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, 20172021
OR
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(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’sRegistrant'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 |
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GLOSSARY OF COMMON ACRONYMS...................................................................................................................................... | |
FORWARD-LOOKING INFORMATION......................................................................................................................................... | |
GENERAL INFORMATION............................................................................................................................................................ | |
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ITEM 1. FINANCIAL STATEMENTS............................................................................................................................................. | |
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Executive Overview............................................................................................................................................................... | |
Results of Operations............................................................................................................................................................ | |
Liquidity and Capital Resources............................................................................................................................................ | |
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Environmental Matters.......................................................................................................................................................... | |
Legal Proceedings................................................................................................................................................................ | |
Off-Balance Sheet Arrangements......................................................................................................................................... | |
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Critical Accounting Estimates........................................................................................................................... | |
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Corporate Governance.......................................................................................................................................................... | |
| Legislative and Regulatory Matters....................................................................................................................................... | |
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ITEM 4. CONTROLS AND PROCEDURES.................................................................................................................................. | |
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ITEM 1. LEGAL PROCEEDINGS.................................................................................................................................................. | |
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ITEM 6. EXHIBITS............................................................................................................................................................................................................................................................................................................................................... | |
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SIGNATURES............................................................................................................................................................................... | |
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| GLOSSARY OF COMMON ACRONYMS |
Following are definitions of some of the terms or acronyms that may be used in this Quarterly Report on Form 10-Q for the quarter ended December 31, 20172021 (the "Quarterly Report"): |
|
| Term or Acronym | | Definition |
AFUDC | | Allowance for funds used during construction |
AOCIACE | | Affordable Clean Energy |
| ACPA | | Anti-Cherrypicking Amendment |
| ANI | | American Nuclear Insurers |
| AOCI | | Accumulated other comprehensive income (loss) |
| ARO | | Asset retirement obligation |
| ART | | Asset Retirement Trust |
ASLBBonds | | Atomic Safety and Licensing BoardBonds, notes, or other evidences of indebtedness |
BLEUCAA | | Blended low-enriched uranium |
CAA | | Clean Air Act |
CAIRCCR | | Clean Air Interstate Rule |
CCR | | Coal combustion residuals |
CMECERCLA | | Chicago Mercantile ExchangeComprehensive Environmental Response, Compensation, and Liability Act |
CO2 | | Carbon dioxide |
COLCOVID-19 | | Combined construction and operating licenseCoronavirus Disease 2019 |
COLACOLA(s) | | Cost-of-living adjustmentadjustment(s) |
| CSAPR | | Cross-State Air Pollution Rule |
| CTs | | Combustion turbine unit(s) |
| CVA | | Credit valuation adjustment |
CYCWA | | Calendar yearClean Water Act |
DCPCY | | Calendar year |
| DBOT | | Down-blend offering for Tritium |
| DCP | | Deferred Compensation Plan |
DOEDER | | Distributed energy resources |
| DOE | | Department of Energy |
| EIS | | Environmental Impact Statement |
EPAELGs | | Effluent Limitation Guidelines |
| EMPs | | Electromagnetic pulses |
| EO(s) | | Executive Order(s) |
| EPA | | Environmental Protection Agency |
ESPAERC | | Early Site Permit ApplicationEnterprise Risk Council |
| FASB | | Financial Accounting Standards Board |
FCMFERC | | Futures Commission Merchant |
FERC | | Federal Energy Regulatory Commission |
FTPFPA | | Federal Power Act |
| FTP | | Financial Trading Program |
| GAAP | | Accounting principles generally accepted in the United States of America |
| GHG | | Greenhouse gas |
GWhHAP | | Gigawatt hour(s)Hazardous Air Pollutants |
| IRP | | Integrated Resource Plan |
JSCCGIwD | | Inclusion with Diversity |
| JSCCG | | John Sevier Combined Cycle Generation LLC |
kWhKOC | | Kilowatt hour(s)Knoxville Office Complex |
LPCkW | | Kilowatts |
| kWh | | Kilowatt hours |
| LPCs | | Local power company customer of TVAcustomers |
MATSLTA | | Long-Term Agreement |
| MATS | | Mercury and Air Toxics Standards |
| | | | | | | | |
| MD&A | | Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations |
mmBtuMLGW | | Memphis Light, Gas and Water Division |
| mmBtu | | Million British thermal unit(s) |
| MtM | | Mark-to-market |
| MW | | MegawattMegawatts |
| NAAQS | | National Ambient Air Quality Standards |
| NAV | | Net asset value |
| NDT | | Nuclear Decommissioning Trust |
NEPANEIL | | Nuclear Electric Insurance Limited |
| NEPA | | National Environmental Policy Act |
| NERC | | North American Electric Reliability Corporation |
| NES | | Nashville Electric Service |
NOx | | Nitrogen oxide |
| NPDES | | National Pollutant Discharge Elimination System |
|
| NRC | | |
NRC | | Nuclear Regulatory Commission |
| NSR | | New Source Review |
OCINuclear Development | | Nuclear Development, LLC |
| NWP | | Nationwide Permit |
| NYSE | | New York Stock Exchange |
| OCI | | Other comprehensive income (loss) |
PARRSOMB | | Office of Management and Budget |
| PARRS | | Putable Automatic Rate Reset Securities |
| PM | | Particulate matter |
QERQTE | | Quadrennial Energy Review |
QTE | | Qualified technological equipment and software |
REITRCRA | | Resource Conservation and Recovery Act |
| RECs | | Renewable Energy Certificates |
| REIT | | Real Estate Investment Trust |
| SCCG | | Southaven Combined Cycle Generation LLC |
| SCRs | | Selective catalytic reduction systems |
| SEC | | Securities and Exchange Commission |
SERPSELC | | Southern Environmental Law Center |
| SERP | | Supplemental Executive Retirement Plan |
| SHLLC | | Southaven Holdco LLC |
SMRSIPs | | State implementation plans |
| SMR | | Small modular reactor(s) |
SO2 | | Sulfur dioxide |
TCWNSPC | | Tennessee Clean Water NetworkSummer Place Complex |
TDECSOA | | Society of Actuaries |
| SSSL | | Seven States Southaven LLC |
| TDEC | | Tennessee Department of Environment &and Conservation |
TOUTIPS | | Time-of-useTreasury Inflation-Protected Securities |
| TVA Act | | The Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee |
TVARSTVA Board | | TVA Board of Directors |
| TVARS | | Tennessee Valley Authority Retirement System |
| U.S. Treasury | | United States Department of the Treasury |
VIEUSACE | | U.S. Army Corps of Engineers |
| VIE | | Variable interest entity |
| XBRL | | eXtensible Business Reporting Language |
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," the negative of such words, or other similar expressions.
Although the Tennessee Valley Authority ("TVA") believes that the assumptions underlying theany 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 theany forward-looking statements. These factors include, among other things:
•The continuing impact of the Coronavirus Disease 2019 ("COVID-19") pandemic on TVA's operating results, financial condition, and cash flows, the demand for electricity, TVA's workforce and operations, the availability of fuel and critical parts, supplies, and services, the financial markets, and the business and financial condition of TVA's customers and counterparties;
•The duration and severity of the COVID-19 pandemic, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on economic and market conditions, including impacts on interest rates, commodity prices, investment performance, and foreign currency exchange rates;
•New, amended, or existing laws, regulations, executive orders ("EOs"), or administrative orders or interpretations, including those related to climate change and other environmental matters, and the costs of complying with these laws, regulations, EOs, or administrative orders;orders or interpretations;
•The cost of complying with known, anticipated, or new emissions reductionenvironmental requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective andor result in their removal from service, perhaps permanently;
•Significant reductions in demand for electricity produced through non-renewable or centrally located generation sources whichthat 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 United States ("U.S.") government relating to the national or TVA debt ceiling or automatic spending cuts in government programs;
•Costs andor liabilities that are not anticipated in TVA’sTVA's financial statements for third-party claims, natural resource damages, environmental clean-upcleanup 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 theTVA'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•Requirements or decisions changing the amount or timing or amount of funding obligations associated with TVA's pension andplans, 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 other generation and related facilities, including coal combustion residualresiduals ("CCR") 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 as well as any other CCR proceedings that may be brought in the future;proceedings;
•The failure of TVA's generation, transmission, navigation, flood control, and related assets and infrastructure, including CCR facilities and spent nuclear fuel storage facilities, to operate as anticipated, resulting in lost revenues, damages, andor other costs that are not reflected in TVA’sTVA's financial statements or projections;
•Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred;
•Weather conditions;conditions including changing weather patterns, extreme weather conditions, and other events such as flooding, droughts, wildfires, and snow or ice storms that may result from climate change;
•Catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMPs"), geomagnetic disturbances, droughts, floods, hurricanes, tornadoes, or other casualty events or pandemics, wars, national emergencies, terrorist activities, andor 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, cyber attacks, mine closures or reduced mine production, an increase in fuel exports, 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 use regulatory accounting or loss of regulatory accounting approval for certain costs;
•Inability to obtain, or loss of, regulatory approval for the construction or operation of assets;
•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");
•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 (collectively, "Bonds") specified in the Tennessee Valley Authority Act of 1933, as amended 16 U.S.C. §§ 831-831ee (the “TVA Act”("TVA Act");
•An increase in TVA's cost of capital whichthat 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 andor creditworthiness of counterparties;
•Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, andor emission allowances;
•Changes in the market price of equity securities, debt securities, andor other investments;
•Changes in interest rates, currency exchange rates, andor inflation rates;
•Ineffectiveness of TVA's disclosure controls and procedures or its internal controlscontrol 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;needs, including the potential for increased demand for energy resulting from an increase in the population in TVA's service territory;
•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, andor 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, andor cause TVA to forego future construction at these or other facilities;
•Loss of quorum of the TVA Board of Directors (the "TVA("TVA Board");
•Changes in the membershippriorities of the TVA Board or TVA senior management; andor
•Other unforeseeable events.
See also Item 1A, Risk Factors, and Item 7, Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in TVA’sTVA's Annual Report on Form 10-K for the year ended September 30, 20172021 (the “Annual Report”"Annual Report"), and
Part I, Item 2, Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in aany 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’sTVA'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,(2022, 2021, etc.) in this Quarterly Report are to TVA’sTVA'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 asand 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’sor accessible through TVA's website shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report.Report or any other report or document that TVA files with the SEC. All TVA SEC reports are available to the public without charge from the website maintained by the SEC at www.sec.gov.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended December 31
(in millions)
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Operating revenues | | | | | | | |
| Revenue from sales of electricity | $ | 2,538 | | | $ | 2,270 | | | | | |
| Other revenue | 45 | | | 34 | | | | | |
| Total operating revenues | 2,583 | | | 2,304 | | | | | |
| Operating expenses | | | | | | | |
| Fuel | 466 | | | 369 | | | | | |
| Purchased power | 369 | | | 206 | | | | | |
| Operating and maintenance | 780 | | | 715 | | | | | |
| Depreciation and amortization | 510 | | | 378 | | | | | |
| Tax equivalents | 133 | | | 121 | | | | | |
| Total operating expenses | 2,258 | | | 1,789 | | | | | |
| Operating income | 325 | | | 515 | | | | | |
| Other income (expense), net | 14 | | | 15 | | | | | |
| Other net periodic benefit cost | 65 | | | 65 | | | | | |
| Interest expense | 263 | | | 281 | | | | | |
| Net income (loss) | $ | 11 | | | $ | 184 | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| | 2017 | | 2016 |
| Operating revenues | | | |
| Revenue from sales of electricity | $ | 2,509 |
| | $ | 2,508 |
|
| Other revenue | 40 |
| | 38 |
|
| Total operating revenues | 2,549 |
| | 2,546 |
|
| Operating expenses | |
| | |
|
| Fuel | 475 |
| | 568 |
|
| Purchased power | 220 |
| | 242 |
|
| Operating and maintenance | 709 |
| | 741 |
|
| Depreciation and amortization | 423 |
| | 437 |
|
| Tax equivalents | 124 |
| | 129 |
|
| Total operating expenses | 1,951 |
| | 2,117 |
|
| Operating income | 598 |
| | 429 |
|
| Other income (expense), net | 12 |
| | 12 |
|
| Interest expense | 322 |
| | 339 |
|
| Net income (loss) | $ | 288 |
| | $ | 102 |
|
| 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)
| | | | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | | | |
| Net income (loss) | $ | 11 | | | $ | 184 | | | | | |
| Other comprehensive income (loss) | | | | | | | |
| Net unrealized gain (loss) on cash flow hedges | 5 | | | 101 | | | | | |
| Net unrealized (gain) loss reclassified to earnings from cash flow hedges | (1) | | | (45) | | | | | |
| Total other comprehensive income (loss) | 4 | | | 56 | | | | | |
| Total comprehensive income (loss) | $ | 15 | | | $ | 240 | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| | 2017 | | 2016 |
| Net income (loss) | $ | 288 |
| | $ | 102 |
|
| Other comprehensive income (loss) | | | |
| Net unrealized gain (loss) on cash flow hedges | 39 |
| | (8 | ) |
| Reclassification to earnings from cash flow hedges | (3 | ) | | 38 |
|
| Total other comprehensive income (loss) | 36 |
| | 30 |
|
| Total comprehensive income (loss) | $ | 324 |
| | $ | 132 |
|
| The accompanying notes are an integral part of these consolidated financial statements. |
TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in(in millions)
| | | | | | | | | | | |
| ASSETS |
| | December 31, 2021 | | September 30, 2021 |
| Current assets | | | |
| Cash and cash equivalents | $ | 507 | | | $ | 499 | |
| | | |
| | | |
| Accounts receivable, net | 1,383 | | | 1,566 | |
| Inventories, net | 1,024 | | | 950 | |
| Regulatory assets | 163 | | | 196 | |
| Other current assets | 177 | | | 287 | |
| Total current assets | 3,254 | | | 3,498 | |
| | | |
| Property, plant, and equipment | | | |
| Completed plant | 66,563 | | | 66,411 | |
| Less accumulated depreciation | (34,808) | | | (34,663) | |
| Net completed plant | 31,755 | | | 31,748 | |
| Construction in progress | 2,496 | | | 2,458 | |
| Nuclear fuel | 1,529 | | | 1,566 | |
| Finance leases | 677 | | | 692 | |
| Total property, plant, and equipment, net | 36,457 | | | 36,464 | |
| | | |
| Investment funds | 4,314 | | | 4,053 | |
| | | |
| Regulatory and other long-term assets | | | |
| Regulatory assets | 7,793 | | | 7,956 | |
| Operating lease assets, net of amortization | 154 | | | 165 | |
| Other long-term assets | 307 | | | 320 | |
| Total regulatory and other long-term assets | 8,254 | | | 8,441 | |
| | | |
| Total assets | $ | 52,279 | | | $ | 52,456 | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| ASSETS |
| | December 31, 2017 |
| September 30, 2017 |
| Current assets | |
| |
| Cash and cash equivalents | $ | 300 |
| | $ | 300 |
|
| Restricted cash | 13 |
| | — |
|
| Accounts receivable, net | 1,500 |
| | 1,569 |
|
| Inventories, net | 1,047 |
| | 1,065 |
|
| Regulatory assets | 455 |
| | 447 |
|
| Other current assets | 95 |
| | 65 |
|
| Total current assets | 3,410 |
| | 3,446 |
|
| | | | |
| Property, plant, and equipment | |
| | |
|
| Completed plant | 59,631 |
| | 58,947 |
|
| Less accumulated depreciation | (28,587 | ) | | (28,404 | ) |
| Net completed plant | 31,044 |
| | 30,543 |
|
| Construction in progress | 2,459 |
| | 2,842 |
|
| Nuclear fuel | 1,370 |
| | 1,401 |
|
| Capital leases | 158 |
| | 161 |
|
| Total property, plant, and equipment, net | 35,031 |
| | 34,947 |
|
| | | | |
| Investment funds | 2,714 |
| | 2,603 |
|
| | | | |
| Regulatory and other long-term assets | |
| | |
|
| Regulatory assets | 8,492 |
| | 8,698 |
|
| Other long-term assets | 330 |
| | 323 |
|
| Total regulatory and other long-term assets | 8,822 |
| | 9,021 |
|
| | | | |
| Total assets | $ | 49,977 |
| | $ | 50,017 |
|
| The accompanying notes are an integral part of these consolidated financial statements. |
TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in(in millions)
| | | | | | | | | | | |
| LIABILITIES AND PROPRIETARY CAPITAL |
| December 31, 2021 | | September 30, 2021 |
| Current liabilities | | | |
| Accounts payable and accrued liabilities | $ | 1,897 | | | $ | 2,215 | |
| | | |
| Accrued interest | 268 | | | 282 | |
| Asset retirement obligations | 301 | | | 266 | |
| Current portion of leaseback obligations | 4 | | | 25 | |
| | | |
| Regulatory liabilities | 223 | | | 340 | |
| Short-term debt, net | 1,066 | | | 780 | |
| Current maturities of power bonds | 1,028 | | | 1,028 | |
| Current maturities of long-term debt of variable interest entities | 43 | | | 43 | |
| | | |
| Total current liabilities | 4,830 | | | 4,979 | |
| | | |
| Other liabilities | | | |
| Post-retirement and post-employment benefit obligations | 4,939 | | | 5,045 | |
| Asset retirement obligations | 6,858 | | | 6,736 | |
| Finance lease liabilities | 677 | | | 687 | |
| Other long-term liabilities | 2,004 | | | 2,041 | |
| | | |
| | | |
| | | |
| Regulatory liabilities | 25 | | | 40 | |
| Total other liabilities | 14,503 | | | 14,549 | |
| | | |
| Long-term debt, net | | | |
| Long-term power bonds, net | 17,461 | | | 17,457 | |
| Long-term debt of variable interest entities, net | 1,006 | | | 1,006 | |
| | | |
| Total long-term debt, net | 18,467 | | | 18,463 | |
| | | |
| Total liabilities | 37,800 | | | 37,991 | |
| | | |
| Contingencies and legal proceedings (Note 20) | | | |
| | | |
| Proprietary capital | | | |
| Power program appropriation investment | 258 | | | 258 | |
| Power program retained earnings | 13,701 | | | 13,689 | |
| Total power program proprietary capital | 13,959 | | | 13,947 | |
| Nonpower programs appropriation investment, net | 538 | | | 540 | |
| Accumulated other comprehensive income (loss) | (18) | | | (22) | |
| Total proprietary capital | 14,479 | | | 14,465 | |
| | | |
| Total liabilities and proprietary capital | $ | 52,279 | | | $ | 52,456 | |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| LIABILITIES AND PROPRIETARY CAPITAL |
| | December 31, 2017 | | September 30, 2017 |
| Current liabilities | | | |
| Accounts payable and accrued liabilities | $ | 1,772 |
| | $ | 1,940 |
|
| Accrued interest | 317 |
| | 346 |
|
| Current portion of leaseback obligations | 37 |
| | 37 |
|
| Current portion of energy prepayment obligations | 85 |
| | 100 |
|
| Regulatory liabilities | 159 |
| | 163 |
|
| Short-term debt, net | 2,721 |
| | 1,998 |
|
| Current maturities of power bonds | 2,031 |
| | 1,728 |
|
| Current maturities of long-term debt of variable interest entities | 36 |
| | 36 |
|
| Current maturities of notes payable | 52 |
| | 53 |
|
| Total current liabilities | 7,210 |
| | 6,401 |
|
| | | | |
| Other liabilities | | | |
| Post-retirement and post-employment benefit obligations | 5,372 |
| | 5,477 |
|
| Asset retirement obligations | 4,206 |
| | 4,176 |
|
| Other long-term liabilities | 2,961 |
| | 3,055 |
|
| Leaseback obligations | 301 |
| | 302 |
|
| Energy prepayment obligations | — |
| | 10 |
|
| Regulatory liabilities | 25 |
| | 25 |
|
| Total other liabilities | 12,865 |
| | 13,045 |
|
| | | | |
| Long-term debt, net | | | |
| Long-term power bonds, net | 19,214 |
| | 20,205 |
|
| Long-term debt of variable interest entities, net | 1,164 |
| | 1,164 |
|
| Long-term notes payable | 68 |
| | 69 |
|
| Total long-term debt, net | 20,446 |
| | 21,438 |
|
| | | | |
| Total liabilities | 40,521 |
| | 40,884 |
|
| | | | |
| Commitments and contingencies | | | |
| | | | |
| Proprietary capital | | | |
| Power program appropriation investment | 258 |
| | 258 |
|
| Power program retained earnings | 8,571 |
| | 8,282 |
|
| Total power program proprietary capital | 8,829 |
| | 8,540 |
|
| Nonpower programs appropriation investment, net | 570 |
| | 572 |
|
| Accumulated other comprehensive income (loss) | 57 |
| | 21 |
|
| Total proprietary capital | 9,456 |
| | 9,133 |
|
| | | | |
| Total liabilities and proprietary capital | $ | 49,977 |
| | $ | 50,017 |
|
| The accompanying notes are an integral part of these consolidated financial statements. |
TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended December 31
(in millions)
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | 11 | | | $ | 184 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | |
Depreciation and amortization(1) | 515 | | | 384 | |
| Amortization of nuclear fuel cost | 88 | | | 96 | |
| Non-cash retirement benefit expense | 82 | | | 84 | |
| | | |
| Other regulatory amortization and deferrals | 32 | | | 6 | |
| | | |
| | | |
| | | |
| Changes in current assets and liabilities | | | |
| Accounts receivable, net | 181 | | | 161 | |
| Inventories and other current assets, net | (101) | | | (73) | |
| Accounts payable and accrued liabilities | (140) | | | (91) | |
| Accrued interest | (13) | | | (3) | |
| | | |
| Pension contributions | (76) | | | (75) | |
| | | |
| | | |
| | | |
| Other, net | (86) | | | (78) | |
| Net cash provided by operating activities | 493 | | | 595 | |
| | | |
| Cash flows from investing activities | | | |
| Construction expenditures | (612) | | | (564) | |
| | | |
| Nuclear fuel expenditures | (137) | | | (79) | |
| | | |
| Loans and other receivables | | | |
| Advances | (3) | | | (4) | |
| Repayments | 6 | | | 1 | |
| Other, net | 12 | | | 2 | |
| Net cash used in investing activities | (734) | | | (644) | |
| | | |
| Cash flows from financing activities | | | |
| Long-term debt | | | |
| | | |
| | | |
| Redemptions and repurchases of power bonds | (1) | | | (1) | |
| | | |
| | | |
| Short-term debt issues (redemptions), net | 286 | | | 55 | |
| Payments on leases and leasebacks | (31) | | | (5) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other, net | (5) | | | 8 | |
| Net cash provided by financing activities | 249 | | | 57 | |
| Net change in cash, cash equivalents, and restricted cash | 8 | | | 8 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 518 | | | 521 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 526 | | | $ | 529 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Note (1) Includes amortization of debt issuance costs and premiums/discounts. |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | |
| | 2017 | | 2016 |
| Cash flows from operating activities | | | |
| Net income (loss) | $ | 288 |
| | $ | 102 |
|
| 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 |
|
| Amortization of nuclear fuel cost | 94 |
| | 85 |
|
| Non-cash retirement benefit expense | 82 |
| | 84 |
|
| Prepayment credits applied to revenue | (25 | ) | | (25 | ) |
| Fuel cost adjustment deferral | (12 | ) | | 57 |
|
| Fuel cost tax equivalents | (5 | ) | | 2 |
|
| Changes in current assets and liabilities | |
| | |
|
| Accounts receivable, net | 70 |
| | 299 |
|
| Inventories and other current assets, net | 7 |
| | (61 | ) |
| Accounts payable and accrued liabilities | (179 | ) | | (209 | ) |
| Accrued interest | (24 | ) | | (24 | ) |
| Regulatory assets costs | (11 | ) | | (16 | ) |
| Pension contributions | (75 | ) | | (75 | ) |
| Other, net | (30 | ) | | (51 | ) |
| Net cash provided by operating activities | 613 |
| | 617 |
|
| | | | |
| Cash flows from investing activities | |
| | |
|
| Construction expenditures | (551 | ) | | (625 | ) |
| Nuclear fuel expenditures | (71 | ) | | (100 | ) |
| Loans and other receivables | |
| | |
|
| Advances | (6 | ) | | (3 | ) |
| Repayments | 1 |
| | 1 |
|
| Other, net | (1 | ) | | 20 |
|
| Net cash used in investing activities | (628 | ) | | (707 | ) |
| | | | |
| Cash flows from financing activities | |
| | |
|
| Long-term debt | |
| | |
|
| Redemptions and repurchases of power bonds | (698 | ) | | (527 | ) |
| Redemptions of notes payable | (2 | ) | | — |
|
| Short-term debt issues (redemptions), net | 717 |
| | 619 |
|
| Payments on leases and leasebacks | (1 | ) | | (1 | ) |
| Payments to U.S. Treasury | (1 | ) | | (1 | ) |
| Net cash provided by (used in) financing activities | 15 |
| | 90 |
|
| 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 |
|
| | | | |
| Supplemental disclosures | | | |
| Significant non-cash transactions | | | |
| Accrued capital and nuclear fuel expenditures | $ | 294 |
| | $ | 336 |
|
| 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 Three Months Ended December 31, 20172021 and 20162020
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Power Program Appropriation Investment | |
Power Program Retained Earnings | | Nonpower Programs Appropriation Investment, Net | | Accumulated
Other
Comprehensive
Income (Loss) | |
Total |
| Balance at September 30, 2020 | $ | 258 | | | $ | 12,177 | | | $ | 548 | | | $ | (51) | | | $ | 12,932 | |
| Net income (loss) | — | | | 186 | | | (2) | | | — | | | 184 | |
| Total other comprehensive income (loss) | — | | | — | | | — | | | 56 | | | 56 | |
| Return on power program appropriation investment | — | | | (1) | | | — | | | — | | | (1) | |
| Implementation of Financial Instruments - Credit Losses Standard | — | | | (4) | | | — | | | — | | | (4) | |
| Balance at December 31, 2020 | $ | 258 | | | $ | 12,358 | | | $ | 546 | | | $ | 5 | | | $ | 13,167 | |
| | | | | | | | | |
| Balance at September 30, 2021 | $ | 258 | | | $ | 13,689 | | | $ | 540 | | | $ | (22) | | | $ | 14,465 | |
| Net income (loss) | — | | | 13 | | | (2) | | | — | | | 11 | |
| Total other comprehensive income (loss) | — | | | — | | | — | | | 4 | | | 4 | |
| Return on power program appropriation investment | — | | | (1) | | | — | | | — | | | (1) | |
| Balance at December 31, 2021 | $ | 258 | | | $ | 13,701 | | | $ | 538 | | | $ | (18) | | | $ | 14,479 | |
The accompanying notes are an integral part of these consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
| Net income (loss) | — |
| | 104 |
| | (2 | ) | | — |
| | 102 |
|
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | 30 |
| | 30 |
|
| Return on power program appropriation investment | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at December 31, 2016 | $ | 258 |
| | $ | 7,697 |
| | $ | 578 |
| | $ | 18 |
| | $ | 8,551 |
|
| | | | | | | | | | |
| Balance at September 30, 2017 | $ | 258 |
| | $ | 8,282 |
| | $ | 572 |
| | $ | 21 |
| | $ | 9,133 |
|
| Net income (loss) | — |
| | 290 |
| | (2 | ) | | — |
| | 288 |
|
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | 36 |
| | 36 |
|
| Return on power program appropriation investment | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Balance at December 31, 2017
| $ | 258 |
| | $ | 8,571 |
| | $ | 570 |
| | $ | 57 |
| | $ | 9,456 |
|
| The accompanying notes are an integral part of these consolidated financial statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except where noted)
| | | | | | | | | | | |
| Note | Page |
| 1 | | Summary of Significant Accounting Policies | |
| 2 | | Impact of New Accounting Standards and Interpretations | |
| 3 | | Accounts Receivable, Net | |
| 4 | | Inventories, Net | |
| 5 | | Other Current Assets | |
| 6 | | Plant Closures | |
| | | |
| 7 | | Other Long-Term Assets | |
| 8 | | Regulatory Assets and Liabilities | |
| 9 | | Variable Interest Entities | |
| 10 | | Other Long-Term Liabilities | |
| 11 | | Asset Retirement Obligations | |
| 12 | | Debt and Other Obligations | |
| 13 | | Accumulated Other Comprehensive Income (Loss) | |
| 14 | | Risk Management Activities and Derivative Transactions | |
| 15 | | Fair Value Measurements | |
| 16 | | Revenue | |
| 17 | | Other Income (Expense), Net | |
| 18 | | Supplemental Cash Flow Information | |
| 19 | | Benefit Plans | |
| 20 | | Contingencies and Legal Proceedings | |
| | | |
|
| | | |
| Note | Page |
| 1 | | Nature of Operations and Summary of Significant Accounting Policies | |
| 2 | | Impact of New Accounting Standards and Interpretations | |
| 3 | | Accounts Receivable, Net | |
| 4 | | Inventories, Net | 17 |
| 5 | | Other Long-Term Assets | |
| 6 | | Regulatory Assets and Liabilities | |
| 7 | | Variable Interest Entities | |
| 8 | | Gallatin Coal Combustion Residual Facilities | |
| 9 | | Other Long-Term Liabilities | |
| 10 | | Asset Retirement Obligations | |
| 11 | | Debt and Other Obligations | |
| 12 | | Accumulated Other Comprehensive Income (Loss) | |
| 13 | | Risk Management Activities and Derivative Transactions | |
| 14 | | Fair Value Measurements | |
| 15 | | Other Income (Expense), Net | |
| 16 | | Benefit Plans | |
| 17 | | Contingencies and Legal Proceedings | |
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 requestproposal 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 nineapproximately 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. TVA performs these management duties in cooperation with other federal and state agencies that have jurisdiction and authority over certain aspects of the river system. In addition, the TVA Board of Directors ("TVA Board") has established two councils — the Regional Resource Stewardship Council and the Regional Energy Resource Council — to advise TVA on its stewardship activities in the Tennessee Valley and its energy resource activities.
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"(collectively, "Bonds"). Although TVA does not currently receive congressionalCongressional 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.
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;
payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business. TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment with the 2014 payment; therefore, this repayment obligation 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, 2017,(2022, 2021, 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 wouldis no longer be considered to be a regulated entity, andthen costs would be required to write off these costs.be written off. All regulatory asset write offswrite-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, 2017,2021, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 20172021 (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 inon 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"VIEs") of which TVA is the primary beneficiary. See Note 7.9 — Variable Interest Entities. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements. Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses, reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are considered critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows.
Cash, Cash Equivalents, and Restricted Cash
Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets on the
Consolidated Balance Sheets. Restricted cash reflects amounts to be used primarilyand cash equivalents include cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to compliance with certain environmental regulations. See Note 1720 — Contingencies and Legal Proceedings — Legal Proceedings —Environmental Agreements.
cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows: | | | | | | | | | | | |
Cash, Cash Equivalents, and Restricted Cash (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| Cash and cash equivalents | $ | 507 | | | $ | 499 | |
| | | |
| Restricted cash and cash equivalents included in Other long-term assets | 19 | | | 19 | |
| Total cash, cash equivalents, and restricted cash | $ | 526 | | | $ | 518 | |
Due to higher volatility in the financial markets associated with the Coronavirus Disease 2019 ("COVID-19") pandemic, TVA increased its balance of Cash and cash equivalents beginning in March 2020. TVA may hold higher cash balances from time to time in response to potential market volatility or other business conditions.
Allowance for Uncollectible Accounts
TVA recognizes an allowance that reflects the current estimate for credit losses expected to be incurred over the life of the financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The appropriateness of the allowance for uncollectible accounts reflects TVA's estimateis evaluated at the end of probable losses inherent in itseach reporting period. TVA continues to monitor the impact of the COVID-19 pandemic on accounts and loans receivable balances. TVA determinesbalances to evaluate the allowance based on known accounts,for uncollectible accounts.
To determine the allowance for trade receivables, TVA considers historical experience and other currently available information, including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days. It also reflectsby the due date. TVA's corporate credit department'sdepartment also performs an assessment of the financial condition of customers and the credit quality of the receivables. In addition, TVA reviews other reasonable and supportable forecasts to determine if the allowance for uncollectible amounts should be further adjusted in accordance with the accounting guidance for CECL.
To determine the allowance for loans receivables, TVA aggregates loans into the appropriate pools based on the existence of similar risk characteristics such as collateral types and internal assessed credit risks. In situations where a loan exhibits unique risk characteristics and is no longer expected to experience similar risks to the rest of its pool, the loan will be evaluated separately. TVA derives an annual loss rate based on historical loss and then adjusts the rate to reflect TVA's consideration of available information on current conditions and reasonable and supportable future forecasts. This information may include economic and business conditions, default trends, and other internal and external factors. For periods beyond the reasonable and supportable forecast period, TVA uses the current calculated long-term average historical loss rate for the remaining life of the loan portfolio.
The allowance for uncollectible accounts was $1 million and less than $1 million at both December 31, 2017,2021, and September 30, 2017. TVA had2021, respectively, for trade accounts receivable. Additionally, loans receivable of $127$104 million and $118$99 million at December 31, 2017,2021, and September 30, 2017,
2021, respectively, are included in Accounts receivable, net and these amountsOther long-term assets, for the current and long-term portions, respectively. Loans receivables are reported net of allowances for uncollectible accounts of $1$4 million at both December 31, 2017,2021 and September 30, 2017. The current portion 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.2021.
Pre-Commercial Plant OperationsRevenues
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 estimatesrecognizes revenue from such pre-commercialcontracts 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 based onand transmission of electricity, this is generally at 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,time the Paradise Combined Cycle Plant commenced pre-commercial plant operations on October 10, 2016, and commercial operations began on April 7, 2017. Furthermore, the Allen Combined Cycle Plant began pre-commercial operations on September 9, 2017. Estimated revenue of $1 million and $14 million primarily relatedpower is delivered to these projects was capitalized to offset project costsa metered customer delivery point 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.customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to the projects above, Johnsonville Combustion Turbine Unit 20 commenced pre-commercial plant operations in September 2017,power sales invoiced and was placed in servicerecorded during the first quartermonth, TVA accrues estimated unbilled revenues for power sales provided to 5 customers whose billing date occurs prior to the end of 2018.the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA's overall mission is recorded in Other revenue. Revenues that are not related to the overall mission are recorded in Other income (expense), net.
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.studies that are updated approximately every five years. During the first quarter of 2022, TVA concluded and implemented a new depreciation study effectiverelated to its completed plant. The new study included a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035.
| | | | | | | | | | | | | |
Property, Plant, and Equipment Depreciation Rates
(percent) |
| Implemented Rates(1) | | At September 30, 2021 | | |
| Asset Class | | | | | |
| Nuclear | 2.72 | | | 2.38 | | | |
| Coal-fired | 3.98 | | | 1.95 | | | |
| Hydroelectric | 1.95 | | | 1.60 | | | |
| Gas and oil-fired | 3.45 | | | 2.98 | | | |
| Transmission | 1.45 | | | 1.34 | | | |
| Other | 3.21 | | | 7.12 | | | |
Note
(1) Implemented rates represent average rates for each asset class as determined by the depreciation study and were applicable beginning October 1, 2016. This study will be updated at least every five years. 2021.
Depreciation expense was $319$453 million and $336$345 million for the three months ended December 31, 20172021 and 2016,2020, respectively. Implementation of the new depreciation rates resulted in an estimated increase of approximately $98 million in depreciation and amortization expense for the three months ended December 31, 2021, as compared to the same period of the prior year. This estimate represents the effect of using the new depreciation rates on the property, plant, and equipment balances at December 31, 2020, and does not include any potential impact from additions to or retirements of net completed plant that occurred since December 31, 2020. See Note 6 — Plant Closures for a discussion of 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 | |
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| Lessor-Certain Leases with Variable Lease Payments |
| Description | This guidance clarifiesamends the requirementslessor lease classification for assessing whether contingent callleases that have variable lease payments that are not based on an index or put optionsrate. If the lease meets the criteria for classification as either (1) a sale-type or (2) direct finance lease, and application of the lease guidance would result in recognition of a day-one selling loss, then the lease should be classified as an operating lease.
There are two transition methods provided by the guidance for entities that can acceleratehave adopted the paymentstandard:
•Retrospective application to leases that commenced or were modified after the beginning of principal on debt instrumentsthe period in which the standard was adopted, or •Prospective application to leases that commence or are clearly and closely relatedmodified subsequent to their debt hosts. An entity performing the assessment under thedate that 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.guidance are first applied.
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| Effective Date for TVA | October 1, 20172021 |
| Effect on the Financial Statements or Other Significant Matters | TVA adopted this standard on a prospective basis. Adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows. |
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| Reference Rate Reform |
| Description | This guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rates.
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| Effective Date for TVA | December 31, 2021 |
| Effect on the Financial Statements or Other Significant Matters | TVA has two issuesinterest rate swap contracts totaling a notional value of Putable Automatic$1.5 billion that are indexed to LIBOR. TVA adopted the International Swaps and Derivative Association’s ("ISDA’s") LIBOR fallback protocol for interest rate swaps prior to December 31, 2021. Under this protocol, U.S. dollar LIBOR transactions would fallback to the Secured Overnight Financing Rate Reset Securities ("PARRS"SOFR") outstanding. After a fixed-rate period. The interest rate swap contracts did not receive hedge accounting treatment, and therefore, TVA did not elect any optional expedients for this modification. TVA does not have any other significant contracts, including lease agreements, that include payments indexed to LIBOR. Therefore, the change of five years, the couponreference 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. |
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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.
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The following accounting standards havestandard has been issued but, as ofat December 31, 2017, were2021, was not effective and had not been adopted by TVA.
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Defined Benefit Costs | |
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| Accounting for Contract Assets and Contract Liabilities from Contracts with Customers |
| Description | This guidance changesrequires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue with customers. It is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how information about defined benefit costs for pension plansthe acquiree recognized and other post-retirement benefit plans is presentedmeasured contract assets and contract liabilities in employerthe acquiree’s 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 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 expenses. Additionally, the guidance stipulates that only the service cost component of net benefit cost is eligible for capitalization in assets.statement. |
| Effective Date for TVA | TheThis new standard is effective for TVA’s interim and annual reporting periods beginning October 1, 2018.2023. While early adoption is permitted, TVA does not currently plan to adopt thethis standard early. |
| Effect on the Financial Statements or Other Significant Matters | TVA has evaluated the impact of adopting this guidance, and if the guidance had been effective for TVA for the three months ended December 31, 2017 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. There will be no impact on the consolidated balance sheets because TVA has historically capitalized the service cost component which is consistent with the new guidance. |
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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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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. 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 is 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. |
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Revenue Recognition |
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. |
Effect on the Financial Statements or Other Significant Matters | While TVA expects most of its revenue to be included in the scope of the new guidance, it has not completed its evaluation of all contracts with customers. TVA’s efforts to date have focused on the scoping of revenue streams and evaluation of contracts with LPCs, which represent the majority 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 impact of the new standard has not yet been determined, TVA has not yet elected its transition method. |
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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. |
Effect on the Financial Statements or Other Significant Matters | TVA’s previous treatment of the classification of certain cash receipts and cash payments is consistent
with the new standard and will have no impact on TVA’s financial condition, results of operations, or
presentation or disclosure of cash flows.
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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.
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Effect on the Financial Statements or Other Significant Matters | Adoption of this standard will result in a change to the amount of 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 of cash flows. 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.
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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 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’sits 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 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 fiscal year and will be required to be applied using a modified retrospective transition. |
Effective Date for TVA | The new standard is effective for 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 standard to impact financial position as adoption is expected to increase the amount of assets and liabilities recognized on TVA’s consolidated balance sheets. TVA expects the new standard to have no material impact on results of operations or cash flows. TVA plans to elect certain of the practical expedients included in the new standard. Efforts to date have consisted of evaluating the completeness of TVA’s lease population, the effectiveness of internal control related to leases, appropriate financial statement disclosure, and selection of a lease system solution. 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. |
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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’sTVA's accounts receivable:
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Accounts Receivable, Net (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| Power receivables | $ | 1,310 | | | $ | 1,480 | |
| Other receivables | 74 | | | 86 | |
| Allowance for uncollectible accounts | (1) | | | — | |
| Accounts receivable, net | $ | 1,383 | | | $ | 1,566 | |
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Accounts Receivable, Net |
| | At December 31, 2017 | | At September 30, 2017 |
| Power receivables | $ | 1,373 |
| | $ | 1,441 |
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| Other receivables | 128 |
| | 129 |
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| Allowance for uncollectible accounts | (1 | ) | | (1 | ) |
| Accounts receivable, net | $ | 1,500 |
| | $ | 1,569 |
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4. Inventories, Net
The table below summarizes the types and amounts of TVA’sTVA's inventories:
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Inventories, Net (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| Materials and supplies inventory | $ | 792 | | | $ | 775 | |
| Fuel inventory | 257 | | | 198 | |
| Renewable energy certificates inventory, net | 16 | | | 12 | |
| Allowance for inventory obsolescence | (41) | | | (35) | |
| Inventories, net | $ | 1,024 | | | $ | 950 | |
5. Other Current Assets
Other current assets consisted of the following:
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Other Current Assets (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| Commodity contract derivative assets | $ | 86 | | | $ | 210 | |
| Other | 91 | | | 77 | |
| Other current assets | $ | 177 | | | $ | 287 | |
Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. SeeNote 14 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives for adiscussion of TVA's commodity contract derivatives.
6. Plant Closures
Background
TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. Based on results of assessments presented to the TVA Board in 2019, the retirement of Bull Run Fossil Plant ("Bull Run") by December 2023 was approved. TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035, and that evaluation includes environmental review, public input, and TVA Board approval.
Financial Impact
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 Bull Run, TVA has recognized a cumulative $377 million of accelerated depreciation since the second quarter of 2019. Of this amount, $35 million and $33 million were recognized for Bull Run during the three months ended December 31, 2021 and 2020, respectively.
During the first quarter of 2022, TVA implemented a new depreciation study related to its completed plant. The new study included a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. As a result, TVA recognized an estimated $82 million of additional depreciation related to its coal-fired fleet during the three months ended December 31, 2021. This estimate represents the effect of using the new depreciation rates on the property, plant, and equipment balances at December 31, 2020, and does not include any potential impact from additions to or retirements of net completed plant that occurred since December 31, 2020.
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Inventories, Net |
| | At December 31, 2017 | | At September 30, 2017 |
| Materials and supplies inventory | $ | 758 |
| | $ | 734 |
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| Fuel inventory | 322 |
| | 355 |
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| Renewable energy certificates/emission allowance inventory, net | 12 |
| | 15 |
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| Allowance for inventory obsolescence | (45 | ) | | (39 | ) |
| Inventories, net | $ | 1,047 |
| | $ | 1,065 |
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5.7. Other Long-Term Assets
The table below summarizes the types and amounts of TVA’sTVA's other long-term assets:
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Other Long-Term Assets (in millions) |
| At December 31, 2021 | | At September 30, 2021 |
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| Loans and other long-term receivables, net | $ | 101 | | | $ | 96 | |
EnergyRight® receivables, net | 55 | | | 57 | |
| Prepaid long-term service agreements | 40 | | | 44 | |
| Commodity contract derivative assets | 25 | | | 40 | |
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| Other | 86 | | | 83 | |
| Total other long-term assets | $ | 307 | | | $ | 320 | |
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Other Long-Term Assets |
| | At December 31, 2017 | | At September 30, 2017 |
| Loans and other long-term receivables, net | $ | 124 |
| | $ | 115 |
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EnergyRight® receivables | 98 |
| | 100 |
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| Prepaid capacity payments | 32 |
| | 34 |
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| Commodity contract derivative assets | 6 |
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| Currency swap asset, net | 5 |
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| Other | 65 |
| | 72 |
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| Other long-term assets | $ | 330 |
| | $ | 323 |
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Loans and Other Long-Term Receivables. TVA's loans and other long-term receivables primarily consist of economic development loans for qualifying organizations and a receivable for reimbursements to recover the cost of providing long-term, on-site storage for spent nuclear fuel. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At both December 31, 2021 and September 30, 2021, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $3 million.
EnergyRight® Receivables. In association with the EnergyRight® Solutions program, TVA's local power company customers of TVA ("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 ten10 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 loanloans receivable that hashave 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. As ofTVA's Consolidated Balance Sheets. At December 31, 2017,2021, and September 30, 2017,2021, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $24$14 million and $25$15 million, respectively. See Note 910 — Other Long-Term Liabilities for information regarding the associated financing obligation.
Allowance for Loan Losses. TVA adopted CECL on October 1, 2020, to determine its allowance for loan loss. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of the loan receivables, that considers reasonable and supportable forecasts of future economic conditions in addition to information about historical experience and current conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts.
The allowance components, which consist of a collective allowance and specific loans allowance, are based on the risk characteristics of TVA's loans. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans that do not share similar risk characteristics with other loans are evaluated on an individual basis.
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Allowance Components (in millions) |
| At December 31, 2021 | | At September 30, 2021 |
EnergyRight® loan reserve | $ | 1 | | | $ | 1 | |
| Economic development loan collective reserve | 1 | | | 1 | |
| Economic development loan specific loan reserve | 2 | | | 2 | |
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| Total allowance for loan losses | $ | 4 | | | $ | 4 | |
Prepaid Long-Term Service Agreements. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under certain of these agreements, payments made exceed the value of parts received and services rendered. The current and long-term portions of the resulting prepayments are reported in Other current assets and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At December 31, 2021, and September 30, 2021, prepayments of $6 million and $12 million, respectively, were recorded in Other current assets.
Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. SeeNote 14 — Risk Management Activities and Derivative Transactions —
Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives for adiscussion of TVA's commodity contract derivatives.
6.
8. 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 deferralsdeferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below:below.
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| Regulatory Assets and Liabilities |
| | At December 31, 2021 | | At September 30, 2021 |
| Current regulatory assets | | | |
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| Unrealized losses on interest rate derivatives | $ | 109 | | | $ | 114 | |
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| Unrealized losses on commodity derivatives | 5 | | | 3 | |
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| Fuel cost adjustment receivable | 49 | | | 79 | |
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| Total current regulatory assets | 163 | | | 196 | |
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| Non-current regulatory assets | | | |
| Deferred pension costs and other post-retirement benefits costs | 3,592 | | | 3,668 | |
| Non-nuclear decommissioning costs | 2,696 | | | 2,653 | |
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| Unrealized losses on interest rate derivatives | 1,143 | | | 1,122 | |
| Nuclear decommissioning costs | 218 | | | 363 | |
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| Unrealized losses on commodity derivatives | 1 | | | — | |
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| Other non-current regulatory assets | 143 | | | 150 | |
| Total non-current regulatory assets | 7,793 | | | 7,956 | |
| Total regulatory assets | $ | 7,956 | | | $ | 8,152 | |
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| Current regulatory liabilities | | | |
| Fuel cost adjustment tax equivalents | $ | 137 | | | $ | 130 | |
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| Unrealized gains on commodity derivatives | 86 | | | 210 | |
| Total current regulatory liabilities | 223 | | | 340 | |
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| Non-current regulatory liabilities | | | |
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| Unrealized gains on commodity derivatives | 25 | | | 40 | |
| Total non-current regulatory liabilities | 25 | | | 40 | |
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| Total regulatory liabilities | $ | 248 | | | $ | 380 | |
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Regulatory Assets and Liabilities |
| | At December 31, 2017 | | At September 30, 2017 |
| Current regulatory assets | | | |
| Deferred nuclear generating units | $ | 237 |
| | $ | 237 |
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| Unrealized losses on interest rate derivatives | 89 |
| | 93 |
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| Unrealized losses on commodity derivatives | 57 |
| | 68 |
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| Fuel cost adjustment receivable | 12 |
| | 1 |
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| Environmental agreements | 3 |
| | 2 |
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| Environmental cleanup costs - Kingston ash spill | 44 |
| | 44 |
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| Gallatin coal combustion residual facilities | 10 |
| | — |
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| Other current regulatory assets | 3 |
| | 2 |
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| Total current regulatory assets | 455 |
| | 447 |
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| Non-current regulatory assets | |
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| Deferred pension costs and other post-retirement benefits costs | 3,945 |
| | 4,009 |
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| Unrealized losses on interest rate derivatives | 957 |
| | 982 |
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| Gallatin coal combustion residual facilities | 889 |
| | 899 |
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| Nuclear decommissioning costs | 771 |
| | 823 |
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| Deferred nuclear generating units | 703 |
| | 759 |
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| Non-nuclear decommissioning costs | 692 |
| | 703 |
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| Environmental cleanup costs - Kingston ash spill | 253 |
| | 263 |
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| Unrealized losses on commodity derivatives | 35 |
| | 9 |
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| Environmental agreements | 12 |
| | 13 |
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| Other non-current regulatory assets | 235 |
| | 238 |
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| Total non-current regulatory assets | 8,492 |
| | 8,698 |
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| Total regulatory assets | $ | 8,947 |
| | $ | 9,145 |
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| Current regulatory liabilities | |
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| Fuel cost adjustment tax equivalents | $ | 149 |
| | $ | 153 |
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| Fuel cost adjustment | — |
| | 2 |
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| Unrealized gains on commodity derivatives | 10 |
| | 8 |
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| Total current regulatory liabilities | 159 |
| | 163 |
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| Non-current regulatory liabilities | |
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| Deferred other post-retirement benefits cost | 19 |
| | 23 |
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| Unrealized gains on commodity derivatives | 6 |
| | 2 |
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| Total non-current regulatory liabilities | 25 |
| | 25 |
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| Total regulatory liabilities | $ | 184 |
| | $ | 188 |
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7.9. Variable Interest Entities
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional
subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest.
When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest
holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the
obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and
design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the
business that can be directed and which party can direct them, and the expected relative impact of those activities on the
economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the
ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt.
Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is
required to account for the VIEs on a consolidated basis.
John Sevier VIEs
In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance (the “JSCCG notes”"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’sTVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. TVA’sTVA's lease payments to JSCCG are equal to and payable on the same dates as JSCCG’sJSCCG's and Holdco’sHoldco'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,activity, 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 statementsConsolidated 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’sTVA's lease payments, and the SHLLC notes are secured by SHLLC’sSHLLC's investment in, and amounts receivable from, SCCG. TVA’sTVA's lease payments to SCCG are payable on the same dates as SCCG’sSCCG's and SHLLC’sSHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG’sSCCG's semi-annual debt service payments,
(ii) the amount of SHLLC’sSHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.
In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right, at any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA.
TVA participated in the design, business conduct,activity, 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 ofat December 31, 2017,2021, and September 30, 2017,2021, as reflected inon the Consolidated Balance Sheets, are as follows:
| | | | | | | | | | | |
Summary of Impact of VIEs on Consolidated Balance Sheets (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| | | |
| | | |
| | | |
| | | |
| Current liabilities | | | |
| Accrued interest | $ | 23 | | | $ | 10 | |
| Accounts payable and accrued liabilities | 3 | | | 3 | |
| Current maturities of long-term debt of variable interest entities | 43 | | | 43 | |
| Total current liabilities | 69 | | | 56 | |
| Other liabilities | | | |
| Other long-term liabilities | 20 | | | 20 | |
| Long-term debt, net | | | |
| Long-term debt of variable interest entities, net | 1,006 | | | 1,006 | |
| Total liabilities | $ | 1,095 | | | $ | 1,082 | |
|
| | | | | | | |
| Summary of Impact of VIEs on Consolidated Balance Sheets |
| | At December 31, 2017 | | At September 30, 2017 |
| Current liabilities | | | |
|
| Accrued interest | $ | 26 |
| | $ | 11 |
|
| Accounts payable and accrued liabilities | 2 |
| | 2 |
|
| Current maturities of long-term debt of variable interest entities | 36 |
| | 36 |
|
| Total current liabilities | 64 |
| | 49 |
|
| Other liabilities | | | |
| Other long-term liabilities | 30 |
| | 30 |
|
| Long-term debt, net | | | |
| Long-term debt of variable interest entities, net | 1,164 |
| | 1,164 |
|
| Total liabilities | $ | 1,258 |
| | $ | 1,243 |
|
Interest expense of $15$13 million related to debt of VIEs and membership interests of variable interest entityVIEs subject to mandatory redemption is included in the Consolidated Statements of Operations for both the three months ended both December 31, 20172021 and 2016.2020.
Creditors of the VIEs do not have noany 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. 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 that pollutants 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 allowing Tennessee Scenic Rivers Association ("TSRA") and Tennessee Clean Water Network ("TCWN") to intervene in the case, and in January 2016, the court ordered TVA, among other things, to develop and submit to TDEC an environmental investigation plan and an environmental assessment report. On August 4, 2017, 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 for the
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 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"). The plaintiffs are seeking 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 2017 Order”), finding that 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 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 would cause TVA to incur significant costs.
On September 5, 2017, TVA submitted the required timetable, which assumes that a new lined facility can be permitted and built on the Gallatin site. The process of obtaining the necessary permits, constructing the facility, and moving all of the CCR materials is estimated to take approximately 24 years. Under current regulations, TVA would be required to monitor the existing facilities and the new facility for 30 years after closure. The estimated cost of the potential Gallatin CCR project is approximately $900 million. At December 31, 2017, related liabilities of $875 million and $23 million were recorded in Other long-term liabilities and Accounts payable and accrued liabilities, respectively. Prior to the court’s 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 the Sixth Circuit ("Sixth Circuit").
Financial Impact
In August 2017, TVA began using regulatory accounting treatment to defer expected future costs of compliance with orders or settlements 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 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 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.
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.
9.10. Other Long-Term Liabilities
Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities for environmental remediation, and liabilities under agreements related to compliance with certain environmental regulations. See Note 17 — Legal Proceedings — Environmental Agreements.operating leases. The table below summarizes the types and amounts of Other long-term liabilities:
| | | | | | | | | | | |
Other Long-Term Liabilities (in millions) |
| | At December 31, 2021 | | At September 30, 2021 |
| Interest rate swap liabilities | $ | 1,511 | | | $ | 1,524 | |
| Operating lease liabilities | 116 | | | 122 | |
| Currency swap liabilities | 71 | | | 76 | |
| | | |
| | | |
| | | |
| | | |
| | | |
EnergyRight® financing obligation | 64 | | | 66 | |
| Long-term deferred compensation | 31 | | | 42 | |
| Long-term deferred revenue | 39 | | | 42 | |
| Accrued long-term service agreements | 20 | | | 29 | |
| Other | 152 | | | 140 | |
| Total other long-term liabilities | $ | 2,004 | | | $ | 2,041 | |
|
| | | | | | | |
| Other Long-Term Liabilities |
| | At December 31, 2017 | | At September 30, 2017 |
| Interest rate swap liabilities | $ | 1,364 |
| | $ | 1,418 |
|
| Gallatin coal combustion residual facilities liability | 875 |
| | 880 |
|
| Capital lease obligations | 181 |
| | 182 |
|
| EnergyRight® financing obligation | 112 |
| | 115 |
|
| Currency swap liabilities | 59 |
| | 92 |
|
| Commodity contract derivative liabilities | 35 |
| | 9 |
|
| Membership interests of VIE subject to mandatory redemption | 30 |
| | 30 |
|
| Environmental agreements liability | 12 |
| | 13 |
|
| Other | 293 |
| | 316 |
|
| Total other long-term liabilities | $ | 2,961 |
| | $ | 3,055 |
|
Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the consolidated balance sheets. As ofConsolidated Balance Sheets. At December 31, 2017,2021, and September 30, 2017,2021, the carrying amount of the interest rate swap liabilities recorded in Accounts payable and accrued liabilities and Accrued interest was $111 million and $115 million, respectively. See Note 14 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives for information regarding the interest rate swap liabilities.
Operating Lease Liabilities. TVA's operating leases consist primarily of railcars, equipment, real estate/land, and power generating facilities. At December 31, 2021 and September 30, 2021, the current portion of TVA's operating leases recorded in Accounts payable and accrued liabilities was $39 million and $40 million, respectively.
Currency Swap Liabilities. To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges. The values of these derivatives are included in Accounts payable and
accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At both December 31, 2021 and September 30, 2021, the carrying amount of the currency swap liabilities reported in Accounts payable and accrued liabilities was approximately $90 million and $93 million, respectively.$7 million. See Note 1314 — Derivatives Not Receiving Hedge Accounting TreatmentRisk Management Activities and Derivative Transactions — Interest Rate DerivativesCash Flow Hedging Strategy for Currency Swaps for more information regarding the associated interest ratecurrency swap liabilities.
Gallatin Coal Combustion Residual Facilities Liability. The estimated cost of the potential Gallatin CCR project is approximately $900 million. The current and long-term portions of the resulting obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s consolidated balance sheets. As of December 31, 2017, and September 30, 2017, related liabilities of $23 million and $19 million, respectively, were recorded in Accounts payable and accrued liabilities. See Note 8 for information regarding the Gallatin CCR facilities.
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 ofTVA's Consolidated Balance Sheets. At both December 31, 2017,2021, and September 30, 2017,2021, the carrying amount of the financing obligation reportedrecorded in Accounts payable and accrued liabilities was approximately $28 million and $29 million, respectively.$16 million. See Note 57 — Other Long-Term Assets for information regarding the associated loans receivablereceivable.
Long-Term Deferred Compensation. TVA provides compensation arrangements to engage and retain certain employees, both executive and non-executive, which are designed to provide participants with the ability to defer compensation to future periods. The current and long-term portions are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At December 31, 2021 and September 30, 2021, the current amount of deferred compensation recorded in Accounts payable and accrued liabilities was $30 million and $51 million, respectively.
Long-Term Deferred Revenue. Long-term deferred revenue represents payments received that exceed services rendered resulting in the deferral of revenue. This long-term portion represents amounts that will not be recognized within the next 12 months primarily related to fiber and transmission agreements. The current and long-term portions of the deferral are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At December 31, 2021 and September 30, 2021, the current amount of deferred revenue was $11 million and $10 million, respectively, and is included in Accounts payable and accrued liabilities.
Accrued Long-Term Service Agreement. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for details regardingcontractor 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 recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At December 31, 2021 and September 30, 2021, related liabilities of $30 million and $28 million, respectively, were recorded in Accounts payable and accrued liabilities.
10.11. Asset Retirement Obligations
During the three months ended December 31, 2017,2021, TVA's total asset retirement obligationobligations ("ARO") liability increased $61$157 million as a result of periodic accretion and revisions in estimates and periodic accretion,estimate, partially offset by settlement projects that were conducted during thisthe 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 expensesamounts were deferred as regulatory assets. During the three months ended December 31, 2017, $362021, $34 million of the related non-nuclear regulatory assets were amortized into expense as these amounts were collected in rates. See Note 6.8 — Regulatory Assets and Liabilities. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 14 15 — Fair Value Measurements — Investment Funds and Note 1720 — Contingencies and Legal Proceedings— Contingencies — Decommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts.
| | | | | | | | | | | | | | | | | | | | |
| Asset Retirement Obligation Activity | |
| | Nuclear | | Non-Nuclear | | Total | |
| Balance at September 30, 2021 | $ | 3,428 | | | $ | 3,574 | | | $ | 7,002 | | (1) |
| Settlements | — | | | (61) | | | (61) | | |
| Revisions in estimate | — | | | 163 | | | 163 | | |
| | | | | | |
| | | | | | |
| Accretion (recorded as regulatory asset) | 38 | | | 17 | | | 55 | | |
| | | | | | |
| Balance at December 31, 2021 | $ | 3,466 | | | $ | 3,693 | | | $ | 7,159 | | (1) |
| | | | | | |
| | | | | | |
Note
(1) Includes $301 million and $266 million at December 31, 2021, and September 30, 2021, respectively, recorded in Current liabilities.
The revisions in non-nuclear estimates increased the liability balance by $163 million for the three months ended December 31, 2021. TVA implemented revised depreciation rates during the first quarter of 2022 applicable to its completed plant as a result of the completion of a new depreciation study. The study includes a decline in the service life estimates of TVA’s coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. As a result of the change in the service life estimates reflected in the depreciation study, TVA performed an assessment of the assumptions used in the timing of cash flows related to its non-nuclear AROs. Based on the assessment, TVA identified changes to its projections of timing of certain asset retirement activities, resulting in an increase of $47 million to the asset retirement obligation. In addition, TVA completed an engineering review of its cost estimates for closure of certain areas containing coal
fines at Paradise Fossil Plant, resulting in an increase of $119 million due to expected cost increases for necessary changes in activities associated with proper completion of the closure.
|
| | | | | | | | | | | |
Asset Retirement Obligation Activity(1) |
| | Nuclear | | Non-Nuclear | | Total |
| Balance at September 30, 2017 | $ | 2,859 |
| | $ | 1,445 |
| | $ | 4,304 |
|
| Settlements | — |
| | (25 | ) | | (25 | ) |
| Revisions in estimate | — |
| | 46 |
| | 46 |
|
| Accretion (recorded as regulatory asset) | 32 |
| | 8 |
| | 40 |
|
| Balance at December 31, 2017 | $ | 2,891 |
| | $ | 1,474 |
| | $ | 4,365 |
|
Note
(1) The current portion of ARO in the amount of $159 million and $128 million is included in Accounts payable and accrued liabilities at December 31, 2017, and September 30, 2017, respectively.
11.12. Debt and Other Obligations
Debt Outstanding
Total debt outstanding at December 31, 2017,2021, and September 30, 2017,2021, consisted of the following:
| | Debt Outstanding | |
Debt Outstanding
(in millions) | | Debt Outstanding
(in millions) |
| | At December 31, 2017 | | At September 30, 2017 | | At December 31, 2021 | | At September 30, 2021 |
| Short-term debt | | | | Short-term debt | | | |
| Short-term debt, net | $ | 2,721 |
| | $ | 1,998 |
| Short-term debt, net | $ | 1,066 | | | $ | 780 | |
| Current maturities of power bonds | 2,031 |
| | 1,728 |
| |
| Current maturities of long-term debt of variable interest entities | 36 |
| | 36 |
| |
| Current maturities of notes payable | 52 |
| | 53 |
| |
| Current maturities of power bonds issued at par | | Current maturities of power bonds issued at par | 1,028 | | | 1,028 | |
| Current maturities of long-term debt of VIEs issued at par | | Current maturities of long-term debt of VIEs issued at par | 43 | | | 43 | |
| | Total current debt outstanding, net | 4,840 |
| | 3,815 |
| Total current debt outstanding, net | 2,137 | | | 1,851 | |
| Long-term debt | |
| | |
| Long-term debt | | | |
Long-term power bonds(1) | 19,362 |
| | 20,357 |
| Long-term power bonds(1) | 17,573 | | | 17,572 | |
| Long-term debt of variable interest entities | 1,175 |
| | 1,175 |
| |
| Long-term notes payable | 68 |
| | 69 |
| |
| Long-term debt of VIEs, net | | Long-term debt of VIEs, net | 1,006 | | | 1,006 | |
| | Unamortized discounts, premiums, issue costs, and other | (159 | ) | | (163 | ) | Unamortized discounts, premiums, issue costs, and other | (112) | | | (115) | |
| Total long-term debt, net | 20,446 |
| | 21,438 |
| Total long-term debt, net | 18,467 | | | 18,463 | |
| Total outstanding debt | $ | 25,286 |
| | $ | 25,253 |
| |
| Total debt outstanding | | Total debt outstanding | $ | 20,604 | | | $ | 20,314 | |
Note
(1) Includes net exchange gain from currency transactions of $118$56 million and $58 million at December 31, 2017,2021, and $125 million at September 30, 2017.2021, respectively.
For the three months ended December 31, 2021, Short-term debt, net increased primarily due to an increase in the overall debt balances.
Debt Securities Activity
The table below summarizes the long-term debt securities activity for the period from October 1, 2017,2021, to December 31, 2017:2021:
|
| | | | | | | | | |
| Debt Securities Activity |
| | | Date | | Amount(1) | | Interest Rate |
Redemptions/Maturities
| | | | | | |
electronotes® | | First Quarter 2018 | | $ | 47 |
| | 4.10 | % |
| 1997 Series E | | December 2017 | | 650 |
| | 6.25 | % |
| 2009 Series B | | December 2017 | | 1 |
| | 3.77 | % |
| Total redemptions/maturities of power bonds | | | | 698 |
| |
|
|
| Notes payable | | November 2017 | | 2 |
| | 1.64 | % |
| Total redemptions/maturities of debt | | | | $ | 700 |
| |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Debt Securities Activity |
| | | Date | | Amount (in millions) | | Coupon Rate |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Redemptions/Maturities(1) | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 2009 Series B | | December 2021 | | $ | 1 | | | 3.770 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total redemptions/maturities of debt | | | | $ | 1 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Note
(1) All redemptions were at 100 percent of par.
Credit Facility Agreements
TVA has funding available under 4 long-term revolving credit facilities totaling approximately $2.7 billion: a $1.0 billion credit facility that matures on September 28, 2023, a $150 million credit facility that matures on February 9, 2024, a $500 million credit facility that matures on February 1, 2025, and a $1.0 billion credit facility that matures on September 21, 2026. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At December 31, 2021, and September 30, 2021, there were approximately $1.1 billion and $1.2 billion, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 14 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral.
The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Summary of Long-Term Credit Facilities At December 31, 2021 (in millions) |
| Maturity Date | | Facility Limit | | Letters of Credit Outstanding | | Cash Borrowings | | Availability |
| | | | | | | | |
| September 2023 | | $ | 1,000 | | | $ | 297 | | | $ | — | | | $ | 703 | |
| February 2024 | | 150 | | | 38 | | | — | | | 112 | |
| February 2025 | | 500 | | | 500 | | | — | | | — | |
| September 2026 | | 1,000 | | | 279 | | | — | | | 721 | |
| Total | | $ | 2,650 | | | $ | 1,114 | | | $ | — | | | $ | 1,536 | |
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 20182022 with a maturity date of September 30, 2018.2022. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA can borrow under the U.S. Treasury credit facility only if it cannot issue Bonds in the market on reasonable terms, and TVA considers the U.S. Treasury credit facility a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United StatesU.S. with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at December 31, 2017.2021. 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, a $500 million credit facility that matures on February 1, 2021, a $1.0 billion credit facility that matures on June 2, 2020, and a $1.0 billion credit facility that matures on September 30, 2020. 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, and September 30, 2017, there were approximately $1.0 billion and $1.2 billion, respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 13 — Other Derivative Instruments — Collateral.
The following table provides additional information regarding TVA's funding available under the four long-term 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 |
|
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’sTVA'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") 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, 2017,2021, and September 30, 2017,2021, the outstanding leaseback obligations related to the remaining CTs and QTE were $338$4 million and $25 million, respectively. Prior to 2021, TVA made final rent payments involving 16 CTs and acquired the equity interest related to these transactions. Rent payments under the remaining CT lease/leaseback transactions were made through January 2022. TVA gave notice in December 2021 of its election to acquire the equity interests related to the remaining 8 CTs for a total of $155 million. The associated acquisitions are expected to close in December 2022 and May 2023.
In October 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE through a series of installments. TVA made its last repurchase payment in December 2021, after which the associated leases were terminated. 12.
13. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) ("AOCI") represents market valuation adjustments related to TVA’sTVA's currency swaps. The currency swaps are cash flow hedges and are the only derivatives in TVA’sTVA'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, 20172021 and 2016,2020, TVA reclassified $3$1 million and $45 million of gains, and $38 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense. See Note 14 — Risk Management Activities and Derivative Transactions.
TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in AOCI or that would impact the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 68 — Regulatory Assets and Liabilities for a schedule of regulatory assets and liabilities. See Note 1314 — Risk Management Activities and Derivative Transactions for a discussion of the recognition in AOCI of gains and losses associated with certain derivative contracts.instruments. See Note 1415 — Fair Value Measurements for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities. See Note 1619 — Benefit Plans for a discussion of the regulatory accounting related to components of TVA’sTVA'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’sTVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.
In November 2021, the TVA has suspended itsBoard approved the elimination of the Value at Risk aggregate transaction limit for the Financial Hedging Program (formerly the Financial Trading Program, ("FTP")which was suspended in 2014) 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 futureauthorized the use of financial instruments.tolerances and measures that will be reviewed annually by the TVA Board. The tolerances will address counterparty exposure, liquidity risk, and reduction in fuel cost volatility. In addition, the TVA Board approved certain administrative changes to the Financial Hedging Program. In December 2021, TVA reinstated the Financial Hedging Program, and activity began under the program in the second quarter of 2022.
Overview of Accounting Treatment
TVA recognizes certain of its derivative instruments as either assets or liabilities on its consolidated balance sheetsConsolidated Balance Sheets at fair value. The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge).
The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
(in millions) |
| | | | | | Three Months Ended December 31 | | | |
| Derivatives in Cash Flow Hedging Relationship | | Objective of Hedge Transaction | | Accounting for Derivative
Hedging Instrument | | 2021 | | 2020 | | | | | |
| Currency swaps | | To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk) | | Unrealized gains and losses are recorded in AOCI and reclassified to Interest expense to the extent they are offset by gains and losses on the hedged transaction | | $ | 5 | | | $ | 101 | | | | | | |
|
| | | | | | | | | | | | |
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 | ) |
| | 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)(1)
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense
(in millions) | | Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1)
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense
(in millions) |
| | | Three Months Ended
December 31, | | Three Months Ended December 31 | |
| Derivatives in Cash Flow Hedging Relationship | | 2017 | | 2016 | Derivatives in Cash Flow Hedging Relationship | | 2021 | | 2020 | |
| Currency swaps | | $ | 3 |
| | $ | (38 | ) | Currency swaps | | $ | 1 | | | $ | 45 | | |
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$7 million of lossesgains from AOCI to interestInterest expense within the next twelve12 months to offset amounts anticipated to be recorded in interestInterest expense related to net exchange gain on the debt.
|
| | | | | | | | | | | | |
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 December 31 | | | |
| Derivative Type | | Objective of Derivative | | Accounting for Derivative Instrument | | 2021 | | 2020 | | | | | |
| Interest rate swaps | | To fix short-term debt variable rate to a fixed rate (interest rate risk) | | Mark-to-market gains and losses are recorded as regulatory assets or liabilities
Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow | | $ | (29) | | | $ | (29) | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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 waswere no related gain (loss)gains (losses) recognized in income for these unrealized gains (losses) for the three months ended December 31, 20172021 and 2016.2020.
| Fair Values of TVA Derivatives (in millions) | | Fair Values of TVA Derivatives (in millions) |
| | | | | | | | | | | | At December 31, 2021 | | At September 30, 2021 |
| Fair Values of TVA Derivatives | |
| Derivatives That Receive Hedge Accounting Treatment: | | Derivatives That Receive Hedge Accounting Treatment: |
| | | At December 31, 2017 | | At September 30, 2017 | | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation |
| Derivatives That Receive Hedge Accounting Treatment | | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation | |
| Currency swaps | | | | | | | | | 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) | £250 million Sterling | $ | (35) | | | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(31) | | $ | (36) | | | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(32) |
| £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) | £150 million Sterling | (43) | | | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(40) | | (47) | | | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(44) |
| | | | | | | |
| Derivatives That Do Not Receive Hedge Accounting Treatment: | | Derivatives That Do Not Receive Hedge Accounting Treatment: |
| | | At December 31, 2017 | | At September 30, 2017 | | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation |
| Derivatives That Do Not Receive Hedge Accounting Treatment | | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation | |
| Interest rate swaps | | | | | | | | | 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) | $1.0 billion notional | $ | (1,169) | | | Accounts payable and accrued liabilities $(62); Accrued interest $(17); Other long-term liabilities $(1,090) | | $ | (1,182) | | | Accounts payable and accrued liabilities $(44); Accrued interest $(37); Other long-term liabilities $(1,101) |
| $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) | $476 million notional | (452) | | | Accounts payable and accrued liabilities $(29); Accrued interest $(2); Other long-term liabilities $(421) | | (455) | | | Accounts payable and accrued liabilities $(22); Accrued interest $(10); Other long-term liabilities $(423) |
$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) | (1) | | | Accrued interest $(1) | | (2) | | | Accounts payable and accrued liabilities $(1); Accrued interest $(1) |
| 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) | Commodity contract derivatives | 105 | | | Other current assets $86; Other long-term assets $25; Accounts payable and accrued liabilities $(5); Other long-term liabilities $(1) | | 247 | | | Other current assets $210; Other long-term assets $40; Accounts payable and accrued liabilities $(3) |
| FTP | | | | | | |
Derivatives under FTP(1) | | — |
| |
| | (5 | ) | | Other current assets $(4); Accounts payable and accrued liabilities $(1) | |
Note
(1) Fair valuesRepresents two interest rate swaps with notional amounts of certain derivatives under the FTP that were in net liability positions totaling $4$28 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.$14 million.
Cash Flow Hedging Strategy for Currency Swaps
To protect against exchange rate risk related to three2 British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred.occurred. TVA had threehad 2 currency swaps outstanding as ofat December 31, 2017,2021, with total currency exposure of £600£400 million and expiration dates ranging from 2021from 2032 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 Accrued interest, respectively. The offsetting exchange losses or gains on the swap contracts are recognized
in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the
resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest
expense. The values of the currency swap 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.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 MtMmark-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 sheetsConsolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the consolidated balance sheets,Consolidated Balance Sheets, and realized gains and losses, if any, are included inon TVA's consolidated statementsConsolidated Statements of operations.Operations. For the three months ended December 31, 20172021 and 2016,2020, the changes in fair market value of the interest rate swaps resulted in deferredthe deferral of unrealized losses of $11 million and unrealized gains of $28$143 million, respectively. TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and $441 million, respectively.other factors.
While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps.
Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all suchnatural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At December 31, 2017,2021, TVA's coal contract derivatives had terms of up to three years and natural gas contract derivatives had terms of up to four3 years.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity Contract Derivatives |
| | At December 31, 2021 | | At September 30, 2021 |
| | Number of Contracts | | Notional Amount | | Fair Value (MtM) | | Number of Contracts | | Notional Amount | | Fair Value (MtM) |
| | | | | | | | | | | |
| Natural gas contract derivatives | 42 | | 361 million mmBtu | | $ | 105 | | | 40 | | 263 million mmBtu | | $ | 247 | |
|
| | | | | | | | | | | | | | | |
Commodity Contract Derivatives |
| | At December 31, 2017 | | At September 30, 2017 |
| | 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 | ) |
| Natural gas contract derivatives | 46 | | 253 million mmBtu | | $ | (4 | ) | | 53 | | 271 million mmBtu | | $ | 7 |
|
Derivatives Under FTP. TVA has suspended its FTP and no longer uses financial instruments to 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 unrealized and realized gains and losses related to the FTP at the dates and during the periods, as applicable, set forth in the tables 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, |
| | | 2017 | | 2016 |
| Decrease (increase) in fuel expense | | | | |
| Natural gas | | $ | (6 | ) | | $ | (11 | ) |
| Decrease (increase) in purchased power expense | | | | |
| Natural gas | | (2 | ) | | (3 | ) |
Offsetting of Derivative Assets and Liabilities
The amounts of TVA's derivative instruments as reported inon the consolidated balance sheets at December 31, 2017, and September 30, 2017,Consolidated Balance Sheets are shown in the table below:
| Derivative Assets and Liabilities(1)
(in millions) | | Derivative Assets and Liabilities(1)
(in millions) |
| | | | At December 31, 2021 | | | At September 30, 2021 |
| Assets | | Assets | | | | |
| | Commodity derivatives not subject to master netting or similar arrangement | | Commodity derivatives not subject to master netting or similar arrangement | $ | 111 | | | | $ | 250 | |
| | | Derivative Assets and Liabilities | |
| | At December 31, 2017 | |
| | 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 |
| |
| | | | | | | |
| Total assets | $ | 17 |
| | $ | — |
| | $ | 17 |
| |
| | | | | | | |
| Liabilities | | | | | | Liabilities | | | |
Currency swaps(3) | $ | 66 |
| | $ | — |
| | $ | 66 |
| |
Interest rate swaps(3) | 1,454 |
| | — |
| | 1,454 |
| |
Currency swaps(2) | | Currency swaps(2) | $ | 78 | | | | $ | 83 | |
Interest rate swaps(2) | | Interest rate swaps(2) | 1,622 | | | | 1,639 | |
| Total derivatives subject to master netting or similar arrangement | 1,520 |
| | — |
| | 1,520 |
| Total derivatives subject to master netting or similar arrangement | 1,700 | | | | 1,722 | |
| Commodity derivatives not subject to master netting or similar arrangement | 93 |
| | — |
| | 93 |
| Commodity derivatives not subject to master netting or similar arrangement | 6 | | | | 3 | |
| | | | | | | |
| Total liabilities | $ | 1,613 |
| | $ | — |
| | $ | 1,613 |
| Total liabilities | $ | 1,706 | | | | $ | 1,725 | |
| | | | | | | |
| | At September 30, 2017 | |
| | 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 |
| |
| |
|
| |
|
| |
|
| |
| Liabilities |
| |
| |
| |
Currency swaps(3) | $ | 103 |
| | $ | — |
| | $ | 103 |
| |
Interest rate swaps(3) | 1,511 |
| | — |
| | 1,511 |
| |
| Commodity derivatives under FTP | 5 |
| | (4 | ) | | 1 |
| |
| Total derivatives subject to master netting or similar arrangement | 1,619 |
| | (4 | ) | | 1,615 |
| |
| Commodity derivatives not subject to master netting or similar arrangement | 70 |
| | — |
| | 70 |
| |
| |
|
| |
|
| |
|
| |
| Total liabilities | $ | 1,689 |
| | $ | (4 | ) | | $ | 1,685 |
| |
|
Notes
(1) AmountsOffsetting 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. There were no material offsetting amounts on TVA's Consolidated Balance Sheets at either December 31, 2021, or September 30, 2021.
(2) There are no derivative contracts subject to a master netting arrangement or similar agreement that are not offset in the consolidated balance sheets.
(3) Letters of credit of approximately $1.0$1.1 billion and $1.2 billion were posted as collateral at December 31, 2017,2021, and September 30, 2017,2021, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.
Other Derivative Instruments
Investment Fund Derivatives. Investment funds consist primarily of funds held in the 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 — Fair Value Measurements — 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, 2017,2021, and September 30, 2017,2021, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net liability positions totaling $2 million and in net asset positions totaling $37 million and $19$2 million at December 31, 2017,2021, and September 30, 2017,2021, 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, 2017,2021, 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, 2017,2021, 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 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’scounterparty'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.agreements.
Customers. TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. TVAOf the $1.3 billion and $1.5 billion of receivables from power sales outstanding at December 31, 2021, and September 30, 2021, respectively, nearly all counterparties were rated investment grade. The obligations of customers that are not investment grade are secured by collateral. TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements. TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions. See Note 1— Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts, Note 3 — Accounts Receivable, Net, andNote 7— Other Long-Term Assets.
TVA had revenue from 2 LPCs that collectively accounted for 16 percent of total operating revenues for both the three months ended December 31, 2021 and Note 3.the three months ended December 31, 2020.
Suppliers. TVA assesses potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation,
maintenance, and capital programs. If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. Nuclear fuel requirements, including uranium miningTVA continues evaluating potential supplier performance risks and milling, conversion services, enrichment services,supplier impact but cannot determine or predict the duration of such risks/impacts or the extent to which such risks/impacts could affect TVA's business, operations and fabrication services, are met from various suppliers, depending on the type of service.financial results, or cause potential business disruptions.
Natural Gas. TVA purchases the majoritya significant amount of its natural gas requirements fromthrough contracts with a variety of suppliers and purchases substantially all of its fuel oil requirements on the spot market. TVA delivers to its gas fleet under short-term contracts.firm and non-firm transportation contracts on multiple interstate natural gas pipelines. TVA contracts for storage capacity that allows for operational flexibility and increased supply during peak gas demand scenarios or supply disruptions. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. TVA also maintains on-site, fuel oil backup to operate at the majority of the combustion turbine sites in the event of major supply disruptions. In the event of nonperformance by suppliers, TVA believes that it can obtain replacement natural gas.
Coal. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at December 31, 2017. 2021. The contracted supply of coal is sourced from multiple geographic regions of the United StatesU.S. and is to be delivered via various transportation methods (i.e.(e.g., barge, rail, and truck). EmergingAs a result of emerging technologies, environmental regulations, and low naturallower gas prices have contributed to weak demand for coal. As a result,on average over the past few years, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies. Continued difficulties bybankruptcies, restructuring, mine closures, or other scenarios. A continued decline in demand for coal suppliers could result in further consolidations, additional bankruptcies, restructurings, contract renegotiations,restructuring, mine closures, or other scenarios. Under these scenariosCurrent market conditions indicate limited availability of spot market coal due to increased exports, utility demand, and TVA’s potential available responses, mine capacity capability.
TVA does not anticipateexperienced challenges in 2021 related to coal supply, as a significant financial impactresult of supply limitation and transportation challenges, and coal supply and transportation continue to be constrained in obtaining continued fuel supply for its coal-fired generation.
On March 29, 2017,2022. In addition, as a result of an event at one of TVA’s suppliers, Westinghouse Electric Company (“Westinghouse”), filed for protection under Chapter 11 offuel storage locations and coal handling service providers, TVA implemented terminal service options at other locations in 2022, which have met and are expected to continue to meet TVA's interim coal handling needs. Plant operations still could be affected by the United States Bankruptcy Code. On January 4, 2018, Brookfield Business Partners L.P. ("Brookfield Business Partners"), togetherlimited offsite coal blending options, limited available inventory capacity, and longer locational lead times associated with institutional partners, announced that they have entered into an agreementthe alternative terminals. At this time, however, TVA has been able to acquire 100% of Westinghouse, which is currently owned by Toshiba Corp. Brookfield Business Partners is listed on the New York and Toronto stock exchanges and is the flagship listed business services and industrials company of Brookfield Asset Managementmanage such impacts. TVA will continue
to monitor these challenges and will utilize its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies.
Inc.,
Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a leading global alternative asset managercombination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.
Purchased Power. TVA acquires power from a variety of power producers through long-term and short-term power purchase agreements ("PPAs") as well as through spot market purchases. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain PPAs with over $265 billion of assets under management, of which approximately $141 billion are in the U.S. Closingrenewable resource providers. Because of the transaction remains subjectlong-term nature and reliability of purchased power, TVA requires that the PPAs contain certain counterparty performance assurance requirements, to Bankruptcy Court approval and customary closing conditions including, among others, regulatory approvals. Closing is expected to occur ininsure counterparty performance during the fourth quarterterm of 2018.the agreements.
Other Suppliers.TVA has experienced an increase in supplier impacts primarily as a power purchase agreement that expires on March 31, 2032,result of COVID-19, such as delays and price fluctuations, and availability of supplies, but has been able to manage these impacts through existing contracts and increased lead times and communications with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant.suppliers; therefore, 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.not experienced significant business disruptions at this time.
Derivative Counterparties. TVATVA has entered into physical and financial contracts that qualifyare classified as derivatives for hedging purposes, and TVA's NDT, fund hasART, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of TVA's hedgingthe 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 hasthe ART, or the qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking, coal, and coalgas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At December 31, 2017,2021, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and ART were with banking counterparties whose Moody's credit ratings were A3A2 or higher.
TVA classifies qualified forward coal and natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At December 31, 2017,2021, the coal derivativenatural gas 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, the natural gas derivative contracts were with counterparties whose Moody's ratings ranged from B1 to A2. See Suppliers above for discussionA1.
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
been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's consolidated balance sheetsConsolidated Balance Sheets and consolidated statementsConsolidated 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 statementsConsolidated Statements of operationsOperations or the consolidated statementsConsolidated Statements of cash flowsCash Flows related to these fair value measurements.
Investment Funds
At December 31, 2017,2021, Investment funds were composedcomprised of $2.7$4.3 billion of equity securities and debt securities classified as trading and measured at fair value. TradingEquity 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$3.0 billion and $655 million,$1.2 billion, respectively, at December 31, 2017.2021.
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.to future periods. The NDT, andART, 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 debtequity and equitydebt 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.
Private equity limited partnerships, private real asset investments, and private real estatecredit 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-year3-to-4-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$205 million, private real assets of $102 million, and private credit of $54 million at December 31, 2021. The ART had unfunded commitments related to limited partnerships in private equity of $116 million, private real estateassets of $5$71 million, and private credit of $29 million at December 31, 2017.2021. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT’sNDT's and ART's ability to liquidate itstheir investments. There are no0 readily available quoted exchange prices for these investments. The fair value of thethese investments is based on TVA’s ownership percentage of the fair value of the underlying investments asinformation provided by the investment managers. These investments are typically valued on a quarterly basis. TVA’sTVA's private equity limited partnerships, private real asset investments, and private real estatecredit 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 valueNAV 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 valueNAV in the fair value hierarchy.
Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies — Cost-Based Regulation and Note 8 — Regulatory Assets and Liabilities. TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized Investment Gains (Losses) (in millions) |
| | | | Three Months Ended December 31 | | | |
| Fund | | Financial Statement Presentation | | 2021 | | 2020 | | | | | |
| NDT | | Regulatory asset | | $ | 119 | | | $ | 230 | | | | | | |
| ART | | Regulatory asset | | 30 | | | 92 | | | | | | |
| SERP | | Other income (expense) | | 2 | | | 4 | | | | | | |
| DCP | | Other income (expense) | | — | | | 1 | | | | | | |
|
| | | | | | | | | | |
| 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 |
|
Currency and Interest Rate Swap Derivatives
See Note 1314 — Risk Management Activities and Derivative Transactions — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps and interest rate swaps. These swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments.
Commodity Contract Derivatives
See Note 14 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment. Most of these contracts are valued based on market approaches which utilize short-short-term 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.
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 19831984 to CY 2017)2020) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a
less than a $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at December 31, 2017.2021.
Fair Value Measurements
The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of at December 31, 2017,2021, and September 30, 2017.2021. 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 December 31, 2021
(in millions) | | Fair Value Measurements
At December 31, 2021
(in millions) |
| | 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 | | | | | | | | Assets | | | | | | | |
| Investments | | | | | | | | Investments | | | | | | | |
| Equity securities | $ | 233 |
| | $ | — |
| | $ | — |
| | $ | 233 |
| Equity securities | $ | 719 | | | $ | — | | | $ | — | | | $ | 719 | |
| Government debt securities | 78 |
| | 69 |
| | — |
| | 147 |
| |
| Corporate debt securities | — |
| | 393 |
| | — |
| | 393 |
| |
Government debt securities(1) | | Government debt securities(1) | 577 | | | 21 | | | — | | | 598 | |
Corporate debt securities(2) | | Corporate debt securities(2) | — | | | 377 | | | — | | | 377 | |
| Mortgage and asset-backed securities | — |
| | 50 |
| | — |
| | 50 |
| Mortgage and asset-backed securities | — | | | 77 | | | — | | | 77 | |
| Institutional mutual funds | 96 |
| | — |
| | — |
| | 96 |
| Institutional mutual funds | 233 | | | — | | | — | | | 233 | |
| Forward debt securities contracts | — |
| | 37 |
| | — |
| | 37 |
| Forward debt securities contracts | — | | | (2) | | | — | | | (2) | |
Private equity funds measured at net asset value(1) | — |
| | — |
| | — |
| | 137 |
| |
Private real estate funds measured at net asset value(1) | — |
| | — |
| | — |
| | 115 |
| |
Private equity funds measured at net asset value(3) | | Private equity funds measured at net asset value(3) | — | | | — | | | — | | | 448 | |
Private real asset funds measured at net asset value(3) | | Private real asset funds measured at net asset value(3) | — | | | — | | | — | | | 308 | |
Private credit measured at net asset value(3) | | Private credit measured at net asset value(3) | — | | | — | | | — | | | 80 | |
Commingled funds measured at net asset value(1)(3) | — |
| | — |
| | — |
| | 1,506 |
| — | | | — | | | — | | | 1,476 | |
| Total investments | 407 |
| | 549 |
| | — |
| | 2,714 |
| Total investments | 1,529 | | | 473 | | | — | | | 4,314 | |
Currency swaps(2) | — |
| | 1 |
| | — |
| | 1 |
| |
| | Commodity contract derivatives | — |
| | 7 |
| | 9 |
| | 16 |
| Commodity contract derivatives | — | | | 111 | | | — | | | 111 | |
| | Total | $ | 407 |
| | $ | 557 |
| | $ | 9 |
| | $ | 2,731 |
| Total | $ | 1,529 | | | $ | 584 | | | $ | — | | | $ | 4,425 | |
| | | | | | | | | | | | | | | | |
| | 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 Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Liabilities | | | | | | | | Liabilities | | | | | | | |
Currency swaps(2) | $ | — |
| | $ | 66 |
| | $ | — |
| | $ | 66 |
| |
Currency swaps(4) | | Currency swaps(4) | $ | — | | | $ | 78 | | | $ | — | | | $ | 78 | |
| Interest rate swaps | — |
| | 1,454 |
| | — |
| | 1,454 |
| Interest rate swaps | — | | | 1,622 | | | — | | | 1,622 | |
| Commodity contract derivatives | — |
| | 11 |
| | 82 |
| | 93 |
| Commodity contract derivatives | — | | | 6 | | | — | | | 6 | |
| Total | $ | — |
| | $ | 1,531 |
| | $ | 82 |
| | $ | 1,613 |
| Total | $ | — | | | $ | 1,706 | | | $ | — | | | $ | 1,706 | |
Notes
(1) Includes government-sponsored entities, including $577 million of U.S. Treasury securities within Level 1 of the fair value hierarchy.
(2) Includes both U.S. and foreign debt.
(3) Certain investments that are measured at fair value using the 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 inon the consolidated balance sheets.Consolidated Balance Sheets.
(2)(4) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 1314 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
| | Fair Value Measurements
At September 30, 2017 | |
Fair Value Measurements
At September 30, 2021
(in millions) | | Fair Value Measurements
At September 30, 2021
(in millions) |
| 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 |
| |
| |
| |
| Assets | | | | | | | |
| Investments | | | | | | | | Investments | | | | | | | |
| Equity securities | $ | 226 |
| | $ | — |
| | $ | — |
| | $ | 226 |
| Equity securities | $ | 634 | | | $ | — | | | $ | — | | | $ | 634 | |
| Government debt securities | 100 |
| | 42 |
| | — |
| | 142 |
| |
| Corporate debt securities | — |
| | 373 |
| | — |
| | 373 |
| |
Government debt securities(1) | | Government debt securities(1) | 573 | | | 24 | | | — | | | 597 | |
Corporate debt securities(2) | | Corporate debt securities(2) | — | | | 411 | | | — | | | 411 | |
| Mortgage and asset-backed securities | — |
| | 49 |
| | — |
| | 49 |
| Mortgage and asset-backed securities | — | | | 63 | | | — | | | 63 | |
| Institutional mutual funds | 94 |
| | — |
| | — |
| | 94 |
| Institutional mutual funds | 225 | | | — | | | — | | | 225 | |
| Forward debt securities contracts | — |
| | 19 |
| | — |
| | 19 |
| Forward debt securities contracts | — | | | 2 | | | — | | | 2 | |
Private equity funds measured at net asset value(1) | — |
| | — |
| | — |
| | 136 |
| |
Private real estate funds measured at net asset value(1) | — |
| | — |
| | — |
| | 113 |
| |
Private equity funds measured at net asset value(3) | | Private equity funds measured at net asset value(3) | — | | | — | | | — | | | 357 | |
Private real asset funds measured at net asset value(3) | | Private real asset funds measured at net asset value(3) | — | | | — | | | — | | | 272 | |
Private credit measured at net asset value(3) | | Private credit measured at net asset value(3) | — | | | — | | | — | | | 71 | |
Commingled funds measured at net asset value(1)(3) | — |
| | — |
| | — |
| | 1,451 |
| — | | | — | | | — | | | 1,421 | |
| Total investments | 420 |
| | 483 |
| | — |
| | 2,603 |
| Total investments | 1,432 | | | 500 | | | — | | | 4,053 | |
| | Commodity contract derivatives | — |
| | 8 |
| | 2 |
| | 10 |
| Commodity contract derivatives | — | | | 250 | | | — | | | 250 | |
| | Total | $ | 420 |
| | $ | 491 |
| | $ | 2 |
| | $ | 2,613 |
| Total | $ | 1,432 | | | $ | 750 | | | $ | — | | | $ | 4,303 | |
| | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| | | | | | | | |
| Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total | | Quoted Prices in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Liabilities |
| |
| |
| |
| Liabilities | | | | | | | |
Currency swaps(2) | $ | — |
| | $ | 103 |
| | $ | — |
| | $ | 103 |
| |
Currency swaps(4) | | Currency swaps(4) | $ | — | | | $ | 83 | | | $ | — | | | $ | 83 | |
| Interest rate swaps | — |
| | 1,511 |
| | — |
| | 1,511 |
| Interest rate swaps | — | | | 1,639 | | | — | | | 1,639 | |
| Commodity contract derivatives | — |
| | 1 |
| | 69 |
| | 70 |
| Commodity contract derivatives | — | | | 3 | | | — | | | 3 | |
Commodity derivatives under FTP(2) |
|
| | |
| | |
| |
|
| |
| Swap contracts | — |
| | 1 |
| | — |
| | 1 |
| |
| | Total | $ | — |
| | $ | 1,616 |
| | $ | 69 |
| | $ | 1,685 |
| Total | $ | — | | | $ | 1,725 | | | $ | — | | | $ | 1,725 | |
Notes
(1) Includes government-sponsored entities, including $573 million of U.S. Treasury securities within Level 1 of the fair value hierarchy.
(2) Includes both U.S. and foreign debt.
(3) Certain investments that are measured at fair value using the 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 inon the consolidated balance sheets.Consolidated Balance Sheets.
(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.(4) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 1314 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
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.
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 | ) |
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 | |
| Assets | | | | | | | | |
| Commodity contract derivatives | $ | 9 |
| | Pricing model | | Coal supply and demand | | 0.6 - 0.7 billion tons/year | |
| | | | | | Long-term market prices | | $12.15 - $112.81/ton | |
| Liabilities | | | | | | | | |
| Commodity contract derivatives | $ | 82 |
| | Pricing model | | Coal supply and demand | | 0.6 - 0.7 billion tons/year | |
| | | | | | Long-term market prices | | $12.15 - $112.81/ton | |
|
| | | | | | | | | | |
Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value at September 30, 2017 | | Valuation Technique(s) | | Unobservable Inputs | | Range | |
| Assets | | | | | | | | |
| Commodity contract derivatives | $ | 2 |
| | Pricing model | | Coal supply and demand | | 0.6 - 0.7 billion tons/year | |
| | | | | | Long-term market prices | | $11.40 - $112.23/ton | |
| Liabilities | | | | | | | | |
| Commodity contract derivatives | $ | 69 |
| | Pricing model | | Coal supply and demand | | 0.6 - 0.7 billion tons/year | |
| | | | | | Long-term market prices | | $11.40 - $112.23/ton | |
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.instruments. The fair value of the financial instruments held at December 31, 2017,2021, and September 30, 2017,2021, 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, 2017,2021, and September 30, 2017,2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Values of Financial Instruments Not Recorded at Fair Value
(in millions) |
| | | | At December 31, 2021 | | At September 30, 2021 |
| | Valuation Classification | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
EnergyRight® receivables, net (including current portion) | Level 2 | | $ | 69 | | | $ | 69 | | | $ | 72 | | | $ | 71 | |
| | | | | | | | | |
| Loans and other long-term receivables, net (including current portion) | Level 2 | | 104 | | | 99 | | | 99 | | | 94 | |
| | | | | | | | | |
EnergyRight® financing obligations (including current portion) | Level 2 | | 80 | | | 89 | | | 82 | | | 92 | |
| | | | | | | | | |
| Unfunded loan commitments | Level 2 | | — | | | 3 | | | — | | | 3 | |
| | | | | | | | | |
| Membership interests of VIEs subject to mandatory redemption (including current portion) | Level 2 | | 23 | | | 30 | | | 23 | | | 30 | |
| | | | | | | | | |
| Long-term outstanding power bonds, net (including current maturities) | Level 2 | | 18,489 | | | 24,223 | | | 18,485 | | | 24,309 | |
| | | | | | | | | |
| Long-term debt of VIEs, net (including current maturities) | Level 2 | | 1,049 | | | 1,292 | | | 1,049 | | | 1,307 | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| Estimated Values of Financial Instruments Not Recorded at Fair Value |
| | | | At December 31, 2017 | | At September 30, 2017 |
| | Valuation Classification | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
EnergyRight® receivables (including current portion) | Level 2 | | $ | 122 |
| | $ | 123 |
| | $ | 125 |
| | $ | 127 |
|
| | | | | | | | | | |
| Loans and other long-term receivables, net (including current portion) | Level 2 | | $ | 127 |
| | $ | 113 |
| | $ | 118 |
| | $ | 107 |
|
| | | | | | | | | | |
EnergyRight® financing obligation (including current portion) | Level 2 | | $ | 140 |
| | $ | 156 |
| | $ | 144 |
| | $ | 161 |
|
| | | | | | | | | | |
| Unfunded loan commitments | Level 2 | | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | 18 |
|
| | | | | | | | | | |
| Membership interest of variable interest entity subject to mandatory redemption (including current portion) | Level 2 | | $ | 32 |
| | $ | 41 |
| | $ | 32 |
| | $ | 41 |
|
| | | | | | | | | | |
| Long-term outstanding power bonds (including current maturities), net | Level 2 | | $ | 21,245 |
| | $ | 26,134 |
| | $ | 21,933 |
| | $ | 26,857 |
|
| | | | | | | | | | |
| Long-term debt of variable interest entities (including current maturities), net | Level 2 | | $ | 1,200 |
| | $ | 1,366 |
| | $ | 1,200 |
| | $ | 1,356 |
|
| | | | | | | | | | |
| Long-term notes payable (including current maturities) | Level 2 | | $ | 120 |
| | $ | 119 |
| | $ | 122 |
| | $ | 121 |
|
Due to the short-term maturityThe carrying value of Cash and cash equivalents, Restricted cash and investments,cash equivalents, Accounts receivable, net, 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 entitiesVIEs 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
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.
| | | | | |
| LPC sales | Approximately 91 percent of TVA's revenue from sales of electricity for the three months ended December 31, 2021 was to LPCs, which then distribute the power to their customers using their own distribution systems. Power is delivered to each LPC at delivery points within the LPC's service territory. TVA recognizes revenue when the customer takes possession of the power at the delivery point. For power sales, the performance obligation to deliver power is satisfied in a series over time because the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to maintain long-term partnerships with LPCs, pandemic credits created to support LPCs and strengthen the public power response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. |
|
| Directly served customers | Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption. Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue. For all power sales, the performance obligation to deliver power is satisfied in a series over time since the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley, pandemic credits created to support directly served customers in response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. |
Other Revenue
Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other ancillary goods or services.
Disaggregated Revenues
During the three months ended December 31, 2021, revenues generated from TVA's electricity sales were $2.5 billion and accounted for virtually all of TVA's revenues. TVA's operating revenues by state for the three months endedDecember 31, 2021 and 2020, are detailed in the table below:
| | | | | | | | | | | | | | | |
Operating Revenues By State (in millions) |
| Three Months Ended December 31 | | |
| | 2021 | | 2020 | | | | |
| Alabama | $ | 371 | | | $ | 334 | | | | | |
| Georgia | 64 | | | 58 | | | | | |
| Kentucky | 171 | | | 137 | | | | | |
| Mississippi | 241 | | | 212 | | | | | |
| North Carolina | 20 | | | 16 | | | | | |
| Tennessee | 1,659 | | | 1,501 | | | | | |
| Virginia | 11 | | | 10 | | | | | |
| Subtotal | 2,537 | | | 2,268 | | | | | |
| Off-system sales | 1 | | | 2 | | | | | |
| Revenue from sales of electricity | 2,538 | | | 2,270 | | | | | |
| Other revenue | 45 | | | 34 | | | | | |
| Total operating revenues | $ | 2,583 | | | $ | 2,304 | | | | | |
TVA's operating revenues by customer type for the three months ended December 31, 2021 and 2020, are detailed in the table below:
| | | | | | | | | | | | | | | |
Operating Revenues by Customer Type (in millions) |
| Three Months Ended December 31 | | |
| | 2021 | | 2020 | | | | |
| Revenue from sales of electricity | | | | | | | |
| Local power companies | $ | 2,306 | | | $ | 2,091 | | | | | |
| Industries directly served | 205 | | | 154 | | | | | |
| Federal agencies and other | 27 | | | 25 | | | | | |
| Revenue from sales of electricity | 2,538 | | | 2,270 | | | | | |
| Other revenue | 45 | | | 34 | | | | | |
| Total operating revenues | $ | 2,583 | | | $ | 2,304 | | | | | |
TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. In 2019, the TVA Board approved a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. The total wholesale bill credits to LPCs participating in the long-term Partnership Agreement were $43 million and $42 million, respectively, for the three months ended December 31, 2021 and 2020. In 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate or purchase up to approximately five percent of average total hourly energy sales over 2015 - 2019 in order to meet their individual customers' needs. As of January 31, 2022, 146 LPCs had signed the 20-year Partnership Agreement with TVA, and 76 LPCs had signed a Flexibility Agreement.
In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which is effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. The credit effective for 2022 is expected to approximate $220 million. For the three months ended December 31, 2021 and 2020, pandemic credits totaled $50 million and $49 million, respectively. In
addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit.
The number of LPCs by contract arrangement, the revenues derived from such arrangements for the three months endedDecember 31, 2021, and the percentage those revenues comprised of TVA's total operating revenues for the same periods, are summarized in the tables below:
| | | | | | | | | | | | | | | | | | | | |
TVA Local Power Company Contracts At or for the Three Months Ended December 31, 2021 |
Contract Arrangements(1) | | Number of LPCs | | Revenue from Sales of Electricity to LPCs
(in millions) | | Percentage of Total Operating Revenues |
| 20-year termination notice | | 146 | | | $ | 1,973 | | | 76.4 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 5-year termination notice | | 7 | | | 333 | | | 12.9 | % |
| Total | | 153 | | | $ | 2,306 | | | 89.3 | % |
Note
(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in a contract with one of the LPCs with five-year termination notice, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.
0 TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for 8 percent of TVA's total operating revenues for both the three months ended December 31, 2021 and 2020. Certain LPCs, including MLGW, are evaluating options for future energy choices. In 2021, four LPCs filed a complaint and petition with the Federal Energy Regulatory Commission ("FERC") asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. Two LPCs currently remain in the complaint and accounted for 1 percent of TVA's total operating revenues for the three months ended December 31, 2021. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment for updates to this legal proceeding.
Contract Balances
Contract assets represent an entity's right to consideration in exchange for goods and services that the entity has transferred to customers. TVA does not have any material contract assets at December 31, 2021.
Contract liabilities represent an entity's obligations to transfer goods or services to customers for which the entity has received consideration (or an amount of consideration is due) from the customers. These contract liabilities are primarily related to upfront consideration received prior to the satisfaction of the performance obligation. See Economic Development Incentives below.
Economic Development Incentives. Under certain economic development programs TVA offers incentives to existing and potential power customers in targeted business sectors that make multi-year commitments to invest in the Tennessee Valley. TVA records those incentives as reductions of revenue. Incentives recorded as a reduction to revenue were $89 million and $75 million for the three months ended December 31, 2021 and 2020, respectively. Incentives that have been approved but have not been paid are recorded in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At December 31, 2021, and September 30, 2021, the outstanding unpaid incentives were $184 million and $176 million, respectively. Incentives that have been paid out may be subject to claw back if the customer fails to meet certain program requirements.
17. Other Income (Expense), Net
Income and expenses not related to TVA’sTVA's operating activities are summarized in the following table:
| | | | | | | | | | | | | | | |
Other Income (Expense), Net (in millions) |
| | Three Months Ended December 31 | | |
| | 2021 | | 2020 | | | | |
| | | | | | | |
| Interest income | $ | 3 | | | $ | 3 | | | | | |
| External services | 5 | | | 4 | | | | | |
| Gains (losses) on investments | 4 | | | 9 | | | | | |
| Miscellaneous | 2 | | | (1) | | | | | |
| Total Other income (expense), net | $ | 14 | | | $ | 15 | | | | | |
18. Supplemental Cash Flow Information
|
| | | | | | | |
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 |
|
Cash Flows for the three months ended December 31, 2021 and 2020, as non-cash investing activities.
16.Cash flows from swap contracts that are accounted for as hedges are classified in the same category as the item being hedged or on a basis consistent with the nature of the instrument.
19. 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 postemploymentpost-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.
The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three months endedDecember 31, 20172021 and 2016,2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of TVA's Benefit Plans(1) (in millions) |
| | Three Months Ended December 31 | | |
| | Pension Benefits | | Other Post-Retirement Benefits | | | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | | | | | | |
| Service cost | $ | 13 | | | $ | 14 | | | $ | 4 | | | $ | 5 | | | | | | | | | |
| Interest cost | 94 | | | 91 | | | 4 | | | 4 | | | | | | | | | |
| Expected return on plan assets | (109) | | | (123) | | | — | | | — | | | | | | | | | |
| Amortization of prior service credit | (23) | | | (24) | | | (4) | | | (5) | | | | | | | | | |
| Recognized net actuarial loss | 96 | | | 112 | | | 1 | | | 3 | | | | | | | | | |
| Total net periodic benefit cost as actuarially determined | 71 | | | 70 | | | 5 | | | 7 | | | | | | | | | |
| Amount expensed due to actions of regulator | 6 | | | 7 | | | — | | | — | | | | | | | | | |
| Total net periodic benefit cost | $ | 77 | | | $ | 77 | | | $ | 5 | | | $ | 7 | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
Components of TVA’s Benefit Plans |
| | For the Three Months Ended December 31 |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | $ | 14 |
| | $ | 17 |
| | $ | 4 |
| | $ | 5 |
|
| Interest cost | 118 |
| | 116 |
| | 5 |
| | 5 |
|
| Expected return on plan assets | (120 | ) | | (114 | ) | | — |
| | — |
|
| Amortization of prior service credit | (25 | ) | | (25 | ) | | (6 | ) | | (6 | ) |
| Recognized net actuarial loss | 103 |
| | 116 |
| | 2 |
| | 3 |
|
| Total net periodic benefit cost as actuarially determined | 90 |
| | 110 |
| | 5 |
| | 7 |
|
| Amount capitalized due to actions of regulator | (14 | ) | | (34 | ) | | — |
| | — |
|
| Total net periodic benefit cost | $ | 76 |
| | $ | 76 |
| | $ | 5 |
| | $ | 7 |
|
(1) The components of net benefit cost other than the service cost component are included in Other net periodic benefit cost on 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 20182022 is $300 million. AsTVA contributes $25 million per month to TVARS and as of December 31, 2017, TVA2021, had contributed $75 million to TVARS and expects to contribute themillion. The remaining $225 million will be contributed by September 30, 2018. TVA contributed $800 million to TVARS in 2017, though the minimum required contribution was $300 million. TVA also contributed $23 million and $20 million to the 401(k) plan during2022. For the three months ended December 31, 2017 and 2016, respectively.2021, TVA does not separately set aside assetsalso contributed $27 million to fund itsthe 401(k) plan, $10 million (net of $1 million in rebates) to the other post-retirement benefit plans, but rather funds such benefits on an as-paid basis. TVA provided approximately $12and $1 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.SERP.
17.
20. 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 financial protection to compensate for liability claims of members of the public for personal injury and property
damages arising from a nuclear eventincident in the United States. ForU.S. This financial protection consists of 2 layers of coverage:
•The primary level is private insurance underwritten by American Nuclear Insurers ("ANI") and provides public liability insurance coverage of $450 million for each nuclear power plant licensed to operate. If this amount is not sufficient to cover claims arising from a nuclear incident, the first layer, allsecond level, Secondary Financial Protection, applies.
•Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor per incident. With TVA's 7 reactors, the maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a maximum rate currently set at approximately $20 million per year per incident per reactor. Currently, 95 reactors are participating in the Secondary Financial Protection program.
In the event that a nuclear incident results in public liability claims, the primary level provided by ANI combined with the Secondary Financial Protection should provide up to approximately $13.5 billion in coverage.
Federal law requires that each Nuclear Regulatory Commission ("NRC") nuclear plant licensees, including TVA, purchase $450 million of nuclear liability insurance from American Nuclear Insurers for each plant with an operating license. Funds for the second layer, the Secondary Financial Program, would come from an assessment of up to $127 million from 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 million per year per unit. American Nuclear Insurers, under a contract with the NRC, administers the Secondary Financial Program. With its seven licensed units, TVA could be required to pay a maximum of $891 million per nuclear incident, but it would have to pay no more than $133 million per incident 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.
Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the
cost of stabilizing or shutting downand decontaminating a reactor and its station site after an accident. TVA carries property, decommissioning liability, and decontamination
liability insurance from Nuclear Electric Insurance Limited ("NEIL"), totaling $5.1 billion and European Mutual Association for its licensed nuclear plants withNuclear Insurance. The limits for each site vary depending on the site and range from up to $2.1 billion to $2.8 billion available for a loss at any one site.TVA's three sites. Some of this insurance may require the payment of retrospective premiums up to a
maximum of approximately $126$128 million.
TVA purchases accidental outage (business interruption) insurance for TVA’sTVA'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 towith a maximum indemnity of $490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $43 million.million, but only to the extent the retrospective premium is deemed necessary by the NEIL Board of Directors to pay losses unable to be covered by NEIL's surplus.
Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to nuclear generating plants, coal-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. See Note 10.11 — Asset Retirement Obligations.
Nuclear Decommissioning. Provision for decommissioning costs of nuclear generating units is based on options prescribed by the NRC procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At December 31, 2017,2021, $3.5 billion, representing the discounted value of future estimated futurenuclear decommissioning cost of $2.9 billioncosts, 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 two2 sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions. Decommissioning costs studies are updated for each of TVA's nuclear units at least every five years, and TVA is currently performing a study with implementation expected in 2023.
TVA maintains aan NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 1415 — Fair Value Measurements — Investment Funds. TVA monitors the value of its NDT and believes that, over the long term and before cessation of nuclear plant operations and commencement of decommissioning activities, adequate funds from investments and additional contributions, if necessary, will be available to support decommissioning. TVA’sTVA's operating nuclear power units are licensed through various dates between 2033 - 2055, depending on the unit. It may be possible to extend the operating life of some of the units with approval from the NRC. See Note 8 — Regulatory Assets and Liabilities and Note 11 — Asset Retirement Obligations.
Non-Nuclear Decommissioning. TheAt December 31, 2021, $3.7 billion, representing the discounted value of future estimated future non-nuclear decommissioning AROcosts, was $1.5 billion at December 31, 2017.included in AROs. This decommissioning cost estimate involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of the timing and duration of the asset retirement process and how costs will escalate with inflation. The actual decommissioning costs
may vary from the derived estimates because of changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. TVA updates its underlying assumptions for non-nuclear decommissioning AROs at least every five years. However, material changes in underlying assumptions that impact the amount and timing of undiscounted cash flows are continuously monitored and incorporated into ARO balances in the period identified.
TVA maintains an ART to help fund the ultimate decommissioning of its non-nuclear power assets. See Note 14.15 — Fair Value Measurements — Investment Funds. Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs. See Note 8 — Regulatory Assets and Liabilities and Note 11 — Asset Retirement Obligations.
Environmental Matters. TVA’s power TVA's 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’sTVA's activities include air quality control, greenhouse gas ("GHG") emissions, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulationsRegulations in all of these major areas are expectedcontinue to become more stringent. Regulations are also expectedstringent and have, and will continue to apply to new emissions and sources, withhave, 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’sTVA's coal-fired and natural gas-fired generating units.units in general. Environmental requirements placed on the operation of TVA’s coal-fired and other generating units will likely continue to become more restrictive over time. Litigation over emissions or discharges from coal-fired generating units is also occurring, including litigation against TVA. Failure to comply with environmental and safety lawsrequirements can result in TVA being subject to enforcement actions and litigation, 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")GHG requirements) could lead to costs of approximately $175$151 million from 20182022 to 2022,2026, which include future clean air controls, existing controls capital projects and air operations and maintenance projects. TVA also estimates additional expenditures of $1 billionapproximately $720 million from 20182022 to 20222026 relating to TVA’s coal combustion residualsTVA's Coal Combustion Residuals ("CCR") conversion program, not including costs related to any new requirements related to the Gallatin CCR facilities lawsuits,Program, as well as expenditures of approximately $500$145 million from 20182022 to 20242026 relating to compliance with Clean Water Act ("CWA") requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates.estimates, and these estimates do not include expenditures expected to be incurred after 2026.
Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") required implementation of a groundwater monitoring program, additional engineering, and ongoing analysis. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. These costs cannot reasonably be predicted until a final remedy is selected, if necessary.
Liability for releases, natural resource damages, and required cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other governmental entities, industries, and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in contaminationreleases of contaminants that TVA has addressed or is addressing.addressing consistent with state and federal requirements. At both December 31, 2017,2021 and September 30, 2017, TVA’s
2021, TVA's estimated liability for required cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $8$18 million and $7 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Additionally, the potential inclusion of new hazardous substances under CERCLA and RCRA jurisdiction may significantly affect TVA's future liability for remediating historical releases.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston Fossil Plant ("Kingston"), TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. On August 24, 2021, the U.S. Court of Appeals for the Sixth Circuit accepted Jacobs’s petition for interim appeal on issues relating to the availability of derivative governmental immunity as a defense to the plaintiffs’ claims. On September 29, 2021, the Eastern District certified four questions to the Tennessee Supreme Court regarding the applicability of the Tennessee Silicosis
Claims Priority Act to the plaintiffs’ claims. The Eastern District’s order also stayed all proceedings pending the Tennessee Supreme Court’s decision. If the litigation proceeds to the second phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. No trial date has been set for the second phase.
Other contractor employees and family members have filed lawsuits against Jacobs that are pending in the Eastern District. These pending lawsuits are stayed and raise similar claims to those being litigated in the case referenced above.
While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition.
Legal Proceedings
�� From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.
General. At December 31, 2017,2021, TVA had accrued $18$12 million of probable losses with respect to Legal Proceedings. Of the accrued amount, $11 million is included in Other long-term liabilities and $7$1 million is included in Accounts payable and accrued liabilities. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.
Environmental Agreements. In April 2011, TVA entered into two2 substantively similar agreements, one1 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-firedamong other things, take actions regarding coal 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)that have been completed. TVA also agreed to invest $290 million in certain TVA environmental projects (5) provide $60of which TVA had spent approximately $281 million to Alabama, Kentucky, North Carolina, and Tennesseeas of December 31, 2021. Additionally, TVA holds restricted cash in an interest earning trust to fund the remaining project commitments. Any interest earned through the trust must also be spent on agreed upon environmental projects, and (6) pay civil penaltiesprojects. The total remaining committed spend, including interest earned through the trust, was approximately $10 million as of $10 million.December 31, 2021. In exchange for these commitments, most past claims against TVA based on alleged New Source Review ("NSR") and associated violations were waived and cannot be brought against TVA. Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA, and claims for increases in particulates can also be pursued at many of TVA’s coal-fired units. Additionally,TVA.
The liabilities related to the Environmental Agreements do not address complianceare included in Accounts payable and accrued liabilities and Other long-term liabilities on the December 31, 2021 Consolidated Balance Sheets. In conjunction with new lawsthe 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 regulations orthey are included as such on the cost associated with such compliance.December 31, 2021 Consolidated Balance Sheets and will be recovered in rates in future periods.
Case Involving Kingston Fossil Plant. On August 12, 2021, an individual landowner and resident of Roane County, Tennessee, Valley Authority Retirement System. In March 2010, eight currentfiled a lawsuit against TVA and former participants in
and beneficiaries of TVARS filed suitJacobs in the U.S. District Court for the MiddleEastern District of Tennessee. The complaint asserts claims for damage to property and personal injuries as a result of the 2008 ash spill at Kingston Fossil Plant and the resulting cleanup activities and from continuing operations at Kingston Fossil Plant. The complaint seeks compensatory damages of $8 million and punitive damages of $10 million. It also requests the court to order TVA to release certain information, to remediate alleged damages to the plaintiff's property, and to stop alleged migration of coal ash onto the plaintiff's property. The plaintiff has not yet provided service of process to notify TVA that the lawsuit was filed.
Case Involving Bull Run Fossil Plant. On August 3, 2021, four residents of Anderson County, Tennessee filed a lawsuit against TVA in the U.S. District Court for the Eastern District of Tennessee. The complaint alleges that the plaintiffs live near Bull Run Fossil Plant ("Bull Run") and asserts claims for personal injuries resulting from exposures to coal combustion residuals ("CCR") that migrated from Bull Run to their home and from second-hand exposures to CCR from a family member who worked with CCR. The complaint also asserts claims for damage to property resulting from the migration of CCR from Bull Run to their home. The plaintiffs seek monetary damages in an unspecified amount as compensation for their injuries and an award of punitive damages in an unspecified amount. The plaintiffs have not yet provided service of process to notify TVA that the lawsuit was filed. The plaintiffs previously filed a similar lawsuit in the U.S. District Court for the Eastern District of Tennessee challengingthat was dismissed without prejudice on August 4, 2020.
Case Involving Bellefonte Nuclear Plant. In November 2018, Nuclear Development, LLC ("Nuclear Development"), filed suit against TVA in the TVARS Board's 2009 decision to amend the TVARS Rules and Regulations (“Rules”) in exchange 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 rateU.S. District Court for the fixed fund accounts, and (4) increased the eligibility age to receive COLAs from age 55 to 60. The plaintiffsNorthern District of Alabama. Nuclear Development alleged that these changes violated their constitutional rights (due process, equal protection, and property rights), violated the Administrative Procedure Act, and violated the substantive and procedural components ofTVA breached its agreement to sell Bellefonte Nuclear Plant ("Bellefonte"). As a remedy, Nuclear Development sought, among other things, (1) an anti-cutback provision in the Rules.injunction requiring TVA to maintain Bellefonte and the plaintiffsassociated NRC permits until the case concluded; (2) an order
compelling TVA to complete the sale of Bellefonte; and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $30 million. On September 23, 2020, the parties filed crosscompeting motions for summary judgment. InOn March 31, 2021, the court denied both parties' summary judgment motions; however, the court ruled as a matter of law that it would have been illegal under Section 101 of the Atomic Energy Act for TVA to close the sale, relying on past NRC precedent to reach that conclusion. Notwithstanding the legal rulings, the court held that there were disputed issues of material fact as to whether TVA satisfied its contractual obligations to use commercially reasonable best efforts and to cooperate with Nuclear Development, in effectuating the close of the sale. Trial took place in May 2021, and the parties filed post-trial briefs on June 9, 2021. Nuclear Development also filed a motion for judgment on partial findings and to reconsider the court's March 31 ruling. The court held closing arguments on July 1, 2021, and on August 2015,26, 2021, the court issued its decision and final judgment. The court held that TVA did not breach its obligations to use commercially reasonable best efforts and to cooperate with Nuclear Development in effectuating the close of the sale. As a result, Nuclear Development is not entitled to specific performance or damages on that claim, and TVA retains full possession and control of the Bellefonte site; however, the court found that, under the contract's termination provision, Nuclear Development was entitled to have TVA return Nuclear Development's $22 million down payment and pay approximately $1 million of compensated costs, along with 7.5% prejudgment interest. Including post-judgment interest, TVA paid approximately $28 million to the court in September 2021 to satisfy the judgment. Post-trial motions have been filed by both parties and are currently pending.
Case Involving Rate Changes. On June 9, 2020, a proposed class action lawsuit was filed against TVA and one of its LPCs, Bristol Virginia Utilities Authority ("BVUA"), in federal court in Abingdon, Virginia, by a LPC customer, asserting claims for breach of contract and violation of the Administrative Procedure Act. The lawsuit alleges that the customers of TVA's LPCs are third-party beneficiaries under TVA's wholesale power contracts with its LPCs and that TVA’s rate changes dating back to 2010 violate Section 11 of the TVA Act. Section 11 of the TVA Act establishes the broad policy that TVA power projects shall be considered primarily for the benefit of the people of the Tennessee Valley and that service to industry is a secondary purpose to be used principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates. The remedies requested include an injunction prohibiting TVA rate changes that violate Section 11, monetary damages, and repayment of rates charged in violation of Section 11. TVA and BVUA filed motions to dismiss the case on November 9, 2020, and filed supplemental motions to dismiss on December 21, 2020, in response to an amended complaint filed by the plaintiff. Oral argument on the motions was held on February 18, 2021, and on March 19, 2021, the court granted TVA’s motion for summaryand BVUA's motions to dismiss. The plaintiff appealed the district court's judgment and dismissed the case with prejudice. In September 2015, the plaintiffs appealed this decision to the Sixth Circuit. On August 12, 2016,U.S. Court of Appeals for the SixthFourth Circuit held that("Fourth Circuit") on April 15, 2021. The parties filed their briefs with 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,Fourth Circuit, and oral argument before the Sixth Circuit was held on January 31, 2018.27, 2022.
CasesCase Involving Gallatin Fossil Plant CCR FacilitiesLong-Term Agreements. TVA is a party in two lawsuits relating to alleged releases of waste materials from the CCR facilities at Gallatin. See Note 8 — Background — Lawsuit Brought by TDEC and— Lawsuit Brought by TSRA and TCWN.
Petitions to Intervene in the Proceeding Involving the Early Site Permit Application for Small Modular Reactors at TVA's Clinch River Site. Three environmental groups —On August 17, 2020, the Southern Alliance for Clean EnergyEnvironmental Law Center ("SACE"SELC"), Tennessee Environmental Council ("TEC"), and Blue Ridge Environmental Defense League ("BREDL") — filed petitions to intervene in the proceeding regarding the Early Site Permit Application that TVA submitted for review by the NRC in May 2016 relating to the potential future construction and operation of two or more small modular reactor units at TVA’s Clinch River site in Oak Ridge, Tennessee. On October 10, 2017, the Atomic Safety 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. One 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.
Gallatin Fossil Plant Clean Air Act Permit. In August 2016, the Sierra Club 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
reporting requirements to ensure compliance with the Environmental Agreements, and (4) contains impermissibly high SO2 emission limits. On May 15, 2017, the Sierra Club filed a lawsuit in the United States District Court for the Western District of Columbia seekingTennessee on behalf of three environmental groups alleging that, beginning in August 2019, TVA violated the National Environmental Policy Act ("NEPA") and Section 10 of the TVA Act by offering a Long-Term Agreement ("LTA") to compelits LPCs. The environmental groups represented by SELC are Protect Our Aquifer, Energy Alabama, and Appalachian Voices.
The environmental groups claim that TVA violated NEPA because (1) TVA failed to perform an environmental review of the EPALTAs, which harmed the groups' advocacy efforts and their ability to actparticipate in and to inform TVA's decision, and (2) the LTAs will have a negative effect on the environment by increasing TVA's reliance on coal and gas and impeding TVA's customers' efforts to institute renewable energy options. The groups also claim that the LTAs violate Section 10 of the TVA Act, which authorizes TVA to enter into power contracts "for a term not exceeding twenty years," because, the groups allege, the twenty-year rolling contract with a twenty-year notice of termination requirement makes the LTAs effectively "never ending."
The environmental groups request the federal court to (1) declare that TVA's entry into long-term power agreements without preparing an environmental review violated NEPA and the TVA Act, (2) vacate the long-term contracts, and (3) enjoin TVA from implementing "system-wide energy contract programs that significantly affect the environment." TVA filed a motion to dismiss the case on October 20, 2020, and filed a supplemental motion to dismiss on December 4, 2020, in response to an amended complaint filed by the plaintiffs. Oral argument on the motion was held on February 26, 2021, and the court denied TVA's motion to dismiss on August 12, 2021. On August 13, 2021, the court held argument on the plaintiffs' motion to complete the administrative record and took the matter under advisement. On August 26, 2021, TVA filed its answer to the amended complaint. On January 24, 2022, the court ordered TVA to supplement the administrative record with background materials pertaining to TVA's decision to offer the LTA and its decision that an environmental review under NEPA was not warranted.
Challenge to Anti-Cherrypicking Amendment. On January 11, 2021, Athens Utilities Board, Gibson Electric Membership Corporation, Joe Wheeler EMC, and Volunteer Energy Cooperative filed a complaint and petition with FERC asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. The petitioners seek to avoid the limitations of the Anti-Cherrypicking Amendment ("ACPA") to the Federal Power Act ("FPA"), which prohibits FERC from ordering TVA to wheel power from another supplier if the power will be consumed within the TVA service territory. The petitioners argue that section 211A of the FPA, which gives FERC limited jurisdiction over the rates, terms, and conditions of transmission service provided by unregulated transmitting utilities such as TVA, provides an alternate grant of authority to enable FERC to order TVA to wheel power inside its service area unrestricted by the application of the ACPA. The petitioners also argue that the public power model is antiquated and TVA’s refusal to wheel power is not in the public interest because it stifles competition. On August 31, 2021, Joe Wheeler EMC notified FERC of its withdrawal from the complaint and
petition. On October 21, 2021, FERC denied the petition. On November 17, 2017,22, 2021, Athens Utilities Board and Gibson Electric Membership Corporation filed a request for rehearing, and on December 7, 2021, TVA filed a response asking FERC to deny the District Court orderedrequest for rehearing. On December 23, 2021, FERC entered an order denying the EPArequest for rehearing by operation of law and providing for possible further consideration by FERC. The petitioners have until February 21, 2022, to respond to the petition by January 31, 2018. While proceedings on this petition were ongoing, TDEC modified the CAA renewal permit on November 6, 2017, to address compliance with the 1-hour SO2 NAAQS.appeal FERC's decision.
Administrative Proceeding Regarding National Pollutant Discharge Elimination System Permit for Kingston. On November 20, 2017,December 28, 2021, the Sierra Club filed a second petition requestingand the Center for Biological Diversity appealed the revised National Pollutant Discharge Elimination System ("NPDES") permit issued by the Tennessee Department of Environment and Conservation ("TDEC") for Kingston in December 2021 before the Tennessee Board of Water Quality, Oil, and Gas ("TN Board"). The petitioners allege that TDEC unlawfully incorporated into the revised permit effluent limits for landfill leachate based on effluent limitation guidelines ("ELGs") for landfill leachate issued by the EPA to object toin 1982 rather than establish new limits based on TDEC’s best professional judgment. TDEC is the modified permit. On January 31, 2018,respondent in the EPA denied both petitions.matter. No hearing date has yet been set.
ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)
Management’sThe 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, 20172021 (the “Annual Report”"Annual Report").
Executive Overview
TVA’s net incomeTVA's operating revenues were $2.6 billion for the three months ended December 31, 2017, was $288 million,2021, as compared with net incomeoperating revenues of $102 million$2.3 billion for the same period of the prior year. Total operating revenue during the first quarter of 2018 was relatively flat 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 during2020. Operating revenues increased for the three months ended December 31, 2016. The increased revenue from higher energy sales and the base rate adjustment that became effective October 1, 2017, was offset by lower fuel cost recovery.
Total operating expenses decreased approximately eight percent during the first quarter of 20182021, as compared to the same period of the prior year. Fuel and purchased power expense decreased $115year, primarily as a result of higher fuel cost recovery revenue. This increase was a result of higher fuel rates driven by higher natural gas prices.
Total operating expenses increased $469 million for the three months ended December 31, 2017,2021, as compared to the three months ended December 31, 2020, primarily as a result of an increase in fuel and purchased power expense and an increase in Depreciation and amortization expense. Fuel and purchased power expense increased $260 million for the three months ended December 31, 2021, as compared to the same period of the prior year. This increase was primarily due to lowerhigher effective fuel rates due to higher natural gas prices and a changeless availability of low-cost TVA-owned generation resulting in generation mix, including significantly more hydroelectric generation. Operatinghigher volume of purchased power. Depreciation and maintenanceamortization expense decreased $32increased $132 million for the three months ended December 31, 2017,2021, as compared to the same period of the prior year. This increase was primarily duedriven by the implementation of a new depreciation study during the three months ended December 31, 2021, which included a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to a decrease in planned nuclear outage days which reduced outage expensepotentially retire the remainder of the coal-fired fleet by $24 million and a decrease of $8 million for reductions in workforce related2035.
TVA continues to identified efficiencies and staffing changes needed to support TVA's generating fleet.
In April 2011, TVA entered into two substantively similar agreements, oneclosely monitor developments associated with the Environmental Protection Agencycoronavirus disease 2019 ("EPA"COVID-19") pandemic, including impacts from variants. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic to date. TVA also continues to provide support to TVA customers and the othercommunities they serve through various customer pandemic initiatives in 2022. See Key Initiatives and Challenges — COVID-19 Pandemic for an expanded discussion of the impact to TVA and related initiatives and regulatory actions.
TVA's reliability, competitive rates, and economic development efforts continue to help attract or expand businesses and industries in the Tennessee Valley, with Alabama, Kentucky, North Carolina, Tennessee,companies announcing over $5.1 billion in investments and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements”). Under the Environmental Agreements, TVA committed to, among other things, retire 18 coal-fired units, control, convert,more than 24,500 jobs created or retire additional coal-fired units, and investretained in certain environmental projects. During the first quarter of 2018, 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 2018.2022.
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, TVA will begin working on an updated IRP that will consider 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 Valley over the next 20 years. TVA remains committed to planning its system in a way that ensures evolving resource portfolios remain reliable and provide the most value to all customers.
Results of Operations
Sales of Electricity
The following chart compares TVA’s energy sales statistics Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 36,988 million and 36,672 million of kilowatt hours ("kWh") for the three months ended December 31, 20172021 and 2016:2020, respectively. TVA sells power at wholesale rates to local power company customers ("LPCs") that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems.
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| Sales of Electricity(1)
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Three Months Ended December 31, |
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The following chart compares TVA's sales of electricity by customer type for the periods indicated:
The following charts show a breakdown of TVA's energy load:
Note
(1) Includes approximately 20 million kilowatt hours ("kWh")Information included in the charts above was derived from energy usage of directly served customers and 536 million kWhcustomers served by LPCs during calendar year 2020, and these graphs will continue to be updated on a calendar year basis.
Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures in the five largest cities in TVA's service area vary from 65 degrees Fahrenheit.
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| Degree Days | | |
| Variation from Normal | | Variation from Prior Period |
| | 2021 | | Normal | | Percent Change | | 2020 | | Normal | | Percent Change | | Percent Change |
| Heating Degree Days | | | | | | | | | | | | | |
| Three Months Ended December 31 | 1,003 | | | 1,289 | | (22.2) | % | | 1,201 | | | 1,289 | | | (6.8) | % | | (16.5) | % |
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| Cooling Degree Days | | | | | | | | | | | | | |
| Three Months Ended December 31 | 104 | | | 43 | | 141.9 | % | | 46 | | | 43 | | | 7.0 | % | | 126.1 | % |
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| 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 | % |
Sales of electricity increased approximately twoone percent for the three months ended December 31, 2017,2021, as compared to the same period of the prior year. The increased sales volume was primarily driven by economic growth, partially offset by milder weather in the three months ended December 31, 2021, than the same period of the prior year. TVA is seeing economic growth in the Tennessee Valley region as a result of migration into the Valley which has driven population growth and load growth. For LPCs, this growth was offset by the overall milder weather during the three months ended December 31, 2021, as December 2021 was one of the mildest Decembers on record and resulted in 16 percent less heating degree days than the same period of the prior year. Sales of electricity increased for industries directly served for the three months ended December 31, 2021, as compared to the same period of the prior year, primarily due to increased sales volume for LPCseconomic growth, as these industries directly served are not driven primarily by a 26 percent increaseweather, but mainly from changes in heating degree days. Partially offsetting this increase was a slight decrease in sales to industries directly served.the economy and respective industry sectors.
Financial Results
The following table compares operating results for the three months endedDecember 31, 20172021 and 2016:2020:
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Summary Consolidated Statements of Operations (in millions) |
| | Three Months Ended December 31 | | |
| | 2021 | | 2020 | | Change | | Percent Change | | | | | | |
| Operating revenues | $ | 2,583 | | | $ | 2,304 | | | $ | 279 | | | 12.1 | % | | | | | | |
| Operating expenses | 2,258 | | | 1,789 | | | 469 | | | 26.2 | % | | | | | | |
| Operating income | 325 | | | 515 | | | (190) | | | (36.9) | % | | | | | | |
| Other income (expense), net | 14 | | | 15 | | | (1) | | | (6.7) | % | | | | | | |
| Other net periodic benefit cost | 65 | | | 65 | | | — | | | — | % | | | | | | |
| Interest expense | 263 | | | 281 | | | (18) | | | (6.4) | % | | | | | | |
| Net income (loss) | $ | 11 | | | $ | 184 | | | $ | (173) | | | (94.0) | % | | | | | | |
|
| | | | | | | | | | |
Summary Consolidated Statements of Operations |
| | 2017 | | 2016 | | Percent Change |
| Operating revenues | $ | 2,549 |
| | $ | 2,546 |
| | 0.1 | % |
| Operating expenses | 1,951 |
| | 2,117 |
| | (7.8 | )% |
| Operating income | 598 |
| | 429 |
| | 39.4 | % |
| Other income, net | 12 |
| | 12 |
| | — | % |
| Interest expense, net | 322 |
| | 339 |
| | (5.0 | )% |
| Net income (loss) | $ | 288 |
| | $ | 102 |
| | 182.4 | % |
Operating Revenues. Operating revenues for the three months ended December 31, 20172021 and 2016, consisted of the following:
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| | |
| Operating Revenues(1)
| |
Three Months Ended December 31, |
Note
(1) Excludes contra-revenue amounts of approximately $1 million2020, were $2.6 billion and $14 million representing revenue capitalized during pre-commercial operations$2.3 billion, respectively. The following chart compares TVA's operating revenues for the threeperiods indicated:
TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for eight percent of TVA's total operating revenues for both the three months ended December 31, 20172021 and 2016, respectively.the three months ended December 31, 2020. Certain LPCs, including MLGW, are evaluating options for future energy choices. In 2021, four LPCs filed a complaint and petition with the Federal Energy Regulatory Commission ("FERC") asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. Two LPCs currently remain in the complaint and accounted for one percent of TVA's total operating revenues for the three months ended December 31, 2021. See Note 120 — Pre-Commercial Plant Operations.Contingencies and Legal Proceedings — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment for updates to this legal proceeding.
TheTVA's rate structure in effect provides priceuses pricing signals intended to reflectindicate seasons and hours of higher cost periods to serve the local power companyits customers and to 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 wholesaleTVA's fixed costs in fixed charges. The structure includes twothree base revenue components: time of use demand charges, time of use energy charges, and a demandgrid access charge and an energy charge.("GAC"). The demand charge ischarges are based onupon the customer's peak monthly usage and increasesincrease as the peak increases. The energy charge ischarges are based on thetime differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure.
In 2019, the TVA Board of Directors (the "TVA Board") approved a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of January 31, 2022, 146 LPCs had signed the 20-year Partnership Agreement with TVA.
In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which is effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. The credit effective for 2022 is expected to approximate $220 million. In addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit.
In addition to base revenues, the rate structure 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 equivalentsequivalents") associated with the fuel cost adjustments.
The changes in revenue components of operating revenues for the three months ended December 31, 2017, compared to the three months ended December 31, 2016, are as follows:summarized below:
| | Changes in Revenue Components (in millions) | | Changes in Revenue Components (in millions) |
| | Three Months Ended December 31, | | | | Three Months Ended December 31 | |
| | 2017 | | 2016 | | Change | | 2021 | | 2020 | | Change | |
Base revenue(1) | $ | 1,837 |
| | $ | 1,716 |
| | $ | 121 |
| | | | | | |
| Energy revenue | | Energy revenue | $ | 1,057 | | | $ | 1,060 | | | $ | (3) | | |
| Demand revenue | | Demand revenue | 786 | | | 750 | | | 36 | | |
| Grid access charge | | Grid access charge | 148 | | | 149 | | | (1) | | |
| Long-term partnership credits for LPCs | | Long-term partnership credits for LPCs | (43) | | | (42) | | | (1) | | |
| Pandemic credits | | Pandemic credits | (50) | | | (49) | | | (1) | | |
Other charges and credits(1) | | Other charges and credits(1) | (162) | | | (141) | | | (21) | | |
| Total base revenue | | Total base revenue | 1,736 | | | 1,727 | | | 9 | | |
| Fuel cost recovery | 670 |
| | 791 |
| | (121 | ) | Fuel cost recovery | 801 | | | 541 | | | 260 | | |
| Off-system sales | 2 |
| | 1 |
| | 1 |
| Off-system sales | 1 | | | 2 | | | (1) | | |
| Revenue from sales of electricity | 2,509 |
| | 2,508 |
| | 1 |
| Revenue from sales of electricity | 2,538 | | | 2,270 | | | 268 | | |
| Other revenue | 40 |
| | 38 |
| | 2 |
| Other revenue | 45 | | | 34 | | | 11 | | |
| Total operating revenues | $ | 2,549 |
| | $ | 2,546 |
| | $ | 3 |
| Total operating revenues | $ | 2,583 | | | $ | 2,304 | | | $ | 279 | | |
Note
(1) Includes economic development credits to promote growth in the impactTennessee Valley, hydro preference credits for residential customers of revenue capitalized during pre-commercial operationsLPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of approximately $1 million and $14peak demand to balance system demand. See Note 16 — Revenue.
Operating revenues increased $279 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, 2017,2021, as compared to the same period of the prior year, primarily due to a $121$260 million increase in basefuel cost recovery revenue. The $121$260 million increase in fuel cost recovery revenue was driven by a $255 million increase attributable to higher fuel rates and a $5 million increase attributable to higher sales volume during the quarter. The higher fuel rates were primarily due to higher natural gas prices. In addition, there was a $9 million increase in base revenue was driven by an increase of $54$15 million resulting fromattributable to higher sales volume, duringpartially offset by a decrease of $6 million attributable to lower effective rates. Sales volume increased as a result of economic growth, but was partially offset by milder weather in the quarterthree months ended December 31, 2017,2021, than the same period of the prior year, as December 2021 was one of the mildest Decembers on record.
Operating Expenses. Operating expense components as a percentage of total operating expenses for the three months ended December 31, 2021 and 2020, consisted of the following:
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Operating Expenses (in millions) |
| Three Months Ended December 31 | | |
| 2021 | | 2020 | | Change | | Percent Change | | | | | | |
| Operating expenses | | | | | | | | | | | | | |
| Fuel | $ | 466 | | | $ | 369 | | | $ | 97 | | | 26.3 | % | | | | | | |
| Purchased power | 369 | | | 206 | | | 163 | | | 79.1 | % | | | | | | |
| Operating and maintenance | 780 | | | 715 | | | 65 | | | 9.1 | % | | | | | | |
| Depreciation and amortization | 510 | | | 378 | | | 132 | | | 34.9 | % | | | | | | |
| Tax equivalents | 133 | | | 121 | | | 12 | | | 9.9 | % | | | | | | |
| Total operating expenses | $ | 2,258 | | | $ | 1,789 | | | $ | 469 | | | 26.2 | % | | | | | | |
Fuel expense increased $97 million for the three months ended December 31, 2021, as compared to the same period of the prior year. In addition, approximately $54 million of theThis increase in base revenue was attributableprimarily due to higher effective fuel rates duringof $106 million due to higher natural gas prices, as well as an increase in fuel cost recovery of $15 million resulting from volatility in the natural gas markets. Partially offsetting these increases was a decrease in fuel volume of $24 million due to a decrease in TVA-owned generation.
Purchased power expense increased $163 million for 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 revenue increase was also due in part to approximately $13 million less capitalization of revenue resulting from pre-commercial generation during the three months ended December 31, 2017,2021, as compared to the same period of the prior year. See Note 1 — Pre-Commercial Plant Operations. Partially offsetting these increasesThis increase was a $121primarily due to an increase in volume of $160 million decrease in fuel cost recovery revenues. The $121 million decrease in fuel cost recovery revenues reflects a $137 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 forless availability of TVA-owned generation as a result of natural gas plant outages due to the timing of natural gas maintenance projects and a changelower hydroelectric generation resulting from lower rainfall and runoff than the same period of the prior year. In addition, there was an increase in the mixeffective rate of generation resources, including significantly more hydroelectric generation.purchased power of $3 million as a result of higher market prices.
Operating Expenses. Operating expensesand maintenance expense increased $65 million for the three months ended December 31, 2017 and 2016, consisted2021, as compared to the same period of the following:prior year. This was primarily due to a $29 million increase in contract labor driven mainly by the timing of natural gas maintenance projects and work to support the company's strategic priorities, $20 million of increased payroll and benefit costs primarily due to labor escalation for cost of living increases and additional headcount to support operational needs and work to support the company's strategic priorities. Additionally, inventory write-offs and reserves increased $6 million as a result of the decline in service life estimates of TVA's coal-fired plants, and outage expense increased $5 million driven by an increase in nuclear outage days.
The following chart summarizes TVA's net generationDepreciation and purchased power in millions of kWh by generating source for the periods indicated:
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| Power Supply from TVA-Operated Generation Facilities and Purchased Power |
| | | Three Months Ended December 31, | | | | |
| | | 2017 | | 2016 | | | | |
| | | 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 | )% |
Nuclear(1) | | 16,154 |
| | 42 | % | | 15,254 |
| | 41 | % | | 900 |
| | 6 | % |
| Hydroelectric | | 3,387 |
| | 9 | % | | 1,692 |
| | 5 | % | | 1,695 |
| | 100 | % |
Natural gas and/or oil-fired(2) | | 6,037 |
| | 16 | % | | 5,328 |
| | 14 | % | | 709 |
| | 13 | % |
Total TVA-operated generation facilities(3) | | 33,119 |
| | 87 | % | | 32,464 |
| | 87 | % | | 655 |
| | 2 | % |
Purchased power (non-renewable)(4) | | 2,877 |
| | 8 | % | | 3,147 |
| | 9 | % | | (270 | ) | | (9 | )% |
Purchased power (renewable)(5) | | 1,927 |
| | 5 | % | | 1,505 |
| | 4 | % | | 422 |
| | 28 | % |
| Total purchased power | | 4,804 |
| | 13 | % | | 4,652 |
| | 13 | % | | 152 |
| | 3 | % |
| Total power supply | | 37,923 |
| | 100 | % | | 37,116 |
| | 100 | % | | 807 |
| | 2 | % |
Notes
(1) The nuclear amountamortization expense increased $132 million for the three months ended December 31, 2016, includes2021, as compared to the same period of the prior year. Implementation of a new depreciation study during the three months ended December 31, 2021, resulted in approximately 494$98 million kWhmore depreciation expense. The increase in depreciation expense as a result of pre-commercial generation at Watts Bar Nuclear Plant ("Watts Bar") Unit 2.the new depreciation rates was primarily driven by a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. See Note 1 — Pre-Commercial Plant OperationsSummary of Significant Accounting Policies — Depreciation.
(2) The natural gas and/or oil-fired amount includes approximately 20Tax equivalents expense increased $12 million kWh and 42 million kWh of pre-commercial generation at Allen and Paradise Combined Cycle Plants for the three months ended December 31, 20172021, as compared to the same period of the prior year. The change is primarily driven by an increase in the tax equivalents collected in the fuel cost recovery.
Generating Sources. The following table shows TVA's generation and 2016, respectively. See Note 1 — Pre-Commercial Plant Operations.purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated:
(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Power Supply by Generating Source For the three months ended December 31 (millions of kWh) |
| | 2021 | | 2020 | | | |
| | | | | | | | | | | | |
| Nuclear | 16,170 | | | 43 | % | | 16,290 | | | 44 | % | | | | | |
| Natural gas and/or oil-fired | 6,829 | | | 18 | % | | 8,359 | | | 22 | % | | | | | |
| Coal-fired | 3,699 | | | 10 | % | | 3,288 | | | 9 | % | | | | | |
| | | | | | | | | | | | |
| Hydroelectric | 3,852 | | | 10 | % | | 4,820 | | | 13 | % | | | | | |
Total TVA-operated generation facilities(1)(2) | 30,550 | | | 81 | % | | 32,757 | | | 88 | % | | | | | |
Purchased power (natural gas and/or oil-fired)(3) | 4,401 | | | 12 | % | | 2,301 | | | 6 | % | | | | | |
Purchased power (other renewables)(4) | 1,442 | | | 4 | % | | 1,354 | | | 4 | % | | | | | |
| | | | | | | | | | | | |
| Purchased power (hydroelectric) | 654 | | | 2 | % | | 624 | | | 1 | % | | | | | |
| Purchased power (coal-fired) | 591 | | | 1 | % | | 221 | | | 1 | % | | | | | |
Total purchased power(2) | 7,088 | | | 19 | % | | 4,500 | | | 12 | % | | | | | |
| Total power supply | 37,638 | | | 100 | % | | 37,257 | | | 100 | % | | | | | |
Notes
(1) 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)(2) Raccoon Mountain Pumped-Storage Plant net generation is allocated against each TVA-operated generation facility and purchased power type for both the three months ended December 31, 2021 and 2020. See Item 1, Business — Power Supply and Load Management Resources — Raccoon Mountain Pumped-Storage Plant in the Annual Report for a discussion of Raccoon Mountain Pumped-Storage Plant.
(3) Purchased power (non-renewable)(gas) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia Combined Cycle PlantCC was 1,0891,176 million kWh and 1,0351,071 million kWh for the three months ended December 31, 20172021 and 2016,2020, respectively.
(5)(4) Purchased power (renewable)(other renewables) includes purchased power purchased from the following renewable sources: hydroelectric, solar, wind, biomass, and renewable cogeneration.
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Fuel |
Fuel expense decreased $93 million for the three months ended December 31, 2017, as compared to the same period of the prior year. The impact of lower effective fuel rates, driven by lower market prices for natural gas and changes in the mix of generation resources, including significantly more hydroelectric generation, contributed $103 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. |
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Purchased Power |
Purchased power expense decreased $22 million for the three months ended December 31, 2017, as compared to the same period of the prior year. This change was driven by increased generation from TVA operated hydroelectric, nuclear, and natural gas assets, resulting in a $29 million decrease. Partially offsetting this decrease was an increase of $7 million related to overall higher demand and an increase in purchased power renewables utilized to meet customer preferences. |
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Operating and Maintenance |
Operating and maintenance expense decreased $32 million for the three months ended December 31, 2017, as compared to the same period of the prior year. This decline was primarily due to a decrease in 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.
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Depreciation and Amortization |
Depreciation and amortization expense decreased $14 million for the three months ended December 31, 2017, as compared to the same period of the prior year. The retirement of Paradise Units 1 and 2 in April 2017 contributed $29 million to the decrease. Partially offsetting this decrease was an increase of approximately $15 million from net additions to Completed plant, including $6 million for the Paradise Combined Cycle Plant, which commenced commercial operations in April 2017.
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Tax Equivalents |
Tax equivalents expense decreased $5 million for the three months ended December 31, 2017, 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, as compared to the same period of the prior year.
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Interest Expense.Interest expense and interest rates for the three months ended December 31, 20172021 and 2016,2020, were as follows:
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Interest Expense and Rates (in millions) | |
| | Three Months Ended December 31 | | | |
| | 2021 | | 2020 | | Percent
Change | | | | | | | |
Interest expense(1) | $ | 263 | | | $ | 281 | | | (6.4) | % | | | | | | | |
| | | | | | | | | | | | |
Average blended debt balance(2) | $ | 20,936 | | | $ | 21,287 | | | (1.6) | % | | | | | | | |
| | | | | | | | | | | | |
Average blended interest rate(3) | 4.92 | % | | 5.17 | % | | (4.8) | % | | | | | | | |
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| | | | | | | | | | |
| Interest Expense and Rates |
| | Three Months Ended December 31, | | |
| | 2017 | | 2016 | | Percent Change |
Interest expense(1) | $ | 322 |
| | $ | 339 |
| | (5.0 | )% |
| | | | | | |
| Average blended interest rate | 4.94 | % | | 5.15 | % | | (4.1 | )% |
NoteNotes
(1) Interest expense includesIncludes amortization of debt discounts, issuance, and reacquisition costs, net.
(2) Includes average balances of long-term power bonds, debt of VIE, and discount notes.
Interest(3) Includes interest on long-term power bonds, debt of VIE, and discount notes.
Total interest expense decreased $17$18 million for the three months ended December 31, 2017,2021, as compared to the same period of the prior year primarily due todriven by a decrease in lower average interest ratebalances on long-term debt and a lower average balance of long-term debt.
Liquidity and Capital Resources
Sources of Liquidity
To meet cash needs and contingencies, TVA depends on various sources of liquidity. TVA’sliquidity 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 usesThe 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 balancemaintain 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 approximately $2.7 billion, and proceeds from other financings. See Note 1112 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, andor other assets.
The Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee ("TVA ActAct") 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.BondsPower bonds outstanding, excluding unamortized discounts and premiums and net exchange lossesgains from foreign currency transactions, at December 31, 20172021, were $24.2$19.7 billion (including current maturities). The balance of Bonds outstanding directly affects TVA’sTVA'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)9 — Variable Interest Entities), could provide supplementary funding if needed. Currently, TVA believes that it hasexpects to have adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decadedecade. See Lease Financings below, Note 9 — Variable Interest Entities, and Note 12 — Debt and Other Obligations for additional information.
TVA may from time to time seek to retire or purchase its outstanding debt through a combinationcash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its balance of Bonds, additional power revenues through power rate increases, cost reductions,Cash and cash equivalents beginning in March 2020. TVA may hold higher balances from time to time in response to potential market volatility or other ways. See Lease Financings below, Note 7, and Note 11 for additional information.business conditions. TVA has maintained continued debt market access since the outbreak of the pandemic. TVA’s next significant power bond maturity is $1.0 billion in August 2022.
Debt Securities. TVA’sTVA's Bonds are not obligations of the United States,U.S., and the United StatesU.S. does not guarantee the payments of principal or interest on Bonds. TVA’sTVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At December 31, 2021, the average maturity of long-term power bonds was 15.44 years, and the weighted average interest rate was 4.51 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEsvariable interest entities ("VIEs") outstanding at December 31, 2017.2021. See Lease Financings below, Note 7,9 — Variable Interest Entities, and Note 1112 — Debt and Other Obligations for additional information.
The following table provides additional information regarding TVA's short-term borrowings.borrowings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-Term Borrowings (in millions) | |
| | At December 31, 2021 | | Three Months Ended December 31, 2021 | | | | At December 31, 2020 | | Three Months Ended December 31, 2020 | | |
| Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) | | | | | | | | | | | |
| Discount notes | $ | 1,066 | | | $ | 1,203 | | | | | $ | 112 | | | $ | 146 | | | |
| Maximum Month-End Gross Amount Outstanding (During Period) | | | | | | | | | | | |
| Discount notes | N/A | | $ | 1,526 | | | | | N/A | | $ | 115 | | | |
| Weighted Average Interest Rate | | | | | | | | | | | |
| Discount notes | 0.03 | % | | 0.04 | % | | | | 0.07 | % | | 0.06 | % | | |
|
| | | | | | | | | | | | | | | |
| Short-Term Borrowing Table |
| | At December 31, 2017 | | Three Months Ended December 31, 2017 | | At December 31, 2016 | | Three Months Ended December 31, 2016 |
| Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) | | | | | | | |
| Discount Notes | $ | 2,722 |
| | $ | 2,084 |
| | $ | 2,027 |
| | $ | 1,391 |
|
| Weighted Average Interest Rate | | | | | | | |
| Discount Notes | 1.246 | % | | 1.110 | % | | 0.499 | % | | 0.330 | % |
| Maximum Month-End Gross Amount Outstanding (During Period) | | | | | | | |
| Discount Notes | N/A |
| | $ | 2,722 |
| | N/A |
| | $ | 2,027 |
|
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 79 — Variable Interest Entities and Note 1112 — Debt and Other Obligations for information about TVA’sTVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain special purpose entitiesSPEs created for the purpose of facilitating lease financing. TVA may seek to enter into similar arrangements in the future. In 2019, TVA made final rent payments under lease/leaseback transactions involving eight combustion turbine units ("CTs") and terminated these transactions. In 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs. In 2021, TVA made final rent payments under lease/leaseback
transactions involving four additional CTs. Rent payments under the remaining lease/leaseback transactions were made through January 2022.
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 andCash, cash equivalents, for the three months endedand restricted cash totaled $526 million and $529 million at December 31, 2017,2021 and December 31, 2016.2020, respectively. A summary of cash flow components for the three months ended December 31, 2017,2021 and December 31, 2016,2020, follows:
Cash provided by (used in):
Operating Activities. TVA’sTVA'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$102 million for the three months ended December 31, 2017,2021, as compared to the same period of the prior year,year. The decrease is primarily due to increased fuel and purchased power payments as a result of decreaseshigher natural gas prices and lower availability of TVA-owned generation, respectively, which have not yet been collected through fuel cost recovery. Increases in revenue collectionspayroll and benefit related costs due to timinglabor escalation for cost of living increases and decreased fuel cost recovery, partially offset by lower operating and maintenance expense due primarilyhigher cash used for asset retirement obligation ("ARO") settlements also contributed to athe decrease in planned nuclear outage days and reductions in workforce related to identified efficiencies and staffing changes needed to support the generation fleet.cash flows from operations.
Investing Activities. The majority of TVA’sTVA'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 $79increased $90 million for the three months ended December 31, 2017,2021, as compared to the same period inof the prior year driven by the completion or pre-commercial operationsJohnsonville aeroderivative combustion turbine project and nuclear fleet improvement projects. In addition, nuclear fuel expenditures were higher for the three months ended December 31, 2021, as compared to the same period of the prior year. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services. These increases were partially offset by decreased spend related to capacity expansion projects for combustion turbine gas facilities at TVA's Paradise and clean air projects, including Paradise Combined CycleColbert Fossil Plant Allen Combined Cycle Plant,("Colbert") sites. See Part I, Item 2, Management's Discussion and the clean air controls at GallatinAnalysis of Financial Condition and Shawnee.Results of Operations — Key Initiatives and Challenges — Generation Resources — Natural Gas-Fired Units.
Financing Activities. TVA’sTVA'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 financing activities decreased by $75increased $192 million for the three months ended December 31, 2017,2021, as compared to the same period inof the prior year, primarily due to higher net issuances of discount notes. Lower net cash flows provided by operating activities and higher net cash used in investing activities in the first quarter of 2022 resulted in the need for net debt issuances to maintain targeted cash balance levels during the first quarter of 2022. Partially offsetting this increase were higher payments on leaseback transactions during the three months ended December 31, 2021.
Impact of COVID-19
To support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA created initiatives such as a resultthe Community Care Fund and Pandemic Credits. TVA has also provided regulatory flexibility for LPCs to halt disconnection of long-term debt redemptions, partially offset by net short-term debt activities. Decreased investing expenditures reduced TVA’s borrowing needs. TVA generally uses short-term debtservices. See Key Initiatives and Challenges—COVID-19 Pandemic for an expanded discussion of these initiatives and the impact to meet working capital needs and other cash requirements while maintaining minimal cash balances. TVA.
Contractual Obligations
TVA has certain obligations and commitments to make future payments under certain contracts. DuringAs discussed in Lease Financings above, during the three months ended December 31, 2017, there were no material changes in TVA’s contractual obligations outside2021, TVA elected to purchase the interests related to eight CTs on the expiration of the ordinary courserelated lease terms in 2023 for a total of business.$155 million. Also, during the three months ended December 31, 2021, TVA entered into a fuel purchase obligation for a total commitment of $204 million from 2022 to 2025, of which $58 million is estimated to be paid during the remainder of 2022. 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, Note 8 — Leases, Note 11— Variable Interest Entities, Note 14 — Debt and Other Obligations, and Note 2122 — Benefit Plans of the Notes to Consolidated Financial Statements in the Annual Report.
Key Initiatives and Challenges
Distributed Energy ResourcesCOVID-19 Pandemic
As In 2020, in response to the amountspread of distributed energy resources ("DER") grows onCOVID-19, TVA implemented a company-wide pandemic plan to address specific aspects of the TVA system, the need for TVA’s traditional generation resources may be reduced,COVID-19 pandemic, and the abilitypandemic plan continually evolves based on medical guidance and federal requirements and guidelines.
The pandemic plan includes telework for those employees and contractors who do not have to be physically present at a TVA facility or office building to provide mission-essential activities or produce safe, reliable power. Based on ongoing monitoring, COVID-19 continues to pose a significant risk in the U.S. and in the Tennessee Valley region, and as a result TVA has extended the timeframe for full workforce reintegration and, for those not fully vaccinated, continues to limit non-essential travel and in-person attendance at non-essential meetings. TVA is currently anticipating a gradual return of teleworkers to corporate sites starting in the second quarter of 2022, subject to close monitoring of the systempublic health situation both in TVA's service territory and nationally. TVA has and will continue to reliablymonitor risk 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 addresspotential impacts throughout 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 financialsituation, including impacts from variants, and assess whether and how to modify 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.pandemic plan as and when appropriate.
As it transitions away from coal to other resources, TVA continues to identify significantimplement strong physical and cybersecurity measures to ensure that systems remain functional to keep employees, customers, and communities safe and enable TVA to continue achieving its mission to serve the people of the Valley. In addition to measures to protect its workforce, stakeholders, and critical operations, TVA is actively monitoring generation, transmission, and distribution functions. Operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic to date. The ultimate impact of the COVID-19 pandemic on TVA's financial condition depends on factors beyond TVA's knowledge or control, including the duration and severity, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy.
TVA also continues to its transmission systemassess potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that include stress on its transmission equipment,may impact generation, maintenance, and capital programs. TVA has experienced an increase in supplier impacts primarily as a result of COVID-19, such as linesdelays and transformers. Whileprice fluctuations, and availability of supplies, but has been able to manage these impacts through existing contracts and increased lead times and communications with suppliers; therefore, TVA ownshas not experienced significant business disruptions at this time. TVA will continue to monitor the supply base and operates its high-voltage transmission grid,remain in contact with suppliers to identify potential risks, including impacts on workforce availability as a result of regulatory actions related to COVID-19.
Regulatory Actions. On January 20, 2021, President Biden issued Executive Order ("EO") 13991, directing federal agencies to implement COVID-19 countermeasures consistent with CDC guidance and establishing a Safer Federal Workforce Task Force (“Task Force”) to develop model safety principles to which all federal agencies would subsequently align their pandemic countermeasures. TVA continues to implement these principles and remains in regular contact with the distribution system is a networkOffice of grids belongingManagement and Budget (“OMB”), which chairs the Task Force. On September 9, 2021, President Biden issued two new EOs in response 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 numberthe COVID-19 pandemic. The first EO required that all federal employees be vaccinated against COVID-19 by November 22, 2021. Only employees entitled to certain accommodations under law were exempt from this requirement. As part of challenges, including grid balancing and reliability. The growth of renewable resources on the distribution grid necessitatesprocess to implement the involvement of entities in addition to TVA, especially the LPCs. vaccination requirement, TVA and LPCs will needits union partners have negotiated and implemented a standalone disciplinary process for employees who have neither been vaccinated by the deadline nor received an exemption allowed by law. This policy includes a progression of counseling for employees and, for those who do not get vaccinated after counseling, a testing program. On January 21, 2022, the United States District Court for the Southern District of Texas issued an injunction against enforcement of the vaccination mandate. The government has filed a notice of its intent to appeal this decision. TVA is continuing to focus on the safety and health of our employees and will continue to implement applicable recommended guidance as it evolves.
The second EO required that federal agencies include clauses in contracts with federal contractors requiring the contractors to comply with guidance issued by the Task Force concerning contractors. This EO does not apply to TVA, and therefore TVA has not been requiring the clauses. On November 30, 2021, the United States District Court for the Eastern District of Kentucky stayed enforcement of the order in Kentucky, Ohio, and Tennessee. The government has appealed this injunction. On December 7, 2021, the United States District Court of the Southern District of Georgia issued a nationwide
injunction suspending enforcement of this order. Given that TVA has not been requiring implementation of the clauses, the injunctions do not impact TVA but could impact TVA contractors who work for other agencies and were required to comply with the order based on those relationships.
On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard ("ETS") in response to the COVID-19 pandemic. The ETS, among other things, would have mandated employers with at least 100 employees to adopt a vaccination policy that requires employees to either be fully vaccinated or submit to at least weekly testing. On November 5, 2021, the United States Court of Appeals for the Fifth Circuit issued an order staying the ETS pending further action by the court. The Supreme Court has agreed to review this matter. The case was subsequently transferred to the United States Court of Appeals for the Sixth Circuit ("Sixth Circuit"), which lifted the stay on December 17, 2021. On January 13, 2022, the Supreme Court reinstated the stay pending further proceedings. On January 26, 2022, OSHA withdrew the ETS as an enforceable emergency temporary standard, but has retained the ETS as a proposed rule.
Customer Pandemic Initiatives. The COVID-19 pandemic created economic uncertainty for TVA's customers and the communities they serve. To support and strengthen the public power response to the COVID-19 pandemic, TVA has announced several customer pandemic initiatives since 2020. The following initiatives are still in effect in 2022:
Regulatory Flexibility. TVA continues to provide regulatory flexibility for LPCs to halt disconnection of services and respond to the local needs of their customers and communities.
Community Care Fund. TVA continues to partner with LPCs through the Community Care Fund by making available over $9 million in TVA matching funds to support local initiatives that address hardships created by the COVID-19 pandemic. As of December 31, 2021, over $5 million in matching funds had been provided by TVA, with over $1 million provided for the three months ended December 31, 2021.
Pandemic Credits. In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which is effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. The credit effective for 2022 is expected to approximate $220 million. For the three months ended December 31, 2021 and 2020, pandemic credits totaled $50 million and $49 million, respectively. In addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023. The 2023 credit is expected to approximate $133 million, and it will be administered in a manner similar to the Pandemic Recovery Credit.
These actions have shown TVA's commitment to support the financial integrity of LPCs along with communities and customers across the Tennessee Valley during these challenging economic conditions caused by the COVID-19 pandemic. The COVID-19 pandemic continues to be an evolving situation that may lead to extended disruption of economic activity and an adverse impact on TVA's results of operations. TVA continues to closely monitor developments and will adjust its response as necessary to ensure reliable service while protecting the safety and health of its workforce.
Distributed Energy Resources
Consumer desire for energy choice, among other things, is driving the expectation for flexible options in the electric industry. TVA and LPCs are working together to leverage the strengths of the Tennessee Valley public power model to provide distributed energy solutions that are economical, sustainable, and flexible. TVA will focus on the safety and reliability impactimpacts of these resources as they are interconnected to the grid as well as ensuringand will ensure that the pricing of electricity remains as low as feasible. As generationAdditional regulatory considerations and analysis may be required as the distributed energy resources become more distributed("DER") market, technologies, and intermittent, the need to extend secure communication networks for visibility and control of these resources becomes even more important in maintaining grid reliability.programs evolve.
Moving towards a more diverse resource mix,Fiber Optic Network. In 2017, the TVA Board approved aauthorized up to $300 million strategic fiber initiative in May
2017 to be spent over the next 10 years, for upgradessubject to the transmission systemannual budget availability and necessary environmental reviews, to maintain reliability. By investing in these
upgrades, TVA plans to be inbuild an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a position to move to more distributed power generation from many smaller sourcesvital 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 December 31, 2021, TVA had spent $157 million on installation of the potentialfiber optic lines and expects to make fiber capacity available to help local communities in rural areas attract and retain jobs.spend an additional $143 million.
Electric Vehicles. TVA is partnering with LPCs and others to support the electrification of transportation in the Valley in a multi-year electric vehicle ("EV") initiative. The initiative focuses on reducing or eliminating EV market barriers by setting EV policies, improving charging infrastructure availability, expanding EV availability and offerings, and spreading EV consumer awareness. In November 2020, the TVA Board approved new policies and an optional wholesale EV rate aimed at encouraging the development of charging infrastructure in the Valley. The updated policies enable LPC investment in public charging infrastructure and allow for the conditional resale of electricity, for transportation purposes only, by any charging developer on a kWh basis. The optional wholesale rate was developed with high power EV charging in mind and provides a stable option for those developing charging infrastructure.
TVA is also working with state agencies, LPCs, and third-party charging developers to create a network of public fast charging stations along major travel corridors in its seven-state region, known as the Fast Charge Network program. In 2021, TVA began a partnership with the State of Tennessee to develop funding programs for a statewide EV fast charging network with plans for fast charging stations every 50 miles along Tennessee's interstates and major highways. Also in 2021, TVA and five other major utilities formed the Electric Highway Coalition to develop a network of fast charging stations along all major highway routes within their service territories. Since formation, the Electric Highway Coalition has gained significant interest from additional utilities and other EV collaboratives. In December 2021, the Electric Highway Coalition merged with the Midwest Electric Vehicle Charging Infrastructure Collaboration to create the National Electric Highway Coalition with members committed to coordination on the development of EV charging infrastructure across the central U.S.
Changing Customer Preferences
As more consumers and businesses are demanding cleaner 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 fromthrough 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 savvysophisticated and want greater control over their energy usage. LargerMany companies are focusing more on sustainability and requiring more energy efficiency as well as cleaner, greener,and renewable energy options. In addition, TVA also seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions. As a result, TVA is increasing its renewable energy portfolio by investing in existing assets and securing power purchase agreements from out-of-Valley wind and in-Valley solar generation facilities. New utility-scale solar is increasing, in part driven by customers’ demand. TVA also encourages renewable power and offers renewable solutions through various current programs and offerings.
Renewable Power Solutions. TVA encourages renewable power through various current programs and offerings. These solutions include:
Small-scale Solutions. The continuing challenge for TVAGreen Connect Program connects residential customers interested in on-site solar installations with qualified solar installers. Qualified solar installers are members of TVA’s Green Connect Quality Contractor Network, which requires installers to have certain qualifications such as certifications and othersmeeting insurance guidelines, among other things, and to install systems to TVA’s program standards.
Utility-scale Solutions. The Green Invest Program matches customer demand with renewable supply through a Green Invest Agreement. The goal of the Green Invest program is finding ways to meet the long-term sustainability needs and preferences of customers while successfully developing flexible pricing modelsat scale. TVA will procure the needed renewable supply through a diversified approach, which could include a competitive procurement process, strategic partnerships, or construction of renewable facilities to accommodatemeet these needs. In addition, Generation Flexibility is a solution available to long-term LPC partners and supports the evolving markets.deployment of up to 2,000 megawatts ("MW") of distributed solar to provide clean, local generation. See Ratemaking below.
Other Renewable Solutions. The Green Switch Program allows customers to support solar renewable resources through purchasing renewable solar energy generated in the Tennessee Valley, sold in 200 kWh blocks. The Green Flex Program gives commercial and industrial customers the ability to meet sustainability goals and to make renewable energy claims through Renewable Energy Certificates ("RECs") from wind generation located outside TVA's service area.
Renewable Power Purchase Agreements. In recent years, TVA has issued request for proposals ("RFP") in order to meet customer preferences and requirements for cleaner energy. As a result of those RFPs, TVA entered into certain PPAs with renewable resource providers, which are summarized below:
Notes
(1) The 2017 RFP consists of three active solar PPAs. Of the three projects, one came online in 2021, one is expected to come online in 2022, and one is expected to come online in 2023.
(2) The 2019 RFP consists of six solar PPAs. Of these six projects, five are expected to come online in 2023, and one is expected to come online in 2024.
(3) The 2020 RFP consists of eight solar PPAs. Of these eight projects, six are expected to come online in 2023, one is expected to come online in 2024, and one is expected to come online in 2025.
(4) In addition, the 2019 RFP includes 50 MW of battery storage and the 2020 RFP includes 196 MW of battery storage that are not included in the chart above.
TVA issued an additional RFP during 2021 for up to 200 MW of new renewable energy and anticipates making selections in 2022. TVA will procure the renewable energy and sell the resulting RECs to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other TVA customers. These agreements help to align the core values of TVA and the public power model with the desire of TVA's customers for renewable energy. Of the renewable PPAs above, more than 2,000 MW has been matched to customers through TVA’s Green Invest Program to meet their needs for new-to-the-world renewable energy.
Integrated Resource Planning
Self-Directed Solar. During 2019, the TVA is beginningBoard approved the process of updating its IRP, a comprehensive study that provides direction on howopportunity for TVA 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. The IRP will consider many views of the future to determine how TVA can continue to provide low-cost, reliable electricity, support environmental stewardship, and spur economic developmentexplore being directly involved in the Valley overdevelopment of a utility-scale solar project, contingent on the next 20 years. To inform TVA’s next long-term financial plan and proactively address the changing utility marketplace, TVA is beginning this work sooner than originally planned.
To ensure TVA best meets projected future needs, TVA will continue its traditionsuccessful completion 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 various DER scenarios, considering the speed and amount of DER penetration, improve TVA’s understanding of the impact and benefit of system flexibility with increasing renewable and distributed resources, and determine the implications to TVA’s diverse portfolio mix for the next 20 years.
TVA is primarily 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 from local power companies, direct-served customers, non-governmental organizations, state and local governments, and academia.
As part of the IRP decision-making process, and in alignment withenvironmental reviews under the National Environmental Policy Act TVA will also analyze potential environmental implications associated with an updated IRP by issuing an environmental impact statement ("EIS").
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"NEPA") and Watts Bar. Implementation isother applicable laws. A tentative project structure has been developed which will allow TVA to work with financial partners for solar development, and in progress at Browns Ferry Nuclear Plant ("Browns Ferry") and is scheduled to be completed in 2019.2021, TVA purchased land for this planned 200 MW development. As of December 31, 2017,2021, TVA had spent $270approximately $24 million on modifications related to these actions at all of its nuclear plants, including Watts Bar Unit 2,the project and expects to spend an additional $12$293 million through 2024.
Low-Income Energy Efficiency Programs. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, third-party contributors, and the Tennessee Valley Public Power Association ("TVPPA") to complete home evaluations and make high-impact home energy upgrades for qualifying homeowners. In addition, TVA and LPCs conduct workshops to educate homeowners about low and no-cost energy efficiency upgrades that improve their quality of life. Through the remaining modifications intendedSchool Uplift Program pilot, TVA is partnering with LPCs as well as state and local governments to address this guidance.assist schools with adopting strategic energy management practices. The engagement with each school includes monthly virtual workshops and fosters performance through competitions for energy efficiency grants and grants for solar pavilions. Finally, through the Community Centered Growth Program, TVA is partnering with LPCs to assist small businesses located within underserved communities with energy evaluations and no-cost energy improvement investments.
Automated Energy Exchange Platform
In October 2021, an automated energy exchange, the Southeast Energy Exchange Market, took effect as a result of a tie vote by FERC commissioners. The exchange was created to facilitate more short-term power exchanges and will be an enhancement to the existing market. TVA’s participation is subject to TVA Board approval and the completion of appropriate environmental reviews. TVA has now completed the appropriate environmental review, and participation will be further subject to TVA Board approval.
Sustainability Reports
Sustainability has been a critical part of TVA’s mission since the TVA Act was signed in 1933 and continues to be a focus in TVA's mission to deliver affordable and reliable energy, steward the environment, and create sustainable economic growth. In 2021, TVA highlighted its sustainability efforts with issuances of its Corporate Sustainability Report, a supplemental Carbon Report, and an Edison Electric Institute Environmental, Social, Governance ("EEI ESG") Sustainability Report, among others. TVA anticipates continuing to highlight its sustainability efforts in 2022.
Strategic Financial Plan
In 2019, the TVA Board approved an annual budget that reflects the first year of a new Strategic Financial Plan. This Strategic Financial Plan, which extends from 2020 through 2030, is flexible in aligning customer preferences and TVA's mission while at the same time establishing a long-term forecast of financial results. Key focus areas of the Strategic Financial Plan include maintaining flat rates, stabilizing debt, establishing alignment between the length of LPC contracts and TVA's long-term commitments, driving efficiencies into the business, and advancing the public power model. As TVA executes the plan, key assumptions and focus areas may change.
Workplace Flexibility
Recognizing the changing work environment, largely fostered by the COVID-19 pandemic, and responding to employee appreciation of flexibility in work location in 2021, TVA established a workplace flexibility initiative called “Reimagining How We Work.” The objective of the initiative is to promote workplace flexibility guided by safety, performance, inclusion, and engagement. In the second quarter of 2022, subject to close monitoring of the public health situation in both TVA's service territory and nationally, TVA plans to begin a hybrid exploration period, to explore how to best work in a hybrid environment in the future, which will allow for more informed long-term decisions around areas such as real estate, technology, and best practices.
Generation Resources
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’sTVA'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 obligatedhas a responsibility 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 NRCNuclear Regulatory Commission ("NRC") for Watts Bar Nuclear Plant ("Watts Bar") Units 1 and 2. However, TVA identified an error in the modeling that will require TVA to resubmitthe models for Watts Bar Units 1 and 2.2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 during 2018.in 2022. In addition, TVA plans to submitsubmitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in 2018.2020. As a result of the recently identified necessary changes to dam stability assumptions, TVA will submit a revision to the Sequoyah model in 2022. TVA will subsequently address conditions at Browns Ferry Nuclear Plant ("Browns Ferry") as needed. TVA has deferred some modifications until the updated Watts Bar and Sequoyah models are completed.
As of December 31, 2017,2021, TVA
had spent $150$155 million on the modifications and improvements related to extreme flooding preparedness and expects to spend up to anpreparedness. TVA is deferring the decision on the need for additional $28 million to completemodifications until after the modifications.modeling work is complete.
NRC Seismic Assessments. On May 9, 2014, the NRC notified licensees of nuclear power reactors in the central and eastern United States 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 evaluations for Browns Ferry and Sequoyah are due by December 31, 2019.
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.events. 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 final rule is expected to be issued in 2018. Minimal changes between the orders and final rule requirements are expected. Once issued, TVA will reviewCommissioners approved the final rule to identify anyin 2019. As of December 31, 2021, TVA has implemented the requirements for Sequoyah, Watts Bar, and Browns Ferry. A gap review of the revised rule has been performed, and no new gaps to compliance. Gaps could result in TVA having to make modifications to one or morecompliance were identified.
Apparent Violations 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 DegradationRegulations. In July 2016, Westinghouse Electric Co., LLC ("Westinghouse") issued a Nuclear Safety Advisory Letter ("NSAL") 16-01 that addresses 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 andOn March 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 ultrasonic inspections during the Sequoyah Unit 1 refueling outage in the spring of 2018 and the Sequoyah Unit 2 refueling outage in the fall of 2018.
Work Environment at Nuclear Plants. In March 2016,2020, the NRC issued a Chilling Effect Letter ("CEL")letter to TVA regarding work environment concerns identified at Watts Bar.identifying four apparent violations of NRC regulations that prohibit licensees from retaliating against employees for their having raised protected nuclear safety concerns. In subsequent inspections,June 2020, TVA participated in a pre-decisional enforcement conference before the NRC, found that Watts Bar still faces challengesand in maintaining a safety conscious work environment. On April 12, 2017, TVA providedAugust 2020, the NRC withissued violations to TVA and a notice of proposed imposition of civil penalties in an updated letter outlining focus areas and metrics for monitoring performance at Watts Bar. In that letter,amount less than $1 million. TVA madesubmitted a formal commitmentwritten response to the NRC that denied the violations and opposed the imposition of civil penalties. In October 2020, the NRC issued an order imposing civil penalties in an amount less than $1 million. In November 2020, TVA responded to conductthe NRC, opposing the order and civil penalty and requesting an evidentiary hearing before the NRC's Atomic Safety and Licensing Board ("ASLB"). In August 2021, TVA filed two Motions for Summary Disposition with the ASLB seeking to have the four violations dismissed. In September 2021, the NRC Staff filed a safety culture assessment at Watts Bar in CY 2017, which it has completed.response to TVA's Motions for Summary Disposition. The ASLB held oral argument on TVA's Motions for Summary Disposition on October 14, 2021. On November 2, 2017,3, 2021, the ASLB granted summary disposition on three of the four violations and in part on the fourth violation. On November 8, 2021, the NRC heldnotified TVA that it was rescinding all four violations, and the NRC and TVA jointly filed a public meeting where motion to terminate the enforcement proceeding. On November 10, 2021, the ASLB granted this motion.
Tritium-Producing Burnable Absorber Rods. TVA presentedand the progress in addressing the issues. TVA is working to implement the fleet-wide actions as documented in the Confirmatory Order issued on July 27, 2017, that will ensure sustainable improvement in safety culture. The NRC began a two-week CEL follow-up inspection at Watts Bar on January 22, 2018.
Watts Bar Unit 2. TVA was a cooperating agency in the February 2016 Department of Energy ("DOE") Final Supplemental Environmental Impact Statement for the Production of Tritiumare engaged in a Commercial Light Water Reactor. On April 5, 2017, due to an anticipated need for morelong-term interagency agreement under which TVA will, at the DOE's request, irradiate tritium-producing burnable absorber rods ("TPBARs"), to assist the DOE announced its preferred alternativein producing tritium for the Department of Defense. TVA has provided 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 to the NRC in December 2017 to authorize the irradiation of TPBARs inusing Watts Bar Unit 2. The NRC is expected to issue a decision by May 2019. Subject to approval of the license amendment,1 since 2003 and began tritium production in Watts Bar Unit 2 is projected to start in the fall of 2020.2021. The DOE's decisionagreement 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 an extended power uprate ("EPU") project at Browns Ferry that is expecteddoes intend to increase the amount of electrical generation capacity of its reactors. TVA plans to begin implementing the EPU project during the plant refueling outagesproduction in the spring of 2018 for Unit 3, the fall of 2018 forboth Watts Bar Unit 1 and Watts Bar Unit 2, beginning in November 2024 for Watts Bar Unit 1 and April 2025 for Watts Bar Unit 2, to align with a DOE request for increased tritium. TVA is currently working to submit a license amendment request with the spring of 2019 forNRC to fulfill this request.
Watts Bar Unit 2. Full EPU power is expected to be achieved following the noted outages for each unit. 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 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 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 to acquire 100 percent of Westinghouse. See Note 13 — Counterparty Risk — Suppliers.
TVA currently has several contracts with Westinghouse and Toshiba, including contracts for 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 2011,2014, the TVA Board approved a project for the additionreplacement of emission control equipmentthe steam generators at Gallatin. TVA completedWatts Bar Unit 2. During the addition of scrubbers on the four Gallatin units during 2016, two SCRs in 2017, and two SCRsrefueling outage in the first quarter of 2018.2021, TVA identified degraded steam generator conditions on Watts Bar Unit 2. Watts Bar Unit 2 remained at 90 percent of rated output until assessments were complete and the mid-cycle outage began inSeptember 2021. The mid-cycle outage concluded in October 2021 and focused on an inspection protocol with multiple contingency repair strategies such that safe and reliable operation can be assured until the permanent steam generator replacement occurs. Watts Bar Unit 2 will remain at or below 95 percent of rated thermal output until the permanent replacement occurs, which is projected for March 2022. As of December 31, 2021, TVA had spent $319 million related to this project and expects to spend an additional $237 million through 2022.
Optimum Energy Portfolio. TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. TVA is also making investments in its generating portfolio to modernize its fleet while also allowing TVA to maintain competitive rates and high reliability and work toward carbon emission reductions.
Based on results of assessments presented to the TVA Board in 2019, the retirement of Bull Run by December 2023 was approved. See Note 6 — Plant Closures. During 2019, the TVA Board also approved the Integrated Resource Plan, which recommended an action to evaluate the engineering end-of-life of aging fossil units. In 2021, this evaluation confirmed that the aging coal fleet is among the oldest in the nation and is experiencing deterioration of material condition and performance challenges. The performance challenges are projected to increase due to the coal fleet’s advancing age and the difficulty of adapting the coal fleet’s generation within the changing generation profile. Therefore, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035.
TVA is also considering plans for additional generating facilities to replace retiring or expiring capacity and to support a low cost, reliable, flexible, and increasingly clean power system. As TVA continues to evaluate the impact of retiring its coal-fired fleet by 2035, it is also evaluating adding flexible lower carbon-emitting gas plants as a bridging strategy to maintain reliability, such as the ongoing CT projects at TVA's Paradise and Colbert sites and the aeroderivative CT project at TVA's Johnsonville site. In addition, atTVA is committed to investing in the future of nuclear with the evaluation of emerging advanced nuclear technologies, such as small modular reactors, and is increasing its December 30, 2014 meeting,renewable energy portfolio by securing power purchase agreements for out-of-Valley wind and in-Valley solar as well as with projects such as TVA's Self-Directed Solar. See Generation Resources — Natural Gas-Fired Units and Small Modular Reactors, in addition to Changing Customer Preferences.
TVA will prepare environmental reviews pursuant to NEPA prior to retiring or building a plant. Environmental reviews evaluating the potential retirement of the Cumberland Fossil Plant ("Cumberland") and Kingston Fossil Plant ("Kingston") and replacement with other generation are now underway. In addition, on November 10, 2021, the TVA Board authorized the 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.
CEO to
evaluate, decide upon, and complete, if necessary, the retirements of Cumberland and Kingston plants and replacement generation projects, subject to complying with all required environmental reviews, periodically updating the TVA Board on plans and actions, and notifying the TVA Board before making final decisions. The TVA Board approved spending up to $3.5 billion for these projects to develop generation and transmission assets and complete required demolition activities.
Decarbonization. TVA seeks to obtain greater amounts of its power supply from clean resources to work towards carbon emission reductions and is making investments in its generating portfolio to modernize the fleet while also allowing TVA to maintain competitive rates and high reliability. In addition, TVA's decarbonization initiative commenced in 2022 and is aimed at understanding and applying clean resources to support the reduction of carbon emissions from its power supply. Related to its carbon reduction efforts, TVA has established six guiding principles which are as follows:
•Prioritize the needs of Valley stakeholders as TVA works to achieve its goals by maintaining low rates and high reliability, and attracting new jobs in the Valley.
•Use best-available science and support research and policies that further carbon-free dispatchable technologies.
•Partner with long-term LPCs and other customers and communities to support economy-wide decarbonization efforts and the strategic electrification of other sectors, such as transportation.
•Maintain nuclear generation, hydro generation, and a strong transmission grid as key enabling assets.
•Be transparent with stakeholders in measuring and sharing TVA's progress, and listen and work effectively with all its stakeholders to understand their priorities and needs.
•Adapt to new technologies and changing policies, and be willing and open to changing TVA's plans and projects to achieve deep carbon reduction.
See also Environmental Matters — Climate Change for a discussion on the impact of executive actions and climate related regulations on TVA.
Natural Gas-Fired Units.During 2019, the TVA Board approved an expansion of approximately 1,500 MW of peaking gas replacement capacity at two combustion turbine gas facilities to coincide with the retirement of Allen CTs 1-20 and Johnsonville CTs 1-16, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began at TVA’s Paradise and Colbert sites to further scope out the projects and supply information needed for the NEPA review. In 2021, environmental reviews under NEPA and other applicable laws were complete, and TVA received the air permits for the Paradise and Colbert facilities. Each project is expected to increase combustion turbine generation capacity by 750 MW at a cost not to exceed approximately $503 million per project. As of December 31, 2021, TVA had spent approximately $364 million on these expansions, and TVA expects to spend an additional $642 million. Both projects are anticipated to enter commercial operations by the end of CY 2023.
A 500 MW aeroderivative CT project at TVA’s Johnsonville site has been approved for $599 million, contingent on the successful completion of environmental reviews under NEPA and other applicable laws. In 2020, detailed design and engineering work began to further scope out the project and supply information needed for the NEPA review. As of December 31, 2021, TVA had spent approximately $148 million on the design and engineering work and for long lead time equipment that could be used at any site. TVA expects to spend an additional $451 million on these expansions and expects the project to enter commercial operations by the end of CY 2024.
Coal Combustion Residual Facilities. Residuals Facilities. TVA has committed to a programmatic approach tofor the elimination of wet storage of CCRscoal combustion residuals ("CCR") within the TVA service area. Under this program (the “CCR Conversion Program”("CCR Program"), TVA has committed to (1) convertperformed stability remediation, completed the conversion of all operational coal-fired plants to dry CCR storage, (2) closeand is now closing all remaining wet storage facilities,facilities.
Dry generation and (3) meet all applicable state and federal regulations. To carry out its CCR Conversion Program,dewatering projects. TVA is undertakinghas accomplished the following actions:
Dry Generation and Dewatering Projects. Conversion of coal plant CCRconversion from wet processes to dry handling of CCR materials at all operating coal plants with the completion of dry generation and/or dewatering is completeprojects at Bull Run, and construction is underway at Kingston, Paradise, and Shawnee. Construction of an additional bottom ash dewatering facility is scheduled to begin atCumberland, Gallatin in 2018.
Landfills. Lined and permitted dry storage facilities have been constructed and are operational at Bull Run,Fossil Plant ("Gallatin"), Kingston, and Gallatin. Construction of newShawnee Fossil Plant ("Shawnee").
Landfills. TVA has made strategic decisions to build and maintain lined and permitted dry storage facilities on TVA-owned property at some TVA locations, allowing these facilities to operate beyond existing dry storage capacity. Lined and permitted landfills are scheduled to begin at Cumberland, Paradise, and Shawnee in 2018. In addition, construction of another lined facilityoperational at Bull Run, Gallatin, Kingston, and Shawnee; construction of a new lined and permitted landfill at Gallatin is scheduledexpected to start in 2022; and TVA continues to work through the permitting process for a new landfill at Cumberland and expects construction to begin in 2019.2023. Construction of additional lined and dry storage facilities may occur to support future business requirements.
CCR Impoundment Closuresfacilities closures. TVA is planningworking to close wet CCR impoundmentsfacilities 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.requirements. Closure project schedules and costs are driven by the selected closure technologymethodology (such as cap and close in placeclosure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure by removal).methodology is closure-in-place, with exceptions at certain facilities. TVA issued an EISenvironmental impact statement ("EIS") in June 2016 that addresses the closure of CCR impoundments at TVA's coal-fired plants. TVA issued its associated Record of Decision in July 2016. Although the EIS was designed to be programmatic in order to address the mode of impoundment closures, it specifically addressed closure methods at 10 impoundments. TVA subsequently decided to close those impoundments, althoughimpoundments. The method of final closure plans are still subject tofor each of these facilities will depend on various factors, including approval by appropriate state regulators.regulators and applicable closure requirements of state and federal regulations. Additional National Environmental Policy Act analysessite-specific NEPA studies will be conducted as other impoundmentsfacilities are designated for closure. As environmental studies are performed and closure methodologies are determined, detailed project schedules and estimates will be finalized.See Note 11 — Asset Retirement Obligations.
Groundwater Monitoringmonitoring. Compliance with the EPAEnvironmental Protection Agency's ("EPA's") CCR rule as well as other requirements will require("CCR Rule") required implementation of a groundwater monitoring program, additional engineering, and analysis as well as implementation of a comprehensive groundwater monitoring program.ongoing analysis. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. TVA expectsThese costs cannot reasonably be predicted until a final remedy is selected, if necessary.
The final Part A revision to continue to evaluate and update these cost estimates.
Thethe CCR Conversion Program is scheduled to be completed by 2022 with two exceptions. First, a new landfill at Shawnee will be required to accommodate the addition of air pollution controls, and the landfill is scheduled to be operational byRule became effective September 28, 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, the impoundments at Gallatin are pending additional studies to determineAmong other things, the final Part A rule requires unlined CCR surface impoundments to stop receiving CCR and non-CCR waste streams and to initiate closure methodologyor retrofit by no later than April 11, 2021. TVA ceased sending CCR and schedule. While plans are currently being formulated fornon-CCR waste streams to, and initiated closure of, unlined CCR surface impoundments by the specified deadline.
In compliance with the CCR closure methodology for Gallatin,Rule, TVA is involved in two lawsuits relating to alleged releasespublished the results of waste materials from the2020 groundwater testing at its CCR facilities during the second quarter of 2021. The results included values above groundwater protection standards for some constituents at Gallatin. On August 4, 2017,certain CCR units. TVA previously identified several CCR units with constituents at statistically significant levels above site-specific groundwater protection standards. TVA has completed an assessment of corrective measures (“ACM”), which analyzes the court in one case ordered TVAeffectiveness of potential corrective actions, and has published ACM reports to move all materials fromits CCR Rule Compliance Data and Information website. Based on the existing impoundments to a lined facility but did not impose any monetary penalties. The costsresults of constructing a lined facility onsite and excavating and moving the ash is approximately $900 million. IfACM, TVA is required to useselect a facility offsite, thenremedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the costs could be approximately $2.0 billion, plus an amountstatus of additional costs reflectingremedy selection until the expected impactsfinal remedy is selected.
As 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. See Note 8.
Through December 31, 2017,2021, TVA had spent approximately $1.3$2.4 billion on its CCR Conversion Program. Through 2026, TVA expects to spend approximately an additional $1.0 billion$720 million on the CCR Conversion Program through 2022, excluding new requirements related toProgram. Estimates for these amounts and spend after 2026 may change depending on the Gallatin CCR facilities lawsuits. Oncefinal closure method selected for each facility. While the conversion portion of the CCR Conversion Program is completed, TVA will continue to undertake certain CCR closure and storage projects, including building new landfill sectionscells under existing permits and closing existing sectionscells once they reach capacity.
Natural Gas-Fired Units. Pre-commercial operations on Units 1 TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the U.S. Court of Appeals for the Sixth Circuit, and 2the other case was resolved by the entry of a consent order in Davidson County Chancery Court that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing ash facility by removal, either to an onsite landfill or to an offsite facility. TVA may also consider options for beneficial reuse of the CCR. TVA has submitted the removal plan to the Tennessee Department of Environment and Conservation ("TDEC") and other applicable parties pursuant to the consent order. See Note 11 — Asset Retirement Obligations.
In October 2019, TDEC released amendments to its regulations which govern solid waste disposal facilities, including TVA's active CCR facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years.
Allen Groundwater Investigation. The CCR Rule required TVA to implement a comprehensive groundwater monitoring program at units subject to the rule. As a result of this groundwater monitoring program, TVA reported to TDEC in 2017 elevated levels of arsenic, lead, and fluoride in groundwater samples collected from two shallow-aquifer groundwater monitoring wells around the Allen East Ash Disposal Area. TVA, under the oversight of TDEC, conducted a remedial investigation into the nature and extent of the contamination. In 2018, TVA submitted a draft Remedial Investigation Report to TDEC which was revised after discussions with TDEC and additional investigation. TVA submitted the Final Updated Remedial Investigation Report to TDEC in 2019.
The remedial investigation confirmed that the high arsenic, fluoride, and lead concentrations are limited to the shallow alluvial aquifer in the north and south areas of the Allen East Ash Disposal Area. These areas are not adversely impacting the Memphis aquifer, which is the source of the public drinking water supply. All samples taken from the Memphis aquifer through TVA production wells were within the Environmental Protection Agency ("EPA") drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant began("Allen CC") by the United States Geological Survey and the University of Memphis, TVA is committed to not operating these production wells until additional data supports safe use. TVA constructed water tanks on site and is purchasing cooling water from MLGW. Purchasing cooling water
in combination with the use of water tanks, rather than wells, could impose some operational restrictions, such as limitations on capacity, on the Allen CC due to lower availability of cooling water.
TVA is taking steps to close both of the CCR storage facilities at the Allen Fossil Plant and initiate remediation of the groundwater at the East Ash Disposal Area. TVA evaluated closure options for both the East Ash Disposal Area and the nearby West Ash Disposal Area through an EIS pursuant to NEPA. In March 2019, TVA released its public scoping report, which eliminated closure-in-place as an alternative. TVA published the final EIS on March 13, 2020, and its Record of Decision on April 14, 2020, which documents the final decision to remove CCR from the above identified areas and transport the CCR to an existing permitted offsite landfill. TVA conducted two virtual public outreach meetings in September 2017,2021 to discuss the project 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 completionselected landfill. As part of this facility,closure, TVA will continue to dewater the existing coal-fired unitsEast Ash Disposal Area and treat the water before it is discharged to the NPDES outfall.
In parallel with the evaluation of closure options, TVA has also initiated an Interim Response Action Plan which includes a groundwater extraction system and treatment system. A feasibility study to evaluate remedial actions for the site was submitted to TDEC on September 4, 2020. A virtual public meeting to present the Interim Response Action as the Proposed Plan for the site was held on November 17, 2020. The public was invited to review the remediation documents and encouraged to comment on the Proposed Plan during the public comment period. TVA submitted the public comments along with responses to TDEC for consideration. After considering public comments, TDEC signed the Record of Decision on August 16, 2021.
TVA prepared a Remedial Action Plan ("RAP") to outline remediation actions at the site and submitted this plan to TDEC for review and approval. After review, consideration, and associated plan revisions, TDEC accepted the RAP and provided written approval to begin relocation of CCR materials to an offsite, lined landfill on November 19, 2021. Removal of CCR from the site began November 29, 2021. Monthly progress meetings with TDEC began in December 2021 and will continue as the site is remediated.
TVA's Remedial Investigation/Interim Response Action Groundwater Monitoring Plan is reviewed and modified annually. The 2021 Remedial Investigation/Interim Response Action Groundwater Monitoring Plan was submitted to TDEC on April 1, 2021. TVA continues to sample the monitoring wells at the site as described by the plan quarterly. TVA prepares a memorandum after each quarterly event and prepares an annual report to evaluate the sampling results. The last groundwater samples for CY 2021 were collected in December 2021; the annual report will be retired. See Regulatory Compliance — Allen Groundwater Investigation below.prepared when the results are available and submitted to TDEC.
Pre-commercial operations on Unit 20Potential 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 Turbinecleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. On August 24, 2021, the U.S. Court of Appeals for the Sixth Circuit accepted Jacobs's petition for interim appeal on issues relating to the availability of derivative governmental immunity as a defense to the plaintiffs' claims. On September 29, 2021, the Eastern District certified four questions to the Tennessee Supreme Court regarding the applicability of the Tennessee Silicosis Claims Priority Act to the plaintiffs' claims. The Eastern District's order also stayed all proceedings pending the Tennessee Supreme Court's decision. If the litigation proceeds to the second phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages. No trial date has been set for the second phase.
Other contractor employees and family members have filed lawsuits against Jacobs that are pending in the Eastern District. These pending lawsuits are stayed and raise similar claims to those being litigated in the case referenced above.
While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition. See Note 20 — Contingencies and Legal Proceedings —Contingencies.
Coal Supply. TVA experienced challenges in 2021 related to coal supply, as a result of supply limitation and transportation challenges. Coal supply and transportation continue to be constrained; however, TVA is utilizing its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies. In October 2021, one of TVA's fuel storage locations and coal handling service providers experienced an event that damaged a number of systems and resulted
in the inability to unload trains for a period of time. This disruption is projected to continue at least into February. To mitigate the issue, TVA implemented terminal service options at other locations which have met and are expected to continue to meet TVA's interim coal handling needs. Plant which allowsoperations still could be affected by the limited offsite coal blending options, limited available inventory capacity, and longer locational lead times associated with the alternative terminals. At this time, however, TVA has been able to manage such impacts, and TVA's coal generation fleet has continued to meet operational needs. TVA will continue to monitor the situation and respond to potential risks as the situation resolves.
River Management. The Tennessee Valley experienced near normal rainfall and runoff for cogeneration capability, began in September 2017, and was placed in service during the first quarter of 2018. Unit 20 replaces Johnsonville Fossil Plant’s cogeneration capability of Units 1-4, which were retired in December 2017.
River Management. While drier than normal conditions dominated the first half of 2017, the second half of the year saw a return to normal rainfall and near normal runoff, a trend that continued into the first quarter of 2018. Increased rainfall and improved runoff during the first quarter of 2018 has helped2022 helping TVA meet its river system commitments, including managing minimum river flows and minimum depths for navigation;navigation, generating low-cost hydroelectric power;power, maintaining water quality,flows that support habitat for fish and other aquatic species, maintaining water supply, and recreationproviding recreational opportunities for the Tennessee Valley;Valley. In addition, having cool water available helps TVA to meet thermal compliance and enablingsupport normal operation of TVA’sTVA's nuclear and fossil-fueled plants; andplants, while oxygenating water to helphelps fish species remain healthy. Rainfall and runoff in the Tennessee Valley during the first quarter of 20182022 were 9995 percent and 110105 percent of normal, respectively, which resultedrespectively.
Aquatic Vegetation. In 2020, the unprecedented growth and breakaway of aquatic vegetation in conventional hydroelectric generation being 87 percent higherWheeler Reservoir challenged the Browns Ferry intake structures and impacted the source of cooling water for the plant. Two units were removed from operation and power was reduced on the third unit to accommodate the decreased capability of the cooling systems. Nuclear safety was not challenged during this period as comparedthe event. Breakaway of aquatic vegetation will continue to be a concern until a permanent solution is finalized. However, mitigation solutions have been identified to eliminate marine biofouling of the same periodplant intake system, and permanent design solutions are expected to be implemented by the end of 2017.CY 2025.
Small Modular Reactors. In December 2019, TVA submittedbecame the first utility in the nation to successfully obtain approval for an Early Site Permit Application ("ESPA") for review byearly site permit from the NRC in May 2016. The NRC completed its acceptance review of the application on December 30, 2016,to potentially construct and began its detailed technical review of the application in January 2017. The ESPA is based on the potential future construction and operation of two or moreoperate small modular reactors ("SMR"SMRs") units at TVA’s Clinch River site in Oak Ridge, Tennessee. TVA’s ESPANuclear Site. The permit 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.valid through 2039 and therefore provides 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 on a schedule that supports submittal of a combined construction and operating license ("COL") application in 2020, in conjunction with supporting the NRC’s review of the ESPA. Submittal of a COL is subject to sufficient progress being made by the 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. The project has a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors. In 2021, TVA initiated a Programmatic Environmental Impact Statement that will evaluate a variety of alternatives for a proposed advanced nuclear technology park at this early stagethe Clinch River Nuclear Site and by moving forwardwill provide additional flexibility for future decision making. The decision to potentially build SMRs is an ongoing discussion as part of the asset strategy for TVA’s future generation portfolio.
TVA is committed to investing in the future of nuclear and evaluating the economic feasibility of advanced nuclear reactors. TVA is also partnering with an ESPA,like-minded organizations and has entered into memorandums of understanding with Oak Ridge National Laboratory and the University of Tennessee that allow for mutual collaboration to explore advanced reactor designs as a next-generation nuclear technology while leveraging the expertise of federally funded research and development centers and academic institutions. Further, in 2021, TVA will beentered a cooperative development agreement with Kairos Power to provide defined engineering, operations, and licensing services in support of a positionlow-power demonstration reactor Kairos Power plans to build a SMR if and when additional power sources are needed. deploy at the East Tennessee Technology Park in Oak Ridge, TN.
Any future decision to construct a SMRany reactor, advanced or otherwise, would require approval by the TVA Board.
On October 10, 2017,Board and the Atomic Safety and Licensing Board issued a decision admitting two contentions proffered jointly by Southern AllianceNRC. As of December 31, 2021, TVA had spent $94 million on work regarding SMRs, including work to complete the early site permit application for Clean Energy ("SACE") and Tennessee Environmental Council ("TEC") to intervene in the ESPA proceeding. See Note 17 — Legal Proceedings — Petitions to Intervene in the Proceeding Involving the Early Site Permit Application for Small Modular Reactors at TVA's Clinch River Nuclear Site,. of which the DOE had reimbursed TVA $29 million. Additional expenditures will be determined based on future project development.
System Operations Center. A new system operations center has been approved for $289 million. The new secured facility is being built to accommodate a new energy management system and adapt to new regulatory requirements, and will have improved physical security from the previous center. The facility is expected to be constructed by the third quarter of 2023 and fully operational in 2025. As of December 31, 2021, TVA had spent approximately $108 million on the project and expects to spend an additional $181 million.
Energy Management System. A new energy management system has been approved for $90 million. As the current energy management system is nearing the end of its life cycle, this project will replace the existing analog system with a digital system. The new digital system will have higher capacity and speed, for communications with the TVA grid and for inputs from monitoring equipment, which will also network the new control center with existing locations and enable better remote visibility and control. The system is expected to be complete in 2026. As of December 31, 2021, TVA had spent approximately $39 million on the project and expects to spend an additional $51 million.
Dam Safety and Remediation Initiatives
Assurance Initiatives. TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety, with the objective of reducing the risk of a dam safety event. The program analyzes, evaluates, and manages risks through a systematic and thorough process that facilitates decision making for the safety of a structure, identifying necessary actions to reduce risk, including remediation projects, and prioritization of actions for TVA's river dams. Prioritization is compriseddriven by reducing risk to the public and asset preservation. TVA also continues to provide routine care of various engineering activities for all of TVA’sthe dams including safety reassessments using modern industry criteria and the new probable maximum flood and site-specific seismic load cases. TVA will continue its preventative and ongoing maintenance as a part of this safety program. TVA has spent $86 million onthe dam safety assurance initiatives since 2012program through inspections, monitoring, and expects to spend an additional $206 million through 2021.maintenance, among other activities.
Boone Dam Remediation. In October 2014,2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam’sdam's earthen embankment. TVA has completed grouting, construction of an upstream and downstream buttress, installation of the concrete cut-off wall, and raising of the reservoir for fluctuation testing of the repair. TVA is currently evaluatingconstructing a floodwall to return the effectiveness of that grouting phase. The second phaseembankment to its original height. Construction of the grouting program (high mobility grouting) is on holdfloodwall 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 plannedwell as site restoration activities are being re-sequenced.planned for completion in 2022.
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, 2017,2021, TVA had spent $108$306 million related to these projectsthis project and expects to spend an additional $342$31 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 planningcurrently working on a project with the local water utility to upgrade the south embankment by constructing berms on the upstream and downstream slopes. The design phaserelocate an affected water intake system, which will allow for completion of the project began during the first quarter of 2017, and the projectremaining upstream berm work. This work is expected to be in full construction during 2018. The project is currently estimated to be completedcomplete in two years. However, the project may take longer than two years depending on successful construction sequencing.2022. As of December 31, 2017,2021, TVA had spent $6$118 million related to these projectsthis project and expects to spend an additional $94 million.$10 million through 2022.
SurplusReal Property Portfolio
TVA continues to study its real estateproperty portfolio foras part of the purpose ofStrategic Real Estate Plan, which is aimed at reducing cost, right-sizing the portfolio, and aligning its real estate holdings with TVA's strategic direction. A comprehensive assessment of itsIn addition, as TVA continues to implement telework for those who do not have to be physically present during the COVID-19 pandemic, it is also assessing and reviewing the pandemic's long-term impacts to real estate holdings has been completed, and TVA is implementing a strategy aimed at reducing cost and right-sizing its portfolio as partestate.
Regional Consolidations — Knoxville Region. Consolidation of the effort.centralized field offices in Norris, Tennessee, is expected to be completed in early CY 2022. Additional consolidations from the Greenway Area Office were performed along with the public auction sale of the property in December 2021.
Bellefonte Nuclear PlantSupply Chain
Buy American Executive Order. On November 14, 2016, following a public auction,January 25, 2021, President Biden issued EO 14005, "Ensuring the Future Is Made in All of America by All of America’s Workers." EO 14005 imposes new reporting and procedural requirements, as well as additional executive oversight, for federal agency purchases of foreign goods and services. OMB issued guidance in connection with EO 14005 in June 2021, and in July 2021 TVA entered into a contract to sell substantially all ofsubmitted its Bellefonte site to Nuclear Development, LLC for $111 million. Nuclear Development, LLC paid TVA $22
million on November 14, 2016, and the remaining $89 million is due at closing. Nuclear Development, LLC has up to two years from November 14, 2016, to close on the property, andreport in response. TVA will maintain the site until then. The closing is subjectcontinue to amongcomply with new reporting requirements as applicable.
other conditions, a determination by TVA's Chief Executive Officer that potential environmentalInflation. TVA continues to see an increase in supplier impacts have been appropriately addressed or are acceptable. TVA's CEO made this determination in the affirmative on August 10, 2017.
Muscle Shoals Property. In alignment with its strategic direction of right-sizing its real estate portfolio, TVA has drafted a strategy to further reduce a significant number of buildings and property in Muscle Shoals, Alabama, including the disposition of 900 acres of the 970 acres approved 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.
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”) and adjacent Summer Place Complex ("SPC"). As a result of this study and subsequent environmental assessment in 2017, TVA is planning to consolidate most of its Knoxville area employees into one location in the West Tower of the KOC and 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.COVID-19, including price fluctuations. TVA has spent $40 million sinceactively managed spend to mitigate inflationary pressures; however, broader inflationary pressures are expected to persist in 2022. TVA will continue to monitor these pressures and spend to lower TVA’s risk.
Ratemaking
TVA, LPCs, and directly served industries have worked collaboratively in recent years to develop changes to rates that focus on TVA's long-term pricing efforts and the approvalchanging needs 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 effluent limitation guidelines ("ELGs"). The ELGs update the existing technology-based water discharge limitations for power plants. Compliance with new requirements is requiredcustomers in the 2018-2023 timeframeTennessee Valley. These changes have improved pricing by better aligning rates with underlying cost drivers and will necessitate major upgradesby sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable.
TVA and LPCs continue 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 (scrubber) wastewater require primary physical/chemical treatment and secondary biological treatmentwork together 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 ELGs previously established for flue gas desulfurization wastewater and bottom ash transport water. The EPA pushed back the compliance dates for these two wastestreams from the 2018-2023 timeframe to 2020-2023. Other requirements and applicability dateschanging needs of the rule 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 in the Annual Report.
TVA currently has four plants with wet scrubbers that will have to comply with the scrubber-related limits, the largest being Cumberland. TVA is working to address future compliance with the ELGs at Cumberland given its unique “once-through” scrubber design. Compliance with the current rule at Cumberland without 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. In May 2017, TVA reported elevated levels of arsenic, lead, and fluoride in water samples taken at a few shallow-aquifer groundwater monitoring wells at Allen Fossil Plant. TVA is working withconsumers around the Tennessee Department of Environment and Conservation ("TDEC") to identify the source of the arsenic, lead, and fluoride. TVA received a Remedial Site Investigation request from TDEC in July 2017, outlining the objectives of the investigation and asking TVA to provide a work plan. The plan includes more extensive groundwater sampling to identify the source and extent of the contamination. The plan also includes groundwater modeling to determine 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, including a pump test involving the cooling water withdrawal wells. TVA has contracted 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 of the investigation will be submitted to TDEC in March 2018. Depending of the results of the monitoring and the determination of the source of the contamination, TVA may be required to take actions including remediation and/or altering its planned source of cooling water for the Allen Combined Cycle Plant.
Ratemaking
At its August 23, 2017 meeting,Valley. In 2019, the TVA Board approved a basePartnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate adjustmentincreases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which became effective on October 1, 2017. The base rate adjustment is expectedenables TVA to contributerecover its long-term financial commitments over a commensurate period. In 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate or purchase up to approximately $195 millionfive percent of average total hourly energy sales over 2015 - 2019 in order to 2018 revenues.meet their individual customers' needs. As of January 31, 2022, 146 LPCs had signed the 20-year Partnership Agreement with TVA, and 76 LPCs had signed a Flexibility Agreement.
Board Quorum
The terms of John L. Ryder and Kenneth E. Allen as members of the TVA Board ended January 3, 2022, with the adjournment of the most recent session of Congress. There are currently five TVA Board members, and the terms of two additional TVA Board members – Jeff W. Smith and A.D. Frazier – expire on May 18, 2022, although they are permitted under the TVA Act to remain in office until the earlier of the end of the current session of Congress or the date a successor takes office. Under the TVA Act, a quorum of the TVA Board is five members. The TVA Board is responsible for, among other things, establishing the rates TVA charges for power as well as TVA's long-term objectives, policies, and plans. Accordingly, loss of a quorum for an extended period of time would impair TVA's ability to change rates and to modify these objectives, policies, and plans. See Item 1A, Risk Factors – Loss of a quorum of the TVA Board could limit TVA’s ability to adapt to meet changing business conditions in the Annual Report.
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.
Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA is workingcontinues 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 U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") and the United StatesU.S. Computer Emergency Readiness Team ("US-CERT"). CISA serves as the agency assisting other federal entities in defending against threats and securing critical infrastructure. US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats 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.threats.
The risk of these cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify and whileacross all industries, including the energy sector. Over the last few years, TVA has observed a significant increase in malicious activity including phishing campaigns, malicious websites, distributed denial of service attacks, and activity specific to the COVID-19 pandemic, among others. These types of malicious activity have also been observed by TVA's external vendors, stakeholders, and partners. This activity has caused the need for heightened awareness and preparedness. In addition, TVA has a robust vulnerability and patch management program in place. When vulnerabilities are identified, the program is utilized to identify and prioritize remediation and mitigation activities to reduce the risk to TVA.
On May 12, 2021, President Biden signed EO 14028, "Improving the Nation's Cybersecurity." This EO is intended to improve the nation's cybersecurity posture and protect federal government networks by improving information-sharing between the U.S. government and the private sector on cyber issues and strengthening the United States' ability to respond to incidents when they occur. This EO is focused on specific goals and requirements including actions for zero trust architectures; cloud services; FedRAMP programs; supply chain and contracts; secure software development; endpoint detection and response, standardized vulnerability, and incident response operational plans; threat and vulnerability analysis; assessment and threat-hunting; event logging, monitoring, and retention; and information sharing. TVA continues to evaluate and respond to the EO, associated OMB memorandums, and other emerging requirements in alignment with the order. TVA has submitted all reports as required, established response teams and an oversight structure, and initiated projects as necessary to address the required actions.
In December 2021, TVA was notified of a potential cyber vulnerability, known as Log4j, that had the ability to impact many applications and services. TVA immediately responded and through its vulnerability and patch management program, implemented remediations and mitigations to address potential impact. TVA is continuing to work with vendors to ensure all services and applications are secure. At this time, this event has not impacted TVA’s ability to operate as planned.
TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. While TVA and its third-party vendors and service providers have been, and will likely continue to be, subjected to such attacks
and attempts to disrupt operations, to date the attacks have not had a significant or material impact on business or operations and have not impacted TVA's ability to operate as planned or compromised data which could involve TVA in legal proceedings.planned. See Item 1A, Risk Factors — OperationalCybersecurity 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.
Transmission Assets. In addition to physical and cybersecurity attacks, TVA’sTVA'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"EMPs"). Although the effects ofTVA meets all existing NERC Standards for GMD, and EMP are dissimilar, they are often considered together. On September 22, 2016, the Federal Energy Regulatory Commission ("FERC") approved the Phase 2 NERC Standard TPL-007 to address GMD events. TVA has already met many of the requirements of the new standard with completion of a model of the 500 kV grid and evaluation ofevaluated the effects of solar storms ranging from NERC’sNERC'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, and other grid owners and operators to address this re-emergent concern.
Bulk-Power System Assets. On May 1, 2020, the Trump Administration issued EO 13920, "Securing the United States Bulk-Power System." Among other things, the EO prohibits the acquisition or installation of any bulk-power system electric equipment where the transaction (1) involves any property in which any foreign country or a national thereof has any interest and (2) poses an undue risk to the bulk-power system in, or national security of, the U.S. On December 17, 2020, the DOE issued a Prohibition Order Securing Critical Defense Facilities, which was suspended and then revoked. EO 13920 has expired and is no longer in effect. EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis," directs DOE and OMB to consider whether to recommend the issuance of a replacement EO to EO 13920. The DOE issued a Request for Information on April 22, 2021, to help inform any recommendation that it may make for a replacement EO. At this time, it is uncertain to what extent a future EO that may potentially address risks associated with the bulk-power system may impact TVA's operations.
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.matters. Emissions from all TVA-owned and operated units (including small CTs of less than 25 MW) have been reduced from historic peaks. Emissions of nitrogen oxide ("NOx") have been reduced by 97 percent below peak 1995 levels and emissions of sulfur dioxide ("SO2") have been reduced by 99 percent below 1977 levels through CY 2020. For CY 2020, TVA's emissions of carbon dioxide ("CO2") from its owned and operated units, including purchased power and REC retirement adjustments which reduce the CO2 emissions, were 43 million tons, resulting in a TVA system average, as delivered, CO2 emission rate of 562 lbs/MWh. This represents a 63 percent reduction in mass carbon emissions from 2005 levels. To remain consistent and to align with the EPA's reporting requirements, TVA intends to continue reporting CO2 emissions on a calendar year basis.
Additional quantitative emissions data is as follows:
| | | | | | | | | | | | | | | | | |
|
Emissions and Intensity Rates (1) | | 2020 | | 2019 | | | |
Nitrogen Oxide (NOx)(2) | | | | | | | |
Total NOx Emissions (MT) | | 12,577 | | 19,430 | | | |
Total NOx Emissions Intensity (MT/Net MWh) | | 0.000094 | | 0.000140 | | | |
Sulfur Dioxide (SO2)(2) | | | | | | | |
Total SO2 Emissions (MT) | | 17,082 | | 26,972 | | | |
Total SO2 Emissions Intensity (MT/Net MWh) | | 0.000127 | | 0.000194 | | | |
| Mercury (Hg) | | | | | | | |
| Total Hg Emissions (kg) | | 17.5 | | 50.1 | | | |
| Total Hg Emissions Intensity (kg/Net MWh) | | 0.0000001 | | 0.0000004 | | | |
| | | | | | | |
| | | | | | | |
Notes
(1) Intensity rates are calculated based on generation from TVA's most recent fiscal year for years indicated and emissions data from the most recent calendar years.
(2) Emissions data is consistent with EEI ESG Sustainability Report standards, which are based on metric tons ("MTs") whereas overall CO2 emission rates and baseline reductions from historical levels are based on short tons.
Clean Air Act
Petition The Clean Air Act ("CAA") establishes a comprehensive program to Expandprotect and improve the Ozone Transport Region. On December 9, 2013, eightnation's air quality and control sources of the twelve statesair pollution. The major CAA programs that make up the Ozone Transport Region ("OTR") submitted a petition, pursuant to section 176A(a) of theaffect TVA's power generation activities are described below.
National Ambient Air Quality Standards. The CAA requestingrequires the EPA to add nine states, including Kentuckyset National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM"), SO2, nitrogen dioxide, carbon
monoxide, and Tennessee, tolead. Over the OTR. On October 27, 2017,years, the EPA deniedhas made the petition.
Cleanup of Solid and Hazardous Wastes
Coal Combustion Residuals. In May 2017, industry petitioners askedNAAQS more stringent. Each state must develop a plan to be approved by the EPA to reconsider the CCR rulefor achieving and to incorporate new flexibility providedmaintaining NAAQS within its borders. These plans impose limits on emissions from pollution sources, including TVA fossil fuel-fired plants. Areas meeting a NAAQS are designated as attainment areas. Areas not meeting a NAAQS are designated as non-attainment areas, and more stringent requirements apply in those areas, including stricter controls on industrial facilities and more complicated permitting processes. TVA fossil fuel-fired plants can be impacted by the Water Infrastructure Improvements 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.these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS.
Cross-State Air Pollution Rule. The EPA had previously agreed through settlementissued the Cross-State Air Pollution Rule ("CSAPR") in 2011 requiring several states in the eastern U.S. to revisit several elements of the CCR rule, so it will already be re-opening the rule. On September 14, 2017,improve air quality by reducing power plant emissions that contribute to pollution in other states. In 2016, the EPA announced that it plansissued an update to CSAPR to address the requestcross-state air pollution (the "CSAPR Update Rule"). The EPA subsequently issued an additional rule 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.resolve any remaining cross-state air pollutant issues ("CSAPR Close-Out Rule"). The United StatesU.S. Court of Appeals for the District of Columbia Circuit essentially denied("D.C. Circuit") remanded a portion of the EPA's motion and directedCSAPR Update Rule back to the EPA to fileaddress its failure to require upwind states to eliminate substantial contributions to downwind non-attainment areas by the statutory deadline. The D.C. Circuit also vacated the CSAPR Close-Out Rule. On March 15, 2021, the EPA Administrator signed the final revisions to the CSAPR Update Rule. The revisions address the defects identified by the D.C. Circuit and took effect on June 29, 2021. In this final action, the EPA reduced ozone-season NOx allowances for a status report specifyinggroup of 12 states, including Kentucky, and required sources in those states to surrender most of their allowance inventory. TVA’s Shawnee Fossil Plant ("Shawnee") facility is affected by these revisions. TVA is monitoring forecasted needs and has purchased allowances with plans to continue doing so as needed to comply with the rule in 2022. A longer-term compliance strategy for the facility is being developed that could include a combination of NOx control upgrades, operational changes, and allowance purchases.
Mercury and Air Toxics Standards for Electric Utility Units. In 2020, the EPA issued a final rule which revokes the agency's earlier finding that regulation of hazardous air pollutants ("HAP") emitted from steam electric utilities is appropriate and necessary. The rule does not remove electric generating units from the source categories listed under Section 112 of the CAA nor does it rescind the Mercury and Air Toxics Standards ("MATS") requirements. Additionally, the EPA determined that further restrictions on HAP emissions are not warranted based on a residual risk and technology review ("RTR") for this source category. TVA does not anticipate that the final rule will change TVA's MATS compliance requirements or strategy. Certain states and environmental groups filed petitions in the D.C. Circuit challenging the "appropriate and necessary" finding and the RTR finding. On February 16, 2021, the EPA filed a motion requesting the D.C. Circuit to hold the cases in abeyance pending the agency's review of the final rule under EO 13990, which, among other things, requires the EPA to reconsider the final rule by August 2021. The EPA did not meet the August 2021 deadline, but is expected to issue a proposed rule that provides the results of its review of the 2020 final rule. On December 3, 2021, the EPA filed a motion requesting the D.C. Circuit to continue holding the cases in abeyance. TVA will evaluate the EPA's proposal when it is issued.
Environmental Agreements. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings — Environmental Agreements for a discussion of two substantively similar agreements into which TVA entered in April 2011: one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"), which discussion is incorporated herein by reference.
Acid Rain Program. The Acid Rain Program is intended to help reduce emissions of SO2 and NOx, which are the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO2 emissions from power plants. TVA continues to reduce SO2 and NOx emissions from its coal-fired plants, and the SO2 allowances allocated to TVA under the Acid Rain Program are sufficient to cover the operation of its coal-fired plants. In the TVA service area, the limitations imposed on SO2 and NOx emissions by the CSAPR program are more stringent than the Acid Rain Program. Therefore, TVA does not anticipate that the Acid Rain Program will impose any additional material requirements on TVA.
Regional Haze Program. The EPA issued the Clean Air Visibility Rule, which required certain older sources to install best available retrofit technology. No additional controls or lower operating limits are required for any TVA units to meet best available retrofit technology requirements. In 2017, the EPA published the final rule that changed some of the requirements for Regional Haze State Implementation Plans ("SIPs"). Specific impacts cannot be determined until future Regional Haze SIPs are developed for the next decennial review under the visibility haze provisions of the CCRCAA. States were required to submit their Regional Haze SIPs to the EPA by July 31, 2021. In response to requests from state air pollution control agencies in Tennessee and Kentucky, TVA submitted regional haze analyses for Cumberland and Shawnee. The reports evaluate SO2 emission reduction options for these facilities and will be used by these state agencies in preparing their Regional Haze SIPs.
Opacity. Opacity, or visible emissions, measures the denseness (or color) of power plant plumes and has traditionally been used by states as a means of monitoring good maintenance and operation of particulate control equipment. Under some conditions, retrofitting a unit with additional equipment to better control SO2 and NOx emissions can adversely affect opacity performance, and TVA and other utilities have addressed this issue. The evaluation of utilities' compliance with opacity requirements is coming under increased scrutiny, especially during periods of startup, shutdown, and malfunction. Historically, SIPs developed under the CAA typically excluded periods of startup, shutdowns, and malfunctions, but in June 2015, the EPA finalized a rule are, or are likely to be, subjecteliminate such exclusions ("2015 Rule"). The 2015 Rule required states to reconsiderationmodify their implementation plans by November 2016. Kentucky, Tennessee, and specifying a rulemaking timeline. The EPAMississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the court-ordered status report on November 15, 2017, and identified2015 Rule before the provisions it intends to reconsider, including the regulation ofD.C. Circuit. In April
2017, the D.C. Circuit, at the request of the EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the 2015 Rule. On October 9, 2020, the EPA issued a guidance memorandum ("2020 Memorandum") that superseded and replaced policy statements outlined in the 2015 Rule. On September 30, 2021, the EPA withdrew the 2020 Memorandum, reinstating the agency's prior policy as set out in the 2015 Rule. The EPA's evaluation of state SIPs will be undertaken in light of the considerations outlined in the September 30, 2021 memorandum. TVA cannot predict the outcome of future SIP evaluations.
inactive service impoundments.
New York Petition to Address Impacts from Upwind High Emitting Sources. In 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 NOx emissions from sources emitting at least 400 tons of NOx in CY 2017 from nine states including Kentucky. The New York petition requests that the EPA require daily NOx limits for utility units with selective catalytic reduction systems ("SCRs") such as Shawnee Units 1 and 4 and emission reductions from utility units without SCRs such as Shawnee Units 2, 3, and 5-9. Kentucky utility unit NOx emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional requirements to reduce Kentucky NOx emissions are necessary. In 2019, the EPA finalized its denial of 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. The State of New York filed a petition in the D.C. Circuit for judicial review of the EPA's denial of the petition. In July 2020, the D.C. Circuit vacated the EPA's denial of the petition and remanded the petition to the EPA for reconsideration. In its recently published Unified Regulatory Agenda, the EPA indicated that it will publish a proposed rule in July 2022 that provides a revised response to New York's Section 126(b) petition. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition.
Affordable Clean Energy Rule. In 2019, the EPA finalized the Affordable Clean Energy ("ACE") rule and repealed the EPA's previous regulation addressing greenhouse gas ("GHG") emissions from existing fossil fuel-fired units. The ACE rule established guidelines for GHG emissions from existing coal-fired units based on efficiency improvements that can be achieved at those units at reasonable cost. Several industry, environmental, and state and local petitioners filed for judicial review of the ACE rule. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE rule, and specified that the court's mandate will not issue with regard to the portion of the ACE rule that repeals the Clean Power Plan until after the EPA develops a replacement for the ACE rule. On October 29, 2021, the U.S. Supreme Court accepted the request filed by a coalition of states and other parties to review the D.C. Circuit's decision to vacate the ACE rule. Petitioners are asking the Supreme Court to rule on the extent of the EPA's authority to regulate GHG emissions from existing power plants under Section 111(d) of the CAA. In its recently published Unified Regulatory Agenda, the EPA indicated that it expects to publish a proposed rule to replace the ACE rule in July 2022. TVA is unable to predict the future course of the litigation on appeal, nor the direction that the EPA may take in the future to regulate GHG emissions from existing fossil fuel-fired units.
New Source Performance Standards. In 2018, the EPA proposed revisions to the 2015 GHG emission standards for new, modified, and reconstructed electric utility generating units required under Section 111(b) of the CAA. For coal-fired units, the EPA proposed 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 2015 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 intendsis not proposing to takerevise the new source performance standard in the 2015 rule for GHG emission from gas-fired units. In January 2021, the EPA published criteria in the Federal Register for making a phased approach and expects to announcesignificant contribution finding for GHGs from a noticesource category for the purpose of proposed rulemaking for phase one issues no later than March 2018 and toregulating those emissions under Section 111(b) of the CAA, but the EPA did not take final action on phase one issuesthe 2018 proposed revisions in this rulemaking. On March 17, 2021, the EPA asked the D.C. Circuit to vacate and remand the "significant contribution" finding since the rule was promulgated without public notice or opportunity to comment. On April 5, 2021, the D.C. Circuit vacated and remanded the January 2021 final rule. In its recently published Unified Regulatory Agenda, the EPA indicated that it is undertaking a comprehensive review of the new source performance standards for GHG emissions from electric utility steam generating units, including a review of all aspects of the 2018 proposed amendments and requirements in the 2015 rule that the agency did not propose to amend in the 2018 proposal. The EPA expects to issue the results of this review in a proposed rule in June 2022. TVA is unable to predict the direction that the EPA may take in the future to regulate GHG emissions from new, modified, or reconstructed fossil fuel-fired units.
Climate Change
Executive Actions. On January 20, 2021, President Biden issued EO 13990, "Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis." EO 13990 directs federal agencies to review and revise regulations consistent with broad policy goals to improve public health and the environment, reduce GHG emissions, and prioritize environmental justice. On March 8, 2021, a coalition of 12 states filed a lawsuit in the U.S. District Court for the Eastern District of Missouri challenging President Biden's authority to establish interim values for the social cost of GHGs under EO 13990. On August 31, 2021, the court dismissed the matter, but the plaintiffs have appealed the decision to the U.S. Court of Appeals for the Eighth Circuit. A similar lawsuit is pending in the U.S. District Court for the Western District of Louisiana. EO 13990 also requires the EPA to review several environmental regulations to determine their consistency with the goals and policies prescribed in the EO. Specific impacts to TVA of EO 13990 cannot be determined at this time.
In addition, on January 27, 2021, President Biden issued EO 14008, "Executive Order on Tackling the Climate Crisis at Home and Abroad." Among other things, EO 14008 expresses the following policies of the federal government: (1) to organize and deploy the full capacity of its agencies to combat the climate crisis to implement a government-wide approach that reduces climate pollution in every sector of the economy, (2) to align the management of federal procurement and real property, public lands and waters, and financial programs to support robust climate action, (3) to use all available procurement authorities to achieve or facilitate (a) a carbon pollution-free electricity sector no later than June 14, 2019. The EPA plans2035 and (b) clean and zero-emission vehicles for federal, state, local, and tribal government fleets, (4) to complete its review and announce any additional proposed revisions for phase twoput the U.S. on a path to achieve net-zero emissions, economy-wide, by no later than September 20182050, (5) to accelerate the deployment of clean energy and transmission projects in an environmentally stable manner, (6) to takeensure that, to the extent consistent with applicable law, federal funding is not directly subsidizing fossil fuels, (7) to promote the flow of capital toward climate-aligned investments and away from high-carbon investments, (8) improve air and water quality, and (9) secure an equitable economic future by making environmental justice part of an agency's mission. TVA is closely monitoring these developments, including the Justice40 Initiative, the Department of Treasury effort to establish a carbon market, establishment and development of the Civilian Climate Corps, and establishment of several White House comprehensive plans. In addition, EO 14008 created the Special Presidential Envoy for Climate and called for an early Leaders' Climate Summit aimed at raising climate ambition and making a positive contribution to the 26th United Nations Climate Change Conference of the Parties and beyond. EO 14008 also stated the U.S. would reconvene the Major Economies Forum on Energy and Climate, beginning with the Leader's Climate Summit. Federal agencies were directed to update their Climate Change Action Plans, and TVA chose to submit its draft plan in May 2021 and its final actionplan in August 2021. In addition to submitting these plans, TVA is voluntarily pursuing multiple policies and programs in the Tennessee Valley that align with the goals and policies of the EO.
On May 20, 2021, President Biden also issued EO 14030, “Climate-Related Financial Risk,” which calls for a governmental-wide strategy on phase two issuesthe disclosure of climate-related financial risk. EO 14030 requires the development of this strategy regarding the following: (1) the measurement, assessment, mitigation, and disclosure of climate-related financial risk to federal government programs, assets, and liabilities in order to increase the long-term stability of federal operations; (2) financing needs associated with achieving net-zero GHG emissions for the U.S. economy by no later than 2050, limiting global average temperature rise to 1.5 degrees Celsius, and adapting to the acute and chronic impacts of climate change; and (3) areas in which private and public investments can play complementary roles in meeting these financing needs while advancing economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities and communities of color. The specific impacts of EO 14030 on TVA cannot be determined at this time, as the regulations required by the EO have not yet been finalized.
On December 2019.8, 2021, President Biden signed EO 14057 detailing the administration’s policy to take a whole of government approach to lead by example to achieve a carbon pollution-free electricity sector by 2035 and net-zero emissions economy-wide by no later than 2050. EO 14057 instructs virtually all elements of the federal government to demonstrate how innovation and environmental stewardship can protect the planet, safeguard federal investments, respond to the needs of American communities, and expand American technologies, industries, and jobs. TVA is voluntarily pursuing multiple policies and programs in the Tennessee Valley that align with the goals and policies of the EO.
International Accords. In September 2016, the U.S. formally accepted the Paris Agreement. The agreement met the threshold of at least 55 countries that account for at least 55 percent of global GHG emissions and formally entered into force in November 2016. On November 4, 2019, the U.S. formally notified the United Nations that it would withdraw from the agreement. Under the terms of the agreement, the effective date for the withdrawal was November 4, 2020.
On January 20, 2021, President Biden formally rejoined the Paris Agreement on behalf of the U.S. The means for tracking emissions targets under the Paris Agreement are nationally determined contributions ("NDCs"). Each nation that is a party to the Paris Agreement is asked to prepare five-year, successive NDCs that it plans to achieve. On April 22, 2021, the Biden Administration announced its GHG NDCs for 2030 under the Paris Agreement, and these NDCs establish a new target for the U.S. to achieve a 50 to 52 percent reduction from 2005 levels in economy-wide net GHG pollution in 2030. Specific impacts to TVA cannot be determined at this time.
Litigation. In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA, and TVA may be subject to additional lawsuits in the future. See Note 20 — Contingencies and Legal Proceedings for additional information.
Indirect Consequences of Regulation or Business Trends. Legal, technological, political, and scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for clean generation from alternative energy sources, and subsequent impacts to business reputation and public opinion.
Physical Impacts of Climate Change. Physical impacts of climate change may include, but not be limited to, changing weather patterns, extreme weather conditions, and other events such as flooding, droughts, wildfires, and snow or ice storms, and these events can impact TVA's system in terms of system operability, customer demand, and the health of regional economies. TVA has a Climate Change Action Plan which it updated in 2021 in support of EO 14008. TVA submitted its draft Climate Change Action Plan to the White House in May 2021 and its final plan in August 2021. The goal of the action planning process is to ensure TVA continues to achieve its mission and program goals and to operate in a secure, effective, and efficient manner in a changing climate by integrating climate change adaptation efforts in coordination with state and local partners, tribal governments, and private stakeholders. TVA manages the potential effects of climate change on its mission, programs, and
operations within its environmental management processes.
Actions Taken by TVA to Reduce GHG Emissions. TVA has reduced GHG emissions from both its generation facilities and its operations. TVA Board actions have focused on TVA's plan to balance its coal-fired generation by increasing its nuclear capacity, modernizing its hydroelectric generation system, increasing natural gas-fired generation, installing emission control equipment on certain of its coal-fired units, increasing its purchases of renewable energy, building solar facilities, and investing in energy efficiency initiatives to reduce energy use in the Tennessee Valley. Additionally, TVA has invested to increase energy efficiency in its operations. The combination of more stringent environmental regulations, lower natural gas prices, and lower demand for energy across the Tennessee Valley has reduced the utilization of coal-fired generation. These factors have resulted in lower CO2 emissions from the TVA system, as previously discussed in this section. As TVA evolves its generation portfolio, and after appropriate environmental review under NEPA, the TVA Board could make decisions about the timing, retirement, and replacement of aging fossil units or other expiring capacity, which may further TVA’s CO2 and other emissions reductions. The Environmental Policy also provides additional direction in several environmental stewardship areas related to reducing environmental impacts on the Valley's natural resources, including reducing carbon intensity and air emissions.
Renewable/Clean Energy Standards
Thirty states and the District of Columbia have established enforceable or mandatory requirements for electric utilities to generate a certain amount of electricity from renewable sources. Two states within the TVA service area, North Carolina and Virginia, have mandatory renewable standards that, while not applying directly to TVA, do apply to TVA's LPCs serving retail customers in those states. TVA's policy is to provide compliance assistance to any distributor of TVA power, and TVA is providing assistance to the covered LPCs that sell TVA power in North Carolina. In 2020, Virginia signed into law the Clean Economy Act. The Act establishes a mandatory requirement for utilities to generate a certain amount of electricity from renewable sources. At this time, TVA is not impacted by the legislation due to the relatively small amount of electricity that TVA provides in Virginia compared to other utilities. Likewise, the Mississippi Public Service Commission adopted an energy efficiency rule applying to electric and natural gas providers in the state, and TVA is supplying information on participation in TVA's energy efficiency programs to support the covered Mississippi LPCs.
Water Quality Control Developments
Waters of the United States. In 2015, the EPA and the U.S. Army Corps of Engineers ("USACE") issued the Clean Water Rule, which redefined waters of the United States ("WOTUS") in the agencies' regulations for the first time since the 1980s and was intended to clarify the regulatory jurisdiction of the EPA and the USACE ("2015 WOTUS Rule"). In April 2020, the USACE and the EPA issued the Navigable Waters Protection Rule ("NWPR"), which established a new regulatory definition of WOTUS and replaced the definition set forth in the 2015 WOTUS Rule. The NWPR established four categories of waters considered jurisdictional under the Clean Water Act ("CWA"): (1) territorial seas and traditional navigable waters, (2) perennial and intermittent tributaries to those waters, (3) certain lakes and ponds, and impoundments of jurisdictional waters, and (4) wetlands adjacent to jurisdictional waters. The rule excluded twelve categories of waters, including ephemerals, groundwater, many ditches, and waste treatment systems. The NWPR reduced the jurisdictional reach of the CWA and could potentially reduce permitting and mitigation requirements for TVA projects that impact waters that were previously considered jurisdictional under the 2015 WOTUS Rule. The NWPR was challenged in multiple courts, and on August 30, 2021, it was vacated by the United States District Court for the District of Arizona. The United States District Court for the District of New Mexico also vacated it on September 27, 2021. Two other courts declined to vacate the rule, but remanded it to the EPA and the Army Corps of Engineers. Previously, on June 9, 2021, the EPA and the Department of the Army announced their intention to initiate a new rulemaking process to restore the definition of WOTUS that was in place prior to the 2015 WOTUS Rule and to develop a new rule to establish a new definition of WOTUS. A proposed rule was published in the Federal Register on December 7, 2021, with the public comment period open until February 7, 2022. The impact of the rulemaking process cannot be ascertained fully at this time. Pending the completion of the rulemaking process, the EPA and the USACE are interpreting WOTUS consistent with the pre-2015 definition.
Cooling Water Intake Structures. In 2014, the EPA released a final rule under Section 316(b) of the CWA relating to cooling water intake structures ("CWIS") for existing power generating facilities. The rule requires changes in CWIS used to cool the vast majority of coal, gas, and nuclear steam-electric generating plants and a wide range of manufacturing and industrial facilities in the U.S. The final rule requires CWIS to reflect the best technology available for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a CWIS. These new requirements will potentially affect a number of TVA's fossil- and nuclear-fueled facilities and will likely require capital upgrades to ensure compliance. Most TVA facilities are projected to require retrofit of CWIS with "fish-friendly" screens and fish return systems to achieve compliance with the new rule. The rule is being implemented through permits issued under the NPDES in Section 402 of the CWA. State agencies administer the NPDES permit program in most states including those in which TVA's facilities are located. In addition, the responsible state agencies must provide all permit applications to the U.S. Fish and Wildlife Service for a 60-day review prior to public notice and an opportunity to comment during the public notice. As a result, the permit may include requirements for additional studies of threatened and endangered species arising from U.S. Fish and Wildlife Service comments and may require additional measures be taken to protect threatened and endangered species and critical habitats directly or indirectly related to the plant cooling water intake. TVA's review of the final rule indicates that the rule offers adequate flexibility for cost-effective compliance. The required compliance timeframe is linked to plant-specific NPDES permit renewal cycles (i.e., technology retrofits), and compliance is expected to be required beginning in the CY 2022 - 2024 timeframe.
The EPA has never previously applied the requirements under Section 316(b) to hydroelectric facilities. However, on September 30, 2021, EPA Region 10, which covers an area outside TVA’s service area, issued NPDES permits to four hydroelectric plants that include Section 316(b) requirements. In determining the best technology available (“BTA”) to minimize adverse impacts on the environment using best professional judgment, Region 10 analyzed the existing controls that the hydroelectric facilities were already implementing and concluded that those controls constitute BTA. It is not clear whether this approach will be adopted nationwide or how the BTA standard would be applied to TVA's hydroelectric facilities; accordingly, the specific impacts to TVA from the new Region 10 permits cannot be determined at this time.
Hydrothermal Discharges. The EPA and many states continue to focus regulatory attention on potential effects of hydrothermal discharges. Many TVA plants have variances from thermal standards under Section 316(a) of the CWA that are subject to review as NPDES permits are renewed. Specific data requirements in the future will be determined based on negotiations between TVA and state regulators. If plant thermal limits are made more stringent, TVA may have to install cooling towers at some of its plants and operate installed cooling towers more often. This could result in a substantial cost to TVA.
Steam-Electric Effluent Guidelines. In 2015, the EPA revised existing steam-electric effluent limitation guidelines ("ELGs"), which regulate water discharge pollutants and require the application of certain pollutant control technologies. The 2015 ELGs established more stringent performance standards for existing and new sources and required major upgrades to wastewater treatment options at all coal-fired plants. Compliance with new requirements was originally required in the CYs
2018 - 2023 timeframe, but the EPA delayed the compliance dates for flue gas desulfurization ("FGD") wastewater and bottom ash transport water until CYs 2020 - 2023 to allow the EPA time to review and potentially revise the ELGs with regard to these waste streams.
In October 2020, the EPA issued final revised ELGs for bottom ash transport water and FGD wastewater. The primary impact for TVA is on the operation of existing coal-fired generation facilities. The revised ELGs could impact long-term investment decisions being made relative to the long-term compliance and operability of these developments, itplants. The revisions may require TVA to install additional wastewater treatment systems for FGD wastewater and bottom ash transport water, and TVA could incur substantial costs to comply with the new rule. In addition, the revised ELGs could cause TVA to reduce utilization of its coal-fired generation facilities or even close such facilities. The revision also includes a subcategory for which Cumberland would qualify that provides TVA greater flexibility in meeting the ELGs. The revision includes two additional subcategories for low utilization units and units that cease coal combustion by the end of CY 2028. TVA is evaluating the applicability of those subcategories to its plants as appropriate. In October 2021, TVA filed Notices of Planned Participation preserving the option for TVA's Bull Run, Cumberland, and Kingston plants to participate in the subcategory for units that cease coal combustion by the end of CY 2028.
Petitions for judicial review of the October 2020 ELG rule were filed in the D.C. Circuit and the U.S. Court of Appeals for the Fourth Circuit (the "Fourth Circuit") and have been consolidated in the Fourth Circuit in the case Appalachian Voices, et al. v. EPA. On August 3, 2021, the EPA announced a supplemental rulemaking to revise the Steam Electric Power Generating Effluent Limitations Guidelines and Standards. As part of the rulemaking process, the EPA will determine whether more stringent limitations and standards are appropriate and consistent with the technology-forcing statutory scheme and the goals of the CWA. The impact of the proposed rulemaking cannot be fully determined at this time. Because this rulemaking could result in more stringent ELGs, the EPA has requested that the Appalachian Voices, et al. v. EPA litigation in the Fourth Circuit be held in abeyance.
Consistent with the 2020 rule, on January 8, 2021, TVA submitted requests to state regulatory authorities to modify NPDES permits for Kingston, Cumberland, Bull Run, Shawnee, and Gallatin Fossil Plant ("Gallatin") to incorporate into the permits limitations in the 2020 rule. The Kentucky Department for Environmental Protection issued a final revised permit for Shawnee in the fourth quarter of 2021, and TDEC issued a final revised permit for Kingston in the first quarter of 2022. TVA anticipates TDEC will issue draft permits for Cumberland, Bull Run, and Gallatin during 2022.
The Sierra Club and the Center for Biological Diversity administratively appealed the NPDES permit issued for Kingston. See Note 20 — Contingencies and Legal Proceedings — Administrative Proceeding Regarding National Pollutant Discharge Elimination System Permit for Kingston.
Nationwide Permits for Dredge and Fill. On January 12, 2021, the USACE published notice of a final rule that reissued and modified 16 Nationwide Permits (“NWPs”) that authorize discharges of dredge and fill material into waters of the U.S. from certain designated activities. The final rule limits applicability of NWP 12, which previously authorized discharges from all utility line activities, to oil and natural gas pipelines, creates new NWPs for certain utility line activities, including NWP 57 for electric utility line and telecommunication activities, and modifies certain pre-construction notification requirements. The new NWP 12 is being challenged in court on the same grounds that were litigated in Northern Plains Resource Council v. U.S. Army Corps of Engineers, where the U.S. District Court for the District of Montana found the permit unlawful and vacated it. Although the new lawsuit does not possiblechallenge NWP 57, the NWP upon which TVA is most likely to predict changesrely for its utility line activities, the lawsuit raises claims that apply with equal force to NWP 57. However, the impact on TVA from this litigation cannot be evaluated fully until the legal challenge is resolved. On December 21, 2021, the EPA and the U.S. Army Corps of Engineers reissued 41 NWPs in a final rule. The reissued permits go into effect on February 25, 2022. This reissuance has little impact on TVA operations, and the reissued permits will not be available for use by TVA until states issue a 401 certification for these permits.
Other Clean Water Act Requirements. As is the case in other industrial sectors, TVA and other utilities are also facing more stringent requirements related to the protection of wetlands, reductions in storm water impacts from construction activities,
new water quality criteria for nutrients and other pollutants, new wastewater analytical methods, and changes in regulation of pesticide application.
Recent CWA Supreme Court Decision
On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund, the Supreme Court held that the CWA requires a permit when there is a direct discharge of pollutants from a point source to waters of the U.S. and when there is "the functional equivalent" of a direct discharge to such waters. The Court suggested seven factors for determining when such a discharge is the functional equivalent of a direct discharge and acknowledged that the new test would be somewhat difficult to apply, potentially requiring evaluation of multiple factors. The Court noted that "time and distance" of pollutant migration often will be the most important factor but that other relevant factors may include, for example, the nature of the material through which the pollutant travels and the extent to which the pollutant is diluted or chemically changed as it travels. After evaluating the potential impact of the decision, TVA determined that this decision will not require TVA to change its operations.
Cleanup of Solid and Hazardous Wastes
Liability for releases and cleanup of hazardous substances is imposed under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other governmental entities, industries, and power systems, TVA has generated or used hazardous substances over the years that have resulted in releases to the environment.
TVA Sites. TVA historical operations at certain facilities have resulted in releases of contaminants that TVA is addressing, including at TVA's Environmental Research Center at Muscle Shoals, Alabama. TVA has completed several removal, remedial, and characterization actions at the site, as required by a hazardous waste permit issued by the Alabama Department of Environmental Management. At December 31, 2021, TVA's estimated liability for required cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate was approximately $18 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheet. TVA must submit an application for renewal of the RCRA permit by September 27, 2022, and both the renewal process and the resulting renewed permit may include additional mandates for further remedial activities. TVA has evaluated the potential impact that a permit renewal could have on its operations and does not believe that the renewal will have any adverse impacts at this time. In addition, the Environmental Research Center has an active groundwater monitoring program as part of a permitted corrective action plan.
Non-TVA Sites. TVA is aware of alleged hazardous-substance releases at certain non-TVA areas for which it may have some liability. See Note 20 — Contingencies and Legal Proceedings — Environmental Matters.
Coal Combustion Residuals. The EPA published its final rule governing CCR in 2015. The rule regulates CCR as nonhazardous waste under Subtitle D of the RCRA. While states may adopt the rule's requirements into their regulatory programs, the rule does not require states to adopt the requirements. The initial version of the rule provided for self-implementation by utilities and allows enforcement through citizen suits in federal court. The Water Infrastructure Improvements for the Nation Act ("WIIN Act") subsequently allowed state or federal-based permitting to implement the CCR Rule as an alternative to self-implementation and citizen suits. 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 Residuals Facilities for a discussion of the impact on TVA's operations, including the cost and timing estimates of related projects.
In July 2018, the EPA issued a final CCR rule which provided additional flexibility and an extension of certain deadlines. In March 2019, the D.C. Circuit granted the EPA's request to remand the final rule to allow the EPA to reconsider the amendments. The remand also allowed the EPA time to complete a new rulemaking to establish revised timelines for unlined impoundments to initiate closure and to reexamine the October 2020 deadline for closing some unlined impoundments. In August 2019, the EPA issued a proposed rule to amend portions of the CCR Rule regarding beneficial use, temporary piles, and public access to information.
On November 4, 2019, the EPA announced a proposed rule that will revise portions of the CCR Rule requiring closure of unlined surface impoundments. The final Part A rule was published in the Federal Register on August 28, 2020, and became effective September 28, 2020. Among other things, the final Part A rule required all unlined CCR surface impoundments to stop receiving CCR and non-CCR waste streams and to initiate closure or retrofit by no later than April 11, 2021, and TVA ceased doing so, and initiated closure, by the specified deadline. Additionally, the final rule provides a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR surface impoundment until October 15, 2023, and possibly longer under certain circumstances. The final rule also includes requirements that enhance the public's access to groundwater monitoring and corrective action reports. TVA does not currently anticipate the final rule will have a significant impact because TVA initiated closure of its unlined CCR surface impoundments by the regulatory deadline and already makes groundwater monitoring and corrective action reports publicly available. A separate final Part B rule was published in the Federal Register on November 12, 2020. This rule provides an alternative liner demonstration procedure for utilities with clay lined units which are being forced to close under the Part A rule. However, TVA does not have any units which qualify for this demonstration.
In August 2015, the TDEC issued an order that (1) established a process for TDEC to oversee TVA's implementation of the EPA's CCR rule and to ensure coordination and compliance with Tennessee laws and regulations that govern the management of CCR and (2) required TVA to investigate and assess CCR contamination risks at seven of TVA's eight coal-fired plants in Tennessee and to remediate any unacceptable risks. The TDEC order does not allege that TVA is violating any CCR regulatory requirements nor does it assess TVA penalties. The TDEC order sets out an iterative process through which TVA and TDEC will identify and evaluate any CCR contamination risks and, if necessary, respond to such risks. TVA submitted to TDEC an environmental assessment report (“EAR”) for Allen in the fourth quarter of 2021. TVA is currently conducting environmental investigations for the remaining six sites in accordance with the TDEC-approved Environmental Investigation Plans and will submit EARs to TDEC upon completion of the relatedinvestigations.
Groundwater Contamination. Environmental groups and state regulatory agencies are increasing their potential impactsattention on TVA.alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages CCR 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 Residuals Facilities and — Allen Groundwater Investigation and Note 11 — Asset Retirement Obligations.
Environmental Investments
From 1970 to 2021, TVA spent approximately $6.8 billion on controls to reduce emissions from its coal-fired power plants. In addition, TVA has reduced emissions by idling or retiring coal-fired units and relying more on cleaner energy resources including natural gas and nuclear generation.
TVA currently anticipates spending significant amounts on environmental projects in the future, including investments in new clean energy generation including renewables to reduce TVA's overall environmental footprint. TVA environmental project expenditures could also result from coal-fired plant decommissioning and from effective ash management modernization. Based on TVA's decisions regarding certain coal-fired units, the amount and timing of expenditures could change.
SO2 Emissions and NOx Emissions. To reduce SO2 emissions, TVA operates scrubbers on 18 of its coal-fired units and switched to lower-sulfur coal at certain coal-fired units. To reduce NOx emissions, TVA operates SCRs on 18 coal-fired units, operates low-NOx burners or low-NOx combustion systems on 21 units, optimized combustion on all 25 units, and operates NOx control equipment year round when units are operating (except during start-up, shutdown, and maintenance periods). TVA has also retired 34 of 59 coal-fired units. Except for seven units at Shawnee, the remaining coal-fired units in the TVA fleet have scrubbers and SCRs.
Particulate Emissions. To reduce particulate emissions of air pollutants, TVA has equipped all of its coal-fired units with scrubbers, mechanical collectors, electrostatic precipitators, and/or bag houses.
Greenhouse Gas Emissions. Various federal agencies, including the EPA and the Department of Commerce, may issue regulations establishing more stringent air, water, and waste requirements, as well as GHG accounting requirements, and these requirements could result in significant changes in the structure of the U.S. power industry, especially in the eastern half of the country. There could be additional material costs if further reductions of GHGs, including CO2, are mandated by legislative, executive, regulatory, or judicial actions and if more stringent emission reduction requirements for conventional pollutants are established. These costs cannot reasonably be predicted at this time because of the uncertainty of these actions.
Estimated Required Environmental Expenditures
The following table contains information about TVA’sTVA's current estimates of expenditures foron projects related to environmental laws and regulations:regulations.
|
| | | | | | | | | | | | | | | |
Estimated Potential Environmental Expenditures(1)(2) At December 31, 2017 (in millions)
|
| | Remaining 2018 | | 2019 | | Thereafter(3) | | Total |
Coal combustion residual conversion program(4) | $ | 215 |
| | $ | 360 |
| | $ | 425 |
| | $ | 1,000 |
|
Clean air control projects(5) | 70 |
| | 35 |
| | 70 |
| | 175 |
|
Clean Water Act requirements(6) | 50 |
| | 45 |
| | 405 |
| | 500 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Estimated Potential Environmental Expenditures(1)(2) As of December 31, 2021 (in millions) |
| | Remaining 2022 | | 2023 | | 2024-2026(3)(4) | | Total |
Coal Combustion Residual Program(5) | $ | 163 | | | $ | 189 | | | $ | 368 | | | $ | 720 | |
Clean Air Act control projects(6) | 23 | | | 38 | | | 90 | | | 151 | |
Clean Water Act requirements(7) | 74 | | | 64 | | | 7 | | | 145 | |
Notes
(1) These estimates are subject to change as additional information becomes available and as regulations change.
(2) These estimates include $255$123 million, $240$74 million, and $600$52 million for the remainder of 2018, 2019,2022, 2023, and Thereafter,thereafter, respectively, in capital expenditures.
(3) See Note 1720 — Contingencies.Contingencies and Legal Proceedings — Contingencies.
(4) These estimates do not include expenditures expected to be incurred after 2026.
(5) Includes costs associated with pond closures, conversionthe closure of wet to dry handling,facilities 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 — Generation Resources — Coal Combustion Residual FacilitiesResiduals Facilities and Note 8.11 — Asset Retirement Obligations.
(5)(6) 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)(7) Includes projects that TVA is currently planning to comply with revised rules under the Clean Water Act (i.e., Section 316(b)regarding CWIS and effluent limitation guidelinesELGs for
steam electric power plants).plants.
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 December 31, 2021, TVA had accrued approximately $18$12 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 820 — Contingencies and Note 17 — Legal Proceedings —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, 2017,2021, 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 estimates and policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting PoliciesEstimates and Estimates and Note 1 — Summary of Significant Accounting Policies 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 — Impact of New Accounting Standards and Interpretations, which discussion is incorporated into this Part I, Item 2, Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
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’sTVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions.
For additional discussion on legislative and regulatory matters, including a discussion of environmental legislation and regulation, see Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges and — Environmental Matters.
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 ("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 13 14 — Risk Management Activities and Derivative Transactions for additional information regarding TVA's derivative transactions and risk management activities.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
TVA’sTVA's management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial and Strategy Officer, and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer) (collectively "management"), evaluated the effectiveness of TVA’sTVA's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))Act) as of December 31, 2017.2021. Based on this evaluation, 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’sTVA's disclosure controls and procedures were effective as of December 31, 2017,2021, 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’sCommission'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’sTVA'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, 2017,2021, 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.
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’sTVA's financial condition, results of operations, and cash flows.
For a discussion of certain current material Legal Proceedings, see Note 820 — Contingencies and Note 17Legal Proceedings — 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.
ITEM 5. OTHER INFORMATION
On January 28, 2022, the Chief Executive Officer approved revised 2022 performance goals for the Combined Cycle Equivalent Availability Factor measure of the TVA Enterprise Scorecard to account for additional planned outage hours that were unintentionally excluded from the original approved target for the fleet due to a data system error. The threshold and target goals were changed from 77.6 and 82.6, respectively, to 75.0 and 80.0, respectively. The stretch goal remained unchanged at 84.9. No changes were made to the goals for the other measures. The TVA Enterprise Scorecard sets forth the performance goals applicable to the Winning Performance Team Incentive Plan and the Executive Annual Incentive Plan.
ITEM 6. EXHIBITS
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Exhibit No. | Description |
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| 31.1 | |
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| 31.2 | |
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| 32.1 | |
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101.INS | TVA |
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| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| 101.SCH | TVAInline XBRL Taxonomy Extension Schema |
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| 101.CAL | TVAInline XBRL Taxonomy Extension Calculation Linkbase |
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| 101.DEF | TVAInline XBRL Taxonomy Extension Definition Linkbase |
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| 101.LAB | TVAInline XBRL Taxonomy Extension Label Linkbase |
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| 101.PRE | TVAInline XBRL Taxonomy Extension Presentation Linkbase |
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| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101 |
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.
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| Date: | February 1, 2018January 31, 2022 | | TENNESSEE VALLEY AUTHORITY |
| | | (Registrant) |
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| | By: | _//s/ William D. Johnson_________Jeffrey J. Lyash |
| | | William D. JohnsonJeffrey J. Lyash |
| | | President and Chief Executive Officer
(Principal Executive Officer)
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| | By: | _//s/ John M. Thomas, III ________ |
| | | John M. Thomas, III |
| | | Executive Vice President and Chief Financial and Strategy Officer
(Principal Financial Officer)
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