Regulatory Assets and Liabilities

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



Regulatory Assets and Liabilities At September 30
	2018		2017
Current regulatory assets
Gallatin coal combustion residual facilities	$	38	$	—
Unrealized losses on interest rate derivatives	73		93
Environmental agreements	3		2
Unrealized losses on commodity contracts	4		68
Deferred nuclear generating units	—		237
Environmental cleanup costs – Kingston ash spill	266		44
Fuel cost adjustment receivable	30		1
Other current regulatory assets	—		2
Total current regulatory assets	414		447

Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	3,119		4,009
Non-nuclear decommissioning costs	1,019		703
Gallatin CCR facilities	861		899
Nuclear decommissioning costs	784		823
Unrealized losses on interest rate derivatives	692		982
Environmental agreements	11		13
Unrealized losses on commodity contracts	8		9
Deferred nuclear generating units	—		759
Environmental cleanup costs - Kingston ash spill	—		263
Other non-current regulatory assets	118		238
Total non-current regulatory assets	6,612		8,698
Total regulatory assets	$	7,026	$	9,145

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

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

In 2017, the TVA Board authorized management to accelerate amortization of certain regulatory assets to the extent actual net income in 2018 exceeds the budgeted amount, up to the aggregate amount of those certain regulatory assets. Assets included in this Board action include: deferred nuclear generating units, environmental cleanup costs related to the Kingston ash spill, and nuclear training costs related to the refurbishing and restarting of Browns Ferry Unit 1 and the construction of Watts Bar Unit 2. TVA recorded $857 million of accelerated amortization of the Deferred nuclear generating units and Nuclear training costs regulatory assets in 2018. The TVA Board is authorizing TVA to use the amount included in the 2019 rate action for these two regulatory assets, to the extent needed, to accelerate amortization of the Environmental cleanup costs - Kingston ash spill regulatory asset in 2019.

Deferred Pension Costs and Other Post-retirement Benefit Costs. TVA measures the funded status of its pension and post-retirement (“OPEB”) benefit plans at each year-end balance sheet date. The funded status is measured as the difference between the fair value of plan assets and the benefit obligations at the measurement date for each plan. The changes in funded status are actuarial gains and losses that are recognized in TVA’s consolidated balance sheets by adjusting the recognized pension and OPEB liabilities, with the offset deferred as a regulatory asset or a regulatory liability. In an unregulated environment, these deferred costs would be recognized as an increase or decrease to accumulated other comprehensive income (loss) ("AOCI").

“Incurred cost” is a cost arising from cash paid out or an obligation to pay for an acquired asset or service, and a loss from any cause that has been sustained and for which payment has been or must be made. In the cases of pension and OPEB costs, the unfunded obligation represents a projected liability to the employee for services rendered, and thus it meets the definition of an incurred cost. Therefore, amounts that otherwise would be charged to AOCI for these costs are recorded as a regulatory asset or liability since TVA has historically recovered pension and OPEB expense in rates. Through historical and current year expense included in ratemaking, the TVA Board has demonstrated the ability and intent to include pension and OPEB costs in allowable costs and in rates for ratemaking purposes. As a result, it is probable that future revenue will result from inclusion of the pension and OPEB regulatory assets or regulatory liability in allowable costs for ratemaking purposes.

The regulatory asset and liability are classified as long-term, which is consistent with the pension and OPEB liabilities, and are not amortized to the consolidated statements of operations over a specified recovery period. They are adjusted either upward or downward each year in conjunction with the adjustments to the unfunded pension liability and OPEB liability, as calculated by the actuaries. Ultimately the regulatory asset and liability will be recognized in the consolidated statements of operations in the form of pension and OBEB expense as the actuarial liabilities are eliminated in future periods. See Note 20 — Obligations and Funded Status.

Additionally on October 1, 2014, TVA began recognizing pension costs as a regulatory asset to the extent that the amount calculated under GAAP as pension expense differs from the amount TVA contributes to the pension plan. As a result of recent plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP.

Non-Nuclear Decommissioning Costs. Non-nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA’s non-nuclear long-lived assets, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA’s ART, and (4) certain other deferred charges under the accounting rules for AROs. TVA has established the ART to more effectively segregate, manage, and invest funds to help meet future non-nuclear AROs. The funds from the ART may be used, among other things, to pay the costs related to the future closure and retirement of non-nuclear long-lived assets under various legal requirements. These future costs can be funded through a combination of investment funds already set aside in the ART, future earnings on those investment funds, and future cash contributions to the ART and future earnings thereon. For 2018, TVA recovered in rates a portion of its estimated current year non-nuclear decommissioning costs and contributions to the ART. Deferred charges will be recovered in rates based on an analysis of the expected expenditures, contributions, and investment earnings required to recover the decommissioning costs. There is not a specified recovery period; therefore, the regulatory asset is classified as long-term consistent with the ART investments and ARO liability.

Gallatin Coal Combustion Residual Facilities. In August 2017, TVA began using regulatory accounting treatment to defer expected future costs related to Gallatin Fossil Plant ("Gallatin") coal combustion residuals ("CCR"). The TVA Board approved a plan to amortize these costs over the anticipated duration of the Gallatin CCR project (excluding post-closure care), beginning October 1, 2018 as project costs are incurred. See Note 8.

Nuclear Decommissioning Costs. Nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA’s nuclear generating units under the Nuclear Regulatory Commission ("NRC") requirements, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's NDT, and (4) certain other deferred charges under the accounting rules for AROs. These future costs will be funded through a combination of the NDT, future earnings on the NDT, and, if necessary, additional TVA cash contributions to the NDT and future earnings thereon. See Note 1 — Investment Funds. There is not a specified recovery period; therefore, the regulatory asset is classified as long-term consistent with the NDT investments and ARO liability.

Unrealized Losses on Interest Rate Derivatives. TVA uses regulatory accounting treatment to defer the unrealized gains and losses on certain interest rate derivative contracts. When amounts in these contracts are realized, the resulting gains or losses are included in the ratemaking formula. The unrealized losses on these interest rate derivatives are recorded on TVA’s consolidated balance sheets as current and non-current regulatory assets, and the related realized gains or losses, if any, are recorded in TVA’s consolidated statements of operations. Gains and losses on interest rate derivatives that are expected to be realized within the next year are included as a current regulatory asset or liability on TVA’s consolidated balance sheet.

Environmental Agreements. In conjunction with the Environmental Agreements (see Note 21 — Legal Proceedings — Environmental Agreements), TVA recorded certain liabilities totaling $360 million ($290 million investment in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects; $60 million to be provided to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects with preference for projects in the Tennessee River watershed; and $10 million in civil penalties). The TVA Board determined that these costs would be collected in customer rates in the future, and, accordingly, the amounts were deferred as a regulatory asset. Through the end of 2018, $276 million has been paid with respect to environmental projects, $60 million has been paid to Alabama, Kentucky, North Carolina, and Tennessee, and $10 million has been paid with respect to civil penalties. The remaining deferred amounts will be charged to expense and recovered in rates over future periods as payments are made through 2027. Amounts included as a current regulatory asset on TVA’s consolidated balance sheets represent the costs expected to be incurred in the next 12 months.

Unrealized Gains (Losses) on Commodity Derivatives. Unrealized gains (losses) on coal and natural gas purchase contracts, included as part of unrealized gains (losses) on commodity derivatives, relate to the mark-to-market ("MtM") valuation of coal and natural gas purchase contracts. These contracts qualify as derivative contracts but do not qualify for cash flow hedge accounting treatment. As a result, TVA recognizes the changes in the market value of these derivative contracts as a regulatory liability or asset. This treatment reflects TVA’s ability and intent to recover the cost of these commodity contracts on a settlement basis for ratemaking purposes through the fuel cost adjustment. TVA recognizes the actual cost of fuel received under these contracts in fuel expense at the time the fuel is used to generate electricity. These contracts expire at various times through 2020. Unrealized gains and losses on contracts with a maturity of less than one year are included as a current regulatory asset or liability on TVA's consolidated balance sheets. See Note 15.

Deferred Nuclear Generating Units. All accumulated costs related to Bellefonte Nuclear Plant ("Bellefonte") are recorded as a regulatory asset. Additionally, in August 2016 the TVA Board approved the recognition of a regulatory asset for (1) all costs attributable to (a) the expected disposition of Bellefonte assets, including preparing or preserving the Bellefonte site, and (b) associated liabilities directly related to those assets, (2) any related future operating and project costs until the assets are sold, (3) the amount by which the book value of Bellefonte exceeds its fair market value less cost to sell, if any, (4) any subsequent gains and losses resulting from the disposition or impairment of Bellefonte, and (5) any costs attributable to the steam generators for Bellefonte until TVA disposes of the generators.

The TVA Board approved recovery of this asset in future rates at an amount of $237 million per year until fully recovered. In addition to this annual recovery, in 2017, the TVA Board authorized management to accelerate additional amortization of this asset in 2018 to the extent actual net income in 2018 exceeded budgeted net income. TVA fully amortized the remaining balance of $764 million during 2018.

On November 14, 2016, following a public auction, TVA entered into a contract to sell substantially all of the Bellefonte Nuclear Plant ("Bellefonte") site to Nuclear Development, LLC for $111 million. Nuclear Development, LLC, paid $22 million on November 14, 2016, which is recorded as a short-term liability on TVA’s Consolidated Balance Sheet at September 30, 2018, with the remaining $89 million due at closing. Nuclear Development, LLC, had up to two years from November 14, 2016, to close on the property, and TVA agreed to maintain the site until closing. Nuclear Development, LLC, requested and was granted an extension of the initial closing date. Nuclear Development, LLC now has until November 30, 2018 to close on the property, and TVA will continue to maintain the site until then. Proceeds from the sale in excess of carrying costs will be recorded as a gain and reflected in earnings.

Environmental Cleanup Costs – Kingston Ash Spill. TVA used regulatory accounting treatment to defer all actual costs incurred and expected future costs related to the Kingston Fossil Plant ("Kingston") Ash Spill. The TVA Board approved a plan to amortize these costs over 15 years beginning on October 1, 2009. Insurance proceeds have been recorded as reductions to the regulatory asset and have reduced amounts collected in future rates. Amounts included as a current regulatory asset on TVA’s consolidated balance sheets represent the amount to be amortized in the next 12 months. The TVA Board is authorizing TVA to use the amount included in the 2019 rate action for the Deferred nuclear generating units and Nuclear training costs regulatory assets, to the extent needed, to accelerate amortization of the Environmental cleanup costs - Kingston ash spill regulatory asset in 2019. Therefore, the remaining balance at September 30, 2018 is recorded as a current asset.

Fuel Cost Adjustment Receivable. The fuel cost adjustment provides a mechanism to alter rates monthly to reflect changing fuel and purchased power costs, including realized gains and losses relating to transactions under TVA’s Financial Trading Program ("FTP"). There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in fuel rates. Balances in the fuel cost adjustment regulatory accounts represent over-collected or under-collected revenues that offset fuel and purchased power costs, and the fuel rate is designed to recover or refund the balance in less than one year.

Other Non-Current Regulatory Assets. Other non-current regulatory assets consist of the following:

Deferred Capital Leases and Other Financing Obligations. Deferred capital lease and other financing asset costs represent the difference between the FERC's Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act ("Uniform System of Accounts") model balances and the balances under GAAP guidance. Under the Uniform System of Accounts, TVA recognizes the initial capital lease and other financing asset and liability at inception of the lease or other obligation; however, the annual expense under the Uniform System of Accounts is equal to the annual lease or other financing obligation payments, which differs from GAAP treatment. This practice results in TVA’s asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to each capital lease or other financing obligation. These costs will be amortized over the respective lease or other financing obligation terms as lease or other financing obligation payments are made. As the costs associated with this regulatory asset are not currently being considered in rates and the asset is expected to increase over the next year, the regulatory asset has been classified as long-term.

Debt Reacquisition Costs. Reacquisition expenses, call premiums, and other related costs, such as unamortized debt issue costs associated with redeemed Bond issues, are deferred and amortized (accreted) on a straight-line basis over the weighted average life of TVA’s debt portfolio. Because timing of additional reacquisition expenses and changes to the weighted average life of the debt are uncertain, the regulatory asset is classified as long-term.

Nuclear Training Costs. As a result of refurbishing and restarting Browns Ferry Unit 1 in 2007 and the construction and startup of Watts Bar Unit 2 in 2017, nuclear training costs associated with these units have been deferred as a regulatory asset and amortized over a cost recovery period equivalent to the expected useful life of the operating nuclear units. In addition to this annual recovery, in 2017, the TVA Board authorized management to accelerate additional amortization of this asset in 2018 to the extent actual net income in 2018 exceeded budgeted net income. TVA fully amortized the remaining balance of $93 million during 2018.

Retirement Removal Costs. Retirement removal costs, net of salvage, that are not legally required are recognized as a regulatory asset. Prior to 2017, net removal costs were amortized over a recovery period consistent with the depreciable lives of related assets under the most recent depreciation study. In 2017 and thereafter, net removal costs are amortized over a one-year period subsequent to completion of the removal activities. TVA treats this regulatory asset as long-term in its entirety primarily because it relates to assets that are long-term in nature.

Fuel Cost Adjustment Tax Equivalents. The fuel cost adjustment includes a provision related to the current funding of the future payments TVA will make. As TVA records the fuel cost adjustment, five percent of the calculation that relates to a future asset or liability for tax equivalent payments is recorded as a current regulatory asset or liability and paid or refunded in the following year.