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Table of C ontent s

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, 2020
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 or other jurisdiction of incorporation or organization) |  | 62-0474417 (I.R.S. Employer Identification No.)
400 W. Summit Hill Drive Knoxville, Tennessee (Address of principal executive offices) |  | 37902 (Zip Code)

(865) 632-2101
(Registrant's 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 every Interactive Data File required to be submitted 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 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 accelerated filer," "accelerated filer," "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 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

1

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Table of Contents
| Page
GLOSSARY OF COMMON ACRONYMS...................................................................................................................................... | 3
FORWARD-LOOKING INFORMATION......................................................................................................................................... | 5
GENERAL INFORMATION............................................................................................................................................................ | 6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................................................................................................................. | 7
Consolidated Statements of Operations (Unaudited)............................................................................................................ | 7
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)............................................................................ | 7
Consolidated Balance Sheets (Unaudited)........................................................................................................................... | 8
Consolidated Statements of Cash Flows (Unaudited).......................................................................................................... | 10
Consolidated Statements of Changes in Proprietary Capital (Unaudited)............................................................................ | 11
Notes to Consolidated Financial Statements (Unaudited).................................................................................................... | 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... | 42
Executive Overview............................................................................................................................................................... | 43
Results of Operations............................................................................................................................................................ | 43
Liquidity and Capital Resources............................................................................................................................................ | 50
Key Initiatives and Challenges.............................................................................................................................................. | 52
Environmental Matters.......................................................................................................................................................... | 61
Legal Proceedings................................................................................................................................................................ | 68
Off-Balance Sheet Arrangements.......................................................................................................................................... | 68
Critical Accounting Policies and Estimates........................................................................................................................... | 68
New Accounting Standards and Interpretations.................................................................................................................... | 68
Legislative and Regulatory Matters....................................................................................................................................... | 68
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................................. | 68
ITEM 4. CONTROLS AND PROCEDURES.................................................................................................................................. | 68
Disclosure Controls and Procedures..................................................................................................................................... | 68
Changes in Internal Control over Financial Reporting.......................................................................................................... | 69
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................................................................................. | 69
ITEM 1A. RISK FACTORS............................................................................................................................................................ | 70
ITEM 5. OTHER INFORMATION.................................................................................................................................................. | 71
ITEM 6. EXHIBITS........................................................................................................................................................................ | 73
SIGNATURES............................................................................................................................................................................... | 74

2

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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, 2020 (the "Quarterly Report"):
Term or Acronym |  | Definition
ACE |  | Affordable Clean Energy
ANI |  | American Nuclear Insurers
AOCI |  | Accumulated other comprehensive income (loss)
ARO |  | Asset retirement obligation
ART |  | Asset Retirement Trust
Bonds |  | Bonds, notes, or other evidences of indebtedness
CAA |  | Clean Air Act
CCR |  | Coal combustion residuals
CEL |  | Chilling Effect Letter
CERCLA |  | Comprehensive Environmental Response, Compensation, and Liability Act
CME |  | Chicago Mercantile Exchange
CO 2 |  | Carbon dioxide
COVID-19 |  | Coronavirus Disease 2019
CPP |  | Clean Power Plan
CSAPR |  | Cross-State Air Pollution Rule
CTs |  | Combustion turbine unit(s)
CVA |  | Credit valuation adjustment
CY |  | Calendar year
DCP |  | Deferred Compensation Plan
DER |  | Distributed energy resources
DOE |  | Department of Energy
EIS |  | Environmental Impact Statement
ELGs |  | Effluent Limitation Guidelines
EMP |  | Electromagnetic pulses
EO |  | Executive Order
EPA |  | Environmental Protection Agency
EPRI |  | Electric Power Research Institute
EPU |  | Extended Power Uprate
ESPA |  | Early Site Permit Application
FASB |  | Financial Accounting Standards Board
FERC |  | Federal Energy Regulatory Commission
FTP |  | Financial Trading Program
GAAP |  | Accounting principles generally accepted in the United States of America
GHG |  | Greenhouse gas
GMDs |  | Geomagnetic disturbances
HAP |  | Hazardous Air Pollutants
IRP |  | Integrated Resource Plan
JSCCG |  | John Sevier Combined Cycle Generation LLC
KOC |  | Knoxville Office Complex
kW |  | Kilowatts
kWh |  | Kilowatt hours
LPCs |  | Local power company customers
LTA |  | Long-Term Agreement
MATS |  | Mercury and Air Toxics Standards

3

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MD&A |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
MLGW |  | Memphis Light, Gas and Water Division
mmBtu |  | Million British thermal unit(s)
MtM |  | Mark-to-market
MW |  | Megawatts
NAAQS |  | National Ambient Air Quality Standards
NAV |  | Net asset value
NDT |  | Nuclear Decommissioning Trust
NEIL |  | Nuclear Electric Insurance Limited
NEPA |  | National Environmental Policy Act
NERC |  | North American Electric Reliability Corporation
NES |  | Nashville Electric Service
NO x |  | Nitrogen oxide
NPDES |  | National Pollutant Discharge Elimination System
NRC |  | Nuclear Regulatory Commission
NSR |  | New Source Review
NWP |  | Nationwide Permit
OCI |  | Other comprehensive income (loss)
OMB |  | Office of Management and Budget
PARRS |  | Putable Automatic Rate Reset Securities
PM |  | Particulate matter
QTE |  | Qualified technological equipment and software
RCRA |  | Resource Conservation and Recovery Act
RECs |  | Renewable Energy Certificates
SCCG |  | Southaven Combined Cycle Generation LLC
SCRs |  | Selective catalytic reduction systems
SEC |  | Securities and Exchange Commission
SELC |  | Southern Environmental Law Center
SERP |  | Supplemental Executive Retirement Plan
SHLLC |  | Southaven Holdco LLC
SIPs |  | State implementation plans
SMR |  | Small modular reactor(s)
SO 2 |  | Sulfur dioxide
SPC |  | Summer Place Complex
SSSL |  | Seven States Southaven LLC
TDEC |  | Tennessee Department of Environment and Conservation
TVA Act |  | The Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee
TVARS |  | Tennessee Valley Authority Retirement System
U.S. Treasury |  | United States Department of the Treasury
VIE |  | Variable interest entity
XBRL |  | eXtensible Business Reporting Language

4

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FORWARD-LOOKING INFORMATION
This Quarterly Report contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as "may," "will," "should," "expect," "anticipate," "believe," "intend," "project," "plan," "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 any 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 any forward-looking statements. These factors include, among other things:
•The 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, or administrative orders or interpretations, including those related to environmental matters, and the costs of complying with these laws, regulations, executive orders, or administrative orders or interpretations;
•The cost of complying with known, anticipated, or new emissions reduction requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective or result in their removal from service, perhaps permanently;
•Significant reductions in demand for electricity produced through non-renewable or centrally located generation sources that may result from, among other things, economic downturns, increased energy efficiency and conservation, increased utilization of distributed generation and microgrids, and improvements in alternative generation and energy storage technologies;
•Changes in customer preferences for energy produced from cleaner generation sources;
•Changes in technology;
•Actions taken, or inaction, by the United States ("U.S.") government relating to the national or TVA debt ceiling or automatic spending cuts in government programs;
•Costs or liabilities that are not anticipated in TVA's financial statements for third-party claims, natural resource damages, environmental cleanup activities, or fines or penalties associated with unexpected events such as failures of a facility or infrastructure;
•Addition or loss of customers by TVA or TVA's local power company customers ("LPCs");
•Significant delays, cost increases, or cost overruns associated with the construction and maintenance of generation, transmission, navigation, flood control, or related assets;
•Requirements or decisions changing the amount or timing of funding obligations associated with TVA's pension plans, other post-retirement benefit plans, or health care 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 residuals ("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;
•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, or other costs that are not reflected in TVA's financial statements or projections;
•Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred;
•Weather conditions;
•Catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMPs"), geomagnetic disturbances ("GMDs"), droughts, floods, hurricanes, tornadoes, or other casualty events or pandemics, wars, national emergencies, terrorist activities, or other similar events, especially if these events occur in or near TVA's service area;
•Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;
•Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid;
•Disruption of fuel supplies, which may result from, among other things, economic conditions, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters;
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•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 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 ("TVA Act");
•An increase in TVA's cost of capital that may result from, among other things, changes in the market for TVA's debt securities, changes in the credit rating of TVA or the U.S. government, or, potentially, an increased reliance by TVA on alternative financing should TVA approach its debt limit;
•Changes in the economy and volatility in financial markets;
•Reliability or creditworthiness of counterparties;
•Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, or emission allowances;
•Changes in the market price of equity securities, debt securities, or other investments;
•Changes in interest rates, currency exchange rates, or inflation rates;
•Ineffectiveness of TVA's disclosure controls and procedures or its internal control over financial reporting;
•Inability to eliminate identified deficiencies in TVA's systems, standards, controls, or corporate culture;
•Inability to attract or retain a skilled workforce;
•Inability to respond quickly enough to current or potential customer demands or needs;
•Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, ownership, operation, or decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, or cause TVA to forego future construction at these or other facilities;
•Loss of quorum of the TVA Board of Directors ("TVA Board");
•Changes in the priorities of the TVA Board or TVA senior management; or
•Other unforeseeable events.
See also Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TVA's Annual Report on Form 10-K for the year ended September 30, 2020 (the "Annual Report"), and Part I, Item 2, Management'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 any forward-looking statement. New factors emerge from time to time, and it is not possible for TVA to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA's 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 (2021, 2020, etc.) in this Quarterly Report are to TVA's fiscal years ending September 30. Years that are preceded by "CY" are references to calendar years.
Notes
References to "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, Current Reports on Form 8-K, and all amendments to those reports, are available on TVA's website, free of charge, as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). TVA's website is www.tva.gov. Information contained on TVA's website shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report. All TVA SEC reports are available to the public without charge from the website maintained by the SEC at www.sec.gov.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended December 31
(in millions)

| 2020 |  | 2019 |  |  |  |
Operating revenues |  |  |  |  |  |  |
Revenue from sales of electricity | $ | 2,270 |  |  | $ | 2,532 |  |  |  |  |
Other revenue | 34 |  |  | 46 |  |  |  |  |
Total operating revenues | 2,304 |  |  | 2,578 |  |  |  |  |
Operating expenses |  |  |  |  |  |  |
Fuel | 369 |  |  | 423 |  |  |  |  |
Purchased power | 206 |  |  | 219 |  |  |  |  |
Operating and maintenance | 715 |  |  | 689 |  |  |  |  |
Depreciation and amortization | 378 |  |  | 584 |  |  |  |  |
Tax equivalents | 121 |  |  | 131 |  |  |  |  |
Total operating expenses | 1,789 |  |  | 2,046 |  |  |  |  |
Operating income | 515 |  |  | 532 |  |  |  |  |
Other income (expense), net | 15 |  |  | 12 |  |  |  |  |
Other net periodic benefit cost | 65 |  |  | 65 |  |  |  |  |
Interest expense | 281 |  |  | 287 |  |  |  |  |
Net income (loss) | $ | 184 |  |  | $ | 192 |  |  |  |  |
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)

| 2020 |  | 2019 |  |  |  |
Net income (loss) | $ | 184 |  |  | $ | 192 |  |  |  |  |
Other comprehensive income (loss) |  |  |  |  |  |  |
Net unrealized gain (loss) on cash flow hedges | 101 |  |  | 76 |  |  |  |  |
Net unrealized (gain) loss reclassified to earnings from cash flow hedges | (45) |  |  | (59) |  |  |  |  |
Total other comprehensive income (loss) | 56 |  |  | 17 |  |  |  |  |
Total comprehensive income (loss) | $ | 240 |  |  | $ | 209 |  |  |  |  |
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)

ASSETS
| December 31, 2020 |  | September 30, 2020
Current assets |  |  |
Cash and cash equivalents | $ | 509 |  |  | $ | 500 |
Accounts receivable, net | 1,368 |  |  | 1,529 |
Inventories, net | 1,064 |  |  | 1,003 |
Regulatory assets | 119 |  |  | 130 |
Other current assets | 84 |  |  | 84 |
Total current assets | 3,144 |  |  | 3,246 |
Property, plant, and equipment |  |  |
Completed plant | 65,295 |  |  | 64,970 |
Less accumulated depreciation | (33,822) |  |  | (33,550) |
Net completed plant | 31,473 |  |  | 31,420 |
Construction in progress | 2,158 |  |  | 2,139 |
Nuclear fuel | 1,463 |  |  | 1,504 |
Finance leases | 505 |  |  | 516 |
Total property, plant, and equipment, net | 35,599 |  |  | 35,579 |
Investment funds | 3,587 |  |  | 3,198 |
Regulatory and other long-term assets |  |  |
Regulatory assets | 9,697 |  |  | 10,245 |
Operating lease assets, net of amortization | 216 |  |  | 232 |
Other long-term assets | 320 |  |  | 325 |
Total regulatory and other long-term assets | 10,233 |  |  | 10,802 |
Total assets | $ | 52,563 |  |  | $ | 52,825 |
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)

LIABILITIES AND PROPRIETARY CAPITAL
| December 31, 2020 |  | September 30, 2020
Current liabilities |  |  |
Accounts payable and accrued liabilities | $ | 1,672 |  |  | $ | 1,844 |
Accrued interest | 295 |  |  | 298 |
Asset retirement obligations | 345 |  |  | 345 |
Current portion of leaseback obligations | 219 |  |  | 198 |
Regulatory liabilities | 128 |  |  | 141 |
Short-term debt, net | 112 |  |  | 57 |
Current maturities of power bonds | 1,802 |  |  | 1,787 |
Current maturities of long-term debt of variable interest entities | 41 |  |  | 41 |
Total current liabilities | 4,614 |  |  | 4,711 |
Other liabilities |  |  |
Post-retirement and post-employment benefit obligations | 6,496 |  |  | 6,617 |
Asset retirement obligations | 6,442 |  |  | 6,440 |
Finance lease liabilities | 520 |  |  | 525 |
Other long-term liabilities | 2,270 |  |  | 2,548 |
Leaseback obligations | 4 |  |  | 25 |
Regulatory liabilities | 13 |  |  | 23 |
Total other liabilities | 15,745 |  |  | 16,178 |
Long-term debt, net |  |  |
Long-term power bonds, net | 17,988 |  |  | 17,956 |
Long-term debt of variable interest entities, net | 1,049 |  |  | 1,048 |
Total long-term debt, net | 19,037 |  |  | 19,004 |
Total liabilities | 39,396 |  |  | 39,893 |
Contingencies and legal proceedings (Note 19) |  |  |
Proprietary capital |  |  |
Power program appropriation investment | 258 |  |  | 258 |
Power program retained earnings | 12,358 |  |  | 12,177 |
Total power program proprietary capital | 12,616 |  |  | 12,435 |
Nonpower programs appropriation investment, net | 546 |  |  | 548 |
Accumulated other comprehensive income (loss) | 5 |  |  | (51) |
Total proprietary capital | 13,167 |  |  | 12,932 |
Total liabilities and proprietary capital | $ | 52,563 |  |  | $ | 52,825 |
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended December 31
(in millions)

| 2020 |  | 2019
Cash flows from operating activities |  |  |
Net income (loss) | $ | 184 |  |  | $ | 192 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities |  |  |
Depreciation and amortization(1) | 384 |  |  | 590 |
Amortization of nuclear fuel cost | 96 |  |  | 93 |
Non-cash retirement benefit expense | 84 |  |  | 81 |
Other regulatory amortization and deferrals | 6 |  |  | (3) |
Changes in current assets and liabilities |  |  |
Accounts receivable, net | 161 |  |  | 316 |
Inventories and other current assets, net | (73) |  |  | (88) |
Accounts payable and accrued liabilities | (91) |  |  | (213) |
Accrued interest | (3) |  |  | 6 |
Pension contributions | (75) |  |  | (75) |
Other, net | (78) |  |  | (61) |
Net cash provided by operating activities | 595 |  |  | 838 |
Cash flows from investing activities |  |  |
Construction expenditures | (564) |  |  | (465) |
Nuclear fuel expenditures | (79) |  |  | (117) |
Loans and other receivables |  |  |
Advances | (4) |  |  | (2) |
Repayments | 1 |  |  | 1 |
Other, net | 2 |  |  | (7) |
Net cash used in investing activities | (644) |  |  | (590) |
Cash flows from financing activities |  |  |
Long-term debt |  |  |
Redemptions and repurchases of power bonds | (1) |  |  | (218) |
Short-term debt issues (redemptions), net | 55 |  |  | (27) |
Payments on leases and leasebacks | (5) |  |  | (1) |
Other, net | 8 |  |  | 3 |
Net cash (used in) provided by financing activities | 57 |  |  | (243) |
Net change in cash, cash equivalents, and restricted cash | 8 |  |  | 5 |
Cash, cash equivalents, and restricted cash at beginning of period | 521 |  |  | 322 |
Cash, cash equivalents, and restricted cash at end of period | $ | 529 |  |  | $ | 327 |
Note (1) Includes amortization of debt issuance costs and premiums/discounts.
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the Three Months Ended December 31, 2020 and 2019
(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, 2019 | $ | 258 |  |  | $ | 10,823 |  |  | $ | 556 |  |  | $ | (12) |  |  | $ | 11,625 |
Net income (loss) | — |  |  | 194 |  |  | (2) |  |  | — |  |  | 192 |
Total other comprehensive income (loss) | — |  |  | — |  |  | — |  |  | 17 |  |  | 17 |
Return on power program appropriation investment | — |  |  | (2) |  |  | — |  |  | — |  |  | (2) |
Balance at December 31, 2019 | $ | 258 |  |  | $ | 11,015 |  |  | $ | 554 |  |  | $ | 5 |  |  | $ | 11,832 |
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 new accounting standard(1) | — |  |  | (4) |  |  | — |  |  | — |  |  | (4) |
Balance at December 31, 2020 | $ | 258 |  |  | $ | 12,358 |  |  | $ | 546 |  |  | $ | 5 |  |  | $ | 13,167 |
Note (1) See Note 2 — Impact of New Accounting Standards and Interpretations.
The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except where noted)

Note | Page
1 |  | Summary of Significant Accounting Policies | 13
2 |  | Impact of New Accounting Standards and Interpretations | 16
3 |  | Accounts Receivable, Net | 16
4 |  | Inventories, Net | 17
5 |  | Plant Closures | 17
6 |  | Other Long-Term Assets | 17
7 |  | Regulatory Assets and Liabilities | 19
8 |  | Variable Interest Entities | 19
9 |  | Other Long-Term Liabilities | 21
10 |  | Asset Retirement Obligations | 22
11 |  | Debt and Other Obligations | 23
12 |  | Accumulated Other Comprehensive Income (Loss) | 24
13 |  | Risk Management Activities and Derivative Transactions | 24
14 |  | Fair Value Measurements | 29
15 |  | Revenue | 35
16 |  | Other Income (Expense), Net | 37
17 |  | Supplemental Cash Flow Information | 38
18 |  | Benefit Plans | 38
19 |  | Contingencies and Legal Proceedings | 38
20 |  | Subsequent Events | 42

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1. 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 in response to a proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern U.S., and sell the electricity generated at the facilities TVA operates.
Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of approximately 10 million people.
TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system and public lands to provide recreational opportunities, adequate water supply, improved water quality, cultural and natural resource protection, and economic development.
The power program has historically been separate and distinct from the stewardship programs. It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, or other evidences of indebtedness (collectively, "Bonds"). Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the United States Department of the Treasury ("U.S. Treasury") as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.
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 ("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 item is no longer a component of rate setting. In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.
Fiscal Year
TVA's fiscal year ends September 30. Years (2021, 2020, etc.) refer to TVA's fiscal years unless they are preceded by "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 recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to
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write off these costs. All regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.
Basis of Presentation
TVA prepares its consolidated interim financial statements in conformity with GAAP for consolidated interim financial information. Accordingly, TVA's consolidated interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2020, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2020 (the "Annual Report"). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included on the consolidated interim financial statements.
The accompanying consolidated interim financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA and variable interest entities ("VIEs") of which TVA is the primary beneficiary. See Note 8 — 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, including impacts from the Coronavirus Disease 2019 ("COVID-19") pandemic, 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 and cash equivalents includes cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to compliance with certain environmental regulations. See Note 19 — Contingencies and Legal Proceedings — Legal Proceedings — Environmental Agreements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:

Cash, Cash Equivalents, and Restricted Cash
| At December 31, 2020 |  | At September 30, 2020
Cash and cash equivalents | $ | 509 |  |  | $ | 500 |
Restricted cash and cash equivalents included in Other long-term assets | 20 |  |  | 21 |
Total cash, cash equivalents, and restricted cash | $ | 529 |  |  | $ | 521 |

Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020. TVA may continue to hold higher balances in future periods due to potential market volatility.
Allowance for Uncollectible Accounts
As described in Note 2 — Impact of New Accounting Standards and Interpretations, TVA adopted Financial Instruments - Credit Losses on October 1, 2020, using a modified retrospective method through a cumulative-effect adjustment to retained earnings. The standard, Current Expected Credit Losses ("CECL"), requires TVA to recognize 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 collectibility of the reported amounts. TVA has reviewed the current portfolio of financial receivables and developed a methodology to reasonably measure the estimate of credit losses for each major financial receivable type. The appropriateness of the allowance is evaluated at the end of each reporting period. TVA continues to monitor the impact of the COVID-19 pandemic on accounts and loans receivable balances to evaluate the allowance for uncollectible accounts.
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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 by the due date. TVA's corporate credit department 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 less than $1 million at both December 31, 2020, and September 30, 2020, for trade accounts receivable. Additionally, loans receivable of $109 million and $105 million at December 31, 2020, and September 30, 2020, respectively, are included in Accounts receivable, net and Other long-term assets, for the current and long-term portions, respectively. Loans receivables are reported net of allowances for uncollectible accounts of $5 million and less than $1 million at December 31, 2020, and September 30, 2020, respectively. The increase in allowances for uncollectible accounts is due to the adoption of CECL. See Note 2 - Impact of New Accounting Standards and Interpretations.
Revenues
TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to power sales invoiced and recorded during the month, TVA accrues estimated unbilled revenues for power sales provided to five customers whose billing date occurs prior to the end of the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA's overall mission 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. Under the 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 the external depreciation studies. These studies are updated approximately every five years, with a study currently being performed in 2021. Depreciation expense was $345 million and $539 million for the three months ended December 31, 2020 and 2019, respectively. See Note 5 — Plant Closures for a discussion of the impact of plant closures.
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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 2021:

Financial Instruments - Credit Losses
Description | This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value. The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities.
Effective Date for TVA | October 1, 2020
Effect on the Financial Statements or Other Significant Matters | TVA adopted this standard on a modified retrospective method through a cumulative-effect adjustment to retained earnings on October 1, 2020. TVA recorded an initial transition adjustment of $4 million to retained earnings. The adoption of this standard did not materially impact TVA's financial condition, results of operations, or cash flows.
Fair Value Measurement Disclosure
Description | This guidance changes certain disclosure requirements for fair value measurements. It removes certain disclosure requirements, such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of the transfers between levels; and the valuation processes for Level 3 fair value measurements. Some disclosure requirements are added, such as the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
Effective Date for TVA | October 1, 2020
Effect on the Financial Statements or Other Significant Matters | Adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows.

The following accounting standard has been issued but at December 31, 2020, was not effective and had not been adopted by TVA:

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.
Effective Date for TVA | The new standard is effective for adoption at any time between March 12, 2020, and December 31, 2022. TVA currently plans to adopt the standard by December 31, 2022.
Effect on the Financial Statements or Other Significant Matters | TVA continues to review this standard and evaluate the impact of using an alternative reference rate instead of LIBOR in its interest rate swap contracts. TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows.

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

Accounts Receivable, Net
| At December 31, 2020 |  | At September 30, 2020
Power receivables | $ | 1,242 |  |  | $ | 1,401 |
Other receivables | 126 |  |  | 128 |
Accounts receivable, net(1) | $ | 1,368 |  |  | $ | 1,529 |

Note
(1) Allowance for uncollectible accounts was less than $1 million at December 31, 2020, and September 30, 2020, and therefore is not represented in the table
above. The allowance at December 31, 2020 includes the impact from adopting CECL on October 1, 2020.
In response to the COVID-19 pandemic, the TVA Board approved the Public Power Support and Stabilization Program in 2020. Through this program, TVA offered up to $1.0 billion of credit support to LPCs that demonstrated the need for temporary financial relief, through the deferral of a portion of LPCs' wholesale power payments owed to TVA. The program ended on December 31, 2020, with a total of $1 million of credit support approved under the program. Repayment of the $1 million has begun and full payment is expected in the second quarter of 2021.
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4. Inventories, Net
The table below summarizes the types and amounts of TVA's inventories:

Inventories, Net
| At December 31, 2020 |  | At September 30, 2020
Materials and supplies inventory | $ | 781 |  |  | $ | 770 |
Fuel inventory | 301 |  |  | 253 |
Renewable energy certificates inventory, net | 17 |  |  | 15 |
Allowance for inventory obsolescence | (35) |  |  | (35) |
Inventories, net | $ | 1,064 |  |  | $ | 1,003 |

5. 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 Paradise Fossil Plant ("Paradise") Unit 3 by December 2020 and Bull Run Fossil Plant ("Bull Run") by December 2023 was approved. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Fossil Plant Unit 3 was taken offline on February 1, 2020, effectively retiring the plant.
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 retirements of Paradise and Bull Run, TVA has recognized a cumulative $986 million of accelerated depreciation, with $33 million and $225 million being recognized during the three months ended December 31, 2020 and 2019, respectively.
6. Other Long-Term Assets
The table below summarizes the types and amounts of TVA's other long-term assets:

Other Long-Term Assets (in millions)
| At December 31, 2020 |  | At September 30, 2020
Loans and other long-term receivables, net | $ | 104 |  |  | $ | 100 |
EnergyRight® receivables, net | 65 |  |  | 69 |
Prepaid long-term service agreements | 47 |  |  | 42 |
Commodity contract derivative assets | 13 |  |  | 23 |
Restricted cash and cash equivalents | 20 |  |  | 21 |
Prepaid capacity payments | 10 |  |  | 11 |
Other | 61 |  |  | 59 |
Total other long-term assets | $ | 320 |  |  | $ | 325 |

EnergyRight® Receivables, Net. In association with the EnergyRight® program, TVA's local power company customers ("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 10 years. TVA purchases the resulting loans receivable from its LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loans receivable that have been in default for 180 days or more or that TVA has determined are 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. At December 31, 2020, and September 30, 2020, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $17 million and $18 million, respectively. See Note 9 — Other Long-Term Liabilities for information regarding the associated financing obligation.
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In response to the COVID-19 pandemic, customers experiencing financial hardship could request a deferral of EnergyRight® loan payments for a period of up to six months. The deferral option began in April 2020 and ended October 31, 2020. Deferred loans did not accrue interest during the deferral months and totaled less than $1 million.
Allowance for Loan Losses. As described in Note 2 — Impact of New Accounting Standards and Interpretations, 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.

Allowance Components (in millions)
| At December 31, 2020
EneryRight® loan reserve | $ | 2 |
Economic development loan collective reserve | 1 |
Economic development loan specific loan reserve | 2 |
Total allowance for loan losses | $ | 5 |

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, 2020, and September 30, 2020, prepayments of $5 million and $3 million, respectively, were recorded in Other current assets.
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7. Regulatory Assets and Liabilities
Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or 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 December 31, 2020 |  | At September 30, 2020
Current regulatory assets |  |  |
Unrealized losses on interest rate derivatives | $ | 115 |  |  | $ | 114 |
Unrealized losses on commodity derivatives | 4 |  |  | 4 |
Fuel cost adjustment receivable | — |  |  | 12 |
Total current regulatory assets | 119 |  |  | 130 |
Non-current regulatory assets |  |  |
Deferred pension costs and other post-retirement benefits costs | 5,100 |  |  | 5,193 |
Non-nuclear decommissioning costs | 2,502 |  |  | 2,512 |
Unrealized losses on interest rate derivatives | 1,367 |  |  | 1,506 |
Nuclear decommissioning costs | 582 |  |  | 896 |
Other non-current regulatory assets | 146 |  |  | 138 |
Total non-current regulatory assets | 9,697 |  |  | 10,245 |
Total regulatory assets | $ | 9,816 |  |  | $ | 10,375 |
Current regulatory liabilities |  |  |
Fuel cost adjustment tax equivalents | $ | 113 |  |  | $ | 115 |
Fuel cost adjustment | 2 |  |  | — |
Unrealized gains on commodity derivatives | 13 |  |  | 26 |
Total current regulatory liabilities | 128 |  |  | 141 |
Non-current regulatory liabilities |  |  |
Unrealized gains on commodity derivatives | 13 |  |  | 23 |
Total regulatory liabilities | $ | 141 |  |  | $ | 164 |

8. Variable Interest Entities
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the 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.
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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 ("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 ("Holdco notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each January 15 and July 15, with a final payment due in January 2042. The payment dates for the mandatorily redeemable membership interests are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes closed in January 2012. The JSCCG notes are secured by TVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. TVA's lease payments to JSCCG are equal to and payable on the same dates as JSCCG's and Holdco's semi-annual debt service payments. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions.
Due to its participation in the design, business conduct, and credit and financial support of JSCCG and Holdco, TVA has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's membership interests in JSCCG are eliminated in consolidation.
Southaven VIE
In 2013, TVA entered into a $400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance ("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 ("SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is 7.0 percent, which is reflected as interest expense in the Consolidated Statements of Operations. SHLLC is required to pay a pre-determined portion of the return on investment to Seven States Southaven, LLC ("SSSL") on each lease payment date as agreed in SHLLC's formation documents (the "Seven States Return"). The current and long-term portions of the Membership interests of VIE subject to mandatory redemption are included in Accounts payable and accrued liabilities and Other long-term liabilities, respectively.
The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes. The SCCG notes are secured by TVA's lease payments, and the SHLLC notes are secured by SHLLC's investment in, and amounts receivable from, SCCG. TVA's lease payments to SCCG are payable on the same dates as SCCG's and SHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG's semi-annual debt service payments, (ii) the amount of SHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.
In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right, at any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA.
TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term.
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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 at December 31, 2020, and September 30, 2020, as reflected on the Consolidated Balance Sheets, are as follows:

Summary of Impact of VIEs on Consolidated Balance Sheets (in millions)
| At December 31, 2020 |  | At September 30, 2020
Current liabilities |  |  |
Accrued interest | $ | 23 |  |  | $ | 10 |
Accounts payable and accrued liabilities | 3 |  |  | 3 |
Current maturities of long-term debt of variable interest entities | 41 |  |  | 41 |
Total current liabilities | 67 |  |  | 54 |
Other liabilities |  |  |
Other long-term liabilities | 23 |  |  | 23 |
Long-term debt, net |  |  |
Long-term debt of variable interest entities, net | 1,049 |  |  | 1,048 |
Total liabilities | $ | 1,139 |  |  | $ | 1,125 |

Interest expense of $13 million and $14 million for the three months ended December 31, 2020 and 2019, respectively, is included in the Consolidated Statements of Operations related to debt of VIEs and membership interests of VIEs subject to mandatory redemption.
Creditors of the VIEs do not have any 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.
9. Other Long-Term Liabilities
Other long-term liabilities consist primarily of liabilities related to certain derivative agreements, as well as for environmental remediation liabilities and liabilities under agreements related to compliance with certain environmental regulations. See Note 10 — Asset Retirement Obligations and Note 13 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives. The table below summarizes the types and amounts of Other long-term liabilities:

Other Long-Term Liabilities (in millions)
| At December 31, 2020 |  | At September 30, 2020
Interest rate swap liabilities | $ | 1,754 |  |  | $ | 1,927 |
Operating lease liabilities | 159 |  |  | 171 |
Currency swap liabilities | 41 |  |  | 123 |
EnergyRight® financing obligations | 75 |  |  | 78 |
Accrued long-term service agreements | 49 |  |  | 56 |
Other | 192 |  |  | 193 |
Total other long-term liabilities | $ | 2,270 |  |  | $ | 2,548 |

Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At December 31, 2020, and September 30, 2020, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities and Accrued interest was $115 million and $114 million, respectively. See Note 13 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives for information regarding the interest rate swap liabilities. As of December 31, 2020, interest rate swap liabilities decreased $172 million as compared to September 30, 2020, due to an increase in both market interest rates since September 30, 2020, and settlement payments during the three months ended December 31, 2020.
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EnergyRight® Financing Obligations. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight® 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. At both December 31, 2020, and September 30, 2020, the carrying amount of the financing obligations reported in Accounts payable and accrued liabilities was $19 million. See Note 6 — Other Long-Term Assets for information regarding the associated loans receivable.
In response to the COVID-19 pandemic, customers experiencing financial hardship could request a deferral of EnergyRight® loan payments for a period of up to six months. This deferral option began in April 2020 and ended October 31, 2020. Deferred loans did not accrue interest during the deferral months and totaled less than $1 million.
Accrued 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, parts received and services rendered exceed payments made. 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. At both December 31, 2020 and September 30, 2020, related liabilities of $15 million were recorded in Accounts payable and accrued liabilities.
10. Asset Retirement Obligations
During the three months ended December 31, 2020, TVA's total asset retirement obligations ("ARO") liability increased $2 million as a result of periodic accretion, partially offset by revisions in estimate and settlement projects that were conducted during the period. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets. During the three months ended December 31, 2020, $18 million of the related regulatory assets were amortized into expense as these amounts were collected in rates. See Note 7 — Regulatory Assets and Liabilities. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 14 — Fair Value Measurements — Investment Funds and Note 19 — Contingencies and Legal Proceedings — Contingencies — Decommissioning Costs for disclosure of the current balances of the trusts and a discussion of the trusts' objectives.

Asset Retirement Obligation Activity |
| Nuclear |  | Non-Nuclear |  | Total |
Balance at September 30, 2020 | $ | 3,278 |  |  | $ | 3,507 |  |  | $ | 6,785 |  | (1)
Settlements | (1) |  |  | (38) |  |  | (39) |  |
Revisions in estimate | 2 |  |  | (12) |  |  | (10) |  |
Accretion (recorded as regulatory asset) | 37 |  |  | 14 |  |  | 51 |  |
Balance at December 31, 2020 | $ | 3,316 |  |  | $ | 3,471 |  |  | $ | 6,787 |  | (1)

Note
(1) Includes $345 million at both December 31, 2020, and September 30, 2020, respectively, in Current liabilities.
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11. Debt and Other Obligations
Debt Outstanding
Total debt outstanding at December 31, 2020, and September 30, 2020, consisted of the following:

Debt Outstanding (in millions)
| At December 31, 2020 |  | At September 30, 2020
Short-term debt |  |  |
Short-term debt, net | $ | 112 |  |  | $ | 57 |
Current maturities of power bonds issued at par(1) | 1,802 |  |  | 1,787 |
Current maturities of long-term debt of VIEs issued at par | 41 |  |  | 41 |
Total current debt outstanding, net | 1,955 |  |  | 1,885 |
Long-term debt |  |  |
Long-term power bonds(2) | 18,108 |  |  | 18,078 |
Long-term debt of VIEs, net | 1,049 |  |  | 1,048 |
Unamortized discounts, premiums, issue costs, and other | (120) |  |  | (122) |
Total long-term debt, net | 19,037 |  |  | 19,004 |
Total debt outstanding | $ | 20,992 |  |  | $ | 20,889 |

Notes
(1) Includes net exchange gain from currency transactions of $58 million and $73 million at December 31, 2020, and September 30, 2020, respectively.
(2) Includes net exchange gain from currency transactions of $50 million and $80 million at December 31, 2020, and September 30, 2020, respectively.
Debt Securities Activity
The table below summarizes the long-term debt securities activity for the period from October 1, 2020, to December 31, 2020:

Debt Securities Activity
|  | Date |  | Amount (in millions) |  | Interest Rate
Redemptions/Maturities(1) |  |  |  |  |  |
2009 Series B |  | December 2020 |  | $ | 1 |  |  | 3.77 | %
Total redemptions/maturities of debt |  |  |  | $ | 1 |  |  |

Note
(1) All redemptions were at 100 percent of par.
Credit Facility Agreements
TVA has funding available under four long-term revolving credit facilities totaling approximately $2.7 billion: a $150 million credit facility that matures on December 11, 2021, a $1.0 billion credit facility that matures on June 13, 2023, a $1.0 billion credit facility that matures on September 28, 2023, and a $500 million credit facility that matures on February 1, 2025. 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, 2020, and September 30, 2020, there were approximately $1.4 billion and $1.5 billion, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 13 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral.
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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, 2020 (in millions)
Maturity Date |  | Facility Limit |  | Letters of Credit Outstanding |  | Cash Borrowings |  | Availability
December 2021 |  | $ | 150 |  |  | $ | 38 |  |  | $ | — |  |  | $ | 112 |
June 2023 |  | 1,000 |  |  | 432 |  |  | — |  |  | 568 |
September 2023 |  | 1,000 |  |  | 394 |  |  | — |  |  | 606 |
February 2025 |  | 500 |  |  | 500 |  |  | — |  |  | — |
Total |  | $ | 2,650 |  |  | $ | 1,364 |  |  | $ | — |  |  | $ | 1,286 |

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 million credit facility. This credit facility was renewed for 2021 with a maturity date of September 30, 2021. 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 U.S. with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at December 31, 2020. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit.
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 ("QTE"). Due to TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At both December 31, 2020, and September 30, 2020, the outstanding leaseback obligations related to the remaining CTs and QTE were $223 million. In May 2020, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and TVA had previously acquired the equity interest related to these transactions. Rent payments under the remaining CT lease/leaseback transactions are scheduled to be made through January 2022. TVA does have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts. In addition, on October 30, 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE. Repurchase payments are being made through a series of installments in 2021 and 2022, after which the associated leases will be terminated.
12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) ("AOCI") represents market valuation adjustments related to TVA's currency swaps. The currency swaps are cash flow hedges and are the only derivatives in TVA's portfolio that have been designated and qualify for hedge accounting treatment. TVA records exchange rate gains and losses on its foreign currency-denominated debt and any related accrued interest in net income and marks its currency swap assets and liabilities to market through other comprehensive income (loss) ("OCI"). TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt. During the three months ended December 31, 2020 and 2019, TVA reclassified $45 million and $59 million of gains, respectively, related to its cash flow hedges from AOCI to Interest expense. See Note 13 — 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 7 — Regulatory Assets and Liabilities for a schedule of regulatory assets and liabilities. See Note 13 — Risk Management Activities and Derivative Transactions for a discussion of the recognition in AOCI of gains and losses associated with certain derivative instruments. See Note 14 — Fair Value Measurements for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities. See Note 18 — Benefit Plans for a discussion of the regulatory accounting related to components of TVA's benefit plans.
13. Risk Management Activities and Derivative Transactions
TVA is exposed to various 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,
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and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts because these contracts no longer met the criteria of net settlement, and, as a result, the associated net derivative liabilities were derecognized at that time. In addition, TVA suspended its Financial Trading Program ("FTP") in 2014 and is not currently using financial instruments to hedge risks related to commodity prices. TVA plans to continue managing fuel price volatility through other methods and is reevaluating its suspended FTP program for future use of financial instruments.
Overview of Accounting Treatment
TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance Sheets 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 |  | 2020 |  | 2019 |  |  |  |  |
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 |  | $ | 101 |  |  | $ | 76 |  |  |  |  |  |

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 |  |  |
Derivatives in Cash Flow Hedging Relationship |  | 2020 |  | 2019 |  |  |  |  |
Currency swaps |  | $ | 45 |  |  | $ | 59 |  |  |  |  |  |

Note
(1) There were no amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $6 million of losses from AOCI to Interest expense within the next 12 months to offset amounts anticipated to be recorded in Interest expense related to exchange gain on the debt.

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(2) |  | Accounting for Derivative Instrument |  | 2020 |  | 2019 |  |  |  |  |
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) |  |  | $ | (21) |  |  |  |  |  |
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 |  | — |  |  | 1 |  |  |  |  |  |

Notes
(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 were no related gains (losses) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2020 and 2019.
(2) During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts.
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Fair Values of TVA Derivatives (in millions)
| At December 31, 2020 |  | At September 30, 2020
Derivatives That Receive Hedge Accounting Treatment:
| Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Currency swaps |  |  |  |  |  |  |
£200 million Sterling | $ | (60) |  |  | Accounts payable and accrued liabilities $(60) |  | $ | (78) |  |  | Accounts payable and accrued liabilities $(78)
£250 million Sterling | (22) |  |  | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(18) |  | (63) |  |  | Accounts payable and accrued liabilities $(5); Other long-term liabilities $(58)
£150 million Sterling | (26) |  |  | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(23) |  | (68) |  |  | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(65)
Derivatives That Do Not Receive Hedge Accounting Treatment:
| Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Interest rate swaps |  |  |  |  |  |  |
$1.0 billion notional | $ | (1,332) |  |  | Accounts payable and accrued liabilities $(64); Accrued interest $(17); Other long-term liabilities $(1,251) |  | $ | (1,449) |  |  | Accounts payable and accrued liabilities $(43); Accrued interest $(37); Other long-term liabilities $(1,369)
$476 million notional | (533) |  |  | Accounts payable and accrued liabilities $(30); Accrued interest $(1); Other long-term liabilities $(502) |  | (588) |  |  | Accounts payable and accrued liabilities $(22); Accrued interest $(10); Other long-term liabilities $(556)
$42 million notional(1) | (4) |  |  | Accounts payable and accrued liabilities $(2); Accrued interest $(1); Other long-term liabilities $(1) |  | (4) |  |  | Accounts payable and accrued liabilities $(2); Other long-term liabilities $(2)
Commodity contract derivatives | 22 |  |  | Other current assets $12; Other long-term assets $13 Accounts payable and accrued liabilities $(3) |  | 46 |  |  | Other current assets $26; Other long-term assets $23; Accounts payable and accrued liabilities $(3)

Note
(1) Represents two interest rate swaps with notional amounts of $28 million and $14 million.
Cash Flow Hedging Strategy for Currency Swaps
To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurre d. TVA had three currency swaps outstanding at December 31, 2020, with total currency exposure of £600 million and expiration dates ranging fr om 2021 to 2043.
When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability and related accrued interest are included in Long-term debt, net and Accounts payable and accrued liabilities, respectively. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap liabilities are included in Accounts payable and accrued liabilities and Other long-term liabilities on the 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 mark-to-market ("MtM") gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the three months ended December 31,
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2020 and 2019, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized gains of $143 million and $171 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 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 natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market natural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At December 31, 2020, TVA's natural gas contract derivatives had terms of up to four years.

Commodity Contract Derivatives
| At December 31, 2020 |  | At September 30, 2020
| Number of Contracts |  | Notional Amount |  | Fair Value (MtM) |  | Number of Contracts |  | Notional Amount |  | Fair Value (MtM)
Natural gas contract derivatives | 32 |  | 300 million mmBtu |  | 22 |  |  | 42 |  | 302 million mmBtu |  | 46 |

Offsetting of Derivative Assets and Liabilities
The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets are shown in the table below:

Derivative Assets and Liabilities(1) (in millions)
| At December 31, 2020 |  |  |  |  | At September 30, 2020
Assets |  |  |  |  |  |
Commodity derivatives not subject to master netting or similar arrangement | $ | 25 |  |  |  |  |  | $ | 49 |
Liabilities |  |  |  |  |  |
Currency swaps(2) | $ | 108 |  |  |  |  |  | $ | 209 |
Interest rate swaps(2) | 1,869 |  |  |  |  |  | 2,041 |
Total derivatives subject to master netting or similar arrangement | 1,977 |  |  |  |  |  | 2,250 |
Commodity derivatives not subject to master netting or similar arrangement | 3 |  |  |  |  |  | 3 |
Total liabilities | $ | 1,980 |  |  |  |  |  | $ | 2,253 |

Notes
(1) Offsetting 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 offsetting amounts on TVA's Consolidated Balance Sheets at either December 31, 2020, or September 30, 2020.
(2) Letters of credit of approximately $1.4 billion and $1.5 billion were posted as collateral at December 31, 2020, and September 30, 2020, 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"). See Note 14 — Fair Value Measurements — Investment Funds for a discussion of the trusts, plans, and types of investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At December 31, 2020, and September 30, 2020, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $11 million and $13 million at December 31, 2020, and September 30, 2020, 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, 2020, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $2.0 billion. TVA's collateral obligations at December 31, 2020, under these arrangements were approximately $1.4 billion, for which TVA had posted approximately $1.4 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.
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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 or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $22 million, and
•If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral.
Counterparty Risk
TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements.
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. Of the $1.2 billion and $1.4 billion of receivables from power sales outstanding at December 31, 2020, and September 30, 2020, respectively, nearly all counterparties were rated investment grade. The obligations of customers that are not investment grade are secured by collateral. T VA 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, and Note 6 — Other Long-Term Assets.
TVA had revenue from two LPCs that collectively accounted for 16 percent of total operating revenues for both the three months ended December 31, 2020 and 2019.
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 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.
Natural Gas. TVA purchases the majority of its natural gas requirements from a variety of suppliers under primarily short-term contracts. In the event of nonperformance by these 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, 2020. The contracted supply of coal is sourced from multiple geographic regions of the U.S. and is to be delivered via various transportation methods (e.g., barge, rail, and truck). Emerging technologies, environmental regulations, and low natural gas prices have contributed to weak demand for coal. As a result, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies. Continued difficulties by coal suppliers, including impacts from the COVID-19 pandemic, could result in consolidations, additional bankruptcies, restructuring, contract renegotiations, or other scenarios.
Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for 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 has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant. TVA has determined that the supplier has the equivalent of a non-investment grade credit rating; therefore, the supplier has provided credit assurance to TVA under the terms of the agreement.
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Other Suppliers. At this time, TVA has experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. A mitigation strategy was developed by TVA and the vendor to reduce projected delays and impacts to TVA's outage schedule. TVA will continue to monitor the supply base and remain in contact with suppliers to identify potential risks.
Derivative Counterparties. T VA has entered into physical and financial contracts that qualify as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the 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 gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At December 31, 2020, 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 A3 or higher.
TVA classifies qualified forward natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At December 31, 2020, the natural gas contracts were with counterparties whose ratings ranged from B1 to A2. TVA recognizes the slowdown in demand and the impacts on the oil and gas industry as a result of the COVID-19 pandemic. TVA will continue to monitor the impacts and affected credit ratings and enforce contract performance assurance provisions when applicable.
14. 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 Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP and DCP assets, there has been no impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows related to these fair value measurements.
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Investment Funds
At December 31, 2020, Investment funds were comprised of $3.6 billion of equity securities and debt securities classified as trading measured at fair value. Equity and trading debt securities are held in the NDT, ART, SERP, and DCP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The balances in the NDT and ART were $2.5 billion and $971 million, respectively, at December 31, 2020.
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 to future periods. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance.
The NDT, ART, SERP, and DCP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities, real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.
Private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments generally involve a three-to-four-year period where the investor contributes capital, followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of $214 million, private real assets of $105 million, and private credit of $48 million at December 31, 2020. The ART had unfunded commitments related to limited partnerships in private equity of $130 million, private real assets of $73 million, and private credit of $23 million at December 31, 2020. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at NAV in the fair value hierarchy.
Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, and DCP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at net asset value in the fair value hierarchy.
Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies — Cost-Based Regulation and Note 7 — 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)
|  |  |  | At or for the Three Months Ended December 31 |  |  |
Fund |  | Financial Statement Presentation |  | 2020 |  | 2019 |  |  |  |  |
NDT |  | Regulatory asset |  | $ | 230 |  |  | $ | 111 |  |  |  |  |  |
ART |  | Regulatory asset |  | 92 |  |  | 37 |  |  |  |  |  |
SERP |  | Other income (expense) |  | 4 |  |  | 1 |  |  |  |  |  |
DCP |  | Other income (expense) |  | 1 |  |  | 1 |  |  |  |  |  |

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Currency and Interest Rate Swap Derivatives
See Note 13 — 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 13 — 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-term and mid-term market-quoted prices from an external industry brokerage service.
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 1983 to CY 2019) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a less than $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at December 31, 2020.
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Fair Value Measurements
The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2020, and September 30, 2020. 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, 2020 (in millions)
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Assets |  |  |  |  |  |  |
Investments |  |  |  |  |  |  |
Equity securities | $ | 588 |  |  | $ | — |  |  | $ | — |  |  | $ | 588 |
Government debt securities(1) | 500 |  |  | 29 |  |  | — |  |  | 529 |
Corporate debt securities(2) | — |  |  | 400 |  |  | — |  |  | 400 |
Mortgage and asset-backed securities | — |  |  | 27 |  |  | — |  |  | 27 |
Institutional mutual funds | 214 |  |  | — |  |  | — |  |  | 214 |
Forward debt securities contracts | — |  |  | 11 |  |  | — |  |  | 11 |
Private equity funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 238 |
Private real asset funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 190 |
Private credit measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 56 |
Commingled funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 1,334 |
Total investments | 1,302 |  |  | 467 |  |  | — |  |  | 3,587 |
Commodity contract derivatives | — |  |  | 25 |  |  | — |  |  | 25 |
Total | $ | 1,302 |  |  | $ | 492 |  |  | $ | — |  |  | $ | 3,612 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Liabilities |  |  |  |  |  |  |
Currency swaps(4) | $ | — |  |  | $ | 108 |  |  | $ | — |  |  | $ | 108 |
Interest rate swaps | — |  |  | 1,869 |  |  | — |  |  | 1,869 |
Commodity contract derivatives | — |  |  | 3 |  |  | — |  |  | 3 |
Total | $ | — |  |  | $ | 1,980 |  |  | $ | — |  |  | $ | 1,980 |

Notes
(1) Includes obligations of government-sponsored entities.
(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 on the Consolidated Balance Sheets.
(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 13 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
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Fair Value Measurements At September 30, 2020 (in millions)
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Assets |  |  |  |  |  |  |
Investments |  |  |  |  |  |  |
Equity securities | $ | 500 |  |  | $ | — |  |  | $ | — |  |  | $ | 500 |
Government debt securities(1) | 485 |  |  | 40 |  |  | — |  |  | 525 |
Corporate debt securities(2) | — |  |  | 356 |  |  | — |  |  | 356 |
Mortgage and asset-backed securities | — |  |  | 27 |  |  | — |  |  | 27 |
Institutional mutual funds | 188 |  |  | — |  |  | — |  |  | 188 |
Forward debt securities contracts | — |  |  | 13 |  |  | — |  |  | 13 |
Private equity funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 194 |
Private real asset funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 168 |
Private credit measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 53 |
Commingled funds measured at net asset value(3) | — |  |  | — |  |  | — |  |  | 1,174 |
Total investments | 1,173 |  |  | 436 |  |  | — |  |  | 3,198 |
Commodity contract derivatives | — |  |  | 49 |  |  | — |  |  | 49 |
Total | $ | 1,173 |  |  | $ | 485 |  |  | $ | — |  |  | $ | 3,247 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total
Liabilities |  |  |  |  |  |  |
Currency swaps(4) | $ | — |  |  | $ | 209 |  |  | $ | — |  |  | $ | 209 |
Interest rate swaps | — |  |  | 2,041 |  |  | — |  |  | 2,041 |
Commodity contract derivatives | — |  |  | 3 |  |  | — |  |  | 3 |
Total | $ | — |  |  | $ | 2,253 |  |  | $ | — |  |  | $ | 2,253 |

Notes
(1) Includes obligations of government-sponsored entities.
(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 on the Consolidated Balance Sheets.
(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 13 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
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 (in millions)
| Commodity Contract Derivatives(1) |  |
Balance at October 1, 2019 | $ | (4) |  |  |
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities | (13) |  |  |
Balance at December 31, 2019 | $ | (17) |  |  |

Note
(1) During the fourth quarter of 2020, TVA discontinued derivative accounting for forward coal contracts. Therefore, the fair value measurement using significant unobservable inputs was zero at October 1, 2020, and December 31, 2020.
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Other Financial Instruments Not Recorded at Fair Value
TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instruments. The fair value of the financial instruments held at December 31, 2020, and September 30, 2020, 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, 2020, and September 30, 2020, were as follows:

Estimated Values of Financial Instruments Not Recorded at Fair Value (in millions)
|  |  | At December 31, 2020 |  | At September 30, 2020
| Valuation Classification |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
EnergyRight® receivables, net (including current portion) | Level 2 |  | $ | 82 |  |  | $ | 82 |  |  | $ | 87 |  |  | $ | 86 |
Loans and other long-term receivables, net (including current portion) | Level 2 |  | 109 |  |  | 96 |  |  | 105 |  |  | 93 |
EnergyRight® financing obligations (including current portion) | Level 2 |  | 94 |  |  | 104 |  |  | 97 |  |  | 108 |
Unfunded loan commitments | Level 2 |  | — |  |  | 6 |  |  | — |  |  | 2 |
Membership interests of VIEs subject to mandatory redemption (including current portion) | Level 2 |  | 26 |  |  | 35 |  |  | 26 |  |  | 35 |
Long-term outstanding power bonds (including current maturities), net | Level 2 |  | 19,790 |  |  | 26,801 |  |  | 19,743 |  |  | 26,630 |
Long-term debt of VIEs (including current maturities), net | Level 2 |  | 1,090 |  |  | 1,430 |  |  | 1,089 |  |  | 1,419 |

The carrying value of Cash and cash equivalents, Restricted cash and cash equivalents, Accounts receivable, net and Short-term debt, net 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 and membership interests of VIEs 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.
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15. 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 92 percent of TVA's revenue from sales of electricity for the three months ended December 31, 2020 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, 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 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.
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Disaggregated Revenues
During the three months ended December 31, 2020, revenues generated from TVA's electricity sales were $2.3 billion and accounted for virtually all of TVA's revenues. TVA's operating revenues by state for the three months ended December 31, 2020 and 2019, are detailed in the table below:

Operating Revenues By State (in millions)
| Three Months Ended December 31 |  |
| 2020 |  | 2019 |  |  |  |
Alabama | $ | 334 |  |  | $ | 369 |  |  |  |  |
Georgia | 58 |  |  | 63 |  |  |  |  |
Kentucky | 137 |  |  | 157 |  |  |  |  |
Mississippi | 212 |  |  | 237 |  |  |  |  |
North Carolina | 16 |  |  | 18 |  |  |  |  |
Tennessee | 1,501 |  |  | 1,676 |  |  |  |  |
Virginia | 10 |  |  | 11 |  |  |  |  |
Subtotal | 2,268 |  |  | 2,531 |  |  |  |  |
Off-system sales | 2 |  |  | 1 |  |  |  |  |
Revenue from sales of electricity | 2,270 |  |  | 2,532 |  |  |  |  |
Other revenue | 34 |  |  | 46 |  |  |  |  |
Total operating revenues | $ | 2,304 |  |  | $ | 2,578 |  |  |  |  |

TVA's operating revenues by customer type for the three months ended December 31, 2020 and 2019, are detailed in the table below:

Operating Revenues by Customer Type (in millions)
| Three Months Ended December 31 |  |
| 2020 |  | 2019 |  |  |  |
Revenue from sales of electricity |  |  |  |  |  |  |
Local power companies(1) | $ | 2,091 |  |  | $ | 2,357 |  |  |  |  |
Industries directly served | 154 |  |  | 150 |  |  |  |  |
Federal agencies and other | 25 |  |  | 25 |  |  |  |  |
Revenue from sales of electricity | 2,270 |  |  | 2,532 |  |  |  |  |
Other revenue | 34 |  |  | 46 |  |  |  |  |
Total operating revenues | $ | 2,304 |  |  | $ | 2,578 |  |  |  |  |

Note
(1) The amount for the three months ended December 31, 2020 and 2019, is net of $42 million and $34 million, respectively, of wholesale bill credits to LPCs participating in the long-term Partnership Agreement.
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 have a 20-year termination notice provision that renews each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs will 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. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of February 11, 2021, 142 LPCs had signed the 20-year Partnership Agreement with TVA, and 68 LPCs had signed a Flexibility Agreement.
In August 2020, the TVA Board approved a Pandemic Relief Credit which became effective beginning October 2020. The credit applies to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers as a 2.5 percent monthly base rate credit, approximating $200 million for 2021.
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The number of LPCs by contract arrangement, the revenues derived from such arrangements for the three months ended December 31, 2020, and the percentage those revenues comprised of TVA's total operating revenues for the same period, are summarized in the table below:

TVA Local Power Company Contracts At or for the Three Months Ended December 31, 2020
Contract Arrangements(1) |  | Number of LPCs |  | Revenue from Sales of Electricity to LPCs (in millions) |  | Percentage of Total Operating Revenues
20-year termination notice |  | 142 |  |  | $ | 1,720 |  |  | 74.7 | %
5-year termination notice |  | 11 |  |  | 371 |  |  | 16.1 | %
Total |  | 153 |  |  | $ | 2,091 |  |  | 90.8 | %

Note
(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in contracts with two of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). 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.
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 during both the three months ended December 31, 2020 and 2019. Certain LPCs, including MLGW, are evaluating options for future energy choices. In addition, in January 2021, four LPCs accounting for four percent of TVA's total operating revenues during the three months ended December 31, 2020, 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. See Note 19 — Contingencies and Legal Proceedings — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment.
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, 2020.
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.
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. During the three months ended December 31, 2020 and 2019, TVA recorded $75 million and $76 million, respectively, in incentives as a reduction of revenue. 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, 2020, and September 30, 2020, the outstanding unpaid incentives were $168 million and $172 million, respectively. Incentives that have been paid out may be subject to claw back if the customer fails to meet certain program requirements. Additionally, in May 2020, TVA established flexibility provisions to support the continued operations and recovery of participating customers experiencing financial and operational hardships as a result of the COVID-19 pandemic and corresponding economic downturn. These provisions have not had a material impact to TVA.
16. Other Income (Expense), Net
Income and expenses not related to TVA's operating activities are summarized in the following table:

Other Income (Expense), Net
| Three Months Ended December 31 |  |
| 2020 |  | 2019 |  |  |  |
Interest income | $ | 3 |  |  | $ | 5 |  |  |  |  |
External services | 4 |  |  | 2 |  |  |  |  |
Gains (losses) on investments | 9 |  |  | 5 |  |  |  |  |
Miscellaneous | (1) |  |  | — |  |  |  |  |
Total Other income (expense), net | $ | 15 |  |  | $ | 12 |  |  |  |  |

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17. Supplemental Cash Flow Information
Construction in progress and Nuclear fuel expenditures included in Accounts payable and accrued liabilities at December 31, 2020 and 2019, were $273 million and $254 million, respectively, and are excluded from the Statements of Consolidated Cash Flows for the three months ended December 31, 2020 and 2019, as non-cash investing activities.
18. Benefit Plans
TVA sponsors a qualified defined benefit 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 post-employment benefits, such as workers' compensation, and the SERP. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of directors.
The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three months ended December 31, 2020 and 2019, were as follows:

Components of TVA's Benefit Plans(1)
| For the Three Months Ended December 31 |  |
| Pension Benefits |  | Other Post-Retirement Benefits |  |  |  |
| 2020 |  | 2019 |  | 2020 |  | 2019 |  |  |  |  |  |  |  |
Service cost | $ | 14 |  |  | $ | 12 |  |  | $ | 5 |  |  | $ | 4 |  |  |  |  |  |  |  |  |
Interest cost | 91 |  |  | 104 |  |  | 4 |  |  | 4 |  |  |  |  |  |  |  |  |
Expected return on plan assets | (123) |  |  | (122) |  |  | — |  |  | — |  |  |  |  |  |  |  |  |
Amortization of prior service credit | (24) |  |  | (24) |  |  | (5) |  |  | (6) |  |  |  |  |  |  |  |  |
Recognized net actuarial loss | 112 |  |  | 109 |  |  | 3 |  |  | 2 |  |  |  |  |  |  |  |  |
Total net periodic benefit cost as actuarially determined | 70 |  |  | 79 |  |  | 7 |  |  | 4 |  |  |  |  |  |  |  |  |
Amount expensed / (capitalized) due to actions of regulator | 7 |  |  | (2) |  |  | — |  |  | — |  |  |  |  |  |  |  |  |
Total net periodic benefit cost | $ | 77 |  |  | $ | 77 |  |  | $ | 7 |  |  | $ | 4 |  |  |  |  |  |  |  |  |

Note
(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.
TVA's minimum required pension plan contribution for 2021 is $300 million. TVA contributes $25 million per month to TVARS and as of December 31, 2020, had contributed $75 million. The remaining $225 million will be contributed by September 30, 2021. For the three months ended December 31, 2020, TVA also contributed $26 million to the 401(k) plan and $9 million (net of $1 million in rebates) to the other post-retirement plans. TVA expects to contribute $5 million to the SERP in 2021.
TVA's pension and other investment portfolios have experienced significant fluctuations over the past year, which had substantially recovered as of September 30, 2020, and have continued to experience gains through the three months ended December 31, 2020. However, effects due to the COVID-19 pandemic on the financial markets, regulations, and experience are uncertain and continue to evolve. The ultimate impact of the COVID-19 pandemic on the pension plan and other post-retirement plans 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. Therefore, TVA cannot estimate the potential impact to the pension plan and other post-retirement plans.
19. Contingencies and Legal Proceedings
Contingencies
Nuclear Insurance. Section 170 of the Atomic Energy Act, commonly known as the Price-Anderson Act, provides a layered framework of financial protection to compensate for liability claims of members of the public for personal injury and property damages arising from a nuclear incident in the U.S. This financial protection consists of two 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 second 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
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of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor per incident. With TVA's seven reactors, the maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a maximum rate currently set at approximately $20 million per year per incident per reactor. Currently, 97 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 $13.8 billion in coverage.
Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the cost of stabilizing and 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"). 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 TVA's three sites. Some of this insurance may require the payment of retrospective premiums up to a maximum of approximately $145 million.
TVA purchases accidental outage (business interruption) insurance for TVA's nuclear sites from NEIL. In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) with 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, 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 — Asset Retirement Obligations.
Nuclear Decommissioning. Provision for decommissioning costs of nuclear generating units is based on options prescribed by the Nuclear Regulatory Commission ("NRC") procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At December 31, 2020, $3.3 billion, representing the discounted value of future estimated decommissioning costs, was included in AROs. The actual decommissioning costs may vary from the derived estimates because of, among other things, changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. Utilities that own and operate nuclear plants are required to use different procedures in calculating nuclear decommissioning costs under GAAP than those that are used in calculating nuclear decommissioning costs when reporting to the NRC. The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions. Decommissioning costs studies are updated for each of TVA's nuclear units at least every five years.
TVA maintains a NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 14 — 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'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 7 — Regulatory Assets and Liabilities and Note 10 — Asset Retirement Obligations.
Non-Nuclear Decommissioning. At December 31, 2020, $3.5 billion, representing the discounted value of future estimated decommissioning costs, was 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 — 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 7 — Regulatory Assets and Liabilities and Note 10 — Asset Retirement Obligations.
Environmental Matters. TVA's power generation activities, like those across the utility industry and in other industrial sectors, are subject to federal, state, and local environmental laws and regulations. Major areas of regulation affecting TVA's activities include air quality control, greenhouse gas ("GHG") emissions, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent. Regulations are also expected to have a particular emphasis on climate change, renewable generation, and energy efficiency.
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TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of TVA's coal-fired generating 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 the regulation of emissions or discharges from coal-fired generating units is also occurring. Failure to comply with environmental and safety laws can result in TVA being subject to enforcement actions, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or the shutting down of non-compliant facilities.
TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding GHG requirements) could lead to additional costs of $147 million from 2021 to 2025, which include existing controls capital projects and air operations and maintenance projects. TVA also estimates additional expenditures of approximately $902 million from 2021 to 2025 relating to TVA's CCR Conversion Program, as well as expenditures of approximately $173 million from 2021 to 2025 relating to compliance with Clean Water Act requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions that could increase these estimates.
Liability for releases and cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in releases of contaminants that TVA is addressing consistent with state and federal requirements. At December 31, 2020, and September 30, 2020, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $15 million and $14 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the 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. The litigation will now proceed to the second phase on the question of whether Jacobs's failures were the specific medical cause of the plaintiffs' alleged injuries and damages.
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, 2020, TVA had accrued $14 million of probable losses with respect to Legal Proceedings. Of the accrued amount, $12 million is included in Other long-term liabilities and $2 million is included in Accounts payable and accrued liabilities. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.
Environmental Agreements. In April 2011, TVA entered into two substantively similar agreements, one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"). Under the Environmental Agreements, TVA committed to, among other things, take actions regarding coal units that have been
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completed. TVA also agreed to invest $290 million in certain TVA environmental projects of which TVA had spent approximately $280 million as of December 31, 2020. Additionally, TVA holds restricted cash in an interest earning trust to fund the remaining project commitments. Under the Environmental Agreements, any interest earned through the trust must also be spent on agreed upon environmental projects. The total remaining committed spend, including interest earned through the trust, is approximately $11 million as of December 31, 2020. 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.
The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the December 31, 2020, Consolidated Balance Sheets. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the December 31, 2020 Consolidated Balance Sheets and will be recovered in rates in future periods.
Class Action Lawsuit Involving Kingston Fossil Plant. On November 7, 2019, a resident of Roane County, Tennessee, filed a proposed class action lawsuit against Jacobs and TVA in the Eastern District. The complaint alleges that the class representative and all other members of the proposed class were damaged as a result of the 2008 ash spill at Kingston and the resulting cleanup activities. The complaint alleges, among other things, that (1) TVA was negligent in its construction and operation of the Kingston CCR facility, (2) TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the cleanup response, and (3) TVA and Jacobs misled the community about health and environmental risks associated with exposure to coal fly ash. The complaint seeks monetary damages and injunctive relief in the form of an order requiring the defendants to establish a blood testing program and medical monitoring protocol and to remediate damage to the properties of the proposed class. On April 22, 2020, TVA and Jacobs moved to dismiss the complaint, and the court has not yet ruled on this motion.
Case Involving Tennessee River Boat Accident. In July 2015, plaintiffs filed suit in the U.S. District Court for the Northern District of Alabama ("Northern District"), seeking recovery for personal injuries sustained when the plaintiffs' boat struck a TVA transmission line which was being raised from the Tennessee River during a repair operation. The Northern District dismissed the case, finding that TVA's exercise of its discretion as a governmental entity in deciding how to carry out the operation barred any liability for negligence. In August 2017, the U.S. Court of Appeals for the Eleventh Circuit ("Eleventh Circuit") affirmed the decision. The plaintiffs petitioned the Supreme Court for review of the decision, arguing that the provision of the TVA Act which allows suit to be brought against TVA does not allow TVA to claim immunity for discretionary actions. In April 2019, the Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit and remanding the case to the Eleventh Circuit. In July 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court's opinion. TVA filed a motion for summary judgment on all of the plaintiffs’ claims on November 23, 2020, and the plaintiffs filed a motion for partial summary judgment. The court cancelled the trial scheduled for February 16, 2021, and stated that the trial would be rescheduled, if necessary, following the court’s ruling on the parties’ summary judgment motions.
Case Involving Bellefonte Nuclear Plant. In November 2018, Nuclear Development, LLC, filed suit against TVA in the Northern District of Alabama. The plaintiff alleges that TVA breached its agreement to sell Bellefonte to the plaintiff. The plaintiff seeks, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the associated NRC permits until the case is concluded, (2) an order compelling TVA to complete the sale of Bellefonte to the plaintiff, and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $30 million. In December 2018, Nuclear Development, LLC, and TVA filed a joint stipulation with the court. Under the stipulation, Nuclear Development, LLC, withdrew its request for an expedited hearing on its injunction in exchange for TVA's agreement to continue to maintain Bellefonte in accordance with the NRC permits and to give Nuclear Development, LLC, and the court five days prior notice of any filing by TVA to terminate the permits or sell the site. TVA filed a motion to dismiss the case in February 2019. In May 2019, the court denied TVA's motion. On September 23, 2020, the parties filed competing motions for summary judgment, and oral argument on the motions is scheduled for February 16, 2021. Trial is currently scheduled for March 29, 2021.
Case Involving Rate Changes. On June 9, 2020, a proposed class action lawsuit was filed 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 filed a motion to dismiss the case on November 9, 2020, and filed a supplemental motion to dismiss on December 21, 2020, in response to an amended complaint filed by the plaintiff. Oral argument on the motion is scheduled for February 18, 2021.
Cases Involving Long-Term Agreements. On August 17, 2020, the Southern Environmental Law Center ("SELC") filed a lawsuit in the United States District Court for the Western District of Tennessee 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
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Act by offering a Long-Term Agreement ("LTA") to its 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 LTAs, which harmed the groups' advocacy efforts and their ability to participate 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 is scheduled for February 19, 2021.
On January 28, 2021, TVA was served with a lawsuit filed by the Glasgow Electric Plant Board ("GEPB") against TVA in the United States District Court for the Western District of Kentucky seeking to rescind its LTA. The lawsuit advances multiple legal theories in asking the court to rescind the LTA, declare it null and void, or, in the alternative, reinstate GEPB's 90-day review period under the LTA. The issues raised by GEPB are limited to its contract with TVA, and the lawsuit does not seek relief that would apply to other customers. TVA is evaluating the complaint and assessing its legal defenses.
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 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. 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 January 19, 2021, FERC issued a notice of the complaint and petition in the Federal Register, establishing February 1, 2021, as the due date for TVA’s response and for others’ interventions, comments, and protests. On January 21, 2021, TVA asked FERC for a 21-day extension to file its response, and FERC granted TVA's request establishing February 22, 2021, as the new response deadline.
20. Subsequent Events
Credit Facility Amendment
On February 9, 2021, TVA executed a second amendment to its $150 million December Maturity Community Bank Credit Agreement dated as of December 12, 2016 and amended as of December 11, 2018, with Truist Bank, as Administrative Agent, Letter of Credit Issuer, and a Lender, First Horizon Bank, First National Bank, HomeTrust Bank, Pinnacle Bank, Regions Bank, SmartBank, and United Community Bank (the “Credit Agreement”). The second amendment, among other things, (1) extends the maturity date of the Credit Agreement to February 9, 2024, (2) changes the name of the Credit Agreement to the February Maturity Community Bank Credit Agreement, (3) adds new definitions, (4) adds provisions regarding a successor rate to LIBOR, (5) adds provisions regarding qualified financial contracts, and (6) updates the schedule of commitments and applicable percentages. The other material terms and conditions of the Credit Agreement were not changed.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions except where noted)
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") explains the results of operations and general financial condition of the Tennessee Valley Authority ("TVA"). The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and TVA's Annual Report on Form 10-K for the year ended September 30, 2020 (the "Annual Report").
Executive Overview
TVA's operating revenues were $2.3 billion and $2.6 billion for the three months ended December 31, 2020 and 2019, respectively. The decrease in operating revenue was primarily due to lower demand revenue as a result of higher peak demand during the three months of the prior year, lower fuel cost recovery revenue from lower fuel rates, and lower effective rates. Lower effective rates resulted primarily from the Pandemic Relief Credit that the TVA Board approved in August 2020 which became effective beginning October 2020. The credit applies to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA's directly served customers as a 2.5 percent monthly base rate credit, approximating $200 million for 2021. For the three months ended December 31, 2020, these credits accounted for $49 million of the decrease to operating revenue.
Depreciation and amortization expense decreased $206 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This decrease was primarily due to a decrease in depreciation expense as a result of the decision in 2019 to accelerate the retirements of Bull Run Fossil Plant ("Bull Run") and Paradise Fossil Plant ("Paradise"). Fuel and purchased power expense decreased $67 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This decrease was primarily due to lower natural gas prices, improved nuclear fleet performance, and more hydroelectric generation.
TVA continues to closely monitor developments associated with the COVID-19 pandemic. For the three months ended December 31, 2020, the COVID-19 pandemic did not significantly decrease TVA's base revenue. TVA estimates base revenues were lower by approximately $10 million during this period as a result of economic conditions surrounding COVID-19. TVA expects these conditions could continue impacting revenue for the remainder of 2021, and has planned for $10.0 billion in total operating revenues for 2021. TVA's pension and other investment portfolios have experienced significant fluctuations over the past year, but had substantially recovered as of September 30, 2020, and have continued to experience gains through the three months ended December 31, 2020. In addition, operations and delivery of energy to customers have not been materially impacted by the COVID-19 pandemic at this time. See Key Initiatives and Challenges - COVID-19 Pandemic for an expanded discussion of the impact to TVA and related initiatives.
TVA continues to maintain 99.999 percent reliability in delivering energy to its customers. TVA's reliability, competitive rates, and economic development efforts continue to attract and encourage the expansion of business and industries in the Tennessee Valley, with over $2.3 billion in investments and more than 32,100 jobs created or retained during the first quarter of 2021.
Results of Operations
Sales of Electricity
Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 36,672 and 36,667 million of kWh for the three months ended December 31, 2020 and 2019, respectively. TVA sells power at wholesale rates to LPCs that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems.
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The following chart compares TVA's sales of electricity by customer type for the periods indicated:

| Sales of Electricity |  |  |  |  |  |
| Three Months Ended December 31 |  |  |  |
| (millions of kWh) |  |  |  |  |  |

The following charts show a breakdown of TVA's energy load:
Note
Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar year 2019, and these graphs will continue to be updated on a calendar year basis.
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Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit.

| Degree Days |  |
| Variation from Normal |  | Variation from Prior Period
| 2020 |  | Normal |  | Percent Change |  | 2019 |  | Normal |  | Percent Change |  | Percent Change
Heating Degree Days |  |  |  |  |  |  |  |  |  |  |  |  |
Three Months Ended December 31 | 1,201 |  |  | 1,289 |  | (6.8) | % |  | 1,278 |  |  | 1,289 |  |  | (0.9) | % |  | (6.0) | %
Cooling Degree Days |  |  |  |  |  |  |  |  |  |  |  |  |
Three Months Ended December 31 | 46 |  |  | 43 |  | 7.0 | % |  | 90 |  |  | 43 |  |  | 109.3 | % |  | (48.9) | %

Sales of electricity for the three months ended December 31, 2020 were flat as compared to the same period of the prior year. Sales of electricity from industries directly served increased as a result of certain customers shifting maintenance outages from December 2020 to the summer of 2020, while businesses were closed due to the COVID-19 pandemic. This increase was offset by a decrease in sales of electricity as a result of overall milder weather experienced during the three months ended December 31, 2020.
Financial Results
The following table compares operating results for the three months ended December 31, 2020 and 2019:

Summary Consolidated Statements of Operations (in millions)
| Three Months Ended December 31 |  |  |
| 2020 |  | 2019 |  | Percent Change |  |  |  |  |  |  |
Operating revenues | $ | 2,304 |  |  | $ | 2,578 |  |  | (10.6) | % |  |  |  |  |  |  |
Operating expenses | 1,789 |  |  | 2,046 |  |  | (12.6) | % |  |  |  |  |  |  |
Operating income | 515 |  |  | 532 |  |  | (3.2) | % |  |  |  |  |  |  |
Other income (expense), net | 15 |  |  | 12 |  |  | 25.0 | % |  |  |  |  |  |  |
Other net periodic benefit cost | 65 |  |  | 65 |  |  | — | % |  |  |  |  |  |  |
Interest expense | 281 |  |  | 287 |  |  | (2.1) | % |  |  |  |  |  |  |
Net income (loss) | $ | 184 |  |  | $ | 192 |  |  | (4.2) | % |  |  |  |  |  |  |

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Operating Revenues. Operating revenues were $2.3 billion and $2.6 billion for the three months ended December 31, 2020 and 2019, respectively, and consisted of the following:
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 during both the three months ended December 31, 2020 and 2019. Certain LPCs, including MLGW, are evaluating options for future energy choices. In addition, in January 2021, four LPCs accounting for four percent of TVA's total operating revenues during the three months ended December 31, 2020, 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. See Note 19 — Contingencies and Legal Proceedings — Legal Proceedings — Challenge to Anti-Cherrypicking Amendment.
TVA's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage and increase as the peak increases. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure.
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 have a 20-year termination notice provision that renews each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs will 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 February 11, 2021, 142 LPCs had signed the 20-year Partnership Agreement with TVA.
In 2020, the TVA Board approved a Pandemic Relief Credit which became effective beginning October 2020. The credit applies to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers as a 2.5 percent monthly base rate credit, approximating $200 million for 2021.
In addition to base revenues, the rate structure includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments.
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The changes in revenue components for the three months ended December 31, 2020, compared to the three months ended December 31, 2019, are summarized below:

Changes in Revenue Components (in millions)
| Three Months Ended December 31 |  |
| 2020 |  | 2019 |  | Change |  |  |  |  |  |
Base revenue |  |  |  |  |  |  |  |  |  |  |
Energy revenue | $ | 1,060 |  |  | $ | 1,067 |  |  | $ | (7) |  |  |  |  |  |  |
Demand revenue | 750 |  |  | 883 |  |  | (133) |  |  |  |  |  |  |
Grid access charge | 149 |  |  | 149 |  |  | — |  |  |  |  |  |  |
Long-term partnership credits for LPCs | (42) |  |  | (34) |  |  | (8) |  |  |  |  |  |  |
Pandemic relief credit | (49) |  |  | — |  |  | (49) |  |  |  |  |  |  |
Other charges and credits(1) | (141) |  |  | (144) |  |  | 3 |  |  |  |  |  |  |
Total base revenue | 1,727 |  |  | 1,921 |  |  | (194) |  |  |  |  |  |  |
Fuel cost recovery | 541 |  |  | 610 |  |  | (69) |  |  |  |  |  |  |
Off-system sales | 2 |  |  | 1 |  |  | 1 |  |  |  |  |  |  |
Revenue from sales of electricity | 2,270 |  |  | 2,532 |  |  | (262) |  |  |  |  |  |  |
Other revenue | 34 |  |  | 46 |  |  | (12) |  |  |  |  |  |  |
Total operating revenues | $ | 2,304 |  |  | $ | 2,578 |  |  | $ | (274) |  |  |  |  |  |  |

Note
(1) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 15 — Revenue.
Operating revenues decreased $274 million for the three months ended December 31, 2020, as compared to the same period of the prior year, primarily due to a $194 million decrease in base revenue and a $69 million decrease in fuel cost recovery revenue. The $194 million decrease in base revenue was driven by a decrease of $119 million primarily attributable to lower demand volume and a decrease of $75 million attributable to lower effective rates. Lower demand volume resulted primarily from higher peak demand during the three months ended December 31, 2019. During this period, TVA's service territory experienced peaks of record-setting heat in October 2019 and record-setting cold in November 2019. Lower effective rates resulted primarily from the Pandemic Relief Credits that began in 2021, totaling $49 million for the three months ended December 31, 2020. For the three months ended December 31, 2020, the COVID-19 pandemic did not significantly decrease TVA's base revenue. TVA estimates base revenues were lower by approximately $10 million during this period as a result of economic conditions surrounding COVID-19. TVA expects these conditions could continue impacting revenue for the remainder of 2021, and has planned for $10.0 billion in total operating revenues for 2021. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021. The $69 million decrease in fuel cost recovery revenue was driven by lower fuel rates resulting primarily from lower market prices for natural gas.
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Operating Expenses. Operating expense components as a percentage of total operating expenses for the three months ended December 31, 2020 and 2019, consisted of the following:

Operating Expenses (in millions)
| Three Months Ended December 31 |  |
| 2020 |  | 2019 |  | Change |  |  |  |  |  |
Operating expenses |  |  |  |  |  |  |  |  |  |  |
Fuel | $ | 369 |  |  | $ | 423 |  |  | $ | (54) |  |  |  |  |  |  |
Purchased power | 206 |  |  | 219 |  |  | (13) |  |  |  |  |  |  |
Operating and maintenance | 715 |  |  | 689 |  |  | 26 |  |  |  |  |  |  |
Depreciation and amortization | 378 |  |  | 584 |  |  | (206) |  |  |  |  |  |  |
Tax equivalents | 121 |  |  | 131 |  |  | (10) |  |  |  |  |  |  |
Total operating expenses | $ | 1,789 |  |  | $ | 2,046 |  |  | $ | (257) |  |  |  |  |  |  |

Fuel expense decreased $54 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This decrease was primarily due to lower effective fuel rates of $60 million, resulting from lower natural gas prices, improved nuclear fleet performance, and more hydroelectric generation. Partially offsetting this decrease was an increase in fuel volume of $4 million due to an increase of TVA-owned generation as well as an increase of $2 million in fuel rate recovery.
Purchased power expense decreased $13 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This was primarily driven by a $17 million decrease in volume resulting from higher availability of TVA-owned generation. Partially offsetting this decrease was a $4 million increase in fuel rate recovery.
Operating and maintenance expense increased $26 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This was primarily due to an increase in outage expense of $30 million, driven by an increase in planned nuclear outage days. Additionally, there was a $14 million increase in payroll and benefit costs due to labor escalation for cost of living increases. Partially offsetting these increases was a reduction related to TVA's capital spare program of $15 million.
Depreciation and amortization expense decreased $206 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This was primarily driven by a net decrease in depreciation expense of $201 million related to the decision in 2019 to accelerate the retirements of Bull Run and Paradise. Paradise was fully depreciated in the second quarter of 2020. Additionally, amortization expense of non-nuclear decommissioning costs recovered in rates decreased $24 million. Partially offsetting these decreases was an increase due to depreciation of additions to completed plant.
Tax equivalents expense decreased $10 million for the three months ended December 31, 2020, as compared to the same period of the prior year. The change is primarily driven by a decrease in TVA's revenue from sales of electricity in 2020, which is used as the basis for calculating tax equivalent expense. Additionally, the amount of tax equivalents collected in the fuel rate recovery decreased during 2020.
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The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated:

Total Power Supply by Generating Source
|  | Three Months Ended December 31 |  |  |  |
|  | 2020 |  | 2019 |  |  |  |
|  | kWh (millions) |  | Percent of Power Supply |  | kWh (millions) |  | Percent of Power Supply |  | Change |  | Percentage Change
Coal-fired |  | 3,299 |  |  | 9 | % |  | 5,170 |  |  | 14 | % |  | (1,871) |  |  | (36) | %
Nuclear |  | 16,348 |  |  | 44 | % |  | 15,716 |  |  | 42 | % |  | 632 |  |  | 4 | %
Hydroelectric |  | 4,705 |  |  | 13 | % |  | 3,655 |  |  | 10 | % |  | 1,050 |  |  | 29 | %
Natural gas and/or oil-fired |  | 8,389 |  |  | 22 | % |  | 7,855 |  |  | 21 | % |  | 534 |  |  | 7 | %
Total TVA-operated generation facilities(1) |  | 32,741 |  |  | 88 | % |  | 32,396 |  |  | 87 | % |  | 345 |  |  | 1 | %
Purchased power (non-renewable)(2) |  | 2,536 |  |  | 7 | % |  | 2,954 |  |  | 8 | % |  | (418) |  |  | (14) | %
Purchased power (renewable)(3) |  | 1,980 |  |  | 5 | % |  | 1,950 |  |  | 5 | % |  | 30 |  |  | 2 | %
Total purchased power |  | 4,516 |  |  | 12 | % |  | 4,904 |  |  | 13 | % |  | (388) |  |  | (8) | %
Total power supply |  | 37,257 |  |  | 100 | % |  | 37,300 |  |  | 100 | % |  | (43) |  |  | — | %

Notes
(1) Generation from TVA-owned renewable resources (non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above.
(2) Purchased power (non-renewable) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia CC was 1,071 million kWh and 805 million kWh for the three months ended December 31, 2020 and 2019, respectively.
(3) Purchased power (renewable) includes purchased power from the following renewable sources: hydroelectric, solar, wind, biomass, and cogeneration.
In addition to power supply sources included here, TVA offers energy efficiency programs that effectively reduce energy needs. TVA estimates energy needs could be reduced by 2,500 million kWh in 2021 due to TVA's energy efficiency programs.
Interest Expense. Interest expense and interest rates for the three months ended December 31, 2020 and 2019, were as follows:

Interest Expense and Rates |
| Three Months Ended December 31 |  |  |
| 2020 |  | 2019 |  | Percent Change |  |  |  |  |  |  |
Interest expense(1) | $ | 281 |  |  | $ | 287 |  |  | (2.1) | % |  |  |  |  |  |  |
Average blended debt balance(2) | 21,287 |  |  | 22,230 |  |  | (4.2) | % |  |  |  |  |  |  |
Average blended interest rate(3) | 5.17 | % |  | 5.06 | % |  | 2.2 | % |  |  |  |  |  |  |

Notes
(1) Includes amortization of debt discounts, issuance, and reacquisition costs, net.
(2) Includes average balances of long-term power bonds, debt of VIE, and discount notes.
(3) Includes interest on long-term power bonds, debt of VIE, and discount notes.
Total interest expense decreased $6 million for the three months ended December 31, 2020, as compared to the same period of the prior year. This decrease was primarily driven by lower average balances and rates on short-term debt and lower average balances on long-term debt. Partially offsetting these decreases was an increase due to higher average rates on long-term debt.
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Liquidity and Capital Resources
Sources of Liquidity
TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while seeking to maintain a target range of cash and cash equivalents on hand.
In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include 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 11 — Debt and Other Obligations — Credit Facility Agreements. Other financing arrangements may include sales of receivables, loans, or other assets.
The TVA Act authorizes TVA to issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in an amount not to exceed $30.0 billion outstanding at any time. Power bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at December 31, 2020, were $20.1 billion (including current maturities). The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings (see Lease Financings below and Note 8 — Variable Interest Entities), could provide supplementary funding if needed. Currently, TVA expects to have adequate capability to fund its ongoing operational liquidity needs and make planned capital investments over the next decade. See Lease Financings below, Note 8 — Variable Interest Entities, and Note 11 — Debt and Other Obligations for additional information.
TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. TVA's next material power bond maturity of $1.5 billion is in February 2021.
Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020. TVA may continue to hold higher balances in future periods due to potential market volatility. TVA has maintained continued debt market access since the outbreak of the pandemic.
Debt Securities. TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At December 31, 2020, the average maturity of long-term power bonds was 15.07 years, and the average interest rate was 4.56 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at December 31, 2020. See Lease Financings below, Note 8 — Variable Interest Entities, and Note 11 — Debt and Other Obligations for additional information.
The following table provides additional information regarding TVA's short-term borrowings:

Short-Term Borrowing Table |
| At December 31, 2020 |  | Three Months Ended December 31, 2020 |  |  |  | At December 31, 2019 |  | Three Months Ended December 31, 2019 |  |
Gross Amount Outstanding (at End of Period) or Average Gross Amount Outstanding (During Period) |  |  |  |  |  |  |  |  |  |  |
Discount Notes | $ | 112 |  |  | $ | 146 |  |  |  |  | $ | 895 |  |  | $ | 767 |  |  |
Maximum Month-End Gross Amount Outstanding (During Period) |  |  |  |  |  |  |  |  |  |  |
Discount Notes | N/A |  | $ | 115 |  |  |  |  | N/A |  | $ | 895 |  |  |
Weighted Average Interest Rate |  |  |  |  |  |  |  |  |  |  |
Discount Notes | 0.07 | % |  | 0.06 | % |  |  |  | 1.56 | % |  | 1.71 | % |  |

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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 8 — Variable Interest Entities and Note 11 — Debt and Other Obligations for information about TVA's lease financing activities. During 2017 and 2016, TVA acquired 100 percent of the equity interests in certain SPEs 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 CTs and terminated these transactions. In 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs and anticipate these transactions will be terminated in 2021. TVA will continue making rent payments under the remaining lease/leaseback transactions through 2022.
Summary Cash Flows
A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash were $529 million at December 31, 2020, compared to $327 million at December 31, 2019. A summary of cash flow components for the three months ended December 31, 2020 and 2019, follows:
Cash provided by (used in):
Operating Activities. TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses.
Net cash flows provided by operating activities decreased $243 million for the three months ended December 31, 2020, as compared to the same period of the prior year. The decrease is primarily due to lower revenue collections from lower demand volume, lower effective rates as a result of the Pandemic Relief Credit, and lower fuel cost recovery revenue. These decreases were partially offset by decreases in fuel and purchased power payments as a result of lower natural gas prices and more availability of lower cost TVA-owned generation in the current year.
Investing Activities. The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain
generating and transmission assets, including environmental projects and the purchase of nuclear fuel. Nuclear fuel
expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment
services.
Net cash flows used in investing activities increased $54 million for the three months ended December 31, 2020, as compared to the same period of the prior year driven by an increase in capacity expansion projects due to construction of the new Colbert and Paradise Combustion Turbine units in addition to the Boone Dam remediation project. This increase was partially offset by a decrease in expenditures for the Pickwick South Embankment remediation project nearing completion.
Financing Activities. TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand.
Net cash provided by financing activities was $57 million for the three months ended December 31, 2020, as compared to $243 million in net cash used in financing activities in the same period of the prior year. The net change of $300 million was due to an increase in TVA’s target balance of Cash and cash equivalents and short-term cash needs. As a result of higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020 and continues to hold an approximately $200 million higher balance at December 31, 2020, as compared to December 31, 2019.
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Impact of COVID-19 to Liquidity
The COVID-19 pandemic did not significantly decrease base revenue for the three months ended December 31, 2020; however, TVA will continue to monitor the impact of the COVID-19 pandemic on revenue for the remainder of 2021. See Results of Operations — Financial Results — Operating Revenues and Key Initiatives and Challenges — Coronavirus Pandemic for an expanded discussion of the impact to TVA.
The COVID-19 pandemic has also created economic uncertainty for TVA's LPCs and the communities they serve. To
support LPCs and strengthen the public power response to the COVID-19 pandemic, TVA has created initiatives such as the
Public Power Support and Stabilization Program, Back-to-Business Credit Program, Community Care Fund, and Pandemic
Relief Credit. TVA has also provided regulatory flexibility for LPCs to halt disconnection of services. See Key Initiatives and Challenges — Coronavirus Pandemic for an expanded discussion of these initiatives.
Contractual Obligations
TVA has certain obligations and commitments to make future payments under contracts. During the three months ended December 31, 2020, there were no material changes in TVA's contractual obligations outside of the ordinary course of business. TVA's contractual obligations are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Note 21 — Benefit Plans of the Notes to Consolidated Financial Statements in the Annual Report.
Key Initiatives and Challenges
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus was reported in China. As this strain continued to spread across the globe, the World Health Organization declared the outbreak of the 2019 novel coronavirus a pandemic on March 11, 2020. TVA has performed risk analyses across the company to determine potential impacts and monitor performance throughout the situation and has implemented a company-wide pandemic plan to address specific aspects of the COVID-19 pandemic. TVA's pandemic plan continues to evolve based on medical guidance and federal, regional, and local requirements and guidelines.
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 workforce reintegration and continues to limit non-essential travel. Mandatory telework has been implemented for those employees 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. TVA continues to implement 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 at this time. Certain TVA recreation areas including TVA campgrounds, day use areas, trails, and undeveloped lands have reopened since TVA had initially closed them to slow the spread of the virus. However, for public and staff safety, restrooms and pavilions remain closed. These changes will continue until TVA believes it is safe to resume full operations.
For the three months ended December 31, 2020, the COVID-19 pandemic did not significantly decrease TVA's base revenue. TVA estimates base revenues were lower by approximately $10 million as a result of economic conditions surrounding COVID-19. TVA expects these conditions could continue impacting revenue for the remainder of 2021 and has planned for $10.0 billion in total operating revenue in 2021. It is uncertain at this time the extent to which revenues may be impacted beyond 2021. 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. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Results — Operating Revenues.
TVA also continues to assess 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 from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. At this time, TVA has experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. A mitigation strategy was developed by TVA and the vendor to reduce projected delays and impacts to TVA's outage schedule. TVA will continue to monitor the supply base and remain in contact with suppliers to identify potential risks.
Customer Pandemic Initiatives. The COVID-19 pandemic has 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 announced the following initiatives:
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Regulatory Flexibility. TVA provided regulatory flexibility for LPCs to halt disconnection of services and respond to the local needs of their customers and communities.
Program Flexibility. In 2020, TVA established flexibility provisions for certain economic development programs for participating customers impacted by the COVID-19 pandemic, as well as deferral options for EnergyRight® program loan payments, through October 31, 2020, for customers experiencing financial hardship. See Note 6 — Other Long-Term Assets, Note 9 — Other Long-Term Liabilities, and Note 15 — Revenue.
Financial Support. In 2020, the TVA Board approved the Public Power Support and Stabilization Program. Through this program, TVA offered up to $1.0 billion of credit support to LPCs that demonstrated the need for temporary financial relief, through the deferral of a portion of LPCs' wholesale power payments owed to TVA. The program ended December 31, 2020, with a total of $1 million of credit support approved under the program. Repayment has begun and full payment is expected in the second quarter of 2021.
Back-to-Business Credit Program. TVA created the Back-to-Business Credit Program to enable TVA and LPCs to provide relief to certain large customers affected by the COVID-19 pandemic by providing certain credits when returning to operations. As of December 31, 2020, TVA had provided approximately $11 million in Back-to-Business credits under this program since its inception, with approximately $1 million provided in the three months ended December 31, 2020.
Community Care Fund. TVA also continues to partner with LPCs through the Community Care Fund by making available over $4 million in TVA matching funds to support local initiatives that address hardships created by the COVID-19 pandemic. As of December 31, 2020, over $3 million in matching funds had been provided by TVA, with approximately $1 million provided in the three months ended December 31, 2020.
Pandemic Relief Credit. In August 2020, the TVA Board approved a Pandemic Relief Credit which became effective beginning October 2020. The credit applies to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers as a 2.5 percent monthly base rate credit, approximating $200 million for 2021. As of December 31, 2020, TVA had provided approximately $49 million in Pandemic Relief Credits.
These actions continue to show 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 is an evolving situation that may lead to extended disruption of economic activity and an adverse impact on TVA's results of operations. TVA is closely monitoring developments and will continue adjusting 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 impacts of these resources as they are interconnected to the grid and will ensure that the pricing of electricity remains as low as feasible. Additional regulatory considerations and analysis may be required as the DER market, technologies, and programs evolve. The TVA Board recently approved new policies and an optional wholesale Electric Vehicle (“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. This will enable transparent and economical refueling pricing options for EV drivers on a kWh basis. The optional wholesale rate was developed with high power EV charging in mind and provides a stable, economical option for those developing charging infrastructure. Setting policies such as these, positions TVA’s service territory to attract more EV and associated technology investment. TVA will continue to develop pricing and regulatory structures for each current and future program offering, in partnership with LPCs, in order to give customers choices and provide end use consumers flexibility.
In 2017, the TVA Board authorized up to $300 million to be spent over the next 10 years, subject to annual budget availability and necessary environmental reviews, to build an enhanced fiber optic network that will better connect TVA's operational assets. Fiber is a vital part of TVA's modern communication infrastructure. The new fiber optic lines will improve the reliability and resiliency of the generation and transmission system while enabling the system to better accommodate DER as they enter the market. As of December 31, 2020, TVA had spent $129 million on installation of the fiber optic lines and expects to spend an additional $171 million.
Changing Customer Preferences
As more consumers and businesses are demanding cleaner energy, the utility industry is evolving to meet those needs. As TVA also evolves, it will see impacts to the way it does business through the pricing of products, transmission of energy, and development of new products and services for its customers in support of changing customer preferences and its economic development efforts. End-use customers are becoming more technologically sophisticated and want greater control over their energy usage. Many companies are focusing on sustainability and requiring more energy efficiency and renewable energy
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options. The continuing challenge for TVA and others is finding ways to meet the needs and preferences of customers while successfully developing flexible pricing models to accommodate the evolving markets.
Low-Income Energy Efficiency Program. Through the Home Uplift Program, TVA is partnering with LPCs, state and local governments, non-profit agencies, energy efficiency advocates, and the Tennessee Valley Public Power Association 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.
Renewable Power Purchase Agreements. In order to meet customer preferences and requirements for cleaner energy, TVA has entered into certain power purchase agreements ("PPAs") with renewable resource providers. In 2019, as a result of TVA's 2017 request for proposals for renewable energy, TVA signed four solar PPAs for 674 megawatts ("MW") of solar generation at sites in Tennessee and Alabama. One of these four solar projects is expected to come online in 2021 and two of the projects are expected to come online in 2022. In 2020, one of the counterparties failed to comply with the terms of its PPA. TVA terminated the 150 MW agreement due to the counterparty's default and is evaluating its rights under the PPA and next steps. During 2020, as a result of TVA's 2019 request for proposals for renewable energy, TVA signed six PPAs for a total of 661 MW of solar generation with 50 MW of battery storage expected to come online in 2023. Due to transmission issues for one of the projects, the 661 MW will be decreased to 651 MW. TVA issued another request for proposal during the second quarter of 2020 for up to 200 MW of new renewable energy. During 2021, as a result of the 2020 request for proposal and increased customer demand, TVA signed seven additional PPAs for a total of 964 MW of solar generation with 130 MW of battery storage expected to come online in 2023. TVA anticipates making any remaining selections in the second quarter of 2021.
TVA will procure the renewable energy and sell the resulting Renewable Energy Certificates ("RECs") to specific customers, allowing TVA to increase its renewable energy portfolio without additional costs to other Tennessee Valley 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.
Renewable Power Solutions. TVA encourages renewable power through various current offerings. Offerings include the Green Switch Program that allows customers to support wind, solar, and biomass renewable resources through purchasing renewable 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 RECs from wind generation located outside TVA's service area. TVA also offers a utility-scale program and a mid-scale flexibility option that better equip TVA and LPCs with the flexibility to meet changing end-use customer needs. The utility-scale program, Green Invest, aggregates demand through a competitive procurement process and is implemented through a renewable investment agreement. The goal of the Green Invest program is to meet the long-term sustainability needs of customers at scale. TVA may also construct its own renewable facilities to meet these needs. The mid-scale option, also known as the Flexibility Research Project, is a joint project with LPCs to enable solutions for situations where the end-use consumer needs onsite renewable or distributed generation. This project will allow TVA to gain market knowledge and operational insights. In addition, TVA launched the Green Connect Program in January 2021 to connect residential customers interested in on-site solar installations with qualified solar installers.
Energy Exchange Market
TVA and other utilities across the southeastern United States are exploring the creation of a new automated energy exchange across the region, to facilitate more immediate and short-term power exchanges. The energy exchange would be an enhancement to TVA's existing trading program, and the creation of this energy exchange platform would require approval of the Federal Energy Regulatory Commission, which regulates transmission service and power transfers by jurisdictional public utilities. These discussions demonstrate TVA's commitment to maintaining and improving reliability in the Tennessee Valley in the least-cost manner.
Natural Resource Plan
In 2020, the TVA Board of Directors accepted changes to TVA's Natural Resource Plan ("NRP") to support a more strategic, flexible, and comprehensive management approach to TVA's natural resource stewardship work, and TVA published its Record of Decision to complete its environmental review process. The updated plan enhances alignment with TVA's mission through economic development, energy, and environmental stewardship, and guides business planning. In the newly published NRP, TVA expanded from six resource areas to ten focus areas, ensuring the NRP provides a more comprehensive view of resource stewardship efforts.
Strategic Financial Plan
In 2019, the TVA Board approved an annual budget that reflects the first year of a new Strategic Financial Plan. The 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 rates as low as feasible, establishing better alignment between the length of LPC contracts and TVA's long-
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term commitments, stabilizing debt, assuming 100 percent long-term partner participation, maintaining a target cash balance of $300 million, and pursuing operational efficiencies. As TVA executes the plan, key assumptions and performance may change estimated debt and cash balances. For example, TVA is continuing to evaluate its long-term asset needs. In addition, due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA increased its target balance of Cash and cash equivalents in 2020. TVA may continue to hold higher balances in future periods due to potential market volatility.
In 2021, TVA retained Lazard Frères & Co. LLC ("Lazard"), an international financial advisory and asset management firm, to evaluate TVA’s financial performance from 2014 through 2020 against TVA’s 2014 long range financial plan (“2014 Plan”). Further, Lazard also reassessed whether the public power model and TVA’s existing business structure are reasonable approaches to support TVA’s mission, consistent with the scope of analysis and findings from Lazard’s 2014 Strategic Assessment Report (“2014 Lazard Report”). In the 2021 report, Lazard concluded that TVA’s financial performance from 2014 through fiscal year 2020 has been strong when measured against the financial performance objectives as set forth in TVA’s 2014 Plan and the performance of other large utility companies. Lazard also concluded that TVA’s performance in recent years and current positioning suggest that the public power model is a reasonable approach to support TVA’s mission. In addition, the 2021 report reaffirmed that Lazard’s previous conclusions from the 2014 Lazard Report with respect to the benefits and considerations of the public power model compared against alternative business models are still valid today.
Generation Resources
Extreme Flooding Preparedness. Updates to the TVA analytical hydrology model completed in 2009 indicated that under "probable maximum flood" conditions, some of TVA's dams might not have been capable of regulating the higher flood waters. A "probable maximum flood" is an extremely unlikely event; however, TVA has a responsibility to provide protection for its nuclear plants against such events. As a result, TVA installed a series of modifications at four dams.
Since 2009, TVA has performed further hydrology modeling of portions of the TVA watershed using updated modeling tools. The revised hydrology models were reviewed and approved by the NRC for Watts Bar Units 1 and 2. However, TVA identified an error in the modeling that will require the models for Watts Bar Units 1 and 2 to be resubmitted. TVA plans to resubmit models for Watts Bar Units 1 and 2 by the end of the third quarter of 2021. In addition, TVA submitted models for Sequoyah Nuclear Plant ("Sequoyah") Units 1 and 2 in 2020. TVA will subsequently address conditions at Browns Ferry as needed. As of December 31, 2020, TVA had spent $154 million on the modifications and improvements related to extreme flooding preparedness. TVA is deferring the decision on the need for additional modifications until after the modeling work is complete.
Mitigation of Beyond-Design-Basis Events. NRC rulemaking has been developed to codify the requirements promulgated by orders related to beyond-design-basis flooding discussed above. The NRC Commissioners approved the final rule in 2019. TVA plans to implement requirements for Sequoyah and Watts Bar by 2022 and for Browns Ferry by 2023. A gap review of the revised rule has been performed, and no new gaps to compliance were identified. Actions to complete flood assessments are still ongoing. See Extreme Flooding Preparedness above.
Work Environment at Nuclear Plants. In 2016, the NRC issued a Chilling Effect Letter ("CEL") to TVA regarding work environment concerns identified at Watts Bar. In the mid-cycle assessment letter issued in 2018, the NRC issued a Cross Cutting Issue in safety conscious work environment ("CCI") and outlined the closure criteria for both the CEL and CCI. In October 2019, TVA informed the NRC of its CEL and CCI closure criteria readiness, and the NRC completed its inspection, resulting in no additional findings with progress noted as documented in its December 2019 inspection report. In March 2020, the NRC issued its Annual Assessment Letter for Watts Bar noting TVA's progress in addressing the CEL and CCI while stating that the NRC continues to monitor TVA's activities as they deliberate on the appropriate time to close the CEL and CCI.
Apparent Violations of NRC Regulations. On March 2, 2020, the NRC issued a letter to TVA identifying four apparent violations of NRC regulations that prohibit licensees from retaliating against employees for their having raised protected nuclear safety concerns. In June 2020, TVA participated in a pre-decisional enforcement conference before the NRC, and in August 2020, the NRC issued violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA submitted a written response to the NRC that denies the violations and opposes 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 requested an evidentiary hearing before the NRC’s Atomic Safety and Licensing Board. The evidentiary hearing is scheduled for August 2021.
On March 9, 2020, the NRC issued a letter to TVA identifying twelve apparent violations of NRC regulations: six relating
to operational activities and six relating to NRC regulations governing the completeness and accuracy of information. TVA
participated in a pre-decisional enforcement conference before the NRC in July 2020, and on November 6, 2020, the NRC
issued five violations to TVA and a notice of proposed imposition of civil penalties in an amount less than $1 million. TVA submitted a written response to the NRC violations in December 2020, accepting the violations in part and denying them in part, and requesting a reduction of the civil penalties consistent with the denial. TVA anticipates that the NRC will issue its order imposing civil penalties in February 2021.
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Tritium-Producing Burnable Absorber Rods. TVA was a cooperating agency in the 2016 Department of Energy ("DOE") Final Supplemental Environmental Impact Statement for the Production of Tritium in a Commercial Light Water Reactor. In 2017, due to an anticipated need for more tritium-producing burnable absorber rods ("TPBARs"), the DOE announced its preferred alternative for irradiation services, which included use of an additional reactor. As a result of TVA's assessment and concurrence with the DOE's alternative, TVA submitted a license amendment request to the NRC to authorize the irradiation of TPBARs in Watts Bar Unit 2. The NRC approved the request in 2019, and TVA began tritium production in Watts Bar Unit 2 in November 2020. The DOE's decision also allows for irradiation of TPBARs at Sequoyah in the future; however, TVA does not have plans to employ Sequoyah units for tritium production in the near term.
Extended Power Uprate. TVA has undertaken an extended power uprate ("EPU") project at Browns Ferry to increase the amount of electrical generation capacity of its reactors. The license for each reactor was amended to allow reactor operation at the higher power level. The Browns Ferry EPU license amendments were approved by the NRC in 2017, following a nearly two-year review.
The project involved 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's total cost will be approximately $475 million. Physical work on all units was completed in 2019. The generating capacity is expected to increase by an estimated 465 MW that must be validated through operation of all units for four seasons and completion of additional testing. TVA is currently operating and testing the units through the required period to complete the validation of the increased generating capacity and will update the official capacity upon issuance of the engineering memos.
Watts Bar Unit 2. During the recently completed Watts Bar Unit 2 refueling outage, TVA identified degraded steam generator conditions on unit 2. Based on a continued operation assessment, TVA submitted a License Amendment Request that supports unit operation until approximately August 2021. The request is under NRC review and a decision is expected in February 2021. A project team is in place to ensure operational assessments, analysis work, and regulatory interface occur to allow for a safe and efficient mid-cycle steam generator inspection. Watts Bar Unit 2 will remain at 90 percent of rated output until assessments are completed, defining the conditions required to operate the unit until the mid-cycle outage in the September 2021 timeframe. The mid-cycle outage will focus 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, which is projected for March 2022.
Plant Closures. Results of assessments performed at Paradise and Bull Run were presented to the TVA Board at its February 2019 meeting. The TVA Board approved the retirement of Paradise Unit 3 by December 2020 and Bull Run by December 2023. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Fossil Plant Unit 3 was taken offline on February 1, 2020, effectively retiring the plant. See Note 5 — Plant Closures.
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. During 2019, the TVA Board approved the Integrated Resource Plan, which recommended an action to evaluate the engineering end-of-life of aging fossil units. These assessments consider material condition, plant performance, system flexibility needs, environmental impacts, grid support, and other factors. 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. In addition, TVA will prepare Environmental Assessments ("EAs") pursuant to the National Environmental Policy Act ("NEPA") prior to retiring or building a plant.
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. In 2020, the capacity expansion projects began at TVA’s Paradise and Colbert sites. 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, 2020, TVA had spent approximately $132 million on these expansions in total and expects to spend an additional $874 million. Both projects are planned to enter commercial operations by the end of CY 2023.
During 2019, the TVA Board approved approximately 500 MW for an aeroderivative combustion turbine project, at a cost not to exceed $499 million. In 2020, the project began at TVA’s Johnsonville site. As of December 31, 2020, TVA had spent approximately $1 million on this project and expects to spend an additional $498 million. The project is expected to enter commercial operations by the end of CY 2024.
Coal Combustion Residuals Facilities. TVA has committed to a programmatic approach for the elimination of wet storage of coal combustion residuals ("CCR") within the TVA service area. Under this program ("CCR Conversion Program"), TVA is converting all operational coal-fired plants to dry CCR storage and closing all wet storage facilities.
Dry generation and dewatering projects. Conversion of coal plant CCR wet processes to dry generation or dewatering is complete at Bull Run, Shawnee, and Kingston Fossil Plant ("Kingston"). Construction at Gallatin Fossil Plant ("Gallatin") was
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completed during 2020. Construction of dewatering and dry generation facilities is underway at Cumberland Fossil Plant ("Cumberland") and is scheduled for completion in the third quarter of 2021.
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 completed and operational at Bull Run, Kingston, and Gallatin; a lined and permitted landfill at Shawnee is currently under construction with completion projected for March 2021; construction of a lined and permitted landfill at Cumberland is expected to start in 2021; and TVA is designing and permitting a lateral expansion of the existing landfill at Gallatin. TVA has withdrawn its permit applications for a new lined landfill at Bull Run and has stopped construction of a permitted lined landfill expansion at Kingston until TVA can determine its need for these landfills with certainty. Construction of additional lined and dry storage facilities may occur to support future business requirements.
Wet CCR impoundment closures. TVA is working to close wet CCR impoundments in accordance with federal and state requirements. Closure project schedules and costs are driven by the selected closure methodology (such as closure-in-place or closure-by-removal). Closure initiation dates are driven by environmental regulations. TVA's predominant closure methodology is closure-in-place, with exceptions at certain facilities. TVA issued an environmental 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. The method of final closure for each of these facilities will depend on various factors, including approval by appropriate state regulators. Additional site-specific NEPA studies will be conducted as other facilities are designated for closure. See Note 10 — Asset Retirement Obligations.
Groundwater monitoring. Compliance with the Environmental Protection Agency's ("EPA's") CCR rule ("CCR Rule") as well as other requirements will require additional engineering and analysis as well as implementation of a comprehensive groundwater monitoring program. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. TVA expects to continue to evaluate and update these cost estimates.
In compliance with the CCR Rule, TVA published the results of additional groundwater testing at TVA's CCR facilities on March 1, 2019. The results included values above groundwater protection standards for some constituents at several CCR units. TVA will have to cease sending CCR and non-CCR wastestreams to unlined CCR surface impoundments as soon as possible but no later than the applicable CCR Rule date. The EPA has published a final rule that changes the deadline to cease sending CCR and non-CCR wastestreams to unlined CCR impoundments and to initiate closure or retrofit the units from October 31, 2020 to April 11, 2021. The final rule establishes a process for a utility to seek site-specific approval from the EPA to continue to use the unlined CCR impoundments based on meeting certain criteria. TVA evaluated and published Assessment of Corrective Measures reports to its CCR website in August 2019. TVA is continuing to publish periodic reports on additional groundwater testing at its CCR facilities; the latest reports were published on February 28, 2020 and August 28, 2020. Under the CCR Rule, based on the results of the assessment of corrective measures, TVA is required to select a remedy as soon as feasible. TVA continues to investigate and evaluate remedies and will continue posting semi-annual progress reports on the status of remedy selection.
As of December 31, 2020, TVA had spent approximately $2.1 billion on its CCR Conversion Program. TVA expects to spend an additional $902 million on the CCR Conversion Program through 2025. These estimates may change depending on the final closure method selected for each facility. Once the CCR Conversion Program is completed, TVA will continue to undertake certain CCR projects, including building new landfill cells under existing permits and closing existing cells once they reach capacity.
TVA was involved in two lawsuits concerning the CCR facilities at Gallatin. One of these cases was decided in TVA's favor by the U.S. Court of Appeals for the Sixth Circuit, and the other case was resolved by the entry of a consent order that became effective July 24, 2019. Under the consent order, TVA agreed to close the existing wet ash impoundments 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 10 — 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.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was
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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. The litigation will now proceed to the second phase on the question of whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages.
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 19 — Contingencies and Legal Proceedings — Contingencies.
River Management. The Tennessee Valley experienced the wettest year on record in CY 2020 and experienced above normal rainfall and runoff for the first quarter of 2021 helping TVA meet its river system commitments, including managing minimum river flows for navigation, generating low-cost hydroelectric power, maintaining water quality and water supply, and providing recreational opportunities for the Tennessee Valley. In addition, having cool water available helps TVA to meet thermal compliance and support normal operation of TVA's nuclear and fossil-fueled plants, while oxygenating water helps fish species remain healthy. Rainfall and runoff in the Tennessee Valley during the first quarter of 2021 were 105 percent and 135 percent of normal, respectively.
Small Modular Reactors. In 2015, the DOE entered into an Interagency Agreement with TVA to support site characterization activities and the development of an Early Site Permit Application ("ESPA") for a generic small modular reactor ("SMR"). The ESPA is based on the potential construction and operation of two or more SMR units at TVA's Clinch River Site in Oak Ridge, Tennessee. TVA submitted the ESPA for review by the NRC in 2016. NRC staff concluded their review and the permit was issued by the NRC in December 2019. The permit is valid through 2039 and therefore provides TVA a great deal of flexibility to make new nuclear decisions based on energy needs and economic factors.
TVA is in the process of evaluating new nuclear technology options and potential deployment scenarios. TVA is exploring advanced reactor designs that would lead to economically viable electricity generating options that can compete with alternatives in the 2030s and beyond. In addition, TVA has partnerships in place through memorandums of understanding that allow for collaboration with Oak Ridge National Laboratory and the University of Tennessee. Any decision to construct an SMR would require approval by the TVA Board and the NRC. As of December 31, 2020, TVA had spent $84 million on work regarding SMRs, including work to complete the ESPA for the Clinch River Site, of which the DOE had reimbursed TVA $28 million. Additional expenditures will be determined based on future project development.
System Operations Center. A new system operations center has been approved for $255 million. The new secured facility is being built to accommodate a new energy management system and to adapt to new regulatory requirements. The facility is expected to be constructed by the second quarter of 2023 and fully operational by 2024. As of December 31, 2020, TVA had spent approximately $50 million on the project and expects to spend an additional $205 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 is comprised of various engineering activities for all of TVA's dams including safety reassessments using modern industry criteria and the new probable maximum flood and site-specific seismic load cases. One aspect of the guidelines is that dam structures will be periodically assessed to assure that TVA's dams meet current design criteria. These assessments include material sampling of the dam and foundational structures and detailed engineering analysis. TVA will continue preventative and ongoing maintenance as a part of this safety program.
Boone Dam Remediation. In 2015, a sinkhole was discovered near the base of the earthen embankment at Boone Dam, and a small amount of water and sediment was found seeping from the river bank below the dam. TVA identified underground pathways contributing to the seepage and prepared a plan to repair the dam, which consists of the construction of a composite seepage barrier wall in the dam's earthen embankment. TVA has completed grouting and construction of an upstream and downstream buttress. Installation of the concrete cut-off wall elements is in process.
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As construction of the embankment repair project continues, the estimated cost and duration continue to be refined. As of December 31, 2020, TVA had spent $275 million related to this project and expects to spend an additional $160 million through 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 upgrading the south embankment by constructing berms on the upstream and downstream slopes. Construction began in the spring of 2019, and the project is currently estimated to be complete in 2022. As of December 31, 2020, TVA had spent $118 million related to this project and expects to spend an additional $14 million through 2022.
Regulatory Compliance
Steam-Electric Effluent Guidelines. In 2015, the EPA published a final rule revising the existing steam-electric effluent limitation guidelines ("ELGs"). The ELGs updated the existing technology-based water discharge limitations for power plants. Compliance with new requirements was required in the 2018-2023 timeframe and necessitated major upgrades to wastewater treatment systems at all coal-fired plants. Dry fly ash handling was mandated by the rule. The rule also required either dry bottom ash handling systems or "no discharge" recycle of bottom ash transport waters, and new technology-based limits on flue gas desulfurization ("FGD") (scrubber) wastewater required primary physical/chemical treatment and secondary biological treatment to meet extremely low limits for arsenic, mercury, and selenium.
The EPA published a rule in 2017, postponing certain compliance/applicability dates to provide the EPA time to review and revise, as necessary, the 2015 ELGs for FGD wastewater and bottom ash transport water. The EPA delayed the compliance dates for these two waste streams from the 2018-2023 timeframe to 2020-2023. However, the 2018-2023 applicability dates and the accompanying requirements for fly ash transport water, flue gas mercury control wastewater, and gasification wastewater remain unchanged. While the EPA was reconsidering the limits for FGD wastewater and bottom ash transport water, states issued National Pollutant Discharge Elimination System ("NPDES") permits for all of TVA's active coal facilities based on the 2015 ELGs, recognizing that the permits may need to be reopened to incorporate modifications to those ELGs.
In October 2020, the EPA issued final revised ELGs for bottom ash transport water and FGD wastewater. The primary impact of these regulations 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 plants. 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 2028. TVA will evaluate the applicability of those subcategories to its plants as appropriate. Petitions for judicial review of the October 2020 ELG rule were filed in the U.S. Court of Appeals for the District of Columbia Circuit ("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.
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 below the EPA drinking water standards. As the result of a pumping test conducted on TVA production wells at the nearby Allen Combined Cycle Plant ("Allen CC") by the United States Geological Survey and the University of Memphis, TVA 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. The use of water tanks rather than the wells may impose some operational restrictions on the Allen CC due to the lower availability of cooling water.
TVA is taking steps to remediate the groundwater at the East Ash Disposal Area. The Interim Response Action Plan will include a groundwater extraction system and a groundwater treatment system. TVA will also continue to dewater the East Ash
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Disposal Area and treat the water before it is discharged to the NPDES outfall. 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. After public comments are considered, TDEC will issue a Record of Decision. TVA is also preparing a Remedial Action Plan to move forward with the remediation at the site.
TVA's Remedial Investigation/Interim Response Action Groundwater Monitoring Plan is reviewed and modified annually. The 2020 Remedial Investigation/Interim Response Action Groundwater Monitoring Plan was approved by TDEC in May 2020. 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 2019 Remedial Investigation/Interim Response Action Groundwater Monitoring report was submitted to TDEC on July 2, 2020. The 2020 Remedial Investigation/Interim Response Action Groundwater Monitoring report is in development.
TVA has evaluated closure options for the Allen East Ash Disposal Area, as well as the nearby West Ash Impoundment, 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 regarding the closure method for the CCR units at the Allen Fossil Plant. TVA has decided to remove CCR from the above identified areas to an existing permitted offsite landfill.
Federal Contracting and Hiring Practices. On August 3, 2020, the Trump administration issued an "Executive Order ("EO") on Aligning Federal Contracting and Hiring Practices With the Interests of American Workers." Among other things, the EO directs federal agencies to review contracts awarded in 2018 and 2019 to assess (i) whether temporary foreign labor was used and impacts from such use, and (ii) whether any offshoring occurred and its impacts. The EO also directs agencies to review employment policies for compliance with specific laws. TVA conducted a review and reported a summary of its findings to the Office of Management and Budget ("OMB") in December 2020.
Buy American Executive Order. On 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. It also directs the Federal Acquisition Regulatory Council to consider proposing regulatory amendments (for notice, comment, and potential promulgation) that could further restrict federal agencies’ ability to buy foreign goods and services in some circumstances.
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 changing needs of customers in the Tennessee Valley. These changes have improved pricing by better aligning rates with underlying cost drivers and by sending improved pricing signals, while maintaining competitive industrial rates and keeping residential rates affordable.
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 have a 20-year termination notice provision that renews each year after their initial effective date, contingent upon certain circumstances, including limited rate increases going forward. Participating LPCs will 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. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of February 11, 2021, 142 LPCs had signed the 20-year Partnership Agreement with TVA, and 68 LPCs had signed a Flexibility Agreement.
Safeguarding Assets
Physical Security — Non-Nuclear Asset Protection. TVA utilizes a variety of security technologies, security awareness activities, and security personnel to prevent sabotage, vandalism, and thefts. Any of these activities could negatively impact the ability of TVA to generate, transmit, and deliver power to its customers. TVA's Police and Emergency Management personnel are active participants with numerous professional and peer physical security organizations in both the electric industry and law enforcement communities.
Physical attacks on transmission facilities across the country have heightened awareness of the need to physically protect facilities. TVA continues to work with the North American Electric Reliability Corporation ("NERC"), the SERC Reliability Corporation, the North American Transmission Forum, and other utilities to implement industry approved recommendations and standards.
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Nuclear Security. Nuclear security is carried out in accordance with federal regulations as set forth by the NRC. These regulations are designed for the protection of TVA's nuclear power plants, the public, and employees from the threat of radiological sabotage and other nuclear-related terrorist threats. TVA has security forces to guard against such threats.
Cybersecurity. TVA operates in a highly regulated environment with respect to cybersecurity. TVA's cybersecurity program aligns or complies with the Federal Information Security Management Act, the NERC Critical Infrastructure Protection requirements, and the NRC requirements for cybersecurity, as well as industry best practices. As part of the U.S. government, TVA coordinates with and works closely with the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") and the U.S. Computer Emergency Readiness Team ("US-CERT"). CISA serves as the agency assisting other federal entities in defending against threats and securing critical infrastructure. US-CERT functions as a liaison between the U.S. Department of Homeland Security and the public and private sectors to coordinate responses to security threats.
The risk of cybersecurity events such as malicious code attacks, unauthorized access attempts, and social engineering attempts continues to intensify. 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 impacted TVA's ability to operate as planned. See Item 1A, Risk Factors — Cybersecurity Risks — TVA's facilities and information infrastructure may not operate as planned due to cyber threats to TVA's assets and operations in the Annual Report.
In December 2020, TVA was notified of the SolarWinds breach by multiple sources including CISA. TVA cybersecurity personnel immediately responded to determine any impact and took measures intended to protect TVA from potential risks from the compromised software. TVA continues to receive and evaluate new information regarding the event and take the necessary actions to protect the computing environment. This event has not had a significant or material impact on business or operations.
Over the last few years, there has been an increase of malicious cyber activity across all industries, including the energy sector. TVA has observed a significant increase in malicious activity related to the COVID-19 pandemic including phishing campaigns and malicious websites. These types of malicious activity are occurring across the industry and have also been observed by TVA's external vendors, stakeholders, and partners. This activity has caused the need for heightened awareness and preparedness. TVA is leveraging federal and other partners to better identify, detect, protect, and respond to these potential attacks. While there have been incidents of phishing and attempted fraud against TVA and its vendors and service providers, these events have not had a significant or material impact on business or operations.
Transmission Assets. In addition to physical and cybersecurity attacks, TVA's transmission assets are vulnerable to various types of electrically charged energy disruptions such as those from geomagnetic disturbances ("GMDs") and electromagnetic pulses ("EMPs"). Because the effects of GMD and EMP are similar, they are often considered together. In September 2016, the Federal Energy Regulatory Commission ("FERC") approved a new standard to address GMD events, and in March 2020, FERC approved a revision to the standard. TVA has met the requirements of the original standard and subsequent revisions, and has evaluated the effects of solar storms ranging from NERC's reference case to possible extreme levels. TVA continues as an active participant with NERC in 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 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 United States. Whether a bulk-power system electric equipment acquisition or installation is prohibited will depend on determinations by the Secretary of DOE. On December 17, 2020, DOE issued a Prohibition Order Securing Critical Defense Facilities (“DOE Order”). The DOE Order, among other things, prohibits electric utilities that own or operate Defense Critical Electric Infrastructure (“DCEI”), as defined by section 215A(a)(4) of the Federal Power Act, from acquiring, importing, transferring, or installing certain bulk-power system electric equipment that (a) has been manufactured or supplied by a person owned by, controlled by, or subject to the jurisdiction or direction of the People’s Republic of China, and (b) is for use as a component of DCEI serving critical defense facilities. The DOE Order originally took effect on January 16, 2021. On January 20, 2021, the Biden administration suspended EO 13920 for 90 days, and as a result the DOE Order is also suspended for the same period. 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. At this time, it is uncertain to what extent EO 13920 or a future EO that may potentially address risks associated with the bulk-power system may impact TVA's operations.
Environmental Matters
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 matters. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MW) have been reduced from historic peaks. Emissions of nitrogen oxide ("NO x") have been reduced by 96 percent below peak 1995 levels and emissions of sulfur dioxide ("SO 2") have been reduced by 99 percent below 1977 levels
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through CY 2019. For CY 2019, TVA's emission of carbon dioxide ("CO 2") from its sources was 47 million tons, a 55 percent reduction from 2005 levels. This amount includes 2,383 tons from units rated at less than 25 MW. To remain consistent and to align with the EPA's reporting requirements, TVA intends to continue reporting CO 2 emissions on a calendar year basis.
Clean Air Act
The Clean Air Act ("CAA") establishes a comprehensive program to protect and improve the nation's air quality and control sources of air pollution. The major CAA programs that affect TVA's power generation activities are described below.
National Ambient Air Quality Standards. The CAA requires the EPA to set National Ambient Air Quality Standards ("NAAQS") for certain air pollutants. The EPA has done this for ozone, particulate matter ("PM"), SO 2, nitrogen dioxide, carbon monoxide, and lead. Over the years, the EPA has made the NAAQS more stringent. Each state must develop a plan to be approved by the EPA for achieving and maintaining 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 these requirements. All TVA generating units are located in areas designated as in attainment with NAAQS.
Cross-State Air Pollution Rule. The EPA issued the Cross-State Air Pollution Rule ("CSAPR") in July 2011 requiring several states in the eastern U.S. to improve air quality by reducing power plant emissions that contribute to pollution in other states. In 2016, the EPA issued an update to CSAPR to address cross-state air pollution (the "CSAPR Update Rule"). The EPA subsequently issued an additional rule to resolve any remaining cross-state air pollutant issues ("CSAPR Close-Out Rule"). The D.C. Circuit has remanded a portion of the CSAPR Update Rule back to the EPA to address 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 October 30, 2020, the EPA published the proposed revisions to the CSAPR Update Rule in the Federal Register, and the revisions must be finalized by March 30, 2021. TVA cannot predict the impact of this proposal to TVA's operations until the rulemaking is complete.
Mercury and Air Toxics Standards for Electric Utility Units. On April 16, 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 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 have filed petitions in the D.C. Circuit challenging the EPA's finding that regulating HAPs from electric generating units is not appropriate and necessary. TVA cannot predict the outcome of these judicial petitions at this time.
Environmental Agreements. See Note 19 — Contingencies and Legal Proceedings — Legal Proceedings — Environmental Agreements for a discussion of the Environmental Agreements, which discussion is incorporated herein by reference.
Acid Rain Program. The Acid Rain Program is intended to help reduce emissions of SO 2 and NO x, which are the primary pollutants implicated in the formation of acid rain. The program includes a cap-and-trade emission reduction program for SO 2 emissions from power plants. TVA continues to reduce SO 2 and NO x emissions from its coal-fired plants, and the SO 2 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 SO 2 and NO x 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 January 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 CAA. States must submit their Regional Haze SIPs to the EPA by July 31, 2021.
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 SO 2 and NO x 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 to eliminate such exclusions. The EPA rule required states to modify their implementation plans by November 2016. Kentucky, Tennessee, and Mississippi submitted implementation plans, but Alabama has not. Environmental petitioners and several states filed petitions for judicial review of the EPA final rule before the D.C. Circuit. In April 2017, the D.C. Circuit, at
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the request of the new EPA Administrator, ordered this litigation to be suspended pending the EPA's review to determine whether to reconsider all or part of the rule. On October 9, 2020, the EPA issued a guidance memorandum that supersedes and replaces policy statements outlined in the EPA's June 2015 rule. TVA does not expect significant impacts from these rule changes at the state level.
New York Petition to Address Impacts from Upwind High Emitting Sources. In March 2018, the State of New York filed a petition with the EPA under Section 126(b) of the CAA to address ozone impacts on New York from the NO x emissions from sources emitting at least 400 tons of NO x in CY 2017 from nine states including Kentucky. The New York petition requests that the EPA require daily NO x limits for utility units with 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 NO x emissions are already limited by the CSAPR Update Rule and are declining, and current EPA modeling projects no additional requirements to reduce Kentucky NO x emissions are necessary. In September 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. Specific impacts to TVA cannot be determined until the EPA takes further action on the petition.
Affordable Clean Energy Rule. In June 2019, the EPA finalized the final 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, holding, among other things, that the ACE rule rests on the erroneous legal premise that the text of the CAA expressly foreclosed consideration of emission reduction measures other than those that apply to the individual source. TVA is unable to predict the future course of this litigation on appeal, nor the direction that the EPA may take in the future to regulate GHG emissions from coal-fired units.
New Source Performance Standards. In December 2018, the EPA proposed revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units that were finalized by the EPA in October 2015. For coal-fired units, the EPA proposes to revise the current new source standards such that carbon capture and sequestration technology is no longer necessary to meet the standards of performance that reflect the best system of emission reduction. The resulting limits are less stringent than limits under the current rule and can be met by modern coal-fired units (e.g., supercritical steam generators) in combination with best operating practices, but without carbon capture and sequestration. The EPA is not proposing to revise the new source performance standard for GHG emission from gas-fired units. If finalized as proposed, the revisions are not expected to significantly impact TVA since TVA does not currently plan to construct, modify, or reconstruct any coal-fired units.
Climate Change
Executive Actions. In March 2017, the Trump administration issued Executive Order ("EO") 13783, "Promoting Energy Independence and Economic Growth." The EO reversed or altered many actions taken by the federal government in the last four years of the Obama Administration to address climate change and mandated that federal agencies review existing regulations and actions that potentially burden energy development and use. EO 13783 did not, however, mandate that the EPA reconsider its finding under the CAA that GHG emissions cause climate change and therefore endanger public health and the environment.
Implementation of EO 13783 has resulted in the replacement of the Clean Power Plan ("CPP") rule for existing fossil generation units by the ACE rule and revisions to the GHG emission standards for new, modified, and reconstructed electric utility generating units. As discussed above, the ACE rule was recently vacated.
In May 2018, EO 13834, "Efficient Federal Operations," was signed. EO 13834 emphasized meeting statutory requirements and gave agencies greater flexibility and discretion to decide how best to improve operations in order to "optimize energy and environmental performance, reduce waste, and cut costs." It called on the White House Council of Environmental Quality to streamline pre-existing environmental orders by "refocusing agencies on cost-effectively meeting mandates and goals" established by law. The order sought to consolidate requirements related to energy and water efficiency, high performance buildings, renewable energy consumption, and federal vehicle fleet management. TVA consistently seeks to improve its operations in order to optimize energy and environmental performance and did not experience any significant changes in its planning or operations as a result of the EO.
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 revoked EO 13783 and most provisions of EO 13834, including the provisions discussed above, and directs federal agencies to review and revise regulations consistent with broad policy goals to improve public health and the environment, reduce greenhouse gas emissions, and prioritize environmental justice. 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
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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 2035 and (b) clean and zero-emission vehicles for federal, state, local, and tribal government fleets, (4) to put the U.S. on a path to achieve net-zero emissions, economy-wide, by no later than 2050, (5) to accelerate the deployment of clean energy and transmission projects in an environmentally stable manner, (6) to ensure 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, and (8) improve air and water quality. TVA is closely monitoring these developments and aside from the directive to update TVA’s Climate Change Adaptation Plan, specific impacts on TVA cannot be determined at this time.
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 accepted the Paris Agreement on behalf of the U.S. Specific impacts to TVA cannot be determined at this time.
In response to the Trump administration's Paris withdrawal announcement, 25 states have formed the U.S. Climate Alliance, a bipartisan coalition of governors committed to reducing GHG emissions consistent with the goals of the Paris Agreement. North Carolina and Virginia are the only states in the TVA region that are U.S. Climate Alliance members. Among other commitments, each state commits to implement policies that advance the goals of the Paris Agreement, aiming to reduce GHG emissions by at least 26-28 percent below CY 2005 levels by CY 2025 and to accelerate new and existing policies to reduce carbon pollution and promote clean energy deployment at the state and federal level. In June 2017, U.S. states, cities, and businesses representing more than half of the U.S. economy made a pledge to meet the GHG reduction targets of the Paris Agreement, called "America's Pledge." In September 2020, America's Pledge released its second economy-wide policy analysis with recommendations of how states, cities, businesses, and other stakeholders can influence U.S. decarbonization. It is premature to determine potential impacts to TVA.
Litigation. In addition to legislative activity, climate change issues have been the subject of a number of lawsuits, including lawsuits against TVA. See Note 19 — 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 generation from alternative energy sources, and subsequent impacts to business reputation and public opinion.
Physical Impacts of Climate Change. TVA's Climate Change Adaptation Plan was last updated in July 2020. The goal of the adaptation 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 stations and its operations. Recent 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 CO 2 emissions from the TVA system, as previously discussed in this section.
Renewable/Clean Energy Standards
Twenty-nine 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. One state within the TVA service area, North Carolina, has a mandatory renewable standard that, while not applying directly to TVA, does apply to TVA's LPCs serving retail customers in that state. 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.
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Water Quality Control Developments
Cooling Water Intake Structures. In May 2014, the EPA released a final rule under Section 316(b) of the Clean Water Act 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 cooling water intake structure. 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 National Pollutant Discharge Elimination System ("NPDES") in Section 402 of the Clean Water Act. 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 in the CYs 2022-2024 timeframe.
The EPA has never applied the requirements under Section 316(b) to hydroelectric facilities. However, two EPA regions that do not cover TVA's activities are proposing to include Section 316(b) requirements in NPDES permits for hydroelectric facilities in those regions that withdraw water used for cooling purposes. It is not clear whether the requirements will be adopted nationwide or, given the unique features of hydroelectric facilities and the manner in which they withdraw water for cooling purposes, how the best technology available standard would be applied to TVA's hydroelectric facilities. The specific impacts to TVA from this potential policy change 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 Clean Water Act 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 plants. 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 2028. TVA will evaluate the applicability of those subcategories to its plants as appropriate. Petitions for judicial review of the October 2020 ELG rule were filed in the D.C. Circuit and the Fourth Circuit and have been consolidated in the Fourth Circuit in the case Appalachian Voices, et al. v. EPA.
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 Clean Water Act Decisions
On April 23, 2020, in County of Maui v. Hawaii Wildlife Fund, the Supreme Court held that the Clean Water Act 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
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pollutant travels and the extent to which the pollutant is diluted or chemically changed as it travels. TVA is evaluating what potential impact the decision and application of the test could have on its operations.
On April 15, 2020, in Northern Plains Resource Council v. U.S. Army Corps of Engineers, the U.S. District Court for the District of Montana ("District Court of Montana") vacated the Nationwide Permit ("NWP") 12, which authorizes discharges of dredged or fill material into waters of the U.S., and enjoined the U.S. Army Corps of Engineers from authorizing projects nationwide under the permit. The District Court of Montana's decision was subsequently amended and the injunction was limited to the Keystone XL pipeline. As a result, the decision has no immediate effect on TVA. However, unless the District Court of Montana's decision is reversed on appeal, there remains a risk that NWP 12 will not be available to authorize impacts to waters of the U.S. for TVA projects in the future. On January 13, 2021, the U.S. Army Corps of Engineers published notice of a final rule in the Federal Register for the reissuance and modification of NWPs, including NWP 12. The final rule limits the applicability of NWP 12 to oil and natural gas pipelines, modifies certain pre-construction notification requirements, and creates new NWPs for certain utility line activities. The final rule is unlikely to have a material impact on TVA, but the impact cannot be evaluated fully until any legal challenges to the rule are resolved.
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 industries and power systems, TVA has generated or used hazardous substances over the years.
TVA Sites. TVA operations at some of its facilities have resulted in releases of contaminates that TVA is addressing including at TVA's Environmental Research Center at Muscle Shoals, Alabama. At December 31, 2020, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information was available to develop a cost estimate is approximately $15 million and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheet. 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 19 — 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 Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — Generation Resources — Coal Combustion Residuals Facilities in the Annual Report 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 requires all unlined CCR surface impoundments to stop receiving CCR and non-CCR wastestreams and to initiate closure or retrofit by no later than April 11, 2021. 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 is already planning to close 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 Tennessee Department of Environment and Conservation ("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
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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. Currently, TVA is conducting environmental investigations of the seven sites in accordance with the TDEC-approved Environmental Investigation Plans for each site. Upon the completion of the investigations, TVA will submit an environmental assessment report for each site.
Groundwater Contamination. Environmental groups and state regulatory agencies are increasing their attention on alleged groundwater contamination associated with CCR management activities. As a result, TVA may have to change how it manages 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 — Regulatory Compliance — Allen Groundwater Investigation and Note 10 — Asset Retirement Obligations.
Environmental Investments
From 1970 to 2020, 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 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.
SO 2 Emissions and NO x Emissions. To reduce SO 2 emissions, TVA operates scrubbers on 18 of its coal-fired units and switched to lower-sulfur coal at certain coal-fired units. To reduce NO x emissions, TVA operates SCRs on 18 coal-fired units, operates low-NO x burners or low-NO x combustion systems on 21 units, optimized combustion on all 25 units, and operates NO x 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 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. There could be additional material costs if further reductions of GHGs, including CO 2, are mandated by legislative, 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. The EPA may issue regulations establishing more stringent air, water, and waste 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.
Estimated Required Environmental Expenditures
The following table contains information about TVA's current estimates on projects related to environmental laws and regulations:

Estimated Potential Environmental Expenditures(1)(2) At December 31, 2020 (in millions)
| Remaining 2021 |  | 2022 |  | Thereafter(3)(4) |  | Total
Coal Combustion Residual Conversion Program(5) | $ | 267 |  |  | $ | 224 |  |  | $ | 411 |  |  | $ | 902 |
Clean Air Act control projects(6) | 21 |  |  | 45 |  |  | 81 |  |  | 147 |
Clean Water Act requirements(7) | 24 |  |  | 78 |  |  | 71 |  |  | 173 |

Notes
(1) These estimates are subject to change as additional information becomes available and as regulations change.
(2) These estimates include $99 million, $134 million, and $121 million for the remainder of 2021, 2022, and thereafter, respectively, in capital expenditures.
(3) See Note 19 — Contingencies and Legal Proceedings — Contingencies.
(4) These estimates include expenditures expected to be incurred during 2023, 2024, and 2025.
(5) Includes costs associated with pond closures, conversion of wet to dry handling, and landfill activities. TVA is continuing to evaluate the rules and their impact on its operations, including the cost and timing estimates of related projects. 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 Note 10 — Asset Retirement Obligations.
(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.
(7) Includes projects that TVA is currently planning to comply with revised rules under the CWA (regarding CWIS and ELGs for steam electric power plants).
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Legal Proceedings
From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. At December 31, 2020, TVA had accrued $14 million with respect to Legal Proceedings. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.
For a discussion of certain current material Legal Proceedings, see Note 19 — Contingencies and 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, 2020, TVA had no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements. Although the financial statements are prepared in conformity with accounting principles generally accepted in the U.S., TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates and Note 1 — 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's Discussion and Analysis of Financial Condition and Results of Operations.
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, 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, TVA's hedging costs may increase, and TVA may have to post additional collateral and margin in connection with its derivative transactions.
TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Securities Exchange Act of 1934 ("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 U.S., TVA does not believe its disclosure obligations, if any, under Section 13(r) extend to the activities of any other departments, divisions, or agencies of the U.S.
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 — 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'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) (collectively "management"), evaluated the effectiveness of TVA's disclosure controls and procedures (as
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defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2020. Based on this evaluation, management concluded that TVA's disclosure controls and procedures were effective as of December 31, 2020, to ensure that information required to be disclosed by TVA in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by TVA in such reports is accumulated and communicated to TVA's management, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, 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's financial condition, results of operations, and cash flows.
For a discussion of certain current material Legal Proceedings, see Note 19 — Contingencies and Legal Proceedings — Legal Proceedings, which discussions are incorporated by reference into this Part II, Item 1, Legal Proceedings.
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ITEM 1A. RISK FACTORS
The following risk factor describes an update from the risk factors disclosed in Item 1A, Risk Factors of the Annual Report. The following information should be read in conjunction with additional risk factors included in the Annual Report.
The COVID-19 pandemic has and may continue to adversely affect TVA's business, financial condition, and results of operations.
The COVID-19 pandemic has and may continue to adversely affect TVA's business, financial condition, and results of operations. To date, the COVID-19 pandemic has resulted in reduced revenues primarily due to economic conditions surrounding COVID-19, including customers curtailing operations to reduce the spread of the outbreak as a result of quarantines, closures, or reduced operations of businesses or other institutions, among other things. TVA's revenues also decreased due to the deferral of revenues under programs offered by TVA to its LPCs to offset the impact of customers' inability to pay during the outbreak. TVA estimates base revenues were reduced by approximately $185 million for the year ended September 30, 2020, and by approximately $10 million for the quarter ended December 31, 2020. TVA expects the COVID-19 pandemic to continue impacting revenue for 2021 and has planned for $10.0 billion in total operating revenues in 2021. It is uncertain at this time the extent to which TVA's revenues may be impacted beyond 2021 by the above referenced or other reasons. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations— Results of Operations — Financial Results — Operating Revenues.
TVA could be further adversely affected by the impact of the COVID-19 pandemic on the economy and financial markets, including a prolonged recession and continued volatility in interest rates, commodity prices, investment performance, and foreign currency exchange rates. TVA has experienced fluctuations related to its pension plan assets and other investment portfolios during the year ended September 30, 2020 and the quarter ended December 31, 2020. The ultimate impact of the COVID-19 pandemic on the pension plan and other investments depends on factors beyond TVA's knowledge or control. A long-term recession could impact access to capital and have other long-term negative effects on TVA's business or results of operations.
In addition, TVA's results of operations could be impacted by, among other things, social distancing to prevent illness from spreading within the workforce; travel restrictions; the availability of the workforce to perform essential functions; and the unavailability of fuel or critical parts, supplies, or services due to transportation restrictions or the shutdown, slowdown, or inability to meet contractual requirements of suppliers or other vendors in TVA's supply chain. In addition, the continued spread of the COVID-19 pandemic could adversely impact TVA's ability to develop, construct, and operate facilities; could delay or prevent the completion of projects; or could lead to impairments of TVA's long-lived assets and accounts or loans receivable.
To address specific aspects of the COVID-19 pandemic, TVA has implemented a company-wide pandemic plan, including limiting non-essential travel and mandatory telework for those who do not have to be physically present at a TVA facility or office building; implementing strong physical and cyber-security measures; keeping certain developed recreation areas closed; actively monitoring generation, transmission, and distribution functions; and maintaining an increased cash reserve. However, it is possible that these measures will not be successful in mitigating the impacts of the pandemic. At this time, operations and delivery of energy to customers have not been materially impacted but there is no guarantee that there will not be a material impact in the future.
The extent to which the COVID-19 pandemic will impact TVA's business, financial condition, and results of operations is uncertain and will depend on numerous evolving factors beyond TVA's knowledge or control including, among other things, the duration and severity of the pandemic, actions taken to contain its spread and mitigate its effects, including vaccination programs, and the broader impact of the COVID-19 pandemic on the country and region's economy. However, TVA reasonably anticipates that a prolonged outbreak could have a material adverse impact on its business, financial condition, and results of operations, and could require TVA to change how it conducts certain operations, takes power under certain agreements, or dispatches its own facilities.
See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Initiatives and Challenges — COVID-19 Pandemic for an expanded discussion of the impact to TVA and related initiatives.
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ITEM 5. OTHER INFORMATION
2021 CEO Compensation
On February 11, 2021, the TVA Board approved compensation adjustments for Mr. Lyash for 2021 based on FW Cook’s independent study and market analysis of CEO compensation, Mr. Lyash's increased tenure with TVA, his 2020 performance, and an intent to narrow the gap to the 50th percentile of CEO market compensation while being mindful of TVA’s federal agency status. The TVA Board determined that the adjustments were merited and consistent with the TVA Act. The following sets forth the components of Mr. Lyash’s 2021 target total direct compensation ("TDC"), effective October 1, 2020.
•Salary increased from $1,058,000 to $1,100,000.
•Long-term performance grant of $2,914,100, which will vest on September 30, 2023.
•Long-term retention grant of $1,248,900, which will vest in three equal increments on September 30, 2021, September 30, 2022, and September 30, 2023.
No adjustments were made to any other existing elements of compensation for Mr. Lyash for 2021.
The TVA Board increased Mr. Lyash's pay closer to the 50th percentile (i.e., median) of market compensation, but his target TDC still remains below the 25th percentile of market TDC, in each case as determined by FW Cook. The approved adjustments position Mr. Lyash’s compensation at 8% below such 25th percentile and 28% below such 50th percentile of TDC for CEO market compensation. The graphic below illustrates the variance between 2021 target TDC for TVA's CEO and the 25th and the 50th percentiles of TDC for CEO market compensation, as determined by FW Cook.
Consistent with TVA’s pay-for-performance philosophy, 66% of Mr. Lyash's TDC is performance-based, up from 65% in 2020. The graphic below illustrates the components of his TDC granted for 2021 and the portion that is performance-based.
See Item 9B and “Compensation Discussion and Analysis” in Item 11 of the TVA Annual Report on Form 10-K for the fiscal year ended September 30, 2020, for more information about the components of executive compensation.
Executive Severance Plan
In 2020, in connection with its review of TVA’s compensation programs, TVA management commissioned Willis Towers Watson to conduct a market review of executive severance arrangements. The study showed that TVA’s approach to executive severance did not reflect best practice among its compensation peers, and indicated that establishing an executive severance plan would be in accordance with the objective of TVA’s Compensation Plan to provide market-based compensation programs in order to attract, retain, and motivate highly competent employees, and to provide consistency of treatment through structured program administration.
On February 10, 2021, TVA’s CEO established the TVA Executive Severance Plan (the “Severance Plan”), including the eligibility of TVA’s named executive officers (other than the CEO) to participate in the Severance Plan. On February 11, 2021, the Board approved the CEO’s participation in the Severance Plan as part of the overall market review of CEO compensation. The Severance Plan provides that if TVA terminates a named executive officer’s employment other than for Gross Misconduct or such participant terminates employment for Good Reason (each term as defined in the Severance Plan), such participant will be eligible to receive the following benefits in addition to his or her accrued compensation:
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•A lump sum severance payment equal to the applicable multiplier times the sum of the employee’s annual base salary and target annual incentive, and continued healthcare benefits for a number of complete or partial years equal to such multiplier. The applicable multiplier is 1.5 for the CEO and 1.0 for the other named executive officers, or, if the qualifying separation occurs within 24 months following a Change in Control (as defined in the Severance Plan) of TVA, then the applicable multiplier is 3.0 for the CEO and 2.0 for the other named executive officers.
•Any earned but unpaid incentive payments, and a prorated annual incentive payment for the year of termination based on actual (or, if the qualifying separation occurs within 24 months following a Change in Control (as defined in the Severance Plan) of TVA, based on target) achievement of performance goals.
•If the qualifying separation occurs within 24 months following a Change in Control of TVA, then a lump sum cash payment equal to the sum of (a) any long-term incentive plan ("LTIP") performance awards the performance cycle of which is in progress on the participant's separation date, non-prorated and calculated based on target achievement of performance goals, and (b) any LTIP retention awards the retention cycle of which is in progress on the participant's separation date, non-prorated and calculated as if all such awards are fully vested.
•If the qualifying separation occurs within 24 months following a Change in Control of TVA, a waiver of the five-year vesting requirement set forth in Section 4.1(a) of the TVA Supplemental Executive Retirement Plan pursuant to its terms.
In order to receive severance benefits under the Severance Plan, participants must timely execute (and not revoke) a release of claims in favor of TVA and comply with all applicable post-separation restrictive covenants. The terms of the Severance Plan will supersede rights and obligations with respect to severance under existing agreements to which Severance Plan participants are a party. A copy of the Severance Plan is attached as an exhibit to this report and is incorporated herein by reference. The foregoing description is qualified in its entirety by reference to such document.
Credit Facility Amendment
On February 9, 2021, TVA executed a second amendment to its $150 million December Maturity Community Bank Credit Agreement dated as of December 12, 2016 and amended as of December 11, 2018, with Truist Bank, as Administrative Agent, Letter of Credit Issuer, and a Lender, First Horizon Bank, First National Bank, HomeTrust Bank, Pinnacle Bank, Regions Bank, SmartBank, and United Community Bank (the “Credit Agreement”). The second amendment, among other things, (1) extends the maturity date of the Credit Agreement to February 9, 2024, (2) changes the name of the Credit Agreement to the February Maturity Community Bank Credit Agreement, (3) adds new definitions, (4) adds provisions regarding a successor rate to LIBOR, (5) adds provisions regarding qualified financial contracts, and (6) updates the schedule of commitments and applicable percentages. The other material terms and conditions of the Credit Agreement were not changed. A copy of the second amendment is attached as an exhibit to this report and is incorporated herein by reference. The foregoing description is qualified in its entirely by reference to such document.
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ITEM 6. EXHIBITS

Exhibit No. | Description
10.1 | Amended and Restated Long-Term Incentive Plan Dated as of November 12, 2020 (Incorporated by reference to Exhibit 10.34 to TVA's Annual Report on Form 10-K for the year ended September 30, 2020, File No. 000-52313)
10.2 | Executive Severance Plan Adopted as of February 10, 2021, and Amended as of February 11, 2021
10.3 | Second Amendment Dated as of February 9, 2021, to December Maturity Community Bank Credit Agreement Dated as of December 12, 2016, and Amended as of December 11, 2018
31.1 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer
31.2 | Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer
32.1 | Section 1350 Certification Executed by the Chief Executive Officer
32.2 | Section 1350 Certification Executed by the Chief Financial Officer
101.INS | TVA XBRL Instance Document
101.SCH | TVA XBRL Taxonomy Extension Schema
101.CAL | TVA XBRL Taxonomy Extension Calculation Linkbase
101.DEF | TVA XBRL Taxonomy Extension Definition Linkbase
101.LAB | TVA XBRL Taxonomy Extension Label Linkbase
101.PRE | TVA XBRL Taxonomy Extension Presentation Linkbase

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

Date: | February 11, 2021 |  | TENNESSEE VALLEY AUTHORITY
|  |  | (Registrant)
|  | By: | /s/ Jeffrey J. Lyash
|  |  | Jeffrey J. Lyash
|  |  | President and Chief Executive Officer (Principal Executive Officer)
|  | By: | /s/ John M. Thomas, III
|  |  | John M. Thomas, III
|  |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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