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Tennessee Valley Authority
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-28 Officers
8-K 2019-08-28 Officers, Exhibits
8-K 2019-08-06 Officers
8-K 2019-05-14 Officers
8-K 2019-02-28 Officers
8-K 2019-02-14 Officers, Exhibits
8-K 2019-01-03 Officers
8-K 2018-12-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-03 Other Events, Exhibits
8-K 2018-11-14 Officers
8-K 2018-10-01 Officers
8-K 2018-09-28 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-09-13 Officers
8-K 2018-08-22 Officers, Exhibits
8-K 2018-06-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-05 Off-BS Arrangement, Other Events, Exhibits
8-K 2018-02-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-12 Other Events
8-K 2018-01-03 Officers
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TVE 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 tve-063019xex3113rdquarter.htm
EX-31.2 tve-063019xex3123rdquarter.htm
EX-32.1 tve-063019xex3213rdquarter.htm
EX-32.2 tve-063019xex3223rdquarter.htm

Tennessee Valley Authority Earnings 2019-06-30

TVE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tve-10q3rdquarter2019x0630.htm Q3 10-Q 2019 Document

 

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 June 30, 2019
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
tva-logoa93.jpg
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large 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  (Do not check if a smaller reporting company) Smaller reporting company  o        
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x
 

1


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

2


GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms that may be used in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (the "Quarterly Report"):
 
Term or Acronym
 
Definition
AFUDC
 
Allowance for funds used during construction
AOCI
 
Accumulated other comprehensive income (loss)
ARO
 
Asset retirement obligation
ART
 
Asset Retirement Trust
ASLB
 
Atomic Safety and Licensing Board
BLEU
 
Blended low-enriched uranium
CAA
 
Clean Air Act
CAIR
 
Clean Air Interstate Rule
CCR
 
Coal combustion residuals
CME
 
Chicago Mercantile Exchange
CO2
 
Carbon dioxide
COL
 
Combined construction and operating license
COLA
 
Cost-of-living adjustment
CSAPR
 
Cross-State Air Pollution Rule
CTs
 
Combustion turbine unit(s)
CVA
 
Credit valuation adjustment
CY
 
Calendar year
DCP
 
Deferred Compensation Plan
DER
 
Distributed energy resources
DOE
 
Department of Energy
EA
 
Environmental Assessments
EIS
 
Environmental Impact Statement
EPA
 
Environmental Protection Agency
EPU
 
Extended Power Update
ESPA
 
Early Site Permit Application
FASB
 
Financial Accounting Standards Board
FCM
 
Futures Commission Merchant
FERC
 
Federal Energy Regulatory Commission
FTP
 
Financial Trading Program
GAAP
 
Accounting principles generally accepted in the United States of America
GHG
 
Greenhouse gas
GWh
 
Gigawatt hour(s)
HAP
 
Hazardous Air Pollutants
IRP
 
Integrated Resource Plan
JSCCG
 
John Sevier Combined Cycle Generation LLC
KOC
 
Knoxville Office Complex
kWh
 
Kilowatt hour(s)
LPC
 
TVA's local power company customer
MATS
 
Mercury and Air Toxics Standards
MD&A
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
mmBtu
 
Million British thermal unit(s)
MtM
 
Mark-to-market
MW
 
Megawatt
NAAQS
 
National Ambient Air Quality Standards
NAV
 
Net asset value

3


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


4


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," or other similar expressions.

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

New, amended, or existing laws, regulations, or administrative orders or interpretations, including those related to environmental matters, and the costs of complying with these laws, regulations, or administrative orders 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 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;
Changes in 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, coal combustion residual ("CCR") facilities, or other facilities;
Physical attacks on TVA's assets;
Cyber attacks on TVA's assets or the assets of third parties upon which TVA relies;
The outcome of legal or administrative proceedings, including the CCR proceedings involving the Gallatin Fossil Plant ("Gallatin") as well as any other CCR proceedings that may be brought in the future;
The failure of TVA's generation, transmission, navigation, flood control, and related assets and infrastructure, including CCR facilities, to operate as anticipated, resulting in lost revenues, damages, or other costs that are not reflected in TVA’s financial statements or projections;
Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred;
Weather conditions;
Catastrophic events such as fires, earthquakes, explosions, solar events, electromagnetic pulses ("EMP"), geomagnetic disturbances ("GMDs"), droughts, floods, hurricanes, tornadoes, or other casualty events or pandemics, wars, national emergencies, terrorist activities, or other similar events, especially if these events occur in or near TVA's service area;
Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;
Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid;
Disruption of fuel supplies, which may result from, among other things, economic conditions, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters;
Purchased power price volatility and disruption of purchased power supplies;
Events which affect the supply of water for TVA's generation facilities;
Changes in TVA's determinations of the appropriate mix of generation assets;
Ineffectiveness of TVA's efforts at adapting its organization to an evolving marketplace and remaining cost competitive;
Inability to obtain, or loss of, regulatory approval for the construction or operation of assets;
Inability to use regulatory accounting or loss of regulatory accounting approval for certain costs;
The requirement or decision to make additional contributions to TVA's Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), or pension plans;

5


Limitations on TVA's ability to borrow money which may result from, among other things, TVA's approaching or substantially reaching the limit on bonds, notes, and other evidences of indebtedness specified in the Tennessee Valley Authority Act of 1933, as amended (the “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 (the "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, 2018 (the "Annual Report"), and Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in a forward-looking statement.  New factors emerge from time to time, and it is not possible for TVA to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA's 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 (2019, 2018, 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.  


6


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions)
 
Three Months Ended June 30
 
Nine Months Ended June 30
 
2019
 
2018
 
2019
 
2018
Operating revenues
 
 
 
 
 
 
 
Revenue from sales of electricity
$
2,565

 
$
2,669

 
$
7,958

 
$
7,931

Other revenue
39

 
38

 
121

 
117

Total operating revenues
2,604


2,707


8,079


8,048

Operating expenses
 

 
 

 
 

 
 

Fuel
417

 
503

 
1,359

 
1,473

Purchased power
223

 
238

 
775

 
731

Operating and maintenance
744

 
603

 
2,289

 
1,881

Depreciation and amortization
576

 
404

 
1,387

 
1,263

Tax equivalents
128

 
129

 
396

 
379

Total operating expenses
2,088

 
1,877

 
6,206

 
5,727

Operating income
516

 
830

 
1,873

 
2,321

Other income (expense), net
14

 
11

 
52

 
34

Other net periodic benefit cost
65

 
65

 
194

 
193

Interest expense
300

 
306

 
902

 
942

Net income (loss)
$
165

 
$
470

 
$
829

 
$
1,220

The accompanying notes are an integral part of these consolidated financial statements.


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
Three Months Ended June 30
 
Nine Months Ended June 30
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
165

 
$
470

 
$
829

 
$
1,220

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gain (loss) on cash flow hedges
(47
)
 
(65
)
 
(76
)
 
17

Reclassification to earnings from cash flow hedges
13

 
43

 
17

 
13

Total other comprehensive income (loss)
(34
)
 
(22
)
 
(59
)
 
30

Total comprehensive income (loss)
$
131

 
$
448

 
$
770

 
$
1,250

The accompanying notes are an integral part of these consolidated financial statements.


7


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
ASSETS
 
June 30, 2019

September 30, 2018
Current assets
 

 
Cash and cash equivalents
$
300

 
$
299

Accounts receivable, net
1,551

 
1,657

Inventories, net
1,051

 
961

Regulatory assets
183

 
414

Other current assets
87

 
86

Total current assets
3,172

 
3,417

 
 
 
 
Property, plant, and equipment
 

 
 

Completed plant
62,716

 
61,114

Less accumulated depreciation
(30,928
)
 
(29,335
)
Net completed plant
31,788

 
31,779

Construction in progress
1,783

 
1,999

Nuclear fuel
1,408

 
1,487

Capital leases
146

 
149

Total property, plant, and equipment, net
35,125

 
35,414

 
 
 
 
Investment funds
2,899

 
2,862

 
 
 
 
Regulatory and other long-term assets
 

 
 

Regulatory assets
6,755

 
6,612

Other long-term assets
324

 
362

Total regulatory and other long-term assets
7,079

 
6,974

 
 
 
 
Total assets
$
48,275

 
$
48,667

The accompanying notes are an integral part of these consolidated financial statements.



8


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
LIABILITIES AND PROPRIETARY CAPITAL
 
June 30, 2019
 
September 30, 2018
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
1,739

 
$
1,982

Accrued interest
287

 
305

Current portion of leaseback obligations
40

 
38

Current portion of energy prepayment obligations

 
10

Regulatory liabilities
161

 
187

Short-term debt, net
1,444

 
1,216

Current maturities of power bonds
1,030

 
1,032

Current maturities of long-term debt of variable interest entities
39

 
38

Current maturities of notes payable
23

 
46

Total current liabilities
4,763

 
4,854

 
 
 
 
Other liabilities
 
 
 
Post-retirement and post-employment benefit obligations
4,260

 
4,476

Asset retirement obligations
5,468

 
4,665

Other long-term liabilities
2,226

 
2,715

Leaseback obligations
223

 
263

Regulatory liabilities
64

 
104

Total other liabilities
12,241

 
12,223

 
 
 
 
Long-term debt, net
 
 
 
Long-term power bonds, net
19,115

 
20,157

Long-term debt of variable interest entities, net
1,108

 
1,127

Long-term notes payable

 
23

Total long-term debt, net
20,223

 
21,307

 
 
 
 
Total liabilities
37,227

 
38,384

 
 
 
 
Commitments and contingencies (Note 19)
 
 
 
 
 
 
 
Proprietary capital
 
 
 
Power program appropriation investment
258

 
258

Power program retained earnings
10,234

 
9,404

Total power program proprietary capital
10,492

 
9,662

Nonpower programs appropriation investment, net
558

 
564

Accumulated other comprehensive income (loss)
(2
)
 
57

Total proprietary capital
11,048

 
10,283

 
 
 
 
Total liabilities and proprietary capital
$
48,275

 
$
48,667

The accompanying notes are an integral part of these consolidated financial statements.


9


TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Nine Months Ended June 30
 (in millions)
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
829

 
$
1,220

Adjustments to reconcile net income (loss) to net cash provided by operating activities
 

 
 

Depreciation and amortization(1)
1,402

 
1,285

Amortization of nuclear fuel cost
277

 
282

Non-cash retirement benefit expense
235

 
243

Prepayment credits applied to revenue
(10
)
 
(75
)
Other regulatory amortization and deferrals
240

 
15

Changes in current assets and liabilities
 

 
 

Accounts receivable, net
149

 
(11
)
Inventories and other current assets, net
(145
)
 
5

Accounts payable and accrued liabilities
(217
)
 
(68
)
Accrued interest
(21
)
 
(52
)
Pension contributions
(232
)
 
(229
)
Other, net
(28
)
 
(78
)
Net cash provided by operating activities
2,479

 
2,537

 
 
 
 
Cash flows from investing activities
 

 
 

Construction expenditures
(1,292
)
 
(1,354
)
Nuclear fuel expenditures
(223
)
 
(181
)
Loans and other receivables
 

 
 

Advances
(8
)
 
(12
)
Repayments
6

 
3

Other, net
(16
)
 
(2
)
Net cash used in investing activities
(1,533
)
 
(1,546
)
 
 
 
 
Cash flows from financing activities
 

 
 

Long-term debt
 

 
 

Issues of power bonds

 
998

Redemptions and repurchases of power bonds
(1,034
)
 
(1,731
)
Redemptions of notes payable
(46
)
 
(52
)
Redemptions of debt of variable interest entities
(19
)
 
(18
)
Short-term debt issues (redemptions), net
196

 
(133
)
Payments on leases and leasebacks
(41
)
 
(40
)
Financing costs, net

 
(3
)
Other, net
(1
)
 

Net cash provided by (used in) financing activities
(945
)
 
(979
)
Net change in cash, cash equivalents, and restricted cash
1

 
12

Cash, cash equivalents, and restricted cash at beginning of period
322

 
300

Cash, cash equivalents, and restricted cash at end of period
$
323

 
$
312

 
 
 
 
Supplemental disclosures
 
 
 
Significant non-cash transactions
 
 
 
Accrued capital and nuclear fuel expenditures
$
266

 
$
315

Capital lease obligations incurred
6

 

The accompanying notes are an integral part of these consolidated financial statements.
Note
(1) Includes amortization of debt issuance costs and premiums/discounts.

10


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the Three Months Ended June 30, 2019 and 2018
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated
Other
Comprehensive
Income (Loss)
from
Net Gains (Losses) on Cash Flow Hedges
 
 
 
Total
Balance at March 31, 2018
$
258

 
$
9,033

 
$
568

 
$
73

 
$
9,932

Net income (loss)

 
472

 
(2
)
 

 
470

Total other comprehensive income (loss)

 

 

 
(22
)
 
(22
)
Return on power program appropriation investment

 
(1
)
 

 

 
(1
)
Balance at June 30, 2018
$
258

 
$
9,504

 
$
566

 
$
51

 
$
10,379

 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
$
258

 
$
10,069

 
$
560

 
$
32

 
$
10,919

Net income (loss)

 
167

 
(2
)
 

 
165

Total other comprehensive income (loss)

 

 

 
(34
)
 
(34
)
Return on power program appropriation investment

 
(2
)
 

 

 
(2
)
Balance at June 30, 2019
$
258

 
$
10,234

 
$
558

 
$
(2
)
 
$
11,048

The accompanying notes are an integral part of these consolidated financial statements.


TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the Nine Months Ended June 30, 2019 and 2018
(in millions)
 
Power Program Appropriation Investment
 
 
Power Program Retained Earnings
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated
Other
Comprehensive
Income (Loss)
from
Net Gains (Losses) on Cash Flow Hedges
 
 
 
Total
Balance at September 30, 2017
$
258

 
$
8,282

 
$
572

 
$
21

 
$
9,133

Net income (loss)

 
1,226

 
(6
)
 

 
1,220

Total other comprehensive income (loss)

 

 

 
30

 
30

Return on power program appropriation investment

 
(4
)
 

 

 
(4
)
Balance at June 30, 2018
$
258

 
$
9,504

 
$
566

 
$
51

 
$
10,379

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2018
$
258

 
$
9,404

 
$
564

 
$
57

 
$
10,283

Net income (loss)

 
835

 
(6
)
 

 
829

Total other comprehensive income (loss)

 

 

 
(59
)
 
(59
)
Return on power program appropriation investment

 
(5
)
 

 

 
(5
)
Balance at June 30, 2019
$
258

 
$
10,234

 
$
558

 
$
(2
)
 
$
11,048

The accompanying notes are an integral part of these consolidated financial statements.


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

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

1.  Nature of Operations and Summary of Significant Accounting Policies

General

The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation 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 nearly 10 million people.

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

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


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Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended (the "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 obligation under the TVA Act to repay $1.0 billion of the Power Program Appropriation Investment with the 2014 payment, and therefore this item is no longer a component of rate setting.  In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible.  Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30.  Years (2019, 2018, 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 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, 2018, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2018 (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 in the consolidated interim financial statements.

The accompanying consolidated interim financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA, wholly-owned direct subsidiaries, and variable interest entities ("VIE") of which TVA is the primary beneficiary. See Note 8. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Reclassifications

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

13


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

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

Cash, Cash Equivalents, and Restricted Cash

Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets in the Consolidated Balance Sheets. Restricted cash 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 19Legal Proceedings Environmental Agreements.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:
Cash, Cash Equivalents, and Restricted Cash
 
At June 30, 2019
 
At September 30, 2018
Cash and cash equivalents
$
300

 
$
299

Restricted cash and cash equivalents included in Other long-term assets
23

 
23

Total Cash, cash equivalents, and restricted cash
$
323

 
$
322


Revenues

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

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

Allowance for Uncollectible Accounts

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

The allowance for uncollectible accounts was less than $1 million at both June 30, 2019, and September 30, 2018, for accounts receivable. Additionally, loans receivable of $125 million and $138 million at June 30, 2019, and September 30, 2018, respectively, are included in Accounts receivable, net and Other long-term assets and are reported net of allowances for uncollectible accounts of less than $1 million at both June 30, 2019, and September 30, 2018.


14


Pre-Commercial Plant Operations

As part of the process of completing the construction of a generating unit, the electricity produced is used to serve the
demands of the electric system. TVA estimates revenue from such pre-commercial generation based on the guidance provided by Federal Energy Regulatory Commission ("FERC") regulations. The Allen Combined Cycle Plant ("Allen CC") began pre-commercial operations in September 2017, and began commercial operations in April 2018. Cogeneration capability at Johnsonville Combustion Turbine Unit 20 commenced pre-commercial plant operations in September 2017, and was placed in service during December 2017. Estimated revenue of less than $1 million and $11 million related to these projects was capitalized to offset project costs for the three and nine months ended June 30, 2018, respectively. TVA also capitalized related fuel costs for these construction projects of approximately $5 million and $20 million during the three and nine months ended June 30, 2018, respectively. No such amounts were capitalized during the three and nine months ended June 30, 2019.

Depreciation    

TVA accounts for depreciation of its properties using the composite depreciation convention of accounting. 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 external depreciation studies. These studies are updated at least every five years. Depreciation expense was $536 million and $301 million for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense was $1.3 billion and $950 million for the nine months ended June 30, 2019 and 2018, respectively. See Note 5Financial Impact for a discussion of the impact of plant closures.

2.  Impact of New Accounting Standards and Interpretations
    
The following are accounting standard updates issued by the Financial Accounting Standards Board ("FASB") that TVA adopted during 2019:
Defined Benefit Costs
Description
This guidance changes how information about defined benefit costs for pension plans and other post-retirement benefit plans is presented in employer financial statements. The guidance requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit and settlement and curtailment effects, are to be included in non-operating expenses. Additionally, the guidance stipulates that only the service cost component of net benefit cost is eligible for capitalization in assets. The guidance requires retrospective presentation of the service and non-service cost components in the Consolidated Statements of Operations.
Effective Date for TVA
October 1, 2018
Effect on the Financial Statements or Other Significant Matters
TVA adopted this standard on a retrospective basis for the prior period presented resulting in lower operating expenses and higher non-operating expenses in the Consolidated Statements of Operations of $194 million and $192 million for the nine months ended June 30, 2019 and 2018, respectively. There was no impact on the Consolidated Balance Sheets because TVA has historically capitalized only the service cost component, which is consistent with the new guidance.
 
Financial Instruments
Description
This guidance applies to the recognition and measurement of financial assets and liabilities. The standard requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The standard also amends presentation requirements related to certain changes in the fair value of a liability and eliminates certain disclosure requirements of significant assumptions for financial instruments measured at amortized cost on the balance sheet. Public entities must apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
Effective Date for TVA
October 1, 2018
Effect on the Financial Statements or Other Significant Matters
TVA currently measures all of its equity investments (other than those that result in the consolidation of the investee) at fair value, with changes in the fair value recognized through net income, unless regulatory accounting is applied. The TVA Board has authorized the use of regulatory accounting for changes in fair value of certain equity investments, and as a result, those changes in fair value are deferred as regulatory assets or liabilities. TVA currently discloses significant assumptions around its estimates of fair value for financial instruments carried at amortized cost on its consolidated balance sheet. The adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows because changes in fair value accounting are recognized through regulatory accounting.

15


Revenue from Contracts with Customers
Description
This guidance, including subsequent amendments, replaces the existing accounting standard and industry specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the guidance is to recognize revenue related to the transfer of goods or services to customers at the amount expected to be collected. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries. The new standard also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and the related cash flows arising from contracts with customers. 
Effective Date for TVA
October 1, 2018
Effect on the Financial Statements or Other Significant Matters
TVA adopted this standard using the modified retrospective method with no material changes to the amount or timing of revenue recognition. In accordance with the modified retrospective method, TVA’s previously issued financial statements have not been restated to comply with the new accounting standard.
  
TVA recognizes revenue when it satisfies a performance obligation by transferring control to the customer. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for a customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers.

TVA utilized certain practical expedients including applying the guidance to open contracts at the date of adoption, applying the guidance to a portfolio of contracts with similar characteristics, and recognizing revenue in the amount for which it has the right to invoice.

As a result of adoption of the standard, TVA did not have a cumulative-effect adjustment to proprietary capital.
 
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
Description
This standard adds or clarifies guidance on the classification of certain cash receipts and payments on the statement of cash flows as follows: debt prepayment or extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and the application of the predominance principle to separately identifiable cash flows.
Effective Date for TVA
October 1, 2018
Effect on the Financial Statements or Other Significant Matters
TVA's previous treatment of the classification of certain cash receipts and cash payments is consistent
with the new standard, and adoption of the standard had no impact on TVA's financial condition, results of operations, or presentation or disclosure of cash flows.
 
Statement of Cash Flows - Restricted Cash
Description
This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance does not provide a definition of restricted cash or restricted cash equivalents.
Effective Date for TVA
October 1, 2018
Effect on the Financial Statements or Other Significant Matters
Adoption of this standard resulted in a change to the beginning-of-period and end-of-period cash and cash equivalents and restricted cash amounts shown on the Consolidated Statements of Cash Flows. TVA applied this standard on a retrospective basis for the prior periods presented.
    
The following accounting standards have been issued but as of June 30, 2019, were not effective and had not been adopted by TVA:
Derivatives and Hedging - Improvements to Accounting for Hedging Activities
Description
This guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
Effective Date for TVA
The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2019. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters
TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows.

16


Lease Accounting
Description
This guidance changes the provisions of recognition in both the lessee and lessor accounting models. The standard requires entities that lease assets ("lessees") to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance (similar to current capital leases) or operating lease. However, unlike current lease accounting rules, which require only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balance sheet. Operating leases will result in straight-line expense, while financing leases will result in recognition of interest on the lease liability separate from amortization expense. The accounting for the owner of the assets leased by the lessee ("lessor accounting") will remain largely unchanged from current lease accounting rules. The standard allows for certain practical expedients to be elected related to lease term determination, separation of lease and non-lease elements, reassessment of existing leases, and short-term leases. When the standard becomes effective, it will include interim periods within the fiscal year of adoption and will be required to be applied using a modified retrospective transition.
Effective Date for TVA
The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2019. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters
TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures. The standard is expected to impact financial position as adoption will increase the amount of assets and liabilities recognized on TVA’s Consolidated Balance Sheets. The standard is not expected to have a material impact on results of operations or cash flows as expense recognition is intended to be substantially the same as the existing standard. TVA plans to elect certain of the practical expedients included in the new standard. TVA has selected a lease system solution and continues to evaluate the completeness of the lease population, the effectiveness of internal control related to leases, and appropriate financial statement disclosure. TVA is also continuing to monitor industry implementation and will analyze the related impacts to lease accounting.
 
Defined Benefit Plans - Disclosure Requirements
Description
This guidance applies to all employers that sponsor defined benefit pension or other post-retirement plans and modifies or clarifies the disclosure requirements for those plans. The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Entities are required to apply the amendments retrospectively.
Effective Date for TVA
The new standard is effective for TVA's annual reporting periods beginning October 1, 2021. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters
TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.
 
Customer's Accounting for Implementation Costs in a Cloud Arrangement That Is a Service Contract
Description
This guidance relates to the accounting for a customer’s implementation costs in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing those implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The amendments also provide requirements for the classification of the capitalized costs and related expense and cash flows in the financial statements, the application of impairment guidance to the capitalized costs, and the application of abandonment guidance to the capitalized costs. Entities are required to apply the amendments either retrospectively or prospectively to all implementation costs incurred after the adoption date.
Effective Date for TVA
The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020. Early adoption is permitted, and TVA plans to adopt this standard October 1, 2019, on a prospective basis.
Effect on the Financial Statements or Other Significant Matters
TVA does not expect any material impact on TVA's financial condition, results of operations, or cash flows after the adoption of this standard.
 
Financial Instruments - Credit Losses
Description
This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value. The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination.
Effective Date for TVA
The new standard is effective for TVA’s interim and annual reporting periods beginning October 1, 2020. While early adoption is permitted, TVA does not plan to adopt the standard early.
Effect on the Financial Statements or Other Significant Matters
TVA is evaluating the potential impact of these changes on its consolidated financial statements and related disclosures.

17


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

3.  Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA's accounts receivable:
Accounts Receivable, Net 
 
At June 30, 2019
 
At September 30, 2018
Power receivables
$
1,436

 
$
1,570

Other receivables
115

 
87

Accounts receivable, net
$
1,551

 
1,657

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

4.  Inventories, Net

The table below summarizes the types and amounts of TVA's inventories:
Inventories, Net 
 
At June 30, 2019
 
At September 30, 2018
Materials and supplies inventory
$
744

 
725

Fuel inventory
351

 
266

Renewable energy certificates/emission allowance inventory, net
18

 
14

Allowance for inventory obsolescence
(62
)
 
(44
)
Inventories, net
$
1,051

 
$
961


5. Plant Closures

Background

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

Financial Impact

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


18


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

6.  Other Long-Term Assets

The table below summarizes the types and amounts of TVA's other long-term assets:
Other Long-Term Assets
 
At June 30, 2019
 
At September 30, 2018
Loans and other long-term receivables, net(1)
$
120

 
$
125

EnergyRight® receivables
82

 
90

Prepaid capacity payments
21

 
27

Restricted cash and cash equivalents(1)
23

 
23

Commodity contract derivative assets
6

 
31

Other
72

 
66

Other long-term assets
$
324

 
$
362

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

In association with the EnergyRight® Solutions program, 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 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. As of June 30, 2019, and September 30, 2018, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $21 million and $22 million, respectively. See Note 10 for information regarding the associated financing obligation.     


19


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 June 30, 2019
 
At September 30, 2018
Current regulatory assets
 
 
 
Gallatin coal combustion residual facilities(1)
$

 
$
38

Unrealized losses on interest rate derivatives
85

 
73

Environmental agreements

 
3

Unrealized losses on commodity contracts
33

 
4

Environmental cleanup costs - Kingston ash spill
65

 
266

Fuel cost adjustment receivable

 
30

Total current regulatory assets
183

 
414

 
 
 
 
Non-current regulatory assets
 

 
 

Deferred pension costs and other post-retirement benefits costs
2,940

 
3,119

Non-nuclear decommissioning costs(1)
1,761

 
1,019

Gallatin coal combustion residuals facilities(1)

 
861

Nuclear decommissioning costs
847

 
784

Unrealized losses on interest rate derivatives
1,049

 
692

Environmental agreements
12

 
11

Unrealized losses on commodity contracts
9

 
8

Other non-current regulatory assets
137

 
118

Total non-current regulatory assets
6,755

 
6,612

Total regulatory assets
$
6,938

 
$
7,026

 
 
 
 
Current regulatory liabilities
 

 
 

Fuel cost adjustment tax equivalents
$
138

 
$
146

Fuel cost adjustment
10

 

Unrealized gains on commodity derivatives
13

 
41

Total current regulatory liabilities
161

 
187

 
 
 
 
Non-current regulatory liabilities
 

 
 

Deferred other post-retirement benefits cost
58

 
73

Unrealized gains on commodity derivatives
6

 
31

Total non-current regulatory liabilities
64

 
104

Total regulatory liabilities
$
225

 
$
291

Note
(1) See Note 9.

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

20


business that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt. Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is required to account for the VIEs on a consolidated basis.

John Sevier VIEs

In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance (the "JSCCG notes") and the issuance of $100 million of membership interests subject to mandatory redemption.  The membership interests were purchased by John Sevier Holdco LLC ("Holdco").  Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG.  A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated. 
 
The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $100 million of secured notes (the "Holdco 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 (the "SCCG notes") and the issuance of $40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests in SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.

The membership interests held by SHLLC were purchased with proceeds from the issuance of $40 million of secured notes (the "SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is 7.0 percent, which is reflected as interest expense in the Consolidated Statements 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,

21


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

TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term. Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the VIE on a consolidated basis.

Impact on Consolidated Financial Statements

The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of June 30, 2019, and September 30, 2018, as reflected in the Consolidated Balance Sheets are as follows:
Summary of Impact of VIEs on Consolidated Balance Sheets
 
At June 30, 2019
 
At September 30, 2018
Current liabilities
 
 
 

Accrued interest
25

 
$
11

Accounts payable and accrued liabilities
2

 
2

Current maturities of long-term debt of variable interest entities
39

 
38

Total current liabilities
66

 
51

Other liabilities
 
 
 
Other long-term liabilities
27

 
28

Long-term debt, net
 
 
 
Long-term debt of variable interest entities, net
1,108

 
1,127

Total liabilities
$
1,201

 
$
1,206


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

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

9.  Gallatin Coal Combustion Residual Facilities

Background

TVA is involved in two lawsuits relating to alleged discharges of pollutants from the CCR facilities at Gallatin.

Lawsuit Brought by TDEC. In January 2015, the Tennessee Department of Environment and Conservation ("TDEC") filed a lawsuit against TVA in the Chancery Court for Davidson County, Tennessee, alleging that pollutants from Gallatin have been discharged in violation of the Tennessee Water Quality Control Act and the Tennessee Solid Waste Disposal Act. The Tennessee Scenic Rivers Association ("TSRA") and Tennessee Clean Water Network ("TCWN") are also plaintiffs. On June 13, 2019, the parties filed a consent decree with the Court to resolve this matter, which the Court approved and entered on July 24, 2019. Under the consent decree, TVA agreed to close the existing wet ash disposal impoundments by removal, either to an onsite landfill or to an offsite facility, which will be determined after appropriate environmental reviews. TVA may also submit a plan that allows for beneficial reuse of the CCR material. Under the consent decree, TVA must submit a removal and closure plan to TDEC and must remove the CCR material within 20 years of TDEC’s approval of the plan. The consent decree does not contain penalties or any admission of fault or liability. In addition to the consent decree, TDEC entered an administrative order providing for ongoing investigation and monitoring related to a closed legacy impoundment at the site. After a five-year study period, TDEC and TVA will determine whether any additional corrective action and/or closure activities are necessary for the legacy impoundment.

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

On August 4, 2017, the court issued a decision (the "August 2017 Order") that found TVA had discharged pollutants into the Cumberland River in the past and that the discharge was likely ongoing.  The court ordered TVA to excavate the CCR

22


materials and move them to a lined facility. The court did not assess any monetary penalties against TVA for the CWA violations, citing the fact that its order to relocate the CCR materials would cause TVA to incur significant costs.

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

Financial Impact

Based on the August 2017 Order and the assumptions that a new lined facility would be permitted and constructed on the Gallatin site and all existing CCR materials at Gallatin would be moved to this site, TVA estimated the costs of the project to be approximately $900 million, which reflected the expected costs of inflation over the duration of the project but was not discounted to a present value amount given the nature of the obligation. At September 30, 2018, related liabilities of $862 million and $30 million were recorded in Other long-term liabilities and Accounts payable and accrued liabilities, respectively.

As a result of the subsequent decision in TVA's favor by the Sixth Circuit, as well as the June 2019 consent decree filed in the case brought by TDEC, amounts previously recorded as Other long-term liabilities on an undiscounted basis have been reversed and an ARO in the amount of $667 million has been recorded for the discounted cash flows expected for the closure and post-closure activities related to Gallatin CCR facilities. See Note 11 for additional details.

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

10.  Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements, liabilities for environmental remediation, and liabilities under agreements related to compliance with certain environmental regulations. The table below summarizes the types and amounts of Other long-term liabilities:
Other Long-Term Liabilities
 
At June 30, 2019
 
At September 30, 2018
Interest rate swap liabilities
$
1,454

 
$
1,122

Gallatin coal combustion residual facilities liability

 
862

Capital lease obligations
181

 
178

Currency swap liabilities
157

 
81

EnergyRight® financing obligation
92

 
102

Paradise pipeline financing obligation(1)
80

 
80

Accrued long-term service agreement(1)
69

 
74

Other(1)
193

 
216

Total other long-term liabilities
$
2,226

 
$
2,715

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

Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. As of June 30, 2019, and September 30, 2018, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities was approximately $84 million and $77 million, respectively. See Note 14Derivatives Not Receiving Hedge Accounting TreatmentInterest Rate Derivatives for information regarding the interest rate swap liabilities. As of June 30, 2019, Interest rate swap liabilities increased $332 million as compared to September 30, 2018, primarily due to decreases in forecasted future interest rates resulting in higher mark-to-market values on future expected net cash flows.

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

23


September 30, 2018, related liabilities of $30 million were recorded in Accounts payable and accrued liabilities. As a result of the subsequent decision in TVA’s favor by the Sixth Circuit, as well as the June 2019 consent decree filed in the case brought by TDEC, Gallatin CCR project costs are now recorded in Asset retirement obligations. See Note 9 for information regarding the Gallatin CCR facilities and Note 11 for information regarding Asset retirement obligations.

EnergyRight® Financing Obligation. TVA purchases certain loans receivable from LPCs in association with the EnergyRight® Solutions program. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. The carrying amount of the financing obligation reported in Accounts payable and accrued liabilities for June 30, 2019, and September 30, 2018, was approximately $23 million and $25 million, respectively. See Note 6 for information regarding the associated loans receivable.

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

Accrued Long-Term Service Agreement. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for 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. As of June 30, 2019, and September 30, 2018, related liabilities of $16 million and $30 million, respectively, were recorded in Accounts payable and accrued liabilities.

11.  Asset Retirement Obligations

During the nine months ended June 30, 2019, TVA's total asset retirement obligations ("ARO") liability increased $853 million as a result of recording an ARO for the Gallatin CCR facilities, additions to obligations, revisions in estimates and periodic accretion, partially offset by settlement activity from ongoing ARO projects at TVA facilities. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets.  During the nine months ended June 30, 2019, $108 million of the related non-nuclear regulatory assets were amortized into expense as these amounts were collected in rates. See Note 7. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 15Investment Funds and Note 19ContingenciesDecommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts.
Asset Retirement Obligation Activity(1)
 
Nuclear
 
Non-Nuclear
 
Total
Balance at September 30, 2018
$
2,989

 
$
1,790

 
$
4,779

Settlements
(2
)
 
(56
)
 
(58
)
Revisions in estimate

 
89

 
89

Additional obligation
18

 

 
18

Gallatin CCR

 
667

 
667

Accretion (recorded as regulatory asset)
102

 
35

 
137

Balance at June 30, 2019
$
3,107

 
$
2,525

 
$
5,632

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

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

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


24


12.  Debt and Other Obligations

Debt Outstanding

Total debt outstanding at June 30, 2019, and September 30, 2018, consisted of the following:
Debt Outstanding 
 
At June 30, 2019
 
At September 30, 2018
Short-term debt
 
 
 
Short-term debt, net
$
1,444

 
$
1,216

Current maturities of power bonds
1,030

 
1,032

Current maturities of long-term debt of variable interest entities
39

 
38

Current maturities of notes payable
23

 
46

Total current debt outstanding, net
2,536

 
2,332

Long-term debt
 

 
 

Long-term power bonds(1)
19,249

 
20,300

Long-term debt of variable interest entities, net
1,108

 
1,127

Long-term notes payable

 
23

Unamortized discounts, premiums, issue costs, and other
(134
)
 
(143
)
Total long-term debt, net
20,223

 
21,307

Total outstanding debt
$
22,759

 
$
23,639

Note
(1) Includes net exchange gain from currency transactions of $167 million and $147 million at June 30, 2019, and September 30, 2018, respectively.

Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, 2018, to June 30, 2019:
Debt Securities Activity
 
 
Date
 
Amount(1)
 
Interest Rate
Redemptions/Maturities
 
 
 
 
 
 
electronotes®
 
First Quarter 2019
 
$
1

 
2.65
%
electronotes®
 
Second Quarter 2019
 
1

 
3.48
%
electronotes®
 
Third Quarter 2019
 
2

 
2.89
%
2013 Series A
 
October 2018
 
1,000

 
1.75
%
2009 Series B
 
December 2018
 
1

 
3.77
%
2009 Series B
 
June 2019
 
29

 
3.77
%
Total redemptions/maturities of power bonds
 
 
 
1,034

 


Notes payable
 
 
 
46

 
1.27
%
Debt of variable interest entities
 
 
 
19

 
4.31
%
Total redemptions/maturities of debt
 
 
 
$
1,099

 


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


25


Credit Facility Agreements

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

TVA also has funding available under four long-term revolving credit facilities totaling $2.7 billion: a $150 million credit facility that matures on December 11, 2021, a $500 million credit facility that matures on February 1, 2022, a $1.0 billion credit facility that matures on June 13, 2023, and a $1.0 billion credit facility that matures on September 28, 2023. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At June 30, 2019, and September 30, 2018, there were approximately $1.1 billion and $921 million, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 14Other Derivative Instruments Collateral.

The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:
Summary of Long-Term Credit Facilities
At June 30, 2019
 
Facility Limit
 
Letters of Credit Outstanding
 
Cash Borrowings
 
Availability
Maturity Date
 
 
 
 
 
 
 
 December 2021
$
150

 
$
38

 
$

 
$
112

 February 2022
500

 
500

 

 

 June 2023
1,000

 
242

 

 
758

 September 2023
1,000

 
310

 

 
690

Total
$
2,650

 
$
1,090

 
$

 
$
1,560


Lease/Leasebacks
    
TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking combustion turbine units ("CTs") as well as certain qualified technological equipment and software (collectively, "QTE"). 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 June 30, 2019, and September 30, 2018, the outstanding leaseback obligations related to the remaining CTs and QTE were $263 million and $301 million, respectively. In March 2019, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and TVA had previously acquired the equity interests related to these transactions. These transactions were terminated in July 2019. Final rent payments are scheduled to be made under the remaining CT lease/leaseback transactions on various dates from May 2020 to January 2022. TVA has already acquired the equity interests related to transactions involving eight of these CTs and will have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts.

13.  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 June 30, 2019 and 2018, TVA reclassified $13 million and $43 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense. During the nine months ended June 30, 2019 and 2018, TVA reclassified $17 million and $13 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense.


26


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 for a schedule of regulatory assets and liabilities.  See Note 14 for a discussion of the recognition in AOCI of gains and losses associated with certain derivative contracts. See Note 15 for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities.  See Note 18 for a discussion of the regulatory accounting related to components of TVA's benefit plans.
    
14.  Risk Management Activities and Derivative Transactions

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

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance Sheets 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)
 
 
 
 
 
 
Three Months Ended
June 30
 
Nine Months Ended
June 30
 
Derivatives in Cash Flow Hedging Relationship
 
Objective of Hedge Transaction
 
Accounting for Derivative
Hedging Instrument
 
2019
 
2018
 
2019
 
2018
 
Currency swaps
 
To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)
 
Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction
 
$
(47
)
 
$
(65
)
 
$
(76
)
 
$
17

 
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income to Interest Expense
(1)
 
 
Three Months Ended
June 30
 
Nine Months Ended
June 30
 
Derivatives in Cash Flow Hedging Relationship
 
2019
 
2018
 
2019
 
2018
 
Currency swaps
 
$
(13
)
 
$
(43
)
 
$
(17
)
 
$
(13
)
 
Note
(1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $36 million of gains from AOCI to interest expense within the next 12 months to offset amounts anticipated to be recorded in interest expense related to net exchange gain on the debt.

27


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





 
Three Months Ended
June 30
 
Nine Months Ended
June 30
 
Derivative Type
 
Objective of Derivative
 
Accounting for Derivative Instrument
 
2019
 
2018
 
2019
 
2018
 
Interest rate swaps
 
To fix short-term debt variable rate to a fixed rate (interest rate risk)
 
Mark-to-market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses are recognized in interest expense when incurred during the settlement period
 
$
(19
)
 
$
(21
)
 
$
(59
)
 
$
(68
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
under FTP
 
To protect against fluctuations in market prices of purchased commodities (price risk)
 
Mark-to-market gains and losses are recorded as regulatory assets or liabilities

Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production
 

 

 

 
(8
)
 
Note
(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three and nine months ended June 30, 2019 and 2018.
Fair Values of TVA Derivatives
 
At June 30, 2019
 
At September 30, 2018
Derivatives That Receive Hedge Accounting Treatment:
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Currency swaps
 
 
 
 
 
 
 
£200 million Sterling
$
(80
)
 
Accounts payable and accrued liabilities $(5); Other long-term liabilities $(75)
 
$
(67
)
 
Accounts payable and
accrued liabilities $(5); Other long-term liabilities $(62)
£250 million Sterling
(44
)
 
Accounts payable and accrued liabilities $(5); Other long-term liabilities $(39)
 
(12
)
 
Accounts payable and accrued liabilities $(5); Other long-term liabilities $(7)
£150 million Sterling
(46
)
 
Accounts payable and accrued liabilities $(3); Other long-term liabilities $(43)
 
(15
)
 
Accounts payable and
accrued liabilities $(3); Other long-term liabilities $(12)
 
 
 
 
 
 
 
 
Derivatives That Do Not Receive Hedge Accounting Treatment:
 
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Interest rate swaps
 
 
 
 
 
 
 
$1.0 billion notional
$
(1,107
)
 
Accounts payable and
accrued liabilities $(60);
Other long-term liabilities
$(1,047)
 
$
(878
)
 
Accounts payable and
accrued liabilities $(56); Other long-term liabilities $(822)
$476 million notional
(425
)
 
Accounts payable and
accrued liabilities $(22);
Other long-term liabilities
$(403)
 
(317
)
 
Accounts payable and
accrued liabilities $(20);
Other long-term liabilities
$(297)
$42 million notional
(6
)
 
Accounts payable and
accrued liabilities $(2); Other long-term liabilities $(4)
 
(4
)
 
Accounts payable and
accrued liabilities $(1); Other long-term liabilities $(3)
Commodity contract derivatives
(22
)
 
Other current assets $14; Other long-term assets $6; Other long-term liabilities $(9); Accounts payable and accrued liabilities $(33)
 
60

 
Other current assets $41; Other long-term assets $31; Other long-term liabilities $(8); Accounts payable and accrued liabilities $(4)


28


Cash Flow Hedging Strategy for Currency Swaps

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

When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability and related accrued interest are included in Long-term debt, net 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 in TVA's Consolidated Statements of Operations. For the three months ended June 30, 2019 and 2018, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $159 million and unrealized gains of $56 million, respectively. For the nine months ended June 30, 2019 and 2018, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $369 million and unrealized gains of $227 million, respectively.

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all such contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At June 30, 2019, TVA's coal and natural gas contract derivatives both had terms of up to three years.
Commodity Contract Derivatives 
 
At June 30, 2019
 
At September 30, 2018
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
 
Number of Contracts
 
Notional Amount
 
Fair Value (MtM)
Coal contract derivatives
8
 
12 million tons
 
$
19

 
13
 
20 million tons
 
$
58

Natural gas contract derivatives
48
 
359 million mmBtu
 
$
(41
)
 
61
 
359 million mmBtu
 
$
2


Derivatives Under FTP. TVA has suspended its FTP and no longer uses financial instruments to hedge risks related to commodity prices. Prior to the suspension of the FTP, TVA deferred all FTP unrealized gains (losses) as regulatory liabilities (assets) and recorded only realized gains or losses to match the delivery period of the underlying commodity. TVA did not experience any unrealized gains and losses related to the FTP at June 30, 2019 or September 30, 2018. TVA experienced the following realized losses related to the FTP during the periods set forth in the table below:
Financial Trading Program Realized Gains (Losses)
 
 
Three Months Ended
June 30
 
Nine Months Ended
June 30
 
 
 
2019
 
2018
 
2019
 
2018
 
Decrease (increase) in fuel expense
 
 
 
 
 
 
 
 
 
Natural gas
 
$

 
$

 
$

 
$
(6
)
 
Decrease (increase) in purchased power expense
 
 
 
 
 
 
 
 
 
Natural gas
 

 

 

 
(2
)
 

29


Offsetting of Derivative Assets and Liabilities

The amounts of TVA's derivative instruments as reported in the Consolidated Balance Sheets at June 30, 2019, and September 30, 2018, are shown in the table below:
Derivative Assets and Liabilities
 
At June 30, 2019
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Balance Sheet(1)
 
Net Amounts of Assets/Liabilities Presented in the Balance Sheet(2)
Assets
 
 
 
 
 
Commodity derivatives not subject to master netting or similar arrangement
$
20

 
$

 
$
20

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Currency swaps(3)
$
170

 
$

 
$
170

Interest rate swaps(3)
1,538

 

 
1,538

Total derivatives subject to master netting or similar arrangement
1,708