NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except where noted)
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| Note | Page No. |
| 1 | | Summary of Significant Accounting Policies | |
| 2 | | Impact of New Accounting Standards and Interpretations | |
| 3 | | Accounts Receivable, Net | |
| 4 | | Inventories, Net | |
| 5 | | Other Current Assets | |
| 6 | | Net Completed Plant | |
| 7 | | Plant Closures | |
| 8 | | Leases | |
| 9 | | Other Long-Term Assets | |
| 10 | | Regulatory Assets and Liabilities | |
| 11 | | Variable Interest Entities | |
| 12 | | Other Long-Term Liabilities | |
| 13 | | Asset Retirement Obligations | |
| 14 | | Debt and Other Obligations | |
| 15 | | Risk Management Activities and Derivative Transactions | |
| 16 | | Fair Value Measurements | |
| 17 | | Revenue | |
| 18 | | Other Income, Net | |
| 19 | | Supplemental Cash Flow Information | |
| 20 | | Benefit Plans | |
| 21 | | Commitments and Contingencies | |
| 22 | | Related Parties | |
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1. Summary of Significant Accounting Policies
General
The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States ("U.S.") that was created in 1933 by federal legislation in response to a proposal by President Franklin D. Roosevelt. TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern U.S., and sell the electricity generated at the facilities TVA operates. Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of approximately 10 million people.
TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system and public lands to provide recreational opportunities, adequate water supply, improved water quality, cultural and natural resource protection, and economic development. TVA performs these management duties in cooperation with other federal and state agencies that have jurisdiction and authority over certain aspects of the river system. In addition, the TVA Board of Directors ("TVA Board") has established two councils — the Regional Resource Stewardship Council and the Regional Energy Resource Council — to advise TVA on its stewardship activities in the Tennessee Valley and its energy resource activities.
The power program has historically been separate and distinct from the stewardship programs. It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, or other evidences of indebtedness (collectively, "Bonds"). Although TVA does not currently receive Congressional appropriations, it is required to make annual payments to the United States Department of the Treasury ("U.S. Treasury") as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not
provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.
Power rates are established by the TVA Board as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee ("TVA Act"). The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents"); debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business. TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment with the 2014 payment; therefore, this repayment obligation is no longer a component of rate setting. In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.
Fiscal Year
TVA's fiscal year ends September 30. Years (2022, 2021, 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 TVA is no longer considered to be a regulated entity, then costs would be required to be written off. 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
The accompanying consolidated financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA and variable interest entities ("VIEs") of which TVA is the primary beneficiary. See Note 11 — Variable Interest Entities. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements. Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses, reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are considered critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows.
Cash, Cash Equivalents, and Restricted Cash
Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets on the Consolidated Balance Sheets. Restricted cash and cash equivalents include cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to
compliance with certain environmental regulations. See Note 21 — Commitments and Contingencies — Legal Proceedings — Environmental Agreements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:
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Cash, Cash Equivalents, and Restricted Cash At September 30 (in millions) |
| | 2022 | | 2021 |
| Cash and cash equivalents | $ | 500 | | | $ | 499 | |
| Restricted cash and cash equivalents included in Other long-term assets | 20 | | | 19 | |
| Total cash, cash equivalents, and restricted cash | $ | 520 | | | $ | 518 | |
Allowance for Uncollectible Accounts
TVA recognizes an allowance that reflects the current estimate for credit losses expected to be incurred over the life of the financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The appropriateness of the allowance is evaluated at the end of each reporting period.
To determine the allowance for trade receivables, TVA considers historical experience and other currently available information, including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements by the due date. TVA's corporate credit department also performs an assessment of the financial condition of customers and the credit quality of the receivables. In addition, TVA reviews other reasonable and supportable forecasts to determine if the allowance for uncollectible amounts should be further adjusted in accordance with the accounting guidance for Current Expected Credit Losses.
To determine the allowance for loans receivables, TVA aggregates loans into the appropriate pools based on the existence of similar risk characteristics such as collateral types and internal assessed credit risks. In situations where a loan exhibits unique risk characteristics and is no longer expected to experience similar risks to the rest of its pool, the loan will be evaluated separately. TVA derives an annual loss rate based on historical loss and then adjusts the rate to reflect TVA's consideration of available information on current conditions and reasonable and supportable future forecasts. This information may include economic and business conditions, default trends, and other internal and external factors. For periods beyond the reasonable and supportable forecast period, TVA uses the current calculated long-term average historical loss rate for the remaining life of the loan portfolio.
The allowance for uncollectible accounts was less than $1 million at both September 30, 2022 and 2021, for trade accounts receivable. Additionally, loans receivable of $105 million and $99 million at September 30, 2022 and 2021, respectively, are included in Accounts receivable, net and Other long-term assets, for the current and long-term portions, respectively. Loans receivables are reported net of allowances for uncollectible accounts of $3 million and $4 million at September 30, 2022 and 2021, respectively.
Revenues
TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to power sales invoiced and recorded during the month, TVA accrues estimated unbilled revenues for power sales provided to five customers whose billing date occurs prior to the end of the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA's overall mission is recorded in Other revenue. Revenues that are not related to the overall mission are recorded in Other income, net.
Inventories
Certain Fuel, Materials, and Supplies. Materials and supplies inventories are valued using an average unit cost method. A new average cost is computed after each inventory purchase transaction, and inventory issuances are priced at the latest moving weighted average unit cost. Coal, fuel oil, and natural gas inventories are valued using an average cost method. A new weighted average cost is computed monthly, and monthly issues are priced accordingly.
Renewable Energy Certificates. TVA accounts for Renewable Energy Certificates ("RECs") using the specific identification cost method. RECs that are acquired through power purchases are recorded as inventory and charged to purchased power expense when the RECs are subsequently used or sold. TVA assigns a value to the RECs at the inception of the power purchase arrangement using a relative standalone selling price approach. RECs created through TVA-owned asset generation are recorded at zero cost.
Emission Allowances. TVA accounts for emission allowances using the specific identification cost method. Allowances that are acquired through third party purchases are recorded as inventory at cost and charged to operating expense based on tons emitted during the respective compliance periods.
Allowance for Inventory Obsolescence. TVA reviews materials and supplies inventories by category and usage on a periodic basis. Each category is assigned a probability of becoming obsolete based on the type of material and historical usage data. TVA has a fleet-wide inventory management policy for each generation type. Based on the estimated value of the inventory, TVA adjusts its allowance for inventory obsolescence.
Property, Plant, and Equipment, and Depreciation
Property, Plant, and Equipment. Additions to plant are recorded at cost, which includes direct and indirect costs. The cost of current repairs and minor replacements is charged to operating expense. Nuclear fuel, which is included in Property, plant, and equipment, is valued using the average cost method for raw materials and the specific identification method for nuclear fuel in a reactor. Amortization of nuclear fuel in a reactor is calculated on a units-of-production basis and is included in fuel expense. When property, plant, and equipment is retired, accumulated depreciation is charged for the original cost of the assets. Gains or losses are only recognized upon the sale of land or an entire operating unit. TVA capitalizes certain costs incurred in connection with developing or obtaining internal-use software. Capitalized software costs are included in Property, plant, and equipment on the Consolidated Balance Sheets and are generally amortized over seven years.
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 that are updated approximately every five years. During the first quarter of 2022, TVA implemented a new depreciation study related to its completed plant. The new study included a decline in the service life estimates of TVA’s coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. Implementation of the study resulted in an estimated increase to depreciation and amortization expense of approximately $345 million during 2022. This estimate represents the effect of using the new depreciation rates on the property, plant, and equipment balances at September 30, 2021, and does not include any potential impact from additions to or retirements of net completed plant, that occurred since September 30, 2021.
Depreciation expense for the years ended September 30, 2022, 2021, and 2020 was $1.8 billion, $1.4 billion, and $1.6 billion, respectively. Depreciation expense expressed as a percentage of the average annual depreciable completed plant was 2.98 percent for 2022, 2.28 percent for 2021, and 2.74 percent for 2020. Average depreciation rates by asset class are as follows:
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Property, Plant, and Equipment Depreciation Rates
At September 30
(percent) |
| 2022 | | 2021 | | 2020 |
| Asset Class | | | | | |
| Nuclear | 2.72 | | | 2.38 | | | 2.38 | |
Coal-fired(1) | 4.27 | | | 1.95 | | | 3.62 | |
| Hydroelectric | 1.85 | | | 1.60 | | | 1.60 | |
| Gas and oil-fired | 3.38 | | | 2.98 | | | 3.04 | |
| Transmission | 1.51 | | | 1.34 | | | 1.34 | |
| Other | 3.64 | | | 7.12 | | | 7.26 | |
Note
(1) The rates include the acceleration of depreciation related to retiring certain coal-fired units and potentially retiring the remainder of the coal-fired fleet by 2035. See Note 7 — Plant Closures.
Reacquired Rights. Property, plant, and equipment includes intangible reacquired rights, net of amortization, of $178 million and $184 million as of September 30, 2022 and 2021, respectively, related to the purchase of residual interests from lease/leaseback agreements of certain combustion turbine units ("CTs"). Reacquired rights are amortized over the estimated useful lives of the underlying CTs which range from 33 to 35 years. Amortization expense was $6 million for 2022 and $8 million for the years 2021 and 2020, and accumulated amortization at September 30, 2022 and 2021 totaled $42 million and $36 million,
respectively. At September 30, 2022, the estimated aggregate amortization expense (in millions) for each of the next five years and thereafter is shown below:
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| | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Reacquired Rights | | $ | 6 | | | $ | 6 | | | $ | 6 | | | $ | 6 | | | $ | 6 | | | $ | 148 | |
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Impairment of Assets. TVA evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For long-lived assets, TVA bases its evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, regulatory approval and ability to set rates at levels that allow for recoverability of the assets, and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, TVA determines whether an impairment has occurred based on an estimate of undiscounted cash flows attributable to the asset as compared with the carrying value of the asset. If an impairment has occurred, the amount of the impairment recognized is measured as the excess of the asset's carrying value over its fair value. Additionally, TVA regularly evaluates construction projects. If the project is canceled or deemed to have no future economic benefit, the project is written off as an asset impairment or, upon TVA Board approval, reclassified as a regulatory asset and amortized over the Board-approved period. See Note 7 — Plant Closures.
Leases
TVA recognizes a lease asset and lease liability for leases with terms of greater than 12 months. Lease assets represent TVA's right to use an underlying asset for the lease term, and lease liabilities represent TVA's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. TVA has certain lease agreements that include variable lease payments that are based on energy production levels. These variable lease payments are not included in the measurement of the lease assets or lease liabilities but are recognized in the period in which the expenses are incurred.
While not specifically structured as leases, certain power purchase agreements ("PPAs") are deemed to contain a lease of the underlying generating units when the terms convey the right to control the use of the assets. Amounts recorded for these leases are generally based on the amount of the scheduled capacity payments due over the remaining terms of the PPAs, the terms of which vary. The total lease obligations included in Accounts payable and accrued liabilities and Other long-term liabilities and Finance lease liabilities related to these agreements were $425 million and $133 million for finance and operating leases, respectively, at September 30, 2022. The total lease obligations included in Accounts payable and accrued liabilities and Other long-term liabilities and Finance lease liabilities related to these agreements were $464 million and $143 million for finance and operating leases, respectively, at September 30, 2021.
TVA has agreements with lease and non-lease components and has elected to account for the components separately. Consideration is allocated to lease and non-lease components generally based on relative standalone selling prices.
TVA has lease agreements which include options for renewal and early termination. The intent to renew a lease varies depending on the lease type and asset. Renewal options that are reasonably certain to be exercised are included in the lease measurements. The decision to terminate a lease early is dependent on various economic factors. No termination options have been included in TVA's lease measurements.
Leases with an initial term of 12 months or less, which do not include an option to extend the initial term of the lease to greater than 12 months that TVA is reasonably certain to exercise, are not recorded on the Consolidated Balance Sheets at September 30, 2022.
Operating leases are recognized on a straight-line basis over the term of the lease agreement. Rent expense associated with short-term leases and variable leases is recorded in Operating and maintenance expense, Fuel expense, or Purchased power expense on the Consolidated Statements of Operations. Expenses associated with finance leases result in the separate presentation of interest expense on the lease liability and amortization expense of the related lease asset on the Consolidated Statements of Operations.
Decommissioning Costs
TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets. These obligations relate to fossil fuel-fired generating plants, nuclear generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. Activities involved with retiring these assets could include decontamination and demolition of structures, removal and disposal of wastes, and site restoration. Revisions to the forecasted costs of decommissioning activities are made whenever factors indicate that the timing or amounts of estimated cash flows have changed materially. Studies are updated for both nuclear and non-nuclear decommissioning costs at least every five years. Any accretion or depreciation expense related to these liabilities and assets is charged to a regulatory asset. See Note 10 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Non-Nuclear Decommissioning Costs and Note 13 —
Asset Retirement Obligations.
Down-blend Offering for Tritium
TVA, the U.S. Department of Energy ("DOE"), and certain nuclear fuel contractors have entered into agreements, referred to as the Down-blend Offering for Tritium ("DBOT"), that provide for the production, processing, and storage of low-enriched uranium that is to be made using surplus DOE highly enriched uranium and other uranium. Low-enriched uranium can be fabricated into fuel for use in a nuclear power plant. Production of the low-enriched uranium began in 2019 and is contracted to continue through September 2025. Contract activity will consist of storage and flag management. Flag management ensures that the uranium is of U.S. origin, free from foreign obligations, and unencumbered by policy restrictions, so that it can be used in connection with the production of tritium. Under the terms of the interagency agreement between the DOE and TVA, the DOE will reimburse TVA for a portion of the costs of converting the highly enriched uranium to low-enriched uranium. Since 2019, TVA has received $188 million in reimbursements from the DOE. At September 30, 2022, TVA recorded $9 million in Accounts receivable, net related to this agreement.
Investment Funds
Investment funds consist primarily of trust funds designated to fund decommissioning requirements (see Note 21 — Commitments and Contingencies — Decommissioning Costs), the Supplemental Executive Retirement Plan ("SERP") (see Note 20 — Benefit Plans — Overview of Plans and Benefits — Supplemental Executive Retirement Plan), and the Deferred Compensation Plan ("DCP"). The Nuclear Decommissioning Trust ("NDT") holds funds primarily for the ultimate decommissioning of TVA's nuclear power plants. The Asset Retirement Trust ("ART") holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance. The NDT, ART, SERP, and DCP funds are all classified as trading.
Insurance
Although TVA uses private companies to administer its healthcare plans for eligible active and retired employees not covered by Medicare, TVA does not purchase health insurance. Third-party actuarial specialists assist TVA in determining certain liabilities for self-insured claims. TVA recovers the costs of claims through power rates and through adjustments to the participants' contributions to their benefit plans. These liabilities are included in Other long-term liabilities on the Consolidated Balance Sheets.
The Federal Employees' Compensation Act ("FECA") governs liability to employees for service-connected injuries. TVA purchases excess workers' compensation insurance above a self-insured retention.
In addition to excess workers' compensation insurance, TVA purchases property and liability insurance for nuclear assets and operations. See Note 21 — Commitments and Contingencies — Nuclear Insurance. TVA also purchases liability insurance and property insurance for certain conventional (non-nuclear) assets, and other insurance policies when commercially feasible.
The insurance policies are subject to the terms and conditions of the specific policy, including deductibles or self-insured retentions. To the extent insurance would not provide either a partial or total recovery of the costs associated with a loss, TVA would have to recover any such costs through other means, including through power rates.
Research and Development Costs
Research and development costs are expensed when incurred. TVA's research programs include those related to power delivery technologies, emerging technologies (clean energy, renewables, distributed resources, and energy efficiency), technologies related to generation (fossil fuel, nuclear, and hydroelectric), and environmental technologies.
Tax Equivalents
TVA is not subject to federal income taxation. In addition, neither TVA nor its property, franchises, or income is subject to taxation by states or their subdivisions. The TVA Act requires TVA to make payments to states and counties in which TVA conducts its power operations and in which TVA has acquired power properties previously subject to state and local taxation. The total amount of these payments is five percent of gross revenues from sales of power during the preceding year, excluding sales or deliveries to other federal agencies and off-system sales with other utilities, with a provision for minimum payments under certain circumstances. TVA calculates tax equivalent expense by subtracting the prior year fuel cost-related tax equivalent regulatory asset or liability from the payments made to the states and counties during the current year and adding back the current year fuel cost-related tax equivalent regulatory asset or liability. Fuel cost-related tax equivalent expense is recognized in the same accounting period in which the fuel cost-related revenue is recognized.
Maintenance Costs
TVA records maintenance costs and repairs related to its property, plant, and equipment on the Consolidated Statements of Operations as they are incurred except for the recording of certain regulatory assets for retirement and removal costs.
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 2022:
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| Lessor-Certain Leases with Variable Lease Payments |
| Description | This guidance amends the lessor lease classification for leases that have variable lease payments that are not based on an index or rate. If the lease meets the criteria for classification as either (1) a sale-type or (2) a direct finance lease, and application of the lease guidance would result in recognition of a day-one selling loss, then the lease should be classified as an operating lease.
There are two transition methods provided by the guidance for entities that have adopted the standard:
•Retrospective application to leases that commenced or were modified after the beginning of the period in which the standard was adopted, or •Prospective application to leases that commence or are modified subsequent to the date that amendments in the guidance are first applied. |
| Effective Date for TVA | October 1, 2021 |
| Effect on the Financial Statements or Other Significant Matters | TVA adopted this standard on a prospective basis. Adoption of this standard did not have a material
impact on TVA's financial condition, results of operations, or cash flows. |
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| Reference Rate Reform |
| Description | This guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rates ("SOFR"). |
| Effective Date for TVA | December 31, 2021 |
| Effect on the Financial Statements or Other Significant Matters | TVA had interest rate swap contracts that totaled a notional value of $1.5 billion at December 31, 2021, that were indexed to LIBOR. TVA adopted the International Swaps and Derivative Association’s ("ISDA’s") LIBOR fallback protocol for interest rate swaps prior to December 31, 2021. Under this protocol, U.S. dollar LIBOR transactions would fall back to the SOFR upon cessation of the related LIBOR publication. The interest rate swap contracts did not receive hedge accounting treatment, and therefore TVA did not elect any optional expedients for this modification. TVA does not have any other significant contracts, including lease agreements, that include payments indexed to LIBOR. Therefore, the change of reference rate did not have a material impact on TVA’s financial condition, results of operations, or cash flows. |
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The following accounting standards have been issued but as of September 30, 2022, were not effective and had not been adopted by TVA:
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| Accounting for Contract Assets and Contract Liabilities from Contracts with Customers |
| Description | This guidance requires an entity (acquirer) to recognize and measure contract assets and contract
liabilities acquired in a business combination in accordance with revenue with customers. It is
expected that an acquirer will generally recognize and measure acquired contract assets and contract
liabilities in a manner consistent with how the acquiree recognized and measured contract assets and
contract liabilities in the acquiree’s financial statement. The entity should apply the standard prospectively to business combinations occurring on or after the effective date of the standard. |
| Effective Date for TVA | This new standard is effective for TVA’s interim and annual reporting periods beginning October 1,
2023. While early adoption is permitted, TVA does not currently plan to adopt this 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 its financial condition,
results of operations, or cash flows. |
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| Troubled Debt Restructurings and Vintage Disclosures |
| Description | This guidance eliminates the recognition and measurement guidance on troubled debt restructuring for
creditors that have adopted Financial Instruments-Credit Losses and requires enhanced disclosures
about loan modifications for borrowers experiencing financial difficulty. Additionally, the guidance
requires public business entities to present current-period gross write-offs by year of origination in their
vintage disclosures. The entity should apply the standard prospectively except for the transition method related to the recognition and measurement of troubled debt restructuring. For the transition method, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. |
| Effective Date for TVA | This new standard is effective for TVA’s interim and annual reporting periods beginning October 1,
2023. While early adoption is permitted, TVA does not currently plan to adopt this 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 its financial condition,
results of operations, or cash flows. |
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3. Accounts Receivable, Net
Accounts receivable primarily consist of amounts due from customers for power sales. The table below summarizes the types and amounts of TVA's accounts receivable:
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Accounts Receivable, Net At September 30 (in millions) |
| | 2022 | | 2021 |
| Power receivables | $ | 1,899 | | | $ | 1,480 | |
| Other receivables | 108 | | | 86 | |
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Accounts receivable, net(1) | $ | 2,007 | | | $ | 1,566 | |
Note
(1) Allowance for uncollectible accounts was less than $1 million at both September 30, 2022 and 2021, and therefore is not represented in the table above.
4. Inventories, Net
The table below summarizes the types and amounts of TVA's inventories:
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Inventories, Net At September 30 (in millions) |
| | 2022 | | 2021 |
| Materials and supplies inventory | $ | 808 | | | $ | 775 | |
| Fuel inventory | 303 | | | 198 | |
| Renewable energy certificates/emissions allowance inventory, net | 18 | | | 12 | |
| Allowance for inventory obsolescence | (57) | | | (35) | |
| Inventories, net | $ | 1,072 | | | $ | 950 | |
Fuel inventory increased $105 million at September 30, 2022, as compared to September 30, 2021, primarily due to an increase in coal inventory of $58 million and an increase in natural gas inventory of $32 million. Coal inventory increased primarily due to higher costs of fuel, including transportation costs, as a result of continued supply constraints driven by both domestic and export demand, limited production capacity, and market volatility. Coal inventory also increased over the prior year due to coal conservation efforts and an increase in inventory levels as TVA prepares for winter inventory needs. Natural gas inventory increased primarily due to higher gas prices, as well as an increase in the amount of stored gas to mitigate fuel price volatility.
5. Other Current Assets
Other current assets consisted of the following:
| | | | | | | | | | | |
Other Current Assets At September 30 (in millions) |
| | 2022 | | 2021 |
| Commodity contract derivative assets | $ | 172 | | | $ | 210 | |
| Other | 85 | | | 77 | |
| Other current assets | $ | 257 | | | $ | 287 | |
Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical
delivery of the contracted quantity of the commodity. TVA also reinstated the Financial Hedging Program ("FHP") (formerly the
Financial Trading Program, which was suspended in 2014) in December 2021, and hedging activity began under the program in
the second quarter of 2022. Commodity contract derivative assets classified as current include deliveries or settlements that will
occur within 12 months or less. See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Commodity Derivatives under the FHP for a discussion of TVA's commodity contract derivatives.
6. Net Completed Plant
Net completed plant consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Completed Plant At September 30 (in millions) |
| | 2022 | | 2021 |
| | Cost | | Accumulated Depreciation | |
Net | | Cost | | Accumulated Depreciation | | Net |
Coal-fired(1) | $ | 18,145 | | | $ | 13,649 | | | $ | 4,496 | | | $ | 19,319 | | | $ | 14,357 | | | $ | 4,962 | |
| Gas and oil-fired | 6,112 | | | 1,957 | | | 4,155 | | | 6,076 | | | 1,824 | | | 4,252 | |
| Nuclear | 26,629 | | | 12,928 | | | 13,701 | | | 26,024 | | | 12,632 | | | 13,392 | |
| Transmission | 8,919 | | | 3,301 | | | 5,618 | | | 8,597 | | | 3,215 | | | 5,382 | |
| Hydroelectric | 3,987 | | | 1,192 | | | 2,795 | | | 3,525 | | | 1,135 | | | 2,390 | |
| Other electrical plant | 1,724 | | | 807 | | | 917 | | | 1,943 | | | 1,103 | | | 840 | |
| | | | | | | | | | | |
| Multipurpose dams | 900 | | | 396 | | | 504 | | | 900 | | | 388 | | | 512 | |
| Other stewardship | 26 | | | 9 | | | 17 | | | 27 | | | 9 | | | 18 | |
| | | | | | | | | | | |
| Total | $ | 66,442 | | | $ | 34,239 | | | $ | 32,203 | | | $ | 66,411 | | | $ | 34,663 | | | $ | 31,748 | |
Note
(1) TVA recognized accelerated depreciation as a result of the decision to idle or retire certain units and the potential retirement of the remainder of the coal-fired fleet by 2035. See Note 7 — Plant Closures.
7. Plant Closures
Background
TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. Based on results of assessments presented to the TVA Board in 2019, the retirement of Bull Run Fossil Plant ("Bull Run") by December 2023 was approved. In addition, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035, and that evaluation includes environmental reviews, public input, and TVA Board approval. Due to these evaluations, certain planning assumptions were updated, and their financial impacts are discussed below.
Financial Impact
TVA's policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates. As a result of TVA's decision to accelerate the retirement of Bull Run, TVA has recognized a cumulative $482 million of accelerated depreciation since the second quarter of 2019. Of this amount, $140 million, $136 million, and $125 million were recognized for the years ended September 30, 2022, 2021, and 2020, respectively.
In addition, service lives for Cumberland Fossil Plant ("Cumberland"), Gallatin Fossil Plant ("Gallatin"), Kingston Fossil Plant ("Kingston"), and Shawnee Fossil Plant ("Shawnee") were shortened in a new depreciation study implemented during the first quarter of 2022 to reflect current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. As a result, TVA recognized an estimated $339 million of additional depreciation related to these four coal-fired plants during the year ended September 30, 2022. This estimate represents the effect of using the new depreciation rates on the property, plant, and equipment balances at September 30, 2021, and does not include any potential impact from additions to or retirements of net completed plant, that occurred since September 30, 2021.
For the years ended September 30, 2022, 2021, and 2020, respectively, TVA also recognized $22 million, $4 million, and $13 million in Operating and maintenance expense related to additional inventory reserves and project write-offs for the coal-fired fleet, including Bull Run.
8. Leases
The following table provides information regarding the presentation of leases on the Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 (in millions) |
| | 2022 | | 2021 |
| Assets | | | | |
| Operating | Operating lease assets, net of amortization | $ | 155 | | | $ | 165 | |
| Finance | Finance leases | 630 | | | 692 | |
| Total lease assets | | $ | 785 | | | $ | 857 | |
| | | | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Accounts payable and accrued liabilities | $ | 59 | | | $ | 40 | |
| Finance | Accounts payable and accrued liabilities | 59 | | | 60 | |
| Non-current | | | | |
| Operating | Other long-term liabilities | 93 | | | 122 | |
| Finance | Finance lease liabilities | 628 | | | 687 | |
| Total lease liabilities | | $ | 839 | | | $ | 909 | |
TVA's leases consist primarily of railcars, equipment, real estate/land, power generating facilities, and gas pipelines. TVA's leases have various terms and expiration dates remaining from less than one year to approximately 24 years. The components of lease costs were as follows:
| | | | | | | | | | | | | | | | | | | |
Lease Costs For the years ended September 30 (in millions) |
| 2022 | | 2021 | | 2020 | | |
Operating lease costs(1) | $ | 56 | | | $ | 52 | | | $ | 84 | | | |
Variable lease costs(1) | 78 | | | 75 | | | 75 | | | |
Short-term lease costs(1) | 26 | | | 12 | | | 7 | | | |
| Finance lease costs | | | | | | | |
Amortization of lease assets(2) | 58 | | | 51 | | | 15 | | | |
Interest on lease liabilities(3)(4) | 42 | | | 39 | | | 33 | | | |
| Total finance lease costs | 100 | | | 90 | | | 48 | | | |
| Total lease costs | $ | 260 | | | $ | 229 | | | $ | 214 | | | |
Notes
(1) Costs are included in Operating and maintenance expense, Fuel expense, Purchased power expense, and Tax equivalents expense on the Consolidated Statements of Operations.
(2) Expense is included in Depreciation and amortization expense on the Consolidated Statements of Operations.
(3) Expense is included in Interest expense on the Consolidated Statements of Operations.
(4) Certain finance leases receive regulatory accounting treatment and are reclassified to Fuel expense and Purchased power expense.
TVA's variable lease costs are primarily related to renewable energy purchase agreements that require TVA to purchase all output from the underlying facility. Payments under those agreements are solely based on the actual output over the lease term. Certain TVA lease agreements contain renewal options. Those renewal options that are reasonably certain to be exercised are included in the lease measurements.
The following table contains additional information with respect to cash and non-cash activities related to leases:
| | | | | | | | | | | | | | | | | |
Amounts Recognized on TVA's Consolidated Statements of Cash Flows For the years ended September 30 (in millions) |
| 2022 | | 2021 | | 2020 |
| Operating cash flows for operating leases | $ | 57 | | | $ | 53 | | | $ | 85 | |
| Operating cash flows for finance leases | 42 | | | 39 | | | 33 | |
| Financing cash flows for finance leases | 60 | | | 52 | | | 15 | |
| | | | | |
| Lease assets obtained in exchange for lease obligations (non-cash) | | | | | |
Operating leases(1) | $ | 43 | | | $ | (22) | | | $ | 110 | |
| Finance leases | — | | | 233 | | | 394 | |
Note
(1) Amount for 2021 represents a non-cash reduction due to a lease that was amended during the fiscal year resulting in derecognition of the operating lease asset and obligation upon remeasurement.
TVA has certain finance leases under PPAs under which the present value of the minimum lease payments exceeds the fair value of the related lease asset at the date of measurement. This resulted in an interest rate that was higher than TVA's incremental borrowing rate. The weighted average remaining lease term in years and the weighted average discount rate for TVA's operating and financing leases were as follows:
| | | | | | | | | | | |
Weighted Averages At September 30 |
| 2022 | | 2021 |
| Weighted average remaining lease terms | | | |
| Operating leases | 3 years | | 5 years |
| Finance leases | 11 years | | 12 years |
| | | |
Weighted average discount rate(1) | | | |
| Operating leases | 1.5% | | 1.5% |
| Finance leases | 17.8% | | 17.7% |
Note
(1) The discount rate is calculated using the rate implicit in a lease if it is readily determinable. If the rate used by the lessor is not readily determinable, TVA uses its incremental borrowing rate as permitted by accounting guidance. The incremental borrowing rate is influenced by TVA's credit rating and lease term and as such may differ for individual leases, embedded leases, or portfolios of leased assets.
The following table presents maturities of lease liabilities and a reconciliation of the undiscounted cash flows to lease liabilities at September 30, 2022:
| | | | | |
Future Minimum Lease Payments Minimum payments due at September 30, 2022 (in millions) |
| Operating leases | |
| 2023 | $ | 61 | |
| 2024 | 43 | |
| 2025 | 35 | |
| 2026 | 10 | |
| 2027 | 2 | |
| Thereafter | 5 | |
| Minimum annual payments | 156 | |
| Less: present value discount | (4) | |
| Operating present value of net minimum lease payments | $ | 152 | |
| |
| Finance leases | |
| 2023 | $ | 112 | |
| 2024 | 107 | |
| 2025 | 106 | |
| 2026 | 105 | |
| 2027 | 104 | |
| Thereafter | 552 | |
| Minimum annual payments | 1,086 | |
| Less: amount representing interest | (399) | |
| Finance present value of net minimum lease payments | $ | 687 | |
TVA has entered into five PPAs with renewable resource providers for solar generation and rights to charge and discharge battery energy storage systems. The systems are considered a lease component in these agreements. These PPAs have terms of 20 years, and are expected to commence between April 2023 and December 2024. Payments made over the term of these PPAs are expected to total approximately $414 million.
During the fourth quarter of 2022, TVA entered into an office lease with a term of approximately 11 years and an expected commencement date of April 2023. Payments made over the term of this lease are expected to total approximately $15 million.
9. Other Long-Term Assets
The table below summarizes the types and amounts of TVA's other long-term assets:
| | | | | | | | | | | |
Other Long-Term Assets At September 30 (in millions) |
| | 2022 | | 2021 |
| Loans and other long-term receivables, net | $ | 99 | | | $ | 96 | |
EnergyRight® receivables, net | 49 | | | 57 | |
| Prepaid long-term service agreements | 74 | | | 44 | |
| Commodity contract derivative assets | 102 | | | 40 | |
| | | |
| | | |
| Other | 70 | | | 83 | |
| Total other long-term assets | $ | 394 | | | $ | 320 | |
Loans and Other Long-Term Receivables. TVA's loans and other long-term receivables primarily consist of economic development loans for qualifying organizations and a receivable for reimbursements to recover the cost of providing long-term, on-site storage for spent nuclear fuel. The current and long-term portions of the loans receivable are reported in Accounts
receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2022 and 2021, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $6 million and $3 million, respectively.
EnergyRight® Receivables. In association with the EnergyRight® program, TVA's local power company customers ("LPCs") offer financing to end-use customers for the purchase of energy-efficient equipment. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. TVA purchases the resulting loans receivable from its LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loans receivable that have been in default for 180 days or more or that TVA has determined are uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2022 and 2021, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $13 million and $15 million, respectively. See Note 12 — Other Long-Term Liabilities for information regarding the associated financing obligation.
Allowance for Loan Losses. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of the loan receivables, that considers reasonable and supportable forecasts of future economic conditions in addition to information about historical experience and current conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts.
The allowance components, which consist of a collective allowance and specific loans allowance, are based on the risk characteristics of TVA's loans. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans that do not share similar risk characteristics with other loans are evaluated on an individual basis.
| | | | | | | | | | | |
Allowance Components At September 30 (in millions) |
| 2022 | | 2021 |
EnergyRight® loan reserve | $ | 1 | | | $ | 1 | |
| Economic development loan collective reserve | 1 | | | 1 | |
| Economic development loan specific loan reserve | 1 | | | 2 | |
| | | |
| Total allowance for loan losses | $ | 3 | | | $ | 4 | |
Prepaid Long-Term Service Agreements. TVA has entered into various long-term service agreements for major
maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these
arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under
certain of these agreements, payments made exceed the value of parts received and services rendered. The current and long-term portions of the resulting prepayments are reported in Other current assets and Other long-term assets, respectively, on
TVA's Consolidated Balance Sheets. At both September 30, 2022 and 2021, prepayments of $12 million were recorded in Other current assets.
Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. TVA also reinstated the FHP in December 2021, and hedging activity began under the program in the second quarter of 2022. See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Commodity Derivatives under the FHP for a discussion of TVA's commodity contract derivatives.
10. Regulatory Assets and Liabilities
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 earnings or that would impact the Consolidated Statements of Operations are recorded as regulatory assets or regulatory liabilities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below.
| | | | | | | | | | | |
Regulatory Assets and Liabilities At September 30 (in millions) |
| | 2022 | | 2021 |
| Current regulatory assets | | | |
| Unrealized losses on interest rate derivatives | $ | 47 | | | $ | 114 | |
| Unrealized losses on commodity derivatives | 14 | | | 3 | |
| | | |
| | | |
| | | |
| | | |
| Fuel cost adjustment receivable | 77 | | | 79 | |
| | | |
| Total current regulatory assets | 138 | | | 196 | |
| | | |
| Non-current regulatory assets | | | |
| Retirement benefit plans deferred costs | 1,839 | | | 3,668 | |
| Non-nuclear decommissioning costs | 2,856 | | | 2,653 | |
| Unrealized losses on interest rate derivatives | 479 | | | 1,122 | |
| Nuclear decommissioning costs | 821 | | | 363 | |
| Unrealized losses on commodity derivatives | 1 | | | — | |
| | | |
| | | |
| | | |
| | | |
| Other non-current regulatory assets | 138 | | | 150 | |
| Total non-current regulatory assets | 6,134 | | | 7,956 | |
| Total regulatory assets | $ | 6,272 | | | $ | 8,152 | |
| | | |
| Current regulatory liabilities | | | |
| Fuel cost adjustment tax equivalents | $ | 218 | | | $ | 130 | |
| | | |
| Unrealized gains on commodity derivatives | 173 | | | 210 | |
| Total current regulatory liabilities | 391 | | | 340 | |
| | | |
| Non-current regulatory liabilities | | | |
| Retirement benefit plans deferred credits | 70 | | | — | |
| Unrealized gains on commodity derivatives | 102 | | | 40 | |
| Total non-current regulatory liabilities | 172 | | | 40 | |
| Total regulatory liabilities | $ | 563 | | | $ | 380 | |
Retirement Benefit Plans Deferred Costs (Credits). TVA measures the funded status of its pension and post-retirement ("OPEB") benefit plans at each year-end balance sheet date. The funded status is measured as the difference between the fair value of plan assets and the benefit obligations at the measurement date for each plan. The changes in funded status are actuarial gains and losses that are recognized on TVA's Consolidated Balance Sheets by adjusting the recognized pension and OPEB liabilities, with the offset deferred as a regulatory asset or a regulatory liability. In an unregulated environment, these deferred costs (credits) would be recognized as an increase or decrease to accumulated other comprehensive income (loss) ("AOCI").
"Incurred cost" is a cost arising from cash paid out or an obligation to pay for an acquired asset or service, and a loss from any cause that has been sustained and for which payment has been or must be made. In the cases of pension and OPEB costs, the unfunded obligation represents a projected liability to the employee for services rendered, and thus it meets the definition of an incurred cost. Therefore, amounts that otherwise would be charged to AOCI for these costs are recorded as a regulatory asset or liability since TVA has historically recovered pension and OPEB expense in rates. Through historical and current year expense included in ratemaking, the TVA Board has demonstrated the ability and intent to include pension and
OPEB costs in allowable costs and in rates for ratemaking purposes. As a result, it is probable that future revenue will result from inclusion of the pension and OPEB regulatory assets or regulatory liability in allowable costs for ratemaking purposes.
The regulatory asset and liability are classified as long-term, which is consistent with the pension and OPEB liabilities, and are not amortized to the Consolidated Statements of Operations over a specified recovery period. They are adjusted either upward or downward each year in conjunction with the adjustments to the unfunded pension liability and OPEB liability, as calculated by the actuaries. Ultimately the regulatory asset and liability will be recognized in the Consolidated Statements of Operations in the form of pension and OPEB expense as the actuarial liabilities are eliminated in future periods. See Note 20 — Benefit Plans — Obligations and Funded Status.
Additionally on October 1, 2014, TVA began recognizing pension costs as a regulatory asset to the extent that the amount calculated under GAAP as pension expense differs from the amount TVA contributes to the pension plan. As a result of previous plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP.
Non-Nuclear Decommissioning Costs. Non-nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA's non-nuclear long-lived assets, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's ART, and (4) certain other deferred charges under the accounting rules for AROs. TVA has established the ART to more effectively segregate, manage, and invest funds to help meet future non-nuclear AROs. The funds from the ART may be used, among other things, to pay the costs related to the future closure and retirement of non-nuclear long-lived assets under various legal requirements. These future costs can be funded through a combination of investment funds set aside in the ART, future earnings on those investment funds, and future cash contributions to the ART. In 2022 and 2021, TVA recovered in rates an amount determined by the average life of debt financed for non-nuclear decommissioning expenditures, assuming a 20-year debt service period, and contributions to the ART. Deferred charges will be recovered in rates based on an analysis of the expected expenditures, contributions, and investment earnings required to recover the decommissioning costs. Recovery of future decommissioning costs is dependent upon the future earnings of the ART, timing of decommissioning activities, and changes in decommissioning estimates. The regulatory asset is classified as long-term as amounts recovered are used to service debt or to contribute to the ART, which is restricted for future decommissioning costs.
Unrealized Losses on Interest Rate Derivatives. TVA uses regulatory accounting treatment to defer the unrealized gains and losses on certain interest rate derivative contracts. When amounts in these contracts are realized, the resulting gains or losses are included in the ratemaking formula. The unrealized losses on these interest rate derivatives are recorded on TVA's Consolidated Balance Sheets as current and non-current regulatory assets, and the related realized gains or losses, if any, are recorded on TVA's Consolidated Statements of Operations when the contracts settle. A portion of certain unrealized gains and losses will be amortized into earnings over the remaining lives of the contracts. Gains and losses on interest rate derivatives that are expected to be realized within the next year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheet.
Due to rising interest rates in the financial markets and net settlement payments made during 2022, TVA experienced a reduction in unrealized losses related to its derivative instruments for the year ended September 30, 2022. TVA does not recognize unrealized gains and losses from the investment portfolios and derivative instruments within earnings but rather defers all such gains and losses within a regulatory liability or asset in accordance with its accounting policy. See Note 15 — Risk Management Activities and Derivative Transactions and Note 16 — Fair Value Measurements.
Nuclear Decommissioning Costs. Nuclear decommissioning costs include: (1) certain deferred charges related to the future closure and decommissioning of TVA's nuclear generating units under the Nuclear Regulatory Commission ("NRC") requirements, (2) recognition of changes in the liability, (3) recognition of changes in the value of TVA's NDT, and (4) certain other deferred charges under the accounting rules for AROs. These future costs can be funded through a combination of investment funds set aside in the NDT and ART and future earnings on those investment funds. Deferred charges will be recovered in rates based on the analysis of expected expenditures, contributions, and investment earnings required to recover the decommissioning costs. See Note 1 — Summary of Significant Accounting Policies — Investment Funds. Recovery of future decommissioning costs is dependent upon the future earnings of the NDT and ART, timing of decommissioning activities, and changes in decommissioning estimates. The regulatory asset is classified as long-term as amounts recovered are contributed to the NDT or the ART, which are restricted for future decommissioning costs.
Nuclear decommissioning costs increased $458 million for the year ended September 30, 2022 as compared to the same period of the prior year, primarily due to investment losses in the NDT and accretion of the related AROs. See Note 13 — Asset Retirement Obligations and Note 16 — Fair Value Measurements
Unrealized Gains (Losses) on Commodity Derivatives. TVA enters into certain derivative contracts for natural gas that require the physical delivery of the contracted quantity of the commodity. Unrealized gains (losses) on natural gas purchase contracts, included as part of unrealized gains (losses) on commodity derivatives, relate to the mark-to-market ("MtM") valuation of natural gas purchase contracts. The natural gas purchase contracts qualify as derivative contracts but do not qualify for cash
flow hedge accounting treatment. As a result, TVA recognizes the changes in the market value of these derivative contracts as a regulatory liability or asset. This treatment reflects TVA's ability and intent to recover the cost of these commodity contracts on a settlement basis for ratemaking purposes through the fuel cost adjustment. TVA recognizes the actual cost of fuel received under these contracts in fuel expense at the time the fuel is used to generate electricity. These contracts expire at various times through October 2024. Unrealized gains and losses on contracts with a maturity of less than one year are included as a current regulatory asset or liability on TVA's Consolidated Balance Sheets. See Note 15 — Risk Management Activities and Derivative Transactions.
TVA reinstated the FHP in December 2021, and hedging activity began under the program in the second quarter of 2022. Currently, TVA is hedging exposure to the price of natural gas under the FHP. Deferred gains and losses relating to TVA's FHP are included as part of unrealized gains and losses on commodity derivatives. TVA defers all MtM unrealized gains or losses as regulatory liabilities or assets, respectively, and records the realized gains or losses in fuel and purchased power expense as the contracts settle to match the delivery period of the underlying commodity. This accounting treatment reflects TVA's ability and intent to include the realized gains or losses of these commodity contracts in future periods through the fuel cost adjustment. Net unrealized gains and losses for any settlements that occur within 12 months or less are classified as a current regulatory liability or asset. See Note 15 — Risk Management Activities and Derivative Transactions.
Fuel Cost Adjustment Receivable. The fuel cost adjustment provides a mechanism to alter rates monthly to reflect changing fuel and purchased power costs. There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in fuel rates. Balances in the fuel cost adjustment regulatory accounts represent over-collected or under-collected revenues that offset fuel and purchased power costs, and the fuel rate is designed to recover or refund the balance in less than one year.
Other Non-Current Regulatory Assets. Other non-current regulatory assets consist of the following:
Deferred Lease Asset and Other Financing Obligations. For certain leases, TVA recognized the initial finance lease and other financing asset and liability at inception of the lease or other obligation. However, the annual expense recognized in rates is equal to the annual payments, which differs from GAAP treatment for non-regulated entities. This practice results in TVA's asset balances being higher than they otherwise would have been under GAAP, with the difference representing a regulatory asset related to the lease or other financing obligation. These costs will be amortized over the respective lease or other financing obligation terms as payments are made. As the costs associated with this regulatory asset are not currently being considered in rates and the asset is expected to increase over the next year, the regulatory asset has been classified as long-term.
Debt Reacquisition Costs. Reacquisition expenses, call premiums, and other related costs, such as unamortized debt issue costs associated with redeemed Bond issues, are deferred and amortized (accreted) on a straight-line basis over the weighted average life of TVA's debt portfolio. Because timing of additional reacquisition expenses and changes to the weighted average life of the debt are uncertain, the regulatory asset is classified as long-term.
Retirement Removal Costs. Retirement removal costs, net of salvage, that are not legally required are recognized as a regulatory asset. Net removal costs are amortized over a one-year period subsequent to completion of the removal activities. TVA treats this regulatory asset as long-term in its entirety primarily because it relates to assets that are long-term in nature.
Fuel Cost Adjustment Tax Equivalents. The fuel cost adjustment includes a provision related to the current funding of the future payments TVA will make. As TVA records the fuel cost adjustment, five percent of the calculation that relates to a future asset or liability for tax equivalent payments is recorded as a current regulatory liability and paid or refunded in the following year.
11. Variable Interest Entities
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the business that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt. Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is required to account for the VIEs on a consolidated basis.
John Sevier VIEs
In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with
John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance (the "JSCCG notes") 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 activity, and credit and financial support of JSCCG and Holdco, TVA
has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the
primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's
membership interests in JSCCG are eliminated in consolidation.
Southaven VIE
In 2013, TVA entered into a $400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance (the "SCCG notes") 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, 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 activity, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term. Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the VIE on a consolidated basis.
Impact on Consolidated Financial Statements
The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of September 30, 2022 and 2021, as reflected on the Consolidated Balance Sheets, are as follows:
| | | | | | | | | | | |
Summary of Impact of VIEs on Consolidated Balance Sheets At September 30 (in millions) |
| | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
| Current liabilities | | | |
| Accrued interest | $ | 10 | | | $ | 10 | |
| Accounts payable and accrued liabilities | 2 | | | 3 | |
| Current maturities of long-term debt of variable interest entities | 39 | | | 43 | |
Total current liabilities | 51 | | | 56 | |
| Other liabilities | | | |
| Other long-term liabilities | 18 | | | 20 | |
| Long-term debt, net | | | |
| Long-term debt of variable interest entities, net | 968 | | | 1,006 | |
| Total liabilities | $ | 1,037 | | | $ | 1,082 | |
Interest expense of $50 million, $52 million, and $54 million related to debt of VIEs and membership interests of variable interest entity subject to mandatory redemption is included on the Consolidated Statements of Operations for the years ended September 30, 2022, 2021, and 2020, respectively.
At September 30, 2022, TVA had outstanding debt of VIEs of $1.0 billion and outstanding membership interests subject to mandatory redemption (including current portion) of $20 million issued by one of its VIEs of which it is the primary beneficiary. The following table sets forth TVA's future payments at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Maturities Due in the Year Ending September 30 (in millions) |
| | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
Long-term debt of VIEs including current maturities(1) | | $ | 39 | | | $ | 36 | | | $ | 37 | | | $ | 39 | | | $ | 40 | | | $ | 822 | |
| Membership interests of variable interest entity subject to mandatory redemption | | 2 | | | 1 | | | 1 | | | 1 | | | 1 | | | 14 | |
| | | | | | | | | | | | |
Note
(1) Long-term debt of VIEs does not include non-cash item of unamortized debt issue costs of $6 million.
Creditors of the VIEs do not have any recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions.
12. Other Long-Term Liabilities
Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities related to operating leases. The table below summarizes the types and amounts of Other long-term liabilities:
| | | | | | | | | | | |
Other Long-Term Liabilities At September 30 (in millions) |
| | 2022 | | 2021(1) |
| Interest rate swap liabilities | $ | 851 | | | $ | 1,524 | |
| Operating lease liabilities | 93 | | | 122 | |
| Currency swap liabilities | 228 | | | 76 | |
| EnergyRight® financing obligation | 58 | | | 66 | |
| Long-term deferred compensation | 39 | | | 42 | |
| Advances for construction | 53 | | | 24 | |
| Long-term deferred revenue | 39 | | | 37 | |
| Accrued long-term service agreements | — | | | 29 | |
| Other | 124 | | | 121 | |
| Total other long-term liabilities | $ | 1,485 | | | $ | 2,041 | |
Note
(1) At September 30, 2021, $5 million and $19 million previously classified as Long-term deferred revenue (a component of Other long-term liabilities) and Other (a
component of Other long-term liabilities), respectively, were reclassified to Advances for construction (a component of Other long-term liabilities) 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, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2022 and 2021, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities and Accrued interest was $54 million and $115 million, respectively. See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives for information regarding the interest rate swap liabilities. As of September 30, 2022, interest rate swap liabilities (including current portion) decreased $734 million as compared to September 30, 2021, primarily due to increases in market interest rates along with net settlement payments made during the year.
Operating Lease Liabilities. TVA's operating leases consist primarily of railcars, equipment, real estate/land, and power generating facilities. At September 30, 2022 and 2021, the current portion of TVA's operating leases reported in Accounts payable and accrued liabilities was $59 million and $40 million, respectively. See Note 8 — Leases for more information regarding leases.
Currency Swap Liabilities. To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2022 and 2021, the carrying amount of the currency swap liabilities reported in Accounts payable and accrued liabilities was $12 million and $7 million, respectively. As of September 30, 2022, currency swap liabilities (including current portion) increased $157 million as compared to September 30, 2021, primarily due to the strengthening of the U.S. dollar against the British pound sterling. See Note 15 — Risk Management Activities and Derivative Transactions — Cash Flow Hedging Strategy for Currency Swaps for more information regarding the currency swap liabilities.
EnergyRight® Financing Obligation. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight® program. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At September 30, 2022 and 2021, the carrying amount of the financing obligation reported in Accounts payable and accrued liabilities was $14 million and $16 million, respectively. See Note 9 — Other Long-Term Assets for information regarding the associated loans receivable.
Long-Term Deferred Compensation. TVA provides compensation arrangements to engage and retain certain employees, both executive and non-executive, which are designed to provide participants with the ability to defer compensation to future periods. The current and long-term portions are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At September 30, 2022 and 2021, the current amount of deferred compensation recorded in Accounts payable and accrued liabilities was $53 million and $51 million, respectively.
Advances for Construction. TVA receives refundable and non-refundable advances for construction that are generally intended to defray all or a portion of the costs of building or extending TVA’s existing power assets. Amounts received are
deferred as a liability with the long-term portion representing amounts that will not be recognized within the next 12 months. As projects meet milestones or other contractual obligations, the refundable portion is refunded to the customer and the non-refundable portion is recognized as contributions in aid of construction and offsets the cost of plant assets. At September 30, 2022 and 2021, the current amount of advances for construction recorded in Accounts payable and accrued liabilities was $33 million and $38 million, respectively.
Long-Term Deferred Revenue. Long-term deferred revenue represents payments received that exceed services rendered resulting in the deferral of revenue. This long-term portion represents amounts that will not be recognized within the next 12 months primarily related to fiber and transmission agreements. The current and long-term portions of the deferral are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At September 30, 2022 and 2021, the current amount of deferred revenue recorded in Accounts payable and accrued liabilities was $16 million and $17 million, respectively.
Accrued Long-Term Service Agreements. TVA has entered into various long-term service agreements for major
maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these
arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under
certain of these agreements, parts received and services rendered exceed payments made. The current and long-term portions
of the resulting obligation are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on
TVA's Consolidated Balance Sheets. At September 30, 2022 and 2021, the current amount of accrued long-term service agreements recorded in Accounts payable and accrued liabilities was $32 million and $28 million, respectively.
13. Asset Retirement Obligations
During the year ended September 30, 2022, TVA's total ARO liability increased $160 million.
To estimate its decommissioning obligation related to its nuclear generating stations, TVA uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimations and assumptions. Those assumptions include (1) estimates of the cost of decommissioning; (2) the method of decommissioning and the timing of the related cash flows; (3) the license period of the nuclear plant, considering the probability of license extensions; (4) cost escalation factors; and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs. TVA has ascribed probabilities to two different decommissioning methods related to its nuclear decommissioning obligation estimate: the DECON method and the SAFSTOR method. The DECON method requires radioactive contamination to be removed from a site and safely disposed of or decontaminated to a level that permits the site to be released for unrestricted use shortly after it ceases operation. The SAFSTOR method allows nuclear facilities to be placed and maintained in a condition that allows the facilities to be safely stored and subsequently decontaminated to levels that permit release for unrestricted use.
The revisions in nuclear estimates increased the liability balance by $61 million for the year ended September 30, 2022. This was primarily due to approval and implementation of the most recent site-specific cost study in September 2022 resulting in an increase of $58 million.
TVA also has decommissioning obligations related to its non-nuclear generating sites, ash impoundments, transmission substation and distribution assets, and certain general facilities. To estimate its decommissioning obligation related to these assets, TVA uses estimations and assumptions for the amounts and timing of future expenditures and makes judgments concerning whether or not such costs are considered a legal obligation. Those assumptions include (1) estimates of the costs of decommissioning, (2) the method of decommissioning and the timing of the related cash flows, (3) the expected retirement date of each asset, (4) cost escalation factors, and (5) the credit adjusted risk free rate to measure the obligation at the present value of the future estimated costs. TVA bases its decommissioning estimates for each asset on its identified preferred closure method.
The revisions in non-nuclear estimates increased the liability balance by $186 million for the year ended September 30, 2022. During the year, TVA completed an engineering review of its cost estimates for closure of certain areas containing coal fines at Paradise Fossil Plant ("Paradise"), which resulted in an increase of $119 million due to expected cost increases for necessary changes in activities associated with proper completion of the closure. Coal combustion residuals ("CCR") closure liabilities at Paradise and Cumberland increased $82 million due to new vendor bids, modified closure designs, and revised estimates for construction costs. Refined project cost assumptions and scope changes related to TVA's AROs for the closure of certain coal yards at its fossil plants resulted in an increase of $57 million. In addition, effective October 1, 2022, TVA implemented revised depreciation rates applicable to its completed plant due to the results of a new depreciation study. The study included a decline in the service life estimates of TVA's coal-fired plants based on current planning assumptions to potentially retire the remainder of the coal-fired fleet by 2035. As a result of the change in service life estimates reflected in the depreciation study, TVA performed an assessment of the assumptions used in the timing of cash flows related to its non-nuclear AROs. Based on the assessment, TVA increased AROs by $47 million due to identified changes in the projections of timing of certain asset retirement activities. Partially offsetting these increases, expected reductions in CCR post-closure costs for maintenance and monitoring at Paradise, Shawnee, and Colbert Fossil Plant ("Colbert") resulted in a decrease of $53 million. CCR closure liabilities at Gallatin decreased $30 million due to selection of a new vendor bid and changes to anticipated timing
of certain asset retirement activities. In addition, CCR closure liabilities at Allen Fossil Plant decreased $15 million as a result of changes in cost estimates and anticipated timing of various retirement activities.
The revisions in non-nuclear estimates increased $191 million for the year ended September 30, 2021. This increase was primarily driven by revisions of approximately $122 million to certain CCR closure liabilities at Shawnee, Paradise, Colbert, Cumberland, and Gallatin resulting from revised engineering estimates for construction costs, new vendor bids, modified closure designs, and expected costs associated with post-closure care of closed areas. CCR ARO liabilities associated with groundwater well monitoring also increased approximately $69 million due to expansion in the scope of recurring activities including measuring, modeling, and reporting. In addition, TVA's use of a new CCR landfill at Shawnee and expansion of landfill acreage used at Gallatin resulted in new obligations of $30 million and $13 million, respectively.
Additionally, during the years ended September 30, 2022 and 2021, both the nuclear and non-nuclear liabilities were increased by periodic accretion, partially offset by settlement projects that were conducted during these periods. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets. During 2022, 2021, and 2020, $137 million, $72 million, and $169 million, respectively, of the related regulatory assets were amortized into expense as these amounts were collected in rates. See Note 10 — Regulatory Assets and Liabilities. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 16 — Fair Value Measurements — Investment Funds and Note 21 — Commitments and Contingencies — Decommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts.
| | | | | | | | | | | | | | | | | | | | |
Asset Retirement Obligation Activity (in millions) |
| | Nuclear | | Non-Nuclear | | Total | |
| Balance at September 30, 2020 | $ | 3,278 | | | $ | 3,507 | | | $ | 6,785 | | |
| Settlements | (11) | | | (231) | | | (242) | | |
| Revisions in estimate | 12 | | | 191 | | | 203 | | |
| Additional obligations | — | | | 43 | | | 43 | | |
| | | | | | |
| Accretion (recorded as regulatory asset) | 149 | | | 64 | | | 213 | | |
| | | | | | |
| Balance at September 30, 2021 | 3,428 | | | 3,574 | | | 7,002 | | (1) |
| | | | | | |
| Settlements | (2) | | | (309) | | | (311) | | (2) |
| Revisions in estimate | 61 | | | 186 | | | 247 | | |
| | | | | | |
| | | | | | |
| Accretion (recorded as regulatory asset) | 156 | | | 68 | | | 224 | | |
| | | | | | |
| Balance at September 30, 2022 | $ | 3,643 | | | $ | 3,519 | | | $ | 7,162 | | (1) |
Note
(1) Includes $275 million and $266 million at September 30, 2022 and 2021, respectively, in Current liabilities.
(2) Settlements include the change in asset retirement obligation project accruals included in Accounts payable and accrued liabilities of $20 million.
14. Debt and Other Obligations
General
The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion at any time. At September 30, 2022, TVA had only two types of Bonds outstanding: power bonds and discount notes. Power bonds have maturities between one year and 50 years, and discount notes have maturities of less than one year. Power bonds and discount notes are both issued pursuant to Section 15d of the TVA Act and pursuant to the Basic Tennessee Valley Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September 28, 1976, October 17, 1989, and March 25, 1992 (the "Basic Resolution"). Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds.
Power bonds and discount notes rank on parity and have first priority of payment from net power proceeds, which are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and tax equivalent payments, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein.
TVA considers its scheduled rent payments under its leaseback transactions, as well as its scheduled payments under its lease financing arrangements involving John Sevier CCF and Southaven CCF, as costs of operating, maintaining, and administering its power properties. Costs of operating, maintaining, and administering TVA's power properties have priority over TVA's payments on the Bonds. Once net power proceeds have been applied to payments on power bonds and discount notes as well as any other Bonds that TVA may issue in the future that rank on parity with or subordinate to power bonds and discount notes, Section 2.3 of the Basic Resolution provides that the remaining net power proceeds shall be used only for (1) minimum payments into the U.S. Treasury required by the TVA Act as repayment of, and as a return on, the Power Program Appropriation
Investment; (2) investment in power system assets; (3) additional reductions of TVA's capital obligations; and (4) other lawful purposes related to TVA's power business.
The TVA Act and the Basic Resolution each contain two bond tests: the rate test and the bondholder protection test. Under the rate test, TVA must charge rates for power which will produce gross revenues sufficient to provide funds for, among other things, debt service on outstanding Bonds. As of September 30, 2022, TVA was in compliance with the rate test. See Note 1 — Summary of Significant Accounting Policies — General. Under the bondholder protection test, TVA must, in successive five-year periods, use an amount of net power proceeds at least equal to the sum of (1) the depreciation accruals and other charges representing the amortization of capital expenditures and (2) the net proceeds from any disposition of power facilities for either the reduction of its capital obligations (including Bonds and the Power Program Appropriation Investment) or investment in power assets. TVA met the bondholder protection test for the five-year period ended September 30, 2020, and must next meet the bondholder protection test for the five-year period ending September 30, 2025.
Secured Debt of VIEs
On August 9, 2013, SCCG issued secured notes totaling $360 million that bear interest at a rate of 3.846 percent. The SCCG notes require amortizing semi-annual payments on each February 15 and August 15, and mature on August 15, 2033. Also on August 9, 2013, SCCG issued $40 million of membership interests subject to mandatory redemption. The proceeds from the secured notes issuance and the issuance of the membership interests were paid to TVA in accordance with the terms of the Southaven head lease. See Note 11 — Variable Interest Entities — Southaven VIE. TVA used the proceeds from the transaction primarily to fund the acquisition of the Southaven CCF from SSSL.
On January 17, 2012, JSCCG issued secured notes totaling $900 million in aggregate principal amount that bear interest at a rate of 4.626 percent. Also on January 17, 2012, Holdco issued secured notes totaling $100 million that bear interest at a rate of 7.1 percent. The JSCCG notes and the Holdco notes require amortizing semi-annual payments on each January 15 and July 15, and mature on January 15, 2042. The Holdco notes require a $10 million balloon payment upon maturity. See Note 11 — Variable Interest Entities — John Sevier VIEs. TVA used the proceeds from the transaction to meet its requirements under the TVA Act.
Secured debt of VIEs, including current maturities, outstanding at both September 30, 2022 and 2021 totaled $1.0 billion.
Short-Term Debt
The following table provides information regarding TVA's short-term borrowings:
| | | | | | | | | | | |
Short-term Borrowings At September 30 |
| | 2022 | | 2021 |
| Gross amount outstanding - discount notes (in millions) | $ | 1,173 | | | $ | 780 | |
| | | |
| Weighted average interest rate - discount notes | 2.93 | % | | 0.03 | % |
Put Options
TVA has two issues of Putable Automatic Rate Reset Securities ("PARRS") outstanding. After a fixed-rate period of five years, the coupon rate on the PARRS may automatically be reset downward under certain market conditions on an annual basis. The coupon rate reset on the PARRS is based on a calculation. For both series of PARRS, the coupon rate will reset downward on the reset date if the rate calculated is below the then-current coupon rate on the Bond. The calculation dates, potential reset dates, and terms of the calculation are different for each series. The coupon rate on the 1998 Series D PARRS may be reset on June 1 (annually) if the sum of the five-day average of the 30-Year Constant Maturity Treasury ("CMT") rate for the week ending the last Friday in April, plus 94 basis points, is below the then-current coupon rate. The coupon rate on the 1999 Series A PARRS may be reset on May 1 (annually) if the sum of the five-day average of the 30-Year CMT rate for the week ending the last Friday in March, plus 84 basis points, is below the then-current coupon rate. The coupon rates may only be reset downward, but investors may request to redeem their Bonds at par value in conjunction with a coupon rate reset for a limited period of time prior to the reset dates under certain circumstances.
The coupon rate for the 1998 Series D PARRS, which mature in June 2028, has been reset eight times, from an initial rate of 6.750 percent to the current rate of 2.134 percent. In connection with these resets, $318 million of the Bonds have been redeemed; therefore, $256 million of the Bonds were outstanding at September 30, 2022. The coupon rate for the 1999 Series A PARRS, which mature in May 2029, has been reset seven times, from an initial rate of 6.50 percent to the current rate of 2.216 percent. In connection with these resets, $316 million of the Bonds have been redeemed; therefore, $208 million of the Bonds were outstanding at September 30, 2022.
Due to the contingent nature of the put option on the PARRS, TVA determines whether the PARRS should be classified as long-term debt or current maturities of long-term debt by calculating the expected reset rate for the Bonds on the calculation dates, described above. If the determination date for reset is before the balance sheet date of the reporting period and the expected reset rate is less than the then-current coupon rate on the PARRS, the PARRS are included in current maturities. Otherwise, the PARRS are included in long-term debt.
Debt Securities Activity
The table below summarizes the long-term debt securities activity for the years ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | |
Debt Securities Activity For the years ended September 30 (in millions) |
| | | 2022 | | 2021 |
| Issues | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
2021 Series A(1) | | $ | — | | | $ | 500 | |
2022 Series A(2) | | 500 | | | — | |
| Discount on debt issues | | (16) | | | — | |
| Total | | $ | 484 | | | $ | 500 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Redemptions/Maturities(3) | | | | |
| | | | |
| 2009 Series B | | $ | 28 | | | $ | 29 | |
| | | | |
| | | | |
| | | | |
| | | | |
| 2011 Series A | | — | | | 1,500 | |
| 1998 Series H | | — | | | 331 | |
| 2012 Series A | | 1,000 | | | — | |
| Total redemptions/maturities of power bonds | | 1,028 | | | 1,860 | |
| | | | |
| Debt of variable interest entities | | 43 | | | 41 | |
| Total redemptions/maturities of debt | | $ | 1,071 | | | $ | 1,901 | |
Notes
(1) The 2021 Series A Bonds were issued at 99.982 percent of par.
(2) The 2022 Series A Bonds were issued at 96.786 percent of par.
(3) All redemptions were at 100 percent of par.
Debt Outstanding
Total debt outstanding at September 30, 2022 and 2021, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-Term Debt At September 30 (in millions) |
CUSIP or Other Identifier | | Maturity | | | |
Coupon Rate | | 2022 | | 2021 | |
| Short-term debt, net of discounts | | | | | | | | $ | 1,172 | | | $ | 780 | | |
| Current maturities of long-term debt of VIEs issued at par | | | | | | | | 39 | | | 43 | | |
| | | | | | | | | | | |
| Current maturities of power bonds issued at par | | | | | | | | | | | |
| | | | | | | | | | | |
| 880591EN8 | | 8/15/2022 | | | | 1.875% | | — | | | 1,000 | | |
| | | | | | | | | | | |
| 880591EF5 | | 12/15/2022 | | | | 3.770% | | 1 | | | 1 | | |
| 880591EF5 | | 6/15/2023 | | | | 3.770% | | 28 | | | 27 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total current maturities of power bonds issued at par | | | | | | | | 29 | | | 1,028 | | |
| Total current debt outstanding, net | | | | | | | | $ | 1,240 | | | $ | 1,851 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-Term Debt At September 30 (in millions) |
CUSIP or Other Identifier | | Maturity | | Coupon
Rate | | | | 2022 Par | | 2021 Par | | Stock Exchange Listings |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| 880591ER9 | | 9/15/2024 | | 2.875% | | | | $ | 1,000 | | | $ | 1,000 | | | New York |
| 880591EW8 | | 5/15/2025 | | 0.750% | | | | 1,000 | | | 1,000 | | | New York |
| 880591CJ9 | | 11/1/2025 | | 6.750% | | | | 1,350 | | | 1,350 | | | New York, Hong Kong, Luxembourg, Singapore |
| 880591EU2 | | 2/1/2027 | | 2.875% | | | | 1,000 | | | 1,000 | | | New York |
880591300(3) | | 6/1/2028 | | 2.134% | | | | 256 | | | 256 | | | New York |
880591409(3) | | 5/1/2029 | | 2.216% | | | | 208 | | | 208 | | | New York |
| 880591DM1 | | 5/1/2030 | | 7.125% | | | | 1,000 | | | 1,000 | | | New York, Luxembourg |
| 880591EX6 | | 9/15/2031 | | 1.500% | | | | 500 | | | 500 | | | New York |
| 880591DP4 | | 6/7/2032 | | 6.587% | (2) | | | 279 | | (1) | 337 | | (1) | New York, Luxembourg |
| 880591DV1 | | 7/15/2033 | | 4.700% | | | | 472 | | | 472 | | | New York, Luxembourg |
| 880591EF5 | | 6/15/2034 | | 3.770% | | | | 160 | | | 190 | | | None |
| 880591DX7 | | 6/15/2035 | | 4.650% | | | | 436 | | | 436 | | | New York |
| 880591CK6 | | 4/1/2036 | | 5.980% | | | | 121 | | | 121 | | | New York |
| 880591CS9 | | 4/1/2036 | | 5.880% | | | | 1,500 | | | 1,500 | | | New York |
| 880591CP5 | | 1/15/2038 | | 6.150% | | | | 1,000 | | | 1,000 | | | New York |
| 880591ED0 | | 6/15/2038 | | 5.500% | | | | 500 | | | 500 | | | New York |
| 880591EH1 | | 9/15/2039 | | 5.250% | | | | 2,000 | | | 2,000 | | | New York |
| 880591EP3 | | 12/15/2042 | | 3.500% | | | | 1,000 | | | 1,000 | | | New York |
| 880591DU3 | | 6/7/2043 | | 4.962% | (2) | | | 168 | | (1) | 202 | | (1) | New York, Luxembourg |
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| 880591EB4 | | 1/15/2048 | | 4.875% | | | | 500 | | | 500 | | | New York, Luxembourg |
| 880591DZ2 | | 4/1/2056 | | 5.375% | | | | 1,000 | | | 1,000 | | | New York |
| 880591EJ7 | | 9/15/2060 | | 4.625% | | | | 1,000 | | | 1,000 | | | New York |
| 880591ES7 | | 9/15/2065 | | 4.250% | | | | 1,000 | | | 1,000 | | | New York |
| 880591EY4 | | 9/15/2052 | | 4.250% | | | | 500 | | | — | | | New York |
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| Subtotal | | | | | | | | 17,950 | | | 17,572 | | | |
| Unamortized discounts, premiums, issue costs, and other | | | | | | | | (124) | | | (115) | | | |
| Total long-term outstanding power bonds, net | | | | | | | | 17,826 | | | 17,457 | | | |
| Long-term debt of VIEs, net | | | | | | | | 968 | | | 1,006 | | | |
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| Total long-term debt, net | | | | | | | | $ | 18,794 | | | $ | 18,463 | | | |
Notes
(1) Includes net exchange gain from currency transactions of $150 million and $58 million at September 30, 2022 and 2021, respectively.
(2) The coupon rate represents TVA's effective interest rate.
(3) TVA PARRS, CUSIP numbers 880591300 and 880591409, may be redeemed under certain conditions. See Put Options above.
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Maturities Due in the Year Ending September 30 (in millions) |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Long-term power bonds including current maturities(1) | $ | 29 | | | $ | 1,022 | | | $ | 1,022 | | | $ | 1,370 | | | $ | 1,020 | | | $ | 13,666 | | | $ | 18,129 | |
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Short-term debt(2) | 1,173 | | | — | | | — | | | — | | | — | | | — | | | 1,173 | |
Notes
(1) Long-term power bonds does not include non-cash items of foreign currency exchange gain of $150 million, unamortized debt issue costs of $42 million, and net
discount on sale of Bonds of $82 million.
(2) Short-term debt does not include the non-cash item of discount on issuance of discount notes of $1 million.
Credit Facility Agreements
TVA has funding available under four long-term revolving credit facilities totaling approximately $2.7 billion: a $150 million credit facility that matures on February 9, 2024, a $500 million credit facility that matures on February 1, 2025, a $1.0 billion credit facility that matures on September 21, 2026, and a $1.0 billion credit facility that matures on March 25, 2027. 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 September 30, 2022 and 2021, there were approximately $704 million and $1.2 billion of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 15 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral.
The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:
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Summary of Long-Term Credit Facilities At September 30, 2022 (in millions) |
| Maturity Date | | Facility Limit | | Letters of Credit Outstanding | | Cash Borrowings | | Availability |
| February 2024 | | $ | 150 | | | $ | 38 | | | $ | — | | | $ | 112 | |
| February 2025 | | 500 | | | 500 | | | — | | | — | |
| September 2026 | | 1,000 | | | 99 | | | — | | | 901 | |
| March 2027 | | 1,000 | | | 67 | | | — | | | 933 | |
| Total | | $ | 2,650 | | | $ | 704 | | | $ | — | | | $ | 1,946 | |
TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility was renewed for 2023 with a maturity date of September 30, 2023. 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 12 months or less. There were no outstanding borrowings under the facility at September 30, 2022. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit.
Lease/Leasebacks
TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking CTs as well as certain qualified technological equipment and software ("QTE"). Due to TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At September 30, 2021, the outstanding leaseback obligations related to the remaining CTs and QTE were $25 million. There were no outstanding leaseback obligations related to the remaining CTs and QTE at September 30, 2022. Prior to 2021, TVA made final rent payments involving 16 CTs, and acquired the equity interest related to these transactions. Rent payments under the remaining CT lease/leaseback transactions were made through January 2022. TVA gave notice in December 2021 of its election to acquire the equity interests related to the remaining eight CTs for a total of $155 million. The associated acquisitions are expected to close in December 2022 and May 2023.
In October 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE through a series of installments. TVA made its last repurchase payment in December 2021, after which the associated leases were terminated.
15. Risk Management Activities and Derivative Transactions
TVA is exposed to various risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks. To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, 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.
In November 2021, the TVA Board approved the elimination of the Value at Risk aggregate transaction limit for the FHP
and authorized the use of tolerances and measures that will be reviewed annually by the TVA Board. The tolerances will address counterparty exposure, liquidity risk, and reduction in fuel cost volatility. In addition, the TVA Board approved certain administrative changes to the FHP. In December 2021, TVA reinstated the FHP, and hedging activity began under the program in the second quarter of 2022.
Overview of Accounting Treatment
TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance 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:
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Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) For the years ended September 30 |
| Derivatives in Cash Flow Hedging Relationship | | Objective of Hedge Transaction | | Accounting for Derivative
Hedging Instrument | | 2022 | | 2021 |
| 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 | | $ | (157) | | | $ | 126 | |
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Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense For the years ended September 30 |
| Derivatives in Cash Flow Hedging Relationship | | 2022 | | 2021 |
| Currency swaps | | $ | (93) | | | $ | 97 | |
Note
(1) There were no amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $29 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 the forecasted exchange loss on the debt.
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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment Amount of Gain (Loss) Recognized in Income on Derivatives(1) For the years ended September 30 |
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| Derivative Type | | Objective of Derivative | | Accounting for Derivative Instrument | | 2022 | | 2021 |
| 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 liabilities and assets, respectively
Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow | | $ | (103) | | | $ | (115) | |
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Commodity derivatives
under the FHP | | To protect against fluctuations in market prices of purchased commodities (price risk) | | Mark-to-market gains and losses are recorded as regulatory liabilities and assets, respectively
Realized gains and losses are recognized in Fuel expense or Purchased power expense as the contracts settle to match the delivery period of the underlying commodity(2) | | 47 | | | — | |
Notes
(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory liabilities and assets. As such, there were no related gains (losses) recognized in income for these unrealized gains (losses) for the years ended September 30, 2022 and 2021.
(2) Of the amount recognized in 2022, $38 million and $9 million were reported in Fuel expense and Purchased power expense, respectively.
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Fair Values of TVA Derivatives At September 30 |
| | 2022 | | 2021 |
| Derivatives That Receive Hedge Accounting Treatment: |
| | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation |
| Currency swaps | | | | | | | |
| | | | | | | |
£250 million Sterling | $ | (130) | | | Accounts payable and accrued liabilities $(7); Other long-term liabilities $(123) | | $ | (36) | | | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(32) |
£150 million Sterling | (110) | | | Accounts payable and accrued liabilities $(5); Other long-term liabilities $(105) | | (47) | | | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(44) |
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| Derivatives That Do Not Receive Hedge Accounting Treatment: |
| | Balance | | Balance Sheet Presentation | | Balance | | Balance Sheet Presentation |
| Interest rate swaps | | | | | | | |
$1.0 billion notional | $ | (672) | | | Accounts payable and accrued liabilities $(9); Accrued interest $(33); Other long-term liabilities $(630) | | $ | (1,182) | | | Accounts payable and accrued liabilities $(44); Accrued interest $(37); Other long-term liabilities $(1,101) |
$476 million notional | (233) | | | Accounts payable and accrued liabilities $(3); Accrued interest $(9); Other long-term liabilities $(221) | | (455) | | | Accounts payable and accrued liabilities $(22); Accrued interest $(10); Other long-term liabilities $(423) |
$42 million notional(1) | — | | | N/A | | (2) | | | Accounts payable and accrued liabilities $(1); Accrued interest $(1) |
| Commodity contract derivatives | 145 | | | Other current assets $118; Other long-term assets $34; Accounts payable and accrued liabilities $(6); Other long-term liabilities $(1) | | 247 | | | Other current assets $210; Other long-term assets $40; Accounts payable and accrued liabilities $(3) |
| Commodity derivatives under the FHP | 115 | | | Accounts receivable, net $1; Other current assets $54; Other long-term assets $68; Accounts payable and accrued liabilities $(8) | | — | | | N/A |
Note
(1) At September 30, 2021, represented two interest rate swaps with notional amounts of $28 million and $14 million. In 2022, final payments were made on both of the interest rate swaps.
Cash Flow Hedging Strategy for Currency Swaps
To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred. TVA had the following currency swaps outstanding at September 30, 2022:
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| Currency Swaps Outstanding |
| Effective Date of Currency Swap Contract | | Associated TVA Bond Issues Currency Exposure | | Expiration Date of Swap | | Overall Effective
Cost to TVA |
| 2001 | | £250 million | | 2032 | | 6.59% |
| 2003 | | £150 million | | 2043 | | 4.96% |
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 Accrued interest, respectively. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap 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 MtM gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory liabilities or assets 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, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the years ended September 30, 2022 and 2021, the changes in fair market value of the interest rate swaps resulted in the reduction in unrealized losses of $728 million and $402 million, respectively. TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and other factors. While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps.
Commodity Derivatives. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market these natural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At September 30, 2022, TVA's natural gas contract derivatives had terms of up to two years.
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Commodity Contract Derivatives At September 30 |
| | 2022 | | 2021 |
| | Number of Contracts | | Notional Amount | | Fair Value (MtM)
(in millions) | | Number of Contracts | | Notional Amount | | Fair Value (MtM) (in millions) |
| | | | | | | | | | | |
| Natural gas contract derivatives | 44 | | 296 million mmBtu | | $ | 145 | | | 40 | | 263 million mmBtu | | $ | 247 | |
Commodity Derivatives under the FHP. In December 2021, TVA reinstated the FHP, and hedging activity began under the program in the second quarter of 2022. Currently, TVA is hedging exposure to the price of natural gas under the FHP. There is no Value at Risk aggregate transaction limit under the current FHP structure, but the TVA Board reviews and authorizes the use of tolerances and measures annually. TVA's policy prohibits trading financial instruments under the FHP for speculative purposes. At September 30, 2022, TVA's natural gas swap contracts under the FHP had remaining terms of up to four years.
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Commodity Derivatives under Financial Hedging Program(1) |
| At September 30, 2022 | | At September 30, 2021 |
| Number of Contracts | | Notional Amount | | Fair Value (MtM) (in millions) | | Number of Contracts | | Notional Amount | | Fair Value (MtM) (in millions) |
| Natural gas | | | | | | | | | | | |
| | | | | | | | | | | |
| Swap contracts | 225 | | 256 | million mmBtu | | $ | 115 | | | — | | — | million mmBtu | | $ | — | |
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Note
(1) Fair value amounts presented are based on the net commodity position with the counterparty. Notional amounts disclosed represent the net value of contractual amounts.
TVA defers all FHP unrealized gains (losses) as regulatory liabilities (assets) and records the realized gains or losses in Fuel expense and Purchased power expense to match the delivery period of the underlying commodity.
Offsetting of Derivative Assets and Liabilities
The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets are shown in the table below:
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Derivative Assets and Liabilities(1) At September 30 (in millions) |
| |
| 2022 | | | | 2021 |
| Assets | | | | | |
| | | | | |
| Commodity contract derivatives | $ | 152 | | | | | $ | 250 | |
Commodity derivatives under the FHP(2) | 123 | | | | | — | |
| Total derivatives subject to master netting or similar arrangement | $ | 275 | | | | | $ | 250 | |
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| Liabilities | | | | | |
| Currency swaps | $ | 240 | | | | | $ | 83 | |
Interest rate swaps(3) | 905 | | | | | 1,639 | |
| Commodity contract derivatives | 7 | | | | | 3 | |
Commodity derivatives under the FHP(2) | 8 | | | | | — | |
| Total derivatives subject to master netting or similar arrangement | $ | 1,160 | | | | | $ | 1,725 | |
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Notes
(1) Offsetting amounts include counterparty netting of derivative contracts. Except as discussed below, there were no other material offsetting amounts on TVA's Consolidated Balance Sheets at either September 30, 2022 or 2021.
(2) At September 30, 2022, the gross derivative asset and gross derivative liability was $168 million and $53 million, respectively, with offsetting amounts for each totaling $45 million. TVA received $68 million of collateral from counterparties as of September 30, 2022, which is recorded separately from the fair values of the derivative assets and liabilities and reported in Accounts payable and accrued liabilities.
(3) Letters of credit of approximately $704 million and $1.2 billion were posted as collateral at September 30, 2022 and 2021, respectively, to partially secure the liability positions of one of the interest rate swaps in accordance with the collateral requirements for this derivative.
Other Derivative Instruments
Investment Fund Derivatives. Investment funds consist primarily of funds held in the NDT, ART, SERP, and DCP. See Note 16 — Fair Value Measurements — Investment Funds for a discussion of the trusts, plans, and types of investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At September 30, 2022 and 2021, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $4 million and $2 million at September 30, 2022 and 2021, respectively.
Collateral. TVA's interest rate swaps, currency swaps, and commodity derivatives under the FHP contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. At September 30, 2022, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.2 billion. TVA's collateral obligations at September 30, 2022, under these arrangements were $602 million, for which TVA had posted $704 million in letters of credit. These letters of credit reduce the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the interest rate swap contracts as a result of this posted collateral. In addition, as of September 30, 2022, TVA received $68 million of collateral from counterparties related to the commodity derivatives under the FHP.
For all of its derivative instruments with credit-risk related contingent features:
•If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC ("S&P") or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $22 million, and
•If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral.
Counterparty Risk
TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements.
Customers. TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. Of the $1.9 billion and $1.5 billion of receivables from power sales outstanding at September 30, 2022 and 2021, respectively, nearly all counterparties were rated investment grade. The obligations of customers that are not investment grade are secured by collateral. TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements. TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts, Note 3 — Accounts Receivable, Net, and Note 9 — Other Long-Term Assets.
TVA had revenue from two LPCs that collectively accounted for 17 percent of total operating revenues for both the years ended September 30, 2022 and 2021.
Suppliers. TVA assesses potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. If certain fuel or purchased power suppliers fail to perform under the terms of their contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. TVA continues evaluating potential supplier performance risks and supplier impact but cannot determine or predict the duration of such risks/impacts or the extent to which such risks/impacts could affect TVA's business, operations, and financial results or cause potential business disruptions.
TVA has experienced an increase in supplier impacts as a result of Coronavirus Disease 2019 ("COVID-19") and the state of global supply chains and the economy, such as project delays, limited availability of supplies, and price increases. Russia's invasion of Ukraine has further intensified the state of global supply chains and inflationary pressures, and TVA will continue to monitor these pressures.
Natural Gas. TVA purchases a significant amount of its natural gas requirements through contracts with a variety of suppliers and purchases substantially all of its fuel oil requirements on the spot market. TVA delivers to its gas fleet under firm and non-firm transportation contracts on multiple interstate natural gas pipelines. TVA contracts for storage capacity that allows for operational flexibility and increased supply during peak gas demand scenarios or supply disruptions. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. TVA also maintains on-site, fuel oil backup to operate at the majority of the combustion turbine sites in the event of major supply disruptions. In the event suppliers are unable to perform under existing contracts, TVA can utilize its storage portfolio or other suppliers to help secure replacement natural gas volumes.
Coal. To ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at September 30, 2022. The contracted supply of coal is sourced from several geographic regions of the U.S. and is delivered via barge and rail. As a result of emerging technologies, environmental regulations, industry trends, and natural gas market volatility over the past few years, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies, restructuring, mine closures, or other scenarios. A long-term continued decline in demand for coal could result in more consolidations, additional bankruptcies, restructuring, mine closures, or other scenarios. Current market conditions indicate limited availability of spot market coal due to increased exports, utility demand, and mine capacity and capability.
TVA experienced challenges in 2021 related to coal supply, as a result of supply limitation and transportation challenges. Coal supply and transportation continued to be constrained in 2022, and these constraints are anticipated to continue into 2023. Rail service continues to limit TVA’s ability to receive contracted supply, and TVA is also seeing supply constraints and price increases for reagents, diesel fuel, and fuel surcharges associated with coal transport, which are also expected to continue. TVA will continue to monitor the coal supply challenges and utilize its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies.
Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.
As a result of Russia’s invasion of Ukraine, new contracts for Russian origin nuclear fuel have been limited by Executive Order 14066, and further restrictions on the purchase or use of Russian origin fuel may be forthcoming. TVA should have no direct impact from existing or future restrictions since TVA has no Russian origin nuclear fuel in inventory for use in its reactors and it is not contracted to purchase any Russian origin nuclear fuel. TVA could be impacted by higher market prices as a result
of general market impacts associated with supply restrictions; however, at this time TVA's nuclear fuel is obtained predominantly through long-term contracts.
Purchased Power. TVA acquires power from a variety of power producers through long-term and short-term PPAs as well as through spot market purchases. Because of the long-term nature and reliability of purchased power, TVA requires that the PPAs contain certain counterparty performance assurance requirements to help insure counterparty performance during the term of the agreements.
Other Suppliers. Mounting solar supply chain constraints, commodity price increases, and the recent trade policy investigation into solar panel imports have created challenges for the U.S. solar industry, threatening project delays, cancellations, and price increases. These constraints are affecting contracted PPAs from previous requests for proposals that are not yet online and TVA's Self-Directed Solar project.
Derivative Counterparties. TVA has entered into physical and financial contracts that are classified as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit plan ("pension plan") have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the ART, or the pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At September 30, 2022, all of TVA's commodity derivatives under the FHP, currency swaps, and interest rate swaps were with counterparties whose Moody's credit ratings were A2 or higher.
TVA classifies forward natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At September 30, 2022, the natural gas contracts were with counterparties whose ratings ranged from B1 to A1.
16. Fair Value Measurements
Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.
Valuation Techniques
The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:
| | | | | | | | | | | |
| Level 1 | —
| | Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing. |
Level 2
| —
| | Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means. |
| Level 3 | —
| | Pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only to be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available. |
A financial instrument's level within the fair value hierarchy (where Level 1 is the highest and Level 3 is the lowest) is based on the lowest level of input significant to the fair value measurement.
The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP and DCP assets, all changes in fair value of these assets and liabilities have been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP and DCP assets, there has been no impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows related to these fair value measurements.
Investment Funds
At September 30, 2022, Investment funds were comprised of $3.7 billion of equity securities and debt securities classified as trading measured at fair value. Equity and trading debt securities are held in the NDT, ART, SERP, and DCP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The balances in the NDT and ART were $2.5 billion and $1.1 billion, respectively, at September 30, 2022.
TVA established a SERP to provide benefits to selected employees of TVA which are comparable to those provided by competing organizations. The DCP is designed to provide participants with the ability to defer compensation to future periods. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance.
The NDT, ART, SERP, and DCP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities ("TIPS"), real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.
Private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments generally involve a three-to-four-year period where the investor contributes capital, followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of $187 million, private real assets of $128 million, and private credit of $57 million at September 30, 2022. The ART had unfunded commitments related to limited partnerships in private equity of $104 million, private real assets of $75 million, and private credit of $32 million at September 30, 2022. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at NAV in the fair value hierarchy.
Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, and DCP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at NAV in the fair value hierarchy.
Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies — Cost-Based Regulation and Note 10 — Regulatory Assets and Liabilities. TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows:
| | | | | | | | | | | | | | | | | |
Unrealized Investment Gains (Losses)
For the years ended September 30 (in millions) |
| Fund | Financial Statement Presentation | | 2022 | | 2021 |
| NDT | Regulatory assets | | $ | (396) | | | $ | 279 | |
| ART | Regulatory assets | | (190) | | | 145 | |
| SERP | Other income, net | | (19) | | | 7 | |
| DCP | Other income, net | | (5) | | | 1 | |
Currency and Interest Rate Swap Derivatives
See Note 15 — Risk Management Activities and Derivative Transactions — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps and interest rate swaps. These swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments.
Commodity Contract Derivatives and Commodity Derivatives under the FHP
Commodity Contract Derivatives. Most of these derivative contracts are valued based on market approaches, which utilize short-term and mid-term market-quoted prices from an external industry brokerage service.
Commodity Derivatives under the FHP. Swap contracts are valued using a pricing model based on New York Mercantile Exchange inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.
See Note 15 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Commodity Derivatives under the FHP.
Nonperformance Risk
The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.
Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying credit valuation adjustments ("CVAs"). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the counterparty. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2021) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a $2 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at September 30, 2022.
Fair Value Measurements
The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2022 and 2021. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.
| | | | | | | | | | | | | | | | | | | | | | | |
Fair Value Measurements At September 30, 2022 (in millions) |
| Quoted Prices in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Assets | | | | | | | |
| Investments | | | | | | | |
| Equity securities | $ | 534 | | | $ | — | | | $ | — | | | $ | 534 | |
Government debt securities(1) | 358 | | | 36 | | | — | | | 394 | |
Corporate debt securities(2) | — | | | 283 | | | — | | | 283 | |
| Mortgage and asset-backed securities | — | | | 52 | | | — | | | 52 | |
| Institutional mutual funds | 242 | | | — | | | — | | | 242 | |
| Forward debt securities contracts | — | | | 4 | | | — | | | 4 | |
Private equity funds measured at net asset value(3) | — | | | — | | | — | | | 487 | |
Private real asset funds measured at net asset value(3) | — | | | — | | | — | | | 369 | |
Private credit measured at net asset value(3) | — | | | — | | | — | | | 103 | |
Commingled funds measured at net asset value(3) | — | | | — | | | — | | | 1,203 | |
| Total investments | 1,134 | | | 375 | | | — | | | 3,671 | |
| | | | | | | |
| Commodity contract derivatives | — | | | 152 | | | — | | | 152 | |
| Commodity derivatives under the FHP | — | | | 123 | | | — | | | 123 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 1,134 | | | $ | 650 | | | $ | — | | | $ | 3,946 | |
| | | | | | | |
| Quoted Prices in Active Markets for Identical Liabilities
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Liabilities | | | | | | | |
Currency swaps(4) | $ | — | | | $ | 240 | | | $ | — | | | $ | 240 | |
| Interest rate swaps | — | | | 905 | | | — | | | 905 | |
| Commodity contract derivatives | — | | | 7 | | | — | | | 7 | |
| Commodity derivatives under the FHP | — | | | 8 | | | — | | | 8 | |
| | | | | | | |
| Total | $ | — | | | $ | 1,160 | | | $ | — | | | $ | 1,160 | |
Notes
(1) Includes government-sponsored entities, including $358 million of U.S. Treasury securities within Level 1 of the fair value hierarchy.
(2) Includes both U.S. and foreign debt.
(3) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets.
(4) TVA records currency swaps net of cash collateral received from or paid to the counterparty if applicable, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 15 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
| | | | | | | | | | | | | | | | | | | | | | | |
Fair Value Measurements
At September 30, 2021 (in millions) |
| Quoted Prices in Active
Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Assets | | | | | | | |
| Investments | | | | | | | |
| Equity securities | $ | 634 | | | $ | — | | | $ | — | | | $ | 634 | |
Government debt securities(1) | 573 | | | 24 | | | — | | | 597 | |
Corporate debt securities(2) | — | | | 411 | | | — | | | 411 | |
| Mortgage and asset-backed securities | — | | | 63 | | | — | | | 63 | |
| Institutional mutual funds | 225 | | | — | | | — | | | 225 | |
| Forward debt securities contracts | — | | | 2 | | | — | | | 2 | |
Private equity funds measured at net asset value(3) | — | | | — | | | — | | | 357 | |
Private real asset funds measured at net asset value(3) | — | | | — | | | — | | | 272 | |
Private credit measured at net asset value(3) | — | | | — | | | — | | | 71 | |
Commingled funds measured at net asset value(3) | — | | | — | | | — | | | 1,421 | |
| | | | | | | |
| | | | | | | |
| Total investments | 1,432 | | | 500 | | | — | | | 4,053 | |
| | | | | | | |
| Commodity contract derivatives | — | | | 250 | | | — | | | 250 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | 1,432 | | | $ | 750 | | | $ | — | | | $ | 4,303 | |
| | | | | | | |
| Quoted Prices in Active Markets for Identical Liabilities
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| Liabilities | | | | | | | |
Currency swaps(4) | $ | — | | | $ | 83 | | | $ | — | | | $ | 83 | |
| Interest rate swaps | — | | | 1,639 | | | — | | | 1,639 | |
| Commodity contract derivatives | — | | | 3 | | | — | | | 3 | |
| Total | $ | — | | | $ | 1,725 | | | $ | — | | | $ | 1,725 | |
Notes
(1) Includes government-sponsored entities, including $573 million of U.S. Treasury securities within Level 1 of the fair value hierarchy.
(2) Includes both U.S. and foreign debt.
(3) Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets.
(4) TVA records currency swaps net of cash collateral received from or paid to the counterparty, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 15 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
Other Financial Instruments Not Recorded at Fair Value
TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instruments. The fair value of the financial instruments held at September 30, 2022 and 2021, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at September 30, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Values of Financial Instruments Not Recorded at Fair Value (in millions) |
| | | | At September 30, 2022 | | At September 30, 2021 |
| | Valuation Classification | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
EnergyRight® receivables, net (including current portion) | Level 2 | | $ | 62 | | | $ | 62 | | | $ | 72 | | | $ | 71 | |
| | | | | | | | | |
| Loans and other long-term receivables, net (including current portion) | Level 2 | | 105 | | | 96 | | | 99 | | | 94 | |
| | | | | | | | | |
EnergyRight® financing obligations (including current portion) | Level 2 | | 72 | | | 81 | | | 82 | | | 92 | |
| | | | | | | | | |
| Unfunded loan commitments | Level 2 | | — | | | — | | | — | | | 3 | |
| | | | | | | | | |
| Membership interests of VIEs subject to mandatory redemption (including current portion) | Level 2 | | 20 | | | 22 | | | 23 | | | 30 | |
| | | | | | | | | |
| Long-term outstanding power bonds, net (including current maturities) | Level 2 | | 17,856 | | | 18,070 | | | 18,485 | | | 24,309 | |
| | | | | | | | | |
| Long-term debt of VIEs, net (including current maturities) | Level 2 | | 1,007 | | | 989 | | | 1,049 | | | 1,307 | |
| | | | | | | | | |
| | | | | | | | | |
The carrying value of Cash and cash equivalents, Restricted cash and cash equivalents, Accounts receivable, net, and Short-term debt, net approximate their fair values.
The fair value for loans and other long-term receivables is estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable. The fair value of long-term debt and membership interests of VIEs subject to mandatory redemption is estimated by determining the present value of future cash flows using current market rates for similar obligations, giving effect to credit ratings and remaining maturities.
17. Revenue
Revenue from Sales of Electricity
TVA's revenue from contracts with customers is primarily derived from the generation and sale of electricity to its customers and is included in Revenue from sales of electricity on the Consolidated Statements of Operations. Electricity is sold primarily to LPCs for distribution to their end-use customers. In addition, TVA sells electricity to directly served industrial companies, federal agencies, and others.
| | | | | |
| LPC sales | Approximately 91 percent of TVA's revenue from sales of electricity for the year ended September 30, 2022 was to LPCs, which then distribute the power to their customers using their own distribution systems. Power is delivered to each LPC at delivery points within the LPC's service territory. TVA recognizes revenue when the customer takes possession of the power at the delivery point. For power sales, the performance obligation to deliver power is satisfied in a series over time because the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to maintain long-term partnerships with LPCs, pandemic credits created to support LPCs and strengthen the public power response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. |
| |
| Directly served customers | Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption. Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue. For all power sales, the performance obligation to deliver power is satisfied in a series over time since the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley, pandemic credits created to support directly served customers in response to the COVID-19 pandemic, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance. |
Other Revenue
Other revenue consists primarily of wheeling and network transmission charges, sales of steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, REC sales, and certain other minor items.
Disaggregated Revenues
During 2022, revenues generated from TVA's electricity sales were $12.4 billion and accounted for virtually all of TVA's revenues. TVA's operating revenues by state for each of the last three years are detailed in the table below:
| | | | | | | | | | | | | | | | | |
Operating Revenues By State For the years ended September 30 (in millions) |
| | 2022 | | 2021 | | 2020 |
Alabama | $ | 1,778 | | | $ | 1,508 | | | $ | 1,439 | |
Georgia | 299 | | | 254 | | | 249 | |
Kentucky | 821 | | | 655 | | | 624 | |
Mississippi | 1,182 | | | 984 | | | 941 | |
North Carolina | 87 | | | 66 | | | 65 | |
Tennessee | 8,137 | | | 6,841 | | | 6,740 | |
Virginia | 48 | | | 42 | | | 42 | |
| Subtotal | 12,352 | | | 10,350 | | | 10,100 | |
| Off-system sales | 19 | | | 7 | | | 4 | |
| | | | | |
| Revenue from sales of electricity | 12,371 | | | 10,357 | | | 10,104 | |
| Other revenue | 169 | | | 146 | | | 145 | |
| Total operating revenues | $ | 12,540 | | | $ | 10,503 | | | $ | 10,249 | |
TVA's operating revenues by customer type for each of the last three years are detailed in the table below:
| | | | | | | | | | | | | | | | | |
Operating Revenues by Customer Type For the years ended September 30 (in millions) |
| | 2022 | | 2021 | | 2020 |
| Revenue from sales of electricity | | | | | |
| Local power companies | $ | 11,291 | | | $ | 9,534 | | | $ | 9,406 | |
| Industries directly served | 926 | | | 707 | | | 588 | |
| Federal agencies and other | 154 | | | 116 | | | 110 | |
| | | | | |
| Revenue from sales of electricity | 12,371 | | | 10,357 | | | 10,104 | |
| Other revenue | 169 | | | 146 | | | 145 | |
| Total operating revenues | $ | 12,540 | | | $ | 10,503 | | | $ | 10,249 | |
TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. In 2019, the TVA Board approved a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. The total wholesale bill credits to LPCs participating in the Partnership Agreement were $199 million, $189 million, and $163 million, respectively, for the years ended September 30, 2022, 2021, and 2020. In 2020, TVA provided participating LPCs a flexibility option, named Generation Flexibility, that allows them to locally generate or purchase up to approximately five percent of their average total hourly energy sales over a certain time period in order to meet their individual customers' needs. As of November 14, 2022, 147 LPCs had signed the Partnership Agreement with TVA, and 80 LPCs had signed a Power Supply Flexibility Agreement.
In 2020, the TVA Board approved a Pandemic Relief Credit which was effective for 2021 as a 2.5 percent monthly base rate credit. In 2021, the TVA Board approved a 2.5 percent monthly base rate credit, the Pandemic Recovery Credit, which was effective for 2022. These pandemic credits apply to service provided to TVA's LPCs, their large commercial and industrial customers, and TVA directly served customers. For the years ended September 30, 2022 and 2021, pandemic credits totaled $228 million and $221 million, respectively. In addition, in November 2021 the TVA Board approved a 1.5 percent monthly base rate credit, which is an extension of the Pandemic Recovery Credit, to be effective for 2023, and on July 28, 2022, the TVA Board notationally approved increasing the credit from 1.5 percent to 2.5 percent. The 2023 credit is expected to approximate $230 million, and it will be administered in a manner similar to the current Pandemic Recovery Credit.
The number of LPCs by contract arrangement, the revenues derived from such arrangements for 2022, and the percentage those revenues comprised of TVA's total operating revenues for 2022, are summarized in the table below:
| | | | | | | | | | | | | | | | | |
TVA Local Power Company Contracts
At or for the year ended September 30, 2022 |
Contract Arrangements(1) | Number of LPCs | | Revenue from Sales of Electricity to LPCs
(in millions) | | Percentage of Total Operating Revenues |
| 20-year termination notice | 147 | | | $ | 9,670 | | | 77.1 | % |
| | | | | |
| | | | | |
| 5-year termination notice | 6 | | | 1,621 | | | 12.9 | % |
| Total | 153 | | | $ | 11,291 | | | 90.0 | % |
Note
(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in a contract with one of the LPCs with a five-year termination notice, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.
TVA's two largest LPCs — MLGW and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues in 2022, 2021, and 2020. Certain LPCs, including MLGW, are evaluating options for future energy choices.
Contract Balances
Contract assets represent an entity's right to consideration in exchange for goods and services that the entity has transferred to customers. TVA did not have any material contract assets at September 30, 2022.
Contract liabilities represent an entity's obligations to transfer goods or services to customers for which the entity has received consideration (or an amount of consideration is due) from the customers. These contract liabilities are primarily related to upfront consideration received prior to the satisfaction of the performance obligation. See Economic Development Incentives below and Note 12 — Other Long-Term Liabilities — Long-Term Deferred Revenue.
Economic Development Incentives. Under certain economic development programs TVA offers incentives to existing and potential power customers in targeted business sectors that make multi-year commitments to invest in the Tennessee Valley. TVA records those incentives as reductions of revenue. Incentives recorded as a reduction to revenue were $328 million, $315 million, and $318 million for 2022, 2021, and 2020, respectively. Incentives that have been approved but have not been paid are recorded in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At September 30, 2022 and 2021, the outstanding unpaid incentives were $187 million and $176 million, respectively. Incentives that have been paid out may be subject to claw back if the customer fails to meet certain program requirements.
18. Other Income, Net
Income and expenses not related to TVA's operating activities are summarized in the following table:
| | | | | | | | | | | | | | | | | |
Other Income, Net For the years ended September 30 (in millions) |
| | 2022 | | 2021 | | 2020 |
| Bellefonte | $ | — | | | $ | (28) | | | $ | — | |
| Interest income | 15 | | | 12 | | | 18 | |
| External services | 16 | | | 13 | | | 12 | |
| Gains (losses) on investments | (17) | | | 16 | | | 9 | |
| Miscellaneous | (7) | | | — | | | (3) | |
| Total other income, net | $ | 7 | | | $ | 13 | | | $ | 36 | |
19. Supplemental Cash Flow Information
Interest paid was $1.1 billion for each of 2022, 2021, and 2020. These amounts differ from interest expense in certain years due to the timing of payments. There was no interest capitalized in 2022, 2021, or 2020.
Construction in progress and asset retirement obligation project accruals and nuclear fuel expenditures included in Accounts payable and accrued liabilities at September 30, 2022, 2021, and 2020 were $629 million, $637 million, and $398 million, respectively, and are excluded from the Statements of Consolidated Cash Flows for the years ended September 30, 2022, 2021, and 2020 as non-cash investing activities.
Excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2021, were non-cash investing and financing activities of $233 million related primarily to an increase in lease assets and liabilities incurred for a finance lease that was amended in March 2021. Excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2020, as non-cash financing activities, was $394 million related to lease obligations incurred primarily in connection with a PPA. See Note 8 — Leases for further information regarding TVA's finance leases. Also excluded from the Statement of Consolidated Cash Flows for the year ended September 30, 2020, were $80 million and $73 million as non-cash financing and investing activities, respectively, due to derecognition of the Paradise pipeline financing obligation and asset. No material finance leases were entered into during the year ended September 30, 2022.
Cash flows from swap contracts that are accounted for as hedges are classified in the same category as the item being hedged or on a basis consistent with the nature of the instrument.
20. Benefit Plans
TVA sponsors a pension plan that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other post-employment benefits such as workers' compensation, and the SERP. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of directors (the "TVARS Board").
Overview of Plans and Benefits
Retirement Plans. The participants in the pension plan receive either a traditional final average pay pension or a cash balance pension. The traditional pension benefit is based on the participant's creditable service, average monthly salary for their highest three consecutive years of eligible compensation, and a pension factor based on the participant's age and years of service, less a Social Security offset. The cash balance pension benefit is based on pay and interest credits accumulated in the participant's account and the participant's age.
Participants in the pension plan are also eligible to receive 401(k) plan matching contributions, may be eligible to receive 401(k) plan non-elective contributions, and may be eligible to make after-tax contributions of up to $10,000 per year to the pension plan, which at the election of the participant are invested in either the fixed fund, which receives a fixed interest rate set forth in the plan, or the variable fund, which receives a rate of return based on an S&P 500 index fund. Participants in the pension plan may also become eligible for a supplemental pension benefit based on age and years of service at retirement, which is provided to help offset the cost of retiree medical insurance. Employees first hired on or after July 1, 2014, are participants in the 401(k) plan only and receive both non-elective and matching contributions to their accounts in the 401(k) plan.
401(k) Plan. Under the 401(k) plan, the non-elective and matching contributions TVA makes to participant accounts depends on the employee's hire date, years of service, and individual elections. Non-elective employer contributions for eligible participants range from three percent to six percent and matching employer contributions range from 1.5 percent to six percent. TVA recognized 401(k) contribution costs of $97 million, $92 million, and $88 million during 2022, 2021, and 2020, respectively. The 2023 plan contribution costs are estimated to be approximately $101 million.
Supplemental Executive Retirement Plan. TVA has established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by IRS rules applicable to the qualified defined benefit pension plan.
Other Post-Retirement Benefits. TVA sponsors two unfunded post-retirement benefit plans that provide for non-vested contributions toward the cost of certain eligible retirees' medical coverage. The first plan covers only certain retirees and surviving dependents who do not qualify for TVARS benefits, including the supplemental pension benefit. The second plan is designed to place a limit on the out-of-pocket amount certain eligible retirees pay for medical coverage and provides a credit based on years of TVA service and monthly base pension amount, reduced by any TVARS supplemental pension benefits or any TVA contribution from the first plan, described above. In January 2017, TVA began providing all Medicare-eligible retirees and spouses Medicare supplement coverage through a private exchange. Transition to the exchange did not affect any TVARS supplemental benefits for eligible retirees, and the credit continues to be calculated in the same manner as before.
Other Post-Employment Benefits. TVA employees injured in work-related incidents are covered by the workers' compensation program for federal employees administered through the Department of Labor by the Office of Workers' Compensation Programs in accordance with the provisions of FECA. FECA provides compensation and medical benefits to federal employees for permanent and temporary disability due to employment-related injury or disease.
Accounting Mechanisms
Regulatory Accounting. TVA has classified all amounts related to unrecognized prior service costs/(credits), net actuarial gains or losses, and the funded status as regulatory assets or liabilities as such amounts are probable of collection in
future rates. Additionally, TVA recognizes pension costs as regulatory assets or regulatory liabilities to the extent that the amount calculated under U.S. GAAP as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. As a result of plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP.
Cost Method. TVA uses the projected unit credit cost method to determine the service cost and the projected benefit obligation for retirement, termination, and ancillary benefits. Under this method, a "projected accrued benefit" is calculated at the beginning of the year and at the end of the year for each benefit that may be payable in the future. The "projected accrued benefit" is based on the plan's accrual formula and upon service at the beginning or end of the year, but it uses final average compensation, social security benefits, and other relevant factors projected to the age at which the employee is assumed to leave active service. The projected benefit obligation is the actuarial present value of the "projected accrued benefits" at the beginning of the year for employed participants and is the actuarial present value of all benefits for other participants. The service cost is the actuarial present value of the difference between the "projected accrued benefits" at the beginning and end of the year.
Amortization of Net Gain or Loss. TVA utilizes the corridor approach for gain/loss amortization. Differences between actuarial assumptions and actual plan results are deferred and amortized into periodic cost only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average future expected working lifetime of participants expected to receive benefits, which is approximately 11 years for the pension plan.
Amortization of Prior Service Cost/(Credit). Amortization of net prior service cost/(credit) resulting from a plan change is included as a component of period expense in the year first recognized and every year thereafter until it is fully amortized. The increase or decrease in the benefit obligation due to the plan change is amortized over the average remaining service period of participating employees expected to receive benefits under the plan. The pension and post-retirement plans currently have prior service costs/(credits) from plan changes made in 2016, 2018, 2019, 2020, and 2021 with remaining amortization periods ranging from one to seven years. However, when a plan change reduces the benefit obligation, existing positive prior service costs are reduced or eliminated starting with the earliest established before a new prior service credit base is established.
Asset Method. TVA's asset method calculates a market-related value of assets ("MRVA") that recognizes realized and unrealized investment gains and losses over a three-year smoothing period to decrease the volatility of annual net periodic pension benefit costs. The MRVA is used to determine the expected return on plan assets, a component of net periodic pension benefit cost. The difference in the expected return on the MRVA and the actual return on the fair value on plan assets is recognized as an actuarial (gain)/loss in the pension benefit obligation at September 30. However, the MRVA has no impact on the fair value of plan assets measured at September 30.
Obligations and Funded Status
The actuarial results provided reflect data and assumptions appropriate for the purpose of the measurement of plan obligations and funded status for the year ended. Effects of COVID-19 on the financial markets, regulations, and experience are uncertain and still evolving. The ultimate impact of the COVID-19 pandemic on the pension plan and other post-retirement plans depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy. There may be significant effects on plan experience and/or assumptions, both demographic and economic, as well as the possibility of related changes in certain plan provisions, used for future measurements. Therefore, TVA cannot estimate the potential impact to the pension plan and other post-retirement plans at this time.
The changes in plan obligations, assets, and funded status for the years ended September 30, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Obligations and Funded Status
For the years ended September 30 (in millions) |
| 809,400,000 | | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Change in benefit obligation | | | | | | | |
| Benefit obligation at beginning of year | $ | 13,348 | | | $ | 13,675 | | | $ | 498 | | | $ | 544 | |
| Service cost | 53 | | | 57 | | | 17 | | | 18 | |
| Interest cost | 378 | | | 368 | | | 15 | | | 16 | |
| Plan participants' contributions | 5 | | | 5 | | | — | | | — | |
Collections(1) | — | | | — | | | 15 | | | 17 | |
| | | | | | | |
| Actuarial (gain) loss | (2,509) | | | (25) | | | (114) | | | (53) | |
| | | | | | | |
| Net transfers (to) from variable fund/401(k) plan | 11 | | | 2 | | | — | | | — | |
| Expenses paid | (6) | | | (6) | | | — | | | — | |
| Benefits paid | (744) | | | (728) | | | (43) | | | (44) | |
| Benefit obligation at end of year | 10,536 | | | 13,348 | | | 388 | | | 498 | |
| | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of net plan assets at beginning of year | 9,110 | | | 7,959 | | | — | | | — | |
| Actual return on plan assets | (590) | | | 1,572 | | | — | | | — | |
| Plan participants' contributions | 5 | | | 5 | | | — | | | — | |
Collections(1) | — | | | — | | | 15 | | | 17 | |
| Net transfers (to) from variable fund/401(k) plan | 11 | | | 2 | | | — | | | — | |
| Employer contributions | 308 | | | 306 | | | 28 | | | 27 | |
| Expenses paid | (6) | | | (6) | | | — | | | — | |
| Benefits paid | (744) | | | (728) | | | (43) | | | (44) | |
| Fair value of net plan assets at end of year | 8,094 | | | 9,110 | | | — | | | — | |
| | | | | | | |
| Funded status | $ | (2,442) | | | $ | (4,238) | | | $ | (388) | | | $ | (498) | |
Note
(1) Collections include retiree contributions as well as provider discounts and rebates.
For 2022, the $2.5 billion pension benefit obligation actuarial gain is primarily due to the increase in the discount rate from 2.90 percent to 5.60 percent, which decreased the liability by $3.5 billion. This gain was partially offset by a $527 million actuarial loss due to mortality assumption changes, a $411 million actuarial loss due to higher Cost of Living Adjustment ("COLA") and higher interest crediting rates than previously assumed for CY 2023 and CY 2024, and a $78 million actuarial loss due to demographic and plan experience.
For 2021, the $25 million pension benefit obligation actuarial gain is primarily due to the increase in the discount rate from 2.75 percent to 2.90 percent, which decreased the liability by $248 million. This gain was partially offset by $104 million of actuarial losses due to demographic and plan experience, an actuarial loss of $91 million due to the higher COLA and higher interest crediting rates than previously assumed for CY 2022, and a $28 million actuarial loss due to updating to the latest mortality improvement scale.
The $114 million other post-retirement actuarial gain for 2022 was primarily due to the increase in the discount rate from 3.05 percent to 5.65 percent, which decreased the liability by $168 million. The liability decreased an additional $31 million as a result of an actuarial gain from delaying the ultimate post-Medicare trend rate assumption two years due to favorable premium rates. These gains were partially offset by a $67 million actuarial loss due to changes in pre-Medicare trend assumptions related to higher claim costs and lower expected future retiree contributions. In addition, TVA recognized an $18 million actuarial loss due to mortality assumption changes.
The other post-retirement actuarial gain for 2021 decreased the benefit obligation by $53 million. TVA recognized a $47 million actuarial gain primarily due to lower per capita claims costs than previously assumed net of the loss from the change in the pre-Medicare eligible per capita contributions trend rate assumption. In addition, TVA recognized a $7 million gain due to demographic and plan experience, partially offset by a $1 million loss due to updating to the latest mortality improvement scale.
Amounts related to these benefit plans recognized on TVA's Consolidated Balance Sheets consist of regulatory assets and liabilities that have not been recognized as components of net periodic benefit cost at September 30, 2022 and 2021, and the funded status of TVA's benefit plans, which are included in Accounts payable and accrued liabilities and Post-retirement and post-employment benefit obligations:
| | | | | | | | | | | | | | | | | | | | | | | |
Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 (in millions) |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Regulatory assets (liabilities) | $ | 1,839 | | | $ | 3,636 | | | $ | (70) | | | $ | 32 | |
| Accounts payable and accrued liabilities | (6) | | | (7) | | | (22) | | | (24) | |
Pension and post-retirement benefit obligations(1) | (2,436) | | | (4,231) | | | (366) | | | (474) | |
Note
(1) The table above excludes $270 million and $340 million of post-employment benefit costs that are recorded in Post-retirement and post-employment benefit obligations on the Consolidated Balance Sheets at September 30, 2022 and 2021, respectively.
Unrecognized amounts included in regulatory assets or liabilities yet to be recognized as components of accrued benefit cost at September 30, 2022 and 2021, consisted of the following:
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Post-Retirement Benefit Costs Deferred as Regulatory Assets (Liabilities) At September 30 (in millions) |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Unrecognized prior service credit | $ | (424) | | | $ | (517) | | | $ | (76) | | | $ | (93) | |
| Unrecognized net loss | 2,186 | | | 4,062 | | | 6 | | | 125 | |
| Amount capitalized due to actions of regulator | 77 | | | 91 | | | — | | | — | |
| Total regulatory assets (liabilities) | $ | 1,839 | | | $ | 3,636 | | | $ | (70) | | | $ | 32 | |
Information for the pension projected benefit obligation ("PBO") in excess of plan assets and other post-retirement accumulated postretirement benefit obligation ("APBO") has been disclosed in the Obligations and Funded Status table above. The following table provides the pension plan accumulated benefit obligation ("ABO") in excess of plan assets. The other post-retirement plans are unfunded or have no plan assets.
| | | | | | | | | | | |
Accumulated Benefit Obligations in Excess of Plan Assets At September 30 (in millions) |
| | 2022 | | 2021 |
| | | |
| Accumulated benefit obligation | $ | 10,508 | | | $ | 13,299 | |
| Fair value of net plan assets | 8,094 | | | 9,110 | |
The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30, 2022, 2021, and 2020 were as follows:
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Components of Net Periodic Benefit Cost For the years ended September 30 (in millions) |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Service cost | $ | 53 | | | $ | 57 | | | $ | 55 | | | $ | 17 | | | $ | 18 | | | $ | 16 | |
| Interest cost | 378 | | | 368 | | | 415 | | | 15 | | | 16 | | | 16 | |
| Expected return on plan assets | (435) | | | (493) | | | (488) | | | — | | | — | | | — | |
| Amortization of prior service credit | (93) | | | (97) | | | (97) | | | (17) | | | (18) | | | (24) | |
| Recognized net actuarial loss | 392 | | | 452 | | | 436 | | | 5 | | | 11 | | | 10 | |
| Total net periodic benefit cost as actuarially determined | 295 | | | 287 | | | 321 | | | 20 | | | 27 | | | 18 | |
| Amount expensed (capitalized) due to actions of regulator | 13 | | | 19 | | | (15) | | | — | | | — | | | — | |
| Net periodic benefit cost | $ | 308 | | | $ | 306 | | | $ | 306 | | | $ | 20 | | | $ | 27 | | | $ | 18 | |
| | | | | | | | | | | |
Plan Assumptions
Plan assumptions utilized to determine benefit obligations and net periodic benefit costs include discount rates, projected health care cost trend rates, COLAs, expected long-term rate of return on plan assets, rate of increase in future compensation levels, retirement rates, expected timing and form of payments, and mortality rates, of which certain key assumptions are noted below. Every five years, a formal actuarial experience study that compares assumptions to the actual experience is conducted. Additional ad-hoc experience studies are performed as needed to review recent experience and validate recommended changes to the actuarial assumptions used based upon TVA's last experience study in 2018.
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| Actuarial Assumptions Utilized to Determine Benefit Obligations at September 30 |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Discount rate | 5.60% | | 2.90% | | 5.65% | | 3.05% |
| Average rate of compensation increase | 3.32% | | 3.37% | | N/A | | N/A |
| Weighted average interest crediting rate | 5.14% | | 5.15% | | N/A | | N/A |
Cost of living adjustment (COLA)(1) | 2.00% | | 2.00% | | 2.00% | | 2.00% |
| Pre-Medicare eligible per capita claim costs | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | 7.00% | | 6.25% |
| Ultimate health care cost trend rate | N/A | | N/A | | 5.00% | | 5.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | 2031 | | 2027 |
| Pre-Medicare eligible per capita contributions | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | 5.00% | | 8.51% |
| Ultimate health care cost trend rate | N/A | | N/A | | 5.00% | | 5.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | 2022 | | 2027 |
| Post-Medicare eligible | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | —% | | —% |
| Ultimate health care cost trend rate | N/A | | N/A | | 4.00% | | 4.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | 2026 | | 2024 |
Note
(1) The COLA assumption is the ultimate long-term rate. The calendar year rates for 2023 and 2024 is assumed to be 6.00 percent and 3.15 percent, respectively, and for years thereafter the ultimate is used.
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Actuarial Assumptions Utilized to Determine Net Periodic Benefit Cost for the Years Ended September 30(1) |
| | Pension Benefits | | Other Post-Retirement Benefits |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Discount rate | 2.90% | | 2.75% | | 3.20% | | 3.05% | | 3.05% | | 3.30% |
Expected return on plan assets(2) | 5.75% | | 6.75% | | 6.75% | | N/A | | N/A | | N/A |
| Weighted average interest crediting rate | 5.14% | | 5.15% | | 5.15% | | N/A | | N/A | | N/A |
Cost of living adjustment (COLA)(3) | 2.00% | | 2.00% | | 2.00% | | 2.00% | | 2.00% | | 2.00% |
| Average rate of compensation increase | 3.32% | | 3.37% | | 3.43% | | N/A | | N/A | | N/A |
| Pre-Medicare eligible per capita claims costs | | | | | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | N/A | | 6.25% | | 6.50% | | 6.75% |
| Ultimate health care cost trend rate | N/A | | N/A | | N/A | | 5.00% | | 5.00% | | 5.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | N/A | | 2027 | | 2027 | | 2027 |
| Pre-Medicare eligible per capita contributions | | | | | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | N/A | | 8.51% | | 11.93% | | 6.75% |
| Ultimate health care cost trend rate | N/A | | N/A | | N/A | | 5.00% | | 5.00% | | 5.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | N/A | | 2027 | | 2027 | | 2027 |
| Post-Medicare eligible | | | | | | | | | | | |
| Current health care cost trend rate | N/A | | N/A | | N/A | | —% | | —% | | —% |
| Ultimate health care cost trend rate | N/A | | N/A | | N/A | | 4.00% | | 4.00% | | 4.00% |
| Year ultimate trend rate is reached | N/A | | N/A | | N/A | | 2024 | | 2024 | | 2023 |
Notes
(1) The actuarial assumptions used to determine the benefit obligations at September 30 of each year are subsequently used to determine net periodic benefit cost
for the following year except the rate of compensation increase assumption.
(2) The actual return on assets for 2022, 2021, and 2020 were (6.64) percent, 20.30 percent, and 5.11 percent, respectively.
(3) The COLA assumption is the ultimate rate. The actual calendar year rate is used in determining the expense, and for years thereafter the ultimate rate is used.
Discount Rate. In selecting the assumed discount rate, TVA reviews market yields on high-quality corporate debt and endeavors to match, through the use of a hypothetical bond portfolio, instrument maturities with the maturities of its pension obligations in accordance with the prevailing accounting standards. The selected bond portfolio is derived from a universe of high quality corporate bonds of Aa-rated quality or higher. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected.
Expected Return on Plan Assets. The qualified defined benefit pension plan is the only plan that is funded with qualified plan assets. The expected rate of return is based on annual studies performed by third-party professional investment consultants. In determining the expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice, the current outlook on capital markets, the asset allocation policy, and the anticipated investment expenses and impact of active management. Asset allocations are periodically updated using the pension plan asset/liability studies and are part of the determination of the estimates of long-term rates of return. The TVARS asset allocation policy diversifies plan assets across multiple asset classes so as to minimize the risk of large losses. The asset allocation policy is designed to be responsive to changes in the funded status of TVARS. During 2022, the TVARS Board increased the expected return on plan assets assumptions from 5.75 percent to 6.50 percent based upon review of the current plan's funding levels and asset target allocation mix, capital market outlooks, and the most recent studies. In 2022, TVA management adopted the 6.50 percent expected long-term rate of return on plan assets assumption, which will be used to calculate the 2023 net periodic pension cost.
Compensation Increases. Assumptions related to compensation increases are based upon the latest TVA compensation experience study performed in 2018. Future compensation is assumed to likely increase at rates between 2.50 percent and 14.00 percent per year, depending upon the employee's age, and is used to determine the benefit obligations and net periodic benefit cost. The average assumed compensation increase is based upon the current active participants.
Mortality. The mortality assumption is comprised of a base table that represents the current future life expectancy adjusted by an improvement scale to project future improvements in life expectancy. TVA's mortality assumptions are based upon actuarial projections in combination with studies of the actual mortality experience of TVA's pension and post-retirement benefit plan participants while taking into consideration the published Society of Actuaries ("SOA") mortality table and projection scale at September 30. In 2022, based upon the most recent mortality experience study, TVA adopted a modified version of the SOA PRI-2012 Upper Quartile mortality table and updated to the latest mortality improvement scale at September 30, 2022.
The following mortality assumptions were used to determine the benefit obligations for the pension and other post-retirement benefit plans at September 30, 2022, 2021, and 2020. Assumptions used to determine year-end benefit obligations are the assumptions used to determine the subsequent year's net periodic benefit costs.
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Mortality Assumptions At September 30 |
| | 2022 | | 2021 | | 2020 |
| Mortality table | PRI-2012 Upper Quartile table (adjusted) | | PRI-2012 table (adjusted) | | PRI-2012 table (adjusted) |
| Improvement scale | MP-2021 (modified) | | MP-2020 (modified) | | MP-2019 (modified) |
Health Care Cost Trends. The health care cost trend rates are assumptions about the annual rate of changes in the cost of health care benefits currently provided by the post-retirement benefit plan. In establishing health care cost trend rates, TVA reviews actual recent cost trends and projected future trends considering health care inflation, changes in health care utilization, and changes in plan benefits and premium experience.
Cost of Living Adjustment. COLAs are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. Eligible retirees receive COLA on pension and supplemental benefits in January based on a formula linked to the Consumer Price Index for All Urban Consumers ("CPI-U") following any year in which the calculation is at least one percent. Increases in COLA will be the percentage change in average CPI-U for the current 12-month period (November - October) compared to the average CPI-U for the previous 12-month period (November - October) for which a COLA was given, less 0.25 percent, with a 6.00 percent cap for any one year.
TVA's COLA assumption is derived from long-term expectations of the expected future rate of inflation, based upon capital market assumptions, economic forecasts, and the Federal Reserve policy. The actual calendar year COLA and the long- term COLA assumption are used to determine the benefit obligation at September 30 and the net periodic benefit costs for the following fiscal year. The actual calendar year COLAs for 2022, 2021, and 2020 were 3.50 percent, 1.13 percent, and 1.54 percent, respectively.
Sensitivity of Costs to Changes in Assumptions. The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions:
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| Sensitivity to Certain Changes in Pension Assumptions |
Actuarial Assumption | | Change in Assumption | | Impact on 2022 Pension Cost (in millions) | | Impact on 2022 Projected Benefit Obligation (in millions) |
| Discount rate | | (0.25) | % | | $ | 16 | | | $ | 257 | |
| Rate of return on plan assets | | (0.25) | % | | 19 | | | N/A |
| Cost of living adjustments | | 0.25 | % | | 29 | | | 179 | |
Each fluctuation above assumes that the other components of the calculation are held constant and excludes any impact for unamortized actuarial gains or losses.
Plan Investments
In 2021, a new asset allocation plan was put in place to reduce risk and volatility in the TVARS investment portfolio. Pursuant to the TVARS Rules and Regulations, any proposed changes in asset allocation that would change TVARS's assumed rate of investment return are subject to the review and veto of the TVA Board. The qualified pension plan assets are invested across growth, defensive-growth, defensive, and inflation-sensitive assets. The TVARS asset allocation policy includes permissible deviations from target allocations, and action can be taken, as appropriate, to rebalance the plan's assets consistent with the asset allocation policy. At September 30, 2022 and 2021, the asset holdings of TVARS included the following:
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| Asset Holdings of TVARS |
| | | | | Plan Assets at September 30 |
| Asset Category | | Target Allocation | | 2022 | | 2021 |
| Growth assets | | 17 | % | | 20 | % | | 18 | % |
| Defensive growth assets | | 38 | % | | 34 | % | | 35 | % |
| Defensive assets | | 20 | % | | 18 | % | | 20 | % |
| Inflation-sensitive assets | | 25 | % | | 28 | % | | 27 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
Fair Value Measurements
The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2022:
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TVA Retirement System At September 30, 2022 (in millions) |
| | Total(1)(2) | | Quoted Prices in Active Markets for Identical
Assets/Liabilities
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets | | | | | | | |
| Equity securities | $ | 709 | | | $ | 707 | | | $ | — | | | $ | 2 | |
| | | | | | | |
| Preferred securities | 6 | | | 1 | | | 5 | | | — | |
| | | | | | | |
| Debt securities | | | | | | | |
| Corporate debt securities | 1,087 | | | — | | | 1,087 | | | — | |
| Residential mortgage-backed securities | 293 | | | — | | | 289 | | | 4 | |
| Debt securities issued by U.S. Treasury | 616 | | | 616 | | | — | | | — | |
Debt securities issued by foreign governments | 130 | | | — | | | 130 | | | — | |
Asset-backed securities | 176 | | | — | | | 136 | | | 40 | |
Debt securities issued by state/local governments | 23 | | | — | | | 23 | | | — | |
Commercial mortgage-backed securities | 161 | | | — | | | 145 | | | 16 | |
| | | | | | | |
Commingled funds measured at net asset value(3) | | | | | | | |
| Equity | 436 | | | — | | | — | | | — | |
| Debt | 657 | | | — | | | — | | | — | |
| | | | | | | |
| Blended | 111 | | | — | | | — | | | — | |
| | | | | | | |
| Institutional mutual funds | 454 | | | 454 | | | — | | | — | |
| Cash equivalents and other short-term investments | 431 | | | 133 | | | 298 | | | — | |
| | | | | | | |
Private credit measured at net asset value(3) | 522 | | | — | | | — | | | — | |
Private equity measured at net asset value(3) | 1,454 | | | — | | | — | | | — | |
Private real assets measured at net asset value(3) | 1,080 | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Securities lending collateral | 196 | | | — | | | 196 | | | — | |
| | | | | | | |
| Derivatives | | | | | | | |
Futures | 5 | | | 5 | | | — | | | — | |
| Swaps | 17 | | | — | | | 17 | | | — | |
| | | | | | | |
| Foreign currency forward receivable | 2 | | | — | | | 2 | | | — | |
| | | | | | | |
| Total assets | $ | 8,566 | | | $ | 1,916 | | | $ | 2,328 | | | $ | 62 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivatives | | | | | | | |
| Futures | $ | 10 | | | $ | 10 | | | $ | — | | | $ | — | |
| Foreign currency forward payable | 1 | | | — | | | 1 | | | — | |
| | | | | | | |
| Swaps | 54 | | | — | | | 54 | | | — | |
| | | | | | | |
| | | | | | | |
| Securities sold under agreements to repurchase | 111 | | | — | | | 111 | | | — | |
| | | | | | | |
| Total liabilities | $ | 176 | | | $ | 10 | | | $ | 166 | | | $ | — | |
Notes
(1) Excludes approximately $100 million in net payables associated with security purchases and sales and various other payables.
(2) Excludes a $196 million payable for collateral on loaned securities in connection with TVARS's participation in securities lending programs.
(3) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
TVA Retirement System At September 30, 2021 (in millions) |
| | Total(1)(2) | | Quoted Prices in Active Markets for Identical
Assets/Liabilities
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets | | | | | | | |
| Equity securities | $ | 992 | | | $ | 990 | | | $ | — | | | $ | 2 | |
| | | | | | | |
| Preferred securities | 9 | | | 2 | | | 6 | | | 1 | |
| | | | | | | |
| Debt securities | | | | | | | |
| Corporate debt securities | 1,360 | | | — | | | 1,359 | | | 1 | |
| Residential mortgage-backed securities | 275 | | | — | | | 267 | | | 8 | |
| Debt securities issued by U.S. Treasury | 741 | | | 741 | | | — | | | — | |
| Debt securities issued by foreign governments | 204 | | | — | | | 200 | | | 4 | |
| Asset-backed securities | 151 | | | — | | | 110 | | | 41 | |
| Debt securities issued by state/local governments | 28 | | | — | | | 28 | | | — | |
Commercial mortgage-backed securities | 168 | | | — | | | 151 | | | 17 | |
| | | | | | | |
Commingled funds measured at net asset value(3) | | | | | | | |
| Equity | 619 | | | — | | | — | | | — | |
| Debt | 881 | | | — | | | — | | | — | |
| | | | | | | |
| Blended | 105 | | | — | | | — | | | — | |
| | | | | | | |
| Institutional mutual funds | 841 | | | 841 | | | — | | | — | |
| Cash equivalents and other short-term investments | 710 | | | 323 | | | 387 | | | — | |
| | | | | | | |
Private credit measured at net asset value(3) | 324 | | | — | | | — | | | — | |
Private equity measured at net asset value(3) | 1,333 | | | — | | | — | | | — | |
Private real assets measured at net asset value(3) | 760 | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Securities lending collateral | 240 | | | — | | | 240 | | | — | |
| | | | | | | |
| Derivatives | | | | | | | |
Futures | 1 | | | 1 | | | — | | | — | |
Swaps | 6 | | | — | | | 6 | | | — | |
| | | | | | | |
| Foreign currency forward receivable | 1 | | | — | | | 1 | | | — | |
| | | | | | | |
| Total assets | $ | 9,749 | | | $ | 2,898 | | | $ | 2,755 | | | $ | 74 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Derivatives | | | | | | | |
| Futures | $ | 4 | | | $ | 4 | | | $ | — | | | $ | — | |
| Foreign currency forward payable | 1 | | | — | | | 1 | | | — | |
| | | | | | | |
| Swaps | 23 | | | — | | | 23 | | | — | |
| | | | | | | |
| | | | | | | |
| Securities sold under agreements to repurchase | 108 | | | — | | | 108 | | | — | |
| | | | | | | |
| Total liabilities | $ | 136 | | | $ | 4 | | | $ | 132 | | | $ | — | |
Notes
(1) Excludes approximately $263 million in net payables associated with security purchases and sales and various other payables.
(2) Excludes a $240 million payable for collateral on loaned securities in connection with TVARS's participation in securities lending programs.
(3) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The following table provides a reconciliation of beginning and ending balances of pension plan assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):
| | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (in millions) |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
Balance at September 30, 2020 | $ | 94 | |
| Net realized/unrealized gains (losses) | (48) | |
| Purchases, sales, issuances, and settlements (net) | 32 | |
| Transfers in and/or out of Level 3 | (4) | |
| |
Balance at September 30, 2021 | 74 | |
| Net realized/unrealized gains (losses) | (4) | |
| Purchases, sales, issuances, and settlements (net) | 2 | |
| Transfers in and/or out of Level 3 | (10) | |
| |
Balance at September 30, 2022 | $ | 62 | |
The following descriptions of the valuation methods and assumptions used by the pension plan to estimate the fair value of investments apply to investments held directly by the pension plan. Third-party pricing vendors provide valuations for investments held by the pension plan in most instances, except for commingled, private credit, private equity, and private real asset funds which are priced at NAVs established by the investment managers. In instances where pricing is determined to be based on unobservable inputs, a Level 3 classification has been assigned. Certain securities priced by the investment manager using a proprietary fair value model with unobservable inputs have been classified as Level 3.
Equity and Preferred Securities. Investments listed on either a national or foreign securities exchange or traded in the over-the-counter National Market System are generally valued each business day at the official closing price (typically the last reported sale price) on the exchange on which the security is primarily traded and are classified as Level 1. Equity securities, including common stocks and preferred securities, classified as Level 2 may have been priced by dealer quote or using assumptions based on observable market data, such as yields on bonds from the same issuer or industry. Certain securities priced by the investment manager using unobservable inputs have been classified as Level 3.
Corporate Debt Securities. Corporate bonds are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). Certain securities priced by the investment manager using broker pricing or unobservable inputs have been classified as Level 3.
Mortgage and Asset-Backed Securities. Residential mortgage-backed securities consist of collateralized mortgage obligations ("CMOs") and U.S. pass-through security pools related to government-sponsored enterprises. CMO pricing is typically based on either a volatility-driven, multidimensional, single-cash-flow stream model or an option-adjusted spread model. These models incorporate available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Pricing for government-sponsored enterprise securities, including the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association, is typically based on quotes from the To Be Announced ("TBA") market, which is highly liquid with multiple electronic platforms that facilitate the execution of trading between investors and broker/dealers. Prices from the TBA market are then compared against other live data feeds as well as input obtained directly from the dealer community. Most residential mortgage-backed securities are considered to be priced using Level 2 inputs because of the nature of their market-data-based pricing models. Certain securities priced by vendors using a single broker quote or unobservable inputs have been classified as Level 3.
Debt Securities Issued by U.S. Treasury. For U.S. Treasury securities, fair values reflect the closing price reported in the active market in which the security is traded (Level 1 inputs).
Debt Securities Issued by Foreign Governments. Foreign government bonds and foreign government inflation-linked securities are typically priced based on proprietary discounted cash flow models, incorporating option-adjusted spread features as appropriate. Debt securities issued by foreign governments are classified as Level 2 because of the nature of their market-data-based pricing models. Certain securities priced by the investment manager using broker quotes or unobservable input have been classified as Level 3.
Debt Securities Issued by State and Local Governments. Debt securities issued by state and local governments are
typically priced using market-data-based pricing models, and are therefore classified as Level 2. These pricing models incorporate market data such as quotes, trading levels, spread relationships, and yield curves, as applicable.
Commercial Mortgage-Backed and Asset-Backed Securities. Commercial mortgage-backed and asset-backed securities are typically priced based on a single-cash-flow stream model, which incorporates available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Because of the market-data-based nature of such pricing models, these securities are typically classified as Level 2. Certain securities priced by investment managers using broker pricing or unobservable inputs have been classified as Level 3.
Commingled Funds. The pension plan invests in commingled funds, which include collective trusts, unit investment trusts, and similar investment funds that predominantly hold debt and/or equity securities as underlying assets. The pension plan's ownership consists of a pro rata share and not a direct ownership of an underlying investment. These commingled funds are valued at their closing NAVs (or unit value) per share as reported by the managers of the commingled funds and as supported by the unit prices of actual purchases and sale transactions occurring as of or close to the financial statement date. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.
The pension plan is invested in equity commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The equity index funds seek to track the performance of a particular index by replicating its capitalization and characteristics. Passive fund benchmark indices include the Russell 1000 index and MSCI ACWI ex-U.S. index. The actively managed equity funds seek to outperform certain equity benchmarks through a combination of fundamental and technical analysis. Active funds select portfolio positions based upon their research.
The pension plan is invested in debt commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The pension plan's debt index fund invests in a diversified portfolio of fixed-income securities and derivatives of varying maturities to replicate the characteristics of the Bloomberg Barclays Capital TIPS. The fund seeks to track the total return of the Bloomberg Barclays Capital U.S. TIPS index. The actively managed debt funds seek to outperform certain fixed-income benchmarks through fundamental research and analysis. The funds invest in a diversified portfolio of fixed income securities and derivatives of varying maturities. Varying by strategy, fund objectives include achieving a positive relative total return through active credit selection and providing risk management through desired strategic exposures.
The pension plan is invested in commingled funds, which invest across multiple asset classes that can be categorized as blended. These funds seek to outperform a passive benchmark through active security selection. The funds invest in securities across equity, fixed income, currency, and commodities. The portfolios employ fundamental, quantitative, and technical analysis.
The pension plan's investments in equity, debt, blended, and commodity commingled funds can generally be redeemed upon notification of the investment managers, with required notice periods varying from same-day to monthly. These investments do not have unfunded commitments.
Institutional Mutual Funds. Investments in institutional mutual funds are valued at prices based on their NAV. Institutional mutual funds have daily published market prices that represent their NAV (or unit value) per share and are classified as Level 1.
Cash Equivalents and Other Short-Term Investments and Certificates of Deposit. Cash equivalents and other short-term investments are highly liquid securities with maturities of less than three months and 12 months, respectively. These consist primarily of discount securities such as commercial paper, repurchase agreements, U.S. Treasury bills, and certain agency securities. These securities, as well as certificates of deposit, may be priced at cost, which approximates fair value due to the short-term nature of the instruments. Model based pricing which incorporates observable inputs may also be utilized. These securities are classified as Level 2. Active market pricing may be utilized for U.S. Treasury bills, which are classified as Level 1.
Private Credit Funds. Private credit limited partnerships are reported at NAVs provided by the fund managers. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.
The private credit limited partnerships invest across direct lending, opportunistic credit, and distressed debt strategies. The limited partnerships generally make investments of senior secured first-lien loans, second-lien secured loans, asset-based loans, risk transfer loans, specialty finance loans, unitranche loans, and distressed debt opportunities to middle market private companies. The limited partnerships generally seek to obtain financial returns through high income potential and occasional equity upside. The limited partnerships generally have a term life of five to eight years and are diversified by sector and industry.
Private Equity Funds. Private equity limited partnerships are reported at NAVs provided by the fund managers. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.
The private equity limited partnerships typically make longer-term investments in private companies and seek to obtain financial returns through long-term appreciation based on corporate stewardship, improved operating processes, and financial
restructuring which may involve a merger or acquisition. Significant investment strategies include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, energy infrastructure, and special situations. Venture capital partnerships consist of two main groupings. Early-stage venture capital partnerships invest in businesses still in the conceptual stage where products may not be fully developed and where revenues and/or profits may be several years away. Later-stage venture capital partnerships invest in more mature companies in need of growth or expansion capital. Buyout partnerships provide the equity capital for acquisition transactions either from a private seller or the public, which may represent the purchase of the entire company or a refinancing or recapitalization transaction where equity is invested. Mezzanine or subordinated debt partnerships provide the intermediate capital between equity and senior debt in a buyout or refinancing transaction and typically own a security in the company that carries current interest payments as well as a potential equity interest in the company. Restructuring or distressed debt partnerships purchase opportunities generated by overleveraged or poorly managed companies. Special situation partnerships include organizations with a specific industry focus not covered by the other private equity subclasses or unique opportunities that fall outside the regular subclasses.
The private equity funds have no investment withdrawal provisions prior to the termination of the partnership. Partnerships generally continue 10 to 14 years after the inception of the fund. The partnerships are generally subject to two to three one-year extensions at the discretion of the General Partner. Partnerships can generally be dissolved by an 80 percent vote in interest by all limited partners, with some funds requiring the occurrence of a specific event.
Private Real Asset Investments. The pension plan's ownership in private real asset investments consists of a pro rata share and not a direct ownership of the underlying investments. The fair values of the pension plan's private real asset investments are estimated utilizing NAVs provided by the investment managers. These investments have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. The investment strategies and methodologies utilized by the investment managers to calculate their NAVs are summarized as follows:
The pension plan is invested in limited partnerships that invest in real estate securities, real estate partnerships, and direct real estate properties. This includes investments in office, multifamily, industrial, and retail investment properties in the U.S. and international markets. The investment strategy focuses on distressed, opportunistic, and value-added opportunities. Partnership investments also include mortgage and/or real estate-related fixed-income instruments and related securities. Investments are diversified by property type and geographic location.
The pension plan is invested in a commingled fund that develops, renovates, and re-leases real estate properties to create value. Investments are predominantly in top tier real estate markets that offer deep liquidity. Property types include residential, office, industrial, hotel, retail, and land. Properties are diversified by geographic region within the U.S. domestic market. The plan is invested in a second commingled fund that invests primarily in core, well-leased, operating real estate properties with a focus on income generation. Investments are diversified by property type with a focus on office, industrial, apartment, and retail. Properties are diversified within the U.S. with an overweight to major market and coastal regions.
Fair value estimates of the underlying investments in these limited partnerships and commingled fund investments are primarily based upon property appraisal reports prepared by independent real estate appraisers within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The appraisals are based on one or a combination of three methodologies: cost of reproduction analysis, discounted cash flow analysis, and sales comparison analysis. Pricing for certain investments in mortgage-backed and asset-backed securities is typically based on models that incorporate observable inputs.
The pension plan is invested in energy infrastructure partnerships which acquire essential, long-lived real assets in three main groupings. Upstream assets include oil and gas exploration, drilling, and acquisition. Midstream assets include storage, pipelines, gathering, processing, and transportation of energy commodities. Downstream assets include generation, distribution, and transmission facilities. Additionally, the pension plan is invested in infrastructure partnerships that target mid-sized operating infrastructure companies and/or assets with limited development and construction risk primarily in the energy, transportation and logistics, environmental, telecommunications, and social industries. The partnerships use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available. The use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market, and/or other risk factors.
The pension plan is invested in a private real asset investment trust formed to make direct or indirect investments in commercial timberland properties. Pricing for these types of investments is based on comprehensive appraisals that are conducted shortly after initial purchase of properties and at three-year intervals thereafter. All appraisals are conducted by third-party timberland appraisal firms. Appraisals are based on either a sales comparison analysis or a discounted cash flow analysis.
Securities Lending Collateral. Collateral held under securities lending arrangements are invested in highly liquid short-term securities, primarily repurchase agreements. The securities are often priced at cost, which approximates fair value due to the short-term nature of the instruments. These securities are classified as Level 2.
Derivatives. The pension plan invests in a variety of derivative instruments. The valuation methodologies for these instruments are as follows:
Futures. The pension plan enters into futures. The futures contracts are listed on either a national or foreign securities exchange and are generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. The pricing is performed by third-party vendors. Since futures are priced by an exchange in an active market, they are classified as Level 1.
Options. The pension plan enters into purchased and written options. Options that are listed on either a national or foreign securities exchange are generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. These options are classified as Level 1. Options traded over the counter and not on exchanges are priced by third-party vendors and are classified as Level 2.
Swaps. The pension plan enters into various types of swaps. Credit default swaps are priced at market using models that consider cash flows, credit curves, recovery rates, and other factors. The pricing is performed by third-party vendors, and in some cases by clearing exchanges. Interest rate swap contracts are priced at market using forward rates derived from the swap curve, and the pricing is also performed by third-party vendors, and in some cases by clearing exchanges. Other swaps such as equity index swaps and variance swaps are priced by third-party vendors using market inputs such as spot rates, yield curves, and volatility. The pension plan's swaps are generally classified as Level 2 based on the observable nature of their pricing inputs.
Foreign currency forwards. The pension plan enters into foreign currency forwards. All commitments are marked to market daily at the applicable translation rates, and any resulting unrealized gains or losses are recorded. Foreign currency forwards are priced by third-party vendors and are classified as Level 2.
Securities Sold Under Agreements to Repurchase. The pension plan enters into contracts to sell securities to a counterparty at a specified price with an agreement to purchase the same or substantially the same security from the same counterparty at a fixed or determinable price at a future date. Securities sold under agreements to repurchase are presented at their contract price which approximates fair value due to their short-term nature. These securities are classified as Level 2. In connection with sales of securities under agreements to repurchase, the counterparties require the pension plan to maintain collateral securities with a fair value that approximates or exceeds the contract amount of the repurchase agreement. These securities are held in government inflation-linked bonds and classified as government debt securities.
The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the pension plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Cash Flows
Estimated Future Benefit Payments. The following table sets forth the estimated future benefit payments under the benefit plans.
| | | | | | | | | | | |
Estimated Future Benefits Payments At September 30, 2022 (in millions) |
| | Pension Benefits(1) | | Other Post-Retirement Benefits |
| 2023 | $ | 793 | | | $ | 22 | |
| 2024 | 808 | | | 21 | |
| 2025 | 813 | | | 21 | |
| 2026 | 810 | | | 21 | |
| 2027 | 807 | | | 22 | |
| 2028 - 2032 | 3,932 | | | 126 | |
Note
(1) Participants are assumed to receive the Fixed Fund in a lump sum in lieu of available annuity options allowed for certain grandfathered participants resulting in higher estimated pension benefits payments.
Contributions. TVA made contributions to the pension plan of $300 million for 2022 and 2021. TVA has committed to make a minimum contribution of $300 million per year through 2036 or until the plan has reached and remained at 100 percent funded status under the actuarial rules applicable to TVARS. TVA made SERP contributions of $8 million and $6 million for 2022 and 2021, respectively. TVA made cash contributions to the other post-retirement benefit plans of $28 million (net of $4 million in rebates) and $25 million (net of $5 million in rebates) for 2022 and 2021, respectively. TVA expects to contribute $300 million to TVARS, $6 million to the SERP, and $22 million to the other post-retirement benefit plans in 2023.
Other Post-Employment Benefits
Post-employment benefit cost estimates are revised to properly reflect changes in actuarial assumptions made at the end of each year. TVA utilizes a discount rate determined by reference to the U.S. Treasury Constant Maturities corresponding to the calculated average durations of TVA's future estimated post-employment claims payments. The use of a 3.83 percent discount rate resulted in the recognition of $40 million in expenses in 2022 and an unpaid benefit obligation of $299 million at September 30, 2022. The use of a 1.52 percent discount rate resulted in the recognition of approximately $20 million in expenses in 2021 and an unpaid benefit obligation of $340 million at September 30, 2021. The use of a 0.69 percent discount rate resulted in the recognition of approximately $45 million in expenses in 2020 and an unpaid benefit obligation of $390 million at September 30, 2020. The U.S. Department of Labor ("DOL") administers TVA's worker compensation program and invoices TVA annually for claims processed.
The decrease in the unpaid obligation at September 30, 2022, compared to the prior year is due primarily to the increase in the discount rate from 1.52 percent in 2021 to 3.83 percent in 2022, decreases in loss experience, and fewer claims partially attributable to delayed medical treatments as a result of the COVID-19 pandemic. The DOL billed TVA $29 million for 2022 claims due in October 2022. TVA estimated claims for 2023 are $29 million.
The decrease in the unpaid obligation at September 30, 2021, compared to the prior year is due primarily to the increase in the discount rate from 0.69 percent in 2020 to 1.52 percent in 2021, decreases in loss experience, and fewer claims partially attributable to delayed medical treatments as a result of the COVID-19 pandemic. TVA paid $31 million for 2021 claims to the DOL in September 2021.
The ultimate impact of the COVID-19 pandemic on post-employment benefit costs and claims experience depends on factors beyond TVA's knowledge or control, including the duration and severity of this outbreak, actions taken to contain its spread and mitigate its effects, and broader impacts of the COVID-19 pandemic on the country and region's economy.
The current portion which represents unpaid losses and administrative fees due are in Accounts payable and accrued liabilities. The long-term portion is recognized in Post-retirement and post-employment benefit obligations.
| | | | | | | | | | | |
Amounts Recognized on TVA's Consolidated Balance Sheets At September 30 (in millions) |
| | 2022 | | 2021 |
Accounts payable and accrued liabilities(1) | $ | 29 | | | $ | — | |
| Post-retirement and post-employment benefit obligations | 270 | | | 340 | |
Note
(1) The 2022 and 2021 DOL invoices were paid in October 2022 and September 2021, respectively.
21. Commitments and Contingencies
Commitments
Power Purchase Obligations. TVA has contracted with various independent power producers and LPCs for additional capacity to be made available to TVA. Several of these agreements have contractual minimum payments and are accounted for as either finance or operating leases. In total, these agreements provide 3,949 MW of summer net capability. The remaining terms of the agreements range up to 13 years. Additionally, TVA has contracted with regional transmission organizations to reserve 2,450 MW of transmission service to support purchases from the market and wind PPAs. The remaining terms of these agreements range up to 4 years. Excluding lease-related costs, TVA incurred $318 million, $202 million, and $202 million of expense under these power purchase and transmission service agreements during 2022, 2021, and 2020, respectively.
TVA has one power purchase agreement that meets the definition of an unconditional purchase obligation. At September 30, 2022, the non-lease portion of the commitment for each of the next five years and thereafter is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Unconditional purchase obligation | | $ | 146 | | | $ | 145 | | | $ | 145 | | | $ | 145 | | | $ | 145 | | | $ | 766 | |
| | | | | | | | | | | | |
Under federal law, TVA is obligated to purchase power from qualifying facilities (cogenerators and small power producers). As of September 30, 2022, there was a combined qualifying facility capacity of 278 MW from 642 different generation sources, from which TVA purchased power under this law.
Unfunded Loan Commitments. At September 30, 2022, TVA had no commitments under unfunded loan commitments for 2023. TVA also has no commitments under unfunded loan commitments for 2024 through 2027.
Other Commitments. See Note 8 — Leases, Note 11 — Variable Interest Entities, Note 14 — Debt and Other Obligations, and Note 20 — Benefit Plans for the obligations and commitments attributable to leases, VIEs and membership interests of VIEs subject to mandatory redemption, leaseback obligations, and the retirement plan, respectively.
Contingencies
Nuclear Insurance. Section 170 of the Atomic Energy Act, commonly known as the Price-Anderson Act, provides a layered framework of financial protection to compensate for liability claims of members of the public for personal injury and property damages arising from a nuclear incident in the U.S. This financial protection consists of two layers of coverage. The primary level is private insurance underwritten by American Nuclear Insurers and provides public liability insurance coverage of $450 million for each nuclear power plant licensed to operate. If this amount is not sufficient to cover claims arising from a nuclear incident, the second level, Secondary Financial Protection, applies. Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor per incident. With TVA's seven reactors, the maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a maximum rate currently set at approximately $20 million per year per nuclear incident per reactor. Currently, 96 reactors are participating in the Secondary Financial Protection program.
In the event that a nuclear incident results in public liability claims, the primary level provided by American Nuclear Insurers combined with the Secondary Financial Protection should provide up to approximately $13.7 billion in coverage.
Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the cost of stabilizing and decontaminating a reactor and its station site after an accident. TVA carries property, decommissioning liability, and decontamination liability insurance from Nuclear Electric Insurance Limited ("NEIL") and European Mutual Association for Nuclear Insurance. The limits available for a loss are up to $2.1 billion for two of TVA's nuclear sites and up to $2.8 billion for the remaining site. Some of this insurance may require the payment of retrospective premiums up to a maximum of approximately $115 million.
TVA purchases accidental outage (business interruption) insurance for TVA's nuclear sites from NEIL. In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) with a maximum indemnity of $490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $44 million, but only to the extent the retrospective premium is deemed necessary by the NEIL Board of Directors to pay losses unable to be covered by NEIL's surplus.
Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to nuclear generating plants, coal-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. See Note 13 — Asset Retirement Obligations.
Nuclear Decommissioning. Provision for decommissioning costs of nuclear generating units is based on options prescribed by the NRC procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At September 30, 2022, $3.6 billion, representing the discounted value of future estimated nuclear decommissioning costs, was included in nuclear AROs. The actual decommissioning costs may vary from the derived estimates because of, among other things, changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. Utilities that own and operate nuclear plants are required to use different procedures in calculating nuclear decommissioning costs under GAAP than those that are used in calculating nuclear decommissioning costs when reporting to the NRC. The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions. TVA bases its nuclear decommissioning estimates on site-specific cost studies. The most recent study was approved and implemented in September 2022. Site-specific cost studies are updated for each of TVA's nuclear units at least every five years.
TVA maintains an NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 16 — Fair Value Measurements — Investment Funds. TVA monitors the value of its NDT and believes that, over the long term and before cessation of nuclear plant operations and commencement of decommissioning activities, adequate funds from investments and additional contributions, if necessary, will be available to support decommissioning. TVA's operating nuclear power units are licensed through various dates between 2033 - 2055, depending on the unit. It may be possible to extend the operating life of some of the units with approval from the NRC. See Note 10 — Regulatory Assets and Liabilities — Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations.
Non-Nuclear Decommissioning. At September 30, 2022, $3.5 billion, representing the discounted value of future estimated non-nuclear decommissioning costs, was included in non-nuclear AROs. This decommissioning cost estimate involves estimating the amount and timing of future expenditures and making judgments concerning whether or not such costs are considered a legal obligation. Estimating the amount and timing of future expenditures includes, among other things, making projections of the timing and duration of the asset retirement process and how costs will escalate with inflation. The actual decommissioning costs may vary from the derived estimates because of changes in current assumptions, such as the assumed
dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. TVA updates its underlying assumptions for non-nuclear decommissioning AROs at least every five years. However, material changes in underlying assumptions that impact the amount and timing of undiscounted cash flows are continuously monitored and incorporated into ARO balances in the period identified.
TVA maintains an ART to help fund the ultimate decommissioning of its non-nuclear power assets. See Note 16 — Fair Value Measurements — Investment Funds. Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs. See Note 10 — Regulatory Assets and Liabilities — Non-Nuclear Decommissioning Costs and Note 13 — Asset Retirement Obligations.
Environmental Matters. TVA's generation activities, like those across the utility industry and in other industrial sectors, are subject to federal, state, and local environmental laws and regulations. Major areas of regulation affecting TVA's activities include air quality control, greenhouse gas ("GHG") emissions, water quality control, and management and disposal of solid and hazardous wastes. Regulations in these major areas continue to become more stringent and have, and will continue to have, a particular emphasis on climate change, renewable generation, and energy efficiency.
TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of TVA's coal-fired and natural gas-fired generating units in general and emissions of pollutants from those units. Environmental requirements placed on the operation of coal-fired and other generating units using fossil fuels such as oil and natural gas will likely continue to become more restrictive over time. Failure to comply with environmental and safety requirements can result in enforcement actions and litigation, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or temporary or permanent closure of non-compliant facilities. Historical non-compliance can also lead to difficulty in renewing existing permits, as well as difficulty in obtaining permits to bring new generation facilities online. Other obstacles to renewal or permitting of new facilities include a proliferation of non-government organizations seeking to use litigation tools to delay or stop altogether permitting of new fossil fuel facilities in favor of renewable energy projects.
From 1970 to 2022, TVA spent approximately $6.8 billion to reduce emissions from its power plants, including $16 million, $17 million, and $19 million in 2022, 2021, and 2020, respectively, on clean air controls. TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding GHG requirements) could lead to costs of $128 million from 2023 to 2027, which include existing controls capital projects and air operations and maintenance projects. TVA also estimates additional expenditures of approximately $900 million from 2023 to 2027 relating to TVA's CCR Program, as well as expenditures of approximately $111 million from 2023 to 2027 relating to compliance with CWA requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates, and these estimates do not include expenditures expected to be incurred after 2027.
Compliance with the EPA's CCR Rule required implementation of a groundwater monitoring program, additional engineering, and ongoing analysis. As further analyses are performed, including evaluation of monitoring results, there is the potential for additional costs for investigation and/or remediation. These costs cannot reasonably be predicted until a final remedy is selected where required.
Liability for releases, natural resource damages, and required cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and other federal and parallel state statutes. In a manner similar to many other governmental entities, industries, and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in releases of contaminants that TVA has addressed or is addressing consistent with state and federal requirements. At September 30, 2022 and 2021, TVA's estimated liability for required cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $17 million and $18 million, respectively, on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. Additionally, the potential inclusion of new hazardous substances under CERCLA and RCRA jurisdiction could significantly affect TVA's future liability for remediating historical releases.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the U.S. District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs also alleged that exposure to the fly ash caused significant illnesses, including in some cases death. In 2018, a jury found in favor of the plaintiffs regarding general causation, including that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a variety of employee medical conditions. Currently, the Eastern District has stayed all proceedings in
the case pending the Tennessee Supreme Court's review of four questions from the Eastern District. An oral argument on these questions was held on June 1, 2022. If the litigation proceeds to a damages phase, the principal question for resolution will be whether Jacobs's breaches were the specific medical cause of the plaintiffs' alleged injuries and damages.
Other contractor employees and family members also have filed lawsuits against Jacobs that are pending in the Eastern District. These pending lawsuits are stayed and raise similar claims to those being litigated against Jacobs.
While TVA is not a party to any of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs in some circumstances. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition.
Legal Proceedings
From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.
General. At September 30, 2022, TVA had accrued $11 million of probable losses with respect to Legal Proceedings. Of the accrued amount, $10 million is included in Other long-term liabilities and $1 million is included in Accounts
payable and accrued liabilities. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.
Environmental Agreements. On April 14, 2011, TVA entered into two substantively similar agreements, one with the EPA and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups (collectively, the "Environmental Agreements"). To resolve alleged New Source Review claims, TVA committed under the Environmental Agreements to, among other things, take now-completed actions regarding coal units and invest $290 million in certain TVA environmental projects. Of this amount, TVA had spent approximately $282 million as of September 30, 2022. Additionally, TVA holds restricted cash in an interest earning trust to fund the remaining project commitments. Any interest earned through the trust must also be spent on agreed upon environmental projects. The total remaining committed costs, including interest earned through the trust, was approximately $9 million as of September 30, 2022.
The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the September 30, 2022, Consolidated Balance Sheets. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the September 30, 2022, Consolidated Balance Sheets and will be recovered in rates in future periods.
Case Involving Bellefonte Nuclear Plant. On November 30, 2018, Nuclear Development, LLC ("Nuclear Development") filed suit against TVA in the U.S. District Court for the Northern District of Alabama alleging that TVA breached its agreement to sell Bellefonte Nuclear Plant ("Bellefonte"). Nuclear Development sought, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the associated NRC permits until the case concluded; (2) an order compelling TVA to complete the sale of Bellefonte; and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $30 million. Trial took place in 2021, and the court held that TVA did not breach its obligations to use commercially reasonable best efforts and to cooperate with Nuclear Development in effectuating the close of the sale and rejected the request for specific performance or damages on that claim. While TVA retains full possession and control of the Bellefonte site, the court found that, under the contract's termination provision, Nuclear Development was entitled to return of its $22 million down payment and approximately $1 million of costs, along with 7.5% prejudgment interest. Including post-judgment interest, TVA paid approximately $28 million to the court in 2021 to satisfy the judgment. On July 18, 2022, the court entered an amended final judgment reflecting the correct prejudgment interest rate to be paid by TVA from the court-ordered 7.5% rate to the contractually-agreed 6% rate, entitling TVA to a return of the difference. On October 3, 2022, the U.S. Court of Appeals for the Eleventh Circuit granted Nuclear Development’s motion to voluntarily dismiss its appeal of the district court's decision. The dismissal of Nuclear Development's appeal ends the litigation surrounding the failed sale of Bellefonte.
Case Involving Rate Changes. On June 9, 2020, a lawsuit was filed against TVA and one of its LPCs, Bristol Virginia Utilities Authority ("BVUA"), in the United States District Court for the Western District of Virginia, by a LPC customer, asserting claims for breach of contract and violation of the Administrative Procedure Act. The proposed class action alleges that the customers of TVA's LPCs are third-party beneficiaries of TVA's wholesale power contracts with its LPCs and that TVA’s rate changes dating back to 2010 violate Section 11 of the TVA Act. Section 11 of the TVA Act establishes the broad policy that TVA power projects shall be considered primarily for the benefit of the people of the Tennessee Valley and that service to industry is a secondary purpose to be used principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates. The remedies requested included an injunction prohibiting TVA rate changes that violate Section 11, monetary damages, and repayment of rates charged in violation of Section 11. The court granted TVA’s and BVUA's motions to dismiss in 2021. The plaintiff appealed the district court's decision to the U.S. Court of Appeals for the Fourth Circuit ("Fourth Circuit") in 2021. On September 7, 2022, the Fourth Circuit affirmed the district court's decision.
Case Involving Long-Term Agreements. On August 17, 2020, the Southern Environmental Law Center filed a lawsuit in the United States District Court for the Western District of Tennessee on behalf of Protect Our Aquifer, Energy Alabama, and Appalachian Voices, alleging that, beginning in August 2019, TVA violated the National Environmental Policy Act ("NEPA") and Section 10 of the TVA Act by offering a Long-Term Agreement ("LTA") to its LPCs.
The environmental groups claim that TVA violated NEPA because (1) TVA failed to perform an environmental review of the LTAs, which harmed the groups' advocacy efforts and their ability to participate in and to inform TVA's decision, and (2) the LTAs will have a negative effect on the environment by increasing TVA's reliance on coal and gas and impeding TVA's customers' efforts to institute renewable energy options. The groups also claim that the LTAs violate Section 10 of the TVA Act, which authorizes TVA to enter into power contracts "for a term not exceeding twenty years."
The environmental groups request the federal court to (1) declare that TVA's entry into LTAs without preparing an environmental review violated NEPA and the TVA Act, (2) vacate the long-term contracts, and (3) enjoin TVA from implementing system-wide energy contract programs that significantly affect the environment. TVA cannot predict the outcome of this litigation.
Challenge to Anti-Cherrypicking Amendment. On January 11, 2021, Athens Utilities Board, Gibson Electric Membership Corporation, Joe Wheeler EMC, and Volunteer Energy Cooperative filed a complaint and petition with FERC asking FERC to order TVA to provide transmission and interconnection service to the LPCs or other suppliers that want to serve them. The petitioners seek to avoid the limitations of the Anti-Cherrypicking Amendment ("ACPA") to the Federal Power Act ("FPA"), which prohibits FERC from ordering TVA to wheel power from another supplier if the power will be consumed within the TVA service territory. The petitioners argue that section 211A of the FPA, which gives FERC limited jurisdiction over the rates, terms, and conditions of transmission service provided by unregulated transmitting utilities such as TVA, provides an alternate grant of authority to enable FERC to order TVA to wheel power inside its service area unrestricted by the application of the ACPA. The petitioners also argue that the public power model is antiquated and TVA’s refusal to wheel power is not in the public interest because it stifles competition. In October 2021, FERC denied the petition. On February 18, 2022, Athens Utilities Board and Gibson Electric Membership Corporation petitioned the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") to review FERC's decision. On October 7, 2022, Gibson Electric Membership Corporation filed an unopposed motion to withdraw as a petitioner, which the D.C. Circuit granted on October 14, 2022. In addition, on October 28, 2022, Athens Utilities Board filed an unopposed motion to withdraw as a petitioner, which the D.C. Circuit granted on November 14, 2022.
Administrative Proceeding Regarding National Pollutant Discharge Elimination System Permit for Kingston. On December 28, 2021, the Sierra Club and the Center for Biological Diversity appealed the revised National Pollutant Discharge Elimination System ("NPDES") permit issued by the Tennessee Department of Environment and Conservation ("TDEC") for Kingston in December 2021 before the Tennessee Board of Water Quality, Oil, and Gas. The petitioners allege that TDEC unlawfully incorporated into the revised permit effluent limits for landfill leachate based on effluent limitation guidelines ("ELGs") for landfill leachate issued by the EPA in 1982 rather than establish new limits based on TDEC’s best professional judgment. TDEC is the respondent in the matter. TVA filed a motion to intervene, which was granted, and on April 8, 2022, the parties and TVA filed cross-motions for summary decisions. Oral argument on the cross-motions was held before an administrative judge on July 12, 2022, following which the judge issued an initial order dismissing the appeal. The order became final in October 2022.
22. Related Parties
TVA is a wholly-owned corporate agency of the federal government, and because of this relationship, TVA's revenues and expenses are included as part of the federal budget as a revolving fund. TVA's purpose and responsibilities as an agency are described under the "Other Agencies" section of the federal budget.
TVA's power program and stewardship (nonpower) programs were originally funded primarily by appropriations from Congress. In 1959, Congress passed an amendment to the TVA Act that required TVA's power program to be self-financing from power revenues and proceeds from power program financings. While TVA's power program did not directly receive appropriated funds after it became self-financing, TVA continued to receive appropriations for certain multipurpose and other nonpower mission-related activities as well as for its stewardship activities. TVA has not received any appropriations from Congress for any activities since 1999, and since that time, TVA has funded stewardship program activities primarily with power revenues.
The 1959 amendment to the TVA Act also required TVA, beginning in 1961, to make annual payments to the U.S. Treasury from net power proceeds as a repayment of and as a return on the Power Program Appropriation Investment until a total of $1.0 billion of the Power Program Appropriation Investment has been repaid in accordance with the 1959 amendment. TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment in 2014. The TVA Act requires TVA to continue making payments to the U.S. Treasury as a return on the remaining $258 million of the Power Program Appropriation Investment.
TVA paid the U.S. Treasury $4 million, $4 million, and $6 million in 2022, 2021, and 2020, respectively, as a return on the Power Program Appropriation Investment. The amount of the return on the Power Program Appropriation Investment is based on the Power Program Appropriation Investment balance at the beginning of that year and the computed average interest rate payable by the U.S. Treasury on its total marketable public obligations at the same date. The interest rates payable by TVA
on the Power Program Appropriation Investment were 1.47 percent, 1.64 percent, and 2.44 percent for 2022, 2021, and 2020, respectively.
TVA also has access to a financing arrangement with the U.S. Treasury pursuant to the TVA Act. TVA and the U.S. Treasury entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility has a maturity date of September 30, 2023, and is typically renewed annually. Access to this credit facility or other similar financing arrangements has been available to TVA since the 1960s. See Note 14 — Debt and Other Obligations — Credit Facility Agreements.
In the normal course of business, TVA contracts with other federal agencies for sales of electricity and other services. Transactions with agencies of the federal government were as follows:
| | | | | | | | | | | | | | | | | |
Related Party Transactions At or for the years ended September 30 (in millions) |
| | 2022 | | 2021 | | 2020 |
| Revenue from sales of electricity | $ | 134 | | | $ | 109 | | | $ | 105 | |
| Other income | 296 | | | 280 | | | 260 | |
| | | | | |
| Expenditures | | | | | |
| Operating expenses | 228 | | | 214 | | | 224 | |
| Additions to property, plant, and equipment | 11 | | | 10 | | | 9 | |
| Cash and cash equivalents | 30 | | | 30 | | | 31 | |
| Accounts receivable, net | 78 | | | 65 | | | 94 | |
| Investment funds | 358 | | | 573 | | | 485 | |
| Long-term accounts receivable | 43 | | | 31 | | | 27 | |
| Accounts payable and accrued liabilities | 42 | | | 15 | | | 39 | |
| Long-term power bonds, net | 1 | | | 1 | | | 1 | |
| Return on power program appropriation investment | 4 | | | 4 | | | 6 | |
| | | | | |