NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except where noted)
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Note
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Page
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1
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Summary of Significant Accounting Policies
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2
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Impact of New Accounting Standards and Interpretations
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3
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Accounts Receivable, Net
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4
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Inventories, Net
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5
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Plant Closures
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6
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Leases
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7
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Other Long-Term Assets
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8
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Regulatory Assets and Liabilities
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9
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Variable Interest Entities
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10
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Other Long-Term Liabilities
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11
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Asset Retirement Obligations
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12
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Debt and Other Obligations
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13
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Accumulated Other Comprehensive Income (Loss)
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14
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Risk Management Activities and Derivative Transactions
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15
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Fair Value Measurements
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16
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Revenue
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17
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Other Income (Expense), Net
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18
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Supplemental Cash Flow Information
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19
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Benefit Plans
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20
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Contingencies and Legal Proceedings
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21
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Subsequent Events
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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 nearly 10 million people.
TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages the river system and public lands to provide recreational opportunities, adequate water supply, improved water quality, cultural and natural resource protection, and economic development.
The power program has historically been separate and distinct from the stewardship programs. It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, or other evidences of indebtedness (collectively, "Bonds"). Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Department of the Treasury ("U.S. Treasury") as a return on the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment"). In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year. Congress has not provided any appropriations to TVA to fund such activities since 1999. Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities. The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP"). Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.
Power rates are established by the TVA Board of Directors ("TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended ("TVA Act"). The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents"); debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in 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 business. TVA fulfilled its requirement to repay $1.0 billion of the Power Program Appropriation Investment with the 2014 payment; therefore, this item is no longer a component of rate setting. In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or federal regulatory body.
Fiscal Year
TVA's fiscal year ends September 30. Years (2020, 2019, etc.) refer to TVA's fiscal years unless they are preceded by "CY," in which case the references are to calendar years.
Cost-Based Regulation
Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is self-regulated. Additionally, TVA's regulated rates are designed to recover its costs. Based on current projections, TVA believes that rates, set at levels that will recover TVA's costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to
write off these costs. All regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.
Basis of Presentation
TVA prepares its consolidated interim financial statements in conformity with GAAP for consolidated interim financial information. Accordingly, TVA's consolidated interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2019, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K/A for the year ended September 30, 2019 (the "Annual Report"). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included on the consolidated interim financial statements.
The accompanying consolidated interim financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA, wholly-owned direct subsidiaries, and variable interest entities ("VIE") of which TVA is the primary beneficiary. See Note 9 — Variable Interest Entities. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the consolidated financial statements. Although the consolidated financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses, including impacts from the COVID-19 pandemic, reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are considered critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows.
Reclassifications
Certain historical amounts have been reclassified in the accompanying consolidated financial statements to the current presentation. In the June 30, 2019, Consolidated Statements of Cash Flows, amounts previously reported as $(10) million of Prepayment credits applied to revenue were reclassified to Other, net in cash flows from operating activities.
Cash, Cash Equivalents, and Restricted Cash
Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets on the Consolidated Balance Sheets. Restricted cash and cash equivalents includes cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to compliance with certain environmental regulations. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings — Environmental Agreements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:
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Cash, Cash Equivalents, and Restricted Cash
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At June 30, 2020
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At September 30, 2019
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Cash and cash equivalents
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$
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800
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$
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299
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Restricted cash and cash equivalents included in Other long-term assets
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23
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23
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Total cash, cash equivalents, and restricted cash
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$
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823
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$
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322
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Due to higher volatility in the financial markets associated with the Coronavirus Disease 2019 ("COVID-19") pandemic, TVA increased its target balance of Cash and cash equivalents beginning in March 2020 by $500 million through discount note issuances.
Allowance for Uncollectible Accounts
The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances, excluding the EnergyRight® loans receivable. TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days. It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables. TVA continues to monitor the impact of the COVID-19 pandemic on accounts and loans receivable balances to evaluate the allowance for uncollectible accounts.
The allowance for uncollectible accounts was less than $1 million at both June 30, 2020, and September 30, 2019, for accounts receivable. Additionally, loans receivable of $134 million and $131 million at June 30, 2020, and September 30, 2019, respectively, are included in Accounts receivable, net and Other long-term assets, for the current and long-term portions, respectively, and are reported net of allowances for uncollectible accounts of less than $1 million at both June 30, 2020, and September 30, 2019.
Revenues
TVA recognizes revenue from contracts with customers to depict the transfer of goods or services to customers in an amount to which the entity expects to be entitled in exchange for those goods or services. For the generation and transmission of electricity, this is generally at the time the power is delivered to a metered customer delivery point for the customer's consumption or distribution. As a result, revenues from power sales are recorded as electricity is delivered to customers. In addition to power sales invoiced and recorded during the month, TVA accrues estimated unbilled revenues for power sales provided to five customers whose billing date occurs prior to the end of the month. Exchange power sales are presented in the accompanying Consolidated Statements of Operations as a component of sales of electricity. Exchange power sales are sales of excess power after meeting TVA native load and directly served requirements. Native load refers to the customers on whose behalf a company, by statute, franchise, regulatory requirement, or contract, has undertaken an obligation to serve. TVA engages in other arrangements in addition to power sales. Certain other revenue from activities related to TVA's overall mission are recorded in Other revenue. Revenues that are not related to the overall mission are recorded in Other income (expense), net.
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 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 power purchase agreements, the terms of which vary. The total lease obligation included in Accounts payable and accrued liabilities and Operating lease liabilities related to these agreements was $285 million at June 30, 2020.
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 June 30, 2020.
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.
Depreciation
TVA accounts for depreciation of its properties using the composite depreciation convention of accounting. Under the composite method, assets with similar economic characteristics are grouped and depreciated as one asset. Depreciation is generally computed on a straight-line basis over the estimated service lives of the various classes of assets. The estimation of asset useful lives requires management judgment, supported by external depreciation studies of historical asset retirement experience. Depreciation rates are determined based on the external depreciation studies. These studies are updated at least every five years. Depreciation expense was $344 million and $536 million for the three months ended June 30, 2020 and 2019, respectively. Depreciation expense was $1.3 billion for both the nine months ended June 30, 2020 and 2019. See Note 5 — Plant Closures for a discussion of the impact of plant closures.
2. Impact of New Accounting Standards and Interpretations
The following are accounting standard updates issued by the Financial Accounting Standards Board ("FASB") that TVA adopted during 2020:
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Lease Accounting
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Description
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This guidance changes the provisions of recognition in both the lessee and lessor accounting models. The standard requires entities that lease assets ("lessees") to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months, while also refining the definition of a lease. In addition, lessees are required to disclose key information about the amount, timing, and uncertainty of cash flows arising from leasing arrangements. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depend on its classification as a finance lease (formerly referred to as capital lease) or operating lease. The standard requires both types of leases to be recognized on the balance sheet. Operating leases will result in straight-line expense, while finance leases will result in recognition of interest on the lease liability separate from amortization expense. The accounting rules for the owner of assets leased by the lessee ("lessor accounting") remain relatively unchanged.
The standard allows for certain practical expedients to be elected related to lease term determination, separation of lease and non-lease elements, reassessment of existing leases, and short-term leases. The standard is to be applied using a modified retrospective transition.
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Effective Date for TVA
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October 1, 2019
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Effect on the Financial Statements or Other Significant Matters
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TVA has elected the modified retrospective method of adoption effective October 1, 2019. Under the modified retrospective method of adoption, prior year reported results are not restated.
TVA recorded $205 million and $210 million of lease assets and lease liabilities, respectively, for operating leases in effect at the adoption date. The accounting for finance leases remained substantially unchanged. Adoption of the standard did not materially impact results of operations or cash flows.
TVA has elected to apply the following practical expedients:
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Practical Expedient
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Description
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Package of transition practical expedients (for leases commenced prior to adoption date; expedients must be adopted as a package)
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Do not need to (1) reassess whether any expired or existing contracts are leases or contain leases, (2) reassess the lease classification for any expired or existing leases, or (3) reassess initial direct costs for any existing leases.
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Short-term lease expedient (elect by class of underlying asset)
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Elect as an accounting policy to not apply the recognition requirements to short-term leases by asset class.
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Existing and expired land easements not previously accounted for as leases
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Elect to not evaluate existing or expired easements under the new guidance and carry forward current accounting treatment.
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Comparative reporting requirements for initial adoption
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Elect to apply transition requirements at adoption date, recognize cumulative effect adjustment to retained earnings in period of adoption, and not apply the new requirements to comparative periods, including disclosures.
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Derivatives and Hedging - Improvements to Accounting for Hedging Activities
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Description
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This guidance better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
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Effective Date for TVA
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October 1, 2019
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Effect on the Financial Statements or Other Significant Matters
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TVA has adopted the standard on a prospective basis. The adoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows. TVA only uses hedge accounting under its foreign currency swap arrangements, and the adoption of this standard had no impact on those arrangements.
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Customer's Accounting for Implementation Costs in a Cloud Arrangement That Is a Service Contract
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Description
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This guidance relates to the accounting for a customer's implementation costs in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing those implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The amendments also provide requirements for the classification of the capitalized costs and related expense and cash flows in the financial statements, the application of impairment guidance to the capitalized costs, and the application of abandonment guidance to the capitalized costs. Entities are required to apply the amendments either retrospectively or prospectively to all implementation costs incurred after the adoption date.
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Effective Date for TVA
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October 1, 2019
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Effect on the Financial Statements or Other Significant Matters
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TVA has adopted the 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. TVA records qualified implementation costs in a cloud arrangement that is a service contract as a prepaid asset and amortizes the prepaid asset to Operating and maintenance expense based on the term of the contract.
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The following accounting standards have been issued but at June 30, 2020, were not effective and had not been adopted by TVA:
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Financial Instruments - Credit Losses
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Description
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This guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an allowance to be recorded for all expected credit losses for certain financial assets that are not measured at fair value. The allowance for credit losses is based on historical information, current conditions, and reasonable and supportable forecasts. The new standard also makes revisions to the other than temporary impairment model for available-for-sale debt securities. Disclosures of credit quality indicators in relation to the amortized cost of financing receivables are further disaggregated by year of origination.
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Effective Date for TVA
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The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020. While early adoption is permitted, TVA does not plan to adopt the standard early.
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Effect on the Financial Statements or Other Significant Matters
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TVA will adopt this standard using the modified retrospective method through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Upon adoption, TVA will recognize an allowance for credit losses based on management's estimate of losses expected to be incurred over the life of certain financial assets. This standard will primarily impact TVA's long-term loans receivable. Adoption of this standard is not expected to have a material impact on TVA's financial condition, results of operations, or cash flows.
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Fair Value Measurement Disclosure
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Description
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The guidance changes certain disclosure requirements for fair value measurements. It removes certain disclosure requirements, such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of the transfers between levels; and the valuation processes for Level 3 fair value measurements. Some disclosure requirements are added, such as the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
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Effective Date for TVA
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The new standard is effective for TVA's interim and annual reporting periods beginning October 1, 2020. While early adoption is permitted, TVA does not plan to adopt the standard early.
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Effect on the Financial Statements or Other Significant Matters
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TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows. TVA is continuing to evaluate the potential impact on related disclosures.
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Reference Rate Reform
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Description
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The guidance provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rates.
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Effective Date for TVA
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The new standard is effective for adoption at any time between March 12, 2020, and December 31, 2022. TVA currently plans to adopt the standard by December 31, 2022.
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Effect on the Financial Statements or Other Significant Matters
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TVA continues to review this standard and evaluate the impact of using an alternative reference rate instead of LIBOR in its interest rate swap contracts. TVA expects the adoption of the standard will simplify the accounting for any modifications to its interest rate swap contracts.
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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
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At June 30, 2020
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At September 30, 2019
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Power receivables
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$
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1,286
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$
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1,624
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Other receivables
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78
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115
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Accounts receivable, net(1)
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$
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1,364
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$
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1,739
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Note
(1) Allowance for uncollectible accounts was less than $1 million at June 30, 2020, and September 30, 2019, and therefore is not represented in the table
above.
In response to the COVID-19 pandemic, the TVA Board approved the Public Power Support and Stabilization Program, which includes alternative wholesale payment arrangements for LPCs, on March 25, 2020. TVA is offering up to $1.0 billion of credit support to LPCs that demonstrate the need for temporary financial relief, through the deferral of a portion of LPCs' wholesale power payments owed to TVA. The program, which began in April 2020, requires LPCs to apply monthly and is subject to approval by TVA. If approved, TVA will establish a repayment schedule based on the LPC's need, not to exceed two years, and an initial repayment date will be approved by TVA no later than December 31, 2020. As of August 3, 2020, $1 million of credit support has been approved under the Public Power Support and Stabilization Program.
4. Inventories, Net
The table below summarizes the types and amounts of TVA's inventories:
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Inventories, Net
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At June 30, 2020
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At September 30, 2019
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Materials and supplies inventory
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$
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784
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$
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742
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Fuel inventory
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307
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294
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Renewable energy certificates/emission allowance inventory, net
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15
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16
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Allowance for inventory obsolescence
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(46)
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(53)
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Inventories, net
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$
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1,060
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$
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999
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5. Plant Closures
Background
TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. Based on results of assessments presented to the TVA Board in 2019, the retirement of Paradise Fossil Plant ("Paradise") Unit 3 by December 2020 and Bull Run Fossil Plant ("Bull Run") by December 2023 was approved. Subsequent to the TVA Board approval, TVA determined that Paradise would not be restarted after January 2020 due to the plant's material condition. Paradise Fossil Plant Unit 3 was taken offline on February 1, 2020, effectively retiring the plant.
Financial Impact
As a result of TVA's decision to accelerate the retirements of Paradise and Bull Run, certain construction projects at these locations were identified as probable of abandonment or were no longer expected to be in service for greater than one year prior to the plants' retirement dates. The write-off of these projects resulted in $124 million of Operating and maintenance expense during the second quarter of 2019. TVA has since recognized a cumulative $37 million of Operating and maintenance expense related to other activities including certain regulatory compliance projects at these facilities. Of this amount, $3 million and $10 million were recognized during the three and nine months ended June 30, 2020, respectively. TVA has also recognized a cumulative $21 million of Operating and maintenance expense related to materials and supplies inventory reserves and write-offs identified at Paradise. No such amounts were recognized during the three months ended June 30, 2020, with $2 million recognized during the nine months ended June 30, 2020. Additional amounts for Bull Run may be written off during closure activities.
TVA's policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates. As a result of TVA's decision to accelerate the retirements of Paradise and Bull Run, TVA has recognized a cumulative $916 million of accelerated depreciation, with $34 million and $350 million being recognized during the three and nine months ended June 30, 2020, respectively.
6. Leases
As described in Note 2 — Impact of New Accounting Standards and Interpretations, TVA has elected the modified retrospective method of adoption for the new lease accounting standard effective October 1, 2019. Under the modified retrospective method of adoption, prior year reported results are not restated.
TVA recorded $205 million and $210 million of lease assets and lease liabilities, respectively, for operating leases in effect at the adoption date. The accounting for finance leases remained substantially unchanged. Adoption of the standard did not materially impact results of operations or cash flows.
The following table provides additional information regarding the presentation of leases on the Consolidated Balance Sheets at June 30, 2020:
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Amounts Recognized on TVA's Consolidated Balance Sheets
At June 30, 2020
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Assets
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Operating
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Operating lease assets, net of amortization
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$
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332
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Finance
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Finance leases
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139
|
|
|
Total lease assets
|
|
$
|
471
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Accounts payable and accrued liabilities
|
$
|
101
|
|
|
Finance
|
Accounts payable and accrued liabilities
|
6
|
|
|
Non-current
|
|
|
|
Operating
|
Operating lease liabilities
|
244
|
|
|
Finance
|
Other long-term liabilities
|
180
|
|
|
Total lease liabilities
|
|
$
|
531
|
|
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 27 years. The components of lease costs for the three and nine months ended June 30, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Costs(1)
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Nine Months Ended June 30, 2020
|
|
|
|
Operating lease costs(1)
|
$
|
26
|
|
|
|
|
$
|
65
|
|
|
|
|
Variable lease costs(1)
|
26
|
|
|
|
|
52
|
|
|
|
|
Short-term lease costs(1)
|
2
|
|
|
|
|
5
|
|
|
|
|
Finance lease costs
|
|
|
|
|
|
|
|
|
Amortization of lease assets(2)
|
2
|
|
|
|
|
7
|
|
|
|
|
Interest on lease liabilities(3)(4)
|
9
|
|
|
|
|
24
|
|
|
|
|
Total finance lease costs
|
11
|
|
|
|
|
31
|
|
|
|
|
Total lease costs
|
$
|
65
|
|
|
|
|
$
|
153
|
|
|
|
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. TVA's rental expense for operating leases was approximately $18 million and $54 million for the three and nine months ended June 30, 2019, respectively.
(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 Nine Months Ended June 30, 2020
|
|
|
Operating cash flows for operating leases
|
$
|
57
|
|
|
Operating cash flows for finance leases
|
24
|
|
|
Financing cash flows for finance leases
|
4
|
|
|
|
|
|
Lease assets obtained in exchange for lease obligations (non-cash)
|
|
|
Operating leases(1)
|
$
|
188
|
|
|
Finance leases
|
3
|
|
Note
(1) Amount excludes operating lease assets recorded as a result of the adoption of the new lease standard
TVA has certain finance leases under power purchase agreements 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. At June 30, 2020, 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 June 30, 2020
|
|
|
Weighted average remaining lease terms
|
|
|
Operating leases
|
4 years
|
|
Finance leases
|
12 years
|
|
|
|
|
Weighted average discount rate(1)
|
|
|
Operating leases
|
1.6%
|
|
Finance leases
|
35.1%
|
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 June 30, 2020:
|
|
|
|
|
|
|
|
Future Minimum Lease Payments
Minimum Payments Due at June 30, 2020
|
|
|
Operating leases
|
|
|
2020 (remaining)
|
$
|
38
|
|
|
2021
|
106
|
|
|
2022
|
91
|
|
|
2023
|
43
|
|
|
2024
|
35
|
|
|
Thereafter
|
44
|
|
|
Minimum annual payments
|
357
|
|
|
Less: present value discount
|
(12)
|
|
|
Operating present value of net minimum lease payments
|
$
|
345
|
|
|
|
|
|
Finance leases
|
|
|
2020 (remaining)
|
$
|
14
|
|
|
2021
|
53
|
|
|
2022
|
53
|
|
|
2023
|
56
|
|
|
2024
|
52
|
|
|
Thereafter
|
418
|
|
|
Minimum annual payments
|
646
|
|
|
Less: amount representing interest
|
(460)
|
|
|
Finance present value of net minimum lease payments
|
$
|
186
|
|
The following table presents the future minimum lease payments under operating leases and the finance lease maturities as reported under the previous lease standard at September 30, 2019:
|
|
|
|
|
|
|
|
Future Minimum Lease Payments
Minimum Payments Due at September 30, 2019
|
|
|
Operating leases
|
|
|
2020
|
$
|
76
|
|
|
2021
|
75
|
|
|
2022
|
60
|
|
|
2023
|
12
|
|
|
2024
|
3
|
|
|
Thereafter
|
2
|
|
|
Minimum annual payments
|
228
|
|
|
Less: present value discount
|
—
|
|
|
Operating present value of net minimum lease payments
|
$
|
228
|
|
|
|
|
|
Finance leases
|
|
|
2020
|
$
|
53
|
|
|
2021
|
53
|
|
|
2022
|
53
|
|
|
2023
|
55
|
|
|
2024
|
51
|
|
|
Thereafter
|
418
|
|
|
Minimum annual payments
|
683
|
|
|
Less: amount representing interest
|
(495)
|
|
|
Finance present value of net minimum lease payments
|
$
|
188
|
|
TVA entered into a power purchase agreement with a renewable resource provider for solar generation and rights to charge and discharge a battery energy storage system. The system is considered a lease component in this agreement. This lease has a term of 20 years, and is expected to commence on October 1, 2022. Payments made over the term of this lease are expected to total approximately $89 million.
7. Other Long-Term Assets
The table below summarizes the types and amounts of TVA's other long-term assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Assets
|
|
|
|
|
|
At June 30, 2020
|
|
At September 30, 2019
|
|
|
|
|
|
|
Loans and other long-term receivables, net
|
$
|
128
|
|
|
$
|
125
|
|
|
EnergyRight® receivables
|
73
|
|
|
81
|
|
|
Prepaid long-term service agreements(1)
|
39
|
|
|
22
|
|
|
Restricted cash and cash equivalents
|
23
|
|
|
23
|
|
|
Prepaid capacity payments
|
13
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
63
|
|
|
55
|
|
|
Total other long-term assets
|
$
|
339
|
|
|
$
|
325
|
|
Note
(1) Certain amounts have been reclassified to conform with current year presentation.
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 June 30, 2020, and September 30, 2019, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was $18 million and $20 million, respectively. See Note 10 — Other Long-Term Liabilities for information regarding the associated financing obligation.
In response to the COVID-19 pandemic, customers experiencing financial hardship can request a deferral of loan payments for a period of up to six months. This deferral option began April 20, 2020, and is available through October 31, 2020. Deferred loans will not accrue interest during the deferral months.
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 June 30, 2020, and September 30, 2019, prepayments of $4 million and $5 million, respectively, were recorded in Other current assets.
8. Regulatory Assets and Liabilities
Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Assets and Liabilities
|
|
|
|
|
|
At June 30, 2020
|
|
At September 30, 2019
|
|
Current regulatory assets
|
|
|
|
|
|
|
|
|
|
Unrealized losses on interest rate derivatives
|
$
|
111
|
|
|
$
|
89
|
|
|
|
|
|
|
|
Unrealized losses on commodity derivatives
|
38
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel cost adjustment receivable
|
—
|
|
|
28
|
|
|
|
|
|
|
|
Total current regulatory assets
|
149
|
|
|
156
|
|
|
|
|
|
|
|
Non-current regulatory assets
|
|
|
|
|
Deferred pension costs and other post-retirement benefits costs
|
4,524
|
|
|
4,756
|
|
|
Non-nuclear decommissioning costs
|
2,012
|
|
|
1,741
|
|
|
|
|
|
|
|
Nuclear decommissioning costs
|
963
|
|
|
868
|
|
|
Unrealized losses on interest rate derivatives
|
1,603
|
|
|
1,241
|
|
|
|
|
|
|
|
Unrealized losses on commodity contracts
|
2
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current regulatory assets
|
147
|
|
|
142
|
|
|
Total non-current regulatory assets
|
9,251
|
|
|
8,763
|
|
|
Total regulatory assets
|
$
|
9,400
|
|
|
$
|
8,919
|
|
|
|
|
|
|
|
Current regulatory liabilities
|
|
|
|
|
Fuel cost adjustment tax equivalents
|
$
|
121
|
|
|
$
|
138
|
|
|
Fuel cost adjustment
|
71
|
|
|
—
|
|
|
Unrealized gains on commodity derivatives
|
5
|
|
|
12
|
|
|
Total current regulatory liabilities
|
197
|
|
|
150
|
|
|
|
|
|
|
|
Non-current regulatory liabilities
|
|
|
|
|
|
|
|
|
|
Unrealized gains on commodity derivatives
|
5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory liabilities
|
$
|
202
|
|
|
$
|
150
|
|
Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA has experienced unrealized losses related to its derivative instruments for the nine months ended June 30, 2020. 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 14 — Risk Management Activities and Derivative Transactions and Note 15 — Fair Value Measurements.
9. Variable Interest Entities
A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the business that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt. Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is required to account for the VIEs on a consolidated basis.
John Sevier VIEs
In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance ("JSCCG notes") and the issuance of $100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC ("Holdco"). Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG. A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated.
The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $100 million of secured notes ("Holdco notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each January 15 and July 15, with a final payment due in January 2042. The payment dates for the mandatorily redeemable membership interests are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes closed in January 2012. The JSCCG notes are secured by TVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. TVA's lease payments to JSCCG are equal to and payable on the same dates as JSCCG's and Holdco's semi-annual debt service payments. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions.
Due to its participation in the design, business conduct, and credit and financial support of JSCCG and Holdco, TVA has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's membership interests in JSCCG are eliminated in consolidation.
Southaven VIE
In 2013, TVA entered into a $400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance ("SCCG notes") and the issuance of $40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests in SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.
The membership interests held by SHLLC were purchased with proceeds from the issuance of $40 million of secured notes ("SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is 7.0 percent, which is reflected as interest expense on 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 SCCG notes are secured by TVA's lease payments, and the SHLLC notes are secured by SHLLC's investment in, and amounts receivable from, SCCG. TVA's lease payments to SCCG are payable on the same dates as SCCG's and SHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG's semi-annual debt service payments, (ii) the amount of SHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.
In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right, at any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA.
TVA participated in the design, business conduct, and financial support of SCCG and has determined that it has a direct variable interest in SCCG resulting from risk associated with the value of the Southaven CCF at the end of the lease term. Based on its analysis, TVA has determined that it is the primary beneficiary of SCCG and, as such, is required to account for the VIE on a consolidated basis.
Impact on Consolidated Financial Statements
The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG at June 30, 2020, and September 30, 2019, as reflected on the Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Impact of VIEs on Consolidated Balance Sheets
(in millions)
|
|
|
|
|
|
At June 30, 2020
|
|
At September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accrued interest
|
$
|
24
|
|
|
$
|
11
|
|
|
Accounts payable and accrued liabilities
|
3
|
|
|
3
|
|
|
Current maturities of long-term debt of variable interest entities
|
40
|
|
|
39
|
|
|
Total current liabilities
|
67
|
|
|
53
|
|
|
Other liabilities
|
|
|
|
|
Other long-term liabilities
|
24
|
|
|
25
|
|
|
Long-term debt, net
|
|
|
|
|
Long-term debt of variable interest entities, net
|
1,069
|
|
|
1,089
|
|
|
Total liabilities
|
$
|
1,160
|
|
|
$
|
1,167
|
|
Interest expense of $13 million and $14 million for the three months ended June 30, 2020 and 2019, respectively, and $41 million and $42 million for the nine months ended June 30, 2020 and 2019, respectively, is included on the Consolidated Statements of Operations related to debt of VIEs and membership interests of VIEs subject to mandatory redemption.
Creditors of the VIEs have no recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions.
10. Other Long-Term Liabilities
Other long-term liabilities consist primarily of liabilities related to certain derivative agreements and finance leases, as well as liabilities for environmental remediation and liabilities under agreements related to compliance with certain environmental regulations. The table below summarizes the types and amounts of Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
(in millions)
|
|
|
|
|
|
At June 30, 2020
|
|
At September 30, 2019
|
|
Interest rate swap liabilities
|
$
|
1,997
|
|
|
$
|
1,676
|
|
|
|
|
|
|
|
Finance lease liabilities
|
180
|
|
|
182
|
|
|
Currency swap liabilities
|
166
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EnergyRight® financing obligations
|
81
|
|
|
90
|
|
|
Paradise pipeline financing obligation
|
79
|
|
|
80
|
|
|
Accrued long-term service agreements
|
59
|
|
|
66
|
|
|
Other
|
186
|
|
|
203
|
|
|
Total other long-term liabilities
|
$
|
2,748
|
|
|
$
|
2,490
|
|
Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. At June 30, 2020, and September 30, 2019, the carrying amount of the interest rate swap liabilities reported in Accounts payable and accrued liabilities was $111 million and $88 million, respectively. See Note 14 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Interest Rate Derivatives for information regarding the interest rate swap liabilities. As of June 30, 2020, interest rate swap liabilities increased $344 million as compared to September 30, 2019, primarily due to a decrease in interest rates resulting in higher mark-to-market values on future expected net cash flows.
EnergyRight® Financing Obligations. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight® program. The current and long-term portions of the resulting financing obligations are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At June 30, 2020, and September 30, 2019, the carrying amount of the financing obligations reported in Accounts payable and accrued liabilities was $20 million and $23 million, respectively. See Note 7 — Other Long-Term Assets for information regarding the associated loans receivable.
In response to the COVID-19 pandemic, customers experiencing financial hardship can request a deferral of loan payments for a period of up to six months. This deferral option began April 20, 2020, and is available through October 31, 2020. Deferred loans will not accrue interest during the deferral months.
Paradise Pipeline Financing Obligation. TVA reserves firm pipeline capacity on an approximately 19-mile pipeline owned by Texas Gas, which serves TVA's Paradise Combined Cycle Plant. TVA accounts for this contract as a financing transaction. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At both June 30, 2020, and September 30, 2019, related liabilities of less than $1 million were recorded in Accounts payable and accrued liabilities.
Accrued Long-Term Service Agreements. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under certain of these agreements, parts received and services rendered exceed payments made. The current and long-term portions of the resulting obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At June 30, 2020, and September 30, 2019, related liabilities of $11 million and $12 million, respectively, were recorded in Accounts payable and accrued liabilities.
11. Asset Retirement Obligations
During the nine months ended June 30, 2020, TVA's total asset retirement obligations ("ARO") liability increased $455 million as a result of periodic accretion and revisions in estimate, partially offset by settlement projects that were conducted during the period. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets. During the nine months ended June 30, 2020, $127 million of the related regulatory assets were amortized into expense as these amounts were collected in rates. See Note 8 — Regulatory Assets and Liabilities. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 15 — Fair Value Measurements — Investment Funds and Note 20 — Contingencies and Legal Proceedings — Contingencies — Decommissioning Costs for disclosure of the current balances of the trusts and a discussion of the trusts' objectives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligation Activity(1)
|
|
|
|
|
|
|
|
Nuclear
|
|
Non-Nuclear
|
|
Total
|
|
Balance at September 30, 2019
|
$
|
3,136
|
|
|
$
|
2,480
|
|
|
$
|
5,616
|
|
|
Settlements
|
—
|
|
|
(85)
|
|
|
(85)
|
|
|
Revisions in estimate
|
—
|
|
|
387
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion (recorded as regulatory asset)
|
106
|
|
|
47
|
|
|
153
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020
|
$
|
3,242
|
|
|
$
|
2,829
|
|
|
$
|
6,071
|
|
|
|
|
|
|
|
|
Note
(1) The current portions of the ARO liability in the amounts of $266 million and $163 million at June 30, 2020, and September 30, 2019, respectively, are included in Accounts payable and accrued liabilities.
The revisions in non-nuclear estimates increased $387 million for the nine months ended June 30, 2020. In November 2019, the Tennessee Department of Environment and Conservation ("TDEC") released amendments to its regulations which govern solid waste disposal facilities, including TVA's active Coal Combustion Residuals ("CCR") facilities covered by a solid waste disposal permit and those which closed pursuant to a TDEC approved closure plan. Such facilities are generally subject to a 30-year post-closure care period during which the owner or operator must undertake certain activities, including monitoring and maintaining the facility. The amendments will, among other things, add an additional 50-year period after the end of the post-closure care period, require TVA to submit recommendations as to what activities must be performed during this 50-year period to protect human health and the environment, and require TVA to submit revised closure plans every 10 years. This regulatory revision resulted in an increase of $129 million, of which $38 million was related to operating CCR facilities and $91 million was related to inactive or closed CCR facilities. Additionally, in June 2020, based on most recent project cost data and estimates, TVA revised its AROs for certain CCR facilities at Allen Fossil Plant, resulting in an increase of $267 million.
12. Debt and Other Obligations
Debt Outstanding
Total debt outstanding at June 30, 2020, and September 30, 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Outstanding
(in millions)
|
|
|
|
|
|
At June 30, 2020
|
|
At September 30, 2019
|
|
Short-term debt
|
|
|
|
|
Short-term debt, net
|
$
|
777
|
|
|
$
|
922
|
|
|
Current maturities of power bonds issued at par(1)
|
1,917
|
|
|
1,030
|
|
|
Current maturities of long-term debt of VIEs issued at par
|
40
|
|
|
39
|
|
|
Current maturities of notes payable
|
—
|
|
|
23
|
|
|
Total current debt outstanding, net
|
2,734
|
|
|
2,014
|
|
|
Long-term debt
|
|
|
|
|
Long-term power bonds(2)
|
18,057
|
|
|
19,225
|
|
|
Long-term debt of VIEs, net
|
1,069
|
|
|
1,089
|
|
|
|
|
|
|
|
Unamortized discounts, premiums, issue costs, and other
|
(125)
|
|
|
(131)
|
|
|
Total long-term debt, net
|
19,001
|
|
|
20,183
|
|
|
Total debt outstanding
|
$
|
21,735
|
|
|
$
|
22,197
|
|
Notes
(1) Includes net exchange gain from currency transactions of $83 million at June 30, 2020. There were no such amounts at September 30, 2019.
(2) Includes net exchange gain from currency transactions of $101 million and $191 million at June 30, 2020, and September 30, 2019, respectively.
For the nine months ended June 30, 2020, long-term debt decreased primarily due to approximately $1.9 billion of power bonds maturing in 2021, offset by a $1.0 billion power bond issuance in May 2020. Short-term debt increased primarily due to power bonds maturing in 2021.
Debt Securities Activity
The table below summarizes the long-term debt securities activity for the period from October 1, 2019, to June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities Activity
|
|
|
|
|
|
|
|
|
|
Date
|
|
Amount
(in millions)
|
|
Interest Rate
|
|
Issues(1)
|
|
|
|
|
|
|
|
2020 Series A Power Bonds
|
|
May 2020
|
|
$
|
1,000
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
|
|
Discount on debt issues
|
|
|
|
(3)
|
|
|
|
|
Total long-term debt issues
|
|
|
|
$
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions/Maturities(2)
|
|
|
|
|
|
|
|
electronotes®
|
|
First Quarter 2020
|
|
$
|
217
|
|
|
3.33
|
%
|
|
electronotes®
|
|
Third Quarter 2020
|
|
1
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Series B
|
|
December 2019
|
|
1
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
2018 Series A
|
|
March 2020
|
|
1,000
|
|
|
2.25
|
%
|
|
1999 Series A PARRS (TVE)
|
|
May 2020
|
|
23
|
|
|
3.36
|
%
|
|
1998 Series D PARRS (TVC)
|
|
June 2020
|
|
17
|
|
|
3.55
|
%
|
|
2009 Series B
|
|
June 2020
|
|
27
|
|
|
3.77
|
%
|
|
Total redemptions/maturities of power bonds
|
|
|
|
1,286
|
|
|
|
|
Notes payable
|
|
|
|
23
|
|
|
1.64
|
%
|
|
Debt of variable interest entities
|
|
|
|
20
|
|
|
4.32
|
%
|
|
Total redemptions/maturities of debt
|
|
|
|
$
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
(1) The 2020 Series A Power Bonds were issued at 99.7 percent of par.
(2) All redemptions were at 100 percent of par.
Credit Facility Agreements
TVA has funding available under four long-term revolving credit facilities totaling $2.7 billion: a $150 million credit facility that matures on December 11, 2021, a $1.0 billion credit facility that matures on June 13, 2023, a $1.0 billion credit facility that matures on September 28, 2023, and a $500 million credit facility that matures on February 1, 2025. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At June 30, 2020, and September 30, 2019, there were approximately $1.5 billion and $1.3 billion, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding. See Note 14 — Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral.
The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Long-Term Credit Facilities
At June 30, 2020
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Facility Limit
|
|
Letters of Credit Outstanding
|
|
Cash Borrowings
|
|
Availability
|
|
Maturity Date
|
|
|
|
|
|
|
|
|
|
December 2021
|
|
$
|
150
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
June 2023
|
|
1,000
|
|
|
522
|
|
|
—
|
|
|
478
|
|
|
September 2023
|
|
1,000
|
|
|
450
|
|
|
—
|
|
|
550
|
|
|
February 2025
|
|
500
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
2,650
|
|
|
$
|
1,510
|
|
|
$
|
—
|
|
|
$
|
1,140
|
|
TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility was renewed in 2019 with a maturity date of September 30, 2020. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA can borrow under the U.S. Treasury credit facility only if it cannot issue Bonds in the market on reasonable terms, and TVA considers the U.S. Treasury credit facility a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the U.S. with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at June 30, 2020. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit.
Lease/Leasebacks
TVA previously entered into leasing transactions to obtain third-party financing for 24 peaking combustion turbine units ("CTs") as well as certain qualified technological equipment and software ("QTE"). Due to TVA's continuing involvement with the combustion turbine facilities and the QTE during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At June 30, 2020, and September 30, 2019, the outstanding leaseback obligations related to the remaining CTs and QTE were $223 million and $263 million, respectively. In March 2019, TVA made final rent payments under lease/leaseback transactions involving eight CTs, and TVA had previously acquired the equity interests related to these transactions. These transactions were terminated in July 2019. In May 2020, TVA made final rent payments under lease/leaseback transactions involving eight additional CTs, and TVA had previously acquired the equity interest related to these transactions. Rent payments under the remaining CT lease/leaseback transactions are scheduled to be made through January 2022. TVA does have the option to acquire the equity interests related to transactions involving the remaining eight CTs for additional amounts. In addition, on October 30, 2019, TVA provided notice of its intent to purchase the ownership interest in certain QTE. Repurchase payments are expected to be paid through a series of installments in 2021 and 2022, after which the associated leases will be terminated.
13. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) ("AOCI") represents market valuation adjustments related to TVA's currency swaps. The currency swaps are cash flow hedges and are the only derivatives in TVA's portfolio that have been designated and qualify for hedge accounting treatment. TVA records exchange rate gains and losses on its foreign currency-denominated debt and any related accrued interest in net income and marks its currency swap assets and liabilities to market through other comprehensive income (loss) ("OCI"). TVA then reclassifies an amount out of AOCI into net income, offsetting the exchange gain/loss recorded on the debt. During the three months ended June 30, 2020 and 2019, TVA reclassified $7 million of gains and $13 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense. During the nine months ended June 30, 2020 and 2019, TVA reclassified $10 million of gains and $17 million of losses, respectively, related to its cash flow hedges from AOCI to Interest expense. See Note 14 — Risk Management Activities and Derivative Transactions.
TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in AOCI or that would impact the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 8 — Regulatory Assets and Liabilities for a schedule of regulatory assets and liabilities. See Note 14 — Risk Management Activities and Derivative Transactions for a discussion of the recognition in AOCI of gains and losses associated with certain derivative contracts. See Note 15 — Fair Value Measurements for a discussion of the recognition of certain investment fund gains and losses as regulatory assets and liabilities. See Note 19 — Benefit Plans for a discussion of the regulatory accounting related to components of TVA's benefit plans.
14. Risk Management Activities and Derivative Transactions
TVA is exposed to various risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks. To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. TVA suspended its Financial Trading Program ("FTP") in 2014 and no longer uses financial instruments to hedge risks related to commodity prices; however, TVA plans to continue to manage fuel price volatility through other methods and to periodically reevaluate its suspended FTP program for future use of financial instruments.
Overview of Accounting Treatment
TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge).
The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Nine Months Ended
June 30
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationship
|
|
Objective of Hedge Transaction
|
|
Accounting for Derivative
Hedging Instrument
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Currency swaps
|
|
To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)
|
|
Unrealized gains and losses are recorded in AOCI and reclassified to Interest expense to the extent they are offset by gains and losses on the hedged transaction
|
|
$
|
31
|
|
|
$
|
(47)
|
|
|
$
|
(56)
|
|
|
$
|
(76)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1)
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Nine Months Ended
June 30
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationship
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Currency swaps
|
|
$
|
7
|
|
|
$
|
(13)
|
|
|
$
|
10
|
|
|
$
|
(17)
|
|
|
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 $30 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 exchange gain on the debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Amount of Gain (Loss) Recognized in Income on Derivatives(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
Nine Months Ended June 30
|
|
|
|
|
Derivative Type
|
|
Objective of Derivative
|
|
Accounting for Derivative Instrument
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Interest rate swaps
|
|
To fix short-term debt variable rate to a fixed rate (interest rate risk)
|
|
Mark-to-market gains and losses are recorded as regulatory assets or liabilities
Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow
|
|
$
|
(25)
|
|
|
$
|
(19)
|
|
|
$
|
(69)
|
|
|
$
|
(59)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
|
To protect against fluctuations in market prices of purchased coal or natural gas (price risk)
|
|
Mark-to-market gains and losses are recorded as regulatory assets or liabilities
Realized gains and losses due to contract settlements are recognized in Fuel expense as incurred
|
|
(2)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there were no related gains (losses) recognized in income for these unrealized gains (losses) for the three and nine months ended June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of TVA Derivatives
(in millions)
|
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
At September 30, 2019
|
|
|
|
Derivatives That Receive Hedge Accounting Treatment:
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance Sheet Presentation
|
|
Balance
|
|
Balance Sheet Presentation
|
|
Currency swaps
|
|
|
|
|
|
|
|
|
£200 million Sterling
|
$
|
(90)
|
|
|
Accounts payable and accrued liabilities $(89); Other long-term liabilities $(1)
|
|
$
|
(90)
|
|
|
Accounts payable and
accrued liabilities $(6); Other long-term liabilities $(84)
|
|
£250 million Sterling
|
(85)
|
|
|
Accounts payable and accrued liabilities $(6); Other long-term liabilities $(79)
|
|
(61)
|
|
|
Accounts payable and accrued liabilities $(5); Other long-term liabilities $(56)
|
|
£150 million Sterling
|
(89)
|
|
|
Accounts payable and accrued liabilities $(3); Other long-term liabilities $(86)
|
|
(57)
|
|
|
Accounts payable and
accrued liabilities $(4); Other long-term liabilities $(53)
|
|
|
|
|
|
|
|
|
|
|
Derivatives That Do Not Receive Hedge Accounting Treatment:
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance Sheet Presentation
|
|
Balance
|
|
Balance Sheet Presentation
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
$1.0 billion notional
|
$
|
(1,492)
|
|
|
Accounts payable and
accrued liabilities $(77);
Other long-term liabilities
$(1,415)
|
|
$
|
(1,261)
|
|
|
Accounts payable and
accrued liabilities $(62); Other long-term liabilities $(1,199)
|
|
$476 million notional
|
(611)
|
|
|
Accounts payable and
accrued liabilities $(32);
Other long-term liabilities
$(579)
|
|
(498)
|
|
|
Accounts payable and
accrued liabilities $(24);
Other long-term liabilities
$(474)
|
|
$42 million notional
|
(5)
|
|
|
Accounts payable and
accrued liabilities $(2); Other long-term liabilities $(3)
|
|
(5)
|
|
|
Accounts payable and
accrued liabilities $(2); Other long-term liabilities $(3)
|
|
Commodity contract derivatives
|
(30)
|
|
|
Other current assets $5; Other long-term assets $5; Accounts payable and accrued liabilities $(38); Other long-term liabilities $(2)
|
|
(41)
|
|
|
Other current assets $12; Accounts payable and accrued liabilities $(37); Other long-term liabilities $(16)
|
Cash Flow Hedging Strategy for Currency Swaps
To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred. TVA had three currency swaps outstanding at June 30, 2020, with total currency exposure of £600 million and expiration dates ranging from 2021 to 2043.
When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability and related accrued interest are included in Long-term debt, net and Accounts payable and accrued liabilities, respectively. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap liabilities are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.
Derivatives Not Receiving Hedge Accounting Treatment
Interest Rate Derivatives. Generally TVA uses interest rate swaps to fix variable short-term debt to a fixed rate, and TVA uses regulatory accounting treatment to defer the mark-to-market ("MtM") gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the three months ended June 30, 2020 and 2019, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized gains of $15 million and unrealized losses of $159 million, respectively. For the nine months ended June 30, 2020 and 2019, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $370 million and $369 million, respectively.
Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all such contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At June 30, 2020, TVA's coal and natural gas contract derivatives had terms of up to two and four years, respectively.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Contract Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
|
At September 30, 2019
|
|
|
|
|
|
|
Number of Contracts
|
|
Notional Amount
|
|
Fair Value (MtM)
|
|
Number of Contracts
|
|
Notional Amount
|
|
Fair Value (MtM)
|
|
Coal contract derivatives
|
6
|
|
8 million tons
|
|
$
|
(10)
|
|
|
8
|
|
9 million tons
|
|
$
|
(4)
|
|
|
Natural gas contract derivatives
|
44
|
|
355 million mmBtu
|
|
(20)
|
|
|
65
|
|
330 million mmBtu
|
|
(37)
|
|
Offsetting of Derivative Assets and Liabilities
The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets at June 30, 2020, and September 30, 2019, are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets and Liabilities(1)
(in millions)
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
|
At September 30, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives not subject to master netting or similar arrangement
|
$
|
10
|
|
|
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Currency swaps(2)
|
$
|
264
|
|
|
|
|
|
$
|
208
|
|
|
Interest rate swaps(2)
|
2,108
|
|
|
|
|
|
1,764
|
|
|
Total derivatives subject to master netting or similar arrangement
|
2,372
|
|
|
|
|
|
1,972
|
|
|
Commodity derivatives not subject to master netting or similar arrangement
|
40
|
|
|
|
|
|
53
|
|
|
Total liabilities
|
$
|
2,412
|
|
|
|
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
(1) Offsetting amounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions. There were no offsetting amounts on TVA's Consolidated Balance Sheets at either June 30, 2020, or September 30, 2019.
(2) Letters of credit of approximately $1.5 billion and $1.3 billion were posted as collateral at June 30, 2020, and September 30, 2019, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.
Other Derivative Instruments
Investment Fund Derivatives. Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), the Asset Retirement Trust ("ART"), the Supplemental Executive Retirement Plan ("SERP"), and the TVA Deferred Compensation Plan ("DCP"). See Note 15 — 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 June 30, 2020, and September 30, 2019, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $11 million and $22 million at June 30, 2020, and September 30, 2019, respectively.
Collateral. TVA's interest rate swaps and currency swaps contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. At June 30, 2020, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $2.4 billion. TVA's collateral obligations at June 30, 2020, under these arrangements were approximately $1.5 billion, for which TVA had posted approximately $1.5 billion in letters of credit. These letters of credit reduce the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral.
For all of its derivative instruments with credit-risk related contingent features:
•If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC 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 $1.3
billion and $1.6 billion of receivables from power sales outstanding at June 30, 2020, and September 30, 2019, 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 and Note 3 — Accounts Receivable, Net.
TVA had revenue from two LPCs that collectively accounted for 18 percent of total operating revenues for both the three months ended June 30, 2020 and 2019. TVA had revenue from two LPCs that collectively accounted for 17 percent and 16 percent of total operating revenues for the nine months ended June 30, 2020 and 2019, respectively.
Suppliers. TVA assesses potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation,
maintenance, and capital programs. If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power.
Natural Gas. TVA purchases the majority of its natural gas requirements from a variety of suppliers under short-term contracts. In the event of nonperformance by these suppliers, TVA believes that it can obtain replacement natural gas.
Coal. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at June 30, 2020. The contracted supply of coal is sourced from multiple geographic regions of the U.S. and is to be delivered via various transportation methods (e.g., barge, rail, and truck). Emerging technologies, environmental regulations, and low natural gas prices have contributed to weak demand for coal. As a result, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies. Continued difficulties by coal suppliers, including impacts from the COVID-19 pandemic, could result in consolidations, additional bankruptcies, restructuring, contract renegotiations, or other scenarios.
Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.
Purchased Power. TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant. TVA has determined that the supplier has the equivalent of a non-investment grade credit rating; therefore, the supplier has provided credit assurance to TVA under the terms of the agreement.
Other Suppliers. At this time, TVA has experienced minimal impacts due to force majeure events, with the exception of a manufacturing delay for a major turbine component. TVA and the vendor have developed a mitigation strategy to reduce projected delays and impacts to TVA's outage schedule.
Derivative Counterparties. TVA has entered into physical and financial contracts that qualify as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the ART, and the qualified pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At June 30, 2020, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and ART were with banking counterparties whose Moody's credit ratings were A3 or higher.
TVA classifies qualified forward coal and natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At June 30, 2020, the coal contracts were with counterparties whose Moody's credit rating, or TVA's internal analysis when such information was unavailable, ranged from B1 to Ba1. At June 30, 2020, the natural gas contracts were with counterparties whose ratings ranged from Caa2 to A2. See Suppliers above for discussion of challenges facing the coal industry. TVA recognizes the oil and gas industry has been impacted as the result of the COVID-19 pandemic and the slowdown in demand. TVA will continue to monitor the impacts and affected credit ratings and enforce contract performance assurance provisions when applicable.
15. Fair Value Measurements
Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.
Valuation Techniques
The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
—
|
|
Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
|
Level 2
|
—
|
|
Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
|
|
Level 3
|
—
|
|
Pricing inputs that are unobservable, or less observable, from objective sources. Unobservable inputs are only to be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.
|
A financial instrument's level within the fair value hierarchy (where Level 1 is the highest and Level 3 is the lowest) is based on the lowest level of input significant to the fair value measurement.
The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP and DCP assets, all changes in fair value of these assets and liabilities have been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's Consolidated Balance 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 June 30, 2020, Investment funds were comprised of $3.0 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 $2.1 billion and $777 million, respectively, at June 30, 2020.
TVA established a SERP to provide benefits to selected employees of TVA which are comparable to those provided by competing organizations. The DCP is designed to provide participants with the ability to defer compensation until employment with TVA ends. The NDT, ART, SERP, and DCP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance.
The NDT, ART, SERP, and DCP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities, real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.
Private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. These investments generally involve a three-to-four-year period where the investor contributes capital, followed by a period of distribution, typically over several years. The
investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of $216 million, unfunded commitments related to private real assets of $58 million, and unfunded commitments related to private credit of $20 million at June 30, 2020. The ART had unfunded commitments related to private equity limited partnerships of $133 million, unfunded commitments related to private real assets of $50 million, and unfunded commitments related to private credit of $10 million at June 30, 2020. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at net asset value in the fair value hierarchy.
Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, and DCP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at net asset value in the fair value hierarchy.
Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies — Cost-Based Regulation and Note 8 — Regulatory Assets and Liabilities. TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Investment Gains (Losses)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
|
|
Nine Months Ended
June 30
|
|
|
|
|
Fund
|
|
Financial Statement Presentation
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
NDT
|
|
Regulatory asset
|
|
$
|
235
|
|
|
$
|
(37)
|
|
|
$
|
(11)
|
|
|
$
|
(84)
|
|
|
|
ART
|
|
Regulatory asset
|
|
97
|
|
|
(6)
|
|
|
(1)
|
|
|
(58)
|
|
|
|
SERP
|
|
Other income (expense)
|
|
7
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
|
DCP
|
|
Other income (expense)
|
|
2
|
|
|
1
|
|
|
—
|
|
|
(1)
|
|
|
Due to higher volatility in the financial markets associated with the COVID-19 pandemic, TVA has experienced fluctuations related to its ART and NDT investment portfolio during the nine months ended June 30, 2020. The losses experienced during the three months ended March 31, 2020, have been recovered. For the nine months ended June 30, 2020, the NDT has increased in value $17 million. Despite this volatility, TVA’s NDT funding as of June 30, 2020, continues to be fully funded per the Nuclear Regulatory Commission’s (“NRC”) funding requirements.
Currency and Interest Rate Derivatives
See Note 14 — 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
Most of these contracts are valued based on market approaches which utilize short-term and mid-term market-quoted prices from an external industry brokerage service. A small number of these contracts are valued based on a pricing model using long-term price estimates from TVA's coal price forecast. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the forecast, contract-specific terms, and other market inputs. These contracts are classified as Level 3 valuations.
Nonperformance Risk
The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.
Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying credit valuation adjustments ("CVAs"). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the counterparty. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2019) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a less than $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at June 30, 2020.
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 June 30, 2020, and September 30, 2019. 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 June 30, 2020
(in millions)
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
470
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
470
|
|
|
Government debt securities
|
366
|
|
|
52
|
|
|
—
|
|
|
418
|
|
|
Corporate debt securities
|
—
|
|
|
322
|
|
|
—
|
|
|
322
|
|
|
Mortgage and asset-backed securities
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
|
Institutional mutual funds
|
173
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
Forward debt securities contracts
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Private credit funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
57
|
|
|
Private equity funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
Private real asset funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
162
|
|
|
Commingled funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,169
|
|
|
Total investments
|
1,009
|
|
|
413
|
|
|
—
|
|
|
2,991
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
—
|
|
|
8
|
|
|
2
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,009
|
|
|
$
|
421
|
|
|
$
|
2
|
|
|
$
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
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(2)
|
$
|
—
|
|
|
$
|
264
|
|
|
$
|
—
|
|
|
$
|
264
|
|
|
Interest rate swaps
|
—
|
|
|
2,108
|
|
|
—
|
|
|
2,108
|
|
|
Commodity contract derivatives
|
—
|
|
|
28
|
|
|
12
|
|
|
40
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,400
|
|
|
$
|
12
|
|
|
$
|
2,412
|
|
Notes
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets.
(2) 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 14 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
At September 30, 2019
(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
|
$
|
464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
464
|
|
|
Government debt securities
|
279
|
|
|
65
|
|
|
—
|
|
|
344
|
|
|
Corporate debt securities
|
—
|
|
|
417
|
|
|
—
|
|
|
417
|
|
|
Mortgage and asset-backed securities
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
Institutional mutual funds
|
250
|
|
|
—
|
|
|
—
|
|
|
250
|
|
|
Forward debt securities contracts
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
Private equity funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
Private real estate funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
135
|
|
|
Private credit funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
Commingled funds measured at net asset value(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,131
|
|
|
Total investments
|
993
|
|
|
536
|
|
|
—
|
|
|
2,968
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
—
|
|
|
7
|
|
|
5
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
993
|
|
|
$
|
543
|
|
|
$
|
5
|
|
|
$
|
2,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(2)
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
208
|
|
|
Interest rate swaps
|
—
|
|
|
1,764
|
|
|
—
|
|
|
1,764
|
|
|
Commodity contract derivatives
|
—
|
|
|
44
|
|
|
9
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,016
|
|
|
$
|
9
|
|
|
$
|
2,025
|
|
Notes
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets.
(2) 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 14 — Risk Management Activities and Derivative Transactions — Offsetting of Derivative Assets and Liabilities.
TVA uses internal valuation specialists for the calculation of its commodity contract derivatives fair value measurements classified as Level 3. Analytical testing is performed on the change in fair value measurements each period to ensure the valuation is reasonable based on changes in general market assumptions. Significant changes to the estimated data used for unobservable inputs, in isolation or combination, may result in significant variations to the fair value measurement reported.
The following table presents a reconciliation of all commodity contract derivatives measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
(in millions)
|
|
|
|
|
|
Commodity Contract Derivatives
|
|
|
|
|
Three Months Ended
June 30
|
|
Nine Months Ended
June 30
|
|
Balance at beginning of period
|
$
|
38
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities
|
(19)
|
|
|
(39)
|
|
|
Balance at June 30, 2019
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(7)
|
|
|
$
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
(1)
|
|
|
(1)
|
|
|
Change in net unrealized gains (losses) deferred as regulatory assets and liabilities
|
(2)
|
|
|
(5)
|
|
|
Balance at June 30, 2020
|
$
|
(10)
|
|
|
$
|
(10)
|
|
The following table presents quantitative information related to the significant unobservable inputs used in the measurement of fair value of TVA's assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Fair Value at
June 30, 2020
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range(1)
|
|
Assets
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
$
|
2
|
|
|
Pricing model
|
|
Coal supply and demand
|
|
0.5 - 0.6 billion tons/year
|
|
|
|
|
|
|
Long-term market prices
|
|
$11.90 - $43.00/ton
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
12
|
|
|
Pricing model
|
|
Coal supply and demand
|
|
0.5 - 0.6 billion tons/year
|
|
|
|
|
|
|
Long-term market prices
|
|
$11.90 - $43.00/ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Fair Value at September 30, 2019
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Assets
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
$
|
5
|
|
|
Pricing model
|
|
Coal supply and demand
|
|
0.4 - 0.8 billion tons/year
|
|
|
|
|
|
|
Long-term market prices
|
|
$12.10 - $94.51/ton
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Commodity contract derivatives
|
9
|
|
|
Pricing model
|
|
Coal supply and demand
|
|
0.4 - 0.8 billion tons/year
|
|
|
|
|
|
|
Long-term market prices
|
|
$12.10 - $94.51/ton
|
Note
(1) During the third quarter of 2020, TVA updated the range estimate to align with the maximum contract term of related commodity contract derivatives.
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 June 30, 2020, and September 30, 2019, 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 June 30, 2020, and September 30, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Values of Financial Instruments Not Recorded at Fair Value
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
|
At September 30, 2019
|
|
|
|
|
Valuation Classification
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
EnergyRight® receivables (including current portion)
|
Level 2
|
|
$
|
91
|
|
|
$
|
90
|
|
|
$
|
101
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and other long-term receivables, net (including current portion)
|
Level 2
|
|
134
|
|
|
122
|
|
|
131
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EnergyRight® financing obligations (including current portion)
|
Level 2
|
|
101
|
|
|
112
|
|
|
113
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments
|
Level 2
|
|
—
|
|
|
7
|
|
|
—
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership interests of VIEs subject to mandatory redemption (including current portion)
|
Level 2
|
|
27
|
|
|
38
|
|
|
28
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term outstanding power bonds (including current maturities), net
|
Level 2
|
|
19,849
|
|
|
26,749
|
|
|
20,124
|
|
|
26,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt of VIEs (including current maturities), net
|
Level 2
|
|
1,109
|
|
|
1,437
|
|
|
1,128
|
|
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable (including current maturities)
|
Level 2
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
The carrying value of Cash and cash equivalents, Restricted cash and cash equivalents, 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.
16. Revenue
Revenue from Sales of Electricity
TVA's revenue from contracts with customers is primarily derived from the generation and sale of electricity to its customers and is included in Revenue from sales of electricity on the Consolidated Statements of Operations. Electricity is sold primarily to LPCs for distribution to their end-use customers. In addition, TVA sells electricity to directly served industrial companies, federal agencies, and others.
|
|
|
|
|
|
|
|
LPC sales
|
Approximately 93 percent of TVA's revenue from sales of electricity for the three and nine months ended June 30, 2020 was to LPCs, which then distribute the power to their customers using their own distribution systems. Power is delivered to each LPC at delivery points within the LPC's service territory. TVA recognizes revenue when the customer takes possession of the power at the delivery point. For power sales, the performance obligation to deliver power is satisfied in a series over time because the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Credits are designed to achieve objectives of the TVA Act and include items such as hydro preference credits for residential customers of LPCs, economic development credits to promote growth in the Tennessee Valley, wholesale bill credits to LPCs participating in the long-term Partnership Agreement, and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance.
|
|
|
|
|
Directly served customers
|
Directly served customers, including industrial customers, federal agencies, and other customers, take power for their own consumption. Similar to LPCs, power is delivered to a delivery point, at which time the customer takes possession and TVA recognizes revenue. For all power sales, the performance obligation to deliver power is satisfied in a series over time since the sales of electricity over the term of the customer contract are a series of distinct goods that are substantially the same and have the same pattern of transfer to the customer. TVA has no continuing performance obligations subsequent to delivery. Using the output method for revenue recognition provides a faithful depiction of the transfer of electricity as customers obtain control of the power and benefit from its use at delivery. Additionally, TVA has an enforceable right to consideration for energy delivered at any discrete point in time and will recognize revenue at an amount that reflects the consideration to which TVA is entitled for the energy delivered.
The amount of revenue is based on contractual prices approved by the TVA Board. Customers are invoiced monthly for power delivered as measured by meters located at the delivery points. The net transaction price is offset by certain credits available to customers that are known at the time of billing. Examples of credits include items such as economic development credits to promote growth in the Tennessee Valley and interruptible credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. Payments are typically due within approximately one month of invoice issuance.
|
Other Revenue
Other revenue consists primarily of wheeling and network transmission charges, sales of excess steam that is a by-product of power production, delivery point charges for interconnection points between TVA and the customer, and certain other ancillary goods or services.
Disaggregated Revenues
During the three and nine months ended June 30, 2020, revenues generated from TVA's electricity sales were $2.2 billion and $7.2 billion, respectively, and accounted for virtually all of TVA's revenues. TVA's operating revenues by state for the three and nine months ended June 30, 2020 and 2019, are detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues By State
(in millions)
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Alabama
|
$
|
312
|
|
|
$
|
367
|
|
|
$
|
1,041
|
|
|
$
|
1,146
|
|
|
Georgia
|
52
|
|
|
59
|
|
|
179
|
|
|
196
|
|
|
Kentucky
|
140
|
|
|
157
|
|
|
455
|
|
|
498
|
|
|
Mississippi
|
204
|
|
|
250
|
|
|
668
|
|
|
751
|
|
|
North Carolina
|
13
|
|
|
15
|
|
|
50
|
|
|
56
|
|
|
Tennessee
|
1,485
|
|
|
1,705
|
|
|
4,809
|
|
|
5,273
|
|
|
Virginia
|
9
|
|
|
10
|
|
|
32
|
|
|
35
|
|
|
Subtotal
|
2,215
|
|
|
2,563
|
|
|
7,234
|
|
|
7,955
|
|
|
Off-system sales
|
1
|
|
|
2
|
|
|
3
|
|
|
3
|
|
|
Revenue from sales of electricity
|
2,216
|
|
|
2,565
|
|
|
7,237
|
|
|
7,958
|
|
|
Other revenue
|
35
|
|
|
39
|
|
|
113
|
|
|
121
|
|
|
Total operating revenues
|
$
|
2,251
|
|
|
$
|
2,604
|
|
|
$
|
7,350
|
|
|
$
|
8,079
|
|
TVA's operating revenues by customer type for the three and nine months ended June 30, 2020 and 2019, are detailed in the table below:
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Operating Revenues by Customer Type
(in millions)
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Three Months Ended June 30
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Nine Months Ended June 30
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2020
|
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2019
|
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2020
|
|
2019
|
|
Revenue from sales of electricity
|
|
|
|
|
|
|
|
|
Local power companies(1)
|
$
|
2,058
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|
|
$
|
2,366
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|
|
$
|
6,716
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|
|
$
|
7,347
|
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|
Industries directly served
|
132
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|
|
168
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|
|
442
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|
|
521
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|
|
Federal agencies and other
|
26
|
|
|
31
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|
|
79
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|
|
90
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|
Revenue from sales of electricity
|
2,216
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|
|
2,565
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|
|
7,237
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|
|
7,958
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Other revenue
|
35
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|
|
39
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|
|
113
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|
|
121
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|
Total operating revenues
|
$
|
2,251
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|
|
$
|
2,604
|
|
|
$
|
7,350
|
|
|
$
|
8,079
|
|
Note
(1) The amount for the three and nine months ended June 30, 2020, is net of $38 million and $108 million, respectively, of wholesale bill credits to LPCs participating in the long-term Partnership Agreement.
TVA and LPCs continue to work together to meet the changing needs of consumers around the Tennessee Valley. At its August 2019 meeting, the TVA Board approved a 20-year Partnership Agreement option that better aligns the length of LPC contracts with TVA's long-term commitments. These agreements are automatically extended each year after their initial effective date, contingent upon certain circumstances, including agreement on flexibility options and limited rate increases going forward. Participating LPCs will receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. In June 2020, TVA provided participating LPCs a flexibility option that allows them to locally generate up to approximately five percent of average total hourly energy sales over the prior five years in order to meet their individual customers' needs. As of August 3, 2020, 141 LPCs had signed the 20-year Partnership Agreement with TVA, and 42 LPCs had signed a Flexibility Agreement.
The number of LPCs with the contract arrangements described below, the revenues derived from such arrangements for the three and nine months ended June 30, 2020, and the percentage of TVA's total operating revenues for the three and nine months ended June 30, 2020 represented by these revenues, are summarized in the tables below:
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TVA Local Power Company Contracts
At and for the Three Months Ended June 30, 2020
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Contract Arrangements(1)
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Number of LPCs
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Revenue from Sales of Electricity to LPCs
(in millions)
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Percentage of Total Operating Revenues
|
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20-year termination notice
|
|
141
|
|
|
$
|
1,630
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|
|
72.4
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%
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|
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|
|
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|
|
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|
|
|
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10-year termination notice
|
|
1
|
|
|
1
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|
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—
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%
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|
|
|
|
|
|
|
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5-year termination notice
|
|
12
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|
|
427
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|
|
19.0
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%
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Total
|
|
154
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|
|
$
|
2,058
|
|
|
91.4
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%
|
Note
(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in contracts with two of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.
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TVA Local Power Company Contracts
At and for the Nine Months Ended June 30, 2020
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Contract Arrangements(1)
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Number of LPCs
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Revenue from Sales of Electricity to LPCs
(in millions)
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Percentage of Total Operating Revenues
|
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20-year termination notice
|
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141
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|
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$
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5,399
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|
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73.5
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%
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|
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|
|
|
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10-year termination notice
|
|
1
|
|
|
1
|
|
|
—
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%
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|
|
|
|
|
|
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|
5-year termination notice
|
|
12
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|
|
1,316
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|
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17.9
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%
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Total
|
|
154
|
|
|
$
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6,716
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|
|
91.4
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%
|
Note
(1) Ordinarily, the LPCs and TVA have the same termination notice period; however, in contracts with two of the LPCs with five-year termination notices, TVA has a 10-year termination notice (which becomes a five-year termination notice if TVA loses its discretionary wholesale rate-setting authority). Certain LPCs have five-year termination notices or a shorter period if any act of Congress, court decision, or regulatory change requires or permits that election.
TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES accounted for nine percent and eight percent, respectively, of TVA's total operating revenues during the nine months ended June 30, 2020. Sales to MLGW and NES each accounted for eight percent of TVA's total operating revenues during the nine months ended June 30, 2019. In May 2020, MLGW published a draft Integrated Resource Plan to guide energy choices in the future, and in July 2020, TVA made a proposal to MLGW that highlights the benefits of remaining a TVA customer.
Contract Balances
Contract assets represent an entity's right to consideration in exchange for goods and services that the entity has transferred to customers. TVA does not have any material contract assets at June 30, 2020.
Contract liabilities represent an entity's obligations to transfer goods or services to customers for which the entity has received consideration (or an amount of consideration is due) from the customers. These contract liabilities are primarily related to upfront consideration received prior to the satisfaction of the performance obligation. TVA does not have any material contract liabilities at June 30, 2020.
Economic Development Incentives. Under certain economic development programs, TVA offers incentives to existing and potential power customers in certain 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 $78 million and $76 million during the three months ended June 30, 2020 and 2019, respectively. Incentives recorded as a reduction to revenue were $238 million and $231 million during the nine months ended June 30, 2020 and 2019, 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 June 30, 2020, and September 30, 2019, the outstanding unpaid incentives were $169 million and $157 million, respectively. These incentives may be subject to clawback provisions if the customers fail to meet certain program requirements. In April 2020, TVA established flexibility provisions to support the continued operations and recovery of participating customers impacted by the COVID-19 pandemic.
17. Other Income (Expense), Net
Income and expenses not related to TVA's operating activities are summarized in the following table:
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Other Income (Expense), Net
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Three Months Ended
June 30
|
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Nine Months Ended
June 30
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2020
|
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2019
|
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2020
|
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2019
|
|
Bellefonte deposit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21
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|
|
Interest income
|
3
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|
|
7
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|
|
14
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|
|
19
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|
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External services
|
3
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|
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3
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9
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|
|
9
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Gains (losses) on investments
|
10
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|
|
3
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|
|
4
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|
|
2
|
|
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Miscellaneous
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Total Other income (expense), net
|
$
|
16
|
|
|
$
|
14
|
|
|
$
|
27
|
|
|
$
|
52
|
|
During the three months ended June 30, 2020, Other income (expense), net increased $2 million as compared to the same period of the prior year, driven by an increase of $7 million in Gains on investments primarily related to unrealized gains on the SERP and DCP investments as a result of higher volatility in the financial markets associated with the COVID-19 pandemic. Partially offsetting this increase was a decrease of $4 million related to Interest income primarily as a result of lower interest rates.
During the nine months ended June 30, 2020, Other income (expense), net decreased $25 million, primarily driven by $21 million of other income in 2019 related to a deposit liability received by TVA as a down payment on the sale of Bellefonte Nuclear Plant ("Bellefonte"). The purchaser, Nuclear Development, LLC, failed to fulfill the requirements of the sales contract with respect to obtaining NRC approval of the transfer of required nuclear licenses and payment of the remainder of the selling price before the November 30, 2018, closing date. See Note 20 — Contingencies and Legal Proceedings — Legal Proceedings for a discussion of the lawsuit filed by Nuclear Development, LLC.
18. Supplemental Cash Flow Information
Construction in progress and Nuclear fuel expenditures included in Accounts payable and accrued liabilities at June 30, 2020 and 2019, were $339 million and $266 million, respectively, and are excluded from the Statements of Consolidated Cash Flows for the nine months ended June 30, 2020 and 2019, as non-cash investing activities.
Excluded from the Statements of Consolidated Cash Flows at June 30, 2020 and 2019, as non-cash financing activities were lease obligations incurred related to lease equipment of $3 million and $6 million, respectively.
19. Benefit Plans
TVA sponsors a qualified defined benefit plan ("pension plan") that covers most of its full-time employees hired before July 1, 2014, a qualified defined contribution plan ("401(k) plan") that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other post-employment benefits, such as workers' compensation, and the SERP. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System ("TVARS"), which is governed by its own board of directors.
The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three and nine months ended June 30, 2020 and 2019, were as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
Components of TVA's Benefit Plans(1)
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30
|
|
|
|
|
|
|
|
For the Nine Months Ended June 30
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
Pension Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
41
|
|
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
8
|
|
|
Interest cost
|
104
|
|
|
125
|
|
|
4
|
|
|
5
|
|
|
312
|
|
|
374
|
|
|
12
|
|
|
14
|
|
|
Expected return on plan assets
|
(122)
|
|
|
(119)
|
|
|
—
|
|
|
—
|
|
|
(366)
|
|
|
(358)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
(25)
|
|
|
(25)
|
|
|
(6)
|
|
|
(6)
|
|
|
(73)
|
|
|
(74)
|
|
|
(18)
|
|
|
(18)
|
|
|
Recognized net actuarial loss
|
109
|
|
|
84
|
|
|
2
|
|
|
1
|
|
|
327
|
|
|
252
|
|
|
7
|
|
|
3
|
|
|
Total net periodic benefit cost as actuarially determined
|
80
|
|
|
76
|
|
|
4
|
|
|
2
|
|
|
241
|
|
|
227
|
|
|
13
|
|
|
7
|
|
|
Amount (capitalized) / expensed due to actions of regulator
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11)
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost
|
$
|
77
|
|
|
$
|
76
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
230
|
|
|
$
|
228
|
|
|
$
|
13
|
|
|
$
|
7
|
|
Note
(1) The components of net benefit cost other than the service cost component are included in Other net periodic benefit cost on the Consolidated Statements of Operations.
TVA's minimum required pension plan contribution for 2020 is $300 million. TVA contributes $25 million per month to TVARS and as of June 30, 2020, had contributed $225 million. The remaining $75 million will be contributed by September 30, 2020. For the nine months ended June 30, 2020, TVA also contributed $67 million to the 401(k) plan, $19 million (net of $4 million in rebates) to the other post-retirement plans, and $5 million to the SERP.
Financial markets have experienced higher volatility since September 30, 2019, due to the COVID-19 pandemic. The uncertainty as to the duration and severity of the COVID-19 pandemic has resulted in significantly lower market valuations for many investments. The impact of these events on TVA’s pension system is reflected in changes in the asset portfolio values from $8.0 billion at September 30, 2019, to $6.8 billion at March 31, 2020, and rebounding to $7.8 billion at June 30, 2020. TVA has not determined at this time whether additional contributions will be made to TVARS during 2020. Additionally, other post-retirement contributions related to the retiree health plans may be higher than previously assumed as a result of the COVID-19 pandemic increasing health care costs, but cannot be estimated at this time.
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. Therefore, TVA cannot estimate the potential impact to the pension plan and other post-retirement plans at this time.
20. Contingencies and Legal Proceedings
Contingencies
Nuclear Insurance. Section 170 of the Atomic Energy Act, commonly known as the Price-Anderson Act, provides a layered framework of financial protection to compensate for liability claims of members of the public for personal injury and property damages arising from a nuclear incident in the U.S. This financial protection consists of two layers of coverage:
•The primary level is private insurance underwritten by American Nuclear Insurers ("ANI") and provides public liability insurance coverage of $450 million for each nuclear power plant licensed to operate. If this amount is not sufficient to cover claims arising from a nuclear incident, the second level, Secondary Financial Protection, applies.
•Within the Secondary Financial Protection level, the licensee of each nuclear reactor has a contingent obligation to pay a retrospective premium, equal to its proportionate share of the loss in excess of the primary level, regardless of proximity to the incident of fault, up to a maximum of approximately $138 million per reactor per incident. With TVA's seven reactors, the maximum total contingent obligation per incident is $963 million. This retrospective premium is payable at a maximum rate currently set at approximately $20 million per year per incident per reactor. Currently, 97 reactors are participating in the Secondary Financial Protection program.
In the event that a nuclear incident results in public liability claims, the primary level provided by ANI combined with the Secondary Financial Protection should provide up to approximately $13.8 billion in coverage.
Federal law requires that each NRC power reactor licensee obtain property insurance from private sources to cover the cost of stabilizing and decontaminating a reactor and its station site after an accident. TVA carries property, decommissioning liability, and decontamination liability insurance from Nuclear Electric Insurance Limited ("NEIL"). The limits for each site vary depending on the site and range from up to $2.1 billion to $2.8 billion available for a loss at TVA's three sites. Some of this insurance may require the payment of retrospective premiums up to a maximum of approximately $145 million.
TVA purchases accidental outage (business interruption) insurance for TVA's nuclear sites from NEIL. In the event that an accident covered by this policy takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, after a waiting period, an indemnity (a set dollar amount per week) with a maximum indemnity of $490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $43 million, but only to the extent the retrospective premium is deemed necessary by the NEIL Board of Directors to pay losses unable to be covered by NEIL's surplus.
Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to nuclear generating plants, coal-fired generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets. See Note 11 — Asset Retirement Obligations.
Nuclear Decommissioning. Provision for decommissioning costs of nuclear generating units is based on options prescribed by the NRC procedures to dismantle and decontaminate the facilities to meet the NRC criteria for license termination. At June 30, 2020, $3.2 billion, representing the discounted value of future estimated decommissioning costs, was included in AROs. The actual decommissioning costs may vary from the derived estimates because of, among other things, changes in current assumptions, such as the assumed dates of decommissioning, changes in regulatory requirements, changes in technology, and changes in the cost of labor, materials, and equipment. Utilities that own and operate nuclear plants are required to use different procedures in calculating nuclear decommissioning costs under GAAP than those that are used in calculating nuclear decommissioning costs when reporting to the NRC. The two sets of procedures produce different estimates for the costs of decommissioning primarily because of differences in the underlying assumptions. Decommissioning costs studies are updated for each of TVA's nuclear units at least every five years.
TVA maintains a NDT to provide funding for the ultimate decommissioning of its nuclear power plants. See Note 15 — 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 8 — Regulatory Assets and Liabilities and Note 11 — Asset Retirement Obligations.
Non-Nuclear Decommissioning. The estimated future non-nuclear decommissioning ARO was $2.8 billion at June 30, 2020. 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 15 — Fair Value Measurements — Investment Funds. Estimates involved in determining if additional funding will be made to the ART include inflation rate, rate of return projections on the fund investments, and the planned use of other sources to fund decommissioning costs. See Note 8 — Regulatory Assets and Liabilities and Note 11 — Asset Retirement Obligations.
Environmental Matters. TVA's power 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, water quality control, and management and disposal of solid and hazardous wastes. In the future, regulations in all of these areas are expected to become more stringent. Regulations are also expected to have a particular emphasis on climate change, renewable generation, and energy efficiency.
TVA has incurred, and expects to continue to incur, substantial capital and operating and maintenance costs to comply with evolving environmental requirements primarily associated with, but not limited to, the operation of TVA's coal-fired generating units. Environmental requirements placed on the operation of TVA's coal-fired and other generating units will likely continue to become more restrictive over time. Litigation over emissions or discharges from coal-fired generating units is also occurring. Failure to comply with environmental and safety laws can result in TVA being subject to enforcement actions, which can lead to the imposition of significant civil liability, including fines and penalties, criminal sanctions, and/or the shutting down of non-compliant facilities.
TVA estimates that compliance with existing and future Clean Air Act ("CAA") requirements (excluding greenhouse gas ("GHG") requirements) could lead to costs of $132 million from 2020 to 2024, which include existing controls capital projects and air operations and maintenance projects. TVA also estimates additional expenditures of approximately $1.0 billion from 2020 to 2024 relating to TVA's CCR conversion program, as well as expenditures of approximately $211 million from 2020 to 2024 relating to compliance with Clean Water Act requirements. Future costs could differ from these estimates if new environmental laws or regulations become applicable to TVA or the facilities it operates, or if existing environmental laws or regulations are revised or reinterpreted. There could also be costs that cannot reasonably be predicted at this time, due to uncertainty of actions, that could increase these estimates.
Liability for releases and cleanup of hazardous substances is primarily regulated by the federal Comprehensive Environmental Response, Compensation, and Liability Act, and other federal and parallel state statutes. In a manner similar to many other industries and power systems, TVA has generated or used hazardous substances over the years. TVA operations at some facilities have resulted in contamination that TVA is addressing. At both June 30, 2020, and September 30, 2019, TVA's estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate was approximately $15 million on a non-discounted basis, and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.
Potential Liability Associated with Workers' Exposure to CCR Materials. In response to the 2008 ash spill at Kingston, TVA hired Jacobs Engineering Group, Inc. ("Jacobs") to oversee certain aspects of the cleanup. After the cleanup was completed, Jacobs was sued in the United States District Court for the Eastern District of Tennessee ("Eastern District") by employees of a contractor involved in the cleanup and family members of some of the employees. The plaintiffs alleged that Jacobs had failed to take or provide proper health precautions and misled workers about the health risks associated with exposure to coal fly ash, which is a CCR material. The plaintiffs alleged that exposure to the fly ash caused a variety of significant health issues and illnesses, including in some cases death. The case was split into two phases, with the first phase considering, among other issues, general causation and the second determining specific causation and damages. On November 7, 2018, a jury hearing the first phase returned a verdict in favor of the plaintiffs, including determinations that Jacobs failed to adhere to its contract with TVA or the Site Wide Safety and Health Plan; Jacobs failed to provide reasonable care to the plaintiffs; and Jacobs's failures were capable of causing a list of medical conditions, ranging from hypertension to cancer. On January 11, 2019, the Eastern District referred the parties to mediation. Mediation has concluded, but the parties did not resolve the matter. The litigation will now proceed to the second phase on the question of whether Jacobs's failures did in fact cause the plaintiffs' alleged injuries and damages.
On May 13, 2019, an additional group of contractor employees and family members filed suit against Jacobs in the Circuit Court for Roane County, Tennessee. These plaintiffs have raised similar claims to those being litigated in the case referenced above.
While TVA is not a party to either of these lawsuits, TVA may potentially have an indemnity obligation to reimburse Jacobs for some amounts that Jacobs is required to pay. TVA will continue monitoring the litigation to determine whether these or similar cases could have broader implications for the utility industry. TVA does not expect any potential liability to have a material adverse impact on its results of operations or financial condition.
Legal Proceedings
From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.
General. At June 30, 2020, TVA had accrued $14 million of probable losses with respect to Legal Proceedings. Of the accrued amount, $13 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. In April 2011, TVA entered into two substantively similar agreements, one with the Environmental Protection Agency ("EPA") and the other with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, the National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"). Under the Environmental Agreements, TVA committed to, among other things, take actions regarding coal units that have been completed. TVA also agreed to invest $290 million in certain TVA environmental projects of which TVA had spent approximately $279 million as of June 30, 2020. In exchange for these commitments, most past claims against TVA based on alleged New Source Review and associated violations were waived and cannot be brought against TVA. Future claims, including those for sulfuric acid mist and GHG emissions, can still be brought against TVA.
The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the June 30, 2020, Consolidated Balance Sheets. In conjunction with the approval of the
Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's obligations under the Environmental Agreements as regulatory assets, and they are included as such on the June 30, 2020, Consolidated Balance Sheets and will be recovered in rates in future periods.
Case Involving Kingston Fossil Plant. On May 7, 2019, Roane County and the Cities of Kingston and Harriman ("local governments") filed a lawsuit in the Circuit Court for Roane County, Tennessee, against TVA and Jacobs for monetary damages and unspecified injunctive relief relating to TVA's cleanup response to the 2008 ash spill at Kingston. The local governments allege that TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the cleanup response and misled the local governments and their citizens about health and environmental risks associated with exposure to coal fly ash. The local governments seek to recover monetary damages on behalf of their citizens for personal injury and property loss claims, damages for lost tax revenue, damages for increased emergency and medical response costs claims, punitive damages, and unspecified injunctive relief. On June 6, 2019, TVA removed the lawsuit to the Eastern District, and TVA and Jacobs filed separate motions to dismiss. Plaintiffs, in response, filed a response opposing both motions and a separate motion seeking leave to file a proposed amended class action complaint in which Roane County would serve as class representative for the municipalities and their citizens.
In December 2019, the federal court ruled that the local governments did not have standing to assert representative claims on behalf of their citizens and rejected their motion to proceed as a class action on behalf of their citizens because of the dissimilarity of the injuries allegedly suffered by the local governments (lost tax revenue) and the personal injuries and personal medical expenses allegedly suffered by the individuals. The court indicated, however, that the local governments may have legal standing to assert claims for their direct injuries (claims relating to municipally owned property) and directed the local governments to file an amended pleading in conformance with the court's order by January 16, 2020. The plaintiffs filed their amended complaint on January 15, 2020. On February 26, 2020, TVA and Jacobs moved to dismiss the amended complaint and the court has not yet ruled on this motion. Discovery is ongoing, and trial is set for April 20, 2021.
Class Action Lawsuit Involving Kingston Fossil Plant. On November 7, 2019, a resident of Roane County, Tennessee, filed a proposed class action lawsuit against Jacobs and TVA in the Eastern District. The complaint alleges that the class representative and all other members of the proposed class were damaged as a result of the 2008 ash spill at Kingston and the resulting cleanup activities. The complaint alleges, among other things, that (1) TVA was negligent in its construction and operation of the Kingston CCR facility, (2) TVA and Jacobs failed to take proper measures to mitigate environmental and health risks during the cleanup response, and (3) TVA and Jacobs misled the community about health and environmental risks associated with exposure to coal fly ash. The complaint seeks monetary damages and injunctive relief in the form of an order requiring the defendants to establish a blood testing program and medical monitoring protocol and to remediate damage to the properties of the proposed class. On April 22, 2020, TVA moved to dismiss the complaint and the court has not yet ruled on this motion.
Case Involving Bull Run Fossil Plant. On February 5, 2020, two plaintiffs who reside near Bull Run filed suit against TVA in the Circuit Court for Anderson County, Tennessee, on behalf of themselves and their two minor children. The plaintiffs allege that they and their children were injured from direct exposures to CCR material originating from Bull Run and from second-hand exposures to coal ash through contact with a family member who worked at an undisclosed TVA facility. TVA
removed the case to the Eastern District on March 5, 2020, and the plaintiffs filed an amended complaint in federal court on
March 12, 2020. On June 19, 2020, TVA moved to dismiss the amended complaint and the court has not yet ruled on this motion.
Consent Decree Involving Colbert Fossil Plant. In May 2013, the Alabama Department of Environmental Management ("ADEM") and TVA entered into a consent decree concerning alleged violations of the Alabama Water Pollution Control Act. The consent decree required, among other things, that TVA continue remediation efforts TVA had begun prior to the suit being filed and stop using an unlined landfill after a lined landfill is approved and constructed. In August 2018, the parties agreed to amend the consent decree to deal with groundwater issues identified after TVA published groundwater monitoring reports in accordance with the EPA's CCR rule. The amended consent decree requires TVA to investigate the nature and extent of any groundwater contamination, develop and implement a remedy, provide semiannual status reports to ADEM, and remedy any seeps identified during inspections. TVA also paid $100,000 to Alabama under the amended consent decree. In accordance with the amended consent decree, TVA submitted to ADEM a Comprehensive Groundwater Investigation Report on May 17, 2019, and an Assessment of Corrective Measures on July 17, 2019. TVA is continuing to develop the groundwater remedy and submit reports to ADEM.
Case Involving Tennessee River Boat Accident. On July 23, 2015, plaintiffs filed suit in the United States District Court for the Northern District of Alabama ("Northern District"), seeking recovery for personal injuries sustained when the plaintiffs' boat struck a TVA transmission line which was being raised from the Tennessee River during a repair operation. The district court dismissed the case, finding that TVA's exercise of its discretion as a governmental entity in deciding how to carry out the operation barred any liability for negligence. In August 2017, the U.S. Court of Appeals for the Eleventh Circuit ("Eleventh Circuit") affirmed the decision. The plaintiffs petitioned the U.S. Supreme Court ("Supreme Court") for review of the decision, arguing that the provision of the TVA Act which allows suit to be brought against TVA does not allow TVA to claim immunity for discretionary actions. On April 29, 2019, the Supreme Court issued its opinion reversing the judgment of the Eleventh Circuit
and remanding the case to the Eleventh Circuit. On July 17, 2019, the Eleventh Circuit remanded the case to the district court for further proceedings consistent with the Supreme Court's opinion. Trial is currently scheduled for February 16, 2021.
Case Involving Bellefonte Nuclear Plant. On November 30, 2018, Nuclear Development, LLC, filed suit against TVA in the Northern District. The plaintiff alleges that TVA breached its agreement to sell Bellefonte to the plaintiff. The plaintiff seeks, among other things, (1) an injunction requiring TVA to maintain Bellefonte and the associated NRC permits until the case is concluded, (2) an order compelling TVA to complete the sale of Bellefonte to the plaintiff, and (3) if the court does not order TVA to complete the sale, monetary damages in excess of $30 million. On December 26, 2018, Nuclear Development, LLC, and TVA filed a joint stipulation with the court. Under the stipulation, Nuclear Development, LLC, withdrew its request for an expedited hearing on its injunction in exchange for TVA's agreement to continue to maintain Bellefonte in accordance with the NRC permits and to give Nuclear Development, LLC, and the court five days prior notice of any filing by TVA to terminate the permits or sell the site. TVA filed a motion to dismiss the case on February 4, 2019. On May 15, 2019, the court denied TVA's motion. Discovery is ongoing, and the case is scheduled to be ready for trial by December 2020.
Case Involving Rate Changes. On June 9, 2020, a proposed class action lawsuit was filed in federal court in Abingdon, Virginia, by a LPC customer, asserting claims for breach of contract and violation of the Administrative Procedure Act. The lawsuit alleges that the customers of TVA's LPCs are third-party beneficiaries under TVA's wholesale power contracts with its LPCs and that TVA’s rate changes dating back to 2010 violate Section 11 of the TVA Act. Section 11 of the TVA Act establishes the broad policy that TVA power projects shall be considered primarily for the benefit of the people of the Tennessee Valley and that service to industry is a secondary purpose to be used principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates. The remedies requested include an injunction prohibiting TVA rate changes that violate Section 11, monetary damages, and repayment of rates charged in violation of Section 11.
21. Subsequent Events
Redemption of Power Bonds
On June 15, 2020, TVA provided notice of its intent to redeem on July 15, 2020, all of its 6.235 percent 1995 Series B Power Bonds (CUSIP number 880591CF7) due July 15, 2045. The bonds, with a principal amount outstanding of $140 million, were redeemed at 100 percent of par value.
United States Credit Rating
On July 31, 2020, Fitch Ratings affirmed the United States' Long-Term Foreign-Currency, Local-Currency, and Issuer Default Ratings ("credit ratings") at AAA, but revised the ratings outlooks from stable to negative. The change in outlooks on the United States’ credit ratings is expected to result in a similar action by Fitch Ratings on the outlook for TVA’s credit ratings.
Federal Contracting and Hiring Practices
On August 3, 2020, President Trump issued an "Executive Order ("EO") on Aligning Federal Contracting and Hiring Practices With the Interests of American Workers." Among other things, the EO directs federal agencies to review their contracting and hiring practices and assess negative impacts from the use of temporary foreign labor or offshoring of work. TVA is reviewing this EO and has not yet determined the extent to which this EO may impact TVA’s operations.