Tennessee Valley Authority (Form: 10-Q, Received: 05/06/2014 06:02:48)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-52313

TENNESSEE VALLEY AUTHORITY

(Exact name of registrant as specified in its charter)



A corporate agency of the United States created by an act of Congress (State or other jurisdiction of incorporation or organization)			62-0474417 (IRS Employer Identification No.)

400 W. Summit Hill Drive Knoxville, Tennessee (Address of principal executive offices)			37902 (Zip Code)

(865) 632-2101

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o

Non-accelerated filer x Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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GLOSSARY OF COMMON ACRONYMS ......................................................................................................................................	3
FORWARD-LOOKING INFORMATION .........................................................................................................................................	5
GENERAL INFORMATION ............................................................................................................................................................	6

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS .............................................................................................................................................	7
Consolidated Statements of Operations (unaudited) ............................................................................................................	7
Consolidated Statements of Comprehensive Income (Loss) (unaudited).............................................................................	7
Consolidated Balance Sheets (unaudited) ............................................................................................................................	8
Consolidated Statements of Cash Flows (unaudited) ...........................................................................................................	10
Consolidated Statements of Changes in Proprietary Capital (unaudited) .............................................................................	11
Notes to Consolidated Financial Statements (unaudited) .....................................................................................................	12

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...	42
Executive Overview ...............................................................................................................................................................	42
Results of Operations ............................................................................................................................................................	43
Liquidity and Capital Resources ............................................................................................................................................	47
Key Initiatives and Challenges..............................................................................................................................................	51
Environmental Matters..........................................................................................................................................................	53
Legal Proceedings................................................................................................................................................................	54
Legislative and Regulatory Matters.......................................................................................................................................	54
Compensation Matters..........................................................................................................................................................	55
Off-Balance Sheet Arrangements.........................................................................................................................................	55
Critical Accounting Policies and Estimates ...........................................................................................................................	55
New Accounting Standards and Interpretations ....................................................................................................................	55
Corporate Governance..........................................................................................................................................................	55
Other Matters........................................................................................................................................................................	55

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..............................................................	56

ITEM 4. CONTROLS AND PROCEDURES ..................................................................................................................................	56
Disclosure Controls and Procedures ......................................................................................................................................	56
Changes in Internal Control over Financial Reporting ............................................................................................................	56

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS ..................................................................................................................................................	57

ITEM 1A. RISK FACTORS ...........................................................................................................................................................	57

ITEM 6. EXHIBITS .......................................................................................................................................................................	58

SIGNATURES ...............................................................................................................................................................................	59

EXHIBIT INDEX ............................................................................................................................................................................	60

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GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Quarterly Report”):

Term or Acronym		Definition
AFUDC		Allowance for funds used during construction
ARO		Asset retirement obligation
ART		Asset Retirement Trust
ASLB		Atomic Safety and Licensing Board
BEST		Bellefonte Efficiency and Sustainability Team
BREDL		Blue Ridge Environmental Defense League
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CCOLA		Combined construction and operating license application
CCP		Coal combustion products
CCR		Coal combustion residual
CME		Chicago Mercantile Exchange
CO ₂		Carbon dioxide
COLA		Cost-of-living adjustment
CSAPR		Cross State Air Pollution Rule
CTs		Combustion turbine unit(s)
CVA		Credit valuation adjustment
CY		Calendar year
DOE		Department of Energy
EPA		Environmental Protection Agency
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FTP		Financial Trading Program
GAAP		Accounting principles generally accepted in the United States of America
GAO		Government Accountability Office
GHG		Greenhouse gas
GWh		Gigawatt hour(s)
JSCCG		John Sevier Combined Cycle Generation LLC
kWh		Kilowatt hour(s)
LIBOR		London Interbank Offered Rate
LPC		Local power company customer of TVA
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
MISO		Midcontinent Independent System Operator, Inc.
mmBtu		Million British thermal unit(s)
MtM		Mark-to-market
MW		Megawatt
NAV		Net asset value
NDT		Nuclear Decommissioning Trust
NEPA		National Environmental Policy Act
NERC		North American Electric Reliability Corporation
NO _x		Nitrogen oxides
NPDES		National Pollutant Discharge Elimination System
NRC		Nuclear Regulatory Commission
OCI		Other Comprehensive Income (Loss)
PM		Particulate matter

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QTE		Qualified technological equipment and software
REIT		Real Estate Investment Trust
SACE		Southern Alliance for Clean Energy
SCCG		Southaven Combined Cycle Generation, LLC
SCRs		Selective catalytic reduction systems
SEC		Securities and Exchange Commission
SERP		Supplemental Executive Retirement Plan
Seven States		Seven States Power Corporation
SHLLC		Southaven Holdco, LLC
SMR		Small modular reactor(s)
SO ₂		Sulfur dioxide
SSSL		Seven States Southaven, LLC
TCWN		Tennessee Clean Water Network
TDEC		Tennessee Department of Environment & Conservation
TOU		Time-of-use
TVARS		Tennessee Valley Authority Retirement System
TN Board		Tennessee Water Quality, Oil, and Gas Board
USEC		United States Enrichment Corporation
VIE		Variable interest entity
XBRL		eXtensible Business Reporting Language

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FORWARD-LOOKING INFORMATION

This Quarterly Report contains forward-looking statements relating to future events and future performance. All statements other than those that are purely historical may be forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” "speculate," or other similar expressions.

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


•	New or amended laws, regulations, or administrative determinations, including those related to environmental matters, and the costs of complying with these laws, regulations, and administrative determinations;


•	The requirement or decision to make additional contributions to TVA's pension or other post-retirement benefit plans or to TVA's Nuclear Decommissioning Trust ("NDT") or Asset Retirement Trust ("ART") ;


•	Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;

•

Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, ownership, operation, and decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, negatively affect the cost and schedule for completing Watts Bar Nuclear Plant ("Watts Bar") Unit 2 and preserving Bellefonte Nuclear Plant ("Bellefonte") Unit 1 for possible completion, or cause TVA to forego future construction at these or other facilities;


•	Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets;


•	Costs and liabilities that are not anticipated in TVA’s financial statements for third-party claims, natural resource damages, or fines or penalties associated with events such as the Kingston Fossil Plant ("Kingston") ash spill;


•	Inability to eliminate identified deficiencies in TVA's systems, standards, controls, and corporate culture;


•	Failure of TVA's cyber security program to protect TVA's assets from cyber attacks;


•	The outcome of legal and administrative proceedings;


•	Significant changes in demand for electricity which may result from, among other things, economic downturns, loss of customers, increased energy efficiency and conservation, and improvements in distributed generation and other alternative generation technologies;


•	Addition or loss of customers;


•	The failure of TVA's generation, transmission, flood control, and related assets, including coal combustion residual ("CCR") facilities, to operate as anticipated, resulting in lost revenues, damages, and other costs that are not reflected in TVA’s financial statements or projections;


•	The cost of complying with known, anticipated, and new emissions reduction requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective and result in their removal from service, perhaps permanently;


•	Disruption of fuel supplies, which may result from, among other things, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters;


•	Purchased power price volatility and disruption of purchased power supplies;


•	Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid, as well as inadequacies in the supply of water to TVA's generation facilities;


•	Inability to obtain regulatory approval for the construction or operation of assets;


•	Weather conditions;


•	Catastrophic events such as fires, earthquakes, solar events, floods, hurricanes, tornadoes, pandemics, wars, national emergencies, terrorist activities, and other similar events, especially if these events occur in or near TVA's service area;


•	Restrictions on TVA's ability to use or manage real property currently under its control;


•	Reliability and creditworthiness of counterparties;


•	Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, and emission allowances;


•	Changes in the market price of equity securities, debt securities, and other investments;


•	Changes in interest rates, currency exchange rates, and inflation rates;


•	Changes in the timing or amount of pension and health care costs;


•	Increases in TVA's financial liability for decommissioning its nuclear facilities and retiring other assets;


•	Limitations on TVA's ability to borrow money which may result from, among other things, TVA's approaching or substantially reaching the limit on bonds, notes, and other evidences of indebtedness specified in the TVA Act of 1933;

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•	An increase in TVA's cost of capital which may result from, among other things, changes in the market for TVA's debt securities, changes in the credit rating of TVA or the U.S. government, and an increased reliance by TVA on alternative financing arrangements as TVA approaches its debt ceiling;


•	Actions taken, or inaction, by the U.S. government to address the situation of approaching its debt limit;


•	Changes in the economy and volatility in financial markets;


•	Ineffectiveness of TVA's disclosure controls and procedures and its internal control over financial reporting;


•	Problems attracting and retaining a qualified workforce;


•	Changes in technology;


•	Failure of TVA's assets to operate as planned;


•	Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred; and


•	Unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (the “Annual Report”) and

Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in a forward-looking statement. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA’s business or cause results to differ materially from those contained in any forward-looking statement. TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

References to years ( 2014 , 2013 , etc.) in this Quarterly Report are to TVA’s fiscal years ending September 30. Years that are preceded by “CY” are references to calendar years.

Notes

References to “Notes” are to the Notes to Consolidated Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available on TVA's web site, free of charge, as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC") . TVA's web site is www.tva.gov. Information contained on TVA’s web site shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report. TVA's SEC reports are also available to the public without charge from the web site maintained by the SEC at www.sec.gov.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in millions)



	Three Months Ended March 31						Six Months Ended March 31
	2014			2013			2014			2013
Operating revenues
Sales of electricity	$	2,901		$	2,709		$	5,251		$	5,258
Other revenue	37			32			69			62
Total operating revenues	2,938			2,741			5,320			5,320
Operating expenses
Fuel	663			672			1,206			1,466
Purchased power	313			288			564			533
Operating and maintenance	793			876			1,600			1,795
Depreciation and amortization	453			408			894			836
Tax equivalents	140			136			262			273
Total operating expenses	2,362			2,380			4,526			4,903
Operating income	576			361			794			417
Other income (expense), net	13			11			27			26
Interest expense
Interest expense	336			359			675			714
Allowance for funds used during construction and nuclear fuel expenditures	(42		)	(41		)	(82		)	(80		)
Net interest expense	294			318			593			634
Net income (loss)	$	295		$	54		$	228		$	(191	)
The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(in millions)



	Three Months Ended March 31						Six Months Ended March 31
	2014			2013			2014			2013

Net income (loss)	$	295		$	54		$	228		$	(191	)
Other comprehensive income (loss)
Net unrealized gain (loss) on cash flow hedges	2			(49		)	22			(16		)
Reclassification to earnings from cash flow hedges	(7		)	63			(29		)	58
Total other comprehensive income (loss)	$	(5	)	$	14		$	(7	)	$	42
Total comprehensive income (loss)	$	290		$	68		$	221		$	(149	)
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED BALANCE SHEETS

(in millions)



ASSETS
	March 31, 2014			September 30, 2013
Current assets	(Unaudited)
Cash and cash equivalents	$	506		$	1,602
Restricted cash and investments	11			33
Accounts receivable, net	1,449			1,567
Inventories, net	1,047			1,091
Regulatory assets	635			561
Other current assets	69			52
Total current assets	3,717			4,906

Property, plant, and equipment
Completed plant	47,541			47,073
Less accumulated depreciation	(23,845		)	(23,157		)
Net completed plant	23,696			23,916
Construction in progress	5,245			4,704
Nuclear fuel	1,305			1,256
Capital leases	62			47
Total property, plant, and equipment, net	30,308			29,923

Investment funds	1,827			1,701

Regulatory and other long-term assets
Regulatory assets	8,663			9,131
Other long-term assets	508			445
Total regulatory and other long-term assets	9,171			9,576

Total assets	$	45,023		$	46,106
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED BALANCE SHEETS

(in millions)



LIABILITIES AND PROPRIETARY CAPITAL
	March 31, 2014			September 30, 2013
Current liabilities	(Unaudited)
Accounts payable and accrued liabilities	$	1,499		$	1,627
Environmental cleanup costs - Kingston ash spill	118			102
Accrued interest	397			378
Current portion of leaseback obligations	75			69
Current portion of energy prepayment obligations	100			100
Regulatory liabilities	180			212
Short-term debt, net	1,691			2,432
Current maturities of power bonds	32			32
Current maturities of long-term debt of variable interest entities	31			30
Total current liabilities	4,123			4,982

Other liabilities
Post-retirement and post-employment benefit obligations	5,319			5,348
Asset retirement obligations	3,535			3,472
Other long-term liabilities	1,877			1,861
Leaseback obligations	637			692
Energy prepayment obligations	360			410
Environmental cleanup costs - Kingston ash spill	—			67
Regulatory liabilities	2			1
Total other liabilities	11,730			11,851

Long-term debt, net
Long-term power bonds, net	22,014			22,315
Long-term debt of variable interest entities	1,295			1,311
Total long-term debt, net	23,309			23,626

Total liabilities	39,162			40,459

Proprietary capital
Power program appropriation investment	263			268
Power program retained earnings	4,997			4,767
Total power program proprietary capital	5,260			5,035
Nonpower programs appropriation investment, net	605			609
Accumulated other comprehensive income (loss)	(4		)	3
Total proprietary capital	5,861			5,647

Total liabilities and proprietary capital	$	45,023		$	46,106
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the six months ended March 31

(in millions)



	2014			2013
Cash flows from operating activities
Net income (loss)	$	228		$	(191	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization (including amortization of debt issuance costs and premiums/discounts)	917			857
Amortization of nuclear fuel cost	143			117
Non-cash retirement benefit expense	286			311
Prepayment credits applied to revenue	(50		)	(52		)
Fuel cost adjustment deferral	(162		)	55
Fuel cost tax equivalents	(3		)	3
Environmental cleanup costs – Kingston ash spill – non cash	34			36
Changes in current assets and liabilities
Accounts receivable, net	116			312
Inventories and other, net	62			(54		)
Accounts payable and accrued liabilities	(96		)	(171		)
Accrued interest	19			22
Regulatory assets costs	(39		)	(5		)
Pension contributions	(132		)	(6		)
Environmental cleanup costs – Kingston ash spill	(43		)	(51		)
Insurance recoveries	161			—
Other, net	(15		)	(35		)
Net cash provided by operating activities	1,426			1,148
Cash flows from investing activities
Construction expenditures	(1,141		)	(996		)
Nuclear fuel expenditures	(239		)	(213		)
Loans and other receivables
Advances	(1		)	(4		)
Repayments	4			5
Other, net	3			4
Net cash used in investing activities	(1,374		)	(1,204		)
Cash flows from financing activities
Long-term debt
Issues of power bonds	—			1,067
Redemptions and repurchases of power bonds	(333		)	(1,387		)
Redemptions of variable interest entities	(15		)	(6		)
Short-term debt issues (redemptions), net	(741		)	537
Payments on leases and leasebacks	(50		)	(55		)
Financing costs, net	—			(7		)
Payments to U.S. Treasury	(7		)	(13		)
Other, net	(2		)	(29		)
Net cash (used in) provided by financing activities	(1,148		)	107
Net change in cash and cash equivalents	(1,096		)	51
Cash and cash equivalents at beginning of period	1,602			868
Cash and cash equivalents at end of period	$	506		$	919
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)

For the three months ended March 31, 2014 and 2013

(in millions)



	Power Program Appropriation Investment			Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss) from Net Gains (Losses) on Cash Flow Hedges			Total
Balance at December 31, 2012 (unaudited)	$	283		$	4,249		$	617		$	(46	)	$	5,103
Net income (loss)	—			55			(1		)	—			54
Total other comprehensive income (loss)	—			—			—			14			14
Return on power program appropriation investment	—			(2		)	—			—			(2		)
Return of power program appropriation investment	(5		)	$	—		—			—			(5		)
Balance at March 31, 2013 (unaudited)	$	278		$	4,302		$	616		$	(32	)	$	5,164

Balance at December 31, 2013 (unaudited)	$	265		$	4,701		$	607		$	1		$	5,574
Net income (loss)	—			297			(2		)	—			295
Total other comprehensive income (loss)	—			—			—			(5		)	(5		)
Return on power program appropriation investment	—			(1		)	—			—			(1		)
Return of power program appropriation investment	(2		)	—			—			—			(2		)
Balance at March 31, 2014 (unaudited)	$	263		$	4,997		$	605		$	(4	)	$	5,861
The accompanying notes are an integral part of these consolidated financial statements.

TENNESSEE VALLEY AUTHORITY

CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)

For the six months ended March 31, 2014 and 2013

(in millions)



	Power Program Appropriation Investment			Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss) from Net Gains (Losses) on Cash Flow Hedges			Total
Balance at September 30, 2012	$	288		$	4,492		$	620		$	(74	)	$	5,326
Net income (loss)	—			(187		)	(4		)	—			(191		)
Total other comprehensive income (loss)	—			—			—			42			42
Return on power program appropriation investment	—			(3		)	—			—			(3		)
Return of power program appropriation investment	(10		)	$	—		—			—			(10		)
Balance at March 31, 2013 (unaudited)	$	278		$	4,302		$	616		$	(32	)	$	5,164

Balance at September 30, 2013	$	268		$	4,767		$	609		$	3		$	5,647
Net income (loss)	—			232			(4		)	—			228
Total other comprehensive income (loss)	—			—			—			(7		)	(7		)
Return on power program appropriation investment	—			(2		)	—			—			(2		)
Return of power program appropriation investment	(5		)	—			—			—			(5		)
Balance at March 31, 2014 (unaudited)	$	263		$	4,997		$	605		$	(4	)	$	5,861
The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions except where noted)



Note No.		Page No.
1	Summary of Significant Accounting Policies	12
2	Impact of New Accounting Standards and Interpretations	14
3	Restructuring	15
4	Accounts Receivable, Net	15
5	Inventories, Net	15
6	Other Long-Term Assets	15
7	Regulatory Assets and Liabilities	16
8	Variable Interest Entities	17
9	Kingston Fossil Plant Ash Spill	18
10	Other Long-Term Liabilities	19
11	Asset Retirement Obligations	20
12	Debt and Other Obligations	20
13	Accumulated Other Comprehensive Income (Loss)	21
14	Risk Management Activities and Derivative Transactions	22
15	Fair Value Measurements	29
16	Other Income (Expense), Net	35
17	Benefit Plans	35
18	Contingencies and Legal Proceedings	36

1. Summary of Significant Accounting Policies

General

The Tennessee Valley Authority ("TVA") is a corporate agency and instrumentality of the United States that was created in 1933 by legislation enacted by the United States ("U.S.") Congress in response to a request 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 United States, 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 over nine 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 to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.

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

Power rates are established by the TVA Board of Directors (the "TVA Board") as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”). The TVA Act requires TVA to charge

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rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents") ; debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business. In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible. Rates set by the TVA Board are not subject to review or approval by any state or other federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30. Years ( 2014 , 2013 , 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. In view of demand for electricity and the level of competition, 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 future 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. Most 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, 2013 , and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2013 (the “Annual Report”). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included in the interim financial statements.

The accompanying consolidated interim financial statements include the accounts of TVA and three variable interest entities ("VIEs") , of which TVA is the primary beneficiary. See Note 8 . Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Reclassifications

Certain reclassifications have been made to the Consolidated Statement of Cash Flows for the six months ended March 31, 2014 in the Cash flows from operating activities section as $ (11) million previously reported as Other, net for the six months ended March 31, 2013 , was reclassified to $ (5) million Regulatory assets costs and $ (6) million Pension contributions.

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Allowance for Uncollectible Accounts

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

The allowance for uncollectible accounts was $ 1 million at both March 31, 2014 and September 30, 2013 for accounts receivable. Additionally, loans receivable of $ 92 million and $ 73 million at March 31, 2014 and September 30, 2013 , respectively, are included in Other long-term assets and reported net of allowances for uncollectible accounts of $ 10 million .

Depreciation

Depreciation expense was $ 382 million and $ 337 million for the three months ended March 31, 2014 , and 2013 , and $ 750 million and $ 694 million for the six months ended March 31, 2014 , and 2013 , respectively. On November 14, 2013, TVA determined that Paradise Fossil Plant ("Paradise") Units 1 and 2 will be idled on March 31, 2017, and depreciation expense is being accelerated over the remaining useful life. This resulted in additional depreciation expense of $ 13 million during the three and six months ended March 31, 2014 . It is expected that the decision to idle Paradise Units 1 and 2 on March 31, 2017, will increase depreciation expense by approximately $ 40 million for the remainder of 2014.

Blended Low-Enriched Uranium Program

Under the blended low-enriched uranium ("BLEU") program, TVA, the Department of Energy ("DOE") , and certain nuclear fuel contractors have entered into agreements providing for the DOE's surplus of enriched uranium to be blended with other uranium down to a level that allows the blended uranium to be fabricated into fuel that can be used in nuclear power plants. Under the terms of an interagency agreement between TVA and the DOE, in exchange for supplying highly enriched uranium materials to the appropriate third-party fuel processors for processing into usable BLEU fuel for TVA, the DOE participates to a degree in the savings generated by TVA’s use of this blended nuclear fuel. Over the life of the program, TVA projects that the DOE’s share of savings generated by TVA’s use of this blended nuclear fuel could result in payments to the DOE of as much as $ 175 million . TVA accrues an obligation with each BLEU reload batch related to the portion of the ultimate future payments estimated to be attributable to the BLEU fuel currently in use. At March 31, 2014 , TVA had paid out approximately $ 101 million for this program, and the obligation recorded was $ 16 million .

2. Impact of New Accounting Standards and Interpretations

The following accounting standards became effective for TVA on October 1, 2013.

Balance Sheet . In December 2011, Financial Accounting Standards Board ("FASB") issued guidance that requires additional disclosures relating to the rights of offset or other netting arrangements of assets and liabilities that are presented on a net or gross basis in the consolidated balance sheets. In January 2013, FASB issued additional guidance to limit the scope of the new offsetting disclosure requirements to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. The guidance requires the disclosure of the gross amounts subject to offset, actual amounts offset in accordance with GAAP, and the related net exposure. These changes became effective for TVA on October 1, 2013, and have been applied on a retrospective basis. This guidance relates solely to enhanced disclosures in the notes to the consolidated financial statements and did not have an impact on TVA's financial condition, results of operations, or cash flows.

Comprehensive Income . In February 2013, FASB issued guidance that requires public reporting companies under the Securities Act of 1933 to present information about reclassification adjustments from accumulated other comprehensive income (loss) ("AOCI") in their annual and interim financial statements in a single location. The guidance requires that companies present the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. This information may be disclosed either in a single note or parenthetically on the face of the financial statements. If a component is not required to be reclassified to net income in its entirety, companies must cross reference to the related footnote for additional information. These changes became effective for TVA on October 1, 2013, and have been applied on a prospective basis. TVA has chosen to disclose the required information in a single note. This guidance relates solely to enhanced disclosures and did not have an impact on TVA's financial condition, results of operations, or cash flows.

There are no FASB Accounting Standards Updates that have been issued but not yet adopted as March 31, 2014, that are expected to significantly impact TVA’s financial condition, results of operations, or cash flows.

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3. Restructuring

TVA is undertaking cost reduction initiatives with the goal of keeping rates low, keeping reliability high, and continuing to fulfill its broader mission of environmental stewardship and economic development. TVA’s current focus is on reducing operating and maintenance costs through further efficiency gains and streamlining the organization. TVA’s goal is to reduce operating and maintenance costs by $500 million by 2015 as compared to its 2013 budget. Certain employees will be eligible for severance payments as a result of these cost reduction initiatives. These amounts are included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets. The table below summarizes the activity related to severance costs:



Severance Cost Liability Activity
	Three Months Ended March 31, 2014			Six Months Ended March 31, 2014
Severance cost liability at beginning of period	$	12		$	—
Liabilities incurred during the period	17			29
Actual costs paid during the period	(4		)	(4		)
Severance cost liability at end of period	$	25		$	25

4. Accounts Receivable, Net

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



Accounts Receivable, Net
	At March 31, 2014			At September 30, 2013
Power receivables	$	1,385		$	1,495
Other receivables	65			73
Allowance for uncollectible accounts	(1		)	(1		)
Accounts receivable, net	$	1,449		$	1,567

5. Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories:



Inventories, Net
	At March 31, 2014			At September 30, 2013
Materials and supplies inventory	$	619		$	620
Fuel inventory	451			494
Emission allowance inventory	17			14
Allowance for inventory obsolescence	(40		)	(37		)
Inventories, net	$	1,047		$	1,091

6. Other Long-Term Assets

The table below summarizes the types and amounts of TVA’s other long-term assets:



Other Long-Term Assets
	At March 31, 2014		At September 30, 2013
EnergyRight ^® receivables	$	118	$	117
Unamortized debt issue cost of power bonds	66		75
Loans and other long-term receivables, net	92		73
Prepaid capacity payments	58		62
Restricted cash	74		—
Currency swap asset, net	—		28
Coal contract derivative assets	2		1
Other	98		89
Other long-term assets	$	508	$	445

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In association with the EnergyRight ^® Solutions program, local power company customers of TVA ("LPCs") offer financing to end-use customers for the purchase of energy-efficient equipment. 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 loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA’s Consolidated Balance Sheets. As of March 31, 2014 and September 30, 2013 , the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was approximately $ 33 million . See Note 10 for information regarding the associated financing obligation.

7. Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferrals 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 March 31, 2014		At September 30, 2013
Current regulatory assets
Deferred nuclear generating units	$	237	$	237
Unrealized losses on commodity derivatives	122		183
Environmental agreements	83		73
Environmental cleanup costs - Kingston ash spill	60		68
Fuel cost adjustment receivable	133		—
Total current regulatory assets	635		561

Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	3,942		4,076
Unrealized losses on interest rate derivatives	833		808
Nuclear decommissioning costs	856		893
Environmental cleanup costs - Kingston ash spill	487		681
Non-nuclear decommissioning costs	582		571
Deferred nuclear generating units	1,358		1,438
Environmental agreements	153		189
Unrealized losses on commodity derivatives	127		139
Other non-current regulatory assets	325		336
Total non-current regulatory assets	8,663		9,131
Total regulatory assets	$	9,298	$	9,692

Current regulatory liabilities
Fuel cost adjustment tax equivalents	$	173	$	176
Fuel cost adjustment liability	—		29
Unrealized gains on commodity derivatives	7		7
Total current regulatory liabilities	180		212

Non-current regulatory liabilities
Unrealized gains on commodity derivatives	2		1
Total non-current regulatory liabilities	2		1
Total regulatory liabilities	$	182	$	213

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8. Variable Interest Entities

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. The analysis to determine whether an entity is a VIE considers factors such as contracts with an entity, credit support for an entity, the adequacy of the equity investment of an entity, the extent of an entity's activities that either involve or are conducted on behalf of an investor with disproportionate voting rights, and the relationship of voting power to the amount of equity invested in an entity. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The determination of the primary beneficiary requires continual reassessment.

When TVA determines that it has a variable interest in a variable interest entity, 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.

Southaven

On August 9, 2013, TVA entered into a lease financing arrangement with Southaven Combined Cycle Generation, LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF") . SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $ 360 million secured notes issuance (the “SCCG notes”) and the issuance of $ 40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco, LLC ("SHLLC") . SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests of SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.

The membership interests held by SHLLC were purchased with proceeds from the issuance of $ 40 million of secured notes (the “SHLLC notes”) and are subject to mandatory redemption pursuant to scheduled amortizing, semi-annual payments due each August 15 and February 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. The sale of the SCCG notes, the membership interests in SCCG, and the SHLLC notes all closed on August 9, 2013. 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 scheduled pre-determined payments to be made to Seven States Southaven, LLC on each lease payment date by SHLLC as agreed in SHLLC’s formation documents. 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.

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.

John Sevier

On January 17, 2012, TVA entered into a $ 1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF") . JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $ 900 million secured note issuance (the “JSCCG notes”) and the issuance of $ 100 million of membership interests subject to mandatory redemption. The membership interests were purchased by John Sevier Holdco LLC ("Holdco") . Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG. A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated.

The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $ 100 million of secured notes (the “Holdco notes") and are subject to mandatory redemption pursuant to scheduled amortizing, semi-annual payments due each January 15 and July 15, with a final payment due on January 15, 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 all closed on January 17, 2012. The JSCCG notes are secured by TVA’s

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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 both 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.

The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG as of March 31, 2014 and September 30, 2013 , as reflected in the Consolidated Balance Sheets are as follows:



Summary of Impact of VIEs on Consolidated Balance Sheets
	At March 31, 2014		At September 30, 2013
Current liabilities of VIE
Accrued interest of VIE	$	12	$	12
Current portion of membership interests of VIE subject to mandatory redemption	2		2
Current maturities of long-term debt of VIE	31		30
Total current liabilities of VIE	45		44
Other liabilities of VIE
Membership interests of VIE subject to mandatory redemption	37		38
Long-term debt of VIE, net
Long-term debt of VIE	1,295		1,311
Total liabilities of VIE	$	1,377	$	1,393

Creditors of the VIEs do not have any recourse to the general credit of TVA. TVA does not have any obligations to provide financial support to the VIEs other than as prescribed in the terms of the agreements related to these transactions.

9. Kingston Fossil Plant Ash Spill

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant ("Kingston") failed, and over five million cubic yards of water and coal fly ash flowed out of the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies. TVA completed the removal of time-critical ash from the river during the third quarter of 2010. In November 2012, the Environmental Protection Agency ("EPA") and the Tennessee Department of Environment and Conservation ("TDEC") approved a plan to allow the Emory River's natural processes to remediate the remaining ash in the river, and to conduct a long-term monitoring program. TVA estimates that the physical cleanup work (final cleanup work and closure) will be completed in the spring of 2015. A final assessment, issuance of a completion report, and approval by the State of Tennessee and the EPA are expected to occur by the third quarter of 2015.

Claims and Litigation

See Note 18 — Legal Proceedings — Legal Proceedings Related to the Kingston Ash Spill and Civil Penalty and Natural Resource Damages for the Kingston Ash Spill .

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category. Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate. The range of costs varies from approximately $ 1.1 billion to approximately $ 1.2 billion .

TVA recorded an estimate of $ 1.1 billion for the cost of cleanup related to this event. In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill. The cost is being charged to expense as it is collected in rates over 15 years , beginning October 1, 2009. As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

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As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate. TVA has accrued a portion of the estimated cost in current liabilities. Amounts spent since the event through March 31, 2014 , totaled $ 1.0 billion . The remaining estimated liability at March 31, 2014 , was $ 118 million .

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in a June 2010 TDEC order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the U.S. Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), future lawsuits, future claims, long-term environmental impact costs, final long-term disposition of the ash processing area, and costs associated with new laws and regulations. There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the consolidated financial statements. Associated capital asset purchases are recorded in property, plant, and equipment. Ash handling and disposition costs from current plant operations are recorded in operating expenses. A portion of the dredge cell closure costs are also excluded from the estimate, as they are included in the non-nuclear asset retirement obligations ("ARO") liability.

Insurance

TVA had property and excess liability insurance programs in place at the time of the Kingston ash spill. TVA pursued claims under both the property and excess liability programs and has settled all of its property insurance claims and some of its excess liability insurance claims. In April 2012, TVA initiated arbitration proceedings against the remaining three excess liability insurance companies in accordance with the policies’ dispute resolution provisions. TVA has successfully resolved two of these proceedings and is pursuing the third, which is scheduled to begin in June 2014. TVA is seeking recovery of certain costs incurred in the cleanup project, including the costs of removing ash from property or waters owned by the State of Tennessee, and related expenses. TVA has received insurance proceeds of $ 253 million . The insurance proceeds are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

10. Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative instruments as well as liabilities under agreements related to compliance with certain environmental regulations (see Note 18 — Legal Proceedings — Environmental Agreements ). The table below summarizes the types and amounts of Other long-term liabilities:



Other Long-Term Liabilities
	At March 31, 2014		At September 30, 2013
Interest rate swap liabilities	$	1,223	$	1,199
Environmental agreements liability	153		190
EnergyRight ^® purchase obligation	149		149
Coal contract derivative liabilities	49		35
Membership interests of VIE subject to mandatory redemption	37		38
Commodity swap derivative liabilities	24		36
Currency swap liabilities	6		15
Other	236		199
Total other long-term liabilities	$	1,877	$	1,861

TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ^® Solutions program. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is 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 resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. As of March 31, 2014 and September 30, 2013 , the carrying amount of the financing obligation reported in Accounts payable and accrued liabilities was approximately $ 37 million . See Note 6 for information regarding the associated loans receivable.

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11. Asset Retirement Obligations

During the six months ended March 31, 2014 , TVA's total ARO liability increased $ 86 million . The increase in the liability resulted from accretion. This was partially offset by ash area settlement projects that were conducted during the six months ended March 31, 2014 . The nuclear and non-nuclear accretion were deferred as regulatory assets, and $ 20 million of the related regulatory assets was amortized into expense as this amount was collected in rates.



Reconciliation of Asset Retirement Obligation Liability

	Nuclear		Non-Nuclear			Total
Balance at September 30, 2013	$	2,399	$	1,089		$	3,488
Settlements (ash storage areas)	—		(7		)	(7		)
Accretion (recorded as regulatory asset)	67		26			93
Balance at March 31, 2014	$	2,466	$	1,108		$	3,574		⁽¹	⁾

Note

(1) The current portion of ARO in the amount of $ 39 million is included in Accounts payable and accrued liabilities at March 31, 2014 .

12. Debt and Other Obligations

Debt Outstanding

Total debt outstanding at March 31, 2014 , and September 30, 2013 , consisted of the following:



Debt Outstanding
	At March 31, 2014			At September 30, 2013
Short-term debt
Short-term debt, net	$	1,691		$	2,432
Current maturities of long-term debt of variable interest entities	31			30
Current maturities of power bonds	32			32
Total current debt outstanding, net	1,754			2,494
Long-term debt
Long-term debt of variable interest entities	1,295			1,311
Long-term power bonds ⁽¹⁾	22,096			22,400
Unamortized discounts, premiums, and other	(82		)	(85		)
Total long-term debt, net	23,309			23,626
Total outstanding debt	$	25,063		$	26,120

Note

(1) Includes net exchange losses from currency transactions of $ 71 million at March 31, 2014 and $ 43 million at September 30, 2013 .

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Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, 2013, to March 31, 2014 .



Debt Securities Activity
	Date	Amount		Interest Rate
Redemptions/Maturities ⁽¹⁾
electronotes ^®	First Quarter 2014	$	4	3.56	%
electronotes ^®	Second Quarter 2014	326		4.52	%
2009 Series A	November 2013	2		2.25	%
2009 Series B	December 2013	1		3.77	%
Total redemptions/maturities of power bonds		333
Variable interest entities	Second Quarter 2014	15		4.30	%
Total redemptions/maturities of debt		$	348

Note

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

Credit Facility Agreements

TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $ 150 million credit facility. This credit facility was renewed for 2014 with a maturity date of September 30, 2014. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA plans to use the U.S. Treasury credit facility as 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 United States with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at March 31, 2014 , The availability of this credit facility may be impacted by how the U.S. government addresses the situation of approaching its debt limit.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $ 2.5 billion . One $ 1.0 billion credit facility matures on June 25, 2017, another $ 1.0 billion credit facility matures on December 13, 2017, and the $ 500 million credit facility matures on April 5, 2018. 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 $ 2.5 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

March 31, 2014 , and September 30, 2013 , there were approximately $ 800 million of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 14 — Other Derivative Instruments — Collateral .

Lease/Leaseback Obligations

Prior to 2004, TVA received approximately $ 945 million in proceeds by entering into lease/leaseback transactions for 24 new peaking combustion turbine units. TVA also received approximately $ 389 million in proceeds by entering into lease/leaseback transactions for qualified technological equipment and software in 2003. Due to TVA's continuing involvement in the operation and maintenance of the leased units and equipment and its control over the distribution of power produced by the combustion turbine facilities during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At March 31, 2014 , and September 30, 2013 , the outstanding leaseback obligations were $ 712 million and $ 761 million , respectively.

13. 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 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 and six months ended March 31, 2014 , TVA reclassified $ 7 million and $ 29 million , respectively, of gains related to its cash flow hedges from AOCI to Interest expense. See Note 14 .

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

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the statements of operations are recorded as regulatory assets or regulatory liabilities. See Note 7 , Note 14 — Overview of Accounting Treatment , Note 15 — Fair Value Measurements, and Note 17 .

14. Risk Management Activities and Derivative Transactions

TVA is exposed to various risks. These include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and performance risks. To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in investment funds, TVA's policy is to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

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 OCI
			Three Months Ended March 31					Six Months Ended March 31
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	2014		2013			2014		2013
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	$	2	$	(49	)	$	22	$	(16	)

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Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2) Amount of Gain (Loss) Reclassified from OCI to Interest Expense
	Three Months Ended March 31					Six Months Ended March 31
Derivatives in Cash Flow Hedging Relationship	2014		2013			2014		2013
Currency swaps	$	7	$	(63	)	$	29	$	(58	)

Note

There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $ 40 million of losses from AOCI to interest expense within the next twelve 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
			Three Months Ended March 31 ⁽¹⁾							Six Months Ended March 31 ⁽¹⁾
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	2014				2013			2014			2013
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 until settlement, at which time the gains/losses are recognized in gain/loss on derivative contracts.	$	—			$	—		$	—		$	—

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.	—				—			—			—

Commodity derivatives under financial trading program ("FTP")	To protect against fluctuations in market prices of purchased commodities (price risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production.	(4		)	—	(32		)	(24		)	(77		)

Note

(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income

but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three months and six months ended March 31, 2014 and 2013 .

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Mark-to-Market Values of TVA Derivatives
	At March 31, 2014				At September 30, 2013
Derivatives that Receive Hedge Accounting Treatment
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Currency swaps
£200 million Sterling	$	(6	)	Other long-term liabilities	$	(15	)	Other long-term liabilities
£250 million Sterling	63			Other long-term assets	51			Other long-term assets
£150 million Sterling	11			Other long-term assets	10			Other long-term assets

Derivatives that Do Not Receive Hedge Accounting Treatment
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Interest rate swaps
$1.0 billion notional	(902		)	Other long-term liabilities	(886		)	Other long-term liabilities
$476 million notional	(310		)	Other long-term liabilities	(300		)	Other long-term liabilities
$42 million notional	(11		)	Other long-term liabilities	(13		)	Other long-term liabilities
Commodity contract derivatives	(134		)	Other long-term assets $2; Other current assets $5; Other long-term liabilities $(49); Accounts payable and accrued liabilities $(92)	(141		)	Other long-term assets $1; Other current assets $2; Other long-term liabilities $(35); Accounts payable and accrued liabilities $(109)
Derivatives under FTP ⁽¹⁾	(104		)	Other current assets $(64); Other long-term liabilities $(24); Accounts payable and accrued liabilities $(16)	(166		)	Other current assets $(97); Other long-term liabilities $(36); Accounts payable and accrued liabilities $(33)

Note

(1) Fair values of certain derivatives under the FTP that were in net liability positions totaling $ 65 million and $ 100 million at March 31, 2014 and September 30, 2013 , respectively, are recorded in TVA's margin cash accounts in Other current assets. These derivatives are transacted with futures commission merchants, and cash deposits have been posted to the margin cash accounts held with each futures commission merchant to offset the net liability positions in full.

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 the following currency swaps outstanding as of March 31, 2014 :



Currency Swaps Outstanding At March 31, 2014
Effective Date of Currency Swap Contract	Associated TVA Bond Issues Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA
1999	£200 million	2021	5.81%
2001	£250 million	2032	6.59%
2003	£150 million	2043	4.96%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by a currency exchange loss on the swap contract. Conversely, when the dollar weakens against the British pound sterling, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract. All such exchange gains or losses on the Bond liability are included in Long-term debt, net. 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.

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Derivatives Not Receiving Hedge Accounting Treatment

Interest Rate Derivatives . 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 the transactions settle. The values of these derivatives are included in Other long-term assets or Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included in TVA's Consolidated Statements of Operations.

For the three months ended March 31, 2014 and 2013 , the changes in market value of the interest rate swaps resulted in deferred unrealized gains (losses) of $ (163) million and $ 99 million , respectively. For the six months ended March 31, 2014 and 2013 , the changes in market value of the interest rate swaps resulted in deferred unrealized gains (losses) of $ (25) million and $ 213 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 market values as regulatory assets or liabilities on a gross basis. At March 31, 2014 , TVA's coal and natural gas contract derivatives had terms of four years and up to one year , respectively.



Commodity Contract Derivatives
	At March 31, 2014					At September 30, 2013
	Number of Contracts	Notional Amount	Fair Value (MtM)			Number of Contracts	Notional Amount	Fair Value ( MtM )
Coal contract derivatives	18	36 million tons	$	(131	)	19	43 million tons	$	(140	)
Natural gas contract derivatives	21	52 million mmBtu	$	(3	)	13	39 million mmBtu	$	(1	)

Derivatives Under FTP. TVA has an FTP under which it may purchase and sell futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies. The combined transaction limit for the fuel cost adjustment and construction material transactions is $ 130 million (based on one-day value at risk). In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $ 100 million at the execution of any new transaction. The portfolio value at risk limit for the foreign currency transactions is $ 5 million and is separate and distinct from the $ 130 million transaction limit discussed above. TVA's policy prohibits trading financial instruments under the FTP for speculative purposes.

At March 31, 2014 and September 30, 2013 , the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, and crude oil. At March 31, 2014 and September 30, 2013 , TVA had no outstanding coal contract derivatives under the FTP. There were no futures contracts or options contracts outstanding under the FTP at March 31, 2014 , and swap contracts under the FTP had remaining terms of four years or less.

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Derivatives Under Financial Trading Program
	At March 31, 2014				At September 30, 2013
	Notional Amount	Fair Value (MtM) (in millions)			Notional Amount	Fair Value (MtM) (in millions)
Natural gas (in mmBtu)
Futures contracts	—	$	—		—	$	—
Swap contracts	132,482,500	(105		)	152,922,500	(169		)
Option contracts	—	—			—	—
Natural gas financial positions	132,482,500	$	(105	)	152,922,500	$	(169	)

Fuel oil/crude oil (in barrels)
Futures contracts	—	$	—		—	$	—
Swap contracts	—	1			1,205,000	3
Option contracts	—	—			—	—
Fuel oil/crude oil financial positions	—	$	1		1,205,000	$	3

Note

Fair value amounts presented are based on net commodity position with the FCM or other counterparty. Notional amounts disclosed represent the net absolute value of contractual amounts.

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $ (3) million at March 31, 2014 , and $ (8) million at September 30, 2013 . Unrealized gains and losses related to the FTP at March 31, 2014 and September 30, 2013 were as follows:



Financial Trading Program Unrealized Gains (Losses)
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)	At March 31, 2014			At September 30, 2013

Natural gas	$	(105	)	$	(169	)
Fuel oil/crude oil	1			3

Realized gains and losses related to the FTP for the three and six months ended March 31, 2014 and 2013 were as follows:



Financial Trading Program Realized Gains (Losses)
	For the Three Months Ended March 31						For the Six Months Ended March 31
Decrease (increase) in fuel expense	2014			2013			2014			2013

Natural gas	$	(3	)	$	(20	)	$	(18	)	$	(48	)
Fuel oil/crude oil	—			—			1			2
Coal	—			—			—			(1		)

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Financial Trading Program Realized Gains (Losses)
	For the Three Months Ended March 31						For the Six Months Ended March 31
Decrease (increase) in purchased power expense	2014			2013			2014			2013

Natural gas	$	(1	)	$	(13	)	$	(7	)	$	(32	)

Offsetting of Derivative Assets and Liabilities

The amounts of TVA's derivative instruments as reported in the Consolidated Balance Sheets as of March 31, 2014 , and September 30, 2013 , are shown in the table below.



	As of March 31, 2014
	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Balance Sheet ⁽¹⁾			Net Amounts of Assets/Liabilities Presented in the Balance Sheet ⁽²⁾
Assets
Currency swaps	$	74		$	(74	)	$	—
Commodity derivatives under FTP	61			(60		)	1
Total derivatives subject to master netting or similar arrangement	135			(134		)	1
Total derivatives not subject to master netting or similar arrangement	7			—			7

Total	$	142		$	(134	)	$	8

Liabilities
Currency swaps ⁽³⁾	$	(6	)	$	—		$	(6	)
Interest rate swaps ⁽³⁾	(1,223		)	—			(1,223		)
Commodity derivatives under FTP	(165		)	125			(40		)
Total derivatives subject to master netting or similar arrangement	(1,394		)	125			(1,269		)
Total derivatives not subject to master netting or similar arrangement	(141		)	—			(141		)

Total	$	(1,535	)	$	125		$	(1,410	)

	As of September 30, 2013
	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Balance Sheet ⁽¹⁾			Net Amounts of Assets/Liabilities Presented in the Balance Sheet ⁽²⁾
Assets
Currency swaps	$	61		$	(33	)	$	28
Commodity derivatives under FTP	101			(98		)	3
Total derivatives subject to master netting or similar arrangement	162			(131		)	31
Total derivatives not subject to master netting or similar arrangement	3			—			3

Total	$	165		$	(131	)	$	34

Liabilities
Currency swaps ⁽³⁾	$	(15	)	$	—		$	(15	)
Interest rate swaps ⁽³⁾	(1,199		)	—			(1,199		)
Commodity derivatives under FTP	(267		)	198			(69		)
Total derivatives subject to master netting or similar arrangement	(1,481		)	198			(1,283		)
Total derivatives not subject to master netting or similar arrangement	(144		)	—			(144		)

Total	$	(1,625	)	$	198		$	(1,427	)

Notes

(1) 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.

(2) There are no derivative contracts subject to a master netting arrangement or similar agreement which are not offset in the balance sheets.

(3) Letters of credit of approximately $ 800 million were posted as collateral at both March 31, 2014 and September 30, 2013 , to partially secure the liability positions of the currency swap and one of the interest rate swaps in accordance with the collateral requirements for these derivatives.

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Other Derivative Instruments

Investment Fund Derivatives . Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT") , Asset Retirement Trust ("ART") , and Supplemental Executive Retirement Plan ("SERP") . All securities in the trusts are classified as trading. See Note 15 — Investments for a discussion of the trusts' objectives and the types of investments included in the various trusts. These trusts may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At March 31, 2014 , and September 30, 2013 , the fair value of derivative instruments in these trusts was not material to TVA's consolidated financial statements.

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 March 31, 2014 , the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $ 1.2 billion . TVA's collateral obligations at March 31, 2014 , under these arrangements were approximately $ 800 million , for which TVA had posted approximately $ 800 million in letters of credit. These letters of credit reduce the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the 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 ("S&P") or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $ 22 million ; and


•	If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral.

Counterparty Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of a counterparty's nonperformance of its contractual obligations. Where exposed to counterparty credit 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 employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

Credit of Customers . The majority of TVA's counterparty credit risk is associated with trade accounts receivable from delivered power sales to LPCs, all located in the Tennessee Valley region. To a lesser extent, TVA is exposed to credit risk from industries and federal agencies directly served and 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 had concentrations of accounts receivable from three LPCs that represented 24 percent of total outstanding accounts receivable at March 31, 2014 , and 26 percent of total outstanding accounts receivable at September 30, 2013 .

The United States Enrichment Corporation ("USEC"), a subsidiary of the parent company, USEC, Inc. , was TVA’s largest directly served customer in 2013. On May 24, 2013, USEC announced its intention to cease enrichment activities at its Paducah, Kentucky site. TVA and USEC have subsequently completed agreements to extend power sales to facilitate the cessation of enrichment activities and to support non-enrichment activities at the site at a greatly reduced level. On March 5, 2014, USEC, Inc. filed a voluntary petition and a plan of reorganization under Chapter 11 of the bankruptcy code in the U.S. Bankruptcy Court for the District of Delaware. USEC was not included as a debtor in the Chapter 11 filing for the parent company.

Credit of Derivative Counterparties . TVA has entered into derivative contracts for hedging purposes, and TVA's NDT fund and defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of TVA's hedging transactions defaults, TVA might incur substantial costs in connection with entering into a replacement hedging transaction. If a counterparty to the derivative contracts into which the NDT fund and the pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At March 31, 2014 , all of TVA's currency swaps, interest rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody's credit rating was Baa2 or higher. At March 31, 2014 , all of TVA's coal contract derivatives were with counterparties whose Moody's credit rating, or TVA's internal analysis when such information was unavailable, was Caa1 or higher. See Derivatives Not Receiving Hedge Accounting Treatment .

TVA currently utilizes two active futures commission merchants ("FCMs") to clear commodity contracts, including futures, options, and similar financial derivatives. These transactions are executed under the FTP by the FCMs on exchanges on behalf of TVA. TVA maintains margin cash accounts with the FCMs. TVA makes deposits to the margin cash accounts to

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adequately cover any net liability positions on its derivatives transacted with the FCMs. See the note to the Mark-to-Market Values of TVA Derivatives table.

Credit of Suppliers . 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. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at March 31, 2014 . The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (for example, barge, rail and truck). TVA purchases the majority of its natural gas requirements from a variety of suppliers under short-term contracts.

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.

While USEC is a TVA supplier of enrichment services for uranium for fueling TVA's nuclear units, TVA has sufficient nuclear fuel inventory available to mitigate near-term supply risks, and also expects to be able to procure material at reasonable rates in the market for nuclear fuel.

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 3 is the lowest and Level 1 is the highest) 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 assets, all changes in fair value of these assets and liabilities have been reflected as changes in regulatory assets, regulatory liabilities, or accumulated other comprehensive loss on TVA's Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP assets, there has been no impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows related to these fair value measurements.

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Investments

At March 31, 2014 , Investment funds were composed of $ 1.8 billion of securities classified as trading and measured at fair value and less than $ 1 million of equity investments not required to be measured at fair value. Trading securities are held in the NDT, ART, and SERP. 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. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits set by Internal Revenue Service rules applicable to the qualified defined benefit pension plan. The NDT and SERP are invested in a mix of investments generally designed to achieve a return in line with overall equity market performance, and the ART is invested in a mix of investments generally designed to achieve a return in line with equity and fixed-income market performance.

The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers. Most U.S. and international equities, 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 partnership 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. Investments in private partnerships generally involve a three-to-four-year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, ten years or longer. The NDT had unfunded commitments related to private partnerships of $ 135 million at March 31, 2014 . These investments have no redemption or limited redemption options and may also have imposed restrictions on the NDT’s ability to liquidate its investment. There are no readily available quoted exchange prices for these investments. The fair value of the investments is based on TVA’s ownership percentage of the fair value of the underlying investments as provided by the investment managers. These investments are typically valued on a quarterly basis. TVA’s private partnership 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 Level 3 within the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, and SERP consist of 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 (Level 1) or measured using observable inputs for similar instruments (Level 2). 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 Level 2 valuations.

Realized and unrealized gains and losses on trading 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 liability or asset account in accordance with TVA's regulatory accounting policy. See Note 1 — Cost-Based Regulation . TVA recorded unrealized gains and losses related to its trading securities held as of the end of each period as follows:



	Unrealized Investment Gains (Losses)
		For the Three Months Ended March 31				For the Six Months Ended March 31
	Financial Statement Presentation	2014		2013		2014		2013

SERP	Other income (expense)	$	—	$	1	$	1	$	1
NDT	Regulatory asset	6		36		36		49
ART	Regulatory asset	2		14		18		17

Currency and Interest Rate Swaps

See Note 14 — 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.

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Commodity Contract Derivatives and Commodity Derivatives Under FTP

Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches. TVA develops an overall coal price forecast using widely used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs.

Commodity Derivatives Under FTP. These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange ("CME") quoted prices and other observable inputs. Futures and options contracts settled on the CME are classified as Level 1 valuations. Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.

See Note 14 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Derivatives Under FTP for a discussion of the nature and purpose of coal contracts and derivatives under TVA's FTP.

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 company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2012) 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 $ 1 million decrease in the fair value of assets and a $ 1 million decrease in the fair value of liabilities at March 31, 2014 .

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Fair Value Measurements

The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2014 , and September 30, 2013 . 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 March 31, 2014
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting ⁽¹⁾			Total

Investments
Equity securities	$	165	$	—	$	—	$	—		$	165
Debt securities
U.S. government corporations and agencies	69		61		—		—			130
Corporate debt securities	—		297		—		—			297
Residential mortgage-backed securities	—		12		—		—			12
Commercial mortgage-backed securities	—		6		—		—			6
Collateralized debt obligations	—		21		—		—			21
Private partnerships	—		—		180		—			180
Commingled funds ⁽²⁾
Equity security commingled funds	—		893		—		—			893
Debt security commingled funds	—		123		—		—			123
Total investments	234		1,413		180		—			1,827
Currency swaps	—		74		—		(74		)	—
Commodity contract derivatives	—		—		7		—			7
Commodity derivatives under FTP
Swap contracts	—		61		—		(60		)	1

Total	$	234	$	1,548	$	187	$	(134	)	$	1,835

Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting ⁽¹⁾			Total

Currency swaps	$	—	$	6	$	—	$	—		$	6
Interest rate swaps	—		1,223		—		—			1,223
Commodity contract derivatives	—		3		138		—			141
Commodity derivatives under FTP
Swap contracts	—		165		—		(125		)	40

Total	$	—	$	1,397	$	138	$	(125	)	$	1,410

Notes

(1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or FCM. Deposits are made to TVA's margin cash accounts held with each FCM to offset any net liability positions in full for derivatives that are transacted with FCMs. TVA records currency swaps net of cash collateral received from or paid to the counterparty.

(2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds primarily composed of one class of security are classified in that category.

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Fair Value Measurements At September 30, 2013
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting ⁽¹⁾			Total

Investments
Equity securities	$	151	$	—	$	—	$	—		$	151
Debt securities
U.S. government corporations and agencies	38		67		—		—			105
Corporate debt securities	—		255		—		—			255
Residential mortgage-backed securities	—		25		—		—			25
Commercial mortgage-backed securities	—		7		—		—			7
Collateralized debt obligations	—		10		—		—			10
Private partnerships	—		—		159		—			159
Commingled funds ⁽²⁾
Equity security commingled funds	—		741		—		—			741
Debt security commingled funds	—		248		—		—			248
Total investments	189		1,353		159		—			1,701
Currency swaps	—		61		—		(33		)	28
Commodity contract derivatives	—		—		3		—			3
Commodity derivatives under FTP
Swap contracts	—		101		—		(98		)	3

Total	$	189	$	1,515	$	162	$	(131	)	$	1,735

Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting ⁽¹⁾			Total

Currency swaps	$	—	$	15	$	—	$	—		$	15
Interest rate swaps	—		1,199		—		—			1,199
Commodity contract derivatives	—		1		143		—			144
Commodity derivatives under FTP
Swap contracts	—		267		—		(198		)	69

Total	$	—	$	1,482	$	143	$	(198	)	$	1,427

Notes

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TVA uses internal and external valuation specialists for the calculation of its 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 assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



Fair Value Measurements Using Significant Unobservable Inputs
	For the Three Months Ended March 31						For the Six Months Ended March 31
	Private Partnerships			Commodity Contract Derivatives			Private Partnerships			Commodity Contract Derivatives
Balance at beginning of period	$	66		$	(224	)	$	53		$	(267	)
Purchases	70			—			83			—
Issuances	—			—			—			—
Sales	(1		)	—			(2		)	—
Settlements	—			—			—			—
Net unrealized gains (losses) deferred as regulatory assets and liabilities	2			76			3			119
Balance at March 31, 2013	$	137		$	(148	)	$	137		$	(148	)

Balance at beginning of period	$	169		$	(145	)	$	159		$	(140	)
Purchases	6			—			14			—
Issuances	—			—			—			—
Sales	(2		)	—			(5		)	—
Settlements	—			—			—			—
Net unrealized gains (losses) deferred as regulatory assets and liabilities	7			14			12			9
Balance at March 31, 2014	$	180		$	(131	)	$	180		$	(131	)

There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected net income during the three and six months ended March 31, 2014 . All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 7 .

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 March 31, 2014		Valuation Technique(s)	Unobservable Inputs	Range

Assets
Commodity contract derivatives	$	7	Discounted cash flow	Credit risk	17	%	*

			Pricing model	Coal supply and demand	0.9 - 1.0 billion tons/year
				Long-term market prices	$12.30 - $67.66/ton
Liabilities
Commodity contract derivatives	$	138	Pricing model	Coal supply and demand	0.9 - 1.0 billion tons/year
				Long-term market prices	$12.30 - $67.66/ton

* Applies to only one contract.

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 instrument. The fair values of the financial instruments held at March 31, 2014 , and September 30, 2013 , 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 March 31, 2014 , and September 30, 2013 , were as follows:

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Estimated Values of Financial Instruments Not Recorded at Fair Value
		At March 31, 2014				At September 30, 2013
	Valuation Classification	Carrying Amount		Fair Value		Carrying Amount		Fair Value
EnergyRight ^® receivables (including current portion)	Level 2	$	151	$	151	$	150	$	150

Loans and other long-term receivables, net	Level 2	$	92	$	82	$	73	$	67

EnergyRight ^® purchase obligation (including current portion)	Level 2	$	186	$	204	$	186	$	210

Membership interest of variable interest entity subject to mandatory redemption (including current portion)	Level 2	$	39	$	50	$	40	$	50

Long-term outstanding power bonds (including current maturities), net	Level 2	$	22,046	$	24,957	$	22,347	$	24,603

Long-term debt of variable interest entities (including current maturities)	Level 2	$	1,326	$	1,420	$	1,341	$	1,386

Due to the short-term maturity of Cash and cash equivalents, Restricted cash and investments, and Short-term debt, net, each considered a Level 1 valuation classification, the carrying amounts of these instruments approximate their fair values.

The fair values of the EnergyRight ^® Solutions receivables and loans and other long-term receivables are estimated by determining the present values of future cash flows using discount rates equal to lending rates for similar loans made to borrowers with similar credit ratings and similar remaining maturities, where applicable.

The fair value of the long-term debt traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date. The fair values of the EnergyRight ^® Solutions purchase obligation and other long-term debt are 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. Other Income (Expense), Net

Income and expenses not related to TVA’s operating activities are summarized in the following table:



Other Income (Expense), Net
	For the Three Months Ended March 31					For the Six Months Ended March 31
	2014		2013			2014		2013
External services	$	6	$	4		$	11	$	11
Interest income	6		6			12		11
Gains (losses) on investments	1		2			3		3
Miscellaneous	—		(1		)	1		1
Total other income (expense), net	$	13	$	11		$	27	$	26

17. Benefit Plans

TVA sponsors a qualified defined benefit pension plan (the "Plan") that covers most of its full-time employees, a qualified defined contribution 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 postemployment benefits, such as workers' compensation, and the SERP.

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three and six months ended March 31, 2014 , and 2013 , were as follows:

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Components of TVA’s Benefit Plans
	For the Three Months Ended March 31												For the Six Months Ended March 31
	Pension Benefits						Other Post-Retirement Benefits						Pension Benefits						Other Post-Retirement Benefits
	2014			2013			2014			2013			2014			2013			2014			2013
Service cost	$	30		$	43		$	4		$	7		$	65		$	77		$	9		$	12
Interest cost	140			111			6			6			279			234			15			15
Expected return on plan assets	(109		)	(105		)	—			—			(217		)	(214		)	—			—
Amortization of prior service cost	(6		)	(5		)	(1		)	(1		)	(11		)	(11		)	(3		)	(3		)
Recognized net actuarial loss	73			98			2			6			142			188			5			13
Total net periodic benefit cost recognized	$	128		$	142		$	11		$	18		$	258		$	274		$	26		$	37

TVA contributes to the Plan such amounts as are necessary on an actuarial basis to provide the Plan with assets sufficient to meet TVA-funded benefit obligations to be paid to members. In consideration of TVA’s $ 1.0 billion contribution to the Plan in September 2009, the Plan's Rules and Regulations ("Plan's Rules") were amended to temporarily suspend the minimum annual contribution requirements for a four year period from FY 2010 through FY 2013. In August 2013, the TVA Board approved a $ 250 million contribution to the Plan for FY 2014, which exceeds the minimum required by the Plan's Rules. As of March 31, 2014 , TVA had contributed $ 126 million and will contribute the remaining $ 124 million by September 30, 2014 . TVA does not separately set aside assets to fund other benefit costs, but rather funds such costs on an as-paid basis. For the six months ended March 31, 2014 , TVA provided approximately $ 24 million for other post-retirement benefit plans and approximately $ 6 million to the SERP. For the six months ended March 31, 2013 , TVA provided approximately $ 26 million to other post-retirement benefit plans and approximately $ 6 million to the SERP.

18. Contingencies and Legal Proceedings

Contingencies

Nuclear Insurance . The Price-Anderson Act provides a layered framework of protection to compensate for losses arising from a nuclear event in the United States. For the first layer, all of the NRC nuclear plant licensees, including TVA, purchase $ 375 million of nuclear liability insurance from American Nuclear Insurers for each plant with an operating license. Funds for the second layer, the Secondary Financial Program, would come from an assessment of up to $ 127 million from the licensees of each of the 104 NRC licensed reactors in the United States. The assessment for any nuclear accident would be limited to $ 19 million per year per unit. American Nuclear Insurers, under a contract with the NRC, administers the Secondary Financial Program. With its six licensed units, TVA could be required to pay a maximum of $ 764 million per nuclear incident, but it would have to pay no more than $ 114 million per incident in any one year. When the contributions of the nuclear plant licensees are added to the insurance proceeds of $ 375 million , over $ 13.0 billion , including a five percent surcharge for legal expenses, would be available. Under the Price-Anderson Act, if the first two layers are exhausted, the U.S. Congress is required to take action to provide additional funds to cover the additional losses.

TVA carries property, decommissioning, and decontamination insurance of $ 4.6 billion for its licensed nuclear plants, with up to $ 2.1 billion available for a loss at any one site, to cover the cost of stabilizing or shutting down a reactor after an accident. Some of this insurance, which is purchased from Nuclear Electric Insurance Limited ("NEIL") , may require the payment of retrospective premiums up to a maximum of approximately $ 120 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) up to a maximum indemnity of $ 490 million per unit. This insurance policy may require the payment of retrospective premiums up to a maximum of approximately $ 35 million .

Decommissioning Costs. TVA recognizes legal obligations associated with the future retirement of certain tangible long-lived assets related primarily to coal-fired generating plants and nuclear generating plants, hydroelectric generating plants/dams, transmission structures, and other property-related assets.

Nuclear . 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 March 31, 2014, the present value of the estimated future decommissioning cost of $ 2.5 billion 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

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decommissioning primarily because of the difference in the discount rates used to calculate the present value of decommissioning costs.

TVA maintains a NDT to provide funding for the ultimate decommissioning of its nuclear power plants. 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 will be available to support decommissioning. TVA’s nuclear power units are currently authorized to operate until 2020-2036, depending on the unit. It may be possible to extend the operating life of some of the units with approval from the NRC. See Note 7 and Note 11 .

Non-Nuclear Decommissioning . The present value of the estimated future non-nuclear decommissioning ARO was $ 1.1 billion at March 31, 2014. 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 maintains an ART to help fund the ultimate decommissioning of its power assets. Estimates involved in determining if additional funding will be made to the ART include inflation rate and rate of return projections on the fund investments. See Note 7 and Note 11 .

Environmental Matters. TVA’s power generation activities, like those across the utility industry and in other industrial sectors, are subject to most 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 apply to new emissions and sources, with 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. It is likely that environmental requirements placed on the operation of TVA’s coal-fired and other generating units will continue to become more restrictive and potentially apply to new emissions and sources. Litigation over emissions or discharges from coal-fired generating units is also occurring, including litigation against TVA. 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 future Clean Air Act ("CAA") requirements (excluding greenhouse gas ("GHG") requirements) could lead to additional costs of $ 1.2 billion from 2014 to 2022. There could be additional material costs if reductions of GHGs, including carbon dioxide, are mandated under the CAA or by legislation or regulation, or if future legislative, regulatory, or judicial actions lead to more stringent emission reduction requirements for conventional pollutants. These costs cannot reasonably be predicted at this time because of the uncertainty of such potential actions.

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 TVA facilities have resulted in oil spills and other contamination that TVA is addressing. At March 31, 2014 , TVA’s estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate (primarily the TVA sites) was approximately $ 16 million on a non-discounted basis and was included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheet.

Legal Proceedings

General. At March 31, 2014 , TVA had accrued approximately $ 272 million of probable losses with respect to Legal Proceedings and estimated the range of these losses to be from $ 272 million to $ 284 million . Of the accrued amount, $ 153 million is included in Other long-term liabilities, $ 91 million is included in Accounts payable and accrued liabilities, and $ 28 million is included in Regulatory assets. TVA is currently unable to estimate any amount or any range of amounts of reasonably possible losses, and 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.

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Environmental Agreements . In April 2011, TVA entered into two substantively similar agreements, a Federal Facilities Compliance Agreement with the EPA and a consent decree with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children's Earth Foundation (collectively, the "Environmental Agreements"). They became effective in June 2011. Under the Environmental Agreements, TVA committed to (1) retire on a phased schedule 18 coal-fired units with a combined summer net dependable capability of 2,200 MW, (2) control, convert, or retire additional coal-fired units with a combined summer net dependable capability of 3,500 MW, (3) comply with annual, declining emission caps for sulfur dioxide ("SO ₂ ") and nitrogen oxides ("NO _x "), (4) invest $ 290 million in certain TVA environmental projects, (5) provide $ 60 million to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects, and (6) pay civil penalties of $ 10 million . In exchange for these commitments, most existing and possible claims against TVA based on alleged New Source Review and associated violations were waived and cannot be brought against TVA. Some possible claims for sulfuric acid mist and GHG emissions can still be brought against TVA, and claims for increases in particulates can also be pursued at many of TVA’s coal-fired units. Additionally, the Environmental Agreements do not address compliance with new laws and regulations or the cost associated with such compliance.

The liabilities related to the Environmental Agreements are included in Accounts payable and accrued liabilities and Other long-term liabilities on the March 31, 2014 Consolidated Balance Sheet. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record TVA's liabilities under the Environmental Agreements as regulatory assets, and they are included as such on the March 31, 2014 Consolidated Balance Sheet and will be recovered in rates in future periods.

Several legal and administrative clean air proceedings have already been terminated in connection with the Environmental Agreements. Additionally, the proceeding discussed below involving the John Sevier Fossil Plant ("John Sevier") CAA permit is expected to be narrowed in scope.

Legal Proceedings Related to the Kingston Ash Spill . Seventy-eight lawsuits based on the Kingston ash spill have been filed in the United States District Court for the Eastern District of Tennessee. Fifteen of these lawsuits have been dismissed, and 63 lawsuits are active and in various stages of litigation. Plaintiffs are residents, businesses, and property owners in the Kingston area and allege tort claims for damage to property (for example, nuisance, strict liability, trespass, and negligence), with some plaintiffs also alleging claims for personal injury, business loss, and inverse condemnation. Plaintiffs seek unspecified compensatory and punitive damages, court orders to clean up properties, and other relief. TVA is the only active defendant in these actions.

A bench trial on the issue of dike failure causation in the seven earliest cases was held in September and October 2011 ("Phase I trial") . Plaintiffs in the 56 remaining cases have agreed to be bound by the Phase I trial record and decision. In August 2012, the court issued its Phase I decision, finding that certain actions by TVA contributed to the ash spill. On November 20, 2012, the court ordered the parties to participate in mediation within 120 days of the issuance of the order. The court has extended the mediation period four times, and the mediation period is now scheduled to end on June 16, 2014. If the case is not resolved through mediation, the case will proceed to the damages phase ("Phase II") trial, during which the individual plaintiffs must prove both that they incurred damages and that the ash spill was the cause of the damages. The date for the Phase II trial has not yet been set.

TVA has received several notices of intent to sue under various environmental statutes from both individuals and environmental groups, but no such suits have been filed.

Civil Penalty and Natural Resource Damages for the Kingston Ash Spill . In June 2010, TDEC issued a civil penalty order of approximately $ 12 million to TVA for the Kingston ash spill, citing violations of the Tennessee Solid Waste Disposal Act and the Tennessee Water Quality Control Act. Of the $ 12 million , TVA has paid $ 10 million , and TDEC has approved environmental projects valued at $ 2 million as a credit against the remaining penalty amount. TVA has completed projects or committed funds that total nearly $ 2 million . As part of a memorandum of agreement for the natural resource damage assessment process, TVA agreed to pay $ 250 thousand each year for three years as a down payment on the amount of natural resource damages ultimately established, and to reimburse TDEC and the U.S. Fish and Wildlife Service for their costs.

Case Involving Tennessee Valley Authority Retirement System . In March 2010, eight current and former participants in and beneficiaries of Tennessee Valley Authority Retirement System ("TVARS") filed suit in the United States District Court for the Middle District of Tennessee against the six then-current members of the TVARS Board. The lawsuit challenged the TVARS Board's decision to suspend the TVA contribution requirements for 2010 through 2013, and to amend the TVARS Rules and Regulations to (1) reduce the calculation for COLA benefits for CY 2010 through CY 2013, (2) reduce the interest crediting rate for the fixed fund accounts, and (3) increase the eligibility age to receive COLAs from age 55 to 60 . The plaintiffs allege that these actions violated the TVARS Board members' fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs' contractual rights, among other claims. The plaintiffs sought, among other things, unspecified damages, an order directing the TVARS Board to rescind the amendments, and the appointment of a seventh TVARS Board member. Five of the six individual defendants filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint. In July 2010, TVA moved to intervene in the suit in the event it was not dismissed. In September 2010, the district court dismissed the breach of fiduciary duty claim against the directors without prejudice, allowing the plaintiffs to file an amended complaint within 14 days

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against TVARS and TVA but not the individual directors. The plaintiffs previously had voluntarily withdrawn their constitutional claims, so the court also dismissed those claims without prejudice. The court dismissed with prejudice the plaintiffs' claims for breach of contract, violation of the Internal Revenue Code, and appointment of a seventh TVARS Board member.

In September 2010, the plaintiffs filed an amended complaint against TVARS and TVA. The plaintiffs allege, among other things, violations of their constitutional rights (due process, equal protection, and property rights), violations of the Administrative Procedure Act, and breach of statutory duties owed to the plaintiffs. They seek a declaratory judgment and appropriate relief for the alleged statutory and constitutional violations and breaches of duty. TVA filed its answer to the amended complaint in December 2010. In May 2012, the court granted the parties' joint motion to administratively close the case subject to reopening to allow the parties the opportunity to engage in mediation. In July 2013, the court granted the plaintiffs' motion to reopen the lawsuit, and in November 2013, TVA filed a motion for summary judgment. The motion is still pending.

Case Involving the NRC Waste Confidence Decision on Spent Nuclear Fuel Storage. In June 2012, the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") vacated the NRC's updated Waste Confidence Decision ("WCD") . The WCD, a key component of NRC licensing activities since 1984, is a generic determination by the NRC that spent nuclear fuel can be safely managed until a permanent off-site repository is established. The most recent update provided that the permanent repository would be available when necessary and that spent fuel could be stored for 60 years after a plant's nuclear license had been terminated. The D.C. Circuit vacated this update on the grounds that, among other things, the NRC failed to support it with an adequate National Environmental Policy Act review and the NRC did not evaluate what would happen if the repository was never built.

In June 2012, multiple intervenor groups submitted a petition to the NRC to (1) hold in abeyance all pending reactor licensing decisions that would depend upon the WCD and (2) establish a process for ensuring that the remanded proceeding complies with the public participation requirements of Section 189a of the Atomic Energy Act. In August 2012, the NRC issued an order (the "August 2012 NRC Order") preventing the issuance of a final licensing decision in all proceedings affected by the petition, including Watts Bar Unit 2 and Bellefonte Units 3 and 4. While resolution of unrelated contentions can proceed, the NRC stated that it will not issue final licensing decisions until it has “appropriately addressed” the D.C. Circuit decision, and all pending contentions concerning the WCD are being held in abeyance pending the NRC's completion of an environmental review and generic rulemaking addressing the shortcomings identified by the D.C. Circuit. A draft rule and Environmental Impact Statement addressing the D.C. Circuit decision were issued by the NRC staff for public comment in September 2013. The NRC is currently scheduled to address this issue by early October 2014.

Administrative Proceeding Regarding Renewal of Operating License for Sequoyah Nuclear Plant. In May 2013, the Blue Ridge Environmental Defense League ("BREDL") , the Bellefonte Efficiency and Sustainability Team ("BEST") , and Mothers Against Tennessee River Radiation filed a petition with the NRC opposing the renewal of the operating license for Sequoyah Nuclear Plant Units 1 and 2. The petition contains eight specific contentions challenging the adequacy of the license renewal application that TVA submitted to the NRC in January 2013. TVA filed a response with the Atomic Safety and Licensing Board ("ASLB") opposing the admission of all eight of the petitioners' contentions. In July 2013, the ASLB concluded that BREDL is the only one of the three petitioners that has standing to intervene in this proceeding. The ASLB also held that seven of the contentions were inadmissible, and held one portion of the remaining contention related to WCD in abeyance pending further direction from the NRC.

Administrative Proceedings Regarding Bellefonte Units 3 and 4 . TVA submitted its combined construction and operating license application ("CCOLA") for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to the NRC in October 2007. In June 2008, BEST, BREDL, and Southern Alliance for Clean Energy ("SACE") submitted a joint petition for intervention and a request for a hearing. The ASLB denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE. The NRC reversed the ASLB's decision to admit two of the four contentions, leaving only two contentions (concerning the estimated costs of the new nuclear plant and the impact of the facility's operations on aquatic ecology) to be litigated in a future hearing. In January 2012, TVA notified the ASLB that the NRC had placed the CCOLA in "suspended" status indefinitely at TVA's request, and TVA requested that the ASLB hold the proceeding in abeyance pending a decision by TVA regarding the best path forward with regards to the CCOLA.

In July 2012, BREDL petitioned for the admission of another new, late-filed contention stemming from the D.C. Circuit's order vacating the WCD. This contention is being held in abeyance pursuant to the August 2012 NRC Order.

Administrative Proceedings Regarding Watts Bar Unit 2 . In July 2009, SACE, the Tennessee Environmental Council, the Sierra Club, We the People, and BREDL filed a request for a hearing and petition to intervene in the NRC administrative process reviewing TVA's application for an operating license for Watts Bar Unit 2. In November 2009, the ASLB granted SACE's request for hearing, admitted two of SACE's seven contentions for hearing, and denied the request for hearing submitted on behalf of the other four petitioners. The ASLB subsequently dismissed one contention, leaving one aquatic impact contention. In July 2013, SACE filed a motion to withdraw its aquatic impact contention. The ASLB granted this motion.

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In July 2012, SACE petitioned for the admission of another new, late-filed contention, similar to the one filed in the Bellefonte Units 3 and 4 proceeding, stemming from the D.C. Circuit's order vacating the WCD. Similarly, this contention is being held in abeyance pursuant to the August 2012 NRC Order.

John Sevier Fossil Plant Clean Air Act Permit . In September 2010, the Environmental Integrity Project, the Southern Environmental Law Center, and the Tennessee Environmental Council filed a petition with the EPA, requesting that the EPA Administrator object to the CAA permit issued to TVA for operation of John Sevier. Among other things, the petitioners allege that repair, maintenance, or replacement activities undertaken at John Sevier Unit 3 in 1986 triggered the Prevention of Significant Deterioration ("PSD") requirements for SO ₂ and NO _x . The CAA permit, issued by TDEC, remains in effect pending the disposition of the petition. The Environmental Agreements should narrow the scope of this proceeding. See Environmental Agreements. TVA has now retired two of the four John Sevier coal-fired units and has idled the remaining two units.

National Environmental Policy Act Challenge at Gallatin Fossil Plant. To comply with the Environmental Agreements and the Mercury and Air Toxics Standards, TVA chose to reduce emissions at the Gallatin Fossil Plant by installing controls and an associated landfill. Pursuant to the National Environmental Policy Act ("NEPA") , TVA completed an Environmental Assessment in March 2013 to assess the impact of installing these emission controls. In April 2013, the Tennessee Environmental Council, Tennessee Scenic Rivers Association, Sierra Club, and Center for Biological Diversity filed suit in the United States District Court for the Middle District of Tennessee alleging that TVA violated NEPA when it decided to install additional emission controls and construct an associated landfill at the Gallatin Fossil Plant. Plaintiffs are demanding that TVA prepare an Environmental Impact Statement, and are asking the court to enjoin TVA from taking any further action relating to these matters pending compliance with NEPA. This case has been transferred to the United States District Court for the Eastern District of Tennessee.

Kingston Fossil Plant NPDES Permit Administrative Appeal . The Sierra Club filed a challenge to the National Pollutant Discharge Elimination System ("NPDES") permit issued by Tennessee for the scrubber-gypsum pond discharge at Kingston in November 2009 before the Tennessee Board of Water Quality, Oil and Gas ("TN Board") . TDEC is the defendant in the challenge, and TVA has intervened in support of TDEC's decision to issue the permit. The matter was set for a hearing before the TN Board in February 2011, but has since been stayed by agreement of the parties.

Bull Run Fossil Plant NPDES Permit Administrative Appeal. SACE and the Tennessee Clean Water Network ("TCWN") filed a challenge to the NPDES permit for the Bull Run Fossil Plant in November 2010. TDEC is the defendant in the challenge, and TVA's motion to intervene to support TDEC's decision to issue the permit was granted in January 2011. At the contested case hearing in October 2013, the TN Board granted TDEC's and TVA's joint motion for involuntary dismissal following the conclusion of the petitioners' presentation of evidence. On December 18, 2013, TCWN and SACE filed a petition for review of the TN Board's decision in the Chancery Court for Davidson, County, Tennessee.

Johnsonville Fossil Plant NPDES Permit Administrative Appeal. SACE and TCWN filed a challenge to the NPDES permit for the Johnsonville Fossil Plant in March 2011. TDEC is the defendant in the challenge. TVA's motion to intervene was granted in August 2011. The matter has not yet been given a hearing date before the TN Board.

John Sevier Fossil Plant NPDES Permit Administrative Appeal. SACE and TCWN filed a challenge to the NPDES permit for John Sevier in May 2011. TDEC is the defendant in the challenge. TVA's motion to intervene was granted in August 2011. The matter has not yet been given a hearing date before the TN Board.

Gallatin Fossil Plant NPDES Permit Administrative Appeal . SACE, TCWN, and the Sierra Club filed a challenge to the NPDES permit for the Gallatin Fossil Plant in June 2012. TDEC is the defendant in the challenge. TVA's motion to intervene was granted in September 2012. Administrative discovery is underway. The matter has been set for a hearing before the TN Board in September 2014.

Petitions Resulting from Japanese Nuclear Events. As a result of events that occurred at the Fukushima Daiichi Nuclear Power Plant in March 2011, petitions have been filed with the NRC which could impact TVA's nuclear program. While some petitions have been dismissed after review, petitions that remain open include the following:


•	Petition to Immediately Suspend the Operating Licenses of GE BWR Mark I Units Pending the Full NRC Review With Independent Expert and Public Participation From Affected Emergency Planning Zone Communities

Beyond Nuclear filed a petition in April 2011, requesting that the NRC take emergency enforcement action against all nuclear reactor licensees that operate units that use the General Electric Mark I BWR design. TVA uses this design at Browns Ferry Units 1, 2, and 3. The petition requests the NRC to take several actions, including the suspension of the operating licenses at the affected nuclear units, including Browns Ferry, until several milestones have been met. In December 2011, the NRC provided its initial response to the petition. The NRC accepted five specific requests that would apply directly or indirectly to Browns Ferry, including issues relating to spent fuel pool use and location, Mark I containment hardened vent systems and design, and backup electrical power. Each of these items was accepted for further investigation, but the requests for immediate action were rejected. The NRC has not yet rendered a decision regarding the petition.

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•	Twelve separate petitions on various issues

In August 2011, the Natural Resources Defense Council submitted twelve separate letters to the NRC requesting action on various health and safety aspects of operating nuclear facilities in the United States. The NRC is treating these as a single 10 CFR 2.206 Petition. The NRC has not yet rendered a decision regarding the petition.


•	Petition Pursuant to 10 CFR 2.206 - Demand For Information Regarding Compliance with 10 CFR 50, Appendix A, General Design Criterion 44, Cooling Water, and 10 CFR 50.49, Environmental Qualification of Electric Equipment Important to Safety for Nuclear Power Plants

A petition was filed by the Union of Concerned Scientists in July 2011, requesting that a demand for information be issued for affected licensees, including TVA with regards to Browns Ferry, describing how the facilities comply with General Design Criterion 44, Cooling Water, within Appendix A to 10 CFR Part 50, and with 10 CFR 50.49, Environmental Qualification of Electric Equipment Important to Safety for Nuclear Power Plants, for all applicable design and licensing bases events. The NRC has not yet rendered a decision regarding the petition.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions except where noted)

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") explains the results of operations and general financial condition of the Tennessee Valley Authority ("TVA") . The MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements and TVA's Annual Report on Form 10-K for the fiscal year ended September 30, 2013 (the “Annual Report”).

Executive Overview

Sales were relatively flat for the three-month period ended March 31, 2014, and two percent lower for the six-month period ended March 31, 2014, as compared to the same periods of 2013. Sales to local power company customers of TVA ("LPCs") increased during the three-month and six-month periods ended March 31, 2014, as compared to the same periods of 2013, due to colder-than-normal weather. However, these increases were offset by a reduction in sales to industrial customers primarily driven by United States Enrichment Corporation ("USEC"), a subsidiary of the parent company, USEC, Inc. , and historically TVA’s largest directly served customer, as USEC began ceasing operations in May 2013.

TVA had net income for the three-month and six-month periods ended March 31, 2014, of $ 295 million and $ 228 million , respectively, as compared with net income of $ 54 million and a net loss of $ 191 million for the same periods of 2013.

Revenue from the sales of electricity increased seven percent for the three months ended March 31, 2014, compared with the same period of the prior year. This was primarily due to a $158 million increase in base revenues resulting from colder-than-normal weather and to a lesser degree changes in TVA’s wholesale base rate approved by the TVA Board in August 2013. This increase was partially offset by a decrease in revenue from USEC. Revenue from the sales of electricity was flat for the six months ended March 31, 2014, compared with the same period of the prior year.

Operating and maintenance expenses decreased $83 million and $195 million, respectively, for the three-month and six-month periods ended March 31, 2014, as compared with the same periods of 2013, primarily due to the timing of refueling outages and other projects as well as cost savings initiatives undertaken by management. TVA continues to make operational changes to its generating fleet and to pursue cost reduction initiatives across all business units with a goal of keeping its rates competitive.

During the six months ended March 31, 2014, TVA made the strategic decision to use cash and cash equivalents of $1.1 billion to reduce long-term and short-term debt.

Recent inspections by the Nuclear Regulatory Commission ("NRC") determined that TVA has met all requirements in connection with the red finding for Browns Ferry Nuclear Plant ("Browns Ferry") , and the NRC has closed this finding. Additionally, the NRC has closed the hydrology issues at Sequoyah Nuclear Plant ("Sequoyah") and Watts Bar Nuclear Plant ("Watts Bar") , and these plants have returned to routine and baseline NRC inspection schedules. All six TVA nuclear reactors generated electricity at or near full power during the severe cold in January 2014, supporting the response from all segments of TVA’s generation and transmission system to provide electricity for heating homes and keeping essential services open across the Tennessee Valley.

During the second quarter of 2014, TVA completed a significant milestone in its cleanup of the ash spill at the Kingston Fossil Plant ("Kingston") with the completion of a seismically designed, underground retaining wall around the containment cell. In addition, TVA plans to finish the cap and cover of the containment cell by the end of 2014.

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Results of Operations

Sales of Electricity

The following table compares TVA’s energy sales for the three and six months ended March 31, 2014 , and 2013 :



Sales of Electricity (millions of kWh)
	Three Months Ended March 31						Six Months Ended March 31
	2014	2013	Change		Percent Change		2014	2013	Change		Percent Change
Local power companies	36,862	34,025	2,837		8.3	%	69,543	64,687	4,856		7.5	%
Industries directly served	4,309	7,447	(3,138	)	(42.1	)%	8,576	15,002	(6,426	)	(42.8	)%
Federal agencies and other	750	826	(76	)	(9.2	)%	1,580	1,722	(142	)	(8.2	)%
Total sales of electricity	41,921	42,298	(377	)	(0.9	)%	79,699	81,411	(1,712	)	(2.1	)%

TVA uses degree days to measure the impact of weather on its power operations since weather affects both demand and market prices for electricity. Degree days measure the extent to which average temperatures in the five largest cities in TVA's service area vary from 65 degrees Fahrenheit.



Degree Days
	2014 Actual	Normal ⁽¹⁾	Percent Variation		2013 Actual	Normal ⁽¹⁾	Percent Variation		2014 Actual	2013 Actual	Percent Change
Heating Degree Days
Three Months Ended March 31	2,144	1,812	18.3	%	1,856	1,812	2.4	%	2,144	1,856	15.5	%
Six Months Ended March 31	3,498	3,115	12.3	%	3,071	3,115	(1.4	)%	3,498	3,071	13.9	%

Cooling Degree Days
Three Months Ended March 31	1	12	(91.7	)%	6	12	(50.0	)%	1	6	(83.3	)%
Six Months Ended March 31	92	79	16.5	%	38	79	(51.9	)%	92	38	142.1	%

Note

(1) This calculation is updated every five years in order to incorporate the then most recent 30 years. It was last updated in 2011.

Sales of electricity decreased 377 million kilowatt hours ("kWh") for the three months ended March 31, 2014,

compared to the three months ended March 31, 2013, primarily due to a decrease in demand from industries directly served. The reduced demand was largely the result of a decrease in demand by USEC, which began ceasing operations during the third quarter of 2013. Partially offsetting this decrease in sales to industries directly served was an increase in sales to LPCs due primarily to 16 percent more heating degree days than the same period in the prior year.

Sales of electricity decreased 1.7 billion kWh for the six months ended March 31, 2014, compared to the six months ended March 31, 2013, primarily due to a decrease in demand from industries directly served. The reduced demand was largely the result of a decrease in demand by USEC, which began ceasing operations during the third quarter of 2013. Partially offsetting this decrease in sales to industries directly served was an increase in sales to LPCs due primarily to greater than normal heating degree days as a result of a colder winter during the six months ended March 31, 2014, as compared to fewer than normal heating degree days for the six months ended March 31, 2013.

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Financial Results

The following table compares operating results for the three and six months ended March 31, 2014 , and 2013 :



Summary Consolidated Statements of Operations
	Three Months Ended March 31						Six Months Ended March 31
	2014		2013		Percent Change		2014		2013			Percent Change
Operating revenues	$	2,938	$	2,741	7.2	%	$	5,320	$	5,320		—	%
Operating expenses	2,362		2,380		(0.8	)%	4,526		4,903			(7.7	)%
Operating income	576		361		59.6	%	794		417			90.4	%
Other income, net	13		11		18.2	%	27		26			3.8	%
Interest expense, net	294		318		(7.5	)%	593		634			(6.5	)%
Net income (loss)	$	295	$	54	446.3	%	$	228	$	(191	)	219.4	%

Operating Revenues. Operating revenues for the three and six months ended March 31, 2014 , and 2013 , consisted of the following:



Operating Revenues
	Three Months Ended March 31						Six Months Ended March 31
	2014		2013		Percent Change		2014		2013		Percent Change
Electricity sales
Local power companies	$	2,668	$	2,350	13.5	%	$	4,834	$	4,539	6.5	%
Industries directly served	193		323		(40.2	)%	342		645		(47.0	)%
Federal agencies and other	40		36		11.1	%	75		74		1.4	%
Electricity sales	2,901		2,709		7.1	%	5,251		5,258		(0.1	)%
Other revenue	37		32		15.6	%	69		62		11.3	%
Total operating revenues	$	2,938	$	2,741	7.2	%	$	5,320	$	5,320	—	%

Operating revenues increased $197 million and remained flat in the three and six months ended March 31, 2014 , respectively, compared to the three and six months ended March 31, 2013 , due to the following:



	Three Month Change		Six Month Change
Fuel cost recovery	$	34	$	(221	)
Base revenue	158		219
Other	5		2
Total	$	197	$	—

Operating revenues increased $197 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, primarily due to a $158 million increase in base revenue and a $34 million increase in fuel cost recovery. The $158 million increase in base revenue was primarily the result of higher sales volume to LPCs and the non-fuel base rate increase that became effective October 1, 2013. These items were partially offset by lower sales volume to industries directly served, which largely resulted from a decrease in demand by USEC. The $34 million increase in fuel cost recovery was largely attributable to higher fuel rates, which resulted from the use of more expensive generation resources.

Operating revenues were flat for the six months ended March 31, 2014, compared to the six months ended March 31, 2013, as a $221 million decrease in fuel cost recovery was almost entirely offset by a $219 million increase in base revenue. The $221 million decrease in fuel cost recovery was attributable to lower fuel rates, which resulted from the use of less expensive generation resources. The $219 million increase in base revenue was primarily the result of higher sales volume to LPCs and the non-fuel base rate increase that became effective October 1, 2013. These items were partially offset by a decrease in sales volume to industries directly served, which largely resulted from a decrease in demand by USEC.

TVA's wholesale rate structure provides price signals intended to encourage LPCs and end-use customers to shift energy usage from high-cost generation periods to less expensive generation periods. Under the revised wholesale structure, weather can positively or negatively impact both volume and effective rates, while only volume was impacted under the former

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wholesale structure. This is because the wholesale structure includes two components: a demand charge and an energy charge. The demand charge is based on the customer's peak monthly usage and increases as the peak increases. The energy charge is based on the kWhs used by the customer. The rate structure also establishes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and tax equivalents associated with the fuel cost adjustments.

Operating Expenses. Operating expenses for the three and six months ended March 31, 2014 , and 2013 , consisted of the following:



Operating Expenses
	Three Months Ended March 31						Six Months Ended March 31
	2014		2013		Percent Change		2014		2013		Percent Change
Fuel	$	663	$	672	(1.3	)%	$	1,206	$	1,466	(17.7	)%
Purchased power	313		288		8.7	%	564		533		5.8	%
Operating and maintenance	793		876		(9.5	)%	1,600		1,795		(10.9	)%
Depreciation and amortization	453		408		11.0	%	894		836		6.9	%
Tax equivalents	140		136		2.9	%	262		273		(4.0	)%
Total operating expenses	$	2,362	$	2,380	(0.8	)%	$	4,526	$	4,903	(7.7	)%

The following table summarizes TVA's net generation and purchased power in millions of kWh by generating source and the percentage of all electric power generated and purchased for the periods indicated:



Power Supply from TVA-Operated Generation Facilities and Purchased Power
	Three Months Ended March 31						Six Months Ended March 31
	2014			2013			2014			2013
	kWh (in millions)	Percent of Total Power Supply		kWh (in millions)	Percent of Total Power Supply		kWh (in millions)	Percent of Total Power Supply		kWh (in millions)	Percent of Total Power Supply
Coal-fired	16,936	40	%	14,648	34	%	29,292	36	%	32,299	39	%
Nuclear	13,576	32	%	13,151	31	%	27,217	33	%	23,740	29	%
Hydroelectric	4,304	10	%	5,606	13	%	8,741	11	%	9,019	11	%
Natural gas and/or oil-fired	2,765	6	%	3,873	9	%	5,763	7	%	7,683	9	%
Renewable resources (non-hydro)	—	—	%	1	—	%	2	—	%	5	—	%
Total TVA-operated generation facilities	37,581	88	%	37,279	87	%	71,015	87	%	72,746	88	%
Purchased power	5,144	12	%	5,707	13	%	10,190	13	%	10,070	12	%
Total power supply	42,725	100	%	42,986	100	%	81,205	100	%	82,816	100	%

Fuel expense decreased $9 million for the three months ended March 31, 2014, as compared to the same period of the prior year, primarily due to the timing of the fuel cost recovery mechanism. The fuel cost recovery mechanism provides a means to regularly adjust rates in order to reflect changing fuel and purchased power costs, including realized gains and losses relating to fuel commodity hedging transactions under TVA’s financial trading program ("FTP") . See Note 14 — Derivatives Not Receiving Hedge Accounting Treatment — Derivatives Under FTP . There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in rates due to the operation of the fuel cost recovery mechanism. This difference is recorded as a regulatory asset or liability and represents over-collected revenues (regulatory liabilities) or under-collected revenues (regulatory assets). As a result of this treatment, eligible fuel expenses are correctly matched to the related revenue on the statements of operations. For the three months ended March 31, 2014, the fuel cost recovery mechanism decreased fuel expense by $74 million, as compared to the same period of the prior year. In addition, the regulatory asset balance for the fuel cost adjustment receivable was $133 million at March 31, 2014, compared to $13 million at March 31, 2013. Balances in the fuel cost receivable regulatory asset account represent under-collected revenues that will offset fuel and purchased power costs as the costs are recovered in fuel rates in a future period. Partially offsetting the decrease in fuel expense resulting from the timing of the fuel cost recovery mechanism was an increase in fuel expense of $34 million due to increased volume of fuel consumed, primarily due to a 16 percent increase in coal-fired generation, compared to the same period of the prior year. Additionally, higher fuel prices contributed to an increase in fuel expense of $31 million, largely due to higher prices for natural gas, as compared to the same period of the prior year.

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Purchased power expense increased $25 million for the three months ended March 31, 2014, as compared to the same period of the prior year, primarily due to higher market prices for natural gas, as TVA’s primary source of purchased power is natural gas-fired generation. The average Henry Hub natural gas spot price for the three months ended March 31, 2014, was $5.05 per mmBtu, which was 45 percent higher than the average price for the same period of the prior year. Partially offsetting the increase in the price of purchased power was a 10 percent decrease in the volume of power purchased.

Operating and maintenance expense decreased $83 million for the three months ended March 31, 2014, compared with the same period of the prior year. This decrease was primarily attributable to cost savings initiatives undertaken by management including a $33 million decrease in contract labor and $24 million decrease in materials and supplies. See Key Initiatives and Challenges — Cost Reduction Initiatives . In addition, pension and post-retirement financing and service cost decreased $17 million due to an increase in the discount rate.

Depreciation and amortization expense increased $45 million for the three months ended March 31, 2014, compared with the same period of the prior year, primarily due to an increase in the amount of accelerated depreciation recognized for certain coal-fired units to be idled.

Tax equivalents expense increased $4 million during the three months ended March 31, 2014, compared to the same period of the prior year. This increase primarily reflects an increase in the accrued tax equivalent expense related to the FCA. The accrued tax equivalent expense is equal to five percent of the FCA revenues and increased for the three months ended March 31, 2014, as compared to the same period of the prior year.

Fuel expense decreased $260 million for the six months ended March 31, 2014, as compared to the same period of the prior year, primarily due to the timing of the fuel cost recovery mechanism and the utilization of less expensive generation resources. For the six months ended March 31, 2014, the fuel cost recovery mechanism decreased fuel expense by $152 million as compared to the same period of the prior year. As a result of fewer nuclear outages during the six months ended March 31, 2014, compared to the same period of the prior year, nuclear generation increased by 15 percent. Due to the utilization of less expensive nuclear generation, TVA reduced generation of its more expensive coal-fired and gas-fired generation resources, resulting in a decrease of fuel expense of $75 million for the six months ended March 31, 2014, as compared to the same period of the prior year. Additionally, a reduction in sales volume of two percent caused a decrease in fuel expense of $33 million.

Purchased power expense increased $31 million for the six months ended March 31, 2014, as compared to the same period of the prior year, primarily due to higher market prices for natural gas, as TVA’s primary source of purchased power is natural gas-fired generation. The average Henry Hub natural gas spot price for the six months ended March 31, 2014, was $4.44 per mmBtu, which was 29 percent higher than the average price for the same period of the prior year. Partially offsetting the increase in the price of purchased power expense was a decrease in expense related to the fuel cost recovery mechanism.

Operating and maintenance expense decreased $195 million for the six months ended March 31, 2014, compared with the same period of the prior year. This decrease was primarily attributable to a $100 million decrease in expenses related to planned nuclear refueling outages as well as a decrease in outage projects and scheduled maintenance during the six months ended March 31, 2014, as compared with the same period of the prior year. In addition, pension and post-retirement financing and service cost decreased $25 million due to an increase in the discount rate. The remaining $70 million decrease is primarily a result of cost savings initiatives undertaken by management. See Key Initiatives and Challenges — Cost Reduction Initiatives .

Depreciation and amortization expense increased $58 million for the six months ended March 31, 2014, compared with the same period of the prior year, primarily due to an increase in the amount of accelerated depreciation recognized for certain coal-fired units to be idled.

Tax equivalents expense decreased $11 million in the six months ended March 31, 2014, compared to the same period of the prior year. This change primarily reflects a decrease in gross revenues from the sale of power (excluding sales or deliveries to other federal agencies and off-system sales with other utilities) during 2013 compared to 2012.

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Interest Expense . Interest expense and interest rates for the three and six months ended March 31, 2014 , and 2013 , were as follows:



Interest Expense
	Three Months Ended March 31								Six Months Ended March 31
	2014			2013			Percent Change		2014			2013			Percent Change
Interest Expense ⁽¹⁾
Interest expense	$	336		$	359		(6.4	)%	$	675		$	714		(5.5	)%
Allowance for funds used during construction and nuclear fuel expenditures	(42		)	(41		)	2.4	%	(82		)	(80		)	2.5	%
Net interest expense	$	294		$	318		(7.5	)%	$	593		$	634		(6.5	)%

	2014			2013			Percent Change		2014			2013			Percent Change
Interest Rates (average)
Long-term outstanding power bonds ⁽²⁾	5.603		%	5.777		%	(3.0	)%	5.590		%	5.767		%	(3.1	)%
Long-term debt of variable interest entities	4.604		%	4.875		%	(5.6	)%	4.601		%	4.875		%	(5.6	)%
Membership interests subject to mandatory redemption	7.180		%	—			100.0	%	7.033		%	—			100.0	%
Discount notes	0.036		%	0.085		%	(57.6	)%	0.050		%	0.104		%	(51.9	)%
Blended	5.166		%	5.498		%	(6.0	)%	5.121		%	5.455		%	(6.1	)%

Notes

(1) Interest expense includes interest on long-term debt obligations, including amortization of debt discounts, issuance, and reacquisition costs, net.

(2) The average interest rates on long-term debt obligations reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the periods above and interest expense for those periods.

Net interest expense decreased $24 million for the three months ended March 31, 2014, as compared to the same period of the prior year. This decrease was attributable to a decrease in both the average balance and average interest rate of TVA’s outstanding debt.

Net interest expense decreased $41 million for the six months ended March 31, 2014, as compared to the same period of the prior year. This decrease was attributable to a decrease in both the average balance and average interest rate of TVA’s outstanding debt.

Liquidity and Capital Resources

Sources of Liquidity

To meet cash needs and contingencies, TVA depends on various sources of liquidity. TVA’s primary sources of liquidity are cash from operations and proceeds from the issuance of short-term and long-term debt. Current liabilities may exceed current assets from time to time in part because TVA uses short-term debt to fund short-term cash needs, as well as to pay scheduled maturities and other redemptions of long-term debt. The daily balance of cash and cash equivalents maintained is based on near-term expectations for cash expenditures and funding needs.

In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity also include a $150 million credit facility with the United States ("U.S.") Treasury, three long-term revolving credit facilities totaling $2.5 billion, and proceeds from any other financing arrangements such as lease financings, call monetization transactions, sales of assets, and sales of receivables and loans. Management expects these sources, certain of which are described below, to provide adequate liquidity to TVA for the foreseeable future.

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. At March 31, 2014 , TVA had $23.7 billion of Bonds outstanding (not including noncash items of foreign currency exchange loss of $71 million and net discount on sale of the amount of outstanding Bonds of $82 million). Due to this limit on Bonds, TVA may not be able to use Bonds to finance all of the capital investments planned over the next decade. However, TVA believes that other forms of financing not subject to the limitation, including lease financings, could provide supplementary funding if needed. See Lease Financings below and Note 8 . Also, the impact of energy efficiency and demand response initiatives may reduce generation requirements and thereby reduce capital needs. TVA anticipates that capital spending needs can be met with a combination of Bonds, lease arrangements, energy prepayments, additional power revenues through rate increases, cost reductions, or other ways.

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Debt Securities . TVA’s Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bonds. TVA’s Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had outstanding at March 31, 2014 , the long-term debt of two variable interest entities. See Lease Financings below and Note 12 — Debt Securities Activity for additional information.

The following table provides additional information regarding TVA's short-term borrowings.



Short-Term Borrowing Table
	At March 31 2014			Three Months Ended March 31 2014			Six Months Ended March 31 2014			At March 31 2013			Three Months Ended March 31 2013			Six Months Ended March 31 2013
Amount Outstanding (at End of Period) or Average Amount Outstanding (During Period)
Discount Notes	$	1,691		$	1,718		$	1,924		$	2,045		$	1,098		$	1,239
Weighted Average Interest Rate
Discount Notes	0.054		%	0.036		%	0.050		%	0.090		%	0.085		%	0.104		%
Maximum Month-End Amount Outstanding (During Period)
Discount Notes	N/A			$	1,950		$	2,442		N/A			$	2,045		$	2,045

In October 2013, one credit rating agency placed the ratings on the United States sovereign debt on rating watch negative, and subsequently placed TVA's rating on rating watch negative. Rating watch is typically event driven, while the negative status indicates a heightened probability of a downgrade. In March 2014, the agency removed the rating watch negative on the ratings on United States sovereign debt and changed the outlook to stable, and subsequently removed the rating watch negative on TVA’s rating and changed the outlook to stable.

Credit Facility Agreements . TVA and the U.S. Treasury, pursuant to the TVA Act, have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility was renewed for 2014 and has a maturity date of September 30, 2014. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA plans to use the U.S. Treasury credit facility as 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 United States with maturities from date of issue of one year or less. There were no outstanding borrowings under the facility at March 31, 2014 . The availability of this credit facility may be impacted by how the U.S. government addresses the situation of approaching its debt limit.

The following table provides additional information regarding TVA's funding available in the form of three long-term revolving credit facilities. The credit facilities accommodate the issuance of letters of credit. 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. See Note 12 — Credit Facility Agreements and Note 14 — Other Derivative Instruments — Collateral .



Summary of Long-Term Credit Facilities At March 31, 2014 (in billions)
Maturity Date	Facility Limit		Letters of Credit Outstanding		Cash Borrowings		Availability
June 2017	$	1.0	$	0.2	$	—	$	0.8
December 2017	1.0		0.1		—		0.9
April 2018	0.5		0.5		—		—
Total	$	2.5	$	0.8	$	—	$	1.7

In April 2014, UBS AG, Stamford Branch, assigned all of its rights and obligations under the $1.0 billion credit facility that matures in December 2017 to Sumitomo Mitsui Banking Corporation.

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Lease Financings . TVA has entered into certain leasing transactions with special purpose entities to obtain third-party financing for its facilities. These special purpose entities are sometimes identified as variable interest entities ("VIEs") of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 8 . TVA may seek to enter into similar arrangements in the future, but has no immediate plans to do so.

Summary Cash Flows

A major source of TVA's liquidity is operating cash flows resulting from the generation and sales of electricity. A summary of cash flow components for the six months ended March 31, 2014 , and 2013 , follows:



Summary Cash Flows
	Six Months Ended March 31
	2014			2013
Cash provided by (used in):
Operating activities	$	1,426		$	1,148
Investing activities	(1,374		)	(1,204		)
Financing activities	(1,148		)	107
Net (decrease) increase in cash and cash equivalents	$	(1,096	)	$	51

Operating

Net cash flow provided by operating activities increased by $278 million for the six months ended March 31, 2014, compared to the same period in the prior year, due primarily to the increase in net income from operations as a result of TVA’s continued efforts to improve cost management, working capital, and operational performance in addition to the recovery of $161 million in insurance proceeds related to the Kingston ash spill. These increases in cash flow provided by operating activities were partially offset by an increase of $126 million in pension contributions.

Investing

The majority of TVA’s investing cash flows are due to investments in property, plant, and equipment for new generating assets and existing facilities, environmental projects, and transmission upgrades necessary to maintain reliability. Net cash flows used in investing activities increased $170 million in the six months ended March 31, 2014, compared to the same period in the prior year. The increase was primarily related to the ongoing work on Watts Bar Unit 2 and transmission and clean air projects for the six months ended March 31, 2014.

Financing

Net cash flows used in financing was over $1.1 billion for the six months ended March 31, 2014, compared to $107 million net cash flows provided by financing for the six months ended March 31, 2013. The increase in cash flows used in financing was due primarily to net redemptions of debt of $1.1 billion during the six months ended March 31, 2014, as compared to net issuances of debt of $211 million during the six months ended March 31, 2013. This $1.3 billion change in net issuance and redemptions of debt was primarily due to TVA’s strategic decision to use cash on hand to reduce debt and meet funding needs in the six months ended March 31, 2014.

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Cash Requirements and Contractual Obligations

TVA has certain obligations and commitments to make future payments under contracts. The following table sets forth TVA's estimates of future payments at March 31, 2014 .



Commitments and Contingencies Payments due in the year ending September 30
	2014 ⁽¹⁾		2015		2016		2017		2018		Thereafter		Total
Debt ⁽²⁾	$	1,719	$	1,032	$	32	$	1,555	$	1,682	$	17,728	$	23,748
Interest payments relating to debt	615		1,192		1,147		1,133		1,044		17,957		23,088
Debt of VIEs	15		32		33		35		36		1,175		1,326
Interest payments relating to debt of VIEs	31		60		58		58		56		747		1,010
Lease obligations
Capital	3		6		6		6		6		60		87
Non-cancelable operating	20		35		33		32		27		88		235
Purchase obligations
Power	113		206		222		231		233		3,734		4,739
Fuel	751		1,231		788		451		517		1,919		5,657
Other	230		205		185		188		189		1,616		2,613
Environmental Agreements	61		62		65		44		4		—		236
Membership interest of VIE subject to mandatory redemption	1		2		2		2		2		30		39
Interest payments related to membership interests of VIE subject to mandatory redemption	2		3		3		2		2		16		28
Flood response commitment to NRC	11		36		1		—		—		—		48
Litigation settlements	6		2		—		—		—		—		8
Environmental cleanup costs-Kingston ash spill	50		68		—		—		—		—		118
Payments on other financings	34		104		104		104		104		401		851
Payments to U.S. Treasury
Return of Power Program Appropriation Investment	10		—		—		—		—		—		10
Return on Power Program Appropriation Investment	5		8		8		8		8		93		130
Retirement Plan ⁽³⁾	124		215		—		—		—		—		339
Total	$	3,801	$	4,499	$	2,687	$	3,849	$	3,910	$	45,564	$	64,310

Notes

(1) Period April 1 – September 30, 2014

(2) Does not include noncash items of foreign currency exchange loss of $71 million and net discount on sale of Bonds of $ 82 million .

(3) Tennessee Valley Authority Retirement System calculates TVA's minimum required annual contribution to the pension plan prior to the beginning of each fiscal year based on pension plan rules. The amount listed for 2015 is the minimum required contribution, and the calculation has not yet been completed for any years beyond 2015. See Note 17.

In addition to the obligations above, TVA has energy prepayment obligations in the form of revenue discounts.



Energy Prepayment Obligations Payments due in the year ending September 30
	2014 ⁽¹⁾		2015		2016		2017		2018		Thereafter		Total
Energy Prepayment Obligations	$	50	$	100	$	100	$	100	$	100	$	10	$	460

Note

(1) Period April 1 – September 30, 2014

EnergyRight ^® Solutions Program. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight ^® Solutions program. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loan receivable that has been in default for 180 days or more or that TVA has determined is uncollectible. As of March 31, 2014 , the total carrying amount of the loans receivable, net of discount, was approximately $151 million. Such

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amounts are not reflected in the Commitments and Contingencies table above. The total carrying amount of the financing obligation was approximately $186 million. See Note 6 and Note 10 for additional information.

Liquidity Challenges Related to Generation Resources

Nuclear Response Capability . Since the events that occurred in 2011 at the Fukushima Daiichi Nuclear Power Plant, the NRC has issued and adopted additional detailed guidance on the expected response capability to be developed by each nuclear plant site. TVA submitted integrated strategies to the NRC on February 28, 2013. TVA has developed plans and schedules for the development and implementation of strategies and physical plant modifications to address the actions outlined in this guidance for all of its plants, including Watts Bar Unit 2. The initial studies, including the required plant walkdowns, have been completed. Flooding and seismic re-evaluations to determine any further plant modifications are scheduled for completion in mid-2015 .

Extreme Flooding Preparedness . Updates to the TVA analytical hydrology model have indicated that under "probable maximum flood" conditions, some of TVA's dams would not be high enough to contain the flood waters. A "probable maximum flood” is an extremely unlikely event, and TVA is taking actions with the aim of ensuring that in the case of such an event, flood waters would pass safely and would not cause failure of these dams. TVA implemented interim dam modifications in 2010 and plans to replace these interim modifications with permanent structures. Construction is scheduled to begin in the spring of 2014, and TVA has made a commitment to the NRC to complete construction by October 2015.

In March 2013, the NRC advised TVA of multiple apparent violations associated with TVA’s management of several aspects of certain hydrology issues associated with Watts Bar and Sequoyah (in addition to the flooding concerns related to TVA's dams described above). The NRC inspected TVA's corrective actions associated with the violations related to hydrology and flooding in December 2013. The NRC inspection did not identify any significant concerns. The NRC closed its inquiry into these violations in the second quarter of 2014.

Watts Bar Unit 2 . Construction of Watts Bar Unit 2 is continuing in accordance with the schedule and budget expectations approved by the TVA Board in April 2012. The total estimated cost of completion is in the range of $4.0 billion to $4.5 billion. The project team has shifted its focus from large-scale construction to completion and testing of individual plant systems. TVA plans to bring Watts Bar Unit 2 into commercial operation by December 2015.

The regulatory reviews associated with the issuance of an NRC operating license are continuing. The NRC issued an extension to the Watts Bar Unit 2 construction permit on November 21, 2013. The revised permit expires on September 30, 2016. The NRC is continuing with its effort to resolve the waste confidence issue, both generally and with respect to Watts Bar Unit 2, and has indicated that it will not issue final licenses until it completes its reassessment of the environmental impacts of the storage of nuclear waste. The NRC reviews of TVA’s actions associated with post-Fukushima requirements are underway and are not currently anticipated to result in any concerns that would affect the timely issuance of an operating license.

Challenges to the project include completing complex work and required documentation; reverification of previously completed systems; completion of open vessel testing; addressing emergent work identified during testing, as well as emergent licensing issues; and successfully transitioning the site into dual-unit operation.

See Note 18 — Legal Proceedings — Administrative Proceedings Regarding Watts Bar Unit 2 for additional information.

Bellefonte Unit 1 . The incorporation of Watts Bar Unit 2 lessons learned into the Bellefonte Nuclear Plant ("Bellefonte") Unit 1 completion estimate has revealed some similar problems and inaccuracies. TVA finalized a new estimate to complete Bellefonte Unit 1 during the first quarter of 2014 putting the total estimated cost of completion in the range of $7.5 billion to $8.7 billion. Work at the site has been slowed to better allocate resources on nearer-term priorities as both budget and staffing levels have been reduced in the 2014 budget. TVA believes that the resulting budgeting and staffing levels should be sufficient to preserve Bellefonte for potential future development. TVA plans to utilize its integrated resource planning process to help determine how Bellefonte best supports TVA's overall efforts to continue to meet customer demand with low-cost, reliable power.

Key Initiatives and Challenges

Generation Resources

Nuclear Generation. In October 2010, while Browns Ferry Unit 1 was shut down for a scheduled refueling outage, TVA discovered a low pressure coolant injection valve had experienced an unanticipated failure. The NRC concluded that the valve failure, and TVA's inability to identify the failure, was an issue of “high safety significance” (which is termed a “red” finding under the NRC's Reactor Oversight Process) and designated Browns Ferry in the “multiple/repetitive degraded cornerstone” category in its performance assessment process. As a result of this designation, Browns Ferry is subject to substantially higher NRC oversight. A series of intensive inspections and assessments began in the fall of 2011. In June 2012, TVA presented its plans to improve Browns Ferry's overall performance and reduce plant risk at a public meeting with the NRC and in February 2013, TVA

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notified the NRC that Browns Ferry was ready for the NRC to conduct the significant inspection associated with the red finding (referred to as a 95003 inspection). The NRC completed this inspection and specified 10 actions that needed to be completed by November 2013 as well as additional longer-term actions that must be completed between May and December of 2014. The 10 actions due by November 2013 were completed as scheduled. The NRC conducted additional inspections in December 2013 to review TVA's completion of the November 2013 actions and on January 30, 2014, the NRC announced the results of its inspections. The NRC concluded that the requirements for closure of all 10 Tier 1 commitments had been met, and the NRC closed the red finding. Browns Ferry Unit 1 will continue to have escalated oversight until two performance indicators on safety systems return to the normal band.

Coal-Fired Units . The decision to idle or retire coal-fired units from TVA's generation fleet is being influenced in part by the two environmental agreements reached in April 2011 (the "Environmental Agreements") and by the cost of adding emission control equipment to existing units. See Note 18 — Legal Proceedings — Environmental Agreements . Under the Environmental Agreements, TVA committed, among other things, to retire, on a phased schedule, 18 coal-fired units. As of March 31, 2014 , TVA had retired four coal-fired units with a summer net capability of 574 megawatts ("MW") . Additionally, TVA had idled 14 coal-fired units with a summer net capability of 2,170 MW as of March 31, 2014 .

At its November 14, 2013 meeting, the TVA Board approved the completion of a natural gas-fired facility at the Paradise Fossil Plant ("Paradise") site and subsequent retirement of Paradise coal-fired Units 1 and 2. Paradise Unit 3, a coal-fired unit, would continue to be operated. Additionally, the TVA Board approved the retirement of Colbert Units 1-5 no later than June 30, 2016, as well as the retirement of Widows Creek Unit 8 in the future. TVA is currently evaluating options for idling, controlling, or replacing its Allen Fossil Plant ("Allen") and anticipates completing its evaluation in 2014.

Status of Other Generation Units. Units 1-4 at Raccoon Mountain Pumped-Storage Plant ("Raccoon Mountain") , with a total net summer capability of 1,616 MW, were taken out of service for maintenance activities in 2012 after an inspection of the turbines in each unit identified cracking in the rotor poles and the rotor rims. All four units have subsequently completed maintenance overhauls to correct these cracking problems. However, an unrelated issue was identified in certain oil-filled power cables which convey power out of the facility, resulting in TVA limiting service to three units until resolved. As of March 31, 2014, three of the four Raccoon Mountain units were in service. A return to service date for the fourth unit has not been established.

Cost Reduction Initiatives

TVA is undertaking cost reduction initiatives with the goal of keeping rates low, keeping reliability high, and continuing to fulfill its broader mission of environmental stewardship and economic development. To position itself to achieve this goal, TVA, in conjunction with other actions, completed a high-level realignment of its strategic business units during 2013.

TVA’s current focus is on reducing operating and maintenance costs through further efficiency gains and streamlining the organization. TVA’s goal is to reduce operating and maintenance costs by $500 million by 2015 as compared to its 2013 budget. Business unit leaders will work to identify ways to further streamline their organizations to achieve 2015 operating and maintenance cost reduction targets by eliminating unnecessary work; increasing productivity; minimizing overlaps, redundancies, and handoffs; and ensuring that accountability for compliance rests with its line organizations. Given that approximately 80 percent of TVA's operating and maintenance costs are related to labor, staffing level reductions will necessarily result from this process. The evaluation of staffing levels will take into account attrition, elimination of open positions, and retirements in order to minimize the impact on current personnel. Certain employees will be eligible for severance payments as a result of these cost reduction initiatives. As of March 31, 2014 , TVA had accrued $25 million related to estimated future severance payments. See Note 3 .

Regulatory Compliance

Coal Combustion Residual Facilities. As a result of the December 2008 ash spill at Kingston, TVA retained an independent third-party engineering firm to perform a multi-phased evaluation of the overall stability and safety of all existing embankments associated with TVA’s wet coal combustion residual ("CCR") facilities. The study showed that none of TVA’s other coal-fired plants presented risks similar to the conditions that existed at Kingston at the time of the ash spill, and that the ongoing remediation work being done at the plants should bring all of them within industry standards in terms of stability upon completion. Implementation of recommended actions is ongoing, including risk mitigation steps such as performance monitoring, designing and completing repairs, developing planning documents, obtaining permits, and generally implementing the lessons learned from the Kingston ash spill at TVA’s other CCR facilities.

TVA is planning to convert its wet ash and gypsum facilities to dry storage collection facilities. The expected cost of the CCR work is between $1.5 billion and $2.0 billion, and the work is expected to be completed by December 2022. As of March 31, 2014 , $546 million of costs had been incurred since the start of the work.

TVA is studying the adequacy of CCR storage capacity at its coal-fired plants that currently have dry storage collection facilities. If it is determined that the remaining capacity is not adequate, additional storage facilities will need to be permitted and built, or off-site disposal will need to be arranged.

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Transmission Issues. TVA anticipates expenditures to increase as a result of both new and evolving compliance regulations. On October 17, 2013, the North American Electric Reliability Corporation ("NERC") approved revisions to the Transmission Planning Reliability Standards. TVA began preliminary work in 2006, and is now evaluating the final version of these standards. Costs to comply with these standards are expected to be significant.

On November 21, 2013, Federal Energy Regulatory Commission ("FERC") approved NERC Critical Infrastructure Protection ("CIP") Version 5 Reliability Standards ("Version 5"). Version 5 does not add or remove any substantial requirements; however, it does significantly increase the number of sites within the scope of these standards. The effective compliance date is April 2016. Costs for compliance with these standards cannot be estimated at this time.

On March 7, 2014, FERC issued an order for the development of new physical security standards that will mandate the identification and protection of transmission substations and their associated primary control centers. This new standard, NERC CIP-014-1— Physical Security, is currently being drafted and is expected to be filed with applicable regulatory authorities no later than June 5, 2014. Costs for compliance with this standard cannot be estimated at this time.

In addition, FERC recently issued orders for the development of new geomagnetic disturbance standards. The effects of another high impact, low frequency event, — the widespread electromagnetic pulse resulting from a high altitude initiation of a nuclear device — are also receiving increased attention and may also be the subject of future regulation.

Dam Safety Assurance Initiatives

TVA has an established dam safety program, which includes procedures based on the Federal Guidelines for Dam Safety. One aspect of the guidelines is that dam structures will be periodically reassessed to assure that TVA's dams meet current design criteria. TVA is currently performing reassessments of its assets. These assessments include material sampling of the dam and foundational structures and detailed engineering analysis. As of March 31, 2014 , TVA had completed 19 assessments. Assessments on the remaining 30 dam projects are scheduled to be completed by the fourth quarter of 2017. Nine of the remaining 30 dam assessments are scheduled to be completed in 2014. To date TVA has spent $32 million, and TVA expects to spend an additional $70 million on these assessments.

It is expected that projects will be identified during these assessments, and the work will be appropriately prioritized and completed within TVA’s capital improvement process. Projects are already underway on embankments at Cherokee, Watts Bar, Tellico, and Fort Loudoun Dams to provide additional dam protection at predicted probable maximum flood conditions. Projects are also started at Cherokee and Douglas Dams to improve concrete dam stability.

Environmental Matters

TVA's activities, particularly its power generation activities, are subject to comprehensive regulation under environmental laws and regulations relating to air pollution, water pollution, and management and disposal of solid and hazardous wastes, among other issues. Emissions from all TVA-owned and operated units (including small combustion turbine units of less than 25 MW whose emissions are not required to be reported to the Environmental Protection Agency ("EPA") ) have been reduced from historically high peaks. Emissions of nitrogen oxide ("NO _x ") have been reduced by 91 percent below peak 1995 levels and emissions of sulfur dioxide ("SO ₂ ") have been reduced by 95 percent below 1977 levels through CY 2013. For CY 2013, TVA’s emission of carbon dioxide ("CO ₂ ") from its sources was 72 million tons, a 32 percent reduction from 2005 levels. This includes 279 tons from units rated at less than 25 MWs whose emissions are not required to be reported to the EPA. To remain consistent and provide clear information and to align with the EPA’s reporting requirements, TVA intends to continue to report CO ₂ emissions on a CY basis.

Mercury and Air Toxic Standards for Electric Utility Units

Effective April 16, 2012, the EPA promulgated a final rule establishing standards for hazardous air pollutants emitted from steam electric utilities. The rule requires additional controls for hazardous air pollutants, including mercury, non-mercury metals, and acid gases, for some of TVA’s coal-fired units by 2015-2016. TVA may choose to idle or retire some units in lieu of investing in additional controls and may in some cases construct replacement generation. The rule is expected to be the primary driver of additional emission controls for TVA's coal-fired plants over the next few years. The rule has been challenged in court, and was upheld by the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit").

Cross State Air Pollution Rule.

In July 2011, the EPA announced the final Cross State Air Pollution Rule ("CSAPR") . This rule was to replace the existing Clean Air Interstate Rule ("CAIR") , effective January 1, 2012. CSAPR was to regulate SO ₂ and NO _x emissions from upwind states that are negatively impacting ozone and fine particulate air quality in downwind states. The rule would have required greater SO ₂ and NO _x reductions than those achieved under CAIR. CSAPR was vacated by the D.C. Circuit on August 21, 2012. However, on April 29, 2014, the U.S. Supreme Court issued an opinion reversing the D.C. Circuit, remanding the rule back to the lower court for further proceedings consistent with the Supreme Court’s opinion. Upon completion of the remand proceedings, CSAPR may get reinstated in its original form or a revised form. Alternatively, the EPA may embark on the

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development of a new transport rule to address attainment of the 8-hour ozone standard. Any such revised or new CSAPR rule should not have a significant impact on TVA because of the changes that TVA has made to its generation mix and the controls that TVA is installing on coal-fired units to comply with the new Mercury and Air Toxic Standards. CAIR is expected to remain in place in the interim, pending the completion of the remand proceedings.

Climate Action Plan

To strengthen the Administration's efforts to increase government-wide energy efficiency and sustainability and implement goals in the President’s June 2013 Climate Action Plan, a Presidential Memorandum was issued on December 5, 2013 directing the federal government to consume 20 percent of electricity from renewable sources by 2020, to the extent economically feasible and technically practicable. The new renewable energy consumption goals are 10 percent by 2015, 15 percent by 2016, 17.5 percent by 2018, and 20 percent by 2020. To date, TVA has achieved an agency renewable energy use rate of 9.4 percent, which exceeds the Energy Policy Act goal of 7.5 percent by 2013. TVA uses renewable energy from improvements to hydroelectric facilities and other sources as low-cost ways to meet these renewable energy requirements. TVA is on track to achieve the 2020 goal of 20 percent renewable energy use.

Petition to Expand the Ozone Transport Region

On December 9, 2013, eight of the twelve states that make up the Ozone Transport Region ("OTR") submitted a petition to the EPA requesting that nine states, including Kentucky and Tennessee, be added to the OTR. TVA is unable to predict the outcome of the petition at this time. Should the petition be granted, additional controls may be required on existing electric generating units and other sources in the additional states. New and modified sources would have to install state of the art controls and meet other requirements as well.

Estimated Required Environmental Expenditures

The following table contains information about TVA's current estimates on potential projects related to environmental laws and regulations:



Air, Water, and Waste Quality Estimated Potential Environmental Expenditures ⁽¹⁾ At March 31, 2014 (in millions)
	Estimated Timetable	Total Estimated Expenditures

Site environmental remediation costs ⁽²⁾	2014+	$	16
Coal combustion residual conversion and remediation ⁽³⁾	2014-2023	$	1,400
Proposed clean air projects ⁽⁴⁾	2014-2022	$	1,200
Clean Water Act requirements ⁽⁵⁾	2014-2022	$	400

Notes

(1) These estimates are subject to change as additional information becomes available and as regulations change.

(2) Estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate.

(3) Includes closure of impoundments, construction of lined landfills, and construction of dewatering systems.

(4) Includes air quality projects that TVA is currently planning to undertake to comply with existing and proposed air quality regulations, but does not include any

projects that may be required to comply with potential greenhouse gas regulations or transmission upgrades.

(5) Includes projects that TVA is currently planning to comply with revised rules under the Clean Water Act (i.e. Section 316(b) and effluent limitation guidelines for

steam electric power plants).

Legal Proceedings

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. TVA had accrued approximately $ 272 million with respect to Legal Proceedings as of March 31, 2014 . No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.

For a discussion of certain current material Legal Proceedings, see Note 18 — Legal Proceedings , which discussion is incorporated into this Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations .

Legislative and Regulatory Matters

In December 2010, Congress passed the Continuing Appropriations and Surface Transportation Extensions Act, 2011, which included a two-year freeze on statutory pay adjustments for all executive branch pay schedules and a two-year freeze by executive agencies on base salary increases to all senior executives. On March 26, 2013, legislation that extended the federal

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pay freeze through December 31, 2013 became law. TVA officers were subject to this freeze, and TVA continued compliance with the freeze for managers, specialists, and non-represented employees until it expired on December 31, 2013. The federal salary freeze did not apply to TVA's represented employees, whose salary increases are governed by the terms of collective bargaining agreements; certain promotions and changes in positions; and other forms of non-salary compensation such as lump-sum and incentive-based awards.

Compensation Matters

On February 28, 2014, the President and Chief Executive Officer ("CEO") approved the TVA Long-Term Retention Incentive Plan ("LTRIP") . LTRIP is designed to (1) provide retention-based long-term incentives to TVA officers and key managers who have the ability to directly impact TVA's long-term strategic objectives and (2) provide a competitive level of total compensation. Awards granted under the LTRIP are at the discretion of the Board or the CEO and are based, in part, on personal performance evaluation, talent assessment, retention risk, and other business considerations. Each award represents the right of a participant to receive a lump sum cash payment, subject to vesting, in the amount determined by the Board or the CEO. At this time, no employees have been selected to participate in the LTRIP, and no awards have been granted under the LTRIP.

Off-Balance Sheet Arrangements

At March 31, 2014 , TVA had no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements. Although the financial statements are prepared in conformity with accounting principles generally accepted in the U.S., TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates and Note 1 of the Notes to Consolidated Financial Statements in the Annual Report.

New Accounting Standards and Interpretations

For a discussion of TVA’s new accounting standards and interpretations, see Note 2 , which discussion is incorporated into this Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Governance

At its February 13, 2014, Board meeting, members of the TVA Board of Directors selected Joe H. Ritch as chairman-elect to succeed William B. Sansom when Mr. Sansom’s term ends on May 18, 2014.

Other Matters

On March 4, 2014, President Obama submitted the Fiscal Year 2015 Budget of the U.S. Government (the “Budget”) to Congress. The Budget contains the following language regarding TVA:

Reforming TVA. Since its creation in the 1930s during the Great Depression, the federally owned and operated TVA has been producing electricity and managing natural resources for a large portion of the Southeastern United States. TVA’s power service territory includes most of Tennessee and parts of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and Virginia, covering 80,000 square miles and serving more than nine million people. TVA is a self-financing Government corporation, funding operations through electricity sales and bond financing. The 2014 President’s Budget announced the Administration’s intentions to undertake a strategic review of options for addressing TVA’s financial situation, including the possible divestiture of TVA. Since then, TVA has undergone a major internal review and taken significant steps to improve its future operating and financial performance. In addition, TVA has committed to resolve its capital financing constraints. The Administration supports TVA’s ongoing operating and financial initiatives and intends to closely monitor TVA’s performance. The Administration continues to believe that reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives, can help mitigate risk to taxpayers. The Administration recognizes the important role TVA serves in the Tennessee Valley and stands ready to work with the Congress and TVA’s stakeholders to explore options to end Federal ties to TVA, including alternatives such as a transfer of ownership to State or local stakeholders.

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Under the Nuclear Waste Policy Act of 1982, generators of nuclear energy are required to pay a fee of one-tenth of a cent per kilowatt-hour into the Department of Energy ("DOE") nuclear waste fund. TVA’s annual payment into this fund have ranged from $50 million to $55 million in recent years. In November 2013, the D.C. Circuit ordered the DOE to stop collecting nuclear waste fees until either (1) DOE complies with the Nuclear Waste Policy Act of 1982 or (2) the U.S. Congress enacts an alternative waste management plan. In accordance with the court’s order, DOE has submitted a proposal to the U.S. Congress to change the fee to zero. The proposal is pending before the U.S. Congress and will become effective after 90 days of legislative session from the time of submittal unless the U.S. Congress enacts legislation that impacts the proposed fee change. In January 2014, DOE filed a petition seeking rehearing en banc of the D.C. Circuit’s November 2013 decision, and in March 2014, the D.C. Circuit rejected DOE’s petition. The ultimate outcome of this matter cannot be determined at this time, and TVA is continuing to make the required payments to DOE’s nuclear waste fund.

TVA does not engage, and does not control any entity that is engaged, in any activity listed under Section 13(r) of the Exchange Act, which requires certain issuers to disclose certain activities relating to Iran involving the issuer and its affiliates. Based on information supplied by each such person, none of TVA's directors and executive officers are involved in any such activities. While TVA is an agency and instrumentality of the United States of America, TVA does not believe its disclosure obligations, if any, under Section 13(r), extend to the activities of any other departments, divisions or agencies of the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes related to market risks disclosed under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in the Annual Report. See Note 14 for additional information regarding TVA's derivative transactions and risk management activities.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

TVA’s management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer, and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), evaluated the effectiveness of TVA’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") ) as of March 31, 2014 . Based on this evaluation, TVA’s management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), concluded that TVA’s disclosure controls and procedures were effective as of March 31, 2014 , to ensure that information required to be disclosed by TVA in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by TVA in such reports is accumulated and communicated to TVA’s management, including the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer and members of the Disclosure Control Committee, including the Vice President and Controller (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2014 , there were no changes in TVA's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, TVA's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA’s financial condition, results of operations, and cash flows.

For a discussion of certain current material Legal Proceedings, see Note 18 — Legal Proceedings , which discussion is incorporated by reference into this Part II Item 1, Legal Proceedings.

ITEM 1A. RISK FACTORS

There are no material changes related to risk factors from the risk factors disclosed in Item 1A, Risk Factors in the Annual Report.

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ITEM 6. EXHIBITS



Exhibit No.	Description

3.1	TVA's Bylaws adopted by the TVA Board on May 18, 2006, as amended on April 3, 2008, May 19, 2008, June 10, 2010, and February 13, 2014

10.1	Long-Term Retention Incentive Plan

10.2	Assignment and Assumption Agreement Dated as of April 30, 2014, Between UBS AG, Stamford Branch, and Sumitomo Mitsui Banking Corporation Relating to $1,000,000,000 Winter Maturity Credit Agreement Dated as of December 13, 2012

10.3	Amendment Dated as of December 4, 2013, to Electronotes® Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and Wachovia Securities, LLC

31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer

32.1	Section 1350 Certification Executed by the Chief Executive Officer

32.2	Section 1350 Certification Executed by the Chief Financial Officer

101.INS *	TVA XBRL Instance Document

101.SCH *	TVA XBRL Taxonomy Extension Schema

101.CAL *	TVA XBRL Taxonomy Extension Calculation Linkbase

101.DEF *	TVA XBRL Taxonomy Extension Definition Linkbase

101.LAB *	TVA XBRL Taxonomy Extension Label Linkbase

101.PRE *	TVA XBRL Taxonomy Extension Presentation Linkbase

* In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under this section.

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SIGNATURES

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



Date:	May 5, 2014		TENNESSEE VALLEY AUTHORITY
			(Registrant)


		By:	/s/ William D. Johnson______________
			William D. Johnson
			President and Chief Executive Officer (Principal Executive Officer)
		By:	/s/ John M. Thomas, III _____________
			John M. Thomas, III
			Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX



Exhibit No.	Description

3.1	TVA's Bylaws adopted by the TVA Board on May 18, 2006, as amended on April 3, 2008, May 19, 2008, June 10, 2010, and February 13, 2014

10.1	Long-Term Retention Incentive Plan

10.2	Assignment and Assumption Agreement Dated as of April 30, 2014, Between UBS AG, Stamford Branch, and Sumitomo Mitsui Banking Corporation Relating to $1,000,000,000 Winter Maturity Credit Agreement Dated as of December 13, 2012

10.3	Amendment Dated as of December 4, 2013, to Electronotes® Selling Agent Agreement Dated as of June 1, 2006, Among TVA, LaSalle Financial Services, Inc., A.G. Edwards & Sons, Inc., Citigroup Global Markets Inc., Edward D. Jones & Co., L.P., First Tennessee Bank National Association, J.J.B. Hilliard, W.L. Lyons, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, and Wachovia Securities, LLC

31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer

32.1	Section 1350 Certification Executed by the Chief Executive Officer

32.2	Section 1350 Certification Executed by the Chief Financial Officer

101.INS *	TVA XBRL Instance Document

101.SCH *	TVA XBRL Taxonomy Extension Schema

101.CAL *	TVA XBRL Taxonomy Extension Calculation Linkbase

101.DEF *	TVA XBRL Taxonomy Extension Definition Linkbase

101.LAB *	TVA XBRL Taxonomy Extension Label Linkbase

101.PRE *	TVA XBRL Taxonomy Extension Presentation Linkbase

EXHIBIT 3.1

BYLAWS

THE TENNESSEE VALLEY AUTHORITY

PREAMBLE

These Bylaws of the Tennessee Valley Authority are adopted by the Board of Directors of the Tennessee Valley Authority in accordance with Section 4(e) of the Tennessee Valley Authority Act of 1933, as amended (said Act hereafter referred to as the “TVA Act”).

ARTICLE I

Board of Directors

Section 1.1 Number; Selection of Chairman . In accordance with Section 2(a)(1) of the TVA Act, the Board of Directors shall consist of nine members appointed by the President of the United States by and with the advice and consent of the United States Senate. The Board of Directors shall select one of its members to serve as Chairman of the Board. The Chairman shall serve a term of two years unless the Board decides otherwise. The term of the first Chairman selected under the provisions of Section 2(a)(2) of the TVA Act shall expire on May 18, 2008, and each subsequent term of a Chairman of the Board shall expire on May 18 of each subsequent even-numbered calendar year, unless the Board decides otherwise. A Chairman’s successor shall be selected by the Board at least thirty (30) calendar days prior to the end of the term of the then current Chairman; provided, however, that if the position of Chairman should become vacant prior to the end of a term due to resignation or any other reason, the Board shall, not later than thirty (30) calendar days after the date upon which such vacancy occurs, select a new Chairman to serve out the remainder of the current term.

Section 1.2 Regular Meetings . Regular meetings of the Board of Directors will be held at least four times each calendar year at such places and at such times as the Board of Directors may from time to time determine, consistent with the requirements of Section 2(g)(2) of the TVA Act. Notice of, and agendas for, regular meetings shall be given to all Board members in advance of the meeting and shall be publicly disclosed in advance in accordance with the requirements of the Government in the Sunshine Act, as amended.

Section 1.3 Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, as the person or persons calling the meeting shall fix. Notice of the time, date and place of, and agenda for, such meeting shall be given to all members in advance of the meeting and shall be publicly disclosed in advance in accordance with the requirements of the Government in the

Sunshine Act, as amended.

Section 1.4 Remote Attendance at Meetings . Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of such Board or committee by means of conference telephone, audio/video transmission, or similar communications medium, by means of which all persons participating in the meeting can simultaneously communicate on a real-time basis with all other participants, and participation in a meeting pursuant to this bylaw shall constitute presence in person at such meeting; provided however, that personal attendance of Board members at meetings of the Board is strongly encouraged. The proceedings of any Board meeting covered by this Section 1.4 shall be public, and proper notice of the time, date, and place of, and agenda for, said meeting shall be publicly disclosed in advance in accordance with the requirements of the Government in the Sunshine Act, as amended.

Section 1.5 Quorum; Vote Required for Action . In accordance with the provisions of Section 2(e) of the TVA Act, five of the members of the Board shall constitute a quorum for the transaction of business. Except as otherwise provided in these Bylaws or required by law, the vote of a majority of the members either physically present or participating by remote attendance in accordance with Section 1.4 of these Bylaws shall be the act of the Board of Directors.

Section 1.6 Vacancies . In the event that vacancies cause the Board to have fewer than five members for any period of time, during any such period of time the members in office may, as a Board without a quorum, continue to exercise those powers of the Board which are necessary to assure continuity of operations of the Corporation along the lines established while the Corporation was guided by a quorum of the Board, but shall not have the authority to direct the Corporation into new areas of activity, to embark on new programs, or to change the Corporation’s existing direction.

Section 1.7 Organization . Meetings of the Board of Directors shall be presided over by the Chairman of the Board. If the Chairman is unable to preside at a meeting of the Board, the Chairman shall designate a member of the Board to preside in his or her absence; provided that, in the absence of such a designation, the Chairman of the audit committee shall preside in the absence of the Chairman of the Board.

Section 1.8 Notational Approvals by Individual Directors . As long as personal notice of said action for consideration by the Board of Directors, or a committee thereof, is provided to individual members of the Board, or of the appropriate committee thereof, by electronic mail or as otherwise specified by said individual Board member, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if a majority of all members of the Board or such committee, as the case may be, approve such action independently and individually in writing. Members shall normally have seven calendar days during which they are to submit their individual votes unless the Chairman of the Board or the Chairman of said committee of the Board, as appropriate, has specified that the deadline for voting on a particular notational item will be a different number of calendar days; provided, that in no event shall the deadline be fewer than three calendar days.

The writings constituting such approval shall be filed with the minutes of proceedings of the next Board or committee meeting as appropriate.

Section 1.9 Powers of the Board of Directors . The principal responsibilities of the Board of Directors are to establish the broad strategies, goals, objectives, long-range plans, and policies of the Corporation in a manner consistent with the missions set forth in the TVA Act and to ensure that those are achieved by the Chief Executive Officer. Accordingly, the Board of Directors has those powers and authorities vested in the Board under the provisions of the TVA Act or under other provisions of law to carry out those principal responsibilities. The Board of Directors may, to the extent permitted by law, delegate authorities of the Board to the Chief Executive Officer or other officials of the Corporation.

Section 1.10 Authorities of the Chairman of the Board . The principal responsibilities of the Chairman of the Board are not executive in nature and are those vested in the Chairman of the Board under these Bylaws. Accordingly, the Chairman of the Board has those authorities as are necessary or appropriate to carry out the aforementioned principal responsibilities.

Section 1.11 Compensation of Board Members . Members shall be compensated in accordance with the provisions of Section 2(f) of the TVA Act and other applicable provisions of law.

ARTICLE II

Committees

Section 2.1 Committees . There shall, as a minimum, be an audit committee of Board members as required by Section 2(g)(1)(I) of the TVA Act. In addition, the Board may, from time to time by resolution passed by a majority of the Board, designate one or more committees of Board members and specify the responsibilities and duties of each such committee. The Chairman of the Board shall appoint Board members to serve on each committee. All appointees for the membership of committees, and any changes to committee membership, shall be submitted by the Chairman of the Board to the Board for its approval as a single slate of appointees. The Chairman of the Board shall select and designate which Board member on each committee shall serve as Chairman of said committee. The Chairmen and members of committees shall serve terms that run concurrently with the term of the Chairman of the Board who appointed them to those positions.

Section 2.2 Committee Rules . Unless the Board of Directors otherwise provides, each committee designated by the Board may make, alter and repeal rules for conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business.

Section 2.3 Committee Retention of Outside Advisors . It is recognized that the committees of the Board may require the engagement of outside advisors with certain expertise to assist such committees and the Board in competently addressing their responsibilities and duties. The engagement of outside advisors will be made in accordance with Board-approved guidance. Because the Board deems it prudent and appropriate to ensure stability and continuity in its outside advisors in light of transitions in membership on the Board, the termination of the engagement of an outside advisor during the term of an engagement contract with a Board committee will require approval by the Board of Directors. To provide for notice and consideration, a vote on a motion to approve any such termination shall be taken no earlier than the next regularly scheduled meeting of the Board following the meeting at which such motion is presented. None of the provisions of this section are applicable to the audit committee of the Board of Directors, which shall have independent authority to engage and terminate engagement of its outside advisors.

ARTICLE III

Officers

Section 3.1 Chief Executive Officer; Officers; Selection; Qualifications; Resignation; Vacancies . The Board of Directors shall choose and appoint a person to serve as Chief Executive Officer of the Tennessee Valley Authority in accordance with the requirements and qualifications specified for such position in Section 2(h) of the TVA Act. The Chief Executive Officer shall serve at the pleasure of the Board of Directors. With the advice and consent of the Board in accordance with Section 3(a) of the TVA Act, the Chief Executive Officer shall choose and appoint such officers, managers, assistant managers, employees, attorneys, and agents as are necessary for the transaction of the business of the Corporation.

Section 3.2 Authorities and Duties of Chief Executive Officer . The principal responsibilities of the Chief Executive Officer are to achieve the broad strategies, goals, objectives, long-range plans, and policies established by the Board of Directors for the Corporation and to ensure the continuity and reliability of the Corporation’s operations. Accordingly, the Chief Executive Officer has all powers, authorities, and duties necessary or appropriate to carry out those principal responsibilities, including but not limited to those to carry out projects and activities approved by the Board of Directors or to maintain continuity and/or reliability of ongoing operations. In addition, the Chief Executive Officer shall have all powers, authorities, and duties which are either: (i) delegated to the Chief Executive Officer by action of the Board; or (ii) vested in the Chief Executive Officer under the provisions of the TVA Act or any other provision of law.

Section 3.3 Primary Spokesperson . The Chief Executive Officer shall be the Corporation’s primary spokesperson in communications with external individuals and entities.

Section 3.4 Compensation . In accordance with the provisions of Section 2(i) of the TVA Act, the Board of Directors shall approve: (i) a compensation plan that specifies all compensation (including salary or any other pay, bonuses, benefits, incentives, and any other form of remuneration) for the Chief Executive Officer and employees of the Corporation and (ii) on the recommendation of the Chief Executive Officer, shall approve the salaries of employees whose annual salaries would be in excess of the annual rate payable for positions at level IV of the Executive Schedule under section 5315 of title 5, United States Code. In accordance with the provisions of Section 2(g)(1)(G) of the TVA Act, the Board of Directors shall approve all compensation (including salary or any other pay, bonuses, benefits, incentives, and any other form of remuneration) of all managers and technical personnel that report directly to the Chief Executive Officer (including any adjustment to compensation).

Section 3.5 Interim Chief Executive Officer . The Chief Executive Officer shall designate to the Board of Directors in writing which executive officer of the Corporation, or what succession of executive officers of the Corporation, is authorized to serve in the position of Chief Executive Officer on an interim basis in the event that the Chief Executive Officer becomes unable to carry out his duties and responsibilities due to incapacitation, death, or absence for any other reason. In such an event, the designated executive officer of the Corporation shall serve as the Chief Executive Officer until such time as the Board of Directors may decide otherwise. The Chief Executive Officer may, from time to time, revise the aforementioned designation by informing the Board of Directors of such change in writing.

ARTICLE IV

TVA Board Practices System

Section 4.1 TVA Board Practices System . The “TVA Board Practices System” shall contain practices approved by the Board for inclusion in the System which govern various Board and Board Committee processes and activities or interpret provisions of these Bylaws. These practices provide guidance to members of the Board and provide guidance or delegate additional general authorities to the Chief Executive Officer in those cases where an amendment to these Bylaws to accomplish such purposes is not deemed to be necessary.

Section 4.2 Adoption of New TVA Board Practices . The adoption by the Board of Directors of any new TVA Board Practice shall require a vote in the affirmative by not less than a majority of those members of the Board voting.

ARTICLE V

Indemnification

Section 5.1 Right to Indemnification . The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended in a manner more favorable to indemnitees, any person (an “Indemnitee”) who was or is made or is threatened to be made a party or is otherwise involved in any threatened or pending claim, action, suit or proceeding,

whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he, she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in Section 5.3, the Corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation. At the Indemnitee’s election, the Corporation shall provide or arrange for legal representation of the Indemnitee in defending any proceeding against said Indemnitee in advance of its final disposition. The indemnification provided by this Article V shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.

Section 5.2 Payment of Expenses . The Corporation shall pay the expenses incurred personally by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that any payment of such expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified under this Article V or otherwise.

Section 5.3 Other Sources . The Corporation’s obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise.

Section 5.4 Amendment or Repeal . Any repeal or modification of the foregoing provisions of this Article V shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification.

Section 5.5 Other Indemnification and Prepayment of Expenses . This Article V shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action.

Section 5.6 Indemnification Contracts . The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee

benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article V.

Section 5.7 Effect of Amendment . Any amendment, repeal or modification of any provision of this Article V shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article V and existing at the time of such amendment, repeal or modification.

Section 5.8 Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article V.

Section 5.9 Savings Clause . If this Article V or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation as to costs, charges and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article V that shall not have been invalidated and to the full extent permitted by applicable law.

ARTICLE VI

Miscellaneous

Section 6.1 Fiscal Year . The fiscal year of the Corporation shall be October 1 through September 30, unless specified otherwise by Act of Congress.

Section 6.2 Seal . The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors.

Section 6.3 Conflict-of-Interest Policy . In accordance with the requirements of Section 2(g)(1)(E) of the TVA Act, the Board of Directors shall maintain and may, from time to time, revise a conflict-of-interest policy applicable to members of the Board, the Chief Executive Officer, and all employees of the Corporation. Any revisions to the aforementioned conflict-of-interest policy adopted by the Board of Directors shall be submitted to the United States Congress.

Section 6.4 Form of Records . Any records maintained by the Corporation in the regular course of its business, including its books of account and minute books, may be kept on, or be in the form of any

information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time.

Section 6.5 Reliance Upon Books and Records . A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.

Section 6.6 TVA Act Governs . In the event of any conflict between the provisions of the TVA Act, or other applicable provisions of law, and these Bylaws, the provisions of the TVA Act, or other applicable provisions of law, shall govern.

Section 6.7 Severability . If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the TVA Act, or other applicable provisions of law, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the TVA Act, or other applicable provisions of law, that are not themselves invalid, illegal, unenforceable or in conflict with the TVA Act, or other applicable provisions of law) shall remain in full force and effect.

Section 6.8 Amendments . To the extent consistent with the provisions of the TVA Act, the Board of Directors shall have the power to adopt, amend or repeal Bylaws of the Corporation. To provide for notice and consideration, a vote on a motion to approve any amendments of the Bylaws shall be taken no sooner than the next meeting of the Board following the meeting at which such motion is presented.

EXHIBIT 10.1

February, 2014

TVA Long-Term Retention Incentive Plan

I. Purpose

The TVA Long-Term Retention Incentive Plan (“Plan”) is designed to (A) provide retention-based long-term incentives to eligible Tennessee Valley Authority ("TVA") officers and key managers to encourage them to remain with TVA and (B) provide a competitive level of total compensation. Awards granted under the Plan are intended to provide retention incentives to participants similar to the retention incentive provided by restricted stock or restricted stock units in publicly-traded companies.

The Plan, in combination with the Executive Long-Term Incentive Plan ("ELTIP"), enables TVA to provide a targeted level of total long-term compensation that is comprised of both (1) a variable, at-risk performance-based component and (2) a retention-based time-vested component. The retention-based portion of the mix to be awarded under this Plan will typically be targeted at 20 percent to 30 percent of each Participant’s total targeted long-term compensation. The other 70 percent to 80 percent of long-term compensation will be performance-based and delivered under the ELTIP.

II. Eligibility

All TVA officers and key managers who have the ability to directly impact TVA’s long-term strategic objectives (each, an "Executive") are eligible to participate in the Plan. An Executive must be a participant in both TVA’s Executive Annual Incentive Plan ("EAIP") and in TVA’s ELTIP in order to be eligible to participate in the Plan (each, an "Eligible Employee").

III. Participation

Participation in the Plan, as well as each Award (as defined in Section VII) granted under the Plan, is at the discretion of the TVA Board of Directors ("Board") or the President and Chief Executive Officer ("CEO"). The Board or the CEO shall select the Eligible Employees to participate in the Plan (each, a "Participant") and receive an Award during a year. An employee's eligibility and participation in one year does not guarantee eligibility for any subsequent year.

IV. Grant Frequency

Awards shall be granted annually, during the second quarter of each fiscal year (typically in January) following an Annual Compensation Review (as described in Section V). In the event an individual

becomes an Eligible Employee during a year or is promoted or transferred into a position that otherwise would have received an Award (including an increase in the Award amount), after Awards have been approved for that year, the Board or CEO shall be authorized to grant an Award (or an additional Award amount) to such newly eligible, promoted or transferred employee, as applicable. Unless the Board or the CEO determines it is not in the best interests of TVA, any Awards granted off-cycle shall be based on the same types of conditions and contingencies as contained in the Awards for similarly situated Participants which were most recently approved by the Board or CEO in accordance with Section III.

V. Annual Compensation Review

Compensation for all officers and key managers will be reviewed annually. The review is intended to ensure that all officers and key managers receive a competitive level of compensation similar to that provided to individuals in comparable positions in TVA’s compensation peer group. This review will typically be conducted during the first quarter of each fiscal year.

VI. Award Determination/Opportunity (Size)

Awards granted under the Plan are typically targeted at 20 percent to 30 percent of the total targeted long-term compensation for each Participant. Total targeted long-term compensation is based on competitive market data derived from published surveys, benchmark analysis, and proxy reviews for each position. The basis of the target long-term compensation for each position is a percentage of each Participant’s salary.

Actual Awards granted under the Plan, if any, are at the discretion of the Board or the CEO and are based on personal performance evaluation, talent assessment, retention risk, and other business considerations. Actual Awards are intended to range from -20 percent to +20 percent of the target award. The maximum Award granted to a participant shall not exceed 120 percent of the target award. In the event performance is determined to be unsatisfactory, no Award will be granted.

VII. Award Grants - Rights and Payments

Awards shall be granted to Participants, and each "Award" represents the right of a Participant to receive a lump sum cash payment, subject to vesting, in the amount determined by the Board or CEO, as set forth above.

VIII. Vesting of Awards

At the Grant Date, the Award will set forth a specified date ("Normal Vesting Date") on which the Award shall become fully vested. Typically, the period from the Grant Date through the Normal Vesting Date (the "Restriction Period") will be three years. For example, an Award granted on January 1, 2012 will have a Normal Vesting Date on December 31, 2014. However, in certain cases, the Restriction Period may be less than three years, but in no event shall the Restriction Period for any Award be less than two years (including any off-cycle grants). The Restriction Period is established at the time the Award is granted and must be approved by the Board or CEO. If a Participant has remained employed with TVA

without interruption during the Restriction Period and the criteria specified for payment of the Award, if any, have been satisfied, the Award shall be 100% vested and paid to the Participant in accordance with Section IX below.

Termination Prior to Normal Vesting Date . Except as otherwise determined by the Board or CEO or provided in subsections B, C or D below, if prior to the Normal Vesting Date, the Participant's employment with TVA terminates for any reason, the Award shall terminate and be completely forfeited on the date of such termination of the Participant's employment. Notwithstanding anything in this Section VIII to the contrary, if the Participant is terminated for "Cause" from TVA prior to payment pursuant to Section IX., the Award will immediately and automatically without any action on the part of the Participant or TVA, be forfeited by the Participant. For purposes of this Plan, termination “for cause” shall be defined as termination as a result of any act on your part resulting in or involving any of the following: (1) insubordination, intentional neglect of duties, or refusal to cooperate with investigations of your or TVA's business practices; (2) criminal indictment or conviction of a felony or crime of moral turpitude; or (3) misconduct involving dishonesty, fraud, or gross negligence that directly results in significant economic or reputational harm to TVA.

Death . If a Participant dies while employed and before the Normal Vesting Date for an Award, the Plan Administrator (as defined in Section X.A) shall waive the employment condition, and the Award shall be 100% vested on the date of the Participant’s death. The Award shall be paid to the Beneficiary (as defined below) in accordance with Section IX below. A Participant's "Beneficiary" means the Participant's surviving spouse, unless the Participant designates one or more persons or entities to be the Participant's Beneficiary. The Participant may make, change or revoke a Beneficiary designation at any time before his or her death without the consent of the Participant’s spouse or anyone the Participant previously named as a Beneficiary, and the Participant may designate primary and secondary Beneficiaries. A Beneficiary designation must comply with procedures established by the Plan Administrator and must be received by the Plan Administrator before the Participant’s death. If the Participant dies without a valid Beneficiary designation (as determined by the Plan Administrator) and has no surviving spouse, the Beneficiary shall be the Participant’s estate.

Disability . If a Participant incurs a "Disability" (as defined in the rules and regulations of the TVA retirement system) while employed and before the Normal Vesting Date for an Award, the Plan Administrator shall waive the employment condition, and the Award shall be 100% vested on the date of the Participant's Disability. The Award shall be paid to such Participant in accordance with Section IX below.

Involuntary Termination . If TVA involuntarily terminates the Participant's employment (other than for Cause, as described in Section VIII.A) prior to the Normal Vesting Date, the Plan Administrator shall waive the employment condition, and the Award shall be 100% vested on the date of such Participant's involuntary termination. The Award shall be paid to such Participant in accordance with Section IX below.

IX. Payment of Awards

Each Award shall be paid in a lump sum as soon as practical following the earliest to occur of (the "Vesting Date"): (A) the Normal Vesting Date, (B) the Participant's death, (C) the Participant's Disability, or (D) the date of the Participant's involuntary termination from TVA; but in no event shall such payment be made later than March 15 of the calendar year following the Vesting Date. Each Award shall be paid in cash after deducting the amount of applicable Federal, state, and local withholding taxes of any kind required by law to be withheld by TVA. All Awards shall be payable out of TVA's general assets. Each Participant’s or each Beneficiary’s claim, if any, for the payment of an Award, shall not be superior to that of any general and unsecured creditor of TVA. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between TVA and any Participant, Beneficiary or any other person. If an error or omission is discovered in any of the determinations, the Plan Administrator shall cause an appropriate equitable adjustment to be made in order to remedy such error or omission.

X. Plan Administration

Powers of the Committee . The Plan shall be administered by the Senior Vice President, Human Resources & Communications of TVA (the "Plan Administrator") unless otherwise delegated by the Board or CEO. Subject to the express provisions of this Plan, the Plan Administrator shall have the power, authority, and sole and exclusive discretion to construe, interpret and administer this Plan, including without limitation, the power and authority to make factual determinations relating to, and correct mistakes in, Awards, and to take such other action in the administration and operation of this Plan as the Plan Administrator deems appropriate under the circumstances, including but not limited to the following:


1.	The Plan Administrator may, from time to time, prescribe forms and procedures for carrying out the purposes and provisions of the Plan.


2.	The Plan Administrator shall have the authority to prescribe the terms of any communications made under this Plan, and to interpret and construe this Plan, any rules and regulations under this Plan and the terms and conditions of any Award, and answer all questions arising under the Plan, including questions on the proper construction and interpretation of the Plan.


3.	The Plan Administrator may (a) notify each Participant that he or she has been selected as a Participant and (b) obtain from each Participant such agreements and powers and designations of Beneficiaries as the Plan Administrator shall reasonably deem necessary for the administration of the Plan.


4.	To the extent permitted by law, the Plan Administrator may at any time delegate such powers and duties to one or more other executives or managers, whether ministerial or discretionary, as the Plan Administrator may deem appropriate, including but not limited to, authorizing the Plan Administrator’s delegate to execute documents on the Plan Administrator’s behalf.

Determinations by Plan Administrator . All decisions, determinations and interpretations by the Plan Administrator regarding the Plan, any rules and regulations under the Plan, and the terms and conditions of or operation of any Plan Award, shall be final and binding on all Participants, Beneficiaries, heirs, assigns, or other persons holding or claiming rights under the Plan or any Award. The Plan Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, in making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of the Board, CEO or any other employee of TVA and such attorneys, consultants and accountants as it may select.

XI. Amendment or Termination of the Plan

The Board, or its delegate, may at any time amend or terminate the Plan without the consent of any Participant, Beneficiary or other person; provided, that TVA and the Plan Administrator, after any such termination, shall continue to have full administrative powers to take any and all action contemplated by the Plan which is necessary or desirable and to make payment of any outstanding Awards earned by Participants in accordance with terms of the Plan. No amendment or termination of the Plan may adversely affect, other than as specified in this Plan, any right acquired by any Participant or any Beneficiary under an Award granted before the effective date of such amendment or termination. Upon termination of the Plan, distribution of vested Awards shall be made to Participants and Beneficiaries in the manner and at the time described in Section IX, unless the Board, the Board’s delegate, or the CEO determines in its sole discretion that all such amounts shall be distributed upon termination of the Plan.

XII. Miscellaneous


A.	TVA Compensation Plan . Approvals regarding Awards granted under the Plan for each Participant, such as the target award opportunity and the amount of actual Awards, will be made in accordance with the TVA Compensation Plan and the delegations thereunder.

Non-Transferability of Rights and Interests . Neither a Participant nor a Beneficiary may alienate, assign, transfer or otherwise encumber his rights and interests under this Plan; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily for the satisfaction of the debts of, or other obligations or claims against, such person, and any attempt to do so shall be null and void. In the event of a Participant’s death, the Plan Administrator shall authorize payment of any Award due a Participant under this Plan to the Participant’s Beneficiary.


C.	Severability . In the event that any provision or portion of this Plan shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of the Plan shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.

Limitation of Rights . Nothing in this Plan shall be construed to give any Employee any right to be selected as a Participant or to receive an Award or to be granted an Award other than as is provided in this document. Nothing in this Plan or any Award issued pursuant to the Plan shall be construed to limit in any way the right of TVA to terminate a Participant’s employment at any time, without regard to the effect of such termination on any rights such Participant would otherwise have under this Plan, or give any right to a Participant to remain employed by TVA as an Executive or in any other particular position or capacity or at any particular rate of remuneration. During the lifetime of the Participant, only the Participant (or the Participant’s legal representative) may exercise the rights and receive the benefits of any Award.

Governing Law . TVA is a corporate agency and instrumentality of the United States, and this Plan shall be governed by and construed under Federal law. In the event Federal law does not provide a rule of decision for any matter or issue under the Plan, the law of the State of Tennessee shall apply; provided, however, in no event shall Tennessee’s choice of law provisions apply. The Plan and payment of Awards are intended to be interpreted, operated, and administered in a manner consistent with the short-term deferral exemption from Section 409A of the Internal Revenue Code and official guidance thereunder.

EXHIBIT 10.2

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (this “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between UBS AG, STAMFORD BRANCH (the “ Assignor ”) and SUMITOMO MITSUI BANKING COPORATION (the “ Assignee ”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor’s rights and obligations as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

1. Assignor: UBS AG, STAMFORD BRANCH

2. Assignee: SUMITOMO MITSUI BANKING CORPORATION

3. Borrower: Tennessee Valley Authority

4. Agent: Royal Bank of Canada, as the administrative agent


5. Credit Agreement:	Winter Maturity Credit Agreement dated as of December 13, 2012 among Borrower, the Lenders parties thereto and Royal Bank of Canada, as Administrative Agent

6. Assigned Interest:



Aggregate Amount of Commitment/Loans for all Lenders	Amount of Commitment/ Loans Assigned	Percentage Assigned of Commitment/Loans
US$1,000,000,000	US$150,000,000	15.000000000%

Effective Date: April 30, 2014

The terms set forth in this Assignment and Assumption are hereby agreed to:



		UBS AG, STAMFORD BRANCH, as Assignor

		By: UBS Securities LLC, as Agent

		By:	/s/ Lisa Murray ______________
			Name: Lisa Murray
			Title: Associate Director Banking Products Services, US
		By:	/s/ Craig Pearson
			Name: Craig Pearson
			Title: Associate Director

		SUMITOMO MITSUI BANKING CORPORATION, as Assignee

		By:	/s/ Shuji Yabe
			Name: Shuji Yabe
			Title: Managing Director



Consented to and Accepted:

ROYAL BANK OF CANADA, as Administrative Agent

By:	/s/ Yvonne Brazier
	Name: Yvonne Brazier
	Title: Manager, Agency

Consented to:
ROYAL BANK OF CANADA, as L/C Issuer
By:	/s/ Frank Lambrinos
	Name: Frank Lambrinos
	Title: Authorized Signatory


TENNESSEE VALLEY AUTHORITY

By:	/s/ Tammy W. Wilson
	Name: Tammy Wilson
	Title: VP & Treasurer

ANNEX 1

STANDARD TERMS AND CONDITIONS

FOR ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties .

1.1 Assignor . The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2 Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.01 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2. Payments . From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other

amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

EXHIBIT 10.3

This Amendment to the Selling Agent Agreement (this “Amendment”) has been filed to provide investors with information regarding its terms. It is not intended to provide any other factual information about the Tennessee Valley Authority. The representations and warranties of the parties in this Amendment were made to, and solely for the benefit of, the other parties to this Amendment. The assertions embodied in the representations and warranties may be qualified by information included in schedules, exhibits, or other materials exchanged by the parties that may modify or create exceptions to the representations and warranties. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

December 4, 2013

To the Agents listed

on the signature page hereto.

Reference is hereby made to that certain Selling Agent Agreement by and among Tennessee Valley Authority (the “Company”) and the Agents named therein (the “Agents”) dated as of June 1, 2006 (the “Selling Agent Agreement”) pursuant to which the Company proposes to issue and sell from time to time up to $3,000,000,000 aggregate principal amount of its electronotes® (the “Bonds”). The parties wish to amend the Selling Agent Agreement as provided herein (this “Amendment”).

Now therefore, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows:

1. Defined Terms . Capitalized terms used but not defined herein shall have the meanings

ascribed to such terms in the Selling Agent Agreement.

2. Amendments .

(a) The addressees of the Selling Agent Agreement are hereby amended as follows:

A.G. Edwards & Sons, Inc., One North Jefferson, St. Louis, Missouri 63103 is deleted.

First Tennessee Bank National Association is changed to FTN Financial Securities Corp.

J.J.B. Hilliard, W.L. Lyons, Inc., Hilliard Lyons Center, 5 ^th Floor, P.O. Box 32760, Louisville, Kentucky 40232 is replaced with J.J.B. Hilliard, W.L. Lyons LLC, 500 West Jefferson Street, 8 ^th Floor, Louisville, KY 40202.

LaSalle Financial Services, Inc., 327 Plaza Real, Suite 225, Boca Raton, Florida 33432 is replaced with Incapital LLC, 200 South Wacker Drive, Suite 3700, Chicago, Illinois 60606.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, 4 World Financial Center, Floor 15, New York, New York 10080 is replaced with Merrill Lynch, Pierce, Fenner & Smith Incorporated, One Bryant Park, New York, NY 10036.

Morgan Stanley & Co. Incorporated is changed to Morgan Stanley & Co. LLC.

Wachovia Securities, LLC, 301 South College Street, One Wachovia Center, Charlotte, North Carolina 28288 is replaced with Wells Fargo Advisors, LLC, One North Jefferson, St. Louis, MO 63103.

(b) The first two sentences of the third paragraph of the introduction to the Selling Agent Agreement are deleted in their entirety and replaced by the following:

The Company has prepared the Power Bonds Offering Circular dated December 4, 2013, relating to the Bonds (the “Power Bonds Offering Circular”) for the purpose of supplying information in respect of the offering of the Bonds. TVA incorporates by reference into the Power Bonds Offering Circular the information included in reports that TVA files with the Securities and Exchange Commission (the “SEC”). The information that TVA incorporates by reference is considered to be part of the Power Bonds Offering Circular, and information that TVA subsequently files with the SEC will automatically update and, where different, supersede the information in the Power Bonds Offering Circular and in TVA’s prior SEC filings. The Power Bonds Offering Circular, as most recently amended, supplemented, or revised, together with (i) the information incorporated by reference therein and (ii) the applicable supplement to the Power Bonds Offering Circular that sets forth only the terms of a particular installment of Bonds (a “Pricing Supplement”), is referred to herein as the “Offering Circular.”

The Company reserves the right, after consultation with Incapital LLC (the “Purchasing Agent”), to enter into agreements substantially identical hereto with other agents.

(d) Section II(b) is amended by changing Maureen H. Dunn to Ralph E. Rodgers.

(e) Section II(c) is amended by changing PricewaterhouseCoopers LLP to Ernst & Young LLP.

(f) Section II(c)(i)(B) is amended by deleting the following language therefrom:

any decrease in the total proprietary capital (to the extent quantifiable) in excess of $200,000,000 or

(g) Section III(e) is amended by adding the following language after “a copy of its annual financial statements for such year”:

(unless such annual financial statements are filed with the SEC, in which case the Company will not be required to furnish such statements to the Agents)

(h) Section V(j) is deleted in its entirety and replaced by the following:

The Bonds are rated “Aaa” by Moody’s Investor Services, Inc. and “AAA” by Fitch Ratings or such other rating as to which the Company shall have most recently notified the Agents pursuant to Section III(h) hereof.

(i) Section VIII is revised by replacing “Senior Vice President, Treasurer/Investor Relations” with “Vice President and Treasurer”.

(j) A new Section XVIII is hereby added as follows:

Pursuant to that certain Asset Purchase Agreement by and among Incapital Holdings LLC, a Delaware limited liability company (“Incapital Holdings”), LaSalle Bank National Association (“LBNA”) and LaSalle Financial Services, Inc. (“LFSI” and together with LBNA, the “Sellers”), dated as of February 8, 2008, as amended and restated through the date hereof (the “Asset Purchase Agreement”), and that certain Assignment and Assumption Agreement dated as of March 3, 2008 by and among LBNA, LFSI, Incapital LLC and Incapital Holdings (the “Assignment and Assumption Agreement”), the Sellers have sold, conveyed, transferred and assigned to Incapital Holdings and Incapital LLC, and Incapital Holdings and Incapital LLC have purchased and accepted assignment of , certain assets, including, but not limited to, the Selling Agent Agreement.

Incapital LLC expressly assumes all of the obligations of LFSI under the Selling Agent Agreement as specified in the Asset Purchase Agreement and the Assignment and Assumption Agreement.

Incapital LLC acknowledges for the Company’s benefit that, as specified in the Assignment and Assumption Agreement, Incapital LLC has undertaken and agreed to accept, assume, perform or otherwise discharge all of the obligations of LFSI as specified in the Selling Agent Agreement and to be bound in all respects, subject to all limitations herein contained, by the provisions of the Selling Agent Agreement.

(k) New Section XIX is hereby added as follows:

The Company hereby waives all liability of LFSI arising under the Selling Agent Agreement, after March 6, 2008.

(l) The second sentence of the first paragraph of Exhibit B to the Selling Agent Agreement is hereby deleted in its entirety and replaced by the following:

The Bonds will be offered by Incapital LLC (the “Purchasing Agent”), and Citigroup Global Markets Inc., Edward D. Jones & Co., L.P., FTN Financial Securities Corp., J.J.B. Hilliard, W.L. Lyons LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, and Wells Fargo Advisors, LLC (collectively, the “Agents”) pursuant to a Selling Agent Agreement among the Company and the Agents dated as of June 1, 2006 (as may be amended from time to time, the “Selling Agent Agreement”), and if the Bonds are to be purchased by the Purchasing

Agent as principal for resale to others, one or more terms agreements substantially in the form attached to the Selling Agent Agreement as Exhibit C (each a “Terms Agreement”). Pursuant to the Selling Agent Agreement, the Agents have agreed to use their reasonable best efforts to solicit offers to purchase Bonds.

(m) Exhibit C of the Selling Agent Agreement is hereby amended as follows:

LaSalle Financial Services, Inc. is deleted and Incapital LLC is added in its place.

(n) Exhibit E to the Selling Agent Agreement is hereby deleted in its entirety and replaced by Exhibit A attached hereto.

3. Selling Agent Agreement Ratified . Except as expressly amended hereby, the Selling Agent Agreement is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect.

4. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

5. Counterparts . This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument.

6. Governing Law . This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York. Each party to this Agreement irrevocably agrees that any legal action or proceeding against it arising out of or in connection with this Agreement or for recognition or enforcement of any judgment rendered against it in connection with this Agreement may be brought in any Federal court sitting in the County of New York, New York, and, by execution and delivery of this Agreement, such party hereby irrevocably accepts and submits to the jurisdiction of the aforesaid courts in person, generally and unconditionally with respect to any such action or proceeding for itself and in respect of its property, assets and revenues. Each party hereby also irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding has been brought in an inconvenient forum.

If the foregoing is in accordance with your understanding, please sign and return to us a counterpart hereof, and upon acceptance hereof by you, this letter and such acceptance hereof shall constitute a binding agreement between the Company and you.

Very truly yours,



		TENNESSEE VALLEY AUTHORITY

		By:	/s/ Tammy W. Wilson
			Name: Tammy W. Wilson
			Title: Vice President and Treasurer