UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(~~Mark One~~)MARK ONE)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30,~~December 31, 2010

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~~ (State or other jurisdiction of incorporation or ~~organization~~)organization)			62-0474417 (~~IRS~~ (IRS Employer Identification No.No.)

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

(865) 632-2101

(Registrant’s telephone number, including area ~~code~~)code)

None

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

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 oNo 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 (~~Do not check if a smaller reporting company~~)	~~Smaller reporting company~~ o

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		45
GENERAL INFORMATION		56

PART I –- FINANCIAL INFORMATION

~~Item~~ITEM 1. FINANCIAL STATEMENTS		67
Statements of Operations ~~(Unaudited)~~(unaudited)		67
Balance Sheets ~~(Unaudited)~~(unaudited)		78
Statements of Cash Flows ~~(Unaudited)~~(unaudited)		89
Statements of Changes in Proprietary Capital ~~(Unaudited)~~(unaudited)		910
Notes to Financial Statements ~~(Unaudited)~~(unaudited)		11

~~Item~~ITEM 2. ~~MANAGEMENT~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3837
Executive Overview		3837
Challenges and Key Initiatives ~~During 2010~~		3938
Liquidity and Capital Resources		4340
Results of Operations		4643
Critical Accounting Policies and Estimates		5046
Changes in Ratemaking Impacting Accounting		5146
New Accounting Standards and Interpretations		5147
Corporate Governance		5347
Legislative and Regulatory Matters		5447
Environmental Matters		54
~~Legal~~ 47	57

~~Item~~Legal Proceedings		49

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		5850

~~Item~~ITEM 4. CONTROLS AND PROCEDURES		5850
Disclosure Controls and Procedures		5850
Changes in Internal Control over Financial Reporting		5850

PART II –- OTHER INFORMATION

~~Item~~ITEM 1. LEGAL PROCEEDINGS		5951

~~Item~~ITEM 1A. RISK FACTORS		5951

~~Item~~ITEM 6. EXHIBITS		6052

~~Signatures~~SIGNATURES		6153

~~Exhibit Index~~EXHIBIT INDEX		6254

GLOSSARY OF COMMON ACRONYMS~~ACRONYMS~~
~~The following~~Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q ~~are defined below:~~for the three months ended December 31, 2010 (the “Quarterly Report”):

Term or Acronym		Definition
AFUDC		Allowance for funds used during construction
ARO		Asset retirement obligation
ARP		Acid Rain Program
ART		Asset ~~retirement trust~~Retirement Trust
ASLB		Atomic Safety and Licensing Board
BEST		Bellefonte Efficiency and Sustainability Team
BREDL		Blue Ridge Environmental Defense League
CAA		Clean Air Act
CCP		Coal combustion products
CERCLA		Comprehensive Environmental Response, Compensation, and Liability Act
CME		Chicago Mercantile Exchange
CO2		Carbon dioxide
COLA		Cost of living adjustment
CVA		Credit valuation adjustment
CY		Calendar year
EIS		Environmental Impact Statement
EPA		Environmental Protection Agency
FASB		Financial Accounting Standards Board
FCA		Fuel cost adjustment
FERC		Federal Energy Regulatory Commission
FTP		Financial ~~Trading Program~~trading program
GAAP		Accounting principles generally accepted in the United States of America
GHG		Greenhouse gas
GWh		Gigawatt hour(s)
IRP		Integrated Resource Plan
KDAQ		Kentucky Division for Air Quality
kWh		Kilowatt hour(s)
~~LIBOR~~		~~London Interbank Offered Rate~~
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~Moody’s~~		~~Moody’s Investors Service, Inc.~~
mmBtu		Million British thermal unit(s)
MtM		Mark-to-market
MW		Megawatt
NAAQS		National Ambient Air Quality Standards
NDT		Nuclear ~~decommissioning trust~~Decommissioning Trust
NEPA		National Environmental Policy Act
NERC		North American Electric Reliability Corporation
NOV		Notice of Violation
NOx		Nitrogen oxides
NPDES		National Pollutant Discharge Elimination System
NRC		Nuclear Regulatory Commission
NRP		Natural Resource Plan
NSR		New Source Review
~~PCB~~PSD		~~Polychlorinated biphenyls~~Prevention of Significant Deterioration
QSPE		Qualifying Special-Purpose Entity
REIT		Real estate investment trust
SACE		Southern Alliance for Clean Energy
~~SCR~~SCRs		Selective catalytic reduction systems
SEC		Securities and Exchange Commission
SERP		Supplemental executive retirement plan

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Seven States		Seven States Power Corporation
SO2		Sulfur dioxide
SSSL		Seven States Southaven, LLC
~~S&P~~		~~Standard & Poor’s Rating Services~~
TDEC		Tennessee Department of Environment ~~and~~& Conservation
TVARS		Tennessee Valley Authority Retirement System
VIE		Variable Interest Entities

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~~FORWARD-LOOKING~~FORWARD-LOOKING INFORMATION

This Quarterly Report ~~on Form 10-Q (“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,” 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 changed laws, regulations, and administrative orders, ~~(“Laws”),~~ including those related to environmental matters, and the costs of complying with these new or changed ~~Laws~~laws, regulations, and administrative orders, as well as complying with existing ~~Laws;~~laws, regulations, and administrative orders;

~~Additional~~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”);

Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets or the cleanup and recovery activities associated with the ash spill at TVA’s Kingston Fossil Plant (“Kingston”) ~~or in construction of generation and transmission assets;~~;

Fines, penalties, natural resource damages, and settlements associated with the Kingston ash spill;

The outcome of legal and administrative proceedings, including, but not limited to, proceedings involving the Kingston ash spill and the North Carolina public nuisance case;

Significant changes in demand for electricity;

~~Loss~~Addition or loss of customers;

The continued operation, performance, or failure of TVA’s generation, transmission, and related assets, including ~~facilities such as~~ coal combustion product (“CCP”) facilities;

The economics of modernizing aging coal-fired generating units and installing emission control equipment to meet anticipated ~~emission-reduction~~emission reduction requirements, which could make continued operation of certain coal-fired units uneconomical and lead to 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~~laws or regulations affecting TVA’s fuel suppliers or ~~shippers;~~transporters;

Purchased power price volatility and disruption of purchased power supplies;

Events 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, as well as the supply of water to TVA’s generation facilities;

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

Weather conditions;

Events at a nuclear facility, even one that is not operated by or licensed to TVA;

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

Reliability and creditworthiness of counterparties;

Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, 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;

•Rising pension and health care costs;

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

Changes in the market for TVA’s debt, changes in TVA’s borrowing authority, changes in TVA’s credit rating, or limitations on TVA’s ability to borrow ~~money;~~money which may result from, among other things, TVA’s approaching or reaching its debt ceiling;

Changes in the economy and volatility in financial markets;

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

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

~~Changes in accounting standards including any change that would eliminate TVA’s ability to use regulatory accounting;~~

~~Table of Contents~~

Problems attracting and retaining a qualified workforce;

Changes in technology;

Failure of TVA’s information technology assets to operate as planned;

Differences between estimates of revenues and expenses and actual revenues and ~~expenses;~~expenses incurred; and

Unforeseeable events.

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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, ~~2009~~2010 (the “Annual Report”) and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors, in this Quarterly Report. 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.~~

sta tement. TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

~~Years (2010, 2009,~~References to years (2011, 2010, etc.) in this Quarterly Report refer to TVA’s fiscal years ending September 30. ~~References to years~~Years that are preceded by “CY” are references to calendar years.

Notes

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

~~Property~~

TVA does not own real property. TVA acquires real property in the name of the United States and such real property is entrusted to TVA as the agent of the United States to accomplish the purposes of the TVA Act. TVA acquires personal property in the name of TVA. Accordingly, unless the context indicates the reference is to TVA’s personal property, any statement in this Quarterly Report referring to TVA property shall be read as referring to the real property of the United States which has been entrusted to TVA as its agent.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, ~~and~~ 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 material is 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. In addition, the public may read and copy any reports or other information that TVA files with or furnishes to the SEC at the ~~SEC’s~~SEC& #8217;s Public Reference Room at 100 F Street ~~NE,~~N.E., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

~~Table of Contents~~

~~PART I –~~ ~~FINANCIAL INFORMATION~~

~~ITEM 1.~~ ~~FINANCIAL STATEMENTS~~

~~TENNESSEE VALLEY AUTHORITY~~

~~STATEMENTS OF OPERATIONS~~(U~~naudited)~~

~~(in millions)~~

Three Months Ended June 30 Nine Months Ended June 30
2010 2009 2010 2009

Operating revenues
Sales of electricity
Municipalities and cooperatives $ 2,204 $ 2,201 $ 6,367 $ 7,279
Industries directly served 324 306 1,019 1,110
Federal agencies and other 31 31 83 101
Other revenue 28 28 89 86
Total operating revenues 2,587 2,566 7,558 8,576

Operating expenses
Fuel and purchased power 786 1,043 1,999 3,658
Operating and maintenance 757 599 2,267 1,775
Depreciation, amortization, and accretion 416 397 1,240 1,191
Tax equivalents 114 128 320 413
Environmental cleanup costs — Kingston ash spill — 258 — 933
Total operating expenses 2,073 2,425 5,826 7,970

Operating income 514 141 1,732 606

Other income (expense), net 6 2 20 13

Interest expense
Interest on debt and leaseback obligations 338 316 1,011 971
Amortization of debt discount, issue, and reacquisition costs, net 5 5 15 15
Allowance for funds used during construction and nuclear fuel expenditures (22 ) (11 ) (53 ) (28 )
Net interest expense 321 310 973 958

Net income (loss) $ 199 $ (167 ) $ 779 $ (339 )

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

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PART I - FINANCIAL INFORMATION

~~TENNESSEE VALLEY AUTHORITY~~

~~BALANCE SHEETS~~ITEM 1. FINANCIAL STATEMENTS

~~(in millions)~~

ASSETS
June 30 September 30
2010 2009
(Unaudited)
Current assets
Cash and cash equivalents $ 198 $ 201
Accounts receivable, net 1,383 1,303
Inventories and other, net 1,115 961
Total current assets 2,696 2,465

Property, plant, and equipment
Completed plant 42,221 41,286
Less accumulated depreciation (18,962 ) (18,086 )
Net completed plant 23,259 23,200
Construction in progress 3,048 2,600
Nuclear fuel and capital leases 1,105 961
Total property, plant, and equipment, net 27,412 26,761

Investment funds 986 983

Regulatory and other long-term assets
Deferred nuclear generating units 2,054 2,347
Other regulatory assets 7,431 7,287
Subtotal 9,485 9,634
Other long-term assets 132 174
Total regulatory and other long-term assets 9,617 9,808

Total assets $ 40,711 $ 40,017

LIABILITIES AND PROPRIETARY CAPITAL

Current liabilities
Accounts payable and accrued liabilities $ 1,526 $ 2,108
Environmental cleanup costs - Kingston ash spill 237 348
Accrued interest 323 401
Current portion of leaseback obligations 74 463
Current portion of energy prepayment obligations 105 105
Short-term debt, net 834 844
Current maturities of long-term debt 1,042 8
Total current liabilities 4,141 4,277

Long-term liabilities
Other long-term liabilities 4,961 4,805
Regulatory liabilities 56 130
Environmental cleanup costs - Kingston ash spill 364 354
Asset retirement obligations 2,821 2,683
Leaseback obligations 1,282 940
Energy prepayment obligations 743 822
Total long-term liabilities 10,227 9,734

Long-term debt, net 21,363 21,788

Total liabilities 35,731 35,799

Proprietary capital
Appropriation investment 4,685 4,703
Retained earnings 4,071 3,291
Accumulated other comprehensive loss (67 ) (75 )
Accumulated net expense of nonpower programs (3,709 ) (3,701 )
Total proprietary capital 4,980 4,218

Total liabilities and proprietary capital $ 40,711 $ 40,017

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

TENNESSEE VALLEY AUTHORITY STATEMENTS OF OPERATIONS (Unaudited) For the three months ended December 31 (in millions)
	2010			2009
Operating revenues
Sales of electricity
Municipalities and cooperatives	$	2,386		$	1,945
Industries directly served		382			348
Federal agencies and other		32			27
Other revenue		28			29
Total operating revenues		2,828			2,349

Operating expenses
Fuel and purchased power		1,098			608
Operating and maintenance		883			754
Depreciation, amortization, and accretion		432			411
Tax equivalents		145			105
Total operating expenses		2,558			1,878

Operating income		270			471

Other income (expense), net		11			6


Interest expense
Interest on debt and leaseback obligations		353			336
Amortization of debt discount, issue, and reacquisition costs, net		5			5
Allowance for funds used during construction and nuclear fuel expenditures		(29	)		(14	)
Net interest expense		329			327

Net income (loss)	$	(48	)	$	150

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

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TENNESSEE VALLEY AUTHORITY BALANCE SHEETS (in millions)
ASSETS
	December 31 2010			September 30 2010
Current assets	(Unaudited)
Cash and cash equivalents	$	242		$	328
Accounts receivable, net		1,407			1,639
Inventories		1,144			1,012
Regulatory assets		790			791
Other current assets		177			78
Total current assets		3,760			3,848

Property, plant, and equipment
Completed plant		43,169			42,997
Less accumulated depreciation		(19,656	)		(19,326	)
Net completed plant		23,513			23,671
Construction in progress		3,332			3,008
Nuclear fuel and capital leases		1,184			1,151
Total property, plant, and equipment, net		28,029			27,830

Investment funds		1,203			1,128

Regulatory and other long-term assets
Regulatory assets		9,323			9,756
Other long-term assets		314			191
Total regulatory and other long-term assets		9,637			9,947

Total assets	$	42,629		$	42,753

LIABILITIES AND PROPRIETARY CAPITAL
Current liabilities
Accounts payable and accrued liabilities	$	1,562		$	1,698
Environmental cleanup costs - Kingston ash spill		210			220
Accrued interest		355			407
Current portion of leaseback obligations		74			74
Current portion of energy prepayment obligations		105			105
Regulatory liabilities		147			63
Short-term debt, net		219			27
Current maturities of long-term debt		1,009			1,008
Total current liabilities		3,681			3,602

Other liabilities
Other liabilities		5,983			6,255
Regulatory liabilities		211			106
Asset retirement obligations		3,000			2,963
Leaseback obligations		1,275			1,279
Energy prepayment obligations		691			717
Environmental cleanup costs - Kingston ash spill		273			305
Total other liabilities		11,433			11,625

Long-term debt, net		22,377			22,389

Total liabilities		37,491			37,616


Proprietary capital
Power program appropriation investment		323			328
Power program retained earnings		4,217			4,264
Total power program proprietary capital		4,540			4,592
Nonpower program appropriation investment, net		637			640
Accumulated other comprehensive loss		(39	)		(95	)
Total proprietary capital		5,138			5,137

Total liabilities and proprietary capital	$	42,629		$	42,753
The accompanying notes are an integral part of these financial statements.

~~TENNESSEE VALLEY AUTHORITY~~

~~STATEMENTS OF CASH FLOWS~~ ~~(Unaudited)~~

~~For the nine months ended June 30~~

~~(in millions)~~

2010 2009

Cash flows from operating activities
Net income (loss) $ 779 $ (339 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
   Depreciation, amortization, and accretion 1,255 1,206
   Nuclear refueling outage amortization 82 91
   Amortization of nuclear fuel 177 155
   Non-cash retirement benefit expense 268 105
   Prepayment credits applied to revenue (79 ) (79 )
   Fuel cost adjustment deferral (808 ) 778
   Environmental cleanup costs - Kingston ash spill – non-cash 47 790
Changes in current assets and liabilities
   Accounts receivable, net (89 ) 151
   Inventories and other, net (137 ) (284 )
   Accounts payable and accrued liabilities (212 ) 59
   Accrued interest (78 ) (151 )
Refueling outage costs — (113 )
Other, net 5 45
Net cash provided by operating activities 1,210 2,414

Cash flows from investing activities
Construction expenditures (1,491 ) (1,286 )
Nuclear fuel expenditures (282 ) (338 )
Change in restricted cash and investments — (17 )
Purchases of investments, net 5 4
Loans and other receivables
   Advances (23 ) (10 )
   Repayments 14 9
Other, net 4 1
Net cash used in investing activities (1,773 ) (1,637 )

Cash flows from financing activities
Long-term debt
   Issues 679 734
   Redemptions and repurchases (35 ) (2,626 )
Short-term issues, net (10 ) 1,108
Proceeds from sale/leaseback financing 9 95
Payments on leases and leaseback financing (79 ) (67 )
Bond premium received 28 —
Financing costs, net (4 ) (7 )
Payments to U.S. Treasury (25 ) (25 )
Other (3 ) (1 )
Net cash provided by (used in) financing activities 560 (789 )

Net change in cash and cash equivalents (3 ) (12 )
Cash and cash equivalents at beginning of period 201 213

Cash and cash equivalents at end of period $ 198 $ 201

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

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~~TENNESSEE VALLEY AUTHORITY~~

~~STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL~~ ~~(Unaudited)~~

~~For the three months ended June 30, 2010 and 2009~~

~~(in millions)~~

Appropriation Investment

Retained Earnings
Accumulated Other Comprehensive Loss Accumulated Net Expense Stewardship Programs

Total

Comprehensive Income (Loss)

Balance at March 31, 2009  (Unaudited) $ 4,713 $ 2,396 $ (154 ) $ (3,698 ) $ 3,257
Net income (loss) — (166 ) — (1 ) (167 ) $ (167 )
Other comprehensive income (loss)
  Net unrealized gain on future cash flow hedges — — 218 — 218 218
  Reclassification to earnings from cash flow hedges — — (126 ) — (126 ) (126 )
  Total other comprehensive income (loss) 92
Total comprehensive income (loss) $ (75 )
Return on Power Facility Appropriation Investment — (3 ) — — (3 )
Return of Power Facility Appropriation Investment (5 ) — — — (5 )
Balance at June 30, 2009 (Unaudited) $ 4,708 $ 2,227 $ (62 ) $ (3,699 ) $ 3,174

Balance at March 31, 2010 (Unaudited) $ 4,693 $ 3,871 $ (5 ) $ (3,706 ) $ 4,853
Net income (loss) — 202 — (3 ) 199 $ 199
Other comprehensive income (loss)
  Net unrealized loss on future cash flow hedges — — (76 ) — (76 ) (76 )
  Reclassification to earnings from cash flow hedges — — 14 — 14 14
  Total other comprehensive income (loss) (62 )
Total comprehensive income (loss) $ 137
Return on Power Facility Appropriation Investment — (2 ) — — (2 )
Return of Power Facility Appropriation Investment (8 ) — — — (8 )
Balance at June 30, 2010 (Unaudited) $ 4,685 $ 4,071 $ (67 ) $ (3,709 ) $ 4,980

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

TENNESSEE VALLEY AUTHORITY STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended December 31 (in millions)
	2010			2009
Cash flows from operating activities
Net income (loss)	$	(48	)	$	150
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, amortization, and accretion		437			416
Nuclear refueling outage amortization		19			31
Amortization of nuclear fuel		52			57
Non-cash retirement benefit expense		116			91
Prepayment credits applied to revenue		(26	)		(26	)
Fuel cost adjustment deferral		98			(202	)
Environmental cleanup costs – Kingston ash spill – non cash		19			16
Changes in current assets and liabilities
Accounts receivable, net		248			217
Inventories and other, net		(173	)		(65	)
Accounts payable and accrued liabilities		(126	)		(106	)
Accrued interest		(52	)		(67	)
Environmental cleanup costs – Kingston ash spill		(42	)		(85	)
Other, net		6			14
Net cash provided by operating activities		528			441

Cash flows from investing activities
Construction expenditures		(621	)		(534	)
Nuclear fuel expenditures		(117	)		(126	)
Loans and other receivables
Advances		(11	)		(11	)
Repayments		3			7
Other, net		(1	)		1
Net cash used in investing activities		(747	)		(663	)

Cash flows from financing activities
Long-term debt
Issues		—			82
Redemptions and repurchases		(5	)		(4	)
Short-term debt issues (redemptions), net		192			213
Payments on leases and leaseback financing		(47	)		(11	)
Financing costs, net		—			(2	)
Payments to U.S. Treasury		(7	)		(7	)
Net cash provided by financing activities		133			271

Net change in cash and cash equivalents		(86	)		49
Cash and cash equivalents at beginning of period		328			201

Cash and cash equivalents at end of period	$	242		$	250
The accompanying notes are an integral part of these financial statements.

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~~TENNESSEE VALLEY AUTHORITY~~

~~STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL~~ ~~(Unaudited)~~

~~For the nine months ended June 30, 2010 and 2009~~

~~(in millions)~~

TENNESSEE VALLEY AUTHORITY STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited) For the three months ended December 31, 2010 and 2009 (in millions)																				TENNESSEE VALLEY AUTHORITY STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited) For the three months ended December 31, 2010 and 2009 (in millions)
		Appropriation Investment			Retained Earnings			Accumulated Other Comprehensive Loss			Accumulated Net Expense Stewardship Programs			Total			Comprehensive Income (Loss)			Power Program Appropriation Investment	Power Program Retained Earnings	Nonpower Appropriation Investment, Net	Accumulated Other Comprehensive Income (Loss)	Total	Comprehensive Income (Loss)

Balance at September 30, 2008		$	4,723		$	2,571		$	(37	)	$	(3,694	)	$	3,563
Net income (loss)			—			(334	)		—			(5	)		(339	)	$	(339	)
Other comprehensive income (loss)
Net unrealized loss on future cash flow hedges			—			—			(105	)		—			(105	)		(105	)
Reclassification to earnings from cash flow hedges			—			—			80			—			80			80
Total other comprehensive income (loss)																		(25	)
Total comprehensive income (loss)																	$	(364	)
Return on Power Facility Appropriation Investment			—			(10	)		—			—			(10	)
Return of Power Facility Appropriation Investment			(15	)		—			—			—			(15	)
Balance at June 30, 2009 (Unaudited)		$	4,708		$	2,227		$	(62	)	$	(3,699	)	$	3,174
																						`
Balance at September 30, 2009		$	4,703		$	3,291		$	(75	)	$	(3,701	)	$	4,218					$ 348	$ 3,291	$ 654	$ (75)	$ 4,218
Net income (loss)			—			787			—			(8	)		779		$	779		–	153	(3)	–	150	$ 150
Other comprehensive income (loss)
Net unrealized loss on future cash flow hedges			—			—			(55	)		—			(55	)		(55	)
Net unrealized gain (loss) on future cash flow hedges																				–	–	–	68	68	68
Reclassification to earnings from cash flow hedges			—			—			63			—			63			63		–	–	–	(11)	(11)	(11)
Total other comprehensive income (loss)																		8		–	–	–	57	57	57
Total comprehensive income (loss)																	$	787							$ 207
Return on Power Facility Appropriation Investment			—			(7	)		—			—			(7	)
Return of Power Facility Appropriation Investment			(18	)		—			—			—			(18	)
Balance at June 30, 2010 (Unaudited)		$	4,685		$	4,071		$	(67	)	$	(3,709	)	$	4,980
Return on Appropriation Investment																				–	(2)	–	–	(2)
Return of Appropriation Investment																				(5)	–	–	–	(5)
Balance at December 31, 2009 (unaudited)																				$ 343	$ 3,442	$ 651	$ (18)	$ 4,418

Balance at September 30, 2010																				$ 328	$ 4,264	$ 640	$ (95)	$ 5,137
Net income (loss)																				–	(45)	(3)	–	(48)	$ (48)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges																				–	–	–	49	49	49
Reclassification to earnings from cash flow hedges																				–	–	–	7	7	7
Total other comprehensive income (loss)																				–	–	–	56	56	56
Total comprehensive income (loss)																									$ 8
Return on Appropriation Investment																				–	(2)	–	–	(2)
Return of Appropriation Investment																				(5)	–	–	–	(5)
Balance at December 31, 2010 (unaudited)																				$ 323	$ 4,217	$ 637	$ (39)	$ 5,138

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

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NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions except where noted)

Note No.		Page No.	Note No.			Page No.
1	Summary of Significant Accounting Policies	11		Summary of Significant Accounting Policies	11
2	Impact of New Accounting Standards and Interpretations	12		Impact of New Accounting Standards and Interpretations	13
3	Accounts Receivable	14		Accounts Receivable	13
4	Inventories and Other, Net	14		Inventories	13
5	Other Long-Term Assets	14		Other Long-Term Assets	14
6	Cost-Based Regulation	14		Regulatory Assets and Liabilities	15
7	Kingston Fossil Plant Ash Spill	15		Kingston Fossil Plant Ash Spill	15
8	Other Long-Term Liabilities	17		Other Long-Term Liabilities	17
9	Asset Retirement Obligations	17		Asset Retirement Obligations	17
10	Debt	18		Debt	18
11	Seven States Power Corporation Obligation	19		Seven States Power Corporation Obligation	19
12	Risk Management Activities and Derivative Transactions	20		Risk Management Activities and Derivative Transactions	19
13	Fair Value Measurements	27		Fair Value Measurements	25
14	Other Income (Expense), Net	32		Other Income (Expense), Net	31
15	Benefit Plans	32		Benefit Plans	31
16	Legal Proceedings	33		Legal Proceedings	32
17	Subsequent Events	37		Subsequent Events	36

1. Summary of Significant Accounting Policies~~Policies~~

General

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation creating the Tennessee Valley Authority (“TVA”), a government corporation. TVA was created to, among other things, to 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.~~million people.

TVA also manages the Tennessee River and its tributaries to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity. Consistent with these primary purposes, TVA also manages ~~land, shoreline and tributaries~~the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development. TVA performs these management duties in cooperation with other federal and state agencies which have jurisdiction and authority over certain aspects of the river system. TVA’s management of the Tennessee River and its tributaries was initially funded in part by appropriated funds and in part by power revenues. TVA’s management of the Tennessee River and its tributa ries will sometimes be referred to as TVA’s “stewardship” programs.

The power program has historically been separate and distinct from the stewardship programs. ~~TVA~~It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and 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 power facilities (the “Power ~~Facility~~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 ~~related~~TVA properties with power ~~fund s~~funds 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. ~~these~~The activities related to ~~essential~~ stewardship properties do not meet the criteria of an operating segment under ~~the~~ accounting principles generally accepted in the United States ~~of America~~ (“GAAP”). Accordingly, ~~stewardship~~these assets and ~~activities~~properties are included as part of the power program, TVA’s only operating segment.

~~Table of Contents~~

Power rates are established by the TVA Board of Directors (“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 rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and

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administration of its power system; payments to states and counties in lieu of taxes; debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power ~~Facility~~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 ~~redu ction~~reduction of the Power ~~Facility~~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 ~~federal~~fede ral regulatory body.

Fiscal Year

TVA’s fiscal year ends September 30. Years (2011, 2010, etc.) refer to TVA’s fiscal years unless they are proceeded 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 of providing electricity. In view of demand for electricity and the level of competition, it is reasonable to assume that the rates, set at levels that will recover TVA’s costs, can be charged and collected. As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology. Based on these assessments, TVA believes the existing regulatory assets are probable of recovery. This determination reflects the current regulatory and political environment and is subject to change in the future. If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to writeoff these costs. Most regulatory asset write-offs would be required to be recognized in earnings in the p eriod in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its interim financial statements in conformity with GAAP for interim financial information. Accordingly, TVA’s 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, ~~2009,~~2010, and the notes thereto, which are contained in TVA’s Annual Report on Form 10-K for the year ended September 30, ~~2009~~2010 (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.

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 financial statements. Although the financial statements are prepared in conformity with GAAP, ~~management~~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 also discussed in Note 1 of the Notes to the Financial Statements contained in the Annual Report~~.

~~Fiscal Year~~

~~TVA’s fiscal year ends September 30. Years (2010, 2009, etc.) refer to TVA’s fiscal years. References to years that are preceded by “CY” are to calendar years.~~

~~2. Impact of New Accounting~~ ~~Standards and Interpretations~~

~~The following accounting standards and interpretations became effective for TVA during 2010.~~

~~Fair Value Measurements~~. In September 2006, the Financial Accounting Standards Board (“FASB”) issued guidance for measuring assets and liabilities that currently require fair value measurement. The guidance also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The guidance establishes a fair value hierarchy that prioritizes the information used to develop measurement assumptions. In February 2008, FASB issued guidance that delayed the effective date of the fair value accounting changes for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Effective October 1, 2009, TVA adopted these fair value accounting changes for its nonfinancial assets and nonfinancial liabilities. The adoption of this guidance did not materially impact TVA’s financial condition,conditions, results of operations, or cash flows.

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.

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2. Impact of New Accounting Standards and Interpretations

~~In August 2009, FASB issued guidance regarding fair value measurements of liabilities.~~ The guidance clarifies how the fair value of a liability should be measured when a quoted price in an active market for the identical liability either is or is not available. Additionally, the guidance clarifies how to consider a restriction when estimating the fair value of a liabilityfollowing accounting standards and ~~the appropriate level within the fair value disclosure hierarchy in which the various measurement techniques result. These changes~~interpretations became effective for TVA ~~on October 1, 2009. The adoption~~during the first quarter of ~~this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows.~~2011.

In September 2009, FASB issued guidance regarding fair value measurements for certain alternative investments, such as interests in hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and funds of funds. The guidance allows reporting entities to use net asset value per share to estimate the fair value of these investments as a practical expedient. The guidance also requires disclosures by major category of investment about the attributes of the investments, such as the nature of any restrictions on the investor's ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investees. These changes became e ffective for TVA on October 1, 2009. The adoption of this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows.

~~Business Combinations~~. In December 2007, FASB issued guidance that changes the accounting for business combinations. The guidance establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. The guidance also requires acquisition-related transaction expenses and restructuring costs to be expensed as incurred rather than capitalized as a component of the business combination. In April 2009, FASB issued additional guidance to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination. These changes became effective for TVA on October 1, 2009. The adoption of this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows but will impact the accounting for any future business acquisitions.

~~Noncontrolling Interests~~. In December 2007, FASB issued guidance that introduces significant changes in the accounting for noncontrolling interests (formerly minority interests) in a partially-owned consolidated subsidiary. The guidance also changes the accounting for and reporting for the deconsolidation of a subsidiary. The guidance requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity. The guidance also requires that earnings attributed to noncontrolling interests be reported as part of consolidated earnings, and requires disclosure of the attribution of consolidated e arnings to the controlling and noncontrolling interests on the face of the consolidated income statement. These changes became effective for TVA on October 1, 2009. The adoption of this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows but will impact the accounting for any future noncontrolling interests.

~~The following accounting standards have been issued, but as of June 30, 2010, were not effective and had not been adopted by TVA.~~

Transfers of Financial Assets. In June 2009, ~~FASB~~the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and subjects those entities to the same consolidation guidance as other variable interest entities (“VIEs”). The guidance changes the eligibility criteria for certain transactions to qualify for sale accounting and the accounting for certain transfers. The guidance also establishes broad disclosure objectives and requires extensive specific ~~disclosures~~disclosure requirements related to the transfers. These ~~changes will become~~ch anges became effective for TVA for any transfers of ~~fina ncial~~financial assets occurring on or after October 1, 2010. ~~TVA does not believe~~The adoption of this guidance ~~will~~did not materially affect ~~its~~TVA’s financial condition, results of operations, or cash flows.

Variable Interest Entities. In June 2009, FASB issued guidance that changes the consolidation guidance for VIEs. The guidance eliminates the consolidation scope exception for QSPEs. The statement amends the triggering events to determine if an entity is a VIE, establishes a primarily qualitative model for determining the primary beneficiary of the VIE, and requires on-going ~~assessments~~assessment of whether the reporting entity is the primary beneficiary. These changes ~~will become~~became effective for TVA on October 1, 2010, and ~~will~~ apply to all entities determined to be VIEs as of and subsequent to the date of adoption. ~~TVA does not believe~~The adoption of this guidance ~~will~~did not materially affect ~~its~~TVA’s financial condition, results of operations, or cash flows.

~~Table~~There were no accounting standards issued that were not yet effective and adopted by TVA as of ~~Contents~~December 31, 2010 that, if adopted, would have materially affected its financial condition, results of operation, or cash flows.

3. Accounts Receivable

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

Accounts Receivable	Accounts Receivable							Accounts Receivable
		At June 30, 2010			At September 30, 2009				At December 31 2010			At September 30 2010

Power receivables billed		$	337		$	309
Power receivables unbilled			1,023			940
Power receivables
Billed									$	480		$	597
Unbilled										884			1,004
Total power receivables			1,360			1,249				1,364			1,601

Other receivables			25			56				44			40
Allowance for uncollectible accounts			(2	)		(2	)		$	(1	)	$	(2	)

Net accounts receivable		$	1,383		$	1,303			$	1,407		$	1,639

4.4. Inventories~~and Other, Net~~

The table below summarizes the types and amounts of TVA’s inventories ~~and other current assets~~:

Inventories and Other, Net
Inventories							Inventories
	At June 30, 2010			At September 30, 2009				At December 31 2010			At September 30 2010

Fuel inventory	$	601		$	535			$	649		$	539
Materials and supplies inventory		465			422				509			486
Emission allowance inventory		11			12				11			11
Allowance for inventory obsolescence		(24	)		(50	)			(25	)		(24	)

Inventories, net		1,053			919			$	1,144		$	1,012
Prepaids and other		62			42
Inventories and other, net	$	1,115		$	961

The $26 million reduction in the allowance for inventory obsolescence is primarily due to changes in assumptions based on a detailed inventory observation study completed during the quarter ended June 30, 2010.

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5. Other Long-Term Assets~~Assets~~

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

Other Long-Term Assets	Other Long-Term Assets					Other Long-Term Assets
		At June 30, 2010		At September 30, 2009			At December 31 2010		At September 30 2010

Loans and long-term receivables, net		$	85	$	77		$	93	$	83
Currency swap assets			—		7			13		–
Coal contract derivative assets			40		87			202		103
Other long-term assets			7		3			6		5

Total other long-term assets		$	132	$	174		$	314	$	191

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6. ~~Cost-Based~~ Regulatory Assets and Liabilities~~Regulation~~

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. ~~These regulatory assets are included in~~ ~~Deferred nuclear generating units~~ ~~and~~ ~~Other regulatory assets~~ ~~on the June 30, 2010, and September 30, 2009 Balance Sheets.~~ 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. ~~These~~Components of regulatory assets and regulatory liabilities ~~are included in~~ ~~Accounts payable and accrued liabilities~~ ~~an d~~ ~~Regulatory liabilities~~ ~~on the June 30, 2010, and September 30, 2009 Balance Sheets. Components of~~ ~~Other regulatory assets~~ ~~and~~ ~~Regulatory liabilities~~ are summarized in the table below.

~~Table of Contents~~

TVA Regulatory Assets and Liabilities

At June 30, 2010 At September 30, 2009
Regulatory Assets:
Deferred other post-retirement benefit costs $ 281 $ 298
Deferred pension costs 3,600 3,764
Nuclear decommissioning costs 973 909
Non-nuclear decommissioning costs 393 351
Debt reacquisition costs 180 195
Unrealized losses relating to TVA’s Financial Trading Program 203 85
Unrealized losses on coal contract derivatives 27 70
Unrealized losses on certain swap and swaption contracts 603 498
Environmental cleanup costs - Kingston ash spill 1,078 933
Deferred outage costs 63 144
Other 30 40
   Subtotal 7,431 7,287
Deferred nuclear generating units 2,054 2,347
   Total $ 9,485 $ 9,634

Regulatory Liabilities:
Unrealized gains on coal contract derivatives $ 40 $ 87
Capital lease liabilities 12 26
Unrealized gains relating to TVA’s Financial Trading Program 4 17
   Subtotal 56 130
Reserve for future generation 64 67
Accrued tax equivalents — 81
Fuel cost adjustment liability: short-term 15 822
   Total $ 135 $ 1,100

TVA Regulatory Assets and Liabilities
	At December 31 2010		At September 30 2010
Current regulatory assets
Deferred capital leases	$	2	$	14
Deferred nuclear generating units		391		391
Deferred outage costs		23		42
Environmental cleanup costs – Kingston ash spill		76		76
Fuel cost adjustment receivable		—		76
Fuel cost adjustment tax equivalents		—		8
Unrealized losses on coal contracts		184		47
Unrealized losses related to commodity derivatives		114		137
Total current regulatory assets		790		791

Non-current regulatory assets
Debt reacquisition costs		168		174
Deferred capital leases		10		10
Deferred nuclear generating units		1,467		1,565
Deferred other post-retirement benefit costs		251		255
Deferred pension costs		4,389		4,456
Environmental cleanup costs – Kingston ash spill		968		987
Non-nuclear decommissioning costs		433		410
Nuclear decommissioning costs		856		898
Nuclear training costs		64		59
Preconstruction costs		25		—
Retirement removal costs		1		1
Unrealized losses on coal contracts		125		2
Unrealized losses on swaps and swaptions		460		797
Unrealized losses related to commodity derivatives		106		142
Total non-current regulatory assets		9,323		9,756

Total regulatory assets	$	10,113	$	10,547
Current regulatory liabilities
Capital leases	$	—	$	6
Fuel cost adjustment		22		—
Fuel cost adjustment tax equivalents		9		—
Unrealized gains on coal contract derivatives		101		50
Unrealized gains relating to commodity derivatives		15		7
Total current liabilities		147		63
Non-current regulatory liabilities
Unrealized gains on coal contract derivatives		202		103
Unrealized gains relating to commodity derivatives		9		3
Total non-current regulatory liabilities		211		106

Total regulatory liabilities	$	358	$	169

~~Fuel Cost Adjustment.~~Preconstruction Costs. ~~Starting~~Certain preliminary work and costs associated with engineering, design, and licensing activities, as well as the ~~October~~procurement of long lead-time components for the partially completed Bellefonte Unit 1, ~~2009 billing period, all adjustments to the FCA~~ have been made on a monthly basis instead of a quarterly basis. This allows the FCA to be more closely aligned with TVA’s costs. The FCA formula also contains a deferred account which is used to reconcile the difference between actual and forecasted fuel and purchased power costs. The difference between the amounts is included in the deferred account, and starting with the October 1, 2009 billing period, 50 percent of the account has been disbursed or collected on a monthly basis instead of a quarterly basis. This change to a monthly FCA formula has resulted in smaller reconciliations and faster liquidation of any balances i n the account. With the change to the monthly FCA formula on October 1, 2009, the remaining balance in the existing deferred liability account balance at that date of approximately $822 million was liquidated over a nine-month period from October 1, 2009, through June 30, 2010. The liability of $15 million at June 30, 2010, represents the overcollection of FCA revenues related to the current year as computed under the new methodology.

~~Deferred Outage Costs~~. TVA’s investment in the fuel used in its nuclear units is being amortized and accounted for as a component of fuel expense. Nuclear refueling outage and maintenance costs already incurred have historically been deferred and amortized on a straight-line basis over the estimated period until the next refueling outage. In August 2009, the TVA Board approved a change in the accounting for deferred outage costs. Beginning October 1, 2009, outage costs are no longer deferred as a regulatory asset pending the TVA Board’s decision on the completion of the project. If the TVA Board decides to complete Bellefonte Unit 1, the costs will be moved to construction in progress and ~~are being~~amortized over a cost recovery period equivalent to the expected useful life of the future operating nuclear unit. If the TVA Board decides not to complete the unit, the costs will be expensed ~~as incurred. Previously deferred outage costs continue to be amortized as~~at the ~~remaining amounts are collected in rates.~~time of the decision.

7. Kingston Fossil Plant Ash Spill

The Event~~. On~~

In December ~~22,~~ 2008, one of the ~~ash~~dredge cells at the Kingston Fossil Plant (“Kingston”) ~~failed. Approximately 5~~failed, and approximately five million cubic yards of water and coal fly ash flowed out of the ash pond at Kingston onto approximately 300 acres, primarily into the Emory River channel portion of the Watts Bar Reservoir and onto shoreline property owned by the United States and managed by TVA, and also structurally damaged three homes, interrupted utility service, and blocked a road. Fly ash is a coal combustion product of a coal-fired plant. Kingston used wet ash containment impoundments for fly ash.

TVA is conducting cleanup and recovery efforts in conjunction with federal and state agencies. Under the May 11, 2009 Administrative Order and Agreement on Consent (“Order and Agreement”) entered into by TVA and the Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), TVA retains its status as a lead federal agency, but TVA's work is subject to review and approval by the EPA, in consultation with the Tennessee Department of Environment and Conservation (“TDEC”).

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~~Under~~ the ~~Order~~cell. TVA is continuing cleanup and ~~Agreement, response actions are classified into three categories: time-critical removal; non-time-critical removal;~~recovery efforts in conjunction with federal and remedial actions. Generally, removal of the ash from the Emory River was considered time-critical. However, the EPA concluded that TVA’s dredging operations should be conducted in a manner that seeks to maximize ash removal while minimizing disturbance to native sediments in the river. Accordingly, some residual ash will remain in the Emory River, and, exceptstate agencies. Except for ~~this~~ residual ash, TVA completed the removal of ~~the~~time-critical ash from the river during the third quarter of ~~2010. Removal~~2010, and removal of the remaining ash is considered to be non-time-critical. TVA estimates that ~~this w ork~~the recovery process will be substantially completed in ~~2014.~~2014 although monitoring may continue beyond that date. Once the removal actions are completed, TVA will be required to assess the site and determine whether any additional actions may be needed at Kingston or the surrounding impacted area. ~~This assessment and any additional activities found to be necessary constitute the remedial actions.~~

Insurance

~~Insurance~~. TVA has property and excess liability insurance programs in place that may cover some of the Kingston ash spill costs. ~~The insurers for each of these programs have been notified of the event.~~ Three of the insurers that provide liability insurance have denied coverage, and three other liability insurers issued reservation of rights letters. All of the property insurers have denied coverage. TVA and the insurance companies that have denied coverage continue to discuss coverage and estimates of covered costs. TVA continues to provide information to the liability insurance companies that have issued reservation of rights letters but have not denied coverage. No estimate for potential ~~insuran ce~~insurance recovery has been accrued.

Claims and Litigation. Sixty lawsuits based on the Kingston ash spill have been filed. Two of these have been voluntarily dismissed and three of the class actions have been consolidated into one action. All of the remaining cases are pending in the United States District Court for the Eastern District of Tennessee.

See Note ~~16—~~16 — Litigation — Legal Proceedings Related to the Kingston Ash ~~Pond Spill.~~Spill and Civil Penalty 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 and either known amounts, most likely scenarios, or the low end of the range for each category has been accumulated and evaluated to determine the total estimate. The range of estimated costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA received an order from TDEC on June 14, 2010, that assessed penalties of approximately $12 million against TVA in connection with the ash spill. The TDEC order stated that the penalties address violations of the Tennessee Water Quality Control Act and the Tennessee Solid Waste Disposal Act. TVA does not plan to appeal the order. During the third quarter of 2010, TVA paid TDEC $3 million to reimburse it for oversight costs, and TVA paid TDEC an additional $3 million on July 15, 2010.

~~Financial Impact. TVA has~~ recorded an estimate ~~in the amount~~ of $1.1 billion for the cost of cleanup related to this event. In August 2009, TVA ~~originally charged a portion of this amount~~began using regulatory accounting treatment to ~~expense as follows: $525 million, $150 million,~~defer all actual costs already incurred and ~~$258 million during~~expected future costs related to the three months ended December 31, 2008, March 31, 2009, and June 30, 2009, respectively. However, in August 2009 the TVA Board reclassified all amounts previously expensed as a regulatory asset and the amountash 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.

During the three months ended June 30, 2010, TVA increased the estimate for the cost of cleanup related to this event by $192 million. The change in estimate is due to increased scope of work to be performed at the site as defined in the Engineering Evaluation Cost Analysis (“EE/CA”) work order plan which was prepared in accordance with the EPA’s Guidance on Conducting Non-Time-Critical Removal Actions under CERCLA. In May 2010, the EPA approved TVA’s ash disposal plan, which clarified the amount of ash to be removed from the site and the final design and closure of ash ponds on site. The plan involves moving less ash offsite than was originally assumed, which results in potential cost savings. These potential savings are more than offset, however, by the costs of other elements of the plan, including the required expansion of the failed cell and the closure and capping of all cells on the plant site that hold wet ash. The potential savings are also offset by the costs of handling the ash under CERCLA requirements and recently assessed penalties and regulatory oversight costs. TVA has also found that certain previously estimated cost categories, such as dredging, were more expensive than originally estimated due to more equipment and staffing being needed to ensure timely completion of removal of time-critical ash from the river. Final designs of holding cells and dikes are more robust than originally estimated as well.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate. Although management has developed a detailed work plan and cost estimate based on the ash disposal plan, the estimate could be subject to volatility until design plans are completed and contracts are finalized. The design of the lateral expansion of the failed cell and the closure and capping of all ash cells is still in process. TVA currently estimates the recovery process will be substantially completed in 2014. As such, TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA’s ~~Balance Sheets. Costs incurred~~balance sheets. Amounts spent since the event through ~~June 30,~~December 31, 2010, totaled ~~$524 million, of which $108 million and $293 million were incurred during the three and nine months ended June 30, 2010, respectively.~~$642 million. The remaining estimated liability at ~~June 30,~~December 31, 2010, was ~~$601~~$483 million.

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The $1.1 billion estimate currently includes, among other things, a reasonable estimate of costs related to ash dredging and processing, ash disposition, infrastructure repair, dredge cell repair, root cause analysis, certain legal and settlement costs, environmental impact studies and remediation, human health assessments, community outreach and support, regulatory oversight, cenosphere recovery, skimmer wall installation, construction of temporary ash storage areas, dike reinforcement, project management, and certain other remediation costs associated with the cleanup.

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 and either the known amounts, most likely scenarios, or low end of the range for each category has been accumulated and evaluated to determine the total estimate. The range of estimated costs varies from approximately $1.1 billion to approximately $1.2 billion.

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 the ~~TDEC~~June 2010 Tennessee Department of Environment & Conservation (“TDEC”) order), regulatory directives, natural resources damages ~~outcome~~(other than payments required under the proposed memorandum of agreement with TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damage claim), outcomes of lawsuits, future claims, long-term environmental impact costs, final long-term disposition of ~~ash~~as h processing area, costs associated with new laws and regulations, or costs of remediating any ~~discovered~~ mixed waste discovered during the ash removal process. 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 financial statements. Associated capital asset purchases are recorded in property, plant, and ~~equipment.~~equipment. Ash ~~h andling~~handling and disposition from current plant operations are recorded in operating expenses. A portion of the pond and dredge cell closure costs are also not included in the estimate as those costs are included in the non-nuclear asset retirement obligation (“ARO”) liability.

~~On January 26, 2010, the owners~~

Table of the landfill in Perry County, Alabama, that is receiving the ash dredged from the Emory River filed a voluntary proceeding under Chapter 11 of the U.S. Bankruptcy Code. At this time TVA has not incurred any additional costs as a result of the filing, and the landfill has continued to receive ash since the filing.Contents

In June 2010, a group of Perry County residents filed two lawsuits challenging the operation of the landfill in the Perry County, Alabama. One lawsuit was filed in state court and the other lawsuit was filed in federal court. TVA has not been named in the lawsuits.

8. Other Long-Term Liabilities~~Liabilities~~

Other long-term liabilities consist primarily of estimated amounts due for post-retirement and post-employment benefits and liabilities related to certain derivative agreements. The table below summarizes the types and amounts of liabilities:

Other Long-Term Liabilities	Other Long-Term Liabilities					Other Long-Term Liabilities
		At June 30, 2010		At September 30, 2009			At December 31 2010		At September 30 2010

Currency swap liabilities		$	99	$	51		$	45	$	81
Swaption liability			674		592			583		804
Interest rate swap liabilities			308		287			255		371
Coal contract derivative liabilities			27		80			125		2
Post-retirement and postemployment benefit obligations			3,751		3,678
Commodity swap derivatives								99		118
Post-retirement and post-employment benefit obligations								4,727		4,729
Other long-term liability obligations			102		117			149		150

Total other long-term liabilities		$	4,961	$	4,805		$	5,983	$	6,255

9. Asset Retirement Obligations~~Obligations~~

During the ~~third quarter of~~three months ended December 31, 2010 and 2009, TVA’s total asset retirement obligations (“ARO”) liability increased $68 million. The increase was comprised of $31 million of new revisions in the estimated lives and cost estimates related to Kingston’s ash storage areas and $37 million in ARO accretion. During the third quarter of 2009, the ARO liability increased ~~$33~~$37 million and $34 million, respectively, primarily due to accretion. The increase in the liability was partially offset by ash area settlement projects that were conducted during the three months ended December 31, 2010. The nuclear and non-nuclear accretion ~~was~~were deferred as regulatory assets. During the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010, ~~$14~~$12 million ~~and $41 million, respectively,~~ of the related regulatory assets were amortized into expense since these amounts were collected in rates. The nuclear ARO liability as of ~~June 30,~~December 31, 2010, was ~~$1.9~~$2.0 billion. The non-nuclear ARO liability as of ~~June 30,~~December 31, 2010, ~~wa s $907 million.~~was $1.0 billion.

Reconciliation of Asset Retirement Obligation Liability
	Three Months Ended December 31
	2010			2009

Balance at beginning of period	$	2,963		$	2,683

Changes in nuclear estimates to future cash flows		—			—
Non-nuclear additional obligations		—			(3	)
Non-nuclear additional obligations (ash storage areas)		—			—
Non-nuclear settlements (ash storage areas)		(2	)		—
		2,961			2,680
Add: ARO accretion
Nuclear accretion (recorded as regulatory asset)		27			26
Non-nuclear accretion (recorded as regulatory asset)		12			11
		39			37

Balance at end of period	$	3,000		$	2,717

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Reconciliation of Asset Retirement Obligation Liability

Three Months Ended June 30 Nine Months Ended June 30
2010 2009 2010 2009

Balance at beginning of period $ 2,753 $ 2,382 $ 2,683 $ 2,318

Non-nuclear additional obligations 31 – 28 –
2,784 2,382 2,711 2,318

Add ARO accretion:
Nuclear accretion 26 25 78 73
Non-nuclear accretion 11 8 32 24
37 33 110 97

Balance at end of period $ 2,821 $ 2,415 $ 2,821 $ 2,415

10. Debt

Debt Outstanding

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30 billion outstanding at any time. Debt outstanding at ~~June 30,~~December 31, 2010 and September 30, ~~2009,~~2010, including the effect of translations related to Bonds denominated in foreign currencies, consisted of the following:

Debt Outstanding	Debt Outstanding							Debt Outstanding
									At December 31 2010			At September 30 2010
		At June 30, 2010			At September 30, 2009
Short-term debt
Discount notes (net of discount)		$	834		$	844			$	219		$	27
Current maturities of long-term debt			1,042			8				1,009			1,008
Total short-term debt, net			1,876			852				1,228			1,035

Long-term debt
Long-term debt			21,560			22,012
Long-term										22,593			22,605
Unamortized discount			(197	)		(224	)			(216	)		(216	)
Total long-term debt, net			21,363			21,788				22,377			22,389
Total outstanding debt									$	23,605		$	23,424

Total outstanding debt		$	23,239		$	22,640

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Debt Securities Activity

The table below summarizes TVA’s long-term Bond activity for the period from October 1, ~~2009,~~2010 to ~~June 30,~~December 31, 2010.

	Date	Amount		Interest Rate
Issuances:
electronotes®	First Quarter 2010	$	82		4.38	%
	Second Quarter 2010		34		4.11	%
	Third Quarter 2010		63		4.16	%	Date	Amount	Interest Rate
2009 Series C Reopening	May 2010		500		5.25	%
Redemptions/Maturities:
		$	679
Redemptions/Maturities:
electronotes®	First Quarter 2010	$	1		3.24	%	Three months ended December 31, 2010	$ 2	3.62%
	Second Quarter 2010		25		4.50	%
	Third Quarter 2010		3		3.49	%
2009 Series A	November 2009		2		2.25	%	November 2010	2	2.25%
2009 Series B	December 2009		1		3.77	%	December 2010	1	3.77%
2009 Series A	May 2010		2		2.25	%
2009 Series B	June 2010		1		3.77	%
		$	35
Total								$ 5

~~TVA also has access to a financing arrangement with the U.S. Treasury pursuant to the TVA Act.~~

Credit Facility Agreements. TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility matures on September 30, ~~2010,~~2011, and is expected to be renewed. This arrangement is pursuant to the TVA Act. Access to this credit facility or other similar financing arrangements ~~has been available~~was made possible by the 1959 amendments to the TVA ~~since the 1960s.~~Act. 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~~faci lity 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 ~~credit fa cility~~facility at ~~June 30,~~December 31, 2010 ~~and September 30, 2009.~~.

TVA also has ~~short-term~~ funding available in the form of ~~two short-term~~three revolving credit facilities oftotaling $2.5 billion. The $1.0 billion ~~each, one of which matures on November 8, 2010, and the other of which~~short-term credit facility matures on May 11, ~~2011.~~2011, and both the $0.5 billion and the $1.0 billion long-term credit facilities mature on January 14, 2014. The credit facilities also accommodate the issuance of letters of credit. The interest rate on any borrowing under these facilities is variable 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 ~~$2.0~~$2.5 billion which TVA has not borrowed or ~~committed~~commit ted under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA’s senior ~~unsec ured~~unsecured long-term non-credit enhanced debt. At ~~June 30,~~December 31, 2010, and September 30, ~~2009,~~2010, there were ~~$133~~$168 million and ~~$103~~$411 million, respectively, of letters of credit outstanding under the facilities in place at those times, and there were no outstanding borrowings.

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11. Seven States Power Corporation Obligation~~Obligation~~

Seven States Power Corporation (“Seven States”), through its subsidiary, Seven States Southaven, LLC (“SSSL”), exercised Seven States’s option to purchase from TVA an undivided 90-percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi. As part of interim joint-ownership arrangements, Seven States has the right at any time, ~~during the interim period,~~ and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven ~~States’~~States’s interest in the facility.

~~Table of Contents~~

operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or alternative arrangements, are not in place by April 23, 2013. TVA’s buy-back obligation will terminate if such long-term arrangements are in place by that date. In the event of a buy-back, TVA will re-acquire the Seven States interest in the facility and the related assets. As of ~~June~~December 31, 2010, and September 30, 2010, the carrying amount of the obligation was approximately $409 million and $413 ~~million.~~

million, respectively~~12. Risk~~ ~~Management Activities~~ ~~and Derivative Transactions~~.

TVA recognizes certain of its derivative instruments as either assets or liabilities on its 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 gains12. Risk Management Activities 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 (e.g., cash flow hedge).~~Derivative Transactions

TVA is exposed to various market risks. These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and counterparty performance risk. 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, it is TVA’s policy 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 balance sheets at fair value. The accounting for changes in the fair value of these instruments depends on whether TVA uses regulatory accounting to defer the derivative gains and losses, or whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and if so, the type of hedge relationship (e.g., 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)
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (Part 1)														Summary of Derivative Instruments That Receive Hedge Accounting Treatment (Part 1)
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	Amount of Mark-to-Market (Loss) Gain Recognized in Other Comprehensive Income (Loss) (“OCI”) Three Months Ended June 30					Amount of Mark-to-Market (Loss) Gain Recognized in OCI Nine Months Ended June 30 (a)							Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	Amount of Mark-to-Market Gain (Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”) Three Months Ended December 31
			2010			2009		2010			2009						2010	2009

Currency swaps	To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction	$	(76	)	$	218	$	(55	)	$	(105	)		To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction	$49	$68

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)

Derivatives in Cash Flow
Hedging Relationship

Amount of Exchange
Gain (Loss) Reclassified from
OCI to Interest Expense
Three Months Ended
June 30 (a)

Amount of Exchange
Gain (Loss) Reclassified from
OCI to Interest Expense
Nine Months Ended
June 30 (a)

2010 2009 2010 2009

Currency swaps $ 14 $ (126 ) $ 63 $ 80
Note
(a) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.
Also see Note 13.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Ended December 31 (1)
			2010	2009
Swaption	To protect against decreases in value of the embedded call (interest rate risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	$ —	$ —

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 (if any) are recognized in gain/loss on derivative contracts. (2)	—	—

Coal contract derivatives	To protect against fluctuations in market prices of purchased coal (price risk)	Mark-to-market gains and losses are recorded as regulatory assets or liabilities. They are recognized in fuel and purchased power expense when the related coal is used in production. (3)	—	—

Commodity derivatives under financial trading program	To protect against fluctuations in market prices of purchased commodities (price risk)	Mark-to-market gains and losses are recorded as a regulatory assets or liabilities. Realized gains and losses are recognized in fuel and purchased power expense when the related commodity is used in production.	(42)	(50)
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 ended December 31, 2009 and 2010. (2) Generally, TVA maintains a level of outstanding discount notes equal to or greater than the notional amount of the interest rate swaps. However, in September 2010, TVA issued $1.0 billion of long-term Bonds in anticipation of the January 2011 maturity of the $1.0 billion 2001 Series A Bonds. As a result of this Bond issuance, TVA paid down its discount notes which caused the discount note balance outstanding at December 31, 2010 to be below the notional amount of the interest rate swaps. There is no statement of operations impact of this due to the use of regulatory accounting for these items. (3) Settlement fees associated with early contract terminations are recognized in fuel and purchased power expense in the period incurred.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Derivative Type Objective of Derivative Accounting for Derivative Instrument
Amount of Gain
(Loss) Recognized in Income on Derivatives
Three Months Ended
June 30 (a)

Amount of Gain
(Loss) Recognized in
Income on Derivatives
Nine Months Ended
June 30 (a)

2010 2009 2010 2009

Swaption

To protect against decreases in value of the embedded call (interest rate risk)

Gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.
$ — $ — $ — $ —

Interest rate swaps

To fix short-term debt variable rate to a fixed rate (interest rate risk)

Gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.
— — — —

Coal contract derivatives

To protect against fluctuations in market prices of purchased coal (price risk)

Gains and losses are recorded as regulatory assets or liabilities. They are recognized in fuel and purchased power expense when the related coal is used in production.(b)
— (27 ) — (27 )

Commodity derivatives
under Financial Trading Program

To protect against fluctuations in market prices of purchased commodities (price risk)

Realized gains and losses are recorded in earnings as fuel and purchased power expense. Unrealized gains and losses are recorded as a regulatory asset/liability.

(26 ) (132 ) (98 ) (289 )
Note
(a) All of TVA’s derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three and nine months ended June 30, 2010, and 2009.
(b) Settlement fees associated with early contract termination are recognized in fuel and purchased power expense in the period incurred. Settlement fees with early contract terminations that qualify for regulatory accounting are recorded as regulatory assets.

MARK-TO-MARKET VALUES OF TVA DERIVATIVES
	At December 31, 2010		At September 30, 2010

Derivatives that Receive Hedge Accounting Treatment:

	Balance	Balance Sheet Presentation	Balance	Balance Sheet Presentation
Currency swaps:
£200 million Sterling	$ (34)	Other long-term liabilities	$ (42)	Other long-term liabilities
£250 million Sterling	13	Other long-term assets	(5)	Other long-term liabilities
£150 million Sterling	(11)	Other long-term liabilities	(34)	Other long-term liabilities

Derivatives that Do Not Receive Hedge Accounting Treatment:

	Balance	Balance Sheet Presentation	Balance	Balance Sheet Presentation
Swaption:
$1.0 billion notional	$ (583)	Other long-term liabilities	$ (804)	Other long-term liabilities

Interest rate swaps:
$476 million notional	(243)	Other long-term liabilities	(356)	Other long-term liabilities
$42 million notional	(12)	Other long-term liabilities	(15)	Other long-term liabilities
Coal contract derivatives	(6)	Other long-term assets $202; Other current assets $101; Other long-term liabilities ($125); Accounts payable and accrued liabilities ($184)	103	Other long-term assets $103; Other current assets $49; Other long-term liabilities ($2); Accounts payable and accrued liabilities ($47)

Derivatives under financial trading program:
Margin cash account*	37	Other current assets	12	Other current assets
Unrealized losses, net	(196)	Current regulatory assets ($114); Regulatory assets ($106); Current regulatory liabilities $15; Regulatory liabilities $9	(269)	Current regulatory assets ($137); Regulatory assets ($142); Current regulatory liabilities $7; Regulatory liabilities $3
Note * In accordance with certain credit terms, TVA used leverage to trade financial instruments under the financial trading program. Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under financial trading program table.

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Mark-to-Market Values of TVA Derivatives

At June 30, 2010 At September 30, 2009

Derivatives that Receive Hedge Accounting Treatment:

Balance Balance Sheets Presentation Balance Balance Sheets Presentation
Currency swaps:

£200 million Sterling
$ (51 ) Other long-term liabilities $ (33 ) Other long-term liabilities

£250 million Sterling
(15 ) Other long-term liabilities 7   Other long-term assets

£150 million Sterling
(33 ) Other long-term liabilities (18 ) Other long-term liabilities

Derivatives that Do Not Receive Hedge Accounting Treatment:

Balance Balance Sheets Presentation Balance Balance Sheets Presentation

Swaption:

$1.0 billion notional
$ (674 ) Other long-term liabilities $ (592 ) Other long-term liabilities

Interest rate swaps:
$476 million notional (295 ) Other long-term liabilities (276 ) Other long-term liabilities
$42 million notional (13 ) Other long-term liabilities (11 )   Other long-term liabilities
Coal contract derivatives 13

  Other long-term assets $40,
Other long-term
liabilities ($27)
7

  Other long-term assets $87,
Other long-term
  liabilities ($80)

Commodity derivatives under Financial Trading Program:
Margin cash account* 19 Inventories and other, net 28 Inventories and other, net
Unrealized losses, net (199 )

Other regulatory assets ($203), Regulatory liabilities $4
(68 )

Other regulatory assets ($85), Regulatory liabilities $17
Note
* In accordance with certain credit terms, TVA leverages financial instruments under the Financial Trading Program. Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Commodity Derivatives Under Financial Trading Program table below.

~~Table of Contents~~

Cash Flow Hedging Strategy for Currency Swaps

To protect against the 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 ~~has~~had the following currency swaps outstanding as of ~~June 30,~~December 31, 2010:

Currency Swaps Outstanding As of June 30, 2010
Currency Swaps Outstanding As of December 31, 2010				Currency Swaps Outstanding As of December 31, 2010
Effective Date of Currency Swap Contract	Associated TVA Bond Issues – Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA		Associated TVA Bond Issues – Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA
2003	£150 million	2043	4.96%		£150 million	2043	4.96%
2001	£250 million	2032	6.59%		£250 million	2032	6.59%
1999	£200 million	2021	5.81%		£200 million	2021	5.81%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by an exchange loss on the swap contract. Conversely, when the dollar weakens, 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~~Long-Term Debt, Net. The offsetting exchange losses or gains on the swap contracts are recognized in Accumulated ~~other comprehensive loss. I~~Other Comprehensive Lossf. If any loss ~~(gain)~~or gain were to be incurred as a result of the early termination of the foreign currency swap contract, any resulting charge ~~(income)~~or income would be amortized over the ~~rema ining~~remaining life of the associated Bond as a component of interest expense.

Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate ~~Swaps~~

Swaps. TVA ~~has~~ entered into four swaption transactions to monetize the value of call provisions on certain of its Bond issues. A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a floating rate of interest and pays the third party a fixed rate of interest equal to the interest rate on the Bond issue whose call provision TVA has ~~monetized.~~monetized.

~~In 2003, TVA monetized~~ Subsequently, the ~~call provisions on a $1.0 billion Bond issue by entering into a swaption agreement with a third party in exchange for $175 million (the “2003A Swaption”).~~

~~In 2003, TVA also monetized~~counterparties to three of the ~~call provisions on a $476 million Bond issue by entering into a swaption agreement with a third party in exchange for $81 million (the “2003B Swaption”).~~

~~In 2005, TVA monetized the call provisions on two electronotes~~® ~~issues ($42 million total par value) by entering into swaption agreements with a third party in exchange for $5 million (the “2005 Swaptions”).~~

~~In February 2004, the counterparty to the 2003B Swaption~~swaptions exercised its option to enter into an interest rate swap with TVA, effective April 10, 2004, requiring TVA to make fixed rate payments to the counterparty of 6.875 percent and the counterparty to make floating payments to TVA based on London Interbank Offered Rate (“LIBOR”). These payments are based on the notional principal amount of $476 million and began on June 15, 2004.

~~In February 2008, the counterparty to the 2005 Swaptions exercised its options~~their rights to enter into interest rate swaps with TVA, effective March 11, 2008. Under the swaps, TVA is required to make fixed rate payments to the counterparty at 6.125 percent, and the counterparty is required to make floating payments to TVA based on LIBOR. These payments are based on a combined notional amount of $42 million and began on April 15, 2008.TVA.

TVA uses regulatory accounting treatment to defer the mark-to-market gains and losses on these ~~swap~~swaps and swaption ~~agreements~~ and includes the gain or loss in the ratemaking formula when these transactions settle. The values of the ~~swap~~swaps and swaption ~~agreements~~ and related deferred unrealized gains and losses are recorded on TVA’s B~~alance~~balance sheets with realized gains or losses, if any, recorded on TVA’s ~~Statements~~statements of ~~operations~~.operations. There were no realized gains or losses for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009.

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For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 ~~the changes in market value resulted in deferred unrealized (losses) gains on the value of the interest rate swaps~~ and ~~swaption of $(318) million and $(105) million, respectively. For the three and nine months ended June 30,~~ 2009, the changes in market value resulted in deferred unrealized gains (losses) on the value of the interest rate swaps and swaption of ~~$380~~$337 million and ~~$(169)~~$218 million, respectively. All net deferred unrealized ~~gains (losses)~~losses are reclassified as regulatory ~~liabilities (assets)~~assets on the B~~alance sheets~~.balance sheets.

Commodity ~~Derivatives~~

Derivatives. TVA enters into certain ~~supply~~derivative contracts for coal and ~~natural gas~~electricity that require physical delivery of ~~fixed~~the contracted quantity of the commodity. TVA expects to take or make delivery, as appropriate, under the electricity contract derivatives. Accordingly, these contracts qualify for normal purchases and normal sales accounting. During the three months ended December 31, 2010, TVA determined that certain quantities ~~at fixed prices. The natural gas contracts and certain~~under the coal ~~contracts are not required to be marked to market because (1) they are~~contract derivatives were no longer probable of physical ~~delivery~~delivery; therefore, these contracts were no longer eligible for normal purchases and ~~(2) early net settlement is not probable. Coal contracts that do not qualify for this exception are~~normal sales accounting. Accordingly, TVA marked all of its coal contract derivatives to market ~~on a quarterly basis~~ as ~~coal contract derivatives. Additionally, certain coal contracts contain options that permit TVA to either increase or reduce the amounts~~ of coal delivered within specified guidelines. Essentially, the option to take more or less coal represents a purchased option that is combined with the forward coal contract in a single supply contract.December 31, 2010.

At ~~June 30,~~December 31, 2010, and September 30, ~~2009,~~2010, TVA’s coal contract derivatives had net market values of ~~$13~~$(6) million and $7$103 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis. ~~TVA will defer all unrealized gains or losses related to these contracts and record only realized gains or losses as fossil fuel expense at the time the coal is used in production.~~ At ~~June 30,~~December 31, 2010, TVA’s coal contract derivatives had terms of up to 2five years.

Coal Contract Derivatives

At June 30, 2010 At September 30, 2009

Number of
Contracts
Notional Amount
(in tons)
Fair Value (MtM)
(in millions)
Number of Contracts
Notional Amount
(in tons)
Fair Value (MtM)
(in millions)

Coal Contract Derivatives 10 25 million $ 13 7 29 million $ 7

~~Commodity~~

Coal Contract Derivatives
	At December 31, 2010			At September 30, 2010
	Number of Contracts	Notional Amount (in tons)	Fair Value (MtM) (in millions)	Number of Contracts	Notional Amount (in tons)	Fair Value (MtM) (in millions)

Coal Contract Derivatives	35	87 million	$ (6)	11	27 million	$ 103

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Derivatives Under Financial Trading ~~Program~~

Program. TVA has a ~~Financial Trading Program~~financial trading program (“FTP”) under which it ~~can purchase~~purchases and ~~sell~~sells 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 ~~FCA~~fuel cost adjustment (“FCA”) 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 FCA and construction material transactions is $130 million (based on one-day value at risk). In ~~addition,~~ad dition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of ~~t he~~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. ~~Under the FTP,~~ TVA is prohibited from trading financial instruments under the FTP for speculative purposes.

At ~~June 30,~~December 31, 2010, the only risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, and ~~crude oil.~~coal. Futures contracts and option contracts under the FTP had remaining terms of less than two years. Swap contracts under the FTP had remaining terms of ~~four~~five years or ~~less~~.less.

Derivatives Under Financial Trading Program
	At December 31, 2010		At September 30, 2010
	Notional Amount	Fair Value (MtM) (in millions)	Notional Amount	Fair Value (MtM) (in millions)

Natural gas (mmBtu)

Futures contracts	6,510,000	$ (15)	7,920,000	$ (21)
Swap contracts	148,835,000	(185)	137,110,000	(241)
Option contracts	5,250,000	(2)	5,250,000	(2)
Natural gas financial positions	160,595,000	$ (202)	150,280,000	$ (264)

Fuel oil/crude oil (in barrels)
Futures contracts	—	$ —	125,000	$ 2
Swap contracts	1,623,000	18	1,711,000	8
Option contracts	360,000	—	495,000	—
Fuel oil/crude oil financial positions	1,983,000	$ 18	2,331,000	$ 10

Coal (in tons)
Futures contracts	—	$ —	—	$ —
Swap contracts	420,000	3	480,000	—
Option contracts	—	—	—	—
Coal financial positions	420,000	$ 3	480,000	$ —
Note 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 broker or other counterparty. Notional amounts disclosed represent the net absolute value of contractual amounts.

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Commodity Derivatives Under Financial Trading Program

At June 30, 2010 At September 30, 2009

Notional
Amount

Fair Value (MtM)
(in millions)

Notional
Amount

Fair Value (MtM)
(in millions)

Natural gas (mmBtu)

Futures contracts 14,130,000 (28 ) 30,020,000 (25 )
Swap contracts 130,987,500 (162 ) 115,307,500 (36 )
Option contracts 5,600,000 — 7,300,000 1

Natural gas financial positions 150,717,500 $ (190 ) 152,627,500 $ (60 )

Fuel oil/crude oil (in barrels)

Futures contracts 147,000 $ 2 398,000 $ 3
Swap contracts 1,917,000 — 1,660,000 7
Option contracts 675,000 1 1,236,000 3
Fuel oil/crude oil financial positions 2,739,000 $ 3 3,294,000 $ 13
Note
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 broker 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 product. In addition to the open commodity derivatives disclosed above, TVA had fixed derivative contracts with market values of ~~$(12) million and $(21)~~$(15) million at ~~June~~both December 31, 2010, and September 30, 2010. The deferred unrealized losses related to natural gas hedges were $202 million at December 31, 2010, and $264 million at September 30, ~~2009, respectively, which were recorded as regulatory assets.~~

~~Natural Gas~~

At June 30, 2010, TVA had natural gas hedges with notional volumes equivalent to 150,717,500 (in mmBtu), the market value of which was a net loss of $190 million. The net unrealized gains of $41 million and net unrealized losses of $130 million for the three and nine months ended June 30, 2010, respectively, were recorded as a decrease and an increase, respectively, to the regulatory asset.2010. For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 ~~TVA recognized realized losses on natural gas hedges of $30 million~~ and ~~$110 million, respectively, which were recorded as increases to purchased power expense.~~

At September 30, 2009, TVA had natural gas hedges with notional volumes equivalent to 152,627,500 (in mmBtu), the market value of which was a net loss of $60 million. The unrealized loss of $63 million and unrealized gain of $3 million for the year ended September 30, 2009, were deferred as a regulatory asset and a regulatory liability, respectively. For the three and nine months ended June 30, 2009, TVA recognized realized losses on natural gas hedges of ~~$132~~$48 million and ~~$289~~$55 million, respectively, which were recorded as increases to fuel and purchased power expense.

~~Fuel Oil/Crude Oil~~

~~At June 30, 2010, TVA had notional volumes of~~ The deferred unrealized gains related to fuel oil/crude oil hedges ~~equivalent to 2,739,000 (in barrels)~~were $18 million at December 31, 2010, ~~the market value of which was a net gain of $3 million. The net unrealized losses of $17 million~~ and $10 million ~~for the three and nine months ended June~~at September 30, ~~2010, respectively, were recorded as decreases to the regulatory liability.~~2010. For the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009, TVA recognized realized gains on fuel oil/crude oil hedges of $3$6 million and ~~$12~~of $5 million, respectively, which were recorded as ~~reductions of fossil~~decreases to fuel and purchased power expense.

At September 30, 2009, TVA had notional volumes of fuel oil/crude oil hedges equivalent to 3,294,000 (in barrels), the market value of which was a net gain of $13 million. The unrealized loss of $1 million and unrealized gain of $14 million for the year ended September 30, 2009, were deferred as a regulatory asset and a regulatory liability, respectively. For the nine months ended June 30, 2009, TVA recognized realized losses on fuel oil/crude oil hedges of $2 million, which were recorded as increases to fossil fuel expense. There were no realized gains or losses on fuel oil/crude oil hedges for the three months ended June 30, 2009.

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Other Derivative Instruments

~~Other Commodity Derivatives~~

TVA enters into forward contracts that hedge cash flow exposures to market fluctuations in the price and delivery of certain commodities including coal, natural gas, fuel oil, crude oil, electricity, uranium, and construction commodities. TVA expects to take or make delivery, as appropriate, under certain forward contracts. Accordingly, these contracts qualify for normal purchases and normal sales accounting and are not required to be marked-to-market each reporting period.

Investment Fund ~~Derivatives~~

Derivatives. Investment funds consist primarily of funds held in ~~trusts designed to fund nuclear decommissioning requirements, AROs,~~the NDT, the Asset Retirement Trust (“ART”), and the supplemental executive retirement plan (“SERP”). All securities in the trusts are classified as trading. See Note 13 for a discussion of the trusts’ objectives and the types of investments included in the various

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trusts. Derivative instruments in these trusts include swaps, futures, options, forwards, and other instruments. As of ~~June 30,~~December 31, 2010, and September 30, ~~2009,~~2010, the fair value of derivative instruments in these trusts was immaterial.

Collateral

. TVA’s interest rate swaps, ~~two of~~ its currency swaps, and its swaption 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. These derivative instruments contain provisions which may adjust these thresholds based on the credit rating of TVA’s debt per Standard & Poor’s Rating Service (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”) and TVA’s continued status as a majority-owned U.S. government entity. If these credit risk-related contingent features were triggered, TVA could be required by its counterparties to provide additional collateral on these derivative instruments in net liability positi ons.

As of ~~June 30,~~December 31, 2010, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was ~~$1.0 billion.~~$883 million. TVA’s collateral obligation as of ~~June 30,~~December 31, 2010, under these arrangements was ~~$225~~$168 million, for which TVA had posted ~~$133~~$168 million under a letter of credit. ~~The difference between the obligation and the collateral amount is due to the timing of the collateral posting. Postings under the~~These letter of credit postings reduce the available balance ~~of TVA’s revolving~~under the related credit ~~facilities.~~facility. 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 ~~the~~TVA remains a majority-owned U.S. government entity but Standard & Poors (“S&P”) or Moody’s Investor Service (“Moody’s”) downgrades TVA’s credit ~~risk-related contingent features underlying these agreements were triggered at June 30, 2010,~~rating to AA+ or Aa1, respectively, TVA would ~~have been~~be required to post ~~up to $897~~an additional $20 million of ~~additional~~ collateral ~~with~~in excess of its ~~counterparties.~~December 31, 2010, obligation; and

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

Counterparty Credit Risk

~~Credit~~Counterparty 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~~

Customers.The majority of TVA’s counterparty credit risk is limited to trade accounts receivable from delivered power sales to municipal and cooperative distributor customers, 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. Power sales to ~~the United States Enrichment Corporation (“USEC”),~~ TVA’s largest industrial customer directly served represented five percent ~~and seven percent~~ of TVA’s total operating revenues for the three ~~and nine~~ months ended ~~Jun e 30, 2010, respectively. USEC’s~~December 31, 2010. This custo mer’s senior unsecured credit ratings are currently ~~‘CCC’~~‘CCC-’ by S~~&P’s~~&P and ‘Caa2’ by Moody’s. As a result of its credit ratings, ~~USEC~~this customer has provided credit assurance to TVA under the terms of its power contract. TVA had concentrations of accounts receivable from seven customers that represented 36 percent and 41 percent of total outstanding accounts receivable at ~~June 30,~~December 31, 2010, and September 30, ~~2009,~~2010, respectively.

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Credit of Derivative ~~Counterparties~~

Counterparties. TVA has entered into derivative contracts for hedging purposes, and TVA’s NDT and defined benefit pension ~~fund~~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 and the pension fund 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~~counter parties to TVA in various derivative transactions. As of ~~June 30,~~December 31, 2010, the swaption and all of TVA’s currency swaps, interest ~~rates~~rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody’s credit rating was “A2” or higher. As of ~~June 30,~~December 31, 2010, 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 “B2” or higher.

Credit of ~~Suppliers~~

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 1417 different suppliers at ~~June 30,~~December 31, 2010. The contracted supply of coal is sourced from multiple geographic regions of the United States and is tot o be delivered via various transportation ~~met hods~~methods (e.g., barge, rail, and truck). TVA purchases all of its natural gas requirements from a variety of suppliers under short-term contracts.

~~As mentioned in Item 1, Business —~~ ~~Current Power Supply — Purchased Power and Other Agreements~~ ~~in the Annual Report,~~ TVA has a power purchase agreement with ~~Choctaw Generation, L.P. (“Choctaw”)~~a supplier of electricity for 440 MW of summer net capability from a lignite-fired generating plant that expires on March 31, 2032. ~~Choctaw’s~~The supplier’s senior secured credit ratings are currently ‘BB-’ by ~~Standard & Poor’s~~S&P and ~~‘B2’~~‘B+’ by Moody’s. As a result of its credit ratings, ~~Choctaw~~the supplier has provided credit assurance to TVA ~~per~~

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under the terms of its agreement. Additionally, ~~USEC is~~the senior unsecured credit ratings of TVA’s largest supplier of uranium enrichment ~~services.~~services, which is also TVA's largest industrial customer directly served, are currently 'CCC-' by S&P and 'Caa2' by Moody's. Any nonperformance by ~~USEC~~this company could result in TVA incurring additional costs.

13. Fair Value Measurements~~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 TVA’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

There are three main approaches to measuring the fair value of assets and liabilities: (1) the market approach; (2) the income approach; and (3) the cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts of income. The cost approach is based on the amount that would currently be required to replace an asset. TVA uses the market approach and the income approach in its fair value measurements.

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The valuation techniques used to measure fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect TVA’s market assumptions. These two types of inputs create the following fair value hierarchy:

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 B~~alance sheet~~Balance Sheet as of ~~June 30,~~December 31, 2010, and S~~tatements~~Statements of ~~changes~~Changes in ~~proprietary capital~~Proprietary Capital for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010. Except for gains and losses on SERP assets, there has been no impact to the S~~tatements~~Statements of ~~operations~~Operations or the S~~tatements~~Statements of ~~cash flows~~Cash Flows related to these fair value measurements.

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Investments

At ~~June 30,~~December 31, 2010, TVA’s investment funds were composed of ~~$984 million~~$1.2 billion of securities classified as trading and measured at fair value and $2 million of equity investments not required to be measured at fair value. Trading securities are held in the ~~nuclear decommissioning trust (“NDT”), asset retirement trust (“ART”),~~NDT, ART, and SERP. The NDT holds funds for the ultimate decommissioning of ~~its~~TVA’s nuclear power plants. The ART holds funds for the costs related to the future closure and retirement of TVA’s long-lived assets. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that ~~is not creditable under~~exceeds limits imposed by Internal Revenue Service (“IRS”) rules applicable to the qualified defined benefit pension plan. The NDT and SERP are invested in securities generally designed to achieve a return in line with ~~broad~~overall equity market performance. The ART is presently invested to achieve a return in line with 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 (“REIT”) 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 venture ~~capita l,~~capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations. 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, a ten-year or longer investment commitment. The NDT had unfunded commitments related to private partnerships of $83 million at December 31, 2010. These investments have no redemption or limited redemption options and may also have imposed restrictions on the trust’s ability to liquidate its investment interest. The private partnerships and other similar alternative investments are ~~classified~~reported at fair value which is derived by independent appraisals or judgment of the general partners of each such investment. The inputs used in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments of comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows of the limited partnerships. The fair value of these investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from th e value ultimately realized from the private partnership investments. TVA classifies its interest in these types of investment as Level 3 ~~valuations.~~ within the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT and SERP consist either of a single class of security, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in ~~the~~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 net asset values ~~("NAV"~~(“NAV”) per fund share

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~~(the~~(the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be liquidated at the measurement date NAV price and are classified as Level 2 valuations. Required notification periods range from zero to 303 0 days. The funds can be redeemed unless doing so would violate regulations to which the fund is subject, would be unreasonable or impracticable, or would be seriously prejudicial to the fund. As of June 30, 2010, TVA did not have any unfunded commitments related to the commingled funds. The NDT had unfunded commitments related to commingled funds of $48 million at June 30, 2010, and these commitments will be funded by NDT assets.

~~Gains~~Realized and unrealized gains and losses on trading securities are recognized in current earnings and are based on average cost. The SERP had unrealized ~~losses~~gains of $2 million and $1 million for the three months ended ~~June 30,~~December 31, 2010, and ~~had unrealized gains of $2 million for the three months ended June 30, 2009.~~December 31, 2009, respectively. 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. The NDT had unrealized ~~losses~~gains of ~~$61~~$23 million and $20 million for the three months ended ~~June 30,~~December 31, 2010 and ~~had unrealized gains of $85 million for~~2009, respectively, and the ~~three months ended June 30, 2009. The~~ ART had unrealized gains of less than $1 million for the three months ended ~~June 30,~~both December 31, 2010 and ~~had unrealized losses of less than $1 million for the three months ended June 30,~~December 31, 2009.

Currency Swaps, Swaption, and Interest Rate Swaps

See Note 12 — 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, swaption, and interest rate swaps.

The currency swaps and interest rate swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments. The swaption is classified as a Level 3 valuation and is valued based on an income approach. The valuation is computed using a broker-provided pricing model utilizing

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interest and volatility rates. While most of the fair value measurement is based on observable inputs, volatility for TVA’s swaption is generally unobservable. Therefore, the valuation is derived from an observable volatility measure with adjustments.

Coal Contract ~~Derivatives~~ and Commodity Derivatives ~~Under TVA’s Financial Trading Program~~

~~See Note 12 —~~ ~~Derivatives Not Receiving Hedge Accounting Treatment — Coal Contract Derivatives~~ ~~and~~ ~~Commodity Derivatives Under Financial Trading Program~~ ~~for a discussion of the nature and purpose of coal contract derivatives and commodity derivatives under TVA’s Financial Trading Program.~~

Coal Contract ~~Derivatives~~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 ~~price forecasts developed with the assistance of a third-party valuation service, and other~~ 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 Financial Trading ~~Program~~Program.. 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 12 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and Derivatives Under Financial Trading Program for a discussion of the nature and purpose of coal contracts and derivatives under TVA’s FTP.

Nonperformance Risk

The impact 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, a swaption, 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.

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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 a ~~credit valuation adjustment~~Credit Valuation Adjustment (“CVA”). 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 2009) for ~~companies~~com panies with a similar credit rating over a time period consistent with the remaining term of the ~~contract as of June 30, 2010.~~contract. The application of CVAs resulted in a $1$59 million decrease in the fair value of assets ~~measured~~ and a $2 million decrease in the fair value of liabilities ~~as of June 30,~~at December 31, 2010.

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The following ~~table sets~~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 ~~June~~December 31, 2010, and September 30, 2010. 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	Fair Value Measurements															Fair Value Measurements
		As of June 30, 2010											As of September 30, 2009				As of December 31, 2010
Assets		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting1			Total		Total				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Description																			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Investments:

Currency swaps																	$	—	$	13	$	—	$	—		$	13
Investments
Equity securities		$	60	$	—	$	—	$	—		$	60	$	83				202		4		—		—			206
Debt securities-U.S. government corporations and agencies			134		68		—		—			202		111
Debt securities
U.S. government corporations and agencies																		103		91		—		—			194
Corporate debt securities			—		160		—		—			160		203				—		200		—		—			200
Residential mortgage-backed securities			—		19		—		—			19		18				—		19		—		—			19
Commercial mortgage-backed securities			—		1		—		—			1		2				—		2		—		—			2
Collateralized debt obligations			—		5		—		—			5		6				—		8		—		—			8
Commingled funds2:
Commingled funds(2)
Equity security commingled funds			—		305		—		—			305		328				—		301		—		—			301
Debt security commingled funds			—		179		—		—			179		185				—		212		—		—			212
Foreign currency commingled funds			—		12		—		—			12		11
Other commingled funds			—		39		—		—			39		34				—		40		—		—			40
Private partnerships			—		—		2		—			2		—				—		—		19		—			19
Total investments			194		788		2		—			984		981				305		877		19		—			1,201
Coal contract derivatives																		—		—		303		—			303
Commodity derivatives under FTP
Futures contracts																		—		—		—		—			—
Swap contracts																		—		37		—		(15	)		22
Total commodity derivatives under FTP																		—		37		—		(15	)		22
Total																	$	305	$	927	$	322	$	(15	)	$	1,539

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

Currency swaps			—		—		—		—			—		7			$	—	$	45	$	—	$	—		$	45
Interest rate swaps																		—		255		—		—			255
Swaption																		—		—		583		—			583
Coal contract derivatives			—		—		40		—			40		87				—		—		309		—			309
Commodity derivatives under FTP:
Commodity derivatives under FTP
Futures contracts			2		—		—		—			2		3				15		—		—		—			15
Swap contracts			—		7		—		(5	)		2		12				—		201		—		(15	)		186
Option contracts			—		—		—		—			—		2				2		—		—		—			2
Total commodity derivatives under FTP			2		7		—		(5	)		4		17				17		201		—		(15	)		203
Total		$	196	$	795	$	42	$	(5	)	$	1,028	$	1,092			$	17	$	501	$	892	$	(15	)	$	1,395
Liabilities		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting1			Total		Total
Description
Currency swaps		$	—	$	99	$	—	$	—		$	99	$	51
Interest rate swaps			—		308		—		—			308		287
Swaption			—		—		674		—			674		592
Coal contract derivatives			—		—		27		—			27		80
Commodity derivatives under FTP:
Futures contracts			28		—		—		—			28		25
Swap contracts			—		168		—		(5	)		163		40
Option contracts			—		—		—		—			—		(2	)
Total commodity derivatives under FTP			28		168		—		(5	)		191		63
Total		$	28	$	575	$	701	$	(5	)	$	1,299	$	1,073
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 broker or other 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 exclusively composed of one class of security are classified in that category (e.g., equity, debt, or foreign currency securities). Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”
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 broker. (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 exclusively composed of one class of security are classified in that category (e.g., equity, debt, or foreign currency securities). Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”																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 broker. (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 exclusively composed of one class of security are classified in that category (e.g., equity, debt, or foreign currency securities). Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

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Fair Value Measurements
	As of September 30, 2010
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
Description			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total

Investments
Equity securities	$	96	$	—	$	—	$	—		$	96
Debt securities
U.S. government corporations and agencies		136		57		—		—			193
Corporate debt securities		—		193		—		—			193
Residential mortgage-backed securities		—		22		—		—			22
Commercial mortgage-backed securities		—		2		—		—			2
Collateralized debt obligations		—		3		—		—			3
Commingled funds(2)
Equity security commingled funds		—		340		—		—			340
Debt security commingled funds		—		209		—		—			209
Foreign currency commingled funds		—		12		—		—			12
Other commingled funds		—		45		—		—			45
Private partnerships		—		—		13		—			13
Total investments		232		883		13		—			1,128
Coal contract derivatives		—		—		152		—			152
Commodity derivatives under FTP
Futures contracts		2		—		—		—			2
Swap contracts		—		9		—		(1	)		8
Total commodity derivatives under FTP		2		9		—		(1	)		10
Total	$	234	$	892	$	165	$	(1	)	$	1,290

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

Currency swaps	$	—	$	81	$	—	$	—		$	81
Interest rate swaps		—		371		—		—			371
Swaption		—		—		804		—			804
Coal contract derivatives		—		—		49		—			49
Commodity derivatives under FTP
Futures contracts		21		—		—		—			21
Swap contracts		15		227		—		(1	)		241
Option contracts		2		—		—		—			2
Total commodity derivatives under FTP		38		227		—		(1	)		264
Total	$	38	$	679	$	853	$	(1	)	$	1,569
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 broker. (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 exclusively composed of one class of security are classified in that category (e.g., equity, debt, or foreign currency securities). Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

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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) ~~for the three and nine months ended June 30, 2010:~~:

Fair Value Measurements Using Significant Unobservable Inputs

For the Three Months
Ended June 30, 2010

For the Nine Months
Ended June 30, 2010

Private Partnerships Coal Contract Derivatives Swaption Private Partnerships Coal Contract Derivatives Swaption
Balances at beginning of period $ — $ — $ (448 ) $ — $ 7 $ (592 )
Purchases, issuances, and settlements 2 — — 2 — —
Total gains or losses (realized or unrealized):
Net unrealized gains (losses) deferred as regulatory assets and liabilities — 13 (226 ) — 6 (82 )
Balances at June 30, 2010 $ 2 $ 13 $ (674 ) $ 2 $ 13 $ (674 )

Fair Value Measurements Using Significant Unobservable Inputs
	Three Months Ended December 31, 2010
	Private Partnerships		Coal Contract Derivatives			Swaption

Balances as of September 30, 2010	$	13	$	103		$	(804	)
Purchases		4		—			—
Issuances		—		—			—
Settlements		—		—			—
Total gains or losses (realized or unrealized):
Net unrealized gains (losses) deferred as regulatory assets and liabilities		2		(109	)		221
Balances at December 31, 2010	$	19	$	(6	)	$	(583	)

	Three Months Ended December 31, 2009
	Private Partnerships		Coal Contract Derivatives			Swaption

Balances as of September 30, 2009	$	—	$	7		$	(592	)

Unrealized gains (net) deferred as regulatory liabilities		—		14			137
Unrealized losses related to expected net settlement fees deferred as regulatory assets		—		(15	)		—
Balances at December 31, 2009	$	—	$	6		$	(455	)

There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected ~~earnings~~net income during the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010. All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 6.

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 market value of the financial instruments held at ~~June 3~~0,December 31, 2010, and September 30, ~~2009,~~2010, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA’s financial instruments not recorded at fair value at ~~June 3~~0,December 31, 2010, and September 30, ~~2009,~~2010, were as follows:

Estimated Values of Financial Instruments	Estimated Values of Financial Instruments									Estimated Values of Financial Instruments
		At June 30, 2010				At September 30, 2009					At December 31, 2010				At September 30, 2010
		Carrying Amount		Fair Value		Carrying Amount		Fair Value			Carrying Amount		Fair Value		Carrying Amount		Fair Value

Cash and cash equivalents		$	198	$	198	$	201	$	201		$	242	$	242	$	328	$	328
Loans and other long-term receivables			85		76		77		68			93		84		83		75
Short-term debt, net			834		834		844		844			219		219		27		27
Long-term debt (including current portion), net			22,405		25,111		21,796		23,757			23,386		25,386		23,397		27,193

Because of the short-term maturity of cash and cash equivalents, restricted cash and investments, and short-term debt, net, the carrying amounts of these instruments approximate their fair values.

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Fair value of 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 ~~date of the respective~~ balance ~~sheets.~~sheet date.

Fair values for loans and other long-term receivables are estimated by determining the present value of future cash flows using a discount ~~rates~~rate equal to ~~the interest~~lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable.

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14. Other Income (Expense), Net

Other income ~~(expense)~~(Expense), net is comprised of the following:

Other Income (Expense), Net	Other Income (Expense), Net												Other Income (Expense), Net
		Three Months Ended June 30						Nine Months Ended June 30						For the three months ended December 31
		2010			2009			2010		2009				2010		2009

Interest income		$	1		$	2		$	4	$	7			$	2	$	2
Gains (losses) on investments			(2	)		2			1		(13	)			2		1
External services			3			4			9		9				5		2
Claims settlement			—			—			—		4
Miscellaneous			4			(6	)		6		6				2		1

Total other income (expense), net		$	6		$	2		$	20	$	13			$	11	$	6

15. Benefit Plans

TVA sponsors a qualified defined benefit pension 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 certain retirees’ medical coverage, other postemployment benefits such as workers’ compensation, and the SERP.

The ~~following table provides the~~ components of net periodic benefit cost ~~for the plans~~and other amounts recognized as changes in regulatory assets for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and ~~2009.~~2009 were as follows:

Components of TVA’s Benefit Plans																					Components of TVA’s Benefit Plans
	TVA Benefit Plan																					Three Months Ended December 31
	Three Months Ended June 30										Nine Months Ended June 30											Pension Benefits						Other Post-retirement Benefits
	Pension Benefits						Other Benefits				Pension Benefits						Other Benefits					2010			2009			2010			2009
	2010			2009			2010		2009		2010			2009			2010		2009

Components of net periodic benefit cost
Service cost	$	24		$	20		$	3	$	2	$	74		$	63		$	9	$	6		$	30		$	25		$	3		$	3
Interest cost		128			145			10		9		384			436			28		27			125			128			8			9
Expected return on plan assets		(140	)		(135	)		—		—		(404	)		(407	)		—		—			(122	)		(132	)		—			—
Amortization of prior service cost (credit)		(6	)		9			1		2		(18	)		27			4		4
Amortization of prior service cost																							(6	)		(6	)		(1	)		2
Recognized net actuarial loss		41			3			4		1		143			11			13		5			71			51			5			4
Net periodic benefit cost as actuarially determined		47			42			18		14		179			130			54		42			98			66			15			18
Amount charged (capitalized) due to actions of regulator		24			(21	)		—		—		38			(62	)		—		—			3			7			—			—
Net periodic benefit cost recognized	$	71		$	21		$	18	$	14	$	217		$	68		$	54	$	42
Total net periodic benefit cost recognized																						$	101		$	73		$	15		$	18

During the ~~nine~~three months ended ~~June 30,~~December 31, 2010, TVA did not make contributions to its pension plan. TVA does not separately set aside assets to fund other benefit costs, but rather funds such costs on an as-paid basis. TVA provided approximately ~~$27~~$12 million and ~~$21~~$11 million for other benefit costs during the ~~nine~~three months ended ~~June 30,~~December 31, 2010 and 2009, respectively. Net amounts capitalized due to actions of ~~the~~ regulator include amounts that have been deemed probable of recovery in future rates.

TVA made a contribution to the defined benefit pension plan on September 24, 2009, of $1.0 billion as an advance on its contributions through 2013. The pension plan is required to pay substantial benefits each year. TVA has not decided at this time whether it will make additional contributions before 2013. The plan currently remains underfunded with obligations recognized in the ~~Balance sheets~~ ~~as follows:~~

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Obligations and Funded Status
Recognized Amounts

Pension Benefits Other Post-retirement Benefits
June 30, 2010 September 30, 2009 June 30, 2010 September 30, 2009

Regulatory assets $ 3,600 $ 3,764 $ 281 $ 298
Accrued liabilities (5 ) (5 ) (35 ) (35 )
Other long-term liabilities (2,668 ) (2,618 ) (639 ) (630 )

~~Estimated benefit payments under the benefit plans by fiscal year are as follows:~~16. Legal Proceedings

Estimated Future Benefits Payments

Pension
Benefits
Other Post-retirement Benefits

2011 683 41
2012 678 45
2013 678 46
2014 678 48
2015 - 2019 3,394 245

~~Currently, TVA does not expect to make additional contributions to the defined benefit pension plan in 2010.~~

~~16.~~ ~~Legal Proceedings~~General

From time to time, TVA is a party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters (“Legal Proceedings”) that have arisen in the ordinary course of conducting TVA’s activities, as a result of a catastrophic ~~events~~event or otherwise. ~~These Legal Proceedings include the matters discussed below.~~ TVA had accrued approximately ~~$13~~$11 million with respect to Legal Proceedings as of ~~June 30,~~December 31, 2010. 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.

Litigation

Legal Proceedings Related to the Kingston Ash ~~Pond~~ Spill. Sixty lawsuits based on the Kingston ash spill have been filed in the United States District Court for the Eastern District of Tennessee. ~~Two~~Five of those actions have been voluntarily dismissed. The lawsuits, filed by residents, businesses, and property owners in the Kingston area, allege various causes of action in tort – including nuisance, strict liability, personal injury, and property damage – as well as inverse condemnation, and generally seek unspecified compensatory and punitive damages, court orders to clean up the plaintiffs’ properties and surrounding properties, and other relief. ~~Four~~Three of the ~~lawsuits are proposed~~four ac tions seeking class ~~actions, and three of the propos ed class actions~~certification have been ~~consolidated.~~voluntarily consolidated so there are now two different complaints, Mays and Chesney, seeking class certification. TVA is the sole defendant in all actions except ~~one of the proposed class actions,~~Chesney, in which Geosyntec Consultants, Inc., and ~~Worley Parsons~~WorleyParsons Corporation also are ~~also~~ defendants. On March 26, 2010, the court issued ~~its~~a decision on TVA’s motions to dismiss the first seven actions that had been filed – the proposed class actions and three other cases filed on behalf of named individuals. In those cases, the court dismissedfinding (1) the ~~tort claims related~~discretionary function doctrine is applicable to TVA’s ~~decisions to build and operate the~~ ash pond design decisions and ~~TVA’s recovery and remediation~~its spill response activities, (2) ~~the plantiffs’ demand for~~plaintiffs cannot recover punitive damages ag ainst TVA, and (3) ~~the plantiffs’ demand for~~plaintiffs have no right to a jury ~~trial.~~ trial against TVA. The court denied TVA’s motions with regard to ~~plantiffs’~~plaintiffs’ tort claims concerning TVA's maintenance and upkeep of the ash pond, along with the inverse condemnation claims raised by certain plaintiffs. The court has scheduled the ~~first sev en filed actions~~seven earliest-filed cases for trial beginning on September 13, 2011, and the remaining cases for trial beginning November 1, 2011.

TVA has received several notices of intent to sue under various environmental statutes from both individuals and environmental groups. In addition, TVA has received substantial other claims from individuals and companies allegedly affected by the ash spill, and may receive additional claims.

Civil Penalty and Natural Resource Damages for the Kingston Ash Spill. On June 14, 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 already satisfied $6 million of the obligation and may also be credited up to $2 million for performing environmental projects approved by TDEC. The remaining obligation will be paid in installments through July 2012.

~~Table~~ On January 24, 2011, TVA entered into a proposed memorandum of ~~Contents~~agreement with the TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damage claim assoc iated with the Kingston ash spill. As part of this memorandum of agreement, TVA agreed to pay $250,000 each year for three years as a down payment on the amount of natural resource damages ultimately established and to reimburse TDEC and the Fish and Wildlife Service for their costs.

Case Brought by North Carolina Alleging Public Nuisance. On January 30, 2006, North Carolina filed suit against TVA in the United States District Court for the Western District of North Carolina, alleging that TVA’s operation of its coal-fired power plants in Tennessee, Alabama, and Kentucky constitutes a public nuisance. On January 13, 2009, the court held that emissions from Bull Run Fossil Plant (“Bull Run”), Kingston, and John Sevier Fossil Plant (“John Sevier”), located in Tennessee, and Widows Creek Fossil Plant (“Widows Creek”), located in Alabama, constitute a public nuisance.

The court issued an order that required TVA to operate existing flue gas scrubbers and selective catalytic reduction systems (“SCRs”) at the units tothat have them, add scrubbers and SCRs by certain dates at the units that ~~did~~do not have them, ~~by certain dates,~~ and to meet specified emission rates and annual tonnage caps for nitrogen oxides (“NOx”) and sulfur dioxide (“SO2”) after the applicable operation dates for the scrubbers.

TVA had already made capital expenditure commitments to decrease emissions from some of the facilities, but the court ordered significant additional investments and in some instances compliance within a time frame that iswas shorter than TVA had planned. ~~The additional estimated costs of taking the actions required by the court would be approximately $1.7 billion from 2010 to 2014.~~

~~On May 29, 2009,~~ TVA appealed the ~~district court’s~~ decision to the United States Court of Appeals for the Fourth Circuit (“Fourth Circuit”), ~~and~~which on July 26, 2010, ~~the Fourth Circuit~~ reversed the holding of the district court and directed the district court to dismiss the action against TVA. In its decision, the Fourth Circuit held that (1) state laws, including nuisance laws, could not be used to bypass the regulatory structure established by Congress and the ~~EPA~~Environmental Protection Agency (“EPA”) for controlling emissions; (2) the district court improperly applied North Carolina law to power plants located in Alabama and Tennessee; and (3) the plant operations in Alabama and Tennessee could not be considered as nuisances because both states had specifically

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approved these operations.

~~At this time, it is not clear whether~~ North Carolina ~~will seek additional review of~~requested an en banc rehearing, but the Fourth ~~Circuit’s decision.~~Circuit denied this request on September 21, 2010. The district court dismissed the case with prejudice on October 1, 2010. North Carolina requested and received an extension of time to seek Supreme Court review until February 3, 2011.

Case Involving Alleged Violations of the New Source Review Regulations at Bull Run. The National Parks Conservation Association and the Sierra Club filed suit against TVA on February 13, 2001, in the United States District Court for the Eastern District of Tennessee, alleging that TVA did not comply with the New Source Review (“NSR”) requirements of the Clean Air Act ~~(“CAA”)~~ when TVA repaired Bull Run. On March 31, 2010, the court ruled in TVA’s favor, holding that two maintenance projects at Bull Run were “routine” and therefore did not require NSR permits. The plaintiffs appealed this decision to the United States Court of Appeals for the Sixth ~~Circui t.~~Circuit.

Case Involving ~~the General Waste Products Sites~~Tennessee Valley Authority Retirement System. ~~In July 2008, a third-party complaint under CERCLA was~~On March 5, 2010, eight current and former participants in and beneficiaries of the Tennessee Valley Authority Retirement System (“TVARS”) filed ~~against TVA~~suit in the United States District Court for the ~~Southern~~Middle District of ~~Indiana, alleging that~~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 ~~several other defendants disposed, or arranged~~to amend the ~~disposal,~~TVARS Rules and Regulations to (1) reduce the calculation for cost of ~~hazardous materials at two General Waste Products sites in Evansville, Indiana. This action was brought by a group of potentially responsible parties in order to require~~living adjustment (“COLA”) benefits for CY 2010 through CY 2013, (2) reduce the ~~third-party defendants to contribute to, or pay~~interest crediting rate for the ~~remediation~~fixed fund accounts, and (3) increase the eligibility age to receive COLAs from ag e 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 ~~sites. As of June 30,~~six individual defendants filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint. On July 28, 2010, ~~the total remediation cost for both sites was expected to exceed $10 million.~~ TVA has entered into a settlement agreement with the third-party pla intiffs which dismisses all claims made against TVA in the case. The settlement agreement must be approved by the court before TVA is dismissed from the case. The trial, previously scheduled to begin on July 12, 2010, has been postponed indefinitely.

~~Proceedings Regarding Bellefonte Nuclear Plant Units 1 and 2~~. On March 9, 2009, in response to a request by TVA, the Nuclear Regulatory Commission (“NRC”) issued an order reinstating the construction permits for Bellefonte Nuclear Plant (“Bellefonte”) Units 1 and 2 and returning Bellefonte to a terminated status. On May 8, 2009, the Blue Ridge Environmental Defense League (“BREDL”), the Bellefonte Efficiency and Sustainability Team (“BEST”), and the Southern Alliance for Clean Energy (“SACE”) filed a petitionmoved to intervene in the ~~NRC construction permit proceeding, raising several contentions regarding reinstatement of~~suit in the construction permits. 60; Holding their other contentions in abeyance, the NRC directed BREDL, BEST, SACE, TVA, and NRC staff to submit briefs addressing whether the NRC has the statutory authority to reinstate the construction permits.event it was not dismissed. On ~~January~~September 7, 2010, the ~~NRC issued a decision holding that~~district court dismissed the ~~NRC has legal authority to reinstate~~breach of fiduciary duty claim against the ~~construction permits, dismissing~~directors without prejudice, allowing the first two contentions submitted by BREDL, BEST, and SACE. The NRC referred the remainder of the contentions to an Atomic Safety and Licensing Board (“ASLB”) for further proceedings. On April 2, 2010, the ASLB issued its decision, finding that although BREDL and SACE established standing, they failed to proffer an admissible contention, and the ASLB dismissed their hearing petition. On April 20, 2010, BREDL and SACE filed a motion for additional timeplaintiffs to file an ~~appeal~~amended complaint within 14 days against TVARS and TVA but not the individual directors. The plaintif fs 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 ~~ASLB’s April 2, 2010 decision~~Internal Revenue Code, and ~~also filed the appeal itself. On April 30, 2010, TVA filed its answer opposi ng the motion for additional time and filed~~appointment of a ~~brief in opposition to the appeal. A decision by the NRC is pending.~~

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On March 30, 2009, BREDL filed a petition in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) challenging the NRC’s authority to reinstate the construction permits and alleging that the NRC failed to follow the requirements of the National Environmental Policy Act (“NEPA”). On May 6, 2009, the D.C. Circuit granted TVA’s motion to intervene in this proceeding. On June 11, 2009, the D.C. Circuit issued an order holding the case in abeyance pending further order of the court. On March 8, 2010, BREDL filed a second petition in the D.C. Circuit, again challenging NRC’s compliance with NEPA and the NRC’s authority to reinstate the construction permits. TVA’s motion to intervene was granted and TVA filed a mo tion for the court to dismiss BREDL’s second petition. On July 26, 2010, the D.C. Circuit issued an order consolidating the two BREDL petitions and continuing the stay of the case. This consolidation effectively grants TVA’s request to dismiss the second petition; further action in this case is not expected until the NRC addresses BREDL’s appeal of the ASLB’s April 2, 2010 decision, described above.

~~Administrative Proceeding Regarding Bellefonte Units 3 and 4~~. TVA submitted its Combined Construction and Operating License Application for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to the NRC in October 2007. On June 6, 2008, BEST, BREDL, and SACE submitted to the NRC a joint petition for intervention and a request for a hearing. The petition raised 20 potential contentions with respect to TVA’s Combined Construction and Operating License Application. The ASLB denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE. The NRC later reversed the ASLB’s decision to admit two of the four contentions, leaving only two contentions (which involve questions ab out the estimated costs of the new nuclear plant and the impact of the facility’s operations, in particular the plant intake, on aquatic ecology) to be litigated in a future hearing. No hearing will take place until the NRC issues a final Environmental Impact Statement and final Safety Evaluation Report for the units, which is not anticipated until the fall of 2011.seventh TVARS Board member.

~~Administrative Proceeding Regarding Watts Bar Nuclear Plant Unit 2~~. On ~~July 13, 2009, SACE,~~September 21, 2010, the ~~Tennessee Environmental Council,~~plaintiffs filed an amended complaint against TVARS and TVA. The plaintiffs allege, among other things, violations of their due process, equal protection, and property rights under 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 Nuclear Plant (“Watts Bar”) Unit 2. The petitioners raised seven contentions related to TVA’s environmental reviewUnited States Constitution, violations of the ~~project~~Administrative Procedure Act, and ~~the NRC’s basis for confidence in the availability~~breach of safe storage options for spent nuclear fuel. On November 19, 2009, the ASLB granted SACE’s request for hearing, admitted two of SACE’s seven cont entions for hearing, and denied the request for hearing submitted on behalf of the other four petitioners. The ASLB subsequently dismissed one of the two admitted contentions, and the sole remaining contention concerns the effects of two-unit operation on nearby aquatic resources. On March 26, 2010, the NRC affirmed the ASLB’s decision denying the other petitioners the opportunity to participate. After providing additional informationstatutory duties owed to the ~~NRC on April 9, 2010, which addressed one of the two admitted contentions, TVA submitted~~plaintiffs. They seek a ~~motion asking the ASLB to dismiss the contention as moot. The motion was unopposed by SACE~~declaratory judgment and on June 2, 2010, the ASLB granted TVA’s motion to dismiss the contention. A hearing on the remaining contention is scheduled to take place between July and September 2011. SACE has also asked the ASLB to waive the NRC’s longstanding regulations establishing that,appropriate relief for the ~~purposes~~alleged statutory and constitutional violations and breaches of NEPA, need for power an d alternative energy sources issues will not be considered in operating license proceedings. On June 29, 2010, the ASLB denied this request and declined to refer the waiver petition to the NRC for consideration. Subsequently, on July 15, 2010, SACE filed a petition for interlocutory review of this decision with the NRC. TVA filed its answer opposing this petition July 26, 2010.duty.

Case Arising out of Hurricane Katrina. In April 2006, TVA was added as a defendant to a class action lawsuit brought in the United States District Court for the Southern District of Mississippi by 14 Mississippi residents allegedly injured by Hurricane Katrina. The plaintiffs sued seven large oil companies and an oil company trade association, three large chemical companies and a chemical trade association, and 31 large companies involved in the mining and/or burning of ~~coal. The plaintiffs allege~~coal, alleging that the defendants’ greenhouse gas emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina’s increased destructive force. The ~~plainti ffs~~plaintiffs seek ~~monetary~~mone tary damages among other relief. The district court dismissed the case ~~on the grounds that the plaintiffs lacked~~for lack of standing. The plaintiffs appealed the dismissal to the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”)~~. In~~ which, in October 2009, ~~the Fifth Circuit~~ reversed the dismissal of the public and private nuisance, trespass, and negligence claims, affirmed the dismissal of the unjust enrichment, fraudulent misrepresentation, and civil conspiracy claims, and remanded the case to the district court for further proceedings. TVA and the other defendants filed a petition seeking a rehearing by the entire Fifth Circuit, which the Fifth Circuit granted. ~~The case had been scheduled for rehearing before the entire court, but~~However, on April 30, 2010, the Fifth Circuit issued an order stating that it lost the necessary quorum to rehear the ~~appeal. On~~appeal and, on May 28, 2010, the court determined that it had no viable way to ~~rehea r~~rehear the case and ~~concluded that the Fifth Circuit’s~~vacated its original decision ~~was vacated. The~~. As a result ~~is that~~, the district court’s ~~ruling dismissing~~dismissal was reinstated. On August 26, 2010, the plaintiffs served a petition to the U.S. Supreme Court for an order requiring the Fifth Circuit to rehear the case, ~~was reinstated.~~or to return it to the district court. The Supreme Court denied this petition on January 10, 2011, ending this case.

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Global Warming Cases, Southern District of New York. On July 21, 2004, two lawsuits were filed in the United States District Court for the Southern District of New York against TVA and other companies that generate power from fossil-fuel electric generating facilities alleging that global warming is a public nuisance and that carbon dioxide (“CO2”) emissions from fossil-fuel electric generating facilities should be ordered abated because they contribute to causing the nuisance. The first case was filed by various states (California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin) and the ~~Ci ty~~City of New York against TVA and other power suppliers. The second case, which also alleges private nuisance, was filed against the same defendants by Open Space Institute, Inc., Open Space Conservancy, Inc., and the Audubon Society of New Hampshire. The plaintiffs seek a court order requiring each defendant to cap its CO2emissions and then reduce these emissions by an unspecified percentage each year for at least a decade. In September 2005, the district court dismissed both lawsuits because they raised political questions that should not be decided by the courts. The plaintiffs appealed to the United States Court of Appeals for the Second Circuit (“Second Circuit”). On September 21, 2009, the Second Circuit reversed the district court’s decision and remanded the cases to the district court

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for further proceedings. On November 5, 2009, TVA and the other defendants filed a petition seeking a rehearing by the entire Second Circuit, which petition was denied on March 5, 2010. ~~Thereafter, the Second Circuit granted defendants’ motions to stay the cases pending the filing of petitions for review by~~On December 6, 2010, the U.S. Supreme ~~Court.~~Court granted a petition requesting that the Supreme Court review the Second Circuit’s decision. The U.S. Solicitor General filed a brief on behalf of TVA on January 31, 2011.

Case Regarding Bellefonte Nuclear Plant Units 1 and 2. On March 9, 2009, in response to a request by TVA, the NRC issued an order reinstating the construction permits for Bellefonte Nuclear Plant (“Bellefonte”) Units 1 and 2 and returning Bellefonte to a terminated status. On March 30, 2009, Blue Ridge Environmental Defense League (“BREDL”) filed a petition in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) challenging the NRC’s authority to reinstate the construction permits and alleging that the NRC failed to follow the requirements of the National Environmental Policy Act (“NEPA”). On May 6, 2009, the D.C. Circuit granted TVA’s motion t o intervene in this proceeding. On June 11, 2009, the D.C. Circuit issued an order holding the case in abeyance pending further order of the court. On March 8, 2010, BREDL filed a second petition in the D.C. Circuit, again challenging NRC’s compliance with NEPA and the NRC’s authority to reinstate the construction permits. TVA was granted intervenor status in this case as well, and requested that the court dismiss this second petition. On July 26, 2010, the D.C. Circuit issued an order consolidating the two BREDL petitions and continuing the stay of the case pending the conclusion of an administrative proceeding concerning the same issue. Upon completion of an administrative proceeding instituted by BREDL which challenged the reinstatement of the construction permits, the D.C. Circuit on November 5, 2010, issued an order returning the two cases to the court’s active docket and establishing a briefing schedule, which began in January 201 1 and will continue through May 2011. See Note 20 – Legal Proceedings in the Annual Report.

Administrative Proceedings Regarding Bellefonte Units 3 and 4. TVA submitted its Combined Construction and Operating License Application for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to the NRC in October 2007. On June 6, 2008, Bellefonte Efficiency and Sustainability Team (“BEST”), BREDL, and Southern Alliance for Clean Energy (“SACE”) submitted to the Nuclear Regulatory Commission (“NRC”) a joint petition for intervention and a request for a hearing. The petition raised 20 potential contentions with respect to TVA’s Combined Construction and Operating License Application. The Atomic Safety and Licensing Board (“ASLB”) denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE. The NRC later reversed the ASLB’s decision to admit two of the four contentions, leaving only two contentions (which involve questions about the estimated costs of the new nuclear plant and the impact of the facility’s operations, in particular the plant intake, on aquatic ecology) to be litigated in a future hearing. No hearing will take place until the NRC issues a final Environmental Impact Statement and final Safety Evaluation Report for the units. On September 29, 2010, TVA notified the NRC that the recently completed Final Supplemental Environmental Impact Statement had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site. Consequently, with the exception of the ongoing review of hydrology-related portions of the appli cation, TVA requested that the NRC defer review of the Bellefonte Units 3 and 4 Combined Construction and Operating License Application pending a final decision of the TVA Board regarding new generation capacity at the Bellefonte site. On October 13, 2010, the ASLB issued an order acknowledging TVA’s request to defer review of the Combined Construction and Operating License Application and requiring TVA to notify the ASLB within 14 days of its notification to the NRC staff of its decision regarding Bellefonte Units 3 and 4. With the uncertainty regarding the review schedule for the Combined Construction and Operating License Application, the ASLB deferred issuance of a general schedule for this proceeding.

Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2. On July 13, 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. The petitioners raised seven contentions related to TVA’s environmental review of the project and the NRC’s basis for confidence in the availability of safe storage options for spent nuclear fuel. On November 19, 2009, the ASLB granted SACE’s request for hearing, admitted two of SACE’s seven contentions for hearing, and den ied the request for hearing submitted on behalf of the other four petitioners. On March 26, 2010, the NRC affirmed the ASLB’s decision denying the other petitioners the opportunity to participate. After providing additional information to the NRC on April 9, 2010, which addressed one of the two admitted contentions, TVA submitted a motion asking the ASLB to dismiss the contention as moot. The motion was unopposed by SACE and on June 2, 2010, the ASLB granted TVA’s motion to dismiss the contention. A hearing on the remaining contention regarding aquatic impact to two-unit operation is scheduled to take place between July and September 2011. However, because the NRC staff has extended completion of its environmental review, the hearing schedule may be extended accordingly. SACE has also asked the ASLB to waive the NRC’s longstanding regulations establishing that, for the purposes of the NEPA, need for power and alternative energy source issues will not be considered in operating license proceedings. On June 29, 2010, the ASLB denied this request and declined to refer the waiver petition to the NRC for consideration. SACE subsequently filed a petition for interlocutory review of this decision with the NRC, which the NRC denied on November 30, 2010.

John Sevier Fossil Plant Clean Air Act Permit. On September 20, 2010, the Environmental Integrity Project, the Southern Environmental Law Center, and the Tennessee

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Environmental Council filed a petition with 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 SO2 and NOx. The CAA permit, issued by the TDEC, remains in effect pending the disposition of EPA’s petition.

Paradise Fossil Plant Clean Air Act Permit. On December 21, 2007, the Sierra Club, the Center for Biological Diversity, Kentucky Heartwood, Preston Forsythe, and Hilary Lambert filed a petition with ~~the~~ EPA raising objections to the conditions of TVA’s current CAA permit at Paradise Fossil Plant (“Paradise”). Among other things, the petitioners allege that activities at Paradise triggered the NSR requirements for NOxand that the monitoring of opacity at Units 1 and 2 of the plant is deficient. In an order issued in July 2009, ~~the~~ EPA agreed that the permit failed to include a proper PSD analysis offor NOx ~~for~~emission increases as a result of physical changes made to the plant’s three main boilers in the 1984-1986 period, that the permit failed to require adequate monitoring systems for opacity and NOx, and that the monitoring of soot emissions from the coal washing and handling plant was inadequate. TVA’s permit at Paradise is issued by the Kentucky Division for Air Quality (“KDAQ”), and if it is changed, it must be changed by KDAQ. In November 2009, KDAQ determined that the actions at Paradise had not triggered NSR requirements and reissued the operating permit without including NSR compliance milestones. ~~Judicial review of KDAQ’s decision about~~On January 9, 2010, Sierra Club petitioned EPA to object to the operating permit, isalleging that KDAQ had failed to properly take into account the PSD requirements for the physical changes made in 1986. 60; On May 21, 2010, the Sierra Club filed a ~~possibility.~~lawsuit seeking to compel EPA to act on the petition. To resolve this lawsuit, EPA entered into a consent decree with the Sierra Club under which EPA will respond to the petition by February 9, 2011. The current permit continues to remain in effect.

~~Information Request from the EPA~~Shawnee Fossil Plant Clean Air Act Permit. On ~~April 25, 2008, TVA received~~December 16, 2010, the Environmental Integrity Project and the Southern Alliance for Clean Energy filed a ~~request from~~petition with EPA requesting that the EPA ~~under section 114~~Administrator object to the proposed CAA renewal permit issued to TVA for operations at Shawnee Fossil Plant (“Shawnee”). Among other things, the petitioners allege that repair, maintenance, or replacement undertaken at Shawnee Units 1 and 4 in the 1989-90 period triggered the PSD requirements for SO2 and NOx. The current permit remains in effect pending KDAQ’s finalization of the CAA requesting extensive information about projects at and the operations of 14 of TVA’s 59 coal-fired units. These 14 units are located in Alabama, Kentucky, and Tennessee. TVA has responded to this request. This request for information is similar to but broader than section 114 requests that other companies have received during the EPA’s NSR enforcement initiative. TVA cannot predict whether the EPA will consider the maintenance, capital improvement, or other activities at these 14 units to have violated NSR requirements because of the uncertain interpretation of this program and recent court d ecisions. If violations are confirmed, TVA could be required to install new pollution control equipment in addition to the modifications that have already been completed or planned, and TVA could become liable for other payments or penalties. The EPA’s request could be the first step in an administrative proceeding against TVA that could then result in litigation in the courts.renewal permit

Notice of Violation at Widows Creek Unit 7. On July 16, 2007, TVA received a Notice of Violation (“NOV”) from ~~the~~ EPA alleging, among other violations, that TVA failed to properly maintain ductwork at Widows Creek Unit 7. TVA repaired the ductwork in 2005. ~~The~~ EPA is discussing a potential monetary sanction against TVA. Additionally, ~~the~~ EPA may require TVA to give up emission allowances. On March 5, 2008, TVA and Alabama entered into an agreed order in which TVA agreed to pay the state ~~$100,000.~~$100,000.

Kingston NPDES Permit Appeal. The Sierra Club has challenged the National Pollutant Discharge Elimination System (“NPDES”) permit issued by Tennessee for the scrubber-gypsum pond discharge at Kingston. This is the second such challenge nationally. In addition to its allegation that Tennessee violated the Clean Water Act by failing to set specific limits on certain toxic ~~pollutants,~~discharges, the Sierra Club alleges that no discharges from the pond infrastructure should be allowed because zero-discharge scrubbers exist. TDEC is the defendant in the challenge, ~~which was heard by~~and TVA has intervened in support of TDEC’s decision to issue the permit. The matter is set for a hearing before the Tennessee Water Quality ~~Control~~ Board in ~~March 2010.~~ February 2011. The other similar challenge involves ~~a n~~an Allegheny Power NPDES permit for its scrubber discharge at a Pennsylvania plant.

Information Request from EPA. On April 25, 2008, TVA received a request from EPA under Section 114 of the CAA requesting extensive information about maintenance, repair, and replacement projects at and the operations of 14 of TVA’s coal-fired units. These 14 units are located in Alabama, Kentucky, and Tennessee. TVA has responded to this request. This request for information is similar to Section 114 requests that other companies have received during EPA’s NSR enforcement initiative. In that enforcement initiative, EPA has taken the position that common repair and boiler component replacement projects a t companies have violated NSR. EPA’s request could be the first step in an administrative proceeding against TVA that could lead to litigation in court. If violations are confirmed by a court, TVA could be required to install new clean air control equipment in addition to the controls that have already been completed, retire one or more of the units, and pay administrative or civil penalties. The cost of these actions and assessed penalties could be material.

Employment Proceedings. TVA is engaged in various administrative and legal proceedings arising from employment disputes. These matters are governed by federal law and involve issues typical of those encountered in the ordinary course of business of a utility. They may include allegations of discrimination or retaliation (including retaliation for raising nuclear safety or environmental concerns), wrongful termination, and failure to pay overtime under the Fair Labor Standards Act. Adverse outcomes in these proceedings would not normally be material to TVA’s financial condition, results of operations, and cash flows, although it is possible that some outcomes could ~~require~~re quire TVA ~~t o~~to change how it handles certain personnel matters or operates its plants.

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17. Subsequent Events

Issuance of Debt

In January 2011, TVA issued $26 million of electronotes® with an interest rate of 4.25 percent which mature in 2031 and are callable beginning in 2015.

Credit Facilities

In January 2011, TVA entered into two long-term revolving credit facilities totaling $1.5 billion. One credit facility is for $0.5 billion and the second credit facility is for $1.0 billion. Both facilities mature on January 14, 2014. The credit facilities also accommodate the issuance of letters of credit.

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~~Case Involving Tennessee Valley Authority Retirement System Board Members~~. On March 5, 2010, eight current and former participants in and beneficiaries of the Tennessee Valley Authority Retirement System (“TVARS”) filed suit in the United States District Court for the Middle District of Tennessee against the six current members of the TVARS Board of Directors (“TVARS Board”). The lawsuit challenges the TVARS Board’s decision to (1) reduce the calculation for cost of living adjustment (“COLA”) benefits for CY 2010 through CY 2013, (2) reduce the interest crediting rate for the fixed fund accounts, (3) increase the eligibility age to receive COLAs to age 60, and (4) suspend the TVA contribution requirements for 2 010 through 2013. The plaintiffs allege that the amendments violated the TVARS Board members’ fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs’ contractual rights, among other claims. The plaintiffs seek damages, an order directing the TVARS Board to rescind the amendments, and other relief. Five of the six individual defendants have filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint. Another group may file a similar lawsuit.

~~17. Subsequent Events~~

On July 22, 2010, TVA entered into a new $1.0 billion revolving credit facility with five lenders that matures on May 11, 2011. This credit facility replaces TVA’s previous $1.0 billion credit facility maturing on August 10, 2010. The credit facility also accommodates the issuance of letters of credit. The interest rate on any borrowing under this facility is variable based on market factors and the rating of TVA’s senior unsecured long-term noncredit enhanced debt. TVA is required to pay an unused facility fee on the portion of the $1.0 billion against which 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 enha nced debt. TVA anticipates renewing this credit facility or replacing it with a different credit facility as it matures.

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

IONS

(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 TVA. The MD&A should be read in conjunction with the accompanying financial statements and TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009~~2010 (the “Annual Report”).

Executive Overview

E~~xecutive Overview~~

TVA ~~continued to see improvement in business conditions during the quarter ended June 30, 2010, while continuing to face certain challenges. Overall sales of electricity increased over six percent~~had a net loss for the ~~third quarter~~three months ended December 31, 2010 of ~~2010~~$48 million as compared to net income of $150 million for the ~~third quarter of 2009~~three-month period ended December 31, 2009. The $198 million decrease in net income was primarily due to warmer weather. The improvement in the economic conditions in the TVA service area resulted in sales to industrial customers increasing over 12 percent, even though one of TVA’s larger directly served customers reduced its purchases. Despite the six percentan increase in ~~overall sales, revenues~~operating and maintenance expenses of $129 million as a result of increased ~~less than one percent~~benefit costs and outages at generating plants. Tax equivalent payments also increased by $40 million. Fuel and purchased power costs increased $490 million but were offset by the increase in ~~the third quarter of 2010 compared~~fuel-related revenue primarily attributable to the ~~third quarter of 2009, primarily due to lower~~ fuel cost adjustment (“FCA”) ~~revenues resulting from a decrease in~~.

Sales of electricity increased two percent for the ~~FCA rate in the third q uarter of~~three months ended December 31, 2010, ~~which includes the liquidation of FCA amounts that were overcollected in prior periods,~~ as compared to the same period of the prior year. ~~Lower~~Colder than normal weather was responsible for most of the increase as evidenced by a three percent increase in sales of electricity primarily to residential customers of TVA’s municipal and cooperative distributor customers. Residential customer usage is typically more temperature sensitive. TVA set a new record for daily electricity sales during the month of December of 674.9 GWh on December 13, 2010, and also set a new December peak demand at 8 a.m. EST on December 14, 2010, when power load reached 31,434 MW. A four percent declin e in sales to directly served customers during the same three-month period from the prior year period was primarily due to lower demand by TVA’s largest industrial customer. The current contract with this customer expires in May 2012 but the customer is pursuing options to extend operations of its plant past that date. TVA and the customer are negotiating a renewal of the contract.

Assuming weather conditions are normal, TVA anticipates a nine percent increase in revenues in 2011 over 2010, primarily related to higher FCA ~~revenue~~revenue.

Hydroelectric generation was ~~mitigated~~45 percent less (or 2,536 GWh) during the three months ended December 31, 2010, than during the same period of the prior year. This was primarily due to a 27 percent decrease in rainfall and a 68 percent decrease in runoff within the Tennessee River Basin during those same periods. This difference in generation was met through increased fossil-fired and combustion turbine generation and purchased power.

During December 2010, TVA had forced outages at two of its nuclear units. Sequoyah Nuclear Plant Unit 1 was taken offline for five days in mid-December and Browns Ferry Nuclear Plant (“Browns Ferry”) Unit 3 was taken offline for five days in late December. TVA met higher than normal customer demand during these periods in part by ~~a base rate increase of nine percent that became effective on October 1, 2009.~~buying replacement power. The ~~base rate increase has provided additional revenue of $484 million for the first nine months of 2010 and is expected to provide~~Browns Ferry Unit 3 outage continued an additional ~~$300 million for the remaining three months of 2010.~~six days into January 2011.

In April 2011, TVA will implement new wholesale base rates. The ~~overcollection~~new wholesale rate structure includes seasonal and time of use rates. Several customers indicated they would like the rates to be effective before that time, so TVA is offering optional rates for large directly served and distributor-served customers from October 2010 to March 2011. A majority of directly served customers transitioned to the new rate structure during the three-month period ended December 31, 2010 to take advantage of lower transitional fall and winter rates. This change in structure will not materially impact TVA’s annual revenue recovery but will more closely align TVA’s revenues with its costs. There will, however, be some seasonal structural changes that may impact the timing of the FCA during 2009 resulted from market prices for fuel-related commodities being lower than forecasted. Starting with the October 1, 2009 billing period, the FCA formula changed from a quarterly to a monthly basis. This change to a monthly FCA formula has resulted in smaller reconciliations and faster liquidation of any balances. At September 30, 2009, there was a balance that represented an overcollection through the FCA of $822 million, whereas at June 30, 2010, the FCA related to the current year, as computed under the new methodology, had been overcollected by only $15 million.revenue between seasons.

The ~~current period~~ FCA rate increased in ~~each of June, July,~~October and ~~August~~decreased in November and December of 2010 as compared to the previous month. These ~~increases~~changes resulted in a 6.4 percent increase, a 5.0 percent ~~3.0~~decrease, and a 3.5 percent ~~and 1.5 percent increase~~decrease in overall wholesale rates, respectively. The January 2011 FCA rate resulted in a 1.0 percent increase in the average wholesale rate while the February 2011 FCA amount resulted in a 1.5 percent decrease.

In December 2010, the U.S. Environmental Protection Agency (“EPA”) issued a report that evaluated progress under its Acid Rain Program (“ARP”). ARP, established under Title IV of the 1990 Clean Air Act (“CAA”) Amendments, requires major emission reductions of sulfur dioxide (“SO2”) and nitrogen oxide (“NOx”) from the electric power industry. The December 2010 report contains information examining emission reductions, reviewing compliance results and market activity, and comparing changes in emissions to changes in pollutant concentrations. Data contained in this report indica tes TVA has reduced SO2 emissions from its coal-fired generating plants at a faster rate than the national average for the industry and that TVA’s SO2 emissions have been significantly reduced during the past three decades. Furthermore, the report indicates that TVA’s NOx emissions have been significantly reduced since CY 1990 and that the reduction in these emissions has been at a rate faster than the national average during the past two decades.

Net income for the three months ended June 30, 2010, was $199 million as compared to a net loss of $167 million for the same period in the prior year. The results for the third quarter of 2009 included $258 million of expenses related to the ash spill at the Kingston Fossil Plant (“Kingston”) in December 2008, which was reclassified as a regulatory asset in August 2009.

Sales of electricity increased nearly four percent for the nine months ended June 30, 2010, compared to the nine months ended June 30, 2009, with comparable increases in sales to both municipalities and cooperatives and directly served industries. Despite the increase in sales, revenues decreased nearly 12 percent in the first nine months of 2010 compared to the same period of 2009, primarily due to lower FCA revenue resulting from a decrease in the FCA rate, which includes the liquidation of FCA amounts that were overcollected in prior periods. Lower FCA revenue was mitigated in part by a base rate increase of nine percent that became effective on October 1, 2009.

Net income for the nine months ended June 30, 2010, was $779 million as compared to a net loss of $339 million for the same period in the prior year. The loss in the nine months ended June 30, 2009, included $933 million of expenses related to the ash spill at Kingston, which was reclassified as a regulatory asset in the fourth quarter of 2009.

Financial markets experienced significant volatility during the nine months ended June 30, 2010. However, investments in TVA’s nuclear decommissioning trust (“NDT”), asset retirement trust (“ART”), and pension funds all experienced modest gains during this period.

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~~Above normal rainfall during~~While the ~~latter part of 2009 and first part of 2010 allowed~~EPA study results indicate progress in improvements TVA has made to ~~increase lower-cost hydroelectric generation by 36 percent, or 3,300 gigawatt hours~~reduce emissions, EPA may question whether TVA has consistently complied with the New Source Review (“~~GWh”~~NSR”)~~, in the first nine months of 2010 as compared~~ regulations. See Note 16 - Litigation - Information Request from EPA. TVA has spent more than $5.0 billion since 1977 to ~~the first nine months of 2009. The increased hydroelectric generation displaced generation by fossil fuel plants, which helped reduce fuel costs.~~

~~Other positive developments during 2010 include:~~

•	TVA’s receipt of favorable court rulings related to (1) its alleged violation of the New Source Review regulations at its Bull Run Fossil Plant (“Bull Run”) and (2) the North Carolina public nuisance case;

•	~~Revision to its 2010 sales forecast to be nearly four percent higher than 2009 sales primarily due to the slight improvement of economic conditions and more favorable weather;~~

•	~~TVA’s completion of the removal of the time-critical ash from the Emory River during the third quarter of 2010; and~~

•	~~Completion of the installation of the Kingston scrubbers.~~

~~TVA also faces challenges through the remainder of 2010 and for several years to come, including:~~

•	~~The economic recovery is still uncertain, even with the increased sales during the quarter ended June 30, 2010.~~

•

TVA is capital intensive and, like other utilities, must obtain large amounts of capital to maintain its aging power system infrastructure and invest in new power assets, yet at the same time TVA has a $30 billion limitinstall emission control equipment on ~~the amount of its outstanding bonds, notes, and other evidences of indebtedness (“Bonds”).~~

•

Laws may be passed or regulations may go into effect that will require electric utilities to reduce greenhouse gas (“GHG”) emissions, further reduce hazardous air pollutant emissions, obtain a specified portion of their power supply from renewable resources, and install caps and synthetic liners at existing and new coal combustion product (“CCP”) landfills.

•	~~These new laws and regulations may also negatively affect the economics of coal units.~~

•	~~Efforts to end the wet storage of fly ash, bottom ash, and gypsum at TVA’s coal-fired plants will involve significant investment.~~

•	The pension fund assets, as impacted by recent financial market volatility, experienced negative returns during the three months ended June 30, 2010, while experiencing positive returns for the nine months ended June 30, 2010. The pension fund remains underfunded at June 30, 2010.

•	~~TVA has been discussing with its distributor customers moving from TVA’s current end-use rate structure to a new wholesale rate structure.~~

•	~~TVA may potentially remove from service some of its coal-fired power plants or units.~~

•	~~Due to the age and condition of some of its generation facilities, TVA may incur significant costs to operate and maintain these facilities.~~

~~Some of these items are discussed in more detail below.~~

As discussed in the Annual Report and elsewhere in this Quarterly Report, TVA’s capital budget for 2010 includes expenditures for construction of environmental controls, new generation sources, and CCP dry storage facilities. TVA expects to meet its ~~financial requirements in 2010 with power revenue and additional borrowing.~~coal-fired generating fleet.

Challenges and Key Initiatives~~Initiatives During~~

Resource Planning

Generation Resources. In September 2010, TVA issued a draft of its Integrated Resource Plan (“IRP”) and associated Environmental Impact Statement (“EIS”) for public comment. The final IRP and EIS are expected to be released in the spring of 2011. The IRP presents multiple strategies and related generation portfolios considering a broad range of supply-and-demand-side resource options. The EIS analyzes the impacts of each resource option and resource strategy on a programmatic level. The IRP and EIS will help inform TVA and its Board in strategic planning activities.

Despite the impacts of the recession of 2008-2009, which reduced TVA sales by approximately seven percent at its peak, and a relatively sluggish economic recovery, TVA believes new generation sources will be needed to meet load growth under most likely scenarios. Additionally, increasingly stringent environmental regulations facing coal-fired power plants, coupled with TVA’s announced intention to transition more towards generation sources with low or no emissions, are highly likely to result in a need for new generating capacity. Accordingly, TVA intends to make capital investments in the current year as well as future years.

~~Kingston Ash Spill~~

Natural Resources. In addition to planning its power operations, TVA ~~continues cleanup~~is reviewing the manner in which it meets its natural resource stewardship obligations. A Natural Resource Plan (“NRP”) is being drafted as a guide for planning resources to implement water resource, biological and ~~recovery efforts related~~cultural resource, recreation, and reservoir lands planning activities. The process for drafting the NRP has been similar to the ~~Kingston ash spill in conjunction with federal~~IRP process, including public input and ~~state agencies. TVA completed the removal~~analysis of time-critical ash from the river during the third quarter of 2010. Removal of the remaining ash is considered to be non-time-critical. TVA estimates that this work will be substantially completed in 2014. Once the removal actions are completed, TVA will be required to assess the sitestrategies and determine whether any additional actions may be needed at Kingston or the surrounding impacted area. This assessment and any additional activities found to be necessary are considered the remedial actions.

TVA has recorded an estimate in the amount of $1.1 billion for the cost of cleanup related to this event. In 2009, TVA originally charged a portion of this amount to expense as follows: $525 million, $150 million, and $258 million during the three months ended December 31, 2008, March 31, 2009, and June 30, 2009, respectively. However, the TVA Board reclassified all amounts previously expensed as a regulatory asset during the fourth quarter of 2009 and the amount is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009. Any estimate changes will also be deferred and charged to expense prospectively as they are collected in future rates.

~~Table of Contents~~

~~During the three months ended June 30, 2010, TVA increased the estimate for the cost of cleanup related to this event by $192 million.~~scenarios. The change in estimate is due to increased scope of work to be performed at the site as defined in the Engineering Evaluation Cost Analysis (“EE/CA”) work order plan which was prepared in accordance with the EPA’s Guidance on Conducting Non-Time-Critical Removal Actions under CERCLA. In May 2010, the EPA approved TVA’s ash disposal plan, which clarified the amount of ash to be removed from the site and the final design and closure of ash ponds on site. The plan involves moving less ash offsite than was originally assumed, which results in potential cost savings. These potential savings are more than offset, however, by the costs of other elements of the plan, including the required expansion of the failed cell and the closure and capping of all cells on the plant site that hold wet ash. The potential savings are also offset by costs of handling the ash under CERCLA requirements and recently assessed penalties and regulatory oversight costs. TVA has also found that certain previously estimated cost categories, such as dredging, were more expensive than originally estimated due to more equipment and staffing being needed to ensure timely completion of removal of time critical ash from the river. Final designs of holding cells and dikes are more robust than originally estimated as well.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate. TVA currently estimates the recovery process will be substantially completed in 2014. As such, TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA’s Balance Sheets. Costs incurred since the event through June 30, 2010, totaled $524 million, of which $108 million and $293 million were incurred during the three and nine months ended June 30, 2010, respectively. The remaining estimated liability at June 30, 2010, was $601 million.

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 and either the known amounts, most likely scenarios, or low end of the range for each category has been accumulated and evaluated to determine the total estimate. The range of estimated costs varies from approximately $1.1 billion to approximately $1.2 billion. See Note 7.

~~Coal Combustion Product Facilities~~

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 CCP facilities. The first phase of the evaluation involved a detailed inspection of all CCP facilities, a detailed documentation review, and a determination of any immediate actions necessary to mitigate risks. The second phase of the evaluation, which is ongoing, includes geotechnical explorations, stability analysis, studies, and risk mitigation steps such as performance monitoring, designing repairs, developing planning documents, obtaining permits, and implementing the lessons learned from the Kingston ash spill at TVA’s other CCP facilities. As a part of this effort, an ongoing monitoring program with third-part y oversight is being implemented, and TVA employees are receiving additional training in dam safety and monitoring.

TVA is converting its wet fly ash, bottom ash, and gypsum facilities to dry collection facilities and remediating or eliminating the CCP facilities that were classified as “high” risk during the preliminary reassessment. The classifications, such as “high,” do not measure the structural integrity of the facility or the possibility of whether a failure could occur. Rather, they are designed to identify where loss of life or significant economic or environmental damage could occur in the event of a failure. The expected cost of the CCP work is between $1.5 billion and $2.0 billion, and the workdraft is expected to ~~take between eight~~be available for public comment in March 2011 and ~~10 years.~~the preferred alternative for planning natural resource activities is scheduled to go th e TVA Board in fall 2011.

Coal-Fired Generation

Future environmental laws, regulations, and judicial actions could result in significant increases in capital expenditures and operating costs, which, in turn, could lead to increased liquidity needs and financing requirements. ~~TVA currently has approximately 15,000 MW of coal-fired generation. Approximately 6,800 MW of this capacity are from units that do not have scrubbers or, in some cases, other emission controls.~~ Current and future environmental laws, regulations, and judicial actions may require TVA to install scrubbers and other emission controls to continue operating ~~these~~its coal-fired units. TVA is reviewing its options with respect to the units without emission control ~~devices~~equipment and these options include, among other things, installing scrubbers or other emission controls or removing the units from service, perhaps permanently. ~~Currently, the~~In October 2010, TVA idled Widows Creek Fossil Plant (“Widows Creek”) Unit 2 as well as Shawnee Fossil P lant Unit 10. TVA had already idled Widows Creek Unit 5 in September 2010. The three units accounted for nearly 350 MW of summer net ~~book value of all the units without emission controls totals approximately $1 billion. TVA may begin to make decisions about some of these units in the near future.~~capability.

Risks are associated with the potential idling of additional coal units. Although these risks are being addressed through the integrated planning processes and diversification of fuel sources and fuel type as well as physical and financial hedging programs for fuel and purchased power there still may be some adverse impacts to TVA.

Coal Combustion Products Facilities

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 product (“CCP”) facilities. Phases one and two were completed during 2010. The studies showed that none of TVA’s other coal-fired plants showed the same set of conditions that existed at the Kingston Fossil Plant (“Kingston”) at the time of the ash spill, and the ongoing remediation work being done at the plants will bring all of them to within industry standards in terms of stability. The third phase of the program, which is implementation of recommended actio ns, is ongoing. This phase includes 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 CCP facilities. As a part of this effort, CCP facilities have been incorporated into TVA’s dam oversight program, and TVA employees have received additional training in dam safety and monitoring.

TVA is converting its wet fly ash, bottom ash, and gypsum facilities to dry collection facilities and remediating or eliminating the CCP facilities that were classified as “high” risk during the preliminary reassessment. The classifications, such as “high,” do not measure the structural integrity of the facility or the possibility of whether a failure could occur. Rather, they are designed to identify where loss of life or significant economic or environmental damage could occur in the event of a failure. The expected cost of the CCP work is between $1.5 billion and $2.0 billion, and the work is expected to take between eight and 10 years to complete. The work is proceeding on schedule and is prioritized based on

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structural needs, plant storage requirements, and ongoing studies to idle TVA’s older fossil facilities.

On ~~July 14,~~December 15, 2010, ~~Unit 5~~a small leak was identified in the clay liner of the gypsum pond at ~~Widows Creek Fossil Plant was removed~~the Kingston facility. TVA identified the leak during a routine inspection and immediately notified the state and the EPA and isolated the leak. The Tennessee Department of Environment & Conservation (“TDEC”) has sent TVA an order outlining the repairs that need to be made to the pond, including installation of a synthetic liner. TVA will comply with TDEC’s order to install a synthetic liner on the gypsum pond. The gypsum from ~~service due~~the plant is scheduled to ~~a suspected generator fault experienced during unit start-up. It may prove uneconomical~~be dewatered in 2012, and the material will be dry stacked in the facility after 2012. The synthetic liner will be designed and installed to ~~fully repair~~meet the ~~unit due~~proposed new EPA rules on coal combustion residue storage and thereby extend the l ife of the facility. TVA has no immediate estimate as to ~~its age, its general material condition,~~how much the liner installation will cost or how long it will take to install. Those plans will be developed by TVA and ~~TVA’s expectations for power demand. In this case,~~submitted to TDEC in the ~~unit could be considered for permanent removal from service during the early part of 2011.~~near future.

~~Browns Ferry Nuclear Plant~~Transmission System

~~On January 20, 2010, the NRC issued a fire protection inspection report for TVA’s Browns Ferry Nuclear Plant (“Browns Ferry”). The report identified three apparent violations related~~ TVA is subject to ~~Browns Ferry’s fire protection program of greater than very low safety significance. Two of the apparent violations primarily related to a failure to ensure~~federal reliability standards that some cables associated with equipment required for safe shutdown, and for maintaining a safe shutdown condition, were adequately protected in the event of fire as specified in the NRC’s regulations. The third apparent violation involved an inappropriate revision to Browns Ferry’s instructions relating to safe shutdowns after fire that could have delayed a proper response to a fire event.

The NRC determined that none of the apparent violations presented an immediate safety concern because TVA implemented compensatory measures to protect the plant in the event of a fire while longer-term corrective actions are being implemented. On April 19, 2010, the NRC issued its final determination regarding the apparent violations. The NRC combined the first two violations and concluded that this finding should be characterized as having substantial safety significance requiring additional inspectionsset forth by the ~~NRC. The second violation was determined to be of low to moderate significance~~North American Electric Reliability Corporation (“NERC”), and ~~will also require additional NRC inspection. By letter dated June 17, 2010,~~approved by the ~~NRC documented its acceptance of TVA's response to the violations. TVA has put compensatory measures in place at Browns Ferry~~Federal Energy Regulatory Commission (“FERC”). These standards are designed to maintain the reliability of the bulk electric system, including TVA’s generation and transmission system. These standards include such areas as maintenance, training, operations, planning, modeling, critical infrastructure, physical and cyber security, vegetation management, and facility ratings. TVA believes itself to be compliant with the majority of these standards, but as a result of self-ex amination and audits by its regional entity, the SERC Reliability Corporation (“SERC”), some issues have been identified. TVA is currently engaged in developing acceptable mitigation plans with SERC, based on findings during recent audits and is negotiating financial settlements where issues have arisen.

TVA recognizes that reliability standards and expectations are becoming more complex and stringent for transmission systems. Compliance with these standards and expectations may necessitate the need to expand manpower and programs to address the associated exposure to risk of noncompliance. TVA is currently evaluating its options to meet these new measures.

Financial Flexibility

The TVA Act specifies that TVA’s bonds, notes, and other evidences of indebtedness (“Bonds”) may not exceed $30.0 billion outstanding at one time. As of December 31, 2010, TVA had $23.8 billion of Bonds outstanding. TVA’s challenge to meet the economic, environmental and energy demands facing the Tennessee Valley region and nation puts further pressure on its $30.0 billion borrowing authority which has not been changed since 1979. Increased future capital expenditures along with restrictive borrowing authority may pose a challenge to TVA’s ability to maintain low ~~level of risk~~and competitive power rates.

Future Workforce Needs and Development

Effectively addressing workforce needs is a priority for TVA. Although TVA traditionally experiences low employee turnover, potential emerging risks exist due to ~~fire. Browns Ferry~~retirements, competition for talent from other companies, new nuclear construction, new regulations and evolving employee skill sets required to meet TVA’s vision of being one of the nation’s leading providers of low-cost and cleaner energy by 2020. During 2010, TVA established a new organization to focus on human capital, including recruiting programs and outreach to high school, trade school and college students. In addition, a workforce planning program was developed in 2010, and the program will be implemented agency-wide in 2011. TVA’s compensation and benefits programs are benchmarked to measure competiveness. The goal of these initiatives is the recruitment, retention and motivation of the talent required to achieve the TVA vision. Achieving this goal may be challenging in light of the ~~process~~recently announced pay freeze for federal employees. See Legislative and Regulatory Matters below for a discussion of ~~transitioning to~~ the ~~use~~pay freeze.

Safeguarding Assets

Physical Security. TVA is responsible for assets across the TVA service area, and the protection of ~~National Fire Protection Association Standard 805. This~~TVA’s critical infrastructures, TVA employees, and the public is a ~~multi-year effort~~priority. In protecting these assets, TVA follows numerous regulatory requirements that ~~is estimated~~set minimum standards for physical security. TVA protects critical assets using a combination of threat analysis, technology and partnerships with the public to ~~cost $12 million~~help deter, detect and respond to ~~$15 million.~~

~~Seven States Power Corporation Obligation~~

~~Seven States Power Corporation (“Seven States”), through its subsidiary, Seven States Southaven, LLC (“SSSL”), exercised Seven States’s option~~specific threats. In addition, training programs for TVA’s workfo rce are also being developed in order to ~~purchase an undivided 90 percent interest in~~foster a ~~combined cycle combustion turbine facility in Southaven, Mississippi. As part~~strong culture of ~~interim joint-ownership arrangements, Seven States has the right at any time during the interim period, and for any reason, to require TVA to buy back the Seven States interest in the facility.~~

The interim period under the original agreements was to expire on April 30, 2010. On April 22, 2010, TVA and Seven States, through SSSL, amended the joint ownership agreement, lease agreement, and buy-back arrangements to extend the term of the interim arrangements by approximately three years, until April 23, 2013. The other material terms and conditions of the agreements were not changed and remain in full force and effect. Under the amended agreements,security awareness throughout TVA. TVA will ~~buy back the Seven States interest if long-term operational~~likely spend between $30 million and ~~power sales arrangements for the facility among TVA, Seven States,~~$60 million between 2011 and ~~SSSL, or alternative arrangements, are not~~2013 on protective measures, based on assessments to be performed in ~~place by April 23, 2013. TVA’s buy-back obligation will terminate if such long-term arrangements are in place by~~2011 that date. In the event of a buy-back, TVA will re-acquire the Seven States interest in the facility and the related assets. As of June 30, 2010, the carrying amount of the obligation was approximately $413 million.

~~Organizational Effectiveness Initiative~~

Following the Kingston ash spill, the TVA Board directed management to develop a plan to improve TVA’s control systems, operating standards, and corporate culture. TVA has embarked on an agency-wide organizational effectiveness initiative to transform TVA into a more effective and accountable operation. Organizational design changes were made in the first nine months of 2010 and further changes are expected as implementation of the initiative continues. Management expects that the initiative will result in a more effective operating structure for TVA in the future.

~~Resource Planning~~

~~In September 2010, TVA plans to issue a draft of its Integrated Resource Plan (“IRP”) and associated Environmental Impact Statement (“EIS”) for public comment. The final IRP and EIS~~ are expected to be released in the spring of 2011. The IRP will present multiple strategies and related generation portfolios considering a broad range of supply-and-demand-side resource options. The EIS will analyze the impacts of each resource option and resource strategy on a programmatic level. The IRP and EIS will help inform TVA and its Board in strategic planning activities.identify opportunities for improvement.

Nuclear Security. Nuclear security is carried out in accordance with federal regulations as set forth by the Nuclear Regulatory Commission (“NRC”). These regulations are

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designed for the protection of TVA’s nuclear power plants and for the health and safety of the public and employees from the threat of radiological sabotage. Unauthorized access to the stations is prohibited by TVA’s nuclear security response forces. These forces are capable of executing a defensive strategy specifically designed and implemented to prevent radiological sabotage. TVA currently plans to spend between $100 million and $140 million between 2011 and 2013 on upgrades to the nuclear security infrastructure.

~~Renewable~~Cyber Security. Cyber security and ~~Clean Energy~~

~~In accordance with TVA’s 2008 Environmental Policy,~~the protection of TVA ~~is working toward obtaining additional power supply~~operations and activities are a priority. TVA uses a defense-in-depth security model in an effort to prevent, detect, respond to, and recover from ~~clean or renewable sources by 2020.~~threats against its systems. TVA ~~defines~~plans to modify and upgrade its ~~clean energy portfolio~~protections as ~~energy that has a zero or near-zero carbon dioxide (“CO~~2~~”) emission rate, including nuclear~~technology advances and ~~renewables such as energy production that is sustainable~~threat environments and ~~often naturally replenished.~~business requirements change. TVA currently plans to spend approximately $20 million to $40 million in cyber security updates between 2011 and 2013.

TVA has entered into seven contracts for the purchase of up to 1,380 megawatts (“MW”) of renewable wind energy. The wind resources are located in North Dakota, South Dakota, Illinois, Kansas, and Iowa. TVA began receiving 300 MW of the wind energy in May 2010 and expects to receive an additional 115 MW beginning in the fall of 2010. The remaining wind resources are under construction with expected deliveries beginning in CY 2012. These deliveries are subject to applicable environmental requirements and firm transmission paths being secured.

~~Peak Power Reduction Program~~

On July 13, 2010, TVA executed an agreement with EnerNOC, Inc. ("EnerNOC"), a leading provider of clean and intelligent energy management applications and services, for a demand response program that will provide up to 560 MW of peak load reduction. Under the program, TVA’s electricity requirements during periods of highest demand can be reduced by the equivalent capacity of up to three new gas-fired combustion turbine units. The agreement with EnerNOC provides for payments from TVA to EnerNOC as the aggregator of the load of participating commercial and industrial facilities.

~~Wholesale Rate Changes~~

Over the last several months, TVA has been discussing with its distributors and directly-served customers a move from TVA’s current rate structure to a new wholesale rate structure, which includes seasonal and time-of-use rates. TVA anticipates that the initial implementation of the rate change will begin in 2011. The purpose of a transition to seasonal and time-of-use rate structures is to more closely align TVA’s revenue recovery with its costs that vary by season and time of day. The new wholesale rates are designed to be revenue neutral to TVA, so this change in structure will not materially impact TVA’s annual revenue recovery. There will, however, be some seasonal structural changes that may impact the timing of the revenue recovery between seasons. The TVA Bo ard must approve the new rates before they can take effect.

Pension Fund

~~On September 24, 2009, TVA contributed $1.0 billion to TVA’s pension plan for 2010 through 2013.~~ As of September 30, ~~2009,~~2010, TVA's pension plan had assets of ~~$6.6~~$6.8 billion compared with liabilities of ~~$9.3 billion, primarily due to the market losses sustained by the portfolio during the recent global economic recession. TVA’s~~$10.4 billion. TVA's plan remained underfunded at ~~June 30,~~December 31, 2010. Assets in the plan at ~~June 30,~~December 31, 2010 were approximately ~~$6.3~~$7.0 billion. The ability of the plan’s funded status to quickly improve ~~will be~~is limited because ~~there are almost twice as many retirees as current employee participants.~~of the significant amount of benefits paid each year to plan beneficiaries. The plan currently has ~~over 22,000 retirees~~nearly 23,000 participants receiving benefits ~~in excess~~ of approximately ~~$500~~$600 million per year. ~~At this time, TVA does not have plans to make additional cont ributions to the plan for 2010.~~

Pension benefits for eligible retired members or beneficiaries may be subject to cost-of-living adjustments (“COLAs”), capped at 5 percent annually, based on the change in the 12-month average of the Consumer Price Index, provided such change is greater than 1 percent. However, the Tennessee Valley Authority Retirement System ("TVARS") Board of Directors recently amended the plan to make the following COLA changes:

•	~~For CY 2010, the COLA will be zero.~~

•	~~For CY 2011, the COLA will be capped at 3 percent.~~

•	~~For CY 2012, the COLA will be zero.~~

•	~~For CY 2013, the COLA will be capped at 2.5 percent.~~

•	~~The eligibility age for COLAs will increase to age 60 for employees who retire on or after January 1, 2010.~~

In addition, the TVARS Board of Directors reduced the rate for crediting interest on employee fixed-fund balances and future contributions to the plan to 6 percent effective January 1, 2010. All of these amendments were made to reduce plan liabilities and help improve the funded status of the plan.

~~Table of Contents~~

On March 5, 2010, eight current and former participants in and beneficiaries of TVARS filed suit in the United States District Court for the Middle District of Tennessee against the six current members of the TVARS Board of Directors alleging that the plan amendments described above and the suspension of TVA’s required contributions for 2010 through 2013 violated the TVARS Board members' fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs' contractual rights, among other claims. The plaintiffs seek damages, an order directing the TVARS Board of Directors to rescind the amendments, and other relief. Another group may file a similar lawsuit. See Note 16 — ~~Case Involving Tennessee Valley Authority Retirement System Boar d Members~~.

~~Cyber Security~~

Cyber security and the protection of TVA operations and activities are a priority. Because it is subject to several regulatory requirements specific to cyber security, TVA uses a defense-in-depth security model in an effort to prevent, detect, respond to, and recover from threats against its systems. TVA plans to modify and upgrade its protections as technology advances and threat environments and business requirements change. TVA currently plans to spend approximately $20 million to $40 million in cyber security updates between 2010 and 2013.

Liquidity and Capital Resources

Sources of Liquidity

To meet cash needs and contingencies, TVA ~~uses~~depends on various sources of ~~liquidity to meet short-term cash needs and contingencies.~~liquidity. TVA’s primary sources of liquidity are cash from operations and proceeds from the issuance of short-term and long-term debt. ~~TVA’s current liabilities exceed current assets because accounts payable significantly exceed accounts receivable~~Net working capital may be negative from time to time, and ~~because~~ TVA uses short-term debt to fund these short-term cash needs ~~and~~as well as scheduled maturities of long-term debt. ~~The majority of TVA’s balance of cash on hand is typically invested in short-term investments.~~ 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 include a $150 million credit facility with the U.S. Treasury, two credit facilities totaling $2.0 billion, and occasional proceeds from other financing arrangements. Management expects these sources to provide adequate liquidity to TVA for the foreseeable future. However, the limit on the amount of Bonds TVA may have outstanding at any one time is ~~$30~~$30.0 billion. The level of the capital investments TVA anticipates that may be needed to meet strategic planning goals over the next decade is such that TVA expects that it will not be able to use debt to finance all of its ~~costs.~~costs under its current borrowing authority. Capital spending requirements could be met with a combination of financing, additional ~~pow er~~power sales, ~~cost~~costs reductions, and rate increases, or in other ways. Certain sources of liquidity are discussed below.

Issuance of Debt.TVA Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bonds. As of December 31, 2010, all of TVA’s Bonds were rated by at least one rating agency except for two issues of power bonds ~~with~~and TVA’s discount notes. TVA’s rated Bonds are currently rated “Aaa” by Moody’s Investors Service and/or “AAA” by Standard & Poor’s and/or Fitch Ratings, which are the highest ratings assigned by these agencies. The ratings are not recommendations to buy, sell, or hold any TVA securities and may be subject to revision or withdrawal at any time by the rating agencies. Ratings are assigned independently, and each should be evaluated as such.

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TVA uses the proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of ~~one to 50 years, primarily to refinance previously-issued power bonds as they mature. In the first nine months of 2010, TVA issued $179 million of electronotes~~®~~, including $39 million with an interest rate of 4.10 percent and $23 million with an interest rate of 4.25 percent during the quarter ended June 30, 2010. In May 2010, TVA issued an~~long-term debt. The following table provides additional ~~$500 million of 2009 Series C power bonds with an interest rate of 5.25 percent. See Note 10 —~~ ~~Debt Securities Activity~~ ~~for more~~ information ~~related to~~regarding TVA’s ~~debt activities.~~short-term borrowings.

Short-Term Borrowing Table
	At December 31 2010			For the three months ended December 31 2010			At December 31 2009			For the three months ended December 31 2009

Amount Outstanding (at End of Period) or Average Amount Outstanding (During Period)
	$	219		$	39		$	1,057		$	817
Discount Notes

Weighted Average Interest Rate

Discount Notes		0.04	%		0.08	%		0.03	%		0.04	%

Maximum Month-End Amount Outstanding During Period

Discount Notes		N/A		$	219			N/A		$	1,057

Credit Facility Agreements. ~~Pursuant to the TVA Act,~~ TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility matures on September 30, ~~2010,~~2011, and is expected to be renewed. This arrangement is pursuant to the TVA Act. Access to this credit facility or other similar financing arrangements ~~has been available~~was made possible by the 1959 amendments to the TVA ~~since the 1960s.~~Act. 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 ~~bo rrowings~~borrowings under the ~~credit~~ facility at ~~June 30,~~December 31, 2010 ~~and September 30, 2009.~~.

TVA also has ~~short-term~~ funding available in the form of ~~two short-term~~three revolving credit facilities oftotaling $2.5 billion. The $1.0 billion ~~each. These~~short-term credit facility matures on May 11, 2011, and both the $0.5 billion and the $1.0 billion long-term credit facilities ~~will~~ mature on ~~November 8, 2010, and May 11, 2011.~~January 14, 2014. The $1.0 billion credit facility maturing on January 14, 2014, replaces a $1.0 billion short-term facility. The credit facilities also accommodate the issuance of letters of credit. The interest rate on any borrowing under these facilities is variable 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 ~~$2.0~~$2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit ~~fees,~~fee s, may fluctuate depending on the rating of TVA’s senior unsecured long-term non-credit enhanced debt. At ~~June 30,~~December 31, 2010, there were ~~$133~~$168 million of letters of credit outstanding under the then-existing credit facilities, and there were no outstanding borrowings. TVA anticipates renewing each credit facility or replacing it with a different credit facility as it matures. See Note 10 — ~~Short-Term Debt.~~Debt Securities Activity and Note 17 — Credit Facilities.

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Summary Cash Flows

~~Call Monetization Transactions.~~ ~~From time to time TVA has entered into swaption transactions to monetize~~A major source of TVA’s liquidity is operating cash flows resulting from the ~~value~~generation and sales of call provisions on certain of its Bond issues. A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a floating rate of interest and pays the third party a fixed rate of interest equal to the interest rate on the Bond issue whose call provision TVA monetized. As a result of an inversion of the swap yield curve and volatility in global financial markets, coupled with a decrease in swap rates to historically low rates, beginning December 1, 2008, TVA was required to post co llateral with a counterparty under the terms of a swaption agreement ($1 billion notional). The value of the swaption at June 30, 2010, was such that TVA’s collateral obligation was $225 million and collateral postings were $133 million. See Note 12 — ~~Other Derivative Instruments~~ — ~~Collateral~~ ~~for a discussion of collateral related to TVA’s derivative liabilities.~~

~~Summary Cash Flows.~~electricity. A summary of cash flow components for the ~~nine~~three months ended ~~June 30,~~December 31, 2010 and 2009 follows:

Summary Cash Flows
For the Nine Months Ended June 30

2010 2009
Cash provided by (used in):
Operating activities $ 1,210 $ 2,414
Investing activities (1,773 ) (1,637 )
Financing activities 560 (789 )
Net change in cash and cash equivalents $ (3 ) $ (12 )

Summary Cash Flows
For the three months ended December 31
	2010			2009
Cash provided by (used in):
Operating activities	$	528		$	441
Investing activities		(747	)		(663	)
Financing activities		133			271

Net increase (decrease) in cash and cash equivalents	$	(86	)	$	49

Operating Activities. Net cash flows from operating activities ~~decreased $1.2 billion~~increased $87 million for the ~~nine~~three months ended ~~June 30, 2010.~~December 31, 2010, compared to the same period in the prior year. This ~~decrease~~increase resulted from ~~a decrease~~an increase in operating revenues primarily due to FCA rate ~~decreases.~~increases and increased sales volume. See Results of ~~Operations.~~Operations.

Investing Activities. Net cash flows used in investing activities increased ~~$136~~$84 million for the ~~nine~~three months ended ~~June 30, 2010.~~December 31, 2010, compared to the same period in the prior year. The increase resulted primarily from an additional ~~$205~~$87 million spent on major projects in process, including the new ~~combined cycle and combustion turbine plants,~~John Sevier Combined Cycle Facility, as well as the new unit at

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the Watts Bar Nuclear Plant (“Watts Bar”). This increase was partially offset by a decrease of $56 million in expenditures for uranium enrichment and fabrication of nuclear fuel related to the normal year-to-year variability resulting from the timing of refueling outages at the nuclear plants.

Financing Activities. Net cash flows provided by financing activities ~~were $560~~decreased $138 million during the ~~nine~~three months ended ~~June 30,~~December 31, 2010, as compared to ~~net cash flows used by financing activities of $789 million during~~ the same period of the prior year. The ~~change~~decrease was primarily due to net issuances of long-term debt of ~~$644~~$78 million during the ~~first nine~~three months ~~of 2010~~ended December 31, 2009 as compared to net redemptions and repurchases of ~~$1.9 billion~~$5 million during the ~~same period in 2009. The increase in debt issuance reflects~~three months ended December 31, 2010. Additionally, payments on leases and leaseback financing increased $36 million primarily due to the ~~need for cash to fund~~purchase of an office building previously under a capital ~~expenditures and other investing activities that was not fully provided by operating activity cash flows.~~lease.

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Cash Requirements and Contractual Obligations

The estimated cash requirements and contractual obligations for TVA as of ~~June 30,~~December 31, 2010, are detailed in the following table.

Commitments and Contingencies Payments due in the year ending September 30	Commitments and Contingencies Payments due in the year ending September 30																Commitments and Contingencies Payments due in the year ending September 30
			2010	1		2011		2012		2013		2014	Thereafter		Total			2011(1)		2012		2013		2014		2015		Thereafter		Total

Debt2		$	834		$	1,008	$	1,523	$	2,308	$	32	$	17,763	$	23,468
Debt(2)																		$	1,223	$	1,523	$	2,308	$	32	$	1,032	$	17,695	$	23,813
Interest payments relating to debt			244			1,294		1,266		1,122		1,036		18,883		23,845			940		1,310		1,166		1,081		1,080		19,916		25,493
Lease obligations
Capital			14			92		43		384		—		3		536			4		5		—		—		—		3		12
Non-cancelable operating			13			49		41		39		29		196		367			37		43		40		29		25		171		345
Purchase obligations
Power			72			274		250		198		191		4,542		5,527			187		227		172		164		212		4,354		5,316
Fuel			795			1,530		1,013		928		766		1,857		6,889			1,521		1,546		1,353		1,143		1,128		2,477		9,168
Other			25			82		119		128		123		2,753		3,230			99		178		152		155		52		493		1,129
Expenditures for emission control commitments3			—			837		455		325		109		—		1,726
Litigation settlement			—			3		3		3		3		—		12			—		3		3		3		—		—		9
Environmental cleanup costs- Kingston ash spill			78			220		124		97		82		—		601
Environmental cleanup costs-Kingston ash spill																			167		124		97		95		—		—		483
Payments on other financings			17			94		98		99		100		817		1,225			120		136		488		100		104		712		1,660
Payments to U.S. Treasury
Return of Power Facility Appropriation Investment			20			20		20		20		10		—		90
Return on Power Facility Appropriation Investment			9			21		22		20		19		253		344
Return of Power Program Appropriation Investment																			20		20		20		10		—		—		70
Return on Power Program Appropriation Investment																			8		22		20		19		18		235		322

Total		$	2,121		$	5,524	$	4,977	$	5,671	$	2,500	$	47,067	$	67,860		$	4,326	$	5,137	$	5,819	$	2,831	$	3,651	$	46,056	$	67,820
Notes (1) Period July 1 – September 30, 2010 (2) Does not include noncash items of foreign currency valuation gain of $32 million and net discount on sale of Bonds of $197 million. (3) Expenditures for emission control commitments represent TVA’s current estimate of costs that may be incurred as a result of the court order in the case brought by North Carolina alleging public nuisance. See Note 16 — Case Brought by North Carolina Alleging Public Nuisance.
Note (1) Period January 1 – September 30, 2011																	Note (1) Period January 1 – September 30, 2011
(2) Does not include noncash items of foreign currency exchange loss of $8 million and net discount on sale of Bonds of $216 million.																	(2) Does not include noncash items of foreign currency exchange loss of $8 million and net discount on sale of Bonds of $216 million.

In addition to the cash requirements above, TVA has contractual obligations in the form of revenue discounts related to energy prepayments.

Energy Prepayment Obligations

2010 1 2011 2012 2013 2014 Thereafter Total
Energy Prepayment Obligations $ 26 $ 105 $ 105 $ 102 $ 100 $ 410 $ 848
Note
(1) Period July1 - September 30, 2010

Energy Prepayment Obligations Payments due in the year ending September 30
	2011(1)		2012		2013		2014		2015		Thereafter		Total

Energy Prepayment Obligations	$	79	$	105	$	102	$	100	$	100	$	310	$	796

Note
(1) Period January 1 – September 30, 2011

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Results of Operations

Sales of Electricity

The following table compares TVA’s ~~electricity~~energy sales statistics for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009:

Sales of Electricity
(Millions of kWh)

Three Months Ended June 30 Nine Months Ended June 30
2010 2009 Percent Change 2010 2009 Percent Change

Sales of electricity
Municipalities and cooperatives 33,004 31,465 4.9 % 101,026 97,446 3.7 %
Industries directly served 7,242 6,448 12.3 % 24,267 23,033 5.4 %
Federal agencies and other 505 485 4.1 % 1,479 1,507 (1.9 %)

Total sales of electricity 40,751 38,398 6.1 % 126,772 121,986 3.9 %

Heating degree days 119 230 (48.3 %) 3,668 3,395 8.0 %
Cooling degree days 847 666 27.2 % 868 748 16.0 %
Combined degree days 966 896 7.8 % 4,536 4,143 9.5 %

Sales of Electricity
(millions of kWh)
	For the three months ended December 31
	2010		2009		Percent Change

Municipalities and cooperatives		32,479		31,390		3.5	%
Industries directly served		8,105		8,484		(4.5	%)
Federal agencies and other		535		496		7.9	%
Total sales of electricity		41.119		40,370		1.9	%


Heating degree days (normal 1,311)		1,406		1,343		4.7	%

Cooling degree days (normal 64)		61		20		205	%

Combined degree days (normal 1,375)		1,467		1,363		7.6	%

The ~~2.4~~1.1 billion kilowatt-hour (“kWh”) increase in sales ~~for the three months ended June 30, 2010, compared to the same period in 2009, was primarily due to a 1.5 billion kWh increase in sales~~ to Municipalities and cooperatives as a result of hotter weather, particularly during the months of May and June 2010. The average temperatures for the Tennessee Valley were 4.9 degrees hotter than normal for the three months ended June 30, 2010, and 3.4 degrees hotter than the three months ended June 30, 2009. Sales to I~~ndustries directly served~~ ~~also increased 794 million kWh f or the three months ended June 30, 2010, compared to the same period in 2009, as a result of improving economic conditions.~~

~~The 4.8 billion kWh increase in sales for the nine months ended June 30, 2010,~~ was ~~primarily due to a 3.6 billion kWh increase in sales to~~ ~~Municipalities and cooperatives~~ primarily due to an increase in residential sales ~~as a~~of TVA’s distributor customers. This was the result of ~~favorable weather experienced during~~an increase in heating degree days for the ~~first nine~~three months ended December 31, 2010, compared to the three months ended December 31, 2009, primarily due to a colder than normal December. Sales to the commercial and industrial customers of ~~2010. Additionally,~~TVA’s distributor customers remained relatively flat compared to the three months ended December 31, 2009.

The 379 million kWh decrease in sales to ITVA’s ~~ndustries~~Industries directly served ~~increased 1.2 billion~~was primarily due to a decrease in sales to TVA’s largest directly served customer, which has been curtailing operations.

The 39 million kWh ~~as a result of improving economic conditions. Despite the~~ increase in sales ~~from I~~to ~~ndustries~~Federal agencies and other was due to a 25 million kWh increase in sales to federal agencies directly served and ~~the commercial and i ndustrial customers~~an increase of ~~TVA’s distributors compared~~14 million kWh sold off-system due to ~~the nine months ended June 30, 2009, sales to these customers were lower than sales levels prior to the economic downturn.~~an increase in excess generation available for resale.

Financial Results

The following table compares operating results for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009:

Summary Statements of Operations	Summary Statements of Operations													Summary Statements of Operations

For the three months ended December 31														For the three months ended December 31
		Three Months Ended June 30						Nine Months Ended June 30							2010			2009
		2010			2009			2010			2009
Operating revenues		$	2,587		$	2,566		$	7,558		$	8,576			$	2,828		$	2,349
Operating expenses			(2,073	)		(2,425	)		(5,826	)		(7,970	)			(2,558	)		(1,878	)
Operating income			514			141			1,732			606				270			471
Other income, net			6			2			20			13				11			6
Interest expense, net			(321	)		(310	)		(973	)		(958	)			(329	)		(327	)

Net income (loss)		$	199		$	(167	)	$	779		$	(339	)		$	(48	)	$	150

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Operating Revenues. Operating revenues for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009 consisted of the following:

Operating Revenues
Operating Revenue															Operating Revenue
	Three Months Ended June 30							Nine Months Ended June 30								For the three months ended December 31
	2010		2009		Percent Change			2010		2009		Percent Change				2010		2009		Percent Change
Sales of electricity

Operating Revenues
Municipalities and cooperatives	$	2,204	$	2,201		0.1	%	$	6,367	$	7,279		(12.5	%)		$	2,386	$	1,945		22.7	%
Industries directly served		324		306		5.9	%		1,019		1,110		(8.2	%)			382		348		9.8	%
Federal agencies and other		31		31		0.0	%		83		101		(17.8	%)			32		27		18.5	%
Other revenue		28		28		0.0	%		89		86		3.5	%			28		29		(3.4	%)

Total	$	2,587	$	2,566		0.8	%	$	7,558	$	8,576		(11.9	%)
Total operating revenues																$	2,828	$	2,349		20.4	%

Operating revenues increased ~~$21~~$479 million ~~or 0.8 percent, and decreased $1.0 billion, or 11.9 percent, for~~in the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 ~~respectively,~~ compared to the ~~same periods in~~three months ended December 31, 2009 due to the ~~following:~~following :

	Three Month Change			Nine Month Change			Three Month Change

FCA rate changes	$	(258	)	$	(1,777	)	$	457
Base rate changes		149			484
Volume		130			272			57
Base rates								(35	)
Off system sales and other								1
Other revenue		0			3			(1	)
Total	$	21		$	(1,018	)	$	479

Starting with the October 1, 2009 billing period, the FCA formula changed from a quarterly to a monthly basis. This change to a monthly FCA formula has resulted in smaller reconciliations and faster liquidation of any balances. At September 30, 2009, there was a FCA liability balance of $822 million that represented an overcollection of fuel and purchased power costs in 2009 when these costs were lower than TVA had forecasted. The $822 million was liquidated over the nine-month period from October 1, 2009 through June 30, 2010. The FCA rates for the three and nine month periods ended June 30, 2010, which included the liquidation of FCA amounts that were overcollected in prior periods, were lower than the FCA rates in the same periods of 2009.

Significant items contributing to the ~~$21~~$479 million increase in operating revenues ~~for the three months ended June 30, 2010, compared to the same period in 2009~~ included:

A $3$441 million increase in ~~revenues~~revenue from Municipalities and cooperatives primarily due to ~~an increase in average base rates of 6.5 percent due to base~~FCA rate increases ~~effective October 1, 2009,~~ which ~~provided $134~~increased revenues by $387 million ~~in revenues,~~ and an increase in sales volume of ~~4.9~~3.5 percent, which increased revenues an additional ~~$97~~$72 million. These increases were partially offset by ~~FCA~~lower base rates resulting from implementation of seasonal rate ~~decreases~~structures which reduced revenues by ~~$228~~$18 million.

~~An $18~~A $34 million increase in revenues from Industries directly served primarily due to anFCA rate increases, which increased revenues by $65 million. This increase ~~in average base rates of 4.4 percent, which provided $13 million in revenues, and an increase~~was partially offset by a decrease in sales volume of ~~12.3~~4.5 percent, ~~which increased revenues an additional $32 million. These increases were partially offset by FCA rate decreases,~~ which reduced revenues by ~~$27~~$16 million,

~~Table~~ and lower base rates resulting from implementation of ~~Contents~~

~~Significant items contributing to the $1.0 billion decrease in operating revenues for the nine months ended June 30, 2010, compared to the same period in 2009 included:~~

~~A $912 million decrease in revenues from~~ ~~Municipalities and cooperatives~~ ~~primarily due to the FCA~~seasonal rate ~~decreases,~~structures, which reduced ~~revenues~~revenue by $1.6 billion. This decrease was partially offset by an increase in average base rates of 7.0 percent due to base rate increases effective October 1, 2009, which provided $439 million in revenues, and an increase in sales volume of 3.7 percent, which increased revenues an additional $223$15 million.

A ~~$91~~$5 million ~~decrease~~increase in revenues from ~~Industries directly served~~ primarily due to FCA rate decreases, which reduced revenues by $182 million. This decrease was partially offset by an increase in average base rates of 4.1 percent, which provided $41 million in revenues, and an increase in sales volume of 5.4 percent, which increased revenues an additional $50 million.

~~An $18 million decrease in revenues from Federal agencies~~Federal Agencies and other as a result of ~~an $18~~a $4 million ~~decrease~~increase in revenues from federal agencies directly served primarily due to the FCA rate ~~decreases~~increases and ~~decreased sales volume of 1.2 percent. This decrease was partially offset by~~ an increase in ~~average base rates~~off-system sales of ~~5.2 percent.~~$1 million.

Operating Expenses. Operating expenses for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009 consisted of the following:

TVA Operating Expenses
	For the three months ended December 31
	2010		2009		Percent Change

Fuel and purchased power	$	1,098	$	608		80.6	%
Operating and maintenance		883		754		17.1	%
Depreciation, amortization, and accretion		432		411		5.1	%
Tax equivalents		145		105		38.1	%

Total operating expenses	$	2,558	$	1,878		36.2	%

Operating Expenses

Three Months Ended June 30 Nine Months Ended June 30
2010 2009 Percent Change 2010 2009 Percent Change
Fuel and purchased power $ 786 $ 1,043 (24.6 %) $ 1,999 $ 3,658 (45.4 %)
Operating and maintenance 757 599 26.4 % 2,267 1,775 27.7 %
Depreciation, amortization, and accretion 416 397 4.8 % 1,240 1,191 4.1 %
Tax equivalents 114 128 (10.9 %) 320 413 (22.5 %)
Environmental cleanup costs - Kingston ash spill — 258 — — 933 —
Total operating expenses $ 2,073 $ 2,425 (14.5 %) $ 5,826 $ 7,970 (26.9 %)

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Operating expenses decreased $352 million for the three months ended June 30, 2010, and $2.1 billion for the nine months ended June 30, 2010, compared to the same periods in 2009. A significant driver for the decreases in operating expenses is related to the ~~Environmental cleanup cost – Kingston ash spill~~ expenses of $258 million and $933 million recognized for the three and nine months ended June 30, 2009, respectively. During August 2009, the TVA Board approved the recovery of Kingston ash spill costs in future rates, and the amount previously expensed was reclassified as a regulatory asset to be amortized over a period of 15 years so that only the amortization (described below) appears in the three and nine-month periods of 2010. See Note 7.

~~Other significant~~Significant drivers contributing to the ~~$352~~$680 million ~~decrease~~increase in total operating expenses ~~for the three months ended June 30, 2010, compared to the same period in 2009~~ are described below:

Fuel and purchased power expense ~~decreased $257~~increased $490 million due to:

A ~~$262~~$296 million ~~decrease~~increase in fuel and purchased power expense related to the FCA ~~mechanism.~~mechanism which matches the recognition of fuel and purchased power expense with the period it is collected in the FCA. This ~~decrease was~~increase primarily resulted from an increase in the ~~result of a decrease in theFCA~~FCA rate ~~which~~for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The FCA rates for the three months ended December 31, 2009, included the liquidation of FCA amounts that were overcollected ~~in prior periods.~~during 2009.

A $35 million decrease in purchased power expense comprised primarily of a $102 million decrease in net realized losses related to natural gas derivatives for the three months ended June 30, 2010, compared to the same period in 2009. This decrease was partially offset by an increase in purchased power volume of 15.4 percent for the three months ended June 30, 2010, compared to the same period in 2009, which increased purchased power expense by $35 million. The average price of purchased power increased 11.9 percent for the quarter from the comparable quarter of 2009, which increased expense by $32 million. While average prices were slightly higher this quarter, the rates were still economically favorable, which is why TVA decided to purchase more power during the third quarter of 2010 when compared to the same quarter during 2009.

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~~A $40~~$109 million increase in fuel expense resulting primarily from an increase in net thermal generation of ~~9.8~~seven percent, which increased fuel expense by ~~$44 million, partially offset by a slight decrease in the aggregate fuel cost per kilowatt-hours of net thermal generation, which decreased fuel expense by $4~~$87 million. The increase in net thermal generation was ~~primarily~~ due to ~~higher electricity sales during~~a decrease in hydroelectric generation of 2.5 billion kWh, or 45 percent. Additionally, the ~~three months ended June 30, 2010.~~aggregate fuel cost per kWh of net thermal generation increased 13 percent, which caused a $22 million increase in fuel expense.

An $85 million increase in purchased power expense primarily because of an increase in purchased power volume of 1.7 billion kWh, or 31 percent, which increased purchased power expense by $80 million, and an increase in the average price of purchased power of two percent, which increased purchased power expense an additional $5 million.

Operating and maintenance expense increased ~~$158 million partially as~~$129 million. The primary drivers for the increase were a ~~result of a $54~~$25 million increase in pension and postretirement benefit expense ~~due to recent market declines combined with a reduction in the assumed discount rate used to estimate the pension~~ and ~~postretirement liabilities. Postemployment benefit costs increased $23 million primarily due to~~ an increase in operating and maintenance expense at nuclear plants of $21 million due to increased duration of refueling outages, maintenance projects to increase plant reliability, and increased security costs due to regulatory requirements. Additional items contributing to the ~~accrual based on an actuarial study that indicates workers’ compensation claims are ultimately costing more than previous studies predicted,~~increase in Operating and maintenance expense included a $10 million increase in other benefit costs, ~~increased $21 million. TVA recognized $16~~a $13 million ~~in expense~~increase related to ash handling due to ~~amortization~~increased handling activities as TVA is in t he process of converting from wet storage to dry storage facilities, a $13 million increase to support economic development initiatives, a $10 million increase at coal-fired and combustion turbine plants due to the ~~Environmental cle anup~~timing of maintenance outages, and a $9 million increase in costs ~~- Kingston ash spill~~ ~~regulatory asset, and this expense was not present for the three months ended June 30, 2009. Additionally, TVA experienced increased costs of $14 million~~ to support energy efficiency and demand response initiatives, and operating and maintenance expense increased $10 million at coal-fired and combustion turbine plants primarily due to an increase in forced maintenance outages during the third quarter of 2010.initiatives.

Depreciation, amortization, and accretion expense increased ~~$19~~$21 million primarily because of an increase in net plant ~~additions.~~additions and the implementation of accelerated depreciation rates on certain coal-fired units due to the long-term idling of those units.

Tax equivalents expense ~~decreased $14~~increased $40 million. This change primarily reflects ~~a decrease~~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 ~~decreased~~increased for the three months ended ~~June 30,~~December 31, 2010, since the FCA revenues ~~for~~were higher than in the ~~third quarter of 2010 were lower than the FCA revenues for the third quarter of June 30,~~three month period ended December 31, 2009.

~~Other significant drivers contributing to the $2.1 billion decrease in operating expenses for the nine months ended June 30, 2010, compared to the same period in 2009 are described below:~~

~~Fuel and purchased power~~ ~~expense decreased $1.7 billion due to:~~

A $1.6 billion decrease in fuel and purchased power expense related to the FCA mechanism. This decrease was primarily the result of a decrease in the FCA rate, which included the liquidation of FCA amounts that were overcollected in prior periods.

A $36 million decrease in fuel expense resulting from a decrease in net thermal generation of 2.8 percent, which decreased fuel expense by $91 million. The decrease in net thermal generation was primarily due to increased hydroelectric generation of 3.3 billion KWh, or 36.3 percent, and an increase in purchased power during the nine months ended June 30, 2010, due to economically favorable prices for purchased power. This decrease was partially offset by a slight increase in the aggregate fuel cost per kilowatt-hour of net thermal generation, which resulted in an increase of $55 million in fuel expense.

A $60 million decrease in purchased power expense comprised primarily of a decrease in the average price of purchased power of 7.0 percent for the nine months ended June 30, 2010, compared to the same period in 2009, which reduced expense by $61 million. In addition, net realized losses related to natural gas derivatives were $179 million lower for the nine months ended June 30, 2010, compared to the same period in 2009. These decreases were partially offset by an increase in purchased power volume of 26.1 percent, which increased purchased power expense by $180 million.

~~Operating and maintenance~~ expense increased $492 million for the nine months ended June 30, 2010. The primary drivers for the increase were a $161 million increase in pension and postretirement benefit expense due to recent market declines and a reduction in the assumed discount rate and a $139 million increase in operating and maintenance expense at nuclear plants due in part to a change in TVA’s accounting for nuclear refueling outages. Historically, nuclear refueling outages and maintenance costs were deferred and amortized on a straight-line basis over the estimated period until the next routine outage. Beginning in 2010, however, outage costs have been expensed as incurred, although pr eviously-deferred outage costs continue to be amortized as the remaining amounts are collected in rates. Additional items contributing to the increase in ~~Operating and maintenance~~ ~~expense included an increase in benefit costs of $47 million, recognition of $47 million in expense due to amortization of the~~ ~~Environmental cleanup costs - Kingston ash spill~~ regulatory asset, a $37 million increase in costs to support energy efficiency and demand response initiatives, a $28 million increase in postemployment benefit costs primarily due to the results of the actuarial study relating to workers’ compensation claims, and a $13 million increase in expense associated with on-going studies related to future uses of the Bellefonte Nuclear Plant site.

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~~Depreciation, amortization, and accretion~~ ~~expense increased $49 million primarily because of an increase in net plant additions.~~

~~Tax equivalents~~ expense decreased $93 million. This change primarily reflects a decrease 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 decreased for the nine months ended June 30, 2010, since the FCA revenues in the first nine months of 2010 were lower than the FCA revenues for the nine months ended June 30, 2009.

Interest Expense. Interest expense and interest rates for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009 ~~consisted of the following:~~were as follows:

Interest Expense	Interest Expense																			Interest Expense
																				For the three months ended December 31
		Three Months Ended June 30									Nine Months Ended June 30									2010	2009	Percent Change
		2010			2009			Percent Change			2010			2009			Percent Change
Interest on debt and leaseback obligations		$	338		$	316			7.0	%	$	1,011		$	971			4.1	%	$ 353	$ 336	5.1%
Amortization of debt discount, issue, and reacquisition costs, net			5			5			0.0	%		15			15			0.0	%	5	5	0.0%
Allowance for funds used during construction & nuclear fuel expenditures			(22	)		(11	)		100.0	%		(53	)		(28	)		89.3	%
Allowance for funds used during construction and nuclear fuel expenditures																				(29)	(14)	107.1%

Net interest expense		$	321		$	310			3.5	%	$	973		$	958			1.6	%	$ 329	$ 327	0.6%

		(Percent)									(Percent)
																				2010	2009	Percent Change
Interest rates (average)			2010			2009		Percent Change				2010			2009		Percent Change
Long-term			5.92			5.99			(1.2	%)		5.90			5.80			1.7	%
Long-term*																				5.87	5.94	(1.2%)
Discount notes			0.12			0.12			0	%		0.07			0.37			(81.1	%)	0.08	0.04	100%
Blended			5.67			5.62			0.9	%		5.66			5.39			5.0	%

Blended*																				5.86	5.73	2.2%
Note * The average interest rates on long-term debt for the three months ended December 31, 2010 reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the period presented, and interest expense for those periods. Interest expense is interest on long-term debt, including amortization of debt discounts, issue, and reacquisition costs, net. Average long-term interest rates reported for the three months ended December 31, 2009 were calculated using the average balance of debt based at the beginning and end of the period. The calculation was changed so that the average rate reflects fluctuations in the balance of long-term debt throughout the periods and the impact on interest expense.																				Note * The average interest rates on long-term debt for the three months ended December 31, 2010 reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the period presented, and interest expense for those periods. Interest expense is interest on long-term debt, including amortization of debt discounts, issue, and reacquisition costs, net. Average long-term interest rates reported for the three months ended December 31, 2009 were calculated using the average balance of debt based at the beginning and end of the period. The calculation was changed so that the average rate reflects fluctuations in the balance of long-term debt throughout the periods and the impact on interest expense.

The ~~$11~~$2 million increase in net interest expense ~~for the three months ended June 30, 2010,~~ was primarily due to an increase in interest on debt as a result of an increase in the average balance of long-term debt for the three months ended ~~June 30,~~December 31, 2010, compared to the ~~same period in~~three months ended December 31, 2009. This increase was offset partially ~~offset~~ by the greater amounts of capitalized interest ~~for the three months ended June 30, 2010, compared to the same period of 2009~~ due to an increase in the construction work in progress base used to calculate allowance for funds used during construction ~~(“AFUDC”~~("AFUDC") as a result of ongoing construction activities at Watts Bar Unit 2.

~~The $15 million increase in net interest expense for the nine months ended June 30, 2010, was primarily attributable to the same items identified above for the three months ended June 30, 2010.~~

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 United States of America (“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 estimat e 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 ~~also~~ 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 the Financial Statements in the Annual Report.

Changes in Ratemaking Impacting Accounting

On August 20, 2010, the TVA Board approved the terms and conditions of new wholesale rate structures to become effective in April 2011. The proposed changes are not intended to provide additional revenue for TVA; however, individual distributors and end-use customers may see some effects on their bills. The proposed rate structures would provide price signals intended to incentivize distributor customers and end-use customers to shift energy usage from high cost periods to less expensive periods. For distributor customers, the wholesale rates would initially be a time-of-use rate with an option for a seasonal demand and energy rate for a limited time. TVA is proposing to have all distributor customers on a time-of-use wholesale rate structure by no later than October 2012; however, TVA will continue to have discus sions with distributors on other alternative wholesale rate structures. For directly served customers and distributor-served customers with contract demands in excess of five MW, TVA is proposing a default time-of-use rate structure with the option of a seasonal demand and energy rate structure.

TVA faces several challenges in implementing time-of-use rates. Although metering is in place today to facilitate implementation at the wholesale level, additional metering and infrastructure will be needed to pass through the time-of-use pricing signals at the retail level. TVA is working with distributors to explore how additional metering and infrastructure

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~~Environmental Cleanup Costs - Kingston Ash Spill~~

Environmental clean-up costs related to the Kingston ash spill are based upon estimates of the incremental direct costs of the remediation effort, including costs of compensation and benefits for those employees who are expected to devoteresources can best be acquired in a significant amount of time directly to the remediation effort. Such amounts are included in the estimate when it is probable that a liability has been incurred as of the financial statement date and the amount of loss cancost-effective manner. In addition, there will be reasonably estimated. When both of those recognition criteria are met and the estimated loss is a range, TVA accrues the amount that appears to be a better estimate than any other estimate within the range, or accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. If the actual costs materially differ from the estimate, TVA’s results of operations, financial condition, and cash flows could be materially affected.

As of June 30, 2010, the costs included in the environmental cleanup estimate for Kingston included ash dredging and processing, ash disposition, infrastructure repair, dredge cell repair, root cause analysis, certain legal and settlement costs, environmental impact studies and remediation, human health assessments, community outreach and support, regulatory oversight, cenosphere recovery, skimmer wall installation, construction of temporary ash storage areas, dike reinforcement, project management, and certain other remediationadditional administration costs associated with implementing the ~~clean up. As of June 30, 2010, TVA estimates that these costs~~time-of-use rates. Billing, metering, communication, and data management systems will range from $1.1 billion to $1.2 billion. Based on the likelihood of multiple scenarios, TVA has accrued $1.1 billion of remediation costs. TVA has deferred the cost estimate as a regulatory asset and is amortizing such costs into operating expenses over a 15-year period beginning in 2010 as such amounts are collected in rates.

~~The following categories could~~ have ~~a significant effect on estimates related to the Kingston ash spill remediation costs:~~

•	Final Closure Design – TVA is still in the process of designing the final closure of the failed dredge cell, other cells on-site, and the lateral expansion of the failed cell. Until the final design is completed and contracts for the work are awarded, costs estimates are subject to change.

•

Excluded Costs – TVA has not included the following categories of costs because it has determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the TDEC order) or regulatory directives, natural resource damages, outcome of lawsuits, future claims, long-term environmental impact costs, final long-term disposition of ash processing area, costs associated with new laws and regulations, or costs of remediating any discovered mixed waste during the ash removal process. See Note 7.

~~Changes in Ratemaking Impacting Accounting~~

~~Fuel Cost Adjustment~~

At June 30, 2010, the FCA related to the current year, as computed under the new methodology, had been overcollected by $15 million. Starting with the October 1, 2009 billing period, all adjustments to the FCA have been made on a monthly basis instead of a quarterly basis. This allows the FCA rate to be ~~more closely aligned with TVA’s costs. The FCA formula also contains a deferred account which is used~~modified (and in some cases acquired) to ~~reconcile the difference between actual~~read, communicate, and ~~forecasted fuel and purchased power costs in the FCA.~~

~~New Accounting Standards~~ ~~and Interpretations~~

~~The following accounting standards and interpretations became effective for TVA during 2010.~~

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~~In August 2009, FASB issued guidance regarding fair value measurements of liabilities~~. The guidance clarifies how the fair value of a liability should be measured when a quoted price in an active market for the identical liability either is or is not available. Additionally, the guidance clarifies how to consider a restriction when estimating the fair value of a liability and the appropriate level within the fair value disclosure hierarchy in which the various measurement techniques result. These changes became effective for TVA on October 1, 2009. The adoption of this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows.

In September 2009, FASB issued guidance regarding fair value measurements for certain alternative investments, such as interests in hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and funds of funds. The guidance allows reporting entities to use net asset value per share to estimate the fair value of these investments as a practical expedient. The guidance also requires disclosures by major category of investment about the attributes of the investments, such as the nature of any restrictions on the investor's ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investees. These changes became effective for TVA on October 1, 2009. The adoption of this guidance did not materia lly impact TVA’s financial condition, results of operations, or cash flows.

~~Noncontrolling Interests~~. In December 2007, FASB issued guidance that introduces significant changes in the accounting for noncontrolling interests (formerly minority interests) in a partially owned consolidated subsidiary. The guidance also changes the accounting for and reporting for the deconsolidation of a subsidiary. The guidance requires that a noncontrolling interest in a consolidated subsidiary be displayed in the consolidated statement of financial position as a separate component of equity. The guidance also requires that earnings attributed to noncontrolling interests be reported as part of consolidated earnings, and requires disclosure of the attribution of con solidated earnings to the controlling and noncontrolling interests on the face of the consolidated income statement. These changes became effective for TVA on October 1, 2009. The adoption of this guidance did not materially impact TVA’s financial condition, results of operations, or cash flows but will impact the accounting for any future noncontrolling interests.

~~The following accounting standards have been issued, but as of June 30, 2010, were not effective and had not been adopted by TVA.~~

~~Transfers of Financial Assets~~. In June 2009, FASB issued guidance regarding accounting for transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and subjects those entities to the same consolidation guidance as other variable interest entities (“VIEs”). The guidance changes the eligibility criteria for certain transactions to qualify for sale accounting and the accounting for certain transfers. The guidance also establishes broad disclosure objectives and requires extensive specific disclosures related to the transfers. These changes will become effective for TVA for any transfers of fina ncial assets occurring on or after October 1, 2010. TVA does not believe adoption of this guidance will materially affect its financial condition, results of operations, or cash flows.

~~Variable Interest Entities~~. In June 2009, FASB issued guidance that changes the consolidation guidance for VIEs. The guidance eliminates the consolidation scope exception for QSPEs. The statement amends the triggering events to determine if an entity is a VIE, establishes a primarily qualitative model for determining the primary beneficiary of the VIE, and requires on-going assessments of whether the reporting entity is the primary beneficiary. These changes will become effective for TVA on October 1, 2010, and will apply to all entities determined to be VIEs as of and subsequent to the date of adoption. TVA does not believe adoption of this guidance will materially affect its financial condition, results of operations, or cash flows.

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ultimately generate customer bills.

~~Corporate Go~~ve~~rnance~~

After serving as chairman of the TVA Board for a year, on April 16, 2010, Robert M. “Mike” Duncan asked the TVA Board to select a new chairman, citing his new duties as leader of a recently formed organization called American Crossroads. The Board voted unanimously to name Director Dennis Bottorff of Nashville, Tennessee, as TVA’s new chairman. Mr. Bottorff assumed the position of chairman of the TVA Board on May 18, 2010. Mr. Duncan continues to serve on the TVA Board.

~~The TVA Board approved a revised Board committee structure~~New Accounting Standards and ~~committee appointments at its June 10, 2010, meeting. The revised Board committees and their members are as follows:~~

~~Audit, Risk, and Regulation Committee~~

~~Thomas Gilliland (Chair)~~

~~Robert Duncan~~

~~Dennis Bottorff~~

~~Finance, Rates, and Portfolio Committee~~

~~Howard Thrailkill (Chair)~~

~~Thomas Gilliland~~

~~Dennis Bottorff~~

~~Customer and External Relations Committee~~

~~Robert Duncan (Chair)~~

~~William Graves~~

~~Dennis Bottorff~~

~~People and Performance Committee~~

~~William Graves (Chair)~~

~~Howard Thrailkill~~

~~Dennis Bottorff~~

Among other responsibilities, the Audit, Risk, and Regulation Committee acts as TVA’s audit committee, evaluates TVA’s risk identification and mitigation process, and reviews and monitors TVA’s policies with regard to resale rates of and use of power revenues by the distributors of TVA power.

Among other responsibilities, the Finance, Rates, and Portfolio Committee oversees the financial health of TVA, recommends to the TVA Board the electricity rates to be charged by TVA, and reviews TVA’s portfolio of generation assets.

Among other responsibilities, the Customer and External Relations Committee reviews the relationships with TVA’s various stakeholders, evaluates TVA’s environmental policies, goals, and strategies, reviews policies pertaining to land stewardship, reviews TVA’s renewable energy program, and monitors TVA’s economic development policies and strategies.

Among other responsibilities, the People and Performance Committee oversees TVA’s performance targets, TVA’s health and safety policies, and TVA’s nuclear safety performance; reviews and recommends performance goals for TVA executives; ensures adequate CEO succession planning; and makes recommendations to the TVA Board regarding compensation.

~~The Board decided not to use a committee to vet matters associated with strategic planning and governance but to consider these matters at the Board level.~~

At its June 10, 2010 meeting, the TVA Board also amended the TVA Bylaws to address the time required to appoint a successor Chairman, the committee appointment process, the retention and dismissal of outside advisors, and the process for amendment of the Bylaws.

~~Table of Contents~~Interpretations

~~Legislative and~~ ~~Regulatory Matters~~

~~Recently Enacted Legislation~~

Two inter-related major health care reform bills have recently been enacted into law. The first, the Patient Protection and Affordable Care Act (H.R. 3590 -- Public Law No. 111-148), was enacted on March 23, 2010, and was followed by the enactment on March 30, 2010, of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872 – Public Law No. 111-152), which amended the earlier act. The new laws are complex, and TVA is in the process of analyzing them in terms of potential effects. TVA’s final analysis as to potential impacts will not be completed until future rulemakings are undertaken and finalized by the various federal agencies which have been given regulatory responsibilities under the new laws.

The President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010. The act instructs regulatory agencies to determine many of the specific requirements related to the broad areas of reform. The legislation will make changes in many financial sectors, including how certain types of derivatives are structured, traded, and used. Depending upon how the so-called “end user exemption” and other provisions are ultimately interpreted and implemented by regulators, this legislation could impact the ability of TVA (as well as other electric suppliers and other “end users”) to use certain derivatives to hedge various risks and might increase the costs of doing so. See Note 12 for a discussion of TVA’s use of derivatives to hedge various risks .

~~Proposed Legislation and Regulation~~

On February 2, 2010, the Senate Environment and Public Works Committee reported S.1733, the Clean Energy Jobs and American Power Act, out of the Committee. This bill, which addresses GHG and climate change issues, is expected to be further revised before being considered by the Senate as a whole.

For a discussion of ~~additional legislation~~TVA’s new accounting standards and ~~regulation,~~interpretation, see Note 2, which discussion is incorporated into this Item 7,2, Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations —~~ Operations.

Corporate Governance

Howard A. Thraikill’s term as a member of the TVA Board ended December 22, 2010, with the adjournment of Congress on that date.

On January 28, 2011, Masoud Bajestani, TVA’s Vice President of Watts Bar 2, left TVA for reasons unrelated to the nuclear program and Watt Bar Unit 2. Also effective, January 28, 2011, Marie Gillman took management responsibility for the Watts Bar Unit 2 construction project until a permanent successor is named. Ms. Gillman is the general manager of strategic projects in the Nuclear Generation Development and Construction organization.

Legislative and Regulatory Matters ~~in the Annual Report.~~

On December 22, 2010, Congress approved President Obama’s proposal to freeze base pay for civilian federal employees for a period from January 1, 2011, to December 31, 2012. This freeze applies to TVA’s senior executives, which includes all employees at the level of vice president and above. Although the freeze does not apply to employees below this level, TVA ~~cannot accurately predict whether~~at its own discretion froze salaries for managers, specialists, and those employees not covered by collective bargaining agreements for the ~~initiatives discussed above and in the Annual Report will become law in the future and, if so, in what form and what their impact would be on TVA. Moreover, given the nature~~duration of the ~~legislative process,~~federal freeze. The freeze does not affect salaries that were already in effect as of January 1, 2011, nor does it is possible that new legislation or a change to existing legislation that has a significant impact on TVA’s activities could become law with little or no advance notice. As a federal entity, TVA’s ownership structure or mission could be changed by legislation. affect TVA employees in bargaining unit represented positions.

For a discussion of ~~the potential impact of legislation and~~recent environmental regulation, ~~on TVA,~~ see ~~Item 1A, Risk Factors in the Annual Report.~~Environmental Matters — Climate Change — Regulation below.

~~Environm~~Environmental Matters~~ental 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 clean air ~~quality~~ control, water quality control, and management and disposal of solid and hazardous ~~wastes,~~wastes. In the future, regulations in all of these areas are expected to become more stringent and to apply to additional emissions and sources, with a particular emphasis on climate ~~change.~~change, renewable generation, and energy efficiency.

Clean Air ~~Quality Control Developments~~Regulations

The Clean Air Act (“CAA”) establishes a comprehensive program to protect and improve the nation’s air quality and control sources of air emissions. The following CAA programs, along with those discussed in Item 1, Business - Environmental Matters in the Annual Report, can affect TVA’s power generation activities.

~~Nitrogen Oxides. Utility NO~~x ~~emissions continue to be regulated under state programs to achieve and maintain the EPA’s~~ National Ambient Air Quality ~~Standard~~Standards--Ozone. In January 2010, EPA published a proposed rule that would establish more stringent primary and secondary ozone national ambient air quality standards (“NAAQS”) ~~for ozone and fine particles, the Federal Acid Rain Program, and the regional haze program.~~. On ~~January 22,~~December 8, 2010, the EPA ~~signed~~Administrator announced a ~~new NAAQS for nitrogen dioxide (“NO~~2~~”). The~~delay in the final issuance of the ozone standard. EPA ~~set~~now expects to publish the ~~new one-hour NO~~2 ~~standard at the level of 100 parts per billion (“ppb”). Th is level defines the maximum allowable concentration anywhere in an area. To determine compliance~~final rule with the new ~~standard,~~ozone standards by July 31, 2011. As the EPA is establishing new ambient air monitoring requirements near major roads as well as in other locations where maximum concentrations are expected. Although existing air quality monitors do not currently show exceedances of this new standard in the TVA region, new non-attainment areasozone standards become more stringent, utilities are expected ~~with the additional community and roadside monitoring. The EPA intends~~ to re-designate areas in CY 2016 or CY 2017, as appropriate, based on the air quality data from the new monitoring network. Designation of new nonattainment areas within the TVA region could impact TVA’s permitting of new or modified emissions sources in the future.

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~~TVA contributes~~come under increasing pressure to ~~ambient ozone levels primarily as a result of~~further reduce NOx emissions from their existing fossil ~~fuel power~~ plants. ~~As a result of its emission reduction program, TVA’s summertime NO~~x ~~emissions have declined substantially. Since 1995, TVA has reduced its annual NO~~x ~~emissions by 89 percent by installing various controls, including low-NO~~x ~~burners and/or combustion controls on 58 of its 59 coal-fired units and installing SCRs on 21 of the largest units.~~

~~In 2005, TVA installed selective non-catalytic reduction (“SNCR”) systems, which generally have lower NO~~x removal capabilities than SCRs, on two units, Unit 1 at the Johnsonville Fossil Plant (“Johnsonville”) and Unit 1 at the Shawnee Fossil Plant (“Shawnee”), to demonstrate long-term technology capability, and continues to operate the SNCR at Johnsonville Unit 1 in west Tennessee. Due to operational issues, the Shawnee SNCR was removed from service in August 2008. TVA also is operating High Energy Reagent Technology (“HERT”) systems on the four units at John Sevier, and on Units 2, 3 and 4 at Johnsonville. HERT is similar to SNCR technology but has higher removal capabilities. TVA is evaluating plans to install SCRs at John Sevier by 2015.

~~Fine Particulates~~Hazardous Air Pollutants. ~~On October 8, 2009, the~~In June 2010, EPA ~~made final designations~~published a proposed rule to establish standards for hazardous air pollutants emitted from industrial, commercial, and institutional boilers and process heaters. Some of ~~areas throughout the U.S. as "non-attainment"~~TVA’s startup and ~~“unclassifiable/attainment" for the 24-hour NAAQS for fine particulates with a size of up to 2.5 micrometers (“PM2.5~~”). One hundred twenty counties or parts of counties were designated as non-attainment based on the recommendations provided by states and tribes, as well as additional supporting information provided by states, tribes, and the public. In the Tennessee Valley region, Anderson, Blount, Knox, and Loudon Counties in Tennessee, and a portion of Roane County, also in Tennessee, were designated as non-attainment. 60;TVA operates coal-fired power plants in Anderson and Roane Counties. State and local governments willauxiliary boilers may be required to ~~take steps to control fine particulate pollution in these non-attainment areas. Those steps may include stricter~~install monitors and/or controls on industrial facilities, including TVA’s power plants, and additional planning requirements for transportation-related sources. States must submit their plans to the EPA within three years after the EPA makes final designations. Areas are required to attain the standard no later than five years after the effective date of the designations. The EPA may grant attainment date extensions for up to five additional years in areas with more severe PM~~2.5~~ ~~problems as well as in areas where emissions control measures are not available or feasible.~~

~~Sulfur Dioxide. Utility SO~~2 ~~emissions are currently regulated under the Federal Acid Rain Program and state programs designed~~ to meet ~~NAAQS~~these standards by CY 2014. In December 2010, EPA filed for SO2 ~~and PM2.5. Looking forward, these programs, as well as implementation of the regional haze program, will result in additional regulation of SO~~2 emissions. The regional haze program establishes timelines for states to improve visibility in national parks and wilderness a reas throughout the United States. The regional haze program will require certain types of older sources of SO2 ~~emissions to install best available retrofit technology to control NO~~x~~, SO~~2~~, and particulate matter emissions. Through CY 2009, TVA had reduced its SO~~2 ~~emissions by 91 percent~~an extension from the ~~peak 1977 level by switching to lower-sulfur coals, continuing to operate an Atmospheric Fluidized Bed Combustion unit at Shawnee, and operating scrubbers on seven larger units.~~

~~On June 2, 2010, EPA announced that it was setting~~current court-ordered schedule, seeking a ~~new one-hour SO~~2 ~~health standard at 75 ppb, and revoking the current 24 hour and annual SO~~2 health standards (annual 0.03 ppm and 24 hour 0.14 ppm). EPA expects to “designate” areas as attainment, non-attainment, or unclassifiable by January 2012 based on the existing monitoring network and modeling. Non-attainment designations are expected to result in lower SO2 ~~emission limits for units in or near those areas. Several areas in the TVA region are expected to be designated non-attainment.~~

~~TVA has completed the installation of certain clean air controls at Kingston. See Note 16 —~~ ~~Case Brought by North Carolina Alleging Public Nuisance~~.

~~EPA Transport Rule.~~ On July 6, 2010, EPA issued a proposed Transport Rule (CAIR Replacement Rule) to limit emissions from electric generating plants in 32 states in the eastern United States that affect the ability of downwind states to attain and maintain compliance with the 1997 and 2006 fine particulate matter (PM~~2.5) NAAQS and the 1997 ozone NAAQS. The Transport Rule identifies a preferred approach (remedy) with four distinct cap-and-trade programs: two for annual SO~~2~~, one for annual NOx, and one for ozone season NOx, with state caps and limited interstate trading. Potential impacts to TVA are currently being evaluated. EPA expects~~15-month delay to issue a final rule ~~in Spring 2011.~~by April 2012. Until the final rule is published, specific requirements are too uncertain to predict.

~~Greenhouse Gases~~. On December 15, 2009, the EPA published two final findings regarding GHGs under section 202(a) of the Clean Air Act (“CAA”): (1) an endangerment finding that current and projected atmospheric concentrations of six key GHGs — carbon dioxide, methane, nitrogen oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride — threaten the public health and welfare of current and future generations, and (2) a cause or contribute finding that the combined emissions of these GHGs from new motor vehicles and new motor vehicle engines contribute to the GHG pollution which threatens public health and welfare. These findings do not themselves impose any requirements on industry or other entities, including TVA. However, related EPA actions are expected to trigger other sections of the CAA, and these other actions are expected to result in GHG emission requirements affecting industry, including TVA.

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On May 7, 2010, EPA and the National Highway Traffic Safety Administration finalized standards for light-duty motor vehicles to reduce GHG emissions and improve fuel economy. This action was expected and is a critical step leading to the regulation of GHG under the CAA beginning in 2011.

On June 3, 2010, EPA issued the final "tailoring" rule addressing which stationary sources and modification projects become subject to permitting requirements for GHG emissions under the Prevention of Significant Deterioration (“PSD”) and Title V programs of the Clean Air Act. Beginning on January 2, 2011, PSD or Title V requirements will apply to sources’ GHG emissions only if the sources are subject to PSD or Title V anyway due to their non-GHG pollutants. Therefore, EPA will not require sources or modifications to evaluate whether they are subject to PSD or Title V requirements solely on account of their GHG emissions. Beginning on July 1, 2011, EPA will phase in additional large sources of GHG emissions so that new sources as well as existing sources not already subject to Title V that emit, or have the potential to emit, at least 100,000 tons per year CO2 ~~equivalent (“tpy CO~~2~~e”) will become subject to the PSD and Title V requirements. In addition, sources that emit or have the potential to emit at least 100,000 tpy CO~~2~~e and that undertake a modification that increases net emissions of GHGs by at least 75,000 tpy CO~~2~~e will also be subject to PSD requirements. This action will require TVA to account for GHG emissions according to this schedule.~~

~~The potential costs of this rulemaking to TVA are not known at this time.~~

Climate Change

Regulation.In December ~~2009, President Obama attended~~2010, EPA entered into a settlement agreement with various states and environmental groups that establishes a schedule for setting new standards

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for regulating greenhouse gas (“GHG”) emissions from oil and coal electric generating units. An EPA proposal is required by July 26, 2011, and a final rule is required by May 26, 2012. These rules will affect TVA, but the ~~15th Conference~~extent of these impacts is not yet known.

In December 2010, EPA identified 13 states, including Kentucky, that will need to change their existing State Implementation Plans to ensure the states can properly implement EPA’s new Title V GHG permitting requirements under the Prevention of Significant Deterioration (“PSD”) program, which began January 2, 2011.

In November 2010, EPA released guidance and other implementation tools for the new permitting requirements. The information released by EPA is intended to guide permitting authorities in issuing permits covering GHG emissions. The guidance does not recommend a specific control option for GHG sources but instead recommends that permitting authorities use the current process, known as the “best available control technology process,” to review all available emission reduction options. EPA statements indicate that in most cases, this process will show that industry can achieve the most cost effective reductions through energy efficiency measures. These rules will affect TVA’s existing fossil power plants if the plants are modified in si gnificant ways which trigger major source permitting, as well as any new fossil power plants which require major source permitting.

In December 2010, EPA finalized requirements for geologic sequestration, a process of capturing carbon dioxide (“CO2”) from industrial sources and injecting the emissions into deep subsurface rock formations for long-term storage. The final rule establishes new federal requirements for the underground injection of CO2 for the purpose of long-term underground storage and a new well class to ensure the protection of underground sources of drinking water from injection-related activities. TVA is evaluating the potential for geologic sequestration.

In October 2010, EPA and the Department of Transportation proposed a rule to reduce GHG emissions and improve the fuel efficiency of model years 2014 through 2018 medium-duty and heavy-duty vehicles. Some industries and other groups are petitioning for court review of EPA’s authority to regulate GHG emissions under this rule. Any court ruling on this matter could impact regulations of GHG that could affect TVA.

In December 2010, California’s Air Resources Board voted to approve a cap-and-trade program for GHG emissions. The cap-and-trade program is scheduled to begin in 2012. Covered sources will initially receive enough free permits to cover the majority of their emissions, but will gradually have to buy permits at auction.

International Accords. The 16th Session of the Conferences of the Parties to the United Nations Framework Convention on Climate ~~Change. At this conference~~Change held a meeting in ~~Copenhagen,~~Cancun, Mexico in late November 2010. The parties agreed on a few elements, known as the ~~President pledged~~Cancun Agreements, that anchor national mitigation pledges and take initial steps to strengthen elements of a climate framework.

Litigation. On December 10, 2010, the United States ~~will reduce its emissions~~Court of Appeals for the D.C. Circuit denied motions by a broad range of industry participants and several states to stay EPA’s GHG regulatory program. See Note 16 for a discussion of GHG ~~“in the range of” 17 percent below CY 2005 levels by CY 2020. This reduction~~litigation to which TVA is ~~in line with~~ a ~~climate bill that passed the U.S. House of Representatives in June 2009. The impact on TVA of this stated reduction goal is not known at this time.~~

party.

~~Executive Order 13514, signed by President Obama on October 5, 2009, requires that the federal agency Strategic Sustainability Performance Plans~~Indirect Consequences of Regulation or Business Trends. Legal, technological, political, and ~~Greenhouse Gas Target be submitted~~scientific developments regarding climate change may create new opportunities and risks. The potential indirect consequences could include an increase or decrease in electricity demand, increased demand for generation from alternative energy sources, and impacts to ~~the Council on Environmental Quality~~business reputation and ~~the Office of Management and Budget annually. TVA submitted its report on June 2, 2010.~~public opinion.

Water Quality Control Developments

~~As reported above, TVA completed construction~~EPA is expected to propose a new rule in early CY 2011 designed to minimize the adverse impacts to fish and began testing of a flue gas scrubber at Kingston. In preparation for the scrubber startup, TVA applied for and was granted a Clean Water Act permit by TDEC on October 16, 2009, to discharge wastewatersshellfish from the ~~scrubber into~~design and operation of cooling water intake structures at existing power plants. The new rule is expected to require changes in the ~~Clinch River. On November 12, 2009, several environmental groups jointly appealed~~operation of cooling water intakes and modifications to their design. All of the ~~Kingston permit~~intakes at TVA’s existing coal-fired and nuclear generating facilities are likely to be subject to the ~~Tennessee Water Quality Control Board. The outcome and potential~~new rule. Because of the uncertainty of the changes to be made by EPA, the impacts of ~~this appeal~~the rulemaking are uncertain at this time. ~~See Note 16 —~~ ~~Kingston NPDES Permit Appeal.~~However, these changes could potentially result in significant increases in TVA’s capital costs and operating and maintenance costs.

~~Coal-Combustion Products~~

The EPA has announced that it plans to propose new regulations for the management of CCP, and the regulations are expected to be finalized in late CY 2010. To meet anticipated, more stringent regulations requiring the installation of caps and liners at existing and new CCP landfills and to convert its CCP handling systems from wet to dry systems, TVA currently estimates that the expected cost of the CCP work will be between $1.5 billion and $2.0 billion, and the work is expected to take between eight and 10 years.

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Estimated Required Environmental Expenditures

The following table contains information about TVA’s current estimates on projects related to environmental

laws and regulations. ~~This table excludes items already recognized on the Balance Sheets at June 30, 2010.~~

TVA Air, Water, and Waste Quality Estimated Potential Environmental Expenditures
As of June 30, 2010

Estimated Timetable Total Estimated Expenditures

North Carolina lawsuit1
2010-2014 $ 1,726
Site environmental remediation costs2
2010 + 20
CCP conversion and remediation3
2010-2020 1,451
Proposed clean air projects4
2011-2018 4,948
Clean Water Act requirements5
2015-2020 TBD*

Notes
(1) As a result of the North Carolina lawsuit seeking caps on emissions of certain pollutants from TVA’s coal-fired plants, TVA has estimated the total costs of taking all actions required by the court. Although the Fourth Circuit recently reversed the district court’s decision, the possibility of appeal adds to the uncertainty of estimating these expenditures. See Note 16 - Case Brought by North Carolina Alleging Public Nuisance.
(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.
(5) Compliance plans to meet the requirements of a revised or new implementing rule under Section 316(b) of the Clean Water Act and the EPA’s decision to revise the steam electric effluent guidelines will be determined upon finalization of the rules.
* TBD – to be determined as regulations become final

~~Other Events~~

TVA Air, Water, and Waste Quality Estimated Potential Environmental Expenditures As of December 31, 2010 (in millions)
	Estimated Timetable	Total Estimated Expenditures

Site environmental remediation costs(1)	2011+	$ 23
CCP conversion and remediation(2)	2011-2020	$ 1,453
Proposed clean air projects(3)	2011-2018	$ 3,774
Clean Water Act requirements(4)	2015-2020	TBD*

Notes (1)Estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate. (2)Includes closure of impoundments, construction of lined landfills, and construction of dewatering systems. (3)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 GHG regulations. (4)Compliance plans to meet the requirements of a revised or new implementing rule under Section 316(b) of the Clean Water Act and EPA’s decision to revise the steam electric effluent guidelines will be determined upon finalization of the rules. * TBD – to be determined as regulations become final

~~Kingston Ash Pond Spill~~. On June 14, 2010, TDEC announced the issuance of a Commissioner’s Order against TVA and issued a penalty of approximately $12 million in response to the Kingston coal ash release on December 22, 2008. The penalties address violations of the Tennessee Water Quality Control Act and the Tennessee Solid Waste Disposal Act. Additional penalties may be assessed by EPA.

~~Widows Creek Gypsum Pond. TVA and Alabama Department of Environmental Management agreed to finalize the Consent Order issued on April 3, 2009, and the order was signed on October 13, 2009.~~

~~Ocoee Hydro Plant~~. TVA has resolved the issues in the TDEC Director’s Order of January 12, 2009. Based on the results of a test drawdown on November 3-5, 2009, TDEC has approved TVA’s Best Management Practices for operation of Ocoee No. 3 when conducting future drawdowns.

~~Browns Ferry Nuclear Plant~~. On April 7, 2010, approximately 350 gallons of water containing the radioactive isotope tritium spilled from a water storage tank at the Browns Ferry Nuclear Plant. The leak, which was reported to the NRC and other authorities under the industry’s voluntary reporting guidelines, was stopped, and the dirt into which the water soaked was collected and sent to a disposal facility. The leak was well below any regulatory limit and there was no danger to any employee or the public.

~~For a discussion of additional environmental matters affecting TVA, see Item 1, Business -~~ ~~Environmental Matters~~ ~~in the Annual Report.~~

~~Leg~~aLegal Proceedingsl

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.~~otherwise. TVA had accrued approximately ~~$13~~$11 million with respect to Legal Proceedings as of ~~June 30, 2010.~~December 31, 2010. 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 ~~financial condition,~~ results of operations, liquidity, and ~~cash flows~~financial condition could be ~~materially~~ma terially adversely affected.

For a discussion of certain current material Legal Proceedings, ~~involving TVA,~~ see Note 16, which discussion is incorporated ~~by reference~~ into this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes related to market risk ~~from the market risks~~ disclosed under Item 7, ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations —- Risk Management Activities in the Annual Report. See Note 12 for ~~more~~additional information regarding ~~TVA’s~~TVA's derivative transactions and risk management activities.

ITEM 4. C ~~ONTROLS~~CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

TVA’s management, including the President and Chief Executive Officer and members of the ~~disclosure control committee~~Disclosure Control Committee (including the Chief Financial Officer and the Vice President ~~Controller and Chief Risk Officer)~~& Controller), evaluated the effectiveness of ~~TVA~~TVA’s disclosure controls and ~~controls~~ procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, ~~(“Exchange Act”~~as amended (the "Exchange Act")) as of ~~June 30,~~December 31, 2010. Based on this evaluation, TVA’s management, including the President and Chief Executive Officer and members of the ~~disclosure control committee~~Disclosure Control Committee (including the Chief Financial Officer and the Vice President ~~Controller and Chief Risk Officer)~~& Controller), concluded that TVA’s disclosure controls and procedures were effective as of ~~June 30,~~December 31, 2010, to ensure that information required to be ~~disclosed~~d isclosed 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~~SEC’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 and members of the ~~disclosure control committee~~Disclosure Control Committee (including the Chief Financial Officer and the Vice President ~~Controller and Chief Risk Officer)~~& Controller), as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the ~~quarter~~three months ended ~~June 30,~~December 31, 2010, 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 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 Legal Proceedings involving TVA, see Note 16, which discussion is incorporated by reference into this Item 1, Legal Proceedings.

ITEM 1A. RISK ~~FAC~~FACTORS~~TORS~~

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

~~ITEM 6. EXHIBI~~TS

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, and June 10, 2010~~
10.1		Second Amendment ~~dated~~Dated as of ~~May 11,~~October 7, 2010, to ~~$1,000,000,000 Spring~~Fall Maturity Credit Agreement Dated as of March 26, 2009, and Amended as of ~~May 13,~~November 9, 2009, Among TVA, Bank of America, N.A., as Administrative Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form 8-K filed on ~~May~~October 12, 2010, File No. 000-52313)
~~10.2~~		~~Supplement No. 4 Dated as of April 22, 2010, to the Joint Ownership Agreement Dated as of April 30, 2008, Between Seven States Power Corporation and TVA~~
~~10.3~~		~~Second Amendment Dated as of April 22, 2010, to Lease Agreement Dated September 30, 2008, Between TVA and Seven States Southaven, LLC~~
~~10.4~~	10.2	Amended and Restated ~~Buy-Back Arrangements Dated as of April 22, 2010, Among TVA, JPMorgan Chase Bank, National Association, as Administrative Agent and a Lender, and the Other Lenders Referred to Therein~~
~~10.5~~		~~Spring~~Fall Maturity Credit Agreement Dated as of ~~July 22, 2010,~~January 14, 2011, Among TVA, Bank of America, N.A., as Administrative Agent and Letter of Credit Issuer, Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto
~~10.6~~
~~Overview~~10.3	Winter Maturity Credit Agreement Dated as of ~~Compensation Arrangements for John M. Thomas, III~~January 14, 2011, Among TVA, The Royal Bank of Scotland pic, as Administrative Agent and Letter of Credit Issuer, The Royal Bank of Scotland pic, as a Lender, and the Other Lenders Party Thereto
~~10.7~~
10.4	Deferral Agreement Between TVA and ~~John M. Thomas, III,~~Preston D. Swafford Dated as of December ~~4, 2009~~23, 2010

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~~
32.1	Section 1350 Certification Executed by the Chief Executive Officer
~~32.2~~
32.2	Section 1350 Certification Executed by the Chief Financial Officer

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~~SIGN~~SIGNATURES~~ATURES~~

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: August 2, 2010 TENNESSEE VALLEY AUTHORITY~~

~~(Registrant)~~

Date: February 2, 2011		TENNESSEE VALLEY AUTHORITY
		(Registrant)


	By:	/s/ Tom Kilgore
		Tom Kilgore
		President and Chief Executive Officer
	(Principal Executive Officer)




By:	/s/ John M. Thomas, III
		John M. Thomas, III
		Chief Financial Officer
	(Principal Financial Officer)

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EX~~HIBI~~EXHIBIT INDEX~~T INDEX~~

Exhibit No.

~~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, and June 10, 2010~~
~~10.1~~
		10.1	Second Amendment ~~dated~~Dated as of ~~May 11,~~October 7, 2010, to ~~$1,000,000,000 Spring~~Fall Maturity Credit Agreement Dated as of March 26, 2009, and Amended as of ~~May 13,~~November 9, 2009, Among TVA, Bank of America, N.A., as Administrative Agent, Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto (Incorporated by reference to Exhibit 99.1 to TVA’s Current Report on Form 8-K filed on ~~May~~October 12, 2010, File No. 000-52313)
~~10.2~~		~~Supplement No. 4 Dated as of April 22, 2010, to the Joint Ownership Agreement Dated as of April 30, 2008, Between Seven States Power Corporation and TVA~~
~~10.3~~		~~Second Amendment Dated as of April 22, 2010, to Lease Agreement Dated September 30, 2008, Between TVA and Seven States Southaven, LLC~~
~~10.4~~	10.2	Amended and Restated ~~Buy-Back Arrangements Dated as of April 22, 2010, Among TVA, JPMorgan Chase Bank, National Association, as Administrative Agent and a Lender, and the Other Lenders Referred to Therein~~
~~10.5~~		~~Spring~~Fall Maturity Credit Agreement Dated as of ~~July 22, 2010,~~January 14, 2011, Among TVA, Bank of America, N.A., as Administrative Agent and Letter of Credit Issuer, Bank of America, N.A., as a Lender, and the Other Lenders Party Thereto
~~10.6~~		~~Overview of Compensation Arrangements for John M. Thomas, III~~
~~10.7~~		10.3	Winter Maturity Credit Agreement Dated as of January 14, 2011, Among TVA, The Royal Bank of Scotland pic, as Administrative Agent and Letter of Credit Issuer, The Royal Bank of Scotland pic, as a Lender, and the Other Lenders Party Thereto

		10.4	Deferral Agreement Between TVA and ~~John M. Thomas, III,~~Preston D. Swafford Dated as of December ~~4, 2009~~23, 2010
~~31.1~~
		31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer
~~31.2~~
		31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer
~~32.1~~
		32.1	Section 1350 Certification Executed by the Chief Executive Officer
~~32.2~~
		32.2	Section 1350 Certification Executed by the Chief Financial Officer

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ASSETS
	June 30			September 30
	2010			2009
	(Unaudited)
Current assets
Cash and cash equivalents	$	198		$	201
Accounts receivable, net		1,383			1,303
Inventories and other, net		1,115			961
Total current assets		2,696			2,465

Property, plant, and equipment
Completed plant		42,221			41,286
Less accumulated depreciation		(18,962	)		(18,086	)
Net completed plant		23,259			23,200
Construction in progress		3,048			2,600
Nuclear fuel and capital leases		1,105			961
Total property, plant, and equipment, net		27,412			26,761

Investment funds		986			983

Regulatory and other long-term assets
Deferred nuclear generating units		2,054			2,347
Other regulatory assets		7,431			7,287
Subtotal		9,485			9,634
Other long-term assets		132			174
Total regulatory and other long-term assets		9,617			9,808

Total assets	$	40,711		$	40,017

LIABILITIES AND PROPRIETARY CAPITAL

Current liabilities
Accounts payable and accrued liabilities	$	1,526		$	2,108
Environmental cleanup costs - Kingston ash spill		237			348
Accrued interest		323			401
Current portion of leaseback obligations		74			463
Current portion of energy prepayment obligations		105			105
Short-term debt, net		834			844
Current maturities of long-term debt		1,042			8
Total current liabilities		4,141			4,277

Long-term liabilities
Other long-term liabilities		4,961			4,805
Regulatory liabilities		56			130
Environmental cleanup costs - Kingston ash spill		364			354
Asset retirement obligations		2,821			2,683
Leaseback obligations		1,282			940
Energy prepayment obligations		743			822
Total long-term liabilities		10,227			9,734

Long-term debt, net		21,363			21,788

Total liabilities		35,731			35,799

Proprietary capital
Appropriation investment		4,685			4,703
Retained earnings		4,071			3,291
Accumulated other comprehensive loss		(67	)		(75	)
Accumulated net expense of nonpower programs		(3,709	)		(3,701	)
Total proprietary capital		4,980			4,218

Total liabilities and proprietary capital	$	40,711		$	40,017

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

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
Derivatives in Cash Flow Hedging Relationship	Amount of Exchange Gain (Loss) Reclassified from OCI to Interest Expense Three Months Ended June 30 (a)					Amount of Exchange Gain (Loss) Reclassified from OCI to Interest Expense Nine Months Ended June 30 (a)
	2010		2009			2010		2009

Currency swaps	$	14	$	(126	)	$	63	$	80
Note (a) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Also see Note 13.

Fair Value Measurements Using Significant Unobservable Inputs
	For the Three Months Ended June 30, 2010							For the Nine Months Ended June 30, 2010
	Private Partnerships		Coal Contract Derivatives		Swaption			Private Partnerships		Coal Contract Derivatives		Swaption
Balances at beginning of period	$	—	$	—	$	(448	)	$	—	$	7	$	(592	)
Purchases, issuances, and settlements		2		—		—			2		—		—
Total gains or losses (realized or unrealized):
Net unrealized gains (losses) deferred as regulatory assets and liabilities		—		13		(226	)		—		6		(82	)
Balances at June 30, 2010	$	2	$	13	$	(674	)	$	2	$	13	$	(674	)

Estimated Future Benefits Payments
	Pension Benefits		Other Post-retirement Benefits

2011		683		41
2012		678		45
2013		678		46
2014		678		48
2015 - 2019		3,394		245

Sales of Electricity (Millions of kWh)
	Three Months Ended June 30							Nine Months Ended June 30
	2010		2009		Percent Change			2010		2009		Percent Change

Sales of electricity
Municipalities and cooperatives		33,004		31,465		4.9	%		101,026		97,446		3.7	%
Industries directly served		7,242		6,448		12.3	%		24,267		23,033		5.4	%
Federal agencies and other		505		485		4.1	%		1,479		1,507		(1.9	%)

Total sales of electricity		40,751		38,398		6.1	%		126,772		121,986		3.9	%

Heating degree days		119		230		(48.3	%)		3,668		3,395		8.0	%
Cooling degree days		847		666		27.2	%		868		748		16.0	%
Combined degree days		966		896		7.8	%		4,536		4,143		9.5	%

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (Part 2)

Derivatives in Cash Flow Hedging Relationship

Amount of Cumulative Unrealized
Gain (Loss) Reclassified from
OCI to Interest Expense
Three Months Ended December 31 (1)

Currency swaps

Note
(1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.