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Table of Contents                 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number 000-52313
TVA_Logo_RGB_Blue.jpg
TENNESSEE VALLEY AUTHORITY
(Exact name of registrant as specified in its charter)
A corporate agency of the United States created by an act of Congress
(State or other jurisdiction of incorporation or organization)
62-0474417
 (I.R.S. Employer Identification No.)
 
400 W. Summit Hill Drive
Knoxville, Tennessee
 (Address of principal executive offices)
 
37902
 (Zip Code)
(865) 632-2101
(Registrant's telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading Symbol(s)Name of each exchange on which registered
N/AN/AN/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o                                                                                    Accelerated filer o
Non-accelerated filer    x   Smaller reporting company  o        
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Number of shares of common stock outstanding at January 29, 2024: N/A
1

Table of Contents                 
Table of Contents
 
 Page
GLOSSARY OF COMMON ACRONYMS......................................................................................................................................
FORWARD-LOOKING INFORMATION.........................................................................................................................................
GENERAL INFORMATION............................................................................................................................................................
  
  
ITEM 1. FINANCIAL STATEMENTS.............................................................................................................................................
  
Executive Overview...............................................................................................................................................................
Results of Operations............................................................................................................................................................
Liquidity and Capital Resources............................................................................................................................................
Critical Accounting Estimates................................................................................................................................................
New Accounting Standards and Interpretations....................................................................................................................
  
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................................
  
ITEM 4. CONTROLS AND PROCEDURES..................................................................................................................................
Changes in Internal Control over Financial Reporting..........................................................................................................
  
             PART II - OTHER INFORMATION 
  
ITEM 1. LEGAL PROCEEDINGS..................................................................................................................................................
ITEM 1A. RISK FACTORS............................................................................................................................................................
  
ITEM 6. EXHIBITS........................................................................................................................................................................
  
SIGNATURES...............................................................................................................................................................................
2

Table of Contents                 
GLOSSARY OF COMMON ACRONYMS
Following are definitions of some of the terms or acronyms that may be used in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 (the "Quarterly Report"):
 
Term or AcronymDefinition
AOCIAccumulated other comprehensive income (loss)
AROAsset retirement obligation
ARTAsset Retirement Trust
BondsBonds, notes, or other evidences of indebtedness
Bull RunBull Run Fossil Plant
CCRCoal combustion residuals
CumberlandCumberland Fossil Plant
CVACredit valuation adjustment
CYCalendar year
DCPDeferred Compensation Plan
EO(s)Executive Order(s)
FERCFederal Energy Regulatory Commission
FHPFinancial Hedging Program
GAAPAccounting principles generally accepted in the United States of America
GACGrid access charge
GEHGE Hitachi Nuclear Energy
HoldcoJohn Sevier Holdco LLC
JacobsJacobs Engineering Group, Inc.
JSCCGJohn Sevier Combined Cycle Generation LLC
kWhKilowatt hours
LPCsLocal power company customers
MLGWMemphis Light, Gas and Water Division
mmBtuMillion British thermal unit(s)
Moody'sMoody's Investors Service, Inc.
MtMMark-to-market
NAVNet asset value
NDTNuclear Decommissioning Trust
NEILNuclear Electric Insurance Limited
NESNashville Electric Service
NRCNuclear Regulatory Commission
PPA(s)Power Purchase Agreement(s)
RFP(s)Request(s) for proposals
RPRestoration Plan
SCCGSouthaven Combined Cycle Generation LLC
SECSecurities and Exchange Commission
SERPSupplemental Executive Retirement Plan
SHLLCSouthaven Holdco LLC
TVATennessee Valley Authority
TVA ActTennessee Valley Authority Act of 1933, as amended
TVA BoardTVA Board of Directors
U.S. TreasuryUnited States Department of the Treasury
VIEVariable interest entity
XBRLeXtensible Business Reporting Language
3

Table of Contents                 
FORWARD-LOOKING INFORMATION

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

Although the Tennessee Valley Authority ("TVA") believes that the assumptions underlying any 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 any forward-looking statements.  These factors include, among other things:

New, amended, or existing laws, regulations, executive orders ("EOs"), or administrative orders or interpretations, including those related to climate change and other environmental matters, and the costs of complying with these laws, regulations, EOs, or administrative orders or interpretations;
The cost of complying with known, anticipated, or new environmental requirements, some of which could render continued operation of many of TVA's aging coal-fired generation units not cost-effective or result in their removal from service, perhaps permanently;
Federal legislation aimed specifically at curtailing TVA's activities, including legislation that may cause TVA to lose its protected service territory, its sole authority to set rates, or its authority to manage the Tennessee River system or the real property currently entrusted to TVA; subject TVA to additional environmental regulation or additional requirements of the North American Electric Reliability Corporation ("NERC") or Federal Energy Regulatory Commission ("FERC"); require the divestiture of TVA or the sale of certain of TVA's assets; lower the debt ceiling on bonds, notes, or other evidences of indebtedness (collectively, "Bonds") specified in the Tennessee Valley Authority Act of 1933, as amended, ("TVA Act"); or restrict TVA's access to its funds;
Cyber attacks on TVA's assets or the assets of third parties upon which TVA relies;
The failure of TVA's information technology systems;
Significant delays and additional costs, and/or inability to obtain necessary regulatory approvals, licenses, or permits, for major projects, including for assets that TVA needs to serve its existing and future load and to meet its carbon reduction aspirations;
Limitations on TVA's ability to borrow money, which may result from, among other things, TVA's approaching or substantially reaching the debt ceiling or TVA's losing access to the debt markets, and which may impact TVA's ability to make planned capital investments;
Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, ownership, operation, or decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, or cause TVA to forego future construction at these or other facilities;
Risks associated with the operation of nuclear facilities or other generation and related facilities, including coal combustion residuals ("CCR") facilities;
Inability to continue to operate certain assets, especially nuclear facilities, including due to the inability to obtain, or loss of, regulatory approval for the operation of assets;
Significant additional costs for TVA to manage and operate its CCR facilities;
Physical attacks, threats, or other interference causing damage to TVA's facilities or interfering with TVA's operations;
The failure of TVA's generation, transmission, navigation, flood control, and related assets and infrastructure, including CCR facilities and spent nuclear fuel storage facilities, to operate as anticipated, resulting in lost revenues, damages, or other costs that are not reflected in TVA's financial statements or projections, including due to aging or technological issues;
Costs or liabilities that are not anticipated in TVA's financial statements for third-party claims, natural resource damages, environmental cleanup activities, or fines or penalties associated with unexpected events such as failures of a facility or infrastructure;
Events at a TVA facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, or damage to the property of others;
Events that negatively impact TVA's reliability, including problems at other utilities or at TVA facilities or the increase in intermittent sources of power;
Events or changes involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part and those that increase flows across TVA's transmission grid;
Disruption of supplies of fuel, purchased power, or other critical items or services, which may result from, among other things, economic conditions, weather conditions, physical or cyber attacks, political developments, international trade restrictions or tariffs, legal actions, mine closures or reduced mine production, increases in fuel exports, environmental regulations affecting TVA's suppliers, transportation or delivery constraints, including limited transmission availability, shortages of raw materials, supply chain difficulties, labor shortages, strikes, inflation, or similar events and which may, among other things, hinder TVA's ability to operate its assets and to complete projects on time and on budget;
Circumstances that cause TVA to change its determinations regarding the appropriate mix of generation assets;
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Costs or other challenges resulting from a failure by TVA to meet its carbon reduction aspirations;
Actions taken, or inaction, by the United States ("U.S.") government relating to the national debt ceiling or automatic spending cuts in government programs;
Inability to respond quickly enough to current or potential customer demands or needs or to act solely in the interest of ratepayers;
Negative outcomes of current or future legal or administrative proceedings;
Other unforeseeable occurrences negatively impacting TVA assets or their supporting infrastructure;
The need for significant future contributions associated with TVA's pension plans, other post-retirement benefit plans, or health care plans;
Increases in TVA's financial liabilities for decommissioning its nuclear facilities and retiring other assets;
The requirement or decision to make additional contributions to TVA's Nuclear Decommissioning Trust ("NDT") or Asset Retirement Trust ("ART");
Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred;
An increase in TVA's cost of capital, which may result from, among other things, changes in the market for Bonds, disruptions in the banking system or financial markets, changes in the credit rating of TVA or the U.S. government, or, potentially, an increased reliance by TVA on alternative financing should TVA approach its debt limit;
The inaccuracy of certain assumptions about the future, including economic forecasts, anticipated energy and commodity prices, cost estimates, construction schedules, power demand forecasts, the appropriate generation mix to meet demand, and assumptions about potential regulatory environments;
Significant decline in the demand for electricity that TVA produces, which may result from, among other things, economic downturns or recessions, loss of customers, reductions in demand for electricity generated from non-renewable sources or centrally located generation sources, increased utilization of distributed energy resources, increased energy efficiency and conservation, or improvements in alternative generation and energy storage technologies;
Changes in customer preferences for energy produced from cleaner generation sources;
Addition or loss of customers by TVA or TVA's local power company customers ("LPCs");
Potential for increased demand for energy resulting from, among other things, an increase in the population of TVA's service area;
Changes in technology, which, among other things, may affect relationships with customers and require TVA to change how it conducts its operations;
Changes in the economy and volatility in financial markets;
Reliability or creditworthiness of counterparties including but not limited to customers, suppliers, renewable resource providers, and financial institutions;
Changes in the market price of commodities such as purchased power, coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, or emission allowances;
Changes in the market price of equity securities, debt securities, or other investments;
Changes in interest rates, currency exchange rates, or inflation rates;
Failure to attract or retain an appropriately qualified, diverse, and inclusive workforce;
Changes in the membership of the TVA Board of Directors ("TVA Board") or TVA senior management, which may impact how TVA operates;
Weather conditions, including changing weather patterns, extreme weather conditions, and other events such as flooding, droughts, wildfires, heat waves, and snow or ice storms that may result from climate change, which may hamper TVA's ability to supply power, cause customers' demand for power to exceed TVA's then-present power supply, or otherwise negatively impact net revenue;
Events affecting the supply or quality of water from the Tennessee River system or Cumberland River system, or elsewhere, which could interfere with TVA's ability to generate power;
Catastrophic events, such as fires, earthquakes, explosions, solar events, electromagnetic pulses, geomagnetic disturbances, droughts, floods, hurricanes, tornadoes, polar vortexes, icing events, pipeline explosions, or other casualty events, wars, national emergencies, terrorist activities, pandemics, widespread public health crises, geopolitical events, or other similar destructive or disruptive events;
Inability to use regulatory accounting for certain costs;
Ineffectiveness of TVA's financial control system to control issues and instances of fraud or to prevent or detect errors;
Ineffectiveness of TVA's disclosure controls and procedures or its internal control over financial reporting;
Adverse effects from regional health emergencies;
Inability of TVA to implement its business strategy successfully, including due to the increased use in the public of distributed energy resources or energy-efficiency programs;
Inability of TVA to adapt its business model to changes in the utility industry and customer preferences and to remain cost competitive;
Inability of TVA to achieve or maintain its cost reduction goals, which may require TVA to increase rates and/or issue more debt than planned;
The emergence of artificial intelligence and its potential application to various business practices, including TVA's operations and the operations of TVA's stakeholders;
Loss of quorum of the TVA Board, which may limit TVA's ability to adapt to meet changing business conditions;
Negative impacts on TVA's reputation; or
Other unforeseeable events.

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See also Part I, Item 1A, Risk Factors, and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TVA's Annual Report on Form 10-K for the year ended September 30, 2023 (the "Annual Report"), and Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for a discussion of factors that could cause actual results to differ materially from those in any forward-looking statement.  New factors emerge from time to time, and it is not possible for TVA to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA's business or cause results to differ materially from those contained in any forward-looking statement.  TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made, except as required by law.

GENERAL INFORMATION

Fiscal Year

References to years (2024, 2023, etc.) in this Quarterly Report are to TVA's fiscal years ending September 30.  Years that are preceded by "CY" are references to calendar years.

Notes

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

Available Information

TVA files annual, quarterly, and current reports with the Securities and Exchange Commission ("SEC") under Section 37 of the Securities Exchange Act of 1934 (the "Exchange Act"). TVA's SEC filings are available to the public at www.tva.com, free of charge, as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.  Information contained on or accessible through TVA's website shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report or any other report or document that TVA files with the SEC.  All TVA SEC reports are available to the public without charge from the website maintained by the SEC at www.sec.gov.  
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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended December 31
(in millions)
 20232022
Operating revenues  
Revenue from sales of electricity$2,731 $2,963 
Other revenue34 52 
Total operating revenues2,765 3,015 
Operating expenses  
Fuel496 615 
Purchased power359 491 
Operating and maintenance867 827 
Depreciation and amortization521 533 
Tax equivalents133 151 
Total operating expenses2,376 2,617 
Operating income389 398 
Other income, net23 16 
Other net periodic benefit cost23 51 
Interest expense262 262 
Net income$127 $101 
The accompanying notes are an integral part of these consolidated financial statements.



TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended December 31
(in millions)
 20232022
Net income$127 $101 
Other comprehensive income (loss)
Net unrealized gain on cash flow hedges20 71 
Net unrealized gain reclassified to earnings from cash flow hedges(19)(34)
Total other comprehensive income1 37 
Total comprehensive income$128 $138 
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
ASSETS
 December 31, 2023September 30, 2023
Current assets  
Cash and cash equivalents$498 $501 
Accounts receivable, net1,593 1,745 
Inventories, net1,182 1,108 
Regulatory assets251 178 
Other current assets152 134 
Total current assets3,676 3,666 
Property, plant, and equipment  
Completed plant67,073 68,199 
Less accumulated depreciation(34,445)(35,871)
Net completed plant32,628 32,328 
Construction in progress3,425 3,238 
Nuclear fuel1,364 1,344 
Finance leases562 572 
Total property, plant, and equipment, net37,979 37,482 
Investment funds4,472 4,123 
Regulatory and other long-term assets  
Regulatory assets5,551 5,566 
Operating lease assets, net of amortization258 177 
Other long-term assets312 330 
Total regulatory and other long-term assets6,121 6,073 
Total assets$52,248 $51,344 
The accompanying notes are an integral part of these consolidated financial statements.


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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
LIABILITIES AND PROPRIETARY CAPITAL
December 31, 2023September 30, 2023
Current liabilities  
Accounts payable and accrued liabilities$2,451 $2,618 
Accrued interest268 272 
Asset retirement obligations275 272 
Regulatory liabilities259 222 
Short-term debt, net1,042 432 
Current maturities of power bonds1,022 1,022 
Current maturities of long-term debt of variable interest entities35 35 
Total current liabilities5,352 4,873 
Other liabilities  
Post-retirement and post-employment benefit obligations2,457 2,527 
Asset retirement obligations7,295 7,217 
Finance lease liabilities571 576 
Other long-term liabilities1,488 1,211 
Regulatory liabilities103 107 
Total other liabilities11,914 11,638 
Long-term debt, net
Long-term power bonds, net17,867 17,844 
Long-term debt of variable interest entities, net933 933 
Total long-term debt, net18,800 18,777 
Total liabilities36,066 35,288 
Contingencies and legal proceedings (Note 20)
Proprietary capital  
Power program appropriation investment258 258 
Power program retained earnings15,429 15,302 
Total power program proprietary capital15,687 15,560 
Nonpower programs appropriation investment, net523 525 
Accumulated other comprehensive loss(28)(29)
Total proprietary capital16,182 16,056 
Total liabilities and proprietary capital$52,248 $51,344 
The accompanying notes are an integral part of these consolidated financial statements.
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TENNESSEE VALLEY AUTHORITY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 For the Three Months Ended December 31
 (in millions)
 20232022
Cash flows from operating activities  
Net income $127 $101 
Adjustments to reconcile net income to net cash provided by operating activities  
Depreciation and amortization(1)
527 538 
Amortization of nuclear fuel cost99 88 
Non-cash retirement benefit expense33 63 
Other regulatory amortization and deferrals46 (69)
Changes in current assets and liabilities
Accounts receivable, net153 256 
Inventories and other current assets, net(105)(216)
Accounts payable and accrued liabilities(289)(86)
Accrued interest(2)(16)
Pension contributions(75)(75)
Other, net(121)(145)
Net cash provided by operating activities393 439 
Cash flows from investing activities  
Construction expenditures(863)(605)
Nuclear fuel expenditures(146)(192)
Purchases of investments(1) 
Acquisition of leasehold interests in combustion turbine assets (78)
Loans and other receivables  
Advances(4) 
Repayments2 3 
Other, net10 (4)
Net cash used in investing activities(1,002)(876)
Cash flows from financing activities  
Long-term debt  
Redemptions and repurchases of power bonds(1)(1)
Short-term debt issues, net610 446 
Payments on leases and leasebacks(10)(10)
Other, net7 2 
Net cash provided by financing activities606 437 
Net change in cash, cash equivalents, and restricted cash(3) 
Cash, cash equivalents, and restricted cash at beginning of period521 520 
Cash, cash equivalents, and restricted cash at end of period$518 $520 
Note
(1) Includes amortization of debt issuance costs and premiums/discounts.
The accompanying notes are an integral part of these consolidated financial statements.

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TENNESSEE VALLEY AUTHORITY
CONSOLIDATED STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the Three Months Ended December 31, 2023 and 2022
 Power Program Appropriation Investment 
Power Program Retained Earnings
Nonpower Programs Appropriation Investment, NetAccumulated
Other
Comprehensive
Income (Loss)
 
 
Total
Balance at September 30, 2022$258 $14,800 $533 $(86)$15,505 
Net income (loss) 103 (2) 101 
Total other comprehensive income   37 37 
Return on power program appropriation investment (1)  (1)
Balance at December 31, 2022
$258 $14,902 $531 $(49)$15,642 
Balance at September 30, 2023$258 $15,302 $525 $(29)$16,056 
Net income (loss) 129 (2) 127 
Total other comprehensive income   1 1 
Return on power program appropriation investment (2)  (2)
Balance at December 31, 2023
$258 $15,429 $523 $(28)$16,182 

The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions except where noted)
NotePage
1Summary of Significant Accounting Policies
2Impact of New Accounting Standards and Interpretations
3Accounts Receivable, Net
4Inventories, Net
5Other Current Assets
6Plant Closures
7Other Long-Term Assets
8Regulatory Assets and Liabilities
9Variable Interest Entities
10Other Long-Term Liabilities
11Asset Retirement Obligations
12Debt and Other Obligations
13Risk Management Activities and Derivative Transactions
14Fair Value Measurements
15Revenue
16Other Income, Net
17Supplemental Cash Flow Information
18Benefit Plans
19Collaborative Arrangement
20Contingencies and Legal Proceedings

1.  Summary of Significant Accounting Policies

Basis of Presentation

The Tennessee Valley Authority ("TVA") prepares its consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") for consolidated interim financial information. Accordingly, TVA's consolidated interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2023, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2023 (the "Annual Report"). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included on the consolidated interim financial statements.

The accompanying consolidated interim financial statements, which have been prepared in accordance with GAAP, include the accounts of TVA and variable interest entities ("VIEs") of which TVA is the primary beneficiary. See Note 9 — Variable Interest Entities. Intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

TVA's fiscal year ends September 30.  Years (2024, 2023, etc.) refer to TVA's fiscal years unless they are preceded by "CY," in which case the references are to calendar years.

Cash, Cash Equivalents, and Restricted Cash

Cash includes cash on hand, non-interest bearing cash, and deposit accounts. All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents that are restricted, as to withdrawal or use under the terms of certain contractual agreements, are recorded in Other long-term assets on the Consolidated Balance Sheets. Restricted cash and cash equivalents include cash held in trusts that are currently restricted for TVA economic development loans and for certain TVA environmental programs in accordance with agreements related to compliance with certain environmental regulations.

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows:
Cash, Cash Equivalents, and Restricted Cash
(in millions)
 At December 31, 2023At September 30, 2023
Cash and cash equivalents$498 $501 
Restricted cash and cash equivalents included in Other long-term assets20 20 
Total cash, cash equivalents, and restricted cash$518 $521 

Allowance for Uncollectible Accounts

TVA recognizes an allowance that reflects the current estimate for credit losses expected to be incurred over the life of the financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The appropriateness of the allowance is evaluated at the end of each reporting period.

To determine the allowance for trade receivables, TVA considers historical experience and other currently available information, including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements by the due date. TVA's corporate credit department also performs an assessment of the financial condition of customers and the credit quality of the receivables. In addition, TVA reviews other reasonable and supportable forecasts to determine if the allowance for uncollectible amounts should be further adjusted in accordance with the accounting guidance for Current Expected Credit Losses.

To determine the allowance for loans receivables, TVA aggregates loans into the appropriate pools based on the existence of similar risk characteristics such as collateral types and internal assessed credit risks. In situations where a loan exhibits unique risk characteristics and is no longer expected to experience similar risks to the rest of its pool, the loan will be evaluated separately. TVA derives an annual loss rate based on historical loss and then adjusts the rate to reflect TVA's consideration of available information on current conditions and reasonable and supportable future forecasts. This information may include economic and business conditions, default trends, and other internal and external factors. For periods beyond the reasonable and supportable forecast period, TVA uses the current calculated long-term average historical loss rate for the remaining life of the loan portfolio.

The allowance for uncollectible accounts was less than $1 million at both December 31, 2023, and September 30, 2023, for trade accounts receivable. Additionally, loans receivable of $105 million and $104 million at December 31, 2023, and September 30, 2023, respectively, are included in Accounts receivable, net and Other long-term assets, for the current and long-term portions, respectively. Loans receivables are reported net of allowances for uncollectible accounts of $3 million at both December 31, 2023 and September 30, 2023.

Pre-Commercial Plant Operations

As part of the process of completing the construction of a generating unit, the electricity produced is used to serve the demands of the electric system. TVA estimates revenues earned during pre-commercial operations at the fair value of the energy delivered based on TVA's hourly incremental dispatch cost. Pre-commercial plant operations began on Paradise Combustion Turbine Units 5-7 in the first quarter of 2024, and the units became operational on December 29, 2023. Estimated revenue of $3 million related to this project was capitalized to offset project costs for the three months ended December 31, 2023. TVA also capitalized related fuel costs for this project of $3 million for the three months ended December 31, 2023.

Depreciation    

TVA accounts for depreciation of its properties using the composite depreciation convention of accounting. Under the composite method, assets with similar economic characteristics are grouped and depreciated as one asset. Depreciation is generally computed on a straight-line basis over the estimated service lives of the various classes of assets. The estimation of asset useful lives requires management judgment, supported by external depreciation studies of historical asset retirement experience. Depreciation rates are determined based on external depreciation studies that are updated approximately every five years, with the latest study implemented during the first quarter of 2022. Depreciation expense was $452 million and $466 million for the three months ended December 31, 2023 and 2022, respectively. See Note 6 — Plant Closures for a discussion of the impact of plant closures.

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2.  Impact of New Accounting Standards and Interpretations     

The following are accounting standard updates issued by the Financial Accounting Standards Board that TVA adopted during 2024:
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
Description
This guidance requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue with customers. It is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured contract assets and contract liabilities in the acquiree’s financial statements. The entity should apply the standard prospectively to business combinations occurring on or after the effective date of the standard.
Effective Date for TVA
TVA adopted the standard on October 1, 2023, on a prospective basis.
Effect on the Financial Statements or Other Significant MattersAdoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows.
Troubled Debt Restructurings and Vintage Disclosures
Description
This guidance eliminates the recognition and measurement guidance on troubled debt restructuring for creditors that have adopted Financial Instruments-Credit Losses and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. Additionally, the guidance requires public business entities to present current-period gross write-offs by year of origination in their vintage disclosures. The entity should apply the standard prospectively except for the transition method related to the recognition and measurement of troubled debt restructuring. For the transition method, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.
Effective Date for TVA
TVA adopted the standard on October 1, 2023, on a prospective basis.
Effect on the Financial Statements or Other Significant MattersAdoption of this standard did not have a material impact on TVA's financial condition, results of operations, or cash flows.
The following accounting standard has been issued but as of December 31, 2023, was not effective and has not been adopted by TVA:
Improvements to Reportable Segment Disclosures
DescriptionThis guidance improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendment requires a public entity to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit and loss. It also requires a public entity that has a single reportable segment to provide all of the disclosures required by the amendment and all existing segment disclosures. The amendment is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. The amendment should be adopted retrospectively unless it is impracticable to do so. Upon adoption, a public entity will adopt the amendment as of the beginning of the earliest period presented.
Effective Date for TVA
October 1, 2024
Effect on the Financial Statements or Other Significant MattersTVA is currently reviewing and evaluating this standard. TVA does not expect the adoption of this standard to have a material impact on TVA's financial condition, results of operations, or cash flows.

3.  Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA's accounts receivable:
Accounts Receivable, Net
(in millions)
 At December 31, 2023At September 30, 2023
Power receivables$1,451 $1,627 
Other receivables142 118 
Accounts receivable, net(1)
$1,593 $1,745 
Note
(1) Allowance for uncollectible accounts was less than $1 million at both December 31, 2023, and September 30, 2023, and therefore is not represented in the table above.

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4.  Inventories, Net

The table below summarizes the types and amounts of TVA's inventories:
Inventories, Net
(in millions)
 At December 31, 2023At September 30, 2023
Materials and supplies inventory$884 $849 
Fuel inventory354 313 
Renewable energy certificates/emissions allowance inventory, net16 15 
Allowance for inventory obsolescence(72)(69)
Inventories, net$1,182 $1,108 

5. Other Current Assets

Other current assets consisted of the following:
Other Current Assets 
(in millions)
 At December 31, 2023At September 30, 2023
Inventory work-in-progress$47 $28 
Prepaid software maintenance36 18 
Commodity contract derivative assets19 21 
Prepaid insurance16 16 
Current portion of prepaid long-term service agreements10 25 
Other24 26 
Other current assets$152 $134 

Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity as well as certain financial derivative contracts to hedge exposure to the price of natural gas. Commodity contract derivative assets classified as current include deliveries or settlements that will occur within 12 months or less. See Note 13 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Commodity Derivatives under the FHP for a discussion of TVA's commodity contract derivatives.

6. Plant Closures

Background

TVA must continuously evaluate all generating assets to ensure an optimal energy portfolio that provides safe, clean, and reliable power while maintaining flexibility and fiscal responsibility to the people of the Tennessee Valley. Based on results of assessments presented to the TVA Board of Directors ("TVA Board") in 2019, the retirement of Bull Run Fossil Plant ("Bull Run") by December 2023 was approved, and as of September 30, 2023, the facility was retired. In January 2023, TVA issued its Record of Decision to retire the two coal-fired units at Cumberland Fossil Plant ("Cumberland") by the end of CY 2026 and CY 2028. In addition, TVA is evaluating the impact of retiring the balance of the coal-fired fleet by 2035, and that evaluation includes environmental reviews, public input, and TVA Board approval.

Financial Impact

TVA's policy is to adjust depreciation rates to reflect the most current assumptions, ensuring units will be fully depreciated by the applicable retirement dates. As a result of TVA's decision to accelerate the retirement of Bull Run, TVA recognized a cumulative $659 million of accelerated depreciation from the second quarter of 2019 through September 30, 2023. Of this amount, $36 million was recognized for Bull Run during the three months ended December 31, 2022. TVA's decision to retire the two units at Cumberland is estimated to result in approximately $16 million of additional depreciation quarterly, which does not include any potential impact from additions or retirements to net completed plant. TVA estimates it has recognized a cumulative $64 million of additional depreciation since January 2023, related to this decision.
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7.  Other Long-Term Assets

The table below summarizes the types and amounts of TVA's other long-term assets:
Other Long-Term Assets
(in millions)
At December 31, 2023At September 30, 2023
Loans and other long-term receivables, net$101 $97 
EnergyRight® receivables, net
46 47 
Prepaid long-term service agreements44 64 
Prepaid capital assets21 28 
Commodity contract derivative assets12 12 
Other88 82 
Total other long-term assets$312 $330 

Loans and Other Long-Term Receivables. TVA's loans and other long-term receivables primarily consist of economic development loans for qualifying organizations and a receivable for reimbursements to recover the cost of providing long-term, on-site storage for spent nuclear fuel. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At December 31, 2023 and September 30, 2023, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was $4 million and $7 million, respectively.

EnergyRight® Receivables. In association with the EnergyRight® program, TVA's local power company customers ("LPCs") offer financing to end-use customers for the purchase of energy-efficient equipment. Depending on the nature of the energy-efficiency project, loans may have a maximum term of five years or 10 years. TVA purchases the resulting loans receivable from its LPCs. The loans receivable are then transferred to a third-party bank with which TVA has agreed to repay in full any loans receivable that have been in default for 180 days or more or that TVA has determined are uncollectible. Given this continuing involvement, TVA accounts for the transfer of the loans receivable as secured borrowings. The current and long-term portions of the loans receivable are reported in Accounts receivable, net and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At December 31, 2023, and September 30, 2023, the carrying amount of the loans receivable, net of discount, reported in Accounts receivable, net was $13 million and $12 million, respectively. See Note 10 — Other Long-Term Liabilities for information regarding the associated financing obligation.

Allowance for Loan Losses. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of the loan receivables, that considers reasonable and supportable forecasts of future economic conditions in addition to information about historical experience and current conditions. See Note 1 — Summary of Significant Accounting Policies Allowance for Uncollectible Accounts.

The allowance components, which consist of a collective allowance and specific loans allowance, are based on the risk characteristics of TVA's loans. Loans that share similar risk characteristics are evaluated on a collective basis in measuring credit losses, while loans that do not share similar risk characteristics with other loans are evaluated on an individual basis.

Allowance Components
(in millions)
At December 31, 2023At September 30, 2023
EnergyRight® loan reserve
$1 $1 
Economic development loan collective reserve1 1 
Economic development loan specific loan reserve1 1 
Total allowance for loan losses$3 $3 

Prepaid Long-Term Service Agreements. TVA has entered into various long-term service agreements for major maintenance activities at certain of its combined cycle plants. TVA uses the direct expense method of accounting for these arrangements. TVA accrues for parts when it takes ownership and for contractor services when they are rendered. Under certain of these agreements, payments made exceed the value of parts received and services rendered. The current and long-term portions of the resulting prepayments are reported in Other current assets and Other long-term assets, respectively, on TVA's Consolidated Balance Sheets. At December 31, 2023, and September 30, 2023, prepayments of $10 million and $25 million, respectively, were recorded in Other current assets.

Commodity Contract Derivative Assets. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity as well as certain financial derivative contracts to hedge exposure to the
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price of natural gas. See Note 13 — Risk Management Activities and Derivative Transactions — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Commodity Derivatives under the FHP for a discussion of TVA's commodity contract derivatives.

8.  Regulatory Assets and Liabilities

TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. As such, certain items that would generally be reported in earnings or that would impact the Consolidated Statements of Operations are recorded as regulatory assets or regulatory liabilities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods. Components of regulatory assets and regulatory liabilities are summarized in the table below.
Regulatory Assets and Liabilities
(in millions)
 At December 31, 2023At September 30, 2023
Current regulatory assets  
Unrealized losses on interest rate derivatives$37 $31 
Unrealized losses on commodity derivatives213 136 
Fuel cost adjustment receivable 11 
Other current regulatory assets1  
Total current regulatory assets251 178 
Non-current regulatory assets  
Retirement benefit plans deferred costs1,438 1,440 
Non-nuclear decommissioning costs2,838 2,922 
Unrealized losses on interest rate derivatives459 272 
Nuclear decommissioning costs543 728 
Unrealized losses on commodity derivatives98 52 
Other non-current regulatory assets175 152 
Total non-current regulatory assets5,551 5,566 
Total regulatory assets$5,802 $5,744 
Current regulatory liabilities  
Fuel cost adjustment tax equivalents$190 $201 
Fuel cost adjustment 50  
Unrealized gains on commodity derivatives19 21 
Total current regulatory liabilities259 222 
Non-current regulatory liabilities  
Retirement benefit plans deferred credits91 95 
Unrealized gains on commodity derivatives12 12 
Total non-current regulatory liabilities103 107 
Total regulatory liabilities$362 $329 

9.  Variable Interest Entities

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of owning a controlling financial interest. When TVA determines that it has a variable interest in a VIE, a qualitative evaluation is performed to assess which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and have the obligation to absorb losses or receive benefits that could be significant to the entity. The evaluation considers the purpose and
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design of the business, the risks that the business was designed to create and pass along to other entities, the activities of the business that can be directed and which party can direct them, and the expected relative impact of those activities on the economic performance of the business through its life. TVA has the power to direct the activities of an entity when it has the ability to make key operating and financing decisions, including, but not limited to, capital investment and the issuance of debt. Based on the evaluation of these criteria, TVA has determined it is the primary beneficiary of certain entities and as such is required to account for the VIEs on a consolidated basis.

John Sevier VIEs

In 2012, TVA entered into a $1.0 billion construction management agreement and lease financing arrangement with John Sevier Combined Cycle Generation LLC ("JSCCG") for the completion and lease by TVA of the John Sevier Combined Cycle Facility ("John Sevier CCF"). JSCCG is a special single-purpose limited liability company formed in January 2012 to finance the John Sevier CCF through a $900 million secured note issuance (the "JSCCG notes") and the issuance of $100 million of membership interests subject to mandatory redemption.  The membership interests were purchased by John Sevier Holdco LLC ("Holdco").  Holdco is a special single-purpose entity, also formed in January 2012, established to acquire and hold the membership interests in JSCCG.  A non-controlling interest in Holdco is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows are allocated. 
 
The membership interests held by Holdco in JSCCG were purchased with proceeds from the issuance of $100 million of secured notes (the "Holdco notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each January 15 and July 15, with a final payment due in January 2042. The payment dates for the mandatorily redeemable membership interests are the same as those of the Holdco notes. The sale of the JSCCG notes, the membership interests in JSCCG, and the Holdco notes closed in January 2012. The JSCCG notes are secured by TVA's lease payments, and the Holdco notes are secured by Holdco's investment in, and amounts receivable from, JSCCG. TVA's lease payments to JSCCG are equal to and payable on the same dates as JSCCG's and Holdco's semi-annual debt service payments. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by JSCCG and Holdco. Certain agreements related to this transaction contain default and acceleration provisions.

Due to its participation in the design, business activity, and credit and financial support of JSCCG and Holdco, TVA has determined that it has a variable interest in each of these entities. Based on its analysis, TVA has concluded that it is the primary beneficiary of JSCCG and Holdco and, as such, is required to account for the VIEs on a consolidated basis. Holdco's membership interests in JSCCG are eliminated in consolidation.

Southaven VIE

In 2013, TVA entered into a $400 million lease financing arrangement with Southaven Combined Cycle Generation LLC ("SCCG") for the lease by TVA of the Southaven Combined Cycle Facility ("Southaven CCF"). SCCG is a special single-purpose limited liability company formed in June 2013 to finance the Southaven CCF through a $360 million secured notes issuance (the "SCCG notes") and the issuance of $40 million of membership interests subject to mandatory redemption. The membership interests were purchased by Southaven Holdco LLC ("SHLLC"). SHLLC is a special single-purpose entity, also formed in June 2013, established to acquire and hold the membership interests in SCCG. A non-controlling interest in SHLLC is held by a third party through nominal membership interests, to which none of the income, expenses, and cash flows of SHLLC are allocated.

The membership interests held by SHLLC were purchased with proceeds from the issuance of $40 million of secured notes (the "SHLLC notes") and are subject to mandatory redemption pursuant to a schedule of amortizing, semi-annual payments due each February 15 and August 15, with a final payment due on August 15, 2033. The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes, and the payment amounts are sufficient to provide returns on, as well as returns of, capital until the investment has been repaid to SHLLC in full. The rate of return on investment to SHLLC is seven percent, which is reflected as interest expense in the Consolidated Statements of Operations. SHLLC is required to pay a pre-determined portion of the return on investment to Seven States Southaven, LLC on each lease payment date as agreed in SHLLC's formation documents (the "Seven States Return"). The current and long-term portions of the Membership interests of VIE subject to mandatory redemption are included in Accounts payable and accrued liabilities and Other long-term liabilities, respectively.

The payment dates for the mandatorily redeemable membership interests are the same as those of the SHLLC notes. The SCCG notes are secured by TVA's lease payments, and the SHLLC notes are secured by SHLLC's investment in, and amounts receivable from, SCCG. TVA's lease payments to SCCG are payable on the same dates as SCCG's and SHLLC's semi-annual debt service payments and are equal to the sum of (i) the amount of SCCG's semi-annual debt service payments, (ii) the amount of SHLLC's semi-annual debt service payments, and (iii) the amount of the Seven States Return. In addition to the lease payments, TVA pays administrative and miscellaneous expenses incurred by SCCG and SHLLC. Certain agreements related to this transaction contain default and acceleration provisions.

In the event that TVA were to choose to exercise an early buy out feature of the Southaven facility lease, in part or in whole, TVA must pay to SCCG amounts sufficient for SCCG to repay or partially repay on a pro rata basis the membership interests held by SHLLC, including any outstanding investment amount plus accrued but unpaid return. TVA also has the right, at
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any time and without any early redemption of the other portions of the Southaven facility lease payments due to SCCG, to fully repay SHLLC's investment, upon which repayment SHLLC will transfer the membership interests to a designee of TVA.

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

Impact on Consolidated Financial Statements

The financial statement items attributable to carrying amounts and classifications of JSCCG, Holdco, and SCCG at December 31, 2023, and September 30, 2023, as reflected on the Consolidated Balance Sheets, are as follows:
Summary of Impact of VIEs on Consolidated Balance Sheets
(in millions)
 At December 31, 2023At September 30, 2023
Current liabilities 
Accrued interest$21 $9 
Accounts payable and accrued liabilities1 1 
Current maturities of long-term debt of variable interest entities35 35 
Total current liabilities
57 45 
Other liabilities
Other long-term liabilities17 17 
Long-term debt, net
Long-term debt of variable interest entities, net933 933 
Total liabilities$1,007 $995 

Interest expense of $12 million for both the three months ended December 31, 2023 and 2022, is included in the Consolidated Statements of Operations related to debt of VIEs and membership interests of VIEs subject to mandatory redemption.

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

10.  Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities related to operating leases. The table below summarizes the types and amounts of Other long-term liabilities:
Other Long-Term Liabilities
(in millions)
 At December 31, 2023At September 30, 2023
Interest rate swap liabilities$782 $627 
Operating lease liabilities163 93 
Currency swap liabilities112 131 
Commodity contract derivative liabilities98 52 
EnergyRight® financing obligation
55 55 
Advances for construction46 56 
Long-term deferred revenue 46 45 
Long-term deferred compensation32 41 
Other154 111 
Total other long-term liabilities$1,488 $1,211 

Interest Rate Swap Liabilities. TVA uses interest rate swaps to fix variable short-term debt to a fixed rate. The values of these derivatives are included in Other current assets, Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets. See Note 13 — Risk Management Activities and Derivative
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TransactionsOverview of Accounting Treatment and Derivatives Not Receiving Hedge Accounting TreatmentInterest Rate Derivatives for information regarding the interest rate swap liabilities.

Operating Lease Liabilities. TVA's operating leases consist primarily of railcars, equipment, real estate/land, and power generating facilities. At December 31, 2023, and September 30, 2023, the current portion of TVA's operating leases reported in Accounts payable and accrued liabilities was $81 million and $71 million, respectively.
    
Currency Swap Liabilities. To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. See Note 13 — Risk Management Activities and Derivative TransactionsOverview of Accounting Treatment and Cash Flow Hedging Strategy for Currency Swaps for more information regarding the currency swap liabilities.

Commodity Contract Derivative Liabilities. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity as well as certain financial derivative contracts to hedge exposure to the price of natural gas. See Note 13 — Risk Management Activities and Derivative TransactionsDerivatives Not Receiving Hedge Accounting Treatment Commodity Derivatives and — Commodity Derivatives under the FHP for a discussion of TVA's commodity contract derivatives.

EnergyRight® Financing Obligation. TVA purchases certain loans receivable from its LPCs in association with the EnergyRight® program. The current and long-term portions of the resulting financing obligation are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA's Consolidated Balance Sheets. At both December 31, 2023, and September 30, 2023, the carrying amount of the financing obligation reported in Accounts payable and accrued liabilities was $14 million. See Note 7 — Other Long-Term Assets for information regarding the associated loans receivable.

Long-Term Deferred Compensation. TVA provides compensation arrangements to engage and retain certain employees, both executive and non-executive, which are designed to provide participants with the ability to defer compensation to future periods. The current and long-term portions are recorded in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At December 31, 2023 and September 30, 2023, the current amount of deferred compensation recorded in Accounts payable and accrued liabilities was $32 million and $65 million, respectively.

Advances for Construction. TVA receives refundable and non-refundable advances for construction that are generally intended to defray all or a portion of the costs of building or extending TVA’s existing power assets. Amounts received are deferred as a liability with the long-term portion representing amounts that will not be recognized within the next 12 months. As projects meet milestones or other contractual obligations, the refundable portion is refunded to the customer and the non-refundable portion is recognized as contributions in aid of construction and offsets the cost of plant assets. At December 31, 2023 and September 30, 2023, the current amount of advances for construction recorded in Accounts payable and accrued liabilities was $60 million and $39 million, respectively.

Long-Term Deferred Revenue. Long-term deferred revenue represents payments received that exceed services rendered resulting in the deferral of revenue. The long-term portion represents amounts that will not be recognized within the next 12 months primarily related to fiber and transmission agreements. The current and long-term portions of the deferral are reported in Accounts payable and accrued liabilities and Other long-term liabilities, respectively, on TVA’s Consolidated Balance Sheets. At December 31, 2023 and September 30, 2023, the current amount of deferred revenue recorded in Accounts payable and accrued liabilities was $23 million and $21 million, respectively.

11.  Asset Retirement Obligations

During the three months ended December 31, 2023, TVA's total asset retirement obligations ("ARO") liability increased $81 million as a result of revisions in estimate and periodic accretion, partially offset by settlements related to retirement projects that were conducted during the period. The nuclear and non-nuclear accretion amounts were deferred as regulatory assets.  During the three months ended December 31, 2023, $47 million of the related regulatory assets were amortized into expense as these amounts were collected in rates. See Note 8 — Regulatory Assets and Liabilities. TVA maintains investment trusts to help fund its decommissioning obligations. See Note 14 — Fair Value MeasurementsInvestment Funds and Note 20 — Contingencies and Legal ProceedingsContingenciesDecommissioning Costs for a discussion of the trusts' objectives and the current balances of the trusts.
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Asset Retirement Obligation Activity
(in millions)
 NuclearNon-NuclearTotal
Balance at September 30, 2023
$3,808 $3,681 $7,489 (1)
Settlements(4)(59)(63)
Revisions in estimate  78 78 
Accretion (recorded as regulatory asset)43 23 66 
Balance at December 31, 2023$3,847 $3,723 $7,570 (1)
Note
(1) Includes $275 million and $272 million at December 31, 2023, and September 30, 2023, respectively, in Current liabilities.

Revisions to non-nuclear estimates increased the liability balance by $78 million for the three months ended December 31, 2023. The increase was primarily attributable to a change in closure liabilities of $76 million at Cumberland based on scope changes to the interim closure plan and updated cost estimates for activities associated with final closure.

12.  Debt and Other Obligations

Debt Outstanding

Total debt outstanding at December 31, 2023, and September 30, 2023, consisted of the following:
Debt Outstanding 
(in millions)
 At December 31, 2023At September 30, 2023
Short-term debt  
Short-term debt, net of discounts$1,042 $432 
Current maturities of power bonds issued at par1,022 1,022 
Current maturities of long-term debt of VIEs issued at par35 35 
Total current debt outstanding, net2,099 1,489 
Long-term debt  
Long-term power bonds(1)
17,990 17,970 
Long-term debt of VIEs, net933 933 
Unamortized discounts, premiums, issue costs, and other(123)(126)
Total long-term debt, net18,800 18,777 
Total debt outstanding$20,899 $20,266 
Note
(1) Includes total net exchange gain from currency transactions of $88 million and $109 million at December 31, 2023, and September 30, 2023, respectively.

Debt Securities Activity

The table below summarizes the long-term debt securities activity for the period from October 1, 2023, to December 31, 2023:
Debt Securities Activity
 Date
Amount
(in millions)
Redemptions/Maturities(1)
 
2009 Series BDecember 2023$1 
Total redemptions/maturities of debt$1 
Note
(1) All redemptions were at 100 percent of par.

Credit Facility Agreements

TVA has funding available under four long-term revolving credit facilities totaling $2.7 billion. See the table below for additional information on the four long-term revolving credit facilities. The interest rate on any borrowing under these facilities varies based on market factors and the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.7 billion that TVA has not borrowed or committed under letters of credit.
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This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured, long-term, non-credit-enhanced debt. At December 31, 2023, and September 30, 2023, there were $469 million and $535 million, respectively, of letters of credit outstanding under these facilities, and there were no borrowings outstanding. TVA's letters of credit are primarily posted as collateral under TVA's interest rate swaps. See Note 13 — Risk Management Activities and Derivative TransactionsOther Derivative InstrumentsCollateral. TVA may also post collateral for TVA's currency swaps, for commodity derivatives under the Financial Hedging Program ("FHP"), or for certain transactions with third parties that require TVA to post letters of credit.

The following table provides additional information regarding TVA's funding available under the four long-term revolving credit facilities:
Summary of Long-Term Credit Facilities
At December 31, 2023
(in millions)
Maturity DateFacility LimitLetters of Credit OutstandingCash BorrowingsAvailability
February 2025$500 $223 $ $277 
March 2026150 38  112 
September 20261,000 112  888 
March 20271,000 96  904 
Total$2,650 $469 $ $2,181 

TVA and the United States ("U.S.") Department of the Treasury ("U.S. Treasury"), pursuant to the Tennessee Valley Authority Act of 1933, as amended ("TVA Act"), have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility. This credit facility was renewed for 2024 with a maturity date of September 30, 2024. Access to this credit facility or other similar financing arrangements with the U.S. Treasury has been available to TVA since the 1960s. TVA can borrow under the U.S. Treasury credit facility only if it cannot issue bonds, notes, or other evidences of indebtedness (collectively, "Bonds") in the market on reasonable terms, and TVA considers the U.S. Treasury credit facility a secondary source of liquidity. The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the U.S. with maturities from date of issue of 12 months or less. There were no outstanding borrowings under the facility at December 31, 2023. The availability of this credit facility may be impacted by how the U.S. government addresses the possibility of approaching its debt limit.

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13.  Risk Management Activities and Derivative Transactions

TVA is exposed to various risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks.  To help manage certain of these risks, TVA has historically entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.  

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its Consolidated Balance Sheets at fair value.  The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge).

The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive:

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) 
Amount of Mark-to-Market Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
(in millions)
Three Months Ended December 31
Derivatives in Cash Flow Hedging RelationshipObjective of Hedge TransactionAccounting for Derivative
Hedging Instrument
20232022
Currency swapsTo protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)Unrealized gains and losses are recorded in AOCI and reclassified to Interest expense to the extent they are offset by gains and losses on the hedged transaction$20 $71 

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1)
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense
(in millions)
Three Months Ended December 31
Derivatives in Cash Flow Hedging Relationship20232022
Currency swaps$19 $34 
Note
(1) There were no amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $3 million of gains from Accumulated other comprehensive income (loss) ("AOCI") to Interest expense within the next 12 months to offset amounts anticipated to be recorded in Interest expense related to the forecasted exchange loss on the debt.
Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Amount of Gain (Loss) Recognized in Income on Derivatives(1)
(in millions)
Three Months Ended December 31
Derivative TypeObjective of DerivativeAccounting for Derivative Instrument20232022
Interest rate swapsTo fix short-term debt variable rate to a fixed rate (interest rate risk)Mark-to-market gains and losses are recorded as regulatory liabilities and assets, respectively

Realized gains and losses are recognized in Interest expense when incurred during the settlement period and are presented in operating cash flow
$(8)$(15)
Commodity derivatives
under the FHP
To protect against fluctuations in market prices of purchased commodities (price risk)
Mark-to-market gains and losses are recorded as regulatory liabilities and assets, respectively

Realized gains and losses are recognized in Fuel expense or Purchased power expense as the contracts settle to match the delivery period of the underlying commodity(2)
(54)(19)
Notes
(1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there were no related gains (losses) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2023 and for the three months ended December 31, 2022.
(2) Of the amount recognized for the three months ended December 31, 2023, $44 million and $10 million were reported in Fuel expense and Purchased power expense, respectively. Of the amount recognized for three months ended December 31, 2022, $15 million and $4 million were reported in Fuel expense and Purchased power expense, respectively.
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Fair Values of TVA Derivatives
(in millions)
 At December 31, 2023At September 30, 2023
Derivatives That Receive Hedge Accounting Treatment:
BalanceBalance Sheet PresentationBalanceBalance Sheet Presentation
Currency swaps    
£250 million Sterling
$(56)
Accounts payable and accrued liabilities $(5); Other long-term liabilities $(51)
$(72)
Accounts payable and accrued liabilities $(6); Other long-term liabilities $(66)
£150 million Sterling
(65)
Accounts payable and accrued liabilities $(4); Other long-term liabilities $(61)
(69)
Accounts payable and
accrued liabilities $(4); Other long-term liabilities $(65)
Derivatives That Do Not Receive Hedge Accounting Treatment:
BalanceBalance Sheet PresentationBalanceBalance Sheet Presentation
Interest rate swaps    
$1.0 billion notional$(607)
Accounts payable and
accrued liabilities $(22); Accrued interest $(6);
Other long-term liabilities
$(579)
$(499)
Other current assets $1; Accrued interest $(27); Other long-term liabilities $(473)
$476 million notional(211)
Accounts payable and
accrued liabilities $(8);
Other long-term liabilities
$(203)
(159)
Other current assets $3; Accrued interest $(8);
Other long-term liabilities
$(154)
Commodity contract derivatives29 
Other current assets $19; Other long-term assets $12; Accounts payable and accrued liabilities $(1); Other long-term liabilities $(1)
31 
Other current assets $21; Other long-term assets $12; Accounts payable and accrued liabilities $(1); Other long-term liabilities $(1)
Commodity derivatives under the FHP(309)
Accounts payable and accrued liabilities $(212); Other long-term liabilities $(97)
(186)
Accounts payable and accrued liabilities $(135); Other long-term liabilities $(51)

Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred.  TVA had two currency swaps outstanding at December 31, 2023, with total currency exposure of £400 million and expiration dates in 2032 and 2043.

When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability and related accrued interest is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability and related accrued interest are included in Long-term debt, net and Accrued interest, respectively. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap liabilities are included in Accounts payable and accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets.

Derivatives Not Receiving Hedge Accounting Treatment

Interest Rate Derivatives.  Generally TVA uses interest rate swaps to fix variable short-term debt to a fixed rate, and TVA uses regulatory accounting treatment to defer the mark-to-market ("MtM") gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory liabilities or assets on TVA's Consolidated Balance Sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Other current assets, Accounts payable and accrued liabilities, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the three months ended December 31, 2023 and 2022, the changes in fair market value of the interest rate swaps resulted in the increase in unrealized losses of $189 million and reduction in unrealized losses of $14 million, respectively. TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and other factors. While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps.
    
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Commodity Derivatives. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. TVA may also enter into short-term power purchase agreements ("PPAs") with a term of less than one year that provide an option to financially settle contracted power deliveries. This option creates an embedded derivative in the hosting PPA. TVA marks to market these contracts and defers the unrealized gains (losses) as regulatory liabilities (assets). At December 31, 2023, TVA's natural gas contract derivatives had terms of up to approximately two years.
Commodity Contract Derivatives 
 At December 31, 2023At September 30, 2023
 
Number of Contracts
Notional Amount
Fair Value (MtM)
(in millions)
Number of ContractsNotional Amount
Fair Value (MtM)
(in millions)
Natural gas contract derivatives45366 million mmBtu$29 54318 million mmBtu$31 

Commodity Derivatives under the FHP. Currently, TVA is hedging exposure to the price of natural gas under the FHP. There is no Value at Risk aggregate transaction limit under the current FHP structure, but the TVA Board reviews and authorizes the use of tolerances and measures annually. TVA's FHP policy prohibits trading financial instruments under the FHP for speculative purposes. At December 31, 2023, TVA's natural gas swap contracts under the FHP had remaining terms of up to approximately four years.

Commodity Derivatives under Financial Hedging Program(1)
At December 31, 2023At September 30, 2023
Number of Contracts
Notional Amount
Fair Value (MtM)
(in millions)
Number of Contracts
Notional Amount
Fair Value (MtM)
(in millions)
Natural gas
Swap contracts206351 million mmBtu$(309)221388 million mmBtu$(186)
Note
(1) Fair value amounts presented are based on the net commodity position with the counterparty. Notional amounts disclosed represent the net value of contractual amounts.

TVA defers all FHP unrealized gains (losses) as regulatory liabilities (assets) and records the realized gains or losses in Fuel expense and Purchased power expense to match the delivery period of the underlying commodity. The fair value of commodity derivatives under the FHP decreased $123 million primarily due to a decrease in forward natural gas prices at December 31, 2023 as compared to September 30, 2023.

Offsetting of Derivative Assets and Liabilities

The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets are shown in the table below:
Derivative Assets and Liabilities(1)
(in millions)
 At December 31, 2023At September 30, 2023
Assets
Commodity contract derivatives$31 $33 
Interest rate swaps 4 
Total derivatives subject to master netting or similar arrangement$31 $37 
Liabilities
Currency swaps$121 $141 
Interest rate swaps(2)
818 662 
Commodity contract derivatives 2 2 
Commodity derivatives under the FHP(3)
309 186 
Total derivatives subject to master netting or similar arrangement$1,250 $991 
Notes
(1) Offsetting amounts include counterparty netting of derivative contracts. Except as discussed below, there were no other material offsetting amounts on TVA's Consolidated Balance Sheets at either December 31, 2023, or September 30, 2023.
(2) Letters of credit of $443 million and $509 million were posted as collateral at December 31, 2023, and September 30, 2023, respectively, to partially secure the
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liability positions of one of the interest rate swaps in accordance with the collateral requirements for this derivative.
(3) At December 31, 2023, the gross derivative asset and gross derivative liability were $8 million and $317 million, respectively, with offsetting amounts for each totaling $8 million.

Other Derivative Instruments

Investment Fund Derivatives.  Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), the Asset Retirement Trust ("ART"), the Supplemental Executive Retirement Plan ("SERP"), the TVA Deferred Compensation Plan ("DCP"), and the Restoration Plan ("RP"). See Note 14 — Fair Value MeasurementsInvestment Funds for a discussion of the trusts, plans, and types of investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At December 31, 2023, and September 30, 2023, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $3 million and $11 million at December 31, 2023, and September 30, 2023, respectively.

Collateral.  TVA's interest rate swaps, currency swaps, and commodity derivatives under the FHP contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold.  At December 31, 2023, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.3 billion.  TVA's collateral obligations at December 31, 2023, under these arrangements were $537 million, for which TVA had posted $443 million in letters of credit. These letters of credit reduce the available balance under the related credit facilities.  TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the interest rate swap contracts as a result of this posted collateral.

For all of its derivative instruments with credit-risk related contingent features:
    
If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $22 million, and

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

Counterparty Risk

TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements.

Customers.  TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. Of the $1.5 billion and $1.6 billion of receivables from power sales outstanding at December 31, 2023, and September 30, 2023, respectively, nearly all of the counterparties were rated investment grade. The obligations of these customers that are not investment grade are secured by collateral. TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to delivered power. TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions. See Note 1 — Summary of Significant Accounting PoliciesAllowance for Uncollectible Accounts, Note 3 — Accounts Receivable, Net, and Note 7 Other Long-Term Assets.

TVA had revenue from two LPCs that collectively accounted for 16 percent of total operating revenues for both the three months ended December 31, 2023 and the three months ended December 31, 2022.

Suppliers.  TVA assesses potential supplier performance risks, including procurement of fuel, purchased power, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. If certain fuel or purchased power suppliers fail to perform under the terms of their contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. TVA continues evaluating potential supplier performance risks and supplier impact but cannot determine or predict the duration of such risks/impacts or the extent to which such risks/impacts could affect TVA's business, operations, and financial results or cause potential business disruptions.

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TVA continues to experience impacts due to inflation, supply chain material challenges, and labor availability. This has led to project delays and limited availability and/or price increases for supplies and labor. TVA has been able to manage these challenges with limited business disruptions at this time; however, should pressures continue long term, TVA could experience more significant disruptions and pressure to further increase power rates.

Natural Gas and Fuel Oil. TVA purchases a significant amount of its natural gas requirements through contracts with a variety of suppliers and purchases substantially all of its fuel oil requirements on the spot market. TVA delivers to its gas fleet under firm and non-firm transportation contracts on multiple interstate natural gas pipelines. TVA contracts for storage capacity that allows for operational flexibility and increased supply during peak gas demand scenarios or supply disruptions. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. TVA also maintains on-site, fuel oil backup to operate at the majority of the combustion turbine sites in the event of major supply disruptions. In the event a supplier experiences an incident that limits its ability to fulfill its firm contractual obligations to supply TVA natural gas, TVA will leverage its storage and balancing services and/or replace the volume with a third party to ensure reliability of generation.

Coal. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at December 31, 2023. The contracted supply of coal is sourced from several geographic regions of the U.S. and is delivered via barge and rail. As a result of emerging technologies, environmental regulations, industry trends, and natural gas market volatility over the past few years, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies, restructuring, mine closures, or other scenarios. A long-term continued decline in demand for coal could result in more consolidations, additional bankruptcies, restructuring, mine closures, or other scenarios.

Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements.

As a result of Russia’s invasion of Ukraine, new contracts for Russian origin nuclear fuel have been limited by Executive Order ("EO") 14066, and further restrictions on the purchase or use of Russian origin fuel may be forthcoming. TVA should have no direct impact from existing or future restrictions since TVA has no Russian origin nuclear fuel in inventory for use in its reactors and it is not contracted to purchase any Russian origin nuclear fuel. TVA could be impacted by higher market prices as a result of general market impacts associated with supply restrictions; however, at this time TVA's nuclear fuel is obtained predominantly through long-term contracts.

Purchased Power. TVA acquires power from a variety of power producers through long-term and short-term PPAs as well as through spot market purchases. Because of the reliability risk of purchased power, TVA requires that the PPAs contain certain counterparty performance assurance requirements to help insure counterparty performance during the term of the agreements.

Other Suppliers. Mounting solar supply chain constraints, commodity price increases, and the recent trade policy investigation into solar panel imports have created challenges for the U.S. solar industry. TVA's Self-Directed Solar project and TVA's existing solar PPA portfolio are not immune from these challenges. Similar to the experience of the rest of the industry, the majority of TVA's contracted PPAs from previous requests for proposals ("RFPs") that are not yet online have been impacted by project delays and price increases, and TVA terminated one PPA because of counterparty default.

Derivative Counterparties.  TVA has entered into physical and financial contracts that are classified as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit plan ("pension plan") have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the ART, or the pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At December 31, 2023, all of TVA's commodity derivatives under the FHP, currency swaps, and interest rate swaps were with counterparties whose Moody's credit ratings were A2 or higher. TVA classifies forward natural gas contracts as derivatives. At December 31, 2023, the forward natural gas contracts were with counterparties whose ratings ranged from B1 to A1.

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14.  Fair Value Measurements

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:
Level 1
 
Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
Level 2
 

 
Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability.  These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
Level 3
 
Pricing inputs that are unobservable, or less observable, from objective sources.  Unobservable inputs are only to be used to the extent observable inputs are not available.  These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants.  An entity should consider all market participant assumptions that are available without unreasonable cost and effort.  These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

A financial instrument's level within the fair value hierarchy (where Level 1 is the highest and Level 3 is the lowest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP and DCP assets, all changes in fair value of these assets and liabilities have been recorded as changes in regulatory assets, regulatory liabilities, or AOCI on TVA's Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP and DCP assets, there has been no impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows related to these fair value measurements.

Investment Funds

At December 31, 2023, Investment funds were comprised of $4.5 billion of equity securities and debt securities classified as trading measured at fair value. Equity and trading debt securities are held in the NDT, ART, SERP, DCP, and RP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds primarily for the costs related to the future closure and retirement of TVA's other long-lived assets. The balances in the NDT and ART were $3.0 billion and $1.3 billion, respectively, at December 31, 2023.

TVA established a SERP to provide benefits to selected employees of TVA which are comparable to those provided by competing organizations. The DCP is designed to provide participants with the ability to defer compensation to future periods. The RP is a non-qualified excess 401(k) plan designed to allow certain eligible employees whose contributions to the 401(k) plan are limited by Internal Revenue Service ("IRS") rules to save additional amounts for retirement and receive non-elective and matching employer contributions. The NDT, ART, SERP, DCP, and RP funds are invested in portfolios of securities generally designed to achieve a return in line with overall equity and debt market performance.

The NDT, ART, SERP, DCP, and RP are composed of multiple types of investments and are managed by external institutional investment managers. Most U.S. and international equities, U.S. Treasury inflation-protected securities, real estate investment trust securities, and cash securities and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.

Private equity limited partnerships, private real asset investments, and private credit investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt,
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and special situations through funds managed by third-party investment managers. These investments generally involve a three-to-four-year period where the investor contributes capital, followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, 10 years or longer. The NDT had unfunded commitments related to private equity limited partnerships of $296 million, private real assets of $110 million, and private credit of $88 million at December 31, 2023. The ART had unfunded commitments related to limited partnerships in private equity of $122 million, private real assets of $54 million, and private credit of $47 million at December 31, 2023. These investments have no redemption or limited redemption options and may also impose restrictions on the NDT's and ART's ability to liquidate their investments. There are no readily available quoted exchange prices for these investments. The fair value of these investments is based on information provided by the investment managers. These investments are valued on a quarterly basis. TVA's private equity limited partnerships, private real asset investments, and private credit investments are valued at net asset values ("NAV") as a practical expedient for fair value. TVA classifies its interest in these types of investments as investments measured at NAV in the fair value hierarchy.

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, SERP, DCP, and RP consist of either a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded or measured using observable inputs for similar instruments. The fair value of commingled funds is based on NAV per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be redeemed at the measurement date NAV and are classified as Commingled funds measured at NAV in the fair value hierarchy.

Realized and unrealized gains and losses on equity and trading debt securities are recognized in current earnings and are based on average cost. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory asset or liability account in accordance with TVA's regulatory accounting policy. See Note 1 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Annual Report and Note 8 — Regulatory Assets and Liabilities. TVA recorded unrealized gains and losses related to its equity and trading debt securities held during each period as follows:
Unrealized Investment Gains (Losses)(1)
(in millions)
 
Three Months Ended December 31
FundFinancial Statement Presentation20232022
NDT
Regulatory assets(2)
$197 $136 
ART
Regulatory assets(3)
89 69 
SERPOther income, net7 3 
DCPOther income, net1  
Notes
(1) Employee contributions to the RP began in the second quarter of 2023. As of December 31, 2023, the unrealized gains for the RP were less than $1 million, and therefore were not represented in the table above.
(2) Includes $61 million and $20 million of unrealized gains related to NDT equity securities (excluding commingled funds) for the three months ended December 31, 2023 and 2022, respectively.
(3) Includes $18 million and $10 million of unrealized gains related to ART equity securities (excluding commingled funds) for the three months ended December 31, 2023 and 2022, respectively.

Currency and Interest Rate Swap Derivatives

See Note 13 — Risk Management Activities and Derivative TransactionsCash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps and interest rate swaps. These swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments.

Commodity Contract Derivatives and Commodity Derivatives under the FHP

Commodity Contract Derivatives. Most of these derivative contracts are valued based on market approaches, which utilize short-term and mid-term market-quoted prices from an external industry brokerage service. These contracts are classified as Level 2 valuations.

Commodity Derivatives under the FHP. Swap contracts are valued using a pricing model based on New York Mercantile Exchange inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.

See Note 13 — Risk Management Activities and Derivative TransactionsDerivatives Not Receiving Hedge Accounting Treatment Commodity Derivatives and — Commodity Derivatives under the FHP.



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Nonperformance Risk

The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

Nonperformance risk for most of TVA's derivative instruments is an adjustment to the asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying credit valuation adjustments ("CVAs"). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the counterparty. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2022) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in a $1 million decrease in the fair value of assets and a $1 million decrease in the fair value of liabilities at December 31, 2023.

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Fair Value Measurements

The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis at December 31, 2023, and September 30, 2023. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.
Fair Value Measurements
At December 31, 2023
(in millions)
Quoted Prices in Active
 Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Investments    
Equity securities$684 $ $ $684 
Government debt securities(1)
453 69  522 
Corporate debt securities(2)
 321  321 
Mortgage and asset-backed securities 37  37 
Institutional mutual funds
309   309 
Forward debt securities contracts 3  3 
Cash equivalents and other short-term investments 163  163 
Private equity funds measured at net asset value(3)
   657 
Private real asset funds measured at net asset value(3)
   408 
Private credit funds measured at net asset value(3)
   184 
Commingled funds measured at net asset value(3)
   1,184 
Total investments1,446 593  4,472 
Commodity contract derivatives 31  31 
Total$1,446 $624 $ $4,503 
Quoted Prices in Active
Markets for
Identical Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Liabilities
Currency swaps(4)
$ $121 $ $121 
Interest rate swaps 818  818 
Commodity contract derivatives 2  2 
Commodity derivatives under the FHP 309  309 
Total$ $1,250 $ $1,250 
Notes
(1) Includes securities of government-sponsored entities, including $453 million of U.S. Treasury securities within Level 1 of the fair value hierarchy.
(2) Includes both U.S. and foreign debt.
(3) Certain investments that are measured at fair value using the NAV or its equivalent (alternative investments) have not been categorized in the fair value hierarchy. The inputs to these fair value measurements include underlying NAVs, discounted cash flow valuations, comparable market valuations, and adjustments for currency, credit, liquidity, and other risks. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Consolidated Balance Sheets.
(4) TVA records currency swaps net of cash collateral received from or paid to the counterparty if applicable, to the extent such amount is not recorded in Accounts payable and accrued liabilities. See Note 13 — Risk Management Activities and Derivative Transactions Offsetting of Derivative Assets and Liabilities.<