Tennessee Valley Authority

Results of Operations

Sales of Electricity

Sales of electricity, which accounted for nearly all of TVA's operating revenues, were 37,335 million and 38,006 million kilowatt hours ("kWh") for the three months ended December 31, 2023 and 2022, respectively. The total sales of electricity for the three months ended December 31, 2023 include 137 million kWh of pre-commercial generation at Paradise Combustion Turbine Units 5-7. TVA sells power at wholesale rates to LPCs that then resell the power to their customers at retail rates. TVA also sells power to directly served customers, consisting primarily of federal agencies and customers with large or nonstandard loads. In addition, power exceeding TVA's system needs is sold under exchange power arrangements with certain other power systems.

The following chart compares TVA's sales of electricity by customer type for the periods indicated:

The following charts show a breakdown of TVA's energy load:

Note

Information included in the charts above was derived from energy usage of directly served customers and customers served by LPCs during calendar

year ("CY") 2022, and these graphs will continue to be updated on a CY basis.

Weather affects both the demand for TVA power and the price for that power. TVA uses degree days to measure the impact of weather on its power operations. Degree days measure the extent to which the TVA system 23-station average temperatures vary from 65 degrees Fahrenheit.

Sales of electricity decreased approximately two percent for the three months ended December 31, 2023, as compared to the same period of the prior year. The decreased sales volume was driven by milder weather during the current quarter, which resulted from a 13 percent decline in heating degree days over the same period of the prior year. For industries directly served, sales of electricity increased primarily from business-specific factors.

Financial Results

The following table compares operating results for the three months ended December 31, 2023 and 2022:

Operating Revenues. Operating revenues for the three months ended December 31, 2023 and 2022, were $2.8 billion and $3.0 billion, respectively. The following table compares TVA's operating revenues for the periods indicated:

Note

TVA's two largest LPCs — Memphis Light, Gas and Water Division ("MLGW") and Nashville Electric Service ("NES") — have contracts with a five-year and a 20-year termination notice period, respectively. Sales to MLGW and NES each accounted for eight percent of TVA's total operating revenues for both the three months ended December 31, 2023 and the three months ended December 31, 2022.

TVA's rate structure uses pricing signals to indicate seasons and hours of higher cost to serve its customers and to capture a portion of TVA's fixed costs in fixed charges. The structure includes three base revenue components: time of use demand charges, time of use energy charges, and a grid access charge ("GAC"). The demand charges are based upon the customer's peak monthly usage. The energy charges are based on time differentiated kWh used by the customer. Both of these components can be significantly impacted by weather. The GAC captures a portion of fixed costs and is offset by a corresponding reduction to the energy rates. The GAC also reduces the impact of weather variability to the overall rate structure.

TVA has a Partnership Agreement option that better aligns the length of LPC power contracts with TVA's long-term commitments. Under the partnership arrangement, the LPC power contracts automatically renew each year and have a 20-year termination notice. The partnership arrangements can be terminated under certain circumstances, including TVA's failure to limit rate increases as provided for in the agreements going forward. Participating LPCs receive benefits including a 3.1 percent wholesale bill credit in exchange for their long-term commitment, which enables TVA to recover its long-term financial commitments over a commensurate period. As of December 31, 2023, 147 LPCs had signed the 20-year Partnership Agreement with TVA.

In addition to base revenues, the rate structure includes a separate fuel rate that includes the costs of natural gas, fuel oil, purchased power, coal, emission allowances, nuclear fuel, and other fuel-related commodities; realized gains and losses on derivatives purchased to hedge the costs of such commodities; and payments to states and counties in lieu of taxes ("tax equivalents") associated with the fuel cost adjustments.

TVA is required to charge rates for power that will produce gross revenues sufficient to cover various costs as discussed in Part I, Item I, Business —Rates of the Annual Report. In August 2023, the TVA Board approved a 4.5 percent wholesale rate increase (excluding fuel) effective October 1, 2023 primarily due to additional capacity needs and rising costs. This rate adjustment is estimated to produce an additional $405 million of revenue during 2024.

The changes in revenue components are summarized below:

Notes

(2) The pandemic credits ended September 30, 2023.

(3) Includes economic development credits to promote growth in the Tennessee Valley, hydro preference credits for residential customers of LPCs, and demand response credits allowing TVA to reduce industrial customer usage in periods of peak demand to balance system demand. See Note 15 —Revenue.

Operating revenues decreased $250 million for the three months ended December 31, 2023, as compared to the same period of the prior year, primarily due to a $298 million decrease in fuel cost recovery revenue. The $298 million decrease in fuel cost recovery revenue was driven by a $277 million decrease attributable to lower fuel rates and a $21 million decrease attributable to lower sales volume in the first quarter of 2024. The lower fuel rates were primarily due to lower natural gas and purchased power prices. The lower sales volume was driven by milder weather in the Tennessee Valley region for the current quarter as compared to the same period of the prior year. The $68 million increase in base revenue was driven by a $175 million increase attributable to higher effective base rates partially offset by a $107 million decrease attributable to lower sales volume. The increase in effective base rates was primarily due to the TVA Board action to increase rates 4.5 percent beginning in 2024 and the pandemic credits ending September 30, 2023.

See Sales of Electricity above for further discussion of the change in the volume of sales of electricity and Operating Expenses below for further discussion of the change in fuel expense.

Operating Expenses. Operating expense components as a percentage of total operating expenses for the three months ended December 31, 2023 and December 31, 2022, consisted of the following:

Fuel expense decreased $119 million for the three months ended December 31, 2023, as compared to the same period of the prior year. This decrease was primarily due to a decrease in effective fuel rates due to lower natural gas prices, resulting in a $179 million decrease in fuel expenses. Partially offsetting these decreases was an increase of $62 million related primarily to the deferral of unplanned fuel costs in December 2022.

Purchased power expense decreased $132 million for the three months ended December 31, 2023, as compared to the same period of the prior year. This decrease was primarily due to lower purchased power market prices, resulting in a decrease of $166 million, as well as lower demand for energy due to overall milder weather and higher availability of nuclear generation resulting in an additional decrease of $29 million. Partially offsetting these decreases was an increase of $63 million related primarily to the deferral of unplanned purchased power costs in December 2022.

Operating and maintenance expense increased $40 million for the three months ended December 31, 2023, as compared to the same period of the prior year. This increase was primarily due to $33 million of increased payroll and benefit costs primarily due to labor escalation for cost of living increases and additional headcount to support operational needs and $20 million of increased contract labor costs primarily related to power operations performance improvement activities and natural gas project work. Partially offsetting these increases was a $33 million decrease in outage expense primarily due to fewer nuclear refueling outages.

Depreciation and amortization expense decreased $12 million for the three months ended December 31, 2023, as compared to the same period of the prior year. The decrease was primarily driven by a decrease in depreciation expense of $43 million related to the decision to retire Bull Run, as Bull Run became fully depreciated in the fourth quarter of 2023. Partially offsetting this decrease was a $16 million increase in additional depreciation related to TVA's decision to retire Cumberland Fossil Plant ("Cumberland"). Additionally, there was an increase due to depreciation of additions to net completed plant.

Tax equivalents expense decreased $18 million for the three months ended December 31, 2023, as compared to the same period of the prior year. The change is primarily driven by a decrease in the tax equivalents collected in the fuel cost recovery.

Generating Sources. The following table shows TVA's generation and purchased power by generating source as a percentage of all electrical power generated and purchased (based on kWh) for the periods indicated:

Notes

(1) Generation from TVA-owned renewable resources (non-hydroelectric) is less than one percent for all periods shown and therefore is not represented in the table above.

(2) Raccoon Mountain Pumped-Storage Plant net generation is allocated against each TVA-operated generation facility and purchased power type for both the three months ended December 31, 2023, and the three months ended December 31, 2022. See Part I, Item 1, Business —Power Supply and Load Management Resources —Hydroelectric Pumped-Storagein the Annual Report for a discussion of Raccoon Mountain Pumped-Storage Plant.

(3) Purchased power (natural gas and/or oil-fired) includes generation from Caledonia Combined Cycle Plant ("Caledonia CC"), which is currently a leased facility operated by TVA. Generation from Caledonia CC was 910 million kWh and 1,041 million kWh for the three months ended December 31, 2023 and 2022, respectively.

(4) Purchased power (other renewables) includes purchased power from the following renewable sources: solar, wind, biomass, and renewable cogeneration. TVA sells the Renewable Energy Certificates resulting from some of this purchased power to certain customers.

In addition to power supply sources included here, TVA offers energy efficiency programs that effectively reduce energy needs. In 2024, TVA plans to invest $104 million on its energy efficiency programs and anticipates approximately 310 gigawatt hours of net incremental energy efficiency savings.

Interest Expense. Interest expense and interest rates for the three months ended December 31, 2023 and the three months ended December 31, 2022, were as follows:

Notes

(1) Includes amortization of debt discounts, issuance, and reacquisition costs, net.

(2) Includes average balances of long-term power bonds, debt of variable interest entities ("VIEs"), and discount notes.

(3) Includes interest on long-term power bonds, debt of VIE, and discount notes.

Total interest expense was flat for the three months ended December 31, 2023, as compared to the same period of the prior year. This resulted from higher average balances of long-term debt and higher average rates on short-term debt, that were offset primarily by lower average rates on long-term debt and lower average balances of short-term debt.