Tennessee Valley Authority

Sources of Liquidity

TVA depends on various sources of liquidity to meet cash needs and contingencies. TVA's primary sources of liquidity are cash from operations and proceeds from the issuance of short-term debt in the form of discount notes, along with periodic issuances of long-term debt. TVA's balance of short-term debt typically changes frequently as TVA issues discount notes to meet short-term cash needs and pay scheduled maturities of discount notes and long-term debt. TVA’s next significant power bond maturity is $1.0 billion in September 2024. The periodic amounts of short-term debt issued are determined by near-term expectations for cash receipts, cash expenditures, and funding needs, while seeking to maintain a target range of cash and cash equivalents on hand. TVA may hold higher cash balances from time to time in response to potential market volatility or other business conditions. In addition, cash balances may include collateral received from counterparties.

In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include four long-term revolving credit facilities totaling $2.7 billion, a $150 million credit facility with the United States Department of the Treasury ("U.S. Treasury"), and proceeds from other financings. See Note 12 — Debt and Other Obligations—Credit Facility Agreements. The TVA Board authorized TVA to issue power bonds and enter into other financing arrangements in an aggregate amount not to exceed $4.0 billion during 2024. Other financing arrangements may include lease financings and sales of receivables, loans, or other assets.

The Tennessee Valley Authority Act of 1933, as amended ("TVA Act"), authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time. Bonds outstanding, excluding unamortized discounts and premiums and net exchange gains from foreign currency transactions, at December 31, 2023, were $20.1 billion (including current maturities). The balance of Bonds outstanding directly affects TVA's capacity to meet operational liquidity needs and to strategically use Bonds to fund certain capital investments as management and the TVA Board may deem desirable. Other options for financing not subject to the limit on Bonds, including lease financings, could provide supplementary funding if needed. Currently, TVA expects to utilize a combination of Bonds and additional power revenues through power rate increases to meet its ongoing operational liquidity needs while making planned capital investments through the decade. TVA may also utilize available federal funding through the Inflation Reduction Act of 2022 ("Inflation Reduction Act") and the Bipartisan Infrastructure Law ("BIL"), third party funding resources, or other funding sources. See Lease Financings below, Note 9 — Variable Interest Entities, and Note 12 — Debt and Other Obligations for additional information.

TVA may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, TVA's liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.

Debt Securities. TVA's Bonds are not obligations of the U.S., and the U.S. does not guarantee the payments of principal or interest on Bonds. TVA's Bonds consist of power bonds and discount notes. Power bonds have maturities of between one and 50 years. At December 31, 2023, the average maturity of long-term power bonds was 14.18 years, and the weighted average interest rate was 4.61 percent. Discount notes have maturities of less than one year. Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds. Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and tax equivalents, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein. In addition to power bonds and discount notes, TVA had long-term debt associated with certain VIEs outstanding at December 31, 2023. See Lease Financings below, Note 9 — Variable Interest Entities, and Note 12 — Debt and Other Obligationsfor additional information.

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

TVA's rated senior unsecured Bonds are currently rated Aaa, AA+, and AA+, by Moody's Investors Services, Inc. ("Moody's"), Fitch Ratings ("Fitch"), and Standard & Poor's Financial Services, LLC ("S&P"), respectively. TVA's short-term discount notes are not rated. TVA and the owners of TVA securities could be impacted by any downgrades of TVA's credit ratings. TVA Bonds are not obligations of the U.S.; however, because TVA is a wholly-owned corporate agency and instrumentality of the U.S. government, TVA's ratings may be impacted if the sovereign credit ratings of the U.S. are downgraded. In August 2023, Fitch downgraded the U.S. government's credit rating to AA+, reflecting its perception of a deterioration in the U.S. public finances and challenges associated with raising the U.S. debt limit. Fitch subsequently downgraded TVA's rating from AAA to AA+. TVA was not required to post additional collateral due to the downgrade. The outlook on the ratings of TVA is currently stable with S&P and Fitch. However, on November 10, 2023, Moody's revised the outlook on the U.S. government's credit ratings from stable to negative, and subsequently determined on November 13, 2023, to revise the outlook on TVA's ratings from stable to negative due to the change in the government rating outlook. TVA would not be required to post additional collateral if downgraded to Aa1 by Moody's. See Part I, Item 1A, Risk Factors— Financial, Economic, and Market Risks — TVA, together with owners of TVA securities, may be impacted by downgrades of TVA's credit ratingsin the Annual Report.

According to statements made by the credit rating agencies, the U.S. rating may face additional downward pressure if policymakers are unable to respond to the country's growing fiscal challenges, if it appears deterioration in debt affordability or fiscal strength is likely to undermine U.S. economic strength or the role of the U.S. dollar or U.S. Treasury bond market, or if a weakening of governance were to occur. Additionally, TVA may be impacted by how the U.S. government addresses situations of approaching its debt limit. See Note 13— Risk Management Activities and Derivative Transactions — Other Derivative Instruments — Collateral.

Lease Financings. TVA has entered into certain leasing transactions with special purpose entities ("SPEs") to obtain third-party financing for its facilities. These SPEs are sometimes identified as VIEs of which TVA is determined to be the primary beneficiary. TVA is required to account for these VIEs on a consolidated basis. See Note 9 —Variable Interest Entities.

Summary Cash Flows

A major source of TVA's liquidity is operating cash flows resulting from the generation and sale of electricity. Cash, cash equivalents, and restricted cash totaled $518 million and $520 million at December 31, 2023 and 2022, respectively. A summary of cash flow components for the three months ended December 31, 2023 and 2022, follows:

Cash provided by (used in):

Operating Activities. TVA's cash flows from operations are primarily driven by sales of electricity, fuel expense, and operating and maintenance expense. The timing and level of cash flows from operations can be affected by the weather, changes in working capital, commodity price fluctuations, outages, and other project expenses.

Net cash flows provided by operating activities decreased $46 million for the three months ended December 31, 2023, as compared to the same period of the prior year. Revenue collections decreased primarily due to lower fuel and purchased power prices which were partially offset by the base rate increase that began in 2024 and pandemic credits which ended in September 2023. There was also an increase in payroll and benefit related payments compared to the same period of the prior year. These decreases were partially offset by lower fuel and purchased power payments, a decrease in cash collateral payments made in the first quarter of 2023, and lower cash used for asset retirement obligation settlements.

Investing Activities. The majority of TVA's investing cash flows are due to investments to acquire, upgrade, or maintain generating and transmission assets, including environmental projects and the purchase of nuclear fuel.

Net cash flows used in investing activities increased $126 million for the three months ended December 31, 2023, as compared to the same period of the prior year, primarily driven by increased expenditures for capacity expansion projects partially offset by decreased expenditures for transmission projects and nuclear fuel during the period and the acquisition of leasehold interests in combustion turbine assets in the first quarter of 2023. Nuclear fuel expenditures vary depending on the number of outages and the prices and timing of purchases of uranium and enrichment services.

Financing Activities. TVA's cash flows provided by or used in financing activities are primarily driven by the timing and level of cash flows provided by operating activities, cash flows used in investing activities, and net issuance and redemption of debt instruments to maintain a strategic balance of cash on hand.

Net cash provided by financing activities increased $169 million for the three months ended December 31, 2023, as compared to the same period of the prior year, primarily due to higher net short-term debt issuances. Lower net cash flows provided by operating activities and higher net cash used in investing activities in the first quarter of 2024 resulted in the need for net short-term debt issuances to maintain targeted cash balance levels during the period. TVA may continue to have a need to increase debt in the coming years as it continues to invest in power system assets, which may result in positive net cash flows provided by financing activities in future periods.

Contractual Obligations

TVA has certain obligations and commitments to make future payments under contracts. During the three months ended December 31, 2023, TVA entered into a purchase obligation for combustion turbine generators totaling $660 million of commitments from 2024 - 2027, of which $89 million is estimated to be paid during the remainder of 2024. TVA's contractual obligations are discussed in the Annual Report in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources, Note 8 —Leases, Note 11 —Variable Interest Entities, Note 14 —Debt and Other Obligations, Note 20 —Benefit Plans, and Note 22 —Commitments and Contingencies.