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Benefit Plans | 12 Months Ended
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Sep. 30, 2011
Compensation and Retirement Disclosure [Abstract] |
Benefit Plans | Benefit Plans TVA sponsors a qualified defined benefit pension plan and a qualified defined contribution plan that cover eligible employees, two unfunded post-retirement plans that provide for non-vested contributions toward the cost of certain eligible retirees’ medical coverage, other postemployment benefits such as workers’ compensation, and the SERP. Overview of Plans and Benefits Defined Benefit Pension Plan. TVA sponsors a qualified defined benefit pension plan for most of its full-time annual employees that provides two benefit structures: the Original Benefit Structure and the Cash Balance Benefit Structure.
• | Original Benefit Structure. The pension benefit for a member participating in the Original Benefit Structure is based on the member’s creditable service, the member’s average monthly salary for the highest three consecutive years of base pay, and a pension factor based on the member’s age and years of service, less a Social Security offset.
• | Cash Balance Benefit Structure. The pension benefit for a member participating in the Cash Balance Benefit Structure is based on credits accumulated in the member’s account and the member’s age. A member’s account receives pay credits equal to six percent of his or her straight-time earnings. The account also receives interest credits at a rate set at the beginning of each calendar year equal to the change in the Consumer Price Index ("CPI") plus three percent, with the provision that the rate may not be less than six percent or more than 10 percent. The rates of the credits were six percent for calendar years 2011 and 2010.
Members of both the Original Benefit Structure and the Cash Balance Benefit Structure can also become eligible for a vested supplemental pension benefit based on age and years of service, which is designed to help retirees offset the cost of medical insurance. The defined benefit pension plan is administered by a separate legal entity, TVARS, which is governed by its own board of directors (the “TVARS Board”). Upon notification by the TVARS Board of a recommended contribution for the next fiscal year, TVA determines whether to make the recommended contribution or any contribution that may be required by the rules and regulations of TVARS. Defined Contribution Plan. TVARS also administers a qualified defined contribution 401(k) plan to which TVA makes matching contributions of 25 cents on the dollar (up to 1.5 percent of annual pay) for members participating in the Original Benefit Structure and of 75 cents on the dollar (up to 4.5 percent of annual pay) for members participating in the Cash Balance Benefit Structure. TVA made matching contributions of approximately $31 million to the plan during 2011, $27 million during 2010, and $24 million during 2009. Supplemental Executive Retirement Plan. In 1995, TVA established its SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by IRS rules applicable to the qualified defined benefit pension plan. TVA has historically funded the annual calculated expense. Other Post-Retirement Benefits. TVA sponsors two unfunded post-retirement benefit plans that provide for non-vested contributions toward the cost of certain eligible retirees’ medical coverage. The first plan covers only certain retirees and surviving dependents who do not qualify for TVARS benefits, including the vested supplemental pension benefit. The second plan is designed to place a limit on the out-of-pocket amount certain eligible retirees pay for medical coverage and provides a credit based on years of TVA service and monthly base pension amount, reduced by any TVARS supplemental pension benefits or any TVA contribution from the first plan, described above. Other Post-employment Benefits. TVA employees injured in work-related incidents are covered by the workers’ compensation program for federal employees administered through the Department of Labor by the Office of Workers’ Compensation Programs in accordance with the provisions of the FECA. FECA provides compensation benefits to federal employees for permanent and temporary disability due to employment-related injury or disease. Accounting Mechanisms Regulatory Accounting. TVA has classified all amounts related to unrecognized prior service costs, net actuarial gains or losses, and subsequent changes in the funded status as regulatory assets. Cost Method. TVA uses the projected unit credit cost method to determine the service cost and the projected benefit obligation for retirement, termination, and ancillary benefits. Under this method, a “projected accrued benefit” is calculated at the beginning of the year and at the end of the year for each benefit that may be payable in the future. The “projected accrued benefit” is based on the plan’s accrual formula and upon service at the beginning or end of the year, but it uses final average compensation, social security benefits, and other relevant factors projected to the age at which the employee is assumed to leave active service. The projected benefit obligation is the actuarial present value of the “projected accrued benefits” at the beginning of the year for employed participants and is the actuarial present value of all benefits for other participants. The service cost is the actuarial present value of the difference between the “projected accrued benefits” at the beginning and end of the year. Amortization of Net Gain or Loss. TVA utilizes the corridor approach for gain/loss amortization. Differences between actuarial assumptions and actual plan results are deferred and amortized into periodic cost only when the accumulated differences exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If necessary, the excess is amortized over the average remaining service period of active employees. Asset Method. TVA recognizes the impact of asset performance on pension expense over a three year phase-in period through a “market-related” value of assets calculation. Since the “market-related” value of assets recognizes investment gains and losses over a three year period, the future value of assets will be impacted as previously deferred gains or losses are recognized. The “market-related” value is used in calculating expected return on plan assets and net gain or loss for pension cost determination. Obligations and Funded Status The changes in plan obligations, assets, and funded status for the years ended September 30, 2011 and 2010, were as follows:
Obligations and Funded Status For the year ended September 30
| Pension Benefits |  | Other Post-Retirement Benefits
| 2011 |  | 2010 |  | 2011 |  | 2010
Change in benefit obligation |  |  |  |  |  |  |
Benefit obligation at beginning of year | $ | 10,394 |  |  | $ | 9,266 |  |  | $ | 658 |  |  | $ | 665 |
Service cost | 120 |  |  | 99 |  |  | 13 |  |  | 12 |
Interest cost | 502 |  |  | 513 |  |  | 32 |  |  | 37 |
Plan participants’ contributions | 30 |  |  | 29 |  |  | 78 |  |  | 81 |
Amendments | — |  |  | 3 |  |  | — |  |  | (90 | )
Actuarial loss | 803 |  |  | 1,077 |  |  | 135 |  |  | 69 |
Net transfers from variable fund/401(k) plan | 8 |  |  | 3 |  |  | — |  |  | — |
Expenses paid | (5 | ) |  | (5 | ) |  | — |  |  | — |
Benefits paid | (597 | ) |  | (591 | ) |  | (116 | ) |  | (116 | )
Benefit obligation at end of year | 11,255 |  |  | 10,394 |  |  | 800 |  |  | 658 |
Change in plan assets |  |  |  |  |  |  |  |  |  |  |
Fair value of net plan assets at beginning of year | 6,792 |  |  | 6,643 |  |  | — |  |  | — |
Actual return on plan assets | 44 |  |  | 707 |  |  | — |  |  | — |
Plan participants’ contributions | 30 |  |  | 29 |  |  | 78 |  |  | 81 |
Net transfers from variable fund/401(k) plan | 8 |  |  | 3 |  |  | — |  |  | — |
Employer contributions | 274 |  |  | 6 |  |  | 38 |  |  | 35 |
Expenses paid | (5 | ) |  | (5 | ) |  | — |  |  | — |
Benefits paid | (597 | ) |  | (591 | ) |  | (116 | ) |  | (116 | )
Fair value of net plan assets at end of year | 6,546 |  |  | 6,792 |  |  | — |  |  | — |
Funded status | $ | (4,709 | ) |  | $ | (3,602 | ) |  | $ | (800 | ) |  | $ | (658 | )
The pension actuarial loss above for 2011 primarily reflects the impact of the reduction in the discount rate from 5.00 percent to 4.50 percent, which increased the liability by approximately $591 million. The pension actuarial loss for 2010 primarily reflects the impact of the reduction in the discount rate from 5.75 percent to 5.00 percent, which increased the liability by approximately $807 million. The other post-retirement actuarial loss for 2011 primarily reflects the impact of the reduction in the discount rate from 5.00 percent to 4.50 percent, which increased the post-retirement liability by approximately $47 million. The other post-retirement actuarial loss for 2010 reflects the impact of the reduction in the discount rate from 5.75 percent to 5.00 percent, which increased the liability by $66 million. This increase was offset by a change in plan provisions which decreased the liability by $90 million. The following changes were made to the cost of living adjustment ("COLA") provisions for the four years beginning January 1, 2010: •For CY 2010, the COLA was zero. •For CY 2011, the COLA will be the change in the CPI, capped at three percent. •For CY 2012, the COLA will be zero. •For CY 2013, the COLA will be the change in the CPI, capped at 2.5 percent. At the end of the four year period, the COLA benefit of CPI, capped at five percent, will be restored. Further, the eligibility for the COLA changed to age 60 for employees who retire on or after January 1, 2010. Finally, the interest crediting rate for fixed fund balances and future contributions was reduced to six percent effective January 1, 2010. No similarly significant pension plan amendments were enacted during 2010 or 2011. Amounts recognized in the balance sheets consist of regulatory assets that have not been recognized as components of periodic benefit cost at September 30, 2011 and 2010, and the funded status of TVA’s benefit plans, which are included in Accounts payable and accrued liabilities and Post-retirement and post-employment benefit obligations:
Amounts Recognized in the Balance Sheet At September 30
| Pension Benefits |  | Other Post-Retirement Benefits
| 2011 |  | 2010 |  | 2011 |  | 2010
Regulatory assets | $ | 5,433 |  |  | $ | 4,456 |  |  | $ | 374 |  |  | $ | 255 |
Accounts payable and accrued liabilities | (6 | ) |  | (4 | ) |  | (39 | ) |  | (35 | )
Post-retirement and post-employment benefit obligations | (4,703 | ) |  | (3,598 | ) |  | (761 | ) |  | (623 | )
Unrecognized amounts included in regulatory assets yet to be recognized as components of accrued benefit cost at September 30 consisted of:
Postretirement Benefit Costs Deferred as Regulatory Assets At September 30
| Pension Benefits |  | Other Post-Retirement Benefits
| 2011 |  | 2010 |  | 2011 |  | 2010
Unrecognized prior service cost (credit) | $ | (255 | ) |  | $ | (279 | ) |  | $ | (58 | ) |  | $ | (64 | )
Unrecognized net loss | 5,688 |  |  | 4,724 |  |  | 432 |  |  | 319 |
Amount deferred due to actions of regulator | — |  |  | 11 |  |  | — |  |  | — |
Total regulatory assets | $ | 5,433 |  |  | $ | 4,456 |  |  | $ | 374 |  |  | $ | 255 |
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets at September 30, 2011, and 2010, were as follows:
Projected Benefit Obligations and Accumulated Benefit Obligations in Excess of Plan Assets At September 30
| 2011 |  | 2010
Projected benefit obligation | $ | 11,255 |  |  | $ | 10,394 |
Accumulated benefit obligation | 10,943 |  |  | 10,085 |
Fair value of net plan assets | 6,546 |  |  | 6,792 |
The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30 were as follows:
Components of Net Periodic Benefit Cost For the years ended September 30
| Pension Benefits |  | Other Post-Retirement Benefits
| 2011 |  | 2010 |  | 2009 |  | 2011 |  | 2010 |  | 2009
Components of net periodic benefit cost |  |  |  |  |  |  |  |  |  |  |
Service cost | $ | 120 |  |  | $ | 99 |  |  | $ | 84 |  |  | $ | 13 |  |  | $ | 12 |  |  | $ | 7 |
Interest cost | 502 |  |  | 513 |  |  | 581 |  |  | 32 |  |  | 37 |  |  | 36 |
Expected return on plan assets | (488 | ) |  | (548 | ) |  | (543 | ) |  | — |  |  | — |  |  | — |
Amortization of prior service cost (credit) | (23 | ) |  | (24 | ) |  | 37 |  |  | (6 | ) |  | 6 |  |  | 5 |
Recognized net actuarial loss | 282 |  |  | 181 |  |  | 14 |  |  | 22 |  |  | 17 |  |  | 7 |
Net periodic benefit cost as actuarially determined | 393 |  |  | 221 |  |  | 173 |  |  | 61 |  |  | 72 |  |  | 55 |
Amount charged (capitalized) due to actions of regulator | 11 |  |  | 71 |  |  | (82 | ) |  | — |  |  | — |  |  | — |
Total net periodic benefit cost recognized | $ | 404 |  |  | $ | 292 |  |  | $ | 91 |  |  | $ | 61 |  |  | $ | 72 |  |  | $ | 55 |
The amounts in the regulatory asset that are expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows:
Expected Amortization of Regulatory Assets in 2012 At September 30, 2011
| Pension Benefits |  | Other Post-Retirement Benefits |  | Total
Prior service cost (credit) | $ | (23 | ) |  | $ | (6 | ) |  | $ | (29 | )
Net actuarial loss | 361 |  |  | 29 |  |  | 390 |
Plan Assumptions TVA’s reported costs of providing the plan benefits are impacted by numerous factors including the provisions of the plans, changing employee demographics, and various assumptions, the most significant of which are noted below.
Actuarial Assumptions At September 30
| Pension Benefits |  | Other Post-Retirement Benefits
| 2011 |  | 2010 |  | 2011 |  | 2010
Assumptions utilized to determine benefit obligations at September 30 |  |  |  |  |  |  |
Discount rate | 4.50 | % |  | 5.00 | % |  | 4.50 | % |  | 5.00 | %
Expected return on plan assets | 7.25 | % |  | 7.50 | % |  | N/A |  |  | N/A |
Rate of compensation increase | 4.43 | % |  | 4.41 | % |  | N/A |  |  | N/A |
Initial health care cost trend rate | N/A |  |  | N/A |  |  | 8.00 | % |  | 8.00 | %
Ultimate health care cost trend rate | N/A |  |  | N/A |  |  | 5.00 | % |  | 5.00 | %
Ultimate trend rate is reached in year beginning | N/A |  |  | N/A |  |  | 2017 |  |  | 2016 |
Assumptions utilized to determine net periodic benefit cost for the years ended September 30 |  |  |  |  |  |  |  |  |  |  |
Discount rate | 5.00 | % |  | 5.75 | % |  | 5.00 | % |  | 5.75 | %
Expected return on plan assets | 7.50 | % |  | 7.75 | % |  | N/A |  |  | N/A |
Rate of compensation increase | 4.41 | % |  | 4.40 | % |  | N/A |  |  | N/A |
Initial health care cost trend rate | N/A |  |  | N/A |  |  | 8.00 | % |  | 8.00 | %
Ultimate health care cost trend rate | N/A |  |  | N/A |  |  | 5.00 | % |  | 5.00 | %
Ultimate trend rate is reached in year beginning | N/A |  |  | N/A |  |  | 2016 |  |  | 2015 |
Discount Rate. In the case of selecting an assumed discount rate, TVA reviews market yields on high-quality corporate debt and long-term obligations of the U.S. Treasury and endeavors to match, through the use of a hypothetical bond portfolio, instrument maturities with the maturities of its pension obligations in accordance with the prevailing accounting standards. Additionally, TVA looks at published pension spot yield curves and applies expected cash flows to these curves to approximate the rate expected to settle the projected benefit payments. Based on recent market trends in all these data points, TVA decreased its discount rate used to determine benefit obligations from 5.00 percent at the end of 2010 to 4.50 percent at the end of 2011. TVA had decreased its discount rate from 5.75 percent at the end of 2009 to 5.00 percent at the end of 2010. Rate of Return. In determining its expected long-term rate of return on pension plan assets, TVA reviews past long-term performance, asset allocations, and long-term inflation assumptions. The expected rates of return used to develop net pension cost were 7.50 percent and 7.75 percent during 2011 and 2010, respectively, and were determined at the beginning of each year. TVA adjusted the expected rate for 2012 based on revisions to future expected returns as provided by third party professional investment consultants. At October 1, 2011, the expected rate of return was 7.25 percent. The actual rate of return for the year ended September 30, 2011, was a gain of 0.67 percent. Compensation Increases. Assumptions related to compensation increases are based on the results obtained from an actual company experience study performed during the most recent six years for retirees as well as other plan participants. TVA obtained an updated study in 2008 and determined that future compensation would increase at rates between 3.30 percent and 10.10 percent per year, depending upon the employee's age. Based upon the current active participants, the average assumed compensation increase used to determine benefit obligations for 2011 and 2010 was 4.43 percent and 4.41 percent, respectively. Mortality. Mortality assumptions are based on the results obtained from a recent actual company experience study performed which included retirees as well as other plan participants. TVA obtained an updated study in 2008 and, accordingly, adjusted the mortality rates from the 1983 Group Annuity Mortality Tables to the RP-2000 Mortality Tables. During 2010, company experience was reexamined and it was determined that TVA’s mortality experience has continued to improve. As a result, TVA adjusted the mortality rates to RP-2000 Combined Healthy Mortality table projected to 2013 using scale AA at September 30, 2010. There were no changes to the mortality assumptions in 2011. Health Care Cost Trends. TVA reviews actual recent cost trends and projected future trends in establishing health care cost trend rates. The assumed health care trend rate used for 2011 and 2010 was 8.0 percent. The 2011 health care cost trend rate of 8.0 percent used to determine benefit obligations is assumed to gradually decrease each successive year until it reaches a 5.0 percent annual increase in health care costs in the years beginning October 1, 2017, and beyond. Cost of Living Adjustment. The qualified defined benefit pension plan includes a COLA that is generally indexed against the CPI, subject to a floor and ceiling. The CPI fell during 2009, and market-based measures of inflation expectations at the end of 2009 projected slow growth in the CPI through 2015. Additionally, the COLA was temporarily reduced for a four-year period beginning January 1, 2010 for current retirees, and the eligibility for the COLA was changed to age 60 for employees retiring on or after January 1, 2010. The COLA assumption has been 2.5 percent since 2009. Due to stabilizing long-term expectations, TVA determined the COLA assumption should be held at 2.5 percent at September 30, 2011. Sensitivity of Costs to Changes in Assumptions. The following chart reflects the sensitivity of pension cost to changes in certain actuarial assumptions:
Sensitivity to Certain Changes in Pension Assumptions At September 30, 2011
Actuarial Assumption |  | Change in Assumption |  | Impact on 2012 Pension Cost |  | Impact on 2012 Projected Benefit Obligation
Discount rate |  | (0.25 | )% |  | $ | 18 |  |  | $ | 332 |
Rate of return on plan assets |  | (0.25 | )% |  | 15 |  |  | N/A |
Each fluctuation above assumes that the other components of the calculation are held constant and excludes any impact for unamortized actuarial gains or losses. The following chart reflects the sensitivity of post-retirement benefit cost to changes in the health care trend rate:
Sensitivity to Changes in Assumed Health Care Cost Trend Rates At September 30, 2011
| 1% Increase |  | 1% Decrease
Effect on total of service and interest cost components | $ | 5 |  |  | $ | (6 | )
Effect on end-of-year accumulated post-retirement benefit obligation | 293 |  |  | (132 | )
Each fluctuation above assumes that the other components of the calculation are held constant and excludes any impact for unamortized actuarial gains or losses. Plan Investments The qualified defined benefit pension plan, which includes the Original Benefit Structure and the Cash Balance Benefit Structure, is the only plan that includes qualified plan assets. The plan assets are primarily stocks and bonds. In September 2011, the TVARS Board approved a long-term investment plan with the goal of reaching a fully funded and "de-risked" status. The investment plan is referred to as an asset allocation policy and contains a "dynamic de-risking" strategy that calls for investments to be shifted into assets that better match the liability, such as long duration fixed income securities, over time as funding targets are met. The new policy targets an initial allocation of 50 percent equity securities, 38 percent fixed income securities, and 12 percent alternative investments. The TVARS asset allocation policy includes permissible deviations from these target allocations. The TVARS Board can take action, as appropriate, to rebalance the system’s assets consistent with the asset allocation policy. At September 30, 2011 and 2010, the asset holdings of the system included the following:
Asset Holdings of TVARS At September 30
|  |  |  | Plan Assets at September 30
Asset Category |  | Target Allocation |  | 2011 |  | 2010
U.S. equity securities |  | 22.50 | % |  | 20.37 | % |  | 22.46 | %
Non-U.S. equity securities |  | 22.50 | % |  | 19.54 | % |  | 23.30 | %
Private equity holdings or similar alternative investments |  | 10.00 | % |  | 10.94 | % |  | 9.98 | %
Private real estate holdings |  | 5.00 | % |  | 4.26 | % |  | 1.93 | %
Fixed income securities |  | 31.00 | % |  | 34.43 | % |  | 32.87 | %
High yield securities |  | 9.00 | % |  | 9.53 | % |  | 8.66 | %
Cash and equivalents |  | — | % |  | 0.93 | % |  | 0.80 | %
Total |  | 100.00 | % |  | 100.00 | % |  | 100.00 | %
Fair Value Measurements The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2011:
TVA Retirement System At September 30, 2011
| Total(1) (2) |  | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Assets |  |  |  |  |  |  |
Equity securities | $ | 1,045 |  |  | $ | 1,045 |  |  | $ | — |  |  | $ | — |
Preferred securities | 20 |  |  | 15 |  |  | — |  |  | 5 |
Debt securities |  |  |  |  |  |  |  |  |  |
Corporate debt securities | 1,276 |  |  | — |  |  | 1,275 |  |  | 1 |
Residential mortgage-backed securities | 455 |  |  | — |  |  | 450 |  |  | 5 |
Debt securities issued by U.S. Treasury and other U.S. government agencies | 454 |  |  | 450 |  |  | 4 |  |  | — |
Debt securities issued by foreign governments | 35 |  |  | — |  |  | 35 |  |  | — |
Asset-backed securities | 102 |  |  | — |  |  | 93 |  |  | 9 |
Debt securities issued by state/local governments | 40 |  |  | — |  |  | 33 |  |  | 7 |
Commercial mortgage-backed securities | 18 |  |  | — |  |  | 18 |  |  | — |
Commingled Funds |  |  |  |  |  |  |  |  |  |  |
Equity | 924 |  |  | — |  |  | 924 |  |  | — |
Debt | 779 |  |  | — |  |  | 779 |  |  | — |
Blended | 300 |  |  | — |  |  | 300 |  |  | — |
Institutional mutual funds | 51 |  |  | 51 |  |  | — |  |  | — |
Cash equivalents | 599 |  |  | 1 |  |  | 598 |  |  | — |
Private equity funds | 481 |  |  | — |  |  | — |  |  | 481 |
Private real estate funds | 326 |  |  | — |  |  | 21 |  |  | 305 |
Treasury bills, U.S. Government notes and securities held as futures and other derivative collateral | 57 |  |  | 28 |  |  | 29 |  |  | — |
Securities lending commingled funds | 3 |  |  | — |  |  | 3 |  |  | — |
Derivatives |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward receivable | 599 |  |  | — |  |  | 599 |  |  | — |
Interest rate swaps | 4 |  |  | — |  |  | 4 |  |  | — |
Purchased options | 1 |  |  | — |  |  | 1 |  |  | — |
Total Assets | $ | 7,569 |  |  | $ | 1,590 |  |  | $ | 5,166 |  |  | $ | 813 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward payable | $ | 601 |  |  | $ | — |  |  | $ | 601 |  |  | $ | — |
Futures | 17 |  |  | 17 |  |  | — |  |  | — |
Credit default swaps | 5 |  |  | — |  |  | 5 |  |  | — |
Written option obligations | 3 |  |  | — |  |  | 3 |  |  | — |
Total Liabilities | $ | 626 |  |  | $ | 17 |  |  | $ | 609 |  |  | $ | — |
Notes (1) Excludes approximately $394 million in net payables associated with security purchases and sales and various other payables. (2) Excludes a $3 million payable for collateral on loaned securities in connection with TVARS’s participation in securities lending programs.
The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2010:
TVA Retirement System At September 30, 2010
| Total(1) (2) |  | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Assets |  |  |  |  |  |  |
Equity securities | $ | 706 |  |  | $ | 706 |  |  | $ | — |  |  | $ | — |
Debt securities |  |  |  |  |  |  |  |  |  |
Corporate debt securities | 1,180 |  |  | — |  |  | 1,180 |  |  | — |
Residential mortgage-backed securities | 430 |  |  | — |  |  | 430 |  |  | — |
Debt securities issued by U.S. Treasury and other U.S. government agencies | 430 |  |  | 426 |  |  | 4 |  |  | — |
Debt securities issued by foreign governments | 177 |  |  | — |  |  | 177 |  |  | — |
Asset-backed securities | 100 |  |  | — |  |  | 100 |  |  | — |
Debt securities issued by state/local governments | 20 |  |  | — |  |  | 20 |  |  | — |
Commercial mortgage-backed securities | 4 |  |  | — |  |  | 4 |  |  | — |
Commingled Funds |  |  |  |  |  |  |  |  |  |  |
Equity | 1,733 |  |  | — |  |  | 1,733 |  |  | — |
Debt | 766 |  |  | — |  |  | 766 |  |  | — |
Blended | 318 |  |  | — |  |  | 318 |  |  | — |
Cash equivalents | 410 |  |  | 3 |  |  | 407 |  |  | — |
Private equity funds | 492 |  |  | — |  |  | — |  |  | 492 |
Private real estate funds | 180 |  |  | — |  |  | 22 |  |  | 158 |
Treasury bills, U.S. Government notes and securities held as futures and other derivative collateral | 46 |  |  | 29 |  |  | 17 |  |  | — |
Securities lending commingled funds | 7 |  |  | — |  |  | 7 |  |  | — |
Derivatives |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward receivable | 737 |  |  | — |  |  | 737 |  |  | — |
Futures | 19 |  |  | 19 |  |  | — |  |  | — |
Purchased options | 1 |  |  | — |  |  | 1 |  |  | — |
Total Assets | $ | 7,756 |  |  | $ | 1,183 |  |  | $ | 5,923 |  |  | $ | 650 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward payable | $ | 742 |  |  | $ | — |  |  | $ | 742 |  |  | $ | — |
Interest rate swaps | 2 |  |  | — |  |  | 2 |  |  | — |
Credit default swaps | 1 |  |  | — |  |  | 1 |  |  | — |
Written option obligations | 3 |  |  | 1 |  |  | 2 |  |  | — |
Total Liabilities | $ | 748 |  |  | $ | 1 |  |  | $ | 747 |  |  | $ | — |
Notes (1) Excludes approximately $208 million in net payables and receivables associated with security purchases and sales. (2) Excludes a $7 million payable for collateral on loaned securities in connection with TVARS’s participation in securities lending programs.
The following table provides a reconciliation of beginning and ending balances of pension plan assets measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs For the year ended September 30, 2011
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance at October 1, 2009 | $ | 458 |
Net realized/unrealized depreciation | 75 |
Purchases, sales, issuances, and settlements (net) | 117 |
Balance at September 30, 2010 | 650 |
Net realized/unrealized depreciation | 30 |
Purchases, sales, issuances, and settlements (net) | 118 |
Transfers in and/or out of Level 3 | 15 |
Balance at September 30, 2011 | $ | 813 |
Vendor-provided prices for the pension plan's investments are subjected to automated tolerance checks by the trustee to identify and avoid, where possible, the use of inaccurate prices. Any questionable prices identified are reported to the vendor which provided the price. If the prices are validated, the primary pricing source is used. If not, a secondary source price that has passed the applicable tolerance check is used (or queried with the vendor if it is out of tolerance), resulting in either the use of a secondary price, where validated, or the last reported default price, as in the case of a missing price. For monthly valued accounts, where secondary price sources are available, an automated inter-source tolerance report identifies prices with an inter-vendor pricing variance of over two percent at an asset class level. For daily valued accounts, each security is assigned, where possible, an indicative major market index, against which daily price movements are automatically compared. Tolerance thresholds are established by asset class. Prices found to be outside of the applicable tolerance threshold are reported and queried with vendors as described above. Equities. Investment securities, including common stock and mutual funds, listed on either a national or foreign securities exchange or traded in the over-the-counter market are generally valued each business day at the official closing price (typically the last reported sale price) on the exchange on which the security is primarily traded. If there are no current day sales, the securities are valued at their last quoted bid price. Equities priced by an exchange in an active market are classified as Level 1. Preferred Securities. Preferred securities are valued at their quoted market price (Level 1 inputs), or in such instances where quoted market prices are unavailable, the fair value is estimated based on yields currently available on comparable securities of issues with similar credit ratings (Level 2 inputs). Certain preferred securities that are priced using unobservable inputs have been classified as Level 3. Corporate Debt Securities. Corporate bonds are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models developed by sources considered by TVA to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). Certain corporate debt securities priced using unobservable inputs have been classified as Level 3. Residential Mortgage-Backed Securities. Residential mortgage-backed securities consist of collateralized mortgage obligations ("CMOs") and U.S. pass-through securities pools related to government-sponsored enterprises ("GSE"). CMO pricing is typically based on either a volatility-driven, multidimensional single cash flow stream model or an option-adjusted spread model. These models incorporate available market data such as trade information, dealer quotes, market color, spreads, bids and offers. Pricing for GSE securities, including the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association, is typically based on quotes from the To Be Announced ("TBA") market, which is highly liquid with multiple electronic platforms that facilitate the execution of trading between investors and broker/dealers. Prices from the TBA market are then compared against other live data feeds as well as input obtained directly from the dealer community. A tolerance check, adjusted dynamically in response to market conditions, is applied to check for consistency across the trading platforms and dealer quotes. If discrepancies are identified, the data is reviewed to resolve the differences and determine an appropriate evaluation. Residential mortgage-backed securities are considered to be priced using Level 2 inputs because of the nature of their market-data-based pricing models with the exception of certain securities priced using unobservable inputs, which are classified as Level 3. U.S. Treasury and Agency Securities. For U.S. Treasury securities, fair values reflect the closing price reported in the active market in which the security is traded (Level 1 inputs). Agency securities are typically priced using evaluated pricing applications and models incorporating U.S. Treasury yield curves. Agency securities are classified as Level 2 because of the nature of their market-data-based pricing models. Debt Securities Issued by Foreign Governments. These include foreign government bonds and foreign government inflation linked securities. They are typically priced based on proprietary discounted cash flow models, incorporating option-adjusted spread features as appropriate. Debt securities issued by foreign governments are classified as Level 2 because of the nature of their market-data-based pricing models. Asset-Backed Securities. Asset-backed securities are typically priced based on a single cash-flow stream model, which incorporates available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Because of the market-data-based nature of such pricing models, asset-backed securities are classified as Level 2 with the exception of certain securities priced using unobservable inputs, which are classified as Level 3. Debt Securities Issued by State and Local Governments. Debt securities issued by state and local governments are typically priced using market-data-based pricing models, and are therefore classified as Level 2. These pricing models incorporate market data such as quotes, trading levels, spread relationships, and yield curves, as applicable. Certain debt securities issued by state and local governments priced using unobservable inputs have been classified as Level 3. Commercial Mortgage-Backed Securities. Commercial mortgage-backed securities are typically priced based on a single cash flow stream model which incorporates available market data such as trade information, dealer quotes, market color, spreads, bids, and offers. Because of the market-data-based nature of such pricing models, commercial mortgage-backed securities are classified as Level 2. Private Equity Funds. Private equity limited partnerships and other similar alternative investments are reported at fair value, which is derived by independent appraisals or investment management judgment. The inputs used by the general partners in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments or comparable issues, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. These investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from the value ultimately realized by the partnership. The private equity managers recognize realized gains or losses when they receive income or dispose of an investment. The net realized capital gains or losses, which include management fees and fund expenses, are allocated to the partners in proportion to their commitments. The private equity values are prepared by the fund managers and classified as Level 3. The private equity limited partnerships typically make longer-term investments in private companies and seek to obtain financial returns through long-term appreciation based on corporate stewardship, improved operating processes, and financial restructuring, which may involve a merger or acquisition. Significant investment strategies include: venture capital; buyout; mezzanine/subordinate debt; restructuring or distressed debt; and special situations. Venture capital partnerships consist of two main groupings. Early-stage venture capital partnerships invest in businesses still in the conceptual stage where products may not be fully developed and where revenues and/or profits may be several years away. Later-stage venture capital partnerships invest in more mature companies in need of growth or expansion capital. Buyout partnerships provide the equity capital for acquisition transactions either from a private seller or the public, which may represent the purchase of the entire company or a refinancing or recapitalization transaction where equity is invested. Mezzanine/subordinated debt partnerships provide the intermediate capital between equity and senior debt in a buyout or refinancing transaction and typically own a security in the company which carries current interest payments as well as a potential equity interest in the company. Restructuring/distressed debt partnerships purchase opportunities generated by overleveraged or poorly managed companies. Special situations partnerships include organizations with a specific industry focus not covered by the other private equity subclasses or unique opportunities which fall outside the regular subclasses. Private Real Estate Funds. The pension plan invests in commingled funds that invest in a wide variety of real estate opportunities and timberland investments. The valuation methodologies for these investments are as follows: The pension plan is invested in a limited partnership formed for the purpose of providing investors with enhanced risk-adjusted total returns through long-biased opportunistic investments principally in mortgage and/or real estate-related fixed income instruments and related securities. This fund is invested primarily in mortgage-backed securities and asset-backed securities. Due to the market-data-based nature of the pricing models used for these types of securities, as described above, they are classified as Level 2. The pension plan is invested in a private real estate investment trust formed to make direct or indirect investments i commercial timberland properties. Pricing for these types of investments is based on comprehensive appraisals that are conducted shortly after initial purchase of properties and at three-year intervals thereafter. All appraisals are conducted by third-party timberland appraisal firms. Appraisals are based on either a sales comparison analysis or a discounted cash flow analysis. Due to the inherent uncertainty of the valuation methodology, these investments are classified as Level 3. The pension plan is invested in certain private real estate commingled funds that consist primarily of real estate investments, either directly owned or through partnership interests, and mortgage and other loans on income-producing real estate. Fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The appraisals are based on one or a combination of three methodologies: cost of reproduction analysis, discounted cash flow analysis, and sales comparison analysis. In general, the input values used in the appraisal process are unobservable; therefore, these funds are classified as Level 3. Derivatives. The pension plan invests in a variety of derivative instruments. The valuation methodologies for these instruments are as follows: Futures. The pension plan enters into equity futures, foreign currency futures, and interest rate futures. The futures contracts are listed on either a national or foreign securities exchange and generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. The pricing is performed by third-party vendors. Since futures are priced by an exchange in an active market, they are classified as Level 1. Options. The pension plan enters into interest rate options, foreign currency options, and fixed income options. Options that are listed on either a national or foreign securities exchange are generally valued each business day at the official closing price (typically the last reported sales price) on the exchange on which the security is primarily traded. These options are classified as Level 1 and include both written and purchased options on Treasury note futures and Eurodollar futures. Options traded over the counter and not in exchanges are priced by third-party vendors and are classified as Level 2. These include both written and purchased options on interest rate swaps. Swaps. The pension plan enters into various types of swaps. Credit default swaps are priced at market using models that consider cash flows, credit curves, recovery rates, and other factors. The pricing is performed by third party vendors. Interest rate swap contracts are priced at market using forward rates derived from the swap curve, and the pricing is also performed by third-party vendors. Other swaps such as currency swaps and total return swaps are priced by third-party vendors using market inputs such as spot rates and yield curves. All swaps are classified as Level 2. Foreign Currency Forwards. The pension plan enters into foreign currency forwards. All commitments are marked to market daily at the applicable translation rates, and any resulting unrealized gains or losses are recorded. Foreign currency forwards are priced by third-party vendors and are classified as Level 2. Commingled Funds. The pension plan invests in commingled funds which include collective trusts, unit investment trusts, and similar investment funds that predominantly hold debt and/or equity securities as underlying assets. The pension plan's ownership consists of a pro rata share and not a direct ownership of an underlying investment. These commingled funds are valued at their closing net asset values (or unit value) per share as reported by the managers of the commingled funds and as supported by the unit prices of actual purchase and sale transactions, occurring as of or close to the financial statement date (Level 2 inputs). The pension plan is invested in equity commingled funds which can be categorized as either passively-managed index funds or actively-managed funds. The equity index funds seek to track the performance of a particular index by replicating its capitalization and characteristics. Passive fund benchmark indices include the Russell 1000 index, the S&P 500 index, and the Morgan Stanley Capital International All Country World Index ex-U.S. The actively-managed equity funds seek to outperform certain equity benchmarks through a combination of fundamental and technical analysis. Active funds select portfolio positions based upon their research. The pension plan is invested in debt commingled funds which can be categorized as either passively-managed index funds or actively-managed funds. The pension plan's debt index fund invests in a diversified portfolio of fixed income securities and derivatives of varying maturities to replicate the characteristics of the Barclays Capital US Aggregate Bond index. The fund seeks to track the total return of the Barclays Capital US Aggregate Bond index. The actively-managed debt funds seek to outperform certain fixed-income benchmarks through fundamental research and analysis. The funds invest in a diversified portfolio of fixed income securities and derivatives of varying maturities. The objective is to achieve a positive relative total return through active credit selection. The pension plan is invested in commingled funds which invest across multiple asset classes that can be categorized as blended. These funds seek to outperform a passive benchmark through active security selection. The funds invest in securities across equity, fixed income, currency, and commodities. The portfolios employ fundamental, quantitative, and technical analysis. Institutional Mutual Funds. Participation units of institutional mutual funds are stated at their quoted redemption values as reported by the investment managers based on their net asset values, which reflect the fair values of the underlying investments. These funds are traded at published net asset values in an active market (Level 1 inputs). Cash Collateral Held under Securities Lending Arrangements. Fair value has been determined to approximate the deposit account balances held in cash collateral pools (Level 2 inputs). Cash Equivalents and Other Short-Term Investments. Cash equivalents and other short-term investments are highly liquid securities with a maturity of less than three months and 12 months, respectively. These consist primarily of U.S. Treasury securities, residential mortgage-backed securities, commercial paper, corporate bonds, asset-backed securities, and certificates of deposit. U.S. Treasury securities are priced based on Level 1 inputs as described above. The other types of cash equivalent securities and other short-term investments, as described above, are priced using models that incorporate market-based inputs and are therefore classified as Level 2. The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while TVA believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Cash Flows Estimated Future Benefit Payments. The following table sets forth the estimated future benefit payments under the benefit plans.
Estimated Future Benefits Payments At September 30, 2011
| Pension Benefits |  | Other Post-Retirement Benefits
2012 | $ | 717 |  |  | $ | 40 |
2013 | 707 |  |  | 41 |
2014 | 708 |  |  | 43 |
2015 | 713 |  |  | 44 |
2016 | 716 |  |  | 46 |
2017 - 2021 | 3,609 |  |  | 235 |
Contributions. In 2011, TVA made contributions of $270 million to the defined benefit pension plan, $4 million to the SERP, and $38 million to the other post-retirement benefit plans. In addition, TVA expects to contribute $6 million to the SERP and $40 million to the other post-retirement benefit plans in 2012. The TVA Board has authorized the Chief Executive Officer to approve TVA making a discretionary contribution of up to $300 million to the defined benefit pension plan for 2012 subject to a review by the Finance, Rates and Portfolio Committee of the TVA Board. At this time, management has not determined whether the contribution will be made. Other Post-Employment Benefits Post-employment benefit cost estimates are revised to properly reflect changes in actuarial assumptions made at the end of the year. TVA utilizes a discount rate determined by reference to the U.S. Treasury Constant Maturities corresponding to calculated average durations of TVA’s future estimated post-employment claims payments. The use of a 1.92 percent discount rate resulted in the recognition of approximately $81 million in expenses in 2011 and an unpaid benefit obligation of about $596 million at September 30, 2011. The current portion of the obligation is $53 million and is recorded in Accounts payable and accrued liabilities. The long-term portion of $543 million is recorded in Post-retirement and post-employment benefit obligations. TVA utilized discount rates of 2.53 percent and 3.31 percent in 2010 and 2009, respectively. The use of these discount rates resulted in expense and unpaid benefit obligations of $141 million and $570 million, respectively, for 2010 and expense and unpaid benefit obligations of $47 million and $484 million, respectively, for 2009. The decrease in the 2011 discount rate increased the expense for 2011, but the overall expense decreased for 2011 in comparison to 2010. In 2010, TVA made changes in the actuarial methods and assumptions for the September 30, 2010 actuarial valuation for other post-employment benefits. These changes stemmed from review of and recognition of developing trends in TVA’s post-employment claims experience. The result of the changes and the decrease in the discount rate increased both the expense and unpaid benefit obligation for 2010.

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