Fair Value Measurements (Tables)

3 Months Ended

Dec. 31, 2012

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.

Unrealized Investments Gains (Losses)

TVA recorded unrealized gains and losses related to its trading securities held as of the end of each period as follows:



	Unrealized Investment Gains (Losses)
		For the Three Months Ended December 31
	Financial Statement Presentation	2012		2011

SERP	Other income (expense)	$	—	$	1
NDT	Regulatory asset	13		58
ART	Regulatory asset	4		9

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 as of December 31, 2012, and September 30, 2012.



Fair Value Measurements At December 31, 2012
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting⁽¹⁾			Total

Investments
Equity securities	$	135	$	—	$	—	$	—		$	135
Debt securities
U.S. government corporations and agencies	74		97		—		—			171
Corporate debt securities	—		207		—		—			207
Residential mortgage-backed securities	—		12		—		—			12
Commercial mortgage-backed securities	—		15		—		—			15
Collateralized debt obligations	—		14		—		—			14
Private partnerships	—		—		66		—			66
Commingled funds⁽²⁾
Equity security commingled funds	—		657		—		—			657
Debt security commingled funds	—		211		—		—			211
Total investments	209		1,213		66		—			1,488
Currency swaps	—		34		—		—			34
Commodity contract derivatives	—		—		111		—			111
Commodity derivatives under FTP
Swap contracts	—		124		—		(120		)	4

Total	$	209	$	1,371	$	177	$	(120	)	$	1,637

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

Currency swaps	—		34		—		—			34
Interest rate swaps	—		1,609		—		—			1,609
Commodity contract derivatives	—		—		335		—			335
Commodity derivatives under FTP
Swap contracts	—		364		—		(120		)	244

Total	$	—	$	2,007	$	335	$	(120	)	$	2,222

Notes

(1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker.

(2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”



Fair Value Measurements At September 30, 2012
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting⁽¹⁾			Total

Investments
Equity securities	$	173	$	—	$	—	$	—		$	173
Debt securities
U.S. government corporations and agencies	59		103		—		—			162
Corporate debt securities	—		197		—		—			197
Residential mortgage-backed securities	—		20		—		—			20
Commercial mortgage-backed securities	—		6		—		—			6
Collateralized debt obligations	—		12		—		—			12
Private partnerships	—		—		53		—			53
Commingled funds⁽²⁾
Equity security commingled funds	—		657		—		—			657
Debt security commingled funds	—		182		—		—			182
Total investments	232		1,177		53		—			1,462
Currency swaps	—		21		—		—			21
Commodity contract derivatives	—		—		119		—			119
Commodity derivatives under FTP
Swap contracts	—		123		—		(115		)	8

Total	$	232	$	1,321	$	172	$	(115	)	$	1,610

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

Currency swaps	—		54		—		—			54
Interest rate swaps	—		1,723		—		—			1,723
Commodity contract derivatives	—		—		386		—			386
Commodity derivatives under FTP
Swap contracts	—		351		—		(115		)	236

Total	$	—	$	2,128	$	386	$	(115	)	$	2,399

Notes

(1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):



Fair Value Measurements Using Significant Unobservable Inputs For the Three Months Ended December 31
	Private Partnerships			Commodity Contract Derivatives			Interest Rate Swaption
Balance at September 30, 2011	$	22		$	239		$	(1,077	)
Purchases	6			—			—
Issuances	—			—			—
Sales	(1		)	—			—
Settlements	—			—			—
Net unrealized gains (losses) deferred as regulatory assets and liabilities	1			(235		)	(51		)
Balance at December 31, 2011	$	28		$	4		$	(1,128	)

Balance at September 30, 2012	$	53		$	(267	)	$	—
Purchases	12			—			—
Issuances	—			—			—
Sales	(1		)	—			—
Settlements	—			—			—
Net unrealized gains (losses) deferred as regulatory assets and liabilities	2			43			—
Balance at December 31, 2012	$	66		$	(224	)	$	—

The following table presents quantitative information related to the significant unobservable inputs used in the measurement of fair value of TVA's assets and liabilities classified as Level 3 in the fair value hierarchy:



Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31 2012		Valuation Technique(s)	Unobservable Inputs	Range

Assets
Commodity contract derivatives	$	111	Discounted cash flow	Credit risk	28.6	%	*

			Pricing model	Coal supply and demand	1.0 - 1.1 billion tons/year
				Long-term market prices	$13.75 - $86.83/ton
Liabilities
Commodity contract derivatives	$	335	Pricing model	Coal supply and demand	1.0 - 1.1 billion tons/year
				Long-term market prices	$13.75 - $86.83/ton

* Applies to only one contract.

Estimated Values of Financial Instruments Not Recorded at Fair Value

The estimated values of TVA's financial instruments not recorded at fair value at December 31, 2012, and September 30, 2012, were as follows:



Estimated Values of Financial Instruments Not Recorded at Fair Value
		At December 31, 2012				At September 30, 2012
	Valuation Classification	Carrying Amount		Fair Value		Carrying Amount		Fair Value
EnergyRight^®receivables (including current portion)	Level 2	$	152	$	152	$	150	$	150

Loans and other long-term receivables, net	Level 2	$	80	$	73	$	76	$	70

EnergyRight^®purchase obligation (including current portion)	Level 2	$	187	$	215	$	185	$	209

Long-term outstanding power bonds (including current maturities), net	Level 2	$	23,546	$	28,990	$	22,577	$	28,041

Long-term debt of variable interest entities (including current maturities)	Level 2	$	994	$	1,122	$	994	$	1,116

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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