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Fair Value Measurements | 3 Months Ended
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Dec. 31, 2013
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 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 3 is the lowest and Level 1 is the highest) 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 assets, all changes in fair value of these assets and liabilities have been reflected as changes in regulatory assets, regulatory liabilities, or accumulated other comprehensive loss on TVA's Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss). Except for gains and losses on SERP 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. Investments At December 31, 2013, Investment funds were composed of $1.8 billion of securities classified as trading and measured at fair value and $1 million of equity investments not required to be measured at fair value. Trading securities are held in the NDT, ART, and SERP. 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. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits set by Internal Revenue Service rules applicable to the qualified defined benefit pension plan. The NDT and SERP are invested in a mix of investments generally designed to achieve a return in line with overall equity market performance, and the ART is invested in a mix of investments generally designed to achieve a return in line with equity and fixed-income market performance. The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers. Most U.S. and international equities, 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 partnership investments may include holdings of investments in private real estate, venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations through funds managed by third-party investment managers. Investments in private partnerships generally involve a three-to-four-year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, ten years or longer. The NDT had unfunded commitments related to private partnerships of $141 million at December 31, 2013. These investments have no redemption or limited redemption options and may also have imposed restrictions on the NDT’s ability to liquidate its investment. There are no readily available quoted exchange prices for these investments. The fair value of the investments is based on TVA’s ownership percentage of the fair value of the underlying investments as provided by the investment managers. These investments are typically valued on a quarterly basis. TVA’s private partnership 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 Level 3 within the fair value hierarchy. Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART, and SERP consist of 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 (Level 1) or measured using observable inputs for similar instruments (Level 2). 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 Level 2 valuations. Realized and unrealized gains and losses on trading 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 liability or asset account in accordance with TVA's regulatory accounting policy. See Note 1 — Cost-Based Regulation. 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 |  | 2013 |  | 2012 |
SERP | Other income (expense) |  | $ | 1 |  |  | $ | — |  |
NDT | Regulatory asset |  | 30 |  |  | 13 |  |
ART | Regulatory asset |  | 15 |  |  | 4 |  |
Currency and Interest Rate Swaps See Note 14 — Cash 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 FTP Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches. TVA develops an overall coal price forecast using widely used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs. Commodity Derivatives Under FTP. These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange ("CME") quoted prices and other observable inputs. Futures and options contracts settled on the CME are classified as Level 1 valuations. Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations. See Note 14 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and — Derivatives Under FTP for a discussion of the nature and purpose of coal contracts and derivatives under TVA's FTP. 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 initial 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 company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2011) 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, 2013. 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, 2013, and September 30, 2013. 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, 2013
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 | $ | 169 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 169 |
Debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies | 53 |  |  | 64 |  |  | — |  |  | — |  |  | 117 |
Corporate debt securities | — |  |  | 314 |  |  | — |  |  | — |  |  | 314 |
Residential mortgage-backed securities | — |  |  | 25 |  |  | — |  |  | — |  |  | 25 |
Commercial mortgage-backed securities | — |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Collateralized debt obligations | — |  |  | 8 |  |  | — |  |  | — |  |  | 8 |
Private partnerships | — |  |  | — |  |  | 169 |  |  | — |  |  | 169 |
Commingled funds(2) |  |  |  |  |  |  |  |  |  |  |  |  |
Equity security commingled funds | — |  |  | 883 |  |  | — |  |  | — |  |  | 883 |
Debt security commingled funds | — |  |  | 104 |  |  | — |  |  | — |  |  | 104 |
Total investments | 222 |  |  | 1,401 |  |  | 169 |  |  | — |  |  | 1,792 |
Currency swaps | — |  |  | 78 |  |  | — |  |  | (74 | ) |  | 4 |
Commodity contract derivatives | — |  |  | — |  |  | 4 |  |  | — |  |  | 4 |
Commodity derivatives under FTP |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts | — |  |  | 70 |  |  | — |  |  | (69 | ) |  | 1 |
Total | $ | 222 |  |  | $ | 1,549 |  |  | $ | 173 |  |  | $ | (143 | ) |  | $ | 1,801 |
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 | $ | — |  |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |
Interest rate swaps | — |  |  | 1,060 |  |  | — |  |  | — |  |  | 1,060 |
Commodity contract derivatives | — |  |  | 1 |  |  | 149 |  |  | — |  |  | 150 |
Commodity derivatives under FTP |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts | — |  |  | 202 |  |  | — |  |  | (152 | ) |  | 50 |
Total | $ | — |  |  | $ | 1,275 |  |  | $ | 149 |  |  | $ | (152 | ) |  | $ | 1,272 |
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 FCM. Deposits are made to TVA's margin cash accounts held with each FCM to offset any net liability positions in full for derivatives that are transacted with FCMs. TVA records currency swaps net of cash collateral received from or paid to the counterparty. (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 primarily composed of one class of security are classified in that category.
Fair Value Measurements At September 30, 2013
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 | $ | 151 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 151 |
Debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government corporations and agencies | 38 |  |  | 67 |  |  | — |  |  | — |  |  | 105 |
Corporate debt securities | — |  |  | 255 |  |  | — |  |  | — |  |  | 255 |
Residential mortgage-backed securities | — |  |  | 25 |  |  | — |  |  | — |  |  | 25 |
Commercial mortgage-backed securities | — |  |  | 7 |  |  | — |  |  | — |  |  | 7 |
Collateralized debt obligations | — |  |  | 10 |  |  | — |  |  | — |  |  | 10 |
Private partnerships | — |  |  | — |  |  | 159 |  |  | — |  |  | 159 |
Commingled funds(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity security commingled funds | — |  |  | 741 |  |  | — |  |  | — |  |  | 741 |
Debt security commingled funds | — |  |  | 248 |  |  | — |  |  | — |  |  | 248 |
Total investments | 189 |  |  | 1,353 |  |  | 159 |  |  | — |  |  | 1,701 |
Currency swaps | — |  |  | 61 |  |  | — |  |  | (33 | ) |  | 28 |
Commodity contract derivatives | — |  |  | — |  |  | 3 |  |  | — |  |  | 3 |
Commodity derivatives under FTP |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts | — |  |  | 101 |  |  | — |  |  | (98 | ) |  | 3 |
Total | $ | 189 |  |  | $ | 1,515 |  |  | $ | 162 |  |  | $ | (131 | ) |  | $ | 1,735 |
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 | $ | — |  |  | $ | 15 |  |  | $ | — |  |  | $ | — |  |  | $ | 15 |
Interest rate swaps | — |  |  | 1,199 |  |  | — |  |  | — |  |  | 1,199 |
Commodity contract derivatives | — |  |  | 1 |  |  | 143 |  |  | — |  |  | 144 |
Commodity derivatives under FTP |  |  |  |  |  |  |  |  |  |  |  |  |  |
Swap contracts | — |  |  | 267 |  |  | — |  |  | (198 | ) |  | 69 |
Total | $ | — |  |  | $ | 1,482 |  |  | $ | 143 |  |  | $ | (198 | ) |  | $ | 1,427 |
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 FCM. Deposits are made to TVA's margin cash accounts held with each FCM to offset any net liability positions in full for derivatives that are transacted with FCMs. TVA records currency swaps net of cash collateral received from or paid to the counterparty. (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 primarily composed of one class of security are classified in that category. TVA uses internal and external valuation specialists for the calculation of its fair value measurements classified as Level 3. Analytical testing is performed on the change in fair value measurements each period to ensure the valuation is reasonable based on changes in general market assumptions. Significant changes to the estimated data used for unobservable inputs, in isolation or combination, may result in significant variations to the fair value measurement reported. 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 |  |
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 | ) |  |
Balance at September 30, 2013 | $ | 159 |  |  | $ | (140 | ) |  |
Purchases | 8 |  |  | — |  |  |
Issuances | — |  |  | — |  |  |
Sales | (2 | ) |  | — |  |  |
Settlements | — |  |  | — |  |  |
Net unrealized gains (losses) deferred as regulatory assets and liabilities | 4 |  |  | (5 | ) |  |
Balance at December 31, 2013 | $ | 169 |  |  | $ | (145 | ) |  |
There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected net income during the three months ended December 31, 2013. All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 7. 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, 2013 |  | Valuation Technique(s) |  | Unobservable Inputs |  | Range |
Assets |  |  |  |  |  |  |  |
Commodity contract derivatives | $ | 4 |  |  | Discounted cash flow |  | Credit risk |  | 18 | % | *
|  |  | Pricing model |  | Coal supply and demand |  | .9 - 1.0 billion tons/year |  |
|  |  |  |  | Long-term market prices |  | $11.90 - $85.25/ton |  |
Liabilities |  |  |  |  |  |  |  |
Commodity contract derivatives | $ | 149 |  |  | Pricing model |  | Coal supply and demand |  | .9 - 1.0 billion tons/year |  |
|  |  |  |  | Long-term market prices |  | $11.90 - $85.25/ton |  |
* Applies to only one contract. Other Financial Instruments Not Recorded at Fair Value TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument. The fair values of the financial instruments held at December 31, 2013, and September 30, 2013, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at December 31, 2013, and September 30, 2013, were as follows:
Estimated Values of Financial Instruments Not Recorded at Fair Value
|  |  | At December 31, 2013 |  | At September 30, 2013
| Valuation Classification |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
EnergyRight® receivables (including current portion) | Level 2 |  | $ | 151 |  |  | $ | 151 |  |  | $ | 150 |  |  | $ | 150 |
Loans and other long-term receivables, net | Level 2 |  | $ | 79 |  |  | $ | 71 |  |  | $ | 73 |  |  | $ | 67 |
EnergyRight® purchase obligation (including current portion) | Level 2 |  | $ | 186 |  |  | $ | 205 |  |  | $ | 186 |  |  | $ | 210 |
Membership interest of variable interest entity subject to mandatory redemption (including current portion) | Level 2 |  | $ | 40 |  |  | $ | 50 |  |  | $ | 40 |  |  | $ | 50 |
Long-term outstanding power bonds (including current maturities), net | Level 2 |  | $ | 22,364 |  |  | $ | 22,983 |  |  | $ | 22,347 |  |  | $ | 24,603 |
Long-term debt of variable interest entities (including current maturities) | Level 2 |  | $ | 1,341 |  |  | $ | 1,381 |  |  | $ | 1,341 |  |  | $ | 1,386 |
Due to the short-term maturity of Cash and cash equivalents, Restricted cash and investments, and Short-term debt, net, each considered a Level 1 valuation classification, the carrying amounts of these instruments approximate their fair values. The fair values of the EnergyRight® Solutions receivables and loans and other long-term receivables are estimated by determining the present values of future cash flows using discount rates equal to lending rates for similar loans made to borrowers with similar credit ratings and similar remaining maturities, where applicable. The fair value of the long-term debt traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date. The fair values of the EnergyRight® Solutions purchase obligation and other long-term debt are estimated by determining the present value of future cash flows using current market rates for similar obligations, giving effect to credit ratings and remaining maturities.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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