Benefit Plans

TVA sponsors a qualified defined benefit pension plan that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of eligible retirees' medical coverage, other postemployment benefits such as workers' compensation, and the SERP.

Overview of Plans and Benefits

Retirement Plans. TVA sponsors a qualified defined benefit pension plan and a qualified defined contribution 401(k) plan for most of its full-time annual employees hired prior to July 1, 2014, that provides two benefit structures: the Original Benefit Structure and the Cash Balance Benefit Structure. Eligible employees initially hired on or after January 1, 1996, must participate in the Cash Balance Benefit Structure. Employees hired after July 1, 2014, qualify for a retirement benefit as participants in the Employer Automatic Benefit Structure and will be eligible for a defined contribution benefit in the 401(k) plan only. A summary of the benefits provided by each structure is as follows:

•

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 eligible compensation, and a pension factor based on the member’s age and years of service, less a Social Security offset. In addition, TVA makes matching contributions of 25 cents on the dollar (up to 1.5 percent of eligible compensation) to the 401(k) plan for members participating in the Original Benefit Structure.

•

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 eligible compensation. 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 for All Urban Consumers ("CPI-U") plus three percent, with the provision that the rate may not be less than six percent or more than ten percent. The interest crediting rate was six percent for calendar years 2015 and 2014. In addition, TVA makes matching contributions of 75 cents on the dollar (up to 4.5 percent of eligible compensation) to the 401(k) plan for members participating in the Cash Balance Benefit Structure.


•	Employer Automatic Benefit Structure. Members participating in the Employer Automatic Benefit Structure receive an automatic, non-elective contribution by TVA to the 401(k) plan equal to 4.5 percent of eligible compensation and matching contributions by TVA to the 401(k) plan of 75 cents on the dollar (up to 4.5 percent of eligible compensation).

There are two investment funds within the defined benefit pension plan: the Fixed Benefit Fund and the Variable Fund. TVA's plan contributions are deposited in the Fixed Benefit Fund. Eligible employees in the Original Benefit Structure and Cash Balance Benefit Structure are allowed to make voluntary contributions to either the Variable Fund, the Fixed Fund within the Fixed Benefit Fund, or both. Employee contributions are limited to $10,000 per year per eligible employee. The pension plan pays interest at the lesser of six percent or the actuarial assumed rate of return less 0.5 percent to employees in the Fixed Fund. Employee contributions in the Fixed Fund were credited an annual rate of interest of six percent during 2015 and 2014, resulting in credit amounts of $26 million and $33 million, respectively. Employee contributions to the Variable Fund are invested in an S&P 500 Stock Index Fund.

The defined benefit pension plan and the defined contribution 401(k) plan are 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 the minimum required and recommended contributions, TVA determines the level of contribution to make to TVARS to fund the defined benefit pension plan for the upcoming fiscal year.

Members of both the Original Benefit Structure and the Cash Balance Benefit Structure can also become eligible for a supplemental pension benefit based on age and years of service at retirement, which is designed to help offset the cost of retiree medical insurance.

401(k) Plan Contributions. TVA made non-elective and matching contributions of approximately $36 million to the plan during 2015, $35 million during 2014, and $34 million during 2013.

Supplemental Executive Retirement Plan. TVA has established a 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 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 FECA. FECA provides compensation and medical 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 the funded status as regulatory assets as such amounts are probable of collection in future rates. On October 1, 2014, TVA began recognizing pension costs as regulatory assets to the extent that the amount calculated under GAAP as pension expense differs from the amount TVA contributes to the pension plan.

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, 2015 and 2014, were as follows:



Obligations and Funded Status For the years ended September 30
	Pension Benefits						Other Post-Retirement Benefits
	2015			2014			2015			2014
Change in benefit obligation
Benefit obligation at beginning of year	$	12,265		$	11,471		$	652		$	656
Service cost	130			130			16			18
Interest cost	540			558			29			32
Plan participants’ contributions	25			28			—			—
Collections⁽¹⁾	—			—			94			93
Amendments	—			2			—			—
Actuarial loss (gain)	556			722			3			(21		)
Net transfers from variable fund/401(k) plan	11			13			—			—
Expenses paid	(6		)	(6		)	—			—
Benefits paid	(697		)	(653		)	(137		)	(126		)
Benefit obligation at end of year	12,824			12,265			657			652

Change in plan assets
Fair value of net plan assets at beginning of year	7,507			7,221			—			—
Actual return on plan assets	(325		)	648			—			—
Plan participants’ contributions	25			28			—			—
Collections⁽¹⁾	—			—			94			93
Net transfers from variable fund/401(k) plan	11			13			—			—
Employer contributions⁽²⁾	282			256			43			33
Expenses paid	(6		)	(6		)	—			—
Benefits paid	(697		)	(653		)	(137		)	(126		)
Fair value of net plan assets at end of year	6,797			7,507			—			—

Funded status	$	(6,027	)	$	(4,758	)	$	(657	)	$	(652	)

Notes

(1) Collections include retiree contributions as well as federal reinsurance payments and provider discounts and rebates.

(2) Other Post-Retirement Benefits Employer contributions are reduced by federal reinsurance payments and provider discounts and rebates.

The $556 million pension actuarial loss for 2015 is primarily due to the change in the mortality assumption, which increased the projected benefit obligation by $518 million. Additional losses of $349 million were due to demographic experience from the impact of TVA’s organization restructuring in 2014 and 2015 and assumptions on the forms of benefit payment elections. These losses were partially offset by assumption changes for the COLA of $232 million reflecting a slower than anticipated economic recovery and increasing the discount rate from 4.45 percent to 4.50 percent which decreased the liability by $79 million. The discount rate increased primarily due to the longer expected duration as a result of the new mortality assumption.

The pension actuarial loss for 2014 primarily reflects the impact of the decrease in the discount rate from 5.00 percent to 4.45 percent, which increased the liability by approximately $729 million. Additional losses were due to demographic experience from the impact of TVA’s organizational restructuring in 2014. This increased the projected benefit obligation by $36 million. These losses were partially offset by the $88 million gain from the change in the retirement rates assumptions based on a five-year experience study.

The other post-retirement actuarial loss for 2015 is due primarily to an updated mortality assumption resulting in a longer expected duration of benefit payments which increased the liability by $21 million and actuarial losses of $20 million due to demographic experience, including assumption changes. These losses were partially offset by assumption changes for updated per capita claims costs and retiree contributions of $30 million to reflect observed and anticipated plan experience. Additionally, the discount rate increased from 4.50 percent to 4.65 percent decreasing the liability by $13 million. The discount rate increased primarily due to the longer expected duration as a result of the new mortality assumption.

The other post-retirement actuarial gain for 2014 was primarily due to demographic experience related to updated per capita claims costs and retiree contributions, which decreased the liability by $64 million. The change in the retirement rates assumptions provided an additional gain of $16 million. These gains were partially offset by the decrease in the discount rate from 5.05 percent to 4.50 percent and the reduction in force impact, which increased the liability by $43 million and $17 million, respectively.

Amounts related to these benefit plans recognized on TVA's consolidated balance sheets consist of regulatory assets that have not been recognized as components of net periodic benefit cost at September 30, 2015 and 2014, 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 on TVA's Consolidated Balance Sheets At September 30
	Pension Benefits						Other Post-Retirement Benefits
	2015			2014			2015			2014
Regulatory assets	$	5,425		$	4,157		$	140		$	140
Accounts payable and accrued liabilities	(6		)	(5		)	(37		)	(38		)
Pension and post-retirement benefit obligations⁽¹⁾	(6,021		)	(4,753		)	(620		)	(614		)

Note

(1) Table above excludes $465 million and $472 million of post-employment benefit costs that are recorded in post-retirement and post-employment benefit obligations on the Consolidated Balance Sheets at September 30, 2015 and 2014, respectively.

Unrecognized amounts included in regulatory assets yet to be recognized as components of accrued benefit cost at September 30 consisted of:



Post-Retirement Benefit Costs Deferred as Regulatory Assets At September 30
	Pension Benefits						Other Post-Retirement Benefits
	2015			2014			2015			2014
Unrecognized prior service credit	$	(158	)	$	(180	)	$	(33	)	$	(39	)
Unrecognized net loss	5,355			4,337			173			179
Amount capitalized due to actions of regulator	228			—			—			—
Total regulatory assets	$	5,425		$	4,157		$	140		$	140

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan at September 30, 2015, and 2014, were as follows:



Projected Benefit Obligations and Accumulated Benefit Obligations in Excess of Plan Assets At September 30
	2015		2014
Projected benefit obligation	$	12,824	$	12,265
Accumulated benefit obligation	12,626		12,039
Fair value of net plan assets	6,797		7,507

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30, 2015, and 2014, were as follows:



Components of Net Periodic Benefit Cost For the years ended September 30

	Pension Benefits									Other Post-Retirement Benefits
	2015			2014			2013			2015			2014			2013
Service cost	$	130		$	130		$	154		$	16		$	18		$	24
Interest cost	540			558			468			29			32			31
Expected return on plan assets	(437		)	(435		)	(428		)	—			—			—
Amortization of prior service credit	(21		)	(21		)	(22		)	(6		)	(6		)	(6		)
Recognized net actuarial loss	299			285			377			9			11			25
Total net periodic benefit cost as actuarially determined	511			517			549			48			55			74
Amount capitalized due to actions of regulator	(228		)	—			—			—			—			—
Total net period benefit cost	$	283		$	517		$	549		$	48		$	55		$	74

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 2016 At September 30, 2015
	Pension Benefits			Other Post-Retirement Benefits			Total
Prior service credit	$	(23	)	$	(6	)	$	(29	)
Net actuarial loss	291			8			299

The amount in the pension net component benefit costs expected to be capitalized due to actions of regulator in the next fiscal year is $231 million.

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
	2015		2014		2015		2014
Assumptions utilized to determine benefit obligations at September 30
Discount rate	4.50	%	4.45	%	4.65	%	4.50	%
Rate of compensation increase	5.70	%	5.70	%	N/A		N/A
Initial health care cost trend rate	N/A		N/A		7.00	%	7.50	%
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		2019		2019

Assumptions utilized to determine net periodic benefit cost for the years ended September 30
Discount rate	4.45	%	5.00	%	4.50	%	5.05	%
Expected return on plan assets	7.00	%	7.25	%	N/A		N/A
Rate of compensation increase	5.70	%	5.72	%	N/A		N/A
Initial health care cost trend rate	N/A		N/A		7.50	%	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		2019		2019

Discount Rate. In selecting the 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. The selected bond portfolio is derived from a universe of high quality corporate bonds of Aa-rated quality or higher. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected. Based on recent market trends and due to the updated mortality assumption resulting in a slightly longer duration of benefits, TVA increased its discount rate used to determine the pension benefit obligation and other post-retirement benefit obligation. At September 30, 2015, the discount rates used to determine the pension and other post-retirement benefit obligations for 2015 were 4.50 percent and 4.65 percent, respectively. At September 30, 2014, the discount rates used to determine the pension and other post-retirement benefit obligations were 4.45 percent and 4.50 percent, respectively. The discount rate assumptions used to determine the obligations at year-end are used to determine the net periodic benefit costs for the following year.

Rate of Return. The qualified defined benefit pension plan is the only plan that is funded with qualified plan

assets. In determining its expected long-term rate of return on pension plan assets, TVA uses a process that incorporates actual

historical asset class returns and an assessment of expected future performance and takes into consideration external actuarial advice and asset class factors. Asset allocations are periodically updated using the pension plan asset/liability studies, and are part of the determination of the estimates of long-term rates of return. The current asset allocation policy approved by the TVARS Board diversifies plan assets across multiple asset classes so as to minimize the risk of large losses. The asset allocation policy is designed to be dynamic in nature and responsive to change in the funded status of TVARS. Changes in the expected return rates are based on annual studies performed by third party professional investment consultants. Considering there were no changes to the asset allocation policy and after reviewing the 2015 annual study and the current outlook on capital markets, TVA management decided to maintain the expected return on assets at 7.00 percent, which will be used to measure 2016 net periodic benefit cost. TVA used an expected rate of return of 7.00 percent to measure benefit costs in 2015 and used 7.25 percent to measure benefit costs in 2014 and 2013.

Compensation Increases. Assumptions related to compensation increases are based on the results obtained from an actual company experience study performed during the most recent five years for plan participants. TVA obtained an updated study in 2013 and determined that future compensation would likely increase at rates between 3.50 percent and 13.00 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 2015 and 2014 was 5.70 percent. The average assumed compensation increases used to determine net periodic pension benefit costs for 2015, 2014, and 2013 were 5.70 percent, 5.72 percent, and 4.44 percent, respectively.

Mortality. Mortality assumptions are based upon actuarial projections in combination with actuarial studies of the actual mortality experience of TVA’s pension and post-retirement plan participants. Based upon a review of the 2013 actuarial experience study, TVA adopted the Society of Actuaries ("SOA") RP-2000 base table projected with a modified improvement scale for purposes of measuring its pension and other post-retirement benefits as of September 30, 2013. In 2014, the SOA released a new base table (RP-2014) and improvement scale (MP-2014). However, based upon analysis of the 2014 actuarial experience study, the results indicated that mortality experience remained in line with the assumptions adopted in 2013. Therefore, TVA retained its 2013 mortality assumptions for purposes of measuring its pension and other post-retirement benefit obligations at September 30, 2014. The actuarial experience study was further updated in 2015. Based on analysis of the 2015 study, the 2014 SOA study of mortality tables, and recent additional studies of mortality improvement that was updated by the SOA in October 2015 (MP-2015), TVA has adopted an adjusted version of the SOA’s new RP-2014 mortality tables and a modified MP-2014 improvement scale for purposes of measuring its pension and other post-retirement benefit obligations at September 30, 2015.

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 rates used to determine post-retirement benefit obligations for 2015 and 2014 were 7.00 percent and 7.50 percent, respectively. The 2015 health care cost trend rate of 7.00 percent used to determine post-retirement benefit obligations is assumed to gradually decrease each successive year until it reaches a 5.00 percent annual increase in health care costs in the years beginning October 1, 2019, and beyond. The assumed health care cost trend rates used to determine the net periodic post-retirement cost were 7.50 percent for 2015, 8.00 percent for 2014, and 8.50 percent for 2013. TVA plans to use 7.00 percent in the determination of 2016 net periodic post-retirement cost. The current trend rate assumption reflects review of TVA medical claims, slight expected increases in premiums for 2016, and more participants moving to the high deductible plan.

Cost of Living Adjustment. COLAs are an increase in the benefits for eligible retirees to help maintain the purchasing power of benefits as consumer prices increase. Eligible retirees may receive a COLA on the base pension portion of the monthly pension benefit in January following any year in which the 12-month average CPI-U exceeded by as much as one percent the 12-month average of the CPI-U for the preceding year. The minimum COLA is one percent and the maximum is five percent. Prior to 2013, TVA had maintained a 2.50 percent COLA, but determined that a more accurate estimate would be to lower the COLA for the short-term with a gradual increase that would trend back up to the long-term expectations based upon the economic forecast and the Federal Reserve policy. As of 2015, the economy is recovering more slowly than anticipated, and the Federal Reserve has reaffirmed its intention to keep the target range for the federal funds rate at zero to 0.25 percent. As a result, TVA determined it should decrease the COLA assumption in 2016 to zero percent with an increase to 2.20 percent in 2017, followed by gradual increases in successive years until it reaches the ultimate rate of 2.40 percent in 2021.

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, 2015
Actuarial Assumption	Change in Assumption		Impact on 2015 Pension Cost		Impact on 2015 Projected Benefit Obligation

Discount rate	(0.25	)	$	18	$	404
Rate of return on plan assets	(0.25	)	16		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, 2015
	1% Increase		1% Decrease
Effect on total of service and interest cost components for the year	$	6	$	(6	)
Effect on end-of-year accumulated post-retirement benefit obligation	88		(94		)

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 (the "Plan"), which includes the Original Benefit Structure and the Cash Balance Benefit Structure, is the only plan that includes qualified plan assets. TVARS has a long-term investment plan which contains a dynamic de-risking strategy that allocates investments to assets that better match the liability, such as long duration fixed income securities, over time as funding status targets are met. The investment asset allocation policy approved by the TVARS Board has targets of 47 percent equity including U.S., non-U.S., private, and low volatility global public equity investments, 28 percent fixed income securities, 15 percent public real assets including Treasury Inflation-Protected Securities ("TIPS"), commodities, and Master Limited Partnerships ("MLPs"), and 10 percent private real assets. The qualified pension plan assets are invested across global public equity, private equity, cash, core fixed income, long-term core fixed income, investment grade credit, high yield fixed income, emerging markets fixed income, global TIPS, commodities, MLPs, and private real assets. 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, 2015 and 2014, 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		2015		2014
Global equity	32	%	38	%	43	%
Private equity	10	%	5	%	5	%
Low volatility global public equity	5	%	5	%	1	%
Cash	2	%	2	%	2	%
Core fixed income	5	%	5	%	5	%
Long-term core fixed income	5	%	5	%	5	%
Investment grade credit	6	%	6	%	6	%
International emerging markets fixed income	5	%	5	%	5	%
High yield fixed income	5	%	6	%	6	%
Global TIPS	5	%	6	%	5	%
Private real assets	10	%	9	%	7	%
Commodities	5	%	4	%	4	%
MLPs	5	%	4	%	6	%

Total	100	%	100	%	100	%

Fair Value Measurements

The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2015:



TVA Retirement System At September 30, 2015
	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	$	1,650	$	1,649	$	—	$	1

Preferred securities	36		2		34		—

Debt securities
Corporate debt securities	1,161		—		1,149		12
Residential mortgage-backed securities	151		—		138		13
Debt securities issued by U.S. Treasury	362		362		—		—
Debt securities issued by foreign governments	294		—		281		13
Asset-backed securities	156		—		116		40
Debt securities issued by state/local governments	25		—		25		—
Commercial mortgage-backed securities	43		—		32		11

Commingled Funds measured at net asset value⁽³⁾
Equity	642		—		—		—
Debt	654		—		—		—
Commodity	244		—		—		—
Blended	206		—		—		—
Institutional mutual funds	26		26		—		—
Cash equivalents and other short-term investments	318		—		318		—
Certificates of deposit	6		—		6		—
Private equity measured at net asset value⁽³⁾	389		—		—		—
Private real estate measured at net asset value⁽³⁾	556		—		—		—
Treasury bills, U.S. Government notes, and securities held as futures and other derivative collateral	34		21		13		—
Securities lending commingled funds	3		—		3		—

Derivatives
Purchased options	2		—		1		1
Foreign currency forward receivable	6		—		6		—

Total Assets	$	6,964	$	2,060	$	2,122	$	91
Liabilities
Futures	17		$	17	$	—	$	—
Foreign currency forward payable	4		—		4		—
Written options	2		—		2		—
Interest rate swaps	10		—		10		—
Credit default swaps	1		—		1		—

Total Liabilities	$	34	$	17	$	17	$	—

Notes

(1) Excludes approximately $130 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.

(3) In accordance with Accounting Standards Codification Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2014:



TVA Retirement System At September 30, 2014
	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	$	1,669	$	1,668	$	—	$	1

Preferred securities	37		5		32		—

Debt securities
Corporate debt securities	1,326		—		1,304		22
Residential mortgage-backed securities	204		—		201		3
Debt securities issued by U.S. Treasury	93		93		—		—
Debt securities issued by foreign governments	225		—		218		7
Asset-backed securities	176		—		147		29
Debt securities issued by state/local governments	30		—		29		1
Commercial mortgage-backed securities	23		—		20		3

Commingled funds measured at net asset value⁽³⁾
Equity	1,106		—		—		—
Debt	661		—		—		—
Commodities	332		—		—		—
Blended	228		—		—		—
Institutional mutual funds	28		28		—		—
Cash equivalents and other short-term investments	464		—		464		—
Certificates of deposit	19		—		19		—
Private equity measured at net asset value⁽³⁾	481		—		—		—
Private real estate measured at net asset value⁽³⁾	435		—		—		—
Treasury bills, U.S. Government notes, and securities held as futures and other derivative collateral	35		10		25		—
Securities lending commingled funds	2		—		2		—

Derivatives
Purchased options	18		—		18		—
Foreign currency forward receivable	8		—		8		—

Total Assets	$	7,600	$	1,804	$	2,487	$	66
Liabilities
Futures	11		$	11	$	—	$	—
Foreign currency forward payable	8		—		8		—
Written options	7		—		7		—

Total Liabilities	$	26	$	11	$	15	$	—

Notes

(1) Excludes approximately $65 million in net payables associated with security purchases and sales and various other payables.

(2) Excludes a $2 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
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Balance at October 1, 2013	$	42
Net realized/unrealized gains (losses)	3
Purchases, sales, issuances, and settlements (net)	26
Transfers in and/or out of Level 3	(5		)

Balance at September 30, 2014	66
Net realized/unrealized gains (losses)	(2		)
Purchases, sales, issuances, and settlements (net)	33
Transfers in and/or out of Level 3	(6		)

Balance at September 30, 2015	$	91

The following descriptions of the valuation methods and assumptions used by the Plan to estimate the fair value of investments apply to investments held directly by the Plan. Third-party pricing vendors provide valuations for investments held by the Plan in most instances, except for commingled, private equity, and private real estate funds which are priced at net asset values established by the investment managers with possible adjustment by management to reflect estimated current fair value. In instances where pricing is determined to be based on unobservable inputs, or where liquidity restrictions exist in the case of funds valued at net asset value, a Level 3 classification has been assigned.

Equities and Preferred Securities. Investment securities, including common stock, mutual funds, and preferred securities listed on either a national or foreign securities exchange or traded in the over-the-counter National Market System, 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 and preferred securities priced by an exchange in an active market are classified as Level 1. Preferred securities classified as Level 2 may have been priced by dealer quote or using assumptions based on observable market data, such as yields on bonds from the same issuer or industry.

Corporate Debt Securities. Most 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 management 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).

Residential Mortgage-Backed Securities. Residential mortgage-backed securities consist of collateralized mortgage obligations ("CMOs") and U.S. pass-through security 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. Most residential mortgage-backed securities are considered to be priced using Level 2 inputs because of the nature of their market-data-based pricing models.

U.S. Treasury 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).

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. Most 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, most asset-backed securities are classified as Level 2.

Debt Securities Issued by State and Local Governments. Most debt securities issued by state and local governments are 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.

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, most commercial mortgage-backed securities are classified as Level 2.

Commingled Funds. The 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 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. These net asset values may be adjusted by management if it is determined that they do not reflect a current estimate of fair value. In accordance with Accounting Standards Codification Subtopic 820-10, commingled funds have not been classified in the fair value hierarchy.

The 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 Plan is invested in actively managed debt commingled funds which 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 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.

The Plan is invested in commodity commingled funds, which can be categorized as actively managed funds. The funds seek to outperform certain commodity benchmarks through fundamental research and analysis. The funds invest in a diversified portfolio of commodity securities and derivatives of varying maturities. The objective is to achieve a positive relative return through active security selection.

The Plan’s investments in equity, debt, blended, and commodity commingled funds can generally be redeemed at any time upon notification of the investment managers, with required notice periods varying from same-day to monthly.

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), as no discounts for credit quality or liquidity were determined to be applicable.

Cash Equivalents and Other Short-Term Investments and Certificates of Deposit. 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 discount securities such as commercial paper, repurchase agreements, U.S. Treasury bills, and certain agency securities. These securities, as well as certificates of deposit, may be priced at cost, which approximates fair value due to the short-term nature of the instruments. Model based pricing which incorporates observable inputs may also be utilized. These securities are classified as Level 2. Active market pricing may be utilized for U.S. Treasury bills, which are classified as Level 1.

Private Equity Funds. Private equity limited partnerships are reported at net asset values provided by the fund managers. These net asset values may be adjusted by management if it is determined that they do not reflect a current estimate of fair value. In accordance with Accounting Standards Codification Subtopic 820-10, commingled funds have not been classified in the fair value hierarchy.

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 or subordinated 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 or 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 that carries current interest payments as well as a potential equity interest in the company. Restructuring or distressed debt partnerships purchase opportunities generated by overleveraged or poorly managed companies. Special situation partnerships include organizations with a specific industry focus not covered by the other private equity subclasses or unique opportunities that fall outside the regular subclasses.

The private equity funds have no investment withdrawal provisions prior to the termination of the partnership. Partnerships generally continue 10 to 12 years after the inception of the fund. The partnerships are subject to three to four one-year extensions at the discretion of the general partner. Partnerships can generally be dissolved by an 80 percent vote in interest by all limited partners, with some funds requiring the occurrence of a specific event.

Private Real Estate Investments. The Plan’s ownership in private real estate investments consists of a pro rata share and not a direct ownership of the underlying investments. The fair values of the Plan’s private real estate investments are estimated utilizing net asset values provided by the investment managers. These net asset values may be adjusted by management if it is determined that they do not reflect a current estimate of fair value. In accordance with Accounting Standards Codification Subtopic 820-10, commingled funds have not been classified in the fair value hierarchy. The methodologies utilized by the investment managers to calculate their net asset values are summarized as follows:

The Plan is invested in limited partnerships that invest in real estate securities, real estate partnerships, and direct real estate properties. This includes investments in office, multifamily, industrial, and retail investment properties in the U.S. and international markets. The investment strategy focuses on distressed, opportunistic, and value-added opportunities. Partnership investments also include mortgage and/or real estate-related fixed-income instruments and related securities. Investments are diversified by property type and geographic location.

The Plan is invested in a commingled fund that develops, renovates, and re-leases real estate properties to create value. Investments are predominantly in top tier real estate markets that offer deep liquidity. Property types include residential, office, industrial, hotel, retail, and land. Properties are diversified by geographic region within the U.S. domestic market. The Plan is invested in a second commingled fund that invests primarily in core, well-leased, operating real estate properties with a focus on income generation. Investments are diversified by property type with a focus on office, industrial, apartment, and retail. Properties are diversified within the U.S. with an overweight to major market and coastal regions.

Fair value estimates of the underlying investments in these limited partnerships and commingled fund investments are primarily 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. Pricing for certain investments in mortgage-backed and asset-backed securities is typically based on models that incorporate observable inputs.

The Plan is invested in a private real estate investment trust formed to make direct or indirect investments in 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.

Derivatives. The Plan invests in a variety of derivative instruments. The valuation methodologies for these instruments are as follows:

Options. The Plan enters into purchased and written 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. Options traded over the counter and not on exchanges are priced by third-party vendors and are classified as Level 2.

Foreign currency forwards. The 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. Foreign currency forwards are disclosed on a net position basis.

Futures. The Plan enters into 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.

Swaps. The 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 equity index swaps and variance swaps are priced by third-party vendors using market inputs such as spot rates, yield curves, and volatility. The Plan's swaps are generally classified as Level 2 based on the observable nature of their pricing inputs.

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 the Plan 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, 2015
	Pension Benefits		Other Post-Retirement Benefits
2016	$	741	$	39
2017	744		39
2018	748		39
2019	755		39
2020	764		39
2021 - 2025	3,903		178

Contributions. The minimum contribution for 2015 was $215 million; however, TVA made a $275 million contribution to TVARS. The 2014 minimum contribution was $198 million; however, TVA made a $250 million contribution to TVARS. In 2015, TVA made contributions of $7 million to the SERP and $44 million to the other post-retirement benefit plans. In 2014, TVA made contributions of $6 million to the SERP and $47 million to the other post-retirement benefit plans. TVA expects to contribute $275 million to TVARS, $6 million to the SERP, and $39 million to the other post-retirement benefit plans in 2016.