Benefit Plans

TVA sponsors a qualified defined benefit plan (“pension plan”) that covers most of its full-time employees hired prior to July 1, 2014, a qualified defined contribution plan (“401(k) 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. The pension plan and the 401(k) plan are administered by a separate legal entity, the TVA Retirement System (“TVARS”), which is governed by its own board of directors (the "TVARS Board").

Overview of Plans and Benefits

Retirement Plans. The participants in the pension plan receive either a traditional final average pay pension or a cash balance pension. The traditional pension benefit is based on the participant’s creditable service, average monthly salary for their highest three consecutive years of eligible compensation, and a pension factor based on the participant’s age and years of service, less a Social Security offset. The cash balance pension benefit is based on pay and interest credits accumulated in the participant’s account and the participant’s age.

Participants in the pension plan are also eligible to receive 401(k) plan matching contributions and may also be eligible to make after-tax contributions of up to $10,000 per year to TVARS, which at the election of the participant are invested in either the fixed fund, which receives a fixed interest rate set forth in the plan, or the variable fund, which receives a rate of return based on an S&P 500 index fund. Participants in the pension plan may also become eligible for a supplemental pension benefit based on age and years of service at retirement, which is provided to help offset the cost of retiree medical insurance. Employees first hired on or after July 1, 2014, are participants in the 401(k) plan only and receive both nonelective and matching contributions to their accounts in the 401(k) plan.

On August 8, 2016, the TVARS Board approved amendments to the pension plan and the 401(k) plan, and these amendments were also approved by the TVA Board on August 25, 2016. The amendments, which became effective on October 1, 2016, change future retirement benefits for employees and retirees and make certain other changes regarding TVA's minimum funding requirements to the pension plan and plan governance. With respect to current cash balance participants in the pension plan, these amendments shift future benefit accruals from the cash balance pension to the 401(k) plan based on hire date and years of service as of October 1, 2016. For cash balance participants first hired on or after January 1, 1996, and having more than 10 years of service as of October 1, 2016, participants will begin receiving nonelective contributions to their accounts in the 401(k) plan and reduced pay credits to their cash balance accounts in the pension plan. For cash balance participants first hired on or after January 1, 1996, and having less than 10 years of service as of October 1, 2016, participants will begin receiving nonelective contributions and higher matching contributions to their accounts in the 401(k) plan and will no longer receive pay credits to their cash balance accounts; however, their cash balance accounts will continue to receive interest credits.

The amendments also made the following additional benefit changes: reducing the future cash balance interest crediting rate and the fixed fund interest rate with a floor and ceiling based on the assumed rate of investment return on TVARS assets; closing the fixed and variable funds to new contributions from pension plan participants first hired on or after January 1, 1996; reducing the rate of future cost-of-living-adjustments (“COLAs”) while increasing the maximum eligible COLA; vesting COLAs; increasing the eligibility age for COLAs for pension plan participants under age 50; restricting COLAs to pension amounts based on compensation up to Executive Level IV; eliminating future COLAs to SERP participants with less than 10 years of service; and capping the maximum supplemental benefit amounts.

The amendments also changed the annual minimum contribution required by TVA to the pension plan to the greater of (a) the minimum contribution calculated by TVARS’s actuary according to the TVARS Rules and Regulations, or (b) $300 million, for a period of 20 years (from 2017 through 2036) or, if earlier, through the fiscal year in which the plan reaches and remains at a 100 percent funded status under the actuarial rules applicable to TVARS.

401(k) Plan Contributions. TVA made non-elective and matching contributions to the 401(k) plan of approximately $38 million during 2016, $36 million during 2015, and $35 million during 2014.

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. Effective January 2017, all Medicare-eligible retirees and spouses will be provided Medicare coverage through a private exchange. Transition to the exchange does not affect any supplemental benefits for eligible retirees, and the credit will continue to be calculated in the same manner as before.

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. Additionally, 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, 2016 and 2015, were as follows:



Obligations and Funded Status For the years ended September 30
	Pension Benefits						Other Post-Retirement Benefits
	2016			2015			2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	12,824		$	12,265		$	657		$	652
Service cost	133			130			16			16
Interest cost	564			540			29			29
Plan participants’ contributions	25			25			—			—
Collections⁽¹⁾	—			—			92			94
Actuarial loss (gain)	1,188			556			68			3
Plan change	(960		)	—			(158		)	—
Net transfers from variable fund/401(k) plan	7			11			—			—
Expenses paid	(6		)	(6		)	—			—
Benefits paid	(692		)	(697		)	(133		)	(137		)
Benefit obligation at end of year	13,083			12,824			571			657

Change in plan assets
Fair value of net plan assets at beginning of year	6,797			7,507			—			—
Actual return on plan assets	733			(325		)	—			—
Plan participants’ contributions	25			25			—			—
Collections⁽¹⁾	—			—			92			94
Net transfers from variable fund/401(k) plan	7			11			—			—
Employer contributions⁽²⁾	281			282			41			43
Expenses paid	(6		)	(6		)	—			—
Benefits paid	(692		)	(697		)	(133		)	(137		)
Fair value of net plan assets at end of year	7,145			6,797			—			—

Funded status	$	(5,938	)	$	(6,027	)	$	(571	)	$	(657	)

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 pension plan change is a result of the amendments to the TVA qualified defined benefit pension plan, which reduced the projected benefit obligation by $960 million and established an additional unrecognized prior service credit at September 30, 2016 to be amortized for approximately 11 years as a component of net periodic pension benefit cost.

The post-retirement plan change is a result of transitioning all Medicare eligible retirees and spouses to a private exchange effective January 2017, which reduced the projected benefit obligation by $158 million.

The $1.2 billion pension actuarial loss for 2016 is primarily due to the decrease in the discount rate from 4.50 percent to 3.65 percent, which increased the projected benefit obligation by $1.4 billion. This loss was partially offset by assumption changes for the COLA of $168 million and for mortality of $133 million to better reflect anticipated future plan experience.

The $556 million pension actuarial loss for 2015 was 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 organizational 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 an increase in 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 other post-retirement actuarial loss for 2016 was primarily due to the decrease in the discount rate from 4.65 percent to 3.70 percent, which increased the liability by $91 million. The loss was partially offset by a gain of $17 million due to demographic experience related to updated per capita costs and retiree contributions and a gain of $7 million related to assumption changes for mortality to better reflect anticipated future plan experience.

The other post-retirement actuarial loss for 2015 was primarily due 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.

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, 2016 and 2015, 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
	2016			2015			2016			2015
Regulatory assets	$	5,336		$	5,425		$	49		$	140
Accounts payable and accrued liabilities	(5		)	(6		)	(35		)	(37		)
Pension and post-retirement benefit obligations⁽¹⁾	(5,933		)	(6,021		)	(536		)	(620		)

Note

(1) The table above excludes $460 million and $465 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, 2016 and 2015, 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
	2016			2015			2016			2015
Unrecognized prior service credit	$	(1,017	)	$	(158	)	$	(185	)	$	(33	)
Unrecognized net loss	5,946			5,355			234			173
Amount capitalized due to actions of regulator	407			228			—			—
Total regulatory assets	$	5,336		$	5,425		$	49		$	140

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan at September 30, 2016, and 2015, were as follows:



Projected Benefit Obligations and Accumulated Benefit Obligations in Excess of Plan Assets At September 30
	2016		2015
Projected benefit obligation	$	13,083	$	12,824
Accumulated benefit obligation	12,912		12,626
Fair value of net plan assets	7,145		6,797

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30, 2016, and 2015, were as follows:



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

	Pension Benefits									Other Post-Retirement Benefits
	2016			2015			2014			2016			2015			2014
Service cost	$	133		$	130		$	130		$	16		$	16		$	18
Interest cost	564			540			558			29			29			32
Expected return on plan assets	(446		)	(437		)	(435		)	—			—			—
Amortization of prior service credit	(23		)	(21		)	(21		)	(6		)	(6		)	(6		)
Recognized net actuarial loss	310			299			285			7			9			11
Curtailment	(78		)	—			—			—			—			—
Total net periodic benefit cost as actuarially determined	460			511			517			46			48			55
Amount capitalized due to actions of regulator	(179		)	(228		)	—			—			—			—
Total net period benefit cost	$	281		$	283		$	517		$	46		$	48		$	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 2017 At September 30, 2016
	Pension Benefits			Other Post-Retirement Benefits			Total
Prior service credit	$	(99	)	$	(22	)	$	(121	)
Net actuarial loss	466			13			479

The amount in the components of net periodic benefit cost expected to be capitalized due to actions of regulator in the next fiscal year is $136 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
	Pension Benefits				Other Post-Retirement Benefits
	2016		2015		2016		2015
Assumptions utilized to determine benefit obligations at September 30
Discount rate	3.65	%	4.50	%	3.70	%	4.65	%
Rate of compensation increase	5.55	%	5.70	%	N/A		N/A
Pre-Medicare eligible
Initial health care cost trend rate	N/A		N/A		6.50	%	7.00	%
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
Post-Medicare eligible
Initial health care cost trend rate	N/A		N/A		—	%	7.00	%
Ultimate health care cost trend rate	N/A		N/A		4.00	%	5.00	%
Ultimate trend rate is reached in year beginning	N/A		N/A		2021		2019

Assumptions utilized to determine net periodic benefit cost for the years ended September 30
Discount rate	4.50	%	4.45	%	4.65	%	4.50	%
Expected return on plan assets	7.00	%	7.00	%	N/A		N/A
Rate of compensation increase	5.70	%	5.70	%	N/A		N/A
Pre-Medicare eligible
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
Post-Medicare eligible
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

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 economic conditions, TVA decreased its discount rate used to determine the pension benefit obligation and other post-retirement benefit obligation. At September 30, 2016, the discount rates used to determine the pension and other post-retirement benefit obligations for 2016 were 3.65 percent and 3.70 percent, respectively. At September 30, 2015, the discount rates used to determine the pension and other post-retirement benefit obligations were 4.50 percent and 4.65 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 the 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. Upon review of TVARS's asset allocation policy effective in 2017, the 2016 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 2017 net periodic benefit cost. TVA used an expected rate of return of 7.00 percent to measure benefit costs in 2016 and 2015 and used 7.25 percent to measure benefit costs in 2014.

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 2016 and 2015 was 5.55 percent and 5.70 percent, respectively. The average assumed compensation increases used to determine net periodic pension benefit costs for 2016, 2015, and 2014 were 5.70 percent, 5.70 percent, and 5.72 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. In 2014 and 2013, TVA had used the Society of Actuaries (“SOA”) RP-2000 base table with a modified improvement scale of Scale AA to 2022. In 2015, TVA adopted an adjusted version of the SOA's 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. In 2016, TVA maintained its mortality table assumption adopted in 2015 but updated the improvement scale assumption to a modified version of the SOA’s RP-2015 scale for purposes of measuring its pension and other post-retirement benefit obligations at September 30, 2016. The mortality rate assumption used to determine the obligations at year-end are used to determine the net periodic benefit costs for the following year.

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 pre-Medicare eligible post-retirement benefit obligations for 2016 and 2015 were 6.50 percent and 7.00 percent, respectively. The 2016 health care cost trend rate of 6.50 percent used to determine the pre-Medicare eligible 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 trend rates used to determine post-Medicare eligible post-retirement benefit obligations for 2016 and 2015 were 0.00 percent and 7.00 percent, respectively. The 2016 health care cost trend rate of 0.00 percent used to determine the post-Medicare eligible post-retirement benefit obligations is assumed to remain at 0.00 percent through 2020 at which point it rises to 4.00 percent in the years beginning October 1, 2021, and beyond as a result of the move of Medicare eligible retirees to a private exchange. The assumed health care cost trend rates used to determine the net periodic post-retirement cost were 7.00 percent for 2016, 7.50 percent for 2015, and 8.00 percent for 2014. TVA plans to use 6.50 percent and 0.00 percent in the determination of 2017 net periodic post-retirement cost for pre-Medicare eligible and post-Medicare eligible, respectively. The current trend rate assumption reflects review of TVA medical claims, more participants moving to the high deductible plan, and TVA moving to a private exchange.

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 receive a COLA on the base pension portion of the monthly pension benefit equal to the percentage change in the Consumer Price Index for All Urban Consumers (“CPI-U”) 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 in which a COLA was given. Prior to October 1, 2016, the minimum COLA was one percent and the maximum was five percent. Effective October 1, 2016, the calculation of the COLA benefit will be equal to the percentage change in the CPI-U minus 0.25 percent with a minimum of one percent and the maximum increased to six percent.

TVA’s 2016 COLA assumption was changed to be 1.25 percent in 2017 and 2.00 percent in 2018 and thereafter to better reflect anticipated future plan experience and the plan amendments to the COLA. Prior to 2013, TVA had maintained a 2.50 percent COLA, but TVA 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. The 2015 and 2014 COLA assumptions assumed that the COLA would trend to the ultimate rate of 2.40 percent in 2021 and to the ultimate rate of 2.50 percent in 2020, respectively.

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, 2016
Actuarial Assumption	Change in Assumption		Impact on 2016 Pension Cost		Impact on 2016 Projected Benefit Obligation

Discount rate	(0.25	)	$	22	$	388
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, 2016
	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	105		(88		)

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.

The TVARS Board’s current asset allocation policy for the investment of qualified pension plan assets has targets of 47 percent equity including global public and private equity investments, 30 percent fixed income securities, and 23 percent real assets including Treasury Inflation-Protected Securities ("TIPS"), commodities, Master Limited Partnerships ("MLPs"), real estate investment trusts ("REITS"), and private real assets. TVARS has a long-term investment plan that contains a dynamic de-risking strategy which will allocate investments to assets that better match the liability, such as long duration fixed income securities, over time as improved funding status targets are met. Pursuant to the TVARS Rules and Regulations, any proposed changes in asset allocation that would change the system’s assumed rate of investment return are subject to TVA’s review and veto.

As set forth above, the qualified pension plan assets are invested across global public equity, private equity, safety oriented fixed income, opportunistic fixed income, public real assets, 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, 2016 and 2015, 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		2016		2015
Global public equity	39	%	44	%	43	%
Private equity	8	%	4	%	5	%
Safety oriented fixed income	15	%	18	%	19	%
Opportunistic fixed income	15	%	10	%	10	%
Public real assets	15	%	15	%	14	%
Private real assets	8	%	9	%	9	%

Total	100	%	100	%	100	%

Fair Value Measurements

The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2016:



TVA Retirement System At September 30, 2016
	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	$	1,847	$	1,846	$	—	$	1

Preferred securities	20		3		17		—

Debt securities
Corporate debt securities	1,145		—		1,135		10
Residential mortgage-backed securities	181		—		165		16
Debt securities issued by U.S. Treasury and other U.S. government agencies	113		113		—		—
Debt securities issued by foreign governments	332		—		299		33
Asset-backed securities	118		—		87		31
Debt securities issued by state/local governments	16		—		16		—
Commercial mortgage-backed securities	44		—		38		6

Commingled funds measured at net asset value⁽³⁾
Equity	682		—		—		—
Debt	653		—		—		—
Commodities	302		—		—		—
Blended	225		—		—		—

Institutional mutual funds	10		10		—		—
Cash equivalents and other short-term investments	612		41		571		—
Certificates of deposit	16		—		16		—
Private equity measured at net asset value⁽³⁾	385		—		—		—
Private real estate measured at net asset value⁽³⁾	568		—		—		—

Treasury bills, U.S. Government notes, and securities held as futures and other derivative collateral	13		4		9		—

Securities lending commingled funds measured at net asset value ⁽³⁾	3		—		—		—

Derivatives
Futures	2		2		—		—
Swaps	1		—		1		—
Foreign currency forward receivable	5		—		5		—

Total Assets	$	7,293	$	2,019	$	2,359	$	97
Liabilities
Futures	$	2	$	2	$	—	$	—
Foreign currency forward payable	9		—		9		—
Total return swaps	1		—		1		—
Interest rate swaps	3		—		3		—
Credit default swaps	1		—		1		—

Total Liabilities	$	16	$	2	$	14	$	—

Notes

(1) Excludes approximately $129 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) 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, 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 and other U.S. government agencies	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		—		—		—
Commodities	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 measured at net asset value⁽³⁾	3		—		—		—

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

Total Assets	$	6,964	$	2,060	$	2,119	$	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) 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 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, 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
Net realized/unrealized gains (losses)	18
Purchases, sales, issuances, and settlements (net)	(12		)
Transfers in and/or out of Level 3	—

Balance at September 30, 2016	$	97

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. In instances where pricing is determined to be based on unobservable inputs a Level 3 classification has been assigned.

Equity and preferred securities. Investments 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 and are classified as Level 1. Equity securities, including common stocks and 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. 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. 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).

Mortgage and asset-backed securities. Residential mortgage-backed securities consist of collateralized mortgage obligations ("CMOs") and U.S. pass-through security pools related to government-sponsored enterprises ("GSEs"). 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.

Commercial mortgage-backed and 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, these securities are typically classified as Level 2.

Debt securities issued by U.S. Treasury and other U.S. government agencies. 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 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.

Debt securities issued by foreign governments. Foreign government bonds and foreign government inflation-linked securities 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.

Private equity funds. Private equity limited partnerships are reported at net asset values provided by the fund managers. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.

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 two to three 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 investments have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015. The investment strategies and 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:

Futures. The Plan enters into futures. The futures contracts are listed on either a national or foreign securities exchange and 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. 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 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.

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, and in some cases by clearing exchanges. 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, and in some cases by clearing exchanges. 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.

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.

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 purchases and sale transactions occurring as of or close to the financial statement date. These funds have not been classified in the fair value hierarchy in accordance with FASB guidance issued in May 2015.

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 debt commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The 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 U.S. Aggregate Bond Index. The fund seeks to track the total return of the Barclays Capital U.S. 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 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 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’s investments in equity, debt, blended, and commodity commingled funds can generally be redeemed upon notification of the investment managers, with required notice periods varying from same-day to monthly. These investments do not have unfunded commitments.

Collateral held under securities lending arrangements is invested in commingled funds which 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 purchases and sale transactions occurring as of or close to the financial statement date.

Cash equivalents and other short-term investments and certificates of deposit. Cash equivalents and other short‐-term investments are highly liquid securities with maturities 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.

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.

Reclassification. In the September 30, 2015 fair value measurement table, securities lending commingled funds have been reclassified out of Level 2. In accordance with Accounting Standards Codification Subtopic 820-10, these funds are measured at fair value using the net asset value per share (or its equivalent) practical expedient, and as such have not been classified in the fair value hierarchy.

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, 2016
	Pension Benefits⁽¹⁾		Other Post-Retirement Benefits
2017	$	770	$	35
2018	771		35
2019	774		33
2020	778		32
2021	780		30
2022 - 2026	$	3,876	$	132

Note

(1) Participants are assumed to receive the Fixed Fund in a lump sum in lieu of available annuity options allowed for certain grandfathered participants resulting in higher estimated pension benefits payments.

Contributions. The minimum contribution for 2016 was $209 million; however, TVA made a $275 million contribution to TVARS. The 2015 minimum contribution was $215 million; however, TVA made a $275 million contribution to TVARS. In 2016, TVA made contributions of $6 million to the SERP and $47 million to the other post-retirement benefit plans. In 2015, TVA made contributions of $7 million to the SERP and $44 million to the other post-retirement benefit plans. TVA expects to contribute $300 million to TVARS, $5 million to the SERP, and $35 million to the other post-retirement benefit plans in 2017.