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, may be eligible to receive 401(k) plan non-elective contributions and may be eligible to make after-tax contributions of up to $10,000 per year to the pension plan, 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 non-elective 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, changed future retirement benefits for employees and retirees and made certain other changes regarding TVA's minimum funding requirements to the pension plan and plan governance. 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 10 or more years of service as of October 1, 2016, participants will begin receiving non-elective 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 non-elective 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. Current cash balance participants in the pension plan who were first hired before January 1, 1996, and elected to switch pension structures from traditional to cash balance did not experience a shift in future benefit accruals from the cash balance plan to the 401(k) plan.

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.

On May 23, 2018, the TVARS Board approved amendments to the pension plan and 401(k) plan. These amendments allow employees who are continuing to accrue cash balance benefits in the pension plan to voluntarily elect to switch future participation to the 401(k) plan only, and employees with cash balance accounts in the pension plan who have a 401(k) only benefit the additional option to waive their rights to benefits under the pension plan and transfer their cash balance accounts (and fixed and variable accounts, if any) to the 401(k) plan. TVARS presented these amendments to TVA for its review and consideration, and the amendments became effective July 8, 2018.

Under the plan amendments, the voluntary election options were offered to eligible TVA employees during a two-month window from July 1, 2018, to August 31, 2018, with changes and transfers becoming effective on October 1, 2018. As a result, there were $23 million of one-time transfers to the 401(k) plan based upon employee elections. These amendments did not trigger curtailment or settlement accounting.

401(k) Plan. Under the 401(k) plan, the non-elective and matching contributions TVA makes to participant accounts are based on the participant’s employment hire date and years of service. Non-elective employer contributions for eligible participants range from three percent to six percent and matching employer contributions range from 1.5 percent to six percent. TVA recognized approximately $80 million in 401(k) plan contribution costs in both 2018 and 2017. TVA recognized $38 million in 401(k) plan contribution costs in 2016. The increase in costs in 2017 to 2018, was primarily a result of the 2016 plan amendments. The 2018 plan amendments are expected to have a de minimis impact on the 401(k) plan costs of less than $1 million. The 2019 plan contribution costs are estimated to be approximately $83 million.

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.

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 were provided Medicare coverage through a private exchange. Transition to the exchange does not affect any TVARS 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 the Federal Employees' Compensation Act ("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 or liabilities as such amounts are probable of collection in future rates. Additionally, TVA recognizes pension costs as regulatory assets or regulatory liabilities to the extent that the amount calculated under U.S. GAAP as pension expense differs from the amount TVA contributes to the pension plan as pension plan contributions. As a result of recent plan design changes, future contributions are expected to exceed the expense calculated under U.S. GAAP. Accordingly, TVA will discontinue this regulatory accounting practice once all such deferred costs have been recovered, at which time it will recognize pension costs in accordance with U.S. GAAP.

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 participating employees expected to receive benefits. The current projected amortization periods of unrecognized net gain or loss is approximately 10 years for the pension plan and 12 years for the post-retirement plan.

Amortization of Prior Service Cost/(Credit). Amortization of net prior service cost/(credit) resulting from a plan change is included as a component of period expense in the year first recognized and every year thereafter until it is fully amortized. The increase or decrease in the benefit obligation due to the plan change is amortized over the average remaining service period of participating employees expected to receive benefits under the plan. The pension and post-retirement plans have prior service credits related to plan changes made in 2009, 2010, 2016 and 2018 with remaining amortization periods ranging from over two to 11 years. However, when a plan change reduces the benefit obligation, existing positive prior service costs are reduced or eliminated starting with the earliest established before a new prior service credit base is established.

Asset Method. TVA’s asset method calculates a market-related value of assets (“MRVA”) that recognizes realized and unrealized investment gains and losses over a three-year smoothing period to decrease the volatility of annual net periodic pension benefit costs. The MRVA is used to determine the expected return on plan assets, a component of net periodic pension benefit cost. The difference in the expected return on the MRVA and the actual return on the fair value on plan assets is recognized as an actuarial (gain)/loss in the pension benefit obligation at September 30. However, the MRVA has no impact on the fair value of plan assets measured at September 30.

Obligations and Funded Status

The changes in plan obligations, assets, and funded status for the years ended September 30, 2018 and 2017, were as follows:



Obligations and Funded Status For the years ended September 30
	Pension Benefits						Other Post-Retirement Benefits
	2018			2017			2018			2017
Change in benefit obligation
Benefit obligation at beginning of year	$	12,601		$	13,083		$	494		$	571
Service cost	53			60			14			18
Interest cost	473			464			19			21
Plan participants’ contributions	7			9			—			—
Collections⁽¹⁾	—			—			25			47
Actuarial (gain) loss	(658		)	(286		)	(46		)	(80		)
Plan change	—			—			(17		)	—
Net transfers (to) from variable fund/401(k) plan⁽²⁾	(26		)	(12		)	—			—
Expenses paid	(6		)	(5		)	—			—
Benefits paid	(719		)	(712		)	(61		)	(83		)
Benefit obligation at end of year	11,725			12,601			428			494

Change in plan assets
Fair value of net plan assets at beginning of year	7,989			7,145			—			—
Actual return on plan assets	454			759			—			—
Plan participants’ contributions	7			9			—			—
Collections⁽¹⁾	—			—			25			47
Net transfers (to) from variable fund/401(k) plan⁽²⁾	(26		)	(12		)	—			—
Employer contributions⁽³⁾	304			805			36			36
Expenses paid	(6		)	(5		)	—			—
Benefits paid	(719		)	(712		)	(61		)	(83		)
Fair value of net plan assets at end of year	8,003			7,989			—			—
Funded status	$	(3,722	)	$	(4,612	)	$	(428	)	$	(494	)

Notes

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

(2) Includes one-time transfers to the 401(k) of $23 million related to the 2018 plan amendment.

(3) Other Post-Retirement Benefits Employer contributions are reduced by provider discounts and rebates.

The pension actuarial gain for 2018 primarily reflects the impact of the increase in the discount rate from 3.85 percent to 4.35 percent, which decreased the liability by $676 million. Based on the results obtained from the most recent experience study performed in 2018, TVA had gains of $138 million due to mortality assumption changes offset by losses of $46 million due to the revision of other demographic and experience based assumptions. In addition, TVA recognized losses related to the change in the assumptions on lump sum elections and annuity benefits as a result of the 2016 plan amendments, which increased the liability by $110 million.

The pension actuarial gain for 2017 primarily reflects the impact of the increase in the discount rate from 3.65 percent to 3.85 percent, which decreased the liability by $292 million. In addition, gains of $117 million were due to mortality assumption changes. These gains were partially offset by a $119 million loss related to a change in the assumption of participant benefit payment elections, based on recent plan experience.

The other post-retirement actuarial gain for 2018 was primarily due to the increase in the discount rate from 3.95 percent to 4.40 percent, which decreased the liability by $28 million. Based on the results obtained from the recent experience study performed during 2018, TVA recognized gains of $6 million due to mortality assumption changes and $23 million of additional gains in other experience related assumptions. These gains were partially offset by losses of $8 million related to per capita claim costs and retiree contributions assumptions and $3 million in actuarial losses related to actual experience different from assumed.

For CY 2019, TVA made plan changes to the other post-retirement benefit plan resulting in a decrease in the liability of $17 million. This decrease is primarily related to the use of a new national preferred formulary and utilization manager program.

The other post-retirement benefit actuarial gain for 2017 was primarily due to lower per capita costs, which decreased the liability by $66 million. In addition, gains of $18 million were due to an increase in the discount rate from 3.70 percent to 3.95 percent, and gains of $6 million resulted from the updated mortality assumption. These gains were slightly offset by a change in the pre-Medicare trend rate, primarily driven by recent increases in prescription drug costs.

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, 2018 and 2017, 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
	2018			2017			2018			2017
Regulatory assets (liabilities)	$	3,119		$	4,009		$	(73	)	$	(23	)
Accounts payable and accrued liabilities	(6		)	(4		)	(28		)	(33		)
Pension and post-retirement benefit obligations⁽¹⁾	(3,716		)	(4,608		)	(400		)	(461		)

Note

(1) The table above excludes $360 million and $408 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, 2018 and 2017, respectively.

Unrecognized amounts included in regulatory assets or liabilities yet to be recognized as components of accrued benefit cost at September 30, 2018 and 2017, consisted of the following:



Post-Retirement Benefit Costs Deferred as Regulatory Assets At September 30
	Pension Benefits						Other Post-Retirement Benefits
	2018			2017			2018			2017
Unrecognized prior service credit	$	(819	)	$	(918	)	$	(159	)	$	(163	)
Unrecognized net loss	3,842			4,885			86			140
Amount capitalized due to actions of regulator	96			42			—			—
Total regulatory assets	$	3,119		$	4,009		$	(73	)	$	(23	)

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan at September 30, 2018 and 2017, were as follows:



Projected Benefit Obligations and Accumulated Benefit Obligations in Excess of Plan Assets At September 30
	2018		2017
Projected benefit obligation	$	11,725	$	12,601
Accumulated benefit obligation	11,659		12,461
Fair value of net plan assets	8,003		7,989

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the years ended September 30, 2018 and 2017, were as follows:



Components of Net Periodic Benefit Cost For the years ended September 30
	Pension Benefits									Other Post-Retirement Benefits
	2018			2017			2016			2018			2017			2016
Service cost	$	53		$	60		$	133		$	14		$	18		$	16
Interest cost	473			464			564			19			21			29
Expected return on plan assets	(478		)	(457		)	(446		)	—			—			—
Amortization of prior service credit	(99		)	(99		)	(23		)	(22		)	(22		)	(6		)
Recognized net actuarial loss	409			472			310			8			14			7
Curtailment	—			—			(78		)	—			—			—
Total net periodic benefit cost as actuarially determined	358			440			460			19			31			46
Amount expensed (capitalized) due to actions of regulator	(54		)	365			(179		)	—			—			—
Change in net periodic benefit cost	$	304		$	805		$	281		$	19		$	31		$	46

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 2019 At September 30, 2018
	Pension Benefits			Other Post-Retirement Benefits			Total
Prior service credit	$	(99	)	$	(24	)	$	(123	)
Net actuarial loss	327			4			331

The amount in the components of net periodic benefit cost expected to be expensed due to actions of the regulator in the next fiscal year is $10 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 Utilized to Determine Benefit Obligations at September 30
	Pension Benefits				Other Post-Retirement Benefits
	2018		2017		2018		2017
Discount rate	4.35	%	3.85	%	4.40	%	3.95	%
Rate of compensation increase	3.60	%	5.43	%	N/A		N/A
Cost of living adjustment (COLA)⁽¹⁾	2.00	%	2.00	%	2.00	%	2.00	%
Pre-Medicare eligible
Initial health care cost trend rate	N/A		N/A		6.25	%	6.50	%
Ultimate health care cost trend rate	N/A		N/A		5.00	%	5.00	%
Year ultimate trend rate is reached	N/A		N/A		2024		2024
Post-Medicare eligible
Initial health care cost trend rate	N/A		N/A		—	%	—	%
Ultimate health care cost trend rate	N/A		N/A		4.00	%	4.00	%
Year ultimate trend rate is reached	N/A		N/A		2021		2021

Note

(1) The COLA rate is the ultimate long-term rate.



Actuarial Assumptions Utilized to Determine Net Periodic Benefit Cost for the Years Ended September 30⁽¹⁾
	Pension Benefits						Other Post-Retirement Benefits
	2018		2017		2016		2018		2017		2016
Discount rate	3.85	%	3.65	%	4.50	%	3.95	%	3.70	%	4.65	%
Expected return on plan assets	6.75	%	7.00	%	7.00	%	N/A		N/A		N/A
Cost of living adjustment (COLA)⁽²⁾	2.00	%	2.00	%	2.40	%	2.00	%	2.00	%	2.40	%
Rate of compensation increase	5.34	%	5.43	%	5.55	%	N/A		N/A		N/A
Pre-Medicare eligible
Initial health care cost trend rate	N/A		N/A		N/A		6.50	%	6.50	%	7.00	%
Ultimate health care cost trend rate	N/A		N/A		N/A		5.00	%	5.00	%	5.00	%
Year ultimate trend rate is reached	N/A		N/A		N/A		2024		2019		2019
Post-Medicare eligible
Initial health care cost trend rate	N/A		N/A		N/A		—	%	—	%	7.00	%
Ultimate health care cost trend rate	N/A		N/A		N/A		4.00	%	4.00	%	5.00	%
Year ultimate trend rate is reached	N/A		N/A		N/A		2021		2021		2019

Notes

(1) The actuarial assumptions used to determine the benefit obligations at September 30 of each year are subsequently used to determine net periodic benefit cost for the following year except the rate of compensation increase assumption.

(2) The COLA assumption is the ultimate rate. The actual calendar year rate is used in determining the expense, and for years thereafter the ultimate rate is used.

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 increased its discount rate used to determine the pension benefit obligation and other post-retirement benefit obligation.

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, the current outlook on capital markets, the asset allocation policy, and the anticipated impact of active management. 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 TVARS asset allocation policy 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 changes in the funded status of TVARS. Changes in the expected return rates are based on annual studies performed by third party professional investment consultants. Taking into account changes in the plan’s asset target allocation mix, capital market outlooks, and the most recent studies, TVA management adopted a 6.75 percent expected long-term rate of return on plan assets in 2017 to calculate the 2018 net periodic pension cost, and had no changes to the assumption in 2018. The 6.75 percent expected long-term return on plan assets will be used to calculate the 2019 net periodic pension cost.

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 2018 and determined that future compensation would likely increase at rates between 2.50 percent and 14.00 percent per year, depending upon the employee's age. The average assumed compensation increase used to determine benefit obligations is based upon the current active participants.

Mortality. The mortality assumption is comprised of a base table that represents the current future life expectancy adjusted by an improvement scale to project future improvements in life expectancy. TVA's mortality assumptions are based upon actuarial projections in combination with studies of the actual mortality experience of TVA's pension and post-retirement benefit plan participants while taking into consideration the published Society of Actuaries ("SOA") mortality table and projection scale at September 30. Based upon the recent 2018 experience study, TVA adjusted its version of the SOA RP-2014 mortality table to reflect increases in female mortality and adopted a modified version of the SOA MP-2017 improvement scale to measure the pension and other post-retirement benefit obligations at September 30, 2018.

The following mortality assumptions were used to determine the benefit obligations for the pension and other post-retirement benefit plans at September 30, 2018, 2017, and 2016. Assumptions used to determine year-end benefit obligations are the assumptions used to determine the subsequent year’s net periodic benefit costs.



Mortality Assumptions At September 30
	2018	2017	2016
Mortality table	RP-2014 table (adjusted)	RP-2014 table (adjusted)	RP-2014 table (adjusted)
Improvement scale	MP-2017 (modified)	MP-2016 (modified)	RP-2015 scale (modified)

Health Care Cost Trends. TVA reviews actual recent cost trends and projected future trends in establishing health care cost trend rates. There were no changes for 2018 in the cost trend assumptions that were adopted in 2017 for pre-Medicare participants. The current trend rate assumption used to determine the pre-Medicare eligible postretirement obligation is 6.25 percent with the rate assumed to gradually decrease each successive year until it reaches a 5.00 percent annual increase in health care costs in 2024 and beyond. TVA maintained the post-Medicare eligible health care cost trend assumption at zero percent through 2020 at which point it increases to 4.00 percent in 2021 and beyond as a result of the move of Medicare eligible retirees to a private exchange beginning January 2017.

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 pension and supplemental benefits 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. Increases in the COLA will be the percent increase in CPI-U over the preceding year less 0.25 percent, with a 6.00 percent cap for any one year.

TVA's COLA assumption is derived from long-term expectations of the expected future rate of inflation, based upon capital market assumptions, economic forecasts, and the Federal Reserve policy. The actual calendar year COLA and the long- term COLA assumption are used to determine the benefit obligation at September 30 and the net periodic benefit costs for the following fiscal year. The actual calendar year COLAs for 2018 and 2017 were 1.84 percent and 0.99 percent, respectively. For 2016 there was no COLA.

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, 2018
Actuarial Assumption	Change in Assumption		Impact on 2018 Pension Cost		Impact on 2018 Projected Benefit Obligation
Discount rate	(0.25	)%	$	16	$	330
Rate of return on plan assets	(0.25	)%	18		N/A
Cost of living adjustments	0.25	%	28		217

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, 2018
	1% Increase		1% Decrease
Effect on total of service and interest cost components for the year	$	4	$	(4	)
Effect on end-of-year accumulated post-retirement benefit obligation	62		(59		)

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 TVARS asset allocation policy for qualified pension plan assets has targets of 43 percent equity including global public and private equity investments, 32 percent fixed income securities, and 25 percent real assets including public 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 TVARS’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 target allocations, and action can be taken, as appropriate, to rebalance the plan’s assets consistent with the asset allocation policy. At September 30, 2018 and 2017, the asset holdings of TVARS included the following:



Asset Holdings of TVARS At September 30
			Plan Assets at September 30
Asset Category	Target Allocation		2018		2017
Global public equity	35	%	44	%	44	%
Private equity	8	%	7	%	5	%
Safety oriented fixed income	17	%	16	%	21	%
Opportunistic fixed income	15	%	10	%	10	%
Public real assets	15	%	15	%	13	%
Private real assets	10	%	8	%	7	%
Total	100	%	100	%	100	%

Fair Value Measurements

The following table provides the fair value measurement amounts for assets held by TVARS at September 30, 2018:



TVA Retirement System At September 30, 2018
	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	$	1,787	$	1,786	$	—	$	1

Preferred securities	10		4		6		—

Debt securities
Corporate debt securities	1,151		—		1,148		3
Residential mortgage-backed securities	377		—		371		6
Debt securities issued by U.S. Treasury	696		696		—		—
Debt securities issued by foreign governments	322		—		304		18
Asset-backed securities	129		—		103		26
Debt securities issued by state/local governments	17		—		17		—
Commercial mortgage-backed securities	74		—		70		4

Commingled funds measured at net asset value⁽³⁾
Equity	1,175		—		—		—
Debt	317		—		—		—
Commodities	232		—		—		—
Blended	109		—		—		—

Institutional mutual funds	109		109		—		—
Cash equivalents and other short-term investments	358		42		316		—
Certificates of deposit	2		—		2		—
Private credit measured at net asset value⁽³⁾	8		—		—		—
Private equity measured at net asset value⁽³⁾	631		—		—		—
Private real estate measured at net asset value⁽³⁾	583		—		—		—

Securities lending collateral	318		—		318		—

Derivatives
Futures	7		7		—		—
Swaps	8		—		8		—
Foreign currency forward receivable	3		—		3		—

Total assets	$	8,423	$	2,644	$	2,666	$	58

Liabilities
Futures	$	3	$	3	$	—	$	—
Foreign currency forward payable	3		—		3		—
Written options	1		—		1		—

Total liabilities	$	7	$	3	$	4	$	—

Notes

(1) Excludes approximately $95 million in net payables associated with security purchases and sales and various other payables.

(2) Excludes a $318 million payable for collateral on loaned securities in connection with TVARS’s participation in securities lending programs.

(3) In accordance with 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, 2017:



TVA Retirement System At September 30, 2017
	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	$	1,771	$	1,770	$	—	$	1

Preferred securities	14		3		11		—

Debt securities
Corporate debt securities	1,100		—		1,088		12
Residential mortgage-backed securities	325		—		317		8
Debt securities issued by U.S. Treasury	193		193		—		—
Debt securities issued by foreign governments	331		—		307		24
Asset-backed securities	146		—		109		37
Debt securities issued by state/local governments	19		—		17		2
Commercial mortgage-backed securities	68		—		62		6

Commingled funds measured at net asset value⁽³⁾
Equity	1,134		—		—		—
Debt	709		—		—		—
Commodities	224		—		—		—

Institutional mutual funds	155		155		—		—
Cash equivalents and other short-term investments	916		—		916		—
Certificates of deposit	6		—		6		—
Private equity measured at net asset value⁽³⁾	500		—		—		—
Private real estate measured at net asset value⁽³⁾	533		—		—		—

Securities lending collateral	369		—		369		—

Derivatives
Futures	18		18		—		—
Swaps	1		—		1		—
Foreign currency forward receivable	4		—		4		—

Total assets	$	8,536	$	2,139	$	3,207	$	90

Liabilities
Futures	$	3	$	2	$	—	$	1
Foreign currency forward payable	6		—		6		—
Swaps	1		—		—		1

Total liabilities	$	10	$	2	$	6	$	2

Notes

(1) Excludes approximately $168 million in net payables associated with security purchases and sales and various other payables.

(2) Excludes a $369 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, 2016	$	97
Net realized/unrealized gains (losses)	2
Purchases, sales, issuances, and settlements (net)	(6		)
Transfers in and/or out of Level 3	(5		)
Balance at September 30, 2017	88
Net realized/unrealized gains (losses)	(4		)
Purchases, sales, issuances, and settlements (net)	(23		)
Transfers in and/or out of Level 3	(3		)
Balance at September 30, 2018	$	58

The following descriptions of the valuation methods and assumptions used by the pension plan to estimate the fair value of investments apply to investments held directly by the pension plan. Third-party pricing vendors provide valuations for investments held by the pension plan in most instances, except for commingled, private credit, 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. Certain securities priced by the investment manager using a proprietary fair value model with unobservable inputs have been classified as Level 3.

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. Certain securities priced by the investment manager using unobservable inputs have been classified as Level 3.

Corporate Debt Securities. Corporate bonds are valued based upon recent bid prices or the average of recent bid and asked prices when available (Level 2 inputs) and, if not available, they are valued through matrix pricing models. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Certain securities priced by the investment manager using broker pricing or unobservable inputs have been classified as Level 3.

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. 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 government-sponsored enterprise 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. Certain securities priced by vendor using a single broker quote or unobservable inputs have been classified as Level 3.

Debt Securities Issued by U.S. Treasury. 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. 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. Certain securities priced by the investment manager using broker quotes or unobservable input have been classified as Level 3.

Debt Securities Issued by State and Local Governments. Debt securities issued by state and local governments are typically priced using market-data-based pricing models, and are therefore classified as Level 2. These pricing models incorporate market data such as quotes, trading levels, spread relationships, and yield curves, as applicable. Certain securities priced using an unobservable input have been classified as Level 3.

Commercial Mortgage-Backed and Asset-Backed Securities. 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. Certain securities priced by investment managers using broker pricing or unobservable inputs have been classified as Level 3.

Commingled Funds. The pension plan invests in commingled funds, which include collective trusts, unit investment trusts, and similar investment funds that predominantly hold debt and/or equity securities as underlying assets. The pension plan’s ownership consists of a pro rata share and not a direct ownership of an underlying investment. These commingled funds are valued at their closing net asset values (or unit value) per share as reported by the managers of the commingled funds and as supported by the unit prices of actual 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 pension plan is invested in equity commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The equity index funds seek to track the performance of a particular index by replicating its capitalization and characteristics. Passive fund benchmark indices include the Russell 1000 index, the S&P 500 index, the MSCI ACWI ex-U.S. index, the MSCI ACWI ex-U.S. Small-Cap index, and the Dow Jones U.S. Select REIT Index. The actively managed equity funds seek to outperform certain equity benchmarks through a combination of fundamental and technical analysis. Active funds select portfolio positions based upon their research.

The pension plan is invested in debt commingled funds, which can be categorized as either passively managed index funds or actively managed funds. The pension plan’s debt index fund invests in a diversified portfolio of fixed-income securities and derivatives of varying maturities to replicate the characteristics of the Bloomberg Barclays Capital U.S. Treasury Inflation-Protected Securities ("TIPS") index. The fund seeks to track the total return of the Bloomberg Barclays Capital U.S. TIPS 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. Varying by strategy, fund objectives include achieving a positive relative total return through active credit selection and providing risk management through desired strategic exposures.

The pension 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 pension plan is invested in commingled funds, which invest across multiple asset classes that can be categorized as blended. These funds seek to outperform a passive benchmark through active security selection. The funds invest in securities across equity, fixed income, currency, and commodities. The portfolios employ fundamental, quantitative, and technical analysis.

The pension 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.

Institutional Mutual Funds. Investments in institutional mutual funds are valued at prices based on their net asset value. Institutional mutual funds have daily published market prices that represent their net asset value (or unit value) per share and are classified as Level 1.

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.

Private Credit Funds. Private credit 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 credit limited partnerships generally focus on direct lending investments of senior secured first-lien loans to lower-middle market companies and seek to obtain financial returns through high income potential and occasional equity upside. The limited partnerships generally have a term life of seven years and are diversified by sector and industry.

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 pension 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 pension 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 pension 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 pension plan is invested in a commingled fund which invests across multiple asset classes that can be categorized as blended. The fund seeks to achieve capital appreciation while targeting a specific risk profile. The fund invests in securities across equity, fixed income, currency, and commodities. The portfolio employs fundamental, quantitative, and technical analysis.

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 pension 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.

Securities Lending Collateral. Collateral held under securities lending arrangements are invested in highly liquid short-term securities, primarily repurchase agreements. The securities are often priced at cost, which approximates fair value due to the short-term nature of the instruments. These securities are classified as Level 2.

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

Futures. The pension plan enters into 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 pension 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 pension plan enters into various types of swaps. Credit default swaps are priced at market using models that consider cash flows, credit curves, recovery rates, and other factors. The pricing is performed by third-party vendors, 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 pension plan's swaps are generally classified as Level 2 based on the observable nature of their pricing inputs.

Foreign currency forwards. The pension plan enters into foreign currency forwards. All commitments are marked to market daily at the applicable translation rates, and any resulting unrealized gains or losses are recorded. Foreign currency forwards are priced by third-party vendors and are classified as Level 2.

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 pension 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, 2018
	Pension Benefits⁽¹⁾		Other Post-Retirement Benefits
2019	$	779	$	29
2020	776		27
2021	772		25
2022	771		24
2023	768		23
2024 - 2028	3,771		109

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 to the pension plan for 2018 and 2017 was $300 million; however in 2017, TVA made an $800 million contribution to TVARS, including a one-time additional discretionary $500 million contribution to TVA's pension plan, which was recognized as pension expense. Additional contributions at any time to TVARS in excess of the minimum contribution determined are maintained and credited with interest and may be used toward the required contributions in future years at the direction of TVA. TVA has committed to make a minimum contribution of $300 million per year through 2036 or until the plan has reached and remained at 100 percent funded status under the actuarial rules applicable to TVARS. TVA made SERP contributions of $4 million and $5 million for 2018 and 2017, respectively. TVA made cash contributions to the other post-retirement benefit plans of $25 million (net of $15 million in rebates) and $30 million (net of $20 million in rebates) for 2018 and 2017, respectively. TVA expects to contribute $300 million to TVARS, $6 million to the SERP, and $29 million to the other post-retirement benefit plans in 2019.