XML 42 R18.htm IDEA: XBRL DOCUMENT
v3.8.0.1

Risk Management Activities and Derivative Transactions | 3 Months Ended
--- | ---
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Risk Management Activities and Derivative Transactions | TVA is exposed to various risks. These include risks related to commodity prices, investment prices, interest rates, currency exchange rates, and inflation as well as counterparty credit and performance risks. To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures. Other than certain derivative instruments in its trust investment funds, it is TVA’s policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes. TVA has suspended its Financial Trading Program ("FTP") and no longer uses financial instruments to hedge risks related to commodity prices; however, TVA plans to continue to manage fuel price volatility through other methods and to periodically reevaluate its suspended FTP program for future use of financial instruments. Overview of Accounting Treatment TVA recognizes certain of its derivative instruments as either assets or liabilities on its consolidated balance sheets at fair value. The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (for example, cash flow hedge). The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive:
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1) Amount of Mark-to-Market Gain (Loss) Recognized in OCI
|  |  |  |  |  | Three Months Ended December 31,
Derivatives in Cash Flow Hedging Relationship |  | Objective of Hedge Transaction |  | Accounting for Derivative Hedging Instrument |  | 2017 |  | 2016
Currency swaps |  | To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk) |  | Unrealized gains and losses are recorded in AOCI and reclassified to interest expense to the extent they are offset by gains and losses on the hedged transaction. |  | $ | 39 |  |  | $ | (8 | )
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1) Amount of Gain (Loss) Reclassified from OCI to Interest Expense
|  | Three Months Ended December 31,
Derivatives in Cash Flow Hedging Relationship |  | 2017 |  | 2016
Currency swaps |  | $ | 3 |  |  | $ | (38 | )
Note (1) There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $1 million of losses from AOCI to interest expense within the next twelve months to offset amounts anticipated to be recorded in interest expense related to net exchange gain on the debt.
Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment(1) Amount of Gain (Loss) Recognized in Income on Derivatives
|  |  |  |  |  | Three Months Ended December 31,
Derivative Type |  | Objective of Derivative |  | Accounting for Derivative Instrument |  | 2017 |  | 2016
Interest rate swaps |  | To fix short-term debt variable rate to a fixed rate (interest rate risk) |  | Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in interest expense when incurred during the settlement period. |  | $ | (24 | ) |  | $ | (26 | )
Commodity contract derivatives |  | To protect against fluctuations in market prices of purchased coal or natural gas (price risk) |  | Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses due to contract settlements are recognized in fuel expense as incurred. |  | 3 |  |  | (2 | )
Commodity derivatives under FTP |  | To protect against fluctuations in market prices of purchased commodities (price risk) |  | Mark-to-market gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses are recognized in fuel expense or purchased power expense when the related commodity is used in production. |  | 8 |  |  | (14 | )
Note (1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2017 and 2016.
Fair Values of TVA Derivatives
|  | At December 31, 2017 |  | At September 30, 2017
Derivatives That Receive Hedge Accounting Treatment |  | Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Currency swaps |  |  |  |  |  |  |  |
£200 million Sterling |  | $ | (59 | ) |  | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(55) |  | $ | (67 | ) |  | Accounts payable and accrued liabilities $(5); Other long-term liabilities $(62)
£250 million Sterling |  | 1 |  |  | Accounts payable and accrued liabilities $(4); Other long-term assets $5 |  | (15 | ) |  | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(11)
£150 million Sterling |  | (7 | ) |  | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(4) |  | (21 | ) |  | Accounts payable and accrued liabilities $(2); Other long-term liabilities $(19)
|  | At December 31, 2017 |  | At September 30, 2017
Derivatives That Do Not Receive Hedge Accounting Treatment |  | Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Interest rate swaps |  |  |  |  |  |  |  |
$1.0 billion notional |  | (1,052 | ) |  | Accounts payable and accrued liabilities $(64); Other long-term liabilities $(988) |  | (1,093 | ) |  | Accounts payable and accrued liabilities $(66); Other long-term liabilities $(1,027)
$476 million notional |  | (394 | ) |  | Accounts payable and accrued liabilities $(24); Other long-term liabilities $(370) |  | (410 | ) |  | Accounts payable and accrued liabilities $(25); Other long-term liabilities $(385)
$42 million notional |  | (8 | ) |  | Accounts payable and accrued liabilities $(2); Other long-term liabilities $(6) |  | (8 | ) |  | Accounts payable and accrued liabilities $(2); Other long-term liabilities $(6)
Commodity contract derivatives |  | (77 | ) |  | Other current assets $10; Other long-term assets $6; Other long-term liabilities $(35); Accounts payable and accrued liabilities $(58) |  | (60 | ) |  | Other current assets $8; Other long-term assets $2; Other long-term liabilities $(9); Accounts payable and accrued liabilities $(61)
FTP |  |  |  |  |  |  |  |
Derivatives under FTP(1) |  | — |  |  |  |  | (5 | ) |  | Other current assets $(4); Accounts payable and accrued liabilities $(1)
Note (1) Fair values of certain derivatives under the FTP that were in net liability positions totaling $4 million at September 30, 2017, were recorded in TVA's margin cash accounts in Other current assets. These derivatives were transacted with futures commission merchants, and cash deposits have been posted to the margin cash accounts held with each futures commission merchant to offset the net liability positions in full. At December 31, 2017, TVA had no derivatives under the FTP in net liability positions. Cash Flow Hedging Strategy for Currency Swaps To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred. TVA had three currency swaps outstanding as of December 31, 2017, with total currency exposure of £600 million and expiration dates ranging from 2021 to 2043. When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability is offset by an equal amount of loss on the swap contract that is reclassified out of AOCI. Conversely, the exchange loss on the Bond liability is offset by an equal amount of gain on the swap contract that is reclassified out of AOCI. All such exchange gains or losses on the Bond liability are included in Long-term debt, net. The offsetting exchange losses or gains on the swap contracts are recognized in AOCI. If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense. The values of the currency swap asset and liabilities are included in Other long-term assets, Accounts payable and accrued liabilities, and Other long-term liabilities on the consolidated balance sheets. Derivatives Not Receiving Hedge Accounting Treatment Interest Rate Derivatives. Generally TVA uses interest rate swaps to fix variable short-term debt to a fixed rate, and TVA uses regulatory accounting treatment to defer the MtM gains and losses on its interest rate swaps. The net deferred unrealized gains and losses are classified as regulatory assets or liabilities on TVA's consolidated balance sheets and are included in the ratemaking formula when gains or losses are realized. The values of these derivatives are included in Accounts payable and accrued liabilities and Other long-term liabilities on the consolidated balance sheets, and realized gains and losses, if any, are included in TVA's consolidated statements of operations. For the three months ended December 31, 2017 and 2016, the changes in fair market value of the interest rate swaps resulted in deferred unrealized gains of $28 million and $441 million, respectively. Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market all such contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At December 31, 2017, TVA's coal contract derivatives had terms of up to three years and natural gas contract derivatives had terms of up to four years.
Commodity Contract Derivatives
| At December 31, 2017 |  | At September 30, 2017
| Number of Contracts |  | Notional Amount |  | Fair Value (MtM) |  | Number of Contracts |  | Notional Amount |  | Fair Value (MtM)
Coal contract derivatives | 11 |  | 23 million tons |  | $ | (73 | ) |  | 20 |  | 17 million tons |  | $ | (67 | )
Natural gas contract derivatives | 46 |  | 253 million mmBtu |  | $ | (4 | ) |  | 53 |  | 271 million mmBtu |  | $ | 7 |
Derivatives Under FTP. TVA has suspended its FTP and no longer uses financial instruments to hedge risks related to commodity prices. At December 31, 2017, TVA had no open commodity derivatives under the FTP.
Derivatives Under Financial Trading Program(1)
| At December 31, 2017 |  | At September 30, 2017
| Notional Amount (in mmBtu) |  | Fair Value (MtM) (in millions) |  | Notional Amount (in mmBtu) |  | Fair Value (MtM) (in millions)
Natural gas |  |  |  |  |  |  |
Swap contracts | — |  |  | $ | — |  |  | 2,800,000 |  |  | $ | (5 | )
Note (1) Fair value amounts presented are based on the net commodity position with the counterparty. Notional amounts disclosed represent the net value of contractual amounts. Prior to the suspension of the FTP, TVA deferred all FTP unrealized gains (losses) as regulatory liabilities (assets) and recorded only realized gains or losses to match the delivery period of the underlying commodity. TVA experienced the following unrealized and realized gains and losses related to the FTP at the dates and during the periods, as applicable, set forth in the tables below:
Financial Trading Program Unrealized Gains (Losses)
|  | At December 31, 2017 |  | At September 30, 2017
FTP unrealized gains (losses) deferred as regulatory liabilities (assets) |  |  |  |
Natural gas |  | $ | — |  |  | $ | (5 | )
Financial Trading Program Realized Gains (Losses)
|  | Three Months Ended December 31,
|  | 2017 |  | 2016
Decrease (increase) in fuel expense |  |  |  |
Natural gas |  | $ | (6 | ) |  | $ | (11 | )
Decrease (increase) in purchased power expense |  |  |  |
Natural gas |  | (2 | ) |  | (3 | )
Offsetting of Derivative Assets and Liabilities The amounts of TVA's derivative instruments as reported in the consolidated balance sheets at December 31, 2017, and September 30, 2017, are shown in the table below:
Derivative Assets and Liabilities
| At December 31, 2017
| Gross Amounts of Recognized Assets/Liabilities |  | Gross Amounts Offset in the Balance Sheet (1) |  | Net Amounts of Assets/Liabilities Presented in the Balance Sheet (2)
Assets |  |  |  |  |
Currency swaps(3) | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Commodity derivatives not subject to master netting or similar arrangement | $ | 16 |  |  | $ | — |  |  | $ | 16 |
Total assets | $ | 17 |  |  | $ | — |  |  | $ | 17 |
Liabilities |  |  |  |  |
Currency swaps(3) | $ | 66 |  |  | $ | — |  |  | $ | 66 |
Interest rate swaps(3) | 1,454 |  |  | — |  |  | 1,454 |
Total derivatives subject to master netting or similar arrangement | 1,520 |  |  | — |  |  | 1,520 |
Commodity derivatives not subject to master netting or similar arrangement | 93 |  |  | — |  |  | 93 |
Total liabilities | $ | 1,613 |  |  | $ | — |  |  | $ | 1,613 |
| At September 30, 2017
| Gross Amounts of Recognized Assets/Liabilities |  | Gross Amounts Offset in the Balance Sheet(1) |  | Net Amounts of Assets/Liabilities Presented in the Balance Sheet(2)
Assets |  |  |  |  |
Commodity derivatives not subject to master netting or similar arrangement | $ | 10 |  |  | $ | — |  |  | $ | 10 |
Liabilities |  |  |  |  |
Currency swaps(3) | $ | 103 |  |  | $ | — |  |  | $ | 103 |
Interest rate swaps(3) | 1,511 |  |  | — |  |  | 1,511 |
Commodity derivatives under FTP | 5 |  |  | (4 | ) |  | 1 |
Total derivatives subject to master netting or similar arrangement | 1,619 |  |  | (4 | ) |  | 1,615 |
Commodity derivatives not subject to master netting or similar arrangement | 70 |  |  | — |  |  | 70 |
Total liabilities | $ | 1,689 |  |  | $ | (4 | ) |  | $ | 1,685 |
Notes (1) Amounts primarily include counterparty netting of derivative contracts, margin account deposits for futures commission merchants transactions, and cash collateral received or paid in accordance with the accounting guidance for derivatives and hedging transactions. (2) There are no derivative contracts subject to a master netting arrangement or similar agreement that are not offset in the consolidated balance sheets. (3) Letters of credit of approximately $1.0 billion and $1.2 billion were posted as collateral at December 31, 2017, and September 30, 2017, respectively, to partially secure the liability positions of one of the currency swaps and one of the interest rate swaps in accordance with the collateral requirements for these derivatives. Other Derivative Instruments Investment Fund Derivatives. Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), the Asset Retirement Trust ("ART"), the Supplemental Executive Retirement Plan ("SERP"), and the TVA Deferred Compensation Plan ("DCP"). All securities in these trusts and plans are classified as trading. See Note 14 — Investment Funds for a discussion of the trusts and plans and the types of investments that they hold. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At December 31, 2017, and September 30, 2017, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net asset positions totaling $37 million and $19 million at December 31, 2017, and September 30, 2017, respectively. Collateral. TVA's interest rate swaps and currency swaps contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold. At December 31, 2017, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.5 billion. TVA's collateral obligations at December 31, 2017, under these arrangements were approximately $1 billion, for which TVA had posted approximately $1 billion in letters of credit. These letters of credit reduce the available balance under the related credit facilities. TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral. For all of its derivative instruments with credit-risk related contingent features:
• | If TVA remains a majority-owned U.S. government entity but Standard & Poor's Financial Services, LLC ("S&P") or Moody's Investors Service, Inc. ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA's collateral obligations would likely increase by $22 million, and
• | If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional collateral.
Counterparty Risk TVA may be exposed to certain risks when a counterparty has the potential to fail to meet its obligations in accordance with agreed terms. These risks may be related to credit, operational, or nonperformance matters. To mitigate certain counterparty risk, TVA analyzes the counterparty’s financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty, on an ongoing basis, and when required, employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk. Customers. TVA is exposed to counterparty credit risk associated with trade accounts receivable from delivered power sales to LPCs, and from industries and federal agencies directly served, all located in the Tennessee Valley region. TVA is also exposed to risk from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements. See Note 1 — Allowance for Uncollectible Accounts and Note 3. Suppliers. If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract. In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power. Nuclear fuel requirements, including uranium mining and milling, conversion services, enrichment services, and fabrication services, are met from various suppliers, depending on the type of service. TVA purchases the majority of its natural gas requirements from a variety of suppliers under short-term contracts. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at December 31, 2017. The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (i.e., barge, rail, and truck). Emerging technologies, environmental regulations, and low natural gas prices have contributed to weak demand for coal. As a result, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies. Continued difficulties by coal suppliers could result in consolidations, additional bankruptcies, restructurings, contract renegotiations, or other scenarios. Under these scenarios and TVA’s potential available responses, TVA does not anticipate a significant financial impact in obtaining continued fuel supply for its coal-fired generation. On March 29, 2017, one of TVA’s suppliers, Westinghouse Electric Company (“Westinghouse”), filed for protection under Chapter 11 of the United States Bankruptcy Code. On January 4, 2018, Brookfield Business Partners L.P. ("Brookfield Business Partners"), together with institutional partners, announced that they have entered into an agreement to acquire 100% of Westinghouse, which is currently owned by Toshiba Corp. Brookfield Business Partners is listed on the New York and Toronto stock exchanges and is the flagship listed business services and industrials company of Brookfield Asset Management Inc., a leading global alternative asset manager with over $265 billion of assets under management, of which approximately $141 billion are in the U.S. Closing of the transaction remains subject to Bankruptcy Court approval and customary closing conditions including, among others, regulatory approvals. Closing is expected to occur in the fourth quarter of 2018. TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant. TVA has determined that the supplier has the equivalent of a non-investment grade credit rating; therefore, the supplier has provided credit assurance to TVA under the terms of the agreement. Derivative Counterparties. TVA has entered into physical and financial contracts that qualify as derivatives for hedging purposes, and TVA's NDT fund has entered into derivative contracts for investment purposes. If a counterparty to one of TVA's hedging transactions defaults, TVA might incur substantial costs in connection with entering into a replacement hedging transaction. If a counterparty to the derivative contracts into which the NDT fund has entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless. TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At December 31, 2017, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT were with banking counterparties whose Moody's credit ratings were A3 or higher. TVA classifies qualified forward coal and natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At December 31, 2017, the coal derivative contracts were with counterparties whose Moody's credit rating, or TVA’s internal analysis when such information was unavailable, ranged from C, or D, respectively, to Ba3. At December 31, 2017, the natural gas derivative contracts were with counterparties whose Moody's ratings ranged from B1 to A2. See Suppliers above for discussion of challenges facing the coal industry. TVA's total value for derivative contracts with coal and natural gas counterparties in an asset position as of December 31, 2017, was approximately $16 million. TVA previously utilized two futures commission merchants ("FCMs") to clear commodity contracts, including futures, options, and similar financial derivatives. These transactions were executed under the FTP by the FCMs on exchanges on behalf of TVA. TVA maintained margin cash accounts with the FCMs. TVA made deposits to the margin cash accounts to adequately cover any net liability positions on its derivatives transacted with the FCMs. At December 31, 2017, TVA had no positions under the FTP. See the note to the Fair Values of TVA Derivatives table above.

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration