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Risk Management Activities and Derivative Transactions | 3 Months Ended
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Dec. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Risk Management Activities and Derivative Transactions | Risk Management Activities and Derivative Transactions TVA is exposed to various 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 historically 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. In November 2021, the TVA Board approved the elimination of the Value at Risk aggregate transaction limit for the Financial Hedging Program (formerly the Financial Trading Program, which was suspended in 2014) and authorized the use of tolerances and measures that will be reviewed annually by the TVA Board. The tolerances will address counterparty exposure, liquidity risk, and reduction in fuel cost volatility. In addition, the TVA Board approved certain administrative changes to the Financial Hedging Program. In December 2021, TVA reinstated the Financial Hedging Program, and activity began under the program in the second quarter of 2022. 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 Accumulated Other Comprehensive Income (Loss) (in millions)
|  |  |  |  |  | Three Months Ended December 31 |  |  |
Derivatives in Cash Flow Hedging Relationship |  | Objective of Hedge Transaction |  | Accounting for Derivative Hedging Instrument |  | 2021 |  | 2020 |  |  |  |  |
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 |  | $ | 5 |  |  | $ | 101 |  |  |  |  |  |
Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)(1) Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest Expense (in millions)
|  | Three Months Ended December 31 |  |  |
Derivatives in Cash Flow Hedging Relationship |  | 2021 |  | 2020 |  |  |  |  |
Currency swaps |  | $ | 1 |  |  | $ | 45 |  |  |  |  |  |
Note (1) There were no amounts excluded from effectiveness testing for any of the periods presented. Based on forecasted foreign currency exchange rates, TVA expects to reclassify approximately $7 million of gains from AOCI to Interest expense within the next 12 months to offset amounts anticipated to be recorded in Interest expense related to exchange gain on the debt.
Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment Amount of Gain (Loss) Recognized in Income on Derivatives(1)
|  |  |  |  |  | Three Months Ended December 31 |  |  |
Derivative Type |  | Objective of Derivative |  | Accounting for Derivative Instrument |  | 2021 |  | 2020 |  |  |  |  |
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 and are presented in operating cash flow |  | $ | (29) |  |  | $ | (29) |  |  |  |  |  |
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 were no related gains (losses) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2021 and 2020.
Fair Values of TVA Derivatives (in millions)
| At December 31, 2021 |  | At September 30, 2021
Derivatives That Receive Hedge Accounting Treatment:
| Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Currency swaps |  |  |  |  |  |  |
£250 million Sterling | $ | (35) |  |  | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(31) |  | $ | (36) |  |  | Accounts payable and accrued liabilities $(4); Other long-term liabilities $(32)
£150 million Sterling | (43) |  |  | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(40) |  | (47) |  |  | Accounts payable and accrued liabilities $(3); Other long-term liabilities $(44)
Derivatives That Do Not Receive Hedge Accounting Treatment:
| Balance |  | Balance Sheet Presentation |  | Balance |  | Balance Sheet Presentation
Interest rate swaps |  |  |  |  |  |  |
$1.0 billion notional | $ | (1,169) |  |  | Accounts payable and accrued liabilities $(62); Accrued interest $(17); Other long-term liabilities $(1,090) |  | $ | (1,182) |  |  | Accounts payable and accrued liabilities $(44); Accrued interest $(37); Other long-term liabilities $(1,101)
$476 million notional | (452) |  |  | Accounts payable and accrued liabilities $(29); Accrued interest $(2); Other long-term liabilities $(421) |  | (455) |  |  | Accounts payable and accrued liabilities $(22); Accrued interest $(10); Other long-term liabilities $(423)
$42 million notional(1) | (1) |  |  | Accrued interest $(1) |  | (2) |  |  | Accounts payable and accrued liabilities $(1); Accrued interest $(1)
Commodity contract derivatives | 105 |  |  | Other current assets $86; Other long-term assets $25; Accounts payable and accrued liabilities $(5); Other long-term liabilities $(1) |  | 247 |  |  | Other current assets $210; Other long-term assets $40; Accounts payable and accrued liabilities $(3)
Note (1) Represents two interest rate swaps with notional amounts of $28 million and $14 million. Cash Flow Hedging Strategy for Currency Swaps To protect against exchange rate risk related to two British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurre d. TVA h ad two currency swaps outstanding at December 31, 2021, with total currency exposure of £400 million and expiration dates ranging fr om 2032 to 2043. When the dollar strengthens against the British pound sterling, the exchange gain on the Bond liability and related accrued interest 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 and related accrued interest 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 and related accrued interest are included in Long-term debt, net and Accrued interest, respectively. 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 liabilities are included in 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 mark-to-market ("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, Accrued interest, and Other long-term liabilities on the Consolidated Balance Sheets, and realized gains and losses, if any, are included on TVA's Consolidated Statements of Operations. For the three months ended December 31, 2021 and 2020, the changes in fair market value of the interest rate swaps resulted in the deferral of unrealized losses of $11 million and unrealized gains of $143 million, respectively. TVA may hold short-term debt balances lower than the notional amount of the interest rate swaps from time to time due to changes in business conditions and other factors. While actual balances vary, TVA generally plans to maintain average balances of short-term debt equal to or in excess of the combined notional amount of the interest rate swaps. Commodity Derivatives. TVA enters into certain derivative contracts for natural gas that require physical delivery of the contracted quantity of the commodity. TVA marks to market natural gas contracts and defers the fair market values as regulatory assets or liabilities on a gross basis. At December 31, 2021, TVA's natural gas contract derivatives had terms of up to three years.
Commodity Contract Derivatives
| At December 31, 2021 |  | At September 30, 2021
| Number of Contracts |  | Notional Amount |  | Fair Value (MtM) |  | Number of Contracts |  | Notional Amount |  | Fair Value (MtM)
Natural gas contract derivatives | 42 |  | 361 million mmBtu |  | $ | 105 |  |  | 40 |  | 263 million mmBtu |  | $ | 247 |
Offsetting of Derivative Assets and Liabilities The amounts of TVA's derivative instruments as reported on the Consolidated Balance Sheets are shown in the table below:
Derivative Assets and Liabilities(1) (in millions)
| At December 31, 2021 |  |  |  |  | At September 30, 2021
Assets |  |  |  |  |  |
Commodity derivatives not subject to master netting or similar arrangement | $ | 111 |  |  |  |  |  | $ | 250 |
Liabilities |  |  |  |  |  |
Currency swaps(2) | $ | 78 |  |  |  |  |  | $ | 83 |
Interest rate swaps(2) | 1,622 |  |  |  |  |  | 1,639 |
Total derivatives subject to master netting or similar arrangement | 1,700 |  |  |  |  |  | 1,722 |
Commodity derivatives not subject to master netting or similar arrangement | 6 |  |  |  |  |  | 3 |
Total liabilities | $ | 1,706 |  |  |  |  |  | $ | 1,725 |
Notes (1) Offsetting 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. There were no material offsetting amounts on TVA's Consolidated Balance Sheets at either December 31, 2021, or September 30, 2021. (2) Letters of credit of approximately $1.1 billion and $1.2 billion were posted as collateral at December 31, 2021, and September 30, 2021, 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"). See Note 15 — Fair Value Measurements — Investment Funds for a discussion of the trusts, plans, and types of investments. The NDT and ART may invest in derivative instruments which may include swaps, futures, options, forwards, and other instruments. At December 31, 2021, and September 30, 2021, the NDT held investments in forward contracts to purchase debt securities. The fair values of these derivatives were in net liability positions totaling $2 million and in net asset positions totaling $2 million at December 31, 2021, and September 30, 2021, 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, 2021, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.7 billion. TVA's collateral obligations at December 31, 2021, under these arrangements were approximately $1.1 billion, for which TVA had posted approximately $1.1 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 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. 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. Of the $1.3 billion and $1.5 billion of receivables from power sales outstanding at December 31, 2021, and September 30, 2021, respectively, nearly all counterparties were rated investment grade. The obligations of customers that are not investment grade are secured by collateral. T VA 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. TVA believes its policies and procedures for counterparty performance risk reviews have generally protected TVA against significant exposure related to market and economic conditions. See Note 1 — Summary of Significant Accounting Policies — Allowance for Uncollectible Accounts, Note 3 — Accounts Receivable, Net, and Note 7 — Other Long-Term Assets. TVA had revenue from two LPCs that collectively accounted for 16 percent of total operating revenues for both the three months ended December 31, 2021 and the three months ended December 31, 2020. Suppliers. TVA assesses potential supplier performance risks, including procurement of fuel, parts, and services. If suppliers are unable to perform under TVA's existing contracts or if TVA is unable to obtain similar services or supplies from other vendors, TVA could experience delays, disruptions, additional costs, or other operational outcomes that may impact generation, maintenance, and capital programs. 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. TVA continues evaluating potential supplier performance risks and supplier impact but cannot determine or predict the duration of such risks/impacts or the extent to which such risks/impacts could affect TVA's business, operations and financial results, or cause potential business disruptions. Natural Gas. TVA purchases a significant amount of its natural gas requirements through contracts with a variety of suppliers and purchases substantially all of its fuel oil requirements on the spot market. TVA delivers to its gas fleet under firm and non-firm transportation contracts on multiple interstate natural gas pipelines. TVA contracts for storage capacity that allows for operational flexibility and increased supply during peak gas demand scenarios or supply disruptions. TVA plans to continue using contracts of various lengths and terms to meet the projected natural gas needs of its natural gas fleet. TVA also maintains on-site, fuel oil backup to operate at the majority of the combustion turbine sites in the event of major supply disruptions. In the event of nonperformance by suppliers, TVA believes that it can obtain replacement natural gas. Coal. To help ensure a reliable supply of coal, TVA had coal contracts with multiple suppliers at December 31, 2021. The contracted supply of coal is sourced from multiple geographic regions of the U.S. and is to be delivered via various transportation methods (e.g., barge, rail, and truck). As a result of emerging technologies, environmental regulations, and lower gas prices on average over the past few years, coal suppliers are facing increased financial pressure, which has led to relatively poor credit ratings and bankruptcies, restructuring, mine closures, or other scenarios. A continued decline in demand for coal could result in further consolidations, additional bankruptcies, restructuring, mine closures, or other scenarios. Current market conditions indicate limited availability of spot market coal due to increased exports, utility demand, and mine capacity capability. TVA experienced challenges in 2021 related to coal supply, as a result of supply limitation and transportation challenges, and coal supply and transportation continue to be constrained in 2022. In addition, as a result of an event at one of TVA’s fuel storage locations and coal handling service providers, TVA implemented terminal service options at other locations in 2022, which have met and are expected to continue to meet TVA's interim coal handling needs. Plant operations still could be affected by the limited offsite coal blending options, limited available inventory capacity, and longer locational lead times associated with the alternative terminals. At this time, however, TVA has been able to manage such impacts. TVA will continue to monitor these challenges and will utilize its contracting strategy and diverse generation portfolio to balance needs and ensure adequate fuel supplies. Nuclear Fuel. Nuclear fuel is obtained predominantly through long-term uranium concentrate supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. The supply markets for uranium concentrates and certain nuclear fuel services are subject to price fluctuations and availability restrictions. Supply market conditions may make procurement contracts subject to credit risk related to the potential nonperformance of counterparties. In the event of nonperformance by these or other suppliers, TVA believes that replacement uranium concentrate and nuclear fuel services can be obtained, although at prices that may be unfavorable when compared to the prices under the current supply agreements. Purchased Power. TVA acquires power from a variety of power producers through long-term and short-term power purchase agreements ("PPAs") as well as through spot market purchases. In order to meet customer preferences and requirements for cleaner and greener energy, TVA has entered into certain PPAs with renewable resource providers. Because of the long-term nature and reliability of purchased power, TVA requires that the PPAs contain certain counterparty performance assurance requirements, to insure counterparty performance during the term of the agreements. Other Suppliers. TVA has experienced an increase in supplier impacts primarily as a result of COVID-19, such as delays and price fluctuations, and availability of supplies, but has been able to manage these impacts through existing contracts and increased lead times and communications with suppliers; therefore, TVA has not experienced significant business disruptions at this time. Derivative Counterparties. T VA has entered into physical and financial contracts that are classified as derivatives for hedging purposes, and TVA's NDT, ART, and qualified defined benefit pension plan have entered into derivative contracts for investment purposes. If a counterparty to one of the physical or financial derivative transactions defaults, TVA might incur substantial costs in connection with entering into a replacement transaction. If a counterparty to the derivative contracts into which the NDT, the ART, or the qualified pension plan have 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, coal, and gas industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions. At December 31, 2021, all of TVA's currency swaps and interest rate swaps as well as all of the derivatives in the NDT and ART were with banking counterparties whose Moody's credit ratings were A2 or higher. TVA classifies forward natural gas contracts as derivatives. See Derivatives Not Receiving Hedge Accounting Treatment above. At December 31, 2021, the natural gas contracts were with counterparties whose ratings ranged from B1 to A1.

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- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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