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EX-32.2 - EXHIBIT 32.2 - Tennessee Valley Authorityexhibit32-2.htm
EX-31.2 - EXHIBIT 31.2 - Tennessee Valley Authorityexhibit31-2.htm
EX-31.1 - EXHIBIT 31.1 - Tennessee Valley Authorityexhibit31-1.htm
EX-32.1 - EXHIBIT 32.1 - Tennessee Valley Authorityexhibit32-1.htm



  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE
 SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-52313


TENNESSEE VALLEY AUTHORITY
(Exact name of registrant as specified in its charter)
     
A corporate agency of the United States created by an act of Congress
 (State or other jurisdiction of incorporation or organization)
 
62-0474417
 (IRS Employer Identification No.)
 
400 W. Summit Hill Drive
Knoxville, Tennessee
 (Address of principal executive offices)
 
37902
 (Zip Code)
(865) 632-2101
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes xNoo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes oNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer  o                                                                                     Accelerated filer o
Non-accelerated filer    x                                                                                     Smaller reporting company  o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x



   
             
             
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             PART II - OTHER INFORMATION
 
       
           
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Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (the “Quarterly Report”):
 
Term or Acronym
 
Definition
AFUDC
 
Allowance for funds used during construction
ARO
 
Asset retirement obligation
ARP
 
Acid Rain Program
ART
 
Asset Retirement Trust
ASLB
 
Atomic Safety and Licensing Board
BEST
 
Bellefonte Efficiency and Sustainability Team
BREDL
 
Blue Ridge Environmental Defense League
CAA
 
Clean Air Act
CCP
 
Coal combustion products
CERCLA
 
Comprehensive Environmental Response, Compensation, and Liability Act
CME
 
Chicago Mercantile Exchange
CO2
 
Carbon dioxide
COLA
 
Cost of living adjustment
CVA
 
Credit valuation adjustment
CY
 
Calendar year
EIS
 
Environmental Impact Statement
EPA
 
Environmental Protection Agency
FASB
 
Financial Accounting Standards Board
FCA
 
Fuel cost adjustment
FERC
 
Federal Energy Regulatory Commission
FTP
 
Financial trading program
GAAP
 
Accounting principles generally accepted in the United States of America
GHG
 
Greenhouse gas
GWh
 
Gigawatt hour(s)
IRP
 
Integrated Resource Plan
KDAQ
 
Kentucky Division for Air Quality
kWh
 
Kilowatt hour(s)
MD&A
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
mmBtu
 
Million British thermal unit(s)
MtM
 
Mark-to-market
MW
 
Megawatt
MWh
 
Megawatt hours (s)
NAAQS
 
National Ambient Air Quality Standards
NDT
 
Nuclear Decommissioning Trust
NEPA
 
National Environmental Policy Act
NERC
 
North American Electric Reliability Corporation
NOV
 
Notice of Violation
NOx
 
Nitrogen oxides
NPDES
 
National Pollutant Discharge Elimination System
NRC
 
Nuclear Regulatory Commission
NRP
 
Natural Resource Plan
NSR
 
New Source Review
PSD
 
Prevention of Significant Deterioration
QSPE
 
Qualifying Special-Purpose Entity
REIT
 
Real estate investment trust
SACE
 
Southern Alliance for Clean Energy
SCRs
 
Selective catalytic reduction systems
SEC
 
Securities and Exchange Commission


 
SERP
 
Supplemental Executive Retirement Plan
Seven States
 
Seven States Power Corporation
SO2
 
Sulfur dioxide
SSSL
 
Seven States Southaven, LLC
TDEC
 
Tennessee Department of Environment & Conservation
TVARS
 
Tennessee Valley Authority Retirement System
VIE
 
Variable Interest Entities




This Quarterly Report contains forward-looking statements relating to future events and future performance.  All statements other than those that are purely historical may be forward-looking statements.  In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” or other similar expressions.

Although the Tennessee Valley Authority (“TVA”) believes that the assumptions underlying the forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements.  Numerous factors could cause actual results to differ materially from those in the forward-looking statements.  These factors include, among other things:

 
New or changed laws, regulations, and administrative orders, including those related to environmental matters, and the costs of complying with these new or changed laws, regulations, and administrative orders, as well as complying with existing laws, regulations, and administrative orders;
 
The requirement or decision to make additional contributions to TVA’s pension or other post-retirement benefit plans or to TVA’s Nuclear Decommissioning Trust (“NDT”);
 
Events at a TVA nuclear facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;
 
Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities and on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, negatively affect the cost and schedule for completing Watts Bar Nuclear Plant (“Watts Bar”) Unit 2, increase the costs of operating TVA’s existing nuclear units, and cause TVA to forego any future construction at Bellefonte Nuclear Plant (“Bellefonte”) or other facilities;
 
Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets or the cleanup and recovery activities associated with the ash spill at TVA’s Kingston Fossil Plant (“Kingston”);
 
Fines, penalties, natural resource damages, and settlements associated with the Kingston ash spill;
 
The outcome of legal and administrative proceedings, including, but not limited to, proceedings involving the Kingston ash spill and the North Carolina public nuisance case;
 
Significant changes in demand for electricity;
 
Addition or loss of customers;
 
The continued operation, performance, or failure of TVA’s generation, transmission, and related assets, including coal combustion product (“CCP”) facilities;
 
The economics of modernizing aging coal-fired generating units and installing emission control equipment to meet anticipated emission reduction requirements, which could make continued operation of certain coal-fired units uneconomical and lead to their removal from service, perhaps permanently;
 
Disruption of fuel supplies, which may result from, among other things, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA’s fuel suppliers or transporters;
 
Purchased power price volatility and disruption of purchased power supplies;
 
Events involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA’s transmission system is a part, as well as the supply of water to TVA’s generation facilities;
 
Inability to obtain regulatory approval for the construction or operation of assets;
 
Weather conditions;
 
Catastrophic events such as fires, earthquakes, solar events, floods, tornadoes, pandemics, wars, national emergencies, terrorist activities, and other similar events, especially if these events occur in or near TVA’s service area;
 
Reliability and creditworthiness of counterparties;
 
Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, and emission allowances;
 
Changes in the market price of equity securities, debt securities, and other investments;
 
Changes in interest rates, currency exchange rates, and inflation rates;
       Rising pension and health care costs;
 
Increases in TVA’s financial liability for decommissioning its nuclear facilities and retiring other assets;
 
Changes in the market for TVA’s debt securities, changes in TVA’s borrowing authority, changes in TVA’s or U.S. Government’s credit rating, or limitations on TVA’s ability to borrow money which may result from, among other things, TVA’s approaching or reaching its debt ceiling;
 
Changes in the economy and volatility in financial markets;
 
 
 
 
 
Inability to eliminate identified deficiencies in TVA’s systems, standards, controls, and corporate culture;
 
Ineffectiveness of TVA’s disclosure controls and procedures and its internal control over financial reporting;
 
Problems attracting and retaining a qualified workforce;
 
Changes in technology;
 
Failure of TVA’s information technology assets to operate as planned;
 
Differences between estimates of revenues and expenses and actual revenues and expenses incurred; and
 
Unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (the “Annual Report”) and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors, in this Quarterly Report.  New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA’s business or cause results to differ materially from those contained in any forward-looking statement.  TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.


Fiscal Year

References to years (2011, 2010, etc.) in this Quarterly Report are to TVA’s fiscal years ending September 30.  Years that are preceded by “CY” are references to calendar years.

Notes

References to “Notes” are to the Notes to Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available on TVA's web site, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  TVA's web site is www.tva.gov.  Information contained on TVA’s web site shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report.  TVA's SEC reports are also available to the public without charge from the web site maintained by the SEC at www.sec.gov.  In addition, the public may read and copy any reports or other information that TVA files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.  The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.







  TENNESSEE VALLEY AUTHORITY
 (in millions)
 
 
   
Three Months Ended March 31
   
Six Months Ended March 31
 
   
2011
   
2010
   
2011
   
2010
 
                         
Operating revenues
                       
Sales of electricity
                       
Municipalities and cooperatives
  $ 2,517     $ 2,218     $ 4,903     $ 4,163  
Industries directly served
    385       347       767       695  
Federal agencies and other
    32       25       64       52  
Other revenue
    34       32       62       61  
Total operating revenues
    2,968       2,622       5,796       4,971  
                                 
Operating expenses
                               
Fuel
    749       411       1,487       834  
Purchased power
    279       194       639       379  
Operating and maintenance
    800       756       1,683       1,510  
Depreciation and amortization
    428       413       860       824  
Tax equivalents
    145       101       290       206  
Total operating expenses
    2,401       1,875       4,959       3,753  
                                 
Operating income
    567       747       837       1,218  
                                 
Other income (expense), net
    10       8       21       14  
                                 
Interest expense
                               
Interest expense
    356       342       714       683  
Allowance for funds used during construction and nuclear fuel expenditures
    (32 )     (17 )     (61 )     (31 )
Net interest expense
    324       325       653       652  
                                 
Net income (loss)
  $ 253     $ 430     $ 205     $ 580  
The accompanying notes are an integral part of these financial statements.
 





TENNESSEE VALLEY AUTHORITY
 (in millions)
 
ASSETS
 
   
March 31, 2011
   
September 30, 2010
 
Current assets
 
(Unaudited)
       
Cash and cash equivalents
  $ 755     $ 328  
Accounts receivable, net
    1,403       1,639  
Inventories, net
    1,136       1,012  
Regulatory assets
    716       791  
Other current assets
    196       78  
Total current assets
    4,206       3,848  
                 
Property, plant, and equipment
               
Completed plant
    43,236       42,997  
Less accumulated depreciation
    (19,984 )     (19,326 )
Net completed plant
    23,252       23,671  
Construction in progress
    3,792       3,008  
Nuclear fuel
    1,129       1,102  
Capital leases
    29       49  
Total property, plant, and equipment, net
    28,202       27,830  
                 
Investment funds
    1,248       1,128  
                 
Regulatory and other long-term assets
               
Regulatory assets
    9,483       9,756  
Other long-term assets
    382       191  
Total regulatory and other long-term assets
    9,865       9,947  
                 
Total assets
  $ 43,521     $ 42,753  
                 
LIABILITIES AND PROPRIETARY CAPITAL
 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 1,382     $ 1,698  
Environmental cleanup costs - Kingston ash spill
    163       220  
Accrued interest
    420       407  
Current portion of leaseback obligations
    79       74  
Current portion of energy prepayment obligations
    105       105  
Regulatory liabilities
    242       63  
Short-term debt, net
          27  
Current maturities of long-term debt
    9       1,008  
Total current liabilities
    2,400       3,602  
                 
Other liabilities
               
Post-retirement and post-employment benefit obligations
    4,780       4,729  
Asset retirement obligations
    3,035       2,963  
Other long-term liabilities
    1,564       1,526  
Leaseback obligations
    1,230       1,279  
Energy prepayment obligations
    664       717  
Environmental cleanup costs - Kingston ash spill
    285       305  
Regulatory liabilities
    275       106  
Total other liabilities
    11,833       11,625  
                 
Long-term debt, net
    23,917       22,389  
                 
Total liabilities
    38,150       37,616  
                 
                 
Proprietary capital
               
Power program appropriation investment
    318       328  
Power program retained earnings
    4,470       4,264  
Total power program proprietary capital
    4,788       4,592  
Nonpower programs appropriation investment, net
    635       640  
Accumulated other comprehensive loss
    (52 )     (95 )
Total proprietary capital
    5,371       5,137  
                 
Total liabilities and proprietary capital
  $ 43,521     $ 42,753  
The accompanying notes are an integral part of these financial statements.
 






TENNESSEE VALLEY AUTHORITY
 For the six months ended March 31
 (in millions)
 
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net income (loss)
  $ 205     $ 580  
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
   Depreciation and amortization
    870       834  
   Nuclear refueling outage amortization
    29       58  
   Amortization of nuclear fuel
    114       116  
   Non-cash retirement benefit expense
    232       177  
   Prepayment credits applied to revenue
    (53 )     (53 )
   Fuel cost adjustment deferral
    157       (642 )
   Environmental cleanup costs – Kingston ash spill – non cash
    38       31  
Changes in current assets and liabilities
               
   Accounts receivable, net
    256       165  
   Inventories and other, net
    (169 )     (115 )
   Accounts payable and accrued liabilities
    (273 )     (60 )
   Accrued interest
    13       18  
Environmental cleanup costs – Kingston ash spill, net
    (66 )     (185 )
Other, net
    (20 )     5  
Net cash provided by operating activities
    1,333       929  
                 
Cash flows from investing activities
               
Construction expenditures
    (1,117 )     (1,005 )
Nuclear fuel expenditures
    (159 )     (235 )
Purchases of investments, net
          5  
Loans and other receivables
               
   Advances
    (19 )     (22 )
   Repayments
    7       10  
Other, net
    (1 )     3  
Net cash used in investing activities
    (1,289 )     (1,244 )
                 
Cash flows from financing activities
               
Long-term debt
               
   Issues
    1,540       116  
   Redemptions and repurchases
    (1,015 )     (29 )
Short-term debt issues (redemptions), net
    (27 )     303  
Proceeds from sale/leaseback financing
    5        
Payments on leases and leaseback financing
    (88 )     (57 )
Financing costs, net
    (18 )     (3 )
Payments to U.S. Treasury
    (14 )     (15 )
Other
          1  
Net cash provided by financing activities
    383       316  
                 
Net change in cash and cash equivalents
    427       1  
Cash and cash equivalents at beginning of period
    328       201  
                 
Cash and cash equivalents at end of period
  $ 755     $ 202  
 
The accompanying notes are an integral part of these financial statements.
 










TENNESSEE VALLEY AUTHORITY
For the three months ended March 31, 2011 and 2010
(in millions)    
 
 
 
Power Program Appropriation Investment
 
 
Power Program
Retained Earnings
 
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
 
 
Total
 
 
 
 
Comprehensive Income (Loss)
 
                         
Balance at December 31, 2009 (unaudited)
$      343
 
$  3,442
 
$      651
 
$      (18)
 
$  4,418
     
Net income (loss)
 
432
 
(2)
 
 
430
 
$         430
 
Other comprehensive income (loss)
                       
Net unrealized gain (loss) on future cash flow hedges
 
 
 
(46)
 
(46)
 
(46)
 
Reclassification to earnings from cash flow hedges
           –
 
           –
 
           –
 
          59
 
        59
 
            59
 
  Total other comprehensive income (loss)
 
 
 
13
 
13
 
            13
 
Total comprehensive income (loss)
                   
$         443
 
Return on Appropriation Investment
 
(3)
 
 
 
(3)
     
Return of Appropriation Investment
         (5)
 
           –
 
            –
 
           –
 
         (5)
     
Balance at March 31, 2010 (unaudited)
$       338
 
$  3,871
 
$       649
 
$       ( 5)
 
$  4,853
     
                         
Balance at December 31, 2010 (unaudited)
$       323
 
$  4,217
 
$       637
 
$      (39)
 
$  5,138
     
Net income (loss)
 
255
 
(2)
 
 
253
 
$         253
 
Other comprehensive income (loss)
                       
  Net unrealized gain (loss) on future cash flow hedges
 
 
 
14
 
14
 
14
 
  Reclassification to earnings from cash flow hedges
           –
 
           –
 
           –
 
        (27)
 
       (27)
 
          (27)
 
    Total other comprehensive income (loss)
 
 
 
(13)
 
(13)
 
          (13)
 
Total comprehensive income (loss)
                   
$         240
 
Return on Appropriation Investment
 
(2)
 
 
 
(2)
     
Return of Appropriation Investment
        (5)
 
           –
 
           –
 
            –
 
        (5)
     
Balance at March 31, 2011 (unaudited)
$      318
 
$  4,470
 
$      635
 
$      (52)
 
$  5,371
     
         
                                               The accompanying notes are an integral part of these financial statements.
 
           









TENNESSEE VALLEY AUTHORITY
STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)
For the six months ended March 31, 2011 and 2010
(in millions)
 
 
 
 
Power Program Appropriation Investment
 
 
Power Program
Retained Earnings
 
 
Nonpower Programs Appropriation Investment, Net
 
Accumulated Other
Comprehensive Income (Loss)
 
 
 
 
 
Total
 
 
 
 
Comprehensive Income (Loss)
                       
Balance at September 30, 2009
$      348
 
$  3,291
 
$        654
 
$       (75)
 
$    4,218
 
 
Net income (loss)
 
585
 
(5)
 
 
580
 
$          580
Other comprehensive income (loss)
                     
Net unrealized gain (loss) on future cash flow hedges
 
 
 
21
 
21
 
21
Reclassification to earnings from cash flow hedges
            –
 
           –
 
           –
 
           49
 
           49
 
            49
  Total other comprehensive income (loss)
 
 
 
70
 
70
 
            70
Total comprehensive income (loss)
                   
$          650
Return on Appropriation Investment
 
(5)
 
 
 
(5)
   
Return of Appropriation Investment
       (10)
 
           –
 
            –
 
            –
 
        (10)
   
Balance at March 31, 2010 (unaudited)
$      338
 
$  3,871
 
$         649
 
$         (5)
 
$    4,853
   
                       
Balance at September 30, 2010
$      328
 
$  4,264
 
$         640
 
$       (95)
 
$    5,137
 
 
Net income (loss)
 
210
 
(5)
 
 
205
 
$          205
Other comprehensive income (loss)
                     
  Net unrealized gain (loss) on future cash flow hedges
 
 
 
63
 
63
 
63
  Reclassification to earnings from cash flow hedges
            –
 
            –
 
            –
 
         (20)
 
         (20)
 
         (20)
    Total other comprehensive income (loss)
 
 
 
43
 
43
 
            43
Total comprehensive income (loss)
                   
$          248
Return on Appropriation Investment
 
(4)
 
 
 
(4)
   
Return of Appropriation Investment
        (10)
 
           –
 
            –
 
            –
 
        (10)
   
Balance at March 31, 2011 (unaudited)
$       318
 
$  4,470
 
$        635
 
$      (52)
 
$    5,371
   
         
                                               The accompanying notes are an integral part of these financial statements.
       








(Dollars in millions except where noted)




General

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation creating the Tennessee Valley Authority (“TVA”), a government corporation.  TVA was created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA’s service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation’s largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of over nine million people.

TVA also manages the Tennessee River and its tributaries to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity.  Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.

The power program has historically been separate and distinct from the stewardship programs.  It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other evidences of indebtedness (“Bonds”).  Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Treasury in repayment of, and as a return on, the government’s appropriation investment in TVA power facilities (the “Power Program Appropriation Investment”).  In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and TVA properties with power funds in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year.  Congress has not provided any appropriations to TVA to fund such activities since 1999.  Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities.  The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States (“GAAP”).  Accordingly, these assets and properties are included as part of the power program, TVA’s only operating segment.

Power rates are established by the TVA Board of Directors (“TVA Board”) as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”).  The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes; debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA’s power business.  In setting TVA’s rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible.  Rates set by the TVA Board are not subject to review or approval by any state or federal regulatory body.




Fiscal Year

TVA’s fiscal year ends September 30.  Years (2011, 2010, etc.) refer to TVA’s fiscal years unless they are proceeded by “CY,” in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is “self regulated.”  Additionally, TVA’s regulated rates are designed to recover its costs of providing electricity.  In view of demand for electricity and the level of competition, it is reasonable to assume that the rates, set at levels that will recover TVA’s costs, can be charged and collected.  As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology.  Based on these assessments, TVA believes the existing regulatory assets are probable of recovery.  This determination reflects the current regulatory and political environment and is subject to change in the future.  If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs.  Most regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its interim financial statements in conformity with GAAP for interim financial information.  Accordingly, TVA’s interim financial statements do not include all of the information and notes required by GAAP for annual financial statements.  As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2010, and the notes thereto, which are contained in TVA’s Annual Report on Form 10-K for the year ended September 30, 2010 (the “Annual Report”).  In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included.

Use of Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements.  Although the financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period.  Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA’s financial results.  Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA’s financial conditions, results of operations, or cash flows.

Reclassifications
 
       Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation.  Nuclear fuel and capital leases of $1.2 billion at September30, 2010, have been reclassified as Nuclear fuel of $1.1 billion and Capital leases of $49 million.  Other long-term liabilities of $4.7 billion have been reclassified to Post-retirement and post-employment benefit obligations on the September 30, 2010 Balance Sheet.  On the Statements of Cash Flows, $185 million previously reported as changes in Accounts payable and accrued liabilities has been reclassified as Environmental cleanup costs-kingston ash spill, net for the six months ended March 31, 2010.
 
      Operating expenses of $605 million and $1.2 billion for the three and six months ended March 31, 2010, respectively, previously reported as Fuel and purchased power on the Statements of Operations, have been reclassified as follows:

   
Three Months Ended
March 31, 2010
   
Six Months Ended
March 31, 2010
 
Fuel
  $ 411     $ 834  
Purchased power
    194       379  
 
       Interest on debt and leaseback obligations has been combined with Amortization of debt discount, issue, and reacquisition costs, net have been combined in the periods ending March 31, 2011 and are shown as Interest expense in the Statements of Operations.  Interest expense for the three and six months ended March 31, 2010, is $342
 
 
 
13

 
 
million and $683 million, respectively.
 
      Operating expenses of $1.1 billion for the three months ended December 31, 2010, previously reported as Fuel and purchased power, have also been reclassified as Fuel of $738 million and Purchased power of $360 million.

Allowance for Uncollectible Accounts
     
       The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances.  TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days.  It also reflects TVA's corporate credit department’s assessment of the financial condition of customers and the credit quality of the receivables.

   
         The following accounting standards and interpretations became effective for TVA during 2011.
 
     Transfers of Financial Assets.  In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for transfers of financial assets.  This guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and subjects those entities to the same consolidation guidance as other variable interest entities (“VIEs”).  The guidance changes the eligibility criteria for certain transactions to qualify for sale accounting and the accounting for certain transfers.  The guidance also establishes broad disclosure objectives and requires extensive specific disclosure requirements related to the transfers.  These changes became effective for TVA for any transfers of financial assets occurring on or after October 1, 2010.  The adoption of this guidance did not materially affect TVA’s financial condition, results of operations, or cash flows.
 
         Variable Interest Entities.  In June 2009, FASB issued guidance that changes the consolidation guidance for VIEs.  The guidance eliminates the consolidation scope exception for QSPEs.  The statement amends the triggering events to determine if an entity is a VIE, establishes a primarily qualitative model for determining the primary beneficiary of the VIE, and requires on-going assessment of whether the reporting entity is the primary beneficiary.  These changes became effective for TVA on October 1, 2010, and apply to all entities determined to be VIEs as of and subsequent to the date of adoption.  The adoption of this guidance did not materially affect TVA’s financial condition, results of operations, or cash flows.
 
        There were no accounting standards issued that were not yet effective and adopted by TVA as of March 31, 2011, that, if adopted, would have materially affected its financial condition, results of operation, or cash flows.


Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA’s accounts receivable:

Accounts Receivable, Net
 
   
At March 31, 2011
   
At September 30, 2010
 
             
Power receivables
           
  Billed
  $ 629     $ 597  
  Unbilled
    715       1,004  
    Total power receivables
    1,344       1,601  
                 
Other receivables
    60       40  
Allowance for uncollectible accounts
    (1 )     (2 )
                 
    Net accounts receivable
  $ 1,403     $ 1,639  




The table below summarizes the types and amounts of TVA’s inventories:

Inventories, Net
 
 
   
At March 31, 2011
   
At September 30, 2010
 
             
Fuel inventory
  $ 637     $ 539  
Materials and supplies inventory
    513       486  
Emission allowance inventory
    11       11  
Allowance for inventory obsolescence
    (25 )      (24 )
                 
     Inventories, net
  $ 1,136     $ 1,012  



The table below summarizes the types and amounts of TVA’s other long-term assets:

Other Long-Term Assets
 
 
   
At March 31, 2011
   
At September 30, 2010
 
             
Coal contract derivative assets
  $ 253     $ 103  
Loans and long-term receivables, net
    99       83  
Currency swap assets
    19        
Other long-term assets
    11       5  
                 
Total other long-term assets
  $ 382     $ 191  

 

 

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  Components of regulatory assets and regulatory liabilities are summarized in the table below.

TVA Regulatory Assets and Liabilities
 
   
At March 31
2011
   
At September 30
2010
 
Current regulatory assets
           
  Deferred nuclear generating units
  $ 391     $ 391  
  Unrealized losses on commodity derivatives
    234       184  
  Environmental cleanup costs – Kingston ash spill
    76       76  
  Deferred outage costs
    13       42  
  Deferred capital lease
    2       14  
  Fuel cost adjustment receivable
          84  
    Total current regulatory assets
    716       791  
                 
Non-current regulatory assets
               
  Deferred pension costs
    4,321       4,456  
  Deferred nuclear generating units
    1,369       1,565  
  Environmental cleanup costs – Kingston ash spill
    939       987  
  Other non-current regulatory assets
    904       499  
  Nuclear decommissioning costs
    837       898  
  Non-nuclear decommissioning costs
    457       410  
  Unrealized losses on swaps and swaptions
    419       797  
  Unrealized losses on commodity contracts
     237       144  
    Total non-current regulatory assets
    9,483       9,756  
                 
  Total regulatory assets
  $ 10,199     $ 10,547  
Current regulatory liabilities
               
  Unrealized gains on commodity contracts
  $ 139     $ 57  
  Fuel cost adjustment payable
    103        
  Capital leases
          6  
    Total current regulatory liabilities
    242       63  
 
Non-current regulatory liabilities
               
  Unrealized gains on commodity contracts
    275        106  
                 
  Total regulatory liabilities
  $ 517     $ 169  
 
 
Preconstruction Costs.  Certain preliminary work and costs associated with engineering, design, and licensing activities, as well as the procurement of long lead-time components for the partially completed Bellefonte Unit 1, have been deferred as a regulatory asset pending the TVA Board’s decision on the completion of the project.  If the TVA Board decides to complete Bellefonte Unit 1, the costs will be moved to construction in progress and amortized over a cost recovery period equivalent to the expected useful life of the future operating nuclear unit.  If the TVA Board decides not to complete the unit, the costs will be expensed at the time of the decision.  The preconstruction costs were $60 million as of March 31, 2011, and are included in other non-current regulatory assets.  At September 30, 2010, no such preconstruction asset had been incurred.

       Environmental Agreement.  In conjunction with the Environmental Protection Agency (“EPA”) agreement (See Note 17 EPA Settlement), management decided to record certain liabilities resulting from the agreement totaling $360 million ($290 million investment in energy efficiency projects, demand response projects, renewable energy projects, and other TVA projects; $60 million provided to Alabama, Kentucky, North Carolina, and Tennessee to fund environmental projects (with preference for projects in the TVA power service area or watershed); and $10 million in civil penalties).  The TVA Board determined that these costs will be collected in customer rates in the future and, accordingly, the amounts have been deferred as a regulatory asset.  These amounts will be charged to expense and recovered in rates over future periods.  The period over which these amounts will be recovered in rates is expected to be determined and approved through the annual rate setting process near the end of 2011.
 
 
 
 

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant (“Kingston”) failed, and approximately five million cubic yards of water and coal fly ash flowed out of
the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies.  TVA completed the removal of time-critical ash from the river during the third quarter of 2010, and removal of the remaining ash is considered to be non-time-critical.  TVA estimates that the recovery process will be substantially completed in 2014, although monitoring may continue beyond that date.  Once the removal actions are completed, TVA will be required to assess the site and determine whether any additional actions may be needed at Kingston or the surrounding impacted area.

Insurance

 TVA has property and excess liability insurance programs in place that may cover some of the Kingston ash spill costs.  Certain of the insurers that provide liability insurance have denied coverage, and three other liability insurers issued reservation of rights letters.  All of the property insurers have denied coverage.  TVA and the insurance companies that have denied coverage continue to discuss coverage and estimates of covered costs.  TVA continues to provide information to the liability insurance companies that have issued reservation of rights letters but have not denied coverage.  During the three months ended March 31, 2011, TVA settled certain of the claims.  Any amounts received related to insurance settlements will be recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

Claims and Litigation

See Note 16 — Litigation — Legal Proceedings Related to the Kingston Ash Spill and Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category.  Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate.  The range of estimated costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA recorded an estimate of $1.1 billion for the cost of cleanup related to this event.  In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill.  The cost is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009.  As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate.  TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA’s balance sheets.  Amounts spent since the event through March 31, 2011, totaled $676 million.   The remaining estimated liability at March 31, 2011, was $449 million.

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the June 2010 Tennessee Department of Environment & Conservation (“TDEC”) order), regulatory directives, natural resources damages (other than payments required under the proposed memorandum of agreement with TDEC and the Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), outcomes of lawsuits, future claims, long-term environmental impact costs, final long-term disposition of ash processing area, costs associated with new laws and regulations, or costs of remediating any mixed waste discovered during the ash removal process.  There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the financial statements.  Associated capital asset purchases are recorded in property, plant, and equipment.  Ash handling and disposition from current plant operations are recorded in operating expenses.  A portion of the pond and dredge cell closure costs are also not included in the estimate as those costs are included in the non-nuclear asset retirement obligation (“ARO”) liability.





Other long-term liabilities consist primarily of liabilities related to certain derivative agreements.  The table below summarizes the types and amounts of liabilities:

Other Long-Term Liabilities
 
 
   
At March 31, 2011
   
At September 30, 2010
 
             
Swaption liability
  $ 554     $ 804  
EPA settlement liabilities
    360        
Interest rate swap liabilities
    241       371  
Coal contract derivative liabilities
    149       2  
Commodity swap derivatives
    73       118  
Currency swap liabilities
    37       81  
Other long-term liability obligations
    150       150  
                 
    Total other long-term liabilities
  $ 1,564     $ 1,526  



During the six months ended March 31, 2011, TVA’s total ARO liability increased $72 million, primarily due to accretion.  The liability was decreased by ash area settlement projects that were conducted during the first six months of 2011.  The nuclear and non-nuclear accretion were deferred as regulatory assets.  During the six months ended March 31, 2011, $24 million of the related regulatory assets was amortized into expense since this amount was collected in rates.  The nuclear ARO liability as of March 31, 2011, was $2.0 billion.  The non-nuclear ARO liability as of March 31, 2011, was $1.0 billion.

Reconciliation of Asset Retirement Obligation Liability
 
 
   
Six Months Ended
March 31, 2011
 
       
       
Balance at beginning of period
  $ 2,963  
         
   Non-nuclear settlements (ash storage areas)
    (7 )
      2,956  
Add:  ARO accretion
       
   Nuclear accretion (recorded as regulatory asset)
    55  
   Non-nuclear accretion (recorded as regulatory asset)
    24  
       79  
         
Balance at end of period
  $ 3,035  



Debt Outstanding

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30 billion outstanding at any time.  Debt outstanding at March 31, 2011, and September 30, 2010, including the effect of translations related to Bonds denominated in foreign currencies, consisted of the following:
 
 Debt Outstanding
 
 
   
At March 31, 2011
   
At September 30, 2010
 
 
           
   Short-term debt
           
     Discount notes (net of discount)
  $     $ 27  
     Current maturities of long-term debt
     9        1,008  
       Total short-term debt, net
    9       1,035  
 
               
   Long-term debt
               
     Long-term debt
    24,151       22,605  
     Unamortized discount
     (234 )      (216 )
       Total long-term debt, net
 
     23,917        22,389  
Total outstanding debt
  $ 23,926     $ 23,424  
                 

 
 
18

 
 
Debt Securities Activity

The table below summarizes TVA’s long-term Bond activity for the period from October 1, 2010 to March 31, 2011.
 
   
 
Date
 
Amount
 
Interest Rate
 
 
Issuances:
           
 2011 Series A
February 2011
 
 
$    1,500
 
3.88%
 
             
electronotes®
Three months ended
March 31, 2011
 
          40
 
4.25%
 
             
             
Total
   
$    1,540
     
 
Redemptions/Maturities:
           
 2009 Series A
November 2010
 
 
$           2
 
2.25%
 
 2009 Series B
December 2010
 
 
            1
 
3.77%
 
 2001 Series A
January 2011
 
 
     1,000
 
5.63%
 
             
electronotes®(1)
Three months ended
December 31, 2010
 
 
            2
 
3.62%
 
 
           
 
Three months ended
March 31, 2011
 
 
           10
 
5.47%
 
             
Total
   
$    1,015
     
 
Note
(1)  The electronotes®  interest rate is the average of the interest rates of the notes redeemed during that period.
 

Credit Facility Agreements.  TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility.  This credit facility matures on September 30, 2011, and is expected to be renewed.  This arrangement is pursuant to the TVA Act.  Access to this credit facility or other similar financing arrangements was made possible by the 1959 amendments to the TVA Act.  TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity.  The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less.  There were no borrowings outstanding under the facility at March 31, 2011.
 
TVA also has funding available in the form of three revolving credit facilities totaling $2.5 billion.  The $1.0 billion short-term credit facility matures on May 11, 2011, and both the $0.5 billion and the $1.0 billion long-term credit facilities mature on January 14, 2014.  The credit facilities also accommodate the issuance of letters of credit. The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA’s senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA’s senior unsecured long-term non-credit enhanced debt.  At March 31, 2011, and September 30, 2010, there were $128 million and $411 million, respectively, of letters of credit outstanding under the facilities in place at those times, and there were no borrowings outstanding .
 
 
           Seven States Power Corporation (“Seven States”), through its subsidiary, Seven States Southaven, LLC (“SSSL”), exercised Seven States’s option to purchase from TVA an undivided 90-percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi.  As part of interim joint-ownership arrangements, Seven States has the right at any time, and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven States’s interest in the facility.  TVA will buy back the Seven States interest if long-term operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or alternative arrangements, are not in place by April 23, 2013.  TVA’s buy-back obligation will terminate if such long-term arrangements are in place by that date.  In the event of a buy-back, TVA will re-acquire the Seven States interest in the facility and the related assets.  As of March 31, 2011, and September 30, 2010, the carrying amount of the obligation was approximately $405 million and $413 million, respectively.
 
 
 
 
 
TVA is exposed to various market risks.  These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and counterparty performance risk.  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 investment funds, it is TVA’s policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.
 
Overview of Accounting Treatment
 
TVA recognizes certain of its derivative instruments as either assets or liabilities on its balance sheets at fair value.  The accounting for changes in the fair value of these instruments depends on whether TVA uses regulatory accounting to defer the derivative gains and losses, or whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and if so, the type of hedge relationship (e.g., 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)
 
Derivatives in Cash Flow Hedging Relationship
 
Objective of Hedge Transaction
 
Accounting for Derivative
Hedging Instrument
 
Amount of Mark-to-Market Gain
(Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”)
Three Months Ended
March 31
 
Amount of Mark-to-Market Gain (Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”)
Six Months Ended
March 31
           
2011
 
2010
 
2011
 
2010
                         
Currency swaps
 
To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)
 
Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction
 
 
$  14
 
 
$  (46)
 
 
$ 63
 
 
$ 21
 

 

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
 
Derivatives in Cash Flow Hedging Relationship
 
Amount of Exchange
Gain (Loss) Reclassified from
OCI to  Interest Expense
Three Months Ended
March 31 (1)
 
Amount of Exchange
Gain (Loss) Reclassified from
OCI to Interest Expense
Six Months Ended
March 31 (1)
   
2011
 
2010
 
2011
 
2010
                 
Currency swaps
 
 
$  (27)
 
 
$ 59
 
 
            $ (20)
 
 
$ 49
 
Note
(1)  There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.
 

 
 
20

 
 
Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
 
Derivative Type
 
Objective of Derivative
 
Accounting for Derivative Instrument
 
Amount of Gain
(Loss) Recognized in
 Income on Derivatives
Three Months Ended
March 31 (1)
 
Amount of Gain
(Loss) Recognized in
Income on Derivatives
Six Months Ended
March 31 (1)
           
2011
 
2010
 
2011
 
2010
 
Swaption
 
 
 
To protect against decreases in value of the embedded call (interest rate risk)
 
 
Mark-to-market gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.
 
$   —
 
$   —
 
$   —
 
$   —
                         
 
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 until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.  (2)
 
 
 
 
 
                         
 
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 are recognized in fuel expense when the related commodity is used in production.
 
 
 
 
                         
 
Commodity derivatives
under financial trading program
 
 
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 when the related commodity is used in production.
 
(35)
 
(22)
 
(77)
 
(71)
 
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 and six months ended March 31, 2011 and 2010.
(2)  Generally, TVA maintains a level of outstanding discount notes equal to or greater than the notional amount of the interest rate swaps.  However, in September 2010 and February 2011 TVA issued long-term Bonds in anticipation of the maturity of other long-term debt, and used the proceeds to pay down discount notes, which caused the balance of discount notes outstanding at March 31, 2011, to remain below the notional amount of the interest rate swaps. There is no impact on the capital Statement of Operations impact of this due to the use of regulatory accounting for these items.
 
 
 

 
MARK-TO-MARKET VALUES OF TVA DERIVATIVES
 
   
At March 31, 2011
 
At September 30, 2010
 
Derivatives that Receive Hedge Accounting Treatment:
 
   
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
Currency swaps:
               
 
£200 million Sterling
  $ (29 )
Other long-term liabilities
  $ (42 )
Other long-term liabilities
 
£250 million Sterling
    19  
Other long-term assets
    (5 )
Other long-term liabilities
 
£150 million Sterling
    (8 )
Other long-term liabilities
    (34 )
Other long-term liabilities
 
Derivatives that Do Not Receive Hedge Accounting Treatment:
 
   
Balance
 
Balance Sheet Presentation
 
Balance
 
Balance Sheet Presentation
 
Swaption:
                   
$1.0 billion notional
  $ (554 )
Other long-term liabilities
  $ (804 )
Other long-term liabilities
                     
Interest rate swaps:
                   
$476 million notional
    (231 )
Other long-term liabilities
    (356 )
Other long-term liabilities
$42 million notional
    (10 )
Other long-term liabilities
    (15 )
Other long-term liabilities
Commodity contract derivatives
    73  
Other long-term assets $253; Other current assets $111; Other long-term  liabilities ($149); Accounts payable and accrued liabilities ($142)
    103  
Other long-term assets $103; Other current assets $49; Other long-term  liabilities ($2); Accounts payable and accrued liabilities ($47)
                     
Derivatives under financial trading program:
                   
Margin cash account(1)
    33  
Other current assets
    12  
Other current assets
Unrealized losses, net
    (130 )
Current regulatory assets ($92); Regulatory assets ($88); Current regulatory liabilities $28; Regulatory
liabilities $22
    (269 )
Current regulatory assets ($137); Regulatory assets ($142); Current regulatory liabilities $7;
Regulatory liabilities $3
 
Note
(1) In accordance with certain credit terms, TVA uses leverage to trade financial instruments under the financial trading program. Therefore, the margin cash
account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under
Financial Trading Program table.
 

 
 
 
Cash Flow Hedging Strategy for Currency Swaps

To protect against the 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 the following currency swaps outstanding as of March 31, 2011:

Currency Swaps Outstanding
As of March 31, 2011
 
 
Effective Date of Currency Swap Contract
 
Associated TVA Bond Issues Currency Exposure
 
Expiration Date of Swap
 
Overall Effective
Cost to TVA
2003
 
£150 million
 
2043
 
4.96%
2001
 
£250 million
 
2032
 
6.59%
1999
 
£200 million
 
2021
 
5.81%
 
 
       When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by an exchange loss on the swap contract.  Conversely, when the dollar weakens, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract.  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 Accumulated Other Comprehensive Loss.  If any loss or gain were to be incurred as a result of the early termination of the foreign currency swap contract, any resulting charge or income would be amortized over the remaining life of the associated Bond as a component of interest expense.

Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate Swaps. TVA entered into four swaption transactions to monetize the value of call provisions on certain of its Bond issues.  A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a floating rate of interest and pays the third party a fixed rate of interest equal to the interest rate on the Bond issue whose call provision TVA has monetized.  Subsequently, the counterparties to three of the swaptions exercised their rights to enter into interest rate swaps with TVA.

    TVA uses regulatory accounting treatment to defer the mark-to-market gains and losses on these swaps and swaption and includes the gain or loss in the ratemaking formula when these transactions settle.  The values of the swaps and swaption and related deferred unrealized gains and losses are recorded on TVA’s balance sheets with realized gains or losses, if any, recorded on TVA’s statements of operations.  There were no realized gains or losses for the six months ended March 31, 2011 and 2010.

    For the three and six months ended March 31, 2011, the changes in market value resulted in deferred unrealized gains on the value of the interest rate swaps and swaption of $43 million and $380 million, respectively.  All net deferred unrealized losses are reclassified as regulatory assets on the balance sheets.

Commodity Derivatives. TVA enters into certain derivative contracts for coal, natural gas, and electricity that require physical delivery of the contracted quantity of the commodity.  TVA expects to take or make delivery, as appropriate, under the electricity contract derivatives.  Accordingly, these contracts qualify for normal purchases and normal sales accounting.

TVA marks all of its natural gas derivative contracts that require physical delivery to market.  The total market value of these natural gas derivative contracts as of March 31, 2011 and September 30, 2010 is less than $1 million.  As of March 31, 2011, these natural gas derivative contracts had terms of up to seven months.

During the three months ended December 31, 2010, TVA determined that certain quantities under the coal contract derivatives were no longer probable of physical delivery; therefore, these contracts were no longer eligible for normal purchases and normal sales accounting.  Accordingly, TVA began marking all of its coal contract derivatives to market as of December 31, 2010.  At March 31, 2011, and September 30, 2010, TVA’s coal contract derivatives had net market values of $72 million and $103 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis.  At March 31, 2011, TVA’s coal contract derivatives had terms of up to six years.



 
Commodity Contract Derivatives
 
 
At March 31, 2011
 
At September 30, 2010
 
Number of
Contracts
Notional Amount
Fair Value (MtM)
(in millions)
 
Number of Contracts
Notional Amount
Fair Value (MtM)
(in millions)
               
Coal Contract Derivatives
35
101 million tons
$     72
 
11
27 million tons
$   103
               
Natural Gas Contract Derivatives
12
43 million mmBtu
$        1
 
3
1 million mmBtu
$      —
 

 Derivatives Under Financial Trading Program.  TVA has a financial trading program (“FTP”) under which it purchases and sells futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment (“FCA”) calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies.  The combined transaction limit for the FCA and construction material transactions is $130 million (based on one-day value at risk).  In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $100 million at the execution of any new transaction.  The portfolio value at risk limit for the foreign currency transactions is $5 million and is separate and distinct from the $130 million transaction limit discussed above.  TVA is prohibited from trading financial instruments under the FTP for speculative purposes.

At March 31, 2011, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, coal, and power.  Futures contracts and option contracts under the FTP had remaining terms of one year or less.  Swap contracts under the FTP had remaining terms of six years or less.



Derivatives Under Financial Trading Program
 
 
 
At March 31, 2011
 
At September 30, 2010
 
 
Notional
Amount
 
Fair Value
(MtM)
(in millions)
 
Notional
Amount
 
Fair Value
(MtM)
(in millions)
 
     
Natural gas (in mmBtu)
   
     
Futures contracts
4,850,000
 
$          (11)
 
7,920,000
 
$          (21)
 
Swap contracts
171,445,000
 
(146)
 
137,110,000
 
(241)
 
Option contracts
    4,500,000
 
             (2)
 
5,250,000
 
            (2)
 
Natural gas financial positions
                180,795,000
 
$        (159)
 
                   150,280,000
 
$        (264)
 
                 
Fuel oil/crude oil (in barrels)
               
Futures contracts
 
$            
 
125,000
 
$              2
 
Swap contracts
1,512,000
 
38
 
1,711,000
 
8
 
Option contracts
        270,000
 
             
 
495,000
 
             
 
Fuel oil/crude oil financial positions
     1,782,000
 
$             38
 
2,331,000
 
$             10
 
 
Coal (in tons)
           
Futures contracts
 
$            
 
 
$            
 
Swap contracts
400,000
 
3
 
480,000
 
 
Option contracts
                  
 
            
 
                 
 
             
 
Coal financial positions
        400,000
 
$              3
 
       480,000
 
$            
 
                 
Power (in MWh)
               
                 
Swap contracts
         34,400
 
$            
 
                
 
$            
 
                 
Power financial positions
         34,400
 
$            
 
                
 
$            
 
 
Note
Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the broker or other counterparty.  Notional amounts disclosed represent the net absolute value of contractual amounts.
 
 

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity product.  In addition to the open commodity derivatives disclosed above, TVA had fixed derivative contracts with market values of $(12) million at March 31, 2011, and $(15) million at September 30, 2010.  The deferred unrealized losses related to natural gas hedges were $(159) million at March 31, 2011, and $(264) million at September 30, 2010.  For the six months ended March 31, 2011 and 2010, TVA recognized realized losses on natural gas hedges of $(86) million and $(80) million, respectively, which were recorded as increases to fuel expense.  The deferred unrealized gains related to fuel oil/crude oil hedges were $38 million at March 31, 2011, and $10 million at September 30, 2010.  For the six months ended March 31, 2011 and 2010, TVA recognized realized gains on fuel oil/crude oil hedges of $10 million and of $9 million, respectively, which were recorded as decreases to fuel expense.

Other Derivative Instruments

Investment Fund Derivatives.  Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust (“NDT”), the Asset Retirement Trust (“ART”), and the Supplemental Executive Retirement Plan (“SERP”).  All securities in the trusts are classified as trading.  See Note 13 for a discussion of the trusts’ objectives and the types of investments included in the various trusts.  Derivative instruments in these trusts include swaps, futures, options, forwards, and other instruments.  As of March 31, 2011, and September 30, 2010, the fair value of derivative instruments in these trusts was immaterial.

Collateral.  TVA’s interest rate swaps, its currency swaps, and its swaption 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.  As of March 31, 2011, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $832 million.  TVA’s collateral obligation as of March 31, 2011, under these arrangements was $128 million, for which TVA had posted $128 million under a letter of credit.  These letter of credit postings reduce the available balance under the related credit facility.  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 & Poors (“S&P”) or Moody’s Investor Service (“Moody’s”) downgrades TVA’s credit rating to AA+ or Aa1, respectively, TVA would be required to post an additional $99 million of collateral in excess of its March 31, 2011, obligation; and

 
If TVA ceases to be majority-owned by the U.S. government, its credit rating would likely change and TVA would be required to post additional collateral.

Counterparty Credit Risk

Counterparty credit risk is the exposure to economic loss that would occur as a result of a counterparty’s nonperformance of its contractual obligations.  Where exposed to counterparty credit 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 employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

Credit of Customers.  The majority of TVA’s counterparty credit risk is limited to trade accounts receivable from delivered power sales to municipal and cooperative distributor customers, all located in the Tennessee Valley region.  To a lesser extent, TVA is exposed to credit risk from industries and federal agencies directly served and 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.  Power sales to TVA’s largest industrial customer directly served represented five percent of TVA’s total operating revenues for the six months ended March 31, 2011.  This customer’s senior unsecured credit ratings are currently CCC- by S&P and Caa2 by Moody’s.  As a result of its credit ratings, this customer has provided credit assurance to TVA under the terms of its power contract. TVA had concentrations of accounts receivable from seven customers that represented 41 percent of total outstanding accounts receivable at both March 31, 2011, and September 30, 2010.

Credit of Derivative Counterparties.  TVA has entered into derivative contracts for hedging purposes, and TVA’s NDT and defined benefit pension plan have 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 and the pension fund 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 and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions.  As of March 31, 2011, the swaption and all of TVA’s currency swaps, interest rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody’s credit rating was A2 or higher.  As of March 31, 2011, all of TVA’s coal contract derivatives were with counterparties whose Moody’s credit rating, or TVA’s internal analysis when such information was unavailable, was Caa2 or higher.

Credit of 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.  To help ensure a reliable supply of coal, TVA had coal contracts with 20 different suppliers at March 31, 2011.  The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck).  TVA purchases all of its natural gas requirements from a variety of suppliers under short-term contracts.

 TVA has a power purchase agreement with a supplier of electricity for 440 megawatts (“MW”) of summer net capability from a lignite-fired generating plant that expires on March 31, 2032.  The supplier’s senior secured credit ratings are currently BB- by S&P and B+ by Moody’s.  As a result of its credit ratings, the supplier has provided credit assurance to TVA under the terms of its agreement.  Additionally, the senior unsecured credit ratings of TVA’s largest supplier of uranium enrichment services, which is also TVA's largest industrial customer directly served, are currently CCC- by S&P and Caa2 by Moody's.  Any nonperformance by this company could result in TVA incurring additional costs.


Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in TVA’s principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants.  TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

 
26

 
 
Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:

Level 1
 
 
Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
 
Level 2
 
 
 
Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability.  These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
 
Level 3
 
 
Pricing inputs that are unobservable, or less observable, from objective sources.  Unobservable inputs are only to be used to the extent observable inputs are not available.  These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants.  An entity should consider all market participant assumptions that are available without unreasonable cost and effort.  These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.
 

A financial instrument's level within the fair value hierarchy (where Level 3 is the lowest and Level 1 is the highest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value.  Except for gains and losses on SERP assets, all changes in fair value of these assets and liabilities have been reflected as changes in regulatory assets, regulatory liabilities, or accumulated other comprehensive loss on TVA’s Balance Sheet as of March 31, 2011, and Statements of Changes in Proprietary Capital for the three and six months ended March 31, 2011.  Except for gains and losses on SERP assets, there has been no impact to the Statements of Operations or the Statements of Cash Flows related to these fair value measurements.

Investments

At March 31, 2011, TVA’s investment funds were composed of $1.2 billion of securities classified as trading and measured at fair value and $2 million of equity investments not required to be measured at fair value.  Trading securities are held in the NDT, ART, and SERP.  The NDT holds funds for the ultimate decommissioning of TVA’s nuclear power plants.  The ART holds funds for the costs related to the future closure and retirement of TVA’s long-lived assets.  TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by Internal Revenue Service (“IRS”) rules applicable to the qualified defined benefit pension plan.  The NDT and SERP are invested in securities generally designed to achieve a return in line with overall equity market performance.  The ART is presently invested to achieve a return in line with fixed-income market performance.

The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers.  Most U.S. and international equities, Treasury inflation-protected securities, real estate investment trust (“REIT”) securities, and cash securities, and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations.  Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations.  These measurements are based on market and income approaches with observable market inputs.

Private partnership investments may include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations.  Investments in private partnerships generally involve a three- to four- year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, a ten-year or longer investment commitment.  The NDT had unfunded commitments related to private partnerships of $85 million at March
 
 
 
27

 
 
31, 2011.  These investments have no redemption or limited redemption options and may also restrict the NDT’s ability to liquidate its investment interest.  The private partnerships and other similar alternative investments are reported at fair value which is derived by independent appraisals or judgment of the general partners of each such investment. The inputs used in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments of comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows of the limited partnerships. The fair value of these investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from the value ultimately realized from the private partnership investments. TVA classifies its interest in these types of investment as Level 3 within the fair value hierarchy. 

Commingled funds represent investment funds comprising multiple individual financial instruments.  The commingled funds held by the NDT and SERP consist either of a single class of security, such as equity, debt, or foreign currency securities, or multiple classes of securities.  All underlying positions in these commingled funds are either exchange traded (Level 1) or measured using observable inputs for similar instruments (Level 2).  The fair value of commingled funds is based on net asset values (“NAV”) per fund share (the unit of account), derived from the prices of the underlying securities in the funds.  These commingled funds can be liquidated at the measurement date NAV price and are classified as Level 2 valuations.  Required notification periods range from zero to 30 days.  The funds can be redeemed unless doing so would violate regulations to which the fund is subject, would be unreasonable or impracticable, or would be seriously prejudicial to the fund.

Realized and unrealized gains and losses on trading securities are recognized in current earnings and are based on average cost.  The SERP had unrealized gains of $2 million and $4 million for the three and six months ended March 31, 2011, respectively, compared with unrealized gains of $2 million and $3 million for the three and six months ended March 31, 2010, respectively.  The gains and losses of the NDT and ART are subsequently reclassified to a regulatory liability or asset account in accordance with TVA’s regulatory accounting policy.  The NDT had unrealized gains of $19 million and $21 million for the three months ended March 31, 2011 and 2010, respectively, and the ART had an unrealized loss of less than $1 million for the three months ended March 31, 2011, compared to an unrealized gain of less than $1 million for the three months ended March 31, 2010.

 Currency Swaps, Swaption, and Interest Rate Swaps

See Note 12 — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA’s currency swaps, swaption, and interest rate swaps.

The currency swaps and interest rate swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments.  The swaption is classified as a Level 3 valuation and is valued based on an income approach.  The valuation is computed using a broker-provided pricing model utilizing interest and volatility rates.  While most of the fair value measurement is based on observable inputs, volatility for TVA’s swaption is generally unobservable.  Therefore, the valuation is derived from an observable volatility measure with adjustments.

Commodity Contract and Commodity Derivatives

Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches.  TVA develops an overall coal price forecast using widely-used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates.  To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs.

Commodity Derivatives Under Financial Trading Program.  These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange (“CME”) quoted prices and other observable inputs.  Futures and options contracts settled on the CME are classified as Level 1 valuations.  Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price.  These contracts are classified as Level 2 valuations.

See Note 12 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and Derivatives Under Financial Trading Program for a discussion of the nature and purpose of coal contracts and derivatives under TVA’s FTP.




Nonperformance Risk

The impact of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements.  TVA is a counterparty to currency swaps, a swaption, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk.  Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

Nonperformance risk for most of TVA’s derivative instruments is an adjustment to the initial asset/liability fair value.  TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a Credit Valuation Adjustment (“CVA”).  TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA’s or counterparty’s credit rating as obtained from Moody’s.  For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company.  TVA discounts each financial instrument using the historical default rate (as reported by Moody’s for CY 1983 to CY 2010) for companies with a similar credit rating over a time period consistent with the remaining term of the contract.  The application of CVAs resulted in a $80 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at March 31, 2011.


The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2011, and September 30, 2010.  Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.

Fair Value Measurements
 
   
As of March 31, 2011
Assets
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting(1)
   
Total
Description
                             
Currency swaps
  $     $ 19     $     $     $ 19  
Investments
                                 
 
Equity securities
    103                         103  
Debt securities
                                   
U.S. government corporations and agencies
    133       54                   187  
Corporate debt securities
          192