FSRA Financial Planning Update

1. FSRA FinancialPlanning Update February xx, 2009

2. Outline • Summary of Current Issues • Boundaries/Constraints • Options and Implications

3. Rate Pressure Summary • Economic slowdown has worsened resulting in decreasing energy demand • Kingston ash spill recovery efforts are ongoing and potential exists for additional lawsuits/fines • Potential for secondary environmental items such as additional ash remediation or expanded environmental oversight • Clean air projects may potentially by accelerated in response to NC Clean Air ruling • Financial market turmoil has significantly reduced retirement system and nuclear decommissioning trust balances • Fuel and purchased power prices have eased some, resulting in lower FCA portion of rates • While FYTD rainfall is near normal, drought impacts continue

4. National Economic Indicators Continue to Worsen • With sales dismal, credit markets tight, and recessionary global conditions, manufacturing has contracted rapidly the past four months. • National auto sales are down to levels not seen since the 1982 recession. • The weakening economy is resulting in shrinking regional jobs with several plant closings and delays in expansions. • Construction-related manufacturers • Whirlpool announced the closing of its Jackson TN plant, eliminating 500 jobs, in addition to its LaVergne plant. • La-Z-Boy announced plans to shut down its cutting and sewing plant in Dayton, TN, eliminating 240 jobs. • Auto & Associated Industries • Nissan has bought-out some 800 employees, and GM is idling its Spring Hill plant until at least February. • Delphi announced plans to close the plant in Athens, AL, in the second half of 2009, eliminating 1,100 jobs. • SeverCorr is expected to cut back production.

5. TVA Region January 2009 Update Regional GDP (constant $'s) Year Current Budget Difference 2010 2.5% 3.6% (1.1%) 2009 (0.4%) 2.2% 2010 2009 (2.6%) 2010 Current 167 BkWh (calendar year annual growth rates) 2010 Budget 178 BkWh 2009 Current 169 BkWh 2009 Budget 177 BkWh TVA Sales (Billions of kWh) TVA Region Economic Outlook (Current Outlook versus Budget) • Effects of the National Outlook on the TVA Region • TVA region economic situation has deteriorated rapidly along with the nation. However, the regional economy is expected to perform only slightly worse than the nation’s in 2009, even given the Valley’s manufacturing intensity. • The region has a concentration of construction-related manufacturing; including carpets, furniture, and appliances, which have suffered from the nation’s severe housing contraction. • The auto manufacturing industry also has a prominent place in the regional economy. Diminished national auto sales are impacting both vehicle and parts production in the Valley. • TVA Sales Impact • The current outlook for FY2009 assumes a reduction of 4.6% compared to the Budget forecast. • Directly served customers hit relatively harder than distributors, with a decline of 11.7% compared to the forecast in the Budget. • In terms of the current outlook compared to actual FY 2008, TVA sales are declining by 4.0% overall with TVA directly served customer’s sales declining 11.9%. • Commodity Prices • Current commodity prices are lower than those used in Budget and such information is reflected in the fuel cost for serving TVA load.

6. Trend of Energy Requirements (billion kWh) Rule of Thumb 1% Decrease  ~$90M Revenue FY04-08 CAGR 1.7% FY09 Forecast 4.6% up to x% Decline Excludes off-system sales

7. Load Growth Impacts • Insert page from Tim regarding how changes to load growth impact power supply planning process

8. Kingston • Insert page summarizing major costs related to Kingston effort

9. NC Clean Air Response Insert a page for page summarizing NC Clean Air adjustments

10. Investment Performance Retirement System 36% Decline in Assets Nuclear Decommissioning • Investment performance in the latter part of FY08 and Q1 FY09 has negatively impacted pension and decommissioning trust funds • Potential for additional funding needs above what was originally expected

11. Fuel and Purchased Power • Insert page from Tim / Van regarding changes to fuel and purchased power expenses

12. FCA Details Insert a slide or two from FCA communications package

13. FY10-13 Revenue Pressure * No assumption in FY09 budget for additional rate increases in FY10-13 to address future cash shortfall Long Range Financial Plan assumed 3% increases in FY10 and FY12

14. Boundaries / Constraints • OMB debt commitment • Inability to raise base rates in this economic climate • Ability to achieve top quartile spending and/or operational performance • Financial guiding principle regarding new debt for capacity expansion (65% new debt / 35% base rates)

15. Options / Implications • Reduce Capacity Expansion • Requires additional reliance on the market for meeting power needs • Potential to identify large amount of spending for deferral • Raise base rates • Difficult economic climate for additionally increase rates • With declining fuel and purchased power costs, base rate increase may be mitigated • Constrain O&M • Potential to provide a broader perception of concrete action • Relatively small dollars compared to overall revenue gap • Reprioritize / defer base capital • Potential to impact asset recovery efforts • Borrow additional debt • Potential political risk with relationship to OMB

16. Summary • TVA is deferring FY09 projects where possible to mitigate short-term cash flow impacts • Expected cash shortfall in FY09 due to significant impacts of economic downturn • FY10-14 financial plans will potentially be impacted by a variety of these factors with long-term implications • Options for addressing revenue shortfall will require strategic guidance