Strategic Issues Discussion

1. Strategic Issues Discussion Board Retreat May 13, 2009

2. Recent Events • Economic Downturn • Loss of Revenue • Pension Underfunded • TVA Specific Events • -Kingston • -North Carolina Today’s Discussion Environmental Outlook

3. 2007 Strategic Objectives • Customer • People • Financial • Assets • Operations

4. CUSTOMER Strategic Objective: Maintain power reliability, provide competitive rates, and build trust with TVA’s customers • Critical Success Factors: • Strengthen relationships and trust by being responsive to stakeholder needs • Develop a portfolio of product and pricing structures that more accurately reflect the costs of serving load at different times and levels of use • Partner with distributors and directly served customers to encourage conservation, promote energy efficiency, and reduce peak load • Partner with customers to limit volatility in rates and participate in power supply through shared generation ownership • Assist states, communities, and distributors in sustaining economic development programs • To Consider: • Definition of “competitive” • Rate predictability?     

5. PEOPLE Strategic Objective: Build pride in TVA’s performance and reputation • Critical Success Factors: • Safeguard the health and safety of employees and the public • Strengthen workforce knowledge and skills and management processes to motivate performance and successfully implement the strategic options • Treat employees, customers, and other stakeholders with integrity and respect • Communicate clearly and consistently • To Consider: • ???    

6. FINANCIAL Strategic Objective: Adhere to a set of sound guiding principles to improve TVA’s fiscal performance and successfully implement the strategic objectives • Critical Success Factors: • Apply sound economic and financing practices to new investments • Pay financing obligations before assets are fully depreciated • Strengthen TVA’s balance sheet by improving the ratio of financing obligations to total assets • Improve TVA’s cash return on total assets in order to service debt, preserve existing assets, reinvest in new assets, and improve environmental performance • Achieve top-quartile performance in non-fuel operation and maintenance (O&M) expenses and then hold increases to be less than unit sales growth (kWhs) • To Consider: • Preserve existing assets or invest in new? • Improve environmental performance- create new environmental objective? • O&M expenses- how fast to achieve goal?    ? ?

7. ASSETS Strategic Objective: Use TVA’s assets to meet market demand and deliver public value • Critical Success Factors: • Balance TVA’s production capabilities and load by adding assets (buy, build, or through long-term contracts) and encouraging the use of energy in ways that reduce the need for new generation • Preserve, maintain, repower, or retire existing assets where appropriate • Manage land and water resources to provide multiple benefits to the Valley • Reduce fuel supply risk with a diverse portfolio of generation assets • To Consider: • Encourage demand reduction- in assets? • Balancing production capabilities and load requirements within 5% every year or in the future? • Manage land and water resources- create new environmental objective? • Preserve vs. retire? ? ?  ? 

8. OPERATIONS Strategic Objective: Improve performance to be recognized as an industry leader • Critical Success Factors: • Deliver reliable electric power generation and transmission products and services • Benchmark the industry’s best performers to develop metrics for top-quartile performance • Make nuclear safety the overriding priority for each nuclear facility and for each individual associated with it • Continue to reduce the impacts of TVA’s operations on the environment • Serve as a responsible steward of the Tennessee River System • Apply science and technological innovation to improve operational performance • To Consider: • Top-quartile performance achievable in what timeframe? • How aggressively to reduce environmental impacts? • Environmental aspects- create new environmental objective? • Technology leadership expectations?  ?  ? ? ? 

9. Revised Strategic Objectives • Energy • Sustainable, reliable system • Cost-effective • Environment • Improve steadily • Absolute goal? • River stewardship • Economic Development • How much can we afford? • Financial • Maintain AAA rating • Pay financing obligations before assets are fully depreciated • Target top quartile O&M performance • Technology Leadership • ?

10. What, really, has changed? • Economy and load forecast • Natural gas supply and volatility • Environmental regulatory outlook • Kingston Ash Slide • North Carolina nuisance decision

11. Economy and Load Forecast

12. Monthly Percent Change from Previous Year

13. Long Range Load Forecast GWh

14. TVA Energy vs. Peak Demand Peak Up 2%, but Sales down 5%

15. 1Q 2009 Year-over-Year Sales Comparison

16. Natural Gas Supply And Volatility

17. Natural Gas Forecast Presentation by Mark Deverka Managing Director Merrill Lynch Petrie Global Energy and Power

18. Key Drivers - Natural Gas & Coal Price Costs shown do not include emission allowances (SO2, NOx & CO2) • PS&F currently has some gas hedged to 2013 • Recent quotes indicate a willingness to go to 2020 • Price range appears to be 25¢ above Nymex curves (~$7.40/mmBtu) • Gas Transportation would add 45-55¢/mmbtu (total ~$7.90/mmBtu) through 2020

19. Environmental Outlook

20. Environmental Outlook Situation Assessment

21. Environmental Outlook Situation Assessment (con’t)

22. Environmental Outlook Situation Assessment (con’t)

23. Environmental Outlook Situation Assessment (con’t)

24. Environmental Outlook Situation Assessment (con’t)

25. Environmental Outlook Situation Assessment (con’t)

26. Environmental Outlook Situation Assessment (con’t)

27. North Carolina Nuisance Decision

28. North Carolina Nuisance Suit- Alternative Actions Appeal Decision • Decision to appeal must be filed in 4th Circuit by June 1, 2009 • Briefing Summer/Fall 2009 • Oral argument Spring 2010 • Decision Summer/Fall 2010 • Implications of Appealing • Reasonable possibility of reversing decision • Provides more time for and leverage in negotiations with NC, others • Implications of Not Appealing • Restrictive unit emission limits could limit operation of Bull Run and Kingston each year • Increased risk of nuisance liability • Bad precedent • Political/PR issues • Appealing will appear to some that TVA is resisting emission reductions with potential adverse political and PR consequences • State of Alabama and others are expected to support TVA by filing amicus briefs • Other utilities are urging TVA to appeal

29. Appeal Decision Yes No • System stability risk unless replacement capacity added 12/31/11 • Operations risk due to unit emission limit constraint • Retire some/all JSF coal units or • Shutdown JSF coal units 12/31/11 until controls are installed Win Lose • Flexibility to complete/operate replacement capacity • Flexibility to retire JSF coal units or control/operate all JSF coal units • Unit emission limit constraints removed Prepared Unprepared • Construct replacement capacity for in service date of 12/31/11 • Retire some/all JSF coal units or • Shutdown JSF coal units 12/31/11 until controls are installed • System stability risk • Complete replacement capacity asap • Retire some/all JSF coal units or • Shutdown JSF coal units 12/31/11 until controls are installed

30. Summary of Change Impacts • Economy and Load Forecast • Revenue Loss • Pension Loss • Economic Development ? • Environmental • Kingston • Ash Ponds • Renewables • CO2 • North Carolina • Capacity Implications • Bull Run and Kingston • Widows Creek • John Sevier

31. Power Supply Plan Impacts • A diversified portfolio in intermediate generation is best hedge against fluctuating gas prices and coal emission taxes • 2022 energy requirement is ~200,000 Gwhs. • Nuclear and hydro generation can cover 100,000 Gwhs, leaving gas/coal to cover remaining 100,000. • Equal capacity split between coal and gas allows either technology to produce 85% of 100,000 Gwhs, depending on which is most economical at the time Current 2022 Plan Environmental Leadership 2022 Plan

32. Dispatch Curve – Gas and Coal swapping

33. Natural Gas & Coal with Emissions Costs shown include emission allowances (SO2, NOx & CO2) • By 2028, the gas forecast is $25/MWh higher than coal including emissions impacts • Including emissions impacts, a potential gas hedge crosses the coal forecast in 2025 at ~$75/MWh • Ability to hedge CO2 requirements is much more uncertain • Gas hedge is more liquid

34. Thoughts on TVA’s Strategic Direction

35. Mission- Three E’s • Environment • Compliance vs. environmental leadership? • Expectations regarding environmental legislation? • Energy • Maintain ‘competitive’ rates? • TVA generation vs. market reliance? • Fleet performance? • O&M cost? • Replace (some) coal with gas? • Nuclear commitment? • Leadership in transmission interconnection? • Economic Development • Incentives or low rate driven? • Value of reputation? • Retain 99.999 transmission reliability?

36. DISCUSSION

37. Strategic Options Cleaner and Greener 7,000 MW Fossil Retired Environmental Leadership (3,000 MW Fossil Retired) Business as Usual • JOF retired in 2022 • CC- 4,000 MW • CT- 6,000 MW • SCPC- 800 MW • New nuclear (5,600 MW in 2018, 2020, 2025, 2027) • No DSM • Renewables- Bingaman Bill • Retirements: JSF (2012), WCF 1-6 (2014), ALF (2015), COF (2015), GAF (2015), SHF 10 and JOF (2016), SHF 1-9 (2018) • CC- 9,300 MW • CT- 5,400 MW • 1600 MW SCPC • New nuclear (5,600 MW in 2018, 2020, 2025, 2027) • No DSM • Renewables- Bingaman Bill • Retirements: JSF (2012), WCF 1-6 (2014), COF 5 (2015), JOF 5-10 (2016), JOF 1-4 (2018) • CC- 4,900 MW • CT- 6,000 MW • SCPC- 1600 MW • New nuclear (5,600 MW in 2018, 2020, 2025, 2027) • No DSM • Renewables- Bingaman Bill Changesin options Same in all options

38. Power Supply – CO2 Emissions Carbon comparison • Aug 08 • 1.97B tons • Business as Usual • 1.93B tons • Environmental Leadership • 1.83B tons • Cleaner & Greener • 1.62B tons • CO2 per GWh of TVA load declines in May cases • From 2009 – 2020: • TVA load increases by 14% • Environmental Leadership CO2 decreases by ~15% • Cleaner & Greener CO2 decreases by ~30% 170K GWh 194K GWh Volumes are calendar years 2010 – 2027

40. Power Supply – 3 Bounding Cases • Aug 08 • August 2008 Budget Plan • Business as Usual • Accelerates existing fleet clean air schedule as needed • Achieves clean air & NC ruling compliance by installing controls • Environmental Leadership • Similar to Business as Usual except ~3,000 MWs of fossil units are retired • Cleaner & Greener • Similar to Business as Usual except ~7,000 MWs of fossil units are retired

41. Power Supply – Case Total Cost - 20 yrs Case Summaries: • Far right cases require more gas-fired generation • Bingaman Bill assumption is more expensive compared to Aug08 RPS outlook • Red circle savings from Clean Air/Plant Capital costs offsets blue circle expansion costs • Not counting fuel & emissions, middle cases are both $78B

42. Expected Rate Impacts: A single rate action of 16% in FY2010 Alternatively, FY09 LRFP rate actions of 3%, 3% and net 3% would increase to 7%, 6% and Net 5%in FY2010, FY2012 and FY2014 Partially offsetting these base rate increases are lower expected fuel costs, driven mainly by falling fuel prices and reduced loads Rate Impacts : Business as Usual Key Cash Flow Drivers : FY 2009 LRFP to Business as Usual

43. Expected Rate Impacts: A single rate action of 16% in FY2010 Alternatively, FY09 LRFP rate actions of 3%,3% and net 3% increase to 7%, 6% and Net 5% in FY2010, FY2012 and FY2014 Partially offsetting these base rate increases are lower expected fuel costs, driven mainly by falling fuel prices and reduced loads Rate Impacts : Environmental Leadership Key Cash Flow Drivers : FY 2009 LRFP to Environmental Leadership

44. Expected Rate Impacts: A single rate action of 15% in FY2010 Alternatively, FY09 LRFP rate actions of 3%,3% and net 3% increase to 6%, 6% and Net 5% in FY10, FY12 and FY14 Partially offsetting these base rate increases are lower expected fuel costs, driven mainly by falling fuel prices and reduced loads Rate Impacts : Cleaner and Greener Key Cash Flow Drivers : FY 2009 LRFP to Cleaner and Greener

45. Financial Plan Comparison ($ millions) Note: 90% of Depreciation = $1.1B per year

46. Revenue Pressure Summary - What we see todayPreliminary High-Level Estimates – Incremental Spending ($ millions)

47. 2020 Fleet Age Data

48. Portfolio Strategy Results Summary* * Note that all rate impacts are estimated using preliminary estimates of some significant items including final cost of KIF effort, ash remediation, and certain other O&M items. As such, these items are likely to change, and given what we know to date, final values will likely be above estimates, resulting in slightly higher rate impacts.

49. Appendix

50. BenchmarksJanuary 2009