Power Supply & Fuels Briefing to the COO FY09 Key Initiatives

1. Power Supply & Fuels Briefing to the COO FY09 Key Initiatives with a focus on initiatives that contain a change in direction or timing October 7, 2008

2. Agenda 10:00 Open & Governance Framework - Van 10:10 Hedging Ladders - Multiple Commodities – Chris / All 10:25 Integrated Strategy / Objective - Chris / All 10:30 Buying Limits - Jacky 10:40 Merrill Lynch Coal Optimization - Mike 10:50 Review Fuel Supply Matrix of Other Items (dates of key deliverables) - Jacky / Mike 10:55 Gas Storage & Transport - Dianne 11:05 Capacity Additions Trajectory - Belinda 11:15 IT Strategy (ETRM focus) - Mike 11:25 PSP Process Improvement / FIPS Phase II* / Transmission Strategy / System Planning 11:45 Q&A 11:55 Wrap-Up - Van 12:00 Adjourn

3. Power Supply & FuelsGovernance Framework Strategy Map & Action Matrix Business Plan WP and Indicators w/ Benchmarks Communications Strategy Overarching Core Process Documents Resource Plan / Generation Strategy Transmission Strategy Plan Commodity Strategies w/ Financial Trading Fuel and Purchased Power Contract Plan Account Interface Mgmt (AIM) & Strategic Partners Coal Natural Gas Power Oil & Reagents Risk Maps People Strategy (CHI, Succession, Staffing, Development) IT Strategy Regulatory Framework - Compliance, Reliability, Financial Project Management and Execution Underlying

4. Are coal optimization opportunities with Merrill Lynch viable? Should we continue to rely solelyon Gulf supplies for Natural gas? What trajectory should our capacity additions take given the economy and other uncertainties? What are the Key elements & objective of an integrated commodity strategy? Do buyer’s delegations need to be changed to match the realities of today’s markets? Speed and substance of Information Technology Strategy Do the current hedging ladder policies achieve the desired balance of predictability and low cost? Key Topics PSP Improvement Plan & Transmission Strategy Update

5. Coal Hedging Initiatives Background Information Initiative • Adjust the 5-year laddered portfolio to increase the hedge target and timing and to incorporate strategic alliances agreements with key suppliers to increase price predictability in the coal portfolio Approved Program • Enter each fiscal year 85% to 95% physically hedged, rolling off approximately 20% per year in subsequent years FY09 Items Under Consideration • Accelerate the coal procurement process to facilitate a 95% hedge position prior to establishment of upcoming year fuel budget by April 2009. This supports the existing strategy to adjust buying strategies to best match market conditions Longer-Term Opportunities • Within 3 years have up to 40% of the total portfolio comprised of strategic alliances • Financial Coal Hedging – currently little activity in U.S. market, very active in Europe • Exploring alternatives such as the Merrill Lynch opportunity (see page 10) Coal F.O.B. Mine net of Expected Defaults FY09 Estimated Commodity Costs $2,456 Million • Natural Position • TVA-owned fossil assets Hedges • Physical contracts with coal suppliers • Default rates by basin increase need (26% Uinta, 21% CAPP, 21% ILB, 5% PRB) Dollars exclude base transportation charges ($722 million), Rail Fuel Surcharges ($261 million), other/inventory reconciliation ($97 million)

6. Natural Gas Hedging Initiatives Background Information Initiative • Increase quantity and timing of natural gas hedging Ladder to increase portfolio price predictability Approved Program • Hedge 50% of combined gas and economic replacement power position 6 months prior to delivery, limited by 90% of expected gas burns. Layer in hedges over 24-month period • $60 million transaction limit (one-day VaR) • Ramping into ladder for FY10 by April FY09 Items Under Consideration • Increase limit on 90% of expected gas burn to 100% by October 31 • Increase ladder minimum target from 6 months to 15 months to reduce gas exposure prior to budgeting cycle by December 31 (expand trading limits), subject to hydro assumptions • Create dynamic hedging targets that take into account both budget price targets and long-term “value” targets by June 30 • Current downside messaging risk of low load, high hydro, and low prices Longer-Term Opportunities • Cross-commodity hedging – using natural gas to hedge open power position (small need currently) • Long-term fixed price purchases from physical suppliers Natural Gas Owned Assets and Tolling/Gas Indexed Contracts FY09 Budgeted Commodity Cost $1,042 Million • Natural Position • TVA-owned assets, e.g., CT sites and Southaven • Contracted Assets, e.g., tolls like Suez and Decatur and gas-indexed power purchases like Morgan Energy Center • Planned contracts and construction units, e.g., KGen and Lagoon Creek CC • Need based on ~8,000 GWh of hydro in FY09 consistent with August PSP; hedge minimums based on normal hydro (~18,000 GWh) for FY10 Hedges • NYMEX Futures (currently 23% of portfolio) • Options (currently 3% of portfolio) • OTC Swaps (currently 74% of portfolio) Dollars exclude $59 million fixed transportation charges, $4 million storage demand fees, and $34 million of variable transportation charges

7. Oil Hedging Initiatives Background Information Initiative • Expand transaction ($) limits for increased hedging of fuel oil and to incorporate crude oil to hedge eastern rail surcharges Approved Program • $5-million transaction limit (one-day VaR) FY09 Items Under Consideration • Work with western rails to explore costs of hedging costs through existing contracts – neither rail carrier has an existing mechanism to do so. Complete exploration by October 31 • Hedge high percentage (80+%) of eastern & western rail exposure with financial contracts under existing authority. Program in place by December 31 • Expand transaction limits to complete hedging by April 30 for FY10 ( $15-20 million limit range) • Physically purchase fuel oil to meet winter needs by November 15 Longer-Term Opportunities • Long-term fixed price purchases from physical suppliers Oil CT Fuel, Fossil Start-up, Fuel Surcharges for Rail (est.) FY09 Budgeted Commodity Costs $353 million • Natural Position • Fuel Surcharges on Rail Contracts; On-Highway Diesel for western rails (UP & BNSF for ~$208 million), and WTI for eastern rails (NS, CSX, and P&L for ~$53 million) • Light-off oil on fossil units ~$84 million • Combustion turbine alternative fuel ~$7 million Hedges • None currently

8. Power Hedging Initiatives Background Information Initiative • No change from current Activity Approved Program • Physical hedging has been the primary method for mitigating electricity price risk • Pilot financial trading activity to mitigate short-term price risk associated with RTO purchases and to ensure desired deliveries from those markets • $5-million transaction limit on financial hedges (one-day VaR) FY09 Items Under Consideration • Pilot activities have been limited due to the infrequent economic opportunities in comparison to purchasing the physical RTO product (the physical has been cheaper) and the limited availability of transmission from MISO • Regulatory/policy uncertainty increases price risk of long-term purchases • Financial trading inside the TVA footprint limited due to the poor liquidity of the Into-TVA product Longer-Term Opportunities • Expanding transaction limits on financial program Power Owned Assets and Tolling/Gas Indexed Contracts FY09 Energy Commodity Costs $817 million VPI/ESP Load Open Position Existing Hedges • Natural Position • Economic position to serve TVA sales filled by economic replacement power and for long-term contracts • TVA Variable Priced Interruptible (VPI) and ESP Rate that float at the top of the stack offset need. VPI terminates at the end of FY09, ESP terminates at end of Alcoa contract. Volume assumes ½ of VPI/ESP indexed to market electricity purchases. Hedges • Red Hills long-term contract with energy rate not indexed to fuel costs • Forward physical power purchases, currently 300 MW on-peak Oct-Dec 09 Dollars exclude $340 million of demand charges, $85 million of transmission related charges, and $12 million of non-fuel energy charges (VO&M fees, start fees, etc)

9. Integrated Commodity Strategy Initiative • Develop an integrated commodity and transportation strategy and incorporate tactical learning into revised commodity strategies Current Process • Completed Coal, Natural Gas, and Power strategies during FY08 Planned FY09 Items • Complete Integrated Strategy by November 30 • Identify key commodity and transportation linkages • Seek commodity trade-offs, for example, explore opportunity to reduce CT Oil inventory with additional firm gas transportation • Ensure common risk mitigation approach • Frame Price Predictability / Low Cost issue • Completing Fuel Oil & Reagent Strategy by November 30 • Update existing strategies during first quarter and gain approvals during second quarter in preparation for FY10 budget process Longer-Term Opportunities • Improve coordination of Strategies and Revised Risk Mapping Process • Work with Risk Management on improving reporting and messaging of commodity positions • Develop commodity and transportation Post-Op Framework

10. Coal – Expanding Buying Limits • Initiative • To ensure reliable, cost-competitive fuel in today’s rapidly changing markets, TVA must be able to quickly and efficiently respond, review, commit, and execute contracts. • Update Buying Limits (Delegation of Authority from CEO to PS&F) to reflect changes in market prices since the original Authority was put in place. • Current Status • PS&F provides detailed annual fuel supply budget and contracting plan that is reviewed and approved by COO, CEO, and appropriate Board Committees. • CEO has been delegated authority to approve contracts as per Board-approved delegation to CEO (within approved contracting plan and not more than 7-year commitment). • EVP, Power Supply & Fuels, currently has the authority to execute contracts that are $15-million or less. • Near-Term Action • Create CEO to COO fuel delegation of $250 million which would leave a material number of contracts for CEO approval. • Complement CEO to COO delegation with a COO to PS&F delegation.

11. Coal – Merrill Lynch Opportunities • Initiative • Utilize Merrill Lynch (ML) expertise to optimize coal structure and strategic opportunities (market arbitrage) to find value for TVA • Gain insights on market intelligence and “point of view” from ML experts • Current Status: • Follow-up meeting with Merrill September 29 in Houston, TX • Established framework for possible structure optimization • Working with ML on specifics of possible contractual agreements • Near term (FY 09) Action Items & Due Dates: • ML to provide TVA with term sheet outlining economic terms and conditions. October 15 • TVA to provide coal contract and transportation for “pilot plants”. November 30 • John Siever and Kingston (primary), Widows Creek 1-6 (secondary) • ML to bring arbitrage opportunities to TVA for consideration January 1 • Long-term Opportunities: • Reduce costs via arbitrage market opportunities • Improved market intelligence resulting in better procurement/hedging decisions • Bring increased sophistication to management and structure of coal portfolio

12. Other FY09 Key Initiatives & Strategic Direction - Coal

13. Power – Accelerate Capacity Purchases • Meet summer 09 requirements by March 2009 • Meet summer 10 requirements (within ~500 MW) by June 2009 Completed Purchases • Red Hills (432 MW) • Invenergy (27 MW) - wind • Caledonia (768 MW) • Suez Choctaw (650 MW) • Calpine/Decatur Energy Center (720 MW) • Calpine/Morgan Energy Center (500 MW)Unit firm call option; January 2009 – December 2011 In Negotiation • JAron/Batesville (276 MW) – 2 years • Union Power (500 MW) – 2 summers • PJM Firm Transmission decision by December 31 Additional Sources • Asset Purchases? • KGen Murray (500 MW) • Magnolia (870 MW) • Customer-Owned Generation • Alcoa/Tapoco (250 MW included in plan) • Weyerhaeuser (approx. 65 MW) Additional Uses • USEC Sales • Emerging Economic Development Projects Morgan 500 MW Decatur 720 MW Caledonia 768 MW Suez 650 MW Tapoco 250 MW Red Hills 432 MW 1,043 MW Gap 1,783 MW Hydro Capacity Loss vs 2011 Drought 1,100 MW 1,020 MW TVA, SEPA, Tapoco Hydro Capacity in 2011 is 3,965 MW

14. Natural Gas – Diversify and Optimize Initiatives • Issue winter physical supply and call option RFP October 15 • Identify opportunities to diversify gas supply and storage • Optimize existing transportation and storage through capacity release and market optimization Contracts Executed • 500,000 MMBtu/day of existing firm transportation contracts • 100,000 MMBtu/day long-term transportation agreement for Gleason • 1.5 Bcf of firm storage at Egan with additional 1 Bcf starting April 2010 In Negotiation / Discussion • 100 MMBtu/day northern back-haul on Tennessee Gas Pipeline by October 31 • Southaven Texas Gas renewal or long-term contract by October 31 • Lagoon Creek CC Trunkline and/or Texas Gas long-term contract by December 31 Opportunities: • Complete gas optimization model (build or buy) by September 30. • Explore opportunities to participate in Shale Gas transportation expansions • Diversification of storage assets

15. IT Strategy Initiative PS&F Data Infrastructure needs resource investment to increase the speed and accessibility of data used for decision-making Current Status Completed IT Strategy as a framework for the development, maintenance, and improvement of the technology utilized by PS&F in all of its roles for fuel and power purchases and sales for TVA Formed IT Steering Committee and Program Management Office to prioritize, deploy, and re-deploy resources Near-term (FY09) Action Items & Due Dates Incorporate System Planning into IT Strategy Coal Business Improvement project (to be completed FY11) Issue RFP for integrated Energy Trading Risk Management (ETRM) System (by early FY10) Data Integration / Warehousing effort (to be completed FY12) Key future projects ETRM implementation FY10 & 11 14

16. Power Supply Plan – Process Improvement • Initiatives • Initiate and Complete Scott Madden Study • Formation of Planning Council • Choose Project Mgr to implement improvements (Roger Field) • Current Status: • Roger Field – leading improvement efforts and teams • Beth Creel – Capacity/Long-Term Plan • Mark Meigs – LT Financial Plan • Cass Larson – FCA • Wayne Hilson – Mid-Term Plan • Steve Birchfield – Budget • Near-term Action Items • November 4 – Update on Team progress and draft 2009 schedule • Get approval to proceed with FIPS Phase II – reduce coal contract overlay time from 15 days to 4 • Mid-term Opportunities: • Improve Speed and Turnaround • Address Enhancements and Tool issues • Gain consistency around process, schedule, and sensitivities/cases

17. Process Improvement - FIPS Phase II • Initiative • Improve the fuel supply information infrastructure to facilitate more timely (faster turn around) fuel forecasts, budgets, and supply plans • Current Status • Fully scope & perform data/information assessment for Fuel Information Planning System (FIPS) Phase 2 and Fuel Supply Plans • FY09 Actions Under Consideration • Accelerate implementation of FIPS Phase 2 by March 30, 2009, to reduce fuel forecasting from 15 days to 4 days • Accelerate implementation of Supply Plans to complete by mid-2009 • The two above accelerations are dependent upon identifying additional funding sources ($616 K in FY09 budget; anticipated additional FY09 funding of $2.4 million needed) • Longer-Term Opportunities • Within three years have fully functional Fuel Information and Planning System to allow (1) quick turnaround on fuel forecasts and budgets and (2) have real time access to fuels information

18. Transmission Strategy • Initiatives • Unified Long-Range Transmission Plan (ULRT Plan) • Best-Start/Head-Start Plan (BSHS Plan) • Optimum New Gen Sites • 60-GW Plan (Pole Star Plan) • Current Status • Begun meetings with Distributors on ULRT Plan – concept well received • Working with FPG to rank potential new generation sites • Near-term Action Items • Conduct 40 power distributor meetings to advance ULRT Plan • Obtain BSHS Phase II project approval • Monitor NERC Draft Planning Standard, TPL-001-1, to ensure compliance lead time • Long-term Opportunities • Complete ULRT Plan for system efficiencies • Fully develop role of transmission planning within TVA’s strategic framework

19. System Planning – Other Initiatives • Other Initiatives: • Improve overall Speed • Process clarity and schedule • Enhanced Tools • Succession Planning / Bench-strength • Recruiting / Retention • One annual LT Capacity Plan • Indicators / Metrics / Dashboards • Uniform Reports / Templates • Improve forecast of on/off-peak (5x16) energy • Move DP forecast from mainframe to server • Add impacts of dryness to normalization process • Improved Outage Planning – Next 2-6 seasons • Reliability Assessment Process Enhancement • CPPP Stakeholder process implementation/refinement • Add Stochastics in production costing modeling of the TVA integrated power system • DSM: modeling DSM program impacts as a resource within TVA’s Portfolio • Databases: Upgrade integrated database to include production cost model (PaR), expansion planning, and System Optimizer

20. Next Steps • Near term follow-up items • Coal Information Infrastructure – FIPS Phase II • Fuel Buying Limits • Strategic Alliances Update • Informational releases for Strategy enhancements for potential CEO Approval Items