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Capacity Expansion Plan Update November 21, 2008

Capacity Expansion Plan Update November 21, 2008. Executive Summary. Objective: Review the existing capacity expansion plan against the current and forecasted market conditions in order to validate or recommend changes that have favorable economic impacts to the portfolio. Key Messages:

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Capacity Expansion Plan Update November 21, 2008

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  1. Capacity Expansion Plan UpdateNovember 21, 2008

  2. Executive Summary Objective: Review the existing capacity expansion plan against the current and forecasted market conditions in order to validate or recommend changes that have favorable economic impacts to the portfolio. Key Messages: • Decreasing capacity needs due to lower load projections puts TVA in a position to delay making large capital expenditures on new capacity expansion projects. • Magnolia provides the best near term portfolio value and does not have the same risk profile of the new construction projects. • The savings of delaying all capacity expansion projects does not support the capital required for buying Magnolia.

  3. Portfolio Supply Outlook – MWs Expected Load Forecast – Aug08 • Key Messages: • Current forecast projects negative load growth from 2009-2011. • Demand side management is expected to fill a significant portion of the capacity shortfalls. • As capacity needs decrease, there is a diminishing value to acquisitions and new construction. • PPA’s begin to expire in 2012. • The current capacity expansion plan has 1468 MWs new generation being added from 2012 – 2014 • Based on lower expected load due to current and projected market conditions, the need for additional generation has decreased and TVA will have surplus capacity beginning in 2011 if we move forward with the current capacity expansion plan. Decreasing capacity needs due to lower load projections puts TVA in a position to delay making large capital expenditures on new capacity expansion projects.

  4. Primary Strategic Supply Options • Magnolia Acquisition • Pros: • Set Price • Immediate Capacity • Reduces net position shortfall in 2009-2010 • Delays Gleason, Caledonia & New Greenfield • Hedge against lower than expected demand side management impacts • Hedge against delayed project completion of nuclear uprates and/or Lagoon Creek and Watts Bar (1690MW) • Hedge against higher than expected load • Hedge against catastrophic failure of one of the fossil/nuclear plants • Hedge against mothballing fossil plant because of potential new CO2 legislation • Provides best near term portfolio value • Proven operations record • Hedge against continuing drought conditions and lower hydro generation Cons: • Owner may not sell for price that is beneficial for TVA • Existing Construction Projects • Pros: • Control of end product • Hedge against lower than expected demand side management impacts • Hedge against higher than expected load • Hedge against catastrophic failure of one of the fossil/nuclear plants • Hedge against mothballing fossil plant because of potential new CO2 legislation • Hedge against continuing drought conditions and lower hydro generation Cons: • Cost Risks • Schedule Risks • Doesn’t address capacity shortfalls in 2009-2010 • Scope Risk Magnolia provides the best near term portfolio value and does not have the same risk profile of the new construction projects.

  5. Impact of Delayed Construction Projects – MWs Expected Load Forecast with Magnolia – Aug08 • Delaying all capacity expansion projects 1 year reduces cash flow by $48.3 Million in FY09. • Delaying Gleason 1 year adds $32.8 Million to the total cost of the project. • Based on the projected decline in demand (January Forecast), we can expect the portfolio value of Magnolia to be less than $500 Million. * Magnolia seasonal net dependable capacity needs to be verified The savings of delaying all capacity expansion projects does not support the capital required for buying Magnolia.

  6. Final Thoughts Key Takeaways: • The savings of delaying the planned construction projects between 2012-2014 doesn’t free up a significant amount of capital to support the Magnolia acquisition (~10% of expected portfolio value). • The current portfolio supply outlook and expected outlook for January does not require any additional capacity expansion from 2009-2014. Next Steps: • The economics of the previous analyses should be revisited to: • Obtain the value of delaying Gleason, Caledonia and New Greenfield projects. • Obtain updated market forecasts for 2009-2014 for purchased power. • Establish the maximum optimal value TVA should pay for Magnolia. • Calculate the potential MW cost of the net position shortfall/surplus each year. • The owners of Magnolia should be approached for initial discussions of a potential purchase (senior executive level contact). • A recommendation on whether to proceed with negotiations for the purchase of Magnolia should be made by mid January.

  7. Appendix

  8. NPV Results

  9. Portfolio Supply Outlook – MWs Low Economic Load Forecast – Aug08 * Magnolia net dependable capacity needs to be verified

  10. Portfolio Supply Outlook – MWs High Load Forecast – Aug08 * Magnolia net dependable capacity needs to be verified

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