Text

Additional Information Regarding Financial Information Related to Operating License Application Update
	ML092470504
Person / Time
Site:	Watts Bar
Issue date:	08/26/2009
From:	Eric Freeman; Tennessee Valley Authority
To:	; Document Control Desk, Office of Nuclear Reactor Regulation
References
	TAC ME0853
	Download: ML092470504 (386)
	v • d • e

I" I I, Tennessee Valley Authority, Post OfficeOffice Box 2000, Spring City, TN 37381-2000 37381-2000 August 26, 2009 10 CFR 50.33 10 10 10 CFR 50.75 U.S. Nuclear Nuclear Regulatory Regulatory Commission ATTN: Document Control Desk Mail Stop: OWFN OWFN P1-35 Washington, Washington, D.C. 20555-0001 Watts Bar Nuclear Nuclear Plant, Unit 2 Docket Docket No. 50-391

Subject:

Information Regarding Additional Information Regarding Financial Financial Information Information Related Related to to Operating License Application Operating License Application Update Update (TAC NO.

NO. ME0853)

References:

1. TVA letter letter dated March 4,2009, dated March 4, 2009, 'Watts Bar Nuclear Nuclear Plant (WBN) Unit 22--

Operating License Operating License Application Update".

2. NRC letter dated dated July 21,21, 2009, 'Watts Bar Nuclear Nuclear Plant Unit 2 -

Request Request for Additional Information Information Regarding Financial Information Information Related Related to Operating License Operating License Application Application Update Update (TAC NO. ME0853)"

In Reference Reference 1, TVA provided an update of the WBN Unit 2 operating license (OL) application. application.

In Reference Reference 2, the NRC requested requested additional information regarding TVA ownership ownership and control, as well the funding funding mechanism mechanism to be used to establish financialfinancial assurance assurance for eventual decommissioning.

decommissioning. Enclosure Enclosure 1 provides the NRC requests and TVA's responses.

Printed on recycled paper Printed on

I I I u.s.

U.S. Nuclear Regulatory Commission Page 2 August 26, 2009 I declare under under penalty of perjury that the foregoing is true and correct. Executed Executed on the the th 26 2 6 th day of August, 2009.

If you have any questions, please contact me at (423)

If (423) 365-2351.

365-2351.

rely Edwin E. Freeman Cost and Scheduling Manager, Watts Bar Unit 2

Enclosures:

Enclosure 1 - NRC's Requests and TVA's Responses Responses Report to U.S. Securities Enclosure 2 - CD containing TVA's 2008 10-K Report Securities Exchange Commission and Exchange Document Components: 2,954,000 bytes Document bytes cc: See page 3

u.s.

U.S. Nuclear Regulatory Regulatory Commission Commission Page 3 August 26, 2009 cc (Enclosure 1):

U. S. Nuclear Regulatory Regulatory Commission Region IIII Sam Nunn Atlanta Federal Center 61 Forsyth Forsyth Street, SW, Suite 23T85 Atlanta, Georgia Georgia 30303-8931 Resident Inspector Unit 2 NRC Resident Watts Bar Nuclear Plant Plant 1260 Nuclear Plant Road 1260 Spring City, Tennessee Tennessee 37381

u.s.

U.S. Nuclear Regulatory Regulatory Commission Page 4 Page August 26, 2009 bcc (Enclosure 1):

Lakshminarasimh Raghavan Lakshminarasimh Raghavan Regulatory Commission U.S. Nuclear Regulatory MS 08H4A One White Flint North 11555 Rockville Rockville Pike Pike Rockville, Maryland 20852-2738 Patrick D. Milano, Senior Project Manager Regulatory Commission U.S. Nuclear Regulatory 08H4 MS 08H4 One White Flint North 11555 Rockville Rockville Pike Pike Rockville, Maryland 20852-2738 20852-2738 Loren R. Plisco, Deputy Regional Administrator Construction Administrator for Construction U. S. Nuclear U. Nuclear Regulatory Regulatory Commission Region IIII Sam Nunn Atlanta Federal Center 61 Forsyth Street, SW, Suite 23T85 23T85 Atlanta, Georgia 30303-8931

Enclosure Enclosure 11 NRC Request 1: Foreign Ownership, Domination, Foreign Ownership, Domination,or Control Control According to TitleTitle 10, 10, Code Code of Federal Regulations (10 CFR) Section FederalRegulations Section SO.33(d)(3),

50.33(d)(3), if applicant is applicant is a corporation corporationor an unincorporated association, an unincorporated association, state:

state:

1. The state

1. state where it is incorporated incorporatedor organized organizedand the principal principallocation location where it does business; business;

2. The names, names, addresses addressesand citizenship citizenship of its directors directorsand and of its principal principal officers; officers; owned, controlled,

3. Where it is owned,

3. controlled, oror dominated dominated by an an alien, alien, a foreign foreign corporation, corporation, or foreign or foreign government, government, and if so, so, give details.

details.

Tennessee Valley Authority (TVA) (TVA) did not provide provide an update update to the above information information about about its organization. Therefore, organization. Therefore, the Nuclear Nuclear Regulatory Commission requests Regulatory Commission requests TVA update update the information information described describedabove.

above.

TVA Response: Regarding items (1) and (3), TVA is a wholly owned corporate Response: Regarding corporate agency instrumentality of the United States of America established and instrumentality pursuant to the established pursuant the Tennessee Tennessee Valley Authority Act of 1'933, 1933, as amended amended (TVA

(VA Act").

Act"). As an agency agency of the the United States Government, TVA is neither owned, owned, controlled, nor dominated dominated by an alien, a foreign corporation, or a foreign government. A copy of TVA's latest annual report (2008 Form 10-K) filed with United States States Securities Commission which Securities and Exchange Commission which provides a current description of TVA is attached. See, in particular, current description particular, pages 7 and 8 which describe TVA's service service area.

Regarding item (2), TVA is administered Regarding administered by a board of nine part-time members members appointed by the President President of the United States with the advice and consent consent of thethe Senate. The Chairman of the TVA Board is selected by the members of the TVA Board.

Under the terms of the TVA Act, in order to be eligible eligible to b,e be appointed appointed as a member of the Board of Directors, an individual individual must be a citizen of the United States. A list and and description description of the members members of the TVA Board of Directors Directors appears on pages 155 and 156 of attached 2008 Form 10-K. The address of each each Board member appearsappears on the the Title Page of the 2008 Form 10-K (See "Address of principal executive offices"). The offices"). The only significant changes regarding the list of Board Board members are that Robert M. M. Duncan currently currently serves as the Chairman and Donald R. DePriest no longer serves serves as a member member of the Board. ThereThere are currently three three vacant vacant positions positions on the TVA Board.

A list and description description of TVA's Executive Officers appearsappears on pages 156-158 156-158 of of the the attached 2008 Form 10-K. The address address of each Executive appears on the Title Executive Officer appears Title Page of the 2008 Form 10-K 10-K (See "Address of principal principal executive offices").

offices"). The only only insofar as the organization significant change insofar organization and governance governance of TVA's nuclear program is concerned is that the current Chief NuclearNuclear Officer and Executive Executive Vice President President is Preston D.

Preston D. Swafford. Executive Officers Swafford. All of TVA's Executive Officers are citizens of the United States.

E1-1 E1-1

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Enclosure 11 NRC Request NRC Request 2: WBNWBN Unit Unit 2 Decommissioning DecommissioningFunding FundingMechanism Mechanism Page E1-2 Page E1-2 of TVA's Watts Watts Bar BarNuclear NuclearPlant, Plant,Unit Unit 2, updated updated application applicationstates states that that TVA TVA currentlyhas currently has aa Master MasterDecommissioning Decommissioning Trust Trust Agreement and and "consistent "consistentwith with this this currentpractice current practiceandand pursuant pursuantto 10 CFR CFR 50. 75(e)(1), aa Fund 50.75(e)(1), Fund will will be established establishedwithin within the Master MasterDecommissioning DecommissioningAgreement for Watts Watts Bar Unit 22..."

Bar Unit ... "

According to According to 10 CFR CFR 50.

50.75(e)(1),

75(e)(1),

Financialassurance Financial assuranceis is to to be be provided following methods.

provided by the following methods.

1.

1. Prepayment.

Prepayment.

2.

2. Externalsinking External sinking fund.

fund.

3.

3. surety method, A surety method, insurance, guaranteemethod [.

insurance, or guarantee [...J

. .]

Pursuantto 10 CFR Pursuant CFR 50. 75(e)(1), please please provide provide the exact method for establishing establishing financial assurance.

financial assurance.

TVA Response:

Response: At the present present time, TVA plans to add a separate separate Watts Bar Unit 2 Fund to TVA's existing Master Decommissioning Decommissioning Trust Agreement. (The original TVA Master Decommissioning Master Decommissioning Trust Agreement Agreement was provided to NRC as an enclosure to Decommissioning Funding Status Report, March 21, TVA's Decommissioning 21, 2001 letter to NRC from Mark J. Burzynski.) TVA's Master Decommissioning Trust Agreement qualifies Master Decommissioning qualifies as an external sinking fund under under NRC's regulations regulations (10 CFR 50.75(e)(1)).

50.75(e)(1>>. .

E1-2 E1-2

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I TENNESSEE TENNESSEE , VALLEY AUTHORITY AUTHORITY I

I I

FORM FORM 10-K 10-K I (Annual (Annual Report)

I I

I 12/16/08 for the Period Ending 09/30/08 Filed 12/16/08 09/30/08 I

I Address Address 400 WEST SUMMIT SUMMIT HILL DRIVE DRIVE KNOXVILLE, TN 37902 KNOXVILLE, I Telephone Telephone 865-632-2101 CIK CIK 0001376986 0001376986 I Symbol TVC TVC Code SIC Code 4911 - Electric Services Services I* Fiscal Year Year 09/30 09/30 I

document restricted under Reserved.

under EDGAR Online, Inc. Terms of Use.

UNITED STATES UNITED STATES I

SECURITIES SECURITIES AND EXCHANGE COMMISSION AND EXCHANGE COMMISSION Washington, D.C. 20549 Washington, I FORM lO-K FORM 10-K (MARK ONE)

I II El

[8] ANNUAL REPORT ANNUAL REPORT PURSUANT PURSUANT TO SECTION 13, 13, 15(d),

15(d), OR 37 OF THETHE

, SECURITIES EXCHANGE EXCHANGE ACT OF 1934 For the fiscal year ended ended September 30,2008 30, 2008 OR OR o

0 TRANSITION TRANSITION REPORT PURSUANT TO SECTION 13 REPORT PURSUANT THE SECURITIES EXCHANGE For the transition EXCHANGE ACT OF 1934 transition period from _ _ to _ _

13 OR 15(d) OF 1934 I Commission file number 000-52313 000-52313 I

I TENNESSEE VALLEY AUTHORITY TENNESSEE AUTHORITY (Exactname of registrant (Exact registrant as specified in its charter) charter) I II A corporate agency agency of the United States created by an act of Congress 62-0474417 62-0474417 (State (State or or otherjurisdiction jurisdiction of incorporation incorporationor or organization) organization) (iRS (IRS Employer Identification Identification No.)

400 W. Summit Hill Drive 37902 (Address Knoxville, Tennessee (Address of Tennessee principal executive offices) ofprincipal (Zip Code)

(Zip Code) 1 (865)

(865) 632-2101 Registrant's telephone number, Registrant's Securities registered pursuant Securities number, including including area pursuant to Section 12(b) area code code 12(b) of the Act: None None I

Securities registered Securities Indicate by check mark if the registrant registered pursuant pursuant to Section 12(g) registrant is a well-known well-known seasoned 12(g) of the Act: None seasoned issuer, as defined in Rule 405 of the Securities Securities Act.

Act.

I Yes [] No []

Yes 0 No [8]

Indicate Indicate by check mark if if the registrant registrant is not required to file reports pursuant pursuant to Section 13,13, Section 15(d),

15(d), or Section 37 of the Securities Securities I

Exchange Act. Yes 0 Exchange No [8]

ON Indicate Indicate by check mark mark whether the registrant registrant (1) has filed all reports required to be filed by Section Act of 1934 during the preceding 12 months (or for such shorter 13, 15(d), or 37 of the Securities Section 13, shorter period that the registrant was required Securities Exchange required to file such reports), and (2)

Exchange 1 (2) has been I

subject to such filing requirements requirements for the past 90 days.

Yes El[8] No 0 I

Indicate Indicate by check mark if disclosure of delinquent contained, contained, to the best of registrant's registrant's knowledge, delinquent filers pursuant pursuant to Item 405 of Regulation S-K is not contained knowledge, in definitive proxy or information statements 10-K or any amendment statements incorporated amendment to this Form 10-K. [8]

contained herein and will not bebe incorporated by reference in Part III of this Form E]

I Indicate by check mark whether the registrant is a large accelerated company. See the definitions definitions of "large "large accelerated accelerated filer, an accelerated accelerated filer," "accelerated "accelerated filer,"

filer," and "smaller (Check one):

Act. (Check non-accelerated filer, or a smaller reporting accelerated filer, a non-accelerated "smaller reporting reporting company" company" in Rule 12b-2 12b-2 of the Exchange I*

accelerated filer 0 Large accelerated Accelerated Accelerated filer 0 Non-accelerated filer [8]

Non-accelerated Mx Smaller reporting company 0 Smaller Indicate Indicate by check mark whether the registrant (Do not check if (Do registrant is a shell company ifaa smaller company (as defined reportingcompany) smaller reporting defined in Rule 12b-2 of the Securities Exchange Exchange Act). Yes 0 No [8]

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Table of Contents of Contents I

Forward-Looking Information _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _--.:.4, iForward-Looking:...!I;!!n~fo""rm=a:..::;ti,-"o",n,---

General Information 5 1

I I Part I

~It-em-I~.--~B~u-s~in-e-s-s-------------------------------------------~dl Item 1. Business 6

____----=.T.:.:.he::....:::C=o!11oration

~I L -_ _ _ _~S~e~~~i'-"c~e~Ar~e~a The Corporation Strategy Strategy Service Area _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~~7 Customers8 61 6q Customers S L -_ _ _ _ ~R~at'-"e~A~u~t;!!h~on~*~

Rate Authority lQ 10(

Rate Rate Actions Actions I I II II

[.------~L,:;o::a=-:d:...a::.:n:..:::d;.::E:::n:::.e-r-gy-_"-=F~o;:r=.:e-c;;a~s.!!:t-s~=======================================================================~I~11

- Load and Energy Forecasts 11II Power Supply II 11

.------~E~n:...:e.:..:rg==-y--==Efficiency Energy Efficiency Initiatives Initiatives 1711 17I Renewable and Clean Energy Energy 17 Nuclear '-------------------------------------------------~I~S F - Nuclear 191

,--_ _ _---;;:F~u.:..:el--=S=upply Fuel Supply 21 Transmission TransmisSIon 231 2233: II Weather and Seasonality Weather Seasonality,_________________________________________--::-:. 23

[ - Competition Competition 24 24; Research and Develorment Development 25

[ Governance Governance 25,III 25;

.--_____-;;,R:;::.egulation Regulation 25 L -_ _ _ _ -=P~ayments Payments in Lieu of Taxes 271 27-'

Environmental Matters Environmental 27 27 L -_ _ _ _::::. E=mJ2!Qyee Relations Employee 34111 34, iltem lItem 1lA A.. Risk Factors 35; 35

.-_____-:::St;:,r=at:,::e.gic Strategic Risks 35

['---_ _ _ _=Operational Operational Risks 37, 371!

Financial Financial Risks Risks 40 11

.------;;,Ri~*s7k::s~R=e7Ia::.:te::d7t:::.o~T=V~A~S~e-c-u~ri~ti-es--------------------------------------------------~4~~

Risks Related to TVA Securities 42

~~t~el~n~I~B~.~_~U~n;!!r~e~so~l~ve=.:d~S=ta~f~f~C~o~m~m.:.:.e~n=t~s Item lB. Unresolved Staff Comments _______________________________________~4=~11 43J, c..:~t.:;,,;em=_::2'_'_.

iltem 2. ____"::_Pr=operties Properties 43; 43!

.--_ _ _ _-::G::-e""n:,;:e.:..ra""t=ingGenerating Properties Properties 4311 43f[

Transmission Transmission Properties 43:

43]

Natural Resource Resource Stewardship Properties --____________________________________44'44 Stewardship Prop::...:e:.:.rt::i.::.:es' 7";]

'---_____=B~u~ild=i~ngs Buildings Disposal of Property,

--- 44111 44, Property__________________________________________________________4,4 44 i 1

Item 3. ____=L~egaIProceeding~s rlt.::.:em~3::.:. Legal Proceedings44_______________________________________________4-,4 1 Item 4.

Item 4. Submission Submission of of Matters Matters to to aa Vote of Security Vote of Security Holders Holders 4911 49 I~------------------------------~~-~-~-=-~-~------------------------_-_-_-~~_-_-_-_-_-_-_-_-_-_-~_-_-_-_-_-_-_-_-~~_-_-_-_~~I Part II L-~----~------~--------------------------------~--~~----~~~--~--------~50111 rJtItem

. :.e: :m:. . :55.:. .:._ _--'-'MMarket for Registrant'ss Common

.::,:a::.r:.::.ke::..:t:...:D.:::,or::...:..:R.::,e.gistrant' Equity, Related Common Equity, Related Stockholder Stockholder Matters and Issuer Matters and Issuer Purchases Purchases of Equity Eguityc.. .::.S.::..eSecurities 501 c::..:u:::r.::.:it.::.:ie:..::;s_ _ _ _ _---=--.:,

1 1 Item 6.

Item 6. Selected Selected Financial Financial Data Data 50 50

~1_ _ _ _~S~ta~te~m~e~n~ffi~o~f~In=c~o~m~e~D~a~t~a Statements of Income Data ______________________________________~5~QII 50,'

. Balance Sheets Data 51 51 Financial Obligations Oblig::!.at:..::;io~n~s~_______________________________________~511 511

.iltem

. :iJt:=.em~7:.7.. :. _ __=M~a:..::;n~agement's Management's Discussion Discussion and Analysis of and Analysis of Financial Financial Condition and Condition and Results of Operations Results of Operations 52,1II 52 Business Overview Business Overview ~==---------------=:?52 5i Executive Summary Executive Summary 53:

53,

.-_ _ _ _-:::L,;;..:iquidity Liquidity and Results L -_ _ _ _~R,:.e""s""u=lt""'s-"o..!-f=Operations of and Capital Operations Capital Resources Resources 5S1 58

671 671 Off-Balance Sheet Off-Balance Arrangements Sheet Arrangements 76 I

.--_ _ _ _""'Changes Critical Critical Accounting C=;:h:.::a:::n,ges in Accounting Policies and Ratemaking Impacting in Ratemaking New Accounting Standards and Inte!,'Pretations and Estimates Estimates Impacting Accounting Accounting 1Interpretations 76, 76 80 1 SO 82:

S2 I

Legislative and Regulatory Matters 83 EniroM eni ftal-Matte-rss 84 Legal Proceedings Legal Proceedings 91 I Page 2 I

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==========~R~i~sk:~~~a:n:a-g-e-m-e-n-t~A-c~ti~v~it~ie-s------------------------------------------------------------------------9~1111 Risk Management Activities n 911

.--_________S_u_b_s_eguent Subsequent Events 97 97 L-~~_ _~~~_ _~~~~~~_ _~_ _~~~~_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~I Item 77A. A. Quantitative Quantitative and Qualitative Disclosures Disclosures About Market~arket Risk 97 1 rl ~~--~====~~~==~~==~==~==~==----------------------------------~I Financial Statements and Supplementary Data 9i

__e_n_ta_ry~::D~a~ta~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~::99~88"1 Item 8.

L.It_em __8_.____--::F::.Statements

.:;in=.;a:.::n""c:..;:ia""I"'S'-t::.of ;at:.. :Income e:=;n:.

Income ::le..::.n:.:.ts:..::-an_d__

Su_P__p_l_em . .

Balance Balance Sheets 99 11 100, Statements of Cash Flows Flows 100.

Statements of Changes in Proprietary Capital Statements 10 1011i Notes to Financial Statements 102

..-_______ Report of Independent Registered Public Accounting R-'.e2ort Firm Accounting'..-F_i_rm ___________________________________________________150 l_5-,0 15281 I Item 9. Changes in and Disagreements Disagreements with Accountants Accountants on Accounting Accounting and Financial Financial Disclosure

c.: .1.:.:.::....'-'-----=---'---'

Item 9A. Controls and Procedures Procedures 152 I

Item 9B. Other Infornlation Information Part III III 153I 153 I 1 1

Item tem 10. 10. Directors, Executive Executive Officers Officers and Corporate Governance Governance 155 1 155 I Directors Directors ISS',

155; Executive Officers 156 156 Disclosure Disclosure and Financial Financial Code of Ethics Ethics 1 i 159:1 Committees of the TVA TV A Board 159 159E I, I tem 11.

Item 11.

1-1_ _ _ _--"'C:..:;o=mQensation Executive Compensation Executive Compensation Discussion and Analysis Executive Compensation Comp~e.:.:n=sa::..:t.:.:io;_:n'--__,__:____:__;----------------------------------------------------____,1..-;6c;:;!0 Compensation Tables Analysis Tables and Narrative Narrative Disclosures Disclosures 160 1160.

CO 1711 171 I

~_ _ _ _~S~e~v~er:..:a=n:.::c..::.e~Ag~re~e~m~e~n~ts~

Severance Agreements ___________________________________________~1~7?a 178 Other Agreements Agreements 179.

1791 II==========~D~i:re:c:t:-or~*C~o=mQ~en~s~a=ti~o~n--~-~~-~~~~~~~----------------------------------~1~7~~

Director Compensation 179,f

..-________--:C:::-' Compensation o::..:m.::.pensation Committee Interlocks and Insider Particip:.:a""tl:..:*0.:.:n'_____________________________________________1~8::_::,1 Insider Participation 181

['--_____..::::C..::.o=mQensationCornpensation Committee Committee Report Rep.~ort!o.!--__________________________________________'_____________"'1811 _1=811

"-'ftem .:2"-'._ _~S~e-"c..::.ur;;..o.i!Y ft..::.em=-I:.12. Security Ownership Ownership of Certain Beneficial Beneficial Owners and ~anagement Management and Related Stockholder ~atters Related Stockholder Matters 182:1 1821 tem 13.

lItem Certain Certain RelationshiQs Relationships and Related Transactions, and Director IndeQc:::en""d"'-'e~n""c:.:::e____________________________________~18:_?1:

Director Independence 18 Director Director Independence Independence 182 1821 fl

[~_____-"R.Related .::.e:.;;;la.:;..t:.::e..::.dParty

. ;;;.P. .::.a!!y Transactions Transactions 182J 182

~temtem 14

14. Princinal Accountant Fees and Services PrinciQal Services 184I 18 41 Item 15. Exhibits Exhibits and Financial Financial Statement Schedules Part IV 185 185 I 1 I

Signatures Signatures 18960 Exhibit 190 fuhibit Index Index Page 3 I I

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I

I Table of Contents Table of Contents FORWARD -LOOKING FORWARD -LOOKING INFORMATION INFORMATION I

statements statements.

statements.

Annual Report This Annual statements relating Report on Form relating to future future events Fonn 10-K events and 10-K for the and future the fiscal year future performance.

year ended ended September perfonnance. All statements September 30, statements other 30,2008 other than those

("Annual Report")

2008 ("Annual those that are Report") contains are purely contains forward-looking purely historical forward-looking historical may may be be forward-looking forward-looking I

certain cases, In certain "anticipate,"

cases, forward-looking

anticipate, "believe,"

"potential,"

"potential," or forward-looking statements "intend," "project,"

believe,' 'intend, or other other similar statements can project, "plan,"

similar expressions.

expressions.

can be identified identified by the "predict," 'assume,'

plan," 'predict, the use of words "assume," 'forecast,'

words such such as "forecast," "estimate,"

as "may,"

"may," "will,"

"will," "should,"

"should," "expect,"

"objective," 'possible,'

'estimate,' 'objective,'

"expect,"

"possible," 'probably,'

"probably," 'likely,'

"likely,"

1 Examples of Examples of forward-looking

. Statements forward-looking statements Statements regarding include, but are statements include, regarding strategic strategic objectives; objectives; are not limited limited to:

Projections regarding

Projections regarding potential potential rate rate actions; actions; I I Forecasts of costs Forecasts costs of certain Estimates regarding Estimates Expectations about Expectations certain asset retirement obligations; regarding power power and energy adequacy of TVA's about the adequacy obligations; energy forecasts; TVA's funding funding of itsits pension pension plans, plans, nuclear nuclear decommissioning decommissioning trust, and asset retirement retirement trust; The anticipated The anticipated results results of TVA's Extended Extended Power Uprate Uprate project at Browns Browns Ferry Ferry Nuclear Nuclear Plant; 1

TVA's plan to TVA's to reduce the TVA's plans to borrow TVA's the growth borrow under TVA's plans to continue demand by up to 1,400 megawatts growth in peak demand with the U.S. Treasury under its credit facility with continue using short-term short-tenn debt to meet current megawatts by the Treasury during the end during 2009; current obligations; and end of 2012; 2012; anticipated cost and timetable

The anticipated timetable for placing placing Watts Bar Unit 22 in service.

service.

I Although the Tennessee Although Valley Authority Tennessee Valley Authority ("TVA")

("TVA") believes believes that the assumptions assumptions underlying underlying the forward-looking forward-looking statements are reasonable, TVA does not guarantee reasonable, guarantee the accuracy accuracy of these these statements. Numerous Numerous factors could could cause actual actual results to differ differ materially from I those in the forward-looking

those statements. These forward-looking statements.

New laws, regulations, These factors include, among regulations, and administrative TVA's protected service among other things:

especially those related administrative orders, especially service area, related to:

- The sole authority authority of the TVTVA A board board of directors directors to set power rates, 1 -

Various environmental environmental matters certain fuels or generation sources The licensing, operation, including laws, matters including sources over over others, others, operation, and decommissioning of nuclear generating administrative orders restricting laws, regulations, and administrative generating facilities; restricting emissions andand preferring preferring

- TVA's management Tennessee River system, management of the Tennessee I -

TVA's TV TV A's credit rating, and TVA's A's debt ceiling;

Loss of customers; and 1 I Perfonnance of TV

Performance Disruption A's generation and transmission assets; TVA's Disruption of fuel supplies, which may result from, among other things, weather weather conditions, conditions, production regulations affecting TVA's fuel suppliers; difficulties, labor challenges, or environmental regulations production or transportation transportation Purchased power price

Purchased price volatility; 1 I Events at facilities not owned by TVA that affect the supply of water to TVA's Events Compliance with existing Compliance existing or future environmental environmental laws laws and regulations; regulations; Significant delays or cost overruns in construction of generation and transmission TVA's generation generation facilities; transmission assets; I I i Inability to obtain regulatory approval for the construction of generation assets; Inability Significant changes in demand for electricity; Legal and administrative proceedings, including awards of damages and amounts paid in settlements; administrative proceedings, Weather conditions, including drought;

Weather 1 I I

Failure of TVA's transmission facilities or the transmission facilities of other utilities; Events at a nuclear facility, even one that is not operated by or licensed to TV A; TVA; Catastrophic events such as fires, earthquakes, floods, tornadoes, pandemics, wars, terrorist activities, and other similar events, Catastrophic especially if these events occur in or near TVA's service area; especially if I*

Reliability of purchased power providers, Reliability providers, fuel suppliers, and other counterparties; Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, construction materials, electricity, and emission emission allowances;

Changes Changes in the prices of equity securities, debt securities, and and other investments; I

Changes Changes in interest rates; Creditworthiness Creditworthiness of TVA, its counterparties, and its customers; Rising Rising pension costs and and health care expenses;

Increases in TVA's financial liability for for decommissioning its nuclear facilities and retiring other assets; I

Unplanned contributions contributions to TV A's pension or other postretirement TVA's benefit plans or to TV postretirement-benefit A's nuclear decommissioning trust; TVA's trust; P~4 1- - - - - - - - - - - - - Page 4 I

Table of Table Contents of Contents

Limitations on TVA's ability to borrow money; I

Changes in the economy; economy; Ineffectiveness of TVA's disclosure controls Ineffectiveness Changes in accounting accounting standards; controls and procedures procedures and its internal The loss of TVA's ability to use regulatory accounting; internal control over over financial reporting; I

Problems attracting and retaining skilled workers; Changes in technology; Differences technology; Changes in TVA's TVA's plans for allocating its financial resources between estimates of revenues and expenses Differences between resources among projects; expenses and actual actual revenues revenues and expenses incurred; I

Volatility in financial markets; Changes in the market

Unforeseeable market for TV Unforeseeable events.

events.

TVA A securities; and Ii Additionally, other risks that may cause actual results to differ materially from the predicted results are set forth in Item IA, Additionally, Factors, and Item 7, Management's Factors, Management's Discussion and Analysis Analysis of Financial Financial Condition lA, Risk Condition and Results of Operations. New factors emerge from time Risk I to time, and it is not possible for management management to predict all such factors or to assess the extent extent to which any factor or combination combination of factors may impact TVA's business business or cause cause results to differ materially from those contained contained in any forward-looking forward-looking statement.

TVA TV A undertakes undertakes no obligation to update any forward-looking statement statement to reflect reflect developments developments that occur after the statement is made. II GENERAL INFORMATION GENERAL INFORMA FiscalYear Fiscal nON I

Unless otherwise otherwise indicated, to years in the biographical indicated, years (2008, 2007, etc.) in this Annual Report refer to TVA's fiscal years ended biographical information about directors and executive officers officers in Item 10, 10, Directors, Executive ended September 30. References Executive Officers and Corporate Corporate References I Governance Governance are to calendar years.

Notes II References to "Notes" are to the Notes to Financial Statements References this Annual Report.

Statements contained in Item 8, Financial Financial Statements and Supplementary Supplementary Data in I Available Information Information TVA's TV A's Annual Reports on Form 10-K, Quarterly reports are made available on TV TVA's Quarterly Reports Reports on Form 10-Q, 1O-Q, Current Reports A's web site, free of charge, as soon as reasonably Reports on Form 8-K, and all amendments amendments to those electronically filed with or reasonably practicable after such material is electronically or I

furnished furnished to the Securities and Exchange information Exchange Commission shall not be deemed to be incorporated Commission ("SEC"). TVA's web site is www.tva.gov.

incorporated into, or to be a part of, of, this Annual information that TVA files with the SEC at the SEC's Public Reference www.tva.gov. Information Information contained on TVA's web site Annual Report. In addition, the public may read and copy any reports or other Reference Room Room at 100 100 F Street N.E., Washington, Washington, D.C. 20549. The public may Il obtain information on the operation of the Public Public Reference Reference Room by calling the SEC at 1-800-SEC-0330.

1-800-SEC-0330. TVA's SEC reports are also available available to the public without charge from the web web site maintained by the SEC at www.sec.gov.

www.sec.gov.

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I Table a/Contents Table of Contents PART I II ITEM 1. 1. BUSINESS BUSINESS Corporation The Corporation I 1933, President Franklin D. Roosevelt In 1933, government corporation. TV TVA proposed and the U.S. Congress created the Tennessee Valley Roosevelt proposed navigation on the Tennessee A was created, among other things, to improve navigation Authority ("TVA"), a Valley Authority Tennessee River, reduce the damage fromfrom II destructive flood waters within the Tennessee River System service area in the southeastern United States, and sell the electricity development of TVA's service development electricity generated Mississippi Rivers, further the economic System and downstream on the lower Ohio and Mississippi generated at the facilities TV TVA economic A operates.

Today, TVA operates the nation's largest supplies power in most of Tennessee, largest public power system and supplies Tennessee, northern Alabama, II northeastern Mississippi, northern Georgia, western North Carolina, and southwestern southwestern Kentucky and in portions of northern Mississippi, and southwestern southwestern Virginia to a population of nearly nine million people. In 2008, the revenues from TVA's power program were $10.4 $10.4 billion and accounted accounted for virtually all of TVA's revenues.

Tennessee River and its tributaries TVA also manages the Tennessee States' fifth largest river system tributaries - the United States' system - to provide, among other I things, year-round navigation, flood damage reduction, and affordable and reliable recreational opportunities, also manages the river system to provide recreational reliable electricity. Consistent with these primary purposes, TVA adequate water opportunities, adequate water supply, improved water supply, improved quality, and water quality, and economic economic TV A I development. TVA's management of the Tennessee River and its tributaries will sometimes TV A's management

this Annual Report.

sometimes be referred "stewardship" program in referred to as TVA's "stewardship" Initially, all TVA operations were funded by federal appropriations. Direct appropriations for the TVA TV A operations TV A power program ended in 1959, 1959, II and appropriations for TVA's economic development, and multipurpose activities ended in 1999. Since 1999, TV TVA's stewardship, economic operations almost entirely from the sale of electricity of its operations electricity and power system financings.

TVA A has funded all Strategy f s On May 31, 2007, the TVA Board of Directors ("TVA Board") approved the 2007 Strategic Plan ("Strategic Plan"). The Strategic Plan I On May 31, 2007, the TVA Board of Directors ("TVA Board") approved the 2007 Strategic Plan ("Strategic Plan"). The Strategic Plan establishes general guidelines for each area:

performance in the following five broad areas and establishes focuses on TVA's performance Customers :

Customers: reliability, provide competitive rates, and build trust with TVA's customers; Maintain power reliability, Maintain I People People:: Build pride in TVA's performance performance and reputation; Financial: Adhere to a set of sound financial guiding principles to improve TV TVA's performance; I Financial: A's fiscal performance; Assets :

Assets: Use TVA's assets to meet market demand demand and deliver public value; and I

Operations: Operations: Improve performance to be recognized as an industry Improve performance Management's Discussion See Item 7, Management's Discussion and Analysis of Financial industry leader.

Condition and Results of Operations - Executive Summary - 2008 Financial Condition I Indicators for a discussion of the corporate-level metrics that TVA used during 2008 to monitor its progress toward successful PerformanceIndicators Performance successful I implementation implementation of the Strategic Plan.

Page ~6 6 I--------------------

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Table a/Contents Table of Contents Service Area I

The area in which TVA sells power, its service area, is defined by two pieces Authority Act of 1933, 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the "TVA U.S.c. §§ pieces of Congressional legislation: the Tennessee Valley amendment to the Federal "TVA Act") and an amendment Valley Federal Power Act Act II

("FPA") known as the "anti-cherrypicking "anti-cherrypicking provision."

TV A Act, subject to certain minor exceptions, TVA may not, without specific authorization from the U.S. Congress, enter Under the TVA distributor customers into contracts which would have the effect of making it, or the distributor enter customers of its power, a source of power supply outside the area for II the primary of power source of supply on 1, 1957.

July 1, on July This provision 1957. This referred to is referred provision is as the "fence" II which TVTVAA or its distributor customers were the primary source power supply to as the "fence" because it bounds TVA's sales activities, activities, essentially limiting TVA to power sales within a defined service area.

essentially limiting anti-cherrypicking provision, prevents the Federal Correspondingly, the FPA, primarily through the anti-cherrypicking Federal Energy Regulatory Regulatory Commission provide access to its transmission lines to others for the purpose of using TVA's transmission lines to deliver ordering TVA to provide

("FERC") from ordering power to customers within substantially to loss of revenue.

anti-cherrypicking provision reduces TVA's exposure defined service area. As a result, the anti-cherrypicking substantially all of TVA's defined II electricity accounted for substantially all of TVA's operating revenues in 2008, 2007, and 2006, amounting Sales of electricity

$9.2 billion, and $8.8 billion, respectively. TVA's revenues by state for the last three years

$10.3 billion, amounting to $10.3 years are detailed in the table below. IIIII II Electricity Sales Revenues by State Electricity ended September 30 For the years ended (in millions)

II 2008 2007 2006 Alabama

'Alabama $ 1,410 $ 1,264 1,264 $ 1,239J 1,239 Georgia Georgia 238 206 226 Kentucky Kentuckx 1,192 1,084 1,084 902 I Mississippi Mississiflpi

'North Carolina North Tennessee Tennessee 923 50 6,389 804 58 5,740 5,740 798 36 I 36 5,621 I

IVirginia I

Subtotal Subtotal

Sale

ýSale for resale resale 10,239 37 13 9,163 7

17 8,827 5

5J 13]

13J I

Subtotal Subtotal 10,252 9,180 9,180 8,840

,Other

Other revenues Operating Operating revenues $

130 130 10,382$ $

10,382 146 9,326 9,326 $

143]

143J 8,983 I Page 7

1 II I

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I Table a/Contents I Table of Contents TVA SERVICE AREA AREA I

I I

I I Customers I TV A is primarily a wholesaler TVA cooperatives wholesaler of power. TVTVA power at wholesale A sells power wholesale to distributor customers, customers, consisting of municipalities municipalities and customers at a retail rate. TVA also sells power to (1) directly served customers, consisting cooperatives that resell the power to their customers consisting primarily of federal unusual loads, and (2) exchange power customers agencies and customers with large or unusual federal agencies customers (electric systems that border TVA's service (electric systems II area) with which TVA has entered exchange power arrangements.

entered into exchange i Operating revenues by customer type for each of the last three years are set forth in the table below. In this table, sales to industries Operating i directly served are included included in INDUSTRIES INDUSTRIES DIRECTLY SERVED , and sales to federal DIRECTLY SERVED, federalagencies exchange power customers are agencies directly served and to exchange I included in FEDERAL AGENCIES AND OTHER.

OTHER.

Operating Revenues by Customer Operating Customer Type I For the years years ended September (in millions) millions) 30 September 30 I Municipalities and cooperatives

!Munici2alities co02eratives Industries directly served Industries served 2008 8,659 1,472 1,472 2007 7,847 1,221 2006 7,65 7,659J 1,065 1,065

Federal IFederal agencies agencies and other I I Federal agencies directly served Off-system sales 108 13 95 17 103 13]

13J Subtotal Subtotal 10,252 10,252 9,180 9,180 8,840

'Other revenues

Other revenues 130 130 146 146 143 143J Operating Operating revenues $ 10,382 $ 9,326 9,326 $ 8,983 II ____________________~--------------- Page 8 Page 8 I

I I

Table ofa/Contents Contents Municipalities and Cooperatives Municipalities Cooperatives I

f TVA had TVA Revenues from Revenues had wholesale from distributor wholesale power of their electric all of electric power distributor customers power contracts power and customers accounted contracts with and energy with 159 energy requirements accounted forfor 83.4 percent 159 municipalities municipalities and requirements from TVA.

percent of TVA's and cooperatives.

TVA's total cooperatives. All total operating All of these operating revenues these contracts revenues in contracts require in 2008.

2008. At require distributor At September September 30,30, 2008, 2008, customers to purchase distributor customers purchase I All distributor customers All customers purchase Contracts that require Contracts purchase power require five years' power under years' notice under one three basic termination one of three notice to terminate; termination notice notice arrangements:

arrangements:

I II

Contracts that require Contracts require 10 years'years' notice to terminate; terminate; andand

Contracts that Contracts that require require 15 15 years' years' notice to terminate.

terminate.

number of The number of distributor distributor customers customers with the the contract contract arrangements arrangements described described above, above, the revenues revenues derived arrangements in derived from such arrangements 2008, and the 2008, the percentage percentage of TVA's TVA's 2008 2008 total total operating operating revenues TVA revenues represented TVA Distributor represented by these Distributor Customer these revenues Customer Contracts revenues are summarized summarized in the table table below.

I As ofof September September 30, 30, 2008 Number Number of of Distributor Sales Sales to Distributor Distributor Percentage Percentage ofof Operating Total Operating I

II Contract Arrangement Arrangement Customers Customers Customers Customers in 2008 Revenues Revenues in 2008 2008 millions (in millions) 15-Year termination notice i1 y-Year termination notice 5D 1b $ 93

'U.'yo 0.9%

V 10-Year termination termination noticenotice 48 2,865 27.6%

27.6%

~~_-Y~ea=r~t=e=rm==in=a=t=io=n~n~o~t~ic~e~*

15-Year Total termination notice *______~~~________________________~1~0~3 Notice given given --lessless than 5 years remaining remaining *

' I~T~0-ta71~--------~--------~------------------~1~59 103 ____________~5,645 159 3*

3**

-$-------8-,6-5-9 5,645 56 56 8,659 54.4O/

54.4%1 0.5%

0.5%

83.4O 83.4%

II

======---1 []

Ordinarily Ordinarily the customers customers with the distributor distributor customer customer and and TVA with five-year termination notices, TV TVA have have the TVA same termination the same A has a 10-year termination notice notice period; 10-year termination period; however, however, in termination notice (which becomes in contracts contracts with becomes a five-year with six of the six of the distributor five-year termination distributor termination notice if TVA TV A I

loses its discretionary discretionary wholesale rate-setting rate-setting authority). Also, under TVA's contractcontract with Bristol Virginia Utilities, a five-year termination termination notice may not be given until January

- One of these contracts, January 2018.

amounting to 0.1%

contracts, amounting 0.1 % of operating revenues, terminated on November 20, 2008.

I TVA's two largest distributor customers -- - Memphis Light, Gas and Water Division ("MLGW") ("MLGW") and Nashville Electric Service Service

("NES") -- contracts with five-year and 10-year

- have contracts lO-year termination notice periods, respectively. Although no single customer accounted for 10 10 percent or more of TVA's total operating revenues in 2008, 2008, sales to MLGW and NES accounted accounted for 8.4 percent and 7.9 percent, respectively.

January 1, On January wholesale power to BVU 2008, Bristol Virginia I, 2008, Virginia Utilities ("BVU") again became a distributor customer BVU from 1945 to 1997. The contract has a minimum I5-year customer of TV TVA A power. TVA TV A had provided 15-year term, and a five-year termination notice may not be given I

until January 2018. The rates under this contract are intended to recover the cost of reintegrating reintegrating BVU into TVA's power supply plan and I

until serving its customer load.

The power contracts between TVA wholesale rates established by the TVA Board, costs. See Item 1, Business -- - Rate Actions.

Board, which, beginning customers provide for purchase of power by the distributor customers at the TV A and the distributor customers beginning with 2007, are adjusted quarterly to reflect changing fuel and purchased power m I U

TVA TV A has a role in regulating the distributor customers since most of the power contracts between TV specify the resale rates that distributor customers TVA A and the distributor customers customers charge their power customers. These rates are revised from time to time, subject to TV TVA A I

approval, to reflect changes in costs, including changes in the wholesale cost of power, and are designed to conform to the TVA Act's objective of providing an adequate supply of power at the lowest feasible rates. The distributor customers' customers' resale rates are divided into the classifications of residential, general power, and manufacturing. The general power and manufacturing classifications are further divided into subclassifications according to their load size. In addition, TVA seeks to ensure that the subclassifications the electric system revenues of the distributor classifications distributor customers are I

for electric system purposes.

used for Page99 Page II II II

I Table a/Contents Table of Contents Other Customers Other Customers 1 Revenues from industrial Revenues industrial customers directly served accounted contracts for customers directly served were generally accounted for 14.2 generally for terms ranging 14.2 percent percent of TVA's total operating revenues in 2008. In 2008, ranging from five to 10 years. These contracts are subject to termination termination by I TVA or the customer upon a minimum notice period

been been provided.

provided.

period that varies according according to the customer's customer's contract contract demand demand and the period of time service has The United States Enrichment Enrichment Corporation ("USEC")

("USEC") is TV A's largest industrial TVA's industrial customer directly served. Sales to USEC for its Paducah, Kentucky, facility represented represented 5.3 percent percent of TVA's total operating revenues in 2008. TVA's current contract with USEC expires on on I May 31, 31, 2012. See Item 7, 7, Management's Management's Discussion and Analysis of Financial Condition and Results of Operations Operations - Risk Management Management I Activities - Credit Credit Risk.

Risk. In January which is outside TVA's service January 2004, USEC announced service area. TVA continues announced its decision decision to construct a new commercial continues to plan for USEC's announced commercial centrifuge announced intention to reduce centrifuge facility in Piketon, Ohio, reduce its electricity electricity purchases purchases and believes USEC will reduce its electricity purchases purchases at the Paducah, Kentucky, facility from about about 2,000 megawatts megawatts at its peak to less than 50 II megawatts. Since TVA's TVA's need to buy purchased cash flows to be to be adversely effected.

purchased power power will decrease with USEC's USEC's departure, departure, TVA does not expect expect its results of operation or I Rate Authority Rate Authority TV TVA A is self-regulated self-regulated with respect to rates, rates, and the TV TVA A Act gives the TVA TV A Board sole responsibility for establishing the rates TVA TV A charges for power. These rates are not subject to judicial charges judicial review review or to review or approval approval by any state or federal regulatory regulatory body.

I Under the TV Under TVA A Act, TVTVAA is required to charge charge rates for power which will produce gross revenues sufficient to provide funds for:

Operation, maintenance, maintenance, and administration administration of its power system; I I Payments Payments to states and counties counties in lieu of taxes ("tax equivalents");

Debt service on outstanding indebtedness; Payments to the U.S. Treasury in repayment repayment of and as a return on the government's government's appropriation appropriation investment in TVA's TV A's power power facilities (the "Power Facilities Facilities Appropriation Appropriation Investment"); and Investment"); and I additional margin as the TVA Such additional TV A Board Board may bonds, notes, or other evidences of indebtedness Appropriation Investment, and other Appropriation may consider consider desirable desirable for investment indebtedness ("Bonds") in advance other purposes connected power system assets, retirement of outstanding investment in power advance of maturity, additional connected with TVA's TVA's power business.

additional reduction outstanding reduction of the Power Facilities I including In setting TVA's TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary including the objective that power shall be sold at rates as low as are feasible. See Note 1I - General. General.

primary objectives objectives of the TVA Act, I

I Requirements Revenue Requirements In setting rates rates to cover the costs set out in the TVTVA A Act, TV TVA A uses a debt-service debt-service coverage ("DSC") methodology methodology to derive annual IH revenue requirements in a manner revenue requirements manner similar to that used by other other public power entities entities that also use the DSC rate methodology. The DSC method method is essentially essentially a measure measure of an organization's ability to cover its operating operating costs and to satisfy satisfy its obligations obligations to pay principal and interest onon debt. TVA believes believes this method is appropriate because because of TVA's debt-intensive debt-intensive capital capital structure. This ratemaking ratemaking approach is particularly particularly suitable suitable for use by highly highly leveraged enterprises enterprises (i.e., enterprises financed primarily, if not entirely, by debt capital).

ifnot II . The revenue requirements requirements (or projected costs)

Fuel and purchased power costs; costs) are calculated under the DSC method method as the sum of the following components:

components:

I

Operating and maintenance costs; Tax equivalents; Tax equivalents; and and Debt service coverage.

Debt service coverage.

I*I' 10 Page 10 1

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Table I

Table a/Contents of Contents Once the revenue requirements (or projected costs) costs) are determined, this amount is compared to the projected revenues revenues for the year in question, at existing existing rates, to arrive at the shortfall or surplus of revenues as compared compared to the projected projected costs. Subject to TVA Board Board approval, power rates would be adjusted to a level sufficient cause-and-effect cause-and-effect relationship services.

relationship between sufficient to produce produce revenues between a regulated entity's costs revenues approximately approximately equal to projected costs. This methodology reflects the corresponding rates the entity charges for its regulated costs and the corresponding regulated products products and IU Rate Actions On August 20, 2008, the TVA Board approved costs that are not recovered for investment in generation approved a base rate increase effective October 1,2008.

recovered by the fuel cost adjustment adjustment ("FCA"), continuing effects 1, 2008. The increase is related to rising fuel effects from drought conditions, continuing need conditions, as well as TVA's continuing generation and transmission facilities, clean air technology, energy efficiency and peak reduction initiatives, and information need 1 I technology systems. It is anticipated that the increase increase of the base charges will produce approximately $310 $310 million of additional accrued revenue II in 2009, which is expected expected to have an estimated $275 million cash impact during 2009. The increase, increase, combined combined with the FCA increase that became effective at the same time,results became effective time, results in an average total increase increase in wholesale wholesale charges charges of 20 percent from the previously effective previously effective charges.

charges. See Item 7, 7, Management's Management's Discussion and Analysis of Financial Condition Condition and Results of Operations Summary--

Operations - Executive Summary Challenges During Challenges During 2008.

2008.

Fuel Cost Fuel Cost Adjustment.

million representing Adjustment. As of September September 30, 2008, representing deferred fuel and purchased 2008, TVA had recognized a regulatory purchased power costs to be recovered recovered through the FCA in future periods. Under TVA's TV A's FCA

$241I regulatory asset of $4 million and a current receivable of $24 W

methodology, methodology, adjustments to rates are based on the difference Because the FCA adjustments adjustments are forward-looking, difference between between forecasted and baseline (budgeted) costs for the upcoming quarter.

forward-looking, there is typically typically a difference that are actually incurred over the course of the quarter. This difference difference between what is collected collected in rates and FCA-eligible expenses difference is added to or deducted from certain certain accounts on TVA's balance I

sheet. The higher or lower costs added to or deducted from the balance balance sheet accounts are then amortized to expense in the periods in which they are to be collected in revenues. This methodology allows better matching can be negatively matching of the revenues with associated expenses, although TVA's cash flow negatively impacted by this process due to timing of collection of revenues and payments related to fuel and purchased amount implemented in October 2008 was 1.806 cents per kilowatt-hour and was expected to produce produce an estimated purchased power. The FCA estimated $669 million in revenue

III during the first quarter of 2009. See Note 1I - Cost-Based Cost-BasedRegulation Regulation and Accounts Receivable.

Receivable.

Load and Energy Forecasts Forecasts TVA TV A produces regional economic produces a range of forecasts of future load and energy economic forecasts of employment, employment, population, energy requirements using multiple models driven by historical TVA population, and electricity and gas prices. Numerous factors, such as weather health of the regional economy, could cause actual results to differ materially from TVA's forecasts. See Forward-Looking TV A loads and and weather conditions and the Information. TVA Forward-Looking Information. TVA

I believes that new generation generation sources will be needed to meet load growth under most likely scenarios. See Item 7 - Management's Management's Discussion and Analysis of Financial Financial Condition and Results of Operations -- Summary-- Future

- Executive Summary Future Challenges.

Challenges.

Power Supply General General Power generating generating facilities operated by TV TVA A at September 30, 30, 2008, included 29 conventional conventional hydroelectric hydroelectric sites, one pumped storage I hydroelectric site, 11II coal-fired sites, three nuclear nuclear sites, 11 digester gas site, one biomass cofiring site, and 15 solar varying duration as well as short-term II combustion turbine turbine sites, two diesel generator solar energy sites. In addition, TV short-term contracts of less than 24-hour 24-hour duration TVA A acquires generator sites, one wind energy energy site, one acquires power under power purchase agreements of duration ("spot market").

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II Table a/Contents Table of Contents Generation Facilities Generation Facilities I The following table The following summarizes TVA's table summarizes TVA's net generation in net generation in millions millions of kilowatt-hours by of kilowatt-hours by generating generating source and the percentage of all I electric power electric power generated TV A for the generated by TVA the years years indicated:

indicated:

source and the percentage of all Power Power Supply Supply from TV A-Operated Generation from TVA-Operated Generation Facilities Facilities I For For the years ended September years ended (millions (millions of September 30 of kWh) kWh) 2008 2007 2007 2006 2006 2005 2004 I Coal-fired

Coal-fired 98,752 62%

62% 100,169 100,169 64%

64% 99,598 64%

64% 98,361 62%

62% 94,618 61°/0 61o/J II Nuclear Nuclear 1Hydroelectric i!:!ydroelectric Combustion turbine and Combustion and 51,371 51,371 6,685 33%

33%

4%

46,441 46,441 9,047 9,047 30%

30%

6%

45,313 45,313 9,961 29% ,. 45,156 29%

6%

45,156 15,723 15,723 28%

28%

10%

46,003 46,003 13,916 13,916 30%

30%

90/0 9o/J IE generators diesel generators

Renewable resources

Renewable resources

Total 1,386 39 39 158,233 158,233 1%

1%

<1%

100%

705 27 27 156,389 100% 156,389 -

<1%

100%

613 36 155,521 100%~ 155,521 m

<1%

1%

<1%

100%

595 595 159,882 159,882 47 47 m

<1%

100%

278 35 m 154,850 154,850

<1%

I<lo/J 100%

100%

Note:

I

Renewable resources for Renewable resources for years purchased power agreements years 2004 through 2006 2004 through agreements and included 2006 have have been included in this table amount of renewable resulted in reductions in the amount adjusted to been adjusted TVA's table in TV A's 2006 to remove renewable resources remove renewable resources by 13 million kWh for 2004,14 renewable resources resources amounts that were amounts that were acquired acquired under Report on Forms 10-K as amended. These adjustments 2006 Annual Report 2004, 14 million kWh for 2005, and 15 under 15 million kWh for 2006. Also, for years through 2006 the following amounts related years 2004 through co firing site have been related to TVA's digester gas cofiring been reclassified reclassified from I facilities include resources: 30 million Renewable resources:

Coal-fired to Renewable million kWh for 2004, cofiring site, a biomass include a digester gas cofiring 2004,43 43 million kWh for 2005, energy site, and solar biomass cofiring site, a wind energy solar energy energy sites.

Renewable resource 2005, and 32 million kWh for 2006. Renewable I indicates TVA's average fuel expense The following table indicates generation-type for the years indicated:

expense by generation-type I Fuel Expense Per kWh For the years ended September 30 For the years ended September 30 (cents/kWh)

(cents/kWh)

I 2008 2007 2007 2006 2005 2004 Coal 2.29 2.13 2.02 1.65 1.65 1.48 1.48 I I 7.00 10.65 I Natural gas and fuel oil Nuclear Average fuel cost per kWh net thermalthermal generation from 6.13 0.50 0.41 10.65 0.38 11.44 0.39 9.01 0.39 0.39 I all sources 1.72 1.61 1.54 1.30 1.14 1.14 I Coal-Fired. TVA has 11 Coal-Fired. 11 coal-fired power sites consisting of 59 units. At September 30,2008, accounted for 14,469 30, 2008, these facilities accounted megawatts of summer net capability. Net capability is defined as the ability of an electric system, generating unit, or other system component to I carry or generate generate power for a specified time period. TVA's coal-fired Management's Discussion and Analysis of Financial Management's were .placed in service between 1951 and 1973. See Item 7, coal-fired units were.placed Financial Condition and Results of Operations - Executive During2008.

ChallengesDuring Executive Summary - Challenges

. Nuclear. TVA has three nuclear Nuclear. nuclear sites consisting of six units in operation. At September 30, 2008, these facilities accounted for 6,671 I megawatts of summer net capability. For a detailed discussion "megawatts discussion of TVA's nuclear power program, see Item 1, discussion of challenges faced by TVA's nuclear power program during 2008, see Item 7, Management's Nuclear. F 1, Business - Nuclear. For Management's Discussion and Analysis of Financial or a Condition and Results of Operations - Executive Summary Summary -- Challenges During2008.

ChallengesDuring 2008.

I . Page 12 Page 12 I

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Table a/Contents of Contents Hydroelectric.

Hydroelectric. TVA has 29 conventional conventional hydroelectric hydroelectric sites consisting of 109 units. In addition, TVA has one pumped storage facility I

consisting of four units. At September consisting electric.i~ that electricity TVA th.at TV of precIpItatIOn, A is a?l~

September 30, 2008, these facilities accounted able .to runoff, initial precipitation, runoff, accounted for 5,503 megawatts generate from its hydroelectric plants depends ~n to generate mitlal water levels, and the need for water for competing megawatts of summer net capability. The amount of on a number of factors out~id~

competmg water management outside TV TVA's A's control, obJectlves. The management objectives. The amount of the amount control, including .th.e amount of electricity electncity I

nu generation is also dependent generation unfavorable, dependent upon the availability of its hydroelectric unfavorable, TVA must increase increase its reliance and Analysis of Financial Condition and Results of Operations hydroelectric generation plants, which is in TVA's control. When these factors are reliance on more expensive expensive generation generation plants plants and purchased purchased power. See Item 7, Operations - Executive Summary - Challenges Challenges During During2008 -,

7, Management's Management's Discussion Weather Conditions.

- Weather I

Combustion Turbine Combustion Turbine Facilities.

and six of which are combined Facilities. As of September September 30, 2008, TV TVAA operated operated 93 combustion combined cycle. The simple cycle units provide a maximum of 5,706 combustion turbine units, 87 of which are simple cycle 5,706 megawatts of summer summer net capability. The six combined cycle units provide a maximum of 1,560 megawatts of summer net capability. Eighty of the simple cycle units are fueled by either six cycle I

natural gas or diesel fuel. The remaining natural remaining seven simple cycle units as wellwell as the six combined combined cycle units are fueled by natural gas only. Seventy-six Seventy-six of the simple cycle minutes. As of September long-term leases.

long-term leases.

cycle units are capable of quick-start September 30, 2008, 24 of the simple cycle quick-start response allowing cycle combustion allowing full generation turbine units are owned combustion turbine generation capability in approximately owned by private private entities approximately 10 entities and leased back to TVA under I U

Caledonia. TVA Caledonia. TV A entered into an operating operating lease agreement located near Columbus, Mississippi, with a commencement agreement and various related contracts for the Caledonia combined commencement date of July 1, Caledonia facility consists of three combined cycle units with a summer 2007. The lease agreement 1,2007.

summer net capability capability of768 agreement expires combined cycle facility expires on February 28, 2022. The megawatts. TVA assumed plant operations of 768 megawatts. operations on I

10, 2007. The lease agreement December 10,2007. agreement also includes includes an end-of-term end-of-term purchase option.

Brownsville.

Brownsville. In November 2007, the TVA Board cycle, gas-fired, combustion turbine Board approved the purchase turbine facility at a price of $55 million. TVTVA purchase of a four-unit, 474 megawatt A agreed to purchase megawatt summer net capability simple purchase the facility, which which is located located in Brownsville, Brownsville, I

Tennessee, from Brownsville Power Power I,I, LLC ("Brownsville Power"). Brownsville

& Trading, Inc. The purchase closed April 18,2008.

dispatch in June 2008.

Brownsville Power is a wholly owned direct subsidiary of Cinergy 18, 2008. After the operating systems were evaluated Cinergy Capital evaluated and tested, the units became available available for I Southaven. TV combined cycle, TVA cycle, combustion purchase price of$461 A also agreed to purchase, as part of a bankruptcy auction process, a three-unit, 792-megawatt combustion turbine facility located in Southaven, Southaven, Mississippi, 792-megawatt summer net capability Mississippi, owned by Southaven Power, LLC ("Southaven")

of $461 million. In addition to the purchase price, TVA agreed to pay $5 $5 million to Southaven

("Southaven") for a base Southaven in connection connection with the terminationII termination I

of an operation operation and maintenance agreement immediate operation. On September 30, Southaven combined cycle, combustion Southaven agreement held by a Southaven 30,2008, Southaven affiliate. The purchase closed 2008, Seven States States Southaven LLC ("SSSL") purchased closed May 9, 2008, and the plant was available for purchased an undivided undivided 69.69 combustion turbine facility. SSSL and TVA have entered into an agreement under which TVA leases for 69.69 percent interest in TVA's SSSL's leases SSSL's TVA's I undivided interest in the Southaven undivided Southaven facility and operates operates the facility through April 30, 2010. See Note 4 -New -- New Generation Generationand Note Note 13-13 --

Leaseback Obligations.

Obligations.

Capacity Capacity Expansion. TVA is constructing an additional combined scheduled to be in service in June 2010 and have a summer net capability combined cycle facility, Lagoon Creek Combined Cycle, which is currently capability of 540 540 megawatts. Also, engineering engineering and procurement procurement of equipment is I

1 underway underway for the conversion of the Gleason simple cycle site to a combined megawatts of summer summer net capability have firm gas transportation capability and to be completed transportation or the ability to bum combined cycle site. This conversion completed in January 2012. TVA's Brownsville bum oil as a back-up conversion is expected Brownsville and Gleason back-up fuel; however, TVA has available expected to add approximately 375 Gleason simple cycle sites do not currently available interruptible interruptible gas supply for these sites 375 currently I*

U through May 2012 which which is the norm for simple cycle single fuel sites. TVA has entered entered into a firm gas transportation transportation agreement with a supplier supplier for the periods of June 1, 2012, through June 1,2012, through May 31,31, 2022. In addition, TVA plans to acquire acquire combustion turbine units for installation installation at the New

Caledonia facility that it acquired in February 2008. The units are expected expected to be in simple cycle service service in June 2013 and have a summer net II capability of 458 megawatts.

megawatts Diesel Generators.

Diesel megawatts of summer Generators. TVA has two diesel generator summer net capability.

generator plants consisting consisting of nine units. At September 30, 2008, these facilities provided September 30,2008, provided 13 I

- - - - - - - - - - - - -I Page 13 Page 13 I

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II Table Table o/Contents of Contents Resources. TVA has one wind energy Renewable Resources. energy site with three wind turbines, one biomass biomass cofiring cofiring site, site, one digester gas cofiring cofiring site, and 15 solar energy sites. At September September 30, 2008, 2008, the digester digester gas co firing site provided cofiring provided TVA with about three megawatts megawatts of renewable 1 summer net capability. In addition, the wind energy capability, but because energy site, the solar energy sites, and the biomass cofiring site provided additional megawatts because of the nature of this capability, it is not considered considered to be summer net capability.

capability. '

megawatts of of U Purchased Purchased Power and Other Power and Other Agreements 1 acquires power TVA acquires through power spot market variety of power producers power from a variety market purchases. During 2008, producers through long-term aI).d 2008, TVA acquired and short-term power purchase acquired 41 percent of the power purchase agreements agreements as well as power that it purchased on the power spot market, as market, nine I percent through through short-term purchase agreements, short-term power purchase agreements, and 50 percent through through long-term power power purchase agreements agreements that expire more than one I year after after September September 30, 2008.

At September September 30, 2008, 2008, TVA's long-term long-term power purchase agreements agreements provided provided TVA with 2,789 megawatts of summer net I

1 capability. See

- Credit See Item 7, Management's CreditRisk.

Risk.

Management's Discussion and Analysis of Financial Condition and Results Results of Operations Operations --- Risk Management Management Activities A portion of TVA's capability capability provided provided by power power purchase agreements is provided under contracts that expire expire between 2010 and 2032,2032, I and the most significant significant of these contracts are discussed below.

Calpine Calpine Energy Services, L.P.

Energy Services, L.P. TVA has contracted contracted with Calpine Energy Services, Services, L.P. ("Calpine") for 720 megawatts of summer net capability capability from a natural gas-fired generating plant located located at Decatur, Alabama. This contract expires on August 31, 31, 2012. In In 1 located Morgan contracted with Calpine for 500 megawatts of summer net capability addition, TVA has contracted located 1, 2009.inThis County, contract Alabama.

expires While this on December contract capability from a natural contract was executed on August 11, 31, 2011.

natural gas-fired gas-fired generating plant generating plant 2008, it will not go into effect until January 11,2008, 1, 2009. This contract expires on December 31, 2011.

II

Suez Energy Energy Marketing net capability MarketingNA, NA, Inc.

Inc. TVA TV A has contracted with Suez Energy Energy Marketing NA, Inc. ("Suez") for 650 megawatts capability from a natural gas-fired generating plant located near Ackerman, Mississippi. TVA's contract megawatts of summer contract with summer with Suez expires expires on December 31, 2012.

December 31,2012.

1 Choctaw Generation, L.P.

Choctaw Generation, capability L.P. TVA has contracted with Choctaw Choctaw Generation, Generation, L.P. ("Choctaw") for 440 megawatts generating plant in Chester, Mississippi. TVA's contract with Choctaw capability from a lignite-fired generating megawatts of summer Choctaw expires summer net expires on March March 31, 31, net 2032. See Item 7, Management's Discussion 7, Management's Discussion and Analysis Analysis of Financial Financial Condition and Results Results of Operations Operations - Risk Management Management 1 Credit Risk.

Activities - Credit Alcoa Power Risk.

Generating,Inc.

Power Generating, Inc. Four hydroelectric hydroelectric plants owned by Alcoa Power Generating, Generating, Inc. ("APGI"), formerly known as Tapoco, Inc., are operated in coordination with the TV TVAA system. Under contractual contractual arrangements with APGI which terminate on on I June 20, 2010, TVA dispatches needs.

needs. TVA's dispatches the.

TVA's arrangement arrangement with the, electric power with APGI power generated at these facilities and uses it to partially supply Alcoa's energy provides 347 APGI provides 347 megawatts megawatts of of summer summer net net capability.

capability.

I

Invenergy TN LLC.LLC. TV turbine generators TVA A has contracted contracted with Invenergy Invenergy TN LLC for 27 megawatts of wind energy generation generators located on Buffalo Mountain near Oak Ridge, service area, these these generators generation from 15 wind Ridge, Tennessee. Because of the nature of wind conditions in the TVA generators provide energy benefits but are not included in TVA's TVA's summer net capability capability total. TVA's wind TVA contract TVA's contract Invenergy TN LLC expires on December with Invenergy December 31, 31, 2024.

I Southeastern PowerAdministration.

Southeastern Power to obtain obtain power Administration. TVA,TV A, along with others, contracted contracted with the Southeastern Southeastern Power Power Administration power from eight U.S. Army Corps of Engineers hydroelectric facilities on the Cumberland River system. The agreement

("SEPA")

Administration ("SEP A")

agreement with SEP SEPA A can be terminated upon three years'years' notice, but this notice of termination may not become become effective prior to June 30, I 2017. The contract 2017. contract originally required SEPA to provide TVA an annual minimum of 1,500 hours0.00579 days 0.139 hours 8.267196e-4 weeks 1.9025e-4 months of power for each megawatt TVA's 405 megawatt allocation, and all surplus power from the Cumberland River system. Because been reduced megawatt of hydroelectric production has Because hydroelectric of reduced at two of the hydroelectric hydroelectric facilities on the Cumberland Cumberland River system (Wolf Creek and Center Hill Dams) Dams) and because because of reductions in the summer stream stream flow on the Cumberland River, SEPA declared "force "force majeure" majeure" on February February 25, 2007. SEPA then instituted an emergency operating plan that:

emergency operating I3,- - - - - - - - - - - - - Page 14

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Table of a/Contents Contents 5

- Eliminates its obligation Eliminates obligation to to provide provide anyany affected affected customer (including TVA) customer (including TVA) with with aa minimum minimum amount amount ofof power; I

Provides for all Provides eight Cumberland the eight Provides for TVA Provides all affected affected customers Cumberland River TVA to receive customers (except receive all all of (except TVA)

River hydroelectric of the TV A) to receive hydroelectric facilities; facilities; the remaining remaining hourly receive aa pro hourly generation share of pro rata share generation (minus of aa portion (minus station portion of station service of the gross service for those gross hourly generation generation from those facilities);

facilities);

from I

- Eliminates the Eliminates the payment payment of demand demand charges charges by customers customers (including (including TVA)

TVA) since since there there is is significantly significantly reduced reduced dependable dependable capacity on capacity on the Cumberland Cumberland River system; system; and and

- Increases the Increases legally legally required the rate charged required to charge charged per per kilowatt-hour charge rates kilowatt-hour of rates that cover of energy energy received cover its costs.

received by SEP A's customers by SEPA's customers (including (inc hiding TVA),TVA), because because SEPA is I

unclear how It is unclear It how long long the emergency operating plan emergency operating plan will remain remain in effect.

Under the the Public Public Utility Regulatory Regulatory Policies Policies Act Act ofof 1978, 1978, as amended amended by the Energy Policy Act of 1992 and the Policy Act Energy Policy Act the Energy Act of of I 2005, TVA is 2005, is required required to purchase purchase energy energy from qualifying qualifying facilities, cogenerators, cogenerators, andand small small power producers producers at TVA's TVA's avoided avoided cost ofof self-generating or purchasing generating During purchasing this During the past this energy energy from another source.

past five years, TVA supplemented supplemented its power power generation generation through through power power purchases purchases as follows:

follows:

I Purchased Power Purchased For the years ended Power **

ended September 30 II

,,:,-M;:.:.il:.::li:.;::0~ns"-07f=k:-:W.:.:'h::--:=---::-:::---_-=----:-

'Millions of kWh 2008 2007 20,887_ _ _--=2=2:,.~14"-"1,--,

_ _ _ _ _ _ _ _ _-,2=0,:::..88::..:7 22,141 2006 2005 14,892 19,019_ _ _-,,1...!.4.,,:::..89,,,,,2,,--_

_ _-,1c::.9,:::..0Io..::9 2004 2004 14,025]

_-,1,-,-4.,025J II Percent of TVA's Total Power Percent Power Supply 11.6 12.4 12.4 10.9 8.5 8.3 8.3 Note II

Purchased power Purchased to power power sales.

power amountsamounts for years 2004, for years 2005, and 2004, 2005, and 2006 have been 2006 have been adjusted adjusted to to remove remove APGI purchases and APGI purchases include them and include as aa credit them as credit I For moremore information regarding regarding TVA's power purchase obligations, obligations, see Note Note 15 - Commitments - Power Purchase Obligations.

Power Purchase Obligations.

Purchasing power from others will likely remain remain a part of how TVA TV A meets the power needs of its service area. The Strategic Plan I establishes a goal of balancing establishes balancing production capabilities electricity and, when necessary, buying, building, and/or leasing assets or entering electricity allow TVA TV A to reduce its reliance on purchased power. Although purchased requirements by promoting capabilities with power supply requirements conservation and efficient promoting the conservation entering into purchased power agreements. Achieving this goal will purchased power volume decreased in 2008, TV TVA efficient use of of A purchased significantly more I

power than planned planned due to decreased decreased hydroelectric generation of 26.1 percent as a result of ongoing drought conditions hydroelectric generation Capacity conditions in 2008. Capacity margins in areas surrounding or reverse surrounding TVA TV A have narrowed reverse due to lower system loads. A return to normal purchased power. See Item 7 - Management's purchased narrowed over the past three years. However, due to current economic normal weather patterns Management's Discussion and Analysis economic conditions, patterns would likely increase hydroelectric hydroelectric generation Financial Condition and Results Analysis of Financial conditions, this trend may flatten Results of Operations - Challenges reliance on l generation and reduce reliance Challenges I II During2008 - Weather During Weather Conditions.

Conditions.

Page 15 I' II II II I

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I Table of Contents Net Capability Net Capability I The following table The following table summarizes summer net capability summarizes the summer megawatts TVA capability in megawatts SUMMER NET CAPABILITY SUMMER TV A had available CAP ABILITY J September 30, 2008:

available as of September 2008:

As of of September September 30, 2008 2008 I Summer Summer Net Net Date First First Date Last Last I 0 Source Source of Capability Capability Location Location Number of Number Units Capability 22 Capability (MW)

(MW)

Unit Placed Placed in Service Service Unit Placed in Placed in Service Service TVA GENERATING TVA GENERATING FACILITIES FACILITIES II Coal-Fired Coal-Fired I Allen Allen Tennessee Tennessee 33 735 1959 1959 1959 1959 Bull Run Bull Tennessee Tennessee 1 882 882 1967 1967 1967 1967

-I Colbert Colbert Alabama Alabama 5 1,147 1,147 1955 1955 1965 1965 I, Cumberland Cumberland Gallatin Gallatin Tennessee Tennessee Tennessee Tennessee 22 44 2,466 2,466 964 1973 1973 1956 1956 1973 1973 1959 1959 II' John Sevier John Johnsonville Johnsonville Kingston Kingston Tennessee Tennessee Tennessee Tennessee Tennessee Tennessee 10 4

99 704 1,128 1,128 1,411 1,411 1955 1955 1951 1951 1954 1957 1957 1959 1959 1955 1955

, Paradise Paradise Kentuc~

Kentucky 3 2,201 1963 1963 1970 1970 I II Shawnee Shawnee Widows Widows Creek Total Coal-Fired Total Kentucky Kentucky Alabama Alabama 10 59 88 1,323 1,323 1,508 1,508 14,469 14,469 1953 1953 1952 1952 1956 1956 1965 1965 II Nuclear Nuclear Browns Ferry Alabama Alabama 3 3,280 1974 1974 1977 1977 II ,LSeqjuyah Seg!!Qyah Watts Bar

,I Total Nuclear Tennessee Tennessee Tennessee Tennessee 2

6 1

2,282 1,109 1,109 6,671 6,f71 1981 1996 1996 1982 I 1996 1996 I ~ydroelectric Hydroelectric Conventional Plants Conventional Alabama Alabama 36 1,498 1925 1925 1962

, Georgia Georgia 2 31 1931 1931 1956iI 1956 Kentucky Kentucky 5 175 1944 1944 1948 North Carolina 6 383 1940 1956I North Carolina 6 383 1940 1956 I'I Tennessee Tennessee 60 1,699 1912 1972 1972 I, Pumped Storage Hydroelectric Total Hydroelectric Tennessee Tennessee 113 4 1,717 5,503 1978 1979 1979 Turbine ~3

,Combustion Allen Turbine Tennessee Tennessee 20 478 1971 1972 I

I, Brownsville Caledonia Colbert Tennessee Tennessee Mississippi MississiRRi Alabama Alabama 3

4 88 474 768 384 2008 2007 1972 2008 2007 1972 1972 III .

Gallatin Gleason

, Johnsonville Johnsonville Tennessee Tennessee Tennessee 20 88 3

636 519 1,218 1975 2007 1975 2000 2007 2000 I' Kemper ILagoon Creek Lagoon Creek Marshall County County Mississippi Mississip'pi Tennessee Kentucky 12 12 4

88 329 1,009 659 659 2001 2002 2007 2001 2002 2007 I Southaven Mississippi 3 792 2008 2008 I Total Combustion Turbine Total 93 93 7,266 I', Generator Diesel Generator I Meridian Meridian Albertville Albertville ITotal jTotal Diesel Generators Mississippi MississiRRi Alabama 4 9

55 9 4

.13 13 1998 2000 1998 1998 2000 2000 Renewable Resources 3 I ~otal (TotalTVTVAA Generating Generating Facilities 33,925 33,925 .

O==W=E=R~P=U~R~C=H~A~SE~A7N=D~O~T=H~ER~----------------------------------------------------------------~II POWER PURCHASE AND OTHER

=1

!AGREEMENTS FAGREEMENTS Total Summer Net Capability 2,789 2,789 36,714 36,714 I 16 Page 16 I

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II Table of Contents Table of Contents Notes Notes 1(1) Net capability (1). Net capability is defined defined asas the the ability ability of of an electric electric system, system, generating generating unit, oror other system component other system component to to carry generate power carry or generate power for a specified time period.

specified period.

TVA estimated (2) TVA estimated total winter net capability capability at September September 30, 30,2008, be approximately 2008, to be approximately 37,085 37,085 megawatts, megawatts, including including hydroelectric hydroelectric capability capability 1(2) of approximately of approximately 5,2655,265 megawatts, megawatts, coal-fired coal-fired capability capability of approximately approximately 14,870 14,870 megawatts, megawatts, nuclear nuclear power power capability capability of of approximately approximately megawatts, combustion 6,898 megawatts, combustion turbine turbine capability approximately 7,150 capability of approximately 7,150 megawatts, megawatts, diesel diesel generator generator capability capability of approximately 13 of approximately megawatts, renewable renewable assets assets capability approximately three megawatts, capability of approximately megawatts, andand capability capability from power power purchase agreements of approximately purchase agreements approximately 2,886 megawatts.

megawatts. The The difference difference in winter and summer summer net capability capability is primarily primarily duedue to more more efficient efficient fossil fuel-fired and nuclear nuclear I

2,886 generation performance generation performance in cold weather.

(3) See Item 1, Business See Power Supply --

Business - Power Generation Facilities - Combustion GenerationFacilities Turbine Facilities Combustion Turbine Facilities,, for aa description description of TVA-operated TV A-operated combustion turbine combustion turbine facilities.

II Energy Efficiency Initiatives Energy Efficiency Initiatives On May 19, 2008, the TVA TV A Board Board approved staff staff recommendations recommendations for an Energy Energy Efficiency Efficiency and and Demand Response Plan. The plan Demand Response I seeks to slow seeks slow the current current rate rate of growth growth in the TVA service area's area's power power demand by providing providing opportunities opportunities for residential, residential, business, and and I industrial consumer groups to use energy industrial opportunities and to reduce opportunities reduce peak energy more more efficiently. TV peak demand. TVA is also expanding TVA plans to work with A plans with the distributor consumers about expanding the ways it informs consumers customers to identify distributor customers identify energy about energy efficiency.

energy efficiency efficiency efficiency. In the short term, the plan proposes proposes reducing reducing the growth in peak peak demand by up to 1,400 megawatts by the end of the the 2012.

2012.

II Renewable Renewable and Clean Clean Energy Energy May 2008, In May 2008, the TVA TVA Board adopted an Environmental Board adopted Policy that establishes Environmental Policy objectives of reducing load growth and establishes objectives and meeting meeting I remaining load remaining low and, load,growth growth through lowerlower carbon carbon emitting energy zero-carbon emitting supply and, effectively, zero-carbon efficiency.

energy sources, including including affordable demand-side options, supply and demand-side affordable renewables.

options, including renewables. Clean energy is defined renewables, nuclear, including renewables, nuclear, combined heat and defined as coming coming from and power, and energy I3 Renewable energy comes from generation generation that is sustainable sustainable and includes:

- Wind generation; I I

Solar generation; Landfill methane generation;

Biomass cofiring;

Dedicated biomass generation; generation; I

Existing hydroelectric hydroelectric generation; Incremental Incremental and low-impact and generation; and low-impact hydroelectric generation.

, In April 2000, TV TVAA launched its Green Power Switch program. This program allows residential, commercial, and industrial I customers to voluntarily buy "kwh "kwh blocks" of specific renewable generation (wind, solar, and digester gas). This was the first voluntary green pricing program offered in the southeast United States certified voluntary certified Renewable and clean energy technologiestechnologies are often considered collectively. However, they are largely unrelated technologically, each each I developmental challenges such as intermittency and varying regional availability having its own developmental availability issues.

I3 Technology advancements will be needed to address some of the operation issues associated with renewable energy, such as energy interconnection technologies to address onsite, non-grid connected storage to address intermittency and interconnection efficiencies..

connected renewables and efficiencies Most renewable energy resources are geographically specific. Some regions of the Unites States have an abundance of wind

. Most renewable energy resources are geographically specific. Some regions of the Unites States have an abundance and solar resources, whereas other hydroelectric resources. Regional differences other regions have hydroelectric differences and limitations playa play a primary role in the types and amount I of renewable and clean energy abundant renewable sources are energy developed in areas across the country. Within the area served are hydroelectric and biomass.

ridgeline installations, and the total potential capacity limited when compared to other capacity is limited served by TVA (southeast United States), two of biomass. Feasible wind energy in this region is primarily associated with mountain of the most mountain top and the nation where wind energy is more abundant.

other parts of the I Page 17 17 I

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of Contents Table of Contents As of September September 30,2008, 30, 2008, TVA's zero zero and near-zero carbon emitting sources included:

I Zero or Low Carbon Source Source Carbon Emitting Generation Generation Site/Units Metyawatts Megawatts IU

!Nuclear g~enC!.:e':!.r~at~io:e.!n~~--:-

Nuclear generation Conventional hydroelectric generation **

Conventional

_ _ _-,----:-_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _66~u.o.:.1lI!..:.*ts~ units _ _ _ _ _-",6.,mJO 109 units 6,671.0 3,786.0 3,786.0 .-

I 27.0]

Wind power purchase agreement iWind Methane

'Biomass cofiring at Colbert Biomass agreement

Methane gas at Allen Fossil Plant **

Colbert Fossil Plant

15 units 2 units 4 units 27.0 8.0 8.0 7.0 I

I I

Landfill Landfill methane methane gas purchase purchase agreements

2 sites 5.9 5.9 2.0]

iWind generation *-

idgeneration Solar photovoltaic TOtal f[6tal photovoltaic

3 units 15 sites 156 units/sites 2.0 0.3 0.3 10,5077211 1O,507.2J I

I

Renewable generation Ii In May 2008, 2008, TV 12,700 million kilowatt-hours TVA A completed a Renewable and Clean kilowatt-hours of potential renewable options for additional regional renewables include:

Clean Energy Assessment ("Assessment")

("Assessment") which Tennessee Valley. The Assessment renewable resources in the Tennessee which estimated that by 2020 there could be Assessment determined that TVA's lowest-cost lowest-cost I

hydroelectric modernization program; Completion of the hydroelectric Additional low level biomass Additional hydroelectric Landfill gas; and Landfill biomass cofiring; hydroelectric units at existing and existing dams; I U

Wind.

Matters In 2008, approximately 37 percent of TVA's 2008, approximately Renewables and Clean Matters - Renewables Clean Energy.

Energy.

clean energy generation was from clean TVA's generation energy sources. Item 1, See Item sources. See Business --Environmental 1, Business Environmental I Nuclear Nuclear 3 Overview 2013.

TVA TV 2013. Selected A has six operating nuclear units and has resumed construction of one nuclear statistics of each of these units are included in the table below.

Selected statistics nuclear unit that is scheduled scheduled to be placed in service in in I TVA Nuclear Nuclear Power Power As of September 30, 2008 II Date of of Date of of Nuclear Nuclear Unit Installed Installed Capacity (MW)

(MW)

Net Capacity Expiration for Factor for 2008 Expiration of Operating Operating License License of Expiration of Construction Construction Permit Permit of I

Status III1 1 221

Seguoxah

Sequoyah Unit 1 Operating, Operating _ _ _ _ _ _ _ _ _ _ _.........o.1,221 1,221 85.9 85.9 2020 2020 Sequoyah Unit 2 Operating 1,221 2021 Sequoyah Unit 2 Operating,_ _ _ _ _ _ _ _ _ _ _-7'1,'-72-==2-::-1_ _ _ _-;::.:::.:.:-_ _ _ _-==-::-~--------,

89.5

'Browns FeDY fuoWns "Browns Ferry Unit 1

-Browns Ferry Browns Ferry Browns

~~~------~

Ferry Unit FeDY Unit Unit 22 Unit 33 Operating Operating _ _ _ _ _ _ _ _ _ _ _-:1,190 Operating~

Operating Operating 1I,L50 1,150 92.1 96.6 2033 2034

-1,~1..:,9-::-0------=.;:..:-:;-----:::_::__::_.;_-------_,

11,190 96.6 71.6

,-=-1-=-9.:o-0_ _ _ _--:-=-'-'::-____

71.6 2034 2036

~::_::_---------'

2036 III 11 Watts Bar Unit 1 Operating Operating 1.230 1,230 80.2 2035 2035 I Construct~io-n-r-e-s-u-m-e~d~i~n~D~ec-e-m~be-r---~~----~~=-----~~---------,

Construction resumed in December Watts Bar Unit 2 Watts Bar Unit 2 2007 2007 2013 2013 I

Page 18 18 Page I

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II Table oJCOIitents Table of Contents TV TVA A began a significant construction program in 1966 to meet significant nuclear plant construction meet projected system load growth. At the height height of its Ii construction program, TVA construction TVA had 17 units either construction of four units because construction either under construction construction or in commercial because of lower than expected load growth, and TV commercial operation at seven plant sites. In 1982, TVA canceled TVA A canceled four more units in 1984 canceled 1984 for similar reasons.

By August 1985, construction of two units each at Watts Bar and Bellefonte 1985, TVA had delayed construction Nuclear Plants and had shut down its Bellefonte Nuclear three-unit Browns three-unit Browns Ferry Ferry Nuclear,Plant ("Browns Ferry") and two-unit Sequoyah NuclearPlant ("Browns Sequoyah Nuclear Plant ("Sequoyah")

("Sequoyah") because because of an increasing number of of II technical and operational Bar Nuclear problems. The Nuclear Regulatory operational problems.

deficiencies and to provide provide its corrective Nuclear Plant Unit 1 ("Watts Bar"). AfterAfter implementing Commission ("NRC") required TVA Regulatory Commission corrective actions to the NRC before implementing aa comprehensive comprehensive recovery TV A to address program and management before restarting any of its licensed licensed nuclear units or requesting recovery plan, TVTVA A restarted management requesting a license for Watts restarted Sequoyah Sequoyah Unit 2 in May 1988 1988 and I Sequoyah Sequoyah Unit 1 I in November 1988.

1988. TVA restarted restarted Browns Browns Ferry Ferry Unit 22 in May 1991 and Browns Ferry Unit 3 in November I 1995. Construction Construction of Watts Bar Unit 1I was successfully successfully completed, and the unit commenced full power commercialcommercial operation in May 1996.

Extended Power Uprate ("EPU")

undertaking an Extended TVA is undertaking Browns Ferry which is expected

("EPU") project at Browns increase the amount of electrical expected to increase electrical I generation by increasing the amount additional capability amount of steam produced by the reactors. This project is expected to result in approximately capability per unit as a result of operating operating the reactor at 120 refueling outage to support the increased steam production. The purpose of the EPU project to the reactor during each refueling approximately 125 megawatts of 120 percent of the original licensed thermal power. Additional fuel is added project is to complete of modifications modifications to the plant required to accommodate the increased steam flows and resulting electrical electrical production. The NRC license for II operating the reactor must be modified to allow In November November 2005, TVA TV A canceled allow reactor operation at the higher power power level.

Bellefonte Nuclear Plant ("Bellefonte"). Two months canceled the construction of Units I and 22 at Bellefonte months prior to I the cancellation of these units, the Bellefonte Development LLC ("NuStart") as one selected by NuStart Development Bellefonte site was selected one of two sites for the development development I of a combined combined license application application for two new reactors using the Westinghouse Westinghouse Advanced Passive Passive 1000 ("API an industry consortium composed of 10 utilities and two reactor vendors whose purpose is to satisfactorily 000") reactor

("APIOOO")

satisfactorily demonstrate reactor design. NuStart is demonstrate the new NRC licensing NRC licensing' submitted its combined operating license application ("COLA") to the NRC for Bellefonte process for advanced advanced design nuclear nuclear plants. TVA TV A submitted U

I Units nits 3 and 4 in October 2007, and it was accepted for detailed review by the NRC on January 18, operate the plant would be issued to TVA. The NRC is expected operate to making a decision as to the new schedule.

schedule. The TVTVA expected to complete 18, 2008. If approved, the license to build and complete an evaluation of its COLA review review schedule in December December 2008 prior construct a new plant at the Bellefonte site, and TV A Board has not made a decision to construct TVA prior A

continues to evaluate all nuclear continues nuclear generation part of this evaluation, TVA asked the NRC in August options 'at the site. As part generation options'at reinstate the August 2008 to reinstate I construction unfinished nuclear units also at the Bellefonte construction permits for its two unfinished place the units in a deferred status again with the NRC and would help TVA Bellefonte Units 11 and 2 to meet feasibility of using Bellefonte meet future base-load TV A clarify base-load power power demand.

construction permits would allow TVA Bellefonte site. Reinstating the construction clarify the regulatory regulatory requirements requirements and continue TV A to continue to evaluate the I3 On June 7, 2008, a joint petition in connection submitted to the NRC by the Bellefonte hearing was submitted Bellefonte Efficiency intervention and a request for a connection with TVA's COLA for Bellefonte Units 33 and 4 for intervention Environmental Defense Sustainability Team, the Blue Ridge Environmental Efficiency and Sustainability Defense League, imd and the Southern Alliance for Clean Energy. The petitioners raised 19 Southern contentions and subsequently added another with respect 19 contentions TVA's respect to TV A's Following TVA's and NRC's COLA. Following responses opposing the proposed contentions, the Atomic Safety NRC's responses Safety and Licensing Board Board ("ASLB"), which I conducted over the proceeding, accepted is presiding over conducted in the future. The admitted contentions contentions submitted by two of the petitioners. A hearing on these admitted contentions will be accepted four contentions contentions involve questions aboutabout the estimated estimated costs of the new nuclear nuclear plant, the storage oflow-level of low-level radioactive waste, and the impact of the facility's operations, radioactive operations, in particular particular the plant intake, on aquatic species.

species.

Ii On August 1, 2007, 2007, the TV TVA detailed scoping, estimating, and planning A Board approved planning study to estimate construction of Watts Bar Unit 2. Prior to the approval, TVA approved completing the construction conducted a TV A conducted prepared a report evaluating schedule, and risks. Separately, TVA prepared estimate the project's cost, schedule, evaluating i environmental impacts as required by the National Environmental potential environmental Policy Act. TVA has an NRC construction permit Environmental Policy permit for Watts Bar I Unit 2 that expires in 2013. TVA TVA will seek Completing Watts Bar Unit 2 is expected to take approximately hearing. Completing approximately 60 months

("AFUDC") and the cost of the first core of fuel. When for funds used during construction ("AFUDC")

process will include an opportunity operating license under NRC regulations, and this process seek an operating months and cost approximately When completed, opportunity for a public

$2.5 billion, excluding an allowance approximately $2.5 completed, Watts Bar Unit 2 is expected allowance expected to provide provide i , 180 megawatts of summer net capability.

11,180 Page 19 Page 19 I

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Table of Contents o/Contents Nuclear Fuel Spent Nuclear Fuel I Under the Under Department of Energy Department the Nuclear Nuclear Waste Energy ("DOE")

Waste Policy

("DOE") for the Policy Act of 1982, the disposal of 1982, TVA of spent TVA (and (and other spent nuclear other domestic nuclear fuel.

domestic nuclear fuel. Payments nuclear utility Payments to DOE utility licensees)

DOE areare based based upon upon TVA's entered into a contract licensees) entered TVA's nuclear nuclear generation generation and u.s.

contract with the U.S.

and charged charged I

to nuclear to nuclear fuel fuel expense.

expense. Although Although the contracts contracts called called for DOE DOE to to begin begin accepting accepting spent spent nuclear nuclear fuel fuel from from the utilities utilities by by January January 31, 31, 1998, 1998, DOE announced DOE announced that itit would nuclear utilities, nuclear spent utilities, stores spent nuclear would not not begin stores spent nuclear nuclear fuel in those begin receiving receiving spent nuclear fuel in pools those storage storage pools pools atat its spent nuclear pools of its Sequoyah nuclear fuel from of borated borated water Sequoyah andand Browns from any Browns Ferry any domestic water at its nuclear domestic nuclear nuclear sites. TVA Ferry Nuclear nuclear utility TVA would utility until would have Nuclear Plants indefinitely until 2010 have had indefinitely had at the earliest. TVA, 2010 at had sufficient had DOE sufficient space DOE begun TVA, like space to continue begun accepting like other continue to accepting spent other to store [i spent nuclear nuclear I

DOE's failure fuel. DOE's Plants and been constructed been constructed and approved so in a timely failure to do so and to purchase purchase special timely manner special storage manner required storage containers approved by the required TVA to construct containers for the spent nuclear the NRC and have construct dry cask nuclear fuel. The cask storage storage facilities facilities at its its Sequoyah The Sequoyah and Browns Ferry dry cask have been in use since 2004 and 2005, 2005, respectively, respectively, providing Sequoyah and Browns Browns Ferry Nuclear cask storage providing storage storage capacity capacity through Nuclear facilities have storage facilities have through 2030 2030 at at I3 Sequoyah and Sequoyah and 2019 2019 at Browns Browns Ferry.

Ferry. Watts Watts BarBar has has sufficient sufficient storage storage capacity capacity in its spent fuel pool pool toto last until approximately approximately 2015.

2015.

To recover recover the cost of of providing States in the Court of Federal Claims States providing long-term, Claims in 2001.

2001. In August on-site storage long-term, on-site August 2006, storage for spent nuclear fuel, TVA spent nuclear States paid TVA 2006, the United States TV A filed a breach TVA almost almost $35 breach of contract suit of contract

$35 million in damages suit against the United awarded by the damages awarded United the Court I3 Federal Claims, which partially of Federal 2008, the United

2008, partially offset United States paid TVA reviewed from time-to-time.

be reviewed offset the construction TVA about time-to-time.

about $10.4 construction costs of the

$10.4 million for on-site the dry dry cask storage storage facilities that on-site spent nuclear fuel storage storage costs that TVA incurred costs incurred incurred during 2005.

through 2004. In September incurred through 2005. Additional September Additional claims will I Low-Level Radioactive Low-Level Radioactive Waste protective Low-level radioactive Low-level protective clothing, mops, and filters. TVA 2008, when that facility closed

2008,

("radwaste") results from the normal radioactive waste ("radwaste")

closed to radwaste normal operation operation of nuclear contracted to dispose of such waste at aa Barnwell, TV A contracted generators located in states that are radwaste generators nuclear units and includes are not members of the Atlantic Interstate materials as disposable includes such materials Barnwell, South Carolina, disposal facility through June Interstate Low-Level disposable Low-Level Radioactive II Management Compact Waste Management Compact ("Atlantic

("Atlantic Compact").

Compact"). *NoneNone of TVA's nuclear nuclear units are located in members of the Atlantic in states that are members Atlantic Compact. Since June 2008, Since June 2008, TVA TV A has has continued practice of having certain continued its practice processed and shipped certain types of radwaste processed shipped to a disposal disposal facility in Clive, Utah, and TVA TV A is also storing storing some some radwaste at its own facilities. TV TVA capable of storing radwaste at its facilities for an extended A is capable extended period of time and and has done so in the past.

Nuclear Decommissioning Nuclear Decommissioning Trust II TVA decommissioning trust to provide funding for the ultimate TV A maintains a nuclear decommissioning generally designed to achieve trust is invested in securities generally decommissioning of its nuclear power plants. The ultimate decommissioning achieve a return in line with overall equity market performance.

performance. The assets of the trust as of of I

30, 2008, totaled $845 million, which is less than the present September 30,2008, September value of TVA's estimated future nuclear present value decommissioning costs as nuclear decommissioning computed under the NRC funding requirements and less than the present value of these costs as computed under Statement Accounting Standards No. 143, Note 18 --impact 143, "Accountingfor Impact of Recent Financial Conditionson Investment Financial Market Conditions investment Portfolios.

Statement of Financial Contingencies- Decommissioning Obligations."" See Note 15 - Contingencies

"'Accountingfor Asset Retirement Obligations.

Financial Decommissioning Costs Portfolios. If market conditions do not improve, additional funding Costs and I3 may be required.

Nuclear Insurance Nuclear insurance I3 The Price-Anderson provides a layered Price-Anderson Act provides compensate for losses arising from a nuclear event. For the first layered framework of protection to compensate layer, all NRC nuclear plant licensees, including TVA, purchase $300 million of nuclear liability insurance from American Nuclear Insurers for each plant with an operating license. Funds for the second layer, the Secondary Financial Program, would come from an assessment of up to I3

$112 million from the licensees of each of the 104 NRC licensed reactors in the United States. The assessment for any nuclear accident would U

$112 be limited to $18$18 million per year per unit. American Nuclear Nuclear Insurers, under a contract with the NRC, administers Secondary Financial administers the Secondary Program. With its six licensed units, TVA could be required required to pay a maximum of $671 $671 million per nuclear incident, but it would have to pay no no.II

$105 million per incident in anyone more than $105 any one year. When the contributions of the nuclear nuclear plant licensees are added to the insurance proceeds IIR of $300 million, over $12 $12 billion, including a five percent surcharge for legal expenses, Price-Anderson Act, if expenses, would be available. Under the Price-Anderson if the first two layers are exhausted, the U.S. Congress is required to take action to provide additional additional funds to cover the additional losses.

Page 20 I

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I Table a/Contents Table of Contents TVA TV A carries property, decommissioning, and decontamination insurance carries property, insurance of $4.6 billion for its licensed licensed nuclear plants, with up to $2.1 $2.1 billion available available for aa loss at anyone cover the cost of stabilizing or shutting any one site, to cover shutting down down a reactor after an accident. Some of this insurance, II which is purchased approximately purchased from Nuclear approximately $72 million.

Nuclear Electric Insurance Insurance Limited Limited ("NEIL"),

("NEIL"), may require require the payment of retrospective premiums up to a maximum maximum of of TVA purchases purchases accidental accidental outage (business (business interruption) interruption) insurance for TVA's nuclear sites from NEIL. In the event that an accident accident I covered covered by this policy dollar amount dollar amount perper week) premiums up to a maximum takes a nuclear unit offline or keeps a nuclear unit offline, NEIL will pay TVA, policy'takes week) up to aa maximum up to maximum indemnity maximum of approximately indemnity of of $490

$490 million million per approximately $30 million. See Note per unit. This insurance unit. This Note 15 - Contingencies TVA, after a waiting period, an indemnity insurance policy may require policy may Contingencies--- Nuclear require the Nuclear Insurance.

Insurance.

payment of the payment indemnity (a set of retrospective retrospective set I Fuel Supply General General

1 "I TVA's consumption of various types of fuel depends largely on the demand for electricity electricity by TVA's customers, the availability of various generating units, and the availability and cost of fuel. The following table indicates TVA's costs for various fuels for the years indicated:

of I Fuel Purchases for TV For the years A-Owned Facilities TVA-Owned years ended September September 30 (in millions) 30 I 2008 2007 2007 2006 2005 2004 2004

':":C=oa=l----:-_

oal _ _ _ _ _ _ _ _ _ _ _ _ _ _-=$$_ _-=2,1lo 2,110 $ 1,922 $ 1,835 $ 1,495 $ 1,00 1254 I Natural gas

!fuel

'Fuel oil 131 131 oil "--'---------------------=-=;6:71-----2=-:2~-----':4:-::6-----=-:28;:;------':1:-;;7"1 61 62 22 60 46

63 63 28 22 22 17 III Uranium Uranium Total Total $$

71 2,373$ $

2,373 121 2,127 2;127 $$ 2,012 2,012 71 44 1,630 1,630 $

16 1,309]

=$===I,=30=9J TVA also has tolling agreements under which it buys power productionproduction from outside suppliers. Under these tolling agreements, TV TVA A I

I supplies the fuel to the outside supplier, and the outsider supplied by TVA outsider supplier converts converts the fuel into electricity.

electricity. The following TV A under these agreements and also the average fuel expense per kilowatt-hour for the years indicated:

following table table indicates indicates the cost of fuel Natural Natural Gas Purchases for Tolling Plants I For the years ended September 30 2008 2008 2007 30 2006 2005 2004 l~ostofFUel(inmillionsl~~~~------~~$--~4~5~7-~$--~4~3~0-%$--~2~8~8~~$---~15~9~~$~--~10~1 Cost of Fuel (in millions)_

Average Fuel ExpenseExpense (cents/kWh) 5457 457 12.26 12.26 430 430 5.51 S

288 288 6.07 6.07

$ 159 159 6.21 10t 10 4.71

.I I Due to rising commodity prices prices across domestic and international natural gas, fuel oil, coal, and electricity during 2008. Market prices international markets, TVTVA experienced increased A experienced prices for these commodities at September increased costs in short-term markets for September 30,2008, 30, 2008, and 2007, 2007, are shown below.

I Commodity Pricing Table As of September 30 Percent Percent Commodity 2008 2008 2007 Increase Natural Gas (He!!!y Hub, $/mmBtul~_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~ $ _$_--=:..~_..::L_

9.01 $ _ _~=:.

II Natural Fuel OilGas (Henry (Gulf Coast,Hub, $/mmBtu)

$/mmBtu) 9.01 21.38 21.38 12.97 31o/J 6.87 _ _ _ _ _..::...!.=

31°/o' 65%

65%

I ,Coal (FOB mine, $/tonl:--::-_

Coal Electricity

$/ton)_

(Into-TVA, Electricity (Into-TV A, $/MWh)

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _-=-".'-'c:::.-___ 48.13 48.13 70.95 70.95 29.65

---'==":=-_

58.03 620/o2

_ _ _ _..o::.::-:-::-

620A 22%

22%

21 Page 21 I

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Table Table of Contents Contents 3 Since September 30,2008, Since September 30, 2008, the market prices for all of these commodities except except for coal have fallen. Market prices for these I

commodities commodities at November 30, 2008, and September 30, 2008, 2008, are shown below.

U I

Commodity Pricing Pricing Table Commodity Commodity Prices Prices As of November 30, 2008 30,2008 Prices As of September 30, 2008 30,2008 Percent Percent Change Change I

Natural Gas QHenry Hub $/mmBtu$ 6.71 $ 9.01 (26)%0

$ 6.71 $ 9.01 Fuel Oil (Gulf Coast, $/mmBtu) 12.20 12.20 21.38 (43)%

Coal FOB mine $/ton) 58.76 58.76 48.13 220 Electricity (Into-TVA, $/MWh)

I On-Peak (5 days x 16 hours1.851852e-4 days 0.00444 hours 2.645503e-5 weeks 6.088e-6 months ) 38.00 38.00 70.95 (46)/

Off-Peak (5 days x 8 hours9.259259e-5 days 0.00222 hours 1.322751e-5 weeks 3.044e-6 months ) 34.75 34.75 38.40 (10)%

Although Although the FCA provides a mechanism to modify modify rates on a quarterly basis to recover recover changing fuel and purchased purchased power costs, there I is a lag between the occurrence flows can be negatively occurrence of a change in fuel and purchased power costs and the reflection negatively affected by the FCA. As of September power costs that are expected September 30, 2008, reflection of the change in rates. As a result, TVA's 2008, TVA had approximately $28 expected to be recovered through the FCA in future periods. See Item 1, TV A's cash

$28 million in deferred fuel and purchased 1, Business Business - Rate Actions.

purchased I Coal Coal Coal consumption at TVA's coal-fired generating generating facilities during 2008 was 46.3 million tons. As of September 30, 2008, and 2007, September 30,2008, 2,007, II TVA had 26 days and 23 days of system-wide system-wide coal supply at full bum, respectively, with a net bookbook value of coal inventory of $303

$303 million and

$264 million, respectively.

respectively.

TVA utilizes both short-term short-term and long-term long-term coal contracts. Long-term Long-term coal contracts generally last longer than one year, while short-term contracts are usually for one year or less. During 2008, long-term contracts made up 93 percent percent of coal purchases purchases and short-term contracts contracts I

II accounted for the remaining seven percent. TV TVAA plans to continue continue signing contracts contracts of various lengths, terms, and coal quality to meet its expected bum and inventory requirements. During 2008, 2008, TVTVAA purchased coal by basin as follows:

35 percent percent from the Illinois Basin; II

27 percent percent from the Powder River Basin Basin in Wyoming; 21 21 percent from the Uinta Basin of of Utah Utah and Colorado; Colorado; and and

17 percent from the Appalachian Basin ofand percent from the Uinta Basin Kentucky, Pennsylvania, Tennessee, Virginia, and West Virginia.

17 percent from the Appalachian Basin of Kentucky, Pennsylvania, Tennessee, Virginia, and West Virginia.

delivered delivered Total system system coal inventories delivered by rail, 19 percent by truck.

delivered by truck.

inventories were at or above target levels for most of 2008. During 2008, 42 percent of TVA's coal supply was percent was delivered by barge, and 33 percent percent was delivered by a combination of barge and rail. The remainder remainder was IUI NaturalGas Natural Gas and and Fuel Fuel Oil 3 I

During 2008, TVA TV A purchased substantially all of its natural gas requirements from a variety of suppliers under contracts with terms of of one year or less. TVTVAA purchases substantially all of its natural gas to operate combustion turbine peaking units and to supply fuel under power II 3

purchase agreements agreements in which which TVA is the fuel supplier. At September 30, 2008, all but two of TVA's combustion 30,2008, combustion turbine plants were dual fuel I

capable, capable, and TVA TV A has fuel oil stored on each each site for its dual fuel combustion turbines as a backup to natural gas. .

During 2008, million and $50 2008, TVA TV A purchased substantially all of its fuel oil on the spot market. At September of TVA's natural gas in inventory was $12

$50 million, respectively.

$12 million and $3 million, respectively, September 30, 2008, and 2007, the net book value respectively, and the net book book value of TVTVA's A's fuel oil in inventory inventory was $66

$66 I Page 22 22 I I

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I Table o/Contents Table of Contents Nuclear Fuel NuclearFuel I Converting uranium to nuclear fuel generally involves four stages:

Converting concentrates; the conversion the enriched conversion of uranium enriched uranium hexafluoride uranium concentrates stages: the mining and milling of uranium concentrates to uranium hexafluoride hexafluoride gas; enrichment hexafluoride into usable fuel assemblies. TVA currently uranium ore to produce uranium hexafluoride; enrichment of uranium produce uranium hexafluoride; and the fabrication currently has 100 percent of its forward three-year fabrication of three-year (2009 through through 2011) of 2011) uranium mining and milling requirements either in inventory inventory or under contract contract for its boiling boiling water reactor reactor units at Browns Browns Ferry Ferry Nuclear Nuclear Plant Plant I Sequoyah percent of its forward three-year (2009 and has 100 percent Sequoyah and Watts Bar Nuclear (2009 through 2011)

Nuclear Plants. In addition, TVA 2011) uranium requirements TV A has 100 percent requirements under contract for its pressurized water reactor units at percent of its conversion, conversion, enrichment, and fabrication fabrication needs under contract contract II through 2011.

2011. Beyond 2011, 2011, TVA anticipates being able to fill its needs by normal forecasts indicate that the fuel cycle cycle components will be readily available.

normal bidding bidding processes processes for fuel cycle components components as market market TVA, DOE, and some nuclear nuclear fuel contractors have entered into agreements agreements that provide for the blending blending down of surplus DOE highly enriched uranium (uranium that is too highly enriched enriched for use in a nuclear power plant) with other uranium. Under these highly enriched these agreements, the II enriched uranium that results from this blending blending process, which is called blended low enriched be used to reload the Browns Ferry reactors through 2014. BLEU enriched uranium can be used in a nuclear power plant. This blended nuclear fuel was first loaded in a Browns Ferry reactor uranium ("BLEU"), is fabricated into fuel that reactor in 2005 and is expected expected to continue BLEU fuel was first loaded into Sequoyah Unit 2 in May 2008 and will be loaded continue to loaded again in 2009 and 2011.

2011.

I Under the terms of an interagency processing into usable usable BLEU fuel for TVA, DOE agreement between DOE and TVA, interagency agreement DOE will participate TV A, in exchange exchange for supplying supplying highly enriched uranium materials for degree in the savings generated participate to a degree TVA's use of this blended generated by TVA's blended nuclear I fuel. TVA anticipates these future payments begin in 2010 and last until 2014. See Note 1 --- Blended Low Enriched payments could begin Program Uranium Program Enriched Uranium I for aa more detailed discussion of the BLEU project.

TVA owns all nuclear fuel held for its nuclear plants. As of September 30, 2008, and 2007, the net book value of this nuclear fuel was I TVA owns all nuclear fuel held for its nuclear plants. As of September 30, 2008, and 2007, the net book value of this nuclear fuel was

$722 million and $602

$602 million, respectively.

For a discussion of TVA's plans with respect to spent nuclear fuel storage, see Item 1, 1, Business - Nuclear Nuclear Fuel.

Nuclear - Spent Nuclear I Transmission Transmission transmission system is one of the largest in North America. TVA's The TVA transmission TV A's transmission system has interconnections interconnections with 13 with 13 neighboring neighboring electric delivered more than 176 billion kilowatt-hours of electricity to Tennessee Valley systems, and delivered electric systems, customers in 2008. The Valley customers I TVA Act gives TVA overall responsibility for grid reliability in the TVA service area. To that end, TVA has operated with 99.999 reliability negatively impact reliability and control the transmission system could negatively reliability in the region. See Item lA, IA, Risk Factors - Strategic 99.999 percent changes to the TVA Act which alter TVA's authority to operate delivering electricity to customers. Any changes reliability over the last nine years in delivering Strategic Risks.

operate I services to others to transmit power services power at wholesale transmission system, the TVA transmission To the extent federal law allows access to the TVA transmission wholesale in a manner that is comparable comparable to TV A's own TVA's organization offers transmission transmission organization own use of the transmission system. TVA has also I adopted accordance with a published adopted and operates in accordance published Standards of Conduct for Transmission transmission functions from its marketing functions.

transmission appropriately separates Transmission Providers and appropriately separates its

- Weather Weather and Seasonality I slightly slightly lower demand for and the market prices of electricity. TVA's power Weather affects both the demand Weather lower peak in the winter. TVA met its highest winter discussion of the potential Factors, for a discussion winter peak demand potential impact of weather on TVA.TvA.

power system generally peaks in the summer, with a demand of 32,027 megawatts on January 25, 2008. See Item IA, lA, Risk I TVA uses weather degree days to measure the impact of weather to which average weather on TVA's temperatures in the five largest cities in TVA's service average temperatures TV A's power operations. Weather service area vary from 65 degrees degrees Fahrenheit. TV TVA degree days measure the extent Weather degree A calculates weather extent weather degree degree Alabama - the five largest cities in TVA's service area.

Tennessee, and Huntsville, Alabama days for Memphis, Nashville, Knoxville, and Chattanooga, Tennessee, I- Page 23 I

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~if~~~

Table of Contents I During 2008, During 2008, TVA had had 14 14 less less heating heating degree degree days days and and 371 371 less less cooling cooling degree degree days days than The graph than in 2007. The below shows the number graph below number heating and of heating and cooling cooling degree Management's Discussion Management's degree days Discussion and Weather Conditions.

Weather Conditions.

days for 2008, and Analysis Analysis of 2008,2007, and 2006 2007, and of Financial 2006 as Financial Condition as compared compared to Condition and and Results to the Results of the normal normal number of Operations number ofof heating heating and and cooling degree days.

cooling degree Challenges During Operations - Executive Summary - Challenges See Item days. See Item 7, During 2008 -

7, II IU

.-3450001

3;5Q: O~ 1,- -'-'. ~ -,- -'-'. - ~ -'-' - -,~,~ -,-'-'-' -,;' - ~,~,-,-'-'~. ;.,

II II 3~()()p 2.,000 . j m

.0

.cI :2'socf*

iGI 0

'C B-0

.9-

2;000.

2.000:

'(SO'Q II 0

1.000 1JlOO

sqO" II 500.

'0\

2008 2007, "2006. II 2008 was the ninth driest year 2008 Tennessee Valley in 119 year in the eastern Tennessee 119 years of record-keeping percent of normal rainfall 76 percent record-keeping with rainfall normal for the II year and runoff runoff4747 percent of normal. Largely as a result of this low rainfall rainfall and runoff, less than 6.7 billion kilowatt-hours, which was 26 percent, 33 percent, and 57 percent lower hydroelectric production for 2008 was slightly runoff, TVA's hydroelectric 2007, 2006, and 2005, respectively.

lower than 2007,2006, respectively.

slightly II weather and low rainfall were also significant factors in causing The hot weather causing TVTVA output at several generating plants during the A to reduce output period of mid-June mid-June through mid-September of through mid-September every effort was made to reduce exceeded. While every of2008.

discharging cooling water from some of TVA's plants into the rivers could at which discharging temperatures on the Tennessee 2008. During this period, temperatures Rivers reached Cumberland Rivers Tennessee and Cumberland reached levels could have caused the permitted thermal limits for the rivers to be electrical output during low load periods to reduce financial and operational reduce (derate) electrical operational impacts, I

some derates were were required required during higher load daytime hours permitted temperature limits. These hours to meet the permitted conditions caused TVA These conditions TV A to rely more heavily purchased power and more expensive generation sources heavily on purchased Discussion and Analysis of Financial Conditions.

Condition and Results of Operations - Executive Summary -Challenges Financial Condition 2008. See Item 7, Management's such as combustion turbines during 2008.

sources such Management's During2008 - Weather

-Challenges During I II Competition Competition TVA sells electricity in a service area that is largely free of competition from other electric power providers. This serv.ice service area is defined primarily by two provisions of law: one called the "fence" region in which TVA or distributors of TVA power may provide power. The anti-cherrypicking TV TVA A transmission system for the purpose of serving customers within TV "anti-cherrypicking" provision. The fence limits the "fence" and one called the "anti-cherrypicking" anti-cherrypicking provision limits the ability of others to use the A's service area. Bristol, Virginia, was exempted from the anti-TVA's I U cherrypicking provision.

cherrypicking 24 Page 24 I I

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I Table of Contents Table of Contents There have been efforts to erode the protection anti-cherrypicking provision. FERC issued an order that would have required protection of the anti-cherrypicking required TVA TV interconnect its transmission system with the transmission system of East Kentucky A to interconnect Cooperative, Inc. ("East Kentucky")

Kentucky Power Cooperative, Kentucky") in what II believed was a violation TVA believed cherrypicking provision cherrypicking anti-cherrypicking provision. See Item 3, Legal Proceedings. Additionally, Senators Jim Bunning and violation of the anti-cherrypicking Competitive Power Act of 2007 in the Senate that would, among other things, provide introduced the Access to Competitive Mitch McConnell introduced provision would not apply with respect provided a termination notice to TVA respect to any distributor which provided provide that the anti-TV A before December 31, 31, 2006, notice was later withdrawn or rescinded. See regardless of whether the notice Management's Discussion and Analysis See Item 7, Management's Analysis of Financial Condition I Operations - Legislative and and Results of Operations RegulatoryMatters. While the FERC action involving and Regulatory legislation has not made it to the Senate floor, the events illustrate how the protection legislation provision could be called perhaps eliminated at some time in the future.

question and perhaps called into question TVA's protection to TV A's service Kentucky is moot and the proposed involving East Kentucky proposed service area provided by the anti-cherrypicking anti-cherrypicking I Research and Development Research Development TV A invests in science and technological TVA technological innovation inform decision making and improve innovation to inform improve operational operational and environmental I

I development activities are leveraged through performance. TVA's research and development performance.

Department of Energy, Oak Ridge National Laboratory, renewables, and clean energy, as well as projects efficiency, renewables, through partnerships with the Electric Power Research Electric Power Research Institute, Laboratory, other utilities, and universities. Examples of ongoing work include projects for energy efficiency and reliability of existing generation and transmission assets, projects to increase efficiency reduce fossil fuel plant emissions, reduce energy energy consumption, and evaluate new and proposed generation options. During 2008, 2008, TVA spent $21 II Governance development activities. See Note 1 - Research million on research and development Research andand Development Development Costs.

Costs.

I TVA is governed by the TVA TV A Board. The Consolidated Appropriations Act, 2005, amended the TVA Act by restructuring Consolidated Appropriations Board from three full-time members to nine part-time members, at least seven of whom TVA restructuring the TV whom must be legal residents of the TVA service area. TVA A

Board members are appointed by the President of the United States with the advice and consent of the U.S. Senate. After an initial phase-in Board I period, TVA Board members five-year terms, and at least one member's term ends each year. The TVA Board, among other things, members serve five-year I establishes broad goals, objectives, and policies for TVA; establishes long-range annual budgets; long-range plans to carry out these goals, objectives, and policies; compensation plan for employees. To allow TVA to operate more flexibly than a traditional government establishes a compensation budgets; and establishes policies; approves government agency, Congress exempted TVA from some general federal laws that govern govern other agencies, such as the federal labor relations laws and the

~he hiring of federal employees, thet?e procuremen~ an~ the acquisition of l~nd.

I civil service laws la:vs related to the laws enacted smcesince the creation creatIOn of TVA procurement of supplies and services, and TV A have been made applicable to TV TVA including those related to paying A mcludmg paymg employees overtime, land. Other federal fede:al protection overtIme, the protectIOn II of the environment, cultural resources, discussed in Item 10, Directors, Executive Officers and CorporateCorporate Governance.

Governance.

members of the TVA Board and TVA's executive resources, and civil rights laws. Information about members is executive officers is Regulation Regulation I Congress I Congress TVA exists pursuant to legislation enacted by Congress and carries on its operations accordance with this legislation. Congress can operations in accordance can enact legislation expanding or reducing TVA's activities, change change TVTVA's eliminate TVA.

A's structure, and even eliminate TV A. Congress Congress can also enact legislation II requiring the sale of some or all of the assets TVA operates or reduce the United States' flexibly than a traditional government agency, Congress traditional government federal labor relations laws and the civil service Congress exempted service laws related States' ownership in TVA. To allow TVA to operate exempted TVA from some general federal laws that govern federal employees, related to the hiring of federal operate more govern other agencies, agencies, such as procurement of supplies and services, and the employees, the procurement acquisition of land. Other federal laws enacted since the creation of TV TVAA have been made applicable to TVA, TV A, including those related to paying I protection of the environment, cultural resources, employees overtime, the protection Securities and Exchange Securities Exchange Commission resources, and civil rights.

I Appropriations Act, 2005.

Appropriations Securities Exchange Act of 1934, as amended Section 37 was added to the Securities "~xchange amended (the "Exchange Act"), as part of the Consolidated periodic, current, and supplementary requires TVA to file with the SEC such periodic, 2005. Section 37 requires Consolidated supplementary information, documents, and information, documents, required pursuant to section 13 of the Exchange reports as would be required Exchange Act if TVA registered pursuant to section 12 of TV A were an issuer of a security registered of I Exchange Act. Section 37 of the Exchange Act exempts TVA from complying

.the Exchange

.the each member committee to be an independent member of a listed issuer's audit committee lOA(m)(3) of the Exchange complying with section 1OA(m)(3) Exchange Act, which requires independent member of the board of directors of the issuer. Since TVA is an agency agency I issued or guaranteed instrumentality of the United States, securities issued and instrumentality guaranteed by TVA are "exempted securities" under the Securities Act of 1933, as "exempted securities" "Securities Act"), and may be offered and sold without registration under the Securities Act.

amended (the "Securities Page 25 25 I

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Table a/Contents of Contents In addition, securities guaranteed by TVA are "exempted securities issued or guaranteed "exempted securities" securities" and "government securities" under the Exchange "government securities" Exchange Act. TVA is I 14(a)-(d) and 14(f)-(h) also exempt from sections l4(a)-(d) Exchange Act (which address proxy solicitations) insofar as those sections 14(f)-(h) of the Exchange sections relate to securities issued by TVA, and transactions Exchange Act.

Exchange Act. Also, since 1939 insofar as Also, since TV TVA transactions in TVA securities securities are A securities it relates to securities issuedare securities are exempt from rules governing tender offers under Regulation exempted securities by exempted securities under TVA, and no independent under the the Securities Securities Act, Act, TVA trustee is required TVA is is exempt from for theseexempt 1939 insofar as it relates to securities issued by TV A, and no independent trustee is required for these securities. .

from the securities.

Regulation 14E of the Trust Indenture the Trust Indenture Act of Act of IU Federal Energy Federal Energy Regulatory Regulatory Commission Commission I

Under the FPA, TVA to the full jurisdiction TVA is not a "public jurisdiction that FERC exercises thus, is directly "public utility," a term which which generally generally includes exercises over public utilities under the FP directly subject to certain aspects of FERC's jurisdiction.

aspects ofFERC'sjurisdiction.

includes investor-owned A. TVA FPA.

investor-owned utilities. Therefore, TV TV A is, however, an "electric "electric utility" TVA utility" as defined A is not subject defined in the FPA FP A and, IU Under section 210 of the FP A, TV FPA, TVAA can be ordered to interconnect its transmission facilities with the electrical facilities of of qualified generators generators and other or resources, resources, or improve electric utilities other electric interconnection is in the public interest interest and would encourage improve reliability. The requirements requirements of section requirements. It must be found that the requested utilities that meet certain requirements. requested conservation of energy or capital, optimize efficiency encourage conservation section 212 concerning efficiency of facilities concerning the terms and conditions of interconnection, interconnection, I

including reimbursement reimbursement of costs, must also be met.

Under section 211 of the FP A, TV FPA, TVAA can be ordered to transmit transmit power at wholesale provided that the order does not impair the I reliability of the TVTVA surrounding systems and likewise meets the applicable A or surrounding conditions, and rates for service. Under section the terms and conditions conditions of service that TVA section 211A applicable requirements 21 IA of the FPA, TVA is subject TV A provides others to ensure requirements of section comparability of treatment ensure comparability concerning terms, section 212 concerning subject to FERC review of the transmission rates rates and treatment of such service with TVA'sTVA's I

own use of its transmission system. With the exception exception of wheeling power to Bristol, Virginia, the anti-cherrypicking anti-cherrypicking provision of the FP FPAA precludes precludes TVTVA A from being ordered to wheel wheel another supplier's power to a customercustomer if if the power would be consumed consumed within TVA's defined defined service I

service territory.

Sections 221 and 222 of the FP FPA,A, applicable applicable to all market participants, participants, including TVA, TVA, prohibit prohibit (i) using manipulative manipulative or deceptive devices or contrivances connection with the purchase contrivances in connection purchase or sale of power or transmission services subject to FERC's FERC's jurisdiction and (ii) reporting false information on the price of electricity jurisdiction capacity to a federal agency with intent to fraudulently fraudulently affect affect the data being wholesale or the availability of transmission electricity sold at wholesale being compiled by the agency.

transmission I

Section 206(e) 206( e) of the FP FPA provides FERC with authority to order refunds of excessive A provides excessive prices on short-term sales (transactions lasting 31 days or less) by all market participants, including market participants, including TVA, TV A, in market manipulation and price market manipulation price gouging situations if if such I sales are under a FERC-approved tariff.

FERC-approved tariff.

Section 220 of the FP FPAA provides provides FERC FERC with authority to issue regulations requiringrequiring the reporting, on a timely basis, of of information about the availability and prices of wholesale power and transmission service TVA.

service by all market market participants, including I

Under sections 306 and 307 of the FPA, FERC may investigate previously mentioned previously mentioned that are subject to FERC's investigate electric industry FERC 's jurisdiction.

practices, including TVA's operations industry practices, I

Under sections 316 and 316A of the FP to TVA.

A, FERC has authority to impose criminal penalties FPA, penalties of up to $1 million penalties and civil penalties violation on entities subject to the provisions of Part II of the FPA, which includes the above provisions a day for each violation applicable provisions applicable I U Finally, while not required to do so, TVA has elected implement various FERC orders and regulations elected to implement extent that these are consistent with TVA's obligations under the TVA Act.

"a voluntary basis to the extent

'a regulations pertaining to public utilities on on.I For a discussion of legislation legislation that could change FERC's ability ability to regulate TVA, regulate TV A, see Item 7, Management's Management's Discussion and Analysis Analysis

,of

.of Financial Operations - Legislative Financial Condition and Results of Operations Legislative and Regulatory Matters,Matters.

I Page 26 Page 26 II I

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II Table of Contents Table of Contents Nuclear Regulatory Nuclear Regulatory Commission Commission I which sets which TVA operates TVA sets the operates its nuclear the rules licensing, operation, licensing, operation, and nuclear facilities rules that users users of facilities in a highly regulated of radioactive radioactive materials and decommissioning decommissioning of of nuclear regulated environment materials must environment and is must follow. The NRC nuclear generating NRC has generating facilities. In is subject subject to the has broad broad authority In addition, if the oversight oversight of authority to impose if TVA TVA fails of the NRC, NRC, an independent impose requirements fails to comply independent agency relating to requirements relating comply with with requirements to the the agency promulgated by requirements promulgated by NRC, the the NRC, the NRC NRC hashas the authority authority to impose impose fines, fines, shut shut down down units, or or modify, suspend, suspend, or or revoke revoke TVA's operating licenses.

TVA's operating licenses.

II Environmental Protection Environmental Protection Agency

TV A is TVA is subject to regulation regulation by the Environmental Environmental Protection Protection Agency Agency ("EPA")

("EPA") in aa variety variety of areas, areas, including including airair quality quality control, control, water water I quality control, quality control, and management management and disposal of hazardous hazardous wastes. See See Item 1, I, Business Business - Environmental Environmental Matters.

Matters.

States II Supremacy Clause of the U.S. Constitution prohibits The Supremacy the federal government government conducts conducts its activities.

prohibits states, states, without activities. As aa federal agency, TVA is without congressional is exempt consent, from regulating congressional consent, exempt from regulation, control, and taxation manner in which regulating the manner taxation by states except which except in in certain areas certain areas such as air and waterwater quality where Congress has given the states states limited limited powers powers to regulate regulate federal federal activities.

activities.

I Other Federal Entities OtherFederal Entities

- TVA's activities review to varying degrees by other federal and records are also subject to review activities and entities, including federal entities, of Inspector including TVA's Office ofInspector I General and the following agencies:

and Budget.

agencies: the Government Government Accountability Office, the Congressional Accountability Office, Congressional Budget Budget Office, and Office of Management and the Office Management II Payments in Lieu of Payments of Taxes subject to federal income taxes, TV A is not subject TVA taxes, and neither TV A nor its property, neither TVA franchises, or income is subject property, franchises, taxation by states or subject to taxation or subdivisions. However, their subdivisions.

their However, the TV TVA A Act Act requires equivalent payments to states and counties' requires TVA to make tax equivalent counties in which which TVATVA conducts conducts power II operations and in which TV operations TVA has acquired A has acquired properties previously subject to state properties previously percent of gross revenues from the sale of power during the preceding percent state and local year excluding preceding year excluding sales amount of these local taxation. The total amount these payments payments is five agencies and sales or deliveries to other federal agencies and off-system off-system Ii sales with other utilities, with a provision provision for minimum minimum payments under certain circumstances.

required to make to counties, distribution of tax equivalent payments required circumstances. Except for certain direct payments within a state is determined determined by individual direct payments payments TVA is individual state legislation.

Environmental Environmental Matters

TVA's industry and in other industrial sectors, are subject to federal, state, and generation activities, like those across the utility industry TVA's power generation and I environmental laws and regulations. Major areas of regulation affecting TVA's local environmental management and disposal of solid and hazardous and management TV A's activities include air quality quality control, water quality control, hazardous wastes. Looking to the future, regulations in all of these areas are expected expected to become II more stringent efficient use of electricity.

electricity.

increased emphasis on dealing with climate change, expanding stringent along with increased expanding renewable generation alternatives, encouraging alternatives, and encouraging Due to the increasing increasing level and complexity expectations, TVA completed a new high-level environmental requirements and expectations, complexity of environmental high-level environmental policy to align with and execute the direction in the Strategic Plan. The Environmental Environmental Policy ("Environmental

("Environmental Policy") was I approved by the TV TVA 19, 2008, and is intended to be an integrated framework which provides policy-level A Board on May 19,2008, TVA's mission of providing cleaner, affordable energy, sustainable economic development, Environmental policy-level guidance to carry development, and proactive environmental stewardship. The TVA environmental dimensions: climate environmental objectives and critical success factors in six environmental Environmental Policy sets out environmental carry out climate change mitigation, air quality improvement, water resource protection and improvement, waste minimization, sustainable land use, and natural resource I management. .

TVA has incurred, and expects to continue continue to incur, substantial maintenance costs to comply with evolving substantial capital and operating and maintenance I

I .environmental requirements primarily associated environmental requirements associated with, but not limited to, the operation of TVA's requirements placed certain that environmental requirements placed on the operation of TVA's TVA's 59 coal-fired generating units. It is virtually coal-fired and other generating units will continue to become more TVA's coal-fired II Proceedings.

Proceedings.

occurring, including litigation against TV emissions from coal-fired generating units is also occurring, restrictive. Litigation over emissions TVA.A. See Item 3, Legal Page 2727 I

I I

Table of Contents Table Contents Air Quality Quality Control Developments ControlDevelopments I

("CAA")

Air quality in the United States

("CAN') in 1970. These States and in the Tennessee Valley These air quality improvements Valley has significantly improvements are expected to continue significantly improved since the enactment of the Clean Air Act continue as the CAA continues continues to be implemented implemented and evolve as a result of of I legislative legislative and regulatory regulatory changes. Three substances emitted from coal-fired particulates - have historically been the focus ofCAA particulates of CAA emission coal-fired units - sulfur dioxide ("SO emission reduction regulatory regulatory programs,

("So 2 "),

"), oxides of nitrogen programs, and these are discussed in more nitrogen ("NO x, "),"), and more detail below. I Expenditures Expenditures related to clean clean air projects aimed at controlling emissions of these substances during 2008 and 2007 were approximately approximately

("scrubbers") to continue systems ("scrubbers")

respectively. These

$274 million and $239 million, respectively.

through through the installation These figures include installation of selective non-catalytic include expenditures expenditures in 2008 of non-catalytic reduction ("SNCR") systems, continue to reduce SoSO 2 emissions.

emissions. TV TVA

$9 million to continue to reduce NO x of$9 systems, and $240 million for the installation A had previously previously estimated its,total x emissions installation of flue gas desulfurization desulfurization its total capital cost for reducing emissions from its I

power plants from 1977 1977 through 2010 would reach $5.5 billion, $5.1 estimates that compliance compliance with future CAA requirements and potential discussed below could lead to additional additional costs of $3.0

$5.1 billion of which had already already been been spent as of September 30, potential mercury regulations, but not including

$3.0 billion to $3.7 billion in the decade 30,2008.

including carbon dioxide ("CO 22 "),

decade beginning in 2011.2011. There There could be additional TVA 2008. TVA

"), as additional material I

costs if reductions of greenhouse if reductions greenhouse gases, gases, including CO 22'l are mandated mandated under the CAA or via legislation, or if future legislative, regulatory, regulatory, or judicial judicial actions lead to more stringent emission conventional pollutants. These costs cannot reasonably be predicted emission reduction requirements for conventional predicted II at this time.

On July 11,2008, that vacated the Clean 11, 2008, the U.S. Court of Appeals for the D.C. Circuit Clean Air Interstate Interstate Rule ("CAIR") in its entirety Circuit ("D.C. Circuit") issued a decision in State entirety and directed the EPA to promulgate Circuit opinion. EPA promulgated CAIR in 2005 and the rule required significant additional utility State of North North Carolina Carolinavs. EPA promulgate a new rule that is consistent with the D.C.

utility SO 22 and NO "x emission reductions EPA reductions to address I

ozone and fine particulate eastern states, including all of TVA's particulate matter attainment issues in 28 eastern TV A's operating operating area, and the District District of Columbia. The requirements ofCAIR of CAIR fonned formed the basis for TVA's (and timelines may result in increased capital (and much of the utility industry's) planning 2009 and continuing well into the next decade. In the absence capital expenditures absence of CAIR, the uncertainty expenditures and operating planning with regard uncertainty regarding regard to air emission controls beginning in regarding compliance requirements, requirements, methods, and operating expenses. In addition, it is unclear whether the petitions petitions for a re-hearing re-hearing or I i review of this decision will be granted by the D.C. Circuit, which could prolong prolong the uncertainty uncertainty of the regulatory regulatory landscape.

landscape.

In the absence of CAIR, other requirements requirements of the CAA, such as achievement standards, requirements relating to regional haze, and control standards, achievement of ozone and fine particulate control of interstate transport transport of air pollution particulate ambient air quality pollution (Section 126 petitions), will continue continue to drive I

installation of additional controls on electric generating units across the industry, including at TVA. As discussed in more detail below, TV installation will continue its previously announced Kingston, and John announced emissions John Sevier Fossil emissions reduction program, including Fossil Plants, and annual operation completion of scrubber installations for SO including completion operation of the 21 selective catalytic reduction ("SCR") and other NO x, controls TVA A SO 2 control at Bull Run, controls beginning beginning I

in October 2008.

On February 8, 8, 2008, the D.C. Circuit vacated the EPA's decision to remove stationary sources whose hazardous air pollutant ("HAP") emissions are subject to Maximum remove coal and oil-fired Maximum Achievable Control Generating Units from the list of oil-fired Electric Generating Technology ("MACT")

Control Technology ("MACT")

If U

section 112 of the CAA. The D.C. Circuit also vacated standards under section mercury mercury limits via a cap-and-trade cap-and-trade program. Unless the D.C.

adequately controlled in accordance with the D.C. Circuit's vacated and remanded remanded the Clean Air Mercury Mercury Rule ("CAMR")

Circuit's ruling is reversed, or EPA is able to detennine D.C..Circuit's Circuit's remand remand instructions, EPA will have

("CAMR") which set determine that mercury have to regulate mercury mercury emissions set mercury emissions emissions are emissions from utilities I

under section 112(d) of the CAA, setting MACT standards standards for emissions based on command and control type requirements. requirements. The cost to complycomply with the MACT MACT standards standards is not known, but is expected status of the EPA's regulatory next five years, mercury emissions expected to be higher than the cost would have been to comply with CAMR. Regardless of the regulatory program for mercury, mercury, TVA will continue emissions from its coal-fired continue to reduce mercury mercury emissions from its coal-fired power plants. Over the coal-fired plants are expected to continue to decline, decline, primarily primarily as a result of the co-benefits co-benefits received received I

from the controls TVA is installing to reduce reduce SO 2 and NO x, emissions.

I coordinated coordinated The D.C. Circuit's caps Circuit's recent decisions with regard to CAIR for power plant emissions of mercury, emissions mercury, SO CAIR and CAMR 2

2' NO x, x'

CAMR may also have adopting multi-pollutant control legislation focused on the electric power sector. Among other and CO 2-

2. The have the effect legislative effect of reviving interest and regulatory regulatory interest in Congress in other things, such an approach could landscape could seek to establish is continuing to change I

53 for these and other issues and the outcome outcome cannot be predicted accurately at this time.

predicted accurately I

Page 28 II I

I

I Table of Contents a/Contents Dioxide. Utility SO 2 emissions Sulfur Dioxide. emissions are currently regulated under the Federal Acid Rain Program Program and state programs designed to meet the National National Ambient Ambient Air Quality Standards ("NAAQS") for SO 22 and fine particulate matter. Looking forward, these programs, Standards ("NAAQS") programs, as well as I implementation of the regional haze program, implementation program, will result in additional regulation of SO SO 22 emissions.

Through calendar calendar year 2007, TV TVA A had reduced reduced its SO SO 22 emissions by 84 percent from the peak peak 1977 level by switching switching to lower-sulfur lower-sulfur I ccoals, oals, continuing to operate an Atmospheric Atmospheric Fluidized Bed Combustion on six larger units, and installing and operating operating a scrubber Combustion ("AFBC") unit at its Shawnee Fossil Plant, operating scrubber on an additional large unit at Paradise Fossil Plant. TV TVA operating existing scrubbers A is constructing constructing a scrubber at at

.1lJohn Bull Run Fossil Plant, which is scheduled John Sevier Fossil Plant scheduled to begin operation in 2009, and two scrubbers at its Kingston begin operation in 2010. In April 2008, 2008, the TV Plant in east Tennessee TVA A Board Board approved Tennessee ("John Sevier"),

approved construction Sevier"), which is expected to begin begin operation Kingston Fossil Plant, which are scheduled construction of additional flue gas desulfurization desulfurization equipment operation in 2012. Additionally, scheduled to equipment at the four-unit Additionally, TVTVAA has switched, or or plans to switch, to lower-sulfur lower-sulfur coal at several additional units in the next few years. It is likely that additional emission reduction measures will several additional have to be undertaken have undertaken in addition to these announced announced actions to achieve achieve compliance compliance with requirements requirements yet to be adopted. Such measures will I also a lso help to meet the goal identified in TVA's Environmental technology with the aim of controlling and new technology Environmental Policy controlling over Policy to reduce reduce emissions by continuing to install emission reduction equipment over 80 percent of fossil generation in the next 10 years.

equipment Nitrogen Oxides. Utility NO x, emissions continue Nitrogen Oxides. continue to be regulated under state programs programs to achieve and maintain EPA's EPA's NAAQS for I ozone and fine particles, the Federal Acid Rain Program, Program, and the regional haze program. On March new, more stringent NAAQS for ozone. EPA lowered the primary standard, created March 12,2008, 12, 2008, EPA issued final rules adopting adopting created to protect public health with an adequate margin of safety, I from 0.084 parts per million ("ppm") to 0.075 form and level of the secondary 0.075 ppm. EPA also promulgated a new secondary secondary standard are the same as the primary standard.

secondary standard, mainly created created to protect vegetation. The In 2009, states will have to recommend counties proposed to be designated recommend to EPA those counties designated as "non-attainment" counties under the new "non-attainment" counties standards, and in 2010, EPA is expected to finalize attainment designations designations using 2006 to 2008 2008 monitoring data. States must submit plans plans to I

I depending on the severity severity of the ozone ozone problem.

problem.

attainment by deadlines that vary (2013 attainment with the standard. Areas must reach attainment demonstrate attainment EPA no later than 2013 that demonstrate (2013 to 2030)

Based on 2005-2007 Based Tennessee Valley area and their associated Metropolitan 2005-2007 monitoring data, virtually all of the larger cities in the Tennessee Metropolitan I Statistical Areas, as well as those rural counties where ozone monitors are present, will likely be designated Statistical new standard.

non-attainment areas under the designated as non-attainment

Non-attainment designation can impact industrial development and expansion since new businesses tend to avoid non-attainment areas, Non-attainment I and expansion industry, delaying the air permitting process, and restricting Non-attainment can have serious repercussions for counties businesses becomes more difficult. Non-attainment expansion of existing businesses restricting expansion existing sources. Consumers expansion of existing counties by increasing increasing costs to affected as a result of Consumers are also likely to be affected of II the institution of vehicle inspection and fuel restriction vehicle inspection highway funds can occur unless projects Non-attainment can also impact transportation planning since loss of federal restriction programs. Non-attainment "conformity" with the new standards.

projects demonstrate "conformity" standards.

emissions from fossil-fired power plants. As a result of its contributes to ambient ozone levels primarily as a result of NO x, emissions TVA contributes emission reduction reduction program, TVA's summertime NO xx emissions have declined substantially. Since 1995, TVA has reduced emissions have reduced its NO NO,,x emissions emissions I during the summer (when ozone levels increase) by 82 percent by installing various controls, including low-NO x burners coal-fired units and installing SCRs controls, on 58 of its 59 coal-fired combustion bumers and/or combustion largest units. (The AFBC unit at Shawnee Fossil Plant is inherently low SCRs on 21 of the largest NO xx emitting.)

II 2005, TVA installed SNCR systems, In 2005, Unit 1 and Shawnee Shawnee Unit 1, to demonstrate demonstrate long-term generally have systems, which generally technology technology capability, and continues continues capabilities than SCRs, on two units, Johnsonville have lower NO xx removal capabilities to operate the SNCR at Johnsonville Johnsonville Johnsonville Unit 1I in West T ennessee. In 2007, TVA began operating the High Energy Reagent Technology Tennessee. Technology ("HERT") system on Unit 1 at John Sevier, and on Unit 4 at I Johnsonville Fossil Plant ("Johnsonville").

equipment

("Johnsonville"). HERT planned for installation equipment is planned HERT is similar to SNCR technology installation on the other three John Sevier technology but has higher removal capabilities. Similar HERT Sevier units and Johnsonville Johnsonville Units 2 and 3 by May 2009, 2009, and TVA has announced announced plans to install SCRs SCRs at John Sevier by 2015.

I* Page 29 Page 29 1

I I

I

Table of Table Contents o/Contents TVA's NO xx emission reduction reduction program is expected to continue continue to depend primarily on SCRs, but will also incorporate incorporate some mix of of I

SNCRs and/or HERTs as TVA gains more experience SNCRs future regulatory regulatory developments developments affecting power (except for maintenance outages).

experience with these technologies.

power plant technologies. These plans may change depending plant emissions. In October 2008, TV TVA depending on the timing and severity of A began operating this NO x, control control equipment equipment year round of I

increase in the number of counties in the Tennessee Valley An increase Valley designated designated as non-attainment non-attainment areas is likely to focus additional regulatory attention on all NO xx emission regulatory attention emission sources, including TVA TV A sources. I Particulates/Opacity.

Particulates/Opacity. Coarse Coarse particulates regulated by states to meet EPA's NAAQS regulated particulates (defined NAAQS for particulate (defined as particles particles of 10 micrometers micrometers or larger),

particulate matter. All of TVA's coal-fired larger), which include fly ash, have long been been equipped with mechanical coal-fired units have been been mechanical collectors, I'

electrostatic precipitators, electrostatic precipitators, scrubbers, or baghouses, baghouses, whichwhich have reduced reduced particulate emissions emissions from the TVA TV A system by more than 99 percent percent compared to uncontrolled units. In 1997, EPA issued separate compared particles" particles" or "PM as non-attainment separate NAAQS for even even smaller particles with a size of up to 2.5 micrometers

"). Counties and parts of counties in the Knoxville and Chattanooga, Tennessee, metropolitan areas have been designated "PM 2.5 ")'

areas under the 1997 standard.

non-attainment areas micrometers ("fine designated I annual In September 2006, EPA revised the 1997 standards. The 2006 revisions tighten the 24-hour fine particle standard annual fine particle standard. EPA also decided to retain the existing 24-hour standard. On August 19, 19, 2008, 24-hour standard 2008, EPA sent letters to state and tribal representatives standard and retain retain the 1997 standard for coarse particles, but revoked the related annual representatives responding to their initial recommendations recommendations for areas meeting 1997 meeting IUU and not meeting the 24-hour modifications 24-hour national ambient modifications to their recommendations counties in the Tennessee Valley ambient air quality recommendations and to provide Valley that include quality standards standards for PM 2.5' provide new information 2.5. States and tribes now have the opportunity to comment on EPA's information and analyses analyses to EPA if if appropriate. Several counties and parts include or are close to TVA coal-fired generating plants are included included in this preliminary parts of preliminary designation.

of EPA's II Particular Particular areas areas of concern to TV TVAA are the Kentucky counties of Muhlenberg Muhlenberg and McCracken, McCracken, the Tennessee countiescounties of Humphreys, Humphreys, Montgomery, and Stewart, and the counties Montgomery, air quality quality monitoring monitoring data from 2005, counties in the Knoxville 2005, 2006, and 2007.

stakeholders to further understand and improve Knoxville area. EPA has announced 2007. TVA announced plans to make final designations TV A will continue efforts to reduce improve regional air quality. TVA's TVA's continued reduce emissions designations in December 2008 using emissions and engage regional and national continued installations of scrubbers for SO 22 control and SCRs SCRs and I

other other technologies technologies for NO x, control as described above are expected to continue continue to reduce fine particle particle levels.

Issues regarding utility compliance compliance with state opacity requirements power plant plumes and has traditionally requirements are also increasing. Opacity traditionally been used by states as a means of monitoring equipment. Under some conditions, retrofitting a unit with additional Opacity measures the denseness (or color) of monitoring good maintenance equipment to better maintenance and operation operation of particulate particulate control of I

additional equipment better control SOSO 22 and NONO,,x emissions can adversely adversely affect affect opacity opacity performance, and TVA TV A and other utilities are addressing this issue. There There are also disputes and lawsuits lawsuits over the role of continuous opacity monitors in determining compliance opacity compliance with opacity limitations, and TV TVA A has received an adverse decision decision in one such lawsuit. See Item 3, Legal Proceedings.

3, greenhouse Climate Change.

Climate program. TVA Change. In 1995, greenhouse gas reduction TV A also participates 1995, TVA was the first utility in the nation to participate reduction program. Over the past decade, participates in the President's decade, TVTVA President's Climate VISION "Climate Challenge,"

participate in "Climate A has reduced, avoided, or sequestered Challenge," a DOE-sponsored DOE-sponsored voluntary sequestered over 305 million tons of CO 22 under this VISION program which calls on the electric utility utility sector, along along with other industry IIU sectors, to help meet a national goal of reducing sectors, reducing the greenhouse greenhouse intensity of the U.S. economy economy by 18 percent from 2002 to 2012.

TVA TV A has taken and is continuing to take significant voluntary steps that will reduce the carbon intensity of its electric generation, including the recovery including recovery of Browns Browns Ferry Unit I, 1, planned planned power up-rates up-rates of Browns Ferry Units 1, 2 and 3 (which will increase the generating 1,2 generating capability capability of the units resulting resulting in additional avoided emissions of CO 2), 2)' the completion completion of Watts Bar Unit 2, and the completioncompletion of the the hydroelectric modernization program. TVA hydroelectric modernization TV A has also filed with the NRC aa combinedcombined operating license application for license application for two advanced nuclear two advanced nuclear II reactors at the Bellefonte Bellefonte Nuclear Plant near Hollywood, Alabama, Alabama, and requested that the NRC reinstate the construction construction permit permit for Bellefonte Nuclear Nuclear Units 1 and 2, although no decisiondecision has been been made to complete those units or to build the new new reactors.

reactors. TVA TV A is also committed committed to increasing its renewable energy increasing energy by adding regional regional renewable renewable energy energy sources to its generation portfolio.

In addition, TVA is a member of the Southeast Research Institute and other sequestration other electric sequestration via reforestation.

reforestation. Legislation Southeast Regional Carbon Sequestration Partnership and is working with the Electric Power electric utilities on projects projects investigating Legislation was introduced investigating technologies for CO 22capture and geologic storage, introduced in the last Congress to require reductions of CO 22 that, if storage, as well as carbon if enacted, could have resulted IU in significant significant additional additional costs for TVTVA A and other other utilities with coal-fired generation. In general, any carbon legislation will result in some level of increase in the price of electricity electricity to consumers, regardless of form, severity, severity, and timing of the legislation, and TVA's analyses analyses of previous versions of several several proposed climate bills indicate that the price increases could could be substantial. These analyses also show that TVA's existing coal-fired generating assets will continue to play an important role in meeting the energy energy needs of the Tennessee Tennessee Valley. TVA expects that the next Congress Congress and Administration reductions and a renewable Administration will again take up the issue of climate change renewable portfolio portfolio standard into its long range planning. TV developments related to CO 2 and a renewable renewable portfolio standard standard to assess TVA change and is incorporating the possibility A will continue possibility of mandatory continue to monitor legislative and regulatory assess any potential financial and operational mandatory carbon operational impacts as information II becomes becomes available. Looking Looking ahead, TVA's Environmental Environmental Policy contains contains a Climate Change Mitigation Mitigation objective to stop the growth in volume of emissions and reduce the rate of carboncarbon emissions by 2020.

I Page 30 II

I Table of Table Contents a/Contents In addition to legislative activity, climate change issues are the subject of a number number of lawsuits, including lawsuits against against TVA.

TV A. See See Item 3, 3, Legal Proceedings. On November November 29,2006, Massachusetts v. EPA, 29, 2006, the U.S. Supreme Court heard the case of Massachusetts EPA , concerning whether whether EPA EPA I has the authority and duty to regulate CO 2 emissions including CO 2' 2' are pollutants emissions under the CAA. On April 2, 2007, the Supreme Court found that greenhouse pollutants under the CAA, and that EPA thus does have the authority authority to regulate greenhouse gases, regulate these gases. The Supreme concluded that EPA's refusal to regulate these pollutants was based on impermissible reasons, and remanded the case to EPA to make a judgment Court also Supreme Court judgment I

I regarding endangerment endangerment (either that greenhouse greenhouse gases do, or do not, pose a threat to health and welfare) welfare) with respect to certain mobile mobile sources.

While this case emissions from motor vehicles, it sets a precedent case focused on CO 22 emissions precedent for regulation regulation in other industrial industrial sectors, such as the electric utility industry.

I b r .In ,In July 2008, EPA issued an Advance Advance Notice of Proposed Rulemaking ("ANPR") that addressed before EPA in which greenhouse gas emissions and climate change establishing new source performance standards and resolving pending addressed essentially all regulatory change are issues, including consideration regulatory proceedings consideration of greenhouse gas emissions emissions in pending appeals of new source review permit applications. The ANPR ANPR sought comments c omments on the framework and direction of EPA's actions actions to regulate greenhouse gas emissions from a wide wide range of facilities, including I electric generating facilities. The ANPR outlines issues to be addressed electric gas emissions. Regulatory Regulatory options that may be considered addressed in new legislation that may be required in order to regulate regulate greenhouse greenhouse considered in such legislation include, but are not limited to, the enactment of a cap-and-trade cap-and-trade policy and development development and deployment deployment of alternative alternative fuels, renewable energy resources, and energy energy conservation. Whether Whether climate change II legislation legislation will be enacted enacted during the 2009 to 2010 legislative session, and if so its potential legislation, or similar regulatory action by EPA under the CAA or otherwise, generation facilities.

potential impacts, cannot cannot be assessed probably have a significant otherwise, would probably assessed at this time. Any such significant impact on fossil-fueled II States are also becoming change. Several northeastern becoming more active in the regulation of emissions northeastern states have have formed the Regional emissions that are believed Regional Greenhouse believed to be contributing contributing to global climate Greenhouse Gas Initiative, which is in the process of being implemented, implemented, and I California passed California passed a bill capping greenhouse gas emissions in the state. Other states are considering a variety variety of actions. North North Carolina Carolina is I studying initiatives aimed at climate change under the provisions of the state's Clean Smokestacks Act of Division of Air Quality to study potential potential control control of CO 2 emissions emissions from coal-fired 2002. This act required of2002.

coal-fired utility plants and other stationary required the State stationary sources. This has also prompted efforts efforts to develop a climate climate action plan for North Carolina.

II Renewables and CleanClean Energy Energy In light of increasing national focus on renewable renewable and clean energy and TV A's desire TVA's desire to reduce its environmental environmental footprint, on May 19, I 2008, the TVA Board approved guiding principles for an Energy Efficiency and Demand Response Assessment.

Assessment.

Response Plan and a Renewable Renewable and Clean Energy Energy

The Energy Energy Efficiency and Demand Response Response Plan Plan seeks to slow the current rate of growth in the region's power demand by, by providing I opportunities opportunities for residential, business, and industrial reducing the growth industrial consumer growth in peak demand by up to 1,400 consumer groups groups to use energy energy more efficiently. In the short term, the plan proposes megawatts by the end of the 2012 fiscal year.

1,400 megawatts proposes I emissions identify The Renewable emissions while Renewable and Clean Energy identify a road map for pursuing Energy Assessment Assessment strives to add clean energy resources to TVA's generating mix to help reduce carbon while minimizing costs and maintaining a reliable power supply. The assessment pursuing additional renewable and clean energy assessment proposes proposes to review TVA's energy supply in the region, and recommends TVA's generation generation mix and consideration of different recommends consideration different sources of renewable renewable energy and a reduction in carbon intensity in TVA's generation II generation mix, along with additional additional energy energy conservation by everyone who uses electricity. ,

, Page 31 Page3!

I- - - - - - - - - - - - -

I I

Table of Table Contents a/Contents Water Quality Quality Control Control Developments I

shellfish, In the second second phase of a three-part shellfish, as required required under Section three-part rulemaking to minimize the adverse Section 316(b) of the Clean Clean Water Act ("CW adverse impacts from cooling water intake structures A"), EPA promulgated

("CWA"),

structures on fish and promulgated a final rule for existing power power producing and producing I facilities ("Phase II Rule")

(the "Second "Second Circuit")

technology Rule") that became available ("BT technology available ("BTA")

became effective on September Circuit") remanded the Phase September 7,2004.

7, 2004. On January25, January2S, 2007, Phase II Rule, holding, among other things, that costs A") to minimize the adverse adverse environmental 2007, the U.S. Court of Appeals for the Second Circuit costs cannot be compared compared to benefits in picking environmental impacts of intake structures. The Utility Water Circuit picking the best Water Act Group, Entergy best Ii Corporation, Corporation, and PSEG Fossil LLC filed a petition petition seeking seeking review of the decision by the U.S. Supreme Supreme Court. TVA and the attorneys attorneys general of ofU several states, including Alabama, Kentucky, several petition, limiting Kentucky, and Tennessee, limiting its review to one issue: "Whether the 'best technology Tennessee, supported this petition. On April 14, "Whether Section 316(b) of the CW CWA A authorizes 14, 2008, the U.S. Supreme Court granted the authorizes EPA to compare costs with benefits technology available for minimizing adverse environmental impact' at cooling water intake structures."

benefits in determining determining structures." The Department of Justice and I*

industry industry petitioners petitioners will defend the EPA rule supporting supporting the concept that costs under the rule should be limited to those that are "not significantly greater than" than" the benefits to be derived. The case case has been been argued before before the U.S. Supreme Court. TVA is unable to predict the outcome.

Circuit's On July 9, 2007, EPA suspended all but one one provision provision of the Phase I1 Circuit's remand. The provision that was retained requires permitting II Rule until the agency permitting authorities agency resolves the issues raised by the Second authorities to apply, in the interim, Best Professional Judgment ("BPJ") ("BPJ")

I3 controls for existing facilities. BPJ controls are those that reflect the best technology available available for minimizing minimizing the adverse environmental environmental impacts of intake structures. The use of BPJ regulate the impact of intake structures regulate BPJ controls reflects a return structures prior to the promulgation return to the regulatory promUlgation of the Phase 11 regulatory process that was used by permitting II Rule.

permitting authorities to I

All of the intakes TVA's intakes at TV A's existing coal and nuclear the ultimate outcome of the appellate process and what nuclear generating facilities were subject subject to the Phase II what the changes in the final rule as ultimately issued by EPA I1 Rule. Given the uncertainty over EPA will be, the impacts of the If eventual rulemaking eventual rulemaking are uncertain uncertain at this time.

I Section Section 303d 303d of the CWCWA A requires states to develop and report to EPA on a two-year cycle a list of waters that are "impaired" "impaired" or are expected expected to not meet water quality standards in the next two years years and need additional pollution controls. The Tennessee Tennessee Department of of Environment and Conservation Conservation ("TDEC")

("TDEC") placed a portion of BarkleyBarkley Reservoir downstream downstream of TVA'sTV A's Cumberland Cumberland Fossil Plant on its 2008 list of impaired impaired streams (the "303d especially especially for temperature emergency "303d List"). This section of Barkley Reservoir temperature and dissolved oxygen, changed significantly emergency dam repairs on the Wolf Reservoir had not been listed previously. The reservoir reservoir conditions in 2007, significantly due primarily to reduced flows in the Cumberland Cumberland River resulting from Creek and Center Hill Dams coupled with the most severe drought on record in the region. The lower flows WolfCreek from I*

made made less water water available available to dissipate the heated discharge discharge from Cumberland Cumberland Fossil Plant and resulted in increased increased river temperatures.

temperatures. The prospect of continued continued reduced reduced flows through the Cumberland Cumberland River systemsystem during the period required required to complete the necessary necessary repairs to Wolf Wolf

Creek Creek and Center Hill Dams Barkley Darns may impact the generation of electricity from TVA's TV A's Cumberland and Gallatin Fossil Plants. Placing this section of

I Barkley reservoir on the 303d List could also impact the thermal limits imposed by the State of Tennessee when the discharge permit for Cumberland Cumberland FossilFossil Plant is renewed renewed in 2010, or earlier earlier if the state or EPA determines determines that additional additional actions actions are required to protect protect the aquatic aquatic environment environment below the plant. TVA is working with the U.S. Army Corps Corps of Engineers and TDEC to minimizeminimize the impacts to TVA's generating generating II plants and improve the conditions observed in the river in 2007. TVA began operating operating temporary cooling towers at Cumberland Cumberland Fossil Plant to

reduce the temperature temperature of the water discharged to the river.

EPA, and many states, are taking increased increased interest in evaluating states and EPA evaluating the potential effects of thermal Region IV to demonstrate that the thermal discharges data discharges from steam-electric generating facilities. TVA is working with states and EPA Region IV to demonstrate that the data collected by TVA in the vicinity of its facilities is sufficient to meet the requirements for assessing the impacts of thermal discharges on the aquatic environment. vicinity of its generating facilities. TV A is working with collected by TV A in the steam-electric II facilities is sufficient to meet the requirements for assessing the impacts of thermal discharges on the aquatic environment.

consumption In March In 2007, TDEC March 2007, adopted aa lower, TDEC adopted consumption due to mercury. Adoption lower, more more conservative threshold (0.3 (0.3 ppm) for issuing precautionary Adoption of the lower threshold resulted in the issuance of several precautionary advisories several new precautionary advisories for fish precautionary fish consumption advisories W II in April 2007 for all or parts of five TVA reservoirs (Norris, Cherokee, Tennessee Tennessee Valley (Buffalo, Emory, in the Tennessee River watershed.

Cherokee, South Holston, Watauga, and Tellico) and parts offour of four rivers in the Emory, Hiwassee, and Holston) as well as the Loosahatchie, Wolf, and Mississippi Rivers in Tennessee that are not II As part of the 2007 advisory determinations, determinations, TDEC also identified several several water bodies where more data were were needed to determine if I*

advisories were necessary, necessary. State agencies have since collected fish from those water bodies and decided several of them needed since collected needed advisories to t protect public health. The new Precautionary Precautionary Advisory list for 2008 includes oneadditional one additional TVTVA A reservoir (Beech)

(Beech) and three additional river segments in the Tennessee Tennessee River watershed watershed (French Broad, Broad, Sequatchie, and Duck). Also, existing advisories for several reservoirs and rivers were expanded to include include mercury as a chemical chemical of concern and/or to include more kinds of fish.

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II Table a/Contents Table of Contents TDEC's announcement announcement of additional Precautionary Precautionary Advisories for several several Tennessee water bodies does not mean that mercury mercury levels in in reflective of the effect of the lowered fish are increasing, but is more reflective lowered threshold values for issuing a precautionary consumption advisory. TVA precautionary consumption II has been been monitoring mercury part of its review mercury levels in fish and sediments in.

review process. TV discharges that have now ceased.

A's data show significant TVA's in TVA reservoirs for the last 35 years, and TVA's data were provided to TDEC as a reductions in mercury concentrations significant reductions concentrations in fish from the reservoirs with known industrial ceased. Other than those areas historically impacted by industrial discharges, mercury mercury concentrations concentrations in fish have tended to fluctuate through through time with no discernible discernible trend in fish from most reservoirs. Despite increased burning of coal for electricity I generation, current and historic data records indicate that mercury One of the results of the major reductions reductions in atmospheric concentrations in reservoir sediments have mercury concentrations have remained stable atmospheric emissions resulting from the clean air expenditures stable or declined.

expenditures discussed above is thatthat wastewaters wastewaters at TVA coal-fired coal-fired facilities facilities and across the utility industry may be changing changing because of waste streams streams from air quality control I technologies. Varying Varying amounts of ammonia or similar compounds used as a necessary facility wastewater ponds that may discharge through outfalls necessary component outfalls regulated under the CW CWA.

component of SCR and SNCR operations may end up in A. Operation Operation of scrubbers scrubbers for SO SO 2 control also results in additional amounts additional amounts of pollutants being being introduced introduced into facility wastewater wastewater treatment treatment ponds. EPA is currently collecting collecting information determine information to determine Ii iffthe national national Steam Electric Guidelines additional wastewater additional Electric Point Source Effluent Guidelines ("Effluent Guidelines are revised, potentially more restrictive wastewater treatment treatment expenses expenses to meet requirements

("Effluent Guidelines") under the CW restrictive discharge limitations for existing parameters requirements of the CWCWA.

CWA A need to be revised. If the Effluent parameters or the addition of new parameters A. These costs cannot be accurately predicted parameters could result in predicted at this time, but TVA is involved in and closely closely monitoring EPA's data collection activities activities and the progress of the Effluent Effluent Guidelines review review process. On the state I level, new numeric numeric nutrient criteria development nitrogen concentrations concentrations being added implementation (an EPA development and implementation added to the waste treatment EPA requirement) requirement) may require require additional treatment costs to reduce treatment ponds as a result of the operation of air pollution control control equipment. TVA TV A is closely closely I monitoring the development regulatory development and implementation implementation of numeric nutrient criteria, regulatory agencies in the Valley states to incorporate incorporate water quality criteria, particularly particularly by the states in TVA's service area quality trading regulations into their water water quality standards.

standards.

area and is encouraging encouraging As is the case across the utility industry and in otherother industrial industrial sectors, sectors, TVA TV A is also facing more stringent requirements requirements related related to protection of wetlands, wetlands, reductions in storm waterwater impacts impacts from construction construction activities, water quality degradation, new water quality criteria, and I laboratory laboratory analytical analytical methods. TVA is also following litigation related to the use of herbicides, not facing any substantive substantive requirements requirements related related to non-compliance non-compliance with existing CWA herbicides, water transfers, and releases CW A regulations.

releases from dams. TVA TVA is HazardousSubstance Hazardous Substance Response, Response, Oil Cleanup, and Similar Cleanup, and SimilarEnvironmental Environmental Work I Response, Liability for Liability for releases Response, Compensation, releases and cleanup of and cleanup Compensation, and Liability of hazardous hazardous substances is primarily Liability Act ("CERCLA"), and other federal primarily regulated under the federal Comprehensive federal and parallel state Comprehensive Environmental state statutes. In a manner similar to many other I ndustries and power systems, industries systems, TVA TV A has generated generated or used hazardous hazardous substances substances over the years. TV TVA A is aware of alleged hazardous-substance hazardous-substance I releases at 10 non-TVA areas for which it may have some liability. TVA has reached non-TVA non-TV A areas for a total of less than $23,000. There reached agreements There have been no recent assertions agreements with EPA to settle its liability at two of the assertions of TVA TV A liability for five of the non-TVA areas, and there is little or no known evidence evidence that TVA TV A contributed contributed any significant quantity of hazardous substances substances to these five sites. There There is evidence that that I

I TVA sent somesome materials to the remaining three non-TVA site in Raleigh, North Carolina, and the General liability related to these sites at this time.

non-TVA areas: the David Witherspoon General Waste Products site in Evansville, Witherspoon site in Knoxville, Tennessee, Evansville, Indiana. As discussed Tennessee, the Ward Transformer Transformer discussed below, TVA is not able to estimate estimate its I The Witherspoon site is contaminated the main contributor contributor of materials contaminated with radionuclides, materials to the Witherspoon polychlorinated biphenyls radionuclides, polychlorinated biphenyls ("PCBs"),

("PCBs"), and metals. DOE has admitted Witherspoon site and is currently performing clean up activities. DOE claims that TVA to be recycled at this facility, and there is some supporting supporting evidence evidence for the claim. However, TVA believes it sent only a relatively admitted to being TV A sent equipment being relatively small amount amount I of equipment and that none of it was radioactive. DOE has asked TV TVA "cooperate" in completing A to "cooperate" completing the cleanup, but it has not provided to TV TVA A I any evidence of TVA's TV A's percentage percentage share of the contamination.

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a/Contents Table of Contents The Ward The Ward Transformer Transformer site site is contaminated contaminated by electrical equipment.

by PCBs from electrical equipment. EPA EPA and aa working group of working group potentially responsible of potentially responsible parties (the parties (the "PRP "PRP Work Group") Group") have have provided provided documentation documentation showing showing that that TVA sent a limited limited amount amount ofof equipment containing PCBs equipment containing PCBs to to the the site in site in 1974.

1974. The The PRP Work been divided into four been Work Group four areas:

Group is cleaning areas: two two phases cleaning up on-site phases of of soil on-site contamination soil cleanup; contamination in accordance cleanup; cleanup cleanup of of off-site accordance with an agreement off-site contamination agreement with contamination in the downstream with EPA.

EPA. The downstream drainage cleanup effort The cleanup drainage basin; and effort has has and supplemental supplemental I groundwater remediation.

groundwater are no reliable are the down the remediation. The reliable estimates down stream estimates for the stream drainage The first first phase phase of the second drainage basin with second phase of soil cleanup phase of cleanup is underway, of soil with aa present-worth soil cleanup present-worth cost underway, and cleanup or and the the high-end or the supplemental cost estimate high-end cost estimate supplemental groundwater estimate of $6.1

$6.1 million. TVA estimate for this TVA understands understands that this work work is about about $66 that EPA has incurred

$66 million.

million. There selected a cleanup remediation. EPA has selected groundwater remediation. cleanup plan incurred approximately approximately $3 There plan for for I million in million in past past response response costs, costs, and and the PRP PRP Work Group Group has has reimbursed reimbursed EPA approximately $725,000 EPA approximately $725,000 of ofthose The PRP those costs. The PRP Work Work Group Group plans to propose plans propose a cost allocation allocation schedule schedule which itit will use as the settlements to offering settlements the basis for offering to PRPs for thethe first phase phase of of soil cleanup. It soil cleanup.

plans to plans to sue PRPs PRPs who who do not not settle. There There also also may be be natural natural resource resource damages damages liability liability at at this site, but TVA aware of TVA is not aware of any estimated estimated amount for any amount disposal of any such such damages.

of aa hazardous damages. TVA hazardous substance TVA has a potential substance at at the site.

potential defense defense that only sent useful equipment to Ward that it only and thus is not liable Ward and liable for arranging arranging for I

action have General Waste General have filed Waste Products Products was filed aa third party complaint was a scrap scrap metal complaint against metal salvage against TVA salvage yard that operated TV A and and others operated from the others seeking cost the 1930s cost contribution 1930s until 1998.

cleanup of contamination contribution for cleanup defendants in a CERCLA 1998. The original defendants CERCLA batteries and contamination from lead batteries and I

PCB transformers transformers at at the facility. There There is evidence evidence that that TVA TV A sent sent scrap metal to the the facility, facility, but TVA has not not found found any records indicating that records indicating that it sent batteries cost of batteries or PCB equipment. There of $3.2

$3.2 million, million, and expected to any, is expected to be and cleanup There are two cleanup estimates be relatively estimates for the relatively small.

two cleanup sites at the the second the facility. TVA second site range from $2 TV A has been

$2 million million toto $7 been informed

$7 million. TVA's that the first site has informed that TVA's allocated allocated share has been cleaned up at a been cleaned share of the cleanup costs, if cleanup costs, II U

incur costs TVA operations at some TV A operations costs of about $15 $15 million some TV TVA A facilities have resulted in oil spills and million for environmental and other contamination decommissioning of environmental work related to decommissioning contamination TV TVA plans to address, and A plans of the Watts Bar Fossil Plant.

and TVA TV A expects to I As of September information is available information 30, 2008, TVA's estimated liability September 30,2008, available to develop the Watts Bar Fossil Plant work, cleanup and similar liability for cleanup estimate (primarily the TVA sites) is approximately develop a cost estimate work, and is included in OTHER OTHER LIABILITIES on the Balance environmental work similar environmental approximately $18 Balance Sheet.

which sufficient work for those sites for which sufficient non-discounted basis, including

$18 million on a non-discounted I5*

Coal-Combustion Wastes Coal-Combustion In accordance accordance with a regulatory determination and surface impoundments are not regulated determination by EPA in May 2000, coal-combustion coal-combustion and certain hazardous waste. In conjunction with this determination, regulated as hazardous related wastes disposed of in landfills certain related committed to developing non-determination, EPA committed II II management standards hazardous management standards for these wastes. These standards are likely to include include increased groundwater monitoring, more stringent stringent siting requirements, requirements, arid waste-management facilities not meeting minimum standards. On August 29, 2007, and closure of existing waste-management 2007, EPA issued a Notice of Data Availability Availability ("NODA")

("NODA") in which which it requested requested public public comment on whether the additional additional information mentioned in the notice information mentioned should affect EPA's decisions as it continues to follow up on its commitment commitment to develop management coal-combustion management standards for coal-combustion wastes. Although TVA did not comment comment on the NODA, the Utility Solid Waste Group, of which TVA is a member, did file extensive Waste Activity Group, extensive 3 comments with EPA regarding the risk assessment assessment method that EPA chose to support the NODA.

I Employee Relations Employee Relations On September 30, 2008, TVA had 11,584 employees, September 30,2008, employees, of whom 5,010 were trades and labor employees. Under Under the TVA Act, TVA is I3 required to pay trades and labor workers hired by TVA prevailing rate of wages. This rate is the rate ofwages TV A or its contractors the prevailing similar nature prevailing in the vicinity where the work is being performed. Neither the federal labor relations laws covering employers nor those covering covering most federal agencies apply to TVA. However, the TV TVA of wages for work of a covering most private sector acknowledging and A Board has a long-standing policy of acknowledging II dealing with recognized representatives of its employees, and that policy is reflected in long-term recognized representatives long-term agreements to recognize the unions (or their theirI represent TVA employees. Federal law prohibits TVA employees from engaging in strikes against TV successors) that represent TVA.A.

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II Table of Contents Table of Contents ITEM IA. 1A. RISK FACTORS I3 predicted The risk factors described below, as well as the other information included in this Annual and uncertainties described described in these risk factors could predicted in forward-looking statements. Although forward-looking statements. Although the risk factors described Annual Report, should be carefully described below are the ones that TV TVA A management carefully considered. Risks materially from historical results as well as from the results could cause future results to differ materially management considers significant, significant, additional risk factors that are not presently known to TV additional TVAA management or that TV TVA management presently A management insignificant may also presently considers insignificant 1 possible that partially or completely possible Although TVA has the authority to set its own rates and thus mitigate some risks by increasing rates, it is impair TVA's business operations. Although eliminating one or more of these risks through rate increases might adversely completely eliminating adversely affect TVA TV A commercially or is I politically. Accordingly, the occurrence and financial financial condition.

occurrence of any of the following could have a material material adverse adverse effect on TVA's cash flows, results of operations, or ease of reference, the risk factors are presented in four categories:

For F operational risks, financial risks, and risks related categories: strategic risks, operational related to TVA securities.

II Strategic Risks Strategic New laws, regulations, and administrative regulations,and administrative orders orders may negatively affect TVA's TVA's cash flows, results of operations, flows, results operations,and andfinancial financial condition, condition, as I well as as the way TVA TVA conducts its business.

business.

administrative orders would impact TVA, some of the possible Although it is difficult to predict exactly how any new laws, regulations, and administrative effects are described described below.

I TVA could lose its protected TVA protected service territory.

territory.

TVA's service area is primarily defined TV A's service defined by two provisions of law.

I - The TVA subject to certain minor exceptions, neither TV A Act provides that, subject TVA neither TV A nor its distributor customers may be a source of of outside of TVA's defined service power supply outside service area. This provision is often called "fence" since it limits TVA's sales called the "fence" I -

activities to a specified service area.

The Federal Power Act prevents FERC from ordering TVA to provide others with access to its transmission transmission lines for the purpose purpose of of delivering power to customers customers within TVA's defined service service area, except to those customers residing in Bristol, Virginia. This This I provision provision is often called the "anti-cherrypicking If Congress were to eliminate or reduce the coveragecoverage of the anti-cherrypicking anti-cherrypicking provision, TVTVA "cherrypicking" TVA's "anti-cherrypicking provision" since it prevents competitors from "cherrypicking" TV A's customers.

A could more easily lose customers, and I the loss of these customers Management's customers could adversely affect TVA's cash flows, results of operations, Management's Discussion and Analysis Proposed Proposed Legislation.

Legislation.

operations, and financial condition. See Item 7, Analysis of Financial Condition and Results of Operations -- - Legislative Legislative and Regulatory Regulatory Matters Matters -

II * . TVA Board The TVA Board could lose its sole authority authority to set rates ratesfor electricity.

for electricity.

Under the TVA TV A Act, the TVTVA A Board has the sole authority TV A charges for electricity, and these rates are not authority to set the rates that TVA authority could have material adverse effects subject to review. The loss of this authority effects on TV TVA A including, but not limited to, the following:

I - TVA TV A might might bebe unable unable to set rates to set at aa level rates at sufficient to level sufficient to generate generate adequate operate and maintain its power assets, and provide for reinvestment adequate revenues revenues to service service its financial obligations, properly reinvestment in its power program; and properly I - TVA might become subject subject to additional regulatory oversight that could impede impede TVA's ability to manage its business.

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Table of Contents TVA could become subject to increased TVA increased environmental environmental regulation.

regulation.

There There is aa risk that existing that new environmental laws new environmental environmental regulations existing environmental Congress that would Congress would regulate regulate CO laws and CO 22 and other and regulations regulations could could become revised or reinterpreted regulations could be revised greenhouse gases other greenhouse gases could become applicable could require applicable to TVA reinterpreted in a way that adversely require TVA TV A or adversely affects TV A to incur facilities it operates or the facilities incur significantly operates and affects TVA. For example, and that increased costs. Any significantly increased that proposals in example, proposals Any such such I

developments developments could could require require TVA TVA to makemake significant significant capital capital expenditures, expenditures, increase increase TVA's operating operating and maintenance costs, and maintenance costs, require require TVA TV A to TVA pay aa carbon to pay carbon penalty, or eveneven lead to TVA's TVA could become subject to Renewable Energy Portfolio TV A's closing certain facilities.

closing certain Portfolio Standards.

Standards.

facilities. See See Item 1, Business - Environmental I, Business Environmental Matters.

I TVA is TVA is not not currently obligated the future. In obligated to provide In such a case, case, TVA provide a percentage would either TV A would percentage of either have have to power it sells from renewable of the power renewable sources but to build additional facilities that use renewable but might renewable resources required to do so in might be required produce the power resources to produce power itself itself II or purchase purchase renewable increase renewable power increase its purchased Energy.

Energy .

power from purchased power costs, from other developments could other companies. Such developments costs, or make changes in how it operates could require require TVA operates its facilities. See TV A to make See Item 1, make significant significant capital capital expenditures, Business - Renewableand I, Business expenditures, Renewable.and Clean Clean I The NRC could impose significant significant restrictions requirements on TVA.

restrictions or requirements TVA.

The NRC has authority to impose has broad authority impose requirements requirements relating relating to the operation, and decommissioning the licensing, operation, decommissioning of of nuclear nuclear generation generation I facilities. If the NRC modifies existing requirements or imposes new requirements, expenditures at its nuclear expenditures nuclear plants or make comply with requirements make substantial substantial contributions promulgated by the NRC, the NRC has the authority requirements promulgated requirements, TVA couldcould be required to make substantial capital decommissioning trust. In addition, if TVA fails to contributions to its nuclear decommissioning authority to impose fines, shut down down units, or modify, modify, suspend, or or I

revoke TVA's operating operating licenses. See Item Item I,1, Business - Nuclear.

Nuclear.

TVA could lose responsibility TVA management of the TVA's management the Tennessee managing the Tennessee River system.

responsibility for managing Tennessee River system is important important to effective operation of the power system. TVA's ability to integrate effective operation I

management of the management the Tennessee system with power system operations Tennessee River system operations increases increases power system reliability reliability and reduces costs. Restrictions Congress Restrictions on how TV Congress could take actions TVA actions that A manages manages the Tennessee that lead Tennessee River system lead to a downgrade downgrade of TVA system could negatively TVA's's credit creditrating.

negatively affect rating.

affect TVA's operations.

I A's rated securities are currently rated "Aaa" TVA's TV "Aaa" by Moody's Moody's Investors Investors Service "AAA" by Standard and Poor's and Fitch Ratings, Service and "AAA" which are the highest ratings assigned by these rating agencies. TVA's credit ratings are not based solely on its underlying underlying business or I

financial condition, which by themselves may not be commensurate extent on the body of legislation include (1)

(I) the TV TVA A Board's ratemaking ratemaking authority, (2) commensurate with a triple-A rating. TVA's current ratings are based to a large TV A's business structure. Key characteristics legislation that defines TVA's (2) the current competitive characteristics of TV competitive environment, A's business defined by legislation TVA's legislation environment, which is defined by the fence and the anti-I cherrypicking provision, and (3) TVA's status as a corporate agency and instrumentality cherrypicking instrumentality of the United States. Accordingly, if CongressCongress characteristics, TVA's credit ratings could be downgraded.

effectively alters any of these characteristics, takes any action that effectively

ceiling could become more restrictive.

TVA's debt ceiling restrictive. I The TVTVA A Act provides that TV TVA evidences of indebtedness ("Bonds") in an amount not to exceed $30 A can issue bonds, notes, and other evidences outstanding at any time. If Congress either lowers the debt ceiling or broadens the types of financial instruments that are billion outstanding

$30. I covered by the debt ceiling, TVA might not be able to raise enough capital to, among other things, service its financial obligations, properly operate and maintain its power assets, and provide for reinvestment in its power program.

TVA may lose lose some of its customers.

customers. I1 As of September 30, 2008, three distributor customerscustomers had notices in effect effect terminating their power contracts with TVA. Although sales to these three distributor customers generated only 0.5 percent of TV Customers - Municipalities Business - Customers Municipalitiesand Cooperatives Cooperatives and Other TVA's A's total operating revenues in 2008, the loss of additional customers could have a material adverse effect on TVA's cash flows, results of operations, and financial condition. See Item 1, Other Customers.

Customers.

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IITable Table of Contents of Contents Operational Risks Risks IITVA TVA's 'sgeneration and transmission assets may not operate as planned.

Many of TV TVA'sA's generation generation and transmission assets have been operating operating since since the 1950s earlier and have been in nearly 1950s or earlier constant service nearly constant since they were completed. If these assets fail to operate as planned, TVA, among since they were completed. If these assets fail to operate as planned, TVA, among other things: other things:

I Might have to invest a significant resources to repair or replace the assets; significant amount of resources U operate the assets Might be unable to operate significant period of time; assets for a significant time; I

Might have have to purchase replacement power on the open purchase replacement open market; market; I I . Might not be able to meet its contractual

Might have to remediate collateral contractual obligations to deliver collateral damage caused power; and deliver power; failure of the caused by a failure the assets.

I InInaddition, addition, the failure of TVA's TVA's assets to perform sch events as the failure of a dam or a nuclear accident.

such planned could perform as planned could cause health, accident. Any of these potential health, safety, environmental problems safety, and environmental could negatively potential outcomes could problems and even affect TVA's negatively affect even result TV A's cash result in cash flows, results results II condition. See Item 7, Management's of operations, and financial condition.

Operations Operations - -Executive Challenges During Executive Summary - Challenges Management's Discussion and Analysis of Financial During2008.

Financial Condition Results of Condition and Results of TVA 'sfuel TVA's supplies might be disrupted.

fuel supplies I TV A purchases coal, coal, uranium, fuel oil, and natural gas from a number of suppliers. Disruption in the acquisition reult from a variety of factors, including, but not limited to, weather, production result production or transportation acquisition or delivery of fuel may transportation difficulties, difficulties, labor challenges, or labor challenges, may I and could require TV TVA A to acquire power higher prices on the spot market, purchase power at higher adversely affect disruptions could adversely affecting TVA's fuel suppliers. These disruptions environmental regulations affecting environmental TV A's ability affect TVA's ability to operate expensive alternative purchase more expensive operate its facilities alternative fuels, or operate operate higher I thereby adversely cost plants, thereby TVA's cash flows, results adversely affecting TVA's Compliance with existing and future environmental laws and regulations may Compliance operations, and results of operations, may affect and financial financial condition.

condition.

TVA 's operations affect TVA's ways.

unexpected ways.

operations in unexpected I ITVA following:

environmental laws and regulations TV A is subject to risks from existing federal, state, and local environmental including, but not regulations including, not limited to, the I *Compliance At some existing environmental Compliance with existing regulations may cost TVA environmental laws and regulations TVA more than it anticipates.

uneconomical for TVA to install the necessary some of TVA's older facilities, it may be uneconomical necessary equipment equipment to to comply comply with future with future I .

environmental TVA TV laws, which may cause TVA to shut down those environmental laws, which may cause TV A to shut down those facilities. facilities.

responsible for on-site liabilities associated with the environmental A may be responsible condition of facilities that it has acquired environmental condition acquired or I developed, regardless of when the liabilities arose and whether they are known developed, regardless TVA may be unable to obtain or maintain all required environmental regulatory approvals environmental required environmental known or unknown.

environmental regulatory unknown.

approvals. If there is a delay in obtaining regulatory approvals.

maintain, or comply with any such approval, approvals or if TVA fails to obtain, maintain, approval, TVTVA A may be unable to required obtaining any required operate its facilities or may have to pay operate pay fines or penalties.

I See Item I, 1, Business - -Environmental Environmental Matters.

Matters.

ICompliance Compliance with environmental laws and regulations relating to carbon dioxide and other greenhouse gases may may affect TVA 's operations in affect TVA's I unexpected ways.

unexpected ways.

Future compliance regulation of carbon dioxide and other greenhouse gases.

required resulting from the regulation compliance may be required legislative or gases. Any future legislative or regulatory regulatory actions change may be materially global climate change actions to address global TVA's financial position materially adverse to TVA's position or results of operations.

operations. The cost impact of legislation or regulation to address global climate change would impact legislation or regulation would depend on the specific legislation enacted, which regulation enacted, which cannot determined at this time. See Item I, cannot be determined 1, Business Business - Environmental Environmental Matters.

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Table of Contents Table 3 TVA TVA is the sole power powerprovider providerfor customers within its service area, and ifif demandfor area, and for power power in TVA TVA's 's service area area increases, increases, TVA TVA isis I

contractually obligated contractually obligated toto take take steps to meet this this increased increased demand.

demand.

If If demand demand for power power in in TVA's TVA's service service area area increases, increases, TVA TVA maymay need need to meet meet this this increased increased demand demand by by purchasingpower purchasing*power from from other other I 1

sources, building sources, power power from building new from external new generation generation and external sources, as results of flows, results of operations, operations, and and transmission as well transmission facilities, well as as acquiring and financial acquiring or financial condition.

condition.

facilities, or or building or purchasing building new purchasing existing new generation existing generation generation and generation and and transmission and transmission transmission facilities. Purchasing transmission facilities, facilities, could negatively Purchasing negatively affect TVA's cash affect TVA's cash I3 Purchased powerprices Purchased prices may be highlyhighly volatile, volatile, andproviders providers ofpurchased ofpurchased power may mayfailfail to perform under their contracts contracts with TVA.

TVA.

TVA TVA acquires recent acquires aa portion portion of recent years, and thethe price of its electricity price that electricity needs that TVA pays needs through through purchased pays for purchased purchased power arrangements.

purchased power arrangements. The price power may increase significantly significantly in price for purchased purchased power power has in the future. In addition, if one has been volatile volatile in one of TVA's TVA's 3

I purchased purchased power suppliers the not be not be able suppliers fails the spot market, perhaps able to recover recover this fails to perform this difference perform under perhaps at a significantly under the the terms of significantly higher price than TV of its contract TVA contract with TVA, A was entitled Moreover, if difference from the supplier. Moreover, entitled to if TVA TVA, TV to pay TV A is unable TVA A might might have to purchase pay under the contract.

unable to to acquire purchase replacement contract. In some acquire enough replacement power some circumstances, enough purchased power on circumstances, TVA power or purchased power on TV A may or enough enough I

replacement power replacement power on on the spot market and does not market and not have enough enough reserve reserve generation capacity available generation capacity available to offset offset the loss ofof power from the the purchased purchased power power supplier, supplier, TVA TV A might not not be be able able to supply enough enough power to meet meet the demand, demand, resulting in in power power curtailments curtailments or even blackouts.

blackouts. SeeSee Item 7,7, Management's Credit Risk Activities - Credit Management's Discussion Risk - Credit Credit of Discussion and afOther and Analysis Analysis of Financial Counterparties.

Other Counterparties.

Financial Condition Condition and Results Results of Operations Operations ---Risk Risk Management I

TVA's ability to supply power and its customers' demands TVA's demands forfor power are are influenced by by weather conditions.

weather conditions. 3 temperatures may increase the demand for power Extreme temperatures from customers, customers, while unusually unusually mild weather power and require weather may result in decreased TV A to purchase power require TVA decreased demand demand for power and power at high prices in order and lead to reduced order to meet the demand reduced electricity demand electricity sales. In addition, I

in periods periods of low rainfall rainfall or drought, TV I

TVA's hydroelectric generation A's low-cost hydroelectric generation may be reduced, requiring requiring TVTVA A to purchase purchase power or use more costly means of producing power. Furthermore, Furthermore, high river water temperatures temperatures in the summer may limit limit TVA's TV A's ability ability to use use water water from the Tennessee or Cumberland Cumberland RiverRiver system for cooling at its generating generating facilities, thereby thereby limiting TVA's TVA's ability ability to operate its generating facilities. See generating Condition andand Results See Item 1, Business Results of Operations Weather and Seasonality Business - Weather Operations - Executive Summary-Seasonality and Item 7, Management's ChallengesDuring Summary - Challenges Management's Discussion During 2008 - Weather Discussion and Weather Conditions.

and Analysis of Financial I3 TVA TVA may incur incur delays delays and and additional additionalcosts in in powerplant constructionand may be unable plant construction unable to obtain obtain necessary necessary regulatory approval.

regulatory approval.

TVA has begun the process of completing in the future. The completion completion of completing the construction construction of Watts Bar Bar Nuclear Nuclear Unit 2 and may need to constructconstruct more generating of such facilities involves substantial risks of delays and overruns in the cost of labor and materials. In generating facilities Ii necessary completion may require regulatory approval, as in the case of Watts Bar Nuclear Unit 2. If TVA does not obtain the addition, completion necessary regulatory regulatory approval, otherwise unable to complete the development approval, is otherwise of a facility, or incurs delays or cost overruns in connection development or construction connection with constructing construction of a facility, decides to cancel constructing a facility, TVA's construction cancel construction TV A's cash flows, financial condition, and results I3 3

of operations operations could be negatively affected. In addition, addition, ifif construction projects are not completed completed according to specifications, TVA TV A may suffer, among among other things, reduced plant efficiency and higher operating operating costs. See Item 1, Business - Nuclear.

TVA TVA may face face problems attractingand problems attracting and retaining retainingskilled workers.

workers. I As TVTVA A employees retire and TVA TV A faces competition for skilled workers, TV to, among other things, operate and maintain Watts Bar Nuclear Nuclear Unit 2.

maintain TV TVA's TVAA may face problems problems attracting and retaining skilled workers A's generation and transmission facilities and complete large construction construction projects such as I Page 38 Page 38 I I

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Table of Contents TVA is involved TVA involved in various various legal legal and administrative administrativeproceedings proceedings whose whose outcomes may affect affect TVA TVA's finances and operations.

'sfinances operations.

I TV A is involved TVA involved in various the ordinary ordinary course become involved, become various legal course of business.

legal and and administrative business. Although involved, the resolution resolution of administrative proceedings Although TVA cannot of these these matters proceedings and cannot predict matters could predict the could require and is likely the outcome require TVA likely to outcome of to become become involved involved in of the individual TVA to make expenditures individual matters in other other legal matters in which expenditures in excess excess of legal proceedings proceedings in which TVA is involved of established reserves and in established reserves future in in the future involved or or will will in amounts in could have aa material that could material adverse adverse effect effect on TVA's TV A's cash cash flows, results of of operations, operations, andand financial condition.

condition. Similarly, Similarly, resolution resolution could could I require TVA require TVA to operations, and operations, to change change its business and financial business practices financial condition. See practices or procedures, See Item Item 3, procedures, which which could 3, Legal Proceedings.

Proceedings.

could also also have have aa material material adverse adverse effect effect onon TVA's cash flows, results of TVA's cash of II TVA's transmission TVA's transmission reliability reliability could be affected by problems at other utilities by problems utilities or TVTVA A facilities.

facilities.

TVA's transmission TVA's transmission facilities are are directly directly interconnected interconnected with with the the transmission transmission facilities of neighboring neighboring utilities and and are are thus part of anan interstate power transmission interstate transmission grid. Accordingly, Accordingly, problems problems at other other utilities, utilities, or at TVA's TVA's ownown facilities, may may cause cause interruptions interruptions in TVA's TVA's II transmission service. If transmission condition could condition could be If TVA TV A were to suffer be negatively negatively affected.

affected.

suffer a transmission transmission service service interruption, TVA's TVA's cash cash flows, results of of operations, operations, and financial financial Events non~TVAfacilities Events at non-TVA facilities which affect the supply of ofwater to TVA TVA's generation facilities

's generation facilities may interfere interfere with TVA TVA's generate

's ability to generate II power.

power.

TVA's coal-fired coal-fired and nuclear generation generation facilities depend on on water from the river river systems nearnear which they they areare located located for cooling cooling water water and I for water to convert into steam to drive turbines. While While TV TVA A manages manages the Tennessee Tennessee River and largelarge portions portions of its tributary system in in I order to provide much order much of this necessary necessary water, the U.S.

some TVA facilities rely. Events at these non-TVA some U.S. Army Corps of Engineers operates and manages other bodies of water upon non-TV A managed bodies of of water or or their associated hydroelectric hydroelectric facilities may upon which may interfere interfere with the flow of the of water and maymay result in TV TVA A having having insufficient insufficient water to meet needs of its plants. In such scenarios, TVA meet the needs TVA may be required required I to reduce generation at its affected reduce generation and Item 7, Management's and Challenges ChallengesDuring available supply of water. See compatible with the available affected facilities to levels compatible Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion During 2008.

2008 .

Business - Power See Item 1, Business Operations --- Executive Summary-Summary-Supply Power Supply II An incident An incident at at any nuclear facility, even one that is not owned by nuclear facility, licensed to TV by or licensed TVA, increasedexpenses and oversight.

A, could result in increased oversight.

A nuclear incident at a TV TVA consequences including loss of life, damage A facility could have significant consequences damage to the environment, environment, damage to or or I damage to non-TVA property. Any nuclear loss of the facility, and damage nuclear incident, even at a facility that is not owned by or licensed to TVA, TVA, has I the potential to impact impact TVAadversely obligating TVA to pay up to $105 TVA adversely by obligating Price-Anderson Act. In addition, a nuclear under the Price-Anderson nuclear incident

$105 million per year and a total of could negatively affect incident could

$671 million per nuclear of$671 nuclear incident TVA by, among other things, obligating TVA to pay affect TVA incident pay II retrospective availability of insurance, retrospective premiums, reducing the availability increasing the costs of operating nuclear insurance, increasing operation, and decommissioning of nuclear construction, operation, regulation or restriction on the construction, regulation nuclear facilities.

nuclear units, or leading to increased increased Catastrophicevents could affect TVA's Catastrophic ability to supply electricity TVA 's ability or reduce electricity or demandfor electricity.

reduce demandfor electricity.

I TVA TV could be adversely affected by catastrophic events A could and other similar events. These events, the frequency frequency and severity earthquakes, floods, tornadoes, wars, terrorist activities, pandemics, events such as fires, earthquakes, severity of which are unpredictable, unpredictable, could negatively affect TVA's cash flows, pandemics, I operations, and financial condition by, among other things, limiting TVA's ability to generate and transmit power, reducing the results of operations, demand for power, disrupting fuel or other supplies, leading to an economic economic downturn, or creating instability in the financial markets.

I Demand Demand for supplied by electricity supplied for electricity could be reduced by TVA could reduced by changes changes in technology.

in technology.

I Research and development development activities are ongoing to improve existing existing and alternative technologies to produce electricity, including gas I turbines, fuel cells, microturbines, and solar cells. It is possible that advances in these or other alternative technologies technologies could reduce the technologies to a level that will enable these technologies to compete effectively with costs of electricity production from alternative technologies traditional power plants like TVA's. To the extent these technologies technologies become a more cost-effective option for certain customers, TV TVA'sA's I . customers could be reduced, thereby negatively affecting TVA's cash flows, results of operations, sales to these customers operations, and financial condition. In electricity may be affected by the implementation addition, demand for electricity time-of-use rates. Depending implementation of time-of-use Depending on design features, time-of-use affect timing and volatility of cash flow. Metering or related technology changes may impact the features and penetration rates may affect penetration of time-i of-use rates.

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Table o/Contents Financial Financial Risks TVA is TVA is subject to a variety of market risks that TV TVA A is subject to a variety that could negatively affect TVA variety of market risks, including, but not limited TVA's 's cash results of operations, cashflows, results limited to, commodity operations, and commodity price risk, investment price financial position.

andfinancial position.

price risk, interest rate risk, and I

credit risk.

Commodity Price Price Risk.

Risk. Prices of commodities materials, emission allowances, commodities critical to TVA's operations, including coal, uranium, natural gas, fuel oil, construction allowances, and electricity, electricity, have been extremely volatile in recent years. If TVA fails to effectively manage its effectively manage IU TVA's rates could increase commodity price risk, TVA's increase and thereby thereby cause customers to look for alternative power suppliers. i Investment Price PriceRisk.

Risk. TVTVA A is exposed to investment price risk in its nuclear decommissioning decommissioning trust, its asset retirement trust, and its I

pension fund. If the value of the investments investments held in the nuclear nuclear decommissioning trust or the pension fund decreases significantly, significantly, 3

TVA could could be required to make substantial unplanned contributions to these funds, which would negatively affect TVA's cash flows, results of operations, operations, and financial condition. I InterestRate Risk.

Interest increasing Risk. Changes Changes in interest rates could interest that TVA increasing the amount of interest could negatively affect TVA's cash flows, results of operations, TV A pays on new bonds that it issues, decreasing operations, and financial condition by TV A receives on its short-term decreasing the return that TVA by I investments, decreasing decreasing the value of the investments investments in TVA's pension fund and trusts, and increasing the losses on the mark-to-market mark-to-market valuation of certain derivative derivative transactions transactions into which TVATV A has entered.

Credit Risk. TV Credit Risk.

counterparties TVA A is exposed counterparties fail to exposed to the risk that its counterparties to perform their obligations, counterparties will not be able to perform perform their contractual contractual obligations. If TV obligations, TVA's cash flows, results of operations, and financial condition affected. In addition, the failure of a counterparty to perform could could make it difficult for TVTVA condition could be adversely A's TVA's adversely A to perform its obligations, particularly particularly if if Ii the counterparty counterparty is a supplier of electricity or fuel to TVA. i For more information information regarding regarding market risks, see Item TV A.

Management's Discussion and Analysis of Financial Condition and Results Item 7, Management's Results ofof I

Operations Operations --- Risk Management Management Activities Activities,, and for a discussion of the impact on TVA of recent developments developments in the commodity, investment, interest rate, and credit markets, see Item 7, Management's Operations - Executive Summary - Challenges Operations Challenges During Management's Discussion and Analysis of Financial During2008 and Liquidity Liquidity and Capital Financial Condition and Results Resources --

CapitalResources -- Sources Sources of Liquidity.

ofLiquidity.

Results ofof I

TVA and TVA and owners owners of TVA TVA securities could be impacted by a downgrade securities could downgradeof TVA 's credit of TVA's credit rating.

rating. I A downgrade in TVA's credit rating could have material adverse adverse effects on TVA's cash flows, results of operations, and financial condition condition as well well as on investors TVA investors in TV A securities.

securities. Among other things, a downgrade downgrade could could have the following effects:

A downgrade downgrade would increase TV increase in TVA's interest expense TVA's A's interest expense expense by increasing increasing the interest rates that TV expense would reduce the amount of cash available TVAA pays on new Bonds that it issues. An available for other purposes, which could result in the need to II increase borrowings, borrowings, to reduce reduce other expenses expenses or capital capital investments, or to increase increase power rates.

A significant downgrade could result in TV rating triggers.

TVA's A's having to post collateral collateral under certain physical and financial contracts that contain contain I A downgrade downgrade below A downgrade below a contractual contractual threshold could prevent downgrade could lower the price prevent TVTVA A from borrowing under two credit facilities totaling $2.25 billion.

price of TVA securities in the secondary secondary market.

I See Item Item 7, 7, Management's Management's Discussion Discussion and Analysis of Financial Condition Condition and Results of Operations Operations - Liquidity Liquidity and Capital CapitalResources.

Resources.

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I Table of Contents Table of Contents TVA may have TVA have to make significant significant unplanned contributions contributions to fund fund itspension pension and otherpostretirement postretirement benefit plans.

plans.

II TVA's costs TVA's costs of providing providing pension pension benefits benefits and other other postretirement postretirement benefits benefits depend depend upon aa number number of factors, including, but not limited factors, including, limited to:

Provisions of the Provisions the pension pension and and postretirement postretirement benefit benefit plans; II . Changing employee Changing employee demographics; demographics;

increase in compensation Rates of increase levels; compensation levels; II

return on plan Rates of return plan assets;

Discount rates used in determining Discount future benefit determining future benefit obligations; obligations; II .

Rates of Rates of increase increase in health health care costs; Levels of interest Levels interest rates used to to measure measure the the required required minimum minimum funding levels of the plans; plans; I Future government Future government regulation; and and I

Contributions made to the plans.

Contributions I number of these factors could Any number could increase increase TVA's costs of providing pension pension and other other postretirement postretirement benefits and require TVA to make significant unplanned significant unplanned contributions contributions to the plans.

plans. Such Such contributions contributions would negatively negatively affect TV A's cash flows, results of operations, TVA's operations, and and I financial condition. For aa discussion funded status discussion of the impact status and recent performance Operations - Executive Summary - Challenges Operations impact of the performance of the fund, see Item 7, the recent turmoil in the financial markets on TVA's 7, Management's Management's Discussion During 2008 - investment ChallengesDuring Investment Performance.

Performance.

TV A's pension fund, including the Discussion and Analysis of Financial Condition and Financial Condition the and Results Results of of II TVA may have to make significant TVA unplanned contributions significantunplanned nuclear decommissioning contributions to its nuclear decommissioning trust.

trust.

TVA decommissioning trust for the purpose nuclear decommissioning TV A maintains a nuclear purpose of providing funds to decommission its nuclear nuclear facilities. The decommissioning trust is invested in securities generally decommissioning generally designed to achieve performance. TVA achieve a return in line with overall equity market performance. TV A I might have to make significant unplanned The value of The value of the investments in the investments contributions to the trust if, among other things:

unplanned contributions in the the trust trust declines significantly; declines significantly; II

The laws or The laws regulations regarding or regulations decommissioning change nuclear decommissioning regarding nuclear change the the decommissioning funding requirements; decommissioning funding requirements; I The assumed real The assumed rate of real rate of return return onon plan assets, which plan assets, which is is currently currently five percent, is five percent, lowered by is lowered by the TV A Board; the TVA Board; I Changes Changes in in technology technology and experience related and experience related to to decommissioning decommissioning cause cause decommissioning decommissioning costcost estimates to increase estimates to significantly; or increase significantly; or i

TVA TV required to is required A is decommission aa nuclear to decommission plant sooner nuclear plant than it sooner than it anticipates.

anticipates.

I If TVA makes unplanned contributions to the trust, the contributions negatively affect TVA's cash flows, results of operations, contributions would negatively operations, and II financial condition. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations Summary - Challenges ChallengesDuring During20082008 ~- investment Performance.

Investment Performance. . .

Operations - Executive TVA TV requirementsif currentcash requirements unable to meet its current A may be unable if its its access markets is access to the debt markets is limited.

limited.

I*U. TV A's cash management TVA's management policy is to use cash provided by operations TVA's current cash requirements. In addition, TVA has access to a $150 credit facilities with a national bank. In light of proceeds from power program borrowings operations together with proceeds borrowings to fund

$150 million credit facility with the U.S. Treasury and $2.25 billion of management policy, it is critical that TVA continue to have access to the debt of TVA's cash management of markets in order to meet its cash cash requirements.

requirements. The importance of having access to the debt markets is underscored by the fact that TV TVA,A, I unlike many utilities, relies almost entirely on the debt 7, Management's Management's Discussion and debt markets to raise capital since it is not authorized to issue equity securities. See Item and Analysis of Financial Condition and Results of Operations --- Liquidity Liquidity and and Capital CapitalResources.

Resources.

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Table o/Contents Approaching or reaching Approaching ceiling could limit TVA's reachingits debt ceiling TVA 's ability ability to carry carry out its business.

business.

At September September 30, 2008, TVA had approximately valuation outstanding Bonds. Approaching outstanding approximately $22.7 billion Approaching or reaching billion of Bonds outstanding of $138 million and net discount on sale of bonds of valuation loss of$138 reaching this debt ceiling outstanding (not including

$199 million). TV of$199 ceiling could adversely TVA adversely affect including noncash items of foreign currency A has a statutorily currency statutorily imposed ceiling of $30 billion on affect TVA's business business by limiting TVA's ability to borrow on borrow I

money and increasing the cost of servicing TV money A's debt. In addition, approaching TVA's approaching or reaching reaching this debt ceiling could lead to increased increased TVA TVA's legislative or regulatory

's cash flows, regulatory oversight of TVA's activities.

results of flows, results of operations, operations, andfinancial financial condition condition could be negatively affected by economic downturns.

downturns.

I Sustained downturns or weakness weakness in the economy in TVA's service area or other parts of the United power and thus reduce TVA's power power sales and cash flows, especially United States could reduce overall demand for especially as TVA's industrial customers reduce their operations operations and thus their their I

consumption of power. See Item 7, Management's Discussion and Analysis of Financial Condition consumption Summary - Future Future Challenges.

Challenges.

Condition and Results of Operations Operations --- Executive I

TVA 'sfinancial TVA's controlsystem cannot financial control cannot guarantee guaranteethatthat all control issues and control issues and instances instances of offraud or errors fraud or errorswill be detected.

detected.

No financial control control system, no matter how well designed system are met, and no evaluation designed and operated, can provide absolute assurance that the objectives evaluation of financial controls controls can provide absolute assurance objectives of the control assurance that all control issues and instances of fraud or errors I

can be detected. The design of any system of financial controls regardless of how remote. For an assessment controls is based in part upon events, and there can be no assurance that any design will succeed in achieving assessment as of September upon certain assumptions assumptions about achieving its stated goals under about the likelihood of future under all potential future conditions, 30, 2008, of TVA's disclosure controls September 30,2008, controls and procedures procedures (which were deemed I

ineffective) and TVA's internal controls ineffective) controls and procedures (which were deemed effective) effective) as well as a discussion of the remediation remediation during the fourth quarter of 2008 of a material material internal internal control weakness weakness related to TVA's estimate of unbilled revenue, see Item 99A, A, Controls Controls and TVA Procedures.

TVA could lose the ability ability to use regulatory accounting and regulatory accounting and be required requiredto write off a significant significantamount amount of regulatory assets.

regulatory assets.

I TVA TV

("SF A is able to use regulatory AS") No.

("SFAS")

regulatory accounting because No.771,I, "Accounting because it satisfies the requirements set forth in Statement of Financial Accounting for the Effects of Certain "Accountingfor Certain Types of Regulation."

Regulation." Accordingly, TVA Accounting Standards TV A records as assets certain costs that I would not be recorded as assets under generally accepted had $6.9

$6.9 billion of regulatory assets. Any asset write-offs accepted accounting accounting principles write-offs would be required to be recognized principles for non-regulated regulatory assets. If TVA loses its ability to use regulatory recognized in earnings non-regulated entities. As of September regulatory accounting, accounting, TVTVA A could could be required earnings in the period in which regulatory September 30, 2008, 2008, TVTVA required to write-off its regulatory regulatory accounting accounting under SF A

regulatory i SFASAS No.

I 771I ceased to apply to TVA. .

Risks Related to TV TVA A Securities Securities 3 Payment of Payment ofprincipal principal andand interest intereston TVA TVA securities securitiesis not guaranteed guaranteed by by the United United States.

States.

I Although TVA TVA is a corporate corporate agency and instrumentality and credit of the United States. Principal instrumentality of the United States government, government, TVA securities securities are not backed backed by the full faith Principal and interest on TVA securities are payable solely from TVA's net power proceeds. Net power power I

proceeds are defined as the remainder remainder of TVA's gross power power revenues after deducting deducting the costs of operating, maintaining, and administering its power properties properties and payments to states and counties in lieu of taxes, but before deducting depreciation representing the amortization representing therein.

amortization of capital expenditures, plus the net proceeds proceeds from the sale or other depreciation accruals accruals or other charges other disposition of any power facility or interest If

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I Table of Contents a/Contents trading marketfor TVA The trading securities might be limited.

TVA securities limited.

II of TVA's All of TVA's Bonds are year, and some of some and the power of TVA's are listed power bonds TVA's Bonds bonds issued the New York listed on the issued under TVA's Bonds are listed listed on on foreign stock Stock Exchange York Stock except for TVA's Exchange except program, which is electro notes program, TVA's electronotes stock exchanges. Although many of exchanges. Although is TVA's of TVA's TVA's Bonds which have discount notes, which TVA's discount medium-term retail notes TVA's medium-term listed on Bonds are listed maturities of have maturities ofless program. In notes program.

exchanges, there on stock exchanges, than one less than In addition, addition, there can bebe I market will assurances that any market no assurances develop or continue will develop continue to assurances can Additionally, no assurances to exist for any Bonds. Additionally, can be made as be made as to to the ability of the ability of I the holders of the depend on depend of Bonds sell their Bonds to sell their Bonds or many factors, including on many the time remaining remaining until or the including prevailing until the maturity maturity of the able to sell their holders will be able at which holders the price at then-current ratings prevailing interest rates, the then-current redemption features of the Bonds, the Bonds, the redemption assigned to the ratings assigned Future trading their Bonds. Future the Bonds, the amount market for similar Bonds, the market prices of Bonds will trading prices amount ofof Bonds will Bonds outstanding, outstanding, securities, and the level, similar securities, level, I direction, and direction, volatility of interest and volatility interest rates rates generally.

generally.

I particular series of Ifaa particular If of Bonds offered through Bonds is offered through underwriters, underwriters may underwriters, those underwriters may attempt to makemake aa market in the Bonds. The underwriters would underwriters obligated to do so, however, and could would not be obligated market-making activity could terminate any market-making activity at any time without at any without notice.

II limitations may affect the addition, legal limitations In addition, the ability ability of banks banks and to invest in Bonds. For example, and others to example, national purchase TVA national banks may purchase TVA Bonds for their own accounts accounts in in an amount not an amount not to exceed exceed 10 percent percent of unimpaired capital and surplus. Also, unimpaired capital Also, TVA TVA Bonds Bonds are "obligations "obligations instrumentality of the United corporation which is an instrumentality of a corporation meaning of section 7701 States" within the meaning United States" (a)(l9)(C)(ii) of 770 I (a)(19)(C)(ii) of the Internal Internal Revenue Revenue I Code for purposes of the 60 percent purposes of assets limitation percent of assets building and loan associations.

applicable to U.S. building limitation applicable associations.

IliTEMTEM lB.lB. UNRESOLVED STAFF COMMENTS UNRESOLVED COMMENTS Not applicable.

IliTEM ITEM 2. 2. PROPERTIES PROPERTIES personal property in its own name TV A holds personal TVA name but holds real agent for the United real property as agent States of America. TVA United States acquire real TV A may acquire I property negotiated purchase property by negotiated Generating Properties purchase or by eminent eminent domain.

I At September 30,30, 2008, generating assets operated by TVA coal-fired units, six nuclear TV A consisted of 59 coal-fired hydroelectric units, four pumped storage units, 93 combustion turbine units, three combined nuclear units, 109 conventional generator units, one digester combined cycle units, nine diesel generator biomass cofiring site, one wind energy gas site, one biomass energy site, and 15 solar energy sites. See Item 1, 1, Business - PowerPower Supply for a chart that I Construction on Watts Bar Unit 2 commenced December commenced in December I ndicates the location, capability, and in-service dates for each of these properties. Construction indicates 2007. Completing Watts Bar Unit 2 is expected expected to take 60 months. TVA added seven combustion turbine units in 2008 and subsequently undivided 69.69 percent interest in three of the combined cycle, combustion turbine units it had acquired. It now operates an undivided subsequently sold operates these three units sold under a lease agreement. See Item 1, Business - Power Power Supply - Generation GenerationFacilities Combustion Turbine Facilities - Combustion Turbine Facilities.

Facilities.

I Twenty-four of TVA's simple cycle combustion Twenty-four Leaseback Obligations.

arrangements, see Note 13 - Leaseback arrangements, Obligations.

leaseback arrangements. For more information combustion turbines are subject to leaseback regarding these information regarding I Transmission Properties TVA's transmission system interconnects with systems of surrounding surrounding utilities and consists primarily of the following assets:

I

Approximately 15,860 circuit miles of transmission lines (primarily 500 kilovolt and 161 kilovolt lines);

Approximately 487 transmission substations, power switchyards, and switching stations; and

interchange and 1,006 customer connection 64 individual interchange connection points.

I . In 2003, TVA entered into a leaseback of certain qualified technological equipment and other software related to TVA's transmission qualified technological transmission system. For more information regarding this transaction, see Note 13 - Leaseback Obligations. Obligations.

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I Table Table of Contents Contents Natural Resource Natural Resource Stewardship Properties TVA operates and maintains 49 dams, and TV A operates

11,000 miles of reservoir shoreline; TVA and TV A manages the following natural natural resource resource stewardship stewardship properties:

I

293,000 acres of reservoir land; 650,000 650,000 surface acres of water; and Over 100 public recreation recreation facilities. I As part of its stewardship stewardship responsibilities, responsibilities, TVA TV A approval approval is required to be obtained before construction of any obstruction affecting before construction affecting navigation, flood control, or public lands can be constructed in or along the Tennessee River and its tributaries.

navigation, I

Buildings TVA has a variety of buildings throughout its service service area in addition to the buildings located located at its generation and transmission transmission II facilities, including office significant Office Complex, office buildings, customer service significant of these buildings is the Knoxville Complex, which consists service centers, power service Knoxville Office service centers, centers, warehouses, warehouses, visitor centers, centers, and crew Office Complex. TVA also leases buildings when it deems appropriate, including consists of approximately 1.2 million square crew quarters. The most including its Chattanooga Chattanooga approximately 1.05 square feet of office space. The initial term of TVA's lease of approximately I3 million square feet of the Chattanooga expires on January 1,2011.

Chattanooga Office Complex expires 1, 2011. On February February 8, 2008, TVA finalized an agreement to purchase this portion of the Chattanooga purchase Chattanooga Office Complex Complex upon the expiration January 1, 2011.

expiration of the existing lease term on January 2011. The purchase priceprice is $22 million, payable payable on January 3,2011.

3, 2011. See Note 4 --AssetAsset Acquisitions and Dispositions.

Acquisitions and Dispositions. The lease on the Monteagle Monteagle Place the remaining remaining portion of the Chattanooga Office Complex significant significant number of buildings in Muscle Complex (approximately Muscle Shoals, (approximately 131,979 square feet) expires Shoals, Alabama, Alabama, and is currently evaluating expires on September September 30, evaluating strategies for long-term 30, 2012. TVA also owns afI long-term solutions to further reduce its a

I Muscle Shoals portfolio.

Disposal of Property II Under the TV TVA A Act, TVTVAA has broad authority authority to dispose of personal personal property property but only limited authority to dispose of real property. TVA's TV A's primary sources sources of authority to dispose of real property property are briefly described below:

I Under Under Section Under Section 31 of the TV Under Section TVA A Act, TV Section 4(k) of the TVA Act, TVA TVAA has authority authority to dispose of surplus TV A can dispose of real property surplus real property property for certain replacement lands for certain entities whose lands were flooded or destroyed replacement property at a public auction.

certain specified purposes, including to provide destroyed by dam or reservoir construction provide construction and to grant II easements easements and rights-of-way upon which are located located transmission transmission or distribution lines.

Under Section Under Section 15d(g) of the TVATV A Act, TVA can dispose of real property other facilities under certain circumstances.

Under 40 U.S.C.

Under circumstances.

U.S.c. § 1314, TVA has authority authority to grant easements property in connection connection with the construction of generating rights-of-way and other purposes.

easements for rights-of-way generating plants or I

disposing In addition, the Basic Tennessee on September September 28, 1976, October 17, disposing of all or any substantial Tennessee Valley Authority 17, 1989, Authority Power Bond Resolution adopted by the TV 1989, and March 25, 1992, prohibits substantial portion of these properties TVAA Board on October October 6, 1960, as amended prohibits TVA from mortgaging any part of its power properties properties unless TV TVA A provides amended properties and from provides for a continuance of the interest, principal, from principal, and sinking fund I

payments payments due and to become become due on all outstanding outstanding Bonds, or for the retirement retirement of such Bonds.

ITEM 3. 3. LEGAL PROCEEDINGS I

claims TVA is subject to various

$46 million and $3 various legal proceedings claims include the matters discussed proceedings and claims that have arisen in the ordinary discussed below. In accordance accordance with SFAS No.5,

$3 million with respect to the proceedings proceedings described No. 5, "Accounting described below below as of September ordinary course course of business. These proceedings and "Accountingfor Contingencies, Contingencies, ""TVA September 30, 2008 and 2007, TVA had accrued accrued approximately approximately respectively, as well as 2007, respectively, I*3 approximately approximately $5 $5 million and $4 million as of September 30, 2008, and 2007, respectively, with respect September 30,2008, respect to other proceedings that have arisen in the normal course expense course of TVA's business. TVA recognized $20 million, $4 million, and $24 million in 2008,2007, expense by increasing increasing accruals accruals related to legal proceedings. No assurance claims and liabilities. If actual liabilities significantly assurance can be given that TV significantly exceed the estimates estimates made, TV TVA's TVA 2008, 2007, and 2006, respectively, A will not be subject to significant A's results of operations, liquidity, of respectively, of significant additional liquidity, and financial condition I*

could be materially materially adversely adversely affected.

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II Table of Contents Table of Contents Global Warming Warming Cases, Cases. Southern District of New York.

Southern District York. On July 21, 21, 2004, two lawsuits were filed against TVA in the United States District Court for the Southern District of New York alleging that global warming is a public public nuisance and that CO 22emissions from fossil-fuel fossil-fuel II electric generating facilities should be ordered (California, Connecticut, ordered abated because Connecticut, Iowa, New Jersey, New York, Rhode other power companies. The second case, which alleges because they contribute to causing the nuisance. The first case was filed by various states Rhode Island, Vermont, and Wisconsin) and the City of New York against TVA and alleges both public public and private nuisance, was filed against the same defendants by Open Space I Institute, nstitute, Inc., Open Open Space Conservancy, Inc., and the Audubon Society Society of New Hampshire. The plaintiffs do not seek monetary damages, but I instead seek a court order requiring each instead each defendant year for at least a decade. In September 2005, defendant to cap its CO 22 emissions and then reduce these emissions by an unspecified 2005, the district court dismissed both lawsuits because they raised political unspecified percentage percentage each political questions that should not be decided by the courts. The plaintiffs appealed decided appealed to the United United States Court of Appeals for the Second Circuit ("Second Circuit"). Oral Oral argument argument I was held before the Second Second Circuit 2007, addressing the impact 2007, parties. On July 6, 2007, Circuit on June 7, 2006. On June 21, impact of the Supreme 21, 2007, the Second Circuit directed the parties Supreme Court's decision in Massachusetts Massachusetts v. EPA, 2007, the defendants jointly submitted their letter brief parties to submit letter briefs by July 6, EPA, 127 S.Ct. 1438 (2007), on the issues raised by the brief. The Second Circuit is deliberating deliberating on its decision.

I Case Involving Alleged Violations of the New New Source Review Regulations at Bull Run Fossil Plant. Plant. The National National Parks Conservation Conservation I Association, Association, Inc. ("NPCA"), and the Sierra Club, Inc. ("Sierra Club") filed suit against against TVA on February 13,2001, 13, 2001, in the United States States District Eastern District of Tennessee, alleging that TVA did not comply with the new source review ("NSR")

Court for the Eastern requirements of the CAA

("NSR") requirements CAA I when TVA repaired repaired its Bull Run Fossil Plant ("Bull Run"), a coal-fired electric generating generating facility located in Anderson Anderson County, Tennessee.

Tennessee. In I March 2005, the district court granted TVA's motion to dismiss the lawsuit on statute of reconsideration was denied, and they appealed reconsideration appealed to the United States Court oflimitation limitation grounds. The plaintiffs' plaintiffs' motion for Court of Appeals for the Sixth Circuit ("Sixth Circuit"). Friend of the court briefs supporting the plaintiffs' appeal were plaintiffs' appeal were filed by New York, Connecticut, Illinois, Iowa, Maryland, Maryland, New Hampshire, New Jersey, New I

I Massachusetts, and Pennsylvania. Several Ohio utilities filed a friend of the court brief supporting Kentucky, Massachusetts, Mexico, Rhode Island, Kentucky, judges issued a decision reversing panel of three judges the appeal was denied. The district court trial previously September 2, 2008, was postponed, and the district court previously scheduled for September supporting TVA.

reversing the district court's dismissal on March 2, 2007. TVA's request that the full Sixth Circuit rehear TV A. A court instead instead heard oral arguments arguments on the parties' judgment on that date. The trial has not yet been rescheduled. TVA is already installing or parties' motions for summary judgment or has installed equipment that the plaintiffs installed the control equipment TV A to install in this case, and it is unlikely that an adverse decision will plaintiffs seek to require TVA I result in substantial substantial additional costs to TVA adverse decision, however, could lead to additional TV A at Bull Run. An adverse additional litigation litigation and could cause TV TVA A uncertain whether there would be significant increased change its emission control strategy and increase costs. It is uncertain to change increased costs to TVA.

I Case Involving Opacity at Colbert Fossil Plant. 16, 2002, the Sierra Club and the Alabama Plant. On September 16,2002, Northern District of Alabama alleging that TVA a lawsuit in the United States District Court for the Northern Alabama Environmental violated CAA opacity limits applicable TV A violated Council filed Environmental Council applicable to Colbert Fossil Plant ("Colbert") between July 1, 1997, and June 30, 2002. The plaintiffs Colbert seek a court order that could require TVA to incur plaintiffs seek incur I

I substantial additional additional costs challenged emissions complaint (finding that the challenged nonexempt opacity monitor readings over nonexempt controls and pay civil penalties environmental controls costs for environmental emissions were within Alabama's approximately $250 million. After the court dismissed the penalties of up to approximately Alabama's two percent de minimis rule, which which provided over 20 percent did not occur more than two percent of the time each quarter),

provided a safe harbor quarter), the plaintiffs if harbor if plaintiffs appealed the the the district court's decision court's decision to the United States States Court of Appeals for the Eleventh Circuit ("Eleventh Circuit ("Eleventh Circuit"). On November 22, 2005, the I Eleventh Circuit affirmed court's dismissal affirmed the district court's Alabama had not yet obtained applicable because Alabama the district court proceedings. On April 5, court for further proceedings.

Protection Agency Environmental Protection obtained Environmental Alabama de minimis rule was not penalties but held that the Alabama dismissal of the claims for civil penalties Agency ("EPA") approval of that rule. The case 5, 2007, the plaintiffs moved for summary judgment. TVA opposed the motion and moved not case was remanded remanded to Ito to stay the proceedings. On April 12, 2007, EPA proposed to approve Alabama's Alabama's de minimis rule subject changes. On July 16,2007, subject to certain changes. 16, 2007, I the district court denied TVA's motion to stay the proceedings pending approval judgment was held on August 16,2007.

motion for summary judgment 27,2007, judgment, finding that TVA had violated the CAA at Colbert. The district court held that, minimis rule. Oral argument approval of Alabama's de minimis 16, 2007. On August 27, while TVA had achieved that,while argument on the plaintiffs' achieved 99 percent compliance plaintiffs' plaintiffs' motion for summary 2007, the district court granted the plaintiffs' compliance on on I Colbert Units 1-41-4 and 99.5 percent compliance at Colbert Unit 5, TVA had exceeded exceeded the 20 percent percent opacity limit (measured in six-minute I intervals) more than 3,350 times between between January 3, 2000, and September 30, 2002. The district court ordered September 30,2002. ordered TVA to submitsubmit a proposed proposed remediation plan, which TVA did on October 26, 2007. The plaintiffs responded to TVA's proposed plan, and the district court held a hearing October 26,2007. hearing Ion on the plan on December December 15,15, 2008. EPAEPA has approved approved Alabama's Alabama's de minimis rule, which will become become effective in 2009.

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Table of Contents I In addition to Colbert, TVA has another coal-fired power plant in Alabama, Widows Creek Fossil Plant ("Widows Creek"), which has a summer net capability capability of 1,508 megawatts. Since the operation of Widows Creek must meet the same opacity requirements, affected by the decision in this case. The Creek from the district court court decision.

recently approved de minimis rule change The recently requirements, this plant may be change helps reduce the chances of an adverse effect on Widows I Case Brought by North Carolina Carolina Alleging Public Nuisance.

Nuisance. On January States District Court for the Western District of North Carolina alleging January 30, 2006, North Carolina alleging that TVA's against TVA in the United Carolina filed suit against TV A's operation of its coal-fired coal-fired power plants in the States States of United of I

Tennessee, Tennessee, Alabama, and Kentucky constitute public public nuisances. North Carolina Carolina is asking the court to impose caps on emissions emissions of certain certain pollutants from TVA's coal-fired coal-fired plants that North Carolina Carolina considers to be equivalent to caps on emissions imposed imposition of such caps could require TVA to install more North Carolina's two largest electric utilities. The imposition schedule than required by federal law. The trial in this case was completed on July 30, 2008.

schedule 2008. The parties imposed by North Carolina law on more pollution pollution controls on a faster parties submitted their post-trial faster post-trial filings on on I

September IS, September 15, 2008, and a decision decision will follow at a later time.

Case Arising out of Hurricane States District District Court Hurricane Katrina.

Court for the Southern Katrina. In April 2006, TVA was added as a defendant defendant to a class action lawsuit brought Southern District of Mississippi by 14 residents of Mississippi allegedly allegedly injured by Hurricane brought in the United Hurricane Katrina. The plaintiffs I

sued seven large oil companies and an oil company sued large companies large companies involved involved in the mining and/or burning greenhouse gas emissions contributed greenhouse burning of coal, coal, including TVA large chemical companies and a chemical trade association, and 31 company trade association, three large plaintiffs allege that the defendants' TVA and other utilities. The plaintiffs contributed to global warming and were a proximate and direct cause of Hurricane defendants' Hurricane Katrina's increased destructive 31 I

force. The plaintiffs are seeking monetary monetary damages among other relief.relief. TVA has moved to dismiss the complaint complaint on grounds that TVA'sTVA's operation of its coal-fired plants is not subject to tort liability due to the discretionary operation the grounds that the plaintiffs lacked lacked standing. The plaintiffs appealed discretionary function doctrine. The district court dismissed the case on United States Court of Appeals appealed the dismissal to the United and oral argument was held before a three judge panel in July 2008. A judge on the panel subsequently subsequently recused Appeals for the Fifth Circuit, recused himself from the case, and the .

on Il case was reargued during the week week of November 3,2008.

3, 2008.

East Kentucky notified TV TVA Kentucky Power Cooperative Transmission Case.

Power CooRerative A that it was terminating terminating its power contract Cooperative ("East Kentucky") under which Warren Cooperative contract with with TV TVA.A. Warren Warren Rural Electric Cooperative Case . In April 2003, Warren Warren then entered into an arrangement Warren would become a member of East Corporation ("Warren")

Cooperative Corporation arrangement with East Kentucky East Kentucky, and East Kentucky

("Warren")

Kentucky Power Power Kentucky would supply power to I

Warren contract with TVA expires Warren after its power contract interconnect its transmission system expires in 2009. East Kentucky asked to interconnect system with the TVATVA transmission system in three places that are currently transmission East Kentucky asked FERC to order TVA TV A to provide provide the interconnections.

supplies power to Warren. TVA did not agree and currently delivery points through which TVA supplies interconnections. In January 2006, FERC issued a final order order directing TVA transmission facilities with East Kentucky's system at three locations. TVA appealed the FERC order in the United States Court interconnect its transmission interconnect TV A to I of Appeals for the District of Columbia Columbia Circuit ("D.C. Circuit") seeking seeking review of this order order on the grounds that this order violated the anti-cherrypicking provision. On January 10, cherrypicking 10, 2007, TV TVA A and Warren Warren executed an agreement terminated the proceeding but did not vacate termination. FERC terminated vacate its previous order. On January Circuit appeal as moot. The D.C. Circuit dismissed the case on January 29,2008 dismiss the D.C. Circuit Warren rescinded its notice of agreement under which Warren 17, 2008, TVA filed an unopposed motion to January 17, 29, 2008. .

Il Case Involving AREV AREVA Inc., which subsequently ANP Inc.,

A Fuel Fabrication.

subsequently changed Fabrication. On November 9,2005, AREV A NP Inc. CAREV changed its name to AREVA TV A received two invoices 9, 2005, TVA

("AREVA"). AREVA A"). AREV invoices totaling $76

$76 million from Framatome Framatome A asserted that it was the successor to the contract contract I

between Babcock and Wilcox Company ("B&W") under which B&W would provide between TVA and Babcock Nuclear Plant. AREVA's invoices Nuclear invoices were based actually purchased. In September 2006, TVA received than TVA actually provide fuel fabrication claim from AREVA received a formal claim fabrication services services for TVA's Bellefonte based upon the premise that the contract required TVA to buy more fuel fabricationfabrication services from B&W AREVA which requested a Contracting Officer's decision B&W I pursuant to the Contract Contract Disputes Act of 1978 1978 and reduced reduced the amount sought to $26 million. On April 13, 13, 2007, the Contracting Officer Officer issued a final decision denying the claim. On April 19, 2007, AREVA filed suit in the United States District Court for the Eastern District of -

Tennessee, reasserting the $26 Tennessee, cancellation question of liability was scheduled claim and alleging that the contract

$26 million claim cancellation fee. TVA filed its answer answer to the complaint contract required TV complaint on June 15,2007.

scheduled to begin on September TVAA to purchase 15, 2007. AREVA subsequently amounts of fuel and/or to pay a purchase certain amounts subsequently raised its claim to $48 22, 2008, but has been reset for April 20, 2009. A second September 22,2008,

$48 million. Trial on the second trial on the question of of I

damages damages will be held later, if if necessary. TVA and AREVAREVA A have negotiated the terms of a settlement agreement. This agreement contingent agreement is contingent on approval by the TVA settlement agreement.

proposed settlement independent third-party on December 16, 2008, to review the TVA Board. The parties have scheduled a meeting with an independent I

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II Table of Contents Table of Contents Notification of Notification of Potential Potential Liability Liability for Ward Ward Transformer Transformer Site.Site. The The Ward Ward Transformer Transformer site is contaminated contaminated by PCBs from electrical by PCBs electrical equipment. EPA and a working equipment. working group potentially responsible group of potentially responsible parties parties (the "PRP "PRP Work Work Group")

Group") have have provided provided documentation documentation showing showing that that I

I TVA sent TVA sent aa limited accordance with accordance limited amount with an contamination in contamination amount of an agreement in the downstream of equipment equipment containing agreement with with EPA.

containing PCBs to the EPA. The downstream drainage The cleanup drainage basin; cleanup effort basin; and the site in 1974.

effort has has been and supplemental 1974. The been divided The PRP divided into supplemental groundwater PRP Work Work Group into four areas:

groundwater remediation.

Group is cleaning areas: two remediation. The two phases cleaning up on-site phases of soil The first phase phase of soil on-site contamination soil cleanup; contamination in cleanup; cleanup cleanup of off-site cleanup is underway, soil cleanup underway, and in offcsite and I high-end cost estimate the high-end estimate for this work work is is about $66

$66 million.

million. There There are are no no reliable reliable estimates estimates for for the the second second phase phase ofof soil and cleanup cleanup or the I supplemental groundwater supplemental estimate of estimate of $6 groundwater remediation,

$6 million. TVA remediation, although TV A understands approximately $725,000 although EPA understands that that EPA EPA has EPA has has selected selected aa cleanup has incurred of those costs.

cleanup plan incurred approximately approximately $3 costs. The PRP Work Group plan for the downstream

$3 million Group plans downstream drainage million in past plans to drainage basin with past response to propose response costs, propose a cost costs, and cost allocation with a present and the present worth the PRP Work allocation schedule worth cost Work Group has schedule which it will will use cost has use as reimbursed EPA approximately $725,000 of I

I the basis for offering settlements to PRPs for the first phase offering settlements damages liability resource damages liability at this site, but TVA equipment to Ward only sent useful equipment Ward and thus phase of TV A is not aware of soil aware of any thus is not liable soil cleanup. It plans any estimated plans to sue PRPs who estimated amount for any such liable for arranging for disposal of aa hazardous who do not hazardous substance not settle. There such damages. TVA There also may TV A has a potential substance at thethe site.

site.

may be natural potential defense natural defense that it I Case Involving Case District Court Involving the General Court for the Southern General Waste Products General Products sites General Waste Products Southern District sites in Evansville, Products Sites.

Evansville, Indiana.

Sites. In District of Indiana, alleging Indiana. TVA In July 2008, TVA was named 2008, a third-party alleging that TVA, and several third-party complaint named in the complaint complaint under several other defendants, under CERCLA defendants, disposed complaint based based on CERCLA was filed disposed of on allegations allegations that of hazardous filed against TVA hazardous materials that TVA arranged TVA in the materials at the the arranged for the disposal the disposal contaminated materials of contaminated materials at the sites. TheThe other other third-party third-party defendants defendants are are General General Waste Products, General General Electric Electric Company, Company, Indianapolis Indianapolis I Power andand Light, National National Tire Tire and Frontier Kemper, Speed Department, Frontier and Battery, Battery, Old Speed Queen, Old Ben Coal Co.,

Queen, Allan Allan Trockman Co., Solar Sources Sources Inc.,

Trockman (the former operator Whirlpool, White Inc., Whirlpool, operator of the County Coal, White County the site), and the Coal, PSI, Tell City Electric PSI, Tell the City of Evansville. This action Electric action was I brought by thethe Evansville hazardous materials hazardous Evansville Greenway Greenway PRP Group, a group of entities materials at the sites, sites, in order to require the third-party entities who are currently third-party defendants currently being being sued in the the underlying underlying case for disposing remediation of the contribute to, or pay for, the remediation defendants to contribute disposing ofof the sites. The The I complaint also includes complaint complaint on October complaint includes a claim under state October 29, 2008.

state law against the defendants hazardous materials. TVA filed its answer defendants for the release of hazardous answer to the I i Unit 1 Completion of Browns Ferry Unit 1, Team Incentive 1,, TVA and two, two engineering engineering and construction Webster"), are to share in aa team

("Stone and Webster"),

("Stone Incentive Fee construction contractors, Fee Pool Claims.

Claims.

contractors, Bechtel Power Corporation incentive fee pool funded from cost team incentive Under the contracts for the restart of TV Under cost savings based

("Bechtel") and Stone Corporation ("Bechtel")

based on underruns A's Browns TVA's Browns Ferry Stone & Webster Construction, underruns in the Construction, Inc.

the budgets for their their respective respective work scopes. The contracts provide provide that the fee pool could could not exceed exceed $100 regardless of

$100 million regardless of the actual savings involved, and the savings savings involved, I would be allocated would allocated as follows: 90 percent of the first $40 million would split equally among among TVA and and the two contractors.

contractors. Thus, if payment from this pool would have been $38 million, for a total payout would be given to the contractors, and any amount if the maximum maximum cost savings of$100 payout under both contracts million had been of $100 million amount over $40 million would be been attained, each contractor's

$76 million with the remaining of$76 contracts of contractor's remaining $24 million being be I credited to TV credited TVA.A. The contractors contractors have have taken the position that they should each receive the maximum payment. In 2008, Bechtel Bechtel agreed to I settle its team incentive fee claim over $15 claim for a payment

$15 million that Stone and Webster receives payment of $15 million, conditioned upon Bechtel of$15 resolution of its team incentive fee claim. TV receives in resolution TVA additional payment equal to any amount Bechtel receiving an additional A and Stone and WebsterWebster mediated the team continuing. On August team claim (as well as other claims) in May 2008 incentive fee claim incentive 2008 and discussions with Stone and Webster are continuing. August 20, 2008, 2008, the II TVA TVA Board approved Webster has not agreed Webster previously calculated previously proposed settlement with Stone and Webster, contingent on Stone approved a proposed calculated by TVA,TV A, and TVA Stone and Webster agreeing reasonably possible that TVA could incur some potential agreed to the conditions. It is reasonably created a reserve for the additional amount.

TV A has created certain conditions. Stone and agreeing to certain potential liability in excess of the amount and I Paradise Fossil Plant Clean Air Act Permit. Permit. On December 21,2007, Heartwood, and Hilary Lambert filed a petition with EPA raising objections to the conditions Heartwood, Fossil Plant ("Paradise"). Among other things, the petitioners Sierra Club, the Center for Biological Diversity, Kentucky 21, 2007, the Sierra conditions of TVA's current CAA permit at the Paradise petitioners allege that activities at Paradise triggered the NSR requirements Kentucky Paradise requirements for NO xx and that I the monitoring of opacity at Units 1 and 2 of the plant is deficient. The current continues to remain in effect. It is unclear whether or how current permit continues I the plant's permit might be modified as a result of this proceeding.

Proceedings. TVA is engaged in various administrative Employment Proceedings_. proceedings arising-from employment administrative and legal proceedings employment disputes. These I matters are governed by federal law and involve issues typical of those encountered in the ordinary course of business ofa matters discrimination or retaliation (including include allegations of discrimination of a utility. They may environmental concerns), wrongful retaliation for raising nuclear safety or environmental (including retaliation termination, and failure to pay overtime under the Fair Labor Standards Act. Adverse outcomes in these proceedings would not normally be I material to TV material TVA'sA's results of operations, liquidity, and financial condition, although it is possible that some outcomes outcomes could require TV TVA A to I change how it handles certain personnel matters or operates its plants.

<:hange

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Table of Contents Contents Information Request Reguest from EPA. EPA. On April 25, 25, 2008, TVA received a request request from EPA under section section 114 114 of the CAA CAA requesting I

extensive information about projects operations of 14 of TVA's 59 coal-fired projects at and the operations coal-fired units. These 14 units are located in the States of of Alabama, Kentucky, and Tennessee. This request for information is similar to but broader received during EPA's NSR enforcement administrative proceeding enforcement initiative.

proceeding against against TVA initiative. TVA has responded broader than section 114 requests that otherother companies responded to this request. EPA's request could be the first step in an TV A that could then result in litigation in the courts.

companies have I

U TVA TV Notice of Violation at Widows Creek A failed to properly properly maintain ductwork Creek Unit 7. 7. On July 16,2007, 16, 2007, TVA received ductwork at Widows Creek Unit 77 and other received a Notice of Violation other violations. TVTVA Violation ("NOV")

A repaired

("NOV") from EPA alleging alleging that repaired the ductwork in 2005. While the NOV NOV that I does not set out an administrative penalty, it is likely that EPA may seek a monetary administrative penalty, or both. TVA and the State

$100,000. TVA

$100,000. TV A is unable to estimate estimate the amount State of Alabama entered amount of potential monetary monetary sanction entered into an agreed monetary sanctions sanction through giving up emission allowances, agreed order allowances, paying an order in which TVA agreed to pay the state sanctions from EPA for which TVA may be liable in connection connection with the an thef I

NOV.

Administrative Proceeding Regarding Nuclear Plant ("Bellefonte")

Nuclear Bellefonte Nuclear Plant Units 33 and 4 . TV Regarding Bellefonte

("Bellefonte") Units 3 and 4 in October TVA A submitted its COLA to NRC for Bellefonte October 2007. If approved, the license to build and operate the plant plant would be issued to.

I TVA. Obtaining Obtaining the necessary COLA for two APlOOO COLA necessary license license would give TV AP1000 reactors at Bellefonte technically sufficient technically TVAA more certainty about the cost and schedule of a nuclear Bellefonte was officially docketed sufficient to support NRC's more detailed reviews.

docketed by NRC on January 18,2008, nuclear option for future decisions. The 18, 2008, indicating the NRC found it complete complete and The I

On June 6, 2008, a joint intervention and a request for a hearing joint petition for intervention hearing submitted to the NRC by the Bellefonte Efficiency Efficiency and II Sustainability Team, the Blue Ridge Environmental Sustainability Environmental Defense Defense League, and the Southern Alliance for Clean Energy. The petition raised 19 potential contentions potential contentions with respect respect to TVA's COLA. Both TVA and the NRCstaff NRC staff opposed the admission of the petitioners' petitioners' proposed contentions, and, as a result, the admission of the petitioners contentions, petitioners as parties to the proceeding. Additionally, TVA proceeding. Additionally, TV A opposed the admission of one of of the petitioners to the proceeding subsequently proceeding on the grounds that it lacked standing. The Atomic Safety and Licensing Board presiding subsequently denied standing standing to one of the petitioners petitioners and accepted hearing on these admitted contentions will be conducted presiding over over the proceeding accepted four of the 19 contentions submitted by the remaining two petitioners. A conducted in the future. The admitted contentions contentions involve questions about the estimated proceeding estimated costs of of I

the new nuclear nuclear plant, the storage of low-level radioactive waste, and the impact low-level radioactive impact of the facility's operations, operations, in particular particular the plant intake, on on aquatic species. Other COLA applicants have aquatic species. have received similar petitions petitions raising similar potential potential contentions.

contentions.

generation The TVA TV A Board generation options Board has not made a decision to construct new plant options at the site.

plant units at the Bellefonte site, and TV TVAA continues continues to evaluate all nuclear nuclear I Significant Litigation to Which States v. Duke Energy, Which TVA Is Not a Party.

Energy, vacating the ruling of the United Party. On April 2, United States Court 2, 2007, the Supreme Court issued an opinion in the case of United Court of Appeals Appeals for the Fourth Circuit Circuit ("Fourth

("Fourth Circuit") in favor of Duke I Energy Energy and against EPA in EPA's NSR enforcement case against Duke plants but can apply to existing plants if a maintenance under EPA's Prevention maintenance project Prevention of Significant Deterioration Deterioration regulations, Duke Energy.

Energy. The The NSR regulations apply primarily "non-routine" and (2) project (1) is "non-routine" regulations, increases increases in annual primarily to the construction construction of new (2) increases emissions. The Supreme Court held that annual emissions should be used used for the test, not hourly hourly emissions new I

as utilities, including including TVA, TV A, have argued argued should be the standard. Annual emissions can increase increase when a project improves the reliability of plant operations and, depending operations depending on the time period over which emission changes are calculated, it is possible possible to argue that almost all reliability increase annual emissions. Neither projects increase Neither the Supreme Court Court nor the Fourth Circuit Circuit addressed addressed what what the "routine" "routine" project test should be. The United States District Court for the Middle District of North Carolina had ruled for Duke Energy on this issue, holding that "routine" United The "routine" must take I into account what is routine in the industry and not just what to vacate vacate its entire prior ruling, including the portion relating what is routine at a particular particular plant or unit as EPA has argued. EPA did not appeal this ruling. On October 5, 2007, EPA filed a motion with the United States District Court for the Middle relating to the test for "routine" "routine" projects.

Middle District District of North Carolina asking that court I TVA is currently involved in an NSR case defenses. Environmental Environmental groups and North Carolina case involving Bull Run, which is discussed in more detail above. The Supreme Court's rejection of the hourly standard for emissions testing could undermine one of TVA's defenses in the Bull Run case, although TVA has other other available Carolina have given TVA notice in the past that they may sue TVA for alleged NSR violations at a available Ii number of TVA units. The Supreme Supreme Court's decision could encourage such suits, which are likely to involve units where could encourage where emission control systems such as scrubbers relatively near scrubbers and selective near term.

selective catalytic catalytic reduction reduction systems are not installed, under construction, or planned planned to be installed installed in the I

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I of Contents Table a/Contents Table Significant Litigation to Which TVA Is Not a Party.

Significant Litigation Party, Case Involving North Carolina's Petition Case Involving EPA. In 2005, Petition to EPA. 2005, North Carolina I petitioned plants in 13 states, Section 126 of the CAA to impose petitioned EPA under Section petition primarily on the basis that CAIR petition CAIR remedies impose additional emission reduction reduction requirements requirements for SO 2 and NO coal-fired power NO,,x on coal-fired coal-fired power plants are located. In March 2006, EPA denied the North Carolina including the states where TVA's coal-fired states, including power Carolina remedies the problem. In June 2006, North Carolina filed a petition for review of EPA's decision with the D.C. Circuit. On October 2007, TVA filed a friend of the court brief in support of EPA's decision to deny North Carolina's October 1, 2007, Carolina's Section 126 126 I petition. The D.C. Circuit ordered briefs in the case and to address what should happen if ordered the parties, including TVA, to file new briefs if the court I vacates CAIR.

vacates .

II ITEM SUBMISSION OF MATTERS TEM 4. SUBMISSION MATTERS TO A VOTE OF SECURITY SECURITY HOLDERS Not applicable.

applicable.

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Table of Table Contents a/Contents PART II I

IT EM 5. MARKET MARKET FOR PURCHASES OF EQUITY PURCHASES FOR REGISTRANT'S REGISTRANT'S COMMON EQUITY SECURITIES COMMON EQUITY, EQUITY, RELATED RELATED STOCKHOLDER STOCKHOLDER MATTERS AND AND ISSUER ISSUER I

Not applicable.

ITEM 6. 6. SELECTED FINANCIAL FINANCIAL DATA DATA I The following selected selected financial data data for the years 2004 through 2008 should be read read in conjunction conjunction with the audited financial financial I

statements and notes thereto (collectively, the "Financial "Financial Statements")

Statements") presented presented in Item 8, 8, Financial Statements Statements and Supplementary Supplementary Data. Certain reclassifications reclassifications have have been been made to the 2004, 2005, 2005, 2006, and 2007 financial financial statement presentation to conform to the 2008 presentation.

presentation.

Statements of Income Data Statements of Income Data For the years years ended September September 30 II (in millions) 2008 2007 2006 2006 2005 2005 2004 2004 I QRerating revenues

,perating revenues 1,1, 77 Revenue capitalized during pre-commercial pre-commercial plant plant

$ 10,382 10,382 $ 9,326 $ 8,983 $ ~c----",-_---,-7 7,792 7,7927 7 $ 7,5257

,iliC] II operations - (57)

(57) - -

(8,198)2 (7,726) 22 (7,560)

(7,560) 22 (6,455)

(6,455) 2,2, 77 (5,833 )37

,Operating pperating expenses 6,6.88 Operating income

'Other income, net 1, 4, 6,7 Other income, net 1,4, 6, 7 (8,198)2 2,184 2,184 9

9 (7,726) 1,543 71 71 1,423 78 78 1,337 577 57 7 (5,833L:j 1,692 1,692 6477 64 I I U Unrealized Unrealized gain gain (loss) on derivative contracts, net - 41 (15)

(15) 3 (7)

(7)

'~~~~~==~~----------~~----~~----~~~----~~~----~~~1~36'~~1 eXRense 4,8 interest expense Net interest (1,376)

(1,376) (1,232) (1,264) (1,312) 8 (1,312) (1,363*) s Cumulative accounting changes effect of accounting Cumulative effect - - (109) 55 (109) - _

Net income I

income $ 817$ $

817 423 $ 113-$ $

113 85 ~_...;;.3,;",,;;.86~

$ 3867 Notes I

(1) Prior to 2007, TVA reported income of$1O reported certain revenue not directly associated with revenue derived of $10 million, $12 $12 million, and $8 $8 million for 2006,2005, INCOME . Additionally, certain items not directly OTHER INCOME.

derived from electric 2006, 2005, and 2004, respectively, directly associated with the sale of electricity electric operations as OTHER respectively, has been been reclassified from OTHER REVENUE electricity were previously previously reported REVENUE. This OTHER REVENUE.

REVENUE to reported as S ALES OF This I

ELECTRICITY. This revenue ELECTRICITY. revenue of $22 million, $23 million, and $22 $22 million for 2006, 2005, 2005, and 2004, respectively, respectively, has been reclassified reclassified from .

S ALES ALES OF OF ELECTRICITY to OTHER OTHER REVENUE.

REVENUE.

(2) During (2) During 2008, 2007, 2006, and 2005, TVA recognized impairment losses related related to its PROPERTY, recognized a total of$9 of $9 million, $21 million, $14 EQUIPMENT. The 2008 Loss ON PROPERTY, PLANT, AND EQUIPMENT.

$14 million, and $24 million, respectively, ON ASSET ASSET IMPAIRMENT respectively, in_

IMPAIRMENT included a $4 million write-off in write-off I due to project and technology changes grinding equipment purchased well as approximately $1 changes from a wet scrubber

$1 million in write-offs scrubber to a dry scrubber write-offs of other CONSTRUCTION scrubber at John Sevier Fossil Plant, a $4 purchased for the Bull Run Fossil Plant when the decision was made to purchase C ONSTRUCTION WORK purchase limestone

$4 million write-off write-off of limestone limestone in the pre-ground pre-ground state, as WORK IN PROGRESS assets. The 2007 Loss ON ASSET IMPAIRMENT IMPAIRMENT

.1 included a $17$17 million write-down of a scrubber project project at Colbert and write-downs of $4 million related related to other CONSTRUCTION IN IN PROGRESS assets. The 2006 LoSS PROGRESS related related to new pollution-control funding limitations and a $2 Loss ONON ASSET IMPAIRMENT included write-downs ASSET IMPAIRMENT pollution-control and other technologies that had not been

$2 million write-down write-down on one of two buildings write-downs of been proven

$12 million on certain CONSTRUCTION of$12 proven effective and a re-evaluation buildings in TVA's CONSTRUCTION IN PROGRESS assets IN PROGRESS re-evaluation of other projects due to TV A's Knoxville Office Complex based on TVA's plans to sell II or lease the East Tower certain re-evaluation Tower of the Knoxville re-evaluation of other projects Knoxville Office certain CONSTRUCTION IN PROGRESS assets related Office Complex. The 2005 Loss ON ASSET IMPAIRMENT related to new pollution-control IMPAIRMENT included a $16 pollution-control and other technologies projects due to funding limitations and an $8 $8 million write-down

$16 million write-down technologies that had not been write-down on one of two buildings been proven write-down on proven effective and a buildings in TVA's Knoxville Office on I

Complex Complex based on TVA's TVA's plans to sell or lease the East Tower of the Knoxville Office Complex.

(3) During 2004, TV (3) TVA A was notified by a supplier that it would not proceed Regenesys energy cancellation of the Regenesys project.

cancellation of the Regenesys project.

storage plant in Columbus, proceed with manufacturing Mississippi.

manufacturing of fuel cells to be installed in the partially completed Regenesys energy storage plant in Columbus, Mississippi. Accordingly, TVA recognized a net $20 million loss on the completed Accordingly, TVA recognized a net $20 million loss on the partially I

(4) Prior to 2006, TVA reported shqrt-termshort-term investment interest 2005 and 2004, respectively, has been reclassified from INTEREST interest income with interest expense. Interest income of INTEREST EXPENSE, EXPENSE, NET to OTHER INCOME, NET.

$19 million and $6 of$19 $6 million for I (5) During 2006, (5) During No.

No. 143 2006, TVA TV A adopted which adopted FIN resulted in FIN No.

a No.447, 7, "" Accounting cumulative Accountingfor effect effect charge for Conditional to Conditional Asset income of $109

$109 Retirement Obligations Asset Retirement million and an Obligations -- an increase in an interpretation interpretation of accumulated ofF depreciation FASB depreciation $20 of Statement ASB Statement

$20 I

million. See Note Note 5.

(6) TVA has certain certain service organizations organizations which provide maintenance maintenance and testing services services to customers both inside and outside of TVA. For (6) 2006 and 2005, the excessexcess of cost recovery over actual cost and services provided to TVA organizations organizations of$12 of $12 million and $12 $12 million, I

I respectively, has been reclassified

. (7) Certain items previously reclassified from OTHER OTHER INCOME to previously reported as revenue under OTHER to OPERATING EXPENSE EXPENSE..

OTHER REVENUE were reclassified INCOME . These reclassified as OTHER INCOME. These items were not directly directly associated associated with revenue derived from electric operations but are associated associated with the operation of service organizations organizations which provide I environmental environmental and maintenance derived from electric operations testing services. Previously maintenance and .testing million for 2005 and 2004, respectively, operations was recorded Previously reported revenue respectively, are now included included in OTHER INCOME.

recorded net of related expenses.

revenue from these items of approximately $5 million and $13 INCOME. Additionally, Additionally, certain expenses. Expenses of $15 million and $13 of$15 REVENUE related certain OTHER REVENUE related to income

$13 million for 2005 and 2004,

$13 respectively, respectively, have been reclassified REVENUE to operating expenses.

reclassified from OTHER REVENUE .

(8) Subsequent to 2005, 2005, certain certain financing charges related to leaseback leaseback obligations were recorded as OPERATING AND MAINTENANCE AND MAINTENANCE expense. Beginning with 2006, these financing financing charges charges are classified as interest expense. Previously reported reported financing charges charges of of approximately $51 million and $53 approximately $51 millio~ for 2005 and 2004,

$53 million 2004, respectively, are now included included in INTEREST ON DEBT AND AND LEASEBACK LEASEBACK OBLlGA nONS..

OBLIGATIONS I- - - - - - - - - - - - - Page 50 50 I

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II Table ofa/Contents Contents Balance Sheets Data Balance Sheets Data At At September September 30 (in (in millions) 2008 2008 millions) 2007 2007 2006 2006 2005 2005 2004 2004 II Assets Assets m I

F Current Current assets assets 11 $$ 2,503 $ 2,436 $$

2,436 2,513 $$ 2,176 2,176 $$ 2,2953 2,12I]1 Property,_plant, Property, plant, and and equipment, equiI'ment, net 25,779 25,779 24,832 24,832 24,421 23,888 23,888 23,699 .

23,699

[I Investment I If Investment funds Regulatory and Regulatory Total otal assets and other long-term long-term assets assets 956 7,899 37,l37 37,137$ $

1,169 1,169 5,295 5,295 33,732 $

33,732$

972 6,402 34,308 $$

858 858 7,551 34,473-$

34,473 $

744 744 7,451 3 7,451 34,189]I3 34,189J I

Liabilities {!ro{!rietar}, capital

.Liabilities and proprietary ca{!ital Current liabilities 11$

Current $ 4,252 4,252 $ 3,429 3,429 $ 5,229 7,052

$ 6,724 6,724 7,606

$ 5,420 5,420 7,168 II I Regulatory other liabilities and other Regulato0:' and liabilities 8,918 8,918 6,400 6,400 7,052 7,606 7,@

Long-term debt, net Long-term net 20,404 21,099 21,099 19,544 19,544 17,751 17,751 19,337 19,337

[fotalliabilities jTotal liabilities 33,574 30,928 30,928 31,825 32,081 32,081 31,925]I 31,925JI I Retained Retained earnings earnings 2,571 2,571 1,763 1,763 1,349 1,349 1,244 1,162 I 1,162 Other proprietary capital capital 992 1,041 1,041 1,l34 1,134 1,148 1,148 1,102 1,102

[Fotal proprietary

[otal proprietary capital 3,563 2,804 2,804 2,483 2,483 2,392 2,392 2,26413 2,264JI liabilities and proprietary Total liabilities proprietary capital $ 37,137 $ 33,732 $ 34,308 34,308 $ 34,473 34,473 $ 34,189in 34,189 Notes Notes I

(1) In 2006, TVA TV A began to apply RECEIVABLE. The advances RECEIVABLE.

LIABILITIES for the same amount.

LIABILITIES customer advances previously apply certain customer previously reported as CURRENT were $93 million in 2005 and $91 advances were $91 million in 2004. A reduction LIABILITIES as a reduction CURRENT LIABILITIES reduction to ACCOUNTS CURRENT ASSETS and CURRENT occurred to both CURRENT reduction occurred CURRENT I II Financial Obligations Obligations As of September 30 (in millions) long-termn debt, excluding Net long-term excluding current maturities maturities $

2008 20,404 $

2007 21,099 21,099 $

2006 19,544 19,544 $

2005 17,751 17,751 $

2004 2004

,~----,,-----,1,-,,-9.,337 J 19,3371.

11 Qther long-term obligations

Other Capital leases ** 92

=7~=7=-~----------------------------~~------~~------~~~----~~~~=======I~,lWJ~7~8 104 128 128 150 138 3 II Leaseback Leaseback obligations obligations 1,353 1,353 1,072 1,108 1,108 1,143 1,178 I

Energy prepayment obligations obligations 1,033 1,138 1,244 1,350 1,455

[otal long-term obligations ffotal other long-term obligations 2,478 2,314 2,480 2,643 2,771]E 2,77I J Total long-term long-term obligations 22,882 23,413 23,413 22,024 20,394 22,108 22,108 Discount notes

'Current maturities of long-term debt, net

Current 185 2,030 1,422 90 2,376 985 2,469 2,693 1,924 1,924 2,000]1 2,000J I

obligations Total short-term obligations 2,215 1,512 3,361 5,162 3,924 3,924 Total financial obligations Total $ 25,097 $ 24,925 $ 25,385 $$ 25,556 $ 26,032 26,032 I Note

- Included in Included in ACCRUED LIABILITIES and ACCRUED LIABILITIES and OTHER OTHER LIABILITIES LIABILITIES on on the the Balance Sheets.

Balance Sheets.

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I Table a/Contents Table of Contents ITEM 7. MANAGEMENT'S MANAGEMENT'S DISCUSSION DISCUSSION AND AND ANALYSIS ANALYSIS OF FINANCIAL FINANCIAL CONDITION AND AND RESULTS OF OPERATIONS OPERATIONS (Dollars (Dollarsin millions millions except where noted) noted)

I Bu siness Overview Overview U Distinguishing Features Distinguishing Features of TVA's TVA 's Business I operates the nation's largest public power system. In 2008, TVA provided TVA operates customers, and 159 distributor customers, distributor customers that serve serve nearly nine million people provided electricity people in seven electricity to 52 large industrial seven southeastern industrial customers, customers, six federal southeastern states. TVA generates almost all of its revenues from the sale of electricity, and in 2008 revenues revenues from the sale of electricity electricity totaled $10.3

$10.3 billion. As a wholly-owned wholly-owned agency and and I instrumentality of the United States, however, TV instrumentality distinguishing features are discussed distinguishing discussed below.

TVA A is different different from other other electric utilities in a number of ways. A few of the more electric utilities I it without power Defined Defined Service Area.

Area. TVA has a defined service without an act of Congress, enter into contracts which would service area established by federal federal law. Subject Subject to certain minor exceptions, TVA may not, would have the effect of making it or the distributor customers power supply outside the area for which TVA or its distributor customers customers were were the primary source of power customers of its power a source of power supply on July 1, 1957. This This of statutory provision is referred to as the "fence" "fence" because bounds TVA's sales activities, essentially because it bounds essentially limiting TVA to power sales within a I defined service area. Correspondingly, service area.

Power Act, primarily however, the possibility of sales by Correspondingly, however, primarily through its anti-cherrypicking others for the purpose of delivering by others into TVA's anti-cherrypicking provision, prevents FERC from ordering TV delivering power power to customers TV A's service customers within its service area except for customers TVA significantly limited. The service area is significantly A to provide access to its transmission customers in Bristol, Virginia.

The Federal Federal transmission lines to I however, Rate Authority.

Authority. Typically, a utility is regulated by a public utility however, is self-regulated respect to rates. The TVA self-regulated with respect utility commission, which approves TV A Act gives the TVTVA approves the rates the utility may charge. TV A Board sole responsibility for establishing establishing the rates rates TV TVA TVA, A charges A,

I for power. These These rates are not subject to judicial however, the TVATV A Board is charged judicial review or review or approval by any state or federal regulatory charged by the TVA TV A Act to have regard for the objective have due regard objective that power regulatory body. In setting TVA's rates, power be sold at rates as low as are feasible.

Funding.

Funding. TV appropriations from Congress. In 1959, A's operations were originally funded primarily with appropriations TVA's 1959, however, Congress passedpassed legislation that required TVA's power programprogram to be self-financing from power revenues and proceeds from power power program financings. Until 1 1999, TVA TVA TV TV A continued continued to receive some appropriations A has not received revenues in accordance appropriations for certain multipurpose multipurpose activities stewardship activities. Since activities and for its stewardship Since 1999, however, appropriations from Congress for any activities and has funded essential stewardship activities primarily with power received any appropriations accordance with a statutory statutory directive from Congress. .

power I c TV A, unlike investor-owned TVA, investor-owned power companies, companies, is not authorized to raise capital cash from operations and proceeds from power program borrowings to fund its operations. The TVA capital by issuing equity securities.

securities. TVA TV A Act authorizes TVA TV A relies primarily on on TV A to issue bonds, notes, and other other evidences (collectively, "Bonds")

indebtedness (collectively, evidences of indebtedness exceed $30 billion at any time. From time to time, draft "Bonds") in an amount not to exceed draft I legislation introduced in Congress that would expand legislation is introduced expand the types of financial obligations that count towards towards TVA's TVA's $30 billion debtdebt I ceiling. Under leaseback Under this draft legislation, legislation, long-term obligations arrangements and power prepayment leaseback arrangements obligations that finance capital capital assets would also count toward the debt ceiling, including exceeding one prepayment agreements with original terms exceeding one year. If Congress decides including decides to broaden the type of of covered by the debt ceiling or to lower the debt ceiling, TV financial instruments that are covered TVA capital to, among A might not be able to raise enough capital among II then-existing financial obligations, other things, service its then-existing operate and maintain its power properly operate obligations, properly power program. At September 30, 2008, TVA had approximately approximately $22.7 reinvestment in its power assets, and provide for reinvestment

$22.7 billion of Bonds outstanding (not including noncash items of foreign of $138 million and net discount on sale of bonds of$199 currency valuation loss of$138 of $199 million). For additional additional information information regarding foreign regarding TVA's sources sources I of funding, see Item 7, 7, Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion Operations - Liquidity and and Capital Capital I Resources - Sources Sources ofLiquidity.

Liquidity.

Stewardship Activities. TVA's mission includes managing Stewardship managing the United States' largest river system - the Tennessee River, its States' fifth largestriver I tributaries, and public lands along among other things, year-round along the shoreline - to provide, aInong year-round navigation, flood damage reduction, affordable damage reduction, affordable I reliable electricity, and, consistent with these primary and reliable and economic economic development.

development. There purposes, recreational opportunities, adequate water primary purposes, comprise TVA's integrated There are 49 dams that comprise integrated reservoir water supply, improved reservoir system. The reservoir system improved water quality, system provides 800 miles of of commercially navigable waterway and also provides significant flood reduction benefits both within the Tennessee commercially Tennessee River system and I downstream on the lower Ohio and Mississippi Rivers.

downstream provides a water supply Rivers. The reservoir system also provides supply for residential and industrial customers, as well as cooling water for some of TVA's coal-fired and nuclear power plants. TVA's Environmental Policy (approved in May May

2008) provides integrated approach to TVA's multi-faceted mission by providing provides objectives for an integrated supporting sustainable economic growth, and engaging supporting engaging in proactive environmental providing cleaner, affordable energy, cleaner, reliable, and still affordable Environmental Policy provides additional stewardship. The Environmental environmental stewardship. additional I direction in several environmental resource management. TV resource TVA stewardship areas, including environmental stewardship including water resource resource protection A also manages 293,000 acres of reservoir lands for natural improvements, sustainable land use, and natural protection and improvements, natural resource resource protection, recreation, and other purposes.

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Table o/Contents Table of Contents 3 I

Economic Economic Development Activities. beginnings in 1933, Activities. Since its beginnings 1933, part of TVA's mission has beenbeen to promote the development development of the Tennessee Valley. TVA Tennessee TV A works with its distributor customers, available to businesses locating or expanding available customers, regional, expanding in TVA's benefit Tennessee Valley residents.

that benefit regional, state and local agencies, and communities to showcase TV A's seven-state seven-state service area. These efforts showcase the advantages efforts have resulted in new investments advantages investments and quality jobs If At its October October 30, 2008 meeting, the TVA Board approved a new economic development development initiative, the Valley Investment Investment Initiative. Under the Valley Investment Initiative, TVA and distributors of TVA power will provide an incentive award to existing companies in Initiative. Under the Valley Investment Initiative, TV A and distributors of TVA power will provide an incentive award to existing companies in II TVA's seven-state service TVA's service area that demonstrate demonstrate a multi-year multi-year commitment commitment to sustained capital investment, the creation of quality jobs, compatible and efficient power use, and a commitment commitment to remain in the TVA region.

performance To monitor its progress progress in accomplishing its economic development mission, the TVA Board uses an economic performance measure. See Item 7, Management's economic development Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion development index Executive Operations --Executive Ii Summary-Summary - 2008 Performance Performanceindicators.

Indicators. This measure tracks tracks the number ofjobs of capital investment in the Valley, and the impact of the retained represent the influence influence TVA has on sustainable retained and added jobs added added and/or retained added jobs on the economic sustainable economic growth in the Valley.

retained in the Tennessee Tennessee Valley, the amount economic vitality of the Valley. These amount These three metrics metrics I Executive Executive Summary Challenges During 2008 ChallengesDuring 2008 I

significant TVA TV A faced several several challenges during 2008 that impacted its cash flows, results of operations, significant of these challenges related to investment supply and temperature.

investment performance, operations, and financial condition. The most performance, weather conditions, higher commodity prices, asset performance, performance, and water water I investment Investment Peiformance. performance of debt, equity, and other markets in 2008 negatively Performance. The performance investments held in TVA's TV A's pension and decommissioning negatively impacted the asset values decommissioning trust funds. During 2008, the investments in the TVA Retirement values of Retirement System declined in I3

$1,429 million, or 19 percent. As of September 30, value $1,429 2008, the TVA 30,2008, TVA retirement retirement system was approximately approximately 80 percent percent funded. From October 1, 2008, to November 30, 30, 2008, the investments percent. Because of these declines, TVA investments in the TVA Retirement TVA may be required Retirement System declined required to make additional declined in value an additional $1,138 additional contributions to the TVA Retirement Retirement System

$1,138 million, or 18 System in the future. I During 2008, the nuclear decommissioning TVA's nuclear decommissioning decommissioning trust portfolio declined in value $241 million, or 22 percent.

percent. As of September decommissioning trust funding was 98 percent of the estimated present value of the funding requirements September 30, 2008, requirements established 2008, established by the I

Nuclear Regulatory Commission ("NRC"). From October October 1,1, 2008, to November November 30, 2008, 2008, the nuclear nuclear decommissioning declined decommissioning trust portfolio declined in value an estimated additional $206 million, or 24 percent.

TVA TV TVA will submit its biennial funding status report A anticipates it may make make contributions report to NRC in March 2009. Based contributions to the decommissioning trust fund or provide Based on the status of the funding requirement requirement at that time, provide other methods of decommissioning funding assurance I3 necessary to match projected decommissioning fund balances. TV projected decommissioning in light of recent market performance TVAA is monitoring the monetary value performance and believes that, over the long term before cessation decommissioning activities, adequate decommissioning adequate funds from investments value of its nuclear decommissioning decommissioning trust fund cessation of nuclear plant operations and commencement investments will be available to support decommissioning.

decommissioning.

commencement of I i During During 2008, TVA's asset retirement trust portfolio, which is invested entirely in fixed income funds, increased in value $1.4 or 3.5 percent. From October 1,2008, or 0.19 percent.

1, 2008, to November 30, 2008, the asset retirement trust portfolio portfolio increased in value an additional

$1.4 million, additional $155

$155 thousand,, I TVA's investment the assumption investment policies are based on the objective of meeting long-term assumption of encountering encountering distressed long-term obligations, and the allocation of investments is based on distressed market conditions from time to time. TVA TV A does not anticipate making significant on significant changes in its basic If investment policies policies as a result of current current market conditions. See Item 7, Management's Item 7, Management's Discussion and Analysis of Financial Financial Condition and and Results Results of Operations Operations - Risk Management Management Activities -- investment Investment Price Price Risk.

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I Table a/Contents Table of Contents Conditions. 2008 was the ninth Weather Conditions. ninth driest driest year year in in the the eastern eastern Tennessee Tennessee Valley Valley in in 119 119 years years of ofrecord-keeping.

record-keeping. Rainfall Rainfall in in the UI eastern Tennessee eastern runoff, Tennessee Valley runoff, TVA's percent lower percent lower than Valley was 76 percent TV A's hydroelectric than in 2007, percent of normal hydroelectric production production for 2008 2007, 2006, and 2005, normal for the the year, 2008 was slightly year, and slightly less 2005, respectively.

and runoff less than respectively. Because Because of runoff was than 6.7 was 4747 percent percent of of normal.

normal. Largely 6.7 billion kilowatt-hours, of the lower kilowatt-hours, which lower hydroelectric Largely as which was hydroelectric production, was 26 production, TVA as aa result of 26 percent, percent, 33 TVA had to of this low rainfall percent, and 33 percent, to rely more more heavily rainfall and and 57 heavily on on and purchased power purchased power and more more expensive expensive generation generation sources sources such combustion turbines such as combustion turbines during during 2008.

2008.

I costs in costs Higher Commodity Higher in short-term 2008, increased 2008, Commodity Prices.

short-term markets Prices. Due to markets for natural to rising rising commodity commodity prices natural gas, fuel oil, coal, coal, and prices across domestic and electricity domestic and electricity during 2008.

percent, 62 percent, and 22 percent, respectively, increased 31 percent, 65 percent, and international 2008. The international markets, The market respectively, as compared market prices compared to the markets, TVA prices for these the market TVA experienced experienced increased these commodities commodities at September market prices at September September 30, increased September 30, 2007. Market 12007. these commodities prices for these Market prices September 30, commodities at September 2008, and 2007, are 30,2008, shown in the are shown the table below.

Commodity Pricing Table Commodity I September 30, As of September As 30, 2008 2008 II

- Commodity Commodity 2008 2008 2007 2007 Percent Percent Change NaruraIGas~~,~$~/m~m~B~tu~)/

Natural Gas (Henry Hub, $/mmBtu)________________________________________~ $ ____~~~~----~~~--------~~

9.01 $

9.01 6.87 31 Oft) 310/J Fuel Oil Fuel Oil (Gulf (Gulf Coast, $/mmBtu) 21.38 21.38 12.97 12.97 65%

65%

Coal

'Coal(FOB $/ton);:-::-=-::-:-_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _--::-:c:.=-=::---__

(FOB mine, S/ton) 48.13 29.65

"'--=;.:c.:-"-"-_ _ _ _---:'7:'-':'

620ft) 62 %'

I Electricity (Into-TVA, Electricity (Into-TVA, $/MWh) 70.95 70.95 58.03 22%

22%

I3 Since September 30,2008, the market prices for some of these commodities have fallen.

Since September 30, 2008, the market prices for some of these commodities have fallen.

Although mechanism to regularly Although the FCA provides aa mechanism rates to reflect changing fuel and regularly alter rates and purchased power costs, there is a lag between purchased power costs and occurrence of a change in fuel and purchased between the occurrence and the reflection change in rates. As a result, TVA's reflection of the change cash flows TVA's cash I can affected by the FCA. As of negatively affected can be negatively expected to be recovered expected of September through the FCA in future recovered through September 30,30, 2008, 2008, TVTVA had $28 A had See Item 1, Business future periods. See Business --- Rate Actions.

purchased power

$28 million in deferred fuel and purchased power costs that are

Performance of Assets. Although TVA's generation and transmission assets performed well overall in meeting the peak demands Performance ofAssets. Although TVA's generation and transmission assets performed well overall in meeting the peak demands I summer of 2008, during the summer 2008, TVTVA related to large generating A faced hard spots in its operations related generating unit outages.

outages. .

Browns Ferry Unit 1 experienced reactor shutdowns experienced five unplanned reactor months after restart shutdowns in the first five months restart in June 2007.

I3

A planned planned outage outage at Sequoyah generator during the scheduled outage.

main generator identification and repair of damage in the Sequoyah Nuclear Plant Unit 1 was extended 16 days due to the identification I I Browns Ferry Nuclear Plant Unit 3 recovering recovering from this generator outage 21 days.

experienced an unplanned 3 experienced automatic shutdown due to a main generator trip. As it was unplanned automatic generator trip, a secondary problem was discovered which required repairs and extended extended the duration of this I The duration of a planned outage scheduled at Watts Bar Nuclear Plant Unit 1 was extended nine days due to emergent issues and completion of identified complications associated with completion identified outage work.

I Fossil generation was 2.2 percent less than planned during 2008 primarily due to a 35-day extension of a planned outage on Colbert Colbert Fossil Plant Unit 5 and increased forced outage rates at Bull Run Fossil Plant and Widows Creek Fossil Plant Unit 7.

See Item 7, Management's Management's Discussion and Analysis and Results of Operations -- Operations--

- Results of Operations - Operating OperatingExpenses.

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Table of Table a/Contents Contents 3 Challenges Related to Water Supply and Water Temperature.

Challenges Temperature. TVA faces challenges TVA faces challenges related related to supply and water to water supply water temperature temperature onon I the the Cumberland Cumberland River system and on River system on the Tennessee River system. On the Tennessee River the Cumberland Cumberland RiverRiver system, the the U.S. Army CorpsCorps of of Engineers Engineers

("Corps") operates

("Corps") operates hydroelectric plants on the Tennessee plants hydroelectric facilities Tennessee River facilities and TVA River system.

system.

TV A operates operates fossil plants. TV A also operates plants. TVA hydroelectric facilities, operates hydroelectric facilities, fossil plants, and and nuclear nuclear I

n agreement with TVA.

agreement coupled with the coupled TVA. Of the drought Challenges. The Corps operates Cumberland River Challenges.

Cumberland operates eight Wolf Creek and Center Of these facilities, Wolf resulted in less water drought has resulted water flow and eight hydroelectric Center Hill above normal and above facilities on the hydroelectric facilities Hill Dams Dams are in in need water temperatures.

normal water temperatures. TVA the Cumberland Cumberland River emergency repairs. The need need of emergency TV A hashas been River which which fall under need to impacted in two ways.

been impacted under the the SEPA repair the dams to repair dams SEP A I

repair First, SEPA's repair the Wolf emergency operating SEPA's emergency Creek and Center WolfCreek operating plan Center Hill reduced the amount of power plan reduced likely that an easing Hill Dams. It is likely power TVA received received from SEPA drought will not eliminate easing of the drought SEPA due to the eliminate the need the drought drought and need for the emergency need to and the need emergency operating to operating I!

plans in the future because plans unclear how long it will because it is unclear will take the Corps to repair take the repair these facilities.

river Second, Second, during summer of 2008, during the summer temperatures, forced TVA to reduce river temperatures, 2008, reduced through the reduced flow through the Cumberland Cumberland RiverRiver system, combined Cumberland and Gallatin

("derate") the power output of its Cumberland reduce ("derate")

combined with higher than normal upstream with higher Gallatin Fossil Plants to remain upstream remain in compliance compliance with I*

temperature limits contained discharge temperature temporary cooling towers at its temporary slightly less by slightly contained in the plants' its Cumberland Cumberland Fossil than one percent; however, less than discharge permits. To mitigate the plants' discharge Plant in Fossil Plant however, no derates in July July 2008. Operation Operation of the experienced at the derates were experienced derates, TVA installed the derates, the cooling towers installed and cooling towers the plant after the cooling and commenced towers reduced Cumberland towers began operating.

operation of commenced operation operating. Output from of Cumberland Fossil Plant's output output I 3

Cumberland River Plant on the Cumberland Gallatin Fossil Plant River was was reduced approximately three percent, primarily reduced by approximately primarily during off-peak hours, to avoid off-peak hours, avoid exceeding exceeding thermal limits. Summer derates derates continue to remain possibility in the future, especially remain a possibility especially until the Wolf Creek and Center Hill Dams are repaired WolfCreek repaired Cumberland River.

normal water flow is restored on the Cumberland and normal Tennessee system. The result was Challenges. Due to the drought, there has been System Challenges.

Tennessee River S~stem was that less water was purposes, and the water that available for cooling purposes, was available rainfall and runoff in the Tennessee been significantly less rainfall that was available was higher Tennessee River higher in temperature.

temperature. During I

the summer summer of 2008, temperatures on the Tennessee 2008, temperatures reached levels that required Tennessee River reached constant use of cooling towers at Sequoyah required nearly constant Sequoyah and 3 Browns Ferry Nuclear Plants substantial amount of Plants to keep of power that TV TVA permitted thermal keep the permitted thermal limits for the river from being A would have otherwise being exceeded. Using the cooling towers required a Ferry lost the use of cooling After Browns Ferry otherwise sold. After towers due to equipment cooling towers equipment I

malfunction in early August 2008, TVA temporarily reduced August 2008, While every effort permitted thermal limits. While derates were required during higher effort was made made to take output on all three units to 50 percent reduced power output derates during low load periods to reduce take derates load daytime hours to meet the permitted higher load temperature limits.

permitted temperature reduce financial capacity to avoid exceeding percent of capacity financial and and operational exceeding operational impacts, some IU 2008 Performance Performance Indicators Indicators TVA quantifies the results of its operations in accordance with its Strategic Plan, which outlines the policy-level policy-level direction for TVATV A and I TVA's TV corporate-level metrics to be used in monitoring progress toward successful lists corporate-level performance in the following five broad areas A's performance areas and establishes implementation of the plan. The Strategic successful implementation establishes general guidelines for each area:

Strategic Plan focuses on on 3

Customers :

Customers:

People :

Maintain power reliability, provide competitive rates, and build trust with TVA's customers; Maintain performance and reputation; Build pride in TVA's performance I

People:

Financial :

Financial:

Assets :

Assets:

Operations :

Operations:

Adhere to a set of sound financial guiding principles to improve TV Adhere Use Use TVA's TVA's assets assets to to meet market meet market demand demand and and deliver public deliver Improve performance to be recognized as an industry leader.

Improve performance to be recognized as an industry leader.

TVA's public value; value; A's fiscal performance; and and II policy-level direction for TV The Strategic Plan also outlines the policy-level toward successful implementation of the plan. These metrics encompass development and may change change from time to time.

TVA corporate-level metrics to be used in monitoring progress A and lists corporate-level encompass aspects of TVA's mission in energy, the environment, and economic economic I n 55 Page 55 Page IU II I

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Table o/Contents Table of Contents 2008 Performance Indicators 2008 Performance I Customer Customer Performance Measure Performance TV A's Delivered TVA's Measure Delivered Cost of Power Power Description I Excluding FCA Costs Excluding Measures cost per MWh highest highest customer MWh sold (excluding FCA costs). Addresses the customer priority of "low cost and reliable power" and controlling costs and increasing emphasizes controlling increasing output.

and I FCA Costs Measures TVA's FCA expenses expenses per MWh sold. Includes expenses recovered through FCA mechanism Includes eligible purchased power, mechanism (fuel, purchased allowance, and reagents). Encourages emission allowance, Encourages TVA to take actions to I lower the overall cost of fuel, purchased costs.

purchased power, and other eligible FCA Economic Development Index Economic Index Measures the effectiveness effectiveness of TVA's sustainable development sustainable economic development I on jobs growth in the Tennessee efforts by focusing onjobs those jobs, and partnership investments in the TV Tennessee Valley, the quality of TVAA service area.

of Participation in Energy Efficiency & Peak Participation Peak Measures the percent TVA percent of TV participating in demand-A customers that are participating I Shaving Initiatives Initiatives management programs (new and existing) such as energyright © side management New Homes or Heat Pumps.

Measures distributors' and directly served customers' satisfaction with I Customer Satisfaction Survey Customer Satisfaction TVA TV variety of areas including wholesale/retail A in a variety performance of local TVA performance TV A customer wholesale/retail supplier, customer service staff, and power quality service staff, quality and pricing, contracts, and power supply reliability of transmission service, pricing, I Connection Connection Point Interruptions mix.

Measures reliability from the customer perspective by focusing on customer perspective on interruptions of power, including interruptions including momentary, caused by the transmission I U People People Cultural Health Index Cultural system at connection connection' points.

Survey of TVA employees includes questions relating to the workforce Performance. CHI Winning Behaviors, and Winning Performance.

environment, safety, Winning I assesses employee assesses employee alignment, alignment, capability, gauge of cultural health.

gauge of cultural health.

capability, and engagement as and engagement an overall as an overall I Safe Workplace Workplace Measures TV TVA employee and staff augmentation safety A employee safety related to the Occupational Safety and Health Administration recordable number of Occupational injuries per 200,000 hours0 days 0 hours 0 weeks 0 months worked. Includes fatality, day time restrictedrestricted duty/job transfer, medical treatment, loss of consciousness, consciousness, and other other I Financial Debt-like Debt-like Obligations/Asset Obligations/Asset Value

"'0'n,1~1{"'nt work-related significant Measures Measures TVA's work-related injury/illness.

TV A's debt-like obligations obligations as a percent percent of total assets.

Includes debt, lease obligations, and prepaid energy obligations.

Includes obligations. Focuses I on achieving a more flexible cost structure.

Earnings/Asset Value Earnings/Asset Measures Measures income income statement earnings earnings before before interest, depreciation, depreciation, amortization, and taxes divided by total assets. Emphasizes Emphasizes effective effective cost cost management management and productivity productivity by focusing on TV TVA's A's return on assets.

Non-fuel O&M Non-fueIO&M Measures Measures all non-fuel non-fuel operations and maintenance maintenance costs per MWh I Emphasizes competitiveness sales. Emphasizes competitiveness by focusing on the most controllable component of TVA's total costs.

I Asset/Operations I Asset/Operations Key Environmental Metrics Measures Measures impact TVA's impact of TV key environmental operations on the environment by focusing on A's operations environmental footprint metrics. Includes weighted summationsummation of: NO x, + SO 2 ++ CO 22+ Clean Water Act Nonconformances Nonconformances + Oil Spills to Water Reportable Quantity Water + Reportable Quantity Releases Releases + Notices Notices of Violation + Office Office I Megawatt Demand Reduction Megawatt (MW Reduced)

Reduced)

Recyclables.

Measures level of demand reduction for electricity Measures electricity (MW) through the efficient efficient use of electricity. Promotes conservation conservation through the I construction of site-built homes that exceed minimum efficiency construction efficiency

Equivalent Availability Factor Equivalent Factor standards.

generation from all TVA Measures the actual available generation generating assets TV A generating I

compared to maximum potential in a given period compared potential availability. Focuses on the generation component and reliable reliable power."

highest customer priority, "low cost component of the highest cost I

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II Table of Contents Table of Contents Future Future Challenges Challenges I3 significant TV TVA A faces several challenges significant of these challenges challenges that may impact its cash flows, results of operations, challenges are discussed discussed below.

operations, and financial condition in the future. The most Meeting the Power Meeting Power Needs in TVA's Service Area. Area. Demand Demand for power in TVA's service area had grown at an average of two percent percent I per year from 2001 to 2007. 2007. During 2008, sales growth as compared and sales that can contribute 2008, demand increased contribute to lower sales growth and lower increased only about 0.2 percent, however, for 2009, TVA has forecasted relatively flat load compared to 2008. This forecast is due in part to expected tighter economic lower load, such as energy efficiency conditions. Although there are many economic conditions.

efficiency and more efficient industrial many drivers industrial and mechanical equipment, drivers equipment, I loads are dependent on the economic conditions in TVA's service area. As economic conditions conditions have deteriorated, deteriorated, TVA has experienced experienced I roughly a two percent reduction in expected expected in the 2009 budget. TV TVA expected sales in early A is not anticipating early 2009 and anticipates that the energy anticipating conditions to improve energy sales for the remainder remainder of 2009 will be lower than improve significantly in the near future but continues to monitor and react to these trends.

II Despite the recent reduction reduction in power sales, TVA TV A still projects that demand plans to meet the need for additional power through a variety of means:

and plans demand for power in its service service area will increase over the long-term I I New Generation.

Generation.TVA intends to add new generation construction of Watts Bar Unit 2. The completion billion. TV TVA A plans to consider generation assets. This intention consider other opportunities intention was reflected in TVA's decision to complete the completion of Watts Bar Unit 22 is scheduled scheduled to occur in 2013 and cost approximately approximately $2.5 opportunities to add new generation from time to time. Market conditions, like the volatility

$2.5 volatility skilled craft labor, may add uncertainties to the cost and schedule potential shortage of skilled of the price of construction materials and the potential I of new construction.

Distributor-Owned Generation.

Distributor-Owned Generation. UnderUnder interim interim agreements agreements dated September 30, 2008, TV TVA A and Seven States Power Corporation Corporation I ("SSPC"), a non-profit organization Tennessee Valley Tennessee Valley- Public Item 1 Business Public Power Power comprised of the majority of TVA distributor customers (who are also members of the organization comprised Supply - Generation Item 1 Business - Power Supply -

took the Association), took Power Association), the first steps in first steps Facilities, Note in joint power 4 -joint power plant plant ownership New Generation ownership

, and Note in the in the- Tennessee 13 Valley. (See Tennessee Valley. (See Leaseback Obligations,)

Generation Facilities, Note 4 - New Generation, and Note l3 - Leaseback Obligations, )

I Power Purchases. Purchasing power from others will likely remain a part of how TVA meets the power needs of its service I Power Purchases.

area. The Purchasing Strategic Plan power establishes fromof a goal others will likely balancing remaincapabilities production a part of how withTV A meets power the power supply needs of requirements area. The Strategic Plan establishes a goal of balancing production capabilities with power supply requirements by promoting the conservation efficient use of electricity conservation and efficient electricity and, when necessary, necessary, buying, building, and/or leasing byits leasing assets or entering service the promoting entering into purchased purchased power agreements. Achieving Achieving this goal will allow TV TVA A to reduce its reliance reliance on purchased power.

I Non-Fuel Non-Fuel Operating maintenance costs.

maintenance costs.

Operating and MaintenanceCosts.

and Maintenance Costs. TVATVA hashas established established twotwo significant significant goals relating to non-fuel operating and I3

Achieving non-fuel operating operating and maintenance performance that ranks in the top quartile maintenance spending performance managing these costs over the next three years; and after that time.

quartile in the electric utility industry by I

performance within the top quartile by keeping the rate of increase Maintaining spending performance in the industry.

increase in these costs in line with the top quartile Meeting these goals will significantly affect TVA's ability to add new generation generation assets.

I Futur~ Contributions Future Contributionsto TVA Investment Funds. TVA's financial markets. If by the recent turmoil in the financial decommissioning trust and pension funds have been adversely TVA's nuclear decommissioning market conditions do not recover quickly enough or continue If market continue to deteriorate, adversely affected TV A may be deteriorate, TVA be I required to make contributions to these investment funds in excess excess of the amounts TVA is currently planning to contribute contribute for the foreseeable I future.

Performance GenerationAssets. Although TVA's generation and transmission assets performed extremely Performance of Generation extremely well well overall in meeting meeting I .the peak demands during the summer of 2008, TV

,the high demand. As a result, TVA

-- Power Supply. TV Power Supply. TVA TV A had to operate A is likely to face similar TVA A was adversely adversely affected problems in the future since many of TVA's similar problems operate as planned affected by the failure of some assets to operate planned during times of operate higher cost units or purchase power in the higher cost energy spot market. See Item 1, Business generation assets have been operating since the TV A's generation of Business the 1950s earlier and have been in nearly constant service 1950S or earlier service since they were completed. In In addition, if if drought conditions conditions continue, TVA continue, TV A will have have 1 limited availability to operate limited operate its hydroelectric generating assets, which are its least expensive units to operate.

hydroelectric generating operate.

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Table of Contents a/Contents i Bonds and Other Financial Obligations. As of September Financial Obligations. September 30,30, 2008, TV A had 2008, TVA had $22.7

$22.7 billion billion of of Bonds Bonds outstanding (not including outstanding (not including I noncash noncash items items of currency valuation of foreign currency valuation loss of million and net

$138 million of$138 net discount discount on sale sale of of bonds of $199 million). The of$199 The amount amount of TVA's TVA's 3

Bonds outstanding Bonds and outstanding has and certain has been Since that time, peaked. Since certain leaseback reduced by been reduced time, however, TVA by about about $5

$5 billion since entered into TV A has entered transactions that leaseback transactions that resulted resulted in $1.3 into energy September 30, 1996, since September energy prepayment

$1.3 billion 1996, when prepayment transactions billion in obligations.

obligations. TheThe amount amount of the end of year when the transactions that year balance prepayment and of prepayment balance of that resulted in $1.6 and leaseback outstanding Bonds of outstanding billion in prepayment

$1.6 billion leaseback obligations Bonds prepayment obligations obligations obligations outstanding outstanding I

at September at September 30, 30, 2008, 2008, was was $2.4 Payments on

$2.4 billion. Payments on these Bonds and obligations do not change and obligations change with the amount with the amount of of power sold, and and ifif competition increases, competition management of management commitments of Bonds commitments may make TV A's obligations increases, TVA's obligations to make Bonds and other financial financial obligations make it difficult difficult for TVA payments could make these payments could limit its ability remain an important obligations will remain important strategic TV A to continue its trend of reducing adjust to market ability to adjust strategic consideration these obligations.

reducing these obligations.

market pressures.

consideration in pressures. While in the future, While prudent future, increased prudent increased capital capital I regulation Environmental Environmental Regulation.

regulation of mercury and Regulation. TVA expects to see increased TV A expects and the emission of of greenhouse greenhouse gases environmental regulation increased environmental gases such as CO 2. TVA TV A has considered, including but not limited regulation in the future, including limited to the the continue considering, fuel mix in considered, and intends to continue I3 making decisions about additional making and TVA's TVA's filing of request request to reactivate reactivate the additional generation.

of a combined generation. The restart of Browns Ferry Unit 1, combined operating operating license construction permit the construction application for two license application permit for the existing two new units at existing Bellefonte decision to complete 1, the decision at the Bellefonte (although no decision Bellefonte units (although complete the construction decision to construct construction of Watts Bar Nuclear Plant ("Bellefonte"),

Bellefonte Nuclear ("Bellefonte"), as well any units at Bellefonte construct any Bar Unit 2, well as TVA's Bellefonte has beenbeen I3m made), are examples of TVA's are examples future regulation of TVA's decisions of greenhouse could be substantial. TV TVA A would decisions to pursue or would have consider generation or consider have to recover such costs generation sources that Accordingly, the costs unclear at this time. Accordingly, greenhouse gases is unclear that do not emit costs in rates or pursue some other associated with costs associated greenhouse gases. The emit greenhouse regulation are with such regulation other action which, among The nature or level are currently among other options, level of currently unknown options, might include of unknown but include but II removing-some coal-fired units from service.

removing* some coal-fired service.

Renewable Portfolio.

hydroelectric, biomass, and landfill gas. Generating hydroelectric, intensity of TVA's generation. Power generated proposed legislation, Portfolio. Under most proposed legislation, renewable generated using renewable power generation resources include solar, wind, incremental renewable power Generating power with renewable renewable sources sources instead renewable sources, with current technologies, may not be current technologies, incremental coal-fired plants could help reduce the carbon instead of coal-fired economically competitive be economically competitive II existing power generation compared to existing Technology advancements will be needed generation assets. Technology needed to address some some of the operational operational issues associated with renewable energy, such as energy storage renewables and and efficiencies.

efficiencies; storage to address interconnection technologies address intermittency and interconnection connected technologies to address onsite, non-grid connected IU renewable energy Most renewable resources, whereas other regions renewable and of renewable and clean energy resources regions have hydroelectric geographically specific. Some regions of the United States resources are geographically energy developed across the country. Within clean energy differences and limitations play hydroelectric resources. Regional differences Within the area served by TVA (southeast States have an abundance playaa primary abundance of wind and (southeast United States), two of the most and solar primary role in the types and amount solar I

abundant renewable ridgeline abundant. If TVA hydroelectric and biomass. Feasible wind energy in this region is primarily renewable resources are hydroelectric capacity is limited when compared installations, and the total potential capacity ridge line installations, primarily associated with mountain top and compared to other parts of the nation where wind energy is more increase its use of renewable resources and the cost of doing so is greater than the costs of other sources of TV A is required to increase Ii generation, TVA's generation, TV A' s costs may increase, and, as a result, TVA may be forced to raise rates.

~osts may increase, and, as a result, TV A may be forced to raise rates.

Liquidity and Capital Resources I

3 Sources of ofLiquidity Liquidity TVA's current liabilities exceed current assets because maturities of long-term maturities because of continued short-term debt to fund cash needs as well as scheduled continued use of short-term short-term cash needs and contingencies, TVA depends on various sources of liquidity. TVA's primary long-term debt. To meet short-term sources of liquidity are cash on hand and cash from operations and proceeds from the issuance of short-term and long-term debt.

primary Ii Financial markets experienced Financial experienced extreme volatility in 2008, and have continued to experience developments in housing and mortgage-related experience extreme volatility into 2009 amid negative 1 weakness of major financial institutions, government actions, and negative economic mortgage-related activities, weakness I i developments. These conditions have resulted in disruptions in credit and lending activities, particularly in the short-term credit markets through corporate institutions borrow and lend to each other. Disruptions in the short-term credit markets have the potential which corporate because TVTVA potential to impact TV A uses short-term debt to meet working capital needs, and because it typically invests its cash holdings in the short-term debt TVA A Il securities of securities of other other institutions.

institutions.

TVA TV A has not experienced markets. Throughout short-term debt, experienced difficulty in issuing short-term Throughout the period, TVA has experienced debt, or or in in refunding debt, despite maturing debt, refunding maturing the disruptions despite the disruptions in experienced strong demand for its short-term discount notes, and has been able to issue discount notes the credit in the credit I at competitive rates.

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II Table o/Contents Table of Contents Other than issuing electronotes , which are retail notes and are generally smaller smaller in size than TVA'sTVA's other long-term debt, TVA has II not sought to issue long-term debt since June 2008. Despite long-term long-term debt if if needed.

needed.

Despite conditions in the credit credit markets, however, TV TVAA believes it would be able to issue Management Management expects continued continued demand for TV TVA short-term debt securities. Along with A short-term with the short-term short-term debt program, management management operating cash expects operating cash flows, cash on hand, and access to credit facilities to continue to provide adequate liquidity for TV provide more than adequate TVA A for the I foreseeable future.

foreseeable Management is not able to anticipate Management anticipate the long-term long-term impacts of recent financial market market turmoil on TVA, TV A, the financial financial markets markets in which which I TVA participates, participates, or the economy economy of the Tennessee Tennessee Valley. Management Management closely monitors conditions in the markets markets in which TVATV A conducts conducts I business and the financial health of companies effort to be proactive in maintaining financial health.

effort companies with which it does business, business, and will continue continue to monitor these conditions conditions in the future in an I balance The majority of TV expectations for cash expenditures term expectations TVA's A's balance typically invested in short-term balance of cash on hand is typically balance of cash and cash equivalents on hand was $357 million. The daily balance of cash and cash equivalents expenditures and funding needs. Under the current short-term investments. During current market market conditions, conditions, TV TVA During 2008, 2008, TVA's average daily equivalents maintained is based on near-A has placed more of its short-term short-term daily investments in U.S. Treasury securities securities and less in commercial paper money marketmarket funds.

funct's.

I In addition to cash on hand, cash from operations, liquidity include a $150 operations, and proceeds proceeds from the issuance

$150 million credit facility with the U.S. Treasury, two credit facilities totaling short-term and long-term debt, TVA's sources of issuance of short-term totaling $2.25 billion with a national bank, and of I occasional occasional proceeds from other financing arrangements including call monetization arrangements including monetization transactions, transactions, sales of assets, and sales of receivables receivables and I loans. Each of these sources of liquidity is discussed below.

I Summary Cash electricity. A summary Cash Flows. Flows. A major source summary of cash flow components source of TVA's TVA's liquidity liquidity is operating generation and sales of operating cash flows resulting from the generation ended September 30 follows:

components for the years ended of Summary Cash Flows For the years ended September 30 30 I :-;::-~

2008 2007 2006 by (used in):

provided by,:-,-,(u,-"s-,-e.:c..d..:.:in",,).:...:

Cash provided _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _--,,----_---,:-;::-::-=---,,----_ _:-=;:-;:----:;:---_ _

QRerating~a~c~ti~v~it~ie~s~

Q--ratlng activities ______________________________________________________~ $ ____~1,957 1,957 $ 1,788 $ 1,985 I 1,985 I

I Investing~a~c~tl~*v-'-it~ie~s~--------------------------------------------

Investing activities ________________~~~L-------~~~------~~~~

(2,299)

(2,299) (1,686)

(1,686) (1,698)

(1,698)

Financing activities financing 390 (473)

(473) (289)1 (289TI Net (decrease)

(decrease) increase in cash cash and cash'equivalents cash 'equivalents $ 48 $ (371)

(371) $ (2)

(2)

I Issuance ofDebt.

Issuance Debt. The TV TVA A Act authorizes TVTVA A to issue Bonds in an amount not to exceed outstanding at any time. At exceed $30 billion outstanding I September 30, 2008, TVA September TV A had only two types of Bonds outstanding: power bonds and discount notes. Power Bonds outstanding: Power bonds have maturities of betweenbetween I of payment years, and discount notes have one and 50 years, payment out of net power proceeds.

have maturities of less than one year. Power bonds and discount proceeds. Net power proceeds remainder of TVA's gross power proceeds are defined as the remainder parity and have first priority discount notes rank on parity deducting the power revenues after deducting the costs of operating, maintaining, and administering properties and payments to states and counties in lieu of taxes, but before deducting administering its power properties II accruals or other charges representing depreciation accruals depreciation representing the amortization of capital expenditures, plus the net proceeds from the sale disposition of any power facility or interest therein. See Note 11 -- - General. .

sale or other other Power bonds and discount discount notes are both issuedissued pursuant to section 15d of the TVA Act and pursuant to the Basic Tennessee Valley I Authority Power Bond Resolution adopted by the TVA Board on October 6, 1960, as amended on September Authority March 25,25, 1992 (the "Basic protection test.

"Basic Resolution"). The TV TVAA Act and the Basic Resolution each contain Basic Resolution September 28, 1976, October 17, 17, 1989, and contain two bond tests: the rate test and the bondholder bondholder I" Page 59 Page 59 I

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I

Table Table a/Contents of Contents Under the rate test, TVA must charge rates for power which will produce gross revenues revenues sufficient sufficient to provide funds for:

I Operation, Operation, maintenance, Payments maintenance, and administration of its power system; Payments to states and counties in lieu of taxes; Debt service Debt service onon outstanding outstanding Bonds; I

" Payments Payments to the U.S.

to the U.S. Treasury Treasury as a repayment of and a return on the Power Facilities Appropriation Investment; Investment; and and

" Such Such additional additional margin Bonds in advance margin as the TVA advance of maturity, TV A Board may consider consider desirable desirable for investment investment in power system assets, retirement A's power business, having due regard for the primary objectives of the TVA Act, including the objective TVA's with TV retirement of outstanding outstanding maturity, additional reduction of the Power Facilities Appropriation Investment, and other purposes connected connected objective that power shall be I

sold at rates as low as are feasible. i Under the bondholder bondholder protection protection test, TVA must, in successive successive five-year periods, use an amount of net power proceeds five-year periods, proceeds at least equal to I

the sum of: of:

The depreciation depreciation accruals and other charges representing representing the amortization of capital expenditures, and The net proceeds from any disposition of power facilities, I

for either

The reduction of its capital obligations obligations (including Bonds and the Power Facilities Appropriation Appropriation Investment),

Investment), or I3

Investment in power assets. i TVA must next meet the bondholder bondholder protection test for the five-year period ending September 30, 2010.

ending September I As discussed above, TV capital requirements.

requirements. During TVAA uses proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund working 2008, 2007, and 2006, the average outstanding balance balance of discount notes was $767 million, $2.3 working

$2.3 billion, and $2.0

$2.0 I*

billion, respectively, respectively, and the weighted September 30, 2008, $185 September weighted average average interest interest rate on discount notes was 3.71 percent,

$185 million of discount notes were outstanding are not listed on any stock exchange.

outstanding with a weighted percent, 5.17 percent, and 4.4 4.477 percent, percent, respectively.

respectively. At weighted average interest rate of 1.26 percent. The discount notes I3 TVA issues power bonds primarily to refinance previously-issued previously-issued power bonds as they mature. During 2008 and 2007, TVA issued issued II

$2.1 billion and $1.0 $1.0 billion of power bonds, respectively, and redeemed $689 million and $470 million of power bonds, respectively. At September 30, 2008, outstanding power bonds (including (including current maturities maturities of long-term long-term debt) consisted of the following:

Page 60

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I Table a/Contents Table of Contents Outstanding Power Outstanding Power Bonds Bonds September 30, As of September As 30, 2008 2008 I CUSIP CUSIP or Other Other or Identifier Identifier Maturity Maturity Coupon Rate Coupon Rate Principal Principal Amount 1 Amount Stock Exchange Listings Stock Exchange Listings 1 3.200% --

3.200%

Ilelectronotes@

lectronotes 0311512009 - 01/15/2028 03/15/2009 01115/2028 5.625% 22 $$

5.625% 910 910 None None 880591085 880591DB5 11113/2008 11/13/2008 5.375%

5.375% 2,000 New 2,000 New York, Hong Kong, Kong, Luxembourg, Luxembourg, Sing~pore Singapore II ;880591ON9

'880591DN9 880591DL3 880591OL3

'880591DT6

880591OT6 01118/2011 01/18/2011 05/23/2012 05/23/2012 05/23/2012 05/23/2012 5.625%

5.625%

7.140%

6.790%

1,000 1,000 29 29 1,486 1,486 New York, Luxembourg New Luxembourg New York New York York I 880591CWO 880591CW0

!880591DW9

SS059lDW9 880591OY5 880591DY5 0311512013 03/15/2013 08/0112013 08/01/2013 06115/2015 06/15/2015 6.000%

6.000%

4.750%

4.375%

1,359 1,359 New 940 940 1,000 1,000 New York, Hong Hong Kong, Kong, Luxembourg, Luxembourg, New York, Luxembourg Luxembour New York, Luxembourg New Luxembourg Sing~pore Singapore g

'880591OS8

,880591DS8 12115/2016 12/15/2016 4.875%

4.875% 524 New York New York 880591EA6 880591 EA6 07118/2017 07/18/2017 5.500%

5.500% 1,000 1,000 New York, Luxembourg New Luxembourg I 880591CU4 1 '880591 CU4 1211512017 12/15/2017 6.250%

6.250% 650 New York New York 880591EC2 880591EC2 04/0112018 04/01/2018 4.500%

4.500% 1,000 1,000 New York, New York, Luxembourg Luxembourg

880591DC3

'880591DC3 06/07/2021 06/07/2021 5.805% 33 5.805% 356 New York, Luxembourg Luxembourg I880591300 880591CJ9 880591CJ9 1 :880591300 880591409 880591409 11101/2025 11/01/2025 06/0112028 06/01/2028 05/0112029 05/01/2029 6.750%

6.750%

5.460%

5.174%

1,350 New 350 298 298 New York, Hong Kong, Luxembourg, New York New York Sing~pore Singapore

'880591OMI

'880591DM1 05/0112030 05/01/2030 7.125%

7.125% 1,000 New York, Luxembourg New II880591DV1 880591OP4 880591DP4

880591OVI 880591OX7 880591DX7 06/07/2032 06/07/2032 07/15/2033 07/15/2033 06115/2035 06/15/2035 6.587% 3 6.587%3 4.700%

4.650%

445 445 472 472 436 New York, Luxembourg New York, Luxembourg Luxembourg_

York New York

880591CK6 880591CK6 04/0112036 04/01/2036 5.980%

5.980% 121 121 New York I I880591CP5 880591CS9 880591CS9

'880591CP5 880591EDO 880591ED0 04/0112036 04/01/2036 0111512038 01/15/2038 06115/2038 06/15/2038 5.880%

5.880%

6.150%

5.500%

1,500 1,000 500 New York New York New York New York York I ;880591BL5 1880591BL5 880591DU3 1',880591OU3

,880591CF7 880591CF7 04/15/2042 04/15/2042 06/07/2043 07115/2045 07/15/2045 8.250%

8.250%

4.962%

4.962% 33 6.235%

6.235%

1,000 267 140 New York New York, Luxembourg New York 880591EB4 01115/2048 01/15/2048 4.875%

4.875% 500 New York, Luxembourg II :880591OZ2

'880591DZ2 Subtotal

~namortized 04/01/2056 discounts, premiums, and other Prnamortized discounts, 5.375%

5.375% 1,000 22,633 22,633 (199)

(199)

New York Total outstanding Total outstanding power bonds, net $ 22,434 22,434 I

Notes 1(1)

I(1)

(2)

The above table includes net exchange exchange losses from currency transactions of$138 The weighted average interest rate of TVA's outstanding electronotes was 30, 2008.

of $138 million at September 30,2008.

percent at September 30, 2008.

was4.83 percent 2008.

(3) The coupon rate represents TVA's effective interest rate.

1(3)

As of September 30, 2008, all of TVTVA's bonds and A's Bonds were rated by at least one rating agency except for two issues of power bonds and I VA's TVA's discount notes. TVA's rated Bonds are currently rated "Aaa" "Aaa" by Moody's Investors Service and/or "AAA" andlor "AAA" by Standard Standard && Poor's and/or and/or I 'Fitch recommendations to buy, sell, or hold any TVA Fitch Ratings, which are the highest ratings assigned by these agencies. The ratings are not recommendations should withdrawal at any time by the rating agencies. Ratings are assigned independently, and each should securities and may be subject to revision or withdrawal be evaluated as such.

such.

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Table of Contents I For additional For information about TVA additional information TVA debt issuance activity debt issuance activity and debt debt instruments outstanding as instruments issued and outstanding September 30, as of September 30, 2008 2008 and and

2007, 2007, including identifiers, rates, including identifiers, rates, maturities, outstanding outstanding principal amounts, and principal amounts, and redemption redemption features, see Note 11. 11.

authorized Million Note

$150 Million Note with U.S. Treasury. TVA U.S.Treasury.

accept an interim obligation authorized to accept obligation with TVA has has access maturity of with maturity of one financing arrangements access to financing one year oror less less in arrangements with with the aggregate amount in an aggregate the U.S.

U.S. Treasury, amount outstanding Treasury, whereby whereby the outstanding not to exceed the U.S. Treasury exceed $150

$150 Treasury is i I million.

million. Interest obligations Interest accrues obligations of approximately accrues daily at a rate of the United approximately $74 United States

$74 million, rate determined States with million, $132 determined by the with maturities maturities of

$132 million, and $131 Secretary of the the U.S. Secretary of one year year or less. During 2008,

$131 million, respectively.

the Treasury Treasury each 2008, 2007, 2007, and each month outstanding balances respectively. The outstanding month based and 2006, the balances were based on the were repaid the average the daily average average of outstanding average amounts repaid quarterly.

outstanding outstanding were amounts outstanding quarterly. In 2009, TVA TV A and were and II E

the U.S. Treasury Treasury replaced replaced the $150 understanding under which understanding facility. TVA which TVA TV A will plans to use the U.S.

TVA plans million note

$150 million will have note under which have a $150 which TVA previously

$150 million credit facility. There Treasury credit facility as a source U.S. Treasury source of borrowed from the U.S. Treasury with aa memorandum previously borrowed There are no fees other other than interest liquidity, but not as a primary source of liquidity, source of liquidity, memorandum of borrowings under interest on borrowings liquidity, in 2009.

2009. See of under the credit credit See Note 9 I

- Payments Payments to U.S. u.s. Treasury and Note 11 Treasury and 11 - Short-Term Debt. Debt.

billion Credit Facilities. TVA has short-term Credit Facilities.

billion facility that that matures on May 13, short-term funding funding available 2009, and the other 13, 2009, available in the form of other of which is a $1 short-term revolving credit of two short-term credit facilities,

$1 billion facility that matures on November facilities, one of which November 9, which is a $1.25 9, 2009. See NoteNote 18 -

$1.251

Credit Facility Credit Facility Agreements.

Agreements. The The interest interest rate any borrowing rate on any borrowing underunder both both of these facilities is variable and based these facilities based on market factors and the the rating of TVA's senior rating senior unsecured unsecured long-term long-term non-credit enhanced debt. TVA is required to pay an unused non-credit enhanced unused facility facility fee on the portion of the total the portion

$2.25

$2.25 billion unsecured unsecured long-term which TVA has not borrowed.

billion against which long-term debt. There credit facility as it matures. TVA There were borrowed. The were no outstanding TVA anticipates anticipates that when The fee fee may fluctuate depending outstanding borrowings when it renews depending on the borrowings under the facilities the non-enhanced non-enhanced credit ratings on TVA's facilities at September September 30, 30, 2008. TVA second credit facility in May 2009, the amount renews the second TV A anticipates amount of TVA's senior senior anticipates renewing renewing eacheach of this facility will also be h

I reduced.

reduced.

Call Monetization Call Transactions. From time to time TVA Monetization Transactions. TV A has entered entered into swaption transactions monetize the value of call transactions to monetize call I provisions on certain of its Bond issues. A swaption provisions which which TVATV A receives a floating rate of interest call provision provision TVA swaption essentially essentially grants grants a third party the right to enter interest and pays the third party TVA monetized. Through September September 30, 2008, TVA TV A has entered into four swaption enter into a swap swaption transactions agreement with swap agreement party a fixed rate of interest equal to the interest rate on the Bond transactions that generated TVA with TV A under Bond issue under issue whose generated proceeds of $261 I

million.

2003, TVA In 2003, agreements TVA monetized monetized the call provisions agreements with a third party provisions on a $1 party in exchange for $175 billion Bond issue and a $476 million Bond issue

$1 billion

$175 million million and $81 $81 million, respectively.

issue by entering into swaption II

monetized the call provisions on two Bond issues ($42 million total par value) by entering into swaption In 2005, TVA monetized exchange for $5 with a third party in exchange $5 million. .

swaption agreements "I For more information information regarding regarding TVTVA's monetization transactions, see Note 10 A's call monetization 10-- Swaptions Swaptions and and Related Interest Rate Swaps.

RelatedInterest Swaps.

Sale ofInterest Interest in TVA selling a 69.69 percent undivided TVA Generating GeneratingFacility.

Facility. On September 30, 2008, TVA obtained approximately 30,2008, 792-megawatt summer net capability, undivided interest in its three-unit, 792-megawatt approximately $325 million in proceeds proceeds from capability, combined cycle combustion turbine facility I

located in Southaven, Mississippi. Seven States Power Corporation

("SSSL"), has the ability to acquire Southaven, LLC ("SSSL"),

Corporation ("SSPC"), the purchaser, through its wholly-owned subsidiary, acquire up to a 90 percent facility up to this amount on or prior to May 9, 2009. Because percent undivided interest in the facility and may increase undivided interest subsidiary, Seven States increase its ownership in the continued ownership interest in the facility as well as buy-back Because of TVA's continued buy-back I

accordingly has been recorded as a leaseback provisions, the transaction did not qualify as a sale and accordingly leaseback obligation. See Note 4 - Asset Acquisitions Acquisitions andandDispositions.

Dispositions.

Sales of Receivables/Loans.

Receivables/Loans. From time to time TV TVA A obtains proceeds proceeds from selling receivables and loans. During 2008, TV TVA A sold $2 $2 iI million of receivables receivables at par such that TV to energy conservation projects. The proceeds CASH FLOWS FROM FROM INVESTING TVA A did not recognize a gain or loss on the sale. These were receivables from a power customer related proceeds from the sale of these receivables are included within the Cash Flow Statement under the caption INVESTING ACTIVITIES.

ACTIVITIES.

I*l Page 62 Page 62 I I

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II Table o/Contents Table of Contents During 2007, TV During TVA A sold $2

$2 million of receivables receivables at par such that TV TVAA did not recognize recognize a gain or loss on the sale. These were II receivables from a power customer receivables within the Cash Flow Statement customer related to the construction of a substation. The proceeds from the sale of these receivables Statement under the caption CASH FLOWS FROM INVESTING INVESTING ACTIVITIES ACTIVITIES..

receivables are included included I retain any claim on these receivables and loans sold, and they are no longer reported TVA did not retain information regarding TVA's TVA's sales sales of receivables and loans, see NoteNote 1 - Sales ofReceivables/Loans.

reported on TVA's Balance Sheets. For more Receivables/Loans.

2008 Compared Compared to 2007 provided by operating activities Net cash provided activities increased from $1,788

$1,788 million in 2007 .to $1,957 2008. This $169

$1,957 million in 2008. $169 million increase I primarily resulted from:

An increase increase in cash from operating revenues of $1,109 $1,109 million resulting primarily from increases increases in revenue from municipalities I and cooperatives cooperatives and industries directly served, in both cases, directly served, higher volume.

cases, from higher average rates and the FCA and, in the case of industries This increase was partially partially offset by:

I An increase increase in cash paid for fuel and purchased purchased power; purchased power; purchased power of $376 million due to higher volume and increased of$376 increased market prices for for I

I

increase in cash paid for interest of $147 An increase $147 million;

increase in cash used by changes An increase changes in working capital of $115 $115 million resulting primarily primarily from an $88

$88 million decrease decrease in I accounts payable inventories payable and accrued liabilities in 2008 compared to a $103 inventories andand other, other, net, net, increase in interest payable; increase in interest payable; partially offset partially offset by by an an $85

$85 million million

$103 million increase in 2007 and a $40 million larger smaller smaller increase increase in accounts in accounts receivable receivable and and aa $31 larger increase in

$31 million million larger larger in I I An increase increase in pension pension contributions of $85 Cash provided by deferred deferred items of $5

$85 million;

$5 million in 2008 compared compared to $61

$61 million of cash provided by deferred deferred items in 2007. This change is primarily primarily due to funds collected collected in rates rates in 2007 that were used to fund future generation. See Note I - Reserve for I

Future Generation Future Generation ;

An increase increase in cash cash paid for refueling outage outage costs of $54

$54 million; I I increase in tax equivalent An increase equivalent payments of $40 million; and and

increase in cash An increase cash outlays outlays for routine routine and recurring recurring operating costs of $25 million.

I Net cash cash used in investing activities resulted primarily from:

activities increased from $1,686

$1,686 million in 2007 to $2,299 million in 2008. This $613 $613 million increase increase I An increase in expenditures for capital projects of $484 million primarily due to the purchase of a three-unit, 792-megawatt An increase in expenditures for capital projects of $484 million primarily due to the purchase of a three-unit, 792-megawatt combined cycle, cycle, combustion combustion turbine facility located located in Southaven, Mississippi; .

° $119 million increase A $119 increase in expenditures for the enrichment and fabrication of nuclearnuclear fuel related to a buildup buildup of fuel for strategic strategic I inventory inventory purposes; and

A $23 million decrease in cash from collateral deposits. See Note 1 - Restricted Restricted Cash Cash and Investments.

Investments.

I*I . Net cash used by financing activities was $473 million in 2007 as compared to net cash provided by financing activities of $390 million in 2008. The $863 million change change was primarily the result of: of:

I I I An increase in long-term Proceeds of$325 Proceeds long-term debt issues as a result of the issuance of $325 million million from the sale/leaseback from the issuance of sale/leaseback of the Southaven

$2,105 million oflong-term of$2,105 Southaven facility.

of long-term debt; and I These items were partially partially offset by:

1

The net redemption redemption of $1 $1,237

,237 million of short-term short-term debt in 2008 as compared compared to the net redemption redemption of $955

$955 million of short-term short-term debt in 2007; 2007; and II .

An increase increase in redemptions redemptions and repurchases of long-term long-term debt of $219 million, with long-term long-term debt of $689 million retired in 2008.

I- - - - - - - - - - - - Page 63 63

Table of Contents o!Contents 2007 Compared 2007 Compared to 2006 2006 I

Net cash Net cash provided primarily resulted primarily provided by operating resulted from:

operating activities activities decreased decreased from from $1,985

$1,985 million million in 2006 2006 to $1,788

$1,788 million in 2007.

2007. This This $197

$197 million decrease decrease I*

An increase An increase in cash cash paid replace hydroelectric replace paid for fuel and hydroelectric generation and purchased generation as well purchased power power of well as increased of $249 increased market

$249 million million due market prices prices for due to higher for fuel; fuel; higher volume volume of fuel and purchased power and purchased power needed needed to I

increase in cash An increase An cash outlays outlays for for routine routine and recurring recurring operating operating costs costs of of $108

$1 08 million; An increase An increase in tax equivalent An increase An planned outages planned outages in the the prior payments of $76 equivalent payments increase in expenditures expenditures for nuclear prior year.

nuclear refueling outages and

$76 million; and outages of $24

$24 million due to to three planned outages in in 2007 2007 compared compared to two I were partially These items were partially offset by:

by:

decrease of $154 A decrease receivable

$154 million in cash used by receivable balance balance of $142

$142 million million and by changes changes in and aa larger in working larger increase working capital capital resulting in accounts increase in resulting primarily accounts payable primarily from a smaller increase payable and accrued accrued liabilities increase in the accounts liabilities of $9 million; accounts iI

provided by Cash provided by deferred deferred items items ofof $61

$61 million million inin 2007 2007 compared compared to aa $35

$35 million million net net use of of cash cash in 2006.

2006. This change change is primarily primarily due due to funds collected Generation;; and Generation A decrease and collected inin rates decrease in cash paid for interest of rates during 2007 that of$33 that were 2007.

$33 million in 2007.

were used to fund future generation. See See Note Note 1-1- Reserve for Future Reserve/or Future I

Cash used in investing activities decreased primarily from:

primarily decreased from $1,698 million in 2006 to $1,686

$1,698 million $1,686 million in 2007. This $12 $12 million decrease decrease resulted resulted I i

A source source of cash from collateral 1I-- Restricted Cash and collateral deposits deposits in 2007 and Investments; Investments ; and and 2007 ofof $48 million million as compared compared to a net net use of cash cash ofof $91

$91 million million in 2006.

2006. See Note I

A decrease expenditures for the enrichment decrease in expenditures enrichment and fabrication fabrication of of nuclear nuclear fuel ofof $74

$74 million million related related to the restart restart of of Browns Browns Ferry Unit 1 in 2007.

2007.

These items were partially partially offset by:

by: Ii An increase increase in expenditures expenditures of $111 million to acquire of$111 acquire the Gleason A $40 million contribution to the Asset Retirement Trust. See Gleason and Marshall Marshall County combustion See Note I1 -Investment

- Investment Funds; Funds; combustion turbine turbine facilities in 2007; 2007; I

A damage damage award award of $35 million that TVA received in 2006 2006 in its breach of contract suit against the DOE not presentpresent in 2007; and

An increase increase in expenditures expenditures for capital capital projects of $9 million.

II Net cash cash used in financing financing activities increased increased from $289 million in 2006 to $473 million in 2007. This $184 $184 million increase increase resulted primarily from:

II primarily from:

A decrease of $92 million in long-term debt issues; and A decrease of $92 million in long-term debt issues; and

short-term debt of$862 An increase in net redemptions of short-term of $862 million.

Cash These items were partially offset by a decrease Requirements and Cash Requirements and Contractual ContractualObligations decrease in redemptions of long-term debt of$771 Obligations of $771 million in 2007 compared to 2006.

I Due to the nature of the power industry, which requires large multi-year capital important in assessing the effectiveness capital investments, using trends and multi-year multi-year forecasts is effectiveness of management's decisions related to capital expenditures, pricing, and accessing capital markets. I

~-------------------------------------------------------------------------

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1 Table a/Contents Table of Contents 1 The future planned construction expenditures generation, are estimated to be as follows:

generation, expenditures for property, property, plant, and equipment additions, including including clean air projects and new Future Planned Planned Construction Construction Expenditures Expenditures 1I As of September 30 30 1 Actual Estimated Estimated Construction Construction Expenditures Expenditures IIWatts 2008 2009 2010 2011 2012 2013 2013 jWatts Bar Unit2 Unit 2 $ 245 $ 649 $ 681 $ 595 $ 314 $ -J Capacity EXQansion Other CaQacity Expenditures Expansion EXPc.c:e.:::n..:;.dl:.:..* 827 tu:.;.:r-'-es=---_ _ _---7-82=7=--_ 665 _ _ _ _--=-77=-:3=--_

_ _--:6:-::6-=-5 773 957 _ _ _ _~1

_ _ _9:-:5-=-7 1,507

,'-:-5-:::-07=--_ _ _ _1,954 1-'-,9-:-:5:-;:4....,

AirEXR:!::;en~d:!!.itu!:!!!.:re~s~--,:-

Clean Air Expenditures _ _ _ _ _ _ _____!2"_. 277 232

!.7-'-7_ _ _ ___=o2::::.:32::..-_ _ _____!2:..=2~3 223 _ _ _ _---'-44_'__'0~

440 _ _ _ _475 4-'-'7. .:::5_ _ _ _~6.:;:.08==-.!1 608 I Expenditures 22 Transmission Expenditures 98 32 45 34 40 41 I Other Capital Expenditures

Other Expenditures 33 Requirements Total Capital Projects Requirements $

547 1,99444 $

1,994 510 2,088 $

489 2,211 $

557 2,583 $

566 2,902 =$===3=,1::6=0

$ 3,160 557j 557J II Notes Notes TVA (1) TV A plans to fund these expenditures expenditures with power power revenues and proceedsproceeds from power program financings. This table shows only I expenditures that are currently planned. Additional expenditures may be required for TVA expenditures TV A to meet the anticipated growth in demand demand for 1 power in its service area.

Expenditures include (2) Transmission Expenditures (2) reimbursable projects. Transmission expenditures include reimbursable expenditures for capacity expansion expansion or load growth are included included in I Other Capacity Expansion Expenditures.

1(3)

(3) Other Capital Expenditures are primarily associated with short lead time construction construction projects aimed at the continued continued safe and reliable operation of generating generating assets.

(4) The numbers 1(4) numbers above exclude exclude allowance allowance for funds used during construction construction of $4 million in 2008.

of$4 II TVA TV forward-looking conducts a continuing A conducts forward-looking amounts amounts based continuing review of its construction based onon aa number based upon a number of factors, including, but not limited number of construction expenditures of assumptions assumptions and limited to, expenditures and financing programs.

and are subject to are subject changes in to various assumptions changes assumptions about programs. The amounts shown in the table above are various uncertainties.

uncertainties. Actual system load growth, amounts may Actual amounts differ materially may differ environmental materially environmental regulation, rates rates I of inflation, total cost of major projects, and availability availability and cost of external sources sources of capital, capital, as well as the outcome outcome of the ongoing ongoing I restructuring of the electric restructuring electric industry. See Forward-Looking Forward-Looking Information.

Information.

Management does not anticipate that TV Management TVAA will substantially change change its strategy for meeting long-term power supply needs due to recent recent I

I conditions in the financial markets. TVA's conditions operations operations and power program program financings.

TV A's primary sources sources of funding for new generation generation investments are expected continue to be cash from expected to continue In the near term, TVA may be negatively impacted by investments in new generation (for example Watts Bar Unit 2) that are not I expected to provide a cash return until put into service.

expected Page 65 65 I --------------------------------------

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Table of Contents a/Contents TVA also TVA also has has certain obligations and certain obligations and commitments commitments to to make make future future payments payments under under contracts.

contracts. The following table The following table sets sets forth forth TVA's TVA's I

estimates of future payments estimates payments asas of September September 30, 2008. See 30,2008. See Notes Notes 9, 11, and 15 9,11, 15 for a further description description of of these obligations and these obligations and commitments.

commitments.

Commitments Commitments and ContingenciesI Payments due in Payments in the the year year ending Contingencies ending September September 30 I

2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 Thereafter Thereafter Total Total I

Debt $_ _=2,215 2,215 $ $ 1,000 $_ _-=-1,;:..5 1,514 2,388 $"$_ _15,563

$ _ _.=2,,=.3.:::..88"----"' $ 22,~

22,6801I 1=!D=eb::..:.t_ _ _ _ _--=-$

~~~

Interest payments relating to debt debt 1,243 1,243 1,186 1,186 1".:::..00::..:;0,--=-$

1,158 1,158

"-.-14,--=-$

1,130 1,130 985 985 1=5,563 15,962 15,962 21,664*

21,664 If

[easeoblig~at~io~n~s~____________~----------~~--------~~----------~----------~________~~~--------~~I Capital CaI'ital I Non-can~elable Non-cancelable 58 58 58 54 6 3 337 337 516 516 I oRerutlng~~--__------~64~--------~6~0----------.:::..5~1----------4~3----------.:::..37~

operating 64 60 51 43 37 ______~2~0~7 207 ________~4~62~ 462U Purchase obligations Purchase obligations I Power Power ~~---------2~2~0~------~2~376--------~247.9~------~2~3~2--------~1~7~7------~6,~09~2~----~7~,~~0~6'1 220 236 249 232 177 6~092 7,206 I 220 236 249 232 177 ,

Fuel 1.184 1,184 787 603 398 398 327 327 863 44,162

,162 Other Other 121 30 23 23 25 25 18 18 100 100 317 I 317 Payments Payments on leasebacks leasebacks

'Payment to U.S.

Payment U.S.

85 89 95 97 97 100 100 918 1,384 1,384 I

U U

I I Treasury~------------------------------------------------------------------------------------~.

II Return of Power Return Power Facilities Facilities Appropriation Appropriation Investment Investment 20 20 20 20 20 10 110 110 Return on Power Facilities Facilities Appropriation Appropriation Investment Investment 14 14 21 21 20 20 19 19 17 17 155 246 I

Retirement Retirement plans

[l'otal

[Total $ $ 5,224 5,224 $ 2,487 $

2,487$ 3,273 $$ 3,484 3,484$ $ 4,072$ $

4,072 40,207 $ $58,747]I 7

Note (1) Does not include noncash items offoreign (1) currency valuation loss of $138 million and net discount on sale of Bonds of of foreign currency $199 million.

of$199 million. I During 2008, TVA executed related to the resumption of construction executed certain contracts related 30, 2008, expenditures against these contracts contracts are forecasted to be approximately approximately $1.3 construction activities at Watts

$1.3 billion through 2012.

Watts Bar Unit 2. As of September September I In addition to the cash requirements above, TV prepayments. See Note 1I - Energy Energy Prepayment TVAA has contractual PrepaymentObligations.

Obligations.

obligations in the form of revenue discounts contractual obligations discounts related to energyenergy II Energy Prepayment Obligations Payments due in the year ending September September 30 30 II Total 2009 2010 2010 2011 2012 2012 2013 Thereafter Thereafter

!Energy Prepayment Prepayment I

IEnergy Obligations Obligations $$ 1,033 =$====

$ 105 105 $$ 105 105 $$ 105 105 $$ 105 105 $$ 102 102 $$51 511 Page 66 66 I

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I Table a/Contents Table of Contents Results of Operations 1I Sales of Electricity Electricity Sales of electricity electricity accounted accounted for substantially substantially all of TVA's TV A's operating operating revenues revenues in 2008, 2007, and 2006. TV TVA A sells power at wholesale I distributor customers, consisting to distributor consisting of municipalities and cooperatives cooperatives that resell the power to their customers customers at retail rates. TV TVA A also sells sells I power to (1) directly served customers, consisting primarily of federal agencies and customers power customers (electric (electric systems that border TVA's service area) area) with which customers with large or unusual loads, and (2) which TVA has entered entered into exchange exchange power arrangements.

(2) exchange arrangements. The The II following table compares compares TVA's energy energy sales statistics for 2008, 2008,2007, 2007, and 2006.

Sales of Electricity Electricity For the years ended September September 30 I (millions ofofkWh) kWh)

Percent Percent 2008 Change Chanse 2007 Change Chanse 2006 I Municipalities and cooQeratives Municipalities cooperatives 139,596 (2.0%)

(2.0%) 142,461 142,461 2.8%

2.8% 138,624 I 138,624 II Industries Industries directly served

'Federal agencies and other rederal Total sales of electricity 34,695 2,013 176,304 176,304 11.9%

11.9%

(3.0%)

0.4%

30,993 30,993 2,075 175,529 175,529 0.0%

1.7%

2.3%

30,987 30,987 2,040]

2,040J 171,651 1 I IS--

Heating Heating degree days Uool*ng degree

Cooling degree days 3,109 3,109 1,990 1,990 (0.4%)

(0.4%)

(15.7%)

3,123 3,123 2,361 0.2%

12.0%

- ]

3,118 3,118 2,108]

2,108J Combined Combined degree days 5,099 (7.0%) 5,484 5,484 4.9%

4.9% 5,226 5,226 I 2008 Compared Comparedto 2007 Significant items contributing Significant contributing to the 775 million kilowatt-hour kilowatt-hour increase increase in electricity electricity sales included:

I A 3,702 A 3,702 customer million kilowatt-hour million kilowatt-hour increase customers, increase and increased October 2006.

in in sales to sales salescustomers These three to industries to one other industries directly directly large customer accounted served primarily served for 86 percent due to primarily due due to increased to increased demand of the increase sales to increased sales to TVA's industrial customers, and increased sales to one other large customer due to increased demand since becoming a directly served industrial in sincetobecoming in sales TVA's two largest two largest industriesa directly directly served.

served customer in October 2006. These three customers accounted for 86 percent of the increase in sales to industries directly served.

II This increase in sales to industries directly served was partially offset

A 2,865 million A 2,865 million kilowatt-hour kilowatt-hour decrease offset by:

decrease in sales to municipalities and cooperatives cooperatives primarily primarily due to a decrease in combined combined degree days of 385 days, or 7.0 percent.

degree days percent. The unfavorable unfavorable weather effects were partially offsetoffset by the addition of a new I municipal municipal and due to leap cooperative customer (Bristol Virginia and cooperative leap year.

Virginia Utilities)

Utilities) beginning beginning in January 2008 and an additional day of sales in 2008 kilowatt-hour decrease in sales to FEDERAL A 62 million kilowatt-hour F EDERAL AGENCIES AND AND OTHER.

I o This decrease decrease was attributable to a 102 generation generation available for sale available for sale and 102 million kilowatt-hour decrease and market market opportunities.

opportunities.

decrease in off-system sales mainly reflecting o The decrease in off-system sales was partially offset by a 40 million kilowatt-hour reflecting decreased decreased kilowatt-hour increase in sales to federal agencies directly served due to increased increased demand load among among federal agencies.

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a/Contents Table of 2007 Contents 2007 Compared Compared to 2006 I

1 Significant items Significant items contributing A 3,837 contributing to the 3,837 million million kilowatt-hour residential power residential power demand the 3,878 demand (which 3,878 million kilowatt-hour increase million kilowatt-hour increase in (which is more weather kilowatt-hour increase in sales sales to weather sensitive) increase in electricity to municipalities municipalities and sensitive) as aa result electricity sales and cooperatives sales included:

cooperatives primarily result of of an an increase primarily as aa result increase inin combined an increase result of an combined degree degree days increase in days of days, or of 258 days, or 1

1I percent, during 4.9 percent, during 2007.

2007.

35 million kilowatt-hour A 35 A kilowatt-hour increase increase in in sales sales to FFEDERAL AGENCIES AND EDERAL AGENCIES AND OTHER.

OTHER.

o increase was This increase was attributable attributable to an an 89 89 million million kilowatt-hour kilowatt-hour increase increase inin off-system off-system sales sales mainly mainly reflecting reflecting increased increased o

generation The increase available for sale.

generation available increase in directly served in off-system served primarily sale.

off-system sales was partially primarily due to partially offset to a decrease decrease in offset by a 54 million kilowatt-hour demand by one of in demand of TVA's kilowatt-hour decrease TV A's largest decrease in sales largest federal agencies sales to to federal agencies agencies directly directly served agencies result of served as aa result of 1

change in the nature a change nature and scope of its its load.

A six million kilowatt-hour A kilowatt-hour increase increase in sales sales to industries industries directly served served largely attributable attributable to customer customer growth.

As As economic economic conditions conditions have have deteriorated, TVA has has experienced experienced roughly roughly a twotwo percent percent reduction expected sales reduction from expected sales in early early 2009, 2009, I1 TVA is not anticipating and TVA Financial Financial Condition anticipating conditions to Condition andand Results Results of to improve improve significantly of Operations significantly in the near future. See Operations - Executive Summary -Future See Item 7, 7, Management's Management's Discussion Discussion and Analysis of Challenges - Meeting the Power Needs in TVA

-Future Challenges TVA's of

's Service Area.

Area. 1 Financial Results Financial The The following following table table compares compares operating operating results and selected selected statistics 2008, 2007, and 2006:

statistics for 2008,2007, Summary Statements of Income Summary Statements of Income 1

For the years years ended ended September 30 1

2008 2007 2006 2006 peating revenues QQerating revenues Revenue capitalized Revenue pre-commercial plant ca{litalized during pre-commercial plant operations

$ 10,382 $

10,382 9,326 $

(57)

(57) 8,~1 8,983__

Operating expenses - - - _ _c..: :.:=---_ _ _ _ _ _ _ _ _ _ _ _ _ _ _-;;::-~~---~:;_;:;"=':_---_;;::;_=~

Operating expenses (8,198)

(8,198) (7,726) (7,560)1 (7,560TI Operating~i~n~c~om~e Operating income_________________________________________~~~----~~~-----~~~ 2,184 1,543 1,423 1 1,423 pther income Other 15 73 80 I 80 Otherexp~e~n~s~e~~~-~~__.~-~-~-~----------------------~~-_____~,~-----~~

Other expense (6)

(6) (2)

(2) (2)

\Unrealized gain jUnrealized gain (lokg)

(loss) on derivative contracts,.. :netn"'eo-"t_______________________________ - '-.:.-_ _ _ __ (15)_

41 ill)]

Interest expense, net (1,376)

(1,376) (1,232)

(l,232) (1,264)

(1,264) 1

'Income ijncome before cumulative effects of accounting changes chang~es~____-:--_ _---::-_:_:____:---------"'..:.-'.-------=~----__:=c:::::=~

817 423 222]

222J Cumulative effect Cumulative change in accounting for conditional asset retirement effect of change retirement obligations obligations - - (109)

(l09)

Net Net income $ 8171$$

817 423 $ 113]f I 113JI 2008 Compared to 2007 2008 Compared Net income income for 2008 was $817 million compared was mainly attributable to:

compared with net income of $423 million for 2007. The $394 million increase in net income 1 1

A $1,056 million increase increase in operating revenues; and decrease of $57 million in revenue capitalized

A decrease These items were partially offset by:

capitalized during pre-commercial preccommercial plant operations.

1 A $472 million increase in operating expenses; A $144 million increase in net interest expense; A $58 million decrease in other income; I

$41 million decrease in net unrealized gain on derivative A $41 derivative contracts contracts resulting largely from the change in ratemaking methodology for gains and losses on swaps and swaptions A $4 million increase in other expenses.

swaptions used in call monetization transactions; and I

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1I Table of Contents Table of Contents OperatingRevenues.

Operating Revenues. Operating Operating revenues revenues during 2008 and 2007 consisted of the following:

1 Operating Operating Revenues For the years ended September 30 Percent I O!,erating revenues Operating revenues 2008

~UlllcIPal~i~ti-es~an-d~c-o-oQ-e-r-a~ti~v-e-s----------------------------------------------,,----~~~~~--~~~--------~~~~

2007 Chan~e Change 1I

'Municipalities and cooperatives $ 8,659 $ 7.847 7,847 10.3%1I 10.3%

Industries directly,--:;..se-7rv~e~d---------------------------------------------------------.!..=_:;___--------"-;-;:-;:;---------.....::.,~~

Industries directly served 1,472 1,472 1,221 20.6%

20.6%

Federal agencies and other federal 121 112 8.0%

8.0%1 Other revenue revenue 130 146 (11.0%)

(11.0%)

1IU Ttl Total oDeratina revenues Total operating revenues $$ 10,382 $$

10,382 9,326 9,326 11.3% 1 11.3%

I I . Significant items contributing An $812 million increase

$1,056 million increase in operating revenues contributing to the $1,056 increase in revenue from municipalities revenues included:

municipalities and cooperatives cooperatives resulting resulting from:

o $605 million in additional additional FCA revenue; I oo $363 million in additional o $113 additional revenue revenue from rate increases averaging additional revenue

$113 million in additional averaging 4.8 percent; and revenue due to sales growth of 1.2 percent.

These increases increases were partially offset by a $269$269 million decline in revenue due to decreased sales of 3.2 percent percent resulting from milder milder I weather (7 (7 percent fewer heating heating and cooling degree days) days) in 2008.

increase in revenue from industries directly served A $251 million increase served as a result of increased increased sales of 11.9 percent, the FCA, and fluctuations in rates. These These items contributed to increased revenue of $145 $145 million, $66 million, and $40 million respectively; and I

A $9 million increase O

o This increase in revenue from FEDERAL This increase increase was the result was the result of F EDERAL AGENCIES of aa $14 million increase

$14 million increase in AND OTHER.

AGENCIES AND OTHER.

in revenues revenues from federal agencies directly served served due to the FCA, increased sales of 2.3 percent, and an increase in average rates of 4.1 percent.

increased I o The increase in revenues from federal agencies directly served was partially reflecting decreased decreased sales of 33.1 percent partially partially offset by a $5 million decrease in off-system sales partially offset by an increase increase in average average rates of 6.7 percent.

m These items were partially partially offset by a $16

$16 million decrease decrease in other revenue revenue primarily due to decreased decreased revenues from wheeling wheeling activity I and the inclusion in 2007 of sales of salvage salvage inventory inventory primarily related to Bellefonte Bellefonte Nuclear Nuclear Plant that did not reoccur reoccur in 2008.

11 --

1-During 2007 there was also a $57 CapitalizedRevenue During Capitalized

$57 million revenue offset related to the Browns Ferry Unit 1 pre-commercial DuringPre-Commercial Pre-Commercial PlantPlant Operations.

Operations.

pre-commercial plant plant operations. See Note As economic conditions conditions have deteriorated, deteriorated, TVTVAA has experienced experienced roughly a two percent reduction in expected sales in early 2009 and anticipates that the energy sales for the remainder of 2009 will be lower than expected in the 2009 budget.

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Table of Contents a/Contents Operating Expenses. A table OperatingExpenses. table of operating expenses for 2008 and 2007 follows:

I TVA Operating Expenses TVA I For the years ended September 30 30 2008 2007 Percent Percent Change Change I

Operating expenses Fuel and purchased power $ 4,176 $ 3,449 21.1%1 Operating and maintenance 2,298 2,332 (1.5%),

Depreciation, amortization, and accretion 1,224 1,473 (L6.9%)

Tax equivalents 491 451 8.9%

Loss on asset impairment 9 21 (57.1%)%J

[Total operating expenses $ 8,198 $ 7,726 6.1%0 Significant drivers contributing contributing to the $472 million increase in total operating operating expenses expenses included:

included: II A $727 million increase increase in FUEL AND PURCHASED POWER expense.

o This increase increase was mainly due to a $507 million increase in fuel expense expense.

expense and a $221

$221 million increase increase in purchased purchased power power I

- The increase in fuel expense resulted primarily

Higher aggregate primarily from:

aggregate fuel cost per kilowatt-hour kilowatt-hour net thermal generation generation of 11.0 percent, which resulted in $263 $263 million million I

in additional expense;

Increased net generation at coal-fired, combustion Increased combustion turbine, and nuclear plants of 2.9 percent, which resulted in $67 and'nuclear $67 I

million in additional expense; expense; and and

A decrease decrease in the FCA net deferral and amortization for fuel expense of $1 $177 77 million. I

- The increase in purchased purchased power expense expense resulted primarily primarily from:

An increase increase in the average price of purchased expense; and purchased power of 16.8 16.8 percent, which resulted in $199

$199 million in additional I A decrease decrease in the FCA net deferral and amortization for purchased power power expense of $93 million.

I

- These increases were partially offset by a decrease in volume volume of purchased power power of 5.7 percent, which resulted in a purchased

$71 million in purchased decrease of $71 purchased significantly significantly ongoing drought purchased power expense. Although more power than moreinpower conditions ongoing drought conditions in 2008.

2008.

than planned planned due due to to decreased purchased power Although purchased decreased hydro power volume decreased in 2008, TVA hydro generation generation of of 26.1 percent as 26.1 percent as aa result result of of I A $40 million increase in TAX EQUIVALENT payments reflecting increased gross revenues from the sale of power (excluding sales 1 A $40 million increase in TAX EQUIVALENT payments reflecting increased gross revenues from the sale of power (excluding sales or deliveries to other federal agencies and off-system sales with other utilities) during 2007 as compared to 2006.

I The increases increases in FUEL AND PURCHASED PURCHASED POWER expense and TAX EQUIVALENT payments payments were were partially partially offset by:

A $249 A $249 million million decrease in DEPRECIATION, AMORTIZATION, AND DEPRECIATION, AMORTIZATION, ACCRETION expense.

AND ACCRETION I o The decrease was primarily primarily attributable to a decrease accounting for non-nuclear asset retirement decrease in depreciation and accretion accretion expense related to a change retirement obligations. In August 2008, the TVA TV A Board change in regulatory Board approved a potential funding I

source through rates rates for non-nuclear decommissioning decommissioning costs through the accumulation accumulation of assets in an asset retirement retirement trust. As a result, all cumulative costs that had been incurred previously adjustment totaled $350 million and was a one-time See Note 6. 6.

previously were reclassified to a regulatory one-time decrease to depreciation, depreciation, amortization, regulatory asset. This amortization, and accretion expense in 2008. I o This decrease was partially partially offset by an increase increase in depreciation accounts as a result of net plant additions and an increase depreciation expense primarily due to increases increase in depreciation depreciation rates rates at several increases in completed plant several of TVA's TV A's facilities.

plant I Page 70

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I Table of Contents Table of Contents A

A $34

$34 million decrease decrease in OPERATING OPERATING AND MAINTENANCE MAINTENANCE expense.

II o This decrease decrease was mainly a result of: of:

- A $61 million decrease decrease in pension costs costs as a result ofa of a 0.35 percent percent higher discount rate used during 2008; I - AA $21

$21 million million reduction reduction in decrease in operating to a decrease in operating operating and operating and maintenance and maintenance maintenance costs related to power system operations and river operations due maintenance projects and a reduction reduction in headcount part of TVA's efforts to reduce headcount as part non-fuel operating operating and maintenance expense.

expense.

I non-fuel

- A $15 decrease in operating

$15 million decrease operating and maintenance expenseexpense related related to nuclear generation and development primarily development primarily due to the absence of Watts Bar Unit 2 studies studies during 2008; and II - A $7$7 million decrease in operating operating and maintenance maintenance cost at coal-fired coal-fired and combustion turbine plants largely due to:

° A decrease decrease in planned outages of 49 days in 2008; 2008; and and I

Significant operating operating and maintenance reoccur in 2008.

maintenance projects at Paradise and Cumberland Cumberland Fossil Plants in 2007 that did not I o0 These items were partially offset by the following:

- Increased operating and maintenance maintenance expense at nuclear plants of $62 $62 million due to the following:

II

Increased cost of operating operating Browns FerryFerry Unit 1, which did not beginbegin commercial commercial operation until August 2007;

Increased contractor and labor cost; I I Various forced maintenance maintenance outages; and and

Increased costs at Browns Ferry related to maintenance maintenance projects undertaken undertaken in 2008 to improve plant performance I -

and reliability in an effort to reduce future unplanned outages.

Increased Increased workers' workers' compensation compensation expense of $14 million primarily due to a 0.74 percent lower discount rate utilized to of$14 I

estimate workers' workers' compensation compensation in 2008.

$12 million decrease in Loss ON ASSET IMPAIRMENT.

A $12 IMPAIRMENT.

O o The $9 million Loss ON ON ASSET IMPAIRMENT in 2008 included ASSET IMPAIRMENT included $8 $8 million from partial write-downs write-downs for scrubber projects projects at at I Bull Run Bull Run and CONSTRUCTION John Sevier and John CONSTRUCTION IN Sevier related related to PROGRESS assets.

IN PROGRESS CONSTRUCTION IN to CONSTRUCTION PROGRESS assets and IN PROGRESS and approximately approximately $1 $1 million in write-offs of other other o $21 million Loss ON ASSET IMPAIRMENT The $21 IMPAIRMENT in 2007 resulted from:

I - $17 million write-down of a scrubber project A $17 project at Colbert during 2007; and Write-downs Write-downs of $4 million related PROGRESS assets during 2007.

I related to other CONSTRUCTION

- CONSTRUCTION IN PROGRESS OtherIncome.

Other Income . The $58 $58 million decrease in other other income income was largely attributable to decreased decreased interest income income from short-term short-term investments, realized and unrealized losses on TVA's supplementalsupplemental executive executive retirement plan funds and restricted investments investments related to the I collateral held by TVA, I*collateral TV A, and a decrease decrease in external business business revenues.

revenues.

Other Expense.

Other Expense. The $4 million increase in other expense was primarily due to the write off of two economic development development investments investments of 2008.

in the fourth quarter of2008.

I UnrealizedGain Unrealized change in ratemaking Gain on Derivative ratemaking methodology.

Net. The decrease in UNREALIZED GAIN ON Contracts,Net.

Derivative Contracts, methodology. Beginning in 2008, TVA began using regulatory regulatory accounting accounting treatment CONTRACTS, NET ON DERIVATIVE CONTRACTS, NET was attributable to a treatment for swaps and swaptions related to I call monetization monetization transactions to reflect reflect that the gain or loss is included in the ratemaking ratemaking formula when these transactions actually settle. This I treatment removes values of

. values removes the non-cash impacts the swaps of the swaps and and swaptions impacts to TVA's earnings that result swaptions forfor 2008 were recorded 2008 were recorded on result from marking the value of these instruments on TVA's TVA's balance instruments to market each sheet and no income was recognized. However, balance sheet each quarter. The The recognized However, TVA recognized I $41 million

$41 as UNREALIZED million as UNREALIZED GAIN Condition and Results ON DERIVATIVE GAIN ON Results of Operations - Changes CONTRACTS, NET DERIVATIVE CONTRACTS, during 2007.

NET during Changes in Ratemaking Impacting 2007. See Item 7, See Item Impacting Accounting.

Accounting.

7, Management's Management's Discussion and Analysis of Financial Page Page 71 I~------------------------------------

I Table Table of a/Contents Contents Interest Expense.

Interest Expense. Interest expense, outstanding debt, and interest interest rates during 2008 and 2007 were as follows:

Interest Expense I For the years ended ended September 30 30 2008 2007 Percent Percent Change I

Interest expense __~__~~~~__~________________________________________~____~~~~______~~________~~~

Interestexp~e~n~s~e

'Interest on debt and leaseback obligations IInterest Amortization Amortization of debt discount, issue, c..~::ll::o~w::a:.::n:.:c.::.e..::.fo:.:r:.-fi::u:.::n:.:d.::.s l\llowance for funds . used ::.u:.:.se:.:d::..during obligations issue, and reacquisition

=du:.:n:.:*n::;g2.. :construction reacquisition costs, net

.co:.:n:.:s::tru:..::.. :c..::.ti:.:o:.:.n. ::.and a:.:n..::.d. :nuclear fuel expenditures

.n::u:.:c:.:le..::.a::..r..::.fu:.:e::l...:e:.:.x.!:p.:.:en:.:d:.:i:.:.tu::r.::.es=---___________

$ 1".1,373

.~_ _~(.:....:..l 20 (17)7)

~____~,.:::-,,-,,-

=:3:. !. .7=-3__$ 1,390 _________(1.2%i 19 (177)

(177)

(1.2%j 5.3%.

5.3%

(90.4%);

(90.4 % ):

Ifl Net interest expense $ 1,376 $ 1,232 11.7%

11. 7%

2008 (percent)

(percent) 2007 Percent Change II

(~ll Interest rates (average)

Long-term iLong-tenn 6.00 6.02 30.3%

Discount notes 3.71 5.21 (28.8%)

(28.8%)

Blended iBlended 5.92 5.94 (0.3%_)..-n Significant items contributing contributing to the.$144 the $144 million increase in net interest expense included:

I A $160 $160 million decrease in ratemaking methodology regarding decrease in capitalized capitalized interest on construction regarding AFUDC. TVA construction projects TV A continues projects and nuclear fuel expenditures expenditures primarily due to the change continues to capitalize a portion of current interest costs associated change i associated with I -

funds invested in most nuclear been capitalized capitalized only if(l) least three years. AFUDC interest continues nuclear fuel inventories, but since October if (1) the expected expected total cost of a project continues to be a component October 1, project is $1 component of asset 1, 2007, 2007, interest interest on funds invested in construction

$1 billion or more and (2) asset cost for projects construction projects has (2) the estimated construction period is at projects meeting this criteria and will be atE I recovered in future periods through depreciation depreciation expense. In addition, AFUDC continues to be a reduction reduction to interest interest expense as costs are incurred. The interest costs associated three-year criteria are expense; and expense; An increase are no longer capitalized associated with funds invested in'construction capitalized as AFUDC and are recovered andof $1.5 billion in the average balance of long-term outstanding debt in 2008.

in" construction projects projects that do not satisfy the $1 recovered in current year rates as a component

$1 billion and component of interest interest and I

An increase of$1.5 billion in the average balance oflong-tenn outstanding debt in 2008.

These items were partially

A decrease decrease partially offset by:

in the average average long-tenn long-term interest rate from 6.02 percent in 2007 to 6.00 percent in 2008; I

A decrease decrease in the average average discount notes interest rate from 5.21 percent in 2007 to 3.71 percent in 2008; and 2007 Compared Comparedto 2006 A decrease decrease of $1.5 $1.5 billion in the average balance of discount notes outstanding in 2008.

I was mainly attributable Net income for 2007 was $423 million compared attributable to:

compared with net income of $113 $113 million for 2006. The $310 $310 million increase increase in net income I i

A $109 $109 million cumulative expense retirement obligations that did not occur in 2007; A $343 million increase in operating revenues; expense charge charge in 2006 for adoption adoption of a new accounting standard related to conditional accounting standard conditional asset asset I

A change of $56 million in net unrealized gain/(loss) gain/(loss) on derivative derivative contracts; contracts; and

A $32 million decrease in net interest expense.

I These items were partially partially offset by:

I

A $166 $166 million increase in operating expenses; A $7 million decrease in other income; and

A Revenue $7 million of $57 decrease millionincapitalized other income; during andpre-commercial plant operations during 2007.

Revenue of$57 million capitalized during pre-commercial plant operations during 2007.

Page 72 II I

I

I Table of Contents Table of Contents Operating Revenues. Operating Operating Operating revenues revenues during during 2007 2007 and 2006 consisted of the following:

consisted of I For For the Operating Operating Revenues years ended the years Revenues ended September September 30 30 Percent Percent I

I Onerating ORerating revenues revenues

~uniciRal~it~i-es-*-an-d~c-o-oR-e-r-a~ti~v-e-s----------------------------------------------~-----=~~~~--~~~----------~~~

Municipalities and cooperatives $

2007 2007 7,847 $

7,847 2006 2006 7,659 Change Chan~e 2.5%

2.5%1 directly~se:;:.rv...:.,.:,ed=-- '::"::;~-----:,.,:.:.~;:."

I Industries directly Industries Federal agencies and other

'Federal agencies revenue Other revenue served _______________________________________________--=."7=:":-_____

other 1,221 1,221 112 146 1,065 116 116 143 143 14.6%

14.6%

(3.4%)

2.1%

I ...... ..

II 1

Total operating revenues $ 9,326 9,326 $ 8,983 8,983 3.8%

3.8%

Total operating revenues I Significant items items contributing

$188 million increase A $188 contributing to the $343

$343 million increase increase in operating revenue from MUNICIPALITIES increase in revenue operating revenues revenues included:

primarily due to increased COOPERATIVES primarily MUNICIPALITIES AND COOPERATIVES of 2.8 percent increased sales of2.8 percent and increased FCA revenue of $76 increased $76 million, partially offset by by a decrease decrease in average rates of 1.3 percent; percent; I *

$156 million increase A $156 and a slight increase and A $3 million increase increase in revenue revenue from INDUSTRIES increase in sales; and increase in OTHER and OTHER REVENUE INDUSTRIES DIRECTLY REVENUE primarily DIRECTLY SERVED primarily due to increased attributable to an increase SERVED attributable average rates of 15.1 increase in average 15.1 percent percent partially offset by decreased increased revenue from salvage sales partially decreased transmission revenues transmission revenues from wheeling activity.

I These items were partially These offset by:

partially offset

A $4 million decrease decrease in revenue from FEDERAL F EDERAL AGENCIES AND OTHER.

I o decrease was This decrease was the result of an percent, and a decrease of 3.0 percent, an $8

$8 million million decrease in revenues revenues from federal agencies directly average rates of 4.4 percent.

decrease in average directly served served due due to decreased decreased sales o The decrease in revenues partially offset by a $4 million revenues from federal agencies directly served was partially million increase in off-system sales I During 2007 there decrease in average rates of 6.5 percent.

increased sales of 40.7 percent partially offset by a decrease reflecting increased reflecting revenue offset related to the Browns Ferry there was also a $57 million revenue pre-commercial plant operations. See Note Ferry Unit 1 pre-commercial 1 --

- Capitalized CapitalizedRevenue During During Pre-Commercial Plant Operations.

Pre-Commercial Plant 1 Operating OperatingExpenses. Expenses. A table of operating expenses expenses for 2007 and 2006 follows:

I TVA Operating Expenses years ended September 30 For the years Percent I ORerating Operating expenses expenses 2007 2006 Change Change I

fuerandP.UTc:;:'h~as=e~d~R-o-w-er------------------------------------~$~--~~~~----~~~----~~~

fuel and purchased power $ 3,449 3,449 $ 3,342 3,342 3.2%

3.2%1 Oeaing and maintenance 2.332 2.328 0.2%

Operating and maintenance 2,332 2,328 0.2%

15e~tion, amortization, and accretion Deprecation, amortization, r173 1,473 1,500 1,500 (1.8%)

(1.8%)

,~~~~~------------------------------------------~.

II Tax equivalents

~n Loss on asset impairment impairment 451 21 376 14 19.9%

19.9%

50.0%7 50.0%1

]Total operating

/Total operating expenses $ 7,726 $ 7,560 2.2%

2.2%1 I 73 Page 73 I

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I Table of Contents o/Contents Significant drivers drivers contributing contributing to the $166

$166 million increase in total operating expenses included:

A $75 million increase increase in TAX TAX EQUIVALENT EQUIVALENT payments reflecting or deliveries to other federal agencies and off-system reflecting increased gross revenues from the sale of power (excluding off-system sales with with other utilities) during 2006 as compared compared to 2005.

(excluding sales I

$107 million increase A $107 increase in FUEL AND PURCHASED PURCHASED POWER expense.

o This increase was mainly due to a $114 $114 million increase increase in purchased power expense. I

- The increase in purchased purchased power expense expense was primarily a result of a 16.4 percent increase increase in the volume of purchased purchased power to accommodate hydroelectric generation of9.2 accommodate decreased hydroelectric Paradise Fossil Plant during the third quarter of percent and the extended of 9.2 percent extended outage 2007. The increase in volume resulted in $178 of2007.

outage of Unit 3 at TVA's TVA's

$178 million in additional additional I

expense.

- The increase in volume was partially offset by the following: I

A decrease decrease in the average price price of purchased power of 0.8 percent, which decreased decreased expense by $10$10 million; million; and and

An FCA net deferral and amortization methodology, TV TVA amortization for purchased power expense of $54 million. In accordance A has deferred deferred the amount of purchased power costs that were higher accordance with the FCA higher than the amount FCA amount included included in I

II power rates during 2007. This $54 million deferred amount will be charged to customers in future FCA FCA adjustments.

o The increase increase in purchased power power expense was partially offset by a $7 $7 million decrease in fuel expense.

- The decrease in fuel expense expense resulted resulted primarily from an FCA net deferral deferral and amortization amortization for fuel expense of $95

$95 II million. In accordance with the FCA methodology, TV amount included included in power TVA A has deferred deferred the amount of fuel costs that were higher than the power rates during 2007. This $95 million deferred amount will be charged to the customers future FCA adjustments.

customers in I

- The decrease was partially offset by the following:

Higher aggregate fuel cost per kilowatt-hour net thermal generation Increased Increased generation generation of 0.6 percent, 14.9 percent, generation of 2.7 percent; and percent, and 2.5 percent percent at the coal-fired, combustion combustion turbine, and nuclear nuclear I

plants, respectively, respectively, in part because because of the lower hydroelectric hydroelectric generation in 2007.

$7 million increase in Loss ON ASSET IMPAIRMENT A $7 IMPAIRMENT from $14 $14 million in 2006 to $21$21 million in 2007.

I o

$21 million Loss ON ASSET IMPAIRMENT The $21 A $17

$17 million write-down IMPAIRMENT in 2007 resulted write-down of a scrubber project resulted from:

project at Colbert during 2007; andand I3 o

- Write-downs of The $14

$4 million related of$4 related to other CONSTRUCTION

$14 million Loss ON ASSET IMPAIRMENT CONSTRUCTION IN IMPAIRMENT in 2006 resulted from:

IN PROGRESS assets during 2007.

I

- Write-downs of technologies

$12 million on certain CONSTRUCTION of$12 CONSTRUCTION IN technologies that had not been proven effective IN PROGRESS assets related to new pollution-control effective and a re-evaluation of other projects pollution-control and other other projects due to funding limitations; and I

- A $2$2 million write-down write-down on one of two buildings lease the East Tower Tower of the Knoxville buildings in TVA's Knoxville Office Complex Knoxville Office Complex during 2006.

Complex based on TVA's plans to sell or or I

A $4 million increase increase in OPERATING MAINTENANCE expense.

OPERATING AND MAINTENANCE o This increase increase was mainly a result result of:

of: I

- Increased outage and routine operating operating and maintenance maintenance costs at coal-fired coal-fired plants of $55

$55 million due to:

An increase increase in outage days of 78 days as a result offour of four more planned planned outages during 2007; I I

Significant repair Significant repair work on Unit 3 at Paradise Fossil Plant; and and Acquisition of new combustion combustion turbine units during 2007.2007.

- A $17

$17 million increase in expense primarily related to WattsWatts Bar Unit 2 studies studies during 2007; 2007; I

I - A $10

$10 million increase in severance severance expense during 2007; Page 74 74 1--------------------------

I I

I '

I I

I I*

I I

II Table o/Contents Table of Contents

- A $5

$5 million increase increase in workers' workers' compensation 2007 and inc~eased utilized during 2007 expense primarily as a result compensation expense increased costs costs to administer the program; program; and result of a 0.05 percent percent lower discount rate II

- A $13

$13 million increase operating and maintenance expenses increase in operating primarily as a result of expenses at nuclear plants primarily of the restart of of o

Ferry Unit 1, which retumed Browns Ferry Browns returned to commercial operation on August 1, These items were partially offset by decreased financing costs of $91 decreased pension financing 1, 2007.

$91 million as a result of a 0.52 percent higher higher II discount rate and a 0.50 percent higher than expected long-term discount long-term rate of return on pension plan assets. .

The increases in TAX EQUIVALENT MAINTENANCE expense EQUIVALENT payments, FUEL expense were partially partially offset by:

FUEL AND AND PURCHASED POWER expense, Loss ON ASSET IMPAIRMENT, PURCHASED POWER IMPAIRMENT, and OPERATING OPERATING ANDAND I

$27 million decrease in DEPRECIATION, A $27 AMORTIZATION, AND ACCRETION DEPRECIATION, AMORTIZATION, ACCRETION expense.

o decrease was mainly a result of a $41 million decrease This decrease decrease in depreciation depreciation expense primarily attributable deprecia~ion II attributable to the depreciation rate reduction for Browns Ferry Nuclear Plant reflecting approved by NRC on May reflecting the 20-year license extension approved May 4, 2006.

o partially offset by a $14 This item was partially updated incremental incremental accretion

$14 million increase in accretion accretion for SFAS SF AS No. 143, 143, and an increase in asset reflecting the adoption of FIN No.47, accretion expense reflecting asset retirement No. 47, the retirement obligation liability during 2007.

II Other Income.

Other Income. The $7 funds held by TVA and decreased

$7 million decrease in other decreased interest income other income income was largely attributable attributable to decreased deposit decreased interest earnings on the collateral deposit income from short-term investments due to a lower average outstanding balance on investments investments inin I

partially offset by a higher average interest 2007 partially interest rate.

(loss)

UnrealizedGain Unrealized (loss) on derivative (Loss) on Derivative Gain (Loss) derivative contracts contracts included:

Derivative Contracts, Contracts,Net.

Significant items contributing to the $56 million change Net. Significant change in net unrealized gain I*

A $58

$58 million smaller loss related to the mark-to-market mark-to-market valuation adjustment of an embedded during 2006 to a $3 million loss during 2007; and mark-to-market valuation A $9 million larger gain related to the mark-to-market valuation of swaption swaption contracts, embedded call option, from a $61 million loss contracts, from a $19$19 million gain during 2006 to a IU

$28 million gain during 2007.

partially offset by an $11 These items were partially $11 million smaller gain related swap contract, from a $27 million gain during 2006 to a $16 million gain during 2007.

$16.million mark-to-market valuation adjustment of an interest rate related to the mark-to-market I

Interest Interest Expense.

Expense. Interest Interest expense, outstanding debt, and interest rates during 2007 and 2006 expense, outstanding 2006 were as follows:

I Interest Expense years ended September For the years September 30 30 2007 2006 Percent Percent Change Change I

Interest expense I Interest on debt and leaseback obligations $ 1,390 $ 12406 1,406 (1.1 Amortization of debt discount, issue, and reacquisition costs, net 19 21 (9.5%

Allowance for funds used during construction and nuclear fuel expenditures (177) (163)

(163) 8.6%

Net interest expense $ 1,232 $ 1,264 (2.5%)I 2007 (percent)

(percent) 2006 Percent Percent Change I

Interest rates (average)

Long-term 6.02 6.17 (2.4°)

Discount notes 5.21 4.47 16.6%

Blended 5.94 6.02 (1.30/E Page 75 Page 75 I I

I

II Table a/Contents Table of Contents Significant items contributing to the $32 $32 million decrease in net interest expense included:

I I

A decrease A

A decrease in the average long-term interest rate from 6.17 percent in 2006 to 6.02 percent in 2007; decrease decrease A $14 million of $283 of million in

$283 million in the increase in AFUDC the average average balance balance of long-term outstanding of long-term due to a 4.0 percent outstanding debt debt in increase in the construction 2007;inand 2007; in work and progress base in 2007.

A $14 million increase in AFUDC due to a 4.0 percent increase in the construction work in progress base in 2007.

I These items were partially partially offset by:

I .

increase in the average An increase average discount notes interest rate from 4.47 percent increase of $260 million in the average An increase percent in 2006 to 5.21 percent in 2007; and balance of discount notes outstanding average balance outstanding in 2007.

Off -Balance Off -Balance Sheet Arrangements I In February 1997, TVA entered entered into a purchase power agreement with Choctaw Generation Limited Partnership) to purchase all the power generated Generation Choctaw Generation, Generation, Inc. (subsequently assigned to Choctaw (subsequently assigned Choctaw generated from its facility located in Choctaw County, Mississippi. The facility had a capacity of 440 megawatts and the term of the agreement was 30 years. Under the accounting guidance provided by Financial committed capacity committed Accounting Standards Accounting Standards Board Board ("FASB")

("F ASB") Interpretation Interpretation No. 46, "Consolidation "Consolidationof Variable Interest Entities, Variable Interest Entities," as amended by FASB FASB Interpretation Interpretation II No. 46R 46R (as amended, "FIN would require TVA No. 46R would "FIN No. 46R"), TVA may be deemed to be the primary access to the financial records of Choctaw Choctaw Generation consolidate Choctaw Generation Limited TV A to consolidate primary beneficiary beneficiary under the contract; Generation Limited Partnership ("Choctaw").

("Choctaw"). As a result, TVA Limited Partnership's balance contract; however, TVA does not have TV A is unable to determine have determine whether FIN operations, and cash flows for balance sheet, results of operations, FiN I the year ended September 30, 2008. Power purchases purchases for 2008 under the agreement agreement amounted $118 million, and the remaining amounted to $118 remaining financial I commitment under this agreement is $6.7 billion. TVA has no additional financial commitments beyond the purchase commitment respect to the facility.

respect purchase power agreement agreement with I* Certain contracts with independent Certain

""Determining Determining Whether an independent power producers qualify as operating an Arrangement Lease." In accordance Contains a Lease."

Arrangement Contains associated with these contracts meet the definition of contingent associated operating leases in accordance accordance with SF accordance with the requirements 13, " Accounting AS No. 13, SFAS contingent rentals. Amounts under these contracts Accountingfor requirements of EITF No. 001-08, for Leases, "variable costs Leases, "variable contracts qualifying as contingent rentals through 1-08, September 30,2008, 30, 2008, amounted to $96 million. In accordance requirements of EITF No. 98-09, " Accounting accordance with the requirements Accountingforfor Contingent ContingentRent,"

Rent, "

II TVA TV A accrues accrues contingent rentals when uncertainty achievement of the event that triggers the contingent rental when the achievement associated with future power demand, TV uncertainty associated TVA accrues contingent rentals A accrues rental expense is probable. Because Because of the arrangements as power is purchased.

rentals under these arrangements the I Critical Critical Accounting Accounting Policies Policies and Estimates preparation of financial statements The preparation statements requires TVA requires TV A to estimate the effects of various matters that are inherently uncertain as of the Although the financial statements date of the financial statements. Although statements are prepared conformity with generally prepared in conformity generally accepted accounting principles S("GAAP"), management is required to make estimates and assumptions that affect the reported amounts

("GAAP"), management amounts of assets and liabilities, the disclosure of of I liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies contingent assets and liabilities, potential impact on TVA's financial results. Estimates are deemed judgment involved and its potential in regard to the level of judgment deemed critical either either when when a different estimate reasonably been used, or where changes estimate could have reasonably reasonably likely to occur from period to period, and changes in the estimate are reasonably II such use or change would materially impact TVA's financial condition, changes in financial position, or results of operations.

materially impact accounting policies are also discussed in Note Note 11..

operations. TVA's critical I Regulatory Regulatory Accounting I TVA power rates are not subject by the TVA Act to set rates for power sold to its customers. This rate-setting service commission or other similar entity. TVA's Board is authorized subject to regulation through a public service rate-setting authority meets the "self-regulated" authorized provisions of SFAS No. 71, "self-regulated" provisions 71, ""

I Accountingfor the Effects of Certain Accountingfor Regulation ," and TVA meets the remaining criteria of SF Certain Types of Regulation SFASAS No. 71 because (1)(1) TVA's regulated regulated I rates rates are designed recover its costs of providing designed to recover providing electricity and (2)(2) 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. collected. Accordingly, certain Accordingly, TVA records certain liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated assets and liabilities non-regulated II entities. Regulatory Regulatory assets generally represent incurred customer rates. Regulatory Regulatory liabilities liabilities generally costs that have been deferred because such costs are probable of future recovery incurred costs obligations to make refunds to customers for previous generally represent obligations whether the regulatory assets are probable of future recovery assesses whether Management assesses likely to be incurred. Management previous collections recovery in collections for costs costs that are not considering factors such as recovery by considering applicable regulatory changes, potential legislation, legislation, and Page 76 I Page 76 I

I I

Table of Contents a/Contents I

changes in technology.

changes technology. BasedBased onon these these assessments, assessments, management management believes believes the the existing existing regulatory regulatory assets areare probable recovery. This probable of recovery. This determination reflects determination assets ceases assets Accountingfor Accounting reflects the ceases to be the current be probable, current regulatory probable, TVA Discontinuation of for the Discontinuation regulatory and TVA would would be and political political environment be required required to write ofApplication Application ofFASB environment andand is subject subject to write off these costs under ofFASB Statement Statement No. 71 to change change in the under the provisions 71 ." Any asset provisions of the future. If future of SFAS asset write-offs SFAS No. 101, write-offs would would be future recovery recovery of regulatory 101, "Regulated regulatory Enterprises-

" Regulated Enterprises be required required to bebe recognized recognized in in

- I earnings in earnings in the the period period in which which future recoveries recoveries cease cease to be be probable.

probable. See See Note Note 6. 6.

Assets Long-Lived Assets TV A capitalizes TVA capitalizes long-lived long-lived assets assets such as property, equipment at property, plant, and equipment at historical historical cost, c9st, which direct and indirect costs which includes direct costs and and I

AFUDC. TVA AFUDC. TVA recovers recovers the costs of of these long-lived long-lived assets through through depreciation depreciation of of the physical physical assets as as they are are consumed consumed in in the the process of of providing products providing classes of depreciation products or services. Depreciation Depreciation is generally of assets. When TVA retires its regulated accordance with utility generally computed regulated long-lived utility industry computed on a straight-line long-lived assets, industry practice.

practice.

straight-line basis over assets, it charges charges the original over the original asset the estimated estimated productive asset cost, less productive lives of the less salvage salvage value, the various value, to accumulated accumulated I depreciation in accordance Impairments Long-Lived Asset Impairments I TVA evaluates the carrying TV A evaluates recoverable. Under the recoverable.

exists for a long-lived asset to be carrying value of long-lived the provisions of SF be held AS No. 144, SFAS held and used Accountingfor 144, "" Accounting used when when the carrying for the Impairment value exceeds carrying value exceeds the indicate the carrying circumstances indicate long-lived assets when circumstances Impairment or Disposal Disposal ofLong-Lived the sum of estimates of the those assets may not be carrying value of those the undiscounted undiscounted cash be impairment

ofLong-Lived Assets, "" an asset impairment cash flows expected expected to I

II result from the use and eventual disposition of the asset. If the asset is impaired, the asset's asset's carrying carrying value value is adjusted adjusted downward to its estimated estimated fair value with a corresponding impairment loss recognized in earnings. Additionally, TVA corresponding impairment TV A regularly regularly evaluates evaluates construction construction inin progress progress projects. If the project project is cancelled cancelled or deemed to have no future economic economic benefit, the the project project costs are written off as an asset impairment.

Recognition Revenue Recognition Revenues from power sales distributor customers (distributors) sales are recorded (distributors) that resell delivered to customers. TVA recorded as power is delivered resell the power to end users at retail rates. Under TV A is primarily a wholesale provider of power Under TVA's end-use end-use billing arrangements power toto arrangements with distributors, I

TVA TV A relies the report report of estimated on the distributors to report relies on of end-use end-use sales sales to TVA, estimated unbilled revenues for power report their end-use sales. Because TV A, TVATV A must estimate power sales provided provided to customers delay between the wholesale delivery of Because of the delay estimate the unbilled revenue at the end customers for the period of time end of each financial reporting of power to the customer reporting period. TV time from the meter read date TVA customer and A accrues accrues date to the end of the month. The and The Ifn methodology for estimating estimating unbilled revenue from electricityelectricity sales sales uses meter meter readings each customer for the current billing period. See readings for each See Note 11 - Revenues.

Revenues.

Obligations Asset Retirement Obligations I Conditional In accordance accordance with the provisions ConditionalAsset Retirement Obligations provisions of SFAS SF AS No. 143, Obligations- an Interpretation Interpretationof "Accountingfor Asset Retirement 143, "Accountingfor ofF ASB Statement No. 143,"

FASB Obligations,"" and FIN No. 47, "Accountingfor Retirement Obligations, TV A recognizes 143, " TVA recognizes legal obligations "Accountingfor obligations associated associated with I

retirement of certain tangible the future retirement tangible long-lived assets. These generating plants, nuclear generating These obligations relate to fossil-fired generating generating plants, hydroelectric generating generating plants/dams, are not limited to, easements, leases,leases, and coal rights. Activities property-related assets include, but property-related assets. These other property-related plants/dams, transmission structures, and other property-related decontamination and demolition n involved with retiring these assets could include decontamination Activities involved disposal of wastes, and site reclamation. Revisions of structures, removal and disposal Revisions to the amount and timing of certain certain cash cash flow estimates of asset but I

retirement obligations may be made based based on engineering studies. For nuclear assets, the studies are performed performed annually in accordance with NRC requirements.

requirements. For non-nuclear obligations, No. 47. Any accretion or depreciation No.7!.

No. 71. See Note 5.

obligations, revisions are made as needed depreciation expense related accordance with guidance provided by SFAS No. 143 and FIN needed in accordance related to these liabilities and assets are charged to a regulatory asset in accordance with SFAS IU NuclearDecommissioning Nuclear Decommissioning I Utilities that own and operate nuclear plants are required to use different different procedures in estimating nuclear decommissioning costs under SFAS No. 143 than those that are used in estimating nuclear decommissioning produce present value of decommissioning costs. At September decommissioning costs that are reported to the NRC. The two sets of procedures primarily because of the difference in the discount rates used to calculate the decommissioning primarily produce different estimates for the costs of decommissioning September 30, 2008, the present value of the estimated future nuclear decommissioning cost under nuclear decommissioning under I

SFAS No. 143 was $1.7 included in OTHER included was $862

$1.7 billion and was included in ASSET OTHER REGULATORY

$862 million at REGULATORY ASSETS.

at September ASSETS . Under the 30, 2008. This decommissioning cost September 30,2008.

OBLIGATIONS , and the unamortized regulatory ASSET RETIREMENT OBLIGATIONS, the NRC's regulations, the present cost estimate is is based onon NRC's NRC's of $764 million was regulatory asset of$764 value of the estimated future nuclear decommissioning present value decommissioning cost cost I 77 Page 77 I

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I Table of Contents Table of Contents

requirements for removing a plant from service, releasing the property for umestricted requirements unrestricted use, and terminating terminating the operating license. The actual I

I decommissioning costs may vary decommissioning decommissioning, changes decommissioning, vary from the derived estimates because changes in regulatory requirements, changes in current assumptions, such as the assumed dates of because of changes requirements, changes in technology, technology, and changes in the cost of labor, materials, and equipment.

of

TV A maintains a nuclear decommissioning trust to provide funding for the ultimate decommissioning of its nuclear TVA nuclear power power plants. The I trust's funds are invested invested in securities generally fund are invested in debt and equity securities generally designed to achieve a return in line with overall equity market performance. The assets of the securities and certain derivative instruments.

instruments. The derivative instruments are are used across various asset II classes to achieve achieve a desired desired investment investment structure. The balance balance in the trust as of September estimated future nuclear decommissioning costs under both the NRC methodology and under SF September 30, 2008, is less than the present value of the 143.

AS No. 143.

SFAS The following key assumptions can have have a significant effect on estimates estimates related related to the nuclear nuclear decommissioning decommissioning costs:

I Timing - In projecting decommissioning costs, two assumptions must be made to estimate the timing of plant decommissioning. First, the date of the plant's retirement must be estimated. At a multiple unit site, the expiration of the unit with decommissioning.

the latest to expire expire operating operating license is typically typically used for this purpose, or an assumption couldcould be made that the the plant plant will be relicensed relicensed and operate for some some time beyond the original license term. Second, an assumption assumption must be made whether I decommissioning will begin decommissioning begin immediately immediately upon plant retirement, or whether the plant applicable regulations authorized by applicable the radioactivity to decay, regulations which allows for a nuclear decay, after plant will be be held in SAFSTOR SAFSTOR status - a status nuclear facility to be maintained and monitored in a condition after which the facility is decommissioned condition that allows decommissioned and dismantled. While the impact of these assumptions cannot cannot be determined with precision, assumingassuming either license license extension extension or use of SAFSTOR status can significantly decrease the I present value of these oblii value of presentpreentvale Technology o these thse obligations.

blgations.

Technology and Regulation -- There There is limited experience experience with actual decommissioning of large nuclear facilities. Changes in I technology technology and experience experience as well as changes in regulations change significantly. The change technology technology and impact of these potential The impact and regulations.

regulations.

regulations regarding nuclear decommissioning could cause cost estimates to potential changes is not presently determinable. TVA's cost studies assume current current I

Discount Rate - TVA uses a blended rate of 5.32 percent required required toto satisfy satisfy TVA's decommissioning obligation.

TVA's decommissioning percent to calculate calculate the present present value of the weighted weighted estimated cash flows

- Investment Investment Rate of Return - TV TVAA assumes that its decommissioning decommissioning fund will achieve a rate rate of return that is five percent greater greater I than the rate of inflation. This results in a 9.2 percent estimated estimated investment rate of return return for all periods presented.

Cost Escalation Factors - TV TVA'sA's decommissioning estimates include an assumption that decommissioning decommissioning costs will escalate over escalate over I Pension Pension and present cost levels by four percent and Other OtherPostretirement percent annually.

Postretirement Benefits I TVA TV A sponsors sponsors a defined benefit pension employees. The TVA Retirement sponsored retirement sponsored retirement plans. TV TVA pension plan that is qualified under IRS rules and covers Retirement System ("TVARS"),

A also provides a supplemental supplemental executive executive retirement retirement plan plan to certain substantially all of its full-time covers substantially

("TVARS"), a separate legal entity governed by its own board board of directors, administers administers TVA-certain executives in critical TVA-critical positions that provides I supplemental pension benefits in addition to those provided supplemental provided by the qualified defined defined benefit benefit pension plan. Additionally, Additionally, TVA provides I postretirement health care providing these benefits care benefits for most of its full-time employees who reach retirement age while still working for TVA. TVA's benefits are impacted actuarial calculations, impacted by numerous factors including the provisions of the plans, changing employee calculations, assumptions, and accounting TV A's costs of employee demographics, and various of actuarial accounting mechanisms. The most significant of these factors are discussed discussed below.

II Expected Return on Plan assets. The expected Plan Assets. The qualified qualified defined benefit pension plan is the only plan that is funded with qualified return on pension plan assets used to develop net pension cost was 8.75 percent, 8.75 percent, expected retum qualified plan percent, and 8.25 percent during percent during 2008, 2007, and 2006, 2008,2007, 2006, respectively, respectively, and is determined at the beginning of the period. Changes Changes in the rates are generally generally based based on studies .

I by third party professional professional asset managers. A higher expected rate of return decreases performed by third party professional increases increases profitability.

profitability. TVA decreases net periodic periodic pension cost, which in turn TV A plans to reduce the expected rate of return to 8.00 percent for 2009 based on a recent asset/liability professional asset managers. The 2009 expected rate of return return also reflects.

reflects a change tum asset/liability study performed change in the allocation policy of TVARS TV ARS performed I assets. The change in the TV TVARS ARS asset allocation allocation policy was based on aa recommendation recommendation by TV TVARS ARS investment consultant. The changes in the the I expected return on plan assets discussed above do not affect assets to fund such benefits. TVA funds its postretirement affect TVA's TV A's postretirement postretirement plan postretirement benefits plan because because TVA does not separately separately set aside I Page 78 78 I

I

Table of Table Contents a/Contents benefits on an as-paid basis. This change also does not impact the supplemental executive retirement retirement plan as any assets set aside for that plan are I

not considered for considered plan assets under for Defined DefinedBenefit Pension under SFAS No. 87, Pension andand Other EmployersAccounting 87, ""Employers Other Postretirement PostretirementPlans-an Accountingfor Pensions, " as amended by SFAS No. 158" for Pensions, Plans-anamendment of FASB StatementsStatements No. 87, 88, I06, No. 87, difference between expected and actual return on plan assets for the pension for 2008 was $2 loss related to the difference 106, and Employers' Accounting 158 "Employers'Accounting and I32(R) 132(R) ." The actuarial

$2 billion. This amount has beenbeen IU recognized recognized as a regulatory regulatory asset. Actual returns for the year ending September September 30, 2008, decreased decreased by 19 percent. Plan assets have have further declined another declined $1,138 million, or 18 percent, through November another $1,138 November 30,2008.

30, 2008.

Discount Rate. In the case of selecting Discount Rate. selecting an assumed assumed discount rate, TVA reviews market yields on high-quality corporate debt and long- I term obligations term obligations of the U.S. Treasury and endeavors maturities maturities of its pension obligations yield curves curves and applies expected endeavors to match, through obligations in accordance accordance with through the use of a proprietary bond portfolio, instrument with the prevailing prevailing accounting standards. In addition, expected cash flows to the curve to approximate the rate expected TVA addition, TV instrument maturities with the A looks at published pension pension spot expected to settle the projected benefit payments. The discount I*

rates used to determine determine pension expense were 6.25 percent, 5.90 percent, percent, and 5.38 percent percent during 2008, 2007, and 2006, respectively. The The discount discount rate is determined determined at the beginning of the period. TV TVA A plans plans to use a discount rate of 7.50 percent percent in the determination of 2009 net periodic periodic pension cost and also used this rate to value plan obligations long-term interest rates. The discount rate is somewhat volatile because date. The discount discount rate used to determine determine the postretirement obligations at the end of 2008. Changes in the discount rate were due to increased because it is determined postretirement benefits increased determined based upon the prevailing rate as of the measurement benefits costs is the same rate used to determine pension benefits measurement benefits costs due to a IU expected duration of the postretirement similar expected postretirement and pension benefit benefit obligations.

obligations. A higher discount rate decreases obligations and decreases the plan obligations and correspondingly decreases the net periodic correspondingly decreases amortized. On the other hand, a lower profitability.

profitability.

periodic pension pension and postretirement lower discount postretirement benefits costs for those plans where discount rate increases net periodic pension and postretirement where actuarial actuarial losses are being postretirement benefits costs and thus reduces TVA's reduces TVA's II The expected rate of return determined in accordance return on pension plan assets and the discount accordance with consistent methodologies, methodologies, as described discount rate, as well as the amortization of actuarial described in Note 14.

actuarial gains and losses, were I1 recent Mortality. Mortality recent six years for retirees Mortality assumptions assumptions are based on the results obtained from an actual company retirees as well as other plan participants. TVA obtained rates from the 1983 Group Annuity Mortality Tables to the RP-2000 obtained an updated RP-2000 Mortality company experience experience study performed performed for the most updated study in 2008 and, accordingly, adjusted the mortality Mortality Tables.

most I

Health Care Health Care Cost Cost Trends.

Trends. TVTVAA reviews reviews actual recent cost trends trends and projected future trends in establishing rates. Based on this review process, TVA did not reset its health care cost trend rate assumption used in calculating establishing health care cost trend calculating the 2008 and 2007 I accumulated made postretirement benefit obligations.

accumulated postretirement made due to consistent actual performance trend rate of 8.0 percent is assumed obligations. The assumed health care assumed to gradually care trend rate used for 2008 and 2007 was 8.0 percent. No change was performance in the plan. In addition, an 8.5 percent decrease each successive gradually decrease percent trend rate was used during 2006. The 2008 health care cost successive year until it reaches reaches a five percent annual annual increase increase in health care costs I

in the year beginning beginning October 1,2014,1, 2014, and beyond.

Sensitivity of Costs to Changes Changes in Assumptions.

Assumptions. The following chart reflects the sensitivity of pension pension costs to changes in certain Sensitivity actuarial assumptions:

actuarial certain I

Sensitivity of Pension Costs to Changes in Assumptions Impact on IU Change in Change Impact on 2009 Pension 2008 Projected Projected Benefit Benefit I1 1 Actuarial Assumption Actuarial Assumption Assumption Assumption Cost Obligation Discount rate __~______________________________________________________~(0.25%)

~D~is~c~o~un~t~r~a~te~

Rate of return on plan plan assets (Increase in millions (Increase (0.25%) $

(0.25%) $

(0.25%)

millions) 14 $

17 195 I*

195 NA NA I

. Each fluctuation above assumes actuarial gains or losses.

assumes that the other other components components of the calculation are held constant and excludes any impact for unamortized I Page 79 Page 79 I I

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I Table o/Contents Table of Contents The following following chart reflects the sensitivity sensitivity of postretirement postretirement benefit costs to changes in the health health care care cost trend rate:

I (Increase millions)

(Increasein millions)

Postretirement Benefit Costs to Changes in Assumptions Sensitivity of Postretirement 1%

1% Increase 1%

1% Decrease i Effect on total of service service and interest cost components . $ 44 $ (5)]

(5)]

I Effect on end-of-year accumulated Effect accumulated postretirement benefit obligation obligation $ 59 $ (60)

(60) fl I .Each fluctuation Each fluctuation above assumes that the other actuarial gains or losses.

other components components of the calculation are held constant and excludes excludes any impact for unamortized unamortized Accounting Mechanisms. In accordanceaccordance with current current accounting methodologies, TV TVA A utilizes a number number of accounting accounting mechanisms mechanisms I that reduce the volatility market-related volatility of reported pension costs. Differences amortized into periodic market-related value of plan assets. If Differences between actuarial assumptions and actual plan results are deferred and are periodic cost only when the accumulated differences differences exceed 10 percent of the greater necessary, the excess is amortized If necessary, greater of the projected projected benefit obligation obligation or the amortized over the average remaining service period of active employees.

II Additionally, TVA Additionally, related" value TV A recognizes the impact of asset performance value of assets calculation. Since the market-related performance on pension expense over a three-year three-year phase-in phase-in period through through a "market-market-related value of assets recognizes investment gains and losses over a three year period, the "market-previously deferred gains or losses are recognized. As a result, the losses that the pension plan assets future value of assets will be impacted as previously I experienced in the current year may have an adverse experienced adverse impact on pension cost in future years years depending on whether the actuarial actuarial losses at each I measurement measurement date exceed the 10 percent corridor in accordance obligations and funded status.

accordance with current current accounting methodologies.

methodologies. See Note 14 for a discussion of of I Medicare Provisions. There have Medicare Provisions. have been several recent Medicare Part D of the Medicare Prescription legislation, such as Medicare Improvement and Modernization Prescription Drug, Improvement recent developments Prescription Drug, Improvement Modernization Act of 2003,2003, employers related to retiree health care benefits, developments related Improvement and Modernization benefits, including cost sharing Modernization Act of2003.

employers may receive retiree drug subsidies for Medicare-eligible sharing and of 2003. Under the Medicare Medicare-eligible retirees retirees I who enroll in the employer's retiree prescription drug plan, provided that the plan is determined to be "actuarially retiree prescription "actuarially equivalent" equivalent" to standard I coverage provided under under Medicare Medicare Part D. TVA determined subsidies. As a result, through its prescription determined that its retiree prescription benefit manager, TV TVA prescription drug coverage did not qualify for retiree retiree prescription A maintained employer-sponsored prescription maintained for 2008 an employer-sponsored retiree drug prescription drug plan II ("PDP"). By providing through to providing an employer-sponsored Medicare-eligible retirees form of lower prescription benefit employer-sponsored PDP, TVA's prescription in the premiums. See benefit manager Note 14 manager receives for receives subsidies from Medicare further through to Medicare-eligible retirees in the form of lower premiums. See No~e 14 for further description. , description.

which are passed Medicare which Contributions. TVA expects to contribute Expected Contributions. contribute $5 supplemental executive retirement plan and $29 million to its

$5 million to its supplemental I postretirement health care benefit plans in 2009. TVA made a contribution postretirement constitutes the amount that was expected of $85 million that constitutes of$85 contribution to the qualified defined benefit pension plan qualified defined contributed in 2009.

expected to be contributed plan on September September 30, 2008; 30,2008; Ratemaking Impacting Accounting Changes in Ratemaking Accounting a u At its September 27, 2007, meeting, the TVA Board approved the following changes in ratemaking, which resulted in changes in I At its September 27,2007, meeting, the TVA Board approved the following changes in ratemaking, which resulted in changes in accounting for the types of transactions transactions described described below.

Allowance forfor Funds UsedDuring Funds Used Construction. Capitalization of interest During Construction. accepted interest and other financing costs has been a generally accepted I regulatory capitalization of interest on major plant construction projects results from a practice in the utility industry. The concept of permitting the capitalization regulatory philosophy that today's customers should not pay for the costs of financing construction that will benefit financing construction benefit only future customers. As a included in rates until the plant is placed in service.,

result, major plant construction costs are not included provide a return on investment during a To provide service. To I

I period of construction, associated with funds invested typically recover construction, utilities typically construction funds from future users by capitalizing a portion of current interest costs recover the cost of construction interest is referred to as AFUDC.

capitalized interest invested in the construction projects. This capitalized 11_'_______________________________________________P_a_ Page 80________________________________________--------

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I a/Contents Table of Contents In accordance accordance with the accounting policy that was in effect on September September 30, 20072007,, TVA capitalized capitalized a portion of current interest interest costs associated with funds invested in most construction construction projects projects and most nuclear fuel inventories.

inventories. TVTVAA will continue continue to capitalize capitalize a portion ofof current interest costs associated construction associated with funds invested construction projects has been been capitalized invested in most nuclear nuclear fuel inventories, inventories, but since October 1, 2007, interest on funds invested in capitalized only if (1) the expected total cost of a project period is at least three years. Capitalized project is $1 billion billion or more and (2)(2) the estimated construction component of the asset cost and is recovered in future periods through continues to be a component Capitalized interest continues in construction Ii depreciation expense. In addition, AFUDC continues to be a reduction to interest expense as costs are incurred. The interest costs associated with funds invested Statement invested in construction construction projects Statement of Income, and are recovered projects that do not satisfy recovered in current current year satisfy the $1 billion and three-year year rates as a component three-year criteria are riot not capitalized associated capitalized as AFUDC, remain in the component of interest expense. TVA recorded a total of $17 $17 million in in I3 AFUDC in 2008 which reflects a decrease of $160 $160 million from the $177$177 million in AFUAFUDCDC that TVA recorded in 2007.

of its Bond Call Monetizations.

Call Monelizations. From time to time TVA has entered into swaption Bond issues, issues. A A swaption swaption essentially swaption transactions transactions to monetize monetize the value of call provisions essentially grants a third party an option to enter into a swap agreement with TVA TV A under which provisions on certain which TVATV A receives a I

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 monetized. Selling such an option option creates creates a liability for TVA until such time as TVA provision TVA TV A buys back the option or until the option matures.

TV A I

These call monetization monetization transactions long-term liabilities transactions result in long-term liabilities which are marked marked to market each each quarter. In accordance accordance with the accounting policy that was in effect accounting losses through TVA's income effect on September 30, income statement in accordance 2007, the changes 30,2007, changes in the value of these liabilities were reported as unrealized accordance with SFAS No. 133.

amounts of non-cash expense or income, which affects net income.

133. The volatility of the valuations resulted unrealized gains or resulted in the recognition or recognition of sizable I Beginning in 2008, the TVA Board approved approved the utilization of regulatory regulatory accounting accounting treatment for swaps and swaptions swaptions related to call monetization transactions monetization transactions in order transactions actually settle. This treatment transactions to better match the income statement statement recognition recognition of gain treatment removes the non-cash impacts to TVA's gain and loss with the economic TV A's earnings instruments to market each quarter. The value of the swaps and swaptions are still recorded on TVA's economic reality of when these earnings that result from marking marking the value of these I TVA's balance sheet, and any interest interest expense I

impacts continue continue to be reflected in TVA's income statement. If this new accounting treatment had been effective during 2007, TVA's net 2007 would have been reduced by less than $50 income for 2007 $50 million.

Non-Nuclear Non-Nuclear Decommissioning Decommissioning Costs. Costs. In September 2007, the TV TVA A Board approved the establishment establishment of an asset retirement retirement trust to 3

more effectively effectively segregate, manage, and invest funds to help meet future asset retirement obligations. TV contribution to the asset retirement contribution retirement trust on September 28, 2007. TVA made 28,2007. made an additional TVA A made made a $40 million initial additional $40 million contribution initial contribution to the asset retirement retirement trust I on September September 26, 2008. As of September 30, 2008, the assets of the trust totaled $81 million. Although to the asset retirement trust in 2007 and 2008, in relation in relation to providing providing a potential 2008, the TV TVA A Board Although the TVA Board approved approved contributions Board did not approve funding for the trust as part of its budget and ratemaking potential funding source through rates for non-nuclear non-nuclear decommissioning contributions ratemaking process decommissioning costs until August 2008, at which time the process I TVA BoardBoard approved making a contribution contribution to the trust in 2009. the The funds from the asset retirement retirement trust may be used, among other things, to pay the cost of retiring non-nuclear non-nuclear long-lived long-lived assets from the accumulation accumulation of assets in the trust. The costs of retiring non-nuclear non-nuclear long-lived assets represent represent the net deferred deferred costs costs related to the future closure and retirement retirement of TVA's non-nuclear non-nuclear long-lived long-lived assets under under various various legal requirements as recognized obligation ("ARO")

recognized by SFAS No. 143 and FIN No. 47. These costs had previously

("ARO") was accreted and the ARO asset was depreciated. In accordance previously been accordance with been included in rates as the asset retirement with EITF 93-4, these costs did not previously retirement previously meet the I

asset recognition recognition criteria in paragraph paragraph nine of SF SFAS AS No. 71 at the date the costs were incurred. Because Because of the establishment establishment of the asset retirement trust and the approval of the funding in 2009 rates as part of the TVA Board's budget and ratemaking meet asset recognition criteria. Therefore, all cumulative asset recognition regulatory asset as of September cumulative costs incurred since September 30, 2008. The regulatory asset 2003, when since 2003, asset initially created ratemaking process, process, these costs currently when SFAS No. 143 was adopted, were recaptured created related to this adjustment recaptured as a adjustment totaled $350 million. The offset to I

this adjustment was a one-time one-time decrease to depreciation, depreciation, amortization, amortization, and accretion expense.

These future costs can be funded through a combinationcombination of investment funds already set aside in the asset retirement trust, future I earnings on those investment funds, and future cash contributions demonstrated the ability and intent demonstrated contributions for 2009 included contributions contributions to the investment funds. Through this rate action, the TVA Board has intent to include non-nuclear non-nuclear retirement costs in allowable 2009 to the asset retirement trust fund in its 2009 budget allowable costs and in rates. Further, the TVA Board has budget and in the related rates. As a result, it is probable that future I

3 revenue will result revenue will result from from inclusion inclusion of of the the deferred non-nuclear asset retirement costs in allowable costs for ratemaking deferred non-nuclear ratemaking purposes.

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I Table of Contents Table of Contents New Accounting Standards and Interpretations Accounting Standards Interpretations I Accounting for Planned Major Maintenance Accounting released FASB released FASB Staff Position accounting for planned accounting Position ("FSP")

("FSP") AUG AIR-I, Activities. On September 8, Maintenance Activities.

AIR-1, "Accounting "Accountingfor maintenance activities and amends certain planned major maintenance for Planned PlannedMajor 8, 2006, the Financial Accounting Standards Board Major Maintenance Activities." The FSP addresses MaintenanceActivities."

provisions in the American Institute of Certified certain provisions Board ("FASB")

addresses the

("F ASB")

Certified Public Accountants I Industry " Audits of ndustry Audit Guide, "Audits and Accounting Principles Board Opinion No. 28, Airlines, ""and ofAirlines, " Interim Financial 28, "Interim Financial Reporting Reporting." ." The guidance in I this FSP states states that entities should adopt an accounting method that recognizes recognizes overhaul expenses in the appropriate employed/permitted: direct expensing method; accounting methods are most often employed/permitted:

in this FSP is applicable to entities in all industries and must be applied to the first fiscal year beginning appropriate period. The following method; built-in overhaul method; or deferral method. The guidance beginning after December 15, 2006. TV December 15,2006. TVA guidance A adopted adopted I guidance for 2008. Except this guidance Except for the recording regulatory assets, TVA's policy is to expense maintenance recording of certain regulatory maintenance costs as incurred (direct(direct I expensing method). Therefore, the adoptionadoption of this FSP did not have a material impact impact on TVA's results of operations operations or financial position.

Measurements. In September 2006, FASB issued SFAS No. 157, "Fair Fair Value Measurements. "FairValue Measurements.

Measurements."" ("SFAS No. 157"). SFAS II No. 157 provides guidance for using fair value to measure responds to investors' also responds measure assets and liabilities that currently require fair value measurement. SFAS measurements on earnings. SF information used to measure fair value, and the effect of fair value measurements information SFAS AS No. 157 applies whenever SF AS No. 157 information about the extent to which companies measure assets and liabilities at fair value, the investors' requests for expanded information whenever other standards 157 liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SF require (or permit) assets or liabilities SFAS AS I establishes a fair value hierarchy that prioritizes the information No. 157 establishes 157 were to be effective statements issued for fiscal years effective for financial statements measurement assumptions. Provisions of SF information used to develop measurement years beginning after November November 15,2007, fiscal years. However, in February 2008, FASB issued FSP FAS 157-2, "Effective Date ofFASB Statement No. 157,"

SFAS 15, 2007, and interim periods within those AS No.

those 157-2"),

157," ("SFAS No. 157-2"),

I which delays the effective SFAS effective date of SF AS No. 157 for nonfinancial nonfinancial liabilities except for items that are recognized nonfinancial assets and nonfinancial recognized or I recurring basis. This FSP delays the effective date of SF disclosed at fair value in the financial statements on a recurring beginning after November November 15, AS No. 157 to fiscal years SFAS 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. TVA will implement implement SFAS SF AS No. 157 in the first quarter of 2009, and will utilize the deferral portion of FSP F FAS nonfinancial assets and liabilities within AS 157-2 for all nonfinancial within Ii its October 2008, the FASB issued FSP No. FAS 157-3, ts scope. In October Asset Is Not Active, "" ("FSP FAS 157-3").

FAS 157-3 It). FSP F FAS AS 157-3 15~-3, "Determining 157-3 clarifies "Determ~nin¥ the Fair application of SFAS clanfies the apphcatlOn SF AS No. 157 III considerations in determining the fair value of a financial asset when the market an example to illustrate key considerations FinancialAsset ~hen FairValue of a l!"inancial in a market When the.

market that IS the Market Marketforfor !hat is not active and prOVIdes market for that financial asset is not active.

That provides The guidance emphasizes that determining fair value in an inactive market depends on the facts and circumstances guidance emphasizes circumstances and may requirerequire the use of of I significant judgment. FSP FAS significant judgment. FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued, effective upon become effective for TVA at upon its implementation of SFAS No. 157 during the first quarter of and will become 2009. TVA is evaluating the of2009.

II requirements of SFASSF AS No. 157 and the related FSP's and has not yet determined the impact of their implementation, which mayor material to TVA's results of operations operations or financial position.

may or may not be Fair Value Option.

Option .. In February 2007, FASB issued issued SFAS No. 159, "The Fair Fair Value Option Optionfor FinancialAssets and Financial for Financial Financial Liabilities Liabilities -- Including an amendment of FASB Statement No.1

- Including No. 115, " ("SFAS 15, "("SF AS No. 159"). statement permits 159"). This statement permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option established by SF SFAS AS No. 159 permits permits all entities entities to choose I many measure eligible items at fair value at specified to measure fair value option has been specified election dates. A business been elected in earnings at each No.159 unrealized gains and losses on items for which the business entity will report unrealized each subsequent reporting date. Most of the provisions in SFAS No. 159 159 are elective. The provisions of SF AS No. 159 are effective as SFAS as of the beginning of an ent.ity's 15, 2007. Early entity's first fiscal year that begins after November 15,2007. Early adoption adoption Ii beginning of the previous fiscal year provided that the entity makes that choice in the first 120 isspermitted as of the beginning also elects to apply the provisions of SF SFAS AS No. 157. SF SFAS AS No. 159 will become effective for TV TVA 120 days of that fiscal year and A during the first quarter of 2009. TV TVA A is I evaluating the requirements evaluating statement and has not yet determined the potential impact requirements of this statement

material to TVA's results of operations operations or financial position.

impact of its implementation, which which maymayor or may not be Amounts. On April 30, 2007, FASB issued FSP FIN No. 39-1, Offsetting Amounts. of FASB Interpretation 39-1, "Amendment ofFASB Interpretation No.No. 39,"

39, "which which addresses certain modifications to FASB certain modifications FASB Interpretation No. 39, "Offsetting of ofAmounts Amounts Related to Certain Contracts." This FSP replaces Certain Contracts. replaces the I "conditional contracts" terms "conditional contracts" and "exchange contracts" with the term "derivative "exchange contracts" instruments" as defined in SFAS No. 133, "derivative instruments" 133, "Accountingfor "Accountingfor I DerivativeInstruments Derivative Instruments andandHedging collateral (a receivable) reclaim cash collateral Activities." The FSP also permits a reporting entity to offset fair value amounts recognized HedgingActivities."

receivable) or the obligation to return recognized for the right to return cash collateral (a payable) against fair value amounts recognized for derivative counterparty under the same master netting arrangement. The guidance in the FSP is effective for fiscal executed with the same counterparty instruments executed I years beginning beginning after November November 15, 15, 2007, with earlyearly application permitted. At this time, TVA is evaluating the requirements determined the potential impact of its implementation, and has not yet determined may or may not be material implementation, which mayor requirements of this guidance material to TVA's financial position.

guidance

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I Table of Table of Contents Contents Business Combinations.

Business Combinations. In In December December 2007,2007, FASB FASB issued issued SFAS No. No. 141R, 141R, "Business Combinations, Combinations,""("SFAS("SFAS No. 141R").

141R"). This This statement establishes statement liabilities establishes principles liabilities acquired contingencies. SFAS contingencies.

principles and requirements acquired in aa business SF AS No. 141R141 R also requirements for determining business combination, combination, including also requires determining how an including non-controlling an enterprise enterprise recognizes non-controlling interests, requires acquisition-related acquisition-related transaction recognizes and interests, contingent transaction expenses and measures measures the contingent consideration, expenses and the fair value consideration, and certain and restructuring restructuring costs costs to be of certain value of certain acquired acquired expensed as be expensed certain assets as incurred assets and incurred rather and rather I

than capitalized than capitalized as aa component first fiscal year October 1, October 1,2009.

component of year that begins begins on or of the business or after expects that SFAS 2009. TVA expects business combination.

after December December 15, SFAS No.

combination. The No. 141R 15,2008.

141R could The provisions provisions of Early adoption 2008. Early of SFAS SF AS No.

adoption is prohibited.

could have an impact impact on No. 141R prohibited. SFAS on accounting accounting for 141R are are effective SFAS No. 141R for any effective asas of 141R will become imy businesses of the the beginning beginning of become effective.for businesses acquired of an entity's effective.for TVA acquired after after the the effective entity's TV A as ofof effective date of of Il this this pronouncement.

pronouncement.

Derivative Instruments Derivative Instruments andand Hedging Hedging Activities.

Activities. In In March March 2008, 2008, FASB FASB issued issued SF AS No. 161, SFAS 161, "Disclosures

" Disclosures about Instruments and Hedging Activities - an amendment of FASB Statement No. 133," (" SFAS No. 161") which establishes, among other things, Instruments and Hedging Activities - an amendment ofFASB Statement No. 133, " (" SF AS No. 161") which establishes, among other things, about Derivative Derivative Il the disclosure the disclosure requirements requirements for derivative instruments instruments andand hedging hedging activities.

activities. SFAS No. 161 161 amends amends and expands requirements of expands the disclosure requirements of SFAS No. 133. 133. The effective datedate of adoption adoption for for TVA TVA is the second quarter quarter ofof2009.

2009.

Hierarchy of Hierarchy of Generally Generally Accepted Acce}2ted Accounting Principles, " ("

Accepted Accounting Principles, (" SF Accounting Principles.

AS No. 162").

SFAS Principles. In 162"). SFAS SF AS No. 162 In May 2008, 2008, FASB FASB issued 162 identifies the sources issued SF sources of AS No. 162, SFAS of accounting 162, "The Hierarchy Hierarchy of Generally principles and accounting principles Generally and the framework framework forfor Ii selecting principles used in the preparation selecting the principles preparation of financial statements.

statements. SFASSFAS No. 162 162 is is effective effective 60 following the SEC's approval 60 days following approval of the Public Company Public Company Accounting Accounting Oversight Accepted Accounting Principles.

AcceptedAccounting financial position Oversight Board Board amendments amendments to AU Section 411, Principles."" The implementation position and results of operations.

implementation of of SFAS SF AS No. 162 is 411, "The Meaning Meaning of is not expected expected to have ofPresent Present Fairly Fairly in Conformity with Generally have aa material material impact impact on on TVA's Generally TV A's consolidated consolidated IIi Employers' Disclosures Employers' Employers 'Disclosures Disclosures about

'Disclosures about about Postretirement about Pensions Pensions and Postretirement Benefit Plan and Other Postretirement Plan Assets.

Assets. On October Postretirement Benefits, October 29,29,2008, 2008, FASB issued FSP No.132 require that an employer Benefits, " to require No.132 (R)-a, (R)-a,""

employer disclose the following information information I3 about the fair value of plan about the inputs plan assets: 1) the level within the fair value inputs and valuation valuation techniques for fair value measurements of plan plan assets using significant value hierarchy significant unobservable measurements of plan hierarchy in which fair value measurements techniques used to measure the fair value of plan plan assets; and 3) plan assets fall; 2) reconciliation of beginning

3) a reconciliation unobservable inputs. The final FSP will be effective beginning and effective for fiscal years ending

2) information and ending information ending balances balances ending after after IU application permitted. At initial 15, 2009, with early application December 15,2009, initial adoption, application application of the FSP would would not be required for earlier be required earlier periods periods that are presented presented for comparative statements.

comparative purposes. TVA evaluating the potential TV A is currently evaluating potential impact adopting this FSP on its disclosures in the financial impact of adopting I 3 Legislative and Regulatory Regulatory Matters President's Budget President's I

On February 4,2008, Congress. The proposed 4, 2008, the Office Office of Management Management and Budget proposed budget recommends allowing Congress to establish directing TVA to fund the amount with power revenues beginning

("OMB") transmitted the President's proposed Budget ("OMB")

establish the amount of TVA'sTVA's Office Office of proposed 2009 federal budget to Inspector General's oflnspector General's budget and beginning in 2009. Funding for TVA's Office of the Inspector General is currently II established by TVA. Senate Appropriations Committee's TV A. The U.S. Senate Committee's ("Committee") report report for the 2009 Energy and Water Development Development Appropriation Bill ("Bill")

Appropriation ("Bill") noted that the Committee funded the requests of the TVA Inspector funding mechanism for the TV TVA Committee did not recommend including General from power Inspector General A Inspector General.

including this proposal power revenues and receipts, proposal of the President receipts, and the Committee President in the Bill because because TVA has Committee saw no compelling reason to change the theflI U In October 2008, Congress passed the Inspector General Reform Act of2008 of 2008 ("Reform

("Reform Act"). Section 8 of the Reform Act addresses the budgets of Inspector Generals. It does not include the provision recommended recommended in the President's proposed the funding of TVA's Office of the Inspector General. It provides an avenue for an Inspector inform Congress ifhe Inspector General, if he or she believes that the funding included in the President's budget for that Inspector proposed 2009 budget in connection Inspector General's connection with General, including TVA's Inspector General, to General's office would substantially I

inhibit the office's performance.

ProposedLegislation Proposed Legislation I 13, 2007, Senators Jim Bunning and Mitch McConnell On March 13,2007, McConnell of Kentucky introduced the Access to Competitive Power Act of 2007 in the U.S. Senate. Under this bill, TVA and federal power marketing agencies would be subject to greater FERC jurisdiction of respect jurisdiction with respect I

to transmission, including rates, terms, and conditions of service. No congressional congressional action had taken place on this bill as of September September 30, 2008, adjournment of the 1110th and none is expected prior to adjournment 10th Congress.

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II Table o/Contents Table of Contents On October October 18,18, 2007, Senators Senators Joseph Lieberman Lieberman and John Warner introduced introduced America's Climate Climate Security Act of2007 of 2007 in the U.S.

Senate. This economy-wide economy-wide bill would mandate mandate the reduction of greenhouse gas emissions of covered covered facilities through through a cap-and-trade II structure. Covered facilities include those that use more than 5,000 borrowing, and offsets. In May 2008, Senators 5,000 tons of coal per year. Compliance Senators Lieberman and Warner reintroduced Compliance may be met through trading, reintroduced the bill as the Lieberman-Warner Lieberman-Warner Climate trading, banking, Climate Security Act of of I 2008, S. 3036. On June 6, 2008, the bill failed to obtain enough Senate. congressional action is expected.

Senate. No further congressional enough votes to overcome a filibuster and to move to final consideration expected prior to adjournment adjournment of the 110th Congress.

consideration in the U.S.

For a discussion of environmental environmental legislation and regulation, regulation, see Item I, 1, Business Business -- Environmental Environmental Matters.

TVA can control neither neither what legislation legislation becomes law nor what regulations are promulgated. Even legislation or regulations of which which I TVA TV A has been made aware may be changed changed in ways which predict with certainty or with any accuracy whether predict which are difficult difficult to predict whether the initiatives discussed predict or have unforeseen discussed above will become unforeseen consequences.

consequences. TVA TV A cannot cannot therefore become law in the future and in what form, and what their impact would be on TVA. Moreover, given given the nature of the legislative process, it is possible that new legislation legislation or a change to existing II legislation that has a significant impact on TVA's activities could become nature of TVA Factors.

become law with little or no advance TV A can be changed by legislation. For a discussion of the potential impact oflegislation advance notice. As a federal entity, of legislation and regulation regulation on TV TVA, entity, the very A, see Item I1A, Risk II Environmental Environmental Matters TVA's power power generation activities, activities, like those across the utility utility industry and in other other industrial industrial sectors, are subject subject to federal, state, and I local environmental environmental laws and regulations. Major Major areas of regulation affecting affecting TVA's activities include air quality control, water quality control, I and management management and disposal of solid and hazardous wastes. Looking to the future, regulations in all of these areas more stringent along with increased emphasis emphasis on dealing with climate change, expanding renewable renewable generation areas are expected to become become generation alternatives, and encouraging encouraging efficient efficient use of electricity.

II Due to the increasing Due environmental policy environmental policy increasing level and complexity to align with and complexity of environmental execute execute the environmental requirements and expectations, direction in the Strategic Strategic Plan. The expectations, TVA completed a new high-level Environmental Environmental Policy ("Environmental high-level

("Environmental Policy")

Policy") was approved approved by the TVA TV A Board on May 19,2008,19, 2008, and is intended intended to be an integrated integrated framework whichwhich provides policy-level guidanceguidance to carry carry out I TVA's TVA's mission of providing Environmental Environmental Policy providing cleaner, affordable energy, cleaner, affordable Policy sets out environmental energy, sustainable environmental objectives sustainable economic development, and proactive objectives and critical success factors in six environmental environmental stewardship. The TVA proactive environmental environmental dimensions: climate change change mitigation, I air quality improvement, water management.

management.

water resource protection and improvement, waste minimization, sustainable land use, and natural resource minimization, sustainable TVA has incurred, and expects to continue continue to incur, substantial capital capital and operating and maintenance maintenance costs to comply with evolving environmental environmental requirements primarily associated associated with, but not limited to, the operation operation of TVA's 59 coal-fired generating units. It is virtually virtually I

I certain certain that environmental environmental requirements requirements placed placed on the operation operation of TVA's coal-fired and other generating units will continue other generating continue to become more restrictive. Litigation overover emissions from coal-fired coal-fired generating units is also occurring, occurring, including including litigation litigation against against TVA. See Item 3, Legal Legal Proceedings.

Proceedings.

II Air Quality ControlDevelopments Quality Control Developments Air quality in the United States and in the Tennessee Tennessee Valley has significantly improved improved since the enactment enactment of the Clean Air Act I ("CAA") in 1970. These air quality improvements

("CAN') improvements are expected expected to continue as the CAA CAA continues to be implemented implemented and evolve evolve as a result of of I legislative legislative and regulatory particulates regulatory changes. Three particulates -- have have historically historically been Three substances substances emitted from coal-fired units - sulfur dioxide ("SO 22 "),

been the focus

")' oxides focus of CAA emission reduction regulatory programs, and these are discussed in more oxides of nitrogen nitrogen ("NO x "), "), and more detail below.

and I through the through Expenditures Expenditures related to clean air projects aimed at controlling emissions installation of the installation selective non-catalytic of selective non-catalytic reduction reduction ("SNCR")

emissions of these these substances during 2008 2008 and 2007 were approximately

$274 million and $239 million, respectively. These figures include expenditures in 2008 of $9 million to continue to reduce NO x emissions

("SN CR") systems, and $240 million for the installation of flue gas desulfurization approximately desulfurization I systems ("scrubbers") to continue to reduce reduce SO 22 emissions. TVA estimated its total capital TV A had previously estimated capital cost for reducing emissions from its I power plants from 1977 through 2010 would reach $5.5 billion, $5.1 billion of which had already been power plants from 1977 through 2010 would reach $5.5 billion, $5.1 billion of which had already been spent estimates that compliance compliance with future CAA requirements requirements and potential mercury mercury regulations, but not including spent as of September as of September 30, 2008.

including carbon dioxide 2008. TV dioxide ("CO 22 ")'

"),

TVA as A

I discussed below discussed below could could lead lead to to additional costs of additional costs $3.0 billion of$3.0 to $3.7 billion to billion in

$3.7 billion in the decade beginning the decade beginning in in 2011.

2011. There There could could be additional material I costs if if reductions judicial judicial reductions actions at this time.

of greenhouse gases, lead to more stringent including CO stringent emission reduction 2,

2' are mandated reduction requirements under the CAA or via legislation, or if if future conventional pollutants. These costs cannot requirements for conventional legislative, legislative, regulatory, or cannot reasonably reasonably be predicted predicted' IU Page 8484 I

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Table of Table Contents a/Contents i On July 11,2008, 11, 2008, the U.S. Court of Appeals for the D.C. Circuit Circuit ("D.C. Circuit") issued a decision in State ofNorth Carolina Carolinavs. EPA EPA I

that vacated ozone ozone vacated the Clean Air Interstate Rule ("CAIR") in its entirety Circuit opinion. EPA promulgated and fine particulate matter attainment entirety and directed the EPA to promulgate a new rule that is consistent promulgated CAIR in 2005 and the rule required significant additional utility matter attainment issues in 28 eastern eastern states, including all of TVA's consistent with the D.C.

utility SO 22 and NO xx emission reductions reductions to address operating area, and the District of Columbia. The U TVA's operating address iI of CAIR formed the basis for TVA's (and much of the utility industry's) planning requirements ofCAIR planning with regard regard to air emission emission controls beginning in in 2009 and continuing continuing well into the next decade. In the absence of CAIR, the uncertainty uncertainty regarding regarding compliance compliance requirements, methods, and timelines time lines may result in increased review review of this decision will be granted expenditures and operating expenses. In addition, it is unclear increased capital expenditures petitions for a re-hearing or 3 unclear whether the petitions granted by the D.C. Circuit, which could prolong the uncertainty of the regulatoryregulatory landscape.

landscape. I In the absence absence of CAIR, other requirements standards, requirements requirements of the CAA, such as achievement requirements relating to regional haze, and control achievement of ozone and fine particulate control of interstate transport transport of air pollution particulate ambient air quality pollution (Section 126 petitions), will continue continue to drive I

installation of additional additional controls controls on electric generating units across the industry, including at TVA. As discussed in more detail below, TVA TVA will continue continue its previously in October October 2008.

previously announced emissions reduction Kingston, and John Sevier Fossil Plants, and annual reduction program, including completion of scrubber installations for SO 22 control at Bull Run operation annual operation of the 21 selective catalytic reduction ("SCR")

reduction ("SCR") and other NO controls Run, beginning x controls beginning

, I On February February 8, 8, 2008, the D.C. Circuit vacated the EPA's EPA'~ decision to remove coal and oil-fired Electric Generating Units from the list of stationary sources whose hazardous air pollutant ("HAP") emissions are subject to Maximum Maximum Achievable Control Technology ("MACT")

Technology ("MACT")

I3 section 112 ofthe standards under section of the CAA. The D.C. Circuit also vacated and remanded the Clean Air Mercury Rule ("CAMR") ("CAMR") which set mercury limits via a cap-and-trade cap-and-trade program. Unless the D.C. Circuit's ruling is reversed, or EPA is able to determine adequately controlled in accordance accordance with the D.C. Circuit's remand instructions, EPA will have to regulate under section 112(d) of the CAA, setting MACT MACT standards for emissions emissions based based on command determine that mercury regulate mercury mercury emissions are mercury emissions from utilities requirements. The cost to comply U command and control type requirements.

I3 with the MACT standards standards is not known, but is expected status of the EPA's regulatory next five years, mercury expected to be higher than the cost would have been to comply with CAMR. Regardless of the regulatory program for mercury, TVA will continue to reduce mercury emissions mercury emissions from its coal-fired coal-fired plants are expected expected to continue emissions from its coal-fired coal-fired power power plants. Over the continue to decline, primarily as a result of the co-benefits co-benefits received received I3 from the controls TVA is installing to reduce SO 2 and NO xx emissions.

The D.C. Circuit's recent decisions with regard to CAIR and CAMR may also have the effect of reviving interest adopting multi-pollutant control legislation focused on the electric coordinated caps for power power plant electric power sector. Among plant emissions of mercury, SO 22 NO x' x, and CO 22-. The legislative legislative and regulatory interest in Congress in Among other things, such an approach could seek to establish regulatory landscape is continuing to change I3 for these and other issues and the outcome outcome cannot cannot be predicted accurately accurately at this time.

Sulfur Dioxide.

Dioxide. Utility SO 2 emissions are currently currently regulated regulated under under the Federal Acid Rain Program and state programs programs designed designed to I meet the National National Ambient Air Quality Standards ("NAAQS")

implementation

("NAAQS") for SO 2 and fine particulate matter. Looking implementation of the regional haze program, will result in additional additional regulation regulation of SO 2 emissions.

Looking forward, these programs, as well as I

I3 Through calendar Through year 2007 calendar year 2007,, TVA TVA had had reduced its SO 22 emissions by 84 percent from the peak 1977 level by switching switching to lower-sulfur lower-sulfur coals, continuing to operate operate an Atmospheric Fluidized Fluidized Bed Combustion ("AFBC")

("AFBC") unit at its Shawnee Shawriee Fossil Plant, operating operating existing existing scrubbers scrubbers [

on six larger units, and installing installing and operating operating a scrubber on an additional additional large unit at Paradise Paradise Fossil Plant. TVA TV A is constructing scrubber at constructing a scrubber Bull Run Fossil Fossil Plant, which is scheduled to begin operation operation in 2009, and two scrubbers scrubbers at its Kingston Fossil Fossil Plant, which are scheduled to begin operation in 2010. In April 2008, the TVA John Sevier Fossil Plant in east Tennessee plans to switch, to lower-sulfur TV A Board approved construction lower-sulfur coal at several additional construction of additional flue gas desulfurization Tennessee ("John Sevier"), which is expected expected to begin operation equipment at the four-unit desulfurization equipment operation in 2012. Additionally, TVA has switched, additional units in the next few years. It is likely that additional additional emission reduction measures or switched, or measures will IU have to be undertaken also help to also help undertaken in addition to these announced actions to achieve compliance with requirements to meet the goal identified meet the requirements yet to be adopted. Such measures will Environmental Policy to reduce emissions by continuing identified in TVA's Environmental and new technology with the aim of controlling controlling over 80 percent continuing to install emission reduction percent of fossil generation in the next 10 years.

reduction equipment I Page 85 Page 85 I 3

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II Table a/Contents Table of Contents Nitrogen Oxides. Utility NO,,

Nitrogen Oxides. NO x emissions emissions continue continue to be regulated under state programsprograms to achieve and maintainmaintain EPA's NAAQS NAAQS for ozone and fine particles, the Federal Acid Rain Program, and the regional haze program. On March March 12,2008, 12, 2008, EPA issued final rules adopting adopting I new, more stringent NAAQSNAAQS for ozone. ozone. EPA lowered the primary from 0.084 parts per million ("ppm") to 0.075 form and level of the secondary primary standard, created to protect 0.075 ppm. EPA also promulgated a new secondary secondary standard are the same as the primary standard.

protect public health with an adequate margin of safety, secondary standard, mainly created created to protect safety, protect vegetation. The I3 In 2009, states will have to recommend recommend to EPA those counties standards, and in 2010, EPA is expected to finalize attainment designations standards, counties proposed to be designated as "non-attainment" "non-attainment" counties counties under the new designations using 2006 to 2008 monitoring data. States must submit plans new plans to II EPA no later than 2013 that demonstrate depending depending on the severity demonstrate attainment severity of the ozone attainment with the standard. Areas must reach attainment ozone problem.

attainment by deadlines that vary (2013 to 2030)

Based on 2005-2007 2005-2007 monitoring monitoring data, virtually all of the larger larger cities in the Tennessee Valley Valley area and their associated Metropolitan Metropolitan Statistical Areas, as well as those rural counties where ozone monitors are present, will likely likely be designated designated as non-attainment areas under the non-attainment areas I new standard.

E Non-attainment Non-attainment designation can impact industrial development and expansion expansion of existing businesses becomes development and expansion since becomes more difficult. Non-attainment Non-attainment can have since new businesses tend to avoid non-attainment have serious repercussions repercussions for counties by increasing areas, non-attainment areas, increasing costs to I industry, delaying the air permitting the institution of vehicle highway permitting process, vehicle inspection process, and restricting inspection and fuel restriction highway funds can occur unless projects demonstrate restricting expansion of existing sources. Consumers restriction programs. Non-attainment demonstrate "conformity" Consumers are also likely to be affected Non-attainment can also impact transportation "conformity" with the new standards.

affected as a result of transportation planning since loss of federal of I3 TVA contributes contributes to ambient ozone levels primarily as a result emission reduction program, TVA's result of NO xx emi.ssions emissions from fossil-fired power plants. As a result of its TVA's summertime NO x, emissions have declined substantially. Since 1995, TVA has reduced its NO x emissions Since 1995, I during the summer (when ozone levels increase) by 82 percent percent by installing various controls, controls, including including low-NO low-NO xx burners and/or combustion combustion I controls, controls, on 58 of its 59 coal-fired emitting.)

NO xx emitting.)

coal-fired units and installing installing SCRs on 21 of the largest units. (The AFBC unit at Shawnee Fossil Plant is inherently inherently low low 1 I In 2005, TVA Unit 1I and Shawnee TVA installed installed SNCR systems, which generally have lower Shawnee Unit 1, to demonstrate long-term lower NO technology capability, long-term technology NO,,x removal capabilities capabilities than SCRs, capability, and continues to operate the SNCR SCRs, on two units, Johnsonville SNCR at Johnsonville Johnsonville Unit 1 in West Tennessee. In 2007, TV TVA A began operating operating the High Energy Energy Reagent Technology ("HERT") system on Unit 1 at John Sevier, and on Unit 4 at Technology ("HERT")

I Johnsonville Fossil Plant ("Johnsonville").

("Johnsonville"). HERT is similar I equipment is planned similar to SNCR technology technology but has higher removal planned for installation on the other three John Sevier units and Johnsonville plans to install SCRs at John Sevier by 2015.

removal capabilities. Similar Johnsonville Units 2 and 33 by May 2009, and TVA Similar HERT TVA has announced announced 1I TVA's NO x emission emission reduction reduction program SNCRs and/or HERTs as TVA gains more experience program is expected to to continue to depend depend primarily primarily on SCRs, SCRs, but will also incorporate incorporate some mix of experience with these technologies. These plans may change depending on the timing and severity of severity of of I3 future regulatory (except regulatory developments affecting power plant emissions. In October maintenance outages).

(except for maintenance outages).

October 2008, 2008, TVATV A began operating operating this NO xx control equipment equipment year round An increase in the number of counties in the Tennessee Valley designated as non-attainment non-attainment areas areas is likely likely to focus additional regulatory regulatory attention attention on all NO xx emission emission sources, sources, including TVA sources.sources.

I Particulates/Opacity.

Particulates/Opacity . . Coarse regulated by states to meet EPA's NAAQS regulated Coarse particulates particulates (defined as particles of 10 micrometers or larger), which include NAAQS for particulate particulate matter. All of TVA's coal-fired coal-fired units have been equipped include fly ash, have long been mechanical collectors, equipped with mechanical I electrostatic electrostatic precipitators, scrubbers, or baghouses, which have reduced particulate precipitators, scrubbers, particulate emissions from the TV TVAA system by more than 99 percent percent I compared to compared particles" to uncontrolled units. In 1997, EPA issued separate particles" or "PM "). Counties and parts of counties "PM 2.5 ")'

separate NAAQS NAAQS for even smaller particles counties in the Knoxville Knoxville and Chattanooga, particles with a size of up to 2.5 micrometers Chattanooga, Tennessee, Tennessee, metropolitan micrometers ("fine metropolitan areas have beenbeen designated as non-attainment non-attainment areas areas under the 1997 standard.

I* annual

. annual In September In fine September 2006, particle particle 2006, EPA standard.

EPA revised EPA revised the also decided 1997 standards.

the 1997 to standards. The retain The 2006 2006 revisions revisions tighten tighten the 24-hour standard and retain the 1997 24-hour fine particle standard the existing 24-hour standard for coarse particles, particles, but revoked the related annual 1997 standard. On August 19, 19, 2008, 2008, EPA sent letters to state and tribal representatives representatives responding recommendations for areas meeting responding to their initial recommendations I and and not not meeting the modifications to modifications counties the 24-hour national ambient to their recommendations and their recommendations ambient air quality standards for PM 2.5' and toto provide provide new information and new information 2.5. States and tribes now have the opportunity to comment on EPA's analyses to and analyses EPA if to EPA if appropriate.

appropriate. Several counties and parts of parts of EPA's counties in the Tennessee Tennessee Valley that include include or are close to TVA coal-fired coal-fired generating generating plants are includedincluded in this preliminary designation.

I I

Particular areas of concern to TV Particular TVA A are the Kentucky counties of Muhlenberg Muhlenberg and McCracken, the Tennessee Tennessee counties counties of Humphreys, Montgomery, and Stewart, and the counties in the Knoxville area. EPA has announced Montgomery, and Stewart, and the counties in the Knoxville area. EPA has announced plans to make plans to make final designations designations in December December 2008 20.08 using air quality air quality monitoring monitoring data data from from 2005, 2006, and 2005, 2006, and 2007.

2007. TVATVA will will continue continue efforts to reduce emissions and engage regional and national stakeholders stakeholders to further understand understand and improve improve regional air quality. TVA's continued installations installations of scrubbers for So SO 22 control and SCRs and 1 technologies for NO xx control as described above other technologies above are expected expected to continue continue toto reduce fine particle particle levels.

Page Page 86 I 86

Table of qf Contents l I

Table Contents Issues regarding regarding utility compliance with state opacity requirements are also increasing.

opacity requirements increasing. Opacity Opacity measures the denseness (or color) of of power plant plumes and has traditionally traditionally been used by states as a means of monitoring good maintenance maintenance and operation operation of particulate particulate control equipment.

equipment. Under some conditions, conditions, retrofitting retrofitting a unit with additional equipment performance, and TVA and other utilities are addressing opacity performance, equipment to better control addressing this issue. There control SO 22 and NO x, emissions can adversely affect There are also disputes and lawsuits over the role of continuous continuous I3 opacity opacity monitors in determining compliance 3, Legal Proceedings.

compliance with opacity opacity limitations, and TVA TV A has received received an adverse adverse decision in one one such lawsuit. See Item 3

Climate Change.

Climate Change. In 1995, 1995, TVA was the first utility greenhouse gas reduction program. Over the past decade, TVA utility in the nation to participate in "Climate "Climate Challenge,"

Challenge," a DOE-sponsored voluntary I TV A has reduced, avoided, or sequestered sequestered over 305 million tons of CO 22 under this program. TVA also participates participates in the President's Climate Climate VISION program which calls on the electric utility sector, along with other sectors, to help meet a national goal of reducing the greenhouse intensity intensity of the U.S. economy by 18 percent percent from 2002 2002 to 2012.

other industry industry I3U TVA TV A has taken taken and is continuing continuing to take significant significant voluntary voluntary steps that will reduce the carbon intensity of its electric generation, including the recovery of Browns Ferry Unit 1, planned power capability of the units resulting in additional hydroelectric modernization additional avoided modernization program. TV TVA power up-rates of Browns Ferry Units 1,2 avoided emissions of CO 2)' 2), the completion A has also filed with the NRC a combined 1, 2 and 3 (which will increase the generating completion of Watts Bar Unit 2, and the completion generating completion of the combined operating license application for two advanced advanced nuclear nuclear I

reactors at the Bellefonte Nuclear Plant near Hollywood, 3 Nuclear Units 1 and 2, 2, although Hollywood, Alabama, and requested that the NRC reinstate the construction although no decision has been made to completecomplete those units or to build increasing its renewable energy by adding regional renewable energy sources to its generation increasing construction permit permit for Bellefonte build the new reactors. TVA is also committed to generation portfolio.

Bellefonte I

In In addition, TVA TV A is a member of the Southeast Southeast Regional Carbon Sequestration Research Institute and other electric utilities on projects Sequestration Partnership projects investigating technologies Partnership and is working with the Electric Power technologies for CO 2 capture and geologic storage, sequestration via reforestation. Legislation was introduced in the last Congress to require require reductions of CO 2 that, if Power storage, as well as carbon if enacted, could have resulted I

additional costs for TVA and other utilities with coal-fired coal-fired generation. In general, any carbon legislation legislation will result in some level

I5 in significant additional of increase in the price of electricity electricity to consumers, regardless regardless of form, severity, and timing of the legislation, and TV TVA's A's analyses analyses of previous versions of several several proposed proposed climate bills indicate that the price increases increases could be substantial. These analyses also show that TVA's existing coal-fired generating generating assets will continue to play an important reductions and a renewable portfolio portfolio standard important role in meeting the energy needs of the Tennessee that the next Congress and Administration will again take up the issue of climate change standard into its long range planning. TV TVA change and is incorporating A will continue Tennessee Valley. TVA expects incorporating the possibility continue to monitor legislative possibility of mandatory carbon legislative and regulatory carbon I3 developments related to CO 22 and a renewable developments renewable portfolio portfolio standard to assess any potential financial and operational impacts as informationinformation becomes becomes available. Looking ahead, TVA's EnvironmentalEnvironmental Policy contains a Climate Change Change Mitigation Mitigation objective objective to stop the growth in volume

of emissions emissions and reduce reduce the rate of carbon emissions by 2020.

I In addition to In addition to legislative legislative activity, Item 3, Legal Proceedings. On November activity, climate change November 29, change issues are the subject of a number oflawsuits, 2006, the U.S. Supreme Court 29,2006, has the authority and duty to regulate CO 2 emissions under the CAA. On April 2, 2007, of lawsuits, including Court heard the case of Massachusetts including lawsuits against TVA. See Massachusetts v. EPA, EPA, concerning See concerning whether EPA 2007, the Supreme Court found that greenhouse gases, I33 including CO 2' regarding 2, are pollutants under the CAA, and that EPA thus does have the authority concluded that EPA's refusal to regulate refusal regulate endangerment (either regarding endangerment these pollutants (either that greenhouse gases was based on authority to regulate impermissible impermissible regulate these gases. The Supreme reasons, and gases do, or do not, pose a threat to health and welfare) remanded the case Supreme Court also case EPA to make a judgment to welfare) with respect to certain certain mobile sources..

I 3 While this case case focused on CO 22emissions from motor vehicles, it sets a precedent precedent for regulation regulation in other industrial sectors, such as the electric utility industry.

before before In July 2008, EPA issued an Advance Notice of Proposed Rulemaking EPA in which greenhouse greenhouse gas emissions emissions and climate change Rulemaking ("ANPR") that addressed change are issues, including consideration of greenhouse regulatory proceedings addressed essentially all regulatory greenhouse gas emissions in proceedings in I

II establishing new source source performance performance standards and resolving resolving pending appeals of new source review permit permit applications. The ANPR sought comments on the framework and direction of EPA's actions to regulate regulate greenhouse gas emissions from a wide range of facilities, including including electric generating facilities. The ANPR ANPR outlines outlines issues to be addressed addressed in new legislation legislation that may be required in order to regulate greenhouse greenhouse gas emissions. Regulatory Regulatory options that may be considered considered in such legislation include, include, but are not limited to, the enactment of a cap-and-trade cap-and-trade policy and development development and deployment of alternative fuels, renewable energy resources, resources, and energy conservation. Whether Whether climate change change 3 legislation will be enacted during the 2009 to 2010 legislative legislation legislation, or similar regulatory legislative session, and if regulatory action by EPA under the CAA or otherwise, if so its potential impacts, cannot be assessed otherwise, would probably probably have a significant assessed at this time. Any such significant impact on fossil-fueled such I

generation generation facilities.

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II Table a/Contents Table of Contents States are also becoming becoming more active in the regulation of emissions that are believed to be contributing to global climate change. Several northeastern northeastern states have formed the Regional have fonned Greenhouse Gas Initiative, Regional Greenhouse Initiative, which is in the process of being being implemented, implemented, and and II California passed California passed a bill capping capping greenhouse gas emissions emissions in the state. Other states are considering studying initiatives aimed at climate change under the provisions of the state's Clean Smokestacks considering a variety of actions. North Carolina is Smokestacks Act of2002.

of 2002. This act required the State is II Division of Air Quality to study potential prompted efforts potential control of CO 2 emissions from coal-fired utility plants and other stationary sources. This has also efforts to develop a climate action plan for North Carolina.

Renewables and and Clean Clean Energy Energy 28 In light of increasing national focus on renewable and clean energy and TVA's desire to reduce its environmental footprint, on May 19, I 2008, In light of increasing national focus on renewable and clean energy and TV A's desire to reduce its environmental footprint, on May 19, 2008, the TV Assessment.

TVA A Board Board approved approved guiding principals for an Energy Efficiency Efficiency and Demand Response Plan and a Renewable Renewable and Clean Energy Energy I The Energy Efficiency opportunities Efficiency and Demand Demand Response Response Plan seeks to slow the current rate of growth in the region's opportunities for residential, business, and industrial consumer reducing reducing the growth in peak demand by up to 1,400 megawatts consumer groups region's power groups to use energy more efficiently. In the short tenn, megawatts by the end of the 2012 fiscal year.

power demand by providing term, the plan proposes I emissions The Renewable and Clean Energy emissions while minimizing Energy Assessment Assessment strives to add clean minimizing costs and maintaining clean energy resources to TVA's generating mix to help reduce carbon maintaining a reliable power supply. The assessment proposes to review TVA's TVA's generation carbon generation mix and identify a road map for pursuing additional additional renewable renewable and clean energy supply in the region, and recommends consideration of different recommends consideration different sources 1I of renewable renewable energy energy and a reduction in carbon uses electricity.

carbon intensity in TVA's TVA's generation generation mix, along with additional additional energy conservation conservation by everyone who Quality Control Water Quality Developments Control Developments I shellfish, In the second second phase of a three-part rulemaking shellfish, as required rulemaking to minimize required under Section 316(b) of the Clean minimize the adverse impacts from cooling water intake structures on fish and Clean Water Act ("CWA"),

("CWA"), EPA promulgated promulgated a final rule for existing power power producing facilities ("Phase 1III Rule") that became effective on September 7, 2004. On January 7,2004. January 25, 25, 2007, the U.S. Court of Appeals Appeals for the Second Circuit I (the "Second "Second Circuit") remanded the Phase II technology technology available ("BTA") to minimize 11 Rule, holding, among other things, that costs cannot minimize the adverse environmental impacts of intake adverse environmental Corporation, and PSEG Fossil LLC filed a petition seeking cannot be compared intake structures.

compared to benefits structures. The Utility Water benefits in picking the best Water Act Group, Entergy seeking review of the decision by the U.S. Supreme Court. TVA and the attorneys general best of general of I several states, including Alabama, Kentucky, and Tennessee, Tennessee, supported this petition. On April 14,2008, 14, 2008, the U.S. Supreme Supreme Court Court granted I petition, limiting its review to one on", issue: "Whether the 'best technology available for minimizing "Whether Section 316(b) of the CW CWA A authorizes granted the authorizes EPA to compare costs with benefits in detennining minimizing adverse environmental impact' at cooling water intake intake structures."

structures." The Department determining Department of Justice andand industry petitioners will defend the EPA rule supporting supporting the concept that costs under the rule should be limited to those that are "not significantly significantly I greater than" than" the benefits benefits to be derived. The case has been argued before the U.S. Supreme Court. TVA is unable On July 9, 2007, EPA suspended suspended all but one provision of the Phase II I1Rule until the agency unable to predict predict the outcome.

outcome.

agency resolves the issues raised by the Second I Circuit's remand. The provision provision that was retained requires permitting pennitting authorities authorities to apply, in the interim, Best Professional Judgment ("BPJ")("BPJ")

I controls for existing existing facilities. BPJ controls are those that reflect the best technology impacts of intake structures. The use of BPJ controls ofBPJ controls reflects a return to the regulatory regulate the impact of intake structures prior to the promulgation promulgation of the Phase II available for minimizing the adverse environmental technology available regulatory process that was used by permitting 11 Rule.

pennitting authorities authorities to I3 the All of the intakes at TVA's existing coal and nuclear the ultimate ultimate outcome outcome ofof the the appellate appellate process nuclear generating facilities were subject to the Phase 1I II Rule. Given the uncertainty over process and what the changes in the final rule as ultimately issued by EPA will be, the impacts of the over eventual rulemaking are uncertain at this time.

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Table a/Contents I

Table of Contents Section 303d of the CWA requires requires states to develop and report to EPA on a two-year two-year cycle a list of waters waters that are "impaired" "impaired" or are expected to not meet water quality expected Environment Environment and Conservation quality standards in the next two years and need additional

("TDEC") placed Conservation ('TDEC")

of impaired streams (the "303d placed a portion portion of Barkley Barkley Reservoir "303d List"). This section of Barkley Reservoir had not been additional pollution pollution controls. The Tennessee Reservoir downstream downstream of TVA's Cumberland been listed previously.

Tennessee Department of Cumberland Fossil Plant of Plant on its 2008 list previously. The reservoir conditions in 2007, 2007, I

U especially for temperature especially emergency temperature and dissolved oxygen, changed significantly emergency dam repairs on the WolfCreek significantly due primarily to reduced Wolf Creek and Center Hill Dams coupled made less water available to dissipate the heated discharge reduced flows in the Cumberland coupled with the most severe Cumberland River resulting from severe drought on record in the region. The lower flows discharge from Cumberland Fossil Plant and resulted resulted in increased increased river temperatures.

temperatures. The I[

reduced flows through the Cumberland River system during the period prospect of continued reduced period required to to complete complete thethe necessary repairs to necessary repairs to Wolf Wolf Creek Creek and Center Hill Dams may impact the generation Barkley Cumberland Cumberland Fossil Plant is renewed generation of electricity Barkley reservoir on the 303d List could also impact the thermal renewed in 2010, or earlier earlier if electricity from TVA's Cumberland thermal limits imposed Cumberland and Gallatin Fossil Plants. Placing imposed by the State of Tennessee Tennessee when the discharge Placing this section discharge permit section of permit for' if the state or EPA determines that additional actions are required to protect the aquatic for of I i environment environment below the plant. TVA is working with the U.S. Army Corps of Engineers and TDEC to minimize the impacts to TVA's generating generating plants and improve the conditions observed in the river in 2007. TVA began operating reduce reduce the the temperature temperature of of the water discharged to the river.

water discharged operating temporary cooling towers at Cumberland Cumberland Fossil Plant Plant to I3 EPA, and many states, are taking increased generating facilities. TVA facilities is sufficient increased interest evaluating the potential effects of thermal interest in evaluating TV A is working with states and EPA Region IV to demonstrate sufficient to meet the requirements requirements for assessing thermal discharges demonstrate that the data collected discharges from steam-electric collected by TV assessing the impacts of thermal discharges on the aquatic environment.

TVA steam-electric A in the vicinity of its I consumption In March 2007, TDEC adopted a lower, more conservative in April 2007 for all or parts of five TVA reservoirs conservative threshold (0.3 consumption due to mercury. Adoption of the lower threshold resulted in the issuance reservoirs (Norris, Cherokee, (0.3 ppm) for issuing precautionary issuance of several Cherokee, South Holston, precautionary advisories for fish several new precautionary precautionary fish consumption Holston, Watauga, and Tellico) and parts consumption advisories parts of four rivers in the offour I*

Tennessee Valley (Buffalo, Emory, Tennessee Emory, Hiwassee, Hiwassee, and Holston) as well as the Loosahatchie, Wolf, and Mississippi Rivers in Tennessee that are not Loosahatchie, Wolf, not in the Tennessee Tennessee River watershed.

advisories As As part part of the 2007 of the advisories were necessary.

2007 advisory necessary. State advisory determinations, determinations, TDEC State agencies have since collected TDEC also also identified several several water bodies collected fish from those water bodies bodies where more data were needed to determine bodies and decided several of them needed advisories determine if advisories to if I

protect protect public public health.

health. The Precautionary Advisory list for 2008 The new Precautionary 2008 includes one additional TV TVA A reservoir reservoir (Beech) and three additional additional river segments in the Tennessee were expanded Tennessee River watershed (French Broad, Sequatchie, expanded to include mercury as a chemical of concern and/or to include Sequatchie, and Duck). Also, existing advisories include more kinds of fish.

advisories for several reservoirs and rivers several reservoirs I3i fish fish are TDEC's announcement TDEC's increasing, increasing, announcement of but is more of additional additional Precautionary reflective reflective of the Precautionary Advisories effect of the Advisories for lowered lowered for several several Tennessee threshold Tennessee water values water bodies does not mean that mercury levels in values for issuing aa precautionary precautionary consumption consumption advisory. TVA I3 has mercury levels in fish and sediments has been monitoring 'mercury sediments in TVA reservoirs reservoirs for the last 35 35 years, and TVA's TVA's data were provided provided to TDEC as a part of its part of tended its review discharges tended to review process.

discharges that have fluctuate process. TVA's through TV A's data have now ceased. Other to fluctuate through timetime with data show with show significant reductions in mercury concentrations Other than those areas no no areas historically discernible trend discernible historically impacted trend inin fish from fish from most most concentrations in fish from the reservoirs industrial discharges, mercury impacted by industrial reservoirs. Despite reservoirs. Despite generation, current and historic data records indicate that mercury concentrations in reservoir sediments have remained increased burning increased reservoirs with known industrial mercury concentrations burning concentrations in fish have of coal of coal for for electricity electricity Il stable or declined.

generation, current and historic data records indicate that mercury concentrations in reservoir sediments have remained stable or declined.

wastewaters One of the results of the major reductions wastewaters at TVA coal-fired reductions in atmospheric coal-fired facilities and across atmospheric emissions resulting from the clean across the utility industry industry may be changing because clean air expenditures discussed discussed above is that because of waste streams from air quality control control that I U technologies.

technologies. Varying amounts of ammonia or similar compounds used as a necessary component of SCR and SNCR operations may end up in facility facility wastewater additional wastewater ponds additional amounts ponds that that may discharge discharge through outfalls outfalls regulated amounts of pollutants being introduced into facility wastewater regulated under the CW CWA. Operation of scrubbers for SO 22 control A. Operation wastewater treatment ponds. EPA is currently control also results in currently collecting information to determine in If if the national if the Steam Electric Point Source Effluent national Steam Effluent Guidelines Guidelines ("Effluent Guidelines") under the CWA CW A need to be revised. If If the Effluent Guidelines Guidelines are revised, potentially additional additional wastewater involved involved in in and and closely potentially more restrictive discharge wastewater treatment expenses to treatment expenses closely monitoring EPA's data to meet discharge limitations for existing requirements of the CWA.

meet requirements data collection existing parameters or the addition of new parameters CW A. These costs cannot be accurately accurately predicted collection activities and the progress of the Effluent Guidelines review parameters could result result in predicted at this time, but TVA is review process. On the state I*

level, new numeric level, new numeric nutrient nutrient criteria development and implementation criteria development implementation (an EPA requirement) may require additional treatment costs to reduce additional treatment nitrogen concentrations nitrogen monitoring regulatory concentrations being monitoring the the development regulatory agencies agencies in being added to the waste treatment ponds development and implementation in the the Valley implementation of numeric Valley states to incorporate states to incorporate water ponds as a result result of the operation of air pollution control equipment. TV numeric nutrient criteria, particularly particularly by the states in TVA's quality trading regulations water quality TV A's service regulations into their water quality quality standards.

standards.

TVA closely A is closely service area and is encouraging encouraging I3U Page 89 Page 89 I m

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I Table a/Contents Table of Contents As is the case across the utility industry and in otherother industrial industrial sectors, sectors, TVTVAA is also facing more stringent stringent requirements requirements related related to protection of wetlands, wetlands, reductions in storm waterwater impacts impacts from construction construction activities, water quality degradation, new water water quality criteria, criteria, and and I laboratory analytical laboratory analytical methods. TVA not facing any substantive TV A is also following litigation related to the use of herbicides, substantive requirements related to non-compliance requirements related non-compliance with existing CW CWA herbicides, water transfers, A regulations.

transfers, and releases from dams. TV TVA A is Hazardous HazardousSubstance Response, Oil Cleanup, Substance Response, Cleanup, and and Similar Environmental Work SimilarEnvironmental I Response, Liability for releases Liability for Response, Compensation, releases and and cleanup cleanup of of hazardous hazardous substances is primarily primarily regulated under the federal Comprehensive Environmental Liability Act ("CERCLA"), and other federal and parallel state statutes. In a manner similar to many other Compensation, and Liability Environmental I ndustries and power systems, TV industries TVA A has generated generated or used hazardous hazardous substances substances over the years. TVA TV A is aware of alleged hazardous-substance hazardous-substance I releases releases at 10 non-TVA non-TVA non-TV A areas non-TVA areas for which it may have some liability. TV areas for a total of less than $23,000. There TVA A has reached There have been no recent assertions reached agreements with EPA to settle its liability at two of the assertions of TVA TV A liability for five of the non-TV non-TVA A areas, and there is little or no known evidence that TV TVAA contributed contributed any significant quantity of hazardous substancessubstances to these five sites. There There is evidence that that II TVA TV A sent some materials to the remaining remaining three non-TVA site in Raleigh, North Carolina, and the General Waste liability related to these sites at this time.

non-TV A areas: the David Witherspoon Waste Products Witherspoon site in Knoxville, Products site in Evansville, Knoxville, Tennessee, Evansville, Indiana. As discussed Tennessee, the Ward Transformer Transformer discussed below, TVA is not able to estimate estimate its I t The Witherspoon Witherspoon site is contaminated the main contributor to be recycled contaminated with radionuclides, contributor of materials to the Witherspoon radionuclides, polychlorinated Witherspoon site and is currently performing recycled at this facility, and there is some supporting supporting evidence biphenyls ("PCBs"), and metals. DOE has admitted to being polychlorinated biphenyls performing clean up activities. DOE claims that TVA sent equipment evidence for the claim. However, TVA believes it sent only a relatively small amount being amount I equipment and that none of it was radioactive. DOE has asked TV of equipment TVA A to "cooperate" "cooperate" inin completing completing the cleanup, but it has not provided to TVA I any evidence evidence of TVA's TVA's percentage percentage share of the contamination.

The Ward Transformer Transformer site is contaminated by PCBs from electrical equipment. EPA and a working group of potentially responsible II parties (the "PRP Work Group") have provided (the "PRP provided documentation site in 1974. The PRP Work Group is cleaning up on-site been divided into four areas: two phases of soil cleanup; documentation showing that TVA sent a limited amount of equipment contamination in accordance on-site contamination equipment containing containing PCBs to the accordance with an agreement with EPA. The cleanup cleanup; cleanup of off-site contamination contamination in the downstream drainage cleanup effort the effort has drainage basin; and supplemental supplemental groundwater groundwater remediation. The first phase of soil cleanup cleanup is underway, and the high-end cost estimate for this work is about $66 million. There I are no reliable reliable estimates the down stream estimates for the second stream drainage second phase of soil cleanup drainage basin with a present-worth cleanup or the supplemental present-worth cost estimate supplemental groundwater remediation. EPA has selected a cleanup plan for estimate of $6.1 million. TVA understands that EPA has incurred approximately million in past response costs, and the PRP Work Group has reimbursed EPA approximately approximately $3 approximately $725,000 of those costs. The PRP Work Group I plans to propose a cost allocation allocation schedule which which it will use as the basis for offering settlements settlements to PRPs for the first phase of soil cleanup. It I plans plans to sue PRPs who do not settle. There also may be natural resource amount for any such damages. TVA has a potential disposal disposal of a hazardous substance substance at the site.

potential defense resource damages damages liability at this site, but TV TVA A is not aware of any estimated defense that it only sent useful equipment to Ward and thus is not liable for arrangingarranging for I ci action General Waste Products was a scrap metal salvage yard that operated General action have filed a third party complaint against TVA operated from the 1930s until 1998. The original defendants TV A and others seeking cost contribution contribution for cleanup of contamination defendants in a CERCLA contamination from lead batteries batteries and PCB transformers transformers at the facility. There is evidence evidence that TVA sent scrap metal to the facility, but TVA TV A has not found any records indicating that I it it sent sent batteries cost of$3.2 batteries or PCB PCB equipment. There are two cleanup of $3.2 million, and cleanup cleanup sites at the facility. TVA cleanup estimates for the second site range from $2 any, is expected to be relatively small.

TV A has been been informed that the first site has been cleaned

$2 million to $7 million. TVA's allocated cleaned up at a allocated share of the cleanup cleanup costs, ifif I ic TVA operations at some TVA facilities have resulted in oil spills and other contamination TVA plans to address, and TVA expects to TV A operations at some TV A facilities have resulted in oil spills and other contamination TV A plans to address, and TV A-expects to incur costs of about $15 $15 million for environmental environmental work related decommissioning of the Watts Bar Fossil Plant.

related to decommissioning

As of of September 30, 2008, TV TVA'sA's estimated estimated liability for cleanup cleanup and similar similar environmental environmental work for those sites for which sufficient sufficient I

As September 30,2008, information information is is available to develop available to develop aa cost cost estimate estimate (primarily (primarily the TVA sites) the TVA sites) is is approximately approximately $18$18 million on a non-discounted non-discounted basis, including the Watts Bar the Watts Bar Fossil Fossil Plant work, and Plant work, and is is included included in OTHER LIABILITIES on the Balance Sheet.

OTHER LIABILITIES Page 90 Page 90 I

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Table of Table Contents of Contents Coal-Combustion Wastes Coal-Combustion I

In accordance accordance with a regulatory surface impoundments and surface regulatory determination impoundments are not regulated determination by EPA in May 2000, coal-combustion regulated as hazardous hazardous waste. In conjunction with coal-combustion and certain related wastes disposed of in landfills with this determination, determination, EPA committed to developing non-I3 hazardous management hazardous management standards standards for these wastes. These standards are likely to include increased groundwatergroundwater monitoring, more stringent stringent siting requirements, and closure of existing waste-management waste-management facilities not meeting minimum standards. On August 29, 2007, EPA issued aam Availability ("NOOA")

Notice of Data Availability Notice should affect EPA's decisions

("NODA") in whichwhich it requested public comment on whether decisions as it continues to follow up on its commitment whether the additional commitment to develop management additional information information mentioned management standards mentioned in the notice standards for coal-combustion wastes. Although TVA did not comment on the NODA, the Utility Solid Waste Activity Group, of which TVA is a member, did file extensive coal-combustion I comments with EPA regarding comments regarding the risk assessment method method that EPA chose to supportsupport the NODA.

Legal Proceedings I

TVA is subject to various various legal proceedings and claims that have claims include the matters discussed have arisen in the ordinary discussed in Item 3, Legal Proceedings. In accordance ordinary course accordance with SFAS No.5, course of business. These proceedings and "Accountingfor No. 5, "Accounting for Contingencies,"

Contingencies," TVA had IU approximately $46 million and $3 million with accrued approximately with respect to the proceedings described described in Item 3, Legal Proceedings, as of September 30, to other proceedings proceedings that have arisen approximately $~

2008, and 2007, respectively, as well as approximately $5 million and $4 million significant additional claims and liabilities. If actual liabilities liabilities significantly million as of September 30, significantly exceed 2008, and 2007, respectively, 30,2008, respectively, with respect arisen in the normal course of TVA's business. No assurance can be given that TVA will not be subject to exceed the estimates made, TVA's results of operations, liquidity, I3 condition could be materially adversely affected.

and financial condition For a discussion of TVA's Risk Management Management Activities Activities TV A's current current legal proceedings proceedings and anticipated anticipated outcomes, outcomes, see Item 3, Legal Proceedings.

Proceedings.

I Risk Governance Governance I The Enterprise Enterprise Risk Council efforts. The ERC is responsible with policy implications Council ("ERC")

("ERC") was created responsible for the highest highest level created in August level of risk oversight at TV TVA strengthen and formalize TVA's enterprise-wide August 2005 to strengthen enterprise-wide risk management A and is also responsible for communicating implications to the TVA Board or a designated TVA Board committee. The ERC's current members are the president communicating enterprise-wide management enterprise-wide risks president and chief I3 n executive officer (chair), the chief chief financial officer, the chief chief operating officer, the general general counsel, and a designated representative from the designated representative Office Office of the Inspector Inspector General General ("OIG")

("OIG") (advisory).

In addition to the ERC, TVA TV A has established three subordinate subordinate risk committees, committees, Financial, Operational, Operational, and Strategic, to manage manage risks I based on natural groupings. Each of the subordinate includes includes senior management management from organizations subordinate committees reports directly to the ERe. ERC. Membership Membership in the subordinate organizations that manage the applicable risks and advisory representatives of the General Counsel. The ERC and the risk committees committees meet regularly.

subordinate committees representatives from the OIG and from the Office I*

operational The ERC and risk committees have cataloged major enterprise level risks for TV operational risks, and financial TVA securities, financial risks. A discussion securities, is presented presented in Item lA, TVA A into three main main categories: strategic risks, discussion of significant risk factors under each of these categories, as well as risk factors related to 1A, Risk Factors.

Factors. Enterprise risk management management is an on-going effort at TVA. As such, it will continue to I3 evolve evolve in a manner that will best support TV TVA's A's mission.

Commodity Commoditx Price Risk I3 methodology TVA measures price risk associated associated with the commodities methodology or sensitivity analysis. Following price risk.

commodities that are critical to its operations Following is an explanation operations using either a Value at Risk ("VaR")

explanation of these methods along with their calculated calculated measures of TVA's commodity commodity I3*

at Risk Value at certain TVA uses aa VaR TV A uses certain of its commodity methodology, which VaR methodology, which isis also also used commodity portfolios. Price risk is quantified used by by other energy companies, other energy companies, to quantified using what is referred to measure the amount measure the amount of referred to as the variance-covariance of price price risk variance-covariance technique that exists risk that exists within technique of measuring VaR, I3 which provides a consistent assumptions assumptions techniques to predict consistent measure including a measure of risk across diverse confidence confidence level for losses, diverse energy market market energy markets markets and products. This technique requires liquidity, and a specified holding period.

predict market movements in light of current prices, historical volatilities, and current specific requires the use of a number of This methodology uses standard methodology of standard statistical commodity correlations.

specific commodity I

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IE Table of Contents Table of Contents The VaR VaR calculation calculation gives TVA TV A a dollar amount which reflects the maximum potential loss in the the fair value of its portfolios due to adverse market movements over a IO-day period within a specified 10-day period specified confidence level. TVA's VaR calculations calculations are based on*aon-a 95 percent percent II confidence confidence level, which means that there is a 2.5 percent probability that TVA's portfolios will incur a loss in value in 10 days at least as large as example, if the reported VaR. For example, positions, the reduction if the VaR is calculated reduction in the value of the portfolio calculated at $5 million, there is a 97.5 percent probability that if portfolio resulting resulting from such IO-day10-day price movements if prices movements would be less than $5 prices move against against current

$5 million.

current I The following table illustrates the potential emission allowance NO xx emission portfolios as measured allowance portfolios potential unfavorable unfavorable price impact impact on measured by the VaR model based on a 10-day on TVA's electricity, natural gas, electricity, natural gas, SO So 22 emission allowance, and IO-day holding period and a 95 percent confidence confidence level. The high and low valuations valuations represent the highest and lowest VaR values during 2008, and the average calculation calculation represents the average of the VaR VaR II values during 2008.

2008.

Value at Risk Risk I September September 30, 2008 Average High Low September 30, September 30, 2007 18 . $

I Electricityl _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _-=$

iElectrici!Y_l Natural Natural Gas 2 2

Allowances 33

$ _ _ _--..::;;2..::.,3_,;:;..$

23 $ _ _ _--=--"---=

18 30 $ _ _ _---"-'---=

15 64 $ _ _----=-=---=------="'-'

26 3 69 5

II SO 2 Emission

SO -,Emission Allowances NO x Emission Allowances 4 NO Emission Allowances 4 24 2

2 63 63 2

2 64 64 3

3 15 15 2

2 201 20 1

Notes (1) TVA's VaR calculations calculations for electricity electricity are based on its on-peak electricity portfolio, which includes electricity electricity forwards and option contracts.

(2) TVA's TVA's VaR calculations calculations for natural gas are based on TVA's natural gas portfolio, portfolio, which includes natural natural gas forwards, futures, options on on I futures, and swap futures contracts.

contracts.

(3) TVA' ~ VaR calculations TVA's calculations for SO 2 emission allowances are based based on TV TVA's A's portfolio of SO 2 emission allowances.

(4) TVA's TVA's VaR calculations calculations for NO x, emission allowances allowances are based on TVA's portfolio portfolio of NO x, emission emission allowances.

allowances.

II portfolio VaR has several several limitations as a measure of portfolio portfolio risk, including, but not limited to, its inability to adequately reflect (1) the risk of a portfolio with significant option exposure, (2) the risk of extreme TVA.

extreme price movements, and (3) (3) the significant regulatory and legislative risks facing I3 Electricity. TVA TV A enters into electricity power supply obligations. During electricity forward contracts in order During 2008, TVA supplied supplied approximately order to hedge its economic risks directly associated with meeting its approximately 9.7 percent of system energy requirements requirements with power purchased under under electricity electricity forward contracts.

contracts.

I purchases TVA's average average electricity electricity market purchases of power to meet growing demand market risk exposure has increased annually annually since 2003. The increases have demand and, to a lesser extent, from increased increased volatility have resulted primarily volatility in the electricity electricity markets.

primarily from TVA's TVA's r a As shown in the Value at Risk table above, at a 95 percent confidence level, the average VaR for TVA's electricity portfolio for 2008 I for a 10-day As shown in the Value at Risk table above, at a 95 percent confidence level, the average VaR for TVA's electricity portfolio for 2008 10-day holding period was $30 million.

Natural Gas. TVA Natural Gas. TV A uses natural natural gas to operate combustion combustion turbine peaking units and to supply fuel under power purchase agreements I 'in which TVA swaps;,

swaps; and TV A is the fuel supplier. TV

~nd options options on swaps TVAA hedges a portion of its natural natural gas needs by entering swaps under a financial hedging program. At September September 30, 2008, TVA entering into futures contracts, options on futures contracts, TV A had derivative positions outstanding under the II program equivalent program approximate equivalent toto about 3,154 contracts, about 3,154 approximate net market value of$715 contracts, made of $715 million.

made up of 2,090 2,090 futures contracts, contracts, 160 options contracts, and 904 swap futures contracts, with an As shown As shown on on the the Value Value atat Risk Risk table above, at table above, at aa 95 95 percent percent confidence confidence level, level, the average VaR the average VaR for TVA's natural gas portfolio for 2008

. for a IO-day 10-day holding period was $15 $15 million.

II emission Emission Emission Allowances.

Allowances. TVA TV A acquires acquires both SO 22 emission allowances and NO xx emission allowances emission requirements of the CAA and its implementing regulations. In addition addition to meeting allowances to help TVA comply comply with the meeting TVA's emissions requirements, TVA also manages the emission the emission positions utilizing the positions utilizing market to the market to optimize optimize the value of its emission allowance the value allowance portfolio.

portfolio. As shown in the VaR table above, at a 95 I percent confidence percent allowance confidence level, allowance portfolio level, the portfolio was $63 the average average VaR for 2008 for aa IO-day

$63 million and $2 10-day holding period for TVA's

$2 million, respectively.

respectively.

TVA's SO 22 emission allowance allowance portfolio portfolio and NO x, emission I Page 92 92

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Table a/Contents Table of Contents Fuel Oil. TVA purchases fuel oil as a substitute fuel source for TVA's combustion turbines and for Fuel Oil. TVA purchases fuel oil as a substitute fuel source for TVA's combustion turbines and for start start up up purposes purposes at at many many ofof TVA's fossil TVA's fossil plants.

plants. InIn addition, addition, many many of of TVA's TVA's rail rail transport transport contracts contracts for movement movement of of certain certain commodities commodities such such as as coal coal are are indexed indexed toto fuel fuel I

1 0il. TVA oil. TVA is is currently currently in the process contracts to hedge contracts hedge TVA's process of developing TVA's exposure exposure to developing an to price price movements.

an additional movements.

additional portion of of the financial financial hedging hedging program program to to purchase purchase fuel fuel oil oil derivative derivative Analysis Sensitivity Analysis I TVA uses TVA uses sensitivity sensitivity analysis analysis toto measure measure the potential potential impact impact that selected selected hypothetical hypothetical changes changes in in certain certain commodity prices would commodity prices would II TVA over have on TVA near-term near-term changes.

over aa selected selected period period of of time. The selected selected hypothetical hypothetical changes changes in commodity commodity prices prices are intended intended to reflect reflect reasonably reasonably possible possible Coal. During 2008, 2008, TVA TV A purchased purchased 93 93 percent percent ofof its coal coal requirements requirements under long-term long-term coal contracts and 77 percent percent of its coal II requirements under short-term requirements short-term contracts.

actually paid, TVA's the rates TVA actually contracts. If TV A's coal If the rates that TVA coal expense expense would TV A paid for coal would have increased coal under increased by $15 under short-term short-term contracts

$15 million in 2008.

contracts during during 2008 were 10 percentpercent higher than Uranium. During 2008, 2008, TVA TV A did not not have to purchase purchase any uranium uranium on the the spot spot market, and and as September 30, as of September 30, 2008, TV A had all of 2008, TVA of its uranium its uranium requirements requirements through through 2011 either either in inventory inventory or under under contract.

contract. Accordingly, Accordingly, aa hypothetical hypothetical 10 10 percent percent change change in uranium uranium prices prices I during 2009 would have during have no material effect Nuclear Fuel.

Supply - Nuclear Fuel.

effect onon TVA's TV A's financial position, results of operations, operations, or cash cash flows. See See Item 1, Business Business - Fuel I Cash Flow

Cash Flow at Risk Risk Cash Flow at RiskRisk ("CFaR")

("CFaR") is a risk metric metric that reflects reflects how energy commodity commodity volatility volatility and price changes translate translate into fluctuations TVA's financial in TVA's financial health health captured captured by cash flow. Although TVA currently has has a FCA that mitigates much of of its fuel-cost risk and also conducts I an extensive cash flow. TVA continues to manage cash program to hedge some of extensive financial trading program of its portfolio risks, TVA still faces volumetric manage CFaR for the mutual benefit of TVA TVA and its customers.

uncertainties that affect volumetric risk and other uncertainties affect TVA forecasts CFaR computer model. The rolling 12 CFaR using a computer 12 month forecast is used to pinpoint months with greater amounts of CFaR ofCFaR I that need to be hedged to limit price exposure. At September that need confidence level.

confidence September 30, 2008, TV TVA 2009 CFaR at $228 million based on estimated its 2009 A estimated percent on a 90 percent I Investment Investment Price Risk TVA's investment price risk relates primarily to investments relates primarily retirement trust, and decommissioning trust, asset retirement investments in TVA's nuclear decommissioning pension plan.

I Nuclear Decommissioning Nuclear Decommissioning Trust The nuclear decommissioning trust is generally generally designed equity market achieve a return in line with overall equity designed to achieve performance. The assets market performance.

I of of the trust are invested Treasury invested in debt and equity securities and certain inflation-protected securities, Treasury inflation-protected securities, commodities, and certain derivative instruments including through these investments the trust has exposure to U.S. equities, international through international equities, currencies. As of September including forwards, futures, options, and swaps, and 30, estate investment trusts, high-yield debt, U.S.

equities, real estate U.S.

2008, the value of the investments in the trust was 2008,

$845 million, and an immediate 10 percent percent decrease in the price of the investments in the trust would have reduced the value of the trust by $85 $85 I andEstimates and Estimates - Nuclear Management's Discussion and Analysis of Financial Condition and Results of Operations-million. See Item 7, Management's Decommissioningfor more information regarding TVA's nuclear decommissioning trust.

NuclearDecommissioning trust.

CriticalAccounting Policies Operations - Critical Policies I

I Asset Retirement Retirement Trust The asset retirement trust is presently invested to achieve a return in line with fixed income market performance. The assets of the trust commingled funds. As of September are invested in fixed income commingled 30, 2008, the value of the investments in the trust was $81 September 30,2008, $81 million, and an I .immediate 10 percent decrease in the price of the the investments in the trust would have reduced the value of the trust by $8 $8 million.

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of Contents I

Table a/Contents Pension Fund Pension The assets in TVA's pension plan are primarily targets an asset allocation targets primarily stocks and bonds. The Tennessee Tennessee Valley allocation policy for its pension plan assets which, in prior years, approximated Valley Authority Authority Retirement approximated 60 percent Retirement System ("TVARS")

percent equity securities securities and 40 percent fixed I*

n income securities. TV percent equity TVARSARS is transitioning to a new asset allocation equity securities and 35 percent allocation policy adopted March 1, 2007, which percent fixed income securities. The pension fund is invested instruments such as futures, options, and swaps, and through these which targets targets an asset allocation policy of 65 invested in equity securities, debt securities, and derivative these investments the fund has exposure exposure to U.S. equities, international equities, real equities, international I]

estate investment trusts, investment-grade investment-grade debt, high-yield high-yield debt, U.S. Treasury inflation-protected inflation-protected securities, commodities, and currencies.

currencies. As of of September September 30,2008, 30, 2008, the value value of the investments investments in the pension fund was $6.2 billion, and an immediate 10 percent decrease in the value of the investments in the fund would have reduced the value of the fund by approximately Analysis of Financial Condition and Results of Operations approximately $622 million. See Item 7, Critical Accounting Policies Operations - Critical Policies and and Estimates Management's Discussion 7, Management's Estimates - Pension Pension and and Other Discussion and Other Postretirement Postretirement I3i Benefits and Note 14 for additional information information regarding regarding TVA's pension pension fund.

Interest Rate Risk TVA's interest interest rate risk is related primarily to its short-term investments, Bonds, short-term investments, Bonds, swaption transaction, transaction, and interest rate swaps swaps related to I

three of TV TVA's A's swaption transactions.

Short-Term Investments Short-Term Investments I At September September 30, 2008, TVA had $213 million of cash and cash equivalents, and the average balance of cash and cash equivalents 2008 was $357 million. If If the rates of interest that TVA received received on its short-term equivalents for investments during 2008 had been one percentage point lower short-term investments I*

than the rates of interest that TVA actually received received on these investments, investments, TVTVA A would have have received received approximately $4 million less in interest fund, asset retirement Results of Operations investments during 2008. In addition, changes from its short-term investments Operations - Risk Management changes in interest rates could affect the value of TVA's investments in its pension retirement trust, and nuclear decommissioning trust. See Item 7, ManagementActivities -Investment

- Investment Price Management's Discussion 7, Management's Price Risk.

Risk.

Discussion and Analysis of Financial Financial Condition and t I Debt Portfolio Debt Portfolio Short-Term Debt. At September September 30, 2008, TVA's TVA's short-term borrowings were $185 $185 million, and the current maturities of oflong-term long-term IU debt were $2 billion. Based on TV would have resulted resulted in an increase short-term debt during 2009 equals of short-term TVA's A's interest rate exposure at September 30, 2008, an immediate one increase of$22 of $22 million in TVA's short-term short-term interest expense short-term debt balance at September equals the short-term one percentage point increase in interest rates expense during 2009. This calculation assumes that the balance September 30, 2008, plus an amount representing the refinancing of current rates balance II maturities of long-term debt.

immediate Long-Term Debt.Debt. At September September 30, 2008, 2008, the interest rates on all of TVA's outstanding long-term debt were fixed. Accordingly, immediate one percentage point increase in interest rates would would not have affected affected TVA's interest Accordingly, an associated with its long-term interest expense associated I

debt. When When TVA's TVA's long-term long-term debt matures or is redeemed, however, TVA typically typically refinances refinances this debt by issuing additional additional long-term debt. Accordingly, Accordingly, if if interest interest rates are high when financial condition may be adversely when TVA issues this additional adversely affected. This risk is somewhat additional long-term long-term debt, TVA's TVA's cash flows, results of operations, somewhat mitigated by the fact that TVA's debt portfolio is diversified maturities and has a long average life. As of September 30, 2008, the average operations, and and diversified in terms of average life of TVA's debt portfolio was 15.8 years. A schedule of TVA's I3*

debt maturities maturities is contained contained in Note 11. 11.

Swaption and Swaption and Related RelatedInterest Interest Rate Swap Agreements I

Unrealized Changes in interest rates also affect losses are reflected affect the mark-to-market valuation Unrealized gains and losses on these transactions transactions are reflected reflected in earnings. Based on TVA's interest valuation of TVA's reflected on TVA's balance interest rate exposure TVA's swaption agreement agreement and related interest rate swaps.

balance sheets in a regulatory exposure at September September 30,2008, regulatory asset account, and realized gains and 30, 2008, an immediate immediate one percentage percentage point decrease in in I

interest rates would have decreased decreased the mark-to-market valuation valuation of TVA's swaption agreement and related interest interest rate swaps swaps by $353

$353 million.

Page Page 94 II I

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I

II Table of Contents Table of Contents Currency Exchange Currency Exchange RateRate Risk Risk I it British pounds British As of respectively. When respectively.

of September September 30, pounds sterling. TVA 30, 2008, When TVA issued 2008, TVA TVA issued TV A had issued these had three issued these Bonds these Bonds, three issues issues of Bonds Bonds in amounts Bonds, it hedged Bonds outstanding amounts of £200 hedged its currency outstanding whose principal

£200 million, £250 currency exchange principal and

£250 million, and exchange raterate risk by and interest and £150 interest payments

£150 million by entering payments are million in entering into currency in 1999, are denominated 1999,2001, currency swap swap denominated in and 2003, 2001, and 2003, I agreements. Accordingly, agreements. Accordingly, as as of September September 30,30, 2008, 2008, aa 10 10 percent percent change change in in the British British pound pound sterling-U.S.

sterling-U.S. dollar dollar exchange exchange rate rate would notnot have have I had aa material had material impact Credit Risk Credit Risk impact on on TVA's TVA's cash flows, results of of operations, operations, oror financial financial position.

II . Credit risk is the Credit obligations. Where exposed obligations.

the exposure exposure to economic exposed to credit economic loss that credit risk, TVA that would occur TV A analyzes analyzes the occur as aa result of aa counterparty's the counterparty's counterparty' s nonperformance counterparty's financial condition prior nonperformance of prior to to entering entering into an of its contractual contractual an agreement, agreement, establishes establishes credit limits, monitors credit monitors the the appropriateness those limits, as appropriateness of those as well as any any changes changes in in the creditworthiness creditworthiness of of the counterparty counterparty on on an ongoing ongoing basis, I employs credit and employs risk.

credit risk.

credit mitigation mitigation measures, measures, such such as collateral prepayment arrangements collateral or prepayment arrangements and and master master purchase purchase and sale agreements, agreements, to mitigate I Credit of Credit o/Customers Customers I The majority The majority of distributor customers, customers, all TVA's credit risk is limited to trade accounts of TVA's all located located in the Tennessee accounts receivable receivable from Valley region. To aa lesser Tennessee Valley delivered power from delivered power sales to exposed to credit lesser extent, TVA is exposed municipal and cooperative to municipal cooperative credit risk from industries and and federal federal I agencies directly served agencies directly served and from exchange power arrangements exchange power arrangements withwith a small number number of investor-owned investor-owned regional utilities utilities related to either I delivered power or the replacement Business - Customers replacement of open positions of longer-term Customers - OtherOther Customers, longer-term purchased power sales to the Customers , power purchased power power or fuel agreements.

the United States Enrichment agreements. As previously Enrichment Corporation Corporation ("USEC")

previously mentioned in Item

("USEC") represented 5.3 percent Item 1, percent of of TVA's total total operating revenues unsecured credit ratings are currently 2008. USEC's senior unsecured revenues in 2008. 'ccc' by Standard & Poor's and 'Caa2' currently 'CCC' 'Caa2' byby II Moody's Investors Service. As aa result of USEC's credit Moody's Investors power contract.

power credit ratings, ratings, the company company has has provided provided credit assurance assurance to TVA, under the terms of T VA had concentrations of accounts receivable from seven customers that represented 40 percent of total accounts receivable as of of its TV A had concentrations of accounts receivable from seven customers that represented 40 percent of total accounts receivable as of I September 30, 2008.

September 2008.

customer credit risk from 'trade summarizes TVA's customer The table below summarizes receivable as of September trade accounts receivable September 30,2008:

30, 2008:

I Trade Accounts Receivable Receivable I Customer Credit Customer Credit Risk As of September 30 Risk 30 II Municipalities

[JiiVe"stment InVestment Grade Cooperative Distributor Municipalities and Cooperative Distributor Customers Investment Grade Internally Rated - Investment

$ 868 430 430

'Industries ttndustn.. es and Federal Agencies Agencies Directly Served II Investment Grade Investment Non-investment Non-investment Grade Internally Rated - Investment Grade 46 20 20 3

I t [Internally Rated- Non-investment Intern. ally Rat.ed- Non-investment Grade 9 I I Exchange Power Arrangements

~tmentGrade Investment Grade Non-investment Grade Arrangements

~~~--------------------------------------------------------------~------------4701 4

IF - I I

Internally Rated - Investment Investment Grade Non-investment Grade Internally Rated - Non-investment 1I

~I~S~u~bt~o~ta~l F Subtotal __~~~____________________________________________________________________~l,~ 1,381]

Accounts Receivable Other Accounts Receivable II -Miscellaneous Accounts

Miscellaneous Provision for for Uncollectible Uncollectible Accounts Accounts 26 I261 (2)

(2)

I ISubtotal Subtotal 24))

24

Total $ 1,405 1,405 Note II(1) Note Includes unbilled power receivables of $1 (1) Includes $1,000 million.

,000 million.

Page 9595 I

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Table a/Contents Table of Contents Credit Creditof Other Other Counter parties Counterparties I

performance In addition to being exposed because of the nonperformance performance risk, TVA analyzes exposed to economic loss due to the nonperformance nonperformance of its other counterparties, nonperformance of TVA's counterparties, including suppliers analyzes the counterparty's financial TV A's customers, TVA suppliers and counterparties TV A is exposed to economic economic loss counterparties to its derivative contracts. Where exposed to financial condition prior to entering entering into an agreement and employs employs performance performance assurance I

m measures, such as parent guarantees, letters letters of credit, cash deposits, deposits, or performance performance bonds, to mitigate the risk.

TVA has various agreements which it does business. Most of institutions with which exposure to various institutions agreements under which it has exposure of these are not these are not I m

material on a net exposure basis. Policies and procedures material exposure to institutions in poor financial condition exposure procedures for counterparty credit review have generally protected TVA current market and ~cono~ic condition due to current economic conditions.

TV A against significant significant

. I Suppliers. If one of TVA's fuel or purchased Credit of Suppliers.

Credit purchased power suppliers supplIers falls fails to perform under the terms of ItS its contract WIth with TVA, TVA TVA might lose the money that it paid to the supplier under the contract and have to purchase at a significantly significantly higher price power in a timely power timely manner price than TV TVA purchase replacement A was entitled to pay under the contract. In addition, TV replacement fuel or power on the spot market, perhaps TVAA might not be able to acquire replacement manner and thus might be unable to satisfy its own obligations to deliver power. As mentioned mentioned in Item 1, perhaps replacement fuel or I, Business - Power I

Supply - Purchased PurchasedPower Power and Other Other Agreements, Agreements , TVATV A has a power power purchase agreement with Choctaw Choctaw that expires on March 31, 31, 2032. Choctaw's senior securedsecured credit ratings are currently 'BB'

'BB' by Standard & Poor's Poor's and 'Bal' Moody's Investors Service. As a result

'Bal' with Moody's result Choctaw's credit ratings, the company has provided credit assurance to TV of Choctaw's TVA,A, per the terms of its agreement.

I In September September 2008, Lehman securities. TVA had no net exposure to Lehman with TV

("Lehman"), an investment bank, filed for protection under Chapter 11 of the Lehman Brothers Holdings Inc. ("Lehman"),

Federal Bankruptcy Code. Lehman's relationship with TVAA had primarily primarily been been as an underwriter underwriter and market Lehman or its subsidiaries as of the date of its bankruptcy market maker for TVA debt bankruptcy filing. TVA's pension pension and NDT funds held I

minimal minimal amounts of Lehman securities.

I Credit ofDerivative Credit Derivative Counter Counterparties.

parties. TVA has entered entered into derivative contracts for hedging purposes, purposes, and TVA's nuclear nuclear decommissioning decommissioning trust and pensionpension fund have entered into derivative derivative contracts counterparty to one of TV investment purposes. If a counterparty contracts for investment A's TVA's hedging transactions transactions defaults, TV counterparty TVAA might incur substantial costs in connection connection with entering into a replacement counterparty to the derivative contracts into which the nuclear decommissioning defaults, the value of the investment investment could decline significantly, or perhaps become worthless.

replacement hedging transaction. If a decommissioning trust and the pension fund have entered for investment investment purposes I Credit of TVA Credit TVA A downgrade in TVA's credit rating could have material adverse effects on TVA's cash flows, results of operations, and financial A downgrade in TVA's credit rating could have material adverse effects on TVA's cash flows, results of operations, and financial condition and would harm investors investors in TVA TV A securities.

securities. Among Among other things, a downgrade downgrade could have the following effects:

I m

A downgrade would increase issues. An increase increase TVA's interest expense by increasing increase in TVA's interest expense expense would reduce increasing the interest rates that TVA pays on debt securities that it reduce the amount of cash available for other purposes, which could result in I

the need to increase borrowings, borrowings, to reduce other expenses or capital capital investments, investments, or to increase increase electricity rates.

A significant downgrade could result in TVA contain rating triggers.

TV A having to post additional collateral under under certain physical and financial contracts that I

A downgrade downgrade below a contractual contractual threshold could prevent TV TVAA from borrowing borrowing under two credit facilities totaling totaling $2.25 billion.

A downgrade downgrade could lower after the downgrade lower the price of TV downgrade and diminishing TVA A securities in the secondary market, thereby hurting investors diminishing the attractiveness and marketability of TVA Bonds.

investors who sell TV TVA A securities I For a discussion of factors that could lead to a downgrade in TVA's credit rating, see Item lA, 1A, Risk Factors.

I

~%

Page 96 I

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II Table of Contents Table of Contents Subsequent Subsequent Events II See Note 18.

18.

ITEM 7A. QUANTITATIVE QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT QUALITATIVE DISCLOSURES ABOUT MARKET RISK I Quantitative and qualitative disclosures about market risk are reported in Item 7, qualitative disclosures Condition and Results of Operations ManagementActivities.

Operations - Risk Management Activities .

7, Management's Discussion and Analysis of Financial Management's Discussion Financial IU Page 97 97 I

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Table of Contents of Contents ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS AND SUPPLEMENTARY SUPPLEMENTARY DATA DATA I TENNESSEE VALLEY TENNESSEE STATEMENTS V ALLEY AUTHORITY STATEMENTS OF INCOME I

For the years ended September September 30 (in millions) 2008 2008 2007 2006 I

~~~__________________________________=-__~~~~~____~~~~__~7,~1I Operating revenues Operating Sales of electricity I Municipalities and cooperatives cooperatives $$ 8,659 $ 7,847 $ 7,659 Industries directly served 1,472 1,472 1,221 1,065 I Federal agencies and other Other revenue 121 130 112 146 _ _ _ _143 1,065 116 116 1;.,.4.,;.3

'I Qperating.perating revenues revenues 10,382-10,382 9,326--

9,326 _ 8,983]

8,983J Revenue capitalized Revenue capitalized during pre-commercial Netoperating Net operating revenues revenues pre-commercial plant operations plant operations -

,=_ _ _

10,382 10,382 (57)

(57)

~:::"",-,,-

9,269 _ _ 8,983-I --.-::::8,WJ

-_m I

,I Operating expenses Qperating Lating expenses Fuel and purchased power power Qperating and maintenance maintenance 4,176 4,176 2,298 2,298 3,449 3,449 2,332 2,332 3,342 3,342

--=2,:R[JI U

,=-=-==--____ 2,328 I

Depreciation, Depreciation, amortization, and accretion accretion 1,224 1,224 1,473 1,500 1,500 I

JI

[ax eguivalents flax equivalents 491 451 376 376 Loss on asset impairment impairment 9 21 14fm 14 iTotal operating

[Total oneratine expenses expenses 8,198 8.198 7,726 ---7-,-56--0 7,726 7.560-]

Qperating Operating income ~

2,184 ______~~~ 1,543 ______~I,iUJl 1 543 1,423 U U

Other income 15 73 80 ,

Other expense pther (6)

(2) m 0(2)C - - -_ _ --'wJ (2j II

- 41 n )_J

!Unrealized gain (loss) on derivative tUnrealized

~-----------------------------------~~-------~~

contracts, net derivative contracts, net 41

~~~--------------------------------------------~--~'I

'interest IInterest expense Interest on debt and leaseback leaseback obligations 1,373 1,390 1,406 1,406 iAmortization of of debt discount, issue issue, and reacquisition costs, costs, net 20 19 21I ,

21

'Amortization Net interest

Net debt discount, interest expense and reacguisition Allowance for funds used during construction construction and nuclear net expenditures nuclear fuel expenditures 20 (17)

(17) 1,376 19 (177)

(177) 1,232 (163 (163) 1,264]

1,264J I

~ncome before Income before cumulative cumulative effects of accounting changes accounting changes 817 817 423 222]

222J U

Cumulative

,Cumulative effect of change in accounting accounting for conditional conditional asset retirement obligations obligations - - ~ ( 109)

(109TI I I Net income I

$ 817 817 $ 423 $ 113

====:::::::::1=13 ] II The accompanying accompanying notes are are an integral integral part of these financial statements.

Page 98 98 II II I

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IITable Table a/Contents of Contents TENNESSEE VALLEY TENNESSEE VALLEY AUTHORITY AUTHORITY BALANCE BALANCE SHEETS I At September 30 (in millions) 30

- ASSETS ASSETS I SA2008 Current assets Current

Cash Cash and cash equivalents equivalents $

2008 213 $

2007 2007 165 I

.1651 I

I Restricted cash and investments Restricted

!Accounts receivable,,_,n~e:!:.t lAccounts receivable, Inventories and other, net net _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~_ _ _ _ _ _ _ _ _---!.1,405 106 779 150 150 1,458 I 1,458 663 663

[fotal jTotal current assets 2,503 2;436J 2i436]

II IPropertYd~lant, and

Property,_plant, and equipment euipment (Note (Note 3)'-'------------------------------'7::_::_~~--__:_::_::__:_:___l

3) ,

40,079 38,811

]

Completed Pr~l;=:an;:ct'_;_:._-~;---------------------------------;7~=:---.,...--,:::-~~

Completed plant 40,079 38,811 I !LeSs accumulated depreciation Less accumulated (16,983)

(16,983) ..,(15,937)_

(15,937D I Net completed completed plant Construc~~R=ro~g-re-s-s-------------------------------:-------~~~---~~~~

Construction in progress 23,096 1,892 22,874 1,286 I1 II Nuclear Nuclear fuel and capital leases

[Q!&R!QP~,_p~~'llii~,,_'n=.:e:!:.t ffotalp 9petyplant and equipent, net ___________________________ ~ _ __'=

791 25,779 672 672 24,832]

24,832J i1nvestment funds Investment 956 1,169 1,00 l~g~YandotherIOng,-~t~e~rm~a~s~se~t~s~'_'__

I Regulatory and other long-term assets ___________________~_________~___~_~__'_'_____~I Deferred nuclear Deferred nuclear generating units generating,....:u==:n~it::::s------------------------------~~ 2,738 _ _ _ _.:::-::~-,3,130 3,130

Other

,Other regulatory regulatory assets assets (Note (Note 6)

6) 4,166 1,790J 1,790J II Subtotal

Other long-term Pther long-term assets regulatory and other long-term Total regulatory long-term assets 6,904

995 995 7,899 4,920 375]

375J 5,295 ml I ~I ~------------------------~------~

J M Total Total assets assets $ 37,137 37,137 $ 33,732 33,732 I

J TIARIIJTWE~ AND PROPRIETARV CAPITAl, LIABILITIES AND PROPRIETARY CAPITAL II :Current liabilities Current liabilities Accounts payable payable and accrued liabilities iCollateral funds held

Collateral

$ 1,333 $

103 1,205

157 I

157]

Accrued interest 441 406 I Crnportion

Current Current

'Shorterm Rortion of Current portion portion of

Short-term debt, net of leaseback of energy obliga::!.!t:!.:io~n~s:_:_:_;__:__---~'-------------~----------.:...--:-'~--------,-:~

leaseback obligations prepayment oblig>.::at:.:io:::..:n::.:s=---_

energy"pre~yment obligations 54 106

_ _ _ _ _ _ _ _ _ ___:_--__:_----------~~~__:_--___;__:;.;:~

106 185 43 1I 106 106 1,422.I

.1,@

I Current maturities

,~~:-------:-~~--;--------------------~----~-----~~---~~

of long-term debt (Note 11) maturities oflong-term 11) 2,030 90 I TFotal current liabilities

[otal . 4,252 3,429]

3,429J Other liabilities

Other liabilities . I I Other liabilities

!Regulatory Regulato~ liabilities liabilities (ote6)

Asset retirement obligations (Note 6)'--_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~_ _ _ _ _ _ _ _ _~_ _ 860 obligations _____________________

o~~=---

3,514 2,318

~---------_-~~=------~~~

2,067

=::_____:_-,-"-': . . .;

2,189 2,189 831 I 83

'Leaseback ILeaseback obligations 1,299 1,029 I1 1,029 I -Energy

Energy prepayment fTotal prepayment obligations ITotal other liabilities 927 8,918 1,032 1,032 6,400_

6,400J II !Long-term debt, net (Note 11)

Long-term debt, net (Note 11) 20,404 20,404 21,099J1 21,099

[

fTotal liabilities (rotalliabilities 33,574 30,928j 30,928J II Commitments and contiIig~iliote

Commitments 15) _ _ _ _ _ _ _ _ _ _ _ _ _ _~_ _ _ _ _ _ _.:...__ _ _ _ _ _ _ _ _ _~

contingencies (Note 15).:..._

IProprietarYcap~it=a~I froprietary capital _ _ _ : _ - - - - - - - - - - - - - - - - - - - - - - - - - - - : - ' - - - -___--:-~~-----:-~~[

Appropriation

~ppropriation investment investment 4,723 4,723 4,743 I Retained Accumulated eaming,"-s_ _ _-:----:-_:--_________________-'-_ _ _ _ _ _ _ _ _ _~_ __=:2,2,571 Retained earnings comprehensive loss Accumulated other comprehensive

,=_5_'_7=_1_ _ _--=-I,m (37) 1,763__

(19)

Ir FA-ccumulated net expense

!Accumulated expense of stewardship stewardship programs programs (3,694) (3,683)J (3,683D Total proprietary capital otal proprietary capital . . 3,563 3,563 2,804 J 2,804

Total liabilities and proprietary proprietary capital The accompanying accompanying notes are an integral part of these financial statements.

37,137 37,137 33,732 33,732 I

Page Page 99 II II II II I

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I Contents Table of Contents TENNESSEE TENNESSEE VALLEY VALLEY AUTHORITY AUTHORITY STATEMENTS STATEMENTS OF CASH FLOWS I For the years ended September (in millions)

September 30 30 I

N*O 2008 IUUo 2007

-,nn*

v t e Letter Sequence Other
TAC:ME0853, (Approved, Closed)
Initiation Request, Request, Request, Request, Request, Request, Request, Request Acceptance... Supplement, Supplement Administration Meeting, Meeting Questions 21 July 2009 18 February 2010 11 March 2010 28 May 2010 11 June 2010 13 July 2010 Answers 5 April 2010 29 July 2010 1 April 2011 Results Approval, Approval Other: CNL-15-189, Decommissioning Funding Update, ML090770757, ML091250151, ML092470504, ML101740152, ML101740157, ML101820478, ML102110075, ML102360283, ML102600474, ML103160419, ML110260321, ML111010165, ML111250430, ML111890037, ML11291A095, ML12069A330, ML12073A391, ML12073A392, ML12073A393, ML12081A073, ML13044A113
MONTHYEAR2010-07-01 [Table View]

ML092470504

Text

Subject:

References:

References:

Enclosures:

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