10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13, 15(d), OR 37 OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-52313

TENNESSEE VALLEY AUTHORITY

(Exact name of registrant as specified in its charter)

A corporate agency of the United States created by an act of Congress  (State or other jurisdiction of incorporation or organization)	62-0474417  (IRS Employer Identification No.)
400 W. Summit Hill Drive Knoxville, Tennessee  (Address of principal executive offices)	37902  (Zip Code)

(865) 632-2101

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, 15(d), or 37 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  o                                                                                    Accelerated filer o

Non-accelerated filer    x                                                                                      Smaller reporting company  o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

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Table of Contents
GLOSSARY OF COMMON ACRONYMS......................................................................................................................................	3
FORWARD-LOOKING INFORMATION.........................................................................................................................................	5
GENERAL INFORMATION............................................................................................................................................................	6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.............................................................................................................................................	7
Statements of Operations (unaudited)..................................................................................................................................	7
Balance Sheets (unaudited)..................................................................................................................................................	8
Statements of Cash Flows (unaudited).................................................................................................................................	9
Statements of Changes in Proprietary Capital (unaudited)...................................................................................................	10
Notes to Financial Statements (unaudited)...........................................................................................................................	11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...	38
Executive Overview...............................................................................................................................................................	38
2012 Challenges and Key Initiatives.....................................................................................................................................	38
Liquidity and Capital Resources............................................................................................................................................	41
Results of Operations............................................................................................................................................................	44
Critical Accounting Policies and Estimates...........................................................................................................................	47
Changes in Ratemaking Impacting Accounting.....................................................................................................................	47
New Accounting Standards and Interpretations....................................................................................................................	48
Corporate Governance..........................................................................................................................................................	48
Environmental Matters..........................................................................................................................................................	48
Legal Proceedings................................................................................................................................................................	49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................................	49
ITEM 4. CONTROLS AND PROCEDURES..................................................................................................................................	49
Disclosure Controls and Procedures......................................................................................................................................	49
Changes in Internal Control over Financial Reporting............................................................................................................	50
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................................................................................................	51
ITEM  1A. RISK FACTORS...........................................................................................................................................................	51
ITEM  6. EXHIBITS.......................................................................................................................................................................	52
SIGNATURES...............................................................................................................................................................................	53
EXHIBIT INDEX............................................................................................................................................................................	54

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GLOSSARY OF COMMON ACRONYMS
Following are definitions of terms or acronyms frequently used in this Quarterly Report on Form 10-Q for the three months ended December 31, 2011 (the “Quarterly Report”):
Term or Acronym	Definition
AFUDC	Allowance for funds used during construction
ARO	Asset retirement obligation
ART	Asset Retirement Trust
ASLB	Atomic Safety and Licensing Board
BEST	Bellefonte Efficiency and Sustainability Team
BREDL	Blue Ridge Environmental Defense League
CAA	Clean Air Act
CAIR	Clean Air Interstate Rule
CCOLA	Combined construction and operating license application
CCR	Coal combustion residual
CME	Chicago Mercantile Exchange
CMP	Conference of the Parties serving as the Meeting of Parties
CO2	Carbon dioxide
COLA	Cost of living adjustment
COP	Conference of the Parties to the UN Framework Convention on Climate Change
CSAPR	Cross State Air Pollution Rule
CTs	Combustion turbine unit(s)
CVA	Credit valuation adjustment
CY	Calendar year
EPA	Environmental Protection Agency
FASB	Financial Accounting Standards Board
FTP	Financial Trading Program
GAAP	Accounting principles generally accepted in the United States of America
GAO	U.S. Government Accountability Office
GHG	Greenhouse gas
JSCCG	John Sevier Combined Cycle Generation LLC
kWh	Kilowatt hour(s)
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
mmBtu	Million British thermal unit(s)
MtM	Mark-to-market
MW	Megawatt
NAV	Net asset values
NDT	Nuclear Decommissioning Trust
NEPA	National Environmental Policy Act
NOx	Nitrogen oxides
NPDES	National Pollutant Discharge Elimination System
NRC	Nuclear Regulatory Commission
NSPS	New Source Performance Standards
OCI	Other Comprehensive Income (Loss)
PM	Particulate matter
PSD	Prevention of Significant Deterioration
QTE	Qualified technological equipment and software
REIT	Real estate investment trust
SACE	Southern Alliance for Clean Energy
SEC	Securities and Exchange Commission

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SERP	Supplemental Executive Retirement Plan
Seven States	Seven States Power Corporation
SO2	Sulfur dioxide
SSSL	Seven States Southaven, LLC
TCWN	Tennessee Clean Water Network
TDEC	Tennessee Department of Environment & Conservation
TOU	Time-of-use
TVARS	Tennessee Valley Authority Retirement System
TWQCB	Tennessee Water Quality Control Board
XBRL	eXtensible Business Reporting Language

4

FORWARD-LOOKING INFORMATION

This Quarterly Report contains forward-looking statements relating to future events and future performance.  All statements other than those that are purely historical may be forward-looking statements.  In certain cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “intend,” “project,” “plan,” “predict,” “assume,” “forecast,” “estimate,” “objective,” “possible,” “probably,” “likely,” “potential,” or other similar expressions.

Although the Tennessee Valley Authority (“TVA”) believes that the assumptions underlying the forward-looking statements are reasonable, TVA does not guarantee the accuracy of these statements.  Numerous factors could cause actual results to differ materially from those in the forward-looking statements.  These factors include, among other things:

• New or changed laws, regulations, and administrative orders, including those related to environmental matters, and the costs of complying with these new or changed laws, regulations, and administrative orders, as well as complying with existing laws, regulations, and administrative orders;

• The requirement or decision to make additional contributions to TVA's pension or other post-retirement benefit plans or to TVA's Nuclear Decommissioning Trust (“NDT”);

• Events at a TVA nuclear facility, which, among other things, could result in loss of life, damage to the environment, damage to or loss of the facility, and damage to the property of others;

• Events at a nuclear facility, whether or not operated by or licensed to TVA, which, among other things, could lead to increased regulation or restriction on the construction, operation, and decommissioning of nuclear facilities or on the storage of spent fuel, obligate TVA to pay retrospective insurance premiums, reduce the availability and affordability of insurance, increase the costs of operating TVA's existing nuclear units, negatively affect the cost and schedule for completing Watts Bar Nuclear Plant (“Watts Bar”) Unit 2 and Bellefonte Nuclear Plant (“Bellefonte”) Unit 1, or cause TVA to forego future construction at these or other facilities;

• Significant delays, cost increases, or cost overruns associated with the construction of generation or transmission assets;

• Fines, penalties, natural resource damages, and settlements associated with the Kingston Fossil Plant ("Kingston") ash spill;

• The outcome of legal and administrative proceedings;

• Significant changes in demand for electricity;

• Addition or loss of customers;

• The continued operation, performance, or failure of TVA's generation, transmission, and related assets, including coal combustion residual (“CCR”) facilities;

• Modernizing aging coal-fired generating units and installing emission control equipment to meet existing and anticipated emissions reduction requirements which could render continued operation of many of these units not cost-effective and result in their removal from service, perhaps permanently;

• Disruption of fuel supplies, which may result from, among other things, weather conditions, production or transportation difficulties, labor challenges, or environmental laws or regulations affecting TVA's fuel suppliers or transporters;

• Purchased power price volatility and disruption of purchased power supplies;

• Events involving transmission lines, dams, and other facilities not operated by TVA, including those that affect the reliability of the interstate transmission grid of which TVA's transmission system is a part, as well as inadequacies in the supply of water to TVA's generation facilities;

• Inability to obtain regulatory approval for the construction or operation of assets;

• Weather conditions;

• Catastrophic events such as fires, earthquakes, solar events, floods, hurricanes, tornadoes, pandemics, wars, national emergencies, terrorist activities, and other similar events, especially if these events occur in or near TVA's service area;

• Restrictions on TVA's ability to use or manage real property currently under its control;

• Reliability and creditworthiness of counterparties;

• Changes in the market price of commodities such as coal, uranium, natural gas, fuel oil, crude oil, construction materials, reagents, electricity, and emission allowances;

• Changes in the market price of equity securities, debt securities, and other investments;

• Changes in interest rates, currency exchange rates, and inflation rates;

• Rising pension and health care costs;

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

• Limitations on TVA's ability to borrow money which may result from, among other things, TVA's approaching or reaching its debt ceiling and changes in TVA's borrowing authority;

• An increase in TVA's cost of capital which may result from, among other things, changes in the market for TVA's debt securities, changes in the credit rating of TVA or the U.S. government, and an increased reliance by TVA on alternative financing arrangements as TVA approaches its debt ceiling;

• Changes in the economy and volatility in financial markets;

• Inability to eliminate identified deficiencies in TVA's systems, standards, controls, and corporate culture;

• Ineffectiveness of TVA's disclosure controls and procedures and its internal control over financial reporting;

• Problems attracting and retaining a qualified workforce;

• Changes in technology;

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• Failure of TVA's information technology assets to operate as planned and the failure of TVA's cyber security program to protect TVA's information technology assets from cyber attacks;

• Differences between estimates of revenues and expenses and actual revenues earned and expenses incurred; and

• Unforeseeable events.

See also Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in TVA’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (the “Annual Report”) and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.  New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the extent to which any factor or combination of factors may impact TVA’s business or cause results to differ materially from those contained in any forward-looking statement.  TVA undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made.

GENERAL INFORMATION

Fiscal Year

References to years (2012, 2011, etc.) in this Quarterly Report are to TVA’s fiscal years ending September 30.  Years that are preceded by “CY” are references to calendar years.

Notes

References to “Notes” are to the Notes to Financial Statements contained in Part I, Item 1, Financial Statements in this Quarterly Report.

Available Information

TVA's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available on TVA's web site, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  TVA's web site is www.tva.gov.  Information contained on TVA’s web site shall not be deemed to be incorporated into, or to be a part of, this Quarterly Report.  TVA's SEC reports are also available to the public without charge from the web site maintained by the SEC at www.sec.gov.  In addition, the public may read and copy any reports or other information that TVA files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.  The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

  TENNESSEE VALLEY AUTHORITY

 STATEMENTS OF OPERATIONS (Unaudited)

 (in millions)

	Three Months Ended December 31
	2011			2010
Operating revenues
Sales of electricity	$	2,540		$	2,800
Other revenue	28			28
Total operating revenues	2,568			2,828
Operating expenses
Fuel	640			738
Purchased power	319			360
Operating and maintenance	880			883
Depreciation and amortization	441			432
Tax equivalents	151			145
Total operating expenses	2,431			2,558
Operating income	137			270
Other income (expense), net	9			11
Interest expense
Interest expense	358			358
Allowance for funds used during construction and nuclear fuel expenditures	(39		)	(29		)
Net interest expense	319			329
Net income (loss)	$	(173	)	$	(48	)
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY

 BALANCE SHEETS

 (in millions)

ASSETS
	December 31, 2011			September 30, 2011
Current assets	(Unaudited)
Cash and cash equivalents	$	213		$	507
Restricted cash and investments	11			11
Accounts receivable, net	1,411			1,739
Inventories, net	1,177			1,028
Regulatory assets	769			543
Other current assets	167			215
Total current assets	3,748			4,043
Property, plant, and equipment
Completed plant	44,498			44,187
Less accumulated depreciation	(20,963		)	(20,643		)
Net completed plant	23,535			23,544
Construction in progress	4,773			4,662
Nuclear fuel	1,193			1,073
Capital leases	31			26
Total property, plant, and equipment, net	29,532			29,305
Investment funds	1,256			1,168
Regulatory and other long-term assets
Regulatory assets	11,384			11,505
Other long-term assets	289			372
Total regulatory and other long-term assets	11,673			11,877
Total assets	$	46,209		$	46,393
LIABILITIES AND PROPRIETARY CAPITAL
Current liabilities
Accounts payable and accrued liabilities	$	1,651		$	1,840
Environmental cleanup costs - Kingston ash spill	128			182
Accrued interest	351			403
Current portion of leaseback obligations	80			80
Current portion of energy prepayment obligations	105			105
Regulatory liabilities	297			280
Short-term debt, net	785			482
Current maturities of long-term debt	1,558			1,537
Total current liabilities	4,955			4,909
Other liabilities
Post-retirement and post-employment benefit obligations	6,018			6,007
Asset retirement obligations	3,175			3,138
Other long-term liabilities	2,388			2,405
Leaseback obligations	1,197			1,202
Energy prepayment obligations	585			612
Environmental cleanup costs - Kingston ash spill	223			194
Regulatory liabilities	205			285
Total other liabilities	13,791			13,843
Long-term debt, net	22,369			22,412
Total liabilities	41,115			41,164
Proprietary capital
Power program appropriation investment	303			308
Power program retained earnings	4,257			4,429
Total power program proprietary capital	4,560			4,737
Nonpower programs appropriation investment, net	627			630
Accumulated other comprehensive income (loss)	(93		)	(138		)
Total proprietary capital	5,094			5,229
Total liabilities and proprietary capital	$	46,209		$	46,393
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY

 STATEMENTS OF CASH FLOWS (Unaudited)

 For the three months ended December 31

 (in millions)

	2011			2010
Cash flows from operating activities
Net income (loss)	$	(173	)	$	(48	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization (including amortization of debt issuance costs and premiums/discounts)	446			437
Nuclear refueling outage amortization cost	—			19
Amortization of nuclear fuel cost	67			52
Non-cash retirement benefit expense	152			116
Prepayment credits applied to revenue	(26		)	(26		)
Fuel cost adjustment deferral	86			98
Fuel cost tax equivalents	10			17
Environmental cleanup costs – Kingston ash spill – non cash	18			19
Changes in current assets and liabilities
Accounts receivable, net	334			248
Inventories and other, net	(338		)	(173		)
Accounts payable and accrued liabilities	(258		)	(143		)
Accrued interest	(51		)	(52		)
Pension contributions	(1		)	—
Environmental cleanup costs – Kingston ash spill, net	(25		)	(42		)
Other, net	16			6
Net cash provided by operating activities	257			528
Cash flows from investing activities
Construction expenditures	(661		)	(621		)
Nuclear fuel expenditures	(165		)	(117		)
Loans and other receivables
Advances	—			(11		)
Repayments	4			3
Other, net	—			(1		)
Net cash used in investing activities	(822		)	(747		)
Cash flows from financing activities
Long-term debt
Redemptions and repurchases	(19		)	(5		)
Short-term debt issues (redemptions), net	303			192
Payments on leases and leaseback financing	(6		)	(47		)
Payments to U.S. Treasury	(7		)	(7		)
Net cash provided by financing activities	271			133
Net change in cash and cash equivalents	(294		)	(86		)
Cash and cash equivalents at beginning of period	507			328
Cash and cash equivalents at end of period	$	213		$	242
The accompanying notes are an integral part of these financial statements.

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TENNESSEE VALLEY AUTHORITY

STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (Unaudited)

For the three months ended December 31, 2011 and 2010

(in millions)

	Power Program Appropriation Investment			Power Program Retained Earnings			Nonpower Programs Appropriation Investment, Net			Accumulated Other Comprehensive Income (Loss)			Total			Comprehensive Income (Loss)
Balance at September 30, 2010	$	328		$	4,264		$	640		$	(95	)	$	5,137
Net income (loss)	—			(45		)	(3		)	—			(48		)	$	(48	)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	—			—			—			49			49			49
Reclassification to earnings from cash flow hedges	—			—			—			7			7			7
Total other comprehensive income (loss)	—			—			—			56			56			56
Total comprehensive income (loss)																$	8
Return on power program appropriation investment	—			(2		)	—			—			(2		)
Return of power program appropriation investment	(5		)	—			—			—			(5		)
Balance at December 31, 2010 (unaudited)	$	323		$	4,217		$	637		$	(39	)	$	5,138
Balance at September 30, 2011	$	308		$	4,429		$	630		$	(138	)	$	5,229
Net income (loss)	—			(170		)	(3		)	—			(173		)	$	(173	)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	—			—			—			42			42			42
Reclassification to earnings from cash flow hedges	—			—			—			3			3			3
Total other comprehensive income (loss)	—			—			—			45			45			45
Total comprehensive income (loss)																$	(128	)
Return on power program appropriation investment	—			(2		)	—			—			(2		)
Return of power program appropriation investment	(5		)	—			—			—			(5		)
Balance at December 31, 2011 (unaudited)	$	303		$	4,257		$	627		$	(93	)	$	5,094
The accompanying notes are an integral part of these financial statements.

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NOTES TO FINANCIAL STATEMENTS (Unaudited)

(Dollars in millions except where noted)

Note No.		Page No.
1	Summary of Significant Accounting Policies	11
2	Impact of New Accounting Standards and Interpretations	13
3	Accounts Receivable, Net	13
4	Inventories, Net	14
5	Other Long-Term Assets	14
6	Regulatory Assets and Liabilities	15
7	Kingston Fossil Plant Ash Spill	16
8	Other Long-Term Liabilities	17
9	Asset Retirement Obligations	17
10	Debt	18
11	Leaseback Obligations	18
12	Risk Management Activities and Derivative Transactions	19
13	Fair Value Measurements	26
14	Other Income (Expense), Net	32
15	Benefit Plans	32
16	Legal Proceedings	32
17	Subsequent Events	36

1.  Summary of Significant Accounting Policies

General

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation creating the Tennessee Valley Authority (“TVA”), a corporate agency and instrumentality of the United States.  TVA was initially created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of over nine million people.

TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity.  Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.

The power program has historically been separate and distinct from the stewardship programs.  It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other evidences of indebtedness (“Bonds”).  Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Treasury in repayment of, and as a return on, the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment").  In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year.  Congress has not provided any appropriations to TVA to fund such activities since 1999.  Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities.  The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP").  Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.

Power rates are established by the TVA Board of Directors (“TVA Board”) as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”).  The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents”); debt service on outstanding indebtedness;

11

payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business.  In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible.  Rates set by the TVA Board are not subject to review or approval by any state or federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30.  Years (2012, 2011, etc.) refer to TVA's fiscal years unless they are proceeded by “CY,” in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is “self regulated.”  Additionally, TVA's regulated rates are designed to recover its costs of providing electricity.  In view of demand for electricity and the level of competition, TVA assumes that rates, set at levels that will recover TVA's costs, can be charged and collected.  As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred, because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology.  Based on these assessments, TVA believes the existing regulatory assets are probable of recovery.  This determination reflects the current regulatory and political environment and is subject to change in the future.  If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs.  Most regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its interim financial statements in conformity with GAAP for interim financial information. Accordingly, TVA's interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2011, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2011 (the “Annual Report”). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included.

Use of Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements.  Although the financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period.  Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results.  Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial conditions, results of operations, or cash flows.

Reclassifications

                Certain reclassifications have been made to the 2011 financial statement to conform to the 2012 presentation.  In the Cash flows from operating activities section of the Statements of Cash Flows, $17 million previously reported as changes in Accounts payable and accrued liabilities for the three months ended December 31, 2010, was reclassified as Fuel cost tax equivalents.

                Sales of electricity for the three months ended December 31, 2010 previously reported in the Statement of Operations as Sales of electricity to Municipalities and cooperatives of $2,386 million,  Industries directly served of $382 million, and Federal agencies and other of $32 million have been combined and reported as Sales of electricity of $2,800 million.

Operating expense of $1,098 million for the three months ended December 31, 2010, previously reported as Fuel and purchased power expense on the Statement of Operations, have been reclassified as Fuel expense of $738 million and Purchased power expense of $360 million.

        Interest on debt and leaseback obligations and Amortization of debt discount, issue, and reacquisition costs, net have

12

been combined for the three months ended December 31, 2010, and are shown as Interest expense in the Statements of Operations.  Interest expense for the three months ended December 31, 2010, was $353 million and Amortization of debt discount, issue, and reacquisition costs, net was $5 million.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances.  TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days.  It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables.

2.  Impact of New Accounting Standards and Interpretations

There were no accounting standards and interpretations that became effective for TVA during the quarter ended December 31, 2011 that, if adopted, would have materially affected  its financial condition, results of operations, or cash flows.

            The following accounting standards have been issued, but as of December 31, 2011, were not effective and had not been adopted by TVA.

Fair Value Measurement.  In May 2011, the Financial Accounting Standards Board ("FASB") issued amendments to achieve common fair value measurement and disclosure requirements to create consistency between GAAP and International Financial Reporting Standards ("IFRS”).  TVA does not expect the adoption of this guidance will materially affect its financial condition, results of operations, or cash flows.  These changes became effective for TVA on January 1, 2012.

Comprehensive Income.  In June 2011, the FASB issued guidance that will require adjustments to the presentation of TVA's financial information.  The guidance eliminates the current option to report comprehensive income and its components in the statement of changes in proprietary capital. The guidance allows for presentation of net income and other comprehensive income in one continuous statement or in two separated, but consecutive statements. These changes become effective for TVA on October 1, 2012. 

Balance Sheet. In December 2011, the FASB issued guidance that requires disclosure about balances presented on a net basis in the financial statements, derivative assets and derivative liabilities, repurchase agreements, and financial assets and

financial liabilities executed under a master netting or similar arrangement. These changes become effective for TVA on October 1, 2013.  TVA is currently evaluating the potential impact of these changes on its financial statements and related disclosures.

3.  Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA’s accounts receivable:

Accounts Receivable, Net
	At December 31, 2011			At September 30, 2011
Power receivables
Billed	$	1,309		$	1,625
Unbilled	16			13
Total power receivables	1,325			1,638
Other receivables	87			102
Allowance for uncollectible accounts	(1		)	(1		)
Accounts receivable, net	$	1,411		$	1,739

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4.  Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories:

Inventories, Net
	At December 31, 2011			At September 30, 2011
Fuel inventory	$	614		$	489
Materials and supplies inventory	581			555
Emission allowance inventory	11			11
Allowance for inventory obsolescence	(29		)	(27		)
Inventories, net	$	1,177		$	1,028

5.  Other Long-Term Assets

The table below summarizes the types and amounts of TVA’s other long-term assets:

Other Long-Term Assets
	At December 31, 2011		At September 30, 2011
Coal contract derivative assets	$	202	$	285
Loans and other long-term receivables, net	76		74
Other	11		13
Total other long-term assets	$	289	$	372

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6.  Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  Components of regulatory assets and regulatory liabilities are summarized in the table below.

Regulatory Assets and Liabilities
	At December 31, 2011		At September 30, 2011
Current regulatory assets
Unrealized losses on commodity derivatives	$	371	$	225
Deferred nuclear generating units	236		236
Environmental agreements	87		—
Environmental cleanup costs – Kingston ash spill	73		73
Deferred capital leases	2		2
Fuel cost adjustment receivable	—		7
Total current regulatory assets	769		543
Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	5,718		5,807
Unrealized losses on swaps and swaptions	1,220		1,164
Nuclear decommissioning costs	964		1,012
Environmental cleanup costs - Kingston ash spill	856		874
Deferred nuclear generating units	650		709
Construction costs	619		619
Non-nuclear decommissioning costs	526		519
Unrealized losses on commodity derivatives	347		221
Environmental agreements	253		346
Other non-current regulatory assets	231		234
Total non-current regulatory assets	11,384		11,505
Total regulatory assets	$	12,153	$	12,048
Current regulatory liabilities
Fuel cost adjustment tax equivalents	$	137	$	127
Unrealized gains on commodity derivatives	81		153
Fuel cost adjustment liability	79		—
Total current regulatory liabilities	297		280
Non-current regulatory liabilities
Unrealized gains on commodity derivatives	205		285
Total regulatory liabilities	$	502	$	565

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7.  Kingston Fossil Plant Ash Spill

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant ("Kingston") failed, and approximately five million cubic yards of water and coal fly ash flowed out of the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies.  TVA completed the removal of time-critical ash from the river during the third quarter of 2010, and removal of the remaining ash is considered to be non-time-critical.  TVA estimates that the physical cleanup work (final removal) will be completed in the last quarter of 2014.  A final assessment, a completion report, and approval by Tennessee and the Environmental Protection Agency ("EPA") is expected to occur by the second quarter of 2015.  Surveillance and monitoring of the site will continue, but this work is beyond the scope of the cleanup project.

Claims and Litigation

See Note 16 — Legal Proceedings Related to the Kingston Ash Spill and — Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category.  Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate.  The range of costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA recorded an estimate of $1.1 billion for the cost of cleanup related to this event.  In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill.  The cost is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009.  As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate.  TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA's balance sheets.  Amounts spent since the event through December 31, 2011, totaled $774 million.  The remaining estimated liability at December 31, 2011, was $351 million.

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the June 2010 Tennessee Department of Environment and Conservation ("TDEC") order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the U.S. Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), future lawsuits, future claims, long-term environmental impact costs, final long-term disposition of the ash processing area, costs associated with new laws and regulations, or cost of remediating any mixed waste discovered during the ash removal process.  There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the financial statements.  Associated capital asset purchases are recorded in property, plant, and equipment.  Ash handling and disposition costs from current plant operations are recorded in operating expenses.  A portion of the pond and dredge cell closure costs is also not included in the estimate as it is included in the non-nuclear Asset retirement obligation ("ARO") liability.

Insurance

TVA had property and excess liability insurance programs in place at the time of the Kingston ash spill.  TVA pursued claims under both the property and excess liability programs and has settled all of its property insurance claims and some of its excess liability insurance claims.  Through December 31, 2011, TVA received proceeds of $40 million.  TVA continues to provide information about the nature and extent of TVA's claims under the policies to the remaining excess liability insurance companies. It is unclear at this time whether the parties will be able to resolve the outstanding claims without resorting to the policies' dispute resolution procedures.  Any amounts received related to insurance settlements are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

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8.  Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities under agreements in respect of compliance with certain environmental regulations (see Note 16 — Environmental Agreements). The table below summarizes the types and amounts of liabilities:

Other Long-Term Liabilities
	At December 31, 2011		At September 30, 2011
Swaption liability	$	1,128	$	1,077
Interest rate swap liabilities	467		463
Environmental Agreements liability	254		346
Other	194		191
Coal contract derivative liabilities	155		119
Commodity swap derivative liabilities	101		78
Currency swap liabilities	89		131
Total other long-term liabilities	$	2,388	$	2,405

9.  Asset Retirement Obligations

During the three months ended December 31, 2011, TVA's total ARO liability increased $37 million due to normal accretion. The increase in the liability was partially offset by ash area settlement projects that were conducted during the three months ended December 31, 2011. The nuclear and non-nuclear accretion were deferred as regulatory assets, and $14 million of the related regulatory assets were amortized into expense since these amounts were collected in rates.

Reconciliation of Asset Retirement Obligation Liability
	Nuclear		Non-nuclear			Total
Balance at September 30, 2011	$	2,091	$	1,047		$	3,138
Settlements (ash storage areas)	—		(5		)	(5		)
Accretion (recorded as regulatory asset)	29		13			42
Change in estimate	—		—			—
Balance at December 31, 2011	$	2,120	$	1,055		$	3,175

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10.  Debt

Debt Outstanding

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time.  Debt outstanding at December 31, 2011, and September 30, 2011, including the effect of translations related to Bonds denominated in foreign currencies, consisted of the following:

Debt Outstanding
	At December 31, 2011			At September 30, 2011
Short-term debt
Discount notes (net of discount)	$	785		$	482
Current maturities of long-term debt	1,558			1,537
Total short-term debt, net	2,343			2,019
Long-term debt
Long-term outstanding power bonds	22,604			22,647
Unamortized discount, premiums and other	(235		)	(235		)
Total long-term debt, net	22,369			22,412
Total outstanding debt	$	24,712		$	24,431

Debt Securities Activity

The table below summarizes TVA’s long-term Bond activity for the period from October 1, 2011, to December 31, 2011.

	Date	Amount		Interest Rate
Redemptions/Maturities:
2009 Series A	November 2011	$	2	2.25%
2009 Series B	December 2011	1		3.77%
electronotes®	Three Months Ended December 31, 2011	16		4.82%
Total		$	19

Credit Facility Agreements. TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility.  This credit facility matures on September 30, 2012, and is expected to be renewed.  This arrangement is pursuant to the TVA Act.  TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity.  The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less.  There were no borrowings outstanding under the facility at December 31, 2011.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion.  Both the $0.5 billion and one of the $1.0 billion credit facilities mature on January 14, 2014, and the other $1.0 billion credit facility matures on May 11, 2014.  The credit facilities also accommodate the issuance of letters of credit.  The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA's senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA's senior unsecured long-term non-credit enhanced debt.  At December 31, 2011, and September 30, 2011, there were $756 million and $575 million, respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 12 — Other Derivative Instruments — Collateral.

11.  Leaseback Obligations

Prior to 2004, TVA received approximately $945 million in proceeds by entering into leaseback transactions for 24 new peaking combustion turbine units (“CTs”). TVA also received approximately $389 million in proceeds by entering into a leaseback transaction for qualified technological equipment and software (“QTE”) in 2003. Due to TVA's continuing involvement in the operation and maintenance of the leased units and equipment and its control over the distribution of power produced by the combustion turbine facilities during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At December 31, 2011 and September 30, 2011, the outstanding leaseback obligations, related to CTs and QTE,

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were $885 million.

Seven States Power Corporation ("Seven States"), through its subsidiary, Seven States Southaven, LLC ("SSSL"), exercised its option to purchase from TVA an undivided 90 percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi.  As part of interim joint-ownership arrangements, Seven States has the right at any time, and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven States's interest in the facility.  TVA will buy back Seven States's interest if long-term operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or alternative arrangements, are not in place by April 23, 2013.  TVA's buy-back obligation will terminate if such long-term arrangements are in place by that date.  In the event of a buy-back, TVA will re-acquire Seven States's interest in the facility and the related assets.  The carrying amount of the Southaven obligation on TVA's balance sheets was approximately $392 million at December 31, 2011, and $397 million at September 30, 2011. 

On August 8, 2011, a credit rating agency lowered the long-term rating of TVA's rated Bonds from AAA to AA+.  This downgrade constituted an event of default under the Amended and Restated Credit Agreement between Seven States and its lenders.  Upon the occurrence of such an event of default, Seven States's lenders may either impose a higher default interest rate on the loan or exercise an option to require TVA to re-acquire its interest in the Southaven facility and the related assets. 

On November 1, 2011, Seven States and its lenders, with the consent of TVA, executed an Amendment to the Amended and Restated Credit Agreement.  In this amendment, Seven States's lenders agreed to waive this event of default and thus waive the lenders' right to force TVA to re-acquire Seven States's interest in the Southaven facility and the related assets or to force Seven States to pay the default interest rate for this event of default.  Also, the amendment ties the interest rate on Seven States's credit facilities to TVA's credit rating.  Seven States will pay interest on the loan at either 1) LIBOR plus 62.5 basis points if TVA's corporate credit rating is AAA (or its equivalent) by all credit rating agencies, or 2) LIBOR plus 87.5 basis points if TVA's corporate credit rating is AA+ (or its equivalent) by one or more credit rating agencies and AAA (or its equivalent) by the other nationally recognized credit agencies.

Lease Ratings Downgrade

On November 29, 2011, one credit rating agency downgraded its ratings on various TVA long-term lease obligations from AA+ to AA-, and set the outlook on the ratings to stable.  The downgrades include TVA's obligations under long-term leasebacks for various generation facilities and technological equipment, and office real estate.  According to the rating agency, the downgrade reflects the application of newer criteria to the leases, rather than any TVA action, event, or change in business conditions.  At December 31, 2011 and September 30, 2011, the total balances of the leaseback obligations were $1.3 billion.

12.  Risk Management Activities and Derivative Transactions

TVA is exposed to various market risks.  These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and counterparty performance risk.  To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.  Other than certain derivative instruments in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its balance sheets at fair value.  The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (e.g., cash flow hedge).

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The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive.

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	Amount of Mark-to-Market ("MtM") Gain (Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”) Three Months Ended December 31
			2011		2010
Currency swaps	To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction	$	42	$	49

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
Derivatives in Cash Flow Hedging Relationship	Amount of Gain (Loss) Reclassified from OCI to Interest Expense Three Months Ended December 31(1)
	2011		2010
Currency swaps	$	3	$	7
Note (1)  There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.

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Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Ended December 31(1)
			2011		2010
Swaption	To protect against decreases in value of the embedded call (interest rate risk)	MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	$   —		$   —
Interest rate swaps	To fix short-term debt variable rate to a fixed rate (interest rate risk)	MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	—		—
Commodity contract derivatives	To protect against fluctuations in market prices of purchased coal or natural gas  (price risk)	MtM gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses (if any) due to contract settlements are recognized in fuel expense as incurred.	—		—
Commodity derivatives under financial trading program ("FTP")	To protect against fluctuations in market prices of purchased commodities (price risk)	MtM gains and losses are recorded as regulatory assets or liabilities.  Realized gains and losses are recognized in fuel and purchased power expense when the related commodity is used in production.	(56	)	(42	)
Notes (1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2011 and 2010.

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MARK-TO-MARKET VALUES OF TVA DERIVATIVES
	At December 31, 2011				At September 30, 2011
Derivatives that Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Currency swaps:
£200 million Sterling	$	(37	)	Other long-term liabilities	$	(44	)	Other long-term liabilities
£250 million Sterling	(2		)	Other long-term liabilities	(24		)	Other long-term liabilities
£150 million Sterling	(50		)	Other long-term liabilities	(63		)	Other long-term liabilities
Derivatives that Do Not Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Swaption:
$1.0 billion notional	$	(1,128	)	Other long-term liabilities	$	(1,077	)	Other long-term liabilities
Interest rate swaps:
$476 million notional	(450		)	Other long-term liabilities	(446		)	Other long-term liabilities
$42 million notional	(17		)	Other long-term liabilities	(17		)	Other long-term liabilities
Commodity contract derivatives	4			Other long-term assets $202; Other current assets $73; Other long-term  liabilities $(155); Accounts payable and accrued liabilities $(116)	239			Other long-term assets $285; Other current assets $150; Other long-term  liabilities $(119); Accounts payable and accrued liabilities $(77)
Derivatives under FTP:
Margin cash account(1)	60			Other current assets	34			Other current assets
Derivatives under FTP(2)	(412		)	Current regulatory assets $(230); Regulatory assets $(192); Current regulatory liabilities $7; Regulatory liabilities $3	(234		)	Current regulatory assets $(135); Regulatory assets $(102); Current regulatory liabilities $3
Note (1)  In accordance with certain credit terms, TVA uses leverage to trade financial instruments under the FTP.  Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under Financial Trading Program table. This balance also includes the $26 million currently being held by the MF Global Trustee. See Counterparty Credit Risk for details. (2)  The December 31, 2011 and September 30, 2011 balances in the Derivatives under Financial Trading Program table show all open derivative positions in the FTP.

Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred.  TVA had the following currency swaps outstanding as of December 31, 2011:

Currency Swaps Outstanding At December 31, 2011
Effective Date of Currency Swap Contract	Associated TVA Bond Issues Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA
1999	£200 million	2021	5.81%
2001	£250 million	2032	6.59%
2003	£150 million	2043	4.96%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by an exchange loss on the swap contract.  Conversely, when the dollar weakens against the British pound sterling, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract.  All such exchange gains or losses on the Bond

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liability are included in Long-term debt, net.  The offsetting exchange losses or gains on the swap contracts are recognized in Accumulated other comprehensive income (loss).  If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense.

Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate Swaps.  Prior to 2006, TVA entered into four swaption transactions to monetize the value of call provisions on certain of its Bond issues.  A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a 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 TVA has monetized.  Subsequently, the counterparties to three of the swaptions exercised their rights to enter into interest rate swaps with TVA.

TVA uses regulatory accounting treatment to defer the MtM gains and losses on these swaps and swaption and includes the gain or loss in the ratemaking formula when these transactions settle.  The values of the swaps and swaption and related deferred unrealized gains and losses are recorded on TVA's balance sheets with realized gains or losses, if any, recorded on TVA's statements of operations.  There were no realized gains or losses for the three months ended December 31, 2011 and 2010.

For the three months ended December 31, 2011 and 2010, the changes in market value resulted in deferred unrealized gains (losses) on the value of the interest rate swaps and swaption of $(55) million and $337 million, respectively.  All net deferred unrealized gains and losses are reclassified as regulatory assets or liabilities on the balance sheet.

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. At December 31, 2010, TVA determined that certain quantities under the coal contract derivatives were no longer probable of physical delivery; therefore, these contracts were no longer eligible for normal purchases and normal sales accounting.  Accordingly, TVA began marking to market all of its coal contract derivatives at December 31, 2010.  At December 31, 2011, and September 30, 2011, TVA's coal contract derivatives had net market values of $4 million and $239 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis.  At December 31, 2011, TVA's coal contract derivatives had terms of up to six years.

TVA marks to market all of its natural gas derivative contracts that require physical delivery. The total market value of these natural gas derivative contracts at December 31, 2011, and September 30, 2011, was less than $1 million. At December 31, 2011, these natural gas derivative contracts had terms of up to one month.

Commodity Contract Derivatives
	At December 31, 2011			At September 30, 2011
	Number ofContracts	Notional Amount	Fair Value (MtM)	Number of Contracts	Notional Amount	Fair Value (MtM)
Coal Contract Derivatives	20	61 million tons	$4	38	66 million tons	$239
Natural Gas Contract Derivatives	9	8 million mmBtu	$—	13	5 million mmBtu	$—

Derivatives Under FTP. TVA has a FTP under which it purchases and sells futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies. The combined transaction limit for the fuel cost adjustment and construction material transactions is $130 million (based on one-day value at risk). In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $100 million at the execution of any new transaction. The portfolio value at risk limit for the foreign currency transactions is $5 million and is separate and distinct from the $130 million transaction limit discussed above. TVA is prohibited from trading financial instruments under the FTP for speculative purposes.

At December 31, 2011, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, and coal. Futures contracts and option contracts under the FTP had remaining terms of less than one year. Swap contracts under the FTP had remaining terms of six years or less.

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Derivatives Under Financial Trading Program
	At December 31, 2011				At September 30, 2011
	Notional Amount	Fair Value (MtM) (in millions)			Notional Amount	Fair Value (MtM) (in millions)
Natural gas (in mmBtu)
Futures contracts	400,000	$	(2	)	1,300,000	$	(4	)
Swap contracts	321,707,500	(417		)	232,295,000	(223		)
Option contracts	—	(2		)	—	(1		)
Natural gas financial positions	322,107,500	$	(421	)	233,595,000	$	(228	)
Fuel oil/crude oil (in barrels)
Futures contracts	—	$	—		—	$	—
Swap contracts	1,408,000	9			1,591,000	(7		)
Option contracts	—	—			90,000	—
Fuel oil/crude oil financial positions	1,408,000	$	9		1,681,000	$	(7	)
Coal (in tons)
Futures contracts	—	$	—		—	$	—
Swap contracts	120,000	—			120,000	1
Option contracts	—	—			—	—
Coal financial positions	120,000	$	—		120,000	$	1
Note Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the broker or other counterparty. Notional amounts disclosed represent the net absolute value of contractual amounts.

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity contract. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $25 million at December 31, 2011, and $(13) million at September 30, 2011. TVA experienced the following unrealized and realized gains and losses related to the FTP during the period:

FTP Unrealized Gains (Losses)
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)	At December 31, 2011			At September 30, 2011
Natural gas	$	(421	)	$	(228	)
Fuel oil/crude oil	9			(7		)
Coal	—			1

FTP Realized Gains (Losses)
	For the Three Months Ended December 31
Decrease (increase) in fuel expense	2011		2010
Fuel oil/crude oil	$	5	$	6
Coal	—		—

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FTP Realized Gains (Losses)
	For the Three Months Ended December 31
Decrease (increase) in purchased power expense	2011			2010
Natural gas	$	(61	)	$	(48	)

Other Derivative Instruments

Investment Fund Derivatives.  Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), and Supplemental Executive Retirement Plan ("SERP").  All securities in the trusts are classified as trading.  See Note 13 — Investments for a discussion of the trusts' objectives and the types of investments included in the various trusts.  Derivative instruments in these trusts include swaps, futures, options, forwards, and other instruments.  At December 31, 2011 and September 30, 2011, the fair value of derivative instruments in these trusts was not material to TVA's financial statements.

Collateral.  TVA's interest rate swaps, its currency swaps, and its swaption contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold.  At December 31, 2011, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.7 billion.  TVA's collateral obligations at December 31, 2011, under these arrangements was $756 million, for which TVA had posted $756 million in letters of credit.  These letters of credit reduce the available balance under the related credit facility.  TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral.

For all of its derivative instruments with credit-risk related contingent features:

• If TVA remains a majority-owned U.S. government entity but Standard & Poor's (“S&P”) or Moody's Investors Service ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA would be required to post an additional $75 million of collateral in excess of its December 31, 2011, obligation; and

• If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional capital.

Counterparty Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of a counterparty's nonperformance of its contractual obligations.  Where exposed to counterparty credit risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty on an ongoing basis, and employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

On October 31, 2011, MF Global Holding Ltd. and its subsidiary MF Global Finance USA Inc. filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. On the same date, a Securities Investor Protection Act proceeding was filed against MF Global Inc. ("MF Global"). TVA had used MF Global to clear certain trades and the MF Global Trustee held $33 million of TVA's cash collateral at that time. TVA has recovered $7 million of this balance from the Trustee. TVA has filed a claim to recover the funds currently being held by the MF Global Trustee and expects to recover some or all of these funds; however, the timing and the amount of the funds' returned and the amount of any potential loss cannot be estimated at this time.

Credit of Customers.  The majority of TVA's counterparty credit risk is associated with trade accounts receivable from delivered power sales to municipal and cooperative distributor customers, all located in the Tennessee Valley region.  To a lesser extent, TVA is exposed to credit risk from industries and federal agencies directly served and from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements.  TVA had concentrations of accounts receivable from four customers that represented 27 percent of total outstanding accounts receivable at December 31, 2011. TVA had concentrations of accounts receivable from three customers that represented 26 percent of total outstanding accounts receivable at September 30, 2011. Power sales to TVA's largest directly served industrial customer represented six percent of TVA's total operating revenues for the three months ended December 31, 2011.  This customer's senior unsecured credit ratings are currently CCC- by S&P and Caa2 by Moody's.  As a result of its credit ratings, this customer has provided credit assurance to TVA under the terms of its power contract.

Credit of Derivative Counterparties.  TVA has entered into derivative contracts for hedging purposes, and TVA's NDT fund and defined benefit pension plan have entered into derivative contracts for investment purposes.  If a counterparty to one of

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TVA's hedging transactions defaults, TVA might incur substantial costs in connection with entering into a replacement hedging transaction.  If a counterparty to the derivative contracts into which the NDT fund and the pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless.  TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions.  At December 31, 2011, the swaption and all of TVA's currency swaps, interest rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody's credit rating was A2 or higher.  At December 31, 2011, all of TVA's coal contract derivatives were with counterparties whose Moody's credit rating, or TVA's internal analysis when such information was unavailable, was Caa1 or higher.

Credit of Suppliers.  If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract.  In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power.  To help ensure a reliable supply of coal, TVA had coal contracts with 11 different suppliers at December 31, 2011.  The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck).  TVA purchases all of its natural gas requirements from a variety of suppliers under short-term contracts.

TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant.  The supplier's senior secured credit ratings are currently CCC- by S&P and Caa1 by Moody's.  As a result of its credit ratings, the supplier has provided credit assurance to TVA under the terms of its agreement.  

The senior unsecured credit ratings of TVA's largest supplier of uranium enrichment services, which is also TVA's largest industrial customer directly served, are currently CCC- by S&P and Caa2 by Moody's.  Any nonperformance by this company could result in TVA incurring additional costs.

13.  Fair Value Measurements

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:

Level 1	—	Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
Level 2	—	Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability.  These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
Level 3	—	Pricing inputs that are unobservable, or less observable, from objective sources.  Unobservable inputs are only to be used to the extent observable inputs are not available.  These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants.  An entity should consider all market participant assumptions that are available without unreasonable cost and effort.  These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

A financial instrument's level within the fair value hierarchy (where Level 3 is the lowest and Level 1 is the highest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP assets, all changes in fair value of these assets and liabilities have been reflected as changes in regulatory assets, regulatory liabilities, or accumulated other comprehensive loss on TVA's Balance Sheet as of December 31, 2011, and Statements of Changes in Proprietary Capital for the three months ended December 31,

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2011. Except for gains and losses on SERP assets, there has been no impact to the Statements of Operations or the Statements of Cash Flows related to these fair value measurements.

Investments

At December 31, 2011, investment funds were composed of $1.3 billion of securities classified as trading and measured at fair value and $2 million of equity investments not required to be measured at fair value. Trading securities are held in the NDT, ART, and SERP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds for the costs related to the future closure and retirement of TVA's long-lived assets. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by Internal Revenue Service (“IRS”) rules applicable to the qualified defined benefit pension plan. The NDT, ART and SERP are invested in securities generally designed to achieve a return in line with overall equity market performance.

The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers. Most U.S. and international equities, Treasury inflation-protected securities, real estate investment trust (“REIT”) securities, and cash securities, and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.

Private partnership investments may include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations. Investments in private partnerships generally involve a three to four year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, a ten-year or longer investment commitment. The NDT had unfunded commitments related to private partnerships of $72 million at December 31, 2011. These investments have no redemption or limited redemption options and may also have imposed restrictions on the NDT's ability to liquidate its investment interest.  The private partnerships and other similar alternative investments are reported at fair value which is derived by independent appraisals or judgment of the general partners of each such investment. The inputs used in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments of comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows of the limited partnerships. The fair value of these investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from the value ultimately realized from the private partnership investments. TVA classifies its interest in these types of investment as Level 3 within the fair value hierarchy. 

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART and SERP consist of a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded (Level 1) or measured using observable inputs for similar instruments (Level 2). The fair value of commingled funds is based on net asset values (“NAV”) per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be liquidated at the measurement date NAV price and are classified as Level 2 valuations. Required notification periods range from zero to 30 days. The funds can be redeemed unless doing so would violate regulations to which the fund is subject, would be unreasonable or impracticable, or would be seriously prejudicial to the fund.

Realized and unrealized gains and losses on trading securities are recognized in current earnings and are based on average cost. The SERP had unrealized gains of $1 million and $2 million for the three months ended December 31, 2011, and December 31, 2010, respectively. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory liability or asset account in accordance with TVA's regulatory accounting policy. The NDT had unrealized gains of $58 million and $23 million for the three months ended December 31, 2011 and 2010, respectively, and the ART had unrealized gains of $9 million and less than $1 million for the three months ended December 31, 2011 and 2010, respectively.

Currency Swaps, Swaption, and Interest Rate Swaps

See Note 12 — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps, swaption, and interest rate swaps.

The currency swaps and interest rate swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments. The swaption is classified as a Level 3 valuation and is valued based on an income approach. The valuation is computed using a broker-provided pricing model utilizing interest and volatility rates. While most of the fair value measurement is based on observable inputs, volatility for TVA's swaption is generally unobservable. Therefore, the valuation is derived from an observable volatility measure with adjustments.

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Commodity Contract Derivatives and Commodity Derivatives under FTP

Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches. TVA develops an overall coal price forecast using widely-used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs.

Commodity Derivatives Under FTP. These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange (“CME”) quoted prices and other observable inputs. Futures and options contracts settled on the CME are classified as Level 1 valuations. Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.

See Note 12 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and Derivatives Under FTP for a discussion of the nature and purpose of coal contracts and derivatives under TVA's FTP.

Nonperformance Risk

The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, a swaption, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a Credit valuation adjustment (“CVA”). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2010) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in an $85 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at December 31, 2011.

The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2011, and September 30, 2011. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.

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Fair Value Measurements At December 31, 2011
Assets	Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Investments
Equity securities	$	94	$	—	$	—	$	—		$	94
Debt securities
U.S. government corporations and agencies	107		101		—		—			208
Corporate debt securities	—		155		—		—			155
Residential mortgage-backed securities	—		16		—		—			16
Commercial mortgage-backed securities	—		3		—		—			3
Collateralized debt obligations	—		3		—		—			3
Private partnerships	—		—		28		—			28
Commingled funds(2)										—
Equity security commingled funds	—		543		—		—			543
Debt security commingled funds	—		204		—		—			204
Foreign currency commingled funds	—		—		—		—			—
Other commingled funds	—		—		—		—			—
Total investments	201		1,025		28		—			1,254
Commodity contract derivatives	—		—		275		—			275
Commodity derivatives under FTP
Swap contracts	—		149		—		(139		)	10
Total commodity derivatives under FTP	—		149		—		(139		)	10
Total	$	201	$	1,174	$	303	$	(139	)	$	1,539
Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Currency swaps	$	—	$	89	$	—	$	—		$	89
Interest rate swaps	—		467		—		—			467
Swaption	—		—		1,128		—			1,128
Commodity contract derivatives	—		—		271		—			271
Commodity derivatives under FTP
Futures contracts	2		—		—		—			2
Swap contracts	—		557		—		(139		)	418
Option contracts	2		—		—		—			2
Total commodity derivatives under FTP	4		557		—		(139		)	422
Total	$	4	$	1,113	$	1,399	$	(139	)	$	2,377
Notes (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

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Fair Value Measurements At September 30, 2011
Assets	Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Investments
Equity securities	$	73	$	—	$	—	$	—		$	73
Debt securities
U.S. government corporations and agencies	117		79		—		—			196
Corporate debt securities	—		164		—		—			164
Residential mortgage-backed securities	—		17		—		—			17
Commercial mortgage-backed securities	—		3		—		—			3
Collateralized debt obligations	—		3		—		—			3
Private partnerships	—		—		22		—			22
Commingled funds(2)
Equity security commingled funds	—		467		—		—			467
Debt security commingled funds	—		221		—		—			221
Foreign currency commingled funds	—		—		—		—			—
Other commingled funds	—		—		—		—			—
Total investments	190		954		22		—			1,166
Commodity contract derivatives	—		—		436		—			436
Commodity derivatives under FTP
Swap contracts	—		15		—		(14		)	1
Total commodity derivatives under FTP	—		15		—		(14		)	1
Total	$	190	$	969	$	458	$	(14	)	$	1,603
Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Currency swaps	$	—	$	131	$	—	$	—		$	131
Interest rate swaps	—		463		—		—			463
Swaption	—		—		1,077		—			1,077
Commodity contract derivatives	—		—		197		—			197
Commodity derivatives under FTP
Futures contracts	4		—		—		—			4
Swap contracts	—		244		—		(14		)	230
Option contracts	1		—		—		—			1
Total commodity derivatives under FTP	5		244		—		(14		)	235
Total	$	5	$	838	$	1,274	$	(14	)	$	2,103
Notes (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

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The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair Value Measurements Using Significant Unobservable Inputs For the Three Months Ended December 31
	Private Partnerships			Commodity Contract Derivatives			Swaption
Balances at September 30, 2010	$	13		$	103		$	(804	)
Purchases	4			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Total gains or losses (realized or unrealized)
Net unrealized gains (losses) deferred as regulatory assets and liabilities	2			(109		)	221
Balances at December 31, 2010	$	19		$	(6	)	$	(583	)
Balances at September 30, 2011	$	22		$	239		$	(1,077	)
Purchases	6			—			—
Issuances	—			—			—
Sales	(1		)	—			—
Settlements	—			—			—
Total gains or losses (realized or unrealized)
Net unrealized gains (losses) deferred as regulatory assets and liabilities	1			(235		)	(51		)
Balances at December 31, 2011	$	28		$	4		$	(1,128	)

There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected net income during the three months ended December 31, 2011. All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 6.

Other Financial Instruments Not Recorded at Fair Value

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument. The fair market value of the financial instruments held at December 31, 2011, and September 30, 2011, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at December 31, 2011, and September 30, 2011, were as follows:

Estimated Values of Financial Instruments
	At December 31, 2011				At September 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Loans and other long-term receivables, net	$	76	$	70	$	74	$	68
Long-term debt (including current portion), net	23,927		28,931		23,949		29,190

Because of the short-term maturity of cash and cash equivalents, restricted cash and investments, and short-term debt, net, the carrying amounts of these instruments approximate their fair values.

Fair value of long-term debt traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date.

Fair values for loans and other long-term receivables are estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable.

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14.  Other Income (Expense), Net

Income and expenses not related to TVA’s operating activities are summarized in the following table:

Other Income (Expense), Net
	For the Three Months Ended December 31
	2011		2010
External services	$	4	$	5
Interest income	2		2
Gains (losses) on investments	1		2
Miscellaneous	2		2
Total other income (expense), net	$	9	$	11

15.  Benefit Plans

TVA sponsors a qualified defined benefit pension plan that covers most of its full-time employees, a qualified defined contribution plan that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of certain retirees' medical coverage, other postemployment benefits such as workers' compensation, and the SERP.

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three months ended December 31, 2011 and 2010 were as follows:

Components of TVA’s Benefit Plans
	For the Three Months Ended December 31
	Pension Benefits						Other Post-retirement Benefits
	2011			2010			2011			2010
Service cost	$	35		$	30		$	5		$	3
Interest cost	122			125			9			8
Expected return on plan assets	(109		)	(122		)	—			—
Amortization of prior service cost	(6		)	(6		)	(2		)	(1		)
Recognized net actuarial loss	90			71			7			5
Net periodic benefit cost as actuarially determined	132			98			19			15
Amount charged (capitalized) due to actions of regulator	—			3			—			—
Total net periodic benefit cost recognized	$	132		$	101		$	19		$	15

During the three months ended December 31, 2011, TVA did not make contributions to its qualified defined benefit pension plan. TVA does not separately set aside assets to fund other benefit costs, but rather funds such costs on an as-paid basis. TVA provided approximately $13 million and $12 million for other benefit costs during the three months ended December 31, 2011 and 2010, respectively. Net amounts capitalized due to actions of regulators include amounts that have been deemed probable of recovery in future rates.

16.  Legal Proceedings

From time to time, TVA is a party to lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.  

General. TVA had accrued approximately $386 million of potential losses with respect to Legal Proceedings through December 31, 2011.  Of this amount, $254 million is included in Other long-term liabilities, $122 million is included in Accounts payable and accrued liabilities, and $10 million is included in Regulatory assets.  No assurance can be given that TVA will not be subject to significant additional claims and liabilities.  If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.

Environmental Agreements. In 2011, TVA entered into two substantively similar agreements with EPA and with

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Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation (collectively, the "Environmental Agreements”). They became effective on June 13, 2011.

The liabilities related to the Environmental Agreements are included in Other long-term liabilities on the December 31, 2011 Balance Sheet. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record the amounts detailed above as regulatory assets, and they are included as such on the December 31, 2011 Balance Sheet and will be recovered in rates in future periods.

    Several legal and administrative clean air proceedings have already been terminated in connection with the Environmental Agreements. Additionally, the proceedings discussed below involving the John Sevier Fossil Plant ("John Sevier")and Shawnee Fossil Plant (“Shawnee”) Clean Air Act ("CAA") permits are expected to be narrowed in scope.

Legal Proceedings Related to the Kingston Ash Spill. Seventy-eight lawsuits based on the Kingston ash spill have been filed in the United States District Court for the Eastern District of Tennessee. Fifteen of these lawsuits have been dismissed, and 63 lawsuits are active and in various stages of litigation. Plaintiffs are residents, businesses, and property owners in the Kingston area and allege tort claims for damage to property, e.g. nuisance, strict liability, trespass, and negligence, with some plaintiffs also alleging claims for personal injury, business loss, and inverse condemnation. Plaintiffs seek unspecified compensatory and punitive damages, court orders to clean up properties and other relief. TVA is the only active defendant in these actions.

A bench trial on the issue of dike failure causation in the seven earliest cases was held in September and October, 2011 (“Phase I trial”), and a decision on the dike failure causation issues is expected in the spring or summer of 2012. The district court also approved stipulations in 53 of the remaining 56 cases in which plaintiffs and TVA agreed to adopt the Phase I trial record and be bound by the Court’s Phase I trial decision and a temporary stay of proceedings pending the court’s trial decision.

TVA has received several notices of intent to sue under various environmental statutes from both individuals and environmental groups, but no such suits have been filed.

Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.  On June 14, 2010, the TDEC issued a civil penalty order of approximately $12 million to TVA for the Kingston ash spill, citing violations of the Tennessee Solid Waste Disposal Act and the Tennessee Water Quality Control Act.  Of the $12 million, TVA has already satisfied $8 million, and TDEC has approved environmental projects valued at $2 million as a credit against the penalty amount. The remaining $2 million obligation will be paid in a final installment due on or before July 15, 2012. On January 24, 2011, TVA entered into a memorandum of agreement with the TDEC and the U.S. Fish and Wildlife Service establishing a process and a method for resolving the natural resource damage claim associated with the Kingston ash spill.  As part of this memorandum of agreement, TVA agreed to pay $250 thousand each year for three years as a down payment on the amount of natural resource damages ultimately established.  TVA is also required to reimburse TDEC and the U.S. Fish and Wildlife Service for their costs.

Case Involving Tennessee Valley Authority Retirement System.  On March 5, 2010, eight current and former participants in and beneficiaries of Tennessee Valley Authority Retirement System ("TVARS") filed suit in the United States District Court for the Middle District of Tennessee against the six then-current members of the TVARS Board of Directors ("TVARS Board").  The lawsuit challenged the TVARS Board's decision to suspend the TVA contribution requirements for 2010 through 2013, and to amend the TVARS Rules and Regulations to (1) reduce the calculation for cost of living adjustment ("COLA") benefits for CY 2010 through CY 2013, (2) reduce the interest crediting rate for the fixed fund accounts, and (3) increase the eligibility age to receive COLAs from age 55 to 60.  The plaintiffs allege that these actions violated the TVARS Board members' fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs' contractual rights, among other claims.  The plaintiffs sought, among other things, unspecified damages, an order directing the TVARS Board to rescind the amendments, and the appointment of a seventh TVARS Board member.  Five of the six individual defendants filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint.  On July 28, 2010, TVA moved to intervene in the suit in the event it was not dismissed.  On September 7, 2010, the district court dismissed the breach of fiduciary duty claim against the directors without prejudice, allowing the plaintiffs to file an amended complaint within 14 days against TVARS and TVA but not the individual directors.  The plaintiffs previously had voluntarily withdrawn their constitutional claims, so the court also dismissed those claims without prejudice.  The court dismissed with prejudice the plaintiffs' claims for breach of contract, violation of the Internal Revenue Code, and appointment of a seventh TVARS Board member. 

On September 21, 2010, the plaintiffs filed an amended complaint against TVARS and TVA.  The plaintiffs allege, among other things, violations of their constitutional rights (due process, equal protection, and property rights), violations of the Administrative Procedure Act, and breach of statutory duties owed to the plaintiffs.  They seek a declaratory judgment and appropriate relief for the alleged statutory and constitutional violations and breaches of duty.  TVA filed its answer to the amended complaint on December 27, 2010.  A briefing schedule has been issued and final dispositive motions are due on October 12, 2012.

Case Arising out of Hurricane Katrina.  In April 2006, TVA was added as a defendant to a class action lawsuit brought in

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the United States District Court for the Southern District of Mississippi by 14 Mississippi residents allegedly injured by Hurricane Katrina.  The plaintiffs sued seven large oil companies and an oil company trade association, three large chemical companies and a chemical trade association, and 31 large companies involved in the mining and/or burning of coal, alleging that the defendants' greenhouse gas ("GHG") emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina's increased destructive force.  Action by the United States Supreme Court on January 10, 2011, ended this case in a manner favorable to TVA.

On May 27, 2011, under a Mississippi state statute that permits the re-filing of lawsuits that were dismissed on procedural grounds, the plaintiffs filed another lawsuit against the same and additional defendants, again alleging that the defendants' GHG emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina' s increased destructive force. A number of defendants, including TVA, have filed motions to dismiss the complaint.

Global Warming Cases, Southern District of New York.  On July 21, 2004, two lawsuits were filed in the United States District Court for the Southern District of New York against TVA and other companies that generate power from fossil-fuel electric generating facilities. The plaintiffs alleged that carbon dioxide ("CO₂") emissions from such facilities should be ordered abated because they contributed to global warming.   In September 2005, the district court dismissed both lawsuits because they raised political questions that should not be decided by the courts.  Following appellate proceedings, the United States Supreme Court issued a decision on June 16, 2011, that any federal common law cause of action was displaced by the CAA and its implementing regulations. The Supreme Court did not address the plaintiffs' state law claims, but instead remanded the case. The district court entered orders on December 5, 2011, dismissing the federal common law claims in both lawsuits. On December 6, 2011, the plaintiffs voluntarily dismissed the state law claims, ending the lawsuits in a manner favorable to TVA.

Case Regarding Bellefonte Nuclear Plant Units 1 and 2.  On March 9, 2009, in response to a request by TVA, the Nuclear Regulatory Commission ("NRC") issued an order reinstating the construction permits for Bellefonte Nuclear Plant ("Bellefonte").  On March 30, 2009, Blue Ridge Environmental Defense League (“BREDL”) filed a petition in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) challenging the NRC's authority to reinstate the construction permits and alleging that the NRC failed to follow the requirements of the National Environmental Policy Act (“NEPA”).  TVA was permitted to intervene in this proceeding.  On June 11, 2009, the D.C. Circuit issued an order holding the case in abeyance pending further order of the court.  On March 8, 2010, BREDL filed a second petition in the D.C. Circuit, again challenging the NRC's compliance with NEPA and the NRC's authority to reinstate the construction permits.  TVA was granted intervenor status in this case as well, and requested that the court dismiss this second petition.  On July 26, 2010, the D.C. Circuit consolidated the two BREDL petitions and continued the stay of the case pending the conclusion of an administrative proceeding concerning the same issues.  The administrative proceeding, in which BREDL challenged the reinstatement of the construction permits before an NRC Atomic Safety and Licensing Board (“ASLB”), was completed on September 29, 2010, with the dismissal of all contentions.  Upon completion of the administrative proceeding, the D.C. Circuit on November 5, 2010, issued an order returning the two cases to the court's active docket.  Final briefs have been submitted, and oral arguments took place on October 20, 2011.

Administrative Proceedings Regarding Bellefonte Units 3 and 4.  TVA submitted its combined construction and operating license application ("CCOLA") for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to the NRC in October 2007.  On June 6, 2008, Bellefonte Efficiency and Sustainability Team (“BEST”), BREDL, and Southern Alliance for Clean Energy (“SACE”) submitted to the NRC a joint petition for intervention and a request for a hearing.  The petition raised 20 potential contentions with respect to TVA's CCOLA.  The ASLB denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE.  The NRC later reversed the ASLB's decision to admit two of the four contentions, leaving only two contentions (which involve questions about the estimated costs of the new nuclear plant and the impact of the facility's operations, in particular the plant intake, on aquatic ecology) to be litigated in a future hearing.  On September 29, 2010, TVA notified the NRC that the recently completed final Supplemental Environmental Impact Statement had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site.  Consequently, TVA has requested, and the NRC has agreed, to place the CCOLA in “suspended” status indefinitely. On January 6, 2012, TVA also notified the ASLB of the suspended status of the CCOLA, and requested that the ASLB hold the proceeding in abeyance pending a decision by TVA regarding the best path forward with regards to the CCOLA. TVA expects to continue to request that the proceeding be held in abeyance until the risks of completing Bellefonte Unit 1 are substantially understood and construction is resumed.

On August 11, 2011, BREDL and SACE petitioned for the admission of a new, late-filed contention to require the environmental analysis completed for the CCOLA to consider the findings of the NRC's Near-Term Task Force on the Fukushima Event regarding the events at the Fukushima Daiichi Nuclear Power Plant ("Fukushima Daiichi").  On November 30, 2011, the ASLB, after considering the submissions of the parties, determined that the proposed contention failed to meet the standards for admission of a new contention in the proceeding.

Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2.  On July 13, 2009, SACE, the Tennessee Environmental Council, the Sierra Club, We the People, and BREDL filed a request for a hearing and petition to intervene in the NRC administrative process reviewing TVA's application for an operating license for Watts Bar Nuclear Plant ("Watts Bar") Unit 2.  The petitioners raised seven contentions related to TVA's environmental review of the project and the NRC's basis for confidence in the availability of safe storage options for spent nuclear fuel.  On November 19, 2009, the ASLB granted SACE's

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request for hearing, admitted two of SACE's seven contentions for hearing, and denied the request for hearing submitted on behalf of the other four petitioners.  On March 26, 2010, the NRC affirmed the ASLB's decision denying the other petitioners the opportunity to participate.  After providing additional information to the NRC on April 9, 2010, which addressed one of the two admitted contentions, TVA submitted a motion asking the ASLB to dismiss the contention as moot.  The motion was unopposed by SACE and on June 2, 2010, the ASLB granted TVA's motion to dismiss the contention.  SACE also asked the ASLB to waive the NRC's longstanding regulations establishing that, for the purposes of NEPA, the need for power and alternative energy source issues will not be considered in operating license proceedings.  On June 29, 2010, the ASLB denied this request and declined to refer the waiver petition to the NRC for consideration.  SACE subsequently filed a petition for interlocutory review of this decision with the NRC, which the NRC denied on November 30, 2010.  Regarding the sole remaining contention which raises concerns about the aquatic impacts of two-unit operation, several additional reports have been provided to the NRC providing up-to-date information to address this contention.  These reports include a mussel survey report and an entrainment report, both issued on March 24, 2011, and an impingement report issued on March 29, 2011.  A supplement to the impingement report was submitted on April 28, 2011.  A hearing on the remaining contention is expected to take place in the latter part of 2012.  On August 11, 2011, SACE petitioned for the admission of a new, late-filed contention to require the environmental analysis completed for TVA's operating license application to consider the findings of the NRC's Near-Term Task Force on the Fukushima Event regarding the events at the Fukushima Daiichi reactors.  TVA submitted a reply brief on September 6, 2011, opposing admission of such a contention on the grounds it does not satisfy the standards for non-timely contentions or the standards for admitting a new contention. On November 21, 2011, TVA filed a motion for summary disposition, arguing that additional aquatic studies conducted by TVA meant there is no longer a genuine issue of material fact. SACE and the NRC staff filed their answers to the motion on December 20, 2011; SACE opposed TVA's motion while the NRC staff supported it.

John Sevier CAA Permit.  On September 20, 2010, the Environmental Integrity Project, the Southern Environmental Law Center, and the Tennessee Environmental Council filed a petition with the EPA, requesting that the EPA Administrator object to the CAA permit issued to TVA for operation of John Sevier.  Among other things, the petitioners allege that repair, maintenance, or replacement activities undertaken at John Sevier Unit 3 in 1986 triggered the Prevention of Significant Deterioration (“PSD”) requirements for sulfer dioxide ("SO₂") and nitrogen oxides ("NO_x").  The CAA permit, issued by TDEC, remains in effect pending the disposition of the EPA's petition.  The Environmental Agreements should narrow the scope of this proceeding. See Environmental Agreements.

Shawnee CAA Permit.  On December 16, 2010, the Environmental Integrity Project and the SACE filed a petition with the EPA requesting that the EPA Administrator object to the proposed CAA renewal permit issued to TVA for operations at Shawnee.  Among other things, the petitioners allege that repair, maintenance, or replacement undertaken at Shawnee Units 1 and 4 in the 1989-90 period triggered the PSD requirements for SO₂ and NO_x.  The current permit remains in effect pending Kentucky Division for Air Quality finalization of the renewal permit.  The Environmental Agreements should narrow the scope of this proceeding.  See Environmental Agreements.

Kingston NPDES Permit Appeal.  The Sierra Club filed a challenge to the National Pollutant Discharge Elimination System (“NPDES”) permit issued by Tennessee for the scrubber-gypsum pond discharge at Kingston in November 2009 before the Tennessee Water Quality Control Board (“TWQCB”).  This is the second such challenge nationally.  In addition to its allegation that Tennessee violated the Clean Water Act by failing to set specific limits on certain toxic discharges, the Sierra Club alleges that no discharges from the pond infrastructure should be allowed because zero-discharge scrubbers exist.  TDEC is the defendant in the challenge, and TVA has intervened in support of TDEC's decision to issue the permit.  The matter was set for a hearing before the TWQCB in February 2011 but has since been stayed by agreement of the parties.  The other similar challenge involves an Allegheny Power NPDES permit for its scrubber discharge at a Pennsylvania plant.

Bull Run NDPES Permit Appeal.  SACE and the Tennessee Clean Water Network (“TCWN”) filed a challenge to the NPDES permit for Bull Run on November 1, 2010.  TDEC is the defendant in the challenge and TVA's petition to intervene to support TDEC's decision to issue the permit was granted on January 12, 2011.  The matter is expected to go to a hearing before the TWQCB in the spring of 2012.

Johnsonville Fossil Plant NDPES Permit Appeal.  SACE and TCWN filed a challenge to the NPDES permit for Johnsonville Fossil Plant ("Johnsonville") on or about March 10, 2011.  TDEC is the defendant in the challenge.  TVA's motion to intervene was granted on August 3, 2011. The matter has not yet been given a hearing date before the TWQCB.

John Sevier Fossil Plant NDPES Permit Appeal.  SACE and TCWN filed a challenge to the NPDES permit for John Sevier on or about May 31, 2011.  TDEC is the defendant in the challenge.  TVA's motion to intervene was granted on August 3, 2011. The matter has not yet been given a hearing date before the TWQCB.

Information Request from the EPA.  On April 25, 2008, TVA received a request from the EPA under Section 114 of the CAA requesting extensive information about maintenance, repair, and replacement projects at and the operations of 14 coal-fired units. The Environmental Agreements have resolved most issues related to this information request, excluding claims related to sulfuric acid mist.  See Environmental Agreements.

Petitions Resulting from Japanese Nuclear Events. As a result of the March 11, 2011 Japanese nuclear events, petitions have been filed with the NRC which could impact TVA's nuclear program. While some petitions have been dismissed

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after review, petitions that remain open include the following:

• Petition to Immediately Suspend the Operating Licenses of GE BWR Mark I Units Pending the Full NRC Review With Independent Expert and Public Participation From Affected Emergency Planning Zone Communities

Beyond Nuclear filed a petition on April 13, 2011, requesting that the NRC take emergency enforcement action against all nuclear reactor licensees that operate units that use the General Electric Mark I BWR design. TVA uses this design at Browns Ferry Nuclear Plant ("Browns Ferry") Units 1, 2, and 3. The petition requests the NRC to take several actions, including the suspension of the operating licenses at the affected nuclear units, including Browns Ferry, until several milestones have been met. On December 13, 2011, the NRC provided its initial response to the petition. The NRC accepted five specific requests that would apply directly or indirectly to TVA's Browns Ferry, including issues relating to spent fuel pool use and location, Mark I containment hardened vent systems and design, and backup electrical power. Each of these items was accepted for further investigation, but the requests for immediate action were rejected.

• Twelve separate petitions on various issues

On July 27, 2011, the Natural Resources Defense Council submitted twelve separate letters to the NRC requesting action on various health and safety aspects of operating nuclear facilities in the United States. The NRC is treating these as a single 2.206 Petition, and the issues are currently under review.

• Petition Pursuant to 10 CFR 2.206 - Demand For Information Regarding Compliance with 10 CFR 50, Appendix A, General Design Criterion 44, Cooling Water, and 10 CFR 50.49, Environmental Qualification

A petition was filed by the Union of Concerned Scientists on July 29, 2011, requesting that a demand for information be issued for affected licensees, including TVA with regards to Browns Ferry, to describe how the facility complies with General Design Criterion 44, Cooling Water, within Appendix A to 10 CFR Part 50, and with 10 CFR 50.49, Environmental Qualification of Electric Equipment Important to Safety for Nuclear Power Plants, for all applicable design and licensing bases events. This petition is under review.

17.  Subsequent Events

Bond Redemption

On January 15, 2012, TVA redeemed all of its 2008 4.75 percent electronotes ® due January 15, 2028, CUSIP number 88059TEE7.  The notes were redeemed at 100 percent of par value for a total of $39 million. 

John Sevier Combined Cycle Transaction

On January 17, 2012, TVA entered into a $1.0 billion leasing transaction with John Sevier Combined Cycle Generation LLC (“JSCCG”), a newly formed entity. In connection with this transaction, TVA and the United States of America agreed to lease the John Sevier Combined Cycle Facility (“John Sevier CCF”) located in Hawkins County, Tennessee, to JSCCG for a term of fifty years (the “Head Lease”). TVA also entered into a construction management agreement (“CMA”) with JSCCG under which TVA is obligated to use commercially reasonable efforts to cause the John Sevier CCF to achieve substantial completion by January 14, 2013, or as soon thereafter as commercially practicable. On January 17, 2012, JSCCG raised $1.0 billion through a secured note issuance and an equity investment and, in accordance with the terms of the Head Lease and CMA, paid approximately $970 million to TVA on January 17, 2012. In addition, JSCCG deposited approximately $30 million with a lease indenture trustee to fund JSCCG's first debt service payment and payment of return on equity investment from January 17, 2012 through the first debt service payment date. TVA intends to use the proceeds from the transaction for the benefit of its power program. TVA continues to expect the John Sevier CCF to commence commercial operations by June 2012.

Also on January 17, 2012, TVA and JSCCG entered into an agreement under which TVA will lease the John Sevier CCF from JSCCG (the “Facility Lease”) through January 15, 2042. In accordance with the Facility Lease, TVA will make rental payments to JSCCG on each January 15 and July 15, commencing on July 15, 2012 and ending on January 15, 2042. The rental payments are equal to JSCCG's semi-annual debt service payments and payments of return on equity and return of equity to the equity investor and range from approximately $30 million to approximately $44 million. Throughout the term of the Facility Lease, TVA will operate and maintain (and improve to the extent required by applicable law) John Sevier CCF and will take all power generated by the facility. As long as all payments are made as prescribed by the Facility Lease and there is no significant lease event of default with respect to which JSCCG has exercised dispossessory remedies, the Head Lease will expire on January 17, 2042 and TVA will own John Sevier CCF at no additional cost to TVA. Certain agreements related to this transaction contain default and acceleration provisions.

JSCCG is a special single purpose limited liability company formed to finance the John Sevier CCF through a $900 million secured note issuance and a $100 million equity investment, both of which are secured by TVA's rental payments. The secured notes bear interest at a rate of 4.626 percent and mature on January 15, 2042. Due to its participation in the design,

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business conduct and financial support of JSCCG, TVA is deemed to have a variable interest in JSCCG. Accordingly,TVA has made a qualitative evaluation of which interest holders have the power to direct the activities that most significantly impact the economic performance of JSCCG and have the obligation to absorb losses or receive benefits that could be significant to JSCCG. Based on its analysis, TVA has determined for accounting purposes that it is the primary beneficiary of JSCCG and, as such, is required to account for the variable interest entity on a consolidated basis.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions except where noted)

Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) explains the results of operations and general financial condition of Tennessee Valley Authority ("TVA"). The MD&A should be read in conjunction with the accompanying financial statements and TVA's Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (the “Annual Report”).

Executive Overview

Sales for the first quarter of 2012 were lower than expected. During the three month period ended December 31, 2011, TVA had a five percent decrease in sales of electricity as compared to the same period of the prior year.  Milder weather as compared to the abnormally cold weather for the same period of the prior year was responsible for a six percent decrease in sales of electricity to TVA's municipalities and cooperatives. Customers of municipalities and cooperatives are primarily residential customers whose usage of electricity is typically more temperature sensitive than that of industrial customers.

TVA projected revenue to be $12.1 billion in 2012, which included the estimated impact of fuel cost recovery. TVA has revised its 2012 sales forecast downward by two percent. The lower than expected sales and resulting lower revenue, exclusive of fuel and purchased power cost recovery, is causing TVA to revisit expenditures for 2012 which may include project scope and schedule revisions related to operations, revisions of certain programs and initiatives and other productivity enhancement initiatives.

TVA had a net loss for the three months ended December 31, 2011, of $173 million as compared to a net loss of $48 million for the three months ended December 31, 2010. The $125 million increase in net loss was primarily due to lower revenues of $260 million and was partially offset by lower expenses of $127 million. A decrease in revenue of $102 million from the recovery of fuel costs from customers was directly related to lower fuel and purchased power costs. Lower sales volume resulted in a further decrease of $100 million due to slightly warmer than normal temperatures during the first quarter of 2012 as compared with temperatures which were well below normal for the same period in 2011. The new wholesale base rates implemented in April 2011, accounted for the remaining decrease in revenue of $58 million.

The purpose of the new wholesale rate design implemented in April 2011 was to better align rates with costs.  TVA's costs tend to be higher in the summer than in the spring and fall. As such, TVA designed wholesale rates to better reflect those cost relationships.  TVA expected the new wholesale structure would produce lower base revenue in the spring and fall due to the new seasonal and time of use wholesale rates.  Similarly, TVA anticipated the new wholesale structure would produce higher base revenue in summer.  Seasonal differences in the weather impact TVA's base revenue under both wholesale structures. Under the new wholesale structure, weather can positively and negatively impact both volume and average rates while under the former wholesale structure only volume was impacted. The milder weather in the first quarter of 2012, relative to the abnormally colder weather in the first quarter of 2011, produced lower maximum load requirements which resulted in lower base revenue for the first quarter of 2012 relative to the first quarter of 2011.

Lower demand for electricity affected generation of energy which was two percent lower for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010. Higher-cost coal-fired generation was 29 percent lower primarily due to outages and economic dispatch of units as demand was met by units using lower-cost fuels and/or lower-cost purchased power. Generation from nuclear units increased 18 percent, generation from natural gas-fired combined cycle units increased 71 percent, and hydroelectric generation, comprised of conventional hydroelectric and pumped storage, increased 31 percent for the three months ended December 31, 2011, as compared to the three-months ended December 31, 2010. Hydroelectric generation was 111 percent of normal and 15 percent above plan.  This was primarily due to a 41 percent increase in rainfall, a 120 percent increase in runoff within the Tennessee River Basin between those same periods, and the need to release water to maintain flood storage levels.This generation mix resulted in fuel costs being $98 million, or 13 percent, lower for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010, and purchased power cost being $41 million, or 11 percent, lower for the same period.

2012 Challenges and Key Initiatives

Generation Resources

John Sevier Combined Cycle Facility. TVA is in the process of completing the John Sevier Combined Cycle Facility (“John Sevier CCF”) in northeastern Tennessee. John Sevier CCF was connected to the TVA electrical grid for the first time on December 17, 2011. This event marked the beginning of the startup testing for the project and is the transition of the project from full construction to pre-commercial testing. John Sevier CCF is currently scheduled to begin commercial operations in June 2012. See Note 17 — John Sevier Combined Cycle Transaction.

Kingston Fossil Plant. Under environmental agreements reached with the Environmental Protection Agency (“EPA”) and others in 2011, TVA was generally not allowed to operate Kingston Fossil Plant (“Kingston”) after September 20, 2011, without scrubbers in operation, and scrubbers could not be operated unless TVA had the ability to store the gypsum the

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scrubbers produced. Accordingly, TVA stopped operating Kingston on September 19, 2011, until work could be completed on the first phase of a new synthetic-lined gypsum storage facility which it completed on October 21, 2011. Approval to place the facility back in operation was received from the Tennessee Department of Environment and Conservation on November 16, 2011. On November 27, 2011, the first Kingston units were returned to service and on December 17, 2011, all units were available for dispatch. The Kingston units are currently not on-line as they are in not in demand status due to low load demand. See Note 16 — Environmental Agreements.

Watts Bar Nuclear Plant Unit 2. The Watts Bar Nuclear Plant (“Watts Bar”) Unit 2 project is experiencing challenges with schedule and costs. Lower productivity has slowed the pace of construction and it is anticipated that regulatory considerations resulting from the Nuclear Regulatory Commission's ("NRC") Near-Term Task Force on the Fukushima event, as well as other causes, will result in additional costs being incurred.  The project’s schedule and cost estimates are currently under assessment and will be revised. The revised completion date for Watts Bar Unit 2 may extend past CY 2013, rather than being in the last quarter of CY 2012 as had been previously scheduled and project costs are expected to significantly exceed the previous estimate of $2.5 billion.

TVA is performing a root cause analysis to better understand the factors that are driving the construction delays and contributing to the project's extended schedule and higher costs. Once the root cause analysis is finalized, TVA will implement additional corrective actions as appropriate to minimize future project schedule and cost risks. The revised schedule and cost estimates and associated root cause analysis are expected to be completed in the second quarter of FY 2012. For legal proceedings related to Watts Bar Unit 2, see Note 16 — Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2.

Delays in the schedule for the completion of Watts Bar Unit 2 may affect the timing of the commencement of construction of Bellefonte Nuclear Plant ("Bellefonte") Unit 1 which, as provided in the TVA Board’s approval of the Bellefonte Unit 1 project in August 2011, will not begin until after initial fuel loading at Watts Bar Unit 2. However, TVA does not anticipate that delays to Watts Bar Unit 2 will have a significant adverse affect on TVA’s ability to provide for the power needs of its customers, due to factors such as the forecasted outlook for electricity demand as well as the impacts of energy efficiency and demand response initiatives.

Johnsonville Fossil Plant. As of March 1, 2012, TVA plans to idle Units 7, 8, 9, and 10 at its Johnsonville Fossil Plant (“Johnsonville”) in west Tennessee. The schedule has been accelerated as part of an effort to address operational challenges at Johnsonville and to reduce costs. This is earlier than the retirement dates required by Environmental Agreements with the EPA and other parties, and is earlier than the expected compliance date for the Utility MACT Rule (Mercury and Air Toxics Standards (“MATS”)).Sixty days after the idle date of these units, TVA plans to put the units in inactive reserve status. Units in inactive reserve status are unavailable for service but can be brought back into service after some maintenance in a relatively short duration of time.  Because of the acceleration of the idling of these units, TVA recognized an additional $25 million of depreciation expense for the three months ended December 31, 2011, and also expects to recognize accelerated depreciation expense of approximately $45 million for the remainder of 2012.  See Note 16 — Environmental Agreements.

Regulatory Compliance

Watts Bar Greater than Green Finding.  The NRC notified TVA in December 2011 of its final determination of a “greater than green” inspection finding associated with the Nuclear Security organization at Watts Bar.  A "green finding" indicates a finding of very low safety significance. The NRC greater than green finding was identified during a recent inspection of the plant's physical security (fences, cameras, detection and intrusion systems, etc.).  Upon notification of the NRC's finding, TVA took immediate compensatory action to address the issue.  TVA is in the process of conducting a root cause analysis to determine the cause of the NRC finding within security and will implement a series of corrective actions to enhance performance.  The NRC will conduct a supplemental inspection known as a 95001 inspection in the coming months to evaluate TVA's root cause analysis and corrective actions. 

Sequoyah Nuclear Plant ("Sequoyah") Unit 1 NRC Performance Indicator Moved to White.  During the first quarter of 2012, the NRC changed the color designator for one of Sequoyah Unit 1's performance indicators from green to white due to the number of unplanned reactor shutdowns in a seven thousand hour period.  The "white" band indicates that performance is outside of the nominal, expected range and can be characterized as of low to moderate safety significance, but performance remains acceptable. The NRC did not place any operating restrictions on the plant, but as a result of the white performance indicator the NRC will conduct an inspection of Sequoyah Unit 1 during the second quarter of 2012 in order to ensure that TVA has developed a detailed root cause for the reactor shutdowns and that TVA has put in place the right corrective actions to ensure improved performance.

Sequoyah Tritium Sample.  On December 16, 2011, one of sixteen groundwater monitoring wells at Sequoyah detected increased levels of tritium. Tritium is a radioactive form of hydrogen that occurs both naturally within the earth's atmosphere and from the operation of nuclear power plants. The adjacent monitoring wells have not detected any elevated tritium levels. The sample of concern was from a newly drilled well, and independent analysis indicates that its source was a spill that occurred in the 1980’s, and that no active leak exists. The groundwater is located directly under Sequoyah and is not used for drinking or irrigation purposes. There are no known public health or safety issues associated with this issue. TVA notified the NRC and other government agencies on December 19, 2011, and will take any necessary corrective actions.

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Hydrology Issues for Nuclear Plants. A preliminary analysis, performed as part of an update to TVA’s hydrology model indicated that under "probable maximum flood" assumptions, four of TVA's dams would not be high enough to contain the flood waters. A "maximum flood” is an extremely unlikely event, and TVA is taking actions with the aim of ensuring that flood waters would pass safely. TVA implemented interim dam modifications in the second quarter of 2010, by installing sand baskets. These baskets are engineered, interconnected, fabric-lined, and sand-filled containers that have been used successfully to protect flood prone areas such as the Mississippi River.

The NRC notified TVA on January 25, 2012, that the sand baskets installed at dams to help protect the nuclear plants from a worst-case flood are not capable of resisting debris impact and are not acceptable as a long-term solution. Based on completion of the hydrology work taking several years, the NRC has requested TVA to provide a status update at least annually or after any major changes are made to the plan. TVA will review the latest information from the NRC and continue to keep the agency informed of its progress in addressing hydrology issues.

Renewable Power

In January 2012, TVA began receiving 535 megawatts of renewable power from four wind power contracts with third-party providers.  These newly added wind power sources are among contracts TVA has entered into with eight wind farms from a 2008 Request for Proposals ("RFP") for more renewable and clean energy.   TVA’s total energy activated under the 2008 RFP is now 950 megawatts, or more than 3 million megawatt hours annually.

Customers/Counterparties Risk

The current contract with TVA's largest directly served customer expires in May 2012 and, although TVA and the customer have been negotiating a renewal of the contract to extend operations of its plant past that date, the customer has yet to commit to an extension. Power sales to TVA's largest directly served industrial customer represented six percent of TVA's total operating revenues for the three months ended December 31, 2011. This customer's senior unsecured credit ratings are currently CCC- by Standard & Poor's ("S&P") and Caa2 by Moody's Investors Service ("Moody's").

The customer is also a supplier of enrichment services for uranium for fueling TVA's nuclear units. Currently the customer is giving the required notices to be able to discontinue operation of the facility at the end of their current power contract and turn the facility back over to the United States Department of Energy.  TVA has sufficient nuclear fuel inventory available to mitigate near-term supply risks. 

For the long-term, deliveries from this supplier through the end of the contract periods are not expected to be affected by the discontinuation of operations of its plant. If necessary, TVA's material can be pre-produced and stored until it is needed. The supplier also has other sources of supply from which to provide enrichment services.   

From a risk of supply exposure perspective, TVA contracts with other suppliers and has sufficient inventory to cover near-term fuel needs. TVA expects to be able to procure material at reasonable rates in the liquid nuclear fuel market in case the customer is not able to deliver.

MF Global. On October 31, 2011, MF Global Holding Ltd. and its subsidiary MF Global Finance USA Inc. filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. On the same date, a Securities Investor Protection Act proceeding was filed against MF Global Inc. ("MF Global"). TVA had used MF Global to clear certain trades and the MF Global Trustee held $33 million of TVA's cash collateral at that time. TVA has recovered $7 million of this balance from the Trustee. TVA has filed a claim to recover the funds currently being held by the MF Global Trustee and expects to recover some or all of these funds; however, the timing and the amount of the funds' returned and the amount of any potential loss cannot be estimated at this time.

Government Accountability Office Audit Findings

The U.S. Government Accountability Office (“GAO”) released a report December 1, 2011, on TVA's energy efficiency and capital expenditures planning. The report was requested by the chairman of the United States Senate Committee on Environment and Public Works. The GAO stated that TVA could benefit from a pending consultants' study on regional energy efficiency potential to ensure that TVA is making the most cost-effective resource decisions to meet its vision of leadership in energy efficiency improvements. TVA agreed with the GAO findings and the potential benefit from the pending commissioned study by the outside firm. The results of the study are intended to assist with future resource planning processes at TVA related to continued progress in energy efficiency and demand response initiatives across its service territory.

The GAO also recommended that TVA develop a written capital expenditure plan that includes the full costs of the assets in which TVA plans to invest and the sources of funding for acquiring those assets. Although TVA already has a number of interrelated and coordinated planning processes for capital expenditures, it understands the GAO recommendation for a more formal process which has the potential to promote greater effectiveness in the financial planning processes. TVA is continuously working to refine and improve these processes.

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Liquidity and Capital Resources

Sources of Liquidity

To meet cash needs and contingencies, TVA depends on various sources of liquidity.  TVA’s primary sources of liquidity are cash from operations and proceeds from the issuance of short-term and long-term debt.  Current liabilities may exceed current assets from time to time in part because TVA uses short-term debt to fund short-term cash needs as well as to pay scheduled maturities and other redemptions of long-term debt. The daily balance of cash and cash equivalents maintained is based on near-term expectations for cash expenditures and funding needs.

In addition to cash from operations and proceeds from the issuance of short-term and long-term debt, TVA's sources of liquidity include a $150 million credit facility with the U.S. Treasury, three long-term revolving credit facilities totaling $2.5 billion, and proceeds from any other financing arrangements such as call monetization transactions, sales of assets, and sales of receivables and loans.  Management expects these sources, certain of which are described below, to provide adequate liquidity to TVA for the foreseeable future.  The TVA Act authorizes TVA to issue bonds, notes, and other evidences of indebtedness (“Bonds”) in an amount not to exceed $30.0 billion outstanding at any time.  However, due to this limit on Bonds, TVA may not be able to use Bonds to finance all of the capital investments planned over the next decade. However, TVA believes that other forms of financing not subject to the $30.0 billion limit on Bonds, such as certain forms of lease financing, could provide additional funding. Also, the impact of energy efficiency and demand response initiatives may reduce generation requirements and thereby reduce capital needs.  Capital spending needs could be met with a combination of Bonds, lease arrangements (such as the lease-purchase transaction involving the John Sevier CCF), energy prepayments, additional power revenues through rate increases, cost reductions, or other ways.

Issuance of Debt.  TVA Bonds are not obligations of the United States, and the United States does not guarantee the payments of principal or interest on Bonds.  At December 31, 2011, TVA had only two types of Bonds outstanding: power bonds and discount notes.  Power bonds have maturities of between one and 50 years, and discount notes have maturities of less than one year.  Power bonds and discount notes have a first priority and equal claim of payment out of net power proceeds.  Net power proceeds are defined as the remainder of TVA's gross power revenues after deducting the costs of operating, maintaining, and administering its power properties and payments to states and counties in lieu of taxes, but before deducting depreciation accruals or other charges representing the amortization of capital expenditures, plus the net proceeds from the sale or other disposition of any power facility or interest therein.  

TVA uses proceeds from the issuance of discount notes, in addition to other sources of liquidity, to fund short-term cash needs and scheduled maturities of long-term debt.  The following table provides additional information regarding TVA's short-term borrowings.

Short-Term Borrowing Table
	At December 31, 2011		For the three months ended December 31, 2011			At December 31, 2010			For the three months ended December 31, 2010
Amount Outstanding (at End of Period) or Average Amount  Outstanding (During Period)
Discount Notes	$	785	$	444		$	219		$	39
Weighted Average Interest Rate
Discount Notes	0.000%		0.001		%	0.038		%	0.076		%
Maximum Month-End Amount Outstanding (During Period)
Discount Notes	N/A		$	785		N/A			$	219

Credit Facility Agreements.  TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility.  This credit facility matures on September 30, 2012, and is expected to be renewed.  This arrangement is pursuant to the TVA Act.  Access to this credit facility or other similar financing arrangements has been available to TVA since the 1960s.  TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity.  The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less.  There were no outstanding borrowings under the facility at December 31, 2011.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion.

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Summary of Long-Term Credit Facilities At December 31, 2011 (in billions)
Maturity Date	Facility Limit		Letters of Credit Outstanding		Cash Borrowings		Availability
January 2014	$	0.5	$	0.5	$	—	$	—
January 2014	1.0		—		—		1.0
May 2014	1.0		0.3		—		0.7
	$	2.5	$	0.8	$	—	$	1.7

The credit facilities accommodate the issuance of letters of credit.  The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA's senior unsecured long-term non-credit enhanced debt.  TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit.  This fee, along with letter of credit fees, may fluctuate depending on the rating of TVA's senior unsecured long-term non-credit enhanced debt.  At December 31, 2011, there were $756 million of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 12 — Other Derivative Instruments — Collateral.

Lease Financing. On January 17, 2012, TVA entered into a $1.0 billion leasing transaction whereby it agreed to lease its John Sevier CCF to a special single purpose limited liability company for a term of fifty years. TVA received proceeds of approximately $970 million. On the same date, TVA agreed to lease the facility back from the special single purpose limited liability company for a term of thirty years. TVA intends to use the proceeds from the transaction for the benefit of its power program. See Note 17 — John Sevier Combined Cycle Transaction.

TVA may seek to enter into similar arrangements for other assets under construction, such as natural gas units, nuclear units, or pollution control equipment. While such leasing transactions allow TVA to diversify its asset financing program, financing an asset by using the proceeds of leasing transactions is typically more costly to TVA than financing an asset with the proceeds of Bonds.

Summary Cash Flows

A major source of TVA's liquidity is operating cash flows resulting from the generationand sales of electricity. A summary of cash flow components for the three months ended December 31, 2011, and 2010, follows:

Summary Cash Flows
	For the three months ended December 31
	2011			2010
Cash provided by (used in):
Operating activities	$	257		$	528
Investing activities	(822		)	(747		)
Financing activities	271			133
Net increase (decrease) in cash and cash equivalents	$	(294	)	$	(86	)

Operating Activities. Net cash flows from operating activities decreased $271 million for the three months ended December 31, 2011, compared to the same period in the prior year. The change resulted from a $165 million increase in the funding of Financial Trading Program ("FTP") margin accounts, a $115 million increase related to the timing of accounts payable and accrued liabilities payments and an increase in change in inventory of $165 million due to lower coal generation. These changes were offset by an $86 million increase in accounts receivable collections.

The increase in margin funding is primarily due to TVA increasing its natural gas hedged positions due to the sharp decline of natural gas prices relative to coal prices. The notional amount of natural gas positions held at December 31, 2011 and 2010, was 322 million mmBtu and 161 million mmBtu, respectively.

Investing Activities. The majority of TVA's investing cash flows are related to investments in property, plant, and equipment for new generating assets, as well as additions and upgrades to existing facilities.  The $40 million increase in construction expenditures for the three months ended December 31, 2011, as compared to the same period in the prior year, is due primarily to milestone payments made in the first quarter of 2012 for major projects completed shortly before or after the end of 2011, as well as an increase on spending for clean air projects and converting wet coal combustion residual (“CCR”) facilities

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to dry collection facilities. 

Nuclear fuel expenditures increased $48 million for the three months ended December 31, 2011, as compared to the same period in the prior year, due to the purchase of nuclear fuel to be used in the five scheduled nuclear refueling outages during CY 2012 as opposed to the two scheduled nuclear refueling outages during CY 2011. The increase was also due to higher prices for enrichment services in 2012.

Financing Activities.  Net cash flows provided by financing activities increased $138 million during the three months ended December 31, 2011, as compared to the same period of the prior year, due to an increase in the issuance of short-term debt and a decrease in payments on leases.  The issuance of debt exceeding redemptions was $284 million for the three months ended December 31, 2011, as compared to $187 million for the three months ended December 31, 2010.  This increase is due to a decrease in the net working capital as a result of the lower sales of electricity for the three months ended December 31, 2011, as compared to the same period of the prior year. 

The increase in cash flows provided by financing activities is also partially due to a $41 million decrease in payments on leases and leaseback financing for the three months ended December 31, 2011, as compared to the same period of the prior year due to the purchase of an office building previously under a capital lease.

Cash Requirements and Contractual Obligations

The estimated cash requirements and contractual obligations for TVA as of December 31, 2011, are detailed in the following table.

Commitments and Contingencies Payments due in the year ending September 30
	2012(1)		2013		2014		2015		2016		Thereafter		Total
Debt(2)	$	2,339	$	2,308	$	32	$	1,032	$	32	$	19,200	$	24,943
Interest payments relating to debt	971		1,226		1,140		1,139		1,094		19,192		24,762
Lease obligations
Capital	4		—		—		—		—		3		7
Non-cancelable operating	50		52		33		24		24		146		329
Purchase obligations
Power	161		157		159		161		168		3,371		4,177
Fuel	1,243		1,544		1,231		1,180		751		1,951		7,900
Other	107		100		91		87		86		697		1,168
Environmental Agreements	79		87		87		87		—		—		340
Litigation settlements	28		3		3		1		—		—		35
Environmental cleanup costs-Kingston ash spill	99		147		105		—		—		—		351
Payments on other financings	123		488		100		104		104		609		1,528
Payments to U.S. Treasury
Return of Power Program     Appropriation Investment	20		20		10		—		—		—		50
Return on Power Program     Appropriation Investment	7		20		19		18		18		217		299
Total	$	5,231	$	6,152	$	3,010	$	3,833	$	2,277	$	45,386	$	65,889
Notes (1) Period January 1 – September 30, 2012 (2) Does not include noncash items of foreign currency exchange loss of $4 million and net discount on sale of Bonds of $235 million.

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In addition to the cash requirements above, TVA has contractual obligations in the form of revenue discounts related to energy prepayments.

Energy Prepayment Obligations Payments due in the year ending September 30
	2012(1)		2013		2014		2015		2016		Thereafter		Total
Energy Prepayment Obligations	$	79	$	102	$	100	$	100	$	100	$	210	$	691
Note (1) Period January 1 - September 30, 2012

Results of Operations

Sales of Electricity

The following table compares TVA’s energy sales statistics for the three months ended December 31, 2011, and 2010:

Sales of Electricity (millions of kWh)
	Three Months Ended December 31
	2011	2010	Percent Change
Municipalities and cooperatives	30,475	32,479	(6.2	)%
Industries directly served	8,026	8,105	(1.0	)%
Federal agencies and other	527	535	(1.5	)%
Total sales of electricity	39,028	41,119	(5.1	)%
Heating degree days (normal 1,302)(1)	1,170	1,417	(17.4	)%
Cooling degree days (normal 67)(1)	46	54	(14.8	)%
Combined degree days (normal 1,369)(1)	1,216	1,471	(17.3	)%
Note (1) The prior year degree day information has been adjusted in order to incorporate a change in TVA’s current calculation of this information. Every five years this calculation is updated in order to include the most recent 30 years of weather history. The most recent update, to incorporate CYs 2006-2010, occurred during the second quarter of 2011.

Sales of electricity decreased 2.1 billion kilowatt-hours ("kWh") for the three months ended December 31, 2011, compared to the three months ended December 31, 2010, almost entirely due to a decrease in sales to municipalities and cooperatives. Sales to municipalities and cooperatives decreased by 2.0 billion kWh for the three months ended December 31, 2011, as compared to the same period in 2010. This change was primarily related to the milder weather for the three months ended December 31, 2011 as compared to the abnormally cold weather for the same period of the prior year.

Financial Results

The following table compares operating results for the three months ended December 31, 2011, and 2010:

Summary Statements of Operations
	Three Months Ended December 31
	2011			2010
Operating revenues	$	2,568		$	2,828
Operating expenses	(2,431		)	(2,558		)
Operating income	137			270
Other income, net	9			11
Interest expense, net	(319		)	(329		)
Net income (loss)	$	(173	)	$	(48	)

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Operating Revenues.  Operating revenues for the three months ended December 31, 2011, and 2010, consisted of the following:

Operating Revenues
	Three Months Ended December 31
	2011		2010		Percent Change
Sales of electricity
Municipalities and cooperatives	$	2,144	$	2,386	(10.1	)%
Industries directly served	367		382		(3.9	)%
Federal agencies and other	29		32		(9.4	)%
Total sales of electricity	2,540		2,800		(9.3	)%
Other revenue	28		28		—	%
Total operating revenues	$	2,568	$	2,828	(9.2	)%

Operating revenues decreased $260 million in the three months ended December 31, 2011, compared to the three months ended December 31, 2010, due to the following:

	Three Month Change
Fuel cost recovery	$	(102	)
Base volume	(100		)
Base rates	(58		)
Total	$	(260	)

Operating revenues decreased $260 million for the three months ended December 31, 2011, compared to the three months ended December 31, 2010, primarily due to a $102 million decrease in fuel cost recovery and a $100 million decrease in base volume.  Of the $102 million decrease in fuel cost recovery, $53 million was due to lower sales volume and $49 million was due to lower fuel cost. See Operating Expenses for further discussion of the change in fuel expense.  The $100 million decrease in base volume was driven primarily by a $97 million decrease in revenues from municipalities and cooperatives primarily as a result of milder weather conditions during the three months ended December 31, 2011 as compared to the same period in 2010.  There was a 17 percent decrease in heating degree days and a 15 percent decrease in cooling degree days during the three months ended December 31, 2011, as compared to the three months ended December 31, 2010. 

            The decrease in base rates also resulted in a $58 million decrease in operating revenues for the three months ended December 31, 2011, compared to the three months ended December 31, 2010.  This overall decrease in base rates was primarily due to a change in the wholesale rate structure of municipalities and cooperatives, which was implemented in April 2011, and was slightly offset by a two percent rate increase that went into effect in October 2011. See Changes in Ratemaking Impacting Accounting for further discussion of the increase in base rates.  The purpose of the new wholesale rate design was to better align rates with costs. TVA's costs tend to be higher in the summer than in the spring and fall and as such TVA designed wholesale rates to better reflect those cost relationships. TVA expected the new wholesale structure would produce lower base revenue in the spring and fall due to the new seasonal and time of use wholesale rates. Similarly, TVA anticipated the new wholesale structure would produce higher base revenue in summer. Seasonal differences in the weather impact TVA's base revenue under both wholesale structures. Under the new wholesale structure, weather can positively and negatively impact both volume and average rates while under the former wholesale structure only volume was impacted. The milder weather in the first quarter of 2012, relative to the abnormally colder weather in the first quarter of 2011, produced lower maximum load requirements which have led to lower base revenue for the first quarter of 2012 relative to the first quarter of 2011.

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Operating Expenses. Operating expenses for the three months ended December 31, 2011, and 2010, consisted of the following:

Operating Expenses
	Three Months Ended December 31
	2011		2010		Percent Change
Fuel	$	640	$	738	(13.3	)%
Purchased power	319		360		(11.4	)%
Operating and maintenance	880		883		(0.3	)%
Depreciation and amortization	441		432		2.1	%
Tax equivalents	151		145		4.1	%
Total operating expenses	$	2,431	$	2,558	(5.0	)%

Operating expenses decreased $127 million in the three months ended December 31, 2011, compared to the three months ended December 31, 2010.     Significant drivers contributing to the decrease in total operating expenses are described below.

Fuel expense decreased $98 million in the three months ended December 31, 2011, as compared to the same period of the prior year. A five percent decrease in sales and overall favorable fuel rates, as a result of the change in the mix of generation sources, account for $77 million of the decrease. Coal-fired generation decreased 29 percent while nuclear generation increased 18 percent. There were two nuclear units in refueling outages during three months ended December 31, 2010, while there were no units in refueling outages during the three months ended December 31, 2011. Additionally, hydroelectric generation, TVA's least expensive type of generation, helped to offset the reduction in coal-fired generation. Hydroelectric generation, comprised of conventional hydroelectric and pumped storage, was 31 percent higher in the three months ended December 31, 2011, as compared to the same period of the prior year, primarily due to a 41 percent increase in rainfall, a 120 percent increase in runoff within the Tennessee River Basin in the three months ended December 31, 2011, as compared to the same period of the prior year, and the need to release water to maintain flood storage levels. The remaining $21 million decrease in fuel cost in the three months ended December 31, 2011, as compared to the same period of the prior year was driven by the timing of the fuel cost adjustment mechanism. The fuel cost adjustment provides a means to regularly alter rates to reflect changing fuel and purchased power costs, including realized gains and losses relating to transactions under TVA's FTP. There is typically a lag between the occurrence of a change in fuel and purchased power costs and the reflection of the change in rates due to a portion of the fuel rate being based on forecasted information. A “true-up” between actual and forecasted costs is performed on a monthly basis, and the difference is recorded as a regulatory liability or asset. These amounts represent overcollected revenues (regulatory liabilities) or undercollected revenues (regulatory assets), which are subsequently used to offset fuel and purchased power costs and are recovered or refunded in fuel rates on an ongoing basis.

Purchased power expense decreased $41 million during the the three months ended December 31, 2011, as compared to the same period of the prior year. Purchased power expense decreased $49 million as a result of the decreased sales discussed above. This decrease was partially offset by the fuel cost adjustment of $8 million. Purchased power volume decreased 22 percent compared with same period of the prior year. This change in volume decreased purchased power expense by $73 million. In addition, the average price of purchased power increased eight percent in the three months ended December 31, 2011, as compared to the same period of the prior year, which increased purchased power expense by $23 million.

Operating and maintenance expense decreased $3 million in the three months ended December 31, 2011, as compared to the same period of the prior year.  The timing of nuclear refueling outages resulted in a decrease of $60 million due to two nuclear refueling outages in the three months ended December 31, 2010 compared to no nuclear refueling outages during the three months ended December 31, 2011. Rent expense was $17 million lower during the three months ended December 31, 2011, as compared to the same period of the prior year, due to the purchase of the Chattanooga Office Complex in Chattanooga, Tennessee in January 2011.  These decreases were partially offset by a $35 million increase in pension and post-retirement benefits as a result of the use of a lower assumed discount rate in the actuarial calculation of post-retirement liabilities. The decreases were also offset by a $32 million increase in operating and maintenance expense related to increased operations at the Lagoon Creek Combined Cycle Plant and the Magnolia Combined Cycle Plant, the timing and duration of fossil-fuel unit maintenance outages, and litigation-related expenditures.

Depreciation and amortization expense increased $9 million in the three months ended December 31, 2011, as compared to the same period of the prior year primarily due to an increase in net plant additions and the implementation of accelerated depreciation rates on certain coal-fired units due to the idling of those units. The $46 million increase in depreciation expense was partially offset by a $37 million decrease in amortization expense due to the treatment of certain regulatory assets as a result of the approval of Bellefonte Unit 1 in August 2011.

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Tax equivalents expense increased $6 million in the three months ended December 31, 2011, as compared to the same period of the prior year. This change primarily reflects an increase in the accrued tax equivalent expense. The accrued tax equivalent expense, which is equal to five percent of the fuel-cost related revenues, increased in the three months ended December 31, 2011, due to the new wholesale rate structure implemented on April 1, 2011, whereby the fuel rate was separated out from the base rate. Due to regulatory accounting, tax equivalents related to fuel-cost related revenues are recognized in the same period the revenues are recognized. Tax equivalents related to all other revenues are recognized in the year paid.

Interest Expense. Interest expense and interest rates for the three months ended December 31, 2011, and 2010, were as follows:

Interest Expense
	Three Months Ended December 31
	2011			2010			Percent  Change
Interest expense	$	358		$	358		—	%
Allowance for funds used during construction and nuclear fuel expenditures	(39		)	(29		)	34.5	%
Net interest expense	$	319		$	329		(3.0	)%
	2011			2010			Percent  Change
Interest rates (average)
Long-term(1)	5.75			5.87			(2.0	)%
Discount notes	—			0.08			(100.0	)%
Blended(1)	5.65			5.86			(3.6	)%
Note (1) The average interest rates on long-term debt reflected in the table above are calculated using an average of long-term debt balances at the end of each month in the fiscal years depicted and interest expense for those periods. Interest expense is interest on long-term debt, including amortization of debt discounts, issue, and reacquisition costs, net.

The $10 million decrease in net interest expense was related to greater amounts of capitalized interest due to an increase in the construction work in progress base used to calculate allowance for funds used during construction ("AFUDC") as a result of ongoing construction activities at Watts Bar Unit 2.

Critical Accounting Policies and Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements. Although the financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period. Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results. Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial condition, results of operations, or cash flows. TVA's critical accounting policies are discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates and Note 1 of the Notes to the Financial Statements in the Annual Report.

Changes in Ratemaking Impacting Accounting

For distributor customers, the default rate structure is time of use ("TOU") with an option to elect a seasonal demand and energy structure.  The TVA rate structures provide that all distributor customers are to be on a TOU wholesale structure by no later than October 2012; however, TVA will continue to have discussions with distributors on alternative rate structures.

The TVA Board of Directors approved a rate adjustment at its August 18, 2011 meeting that went into effect in October 2011. The rate adjustment resulted in an increase in wholesale base rates of two percent.

TVA faces several challenges in implementing TOU rates.  Although metering is in place today to facilitate implementation at the wholesale level, additional metering and infrastructure will be needed to pass through the TOU pricing signals at the retail level.  TVA is working with distributors to explore how additional metering and infrastructure resources can best be acquired in a cost-effective manner.  There will also be additional administration costs associated with implementing the

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TOU rates.  Billing, metering, communication, and data management systems will have to be modified (and in some cases acquired) to read, communicate, and ultimately generate customer bills.

New Accounting Standards and Interpretations

For a discussion of TVA’s new accounting standards and interpretations, see Note 2, which discussion is incorporated into this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Corporate Governance

On December 21, 2011, William R. McCollum, Jr., TVA's Chief Operating Officer, announced that he would be retiring, effective June 30, 2012.

The service of Dennis C. Bottorff, Robert M. Duncan, and Thomas C. Gilliland as members of TVA's Board of Directors ended January 3, 2012, with the adjournment of the first session of the 112th Congress.  Their terms of office, which began in 2006 for Mr. Bottorff and Mr. Duncan and 2008 for Mr. Gilliland, expired May 18, 2011.  The TVA Act permitted them to continue to serve as directors until the end of the then-current session of Congress.

Environmental Matters

TVA's power generation activities, like those across the utility industry and in other industrial sectors, are subject to most federal, state, and local environmental laws and regulations.  Major areas of regulation affecting TVA's activities include clean air control, water quality control, and management and disposal of solid and hazardous wastes.  In the future, regulations in all of these areas are expected to become more stringent and to apply to additional emissions and sources.

Clean Air Regulations

               The Clean Air Act ("CAA") establishes a comprehensive program to protect and improve the nation's air quality and control sources of air emissions.  The major CAA programs that affect TVA's power generation activities are described below.

Cross State Air Pollution Rule. The Environmental Protection Agency ("EPA") announced on October 6, 2011, the final Cross State Air Pollution Rule ("CSAPR"). The final CSAPR will allow slightly more ozone season nitrogen oxides ("NO_x") emissions in Mississippi, where TVA has recently purchased Magnolia.  It also reduces the sulfur dioxide ("SO₂") and NO_x allowances allocated to coal-fired plants in Alabama, Kentucky, and Tennessee to match the more stringent requirements of the Environmental Agreements for the years 2013, 2018, and 2019.

On December 30, 2011 the District of Columbia Court of Appeals stayed the implementation of CSAPR while it reviews the legal challenges to the rule. In the interim, the Clean Air Interstate Rule ("CAIR") remains in effect for TVA and other utilities. Speculation is that due to the time required for the review, CSAPR may not become effective until January 1, 2013, at the earliest. In the interim, the Environmental Agreements and CAIR SO₂ and NO_x allowance allocations remain the air quality compliance drivers for TVA's coal-fired plants in 2012.

Hazardous Air Pollutants from Steam Electric Utility Units.  On December 16, 2011, the EPA released the final rule establishing standards for hazardous air pollutants emitted from steam electric utility units. The rule requires additional controls for hazardous air pollutants, including mercury, non-mercury metals, and acid gasses for some of TVA’s coal-fired units in the 2015-2016 timeframe. Boiler combustion systems require scheduled maintenance to ensure optimized combustion to minimize emissions of organic hazardous air pollutants. TVA may choose to idle or retire some units in lieu of investing in additional controls. The EPA also finalized the New Source Performance Standards (“NSPS”) for new and reconstructed coal and oil-fired units for emissions of particulate matter ("PM"), SO_2, and NO_x. New PM and NO_x standards for modified units are also included in the NSPS. The final rule moderated somewhat from the proposed rule, but it remains the primary driver of additional air quality controls for TVA's coal-fired plants over the next few years.

Climate Change

New Source Performance Standards for Greenhouse Gas Emissions.  In December 2010, the EPA entered into a settlement agreement with various states and environmental groups that establishes a schedule for setting new standards for regulating greenhouse gas ("GHG") emissions from oil and coal-fired electric generating units.  On June 13, 2011, the EPA and these states and environmental groups agreed to a two-month postponement of the EPA's deadline to propose GHG limits on new and modified power plants.  The original deadline for the EPA to propose NSPS standards for power plants was July 26, 2011.  The deadline was extended to September 30, 2011, but the EPA announced that it will miss that deadline and is working on developing a new schedule for the rule.  The original deadline for the final rule was May 26, 2012, but it is possible that the EPA will request an extension for the final rule deadline.  These rules will affect TVA, but the extent of the impact is not yet known.

The Durban Climate Change Conference occurred November 28 to December 11, 2011. The Durban Conference

48

included the 17th session of the Conference of the Parties to the UN Framework Convention on Climate Change ("COP") and the 7th meeting of the Conference of the Parties serving as the Meeting of Parties ("CMP") to the Kyoto Protocol. The meetings resulted in the adoption of 19 COP decisions and 17 CMP decisions. TVA is unable to predict the influence these decisions may have on domestic climate-related legislation.

Estimated Required Environmental Expenditures

The following table contains information about TVA's current remaining estimates on projects related to environmental

laws and regulations. 

Air, Water, and Waste Quality Estimated Potential Environmental Expenditures At December 31, 2011 (in millions)
	Estimated Timetable	Total Estimated Expenditures
Site environmental remediation costs(1)	2012+	$	19
Coal combustion products conversion and remediation(2)	2012-2022	$	1,480
Proposed clean air projects(3)	2012-2018	$	3,414
Clean Water Act requirements(4)	2015-2020	TBD*
Notes (1) Estimated liability for cleanup and similar environmental work for those sites for which sufficient information is available to develop a cost estimate. (2) Includes closure of impoundments, construction of lined landfills, and construction of dewatering systems. (3) Includes air quality projects that TVA is currently planning to undertake to comply with existing and proposed air quality regulations, but does not include any projects that may be required to comply with potential GHG regulations. (4) Compliance plans to meet the requirements of a revised or new implementing rule under Section 316(b) of the Clean Water Act and EPA’s revised steam electric effluent guidelines will be determined upon finalization of the rules. *  TBD – to be determined as the regulations progress.

Legal Proceedings

From time to time, TVA is party to or otherwise involved in lawsuits, claims, proceedings, investigations, and other legal matters (“Legal Proceedings”) that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise. TVA had accrued approximately $386 million with respect to Legal Proceedings as of December 31, 2011. No assurance can be given that TVA will not be subject to significant additional claims and liabilities. If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.

For a discussion of certain current material Legal Proceedings, see Note 16, which discussion is incorporated into this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes related to market risk disclosed under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Activities in the Annual Report.  See Note 12 for additional information regarding TVA's derivative transactions and risk management activities.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee, including the Chief Financial Officer and the Vice President and Controller (Principal Accounting Officer), evaluated the effectiveness of TVA’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of December 31, 2011.  Based on this evaluation, TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee including the Chief Financial Officer and the Vice President and Controller (Principal Accounting Officer), concluded that TVA’s disclosure controls and procedures were effective as of December 31, 2011, to ensure that information required to be disclosed by TVA in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by TVA in such reports is accumulated and communicated to TVA’s management, including the President and Chief Executive Officer and members of the Disclosure Control Committee, including the Chief Financial Officer and the Vice President and Controller (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2011, there were no changes in TVA's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, TVA's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time, TVA is a party to lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting its activities, as a result of catastrophic events or otherwise.  While the outcome of the Legal Proceedings to which TVA is a party cannot be predicted with certainty, any adverse outcome to a Legal Proceeding involving TVA may have a material adverse effect on TVA’s financial condition, results of operations, and cash flows.

For a discussion of certain current material Legal Proceedings, see Note 16, which discussion is incorporated by reference into this Item 1, Legal Proceedings.

ITEM 1A.  RISK FACTORS

There are no material changes related to risk factors from the risk factors disclosed in Item 1A, Risk Factors in the Annual Report.

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ITEM 6.  EXHIBITS

Exhibit  No.	Description
10.1	Facility Lease-Purchase Agreement Dated as of January 17, 2012, Between John Sevier Combined Cycle Generation LLC and TVA
10.2	Head Lease Agreement Dated as of January 17, 2012, Among the United States of America, TVA, and John Sevier Combined Cycle Generation LLC
10.3	Construction Management Agreement Dated as of January 17, 2012, Between John Sevier Combined Cycle Generation LLC and TVA
31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer
32.1	Section 1350 Certification Executed by the Chief Executive Officer
32.2	Section 1350 Certification Executed by the Chief Financial Officer
101.INS *	TVA XBRL Instance Document
101.SCH *	TVA XBRL Taxonomy Extension Schema
101.CAL *	TVA XBRL Taxonomy Extension Calculation Linkbase
101.DEF *	TVA XBRL Taxonomy Extension Definition Linkbase
101.LAB *	TVA XBRL Taxonomy Extension Label Linkbase
101.PRE *	TVA XBRL Taxonomy Extension Presentation Linkbase

* In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under this section.

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SIGNATURES

Pursuant to the requirements of Section 13, 15(d), or 37 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	February 2, 2012		TENNESSEE VALLEY AUTHORITY
			(Registrant)
		By:	/s/ Tom Kilgore
			Tom  Kilgore
			President and Chief Executive Officer (Principal Executive Officer)
		By:	/s/ John M. Thomas, III
			John M. Thomas, III
			Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX

Exhibit  No.	Description
10.1	Facility Lease-Purchase Agreement Dated as of January 17, 2012, Between John Sevier Combined Cycle Generation LLC and TVA
10.2	Head Lease Agreement Dated as of January 17, 2012, Among the United States of America, TVA, and John Sevier Combined Cycle Generation LLC
10.3	Construction Management Agreement Dated as of January 17, 2012, Between John Sevier Combined Cycle Generation LLC and TVA
31.1	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification Executed by the Chief Financial Officer
32.1	Section 1350 Certification Executed by the Chief Executive Officer
32.2	Section 1350 Certification Executed by the Chief Financial Officer
101.INS *	TVA XBRL Instance Document
101.SCH *	TVA XBRL Taxonomy Extension Schema
101.CAL *	TVA XBRL Taxonomy Extension Calculation Linkbase
101.DEF *	TVA XBRL Taxonomy Extension Definition Linkbase
101.LAB *	TVA XBRL Taxonomy Extension Label Linkbase
101.PRE *	TVA XBRL Taxonomy Extension Presentation Linkbase

* In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under this section.

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EX-10.1

Exhibit 10.1

This Facility Lease-Purchase Agreement has been filed to provide investors with information regarding its terms. It is not intended to provide any other factual information about the Tennessee Valley Authority. The representations and warranties of the parties in this Facility Lease-Purchase Agreement were made to, and solely for the benefit of, the other parties to this Facility Lease-Purchase Agreement. The assertions embodied in the representations and warranties may be qualified by information included in schedules, exhibits or other materials exchanged by the parties that may modify or create exceptions to the representations and warranties. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

EXECUTION VERSION

This instrument prepared by:

Christopher J. Moore, Esq.

Orrick, Herrington, & Sutcliffe LLP

51 West 52^nd Street

New York, New York 10019

(212) 506-5000

Facility Lease-Purchase Agreement

Dated as of January 17, 2012

between

John Sevier Combined Cycle Generation LLC,

as Owner Lessor

and

Tennessee Valley Authority,

as Facility Lessee

______________________________________

John Sevier Combined Cycle

Generation Facility

located in Hawkins County, Tennessee

CERTAIN OF THE RIGHT, TITLE AND INTEREST OF THE OWNER LESSOR IN AND TO THIS FACILITY LEASE AND THE RENT DUE AND TO BECOME DUE HEREUNDER HAVE BEEN ASSIGNED AS COLLATERAL SECURITY TO, AND ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF, WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL CAPACITY BUT SOLELY AS LEASE INDENTURE TRUSTEE UNDER AN INDENTURE OF TRUST, DEED OF TRUST AND SECURITY AGREEMENT, DATED AS OF JANUARY 17, 2012, BETWEEN SAID LEASE INDENTURE TRUSTEE, AS SECURED PARTY, AND THE OWNER LESSOR, AS DEBTOR. SEE SECTION 22 HEREOF FOR INFORMATION CONCERNING THE RIGHTS OF THE ORIGINAL HOLDER AND THE HOLDERS OF THE VARIOUS COUNTERPARTS HEREOF.

Table of Contents
		Page
SECTION 1.	DEFINITIONS.........................................................................................................	1
SECTION 2.	LEASE OF THE FACILITY....................................................................................	2
Section 2.1	Binding Nature..................................................................................................	2
Section 2.2	Lease.................................................................................................................	2
Section 2.3	Title; Construction Completion; Modifications; Replacements.......................	2
SECTION 3.	FACILITY LEASE TERM AND RENT..................................................................	2
Section 3.1	Facility Lease Term...........................................................................................	2
Section 3.2	Rent...................................................................................................................	3
Section 3.3	Supplemental Lease Rent..................................................................................	3
Section 3.4	Adjustment of Lease Schedules........................................................................	3
Section 3.5	Manner of Payments.........................................................................................	5
SECTION 4.	DISCLAIMER OF WARRANTIES; RIGHT OF QUIET ENJOYMENT...............	5
Section 4.1	Disclaimer of Warranties...................................................................................	5
Section 4.2	Quiet Enjoyment...............................................................................................	7
SECTION 5.	RETURN OF FACILITY.........................................................................................	7
Section 5.1	Return................................................................................................................	7
Section 5.2	Condition Upon Delivery of Possession to Owner Lessor................................	8
Section 5.3	Environmental Assessment...............................................................................	8
Section 5.4	Deferred Maintenance on the Facility...............................................................	9
SECTION 6.	LIENS.......................................................................................................................	9
SECTION 7.	MAINTENANCE; REPLACEMENTS OF COMPONENTS.................................	9
Section 7.1	Maintenance......................................................................................................	9
Section 7.2	Replacement of Components............................................................................	9
SECTION 8.	MODIFICATIONS...................................................................................................	10
Section 8.1	Required Modifications.....................................................................................	10
Section 8.2	Optional Modifications....................................................................................	10
Section 8.3	Title to Modifications........................................................................................	10
SECTION 9.	NET LEASE.............................................................................................................	11
SECTION 10.	EVENTS OF LOSS..................................................................................................	12

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Table of Contents
		Page
Section 10.1	Occurrence of Events of Loss...........................................................................	12
Section 10.2	Condemnation Payments...................................................................................	13
Section 10.3	Rebuild or Replace............................................................................................	13
Section 10.4	Application of Payments Not Relating to an Event of Loss.............................	14
SECTION 11.	INSURANCE...........................................................................................................	15
Section 11.1	Insurance by Owner Lessor...............................................................................	15
Section 11.2	Insurance by the Facility Lessee.......................................................................	15
SECTION 12.	INSPECTION...........................................................................................................	15
SECTION 13.	REGULATORY EVENT OF LOSS.........................................................................	16
Section 13.1	Occurrence of a Regulatory Event of Loss.......................................................	16
Section 13.2	Procedure for Termination With Respect to a Regulatory Event of Loss.........	16
SECTION 14.	[RESERVED]...........................................................................................................	18
SECTION 15.	EARLY BUY OUT...................................................................................................	18
Section 15.1	Election of Early Buy Out.................................................................................	18
Section 15.2	Procedure for Exercise of an Early Buy Out.....................................................	19
Section 15.3	Replacement and Exchange of the Lessor Notes..............................................	20
SECTION 16.	TRANSFER UPON THE EXPIRATION DATE.....................................................	20
SECTION 17.	EVENTS OF DEFAULT..........................................................................................	21
SECTION 18.	REMEDIES..............................................................................................................	23
Section 18.1	Remedies for Lease Event of Default...............................................................	23
Section 18.2	Additional Remedies for Specified Lease Events of Default............................	23
Section 18.3	Application of Funds Held as Security; Liability for Basic Lease Rent, Costs and Expenses.....................................................................................................	25
Section 18.4	Payment of FMV Net Termination Value or Sale Net Termination Value........	25
Section 18.5	Special Environmental Site Assessment and Remediation Remedy.................	26
Section 18.6	Cumulative Remedies.......................................................................................	26
Section 18.7	No Delay or Omission to be Construed as Waiver............................................	26
SECTION 19.	SECURITY INTEREST AND INVESTMENT OF SECURITY FUNDS..............	27

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Table of Contents
		Page
SECTION 20.	FACILITY LESSEE'S RIGHT TO SUBLEASE; ASSIGNMENT..........................	27
Section 20.1	Assignment and Sublease..................................................................................	27
Section 20.2	Right to Sublease..............................................................................................	27
SECTION 21.	OWNER LESSOR'S RIGHT TO PERFORM.........................................................	28
SECTION 22.	SECURITY FOR OWNER LESSOR'S OBLIGATION TO THE LEASE INDENTURE TRUSTEE.........................................................................................	28
SECTION 23.	MISCELLANEOUS.................................................................................................	28
Section 23.1	Amendments and Waivers.................................................................................	28
Section 23.2	Notices..............................................................................................................	29
Section 23.3	Survival.............................................................................................................	30
Section 23.4	Successors and Assigns.....................................................................................	30
Section 23.5	Intended Tax Treatment.....................................................................................	30
Section 23.6	Business Day.....................................................................................................	30
Section 23.7	Governing Law..................................................................................................	31
Section 23.8	Severability........................................................................................................	31
Section 23.9	Counterparts......................................................................................................	31
Section 23.10	Headings and Table of Contents........................................................................	31
Section 23.11	Further Assurances............................................................................................	31
Section 23.12	Effectiveness.....................................................................................................	31
Section 23.13	Measuring Life..................................................................................................	31
Section 23.14	Owner Lessor Covenant....................................................................................	32
Section 23.15	Limitation on Liability......................................................................................	32
APPENDICES:
Appendix A	Definitions
SCHEDULES:
Schedule 1	Basic Lease Rent
Schedule 2	Termination Values
EXHIBITS:
Exhibit A	Description of the Facility

iii

Facility Lease-Purchase Agreement

This FACILITY LEASE-PURCHASE AGREEMENT, dated as of January 17, 2012 (this “Facility Lease”), between JOHN SEVIER COMBINED CYCLE GENERATION LLC, a Delaware limited liability company (the “Owner Lessor”), and TENNESSEE VALLEY AUTHORITY, a wholly owned corporate agency and instrumentality of the United States (the “Facility Lessee” or “TVA”).

WITNESSETH:

WHEREAS, TVA is constructing the John Sevier Combined Cycle Facility located in Hawkins County, Tennessee, a combined cycle generating facility designed to have a summer net generation capacity of approximately 880 megawatts (as more particularly described on Exhibit A to this Facility Lease, the “Facility”);

WHEREAS, the Facility Lessee holds title to the Facility, and, pursuant to the Head Lease as of the Closing Date, the Owner Lessor has leased the Facility from the Facility Lessee as of the Closing Date for the Head Lease Term;

WHEREAS, on the Closing Date, the Facility Lessee is entering into the Construction Management Agreement pursuant to which TVA is agreeing to complete construction of the Facility;

WHEREAS, the Facility Lessee and the Owner Lessor desire to enter into this Facility Lease, which provides, among other terms, that the Facility Lease Term will commence upon the Lease Commencement Date;

WHEREAS, pursuant to and subject to the terms and conditions of this Facility Lease, the Owner Lessor will sublease the Facility to the Facility Lessee for the Facility Lease Term;

WHEREAS, the Facility is located on the Facility Site;

WHEREAS, pursuant to the Ground Lease, the Owner Lessor is acquiring from the Ground Lessor the Ground Interest for the Ground Lease Term; and

WHEREAS, pursuant to the Ground Sublease, the Owner Lessor will sublease and grant the Ground Interest to the Facility Lessee, as Ground Sublessee, for the term provided therein.

NOW, THEREFORE, in consideration of the foregoing premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1.    DEFINITIONS

Unless the context hereof otherwise requires, capitalized terms used in this Facility Lease, including those in the recitals, and not otherwise defined herein shall have the respective meanings set forth in Appendix A hereto. The general provisions of such Appendix A shall apply to the terms used in this Facility Lease and specifically defined herein.

1

SECTION 2.    LEASE OF THE FACILITY

Section 2.1    Binding Nature. This Facility Lease has been executed and delivered by, and is binding on, and enforceable against, the Facility Lessee and the Owner Lessor as of the Closing Date, provided,however,that the Facility Lease Term shall commence upon the occurrence of the Lease Commencement Date.

Section 2.2    Lease. On the Lease Commencement Date, without the necessity for any further action, the Owner Lessor shall sublease, and as of the Lease Commencement Date subleases, the Facility to the Facility Lessee and the Facility Lessee shall sublease, and as of the Lease Commencement Date subleases, the Facility from the Owner Lessor, subject in each case to the terms set forth herein.

Section 2.3    Title; Construction Completion; Modifications; Replacements. The Facility Lessee and the Owner Lessor understand and agree that (a) this Facility Lease is a sublease and is subject to the Head Lease and the interest of the Head Lessor under the Head Lease, (b) legal title to the Facility remains vested in the Head Lessor, (c) this Facility Lease is subject to Permitted Closing Date Liens, (d) the Facility (as of the date hereof) has not achieved Substantial Completion, and (e) this Facility Lease is intended to be a lease of personal property under Tennessee law. Any portion of the Facility which is added to, or otherwise becomes a part of, the Facility after the Closing Date in accordance with the Construction Management Agreement shall (at no cost to the Owner Lessor and with no adjustment to Basic Lease Rent or Termination Value) automatically (i) become subject to this Facility Lease (subject to the occurrence of the Lease Commencement Date) and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture, and (ii) be deemed part of the Facility for all purposes, including for purposes of this Facility Lease. The Facility Lessee and the Owner Lessor further understand and agree that the Owner Lessor's Interest shall also include an interest in (A) all Modifications which are incorporated in the Facility and which pursuant to Section 8.3 hereof become subject to this Facility Lease and (B) all Replacement Components which become part of the Facility pursuant to Section 7.2 hereof, and that any such Modifications and Replacement Components shall, immediately upon such incorporation or replacement, become subject to this Facility Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture.

SECTION 3.    FACILITY LEASE TERM AND RENT

Section 3.1    Facility Lease Term. The term of this Facility Lease (the “Facility Lease Term”) shall commence on the Lease Commencement Date and shall terminate at 11:59 p.m., New York City time, on the Expiration Date, subject to earlier termination (a) in whole pursuant to Sections 15 or 18 hereof or (b) in part with respect to a Relevant Portion of the Facility pursuant to Section 15 hereof; provided, however, that if a Significant Lease Default shall have occurred prior to the then scheduled expiration of the Facility Lease Term and is continuing on such date, the Facility Lease Term shall be extended until such time as either (i) such Significant Lease Default has been cured and all relevant amounts due and payable by TVA hereunder and under the other Transaction Documents have been paid or (ii) the Facility Lessee has delivered possession of the Facility and the Facility Site to the Owner Lessor in accordance with the terms hereof,

2

including as a result of the exercise of the dispossessory remedies set forth in Section 18.2 hereof.

Section 3.2    Rent. The Facility Lessee hereby agrees to pay to the Owner Lessor basic lease rent (“Basic Lease Rent”) for the lease of the Facility during the Facility Lease Term in installments payable on each Rent Payment Date in the amount set forth opposite such Rent Payment Date under the columns entitled “Basic Lease Rent (Debt Portion)” and “Basic Lease Rent (Equity Portion)” on Schedule 1 hereto, subject to adjustment in accordance with Section 3.4 hereof. In the event this Facility Lease shall have been terminated in part pursuant to Section 15 with respect to a Relevant Portion of the Facility, Basic Lease Rent payable on any Rent Payment Date thereafter shall be determined by multiplying the amount calculated pursuant to the immediately preceding sentenceby a fraction, the numerator of which is the number of Units that continue to be subject to this Facility Lease and the Head Lease after giving effect to such termination and the denominator of which is the number of Units subject to this Facility Lease immediately prior to such partial termination, and Basic Lease Rent and Termination Value shall be adjusted downward by such amount in accordance with Section 3.4. All Basic Lease Rent to be paid pursuant to this Section 3.2 shall be payable in the manner set forth in Section 3.5.

Section 3.3    Supplemental Lease Rent. The Facility Lessee also agrees to pay to the Owner Lessor, or to any other Person entitled thereto as expressly provided herein or in any other Transaction Document, as appropriate, any and all Supplemental Lease Rent, promptly as the same shall become due and owing, or where no due date is specified, promptly after demand by the Person entitled thereto, and on an After-Tax Basis to the extent such Supplemental Lease Rent is paid in order to pay, or reimburse the Owner Lessor or the Indenture Trustee for, costs or expenses of the Owner Lessor or the Indenture Trustee under any Transaction Document and in the event of any failure on the part of the Facility Lessee to pay any Supplemental Lease Rent, the Owner Lessor shall have all rights, powers and remedies provided for herein. The Facility Lessee will also pay as Supplemental Lease Rent, to the extent permitted by Applicable Law, an amount equal to interest at the Overdue Rate on any part of any payment of Basic Lease Rent not paid when due for any period for which the same shall be overdue and on any Supplemental Lease Rent not paid when due (whether on demand or otherwise) for the period from such due date until the same shall be paid. All Supplemental Lease Rent to be paid pursuant to this Section 3.3 shall be payable in the manner set forth in Section 3.5.

Section 3.4    Adjustment of Lease Schedules.

(a)    The Facility Lessee and the Owner Lessor agree that Basic Lease Rent shall be adjusted after the Closing Date, either upwards or downwards, to reflect (i) a reduction in Basic Lease Rent in connection with a partial termination of the Facility Lease pursuant to Section 15 calculated in accordance with the second sentence of Section 3.2, (ii) a reduction in Basic Lease Rent in connection with the prepayment of one or more Equity Notes in connection with a Regulatory Event of Loss calculated in accordance with Section 13.2(c), and (iii) either a reduction or an increase in Basic Lease Rent to reflect the principal amount, amortization and interest rate on any Additional Lessor Notes issued pursuant to Section 2.12 of the Lease Indenture in connection with (A) a refinancing of the Lessor Notes pursuant to Section 11.1 of the Participation Agreement or (B) a Supplemental Financing pursuant to Section 11.2 of the Participation Agreement. Any

3

adjustments pursuant to this Section 3.4 shall be calculated in a manner to ensure that Basic Lease Rent payable hereunder is in an amount sufficient to enable the Owner Lessor to pay the principal of and interest on the Lessor Notes (after taking into account such Additional Lessor Notes issued pursuant to Section 11.2 of the Participation Agreement and refinancing of Lessor Notes in accordance with Section 11.1 of the Participation Agreement, as applicable) due and payable on each scheduled payment date in respect of such Lessor Note and to preserve the return on and of the Equity Investment and, in the case of a Supplemental Financing, any Additional Equity Investment made pursuant to Section 11.2 of the Participation Agreement, as contemplated at the time the Equity Investment or Additional Equity Investment, if any, was made through the end of the Facility Lease Term calculated in a manner consistent with the initial calculation of the return on and of the Equity Investment of the Owner Lessor and the Equity Investor, including as to the U.S. federal, state and local income tax consequences of the return on and of such investment and of the receipt of Basic Lease Rent and Supplemental Lease Rent by the Owner Lessor for the payment of amounts due and payable by the Owner Lessor under or with respect to the Lessor Notes or the Lease Indenture. The adjustments contemplated by this Section 3.4 will result in corresponding adjustments to the Termination Values. Any adjustment pursuant to this Section 3.4(a) shall be made subject to and in compliance with Section 3.4(b) hereof.

(b)    Anything herein or in any other Transaction Document to the contrary notwithstanding, Basic Lease Rent payable on any Rent Payment Date, whether or not adjusted in accordance with this Section 3.4, shall, in the aggregate, be in an amount at least sufficient to pay in full the scheduled principal of and interest payments on the Lessor Notes on such Rent Payment Date, other than any such scheduled principal of and interest payments on the Lessor Notes to the extent paid from the Construction Period Financing Account pursuant to Section 2.17 of the Lease Indenture. Anything herein or in any other Transaction Document to the contrary notwithstanding, Termination Values on any date under this Facility Lease, whether or not adjusted in accordance with this Section 3.4, shall, together with Basic Lease Rent due and owing on such date, be in an amount at least sufficient to pay in full the principal of, and accrued interest on, the Lessor Notes payable on such date.

(c)    Any adjustment pursuant to this Section 3.4 shall initially be computed by the Facility Lessee, subject to the verification procedure described in this Section 3.4(c). Once computed, the results of such computation shall promptly be delivered by the Facility Lessee to the Owner Lessor. Within 20 days after the receipt of the results of any such adjustment, the Owner Lessor may request that a nationally recognized firm of independent public accountants (which firm shall not be the primary accountants for the Facility Lessee, the Owner Lessor, the Equity Investor or the Lease Indenture Trustee) jointly selected by the Owner Lessor and the Facility Lessee (the “Verifier”) verify, after consultation with the Owner Lessor and the Facility Lessee, the accuracy of such adjustment in accordance with this Section 3.4. The Owner Lessor and the Facility Lessee hereby agree, subject to the execution by the Verifier of an appropriate confidentiality agreement, to provide the Verifier with all information and materials (other than income tax returns) as shall be necessary in connection therewith. If the Verifier confirms that such adjustment is in accordance with this Section 3.4, it shall so certify to the Facility Lessee and the Owner Lessor and such certification shall be final, binding and conclusive on the Facility Lessee, the Owner Lessor and the Equity Investor. If the Verifier concludes that such adjustment is not in accordance with this Section 3.4, and the adjustments to

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Basic Lease Rent or Termination Value calculated by the Verifier are different from those calculated by the Facility Lessee, then it shall so certify to the Facility Lessee and the Owner Lessor and the Verifier's calculation shall be final, binding and conclusive on the Facility Lessee, the Owner Lessor and the Equity Investor. If the Owner Lessor does not request verification of any adjustment within the period specified above, the computation provided by the Facility Lessee shall be final, binding and conclusive on the Facility Lessee, the Owner Lessor and the Equity Investor. The final determination of any adjustment hereunder shall be set forth in an amendment to this Facility Lease, executed and delivered by the Owner Lessor and the Facility Lessee; provided, however,that any omission to execute and deliver such amendment shall not affect the validity and effectiveness of any such adjustment. The reasonable fees, costs and expenses of the Verifier in verifying an adjustment pursuant to this Section 3.4 shall be paid by the Facility Lessee. Notwithstanding anything herein to the contrary, the sole responsibility of the Verifier shall be to verify the calculations hereunder and matters of interpretation of this Facility Lease or any other Transaction Document shall not be within the scope of the Verifier's responsibilities.

Section 3.5    Manner of Payments. All Rent (whether Basic Lease Rent or Supplemental Lease Rent) shall be paid by the Facility Lessee in lawful currency of the United States of America in immediately available funds to the recipient not later than 1:00 p.m. (New York City time) on the date due. All Rent payable to the Owner Lessor (other than Excepted Payments) shall be paid by the Facility Lessee to the Owner Lessor by payment to the Owner Lessor's Account, or to such other place as the Owner Lessor shall notify the Facility Lessee in writing; provided, however, that so long as the Lien of the Lease Indenture has not been discharged, the Owner Lessor hereby irrevocably directs (it being agreed and understood that such direction shall be deemed to have been revoked after the Lien of the Lease Indenture shall have been fully discharged in accordance with its terms), and the Facility Lessee agrees, that all payments of Rent (other than Excepted Payments) payable to the Owner Lessor shall be paid by wire transfer directly to the Lease Indenture Trustee's Account or to such other place as the Lease Indenture Trustee shall notify the Facility Lessee in writing pursuant to the Lease Indenture. Payments constituting Excepted Payments shall be made to the Person entitled thereto at the address for such Person set forth in the Participation Agreement, or to such other place as such Person shall notify the Facility Lessee in writing.

SECTION 4.    DISCLAIMER OF WARRANTIES; RIGHT OF QUIET ENJOYMENT

Section 4.1    Disclaimer of Warranties.

(a)    Without waiving any claim the Facility Lessee may have against any manufacturer, vendor or contractor, THE FACILITY LESSEE ACKNOWLEDGES AND AGREES SOLELY FOR THE BENEFIT OF THE OWNER LESSOR, THE LESSOR MANAGER, THE EQUITY INVESTOR AND THE LEASE INDENTURE TRUSTEE THAT (i) THE FACILITY AND EACH COMPONENT THEREOF IS OF A SIZE, DESIGN, CAPACITY AND MANUFACTURE ACCEPTABLE TO THE FACILITY LESSEE, (ii) THE FACILITY LESSEE IS SATISFIED THAT THE FACILITY AND EACH COMPONENT THEREOF IS SUITABLE FOR THEIR RESPECTIVE PURPOSES, (iii) NONE OF THE OWNER LESSOR, THE LESSOR MANAGER, THE EQUITY INVESTOR OR THE LEASE INDENTURE TRUSTEE IS A MANUFACTURER OR A DEALER IN PROPERTY OF SUCH KIND, AND (iv) THE FACILITY IS LEASED HEREUNDER TO THE EXTENT PROVIDED HEREBY FOR THE FACILITY

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LEASE TERM SPECIFIED HEREIN SUBJECT TO ALL APPLICABLE LAWS NOW IN EFFECT OR HEREAFTER ADOPTED, INCLUDING (A) ZONING REGULATIONS, (B) ENVIRONMENTAL LAWS AND (C) BUILDING RESTRICTIONS, AND IN THE STATE AND CONDITION OF EVERY PART THEREOF WHEN THE SAME FIRST BECAME SUBJECT TO THIS FACILITY LEASE, WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND BY THE OWNER LESSOR, THE LESSOR MANAGER, THE EQUITY INVESTOR OR THE LEASE INDENTURE TRUSTEE AND (vi) THE OWNER LESSOR LEASES FOR THE FACILITY LEASE TERM SPECIFIED HEREIN AND THE FACILITY LESSEE TAKES THE FACILITY UNDER THIS FACILITY LEASE “AS-IS”, “WHERE-IS” AND “WITH ALL FAULTS”, AND THE FACILITY LESSEE ACKNOWLEDGES THAT NONE OF THE OWNER LESSOR, THE LESSOR MANAGER, THE EQUITY INVESTOR OR THE LEASE INDENTURE TRUSTEE MAKES NOR SHALL BE DEEMED TO HAVE MADE, AND EACH EXPRESSLY DISCLAIMS, ANY AND ALL RIGHTS, CLAIMS, WARRANTIES OR REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, CONDITION, FITNESS FOR ANY PARTICULAR PURPOSE, DESIGN, OPERATION, MERCHANTABILITY OF THE FACILITY OR AS TO THE TITLE TO THE FACILITY, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE FACILITY OR CONFORMITY THEREOF TO SPECIFICATIONS, FREEDOM FROM PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT, THE ABSENCE OF ANY LATENT OR OTHER DEFECT, WHETHER OR NOT DISCOVERABLE, OR AS TO THE ABSENCE OF ANY OBLIGATIONS BASED ON STRICT LIABILITY IN TORT OR ANY OTHER EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WHATSOEVER WITH RESPECT THERETO, except that the Owner Lessor represents and warrants that on the Closing Date and the Lease Commencement Date, the Facility will be free of Owner Lessor's Liens. It is agreed that all such risks, as between the Owner Lessor, the Lessor Manager, the Equity Investor and the Lease Indenture Trustee on the one hand and the Facility Lessee on the other hand are to be borne by the Facility Lessee with respect to acts, occurrences or omissions prior to or during the Facility Lease Term. None of the Owner Lessor, the Lessor Manager, the Equity Investor or the Lease Indenture Trustee shall have any responsibility or liability to the Facility Lessee or any other Person with respect to any of the following: (1) any liability, loss or damage caused or alleged to be caused directly or indirectly by the Facility or any Component or by any inadequacy thereof or deficiency or defect therein or by any other circumstances in connection therewith; (2) the use, operation or performance of the Facility, any Unit or any Component thereof or any risks relating thereto; or (3) the construction, delivery, operation, servicing, maintenance, repair, improvement, replacement or decommissioning of the Facility, any Unit or any Component thereof. The provisions of this paragraph (a) of this Section 4.1 have been negotiated, and, except to the extent otherwise expressly stated, the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties of the Owner Lessor, the Lessor Manager, the Equity Investor and the Lease Indenture Trustee, express or implied, with respect to the Facility, any Unit or any Components thereof that may arise pursuant to any Applicable Law now or hereafter in effect, or otherwise.

(b)    From and after the Closing Date, the Owner Lessor hereby appoints irrevocably and constitutes the Facility Lessee its agent and attorney-in-fact, coupled with an interest, to assert and enforce, from time to time so long as the Owner Lessor does not have the right to exercise remedies pursuant to Section 18.2, in the name and for the account of the Owner Lessor and the Facility Lessee, as their interests

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may appear, but in all cases at the sole cost and expense of the Facility Lessee, whatever claims and rights the Owner Lessor may have in respect of the Facility, any Unit or any Component thereof, against any manufacturer, vendor or contractor, or under any express or implied warranties relating to the Facility, any Unit or any Component thereof; provided, however, that, the Owner Lessor may revoke such appointment, by written notice to the Facility Lessee, if (i) a Lease Event of Default shall have occurred and be continuing, (ii) any manufacturer, vendor or contractor is in default or otherwise not in compliance with its obligations or warranties relating to the Facility, the Unit or any Component thereof and (iii) the Facility Lessee has failed to diligently pursue the enforcement of rights under the respective warranties against such manufacturer, vendor or contractor, and such failure could reasonably be expected to result in a material adverse effect on the operation and maintenance of the Facility, the Global Common Facilities or the Site.

Section 4.2    Quiet Enjoyment. The Owner Lessor expressly agrees that, notwithstanding any provision of any other Transaction Document, but without limiting the rights and remedies which may be available to the Owner Lessor (and the Lease Indenture Trustee as its assignee) under and in accordance with Section 18, neither it, the Lessor Manager, the Equity Investor, the Equity Manager nor any other party acting by, through or under the Owner Lessor, the Lessor Manager, the Equity Investor or the Equity Manager shall interfere with or interrupt the quiet enjoyment of the use, operation and possession by the Facility Lessee of the Facility prior to the expiration or early termination of this Facility Lease in accordance with the terms hereof.

SECTION 5.    RETURN OF FACILITY

Section 5.1    Return. Upon the early termination of this Facility Lease pursuant to Section 18.2 or, if the Facility Lessee shall fail to satisfy the requirements set forth in Section 16, the exercise of dispossessory remedies under Section 18.2 on or after the Expiration Date, the Facility Lessee, at its own expense, shall deliver possession of the Facility (together with Modifications to the Facility that shall have become subject to the Head Lease and this Facility Lease pursuant to Section 10 of the Head Lease and Section 8.3 hereof) to the Owner Lessor or any permitted transferee or assignee of the Owner Lessor. The Facility Lessee shall effect delivery of the Facility at its own cost and expense by surrendering the Facility into the possession of the Owner Lessor or such transferee or assignee and by executing and delivering to the Owner Lessor or such transferee or assignee an instrument or instruments in form and substance reasonably acceptable to the Owner Lessor evidencing surrender by the Facility Lessee of the Facility Lessee's right to the Facility under this Facility Lease and to the possession thereof. In connection with such return, the Facility Lessee shall (a) assign, to the extent permitted by Applicable Law, and shall cooperate with all reasonable requests of the Owner Lessor for purposes of obtaining, or enabling the Equity Investor, the Owner Lessor or such transferees or assignees to obtain, any and all licenses, permits, approvals and consents of any Governmental Entities or other Persons that are or will be required to be obtained by the Equity Investor, the Owner Lessor or such transferee or assignee in connection with the use, operation or maintenance of the Facility on or after such return in compliance with Applicable Law; and (b) provide the Owner Lessor or a permitted transferee or assignee of the Owner Lessor, subject to any equipment manufacturer-imposed conditions of confidentiality, copies of all documents, instruments, plans, maps, specifications, manuals, drawings and other documentary

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materials relating to the installation, maintenance, operation, construction, design, modification or repair of the Facility or any portion thereof, as shall be in the Facility Lessee's possession and shall be reasonably appropriate or necessary for the ownership, possession, operation or maintenance of the Facility.

Section 5.2    Condition Upon Delivery of Possession to Owner Lessor. In connection with the delivery of possession of the Facility by the Facility Lessee to the Owner Lessor pursuant to Section 5.1, the Facility Lessee shall ensure, at the Facility Lessee's sole cost and expense, that the Facility complies with each of the following conditions:

(a)    the Facility (including all Required Modifications and Nonseverable Modifications) will be in at least as good condition as if it had been maintained, repaired and operated during the Facility Lease Term in compliance with the provisions of this Facility Lease, ordinary wear and tear and degradation excepted;

(b)    the Facility shall be free and clear of all Liens other than Permitted Post Facility Lease Term Liens;

(c)    the Facility control capability will be operational such that the Facility can be operated independently of any other power generation facility owned or operated by the Facility Lessee;

(d)    the Facility shall have at least the capability and functional ability to perform, substantially at the ratings for which it was designed in normal commercial operation, all functions for which it was designed (normal wear and tear and degradation excepted); and

(e)    no Component shall be a temporary Component and any Replacement Component shall comply with Prudent Industry Practice.

The Facility Lessee, at the request of the Owner Lessor, shall lease (subject to all existing encumbrances) to the Owner Lessor (or its designee) at the then Fair Market Rental Value thereof under the Head Lease, determined by agreement between the Facility Lessee and the Owner Lessor or, absent agreement, by an appraisal conducted according to the Appraisal Procedures, any or all Optional Modifications that are Removable Modifications and which have been made to the Facility following the Lease Commencement Date. The Facility Lessee shall enter into any amendments or modifications to the Head Lease necessary to cause such Modifications to be subject thereto; provided,that title to such Modifications will remain vested in the Head Lessor. The appraiser's fees and expenses incurred pursuant to this clause shall be paid by the Owner Lessor.

Section 5.3    Environmental Assessment. In connection with the delivery of possession of the Facility by the Facility Lessee to the Owner Lessor pursuant to Section 5.1, the Facility Lessee shall, at the reasonable request of the Owner Lessor, arrange for the preparation and delivery as promptly as practicable, but in no event later than ninety (90) days following such request, which request may be given at any time during the continuance of a Significant Lease Default (provided that in the case of a Significant Lease Default of the type described in clause (i) or (ii) of the definition thereof, only if such Significant Lease Default has

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been continuing for at least forty-five (45) days), of a Phase I or comparable environmental assessment prepared by a licensed environmental consulting firm (selected by the Facility Lessee and reasonably acceptable to the Lease Indenture Trustee, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, and the Owner Lessor) identifying any Environmental Condition on, under or relating to the Facility, the Global Common Facilities and the Site, including the compliance or non-compliance thereof with Environmental Law. In the event the Phase I discloses an Environmental Condition that requires a response action pursuant to any applicable Environmental Law or discloses non-compliance with applicable Environmental Laws, the Facility Lessee shall, at its own cost and expense, make arrangements for the prompt and diligent correction or remediation, in compliance with applicable Environmental Law, of such Environmental Condition or non-compliance and shall promptly reimburse the Owner Lessor for all reasonable costs and expenses, if any, incurred by the Owner Lessor associated with such corrective measures.

Section 5.4    Deferred Maintenance on the Facility. In connection with a delivery of possession of the Facility by the Facility Lessee to the Owner Lessor pursuant to Section 5.1, the Facility Lessee will, at the cost and expense of the Facility Lessee, perform such maintenance on the Facility that is required to satisfy the conditions described in Section 5.2. If the Facility Lessee is unable to perform such requested maintenance, it will use reasonable efforts to arrange on behalf of the Owner Lessor and with no liability to the Owner Lessor to have such maintenance performed by a Person acceptable to the Owner Lessor. The Facility Lessee shall promptly pay such rates charged by any Person in connection with such requested maintenance.

SECTION 6.    LIENS

The Facility Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Facility, the Facility Site or any interest therein or in, to or on its interest in this Facility Lease or its interest in any other Transaction Document, except Permitted Liens, and the Facility Lessee shall promptly notify the Owner Lessor of the imposition of any such Lien of which the Facility Lessee is aware and shall promptly, at its own expense, take such action as may be necessary to fully discharge or release any such Lien.

SECTION 7.    MAINTENANCE; REPLACEMENTS OF COMPONENTS

Section 7.1    Maintenance. The Facility Lessee, at its own cost and expense, will (a) cause the Facility to be maintained in accordance with Prudent Industry Practice, and will not operate the Facility other than in compliance with all Applicable Laws of any Governmental Entity having jurisdiction (provided that the Facility Lessee may contest, in good faith and by appropriate proceedings, the validity or applicability of any such Applicable Law) and (b) make, or cause to be made, all necessary repairs, renewals and replacements thereof in accordance with Prudent Industry Practice. Nothing in this Facility Lease or in the other Transaction Documents will require TVA to operate the Facility; provided that if and when TVA does operate the Facility, the Facility shall be operated in accordance with Prudent Industry Practice.

Section 7.2    Replacement of Components. In the ordinary course of maintenance, service, repair or testing, the Facility Lessee, at its own cost and expense, may remove or cause or permit to be removed from the Facility any Component; provided, however, that the Facility Lessee shall cause such Component

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to be replaced by a replacement Component which shall be free and clear of all Liens (except Permitted Liens) and in as good operating condition as the Component replaced, assuming that the Component replaced was maintained in accordance with this Facility Lease (each such replacement Component being herein referred to as a “Replacement Component”). If any Component that is subject to this Facility Lease is at any time removed from the Facility, such Component shall remain subject to this Facility Lease, wherever located, until such time as such Component shall be replaced by a Replacement Component that has been incorporated in the Facility and that meets the requirements for Replacement Components specified above. Immediately upon any Replacement Component becoming incorporated in the Facility, without further act (and at no cost to the Owner Lessor and with no adjustment to Basic Lease Rent or Termination Value), (a) the removed Component shall no longer be subject to the Head Lease, this Facility Lease or the Lien of the Lease Indenture, and shall be free and clear of all rights of the Owner Lessor and the Lease Indenture Trustee and (b) the Replacement Component shall automatically (i) become subject to the Head Lease, this Facility Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture and (ii) be deemed a part of the Facility for all purposes of the Head Lease and this Facility Lease. Notwithstanding anything in this Section 7.2 or elsewhere in this Facility Lease to the contrary, if the Facility Lessee has determined that a Component is surplus or obsolete and not necessary for the operation of the Facility in accordance with this Facility Lease, the Facility Lessee shall have the right to remove such Component without replacing such Component, and upon such removal, the removed Component shall no longer be subject to the Head Lease, this Facility Lease or the Lien of the Lease Indenture.

SECTIOIN 8.    MODIFICATIONS

Section 8.1    Required Modifications. The Facility Lessee, at its own cost and expense, shall make or cause or permit to be made all Modifications to the Facility as are required by Applicable Law or any Governmental Entity having jurisdiction (each, a “Required Modification”); provided, however, that the Facility Lessee may, in good faith and by appropriate proceedings, diligently contest the validity or application of any Applicable Law in any reasonable manner which does not involve any material risk of (a) foreclosure, sale, forfeiture or loss of, or imposition of a material Lien on the Facility or any impairment of the use, operation or maintenance of the Facility in any material respect, or (b) any criminal or material civil liability being imposed on the Lessor Manager, the Equity Investor, the Equity Manager, any Equity Note Purchaser, or the Owner Lessor, the Lease Indenture Trustee or any Noteholder.

Section 8.2    Optional Modifications. The Facility Lessee at any time may, at its own cost and expense and without the consent of any other Person, make or cause or permit to be made any Modification to the Facility as the Facility Lessee considers desirable in the proper conduct of its business (any such Modification which is not a Required Modification being referred to as an “Optional Modification”).

Section 8.3    Title to Modifications. Title to all Modifications shall be with the Head Lessor. All Required Modifications, all Nonseverable Modifications and all Modifications financed by the Owner Lessor

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by an Additional Equity Investment or a Supplemental Financing pursuant to Section 11.2 of the Participation Agreement shall (at no cost to the Owner Lessor and with no adjustment to Head Lease Rent, or except in the case of a Supplemental Financing and Additional Equity Investment, Basic Lease Rent or Termination Value) automatically upon being affixed to or incorporated into the Facility (a) become subject to the Head Lease and this Facility Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture and (b) be deemed part of the Facility for all purposes of the Head Lease and this Facility Lease. The Facility Lessee, at its own cost and expense, shall take such steps as either the Owner Lessor or, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee may reasonably require from time to time to confirm that the Modifications set forth in the preceding sentence are subject to the Head Lease and this Facility Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture. No Optional Modification which is a Severable Modification (other than such Optional Modifications which are financed by the Owner Lessor by an Additional Equity Investment or a Supplemental Financing pursuant to Section 11.2 of the Participation Agreement, any such Optional Modification that is a Severable Modification that has not been so financed is referred to as a “Removable Modification”) shall become subject to the Head Lease and this Facility Lease or the Lien of the Lease Indenture unless the Owner Lessor shall have elected to lease, in accordance with Section 5.2, such Removable Modification. Removable Modifications may be removed by the Facility Lessee at any time prior to the exercise by the Owner Lessor of its remedies under Section 18.2 at the Facility Lessee's cost and expense. The Facility Lessee will repair, at its own cost and expense, any damage caused by its removal of any Removable Modifications.

SECTION 9.    NET LEASE

This Facility Lease is a “net lease” and the Facility Lessee's obligation to pay all Basic Lease Rent payable hereunder, as well as any Termination Value (or amount computed by reference thereto) in lieu of Basic Lease Rent following termination of this Lease, shall be absolute and unconditional under any and all circumstances and shall not be terminated, extinguished, diminished, lost or otherwise impaired by any circumstance of any character, including by (a) any setoff, counterclaim, recoupment, defense or other right which the Facility Lessee may have against the Owner Lessor, the Lessor Manager, the Equity Investor, the Equity Manager, any Equity Note Purchaser, or the Lease Indenture Trustee, the Noteholders or any other Person, including any claim as a result of any breach by any of said parties of any covenant or provision in this Facility Lease or any other Transaction Document, (b) any lack or invalidity of title or other interest or any defect in the title or other interest, condition, design, operation, merchantability or fitness for use of the Facility or any Component or any portion thereof, or any eviction by paramount title or otherwise, or any unavailability of the Facility, the Global Common Facilities, the Site, any Component or any portion thereof, (c) the failure to complete the construction of the Facility, or to reach Substantial Completion or Final Completion under, and as defined in, the Construction Management Agreement, (d) any loss or destruction of, or damage to, the Facility, the Global Common Facilities, the Site or any Component or any portion thereof or interruption or cessation in the use or possession thereof or any part thereof by the Facility Lessee for any reason whatsoever and of whatever duration, (e) the condemnation, requisitioning, expropriation, seizure or other taking of title to or use of the Facility, the Global Common Facilities, the Site or any Component

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or any portion thereof by any Governmental Entity or otherwise, (f) the invalidity or unenforceability or lack of due authorization or other infirmity of this Facility Lease or any other Transaction Document, (g) the lack of right, power or authority of the Owner Lessor to enter into this Facility Lease or any other Transaction Document, (h) any ineligibility of the Facility, the Global Common Facilities, the Site or any Component or any portion thereof for any particular use, whether or not due to any failure of the Facility Lessee to comply with any Applicable Law, (i) any event of “force majeure”, (j) any legal requirement similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding, (k) any insolvency, bankruptcy, reorganization or similar proceeding by or against the Facility Lessee or any other Person, (l) any Lien of any Person with respect to the Site, the Facility, the Global Common Facilities or any Component or any portion thereof, or (m) any other cause, whether similar or dissimilar to the foregoing, any present or future law notwithstanding, except as expressly set forth herein or in any other Transaction Document, it being the intention of the parties hereto that all Basic Lease Rent (and all amounts, including Termination Value (or amounts computed by reference thereto), in lieu of Basic Lease Rent following termination of this Facility Lease in whole or in part) payable by the Facility Lessee hereunder shall continue to be payable in all events in the manner and at times provided for herein. All Rent, including Basic Lease Rent (and all amounts, including Termination Value (or amounts computed by reference thereto), in lieu of Basic Lease Rent following termination of this Facility Lease in whole or in part), shall not be subject to any abatement and the payments thereof shall not be subject to any setoff or reduction for any reason whatsoever, including any present or future claims of the Facility Lessee or any other Person against the Owner Lessor or any other Person under this Facility Lease or otherwise. To the extent permitted by Applicable Law, the Facility Lessee hereby waives any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Facility Lease except in accordance with Sections 10, 13 or 15 hereof. If for any reason whatsoever this Facility Lease shall be terminated in whole or in part by operation of law or otherwise, except as specifically provided herein, the Facility Lessee nonetheless agrees, to the extent permitted by Applicable Law, to pay to the Owner Lessor an amount equal to each installment of Basic Lease Rent and all Supplemental Lease Rent due and owing, at the time such payment would have become due and payable in accordance with the terms hereof had this Facility Lease not been so terminated. Nothing contained herein shall be construed to waive any claim which the Facility Lessee might have under any of the Transaction Documents or otherwise or to limit the right of the Facility Lessee separately to make any claim it might have against the Owner Lessor or any other Person or to separately pursue such claim in such manner as the Facility Lessee shall deem appropriate.

SECTION 10. EVENTS OF LOSS

Section 10.1    Occurrence of Events of Loss. The Facility Lessee will promptly notify the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee of any damage to, or other event with respect to, any portion of the Facility which the Facility Lessee reasonably anticipates will cause an Event of Loss. If an Event of Loss shall occur, then no later than eighteen months following such occurrence, the Facility Lessee shall notify the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee, in writing of its election to either (a) subject to the satisfaction of the conditions set forth in Section 10.3(a), rebuild or replace the Facility or a Relevant Portion of the Facility or (b) terminate this

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Facility Lease, in whole or in part with respect to the Facility or a Relevant Portion of the Facility, as the case may be, by electing to effect an Early Buy Out pursuant to Section 15.1 hereof; provided, however, that the Facility Lessee may only elect to terminate the Facility Lease in part with respect to a Relevant Portion of the Facility to the extent that the remaining Units subject to the Facility Lease continue to be (or will be, after repairing in accordance with this Facility Lease any damage to such remaining Units which may have occurred as a result of the Event of Loss to a Relevant Portion of the Facility to which such partial termination relates) commercially viable in accordance with Prudent Industry Practice. Subject to the last sentence of Section 15.1, the Facility Lessee may elect the option provided in clause (b) of the preceding sentence regardless of whether a Relevant Portion of the Facility is to be rebuilt or replaced. If the Facility Lessee fails to make an election as provided above, an Event of Loss shall be deemed to occur with respect to the Facility or, if the Event of Loss relates to less than all of the Units, a Relevant Portion of the Facility, as of the end of the eighteen-month period referred to in the second sentence of this Section 10.1 and the Facility Lessee will be deemed to have made the election to terminate this Facility Lease, in whole or in part, as the case may be, by exercising its Early Buy Out pursuant to Section 15.2 and will be deemed to have delivered an Early Buy Out Notice pursuant to Section 15.2 as of the end of such eighteen-month period.

Section 10.2    Condemnation Payments. Any payments received at any time by the Owner Lessor, the Lease Indenture Trustee or the Facility Lessee from any Governmental Entity as a result of the occurrence of an Event of Loss described in clause (c) of the definition of Event of Loss shall be promptly paid to the Owner Lessor or, if the Lien of the Lease Indenture shall not have been discharged or terminated, to the Lease Indenture Trustee, to be held as security for the Facility Lessee's obligations hereunder and under the other Transaction Documents, and shall be promptly applied, first, to satisfy the Facility Lessee's obligation to pay Termination Value and other amounts required to be paid by it under Section 15.2(a), if any, and, so long as no Significant Lease Default shall then have occurred and be continuing, the balance shall be paid to or retained by, as applicable, the Facility Lessee.

Section 10.3    Rebuild or Replace. The Facility Lessee's right to rebuild or replace the Facility or any Relevant Portion of the Facility pursuant to Section 10.1(a) shall be subject to the fulfillment, at the Facility Lessee's sole cost and expense, in addition to the conditions contained in said clause (a), of the following conditions:

(a)    the Facility Lessee shall cause the rebuilding or replacement of the Facility or any Relevant Portion of the Facility to commence as soon as reasonably practicable after notifying the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee pursuant to Section 10.1(a) of its election to rebuild or replace the Facility or any Relevant Portion of the Facility, and in all events within thirty-six (36) months of the occurrence of the event that caused such Event of Loss, and will cause work on such rebuilding or replacement to proceed diligently thereafter. As the rebuilding or replacement of the Facility or any Relevant Portion of the Facility progresses and title to the rebuilt or replacement Facility or Relevant Portion of the Facility vests in the Head Lessor, the rebuilt or replacement facilities shall become subject to the Head Lease, this Facility Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture and be deemed a part of the Facility for all purposes of the Head Lease and this Facility Lease, automatically

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without any further act by any Person; and

(b)    within thirty (30) days after the date of the completion of such rebuilding or replacement (the “Rebuilding Closing Date”) the following documents shall be duly authorized, executed and delivered and, if appropriate, filed for recordation by the respective party or parties thereto and shall be in full force and effect, and an executed counterpart of each thereof shall be delivered to the Owner Lessor, the Lessor Manager and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee: (i) supplements to the Head Lease and this Facility Lease subjecting the rebuilt or replacement facilities to the Head Lease and this Facility Lease (with no change in Head Lease Rent or in Basic Lease Rent as a result of such rebuilding or replacement), (ii) so long as the Lien of the Lease Indenture shall not have been terminated or discharged, supplements to the Lease Indenture subjecting the rebuilt or replacement facilities to the Lien of the Lease Indenture, (iii) such recordings and filings as may be reasonably requested by the Owner Lessor or the Lease Indenture Trustee to be made or filed, (iv) an opinion of counsel of the Facility Lessee, such counsel and such opinion to be reasonably satisfactory to the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee to the effect that (A) the supplements to the Head Lease and this Facility Lease required by clause (i) above constitute effective instruments for subjecting the rebuilt or replacement facilities to the Head Lease and this Facility Lease, (B) the supplements to the Lease Indenture required by clause (ii) above, if any, constitute effective instruments for subjecting the rebuilt or replacement facilities to the Lien of the Lease Indenture,and (C) all filings and other action necessary to perfect and protect the Owner Lessor's and, if applicable, the Lease Indenture Trustee's interest in the rebuilt or replacement facilities have been accomplished, (v) a report by an independent engineer certifying that the rebuilt or replacement facilities are in a state of repair and condition required by this Facility Lease, and (vi) an Officer's Certificate of the Facility Lessee as to compliance with this Section 10.3 and that no Lease Event of Default shall have occurred and be continuing as a result of the rebuilding or replacement.

Whether or not the transactions contemplated by this Section 10.3 are consummated, the Facility Lessee agrees to pay or reimburse, on an After-Tax Basis, any costs or expenses (including reasonable and documented legal fees and expenses) incurred by the Owner Lessor, the Lessor Manager and the Lease Indenture Trustee in connection with the transactions contemplated by this Section 10.3.

Section 10.4    Application of Payments Not Relating to an Event of Loss. In the event that during the Facility Lease Term the use of all or any portion of the Facility is requisitioned or taken by or pursuant to a request of any Governmental Entity under the power of eminent domain or otherwise for a period which does not constitute an Event of Loss, the Facility Lessee's obligation to pay all installments of Basic Lease Rent shall continue for the duration of such requisitioning or taking. The Facility Lessee shall be entitled to receive and retain for its own account all sums payable for any such period by such Governmental Entity as compensation for such requisition or taking of possession; provided, however, that if at the time of such payment a Significant Lease Default shall have occurred and be continuing, all such sums shall be paid to and held by the Lease Indenture Trustee, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, or thereafter, the Owner Lessor as security for the obligations of the Facility Lessee

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under this Facility Lease, and such amount shall be paid to the Facility Lessee only at such time as no Significant Lease Default shall be continuing.

SECTION 11.    INSURANCE

Section 11.1    Insurance by Owner Lessor. At any time, the Owner Lessor (either directly or in the name of the Equity Investor), the Equity Investor or the Lease Indenture Trustee may at its own expense and for its own account carry insurance with respect to its interest in the Facility or the Ground Interest. Any insurance payments received from policies maintained by the Owner Lessor, the Equity Investor or the Lease Indenture Trustee pursuant to the previous sentence shall be retained by the Owner Lessor, the Equity Investor or the Lease Indenture Trustee, as the case may be.

Section 11.2    Insurance by the Facility Lessee.

(a)    If and for so long as the Facility Lessee is rated less than BBB+ by S&P or Baa1 by Moody's, the Facility Lessee shall maintain (or cause to be maintained) property and commercial general liability insurance with respect to the Facility customarily carried by other operators of similar facilities of comparable size as the Facility and against such loss, damage or liability and with such deductibles as are customarily insured against. Any such property insurance required to be maintained pursuant to this Section 11.2(a) shall, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, name the Lease Indenture Trustee as loss payee with respect to any claim in excess of $10 million and such amounts shall be paid to the Facility Lessee as and when needed to pay or reimburse the Facility Lessee for any construction costs to repair the damage to which such claim relates, with the balance, if any paid to the Facility Lessee upon completion of such repairs, or applied at the direction of the Facility Lessee to pay Termination Value or any other amounts payable by the Facility Lessee under Section 15 in connection with an Event of Loss. During the period the Facility Lessee is required to maintain insurance pursuant to this Section 11.2(a), the Facility Lessee shall no less frequently than annually provide the Owner Lessor, the Equity Investor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee, a description of the insurance it is maintaining pursuant to this Section 11.2 and evidence which may at the Facility Lessee's option, be in the form of an Officer's Certificate, that all premiums in respect of such policies are current and that such insurance is in effect.

(b)    Notwithstanding Section 11.2(a), the Facility Lessee agrees that if and to the extent the Facility Lessee is insuring other gas-fired, combined cycle generating facilities similar to the Facility which are owned or leased by the Facility Lessee or self-insures for third party liability for the Facility Lessee's operation of such other facilities owned or leased by the Facility Lessee, the Facility Lessee shall maintain (or cause to be maintained) insurance for property damage or third party liability, as the case may be, with respect to the Facility in comparable amounts, with comparable deductibles and on other terms substantially comparable to the insurance maintained with respect to such other facilities.

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SECTION 12.    INSPECTION

During the Facility Lease Term, the Owner Lessor, and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee and their representatives may, during normal business hours, on reasonable notice to the Facility Lessee and at their own risk and expense (except, at the expense but not risk, of the Facility Lessee when a Significant Lease Default or a Lease Event of Default has occurred and is continuing), inspect the Facility and the records with respect to the operations and maintenance thereof, in the Facility Lessee's custody; provided, however, that so long as no Significant Lease Default or Lease Event of Default shall have occurred and be continuing, each such Person (together with their representatives) shall only be entitled to make one inspection in any twelve-month period; provided, further, that the limitations on the number of inspections included in the preceding proviso shall not apply with respect to any such inspection made in connection with the occurrence of (a) a catastrophic failure of any Component or system which causes a forced outage in excess of sixty (60) days, (b) failure or malfunction of any equipment resulting in serious injury or death, (c) a significant curtailment of operations due to a final, nonappealable order of a Governmental Entity having jurisdiction over Environmental Laws or safety, or (d) following commencement of commercial operations, cessation of operations of the Facility for more than one-hundred and eighty (180) days. Any such inspection will not unreasonably interfere with the operation or maintenance of the Facility or the conduct by the Facility Lessee of its business and will be in accordance with Applicable Law and the Facility Lessee's safety and security precautions and confidentiality undertakings, as applicable. In no event shall the Owner Lessor, the Lessor Manager, the Equity Investor or the Lease Indenture Trustee have any duty or obligation to make any such inspection and such Persons shall not incur any liability or obligation by reason of not making any such inspection.

SECTION 13.    REGULATORY EVENT OF LOSS

Section 13.1    Occurrence of a Regulatory Event of Loss. The Owner Lessor and the Equity Investor shall promptly notify the Facility Lessee and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee of an event or occurrence of which it has Actual Knowledge that it reasonably believes constitutes a Regulatory Event of Loss with respect to it. Such notice shall specify in reasonable detail the event or occurrence giving rise to such Regulatory Event of Loss and the materially burdensome rate of return regulation or other applicable public utility law or regulation of a Governmental Entity. The Owner Lessor, the Equity Investor and the Facility Lessee shall reasonably cooperate and take reasonable measures to alleviate such Regulatory Event of Loss at the cost and expense of the party requesting such cooperation. The Owner Lessor or the Equity Investor may elect to declare a Regulatory Event of Loss by giving notice to the Facility Lessee within twelve (12) months of obtaining Actual Knowledge of an event or circumstance which upon the giving of such notice would be a Regulatory Event of Loss (the “Election Notice”).

Section 13.2    Procedure for Termination With Respect to a Regulatory Event of Loss. If a Regulatory Event of Loss occurs, then, within sixty (60) days of receiving the Election Notice from the Owner Lessor or the Equity Investor, the Facility Lessee shall elect one of the following:

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(a)    If the event or occurrence giving rise to such Regulatory Event of Loss would be alleviated by transferring one or more Equity Notes to the Facility Lessee, the Facility Lessee may purchase such Equity Notes from the applicable Equity Note Purchaser on the next succeeding Termination Date, for an amount equal to the Regulatory Event of Loss Termination Payment, in which case each such Equity Note Purchaser shall transfer all of its right, title and interest in its Equity Note by appropriate instruments of transfer without representations (other than that such Equity Note is free and clear of any Liens) to the Facility Lessee or such other Person as the Facility Lessee shall designate;

(b)    If the event or occurrence giving rise to such Regulatory Event of Loss would be alleviated by transferring one or more Equity Notes to another Person, the Facility Lessee may pay each Equity Note Purchaser that holds such Equity Notes on the next succeeding Termination Date the amount, if any, by which (i) the Regulatory Event of Loss Termination Payment, exceeds (ii) the net proceeds of the sale of such Equity Note Purchaser's Equity Note pursuant to this clause (b) received by such Equity Note Purchaser; provided, that if the Facility Lessee elects to make the payment pursuant to this clause (b), then such Equity Note Purchaser shall sell its Equity Note in such manner, to such Person and at such price as directed by the Facility Lessee, at the cost and expense of the Facility Lessee; provided, however, that if such sale does not occur on or before the Termination Date referred to in clause (a) above, then the Facility Lessee shall be deemed to have elected to purchase such Equity Note Purchaser's Equity Note under clause (a) and shall make the payment required to be made thereunder to such Equity Note Purchaser pursuant thereto on such Termination Date;

(c)    If the event or occurrence giving rise to such Regulatory Event of Loss would be alleviated by causing the Equity Investor to prepay one or more Equity Notes, the Facility Lessee may cause the Equity Investor to prepay such Equity Notes by paying to the Owner Lessor for distribution to the Equity Investor for prepayment of such Equity Notes pursuant to the Equity Note Purchase Agreement on the next succeeding Termination Date an amount equal to the Regulatory Event of Loss Termination Payment, whereupon Basic Lease Rent (Equity Portion) and Termination Value (Equity Portion) shall be reduced in accordance with Section 3.4 hereof in an amount equal to the product of (i) Basic Lease Rent (Equity Portion) or Termination Value (Equity Portion), as applicable, multiplied by (ii) the Equity Note Purchaser's Percentage Interest; provided, that the Facility Lessee may only make an election under this clause (c) with respect to an Equity Note if (A) the total number of Equity Note Purchasers for which an election under this clause (c) is made is less than a majority of the aggregate number of Equity Note Purchasers and (B) the Equity Notes held by such Equity Note Purchasers are less than a majority of the aggregate outstanding amount of Equity Notes of the Equity Investor; or

(d)    If the event or occurrence giving rise to such Regulatory Event of Loss would be alleviated by transferring the Equity Investor's Membership Interests in whole or in part to another Person, the Facility Lessee may pay the Equity Investor on the next succeeding Termination Date the amount, if any, by which (i) the Termination Value (Equity Portion), exceeds (ii) the net proceeds of the sale of Membership Interests pursuant to this clause (d) received by the Equity Investor; provided, that if the Facility Lessee elects to make the payment pursuant to this clause (d), then the Equity Investor shall sell such Membership Interests in such manner, to such Person (which, subject to Applicable Law, may be the Facility Lessee) and at such

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price as directed by the Facility Lessee, at the cost and expense of the Facility Lessee; provided, however, that if such sale does not occur on or before the Termination Date referred to in clause (a) above, then the Facility Lessee shall be deemed to have elected to purchase such Membership Interests and shall pay the Equity Investor an amount equal to the Termination Value (Equity Portion), in which case the Equity Investor shall transfer all of its right, title and interest in such Membership Interests by appropriate instruments of transfer without representations to the Facility Lessee or such other Person as the Facility Lessee shall designate.

(e)    The Facility Lessee may terminate the Facility Lease (in whole but not in part) by electing an Early Buy Out in accordance with Section 15.1 hereof.

Simultaneously with the payment of any amounts contemplated under clauses (a), (b), (c) or (d) of this Section 13.2 and as a condition to the sale, transfer or prepayment of the applicable Equity Notes or Equity Investor's Membership Interests, as applicable, the Facility Lessee shall pay all Basic Lease Rent (Equity Portion) and Supplement Lease Rent due and payable on the applicable Termination Date (including all costs and expenses of the Equity Investor, the Owner Lessor or any Equity Note Purchaser incurred in connection therewith and all sales, use, value added and other Taxes required to be paid by the Facility Lessee to the Equity Investor or applicable Equity Note Purchaser associated with the sale, transfer or retirement of the Equity Note Purchaser's Equity Notes or Equity Investor's Membership Interests, as applicable) whereupon the Facility Lessee shall cease to have any liability with respect to the Transaction Documents to such Equity Note Purchaser in the case of the payment of amounts pursuant to clauses (a), (b) and (c) and to all Equity Note Purchasers and the Equity Investor in the case of the payment of amounts pursuant to clause (d), except for obligations (including those under Sections 9.1 and 9.2 of the Participation Agreement) surviving pursuant to the express terms of any Transaction Document or which have otherwise accrued but not been paid as of the applicable Termination Date. If necessary, the parties shall reasonably cooperate to cause the provisions of the Owner Lessor LLC Agreement to be amended to reflect the existence of more than one Equity Investor with a Membership Interest in the Owner Lessor.

SECTION 14.    [RESERVED]

SECTION 15.    EARLY BUY OUT

Section 15.1    Election of Early Buy Out. The Facility Lessee shall have the right, at its option and at any time (including (a) during the occurrence and continuance of a Significant Lease Default or Lease Event of Default so long as the Facility Lease shall not have been terminated by the Owner Lessor pursuant to Section 18.2, (b) following an Event of Loss pursuant to Section 10.1 and (c) following a Regulatory Event of Loss for which the Facility Lessee has made the election described in Section 13.2(d)), by giving written notice (the “Early Buy Out Notice”) to the Owner Lessor, the Lessor Manager, and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee, to purchase the Owner Lessor's Interest and terminate this Facility Lease, either in whole with respect to the entire Facility or in part with respect to a Relevant Portion of the Facility (an “Early Buy Out”). In the case of an Early Buy Out other than in connection with an Event of Loss or a Regulatory Event of Loss, the Facility Lessee will specify a Termination Date in the Early Buy Out Notice upon which date such purchase and termination

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will occur (the “Early Buy Out Date”), which Early Buy Out Date shall occur on a date occurring at least thirty (30) days after the delivery of the Early Buy Out Notice. In the case of an Early Buy Out in connection with an Event of Loss, the Early Buy Out Date shall occur on (i) the next Termination Date occurring at least one month after the Facility Lessee's delivery of the Early Buy Out Notice, or (ii) if the Event of Loss shall be deemed to have occurred pursuant to the last sentence of Section 10.1, on the Termination Date occurring next following thirty (30) days after the date as of which an Event of Loss shall have been so deemed to have occurred. In the case of an Early Buy Out in connection with a Regulatory Event of Loss, the Early Buy Out Date shall be the Termination Date next succeeding the date of delivery of the Early Buy Out Notice pursuant to Section 13.2(d) with respect to such Regulatory Event of Loss. The Facility Lessee may only purchase the Owner Lessor's Interest in part or terminate the Facility Lease in part with respect to a Relevant Portion of the Facility to the extent that the remaining Units subject to the Facility Lease continue to be commercially viable in accordance with Prudent Industry Practice. If the Facility Lessee exercises the Early Buy Out in connection with an Event of Loss or Regulatory Event of Loss and the Facility Lessee certifies either that (A) such Early Buy Out is in connection with an Event of Loss described in clause (c) of the definition thereof or a Regulatory Event of Loss or (B) such Early Buy Out is in connection with an Event of Loss described in clauses (a) or (b) of the definition thereof and the Facility Lessee has no current intention to rebuild or replace the Facility or a Relevant Portion of the Facility, then such Early Buy Out shall constitute an Early Buy Out in connection with an Event of Loss or a Regulatory Event of Loss, as applicable, and no Make Whole Premium or Equity Breakage shall be due in connection with such Early Buy Out.

Section 15.2    Procedure for Exercise of an Early Buy Out.

(a)    If the Facility Lessee shall have exercised its option under Section 15.1, then, on the Early Buy Out Date the Facility Lessee shall pay to the Owner Lessor (i) the Termination Value with respect to the Termination Date that coincides with the Early Buy Out Date, (ii) all amounts of Supplemental Lease Rent (including all reasonable and documented out-of-pocket costs and expenses of the Owner Lessor, the Lessor Manager, the Equity Investor, any Equity Note Purchaser and the Lease Indenture Trustee, and all sales, use, value added and other Taxes associated with the exercise of the Early Buy Out pursuant to this Section 15 and required to be indemnified by the Facility Lessee pursuant to Section 9.2 of the Participation Agreement) on an After-Tax Basis due and payable on or prior to such Early Buy Out Date, (iii) any unpaid Basic Lease Rent due on or before such Early Buy Out Date, and (iv) other than in the case of an Early Buy Out exercised in connection with an Event of Loss or a Regulatory Event of Loss so long as the Facility Lessee has delivered the certificate referred to in the last sentence of Section 15.1, the Make Whole Premium, if any, due on the Lessor Notes being prepaid pursuant to this Section 15 and the Equity Breakage in respect of the Equity Investment.

(b)    Upon receipt by the Lease Indenture Trustee, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, or thereafter, the Owner Lessor, of the payments required to be made pursuant to Section 15.2(a), (i) Basic Lease Rent shall cease to accrue, in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, calculated pursuant to Section 3.2, (ii) the Facility Lessee's obligations hereunder shall terminate,

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in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, except for Supplemental Lease Rent and other obligations (including those under Sections 9.1 and 9.2 of the Participation Agreement) surviving pursuant to the express provisions of any Transaction Document, (iii) this Facility Lease and the Head Lease shall terminate, in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, (iv) the Owner Lessor shall, at the Facility Lessee's cost and expense, execute and deliver to the Facility Lessee a release or termination of this Facility Lease, in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility, or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, (v) the Owner Lessor shall transfer (by an appropriate instrument of transfer in form and substance reasonably satisfactory to the Owner Lessor and prepared and recorded by and at the expense of the Facility Lessee) all of its right, title and interest in and to the Owner Lessor's Interest, in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility, or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, to the Facility Lessee pursuant to this Section 15.2 and Section 6.2 of the Head Lease on an “as is,” “where is” and “with all faults” basis, without representations or warranties other than a warranty as to the absence of Owner Lessor's Liens and a warranty of the Equity Investor as to the absence of Equity Investor's Liens, and (vi) the Owner Lessor shall discharge the Lien of the Lease Indenture, in whole, in the case of an exercise of the Early Buy Out with respect to the entire Facility, or in part, with respect to a Relevant Portion of the Facility, in the case of an exercise of the Early Buy Out with respect to a Relevant Portion of the Facility, and execute and deliver appropriate releases and other documents or instruments necessary or desirable to effect the foregoing, all to be prepared, filed and recorded (as appropriate) by and at the cost and expense of the Facility Lessee.

Section 15.3    Replacement and Exchange of the Lessor Notes. In connection with any proper exercise of the Early Buy Out under this Section 15 with respect to the entire Facility, the Facility Lessee may, at its option, elect to replace and exchange in full all the Lessor Notes for Replacement Power Bonds and if (a) the Facility Lessee shall have replaced and exchanged the Lessor Notes for Replacement Power Bonds in accordance with Section 2.10(c) of the Lease Indenture, (b) all other conditions contained in such Section 2.10(c) thereof shall have been satisfied, and (c) no Significant Lease Default or Lease Event of Default shall have occurred and be continuing after giving effect to such replacement and exchange, then the obligation of the Facility Lessee to pay the Termination Value pursuant to Section 15.2 shall be reduced by the outstanding principal amount of and accrued interest on the Lessor Notes so replaced and exchanged by the Facility Lessee.

SECTION 16.    TRANSFER UPON THE EXPIRATION DATE

On or after the Expiration Date, so long as no Significant Lease Default shall then have occurred and be continuing and the Owner Lessor has not exercised dispossessory remedies under Section 18.2 in connection therewith, then upon payment of all amounts of Basic Lease Rent and all amounts of Supplemental Lease Rent then due and payable (including all reasonable out of pocket costs and expenses of the Owner

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Lessor, the Equity Investor and the Lease Indenture Trustee, all sales, use, value added and other Taxes required to be indemnified by the Facility Lessee pursuant to Section 9.2 of the Participation Agreement associated with the transfer to be effected pursuant to this Section 16 and any Basic Lease Rent due on or before the Expiration Date), (i) the Facility Lessee shall cease to have any liability to the Owner Lessor hereunder or under the other Transaction Documents, except for Supplemental Lease Rent and other obligations (including those under Sections 9.1 and 9.2 of the Participation Agreement) surviving pursuant to the express terms of any Transaction Document, (ii) subject to clause (i) above, this Facility Lease shall terminate, (iii) the Owner Lessor shall transfer to the Facility Lessee, at the Facility Lessee's cost and expense, by an appropriate instrument of transfer (in form and substance reasonably satisfactory to the Owner Lessor and prepared by and at the expense of the Facility Lessee), all of its right, title and interest in and to the Owner Lessor's Interest pursuant to this Section 16 and Section 6.2 of the Head Lease on an “as is,” “where is” and “with all faults” basis, without representations or warranties other than a warranty as to the absence of Owner Lessor's Liens and a warranty of the Equity Investor as to the absence of Equity Investor's Liens and (iv) the Owner Lessor shall discharge the Lien of the Lease Indenture, and the Owner Lessor and the Equity Investor shall execute and deliver appropriate releases and other documents or instruments necessary or desirable to effect the foregoing, all to be prepared, filed and recorded (as appropriate) by and at the cost and expense of the Facility Lessee. In connection with the transfer described in clause (iii) of the preceding sentence, the Owner Lessor (at the Facility Lessee's cost and expense) shall (a) assign, to the extent permitted by Applicable Law, and shall cooperate with all reasonable requests of the Facility Lessee for purposes of obtaining, or enabling the Facility Lessee to obtain, any and all licenses, permits, approvals and consents of any Governmental Entities or other Persons that are held in the name of the Owner Lessor or the Lessor Manager and are or will be required to be obtained by the Facility Lessee in connection with the Facility Lessee's ownership, use, operation and maintenance of the Facility on or after such transfer in compliance with Applicable Law. Except for amounts expressly set forth in this Section 16 (including Supplemental Lease Rent and other obligations (including those under Sections 9.1 and 9.2 of the Participation Agreement) surviving pursuant to the express terms of any Transaction Document), the Facility Lessee shall not be obligated to pay any additional amounts or compensation to the Owner Lessor, the Lessor Manager, the Equity Investor, and the Equity Manager in connection with the transfer to the Facility Lessee of the Owner Lessor's right, title and interest in the Facility pursuant to this Section 16.

SECTION 17.    EVENTS OF DEFAULT

The following events shall constitute a “Lease Event of Default” hereunder (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Entity):

(a)    the Facility Lessee shall fail to make any payment of Basic Lease Rent or Termination Value after the same shall have become due and such failure shall have continued for five (5) Business Days after the same shall become due; or

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(b)    the Facility Lessee shall fail to make any payment of Supplemental Lease Rent (other than Excepted Payments, unless the Equity Investor shall have declared a default with respect thereto, and Termination Value described in clause (a)), after the same shall have become due and such failure shall have continued for a period of thirty (30) days after receipt by the Facility Lessee of written notice of such default from the Lessor Manager, the Owner Lessor, or the Lease Indenture Trustee; or

(c)    the Facility Lessee shall fail to perform or observe in any material respect any covenant, obligation or agreement to be performed or observed by it under this Facility Lease, the Participation Agreement, the Head Lease, the Ground Lease or the Ground Sublease (other than any covenant, obligation or agreement referred to in clauses (a) or (b) of this Section 17), which shall continue unremedied for sixty (60) days after receipt by the Facility Lessee of written notice thereof from the Lessor Manager (acting at the direction of the Equity Investor) or the Lease Indenture Trustee; provided, however, that if such condition cannot be remedied within such sixty (60)-day period, then the period within which to remedy such condition shall be extended up to an additional two-hundred and seventy (270) days, so long as the Facility Lessee diligently pursues such remedy and such condition is capable of being remedied within such additional two-hundred and seventy (270)-day period; provided, further, that, in the case of the Facility Lessee's obligation set forth in clause (a) of Section 7.1, if, to the extent and for so long as a test, challenge, appeal or proceeding shall be prosecuted in good faith by the Facility Lessee, the failure by the Facility Lessee to comply with such requirement shall not constitute a Lease Event of Default if such test, challenge, appeal or proceeding shall not involve any material risk of (i) foreclosure, sale, forfeiture or loss of, or imposition of a lien on, the Facility, (ii) the impairment of the use, operation or maintenance of the Facility in any material respect or (iii) any criminal liability being incurred by, or any material adverse effect on the interests of, the Lessor Manager, the Equity Investor, any Equity Note Purchaser, the Equity Manager, the Owner Lessor, any Noteholder or the Lease Indenture Trustee, including subjecting the Equity Investor, any Equity Note Purchaser or the Owner Lessor to regulation as a public utility or similar entity under Applicable Law; and provided, further, that in the case of the Facility Lessee's obligation set forth in clause (a) of Section 7.1, if the noncompliance is not a type that can be immediately remedied, the failure to comply shall not be a Lease Event of Default if the Facility Lessee is taking all reasonable action to remedy such noncompliance and if, but only if, such noncompliance shall not involve any material risk described in clause (i), (ii) or (iii) of the preceding proviso; or

(d)    any representation or warranty made by the Facility Lessee in the Operative Documents shall prove to have been incorrect in any material respect when made and continues to be material and unremedied for a period of sixty (60) days after receipt by the Facility Lessee of written notice thereof from the Equity Investor or the Lease Indenture Trustee; provided, however, that if such condition cannot be remedied within such sixty (60)-day period, then the period within which to remedy such condition shall be extended up to an additional two-hundred and seventy (270) days, so long as the Facility Lessee diligently pursues such remedy and such condition is reasonably capable of being remedied within such additional two-hundred and seventy (270)-day period; or

(e)    the Facility Lessee shall (i) commence a voluntary case or other proceeding seeking relief under Title 11 of the Bankruptcy Code or liquidation, reorganization or other relief with respect to itself

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or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or apply for or consent to the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or (ii) consent to, or fail to controvert in a timely manner, any such relief or the appointment of or taking possession by any such official in any voluntary case or other insolvency proceeding commenced against it, or (iii) file an answer admitting the material allegations of a petition filed against it in any such proceeding, or (iv) make a general assignment for the benefit of creditors; or

(f)    an involuntary case or other proceeding shall be commenced against the Facility Lessee seeking (i) liquidation, reorganization or other relief with respect to it or its debts under Title 11 of the Bankruptcy Code or any bankruptcy, insolvency or other similar law now or hereafter in effect, or (ii) the appointment of a trustee, receiver, liquidator, custodian or other similar official with respect to it or any substantial part of its property or (iii) the winding-up or liquidation of the Facility Lessee; and such involuntary case or other insolvency proceeding shall remain undismissed and unstayed for a period of ninety (90) days (unless, in lieu of dismissal or stay of such proceeding, the Facility Lessee shall deliver to the Owner Lessor and the Lease Indenture Trustee an opinion of counsel reasonably satisfactory to each of them to the effect that the Facility Lessee is not an entity which can become a “debtor” under Section 101 of Title 11 of the Bankruptcy Code); or

(g)    the Facility Lessee shall repudiate or disaffirm the validity or enforceability of this Facility Lease, the Head Lease or the Ground Lease; or

(h)    during any period when there shall exist an “Event of Default” as defined in the Bond Resolution, the Facility Lessee shall have failed to complete an Environmental Site Assessment or failed to Remediate an Environmental Condition required to be Remediated under Applicable Law, each in accordance with Section 5.8 of the Participation Agreement and whether or not the time periods specified in such section have elapsed.

SECTION 18.    REMEDIES

Section 18.1    Remedies for Lease Event of Default. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, the Owner Lessor may, at its option, declare this Facility Lease to be in default by written notice to the Facility Lessee; provided,that upon the occurrence of a Lease Event of Default described in paragraph (e) or (f) of Section 17, this Facility Lease shall automatically be deemed to be in default without the need for giving any notice; and at any time thereafter, so long as the Facility Lessee shall not have remedied all outstanding Lease Events of Default, the Owner Lessor may proceed by appropriate court action or actions, either at law or in equity, to enforce performance by the Facility Lessee, at the Facility Lessee's sole cost and expense, of the applicable covenants and terms of this Facility Lease or to recover damages for breach thereof, including recovery of any payment of Rent then due and unpaid, provided, further,that in connection with such action or actions, the Owner

23

Lessor may not, except as permitted under Section 18.2, seek (i) termination of this Facility Lease or any other Transaction Document, (ii) dispossession of the Facility Lessee or (iii) acceleration or early payment of amounts not yet due and payable under this Facility Lease or any other Transaction Document, provided, further,that the exclusive remedy with respect to a Lease Event of Default under Section 17(h) when no other Lease Event of Default has occurred and is continuing is set forth in Section 18.5.

Section 18.2    Additional Remedies for Specified Lease Events of Default. On a date no earlier than one-hundred and eighty (180) days after the occurrence of a Lease Event of Default specified in Sections 17(a) or (b), or immediately upon the occurrence of a Lease Event of Default specified in Sections 17(e), (f), or (g), but, in each case, only to the extent the applicable Lease Event of Default is then continuing, and at any time thereafter so long as the same shall be continuing, the Owner Lessor, in its sole discretion, may elect, and to the extent permitted by, and subject to compliance with any mandatory requirements of, Applicable Law then in effect:

(a)    by notice in writing to the Facility Lessee, to terminate this Facility Lease whereupon all right of the Facility Lessee to the possession and use under this Facility Lease of the Facility shall absolutely cease and terminate but the Facility Lessee shall remain liable as hereinafter provided; and thereupon, the Owner Lessor may demand that the Facility Lessee, and the Facility Lessee shall, upon written demand of the Owner Lessor and at the Facility Lessee's expense, forthwith deliver possession of the Facility to the Owner Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Section 5, except those provisions relating to periods of notice; and the Owner Lessor may thenceforth hold, possess and enjoy the same, free from any right of the Facility Lessee, or its successor or assigns, to use the Facility for any purpose whatever;

(b)    to sell the Owner Lessor's Interest at public or private sale, as the Owner Lessor may determine, free and clear of any rights of the Facility Lessee under this Facility Lease and without any duty to account to the Facility Lessee with respect to such sale or for the proceeds thereof (except to the extent required (i) by paragraph (e) below if the Owner Lessor elects to exercise its rights under such paragraph and (ii) by Applicable Law), in which event the Facility Lessee's obligation to pay Basic Lease Rent hereunder due for any periods subsequent to the date of such sale shall terminate (except to the extent that Basic Lease Rent is to be included in computations under paragraph (d) or (e) below if the Owner Lessor elects to exercise its rights under said paragraphs);

(c)    to hold, keep idle or lease to others the Facility as the Owner Lessor in its sole discretion may determine, free and clear of any rights of the Facility Lessee under this Facility Lease and without any duty to account to the Facility Lessee with respect to such action or inaction or for any proceeds with respect thereto, except that the Facility Lessee's obligation to pay Basic Lease Rent due for any periods subsequent to the date upon which the Facility Lessee shall have been deprived of possession and use of the Facility pursuant to this Section 18.2 shall be reduced by the net proceeds, if any, received by the Owner Lessor from subleasing the Facility to any Person other than the Facility Lessee;

(d)    whether or not the Owner Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (a) above with respect to the Facility, to specify, by written notice to the Facility Lessee, a Termination Date that shall not be earlier than thirty (30) days after the date of such notice, and to demand that the Facility Lessee pay to the Owner Lessor, and the Facility Lessee shall pay to the Owner Lessor, on the Termination Date specified in such notice, any unpaid Basic Lease Rent due on or

24

before such Termination Date, any Supplemental Lease Rent due and payable as of the Termination Date specified in such notice, plus, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Lease Rent due after the Termination Date specified in such notice), an amount equal to the excess, if any, of the Termination Value computed as of the Termination Date specified in such notice over the Fair Market Sales Value of the Owner Lessor's Interest as of the Termination Date specified in such notice (such amount, the “FMV Net Termination Value”),and upon payment of such excess amount, this Facility Lease and the Facility Lessee's obligation to pay Basic Lease Rent hereunder due for any periods subsequent to the date of such payments shall terminate; or

(e)    if the Owner Lessor shall have sold the Owner Lessor's Interest pursuant to paragraph (b) above, to demand that the Facility Lessee pay to the Owner Lessor, and the Facility Lessee shall pay to the Owner Lessor, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Lease Rent due after the date of such sale), an amount equal to (i) any unpaid Basic Lease Rent and Supplemental Lease Rent due on or before the date of such sale, (ii) if that date is not a Termination Date, the daily equivalent of Basic Lease Rent for the period from the preceding Termination Date to the date of such sale, and (iii) the amount, if any, by which the Termination Value for the Facility computed as of the Termination Date next preceding the date of such sale or, if such sale occurs on a Rent Payment Date or a Termination Date then computed as of such date, exceeds the proceeds of such sale net of all costs and expenses incurred by or on behalf of the Owner Lessor or the Lease Indenture Trustee in connection with or otherwise attributable to such sale (such amount set forth in subclause (iii), the “Sale Net Termination Value”), and, upon payment of such amount, this Facility Lease and the Facility Lessee's obligation to pay Basic Lease Rent for any periods subsequent to the date of such payment shall terminate.

Section 18.3    Application of Funds Held as Security; Liability for Basic Lease Rent, Costs and Expenses. In connection with the exercise of remedies under Sections 18.1 or 18.2, the Owner Lessor may apply any amounts which are held by the Owner Lessor or the Lease Indenture Trustee under Section 10.2 or 11.2 as security for the Facility Lessee's obligations hereunder and under any other Transaction Documents against any amounts owed by the Facility Lessee hereunder or under any other Transaction Document. In addition, the Facility Lessee shall be liable, except as otherwise provided in Sections 18.2(d) and (e), for (i) any and all unpaid Basic Lease Rent due hereunder before or during the exercise of any of the foregoing remedies, and (ii) on an After-Tax Basis for all legal fees and other documented costs and expenses incurred by reason of the occurrence of any Lease Event of Default or the exercise of the Owner Lessor's remedies with respect thereto (whether those remedies are exercised by the Owner Lessor, the Lease Indenture Trustee or a designee of either), including the repayment in full of any documented costs and expenses necessary to be expended in connection with the return of the Facility in accordance with Section 5, and any costs and expenses incurred by the Owner Lessor, the Equity Investor and the Lease Indenture Trustee in connection with retaking constructive possession of, or in repairing, such Facility in accordance with Section 18.2, in order to cause it to be in compliance with all maintenance standards imposed by this Facility Lease.

Section 18.4    Payment of FMV Net Termination Value or Sale Net Termination Value. If the Owner Lessor elects to exercise its rights set forth in Section 18.2(d) or (e) and the Facility Lessee is obligated to

25

pay FMV Net Termination Value or Sale Net Termination Value, as applicable, subject to payment of all other amounts due and owing by the Facility Lessee pursuant to Section 18.2(d) or (e), as applicable, the Facility Lessee may, subject to the conditions set forth in this Section 18.4 below, elect to pay the Owner Lessor such FMV Net Termination Value or such Sale Net Termination Value, as applicable, in three equal installments payable on the first, second and third anniversaries of the Term-Out Notice Date (the “Term-Out Payment Dates”), together with interest (a) on the Net TV Amount (Debt Portion) of such FMV Net Termination Value or such Sale Net Termination Value, as applicable, at the Net TV Amount (Debt Portion) Rate, and (b) on the Net TV Amount (Equity Portion) of such FMV Net Termination Value or such Sale Net Termination Value, as applicable, at the Net TV Amount (Equity Portion) Rate. The Facility Lessee shall only be permitted to make such election by written notice given to the Owner Lessor, the Lessor Manager, and the Lease Indenture Trustee given within thirty (30) days of delivery of the written notice from the Owner Lessor pursuant to Section 18.2 with respect to the Owner Lessor's election to exercise remedies set forth in Section 18.2(d) or (e), as applicable, certifying that the issuance of Evidences of Indebtedness under the Bond Resolution is legally impossible or commercially unreasonable at such time in an amount sufficient to pay FMV Net Termination Value or Sale Net Termination Value when due under Section 18.2(d) or (e), as applicable. Upon the Facility Lessee's delivery of the notice described in the previous sentence, the Facility Lessee shall become obligated to pay FMV Net Termination Value or Sale Net Termination Value, as applicable, as provided above, and this Facility Lease and the Facility Lessee's obligation to pay Basic Lease Rent for any periods subsequent to the date of the delivery of such notice shall terminate. If the Facility Lessee (i) fails to deliver the notice described in the second preceding sentence with respect to any unpaid Net TV Amount, (ii) fails to certify by written notice given the Owner Lessor, the Lessor Manager and the Lease Indenture Trustee concurrently with its payment of an installment then due and payable on any Term-Out Payment Date that the issuance of Evidences of Indebtedness under the Bond Resolution is still legally impossible or commercially unreasonable or (iii) fails to pay any installment of the Net TV Amount then due and payable within ten (10) Business Days of the applicable Term-Out Payment Date, then in each case any unpaid Net TV Amount shall immediately become due and payable and the Owner Lessor may exercise any remedies available to it in accordance with Applicable Law. The Facility Lessee's obligation to make payment of FMV Net Termination Value or Sale Net Termination Value, as applicable, shall survive the termination of this Facility Lease

Section 18.5    Special Environmental Site Assessment and Remediation Remedy. In connection with the exercise of remedies as a result of a Lease Event of Default specified in Section 17(h), the Owner Lessor shall have any remedies available to the holders of debt obligations outstanding under the Bond Resolution and, if no other Lease Event of Default then exists, to the exclusion of all other remedies available to the Owner Lessor under this Section 18 in connection therewith.

Section 18.6    Cumulative Remedies. Except as otherwise provided in this Section 18, the remedies in this Facility Lease provided in favor of the Owner Lessor shall not be deemed exclusive, but shall be cumulative and shall be in addition to all other remedies in its favor existing at law or in equity; and the exercise or beginning of exercise by the Owner Lessor of any one or more of such remedies shall not, except as otherwise provided in this Section 18, preclude the simultaneous or later exercise by the Owner Lessor of any or all of such other remedies.

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Section 18.7    No Delay or Omission to Be Construed as Waiver. No delay or omission to exercise any right, power or remedy accruing to the Owner Lessor upon any breach or default by the Facility Lessee under this Facility Lease shall impair any such right, power or remedy of the Owner Lessor, nor shall any such delay or omission be construed as a waiver of any breach or default, or of any similar breach or default hereafter occurring; nor shall any waiver of a single breach or default be deemed a waiver of any subsequent breach or default. To the extent permitted by Applicable Law, but subject to Section 18.2, the Facility Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require the Owner Lessor to sell, lease or otherwise use the Facility or any Component thereof in mitigation of the Owner Lessor's damages as set forth in this Section 18 or which otherwise may limit or modify any of the Owner Lessor's rights and remedies under this Section 18.

SECTION 19.    SECURITY INTEREST AND INVESTMENT OF SECURITY FUNDS.

Any moneys received by the Owner Lessor or the Lease Indenture Trustee pursuant to Sections 10.2 or 11.2, until paid to the Facility Lessee in accordance with such Section, shall be held by the Owner Lessor or the Lease Indenture Trustee, as the case may be, as security for the Facility Lessee's obligations under this Facility Lease and be invested in Permitted Instruments by the Owner Lessor or the Lease Indenture Trustee, as the case may be, at the sole risk of the Facility Lessee, from time to time as directed in writing by the Facility Lessee if such instruments are reasonably available for purchase. So long as no Significant Lease Default has occurred and is continuing, any gain (including interest received) realized as the result of any such Permitted Instrument (net of any fees, commissions, taxes and other expenses, if any, incurred in connection with such Permitted Instrument) shall be applied or remitted to the Facility Lessee in the same manner as the principal invested.

SECTION 20.    FACILITY LESSEE'S RIGHT TO SUBLEASE; ASSIGNMENT

Section 20.1    Assignment and Sublease. Except as provided in Section 20.2, the Facility Lessee shall not have the right to assign or sublease the Facility Lessee's Interest and shall not be released from its obligations under this Facility Lease and the Transaction Documents without the consent of the Owner Lessor, and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lease Indenture Trustee.

Section 20.2    Right to Sublease. The Facility Lessee may sublease the Facility without the consent of the Owner Lessor, the Lessor Manager, the Equity Investor, the Equity Manager, Equity Note Purchasers and the Lease Indenture Trustee under the following conditions:

(a)    the sublessee is a solvent corporation, partnership, business trust, limited liability company or other person or entity not then involved in a bankruptcy proceeding and that is, or has engaged a third party that is, experienced in the operation of similar facilities;

(b)    the sublease is expressly subject and subordinated to the Head Lease, this Facility Lease, the Ground Lease and the Ground Sublease;

(c)    all terms and conditions of this Facility Lease and the other Transaction Documents remain in effect and the Facility Lessee remains fully and primarily liable for its obligations under this Facility Lease and the other Transaction Documents;

27

(d)    no Significant Lease Default or Lease Event of Default shall have occurred and be continuing at the time of the entering into of such sublease;

(e)    the sublease prohibits further assignment or subletting; and

(f)    the Lien of the Lease Indenture is not impaired by the sublease.

The Facility Lessee shall pay all reasonable, documented out-of-pocket expenses of the Owner Lessor, the Equity Investor, the Equity Manager, the Lessor Manager and the Lease Indenture Trustee in connection with such sublease.

SECTION 21.    OWNER LESSOR'S RIGHT TO PERFORM

If the Facility Lessee fails to make any payment required to be made by it hereunder or fails to perform or comply with any of its other agreements contained herein after notice to the Facility Lessee and failure of the Facility Lessee to so perform or comply within 10 days thereafter, the Owner Lessor or the Equity Investor may make such payment or perform or comply with such agreement in a reasonable manner, but shall not be obligated hereunder to do so, and the amount of such payment and of the reasonable documented expenses of the Owner Lessor or the Equity Investor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, to the extent permitted by Applicable Law, shall be deemed to be Supplemental Lease Rent, payable by the Facility Lessee to the Owner Lessor on demand.

SECTION 22.    SECURITY FOR OWNER LESSOR'S OBLIGATION TO THE LEASE INDENTURE TRUSTEE

In order to secure the Lessor Notes, the Owner Lessor will assign and grant a Lien to the Lease Indenture Trustee in and to all of the Owner Lessor's right, title and interest in, to and under this Facility Lease, and grant a security interest in favor of the Lease Indenture Trustee in all of the Owner Lessor's right, title and interest in and to the Owner Lessor's Interest (other than Excepted Payments and Excepted Rights). The Facility Lessee hereby consents to such assignment and to the creation of such Lien and security interest and acknowledges receipt of copies of the Lease Indenture, it being understood that such consent shall not affect any requirement or the absence of any requirement for any consent of the Facility Lessee under any other circumstances. Unless and until the Facility Lessee shall have received written notice from the Lease Indenture Trustee that the Lien of the Lease Indenture has been fully terminated, the Lease Indenture Trustee shall have the right to exercise the rights of the Owner Lessor under this Facility Lease to the extent set forth in and subject in each case to the exceptions set forth in the Lease Indenture. TO THE EXTENT, IF ANY, THAT THIS FACILITY LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS FACILITY LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART HEREOF OTHER THAN THE ORIGINAL COUNTERPART, WHICH SHALL BE IDENTIFIED AS THE COUNTERPART CONTAINING THE RECEIPT THEREFOR EXECUTED BY THE LEASE INDENTURE TRUSTEE ON THE SIGNATURE PAGE THEREOF.

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SECTION 23.    MISCELLANEOUS

Section 23.1    Amendments and Waivers. No term, covenant, agreement or condition of this Facility Lease may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by each party hereto.

Section 23.2    Notices. Unless otherwise expressly specified or permitted by the terms hereof, all communications and notices provided for herein to a party hereto shall be in writing or by a telecommunications or electronic device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including by overnight mail or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such a telecommunications or electronic device, upon transmission thereof, provided such transmission is promptly confirmed by either of the methods set forth in clauses (a) and (b) above, in each case addressed to such party and copy party at its address set forth below or at such other address as such party or copy party may from time to time designate by written notice to the other party:

If to the Owner Lessor:

John Sevier Combined Cycle Generation LLC

c/o Wells Fargo Delaware Trust Company

Corporate Trust Services

919 Market Street, Suite 700

Wilmington, DE 19801

Telephone No.: (302) 575-2025

Facsimile No.: (302) 575-2006

E-mail: scott.a.huff@wellsfargo.com

Attention: Corporate Trust Administration

with a copy to the Equity Investor:

John Sevier Holdco LLC

c/o Wells Fargo Delaware Trust Company

Corporate Trust Services

919 Market Street, Suite 700

Wilmington, DE 19801

Telephone No.: (302) 575-2025

Facsimile No.: (302) 575-2006

E-mail: scott.a.huff@wellsfargo.com

Attention: Corporate Trust Administration

and to the Lease Indenture Trustee:

Wilmington Trust Company

Rodney Square North

29

1100 North Market Street

Wilmington, Delaware 19890-0001

Telephone No.: (302)636-6197    

Facsimile No.: (302) 636-4140

E-mail: rhines@wilmingtontrust.com

Attention: Corporate Trust Administration

If to the Facility Lessee:

Tennessee Valley Authority

400 West Summit Hill Drive

Knoxville, Tennessee 37902

Telephone No.: (865) 632-3366

Facsimile No.: (865) 632-6673

E-mail: leasenotices@tva.gov

Attention:    Treasurer

Section 23.3    Survival. Except for the provisions of Sections 3.3, 3.5, 5, 9, 18 and 23, which shall survive, the warranties and covenants made by each party hereto shall not survive the expiration or termination of this Facility Lease in accordance with its terms.

Section 23.4    Successors and Assigns.

(a)    This Facility Lease shall be binding upon and shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and assigns as permitted by and in accordance with the terms hereof.

(b)    Except as expressly provided herein or in the other Transaction Documents, neither party hereto may assign its interests or transfer its obligations herein without the consent of the other party hereto.

(c)    This Facility Lease is a registered instrument. A manually signed copy of this Facility Lease shall be evidence only of Owner Lessor's rights and is not a bearer instrument. Owner Lessor and Facility Lessee hereby agree that the Facility Lessee shall keep books of registry in which it will register by book entry any transfer of Owner Lessor's interest in the Facility, in this Facility Lease and in the rights to receive any payment hereunder. No transfer by Owner Lessor of any interest in this Facility Lease or in the right to receive any payments hereunder shall be permitted unless a book entry of such transfer is made upon such registry and such transfer is effected in compliance with this Section 23.4(c). Prior to the registration of any transfer by Owner Lessor (or any successor of Owner Lessor) as provided in this paragraph, Facility Lessee may deem and treat the registered owner of this Facility Lease as the owner hereof for all purposes.

Section 23.5    Intended Tax Treatment. The Facility Lessee and the Owner Lessor hereby agree that for U.S. federal, state and local income tax purposes only, the Facility Lessee is intended to be the owner of the Facility and this Facility Lease is not a true lease and neither party will take any inconsistent position in any U.S. federal, state or local income tax filing, unless otherwise required by a change of law after the date

30

hereof or a non-appealable judgment of a court of competent jurisdiction.

Section 23.6    Business Day. Notwithstanding anything herein to the contrary, if the date on which any payment or performance is to be made pursuant to this Facility Lease is not a Business Day, the payment otherwise payable on such date shall be payable on the next succeeding Business Day with the same force and effect as if made on such scheduled date and (provided that such payment is made on such succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on such next succeeding Business Day.

Section 23.7    Governing Law. This Facility Lease shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York (without regard to conflicts of laws principles other than as provided in Section 5-1401 of the NY General Obligations Law), except to the extent that Tennessee law or U.S. federal law shall apply.

Section 23.8    Severability. Any provision of this Facility Lease that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

Section 23.9    Counterparts. This Facility Lease may be executed by the parties hereto in separate counterparts, each of which, subject to Section 22, when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

Section 23.10    Headings and Table of Contents. The headings of the sections of this Facility Lease and the Table of Contents are inserted for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof.

Section 23.11    Further Assurances. Each party hereto will promptly and duly execute and deliver such further documents and assurances for and take such further action reasonably requested by the other party, all as may be reasonably necessary to carry out more effectively the intent and purpose of this Facility Lease.

Section 23.12    Effectiveness. This Facility Lease has been dated as of the date first above written for convenience only. This Facility Lease shall be effective as of the latest date set forth on the signature pages hereto.

Section 23.13    Measuring Life. If and to the extent that any of the rights and privileges granted under this Facility Lease would, in the absence of the limitation imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule or law relating to the vesting of interests in property or the suspension of the power of alienation of property, then it is agreed that, notwithstanding any other provision of this Facility Lease, such options, rights and privileges, subject to the respective conditions hereof governing the exercise of such options, rights and privileges, will be exercisable only during (a) the longer of (i) a period which will end twenty-one (21) years after the death of the last survivor

31

of the descendants living on the date of the execution of this Facility Lease of Steven M. Wills and the following Presidents of the United States: Franklin D. Roosevelt, Harry S. Truman, Dwight D. Eisenhower, John F. Kennedy, Lyndon B. Johnson, Richard M. Nixon, Gerald R. Ford, James E. Carter, Ronald W. Reagan, George H.W. Bush, William J. Clinton, George W. Bush and Barack H. Obama or (ii) the period provided under the Uniform Statutory Rule Against Perpetuities or (b) the specific applicable period of time expressed in this Facility Lease, whichever of (a) and (b) is shorter.

Section 23.14    Owner Lessor Covenant. So long as this Facility Lease shall remain in effect, the Owner Lessor (or any successor thereto) hereby agrees and covenants to comply with the applicable provisions of 41 C.F.R. section 60-1.4, 41 C.F.R. section 60-250.4 and 41 C.F.R. section 60-741.4.

Section 23.15    Limitation on Liability. It is expressly understood and agreed by the parties hereto that (a) this Facility Lease is executed and delivered by Wells Fargo Delaware Trust Company, National Association (“Wells Fargo”), not individually or personally but solely as in its capacity as Lessor Manager of the Owner Lessor under the Owner Lessor LLC Agreement, in the exercise of the powers and authority conferred and vested in it pursuant thereto, (b) each of the representations, undertakings and agreements herein made on the part of the Owner Lessor is made and intended not as personal representations, undertakings and agreements by Wells Fargo, but is made and intended for the purpose for binding only the Owner Lessor, (c) nothing herein contained shall be construed as creating any liability on Wells Fargo, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto or by any Person claiming by, through or under the parties hereto and (d) under no circumstances shall Wells Fargo, be personally liable for the payment of any indebtedness or expenses of the Owner Lessor or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Owner Lessor under this Facility Lease.

[Signature page follows]

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IN WITNESS WHEREOF, the Owner Lessor and the Facility Lessee have caused this Facility Lease to be duly executed and delivered under seal by their respective officers thereunto duly authorized on the dates below their respective signatures, but effective as of the date first set forth above.

JOHN SEVIER COMBINED CYCLE GENERATION LLC

By: Wells Fargo Delaware Trust Company, National Association, not in its individual capacity, but solely as Lessor Manager under the Owner Lessor LLC Agreement

By: /s/ Scott A. Huff

Name: Scott A. Huff

Title: Vice President

Date: January 10, 2012

STATE OF DELAWARE )

) ss.:

COUNTY OF NEW CASTLE)

Personally appeared before me, the undersigned authority in and for the said county and state, on this 10th day of January, 2012, within my jurisdiction, the within named Scott A. Huff, who acknowledged to me that he is Vice President of Wells Fargo Delaware Trust Company, National Association, a national banking association and Lessor Manager of the John Sevier Combined Cycle Generation LLC, a Delaware limited liability company (the “Owner Lessor”), and that for and on behalf of Wells Fargo Delaware Trust Company, National Association solely as Lessor Manager of the Owner Lessor, and as the act and deed of Wells Fargo Delaware Trust Company, National Association solely as Lessor Manager of the Owner Lessor, and as the act and deed of the Owner Lessor, he executed the above and foregoing instrument, after first having been duly authorized by Wells Fargo Delaware Trust Company, National Association and Owner Lessor so to do.

/s/ Amy E. Falcone

Notary Public

My Commission expires:                Amy Elizabeth Falcone

Notary Public

State of Delaware

My Commission Expires 05-23-2013

(Facility Lease)

TENNESSEE VALLEY AUTHORITY

By: /s/ Joshua J. Carlon

Name: Joshua John Carlon

Title: Director, Corporate Finance

Date: January 12, 2012

STATE OF NEW YORK)

) ss.:

COUNTY OF NEW YORK)

Personally appeared before me, the undersigned authority in and for the said county and state, on this 12th day of January, 2012, within my jurisdiction, the within named Joshua John Carlon, who acknowledged to me that he is Director, Corporate Finance of Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States of America, and that for and on behalf of the Tennessee Valley Authority, and as its act and deed, he executed the above and foregoing instrument, after first having been duly authorized so to do.

/s/ Jose L. DeJesus

Notary Public

My Commission expires: 5/19/2015            Jose L. DeJesus

Notary Public, State of New York

No. 01DE5078255

Qualified in Queens County

Certificate Filed in New York County

Commission Expires May 19, 2015

(Facility Lease)

The name and address of the Owner Lessor are:

OWNER LESSOR: c/o Wells Fargo Delaware Trust Company

919 Market Street, Suite 700

Wilmington, DE 19801

Telephone No.: (302) 575-2025

Attention: Corporate Trust Services

The name and address of the Facility Lessee are:

FACILITY LESSEE: Tennessee Valley Authority

c/o Realty Services

1101 Market Street, SP 3L

Chattanooga, Tennessee 37402-2801

Telephone No. (423) 751-7691

Attention: Senior Manager

(Facility Lease)

Appendix A

___________________________________________

Definitions

___________________________________________

John Sevier Combined Cycle

Generation Facility

1

Appendix A - Definitions

GENERAL PROVISIONS

In this Appendix A and each Transaction Document (as hereinafter defined), unless otherwise provided herein or therein:

(a)the terms set forth in this Appendix A or in any such Transaction Document shall have the meanings herein provided for and any term used in a Transaction Document and not defined therein or in this Appendix A but in another Transaction Document shall have the meaning herein or therein provided for in such other Transaction Document;

(b)any term defined in this Appendix A by reference to another document, instrument or agreement shall continue to have the meaning ascribed thereto whether or not such other document, instrument or agreement remains in effect;

(c)words importing the singular include the plural and vice versa;

(d)words importing a gender include either gender;

(e)a reference to a part, clause, section, paragraph, article, party, annex, appendix, exhibit, schedule or other attachment to or in respect of a Transaction Document is a reference to a part, clause, section, paragraph, or article of, or a part, annex, appendix, exhibit, schedule or other attachment to, such Transaction Document unless, in any such case, otherwise expressly provided in any such Transaction Document;

(f)a reference to any statute, regulation, proclamation, ordinance or law includes all statutes, regulations, proclamations, ordinances or laws varying, consolidating or replacing the same from time to time, and a reference to a statute includes all regulations, policies, protocols, codes, proclamations and ordinances issued or otherwise applicable under that statute unless, in any such case, otherwise expressly provided in any such statute or in such Transaction Document;

(g)a definition of or reference to any document, instrument or agreement includes an amendment or supplement to, or restatement, replacement, modification or renovation of, any such document, instrument or agreement unless otherwise specified in such definition or in the context in which such reference is used;

(h)a reference to a particular section, paragraph or other part of a particular statute shall be deemed to be a reference to any other section, paragraph or other part substituted therefor from time to time;

(i)if a capitalized term describes, or shall be defined by reference to, a document, instrument or agreement that has not as of any particular date been executed and delivered and such document, instrument or agreement is attached as an exhibit to the Participation Agreement (as hereinafter defined),

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such reference shall be deemed to be to such form and, following such execution and delivery and subject to paragraph (h) above, to the document, instrument or agreement as so executed and delivered;

(j)a reference to any Person (as hereinafter defined) includes such Person's successors and permitted assigns;

(k)any reference to “days” shall mean calendar days unless “Business Days” (as hereinafter defined) are expressly specified;

(l)if the date as of which any right, option or election is exercisable, or the date upon which any amount is due and payable, is stated to be on a date or day that is not a Business Day, such right, option or election may be exercised, and such amount shall be deemed due and payable, on the next succeeding Business Day with the same effect as if the same was exercised or made on such date or day (without, in the case of any such payment, the payment or accrual of any interest or other late payment or charge, provided such payment is made on such next succeeding Business Day);

(m)words such as “hereunder”, “hereto”, “hereof” and “herein” and other words of similar import shall, unless the context requires otherwise, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof;

(n)a reference to “including” shall mean including without limiting the generality of any description preceding such term, and for purposes hereof and of each Transaction Document the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned;

(o)all accounting terms not specifically defined herein or in any Transaction Document shall be construed in accordance with GAAP; and

(p)unless the context or the specific provision otherwise requires, whenever in the Transaction Documents a provision requires that the rating of a Person or the Lessor Notes be confirmed, such provisions shall be deemed to mean that each Rating Agency shall have confirmed the rating of the senior long term unsecured debt of such Person or the Lessor Notes, if then rated by such Rating Agency, a copy of which confirmation shall be delivered by TVA to the Equity Investor, the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, to the Lease Indenture Trustee and shall be without indication that such Person or the Lessor Notes, as the case may be, has been placed on credit watch, credit review, or any similar status with negative implications or which does not indicate the direction of the potential ratings change.

DEFINED TERMS

“2012 Lessor Notes" shall mean the 4.626% Series 2012 Bonds due January 15, 2042 issued on the Closing Date by the Owner Lessor and any Lessor Notes issued in replacement therefor pursuant to Section 2.9 of the Lease Indenture.

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“Access Property" shall mean the access routes to and from the Facility Site and to and from the Global Common Facilities Site, as more particularly described in Exhibit 3 to the Ground Lease.

“Actual Knowledge" shall mean, with respect to any Transaction Party, actual knowledge of, or receipt of written notice by, an officer (or other employee whose responsibilities include the administration of the Transaction) of such Transaction Party; provided that neither the Lease Indenture Trustee nor the Lessor Manager shall be deemed to have Actual Knowledge of any fact solely by virtue of an officer of the Lease Indenture Trustee or the Lessor Manager, as the case may be, having actual knowledge of such fact unless such officer is an officer in the Corporate Trust Administration Department of the Lease Indenture Trustee or the Lessor Manager, as the case may be, responsible for the administration of this transaction.

“Additional Equity Investment" shall mean the amount, if any, provided by the Equity Investor to finance all or a portion of the cost of any Modification financed pursuant to Section 11.2(a) of the Participation Agreement.

“Additional Facility" shall have the meaning specified in Section 4.4 of the Ground Lease.

“Additional Lessor Notes" shall have the meaning specified in Section 2.12 of the Lease Indenture.

“Additional Owner" shall have the meaning specified in Section 4.4 of the Ground Lease.

“Affiliate" of a particular Person shall mean any Person directly or indirectly controlling, controlled by or under common control with such particular Person. For purposes of this definition, “control” when used with respect to any particular Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing; provided, however, that under no circumstances shall the Trust Company be considered an Affiliate of any of the Owner Lessor or the Equity Investor or any Equity Note Purchaser, nor the Owner Lessor, any Equity Investor or any Equity Note Purchaser be considered an Affiliate of the Trust Company; provided, further, that no Federal Governmental Entity shall be considered to be an Affiliate of TVA.

“After-Tax Basis" shall mean, with respect to any payment to be received by any Person, the amount of such payment (the base payment) supplemented by a further payment (the additional payment) to that Person so that the sum of the base payment plus the additional payment shall, after deduction of the amount of all Federal, state and local income Taxes required to be paid by such Person in respect of the receipt or accrual of the base payment and the additional payment (taking into account any reduction in such income Taxes resulting from Tax benefits realized or to be realized by the recipient as a result of the payment or the event giving rise to the payment), be equal to the amount required to be received. Such calculations shall be made on the basis of the highest generally applicable Federal, state and local income tax rates applicable to the Person for whom the calculation is being made for all relevant periods, and shall take into account the deductibility of state and local income taxes for Federal income tax purposes.

“Applicable Law" shall mean, without limitation, all applicable laws, including all Environmental Laws, and treaties, judgments, decrees, injunctions, writs and orders of any court, arbitration board or Governmental

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Entity and rules, regulations, orders, ordinances, licenses and permits of any Governmental Entity.

“Applicable Permits" shall mean any valid waiver, exemption, variance, franchise, permit, authorization, license or similar order of or from, or filing or registration with, or notice to, any Governmental Entity having jurisdiction over the matter in question, including any decision of a Governmental Entity accompanying any of the foregoing, required by Applicable Law (including Environmental Laws) to be obtained or maintained in connection with the construction, operation and maintenance of the Facility and the Facility Site, transmission of electricity, performance of the Work, testing, commissioning, health and safety or any Environmental Condition.

“Applicable Rate" shall mean 7.100% per annum.

“Appraisal Procedure" shall mean (except with respect to the Closing Appraisal and any appraisal to determine Fair Market Sales Value after a Lease Event of Default shall have occurred and be continuing) an appraisal conducted by an appraiser or appraisers in accordance with the procedures set forth in this definition of “Appraisal Procedure.” The Equity Investor and TVA will consult with the intent of selecting a mutually acceptable Independent Appraiser. If a mutually acceptable Independent Appraiser is selected, the Fair Market Sales Value shall be determined by such Independent Appraiser. If the Equity Investor and TVA are unable to agree upon a single Independent Appraiser within a 15-day period, one shall be appointed by the Equity Investor, and one shall be appointed by TVA (or its designee), which Independent Appraisers shall attempt to agree upon the value, period, amount or other determination that is the subject of the appraisal. If either the Equity Investor or TVA does not appoint its appraiser, the determination of the other appraiser shall be conclusive and binding on the Equity Investor and TVA. If the appraisers appointed by the Equity Investor and TVA are unable to agree upon the value, period, amount or other determination in question, such appraisers shall jointly appoint a third Independent Appraiser or, if such appraisers do not appoint a third Independent Appraiser, the Equity Investor and TVA shall jointly appoint the third Independent Appraiser. In such case, the average of the determinations of the three appraisers shall be conclusive and binding on the Equity Investor and TVA, unless the determination of one appraiser differs from the middle determination by more than twice the amount by which the third determination differs from the middle determination, in which case the determination of the most disparate appraiser shall be excluded, and the average of the remaining two determinations shall be conclusive and binding on the Equity Investor and TVA.

“Appraiser" shall mean MR Valuation Consulting, LLC.

“Arbitration Proceeding" shall mean a procedure whereby the party seeking to arbitrate a dispute concerning an amount payable under the Support Agreement shall provide written notice of its intention to arbitrate at the time and to the other party of the Support Agreement. Such notice (i) shall specify the section or sections of the Support Agreement which authorizes or authorize an Arbitration Proceeding, (ii) provide reasonable detail of the item or items in dispute, and (iii) set forth the name and address of the person designated to act as the arbitrator on behalf of the party providing such notice. Within 20 Business Days after such notice is given, the party to which such notice was given shall give notice to the first party, specifying the name and

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address of the person designated to act as arbitrator on its behalf. If the second party fails to notify the first party of the appointment of its arbitrator within such 20 Business Day period, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator. The arbitrators so chosen shall meet within 10 Business Days after the second arbitrator is appointed and within 20 Business Days thereafter shall decide the dispute. If within such period they cannot agree upon their decision, they shall within 10 Business Days thereafter appoint a third arbitrator and, if they cannot agree upon such appointment, the third arbitrator shall be appointed upon their application or upon the application of either party, by the American Arbitration Association, or any organization which is a successor thereto from a panel of arbitrators having expertise in the business of operating simple cycle combustion turbines. The three arbitrators shall meet and decide the dispute within 20 Business Days of the appointment of the third arbitrator. Any decision or determination in which two of the three arbitrators shall concur or, if no two of the three arbitrators shall concur, the decision or determination of the arbitrator last selected shall be final and binding upon the parties. In designating arbitrators and in deciding the dispute, the arbitrators shall act in accordance with the rules of the American Arbitration Association then in force, subject, however, to express provisions to the contrary, if any, contained in the Support Agreement. In the event that the American Arbitration Association or a nationally recognized successor shall not then be in existence, the arbitration shall proceed under comparable laws or statutes then in effect. The parties to the arbitration shall be entitled to present evidence and argument to the arbitrators. Each party shall pay (i) the fees and expenses of the arbitrator appointed by or on its behalf, and (ii) equal shares of (a) the other expenses of the arbitration properly incurred and (b) the fees and expenses of the third arbitrator, if any. For purposes of this definition, the Facility User shall be deemed to be one party and TVA shall be deemed to be the other party.

“Assigned Documents" shall have the meaning specified in clause (2) of the Granting Clause of the Lease Indenture.

“Assignment and Assumption Agreement" shall mean an assignment and assumption agreement in form and substance substantially in the form of Exhibit F to the Participation Agreement.

“Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time, 11 U.S.C. §101 et seq.

“Base Rate" shall mean the rate of interest publicly announced from time to time by Citibank, N.A. at its New York office as its base rate for domestic commercial loans, such rate to change as and when such base rate changes. For purpose of this definition, “base rate” shall mean that rate announced by Citibank, N.A. from time to time as its base rate as that rate may change from time to time with changes to occur on the date Citibank, N.A.'s base rate changes.

“Basic Lease Rent" shall have the meaning specified in Section 3.2 of the Facility Lease.

“Basic Lease Rent(Debt Portion)" for any Rent Payment Date shall mean the amount set forth under the heading “Basic Lease Rent (Debt Portion)” on Schedule 1 of the Facility Lease for such Rent Payment Date.

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“Basic Lease Rent (Equity Portion)" for any Rent Payment Date shall mean the amount set forth under the heading “Basic Lease Rent (Equity Portion)” on Schedule 1 of the Facility Lease for such Rent Payment Date.

“Benefit Plan" shall mean an employee benefit plan as defined in Section 3(3) of ERISA that is subject to Title I of ERISA, a plan as defined in Section 4975(e) of the Code that is subject to Section 4975 of the Code or any entity that is deemed to hold the assets of any such employee benefit plan or plan by virtue of such employee benefit plan's or plan's investment in such entity.

“Bond Resolution" shall mean the Basic Tennessee Valley Authority Power Bond Resolution adopted October 6, 1960, as amended.

“Boundary Property" shall have the meaning specified in Section 4.3(a) of the Ground Lease.

“Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which commercial banking institutions are authorized or required by law, regulation or executive order to be closed in Wilmington, Delaware, Knoxville, Tennessee, or the city and the state in which the Corporate Trust Office of the Lease Indenture Trustee, the Lessor Manager or the Equity Manager is located.

“Called Amount" shall mean the amount of the Equity Investment that is being repaid, determined by reference to the Termination Value (Equity Portion) with respect to the applicable Termination Date.

“Capability" shall mean the amount of Energy, expressed in megawatt hours, that can be generated by the Facility.

“Capacity" shall mean megawatts of electric energy generating capacity.

“Capital Expenditure Budget" shall have the meaning set forth in Section 4.4(a) of the Support Agreement.

“Claim" shall mean any liability (including in respect of negligence (whether passive or active or other torts), strict or absolute liability in tort or otherwise, warranty, latent or other defects (regardless of whether or not discoverable), statutory liability, property damage, bodily injury or death), obligation, loss, settlement, damage, penalty, claim, action, suit, proceeding (whether civil or criminal), judgment, penalty, fine and other legal or administrative sanction, judicial or administrative proceeding, cost, expense or disbursement, including reasonable legal, investigation and expert fees, expenses and reasonable related charges, of whatsoever kind and nature, but excluding Taxes.

“Closing" shall have the meaning specified in Section 2.2(a) of the Participation Agreement.

“Closing Appraisal" shall mean the appraisal, dated the Closing Date, prepared by the Appraiser for the use of TVA.

“Closing Date" shall have the meaning specified in Section 2.2(a) of the Participation Agreement.

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“CMA Payment" shall have the meaning specified in Section 6.1 of the Construction Management Agreement.

“Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute.

“Co-Equity Manager" shall mean a co-Manager appointed pursuant to Section 21 of the Equity Investor LLC Agreement.

“Co-Lessor Manager" shall mean a co-Independent Manager appointed pursuant to Section 16.6 of the Owner Lessor LLC Agreement.

“Collateral" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Common Facilities" shall mean all property and facilities intended for common use in the operation of the Units, including but not limited to a Toshiba nominally rated 400 megawatt steam turbine generator, as more particularly described on Exhibit A to the Facility Lease, and shall include any Modifications to such facilities which become subject to the Head Lease during the Facility Lease Term and any Modifications to the Common Facilities made in accordance with the Support Agreement, but shall not include any property or facilities that are used in whole or in part solely for operation or maintenance of other TVA generating units.

“Competitor" shall have the meaning specified in Section 7.1(b) of the Participation Agreement.

“Component" shall mean any appliance, part, instrument, appurtenance, accessory, furnishing, equipment or other property of whatever nature that may from time to time be incorporated in any Unit or the Facility, except to the extent constituting Modifications.

“Confidential Information" shall have the meaning specified in Section 13.2 of the Participation Agreement.

“Construction Cost" shall mean, with respect to any Modification, the actual cost or purchase price (after deducting amounts realized as the salvage value of any component or item of equipment which is being replaced by the Modification, determined in accordance with Prudent Industry Practice), including, without limitation, (i) all costs of architectural and engineering services, labor, materials, equipment, supplies, personnel training, testing, permits and licenses, and legal services, (ii) payroll, including related fringe benefits and payroll taxes, of direct full time employees of TVA allocable on an actual time basis to such acquisition or construction and not included in costs described in clause (vi) below, (iii) reasonable and allocable traveling expenses including use of TVA's transportation equipment, (iv) all costs relating to injury or damage claims and claims by contractors or suppliers arising under construction contracts and arising out of such acquisition or construction, (v) all Taxes legally required to be paid with respect to such acquisition or construction if paid by TVA and (vi) administrative and other overhead costs of TVA as apportioned by TVA to such Modification in accordance with the Uniform System of Accounts, applicable to such acquisition or construction of such Modification, all in accordance with the Capital Expenditure Budget in effect from time to time.

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“Construction Documents" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Construction Management Agreement" shall mean the Construction Management Agreement dated as of the Closing Date between TVA and the Owner Lessor.

“Construction Period Financing Account" shall have the meaning specified in Section 2.17(a) of the Lease Indenture.

“Construction Period Financing Costs" shall mean a dollar amount equal to the sum of (a) $26,444,746 with respect to the Lessor Notes and (b) $3,510,556 with respect to the Equity Investment.

“Contractor" shall mean TVA as contractor under the Construction Management Agreement.

“Contract Year" shall mean the 12-month period commencing at 12:01 a.m. on January 1 of each year and ending at 12:01 a.m. on the following January 1, except that the first Contract Year shall begin on the Service Commencement Date and the last Contract Year shall end on the Final Shutdown Date.

“Debt Portion" shall mean the separate portions of the Net TV Amount (Debt Portion), which portions correspond to the 2012 Lessor Notes and each series of Additional Lessor Notes that may have been issued from time to time and are determined by multiplying (a) the Net TV Amount (Debt Portion), by (b) the fraction (i) the numerator of which is the outstanding principal amount of the applicable 2012 Lessor Notes or such series of Additional Lessor Notes and (ii) the denominator of which is the aggregate outstanding principal amount of the 2012 Lessor Notes and the Additional Lessor Notes.

“Deed of Trust Trustee" shall mean John Seehorn, Esq.

“Design Documents" shall have the meaning specified in Section 2.2.1 of the Construction Management Agreement.

“Discounted Value" shall mean, with respect to the Called Amount of any Equity Investment, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Amount from their respective scheduled due dates to the Settlement Date with respect to such Called Amount, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which return on the Equity Investment is payable) equal to the Reinvestment Yield with respect to such Called Amount.

“Dollars" or the sign “$” shall mean United States dollars or other lawful currency of the United States.

“DTC" shall mean The Depository Trust Company, a New York corporation.

“Early Buy Out" shall have the meaning specified in Section 15.1 of the Facility Lease.

“Early Buy Out Date" shall have the meaning specified in Section 15.1 of the Facility Lease.

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“Early Buy Out Notice" shall have the meaning specified in Section 15.1 of the Facility Lease.

“Effective Date" shall mean January 10, 2012.

“Election Notice" shall have the meaning specified in Section 13.1 of the Facility Lease.

“Energy" shall mean megawatt hours of electric energy.

“Enforcement Notice" shall have the meaning specified in Section 5.1 of the Lease Indenture.

“Engineering Consultant" shall mean Black & Veatch Corporation.

“Engineering Report" shall mean the report of the Engineering Consultant, dated November 16, 2011.

“Environmental Condition" shall mean any action, omission, event, condition or circumstance, including the presence of any Hazardous Substance, that does or reasonably could (i) require assessment, investigation, abatement, correction, removal or remediation under any Environmental Law, (ii) give rise to any obligation or liability of any nature (whether civil or criminal, arising under a theory of negligence or strict liability, or otherwise) under any Environmental Law, or (iii) constitute a violation of or non-compliance with any Environmental Law.

“Environmental Firm" shall mean Skelly and Loy, Inc. or such other nationally recognized environmental consulting or environmental engineering firm selected by TVA.

“Environmental Laws" shall mean any federal, state or local laws, common law, ordinances, rules, orders, statutes, decrees, judgments, injunctions, directives, permits, licenses, approvals, codes and regulations relating to the environment, human health, natural resources or Hazardous Substances, now or hereafter in effect and as each may from time to time be amended, supplemented or supplanted.

“Environmental Site Assessment" shall mean a Phase I or a Phase II.

“Equity Breakage" shall mean, with respect to a Called Amount, an amount equal to the excess, if any, of the Discounted Value with respect to the Called Amount of such Equity Investment over the amount of such Called Amount, provided that the Equity Breakage may in no event be less than zero.

“Equity Collateral Agent" shall mean Wells Fargo Delaware Trust Company, National Association, or any successor thereto, as collateral agent appointed pursuant to the Equity Note Purchase Documents.

“Equity Guarantor" shall have the meaning specified in Section 7.1 of the Participation Agreement.

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“Equity Guaranty" shall mean any guaranty agreement guaranteeing the obligations of the Equity Investor or entered into pursuant to Section 7.1 of the Participation Agreement in form and substance substantially in the form of Exhibit G to the Participation Agreement.

“Equity Investment" shall mean the amount specified under the heading “Equity Investment” in Schedule 4 to the Participation Agreement.

“Equity Investor" shall have the meaning set forth in the introductory paragraph to the Participation Agreement; provided that if the Membership Interests are transferred pursuant to the Participation Agreement such that more than one person is a holder thereof, the term “Equity Investor” shall be deemed to include each holder of the Membership Interests.

“Equity Investor LLC Agreement" shall mean the limited liability company agreement, dated on or about the Effective Date, between the Owner Participant and the Equity Manager.

“Equity Investor's Lien" shall mean, with respect to the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Note Purchaser or the Equity Manager, any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Claims against or any act or omission of the Equity Investor, an Equity Note Purchaser, the Trust Company or the Equity Manager or any Affiliate of any thereof that are not related to, or that are in violation of, any Transaction Document or the transactions contemplated thereby or that are in breach of any covenant or agreement of the Equity Investor, the Trust Company or the Equity Manager set forth therein, (ii) Taxes against the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Manager or any respective Affiliate thereof that are not indemnified against by TVA pursuant to any Transaction Document or (iii) Claims against or affecting the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Manager or any respective Affiliate thereof arising out of the voluntary or involuntary transfer by the Trust Company, the Equity Manager or the Equity Investor (except as contemplated or permitted by the Transaction Documents) of any portion of the Equity Investor's Membership Interests.

“Equity Manager" shall have the meaning set forth in the introductory paragraph of the Participation Agreement.

“Equity Note" shall mean, with respect to any Equity Note Purchaser, the Equity Note issued by the Equity Investor as of the Closing Date to such Equity Note Purchaser substantially in the form attached as Exhibit 1 to the Equity Note Purchase Agreement.

“Equity Note Purchase Agreement" shall mean the Note Purchase Agreement, dated as of the Effective Date, between the Equity Investor and the Equity Note Purchasers.

“Equity Note Purchase Documents" shall mean the Equity Note Purchase Agreement, the Equity Notes, the Equity Pledge Agreement and the Equity Investor LLC Agreement.

“Equity Note Purchaser" or “Equity Note Purchasers” shall mean the Persons set forth under the caption “Equity Note Purchaser” on Schedule 4 to the Participation Agreement.

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“Equity Note Purchaser's Percentage Interest of the Notes" shall mean, as of any date of determination, the percentage of the outstanding principal amount of Equity Notes held by the applicable Equity Note Purchaser.

“Equity Placement Agent" shall mean Morgan Stanley & Co. LLC.

“Equity Pledge Agreement" shall mean the Membership Interest Pledge Agreement, dated on or about the Closing Date, between the Equity Investor and the Equity Collateral Agent.

“Equity Portion" shall mean the separate portions of the Net TV Amount (Equity Portion), which portions correspond to the Equity Investment and each series of Additional Equity Investment that may have been issued from time to time and are determined by multiplying (a) the Net TV Amount (Equity Portion), by (b) the fraction (i) the numerator of which is the outstanding principal amount of the applicable Equity Investment or such series of Additional Equity Investment and (ii) the denominator of which is the aggregate outstanding principal amount of the Equity Investment and the Additional Equity Investments.

“ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

“Event of Loss" shall mean, with respect to any Unit or Units, any of the following events:

(a)loss of such Unit or Units or use thereof due to destruction or damage to such Unit or Units, the Common Facilities or the Global Common Facilities that is beyond economic repair or that renders such Unit or Units permanently unfit for normal use;

(b)damage to such Unit or Units, the Common Facilities or the Global Common Facilities that results in an insurance settlement with respect to such Unit or Units on the basis of a total loss or an agreed constructive or a compromised total loss of such Unit or Units; and

(c)seizure, condemnation, confiscation or taking of, or requisition of title to or use of, all or substantially all of a Unit or Units, the Common Facilities or the Global Common Facilities by any Governmental Entity, which in the case of a requisition of use prevents the Facility Lessee from operating and maintaining all or substantially all of the Facility, such Unit or Units or the Facility Site for a period of 365 days or more, in each case following any contest thereof and exhaustion of all permitted appeals or an election by TVA not to pursue such appeals.

“Evidences of Indebtedness" shall have the meaning specified in the Bond Resolution.

“Excepted Payments" shall mean and include (a)(i) any indemnity or other payment (whether or not constituting Supplemental Lease Rent and whether or not a Lease Event of Default exists) payable to the Trust Company, the Equity Investor, the Equity Manager, any Equity Note Purchaser, the Lessor Manager or to their respective successors and permitted assigns (other than the Lease Indenture Trustee) pursuant to Section 2.4, 9.1 or 9.2 of the Participation Agreement and Section 11.1 of the Owner Lessor LLC Agreement or (ii) any amount payable by TVA to the Owner Lessor, the Equity Investor, the Lessor Manager, the Equity

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Manager or any Equity Note Purchaser to reimburse any such Person for its costs and expenses in exercising its rights under the Transaction Documents, (b) insurance proceeds, if any, payable to the Owner Lessor or the Equity Investor under insurance separately maintained by the Owner Lessor or the Equity Investor with respect to the Facility as permitted by Section 11.1 of the Facility Lease, (c) any amount payable to the Equity Investor as the purchase price of the Equity Investor's Membership Interests in connection with any permitted sale or transfer thereof pursuant to Section 7.1 of the Participation Agreement or Section 13 of the Facility Lease, (d) any amounts payable to the Equity Investor upon exercise by TVA of the Special Lessee Transfer pursuant to Section 12 of the Participation Agreement; (e) all other fees expressly payable to the Owner Lessor, the Equity Investor, the Lessor Manager, the Equity Manager or any Equity Note Purchaser under the Transaction Documents; (f) any amounts payable by TVA to the Owner Lessor pursuant to Section 13.2 of the Facility Lease; and (vii) any payments in respect of interest to the extent attributable to payments referred to above that constitute Excepted Payments.

“Excepted Rights" shall mean the rights specified in Section 5.6 of the Lease Indenture.

“Excess Amounts" shall have the meaning specified in Section 9.12 of the Lease Indenture.

“Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

“Exchange Date" shall mean, when used with respect to any Lessor Notes being replaced and exchanged for Replacement Power Bonds, the date fixed for such replacement and exchange by or pursuant to the Lease Indenture or the respective Lessor Notes, which date shall be a Termination Date.

“Excluded Property" shall mean Excepted Payments and rights reserved to the Owner Lessor and included within Excepted Rights, collectively.

“Excluded Taxes" shall have the meaning specified in Section 9.2(b) of the Participation Agreement.

“Expected Completion Date" shall have the meaning specified in Section 4.1.1 of the Construction Management Agreement

“Expiration Date" shall mean January 15, 2042, the scheduled expiration date of the Facility Lease Term.

“Facility" shall have the meaning specified in the first recital of the Participation Agreement.

“Facility Lease" shall mean the Facility Lease-Purchase Agreement, dated as of the Closing Date, between the Owner Lessor and TVA, substantially in the form of Exhibit B to the Participation Agreement.

“Facility Lease Term" shall have the meaning specified in Section 3.1 of the Facility Lease.

“Facility Lessee" shall mean TVA as lessee under the Facility Lease.

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“Facility Lessee's Interest" shall mean the Facility Lessee's interest in and to the Facility under the Facility Lease and the Ground Interest under the Ground Sublease.

“Facility Lessor" shall mean the Owner Lessor as lessor under the Facility Lease.

“Facility Operating Fee" shall have the meaning specified in Section 3.6 of the Support Agreement.

“Facility Operation and Maintenance Expense" shall mean all payments made, costs incurred, and obligations and liabilities incurred, by TVA for or in connection with engineering, contract preparation, purchasing, repairing, insuring, supervising, recruiting, training, expediting, inspecting, accounting, providing legal services, testing, protecting, operating, insuring, using, decommissioning, retiring, and maintaining the Facility, including, but not limited to, Station Service Requirements and all such payments made, and obligations incurred, during an operating emergency, and with respect to the purchase of materials, supplies and spare parts, but excluding the Construction Cost of Modifications and any other cost included in a Capital Expenditures Budget. Facility Operation and Maintenance Expenses shall include the properly allocable direct overheads of TVA in the operation and maintenance of the Facility. Facility Operation and Maintenance Expenses shall be determined under and in accordance with the Uniform System of Accounts and shall be in accordance with the Operation and Maintenance Expense Budget in effect from time to time. There shall be credited against Facility Operation and Maintenance Expenses for such Month the proceeds of the sale by TVA of any surplus materials or supplies constituting part of, or used in connection with, the Facility. Facility Operation and Maintenance Expense shall not include any payments made by the Ground Lessee for Taxes pursuant to Section 3.2 of the Ground Lease and payments made, or costs incurred, for commodities, equipment or services supplied by TVA to the Facility User under separate contract, including transmission services supplied under contracts negotiated pursuant to Section 5 of the Support Agreement.

“Facility Site" shall mean the land on which the Facility is situated, as more particularly described in Exhibit 1 to the Ground Lease.

“Facility User" shall mean (i) the Owner Lessor, (ii) any Person to which the Owner Lessor has transferred its interest in the Facility or is leasing the Facility, or (iii) any other Person during the time and to the extent such Person has possession and control of the Facility, in each case under circumstances giving the Owner Lessor or such Person, as the case may be, the right to market and sell Energy from the Facility for its own account, including any Person designated by the Owner Lessor to be so entitled.

“Fair Market Rental Value" or “Fair Market Sales Value" shall mean with respect to any property or service as of any date, the cash rent or cash price obtainable in an arm's length lease, sale or supply, respectively, between an informed and willing lessee or purchaser under no compulsion to lease or purchase and an informed and willing lessor or seller or supplier under no compulsion to lease or sell or supply the property or service in question, and shall, in the case of an Owner Lessor's Interest, be determined (except as otherwise provided below or in the Transaction Documents) on the basis that (a) the Facility is located on the Facility Site and the conditions contained in Sections 7 and 8 of the Facility Lease shall have been complied with in

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all respects, (b) the lessee or buyer shall have rights in, or an assignment of, the Transaction Documents to which the Owner Lessor is a party and the obligations relating thereto and (c) the Owner Lessor's Interest is free and clear of all Liens (other than Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens) and taking into account (i) the remaining term of the Ground Lease and the Ground Sublease and (ii) in the case of the Fair Market Rental Value, the terms of the Facility Lease and the Transaction Documents. If the Fair Market Sales Value of the Owner Lessor's Interest is to be determined during the continuance of a Lease Event of Default or in connection with the exercise of remedies by the Owner Lessor pursuant to Section 18 of the Facility Lease, such value shall be determined by an appraiser appointed by the Owner Lessor on an “as-is,” “where-is” and “with all faults” basis and shall take into account all Liens (other than Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens); provided, however, in any such case where the Owner Lessor shall be unable to obtain constructive possession sufficient to realize the economic benefit of the Owner Lessor's Interest, Fair Market Sales Value of the Owner Lessor's Interest shall be deemed equal to $0. If in any case other than in the preceding sentence the parties are unable to agree upon a Fair Market Sales Value of the Owner Lessor's Interest within 30 days after a request therefor has been made, the Fair Market Sales Value of the Owner Lessor's Interest shall be determined by appraisal pursuant to the Appraisal Procedures. Any fair market value determination of a Severable Modification shall take into consideration any liens or encumbrances to which the Severable Modification being appraised is subject and which are being assumed by the transferee.

“Federal Power Act" shall mean the Federal Power Act, as amended.

“FERC" shall mean the Federal Energy Regulatory Commission.

“Final Completion" shall have the meaning specified in Section 5.3 of the Construction Management Agreement.

“Final Completion Certificate" shall have the meaning specified in Section 5.4 of the Construction Management Agreement.

“Final Determination" shall mean (i) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals or rehearings by either party to the action have been exhausted or the time for filing such appeal has expired, or in any case where judicial review shall at the time be unavailable because the proposed adjustment involves a decrease in net operating loss carryforward or a business credit carryforward, a decision, judgment, decree or other order of an administrative official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., where all administrative appeals have been exhausted by all parties thereto), (ii) a closing agreement entered into under section 7121 of the Code, or any other settlement agreement entered into in connection with an administrative or judicial proceeding or (iii) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto.

“Final Shutdown" shall mean the permanent removal from operation and commercial service of the Facility.

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“Final Shutdown Date" shall mean the date on which Final Shutdown occurs.

“Fitch" shall mean Fitch, Inc. and any successor thereto.

“FMV Net Termination Value" shall have the meaning set forth in Section 18.2(d) of the Facility Lease.

“GAAP" shall mean generally accepted accounting principles used in the United States consistently applied.

“Global Common Facilities" shall mean all property and facilities intended for use in the operation and maintenance of the Facility and which are common to the operation and maintenance of the Facility, the John Sevier Fossil Plant and any other facility existing on or adjacent to the Facility Site, as more particularly described in Attachment C to the Owner Lessor Mortgage.

“Global Common Facilities Operating Fee" shall have the meaning specified in Section 2.4 of the Support Agreement.

“Global Common Facilities Operation and Maintenance Expense" shall mean all payments made, costs incurred, and obligations and liabilities incurred, by TVA for or in connection with engineering, contract preparation, purchasing, repairing, insuring, supervising, recruiting, training, expediting, inspecting, accounting, providing legal services, testing, protecting, operating, insuring, using, decommissioning, retiring, and maintaining the Global Common Facilities, including depreciation and all such payments made, and obligations incurred, during an operating emergency, and with respect to the purchase of materials, supplies and spare parts. Global Common Facilities Operation and Maintenance Expenses shall include the properly allocable direct overheads of TVA in the operation and maintenance of the Global Common Facility. Global Common Facilities Operation and Maintenance Expenses shall be determined under and in accordance with the Uniform System of Accounts. There shall be credited against Global Common Facilities Operation and Maintenance Expenses for such Month the proceeds of the sale by TVA of any surplus materials or supplies constituting part of, or used in connection with, the Global Common Facilities. Global Common Facilities Operation and Maintenance Expense shall not include any payments made by the Ground Lessee for Taxes pursuant to Section 3.2 of the Ground Lease and any payments made, or costs incurred, for commodities, equipment or services supplied by TVA to the Facility User under separate contract, including transmission services supplied under contracts negotiated pursuant to Section 5 of the Support Agreement.

“Global Common Facilities Percentage" at any point in time, shall mean a percentage equal to a fraction the numerator of which is the then current rated Capacity of the Facility and the denominator of which is the sum of the then current rated Capacities of all generating facilities for the operation of which the Global Common Facilities are then utilized.

“Global Common Facilities Site" shall mean the land on which the Global Common Facilities are located, as more particularly described in Exhibit 2 to the Ground Lease.

“Government" shall mean the United States of America.

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“Governmental Entity" shall mean and include the Government, any national government, any political subdivision of a national government or of any state, county or local jurisdiction therein or any board, commission, department, division, organ, instrumentality, court or agency of any thereof, but shall not include TVA.

“Ground Interest" shall mean (i) a leasehold in the Facility Site, (ii) a nonexclusive easement in, to and over the Global Common Facilities Site and (iii) a nonexclusive easement in, to and over the Access Property, granted pursuant to, and for the purposes and subject to the limitations set forth in, Section 5 of the Ground Lease.

“Ground Lease" shall mean the Ground Lease and Easement Agreement, dated as of the Closing Date, among the Ground Lessor and the Ground Lessee, substantially in the form of Exhibit C to the Participation Agreement.

“Ground Lease Term" shall have the meaning specified in Section 2.2 of the Ground Lease.

“Ground Lessee" shall mean the Owner Lessor as lessee of the Ground Interest under the Ground Lease.

“Ground Lessor" shall mean TVA and the Government (solely for purposes of Section 2.1 of the Ground Lease), as lessor of the Ground Interest under the Ground Lease.

“Ground Lessor's Release Rights" shall have the meaning specified in Section 4.2 of the Ground Lease.

“Ground Sublease" shall mean the Ground Sublease and Easement Agreement, dated as of the Closing Date, among the Ground Sublessor and the Ground Sublessee, substantially in the form of Exhibit D to the Participation Agreement.

“Ground Sublease Term" shall have the meaning specified in Section 2.2 of the Ground Sublease.

“Ground Sublessee" shall mean TVA and the Government (solely for purposes of Section 2.1 of the Ground Sublease) as sublessee of the Ground Interest under the Ground Sublease.

“Ground Sublessor" shall mean the Owner Lessor as sublessor of the Ground Interest under the Ground Sublease.

“Guaranteed Outside Completion Date" shall mean January 14, 2013.

“Hazardous Substance" shall mean any pollutant, contaminant, hazardous substance, hazardous waste, toxic substance, chemical substance, extremely hazardous substance, petroleum or petroleum derived substance, waste, or additive, asbestos, PCBs, radioactive material, corrosive, explosive, flammable or infectious material, lead, radon or other compound, element, material or substance in any form whatsoever (including products) defined, regulated, restricted or controlled by or under any Environmental Law.

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“Head Lease" shall mean the Head Lease Agreement, dated as of the Closing Date, among the Head Lessor and the Head Lessee, substantially in the form of Exhibit A to the Participation Agreement.

“Head Lease Rent" shall have the meaning specified in Section 3.2(a) of the Head Lease.

“Head Lease Term" shall have the meaning specified in Section 3.1 of the Head Lease.

“Head Lessee" shall mean the Owner Lessor as lessee of the Facility under the Head Lease.

“Head Lessor" shall mean TVA and the Government (solely for purposes of Section 2 of the Head Lease) as lessor of the Facility under the Head Lease.

“Indemnitee" shall have the meaning specified in Section 9.1(a) of the Participation Agreement.

“Indemnity Period” shall have the meaning specified in Section 11 of the Ground Lease.

“Independent Appraiser" shall mean a disinterested, licensed industrial property appraiser who is a member of the Appraisal Institute having experience in the business of evaluating facilities similar to the Facility.

“Investment Banker" shall have the meaning specified in Section 2.10(b) of the Lease Indenture.

“John Sevier Fossil Plant" shall mean the John Sevier Fossil Plant consisting of four coal-fired units with a combined summer net generation capacity of 704 MW located at a site adjacent to the Facility Site.

“Kiewit" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Kiewit Construction Contract" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Lease Commencement Date" shall mean the earlier of (i) the date the Facility achieves Substantial Completion in accordance with the Construction Management Agreement and (ii) the Outside Lease Commencement Date.

“Lease Debt Rate" shall mean the interest rate under the 2012 Lessor Notes.

“Lease Default" shall mean any event or circumstance that, with the passage of time or the giving of notice, or both, would become a Lease Event of Default.

“Lease Event of Default" shall have the meaning specified in Section 17 of the Facility Lease.

“Leasehold Deed of Trust Trustee" shall mean Robert R. Campbell, Jr., Esq.

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“Lease Indenture" shall mean the Indenture of Trust, Deed of Trust and Security Agreement, dated as of the Closing Date, among the Owner Lessor, the Lease Indenture Trustee and the Deed of Trust Trustee, substantially in the form of Exhibit E to the Participation Agreement.

“Lease Indenture Bankruptcy Default" shall mean any event or occurrence, which, with the passage of time or the giving of notice or both, would become a Lease Indenture Event of Default under Section 4.2(e) or (f) of the Lease Indenture.

“Lease Indenture Estate" shall have the meaning specified in the Granting Clause of the Lease Indenture.

“Lease Indenture Event of Default" shall have the meaning specified in Section 4.2 of the Lease Indenture.

“Lease Indenture Payment Default" shall mean any event or occurrence, which, with the passage of time or the giving of notice or both, would become an Lease Indenture Event of Default under Section 4.2(b) of the Lease Indenture.

“Lease Indenture Trustee" shall mean Wilmington Trust Company, not in its individual capacity, but solely as Lease Indenture Trustee under the Lease Indenture, and each other Person who may from time to time be acting as Lease Indenture Trustee in accordance with the provisions of the Lease Indenture.

“Lease Indenture Trustee Office" shall mean the office to be used for notices to the Lease Indenture Trustee from time to time pursuant to Section 9.5 of the Lease Indenture.

“Lease Indenture Trustee's Account" shall mean the account identified as the Lease Indenture Trustee's Account on Schedule 4 of the Participation Agreement.

“Lease Indenture Trustee's Liens" shall mean any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Taxes against or affecting the Lease Indenture Trustee, or any Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby, (ii) Claims against or any act or omission of the Lease Indenture Trustee, or Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby or that is in breach of any covenant or agreement of the Lease Indenture Trustee specified therein, (iii) Taxes imposed upon the Lease Indenture Trustee, or any Affiliate thereof, that are not indemnified against by TVA pursuant to any Transaction Document, or (iv) Claims against or affecting the Lease Indenture Trustee, or any Affiliate thereof, arising out of the voluntary or involuntary transfer by the Lease Indenture Trustee of any portion of the interest of the Trust Company or the Lease Indenture Trustee in the Lessor Estate, other than pursuant to the Transaction Documents.

“Lessee Person" shall mean the Facility Lessee, any sublessee of the Facility Lessee or any other Person using or having possession of the Facility during the Facility Lease Term or any portion thereof and any Affiliate, successor, assignee, transferee, agent or employee of any of the foregoing or any Person claiming through any of the foregoing, except that none of the Owner Lessor, the Equity Investor, the Equity Manager, any Equity Note Purchaser nor the Lease Indenture Trustee, nor any Affiliate, successor, assignee, transferee,

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agent or employee of any of the foregoing, nor any Person claiming through any of the foregoing, shall be a Lessee Person.

“Lessor Estate" shall mean all the estate, right, title and interest of the Owner Lessor in, to and under the Facility, the Ground Interest and the Transaction Documents, including all funds advanced to the Owner Lessor by the Equity Investor, all installments and other payments of Basic Lease Rent, Supplemental Lease Rent, Termination Value, condemnation awards, purchase price, sale proceeds and all other proceeds, rights and interests of any kind for or with respect to the estate, right, title and interest of the Owner Lessor in, to and under the Facility, the Ground Interest, the Transaction Documents, and any of the foregoing.

“Lessor Manager" shall have the meaning set forth in the introductory paragraph of the Participation Agreement.

“Lessor Notes" shall mean the 2012 Lessor Notes and any Additional Lessor Notes.

“Lien" shall mean any mortgage, security deed, security title, pledge, lien, charge, encumbrance, lease, or security interest or title retention arrangement.

“List of Competitors" shall mean the initial list attached to the Participation Agreement as Schedule 2, as amended from time to time pursuant to Section 7.1(b) of the Participation Agreement.

“Majority in Interest of Noteholders" as of any date of determination, shall mean Noteholders holding in aggregate more than 50% of the total outstanding principal amount of Lessor Notes; provided, however, that any Lessor Notes held by TVA and/or any Affiliate of TVA shall not be considered outstanding for purposes of this definition unless TVA and/or such Affiliate shall hold title to all the Lessor Notes outstanding.

“Make Whole Premium" shall mean, with respect to the Lessor Notes subject to redemption pursuant to the Lease Indenture, an amount equal to the Discounted Present Value of the Lessor Notes less the unpaid principal amount of such Lessor Notes; provided that the Make Whole Premium shall not be less than zero. For purposes of this definition, the “Discounted Present Value” of any Lessor Notes subject to redemption pursuant to the Lease Indenture shall be equal to the discounted present value of all principal and interest payments scheduled to become due after the date of such redemption in respect of the Lessor Notes, calculated using a discount rate equal to the sum of (i) the yield to maturity on the U.S. Treasury security having a life equal to the remaining average life of the Lessor Notes and (ii) 25 basis points; provided, however, that if there is no U.S. Treasury security having a life equal to the remaining average life of the Lessor Notes, such discount rate shall be calculated using a yield to maturity interpolated or extrapolated on a straight-line basis (rounding to the nearest calendar month, if necessary) from the yields to maturity for two U.S. Treasury securities having lives most closely corresponding to the remaining average life of the Lessor Notes.

“Material Adverse Effect" shall mean with respect to any Person a materially adverse effect on (i) the business, assets, revenues, results of operations, or financial condition of such Person, (ii) the ability of such Person to perform its obligations under the Transaction Documents, or (iii) the validity or enforceability of

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the Transaction Documents, the Liens granted thereunder, or the rights and remedies thereto.

“Maximum Net Generating Capacity" shall mean the maximum net Capability of the Facility to produce Energy under conditions existing from time to time.

“Membership Interests" shall mean the membership interests of the Equity Investor in the Owner Lessor.

“Modification" shall mean a modification, alteration, improvement, addition, betterment or enlargement of the Facility, including any Required Modifications and Optional Modifications, but not Components.

“Month" shall mean a calendar month.

“Moody's" shall mean Moody's Investors Service, Inc. and any successor thereto.

“Net TV Amount" shall mean the FMV Net Termination Value or the Sale Net Termination Value, as applicable.

“Net TV Amount (Debt Portion)" shall be the amount equal to the product of (a) the applicable Net TV Amount as of the applicable Termination Date, multiplied by (b) a fraction (i) the numerator of which is the Termination Value (Debt Portion) as of such Termination Date and (ii) the denominator of which is the Termination Value as of such Termination Date.

“Net TV Amount (Debt Portion) Rate" shall mean, with respect to the applicable Debt Portion, a rate per annum equal to (a) 6.626% per annum with respect to the Debt Portion that corresponds to the 2012 Lessor Notes; or (b) the interest rate on the applicable Additional Lessor Notes plus two percent (2%) per annum with respect to the Debt Portion that corresponds to such Additional Lessor Notes.

“Net TV Amount (Equity Portion)" shall be the amount equal to the product of (a) the applicable Net TV Amount as of the applicable Termination Date, multiplied by (b) a fraction (i) the numerator of which is the Termination Value (Equity Portion) as of such Termination Date and (ii) the denominator of which is the Termination Value as of such Termination Date.

“Net TV Amount (Equity Portion) Rate" shall mean, with respect to the applicable Equity Portion, a rate per annum equal to (a) 9.100% per annum with respect to the Equity Portion that corresponds to the Equity Investment; and (b) the interest rate on the applicable Additional Equity Investment plus two percent (2%) per annum with respect to the Equity Portion that corresponds to such Additional Equity Investment.

“Nonseverable Modifications" shall mean any Modification that is not a Severable Modification.

“Note Register" shall have the meaning specified in Section 2.8 of the Lease Indenture.

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“Noteholder" shall mean any holder from time to time of outstanding Lessor Notes, and each such holder's successors and permitted assigns.

“Offering Circular" shall mean the Offering Circular, dated January 10, 2012, with respect to the 2012 Lessor Notes.

“Officer's Certificate" shall mean with respect to any Person a certificate signed by the Responsible Officer of such Person.

“Operating Fee" shall mean the Global Common Facilities Operating Fee and, if the Owner Lessor shall elect to appoint TVA operator of the Facility pursuant to Section 3.1 of the Support Agreement and TVA shall not be precluded by law from so serving, the Facility Operating Fee.

“Operation and Maintenance Expense" shall mean the Facility Operation and Maintenance Expense and the Global Common Facilities Operation and Maintenance Expense.

“Operation and Maintenance Expense Budget" shall have the meaning set forth in Section 4.4(c) of the Support Agreement.

“Operative Documents" shall mean the Participation Agreement, the Head Lease, the Facility Lease, the Ground Lease, the Ground Sublease, any Equity Guaranty, the Owner Lessor Mortgage, the Lease Indenture, the Lessor Notes, the Owner Lessor LLC Agreement and the Support Agreement.

“Optional Modification" shall have the meaning specified in Section 8.2 of the Facility Lease.

“Other Exchange Date Payment Amounts" shall mean the following amounts (without duplication) to be paid by the Facility Lessee on the Exchange Date: (a) if the Exchange Date is also a Rent Payment Date, Basic Lease Rent payable on such Exchange Date; plus (b) all reasonable documented out-of-pocket costs and expenses incurred by the Owner Lessor, the Equity Investor, the Equity Note Purchasers and the Lease Indenture Trustee in connection with the exercise of the Early Buy Out (without duplication of any such costs and expenses payable pursuant to the Facility Lease); plus (c) any other Supplemental Lease Rent payments due and unpaid on the Exchange Date under any other Transaction Document.

“Other Redemption Date Payment Amounts" shall mean the following amounts (without duplication) to be paid by the Facility Lessee on the Redemption Date: (a) if the Redemption Date is also a Rent Payment Date, Basic Lease Rent payable on such Redemption Date; plus (b) all reasonable documented out-of-pocket costs and expenses incurred by the Owner Lessor, the Equity Investor, the Equity Note Purchasers and the Lease Indenture Trustee in connection with the exercise of the Early Buy Out (without duplication of any such costs and expenses payable pursuant to the Facility Lease); plus (c) any other Supplemental Lease Rent payments due and unpaid on the Redemption Date under any other Transaction Document.

“Outside Lease Commencement Date" shall mean January 14, 2013.

“Overdue Rate" (a) when used with reference to the Lessor Notes, Basic Lease Rent (Debt Portion) or Termination Value (Debt Portion) shall mean two percent (2%) per annum over the greater of (i) the Base

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Rate and (ii) the stated interest rate on the Lessor Notes, (b) when used with reference to the Basic Lease Rent (Equity Portion) or Termination Value (Equity Portion), shall mean two percent (2%) over the greater of (A) the Base Rate and (B) 7.100% per annum or (c) when used with reference to any amount which is due and owing and not referenced in clause (a) or (b) of this definition, the Base Rate plus two percent (2%) per annum.

“Owner Lessor" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Owner Lessor Indemnified Parties" shall have the meaning specified in Section 7.2 of the Construction Management Agreement.

“Owner Lessor LLC Agreement" shall mean the limited liability company agreement of the Owner Lessor, dated on or about the Effective Date, between the Equity Investor, and the Lessor Manager.

“Owner Lessor Mortgage" shall mean the Leasehold Deed of Trust and Security Agreement, dated as of the Closing Date, made by the Owner Lessor to the Leasehold Deed of Trust Trustee and TVA, substantially in the form of Exhibit I to the Participation Agreement.

“Owner Lessor's Account" shall mean the account identified as the Owner Lessor's Account on Schedule 4 to the Participation Agreement.

“Owner Lessor's Interest" shall mean the Owner Lessor's right, title and interest in and to (i) the Facility under the Head Lease, (ii) the Ground Interest under the Ground Lease and (iii) the Support Agreement.

“Owner Lessor's Lien" shall mean any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Taxes against or affecting the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby, (ii) Claims against, or any act or omission of, the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby or that is in breach of any covenant or agreement of the Trust Company, the Lessor Manager or the Owner Lessor specified therein, (iii) Taxes imposed upon the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof that are not indemnified against by TVA pursuant to any Transaction Document, or (iv) Claims against or affecting the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof arising out of the voluntary or involuntary transfer by the Trust Company, the Lessor Manager or the Owner Lessor of any portion of the interest of the Trust Company, the Lessor Manager or the Owner Lessor in the Owner Lessor's Interest, other than pursuant to the Transaction Documents.

“Owner Participant" shall mean the owner of the membership interests of the Equity Investor which shall mean GSS Holdings (John Sevier), Inc. until such time, if any, that it has transferred such membership interest in accordance with the Equity Investor LLC Agreement, and, thereafter shall mean such transferee or its permitted successor or assign.

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“Partial Early Buy Out" shall mean TVA's exercise of the Early Buy Out with respect to less than all Units.

“Partial Event of Loss" shall mean an Event of Loss with respect to less than all Units.

“Participation Agreement" shall mean the Participation Agreement, dated as of the Effective Date, among TVA, the Owner Lessor, the Lessor Manager, the Equity Manager, the Equity Investor and the Lease Indenture Trustee.

“Paying Agent" shall have the meaning specified in Section 2.6 of the Lease Indenture.

“Permitted Closing Date Liens" shall mean those matters listed on Exhibit 5 to the Ground Lease.

“Permitted Instruments" shall mean (a) Permitted Securities, (b) overnight loans to or other customary overnight investments in commercial banks of the type referred to in paragraph (d) below, (c) open market commercial paper of any corporation (other than TVA or any Affiliate thereof) incorporated under the laws of the United States or any state thereof which is rated not less than “prime 1” or its equivalent by Moody's and “A 1” or its equivalent by S&P maturing within one year after such investment, or such other comparable rating by a nationally recognized rating agency, (d) certificates of deposit issued by commercial banks organized under the laws of the United States or any state thereof or a domestic branch of a foreign bank (i) having a combined capital and surplus in excess of $500,000,000 and (ii) which are rated “AA” or better by S&P and “Aa2” or better by Moody's, or such other comparable rating by a nationally recognized rating agency; provided that no more than $20,000,000 may be invested in such deposits at any one such bank and (e) a money market fund registered under the Investment Company Act of 1940, as amended, the portfolio of which is limited to Permitted Securities.

“Permitted Liens" shall mean (i) the interests of TVA, the Equity Investor, the Owner Lessor and the Lease Indenture Trustee under any of the Transaction Documents; (ii) all Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens; (iii) the interests of TVA in the Facility and the Facility Site; (iv) Permitted Closing Date Liens; (v) Liens for taxes either not delinquent or being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of TVA if required by generally accepted accounting principles, so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (vi) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business for amounts either not delinquent or being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of TVA if required by generally accepted accounting principles, so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (vii) liens arising out of judgments or awards against TVA with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith by TVA, so long as such judgment, award or appeal shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (viii) utility rights of way and easements; and (ix) Liens permitted pursuant to Section 4.2 or 4.3 of the Ground Lease.

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“Permitted Post Facility Lease Term Liens" shall mean the Permitted Liens referred to in clauses (ii), (iii) and (ix) of the definition thereof.

“Permitted Securities" shall mean securities (and security entitlements with respect thereto) that (a) are (i) direct obligations of the United States of America or obligations guaranteed as to principal and interest by the full faith and credit of the United States of America, and (ii) securities issued by agencies of the U.S. Federal government whether or not backed by the full faith and credit of the United States rated “AA” and “Aa2” by S&P and Moody's, respectively, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government obligation or a specific payment of interest on or principal of any such U.S. Government obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction in the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government obligation or the specific payment of interest on or principal of the U.S. Government obligation evidenced by such depository receipt and (b) have a stated maturity no later than the date of the expected use of the funds.

“Person" shall mean any individual, corporation, cooperative, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Personalty" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Phase I" means a Phase I environmental site assessment required by Section 5.8 of the Participation Agreement or Section 5.3 of the Facility Lease performed in accordance with the standards set forth in 40 C.F.R. Part 312 and ASTM E-1527-05.

“Phase II" means a Phase II environmental site assessment required by Section 5.8 of the Participation Agreement performed in accordance with the standards set forth in ASTM E-1903-97 (Reapproved 2002) and, to the extent applicable, 40 C.F.R. Part 312.

“Plan" shall mean any “employee benefit plan” (as defined in Section 3(3) of ERISA) that is subject to ERISA, any “plan” (as defined in Section 4975(e)(1) of the Code) that is subject to Section 4975 of the Code, any trust created under any such plan or any “governmental plan” (as defined in Section 3(32) of ERISA or Section 414(d) of the Code) that is organized in a jurisdiction having prohibitions on transactions with government plans similar to those contained in Section 406 of ERISA or Section 4975 of the Code.

“Point or Points of Interconnection" shall mean the points of interconnection of the transmission facilities owned by TVA with regional transmission lines of entities to which TVA wheels power on behalf of the Owner Lessor pursuant to Section 5 of the Support Agreement, as such points may be agreed upon by the Parties from time to time.

“Power" shall mean megawatts of Capacity and associated Energy.

25

“Proceeds" shall mean the proceeds from the sale of the 2012 Lessor Notes by the Owner Lessor to the Noteholders on the Closing Date.

“Prudent Industry Practice" shall mean, at a particular time, either (a) any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry with respect to facilities similar in nature to the Facility, or (b) any of the practices, methods and acts which, in the exercise of reasonable judgment at the time the decision was made, could have been expected to accomplish the desired result at the lowest reasonable cost consistent with good business practices, reliability, safety and expedition. “Prudent Industry Practice” is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts.

“Punch List" shall have the meaning specified in Section 2.3.2 of the Construction Management Agreement.

“Quarter" means a calendar three-month period, ending on March 31, June 30, September 30 or December 31.

“Rates" shall have the meaning specified in Section 5.5 of the Participation Agreement.

“Rating Agencies" shall mean S&P, Moody's and Fitch and any other comparable nationally recognized rating agency.

“Real Property" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Reasonable Basis" for a position shall exist if tax counsel may properly advise reporting such position on a tax return in accordance with Formal Opinion 85 352 issued by the Standing Committee on Ethics and Professional Responsibility of the American Bar Association (or any successor to such opinion).

“Rebuilding Closing Date" shall have the meaning specified in Section 10.3(b) of the Facility Lease.

“Redemption Date" shall mean, when used with respect to any Lessor Notes to be redeemed, the date fixed for such redemption by or pursuant to the Lease Indenture or the respective Lessor Notes, which date shall be a Termination Date.

“Registrar" shall have the meaning specified in Section 2.8 of the Lease Indenture.

“Regulatory Event of Loss" shall mean a condition or circumstance where, if elected by the Owner Lessor, the Equity Investor or one or more affected Equity Note Purchasers (by notice to the Facility Lessee) within 12 months of obtaining knowledge of the event or circumstance causing a “Regulatory Event of Loss,” the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers become subject to rate of return regulation or other applicable public utility law or regulation of a Governmental Entity that, in the reasonable opinion of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers, is materially burdensome to the Owner Lessor, the Equity Investor or such affected Equity

26

Note Purchaser or Purchasers and cannot be remedied by cooperation among the parties and the taking of reasonable measures to alleviate the source or consequence of any such regulation or law, provided that: (i) such regulation or law is applicable solely as a result of the participation of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers in the transactions contemplated by the Transaction Documents and not as a result of (A) any other investments, loans, or other business activities of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates or the nature of properties or assets owned, held or otherwise available to the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates or (B) a failure of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates to perform routine, administrative or ministerial actions which would not have a material adverse consequence on the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates; and (ii) the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers would no longer be subject to such law or regulation if the Owner Lessor terminated the Head Lease and the Facility Lease and transferred possession of the Facility to the Head Lessor, the Equity Investor disposed of its Membership Interests, or such affected Equity Note Purchaser or Purchasers disposed of its or their Equity Notes as the case may be.

“Regulatory Event of Loss Termination Payment" shall mean, with respect to any Termination Date, an amount equal to the product of (a) the Termination Value (Equity Portion) with respect to such Termination Date, multiplied by (b) the applicable Equity Note Purchaser's Percentage Interest of the Notes.

“Related Party" shall mean, with respect to any Person or its successors and assigns, an Affiliate of such Person or its successors and assigns and any director, officer, servant, employee or agent of that Person or any such Affiliate or their respective successors and assigns; provided that the Lessor Manager and the Owner Lessor shall not be treated as Related Parties to each other and neither the Owner Lessor nor the Lessor Manager shall be treated as a Related Party to the Equity Investor except that, for purposes of Section 9 of the Participation Agreement, the Owner Lessor will be treated as a Related Party to the Equity Investor to the extent that the Owner Lessor acts on the express direction or with the express consent of the Equity Investor.

“Released Property" shall have the meaning specified in Section 4.2 of the Ground Lease.

“Relevant Portion" shall mean (a) with respect to Section 10 of the Facility Lease, the Unit or Units suffering an Event of Loss or (b) with respect to Section 15 of the Facility Lease, the Unit or Units subject to TVA's exercise of the Early Buy Out, in either case with respect to a termination of the Facility Lease with respect to less than the entire Facility.

“Reinvestment Yield" shall mean, with respect to the Called Amount of any Equity Investment, 0.50% over the yield to maturity implied by the yield(s) reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Amount, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on-the-run U.S. Treasury securities (“Reported”) having a maturity equal to the Remaining Average Life of such Remaining Scheduled Payments as of such Settlement Date.

27

If there are no such U.S. Treasury securities Reported having a maturity equal to such Remaining Average Life, then such implied yield to maturity will be determined by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between the yields Reported for the applicable most recently issued actively traded on-the-run U.S. Treasury securities with the maturities (1) closest to and greater than such Remaining Average Life and (2) closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Equity Investment. If such yields are not Reported or the yields Reported as of such time are not ascertainable (including by way of interpolation), then “Reinvestment Yield” shall mean, with respect to the Called Amount of any Equity Investment, 0.50% over the yield to maturity implied by the U.S. Treasury constant maturity yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Amount, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for the U.S. Treasury constant maturity having a term equal to the Remaining Average Life of such Called Amount as of such Settlement Date. If there is no such U.S. Treasury constant maturity having a term equal to such Remaining Average Life, such implied yield to maturity will be determined by interpolating linearly between (1) the U.S. Treasury constant maturity so reported with the term closest to and greater than such Remaining Average Life and (2) the U.S. Treasury constant maturity so reported with the term closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Equity Investment.

“Remaining Average Life" shall mean, with respect to any Called Amount, the number of years obtained by dividing (i) such Called Amount into (ii) the sum of the products obtained by multiplying (a) the return of equity component of each Remaining Scheduled Payment with respect to such Called Amount by (b) the number of years, computed on the basis of a 360-day year composed of twelve 30-day months, that will elapse between the Settlement Date with respect to such Called Amount and the scheduled due date of such Remaining Scheduled Payment.

“Remaining Scheduled Payments" shall mean, with respect to the Called Amount of any Equity Investment, all payments of Basic Lease Rent (Equity Portion) that would be due after the Settlement Date if no payment of such Called Amount were made prior to its scheduled due date.

“Remediate" or “Remediation” means an action or actions required by a Governmental Entity pursuant to Applicable Law to address an Environmental Condition or a release of Hazardous Substances, including monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or remediation work in connection with such Environmental Conditions or a release of Hazardous Substances.

“Removable Modification" shall have the meaning specified in Section 8.3 of the Facility Lease.

“Rent" shall mean Basic Lease Rent and Supplemental Lease Rent.

“Rent Payment Date" shall mean each January 15 and July 15, commencing July 15, 2012, to and including January 15, 2042.

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“Replacement Component" shall have the meaning specified in Section 7.2 of the Facility Lease.

“Replacement Power Bond" shall have the meaning specified in Section 2.10(c) of the Lease Indenture.

“Reported" shall have the meaning specified in the definition of Reinvestment Yield in this Appendix A.

“Required Modification" shall have the meaning specified in Section 8.1 of the Facility Lease.

“Responsible Officer" shall mean (a) with respect to a corporation or limited liability company, its Chairman of the Board, its President, any Senior Vice President, the Chief Financial Officer, any Vice President, the Treasurer, its Independent Manager or any other management employee (i) that has the power to take the action in question and has been authorized, directly or indirectly, by the Board of Directors (or equivalent body) of such Person, (ii) working under the direct supervision of such Chairman of the Board, President, Senior Vice President, Chief Financial Officer, Vice President or Treasurer, and (iii) whose responsibilities include the administration of the transactions and agreements contemplated by the Transaction Documents, (b) with respect to the Lease Indenture Trustee, an officer in its corporate trust administration department, (c) with respect to TVA, its Chairman of the Board, its President, any Senior Vice President, the Chief Financial Officer, any Vice President, the Treasurer or any other management employee, (d) with respect to the Owner Lessor, the Lessor Manager and (e) with respect to the Equity Investor, the Equity Manager.

“Revenues" shall have the meaning specified in the Granting Clause of the Lease Indenture.

“S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor thereto.

“Sale Net Termination Value" shall have the meaning set forth in Section 18.2(e) of the Facility Lease.

“Scheduled Closing Date" shall mean January 17, 2012 and any date set for the Closing in a notice of postponement pursuant to Section 2.3(a) of the Participation Agreement.

“Scheduled Payment Date" shall mean a Rent Payment Date.

“SEC" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934.

“Secured Indebtedness" shall have the meaning specified in Section 1 of the Lease Indenture.

“Securities Act" shall mean the Securities Act of 1933, as amended.

“Security" shall have the same meaning as in Section 2(a)(1) of the Securities Act.

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“Service Commencement Date" shall mean the date upon which the Facility Lease expires or terminates and possession and control of the Owner Lessor's Interest is delivered to the Owner Lessor or its designee pursuant to Section 5 or Section 18.2 of the Facility Lease.

“Settlement Date" shall mean, with respect to the Called Amount of any Equity Investment, the date, which shall be a Termination Date, on which such Called Amount is to be repaid pursuant to Section 15 of the Facility Lease.

“Severable Modification" shall mean any Modification that is removable without causing material damage to the Facility that cannot readily be repaired.

“Significant Lease Default" shall mean any of: (i) TVA shall fail to make any payment of Basic Lease Rent or Termination Value on the relevant payment date or after the same shall have become due and payable, (ii) TVA shall fail to make any payment of Supplemental Lease Rent in excess of $250,000 (other than Excepted Payments, or Termination Value or any amount determined by reference thereto) on the relevant payment date after the same shall have become due and payable, except to the extent such amounts are the subject of a good faith dispute and have not been established to be due and payable, or (iii) an event which is or, with the passage of time would be, a Lease Event of Default under Section 17(e) or (f) of the Facility Lease.

“Significant Lease Indenture Default" shall mean a failure by the Owner Lessor to make any payment of principal or interest on the Lessor Notes after the same shall have become due and payable.

“Similar Law" shall mean any federal, state or local law that is substantially similar to Title I of ERISA or Section 4975 of the Code.

“Site" shall mean the Facility Site, the Global Common Facilities Site and the Access Property.

“Special Lessee Transfer" shall have the meaning specified in Section 12 of the Participation Agreement.

“Special Lessee Transfer Amount" shall mean for any Termination Date, the amount determined as follows: (i) the Termination Value (Equity Portion) under the Facility Lease on such Termination Date; plus (ii) any unpaid Basic Lease Rent (Equity Portion) due on or before such Termination Date; plus (iii) the Equity Breakage.

“Station Service Requirements" shall mean the Capacity and Energy required during any period (including initial start-up and testing) and supplied from any source other than the Facility for operation of all on-site process and auxiliary equipment and systems used or useful in connection with the operation and maintenance of the Facility.

“Subcontractors" shall have the meaning specified in the third recital of the Construction Management Agreement.

“Subordinated Resolution" shall mean the Tennessee Valley Authority Subordinated Debt resolution adopted March 29, 1995, as amended and supplemented.

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“Substantial Completion" shall have the meaning specified in Section 5.1 of the Construction Management Agreement.

“Substantial Completion Certificate" shall have the meaning specified in Section 5.2 of the Construction Management Agreement.

“Supplemental Financing" shall have the meaning specified in Section 11.2(b) of the Participation Agreement.

“Supplemental Lease Rent" shall mean any and all amounts, liabilities and obligations (other than Basic Lease Rent or any amount determined by reference thereto) that TVA assumes, agrees to or is required to pay under the Transaction Documents (whether or not identified as “Supplemental Lease Rent”) to the Owner Lessor or any other Person, including Termination Value and Make Whole Premium.

“Support Agreement" shall mean the Operating and Support Agreement, dated as of the Closing Date, between the Owner Lessor and TVA, substantially in the form of Exhibit H to the Participation Agreement.

“Tax" or “Taxes" shall mean all fees, taxes (including sales taxes, use taxes, stamp taxes, value added taxes, ad valorem taxes and property taxes (personal and real, tangible and intangible)), levies, assessments, withholdings and other charges and impositions of any nature, plus all related interest, penalties, fines and additions to tax, now or hereafter imposed by any Federal, state, local or foreign government or other taxing authority (including penalties or other amounts payable pursuant to subtitle B of Title I of ERISA).

“Tax Advance" shall have the meaning specified in Section 9.2(g)(iii)(4) of the Participation Agreement.

“Tax Benefit" shall have the meaning specified in Section 9.2(e) of the Participation Agreement.

“Tax Claim" shall have the meaning specified in Section 9.2(g)(i) of the Participation Agreement.

“Tax Event" shall mean any event or transaction that results in a Noteholder being subject to U.S. federal income tax on a different amount, in a different manner or at a different time than would have been the case if such event had not occurred.

“Tax Indemnitee" shall have the meaning specified in Section 9.2(a) of the Participation Agreement.

“Term-Out Notice Date" shall mean the date on which TVA delivers written notice to the Owner Lessor of TVA's election to pay the Net TV Amount in accordance with Section 18.4 of the Facility Lease.

“Term-Out Payment Dates" shall have the meaning specified in Section 18.4 of the Facility Lease.

31

“Termination Date" shall mean each of the monthly dates during the Facility Lease Term identified as a “Termination Date” on Schedule 2 of the Facility Lease.

“Termination Value" for any Termination Date shall mean an amount equal to the sum of (a) Termination Value (Debt Portion) and (b) Termination Value (Equity Portion) for such Termination Date.

“Termination Value (Debt Portion)" for any Termination Date shall mean the amount set forth under the heading “Termination Value (Debt Portion)” on Schedule 2 of the Facility Lease for such Termination Date.

“Termination Value (Equity Portion)" for any Termination Date shall mean the amount set forth under the heading “Termination Value (Equity Portion)” on Schedule 2 of the Facility Lease for such Termination Date.

“Transaction" shall mean, collectively, the transactions contemplated under the Participation Agreement and the other Transaction Documents.

“Transaction Costs" shall mean the following costs to the extent substantiated or otherwise supported in reasonable detail:

(i)the cost of reproducing and printing the Transaction Documents and the Offering Circular and all costs and fees, including filing and recording fees and recording, transfer, mortgage, intangible and similar taxes in connection with the execution, delivery, filing and recording of the Head Lease, the Facility Lease, the Ground Lease, the Ground Sublease and any other Transaction Document, and any other document required to be filed or recorded pursuant to the provisions hereof or of any other Transaction Document and any Uniform Commercial Code filing fees in respect of the perfection of any security interests created by any of the Transaction Documents or as otherwise reasonably required by the Owner Lessor or the Lease Indenture Trustee;

(ii)the reasonable fees and expenses of Hunton & Williams LLP, counsel to the Equity Investor and the Equity Note Purchasers, and Winston & Strawn LLP, special counsel to the Equity Note Purchasers for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(iii)the reasonable fees and expenses of Bass, Berry & Sims PLC, Tennessee counsel to the Equity Investor and the Underwriters, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(iv)the reasonable fees and expenses of Orrick, Herrington & Sutcliffe LLP, special counsel to TVA, and Waller, Lansden Dortch & Davis, LLP, Tennessee counsel to TVA, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement, the other Transaction Documents and the Underwriting Agreement and the preparation of the Offering Circular;

32

(v)the reasonable fees and expenses of Morris James LLP, counsel for the Owner Lessor, the Lessor Manager, the Equity Manager and the Equity Collateral Agent, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(vi)the reasonable fees and expenses of White & Case, LLP, counsel to the Underwriters, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement, the other Transaction Documents and the Underwriting Agreement and the preparation of the Offering Circular;

(vii)the reasonable fees and expenses of Richards, Layton & Finger PA, counsel for the Lease Indenture Trustee for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(viii)the underwriting discounts and commissions payable to, and reasonable out of pocket expenses of, the Underwriters;

(ix)the reasonable fees and expenses of Ernst & Young LLP for services rendered in connection with the Transaction;

(x)the reasonable, documented out-of-pocket expenses of the Equity Investor, each Equity Note Purchaser, the Owner Participant and the Owner Lessor;

(xi)the initial fees and expenses of the Lease Indenture Trustee in connection with the execution and delivery of the Participation Agreement and the other Transaction Documents to which it is or will be a party;

(xii)the fees and expenses of the Appraiser, for services rendered in connection with delivering the Closing Appraisal required by Section 4 of the Participation Agreement;

(xiii)the fees and expenses of the Engineering Consultant, for services rendered in connection with delivering the Engineering Report required by Section 4 of the Participation Agreement; and

(xiv)the fees and expenses of the Rating Agencies in connection with the rating of the Lessor Notes.

Notwithstanding the foregoing, Transaction Costs shall not include internal costs and expenses such as salaries and overhead of whatsoever kind or nature nor costs incurred by the parties to the Participation Agreement pursuant to arrangements with third parties for services (other than those expressly referred to above), such as the fees and expenses of financial analysis and consulting, advisory services, and costs of a similar nature.

“Transaction Documents" shall meanthe Operative Documents, the Construction Management Agreement and the Equity Note Purchase Documents.

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“Transaction Party(ies)" shall mean, individually or collectively as the context may require, all or any of the parties to the Transaction Documents (including the Trust Company and Wilmington Trust).

“Transferee" shall have the meaning specified in Section 7.1(a) of the Participation Agreement.

“Transmission Services Guidelines" shall mean the “Transmission Services Guidelines” of TVA or any successor tariff thereto of general applicability governing the provision of such transmission services and associated ancillary services over the TVA transmission facilities.

“Treasury Regulations" shall mean regulations, including temporary regulations, promulgated under the Code.

“Trust Company" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Trust Indenture Act" shall mean the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed except as provided in Section 905 of such act; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

“TVA" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“TVA Act" shall mean the Tennessee Valley Authority Act of 1933, as amended.

“Uncontrollable Forces" shall have the meaning set forth in Section 8.2 of the Support Agreement.

“Underwriters" shall mean Morgan Stanley & Co. LLC, Barclays Capital Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

“Underwriting Agreement" shall mean the Underwriting Agreement, dated the Effective Date, between TVA and the Underwriters.

“Uniform Commercial Code” or “UCC" shall mean the Uniform Commercial Code as in effect in the applicable jurisdiction.

“Uniform System of Accounts" shall mean the Uniform System of Accounts prescribed by FERC, as in effect on the Closing Date and as from time to time and thereafter amended, or the chart of accounts and accounting classifications which may be substituted for such Uniform System of Accounts from time to time by FERC or its successor for such purpose.

“Unit" and collectively the “Units" shall mean each of the three (3) General Electric 7FA.04 combustion turbine generators, together with the related Nooter/Eriksen heat recovery steam generator with supplementary duct firing, and any Components exclusively related thereto, as more particularly described on Exhibit A to the Facility Lease.

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“URS" shall have the meaning specified in the first recital of the Construction Management Agreement.

“URS Construction Contract" shall have the meaning specified in the first recital of the Construction Management Agreement.

“U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction in the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.

“Verifier" shall have the meaning specified in Section 3.4(c) of the Facility Lease.

“Wilmington Trust" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Work" shall have the meaning specified in Section 2.1(a) of the Construction Management Agreement.

_______________

Copies of the Ground Lease, the Ground Sublease, the Head Lease, the Facility Lease, and the Indenture of Trust are of record with the office of the Register of Deeds of Hawkins County, Tennessee.

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Index
2012 Lessor Notes..................................................	3	Construction Documents.........................................	9
Access Property......................................................	4	Construction Management Agreement....................	9
Actual Knowledge..................................................	4	Construction Period Financing Account.................	9
Additional Equity Investment.................................	4	Construction Period Financing Costs......................	9
Additional Facility..................................................	4	Contract Year...........................................................	9
Additional Lessor Notes.........................................	4	Contractor................................................................	9
Additional Owner....................................................	4	Debt Portion............................................................	9
Affiliate...................................................................	4	Deed of Trust Trustee..............................................	9
After-Tax Basis.......................................................	4	Design Documents..................................................	10
Applicable Law.......................................................	5	Discount Value........................................................	10
Applicable Permits..................................................	5	Dollars.....................................................................	10
Applicable Rate......................................................	5	DTC.........................................................................	10
Appraisal Procedure................................................	5	Early Buy Out.........................................................	10
Appraiser.................................................................	5	Early Buy Out Date.................................................	10
Arbitration Proceeding............................................	5	Early Buy Out Notice..............................................	10
Assigned Documents..............................................	6	Effective Date..........................................................	10
Assignment and Assumption Agreement................	6	Election Notice........................................................	10
Bankruptcy Code....................................................	6	Energy.....................................................................	10
Base Rate................................................................	6	Enforcement Notice................................................	10
Basic Lease Rent.....................................................	7	Engineering Consultant...........................................	10
Basic Lease Rent (Debt Portion)............................	7	Engineering Report.................................................	10
Basic Lease Rent (Equity Portion).........................	7	Environmental Condition........................................	10
Benefit Plan............................................................	7	Environmental Firm................................................	11
Bond Resolution.....................................................	7	Environmental Laws...............................................	11
Boundary Property..................................................	7	Environmental Site Assessment..............................	11
Business Day...........................................................	7	Equity Breakage......................................................	11
Called Amount........................................................	7	Equity Collateral Agent...........................................	11
Capability................................................................	7	Equity Guarantor.....................................................	11
Capacity..................................................................	7	Equity Guaranty......................................................	11
Capital Expenditure Budget....................................	7	Equity Investment...................................................	11
Claim.......................................................................	7	Equity Investor........................................................	11
Closing....................................................................	8	Equity Investor LLC Agreement.............................	11
Closing Appraisal....................................................	8	Equity Investor's Lien.............................................	11
Closing Date...........................................................	8	Equity Manager.......................................................	12
CMA Payment........................................................	8	Equity Note.............................................................	12
Code........................................................................	8	Equity Note Purchase Agreement...........................	12
Co-Equity Manager.................................................	8	Equity Note Purchase Documents...........................	12
Co-Lessor Manager.................................................	8	Equity Note Purchaser.............................................	12
Collateral.................................................................	8	Equity Note Purchaser's Percentage Interest of the
Common Facilities..................................................	8	Notes....................................................................	12
Competitor..............................................................	8	Equity Placement Agent..........................................	12
Component..............................................................	8	Equity Pledge Agreement........................................	12
Confidential Information........................................	8	Equity Portion.........................................................	12
Construction Cost...................................................	9	ERISA.....................................................................	13

Event of Loss..........................................................	13	Ground Lessor's Release Rights..............................	18
Evidences of Indebtedness......................................	13	Ground Sublease.....................................................	18
Excepted Payments.................................................	13	Ground Sublease Term............................................	18
Excepted Rights......................................................	14	Ground Sublessee....................................................	18
Excess Amounts......................................................	14	Ground Sublessor....................................................	18
Exchange Act..........................................................	14	Guaranteed Outside Completion Date....................	18
Exchange Date........................................................	14	Hazardous Substance..............................................	18
Excluded Property...................................................	14	Head Lease..............................................................	19
Excluded Taxes.......................................................	14	Head Lease Rent.....................................................	19
Expected Completion Date.....................................	14	Head Lease Term.....................................................	19
Expiration Date.......................................................	14	Head Lessee............................................................	19
Facility....................................................................	14	Head Lessor.............................................................	19
Facility Lease..........................................................	14	Indemnitee...............................................................	19
Facility Lease Term................................................	14	Independent Appraiser.............................................	19
Facility Lessee........................................................	14	Investment Banker...................................................	19
Facility Lessee's Interest.........................................	14	John Sevier Fossil Plant..........................................	19
Facility Lessor.........................................................	14	Kiewit......................................................................	19
Facility Operating Fee............................................	15	Kiewit Construction Contract.................................	19
Facility Operation and Maintenance Expense........	15	Lease Commencement Date....................................	19
Facility Site.............................................................	15	Lease Debt Rate......................................................	19
Facility User............................................................	15	Lease Default..........................................................	20
Fair Market Rental Value........................................	15	Lease Event of Default............................................	20
Fair Market Sales Value..........................................	15	Lease Indenture.......................................................	20
Federal Power Act...................................................	16	Lease Indenture Bankruptcy Default......................	20
FERC......................................................................	16	Lease Indenture Estate............................................	20
Final Completion....................................................	16	Lease Indenture Event of Default...........................	20
Final Completion Certificate..................................	16	Lease Indenture Payment Default...........................	20
Final Determination................................................	16	Lease Indenture Trustee..........................................	20
Final Shutdown.......................................................	16	Lease Indenture Trustee Office...............................	20
Final Shutdown Date..............................................	16	Lease Indenture Trustee's Account..........................	20
Fitch........................................................................	16	Lease Indenture Trustee's Liens..............................	20
FMV Net Termination Value..................................	17	Leasehold Deed of Trust Trustee............................	20
GAAP......................................................................	17	Lessee Person..........................................................	21
Global Common Facilities......................................	17	Lessor Estate...........................................................	21
Global Common Facilities Operating Fee..............	17	Lessor Manager.......................................................	21
Global Common Facilities Operation and		Lessor Notes............................................................	21
Maintenance Expenses........................................	17	Lien.........................................................................	21
Global Common Facilities Site...............................	17	List of Competitors.................................................	21
Government............................................................	17	Majority in Interest of Noteholders.........................	21
Governmental Entity...............................................	18	Make Whole Premium............................................	21
Ground Interest.......................................................	18	Material Adverse Effect..........................................	22
Ground Lease..........................................................	18	Maximum Net Generating Capacity........................	22
Ground Lease Term................................................	18	Membership Interests..............................................	22
Ground Lessee........................................................	18	Modification............................................................	22
Ground Lessor.........................................................	18	Month......................................................................	22
		Moody's...................................................................	22

Net TV Amount......................................................	22	Punch List...............................................................	27
Net TV Amount (Debt Portion)..............................	22	Quarter.....................................................................	28
Net TV Amount (Debt Portion) Rate......................	22	Rates........................................................................	28
Net TV Amount (Equity Portion)...........................	23	Rating Agencies......................................................	28
Net TV Amount (Equity Portion) Rate...................	23	Real Property...........................................................	28
Nonseverable Modifications...................................	23	Reasonable Basis.....................................................	28
Note Register..........................................................	23	Rebuilding Closing Date.........................................	28
Noteholder...............................................................	23	Redemption Date.....................................................	28
Offering Circular.....................................................	23	Registrar..................................................................	28
Officer's Certificate.................................................	23	Regulatory Event of Loss........................................	28
Operating Fee..........................................................	23	Regulatory Event of Loss Termination Payment....	29
Operation and Maintenance Expense.....................	23	Reinvestment Yield.................................................	29
Operation and Maintenance Expense Budget.........	23	Related Party...........................................................	29
Operative Documents.............................................	23	Released Property....................................................	29
Optional Modification............................................	23	Relevant Portion......................................................	29
Other Redemption Date Payment Amounts............	24	Remaining Average Life.........................................	30
Outside Lease Commencement Date......................	24	Remaining Scheduled Payments.............................	30
Overdue Rate..........................................................	24	Remediate................................................................	30
Owner Lessor..........................................................	24	Removable Modification.........................................	30
Owner Lessor Indemnified Party............................	24	Rent.........................................................................	30
Owner Lessor LLC Agreement...............................	24	Rent Payment Date..................................................	30
Owner Lessor Mortgage.........................................	24	Replacement Component........................................	30
Owner Lessor's Account.........................................	25	Replacement Power Bond.......................................	30
Owner Lessor's Interest..........................................	25	Reported..................................................................	31
Owner Lessor's Lien...............................................	25	Required Modification............................................	31
Owner Participant...................................................	25	Responsible Officer.................................................	31
Partial Early Buy Out..............................................	25	Revenues.................................................................	31
Partial Event of Loss...............................................	25	S&P..........................................................................	31
Participation Agreement.........................................	25	Sale Net Termination Value.....................................	31
Paying Agent...........................................................	25	Scheduled Closing Date..........................................	31
Permitted Closing Date Liens.................................	25	Scheduled Payment Date........................................	31
Permitted Instruments.............................................	25	SEC.........................................................................	31
Permitted Liens.......................................................	26	Secured Indebtedness..............................................	31
Permitted Post Facility Lease Term Liens..............	26	Securities Act..........................................................	31
Permitted Securities................................................	26	Security....................................................................	31
Person.....................................................................	27	Service Commencement Date.................................	31
Personalty................................................................	27	Settlement Date.......................................................	32
Phase I.....................................................................	27	Severable Modification...........................................	32
Phase II...................................................................	27	Significant Lease Default........................................	32
Plan.........................................................................	27	Significant Lease Indenture Default........................	32
Point or Points of Interconnection..........................	27	Similar Law.............................................................	32
Power......................................................................	27	Site..........................................................................	32
Proceeds..................................................................	27	Special Lessee Transfer...........................................	32
Prudent Industry Practice........................................	27	Special Lessee Transfer Amount.............................	32
		Station Service Requirements.................................	32

Subcontractors.................................................	32	Transaction Documents...........................................	35
Subordinated Resolution.................................	32	Transaction Party(ies).............................................	36
Substantial Completion...................................	33	Transferee................................................................	36
Substantial Completion Certificate.................	33	Transmission Services Guidelines..........................	36
Supplemental Financing..................................	33	Treasury Regulations...............................................	36
Supplemental Lease Rent................................	33	Trust Company........................................................	36
Support Agreement..........................................	33	Trust Indenture Act..................................................	36
Tax...................................................................	33	TVA.........................................................................	36
Tax Advance....................................................	33	TVA Act...................................................................	36
Tax Benefit......................................................	33	U.S. Government Obligations.................................	37
Tax Claim........................................................	33	Uncontrollable Forces.............................................	36
Tax Event.........................................................	33	Underwriters............................................................	36
Tax Indemnitee................................................	33	Underwriting Agreement.........................................	36
Taxes................................................................	33	Uniform Commercial Code” or “UCC....................	36
Termination Date.............................................	34	Uniform System of Accounts..................................	36
Termination Value...........................................	34	Unit..........................................................................	37
Termination Value (Debt Portion)...................	34	Units........................................................................	37
Termination Value (Equity Portion)................	34	URS.........................................................................	37
Term-Out Notice Date.....................................	33	URS Construction Contract....................................	37
Term-Out Payment Dates................................	33	Verifier.....................................................................	37
Transaction......................................................	34	Wilmington Trust....................................................	37
Transaction Costs............................................	34	Work........................................................................	37

SCHEDULE 1

to

Facility Lease

BASIC LEASE RENT
Rent Payment Date	Basic Lease Rent (Debt Portion)	Basic Lease Rent (Equity Portion)	Basic Lease Rent Interest Portion*
July 15, 2012	$26,444,746	$3,510,556	$24,096,256
January 15, 2013	26,444,746	4,117,206	24,231,480
July 15, 2013	26,444,746	4,117,206	24,078,040
January 15, 2014	26,444,746	4,117,206	23,920,802
July 15, 2014	26,444,746	4,117,206	23,759,669
January 15, 2015	26,444,746	4,117,206	23,594,541
July 15, 2015	26,444,746	4,117,206	23,425,318
January 15, 2016	26,444,746	4,117,206	23,251,895
July 15, 2016	26,444,746	4,117,206	23,074,163
January 15, 2017	26,444,746	4,117,206	22,892,014
July 15, 2017	26,444,746	4,117,206	22,705,333
January 15, 2018	26,444,746	4,117,206	22,514,005
July 15, 2018	26,444,746	4,117,206	22,317,911
January 15, 2019	26,444,746	4,117,206	22,116,928
July 15, 2019	26,444,746	4,117,206	21,910,931
* For the avoidance of doubt, the amounts set forth under the column entitled "Basic Lease Rent Interest Portion" are provided for informational purposes only and reflect the amount included within the payment of Basic Lease Rent (Debt Portion) and Basic Lease Rent (Equity Portion) that constitutes, and shall be treated by the parties as, interest for U.S. federal income tax purposes and the listing of such amount does not create a payment obligation in addition to Basic Lease Rent.

SCHD 1-1

Rent Payment Date	Basic Lease Rent (Debt Portion)	Basic Lease Rent (Equity Portion)	Basic Lease Rent Interest Portion*
January 15, 2020	26,444,746	4,117,206	21,699,791
July 15, 2020	26,444,746	4,117,206	21,483,374
January 15, 2021	26,444,746	4,117,206	21,261,547
July 15, 2021	26,444,746	4,117,206	21,034,168
January 15, 2022	26,444,746	4,117,206	20,801,094
July 15, 2022	26,444,746	4,117,206	20,562,179
January 15, 2023	26,444,746	4,117,206	20,317,271
July 15, 2023	26,444,746	4,117,206	20,066,215
January 15, 2024	26,444,746	4,117,206	19,808,852
July 15, 2024	26,444,746	4,117,206	19,545,017
January 15, 2025	26,444,746	4,117,206	19,274,544
July 15, 2025	26,444,746	4,117,206	18,997,259
January 15, 2026	26,444,746	4,117,206	18,712,985
July 15, 2026	26,444,746	4,117,206	18,421,539
January 15, 2027	26,444,746	4,117,206	18,122,736
July 15, 2027	26,444,746	4,117,206	17,816,383
January 15, 2028	26,444,746	4,117,206	17,502,282
July 15, 2028	26,444,746	4,117,206	17,180,231
January 15, 2029	26,444,746	4,117,206	16,850,022
July 15, 2029	26,444,746	4,117,206	16,511,440
January 15, 2030	26,444,746	4,117,206	16,164,267
July 15, 2030	26,444,746	4,117,206	15,808,275
January 15, 2031	26,444,746	4,117,206	15,443,235

SCHD 1-2

Rent Payment Date	Basic Lease Rent (Debt Portion)	Basic Lease Rent (Equity Portion)	Basic Lease Rent Interest Portion*
July 15, 2031	26,444,746	4,117,206	15,068,906
January 15, 2032	26,444,746	4,117,206	14,685,044
July 15, 2032	33,744,507	3,555,970	14,291,399
January 15, 2033	33,744,507	3,555,970	13,738,791
July 15, 2033	33,744,507	3,555,970	13,172,677
January 15, 2034	33,744,507	3,555,970	12,592,718
July 15, 2034	33,744,507	3,555,970	11,998,568
January 15, 2035	33,744,507	3,555,970	11,389,871
July 15, 2035	33,744,507	3,555,970	10,766,262
January 15, 2036	33,744,507	3,555,970	10,127,366
July 15, 2036	33,744,507	3,555,970	9,472,799
January 15, 2037	33,744,507	3,555,970	8,802,168
July 15, 2037	33,744,507	3,555,970	8,115,067
January 15, 2038	33,744,507	3,555,970	7,411,081
July 15, 2038	33,744,507	3,555,970	6,689,786
January 15, 2039	33,744,507	3,555,970	5,950,744
July 15, 2039	33,744,507	3,555,970	5,193,506
January 15, 2040	33,744,507	3,555,970	4,417,613
July 15, 2040	33,744,507	3,555,970	3,622,594
January 15, 2041	33,744,507	3,555,970	2,807,963
July 15, 2041	33,744,507	3,555,970	1,973,223
January 15, 2042	$33,744,507	$10,355,000	$1,117,865

SCHD 1-3

SCHEDULE 2

to

Facility Lease

TERMINATION VALUES
Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
January 17, 2012	$900,000,000	$100,000,000
February 15, 2012	903,238,200	100,552,222
March 15, 2012	906,707,700	101,143,889
April 15, 2012	910,177,200	101,735,556
May 15, 2012	913,646,700	102,327,222
June 15, 2012	917,116,200	102,918,889
July 15, 2012	894,140,954	100,000,000
August 15, 2012	897,587,867	100,591,667
September 15, 2012	901,034,781	101,183,333
October 15, 2012	904,481,694	101,775,000
November 15, 2012	907,928,607	102,366,667
December 15, 2012	911,375,521	102,958,333
January 15, 2013	888,377,688	99,432,794
February 15, 2013	891,802,384	100,021,105
March 15, 2013	895,227,080	100,609,416
April 15, 2013	898,651,776	101,197,727
May 15, 2013	902,076,472	101,786,037
June 15, 2013	905,501,168	102,374,348

SCHD 2-1

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
July 15, 2013	882,481,117	98,845,453
August 15, 2013	885,883,082	99,430,289
September 15, 2013	889,285,047	100,015,124
October 15, 2013	892,687,012	100,599,960
November 15, 2013	896,088,976	101,184,795
December 15, 2013	899,490,941	101,769,631
January 15, 2014	876,448,159	98,237,261
February 15, 2014	879,826,867	98,818,498
March 15, 2014	883,205,575	99,399,735
April 15, 2014	886,584,282	99,980,973
May 15, 2014	889,962,990	100,562,210
June 15, 2014	893,341,698	101,143,447
July 15, 2014	870,275,659	97,607,478
August 15, 2014	873,630,572	98,184,989
September 15, 2014	876,985,484	98,762,500
October 15, 2014	880,340,397	99,340,011
November 15, 2014	883,695,310	99,917,522
December 15, 2014	887,050,222	100,495,033
January 15, 2015	863,960,389	96,955,338
February 15, 2015	867,290,956	97,528,991
March 15, 2015	870,621,523	98,102,643
April 15, 2015	873,952,091	98,676,296
May 15, 2015	877,282,658	99,249,948

SCHD 2-2

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
June 15, 2015	880,613,225	99,823,600
July 15, 2015	857,499,046	96,280,047
August 15, 2015	860,804,705	96,849,704
September 15, 2015	864,110,364	97,419,361
October 15, 2015	867,416,023	97,989,018
November 15, 2015	870,721,682	98,558,675
December 15, 2015	874,027,340	99,128,332
January 15, 2016	850,888,253	95,580,783
February 15, 2016	854,168,427	96,146,303
March 15, 2016	857,448,601	96,711,823
April 15, 2016	860,728,776	97,277,342
May 15, 2016	864,008,950	97,842,862
June 15, 2016	867,289,124	98,408,382
July 15, 2016	844,124,552	94,856,696
August 15, 2016	847,378,652	95,417,931
September 15, 2016	850,632,752	95,979,166
October 15, 2016	853,886,853	96,540,402
November 15, 2016	857,140,953	97,101,637
December 15, 2016	860,395,053	97,662,873
January 15, 2017	837,204,407	94,106,903
February 15, 2017	840,431,830	94,663,702
March 15, 2017	843,659,253	95,220,501
April 15, 2017	846,886,676	95,777,300

SCHD 2-3

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
May 15, 2017	850,114,099	96,334,099
June 15, 2017	853,341,522	96,890,899
July 15, 2017	830,124,198	93,330,492
August 15, 2017	833,324,327	93,882,698
September 15, 2017	836,524,456	94,434,903
October 15, 2017	839,724,585	94,987,108
November 15, 2017	842,924,714	95,539,314
December 15, 2017	846,124,842	96,091,519
January 15, 2018	822,880,225	92,526,519
February 15, 2018	826,052,428	93,073,968
March 15, 2018	829,224,631	93,621,416
April 15, 2018	832,396,835	94,168,865
May 15, 2018	835,569,038	94,716,313
June 15, 2018	838,741,241	95,263,762
July 15, 2018	815,468,698	91,694,005
August 15, 2018	818,612,330	92,236,528
September 15, 2018	821,755,962	92,779,051
October 15, 2018	824,899,594	93,321,574
November 15, 2018	828,043,226	93,864,096
December 15, 2018	831,186,857	94,406,619
January 15, 2019	807,885,743	90,831,937
February 15, 2019	811,000,142	91,369,359
March 15, 2019	814,114,542	91,906,781

SCHD 2-4

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
April 15, 2019	817,228,942	92,444,204
May 15, 2019	820,343,341	92,981,626
June 15, 2019	823,457,741	93,519,048
July 15, 2019	800,127,394	89,939,265
August 15, 2019	803,211,885	90,471,405
September 15, 2019	806,296,376	91,003,546
October 15, 2019	809,380,867	91,535,687
November 15, 2019	812,465,358	92,067,827
December 15, 2019	815,549,849	92,599,968
January 15, 2020	792,189,594	89,014,903
February 15, 2020	795,243,485	89,541,575
March 15, 2020	798,297,376	90,068,246
April 15, 2020	801,351,267	90,594,918
May 15, 2020	804,405,158	91,121,589
June 15, 2020	807,459,049	91,648,261
July 15, 2020	784,068,193	88,057,727
August 15, 2020	787,090,776	88,578,735
September 15, 2020	790,113,359	89,099,743
October 15, 2020	793,135,942	89,620,751
November 15, 2020	796,158,525	90,141,760
December 15, 2020	799,181,108	90,662,768
January 15, 2021	775,758,944	87,066,570
February 15, 2021	778,749,495	87,581,714

SCHD 2-5

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
March 15, 2021	781,740,046	88,096,858
April 15, 2021	784,730,597	88,612,002
May 15, 2021	787,721,147	89,127,146
June 15, 2021	790,711,698	89,642,290
July 15, 2021	767,257,503	86,040,228
August 15, 2021	770,215,280	86,549,299
September 15, 2021	773,173,058	87,058,371
October 15, 2021	776,130,836	87,567,442
November 15, 2021	779,088,613	88,076,514
December 15, 2021	782,046,391	88,585,585
January 15, 2022	758,559,422	84,977,451
February 15, 2022	761,483,669	85,480,234
March 15, 2022	764,407,915	85,983,017
April 15, 2022	767,332,162	86,485,800
May 15, 2022	770,256,409	86,988,584
June 15, 2022	773,180,655	87,491,367
July 15, 2022	749,660,156	83,876,945
August 15, 2022	752,550,095	84,373,217
September 15, 2022	755,440,035	84,869,488
October 15, 2022	758,329,975	85,365,760
November 15, 2022	761,219,915	85,862,032
December 15, 2022	764,109,855	86,358,304
January 15, 2023	740,555,049	82,737,371

SCHD 2-6

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
February 15, 2023	743,409,888	83,226,900
March 15, 2023	746,264,728	83,716,429
April 15, 2023	749,119,568	84,205,959
May 15, 2023	751,974,408	84,695,488
June 15, 2023	754,829,247	85,185,018
July 15, 2023	731,239,341	81,557,342
August 15, 2023	734,058,268	82,039,889
September 15, 2023	736,877,196	82,522,437
October 15, 2023	739,696,124	83,004,985
November 15, 2023	742,515,051	83,487,532
December 15, 2023	745,333,979	83,970,080
January 15, 2024	721,708,160	80,335,422
February 15, 2024	724,490,345	80,810,740
March 15, 2024	727,272,530	81,286,058
April 15, 2024	730,054,715	81,761,376
May 15, 2024	732,836,900	82,236,693
June 15, 2024	735,619,085	82,712,011
July 15, 2024	711,956,524	79,070,124
August 15, 2024	714,701,116	79,537,955
September 15, 2024	717,445,709	80,005,787
October 15, 2024	720,190,301	80,473,618
November 15, 2024	722,934,894	80,941,450
December 15, 2024	725,679,486	81,409,282

SCHD 2-7

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
January 15, 2025	701,979,332	77,759,908
February 15, 2025	704,685,462	78,219,987
March 15, 2025	707,391,593	78,680,066
April 15, 2025	710,097,723	79,140,146
May 15, 2025	712,803,853	79,600,225
June 15, 2025	715,509,984	80,060,305
July 15, 2025	691,771,368	76,403,179
August 15, 2025	694,438,146	76,855,231
September 15, 2025	697,104,925	77,307,283
October 15, 2025	699,771,704	77,759,335
November 15, 2025	702,438,482	78,211,387
December 15, 2025	705,105,261	78,663,439
January 15, 2026	681,327,293	74,998,286
February 15, 2026	683,953,810	75,442,026
March 15, 2026	686,580,327	75,885,766
April 15, 2026	689,206,843	76,329,506
May 15, 2026	691,833,360	76,773,245
June 15, 2026	694,459,877	77,216,985
July 15, 2026	670,641,647	73,543,520
August 15, 2026	673,226,971	73,978,652
September 15, 2026	675,812,294	74,413,785
October 15, 2026	678,397,618	74,848,917
November 15, 2026	680,982,941	75,284,050

SCHD 2-8

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
December 15, 2026	683,568,265	75,719,182
January 15, 2027	659,708,842	72,037,109
February 15, 2027	662,252,020	72,463,329
March 15, 2027	664,795,197	72,889,548
April 15, 2027	667,338,375	73,315,768
May 15, 2027	669,881,553	73,741,987
June 15, 2027	672,424,730	74,168,207
July 15, 2027	648,523,162	70,477,221
August 15, 2027	651,023,218	70,894,211
September 15, 2027	653,523,275	71,311,201
October 15, 2027	656,023,332	71,728,191
November 15, 2027	658,523,389	72,145,182
December 15, 2027	661,023,446	72,562,172
January 15, 2028	637,078,756	68,861,957
February 15, 2028	639,534,695	69,269,390
March 15, 2028	641,990,633	69,676,823
April 15, 2028	644,446,572	70,084,256
May 15, 2028	646,902,510	70,491,690
June 15, 2028	649,358,449	70,899,123
July 15, 2028	625,369,641	67,189,350
August 15, 2028	627,780,441	67,586,887
September 15, 2028	630,191,241	67,984,424
October 15, 2028	632,602,041	68,381,961

SCHD 2-9

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
November 15, 2028	635,012,841	68,779,498
December 15, 2028	637,423,641	69,177,035
January 15, 2029	613,389,695	65,457,367
February 15, 2029	615,754,312	65,844,656
March 15, 2029	618,118,930	66,231,946
April 15, 2029	620,483,547	66,619,235
May 15, 2029	622,848,164	67,006,525
June 15, 2029	625,212,781	67,393,814
July 15, 2029	601,132,652	63,663,898
August 15, 2029	603,450,019	64,040,576
September 15, 2029	605,767,385	64,417,254
October 15, 2029	608,084,752	64,793,932
November 15, 2029	610,402,118	65,170,610
December 15, 2029	612,719,484	65,547,288
January 15, 2030	588,592,104	61,806,761
February 15, 2030	590,861,127	62,172,451
March 15, 2030	593,130,150	62,538,141
April 15, 2030	595,399,172	62,903,831
May 15, 2030	597,668,195	63,269,521
June 15, 2030	599,937,217	63,635,211
July 15, 2030	575,761,494	59,883,695
August 15, 2030	577,981,054	60,238,007
September 15, 2030	580,200,615	60,592,319

SCHD 2-10

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
October 15, 2030	582,420,175	60,946,631
November 15, 2030	584,639,736	61,300,943
December 15, 2030	586,859,296	61,655,254
January 15, 2031	562,634,111	57,892,361
February 15, 2031	564,803,065	58,234,891
March 15, 2031	566,972,020	58,577,420
April 15, 2031	569,140,974	58,919,950
May 15, 2031	571,309,929	59,262,480
June 15, 2031	573,478,883	59,605,010
July 15, 2031	549,203,091	55,830,334
August 15, 2031	551,320,269	56,160,663
September 15, 2031	553,437,447	56,490,993
October 15, 2031	555,554,625	56,821,322
November 15, 2031	557,671,803	57,151,652
December 15, 2031	559,788,981	57,481,981
January 15, 2032	535,461,413	53,695,105
February 15, 2032	537,525,616	54,012,801
March 15, 2032	539,589,820	54,330,497
April 15, 2032	541,654,024	54,648,193
May 15, 2032	543,718,228	54,965,889
June 15, 2032	545,782,431	55,283,585
July 15, 2032	514,102,128	52,045,312
August 15, 2032	516,083,991	52,353,246

SCHD 2-11

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
September 15, 2032	518,065,855	52,661,181
October 15, 2032	520,047,719	52,969,116
November 15, 2032	522,029,582	53,277,051
December 15, 2032	524,011,446	53,584,985
January 15, 2033	492,248,802	50,336,950
February 15, 2033	494,146,421	50,634,777
March 15, 2033	496,044,041	50,932,604
April 15, 2033	497,941,660	51,230,431
May 15, 2033	499,839,279	51,528,258
June 15, 2033	501,736,898	51,826,085
July 15, 2033	469,890,010	48,567,942
August 15, 2033	471,701,436	48,855,303
September 15, 2033	473,512,862	49,142,663
October 15, 2033	475,324,288	49,430,023
November 15, 2033	477,135,714	49,717,383
December 15, 2033	478,947,139	50,004,744
January 15, 2034	447,014,058	46,736,134
February 15, 2034	448,737,297	47,012,656
March 15, 2034	450,460,536	47,289,178
April 15, 2034	452,183,776	47,565,701
May 15, 2034	453,907,015	47,842,223
June 15, 2034	455,630,254	48,118,745
July 15, 2034	423,608,986	44,839,297

SCHD 2-12

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
August 15, 2034	425,241,998	45,104,596
September 15, 2034	426,875,011	45,369,895
October 15, 2034	428,508,024	45,635,195
November 15, 2034	430,141,036	45,900,494
December 15, 2034	431,774,049	46,165,793
January 15, 2035	399,662,554	42,875,122
February 15, 2035	401,203,253	43,128,800
March 15, 2035	402,743,952	43,382,478
April 15, 2035	404,284,651	43,636,156
May 15, 2035	405,825,351	43,889,834
June 15, 2035	407,366,050	44,143,511
July 15, 2035	375,162,241	40,841,219
August 15, 2035	376,608,492	41,082,863
September 15, 2035	378,054,742	41,324,507
October 15, 2035	379,500,993	41,566,151
November 15, 2035	380,947,243	41,807,795
December 15, 2035	382,393,494	42,049,439
January 15, 2036	350,095,237	38,735,113
February 15, 2036	351,444,854	38,964,295
March 15, 2036	352,794,471	39,193,478
April 15, 2036	354,144,088	39,422,661
May 15, 2036	355,493,705	39,651,844
June 15, 2036	356,843,322	39,881,026

SCHD 2-13

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
July 15, 2036	324,448,432	36,554,239
August 15, 2036	325,699,181	36,770,519
September 15, 2036	326,949,929	36,986,798
October 15, 2036	328,200,678	37,203,077
November 15, 2036	329,451,427	37,419,356
December 15, 2036	330,702,175	37,635,635
January 15, 2037	298,208,417	34,295,945
February 15, 2037	299,358,010	34,498,863
March 15, 2037	300,507,603	34,701,780
April 15, 2037	301,657,197	34,904,698
May 15, 2037	302,806,790	35,107,616
June 15, 2037	303,956,384	35,310,533
July 15, 2037	271,361,470	31,957,481
August 15, 2037	272,407,568	32,146,563
September 15, 2037	273,453,667	32,335,645
October 15, 2037	274,499,765	32,524,726
November 15, 2037	275,545,864	32,713,808
December 15, 2037	276,591,962	32,902,890
January 15, 2038	243,893,553	29,536,002
February 15, 2038	244,833,763	29,710,756
March 15, 2038	245,773,972	29,885,511
April 15, 2038	246,714,182	30,060,266
May 15, 2038	247,654,392	30,235,020

SCHD 2-14

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
June 15, 2038	248,594,601	30,409,775
July 15, 2038	215,790,303	27,028,560
August 15, 2038	216,622,175	27,188,479
September 15, 2038	217,454,047	27,348,398
October 15, 2038	218,285,918	27,508,317
November 15, 2038	219,117,790	27,668,236
December 15, 2038	219,949,662	27,828,155
January 15, 2039	187,037,026	24,432,104
February 15, 2039	187,758,053	24,576,660
March 15, 2039	188,479,081	24,721,217
April 15, 2039	189,200,109	24,865,774
May 15, 2039	189,921,137	25,010,330
June 15, 2039	190,642,164	25,154,887
July 15, 2039	157,618,685	21,743,474
August 15, 2039	158,226,305	21,872,123
September 15, 2039	158,833,925	22,000,771
October 15, 2039	159,441,545	22,129,420
November 15, 2039	160,049,165	22,258,069
December 15, 2039	160,656,785	22,386,718
January 15, 2040	127,519,897	18,959,397
February 15, 2040	128,011,486	19,071,574
March 15, 2040	128,503,076	19,183,750
April 15, 2040	128,994,665	19,295,926

SCHD 2-15

Termination Date (Monthly)	Termination Value (Debt Portion)	Termination Value (Equity Portion)
May 15, 2040	129,486,254	19,408,103
June 15, 2040	129,977,843	19,520,279
July 15, 2040	96,724,925	16,076,486
August 15, 2040	97,097,800	16,171,605
September 15, 2040	97,470,674	16,266,724
October 15, 2040	97,843,549	16,361,843
November 15, 2040	98,216,423	16,456,963
December 15, 2040	98,589,298	16,552,082
January 15, 2041	65,217,665	13,091,231
February 15, 2041	65,469,079	13,168,688
March 15, 2041	65,720,493	13,246,144
April 15, 2041	65,971,907	13,323,601
May 15, 2041	66,223,321	13,401,057
June 15, 2041	66,474,736	13,478,513
July 15, 2041	32,981,642	10,000,000
August 15, 2041	33,108,786	10,059,167
September 15, 2041	33,235,931	10,118,333
October 15, 2041	33,363,075	10,177,500
November 15, 2041	33,490,219	10,236,667
December 15, 2041	33,617,363	10,295,833
January 15, 2042	$0	$0

SCHD 2-16

EXHIBIT A

to

Facility Lease

DESCRIPTION OF THE FACILITY

The Facility consists of the Units, Common Facilities, and any other equipment, material or property, other than real property, associated with the Units and Common Facilities (but not associated with the Global Common Facilities), all of which are located on, under, or over the Facility Site, which Facility Site is the real property located in Hawkins County, Tennessee and is described in greater detail in Exhibit 1 to the Ground Lease.

The Facility will have a three over one combined cycle configuation consisting of three (3) Units and one (1) Toshiba nominally rated 400 megawatt steam turbine generator (the “STG”). Each Unit consists of a General Electric 7FA.04 combustion turbine generator (“CTG”), the related Nooter/Eriksen heat recovery steam generator (“HRSG”) with supplementary duct firing and any ancillary equipment related thereto, except for any Component exclusively constituting Common Facilities.

The Facility will be capable of operating in both simple cycle operation and combined cycle operation. The CTG's primary fuel supply will be natural gas and its secondary fuel supply will be No. 2. Fuel oil. The HRSG's supplemental duct firing will utilize natural gas only.

The CTGs are sometimes referred to as CT1, CT2 and CT3. The serial numbers for each CTG-HRSG pair are as follows:

TVA Tag Number	CTG Serial Number	HRSG Serial Number
Unit 1	298973	083200-1
Unit 2	298974	083200-2
Unit 3	298975	083200-3

The Components for each Unit includes the following:

Mark VIe Gas Turbine Control System

Inlet Filter System

Exhaust System

Exhaust Diverter Damper

Guillotine Isolation Damper to HRSG

Evaporative Cooling System

Cooling Water Module

Exh. A-1

Water Injection Skid

Fuel Gas Filter/Separator

CO2 Fire Protection System

Control Cab/(PEECC)

LCI Starting System/Transformer

EX2100 Generator Excitation System

Generator Auxiliary Compartment

Main Step-up Transformer

Fuel Oil Heating System

Fuel Oil Forwarding System

Fuel Gas Module

Lube Oil Mist Eliminator

Atomizing Air/HP Fuel Oil Pump Skid

Emissions Monitoring Systems on CT exhaust, SCR inlet and HRSG exhaust

Feed Water System

Steam System

CO Catalyst

SCR Catalyst

Duct Burners

The Common Facilities are equipment and facilities that are used for the operation of the Units at the Facility, but are not Global Common Facilities. These shared facilities support the Units. The Common Facilities are as follows:

Steam Turbine Generator

Condensate System

Circulating Water System

Closed Cooling Water System

Fuel Oil Storage System

Compressed Air System

Chemical Feed System

Steam Water Sampling System

Nitrogen, Hydrogen, & CO₂ Gas Systems

Fuel Gas Dew Point Heating System

Fuel Gas Pressure Regulation System

Plant Water Supply System

Auxiliary Steam System

Ammonia Supply System

Oil-Water Separation and Discharge System

Fire Loop System

Potable Water System

Eye Wash System

Storm Water Drains

Process Water

Compressor Wash System

Exh. A-2

EX-10.2

Exhibit 10.2

This Head Lease Agreement has been filed to provide investors with information regarding its terms. It is not intended to provide any other factual information about the Tennessee Valley Authority. The representations and warranties of the parties in this Head Lease Agreement were made to, and solely for the benefit of, the other parties to this Head Lease Agreement. The assertions embodied in the representations and warranties may be qualified by information included in schedules, exhibits or other materials exchanged by the parties that may modify or create exceptions to the representations and warranties. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

EXECUTION VERSION

This instrument prepared by:

Christopher J. Moore, Esq.

Orrick, Herrington & Sutcliffe LLP

51 West 52^nd Street

New York, NY 10019

(212) 506-5000

Head Lease Agreement

Dated as of January 17, 2012

among

The United States of America,

Tennessee Valley Authority,

as Head Lessor

and

John Sevier Combined Cycle Generation LLC,

as Head Lessee

________________________

John Sevier Combined Cycle

Generation Facility

located in Hawkins County, Tennessee

Table of Contents
		Page
SECTION 1.	DEFINITIONS.........................................................................................................	1
SECTION 2.	LEASE OF THE FACILITY....................................................................................	1
SECTION 3.	TERM AND RENT..................................................................................................	2
Section 3.1.	Head Lease Term...............................................................................................	2
Section 3.2.	Rent for the Facility...........................................................................................	2
SECTION 4.	RIGHT OF QUIET ENJOYMENT..........................................................................	2
SECTION 5.	TRANSFERS OF THE FACILIITY; CONVEYANCE OF TITLE.........................	3
SECTION 6.	TERMINATION; SURRENDER; AND RETURN.................................................	3
Section 6.1.	Surrender and Termination of this Head Lease.................................................	3
Section 6.2.	Termination of Head Lease at Option of Head Lessee.....................................	3
Section 6.3.	Return................................................................................................................	3
SECTION 7.	LIENS.......................................................................................................................	4
Section 7.1.	Head Lessee Covenant......................................................................................	4
Section 7.2.	Head Lessor Covenant......................................................................................	4
SECTION 8.	NONTERMINABILITY..........................................................................................	4
SECTION 9.	MODIFICATIONS; REPLACEMENT COMPONENTS........................................	5
SECTION 10.	RELEASE OF COMPONENTS..............................................................................	5
SECTION 11.	NONMERGER.........................................................................................................	5
SECTION 12.	APPLICATION OF PAYMENTS FROM GOVERNMENTAL ENTITY...............	5
SECTION 13.	SECURITY FOR THE HEAD LESSEE'S OBLIGATIONS...................................	6
SECTION 14.	MISCELLANEOUS.................................................................................................	6
Section 14.1.	Amendments and Waivers.................................................................................	6
Section 14.2.	Notices..............................................................................................................	6
Section 14.3.	Survival.............................................................................................................	6
Section 14.4.	Successors and Assigns.....................................................................................	6
Section 14.5.	Business Day.....................................................................................................	6
Section 14.6.	Governing Law..................................................................................................	7
Section 14.7.	Severability........................................................................................................	7
Section 14.8.	Counterparts......................................................................................................	7
Section 14.9.	Headings and Table of Contents........................................................................	7
Section 14.10.	Further Assurances............................................................................................	7
Section 14.11.	Effectiveness.....................................................................................................	7
Section 14.12.	Measuring Life..................................................................................................	7
Section 14.13.	Limitation of Liability.......................................................................................	8

i

Table of Contents (continued)
		Page
Section 14.13.	Effect of the Facility Lease...............................................................................	8
Appendix A	Definitions
Attachment A	Description of the Facility
Attachment B	Permitted Closing Date Liens

ii

Head Lease Agreement

This HEAD LEASE AGREEMENT, dated as of January 17, 2012 (this “Head Lease”), among THE UNITED STATES OF AMERICA (the “Government”), TENNESSEE VALLEY AUTHORITY, a wholly owned corporate agency and instrumentality of the United States (“TVA”) (the Government, solely for purposes of Section 2, and TVA, collectively, together with their successors and permitted assigns, the “Head Lessor”), and JOHN SEVIER COMBINED CYCLE GENERATION, LLC, a Delaware limited liability company (together with its successors and permitted assigns, the “Head Lessee”).

WHEREAS, TVA is constructing the John Sevier Combined Cycle Facility located in Hawkins County, Tennessee, a combined cycle generating facility designed to have a summer net generation capacity of approximately 880 megawatts (as more particularly described on Attachment A hereto, the “Facility”);

WHEREAS, the Head Lessor holds title to the Facility, and desires to lease the Facility to the Head Lessee, and the Head Lessee desires to lease the Facility from the Head Lessor, in each case on the terms and conditions provided herein; and

WHEREAS, pursuant to the Ground Lease, the Head Lessee will lease and accept the conveyance of the Ground Interest from the Head Lessor for a term equal to the term of this Head Lease;

NOW, THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1.DEFINITIONS.

Unless the context otherwise requires, capitalized terms used in this Head Lease, including those used in the recitals, and not otherwise defined herein shall have the respective meanings set forth in Appendix A hereto. The general provisions of Appendix A shall apply to terms used in this Head Lease and specifically defined herein.

SECTION 2.LEASE OF THE FACILITY.

The Head Lessor hereby leases the Facility to the Head Lessee, upon the terms and conditions set forth herein, for the term described below, and the Head Lessee hereby leases the Facility, upon the terms and conditions set forth herein, from the Head Lessor. The Head Lessor and the Head Lessee understand and agree that (a) legal title to the Facility remains vested in the Head Lessor throughout the Head Lease Term, (b) this Head Lease is subject to the Permitted Closing Date Liens set forth in Attachment B hereto and (c) this Head Lease is intended to be a lease of personal property under Tennessee law. The Head Lessor and the Head Lessee acknowledge and agree that (as of the date hereof) the Facility has not achieved Substantial Completion. The Head Lessor and Head Lessee further acknowledge and agree that title to

1

portions of the Facility which will be added to, or otherwise become a part of, the Facility after the Closing Date in accordance with the Construction Documents (at no additional cost to the Head Lessee and with no adjustment to Basic Lease Rent or Termination Value) shall remain in the Head Lessor and shall automatically and, without further act, become subject to this Head Lease and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, the Lien of the Lease Indenture, and shall be deemed part of the Facility for all purposes, including for purposes of this Head Lease. The Facility also includes an interest in (i) all Modifications which are incorporated in the Facility and which pursuant to Section 8.3 of the Facility Lease and Section 9 hereof become subject to this Head Lease and (ii) all Replacement Components which become part of the Facility pursuant to Section 7.2 of the Facility Lease and Section 10 hereof.

SECTION 3.TERM AND RENT.

Section 3.1.    Head Lease Term. The term of this Head Lease shall commence on the Closing Date and shall terminate at 11:59 p.m. (New York City time) on January 17, 2062 (the “Head Lease Term”), subject to earlier termination pursuant to the express terms hereof. Notwithstanding anything to the contrary set forth in this Section 3.1, in no event shall the Head Lease Term terminate so long as the Head Lessee's interest under this Head Lease shall be subject to the Lien of the Lease Indenture.

Section 3.2.Rent for the Facility.

(a)    The Head Lessee hereby agrees to pay the Head Lessor rent of $782,000,000 (the “Head Lease Rent”) on the Closing Date for the entire Head Lease Term. The Head Lessor acknowledges receipt of such amount in full satisfaction of the Head Lessee's obligation to pay rent during the Head Lease Term.

(b)    Head Lease Rent paid pursuant to Section 3.2(a) shall be retained by the Head Lessor in any and all events which are contemplated, prospective or possible under the provisions and conditions of this Head Lease and the other Transaction Documents and shall be absolute and irrevocable under any circumstances whatsoever, including any rescission or termination of this Head Lease, in whole or in part.

SECTION 4.RIGHT OF QUIET ENJOYMENT.

The Head Lessor agrees that, during the Head Lease Term, neither the Head Lessor, any Affiliate nor any other Person claiming title superior to, or by, through or under it shall interfere with or interrupt the quiet enjoyment of the use, operation and possession by the Head Lessee of the Facility subject to the terms hereof; provided that the Head Lessor's covenant does not relate to actions of the Lease Indenture Trustee. The Head Lessor and Head Lessee acknowledge and agree that the Head Lessor shall retain the right to fully access, modify, and improve the Facility in a manner necessary to perform the Work and complete the Facility pursuant to the terms of the Construction Management Agreement.

2

SECTION 5.TRANSFERS OF THE FACILITY.

The Head Lessee agrees that, prior to the expiration or earlier termination of the Facility Lease Term, it shall not assign, transfer or convey the Head Lessee's leasehold interest in the Facility, in whole or in part, except as part of the Head Lessee's transfer of all or part of the Owner Lessor's Interest pursuant to, and as permitted by, the Transaction Documents. The Head Lessor acknowledges that (a) the Facility will be leased to the Facility Lessee pursuant to the Facility Lease, (b) the Head Lessee shall have the right to transfer and convey all or part of the Head Lessee's leasehold interest in the Facility under and in accordance with Sections 5.1, 15.2, 16 and 18.2 of the Facility Lease in connection with the transfer thereunder of all or part of the Owner Lessor's Interest (or, in connection with a partial termination pursuant to Section 15.2 of the Facility Lease, the Relevant Portion of the Facility), and (c) the Facility Lessee shall have the right to sublease the Facility in accordance with Section 20.2 of the Facility Lease.

SECTION 6.TERMINATION; SURRENDER; AND RETURN.

Section 6.1.Surrender and Termination of this Head Lease.

(a)    The Head Lessee shall surrender all of its interest in this Head Lease upon (i) the termination in whole of the Facility Lease pursuant to Section 15.2 thereof, (ii) the expiration of the Facility Lease Term in accordance with Section 16 of the Facility Lease or (iii) the expiration or termination of the Head Lease Term in accordance herewith.

(b)    If the Facility Lease is terminated pursuant to Section 15.2 thereof in part with respect to a Relevant Portion of the Facility, this Head Lease shall terminate in part with respect to such Relevant Portion of the Facility on the same date and time as the termination of the Facility Lease with respect to such Relevant Portion.

Section 6.2.Termination of Head Lease at Option of Head Lessee. At any time on or following (a) termination of the Facility Lease pursuant to Section 18.2 thereof, or (b) the expiration of the Facility Lease Term in circumstances under which the Facility Lessee is required to deliver possession of the Facility to the Owner Lessor in accordance with Section 5 of the Facility Lease, the Head Lessee may elect to terminate this Head Lease upon written notice to the Head Lessor, in each case without any obligation or liability to the Head Lessor. In connection with any termination of this Head Lease pursuant to this Section 6.2, the Head Lessee shall return the Facility to the Head Lessor in accordance with Section 6.3.

Section 6.3.Return. Upon (a) surrender of the Head Lessee's interest in this Head Lease pursuant to Section 6.1(a), (b) termination of this Head Lease in whole pursuant to Section 6.2 or (c) termination of this Head Lease in part with respect to a Relevant Portion of the Facility pursuant to Section 6.1(b), the Head Lessee shall (i) return the Facility or the Relevant Portion of the Facility, as the case may be, to the Head Lessor, by delivering possession of the same to the Head Lessor at its location on the Facility Site and (ii) execute, acknowledge and deliver a release, surrender or conveyance of all its right, title, interest and estate in the Facility or Relevant Portion of the Facility, as the case may be, to the Head Lessor, to be prepared by and at the expense of the Head Lessor in a form reasonably satisfactory to the Head Lessee, in each case on an “as is,” “where is,” and “with all faults” basis.

3

SECTION 7.LIENS.

Section 7.1.Head Lessee Covenant. The Head Lessee agrees that it shall (a) not, directly or indirectly, create, incur, assume or suffer to exist, any Owner Lessor's Liens, (b) promptly notify the Head Lessor and, so long as the Lien of the Lease Indenture has not been discharged, the Lease Indenture Trustee, of the imposition of any such Owner Lessor's Lien of which the Head Lessee is aware, and (c) promptly, at its own expense, take such action as may be necessary to fully discharge or release any such Owner Lessor's Lien; provided, however, that the Head Lessee shall not be in breach of this covenant so long as it shall be diligently contesting such Lien and such contest shall not present any material risk of the sale, foreclosure or loss of the Owner Lessor's Interest or any part thereof or the rights of the Head Lessor or, so long as the Lien of the Lease Indenture has not been terminated or discharged, the Lease Indenture Trustee under the Transaction Documents.

Section 7.2.Head Lessor Covenant. The Head Lessor agrees that it shall (a) not, directly or indirectly, create, incur, assume or suffer to exist any Lien on or with respect to the Facility or any interest therein or in, to or on its interest in this Head Lease, other than Permitted Liens, (b) promptly notify the Head Lessee and, so long as the Lien of the Lease Indenture has not been discharged, the Lease Indenture Trustee of the imposition of any such Lien (other than Permitted Liens) of which the Head Lessor is aware, and (c) promptly, at its own expense, take such action as may be necessary to fully discharge or release any such Lien (other than Permitted Liens); provided, however, that the Head Lessor shall not be in breach of this covenant so long as it shall be diligently contesting such Lien and such contest shall not present any material risk of the sale, foreclosure or loss of the Owner Lessor's Interest or any part thereof or the rights of the Head Lessee or, so long as the Lien of the Lease Indenture has not been terminated or discharged, the Lease Indenture Trustee under the Transaction Documents.

SECTION 8.NONTERMINABILITY.

Neither the rights nor obligations of the Head Lessee or the Head Lessor under this Head Lease shall be terminated, extinguished, diminished, lost or otherwise impaired prior to the expiration or early termination of the Head Lease Term in accordance herewith by any circumstances of any character, including, without limitation: (a) any loss or destruction of, or damage to, or failure to complete construction of, all or any part of the Facility, the Facility Site or any Component for any reason whatsoever and of whatever duration, (b) the condemnation, requisitioning (by eminent domain or otherwise), expropriation, seizure or other taking of title to or use of the Facility, the Facility Site or any Component thereof or any other portion of the Facility or the Facility Site by any Governmental Entity or otherwise, (c) any prohibition, limitation or restriction on the use by any Person of all or any part of its property or the interference with such use by any Person, or any eviction by paramount title or otherwise, (d) any inadequacy, incorrectness or failure of the description of the Facility, the Facility Site or any part thereof or any rights or property in which an interest is intended to be granted or conveyed by this Head Lease, (e) insolvency, bankruptcy, reorganization or similar proceedings by or against the Head Lessor, the Head Lessee or any other Person, (f) the failure by the Head Lessee or the Head Lessor to comply with Section 7 hereof or with any other Transaction Documents or (g) any other reason whatsoever, whether similar or dissimilar to any of the foregoing.

4

SECTION 9.MODIFICATIONS; REPLACEMENT COMPONENTS.

All Required Modifications, all Nonseverable Modifications and all Modifications financed by the Owner Lessor by an Additional Equity Investment or a Supplemental Financing pursuant to Section 11.2 of the Participation Agreement shall automatically upon being affixed to or incorporated into the Facility become subject to this Head Lease without any action by any Person whatsoever and shall be deemed to be a part of the Facility for all purposes of this Head Lease. Any Removable Modification shall not become subject to this Head Lease unless the Owner Lessor shall have leased such Removable Modification in accordance with Section 5.2 of the Facility Lease. All Replacement Components incorporated in the Facility in accordance with the Facility Lease shall automatically become subject to this Head Lease without any action by any Person whatsoever and shall be deemed to be a part of the Facility for all purposes of this Head Lease.

SECTION 10.RELEASE OF COMPONENTS.

Whenever a Component is replaced or any surplus or obsolete Component is removed because it is no longer necessary for the use, operation or maintenance of the Facility, in each case pursuant to, and in accordance with, Section 7.2 of the Facility Lease, and thereafter ceases to be subject to the Facility Lease, the Head Lessee's interest in such replaced, surplus or obsolete Component shall automatically and without further act of any Person be released from this Head Lease, and the Head Lessee shall, upon the written request of, and at the cost and expense of, the Head Lessor, execute and deliver to, and as directed in writing by, the Head Lessor an appropriate instrument (in due form for recording) releasing such replaced, surplus or obsolete Component from this Head Lease.

SECTION 11.NONMERGER.

The reversionary interests of the Head Lessor in the Facility shall not merge into any interests in the Facility leased by, through or under this Head Lease even if such reversionary interests and such leased interests are at any time vested in or held directly or indirectly by the same Person, but this Head Lease shall nonetheless remain in full force and effect in accordance with its terms notwithstanding such vesting or holding. Notwithstanding this Section 11, nothing shall preclude termination of this Head Lease pursuant to Section 6.1.

SECTION 12.APPLICATION OF PAYMENTS FROM GOVERNMENTAL ENTITY.

Any payments received during or with respect to the Facility Lease Term by the Head Lessor or by the Head Lessee from any Governmental Entity with respect to the seizure, expropriation, condemnation or requisition of the use of, or title to, the Facility shall be applied in accordance with Section 10.2 of the Facility Lease. Any payments received with respect to the period after the expiration of the Facility Lease Term by the Head Lessor or by the Head Lessee from any Governmental Entity with respect to the seizure, expropriation, condemnation or requisition of the use of, or title to the Facility shall be paid over to, or retained by, the Head Lessee.

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SECTION 13.SECURITY FOR THE HEAD LESSEE'S OBLIGATIONS.

In order to secure the Lessor Notes, the Head Lessee will by the Lease Indenture assign and grant a Lien to the Lease Indenture Trustee in and to all of the Head Lessee's right, title and interest in, to and under this Head Lease and the Owner Lessor's Interest including its leasehold interest in the Facility, other than Excepted Payments and subject to Excepted Rights. The Head Lessor hereby consents to such assignment and to the creation of such Lien and acknowledges receipt of a copy of the Lease Indenture, it being understood that such consent shall not affect any requirement or the absence of any requirement for any consent under any other circumstances. TO THE EXTENT, IF ANY, THAT THIS HEAD LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS HEAD LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART HEREOF OTHER THAN THE ORIGINAL COUNTERPART, WHICH SHALL BE IDENTIFIED AS THE COUNTERPART CONTAINING THE RECEIPT THEREFOR EXECUTED BY THE LEASE INDENTURE TRUSTEE ON THE SIGNATURE PAGE THEREOF.

SECTION 14.MISCELLANEOUS.

Section 14.1.Amendments and Waivers. No term, covenant, agreement or condition of this Head Lease may be terminated, amended or compliance therewith waived (either generally or in a particular instance, retroactively or prospectively) except by an instrument or instruments in writing executed by each party hereto.

Section 14.2.Notices. Any notices, requests or communications hereunder shall be given or made in accordance with the provisions of Section 15.5 of the Participation Agreement.

Section 14.3.Survival. Except as expressly set forth herein, the warranties and covenants made by each party hereto shall not survive the expiration or termination of this Head Lease in accordance with the terms hereof.

Section 14.4.Successors and Assigns.

(a)    This Head Lease shall be binding upon and shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and permitted assigns as permitted by and in accordance with the terms hereof.

(b)    The Head Lessor hereby consents to the entry by the Head Lessee into, and the performance by the Head Lessee of, the Transaction Documents. Except as expressly provided herein or in any other Transaction Document, neither party may assign its interests or transfer its obligations herein without the consent of the other party hereto.

Section 14.5.Business Day. Notwithstanding anything herein to the contrary, if the date on which any payment or performance is to be made pursuant to this Head Lease is not a Business Day, the payment otherwise payable on such date shall be payable on the next succeeding Business Day with the same force and effect as if made on such scheduled date and (provided such payment is made on such succeeding Business

6

Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on the next succeeding Business Day.

Section 14.6.Governing Law. This Head Lease shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York (without regard to conflicts of laws principles other than as provided in Section 5-1401 of the NY General Obligations Law), except to the extent that Tennessee law or U.S. federal law shall apply.

Section 14.7.Severability. If any provision hereof shall be invalid, illegal or unenforceable under the Applicable Law of any jurisdiction, the validity, legality and enforceability of such provision in any other jurisdiction, and of the remaining provisions hereof in any jurisdiction, shall not be affected or impaired thereby.

Section 14.8.Counterparts. This Head Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

Section 14.9.Headings and Table of Contents. The headings of the sections of this Head Lease and the Table of Contents are inserted for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof.

Section 14.10.Further Assurances. Each party hereto shall promptly and duly execute and deliver such further documents to make such further assurances for and take such further action reasonably requested by the other party hereto, all as may be reasonably necessary to carry out more effectively the intent and purpose of this Head Lease.

Section 14.11.Effectiveness. This Head Lease has been dated as of the date first above written for convenience only. This Head Lease shall be effective as of the date set forth on the signature page hereto.

Section 14.12.Measuring Life. If and to the extent that any of the rights and privileges granted under this Head Lease, would, in the absence of the limitation imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule or law relating to the vesting of interests in property or the suspension of the power of alienation of property, then it is agreed that notwithstanding any other provision of this Head Lease, such options, rights and privileges, subject to the respective conditions hereof governing the exercise of such options, rights and privileges, shall be exercisable only during (a) the longer of (i) a period which shall end twenty-one (21) years after the death of the last survivor of the descendants living on the date of the execution of this Head Lease of Steven M. Wills and the following Presidents of the United States: Franklin D. Roosevelt, Harry S. Truman, Dwight D. Eisenhower, John F. Kennedy, Lyndon B. Johnson, Richard M. Nixon, Gerald R. Ford, James E. Carter, Ronald W. Reagan, George H.W. Bush, William J. Clinton, George W. Bush and Barack H. Obama or (ii) the period provided under the Uniform Statutory Rule Against Perpetuities or (b) the specific applicable period of time expressed in this Head Lease, whichever of (a) and (b) is shorter.

Section 14.13.Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a) this Head Lease is executed and delivered by Wells Fargo Delaware Trust Company, National Association

7

(“Wells Fargo”), not individually or personally but solely as the Lessor Manager of the Head Lessee under the Owner Lessor LLC Agreement, in the exercise of the powers and authority conferred and vested in it pursuant thereto, (b) each of the representations, undertakings and agreements herein made on the part of the Head Lessee is made and intended not as personal representations, undertakings and agreements by Wells Fargo, but is made and intended for the purpose for binding only the Head Lessee, (c) nothing herein contained shall be construed as creating any liability on Wells Fargo, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto or by any Person claiming by, through or under the parties hereto and (d) under no circumstances shall Wells Fargo, be personally liable for the payment of any indebtedness or expenses of the Head Lessee or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Head Lessee under this Head Lease.

Section 14.14.Effect of the Facility Lease. Except for its obligations under Sections 4, 6, or 7.1 hereof, by entering into the Facility Lease, the Head Lessee shall be deemed to have complied with any covenant or agreement made by it hereunder with respect to the operation, maintenance and use of the Facility during the Facility Lease Term, without necessity of any action by the Head Lessee and regardless of whether the Facility Lessee complies with its corresponding obligations under the Facility Lease.

(Signatures Follow On Next Page)

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IN WITNESS WHEREOF, the Head Lessor and the Head Lessee have caused this Head Lease to be duly executed and delivered by their respective officers thereunto duly authorized on the dates below their respective signatures, but effective as of the date first set forth above.

THE UNITED STATES OF AMERICA

By: Tennessee Valley Authority, as legal agent

By:  /s/ Joshua J. Carlon

Name: Joshua John Carlon

Title: Director, Corporate Finance

Date: January 12, 2012

STATE OF NEW YORK)

) ss.:

COUNTY OF NEW YORK)

Personally appeared before me, the undersigned authority in and for the said county and state, on this 12th day of January, 2012, within my jurisdiction, the within named Joshua John Carlon, who acknowledged to me that he is Director, Corporate Finance of Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States of America and agent for the United States of America, and that for and on behalf of Tennessee Valley Authority as agent for the United States of America, and as the act and deed of the United States of America, he executed the above and foregoing instrument, after first having been duly authorized by Tennessee Valley Authority and the United States of America so to do.

/s/ Jose L. DeJesus

Notary Public

My Commission expires: 5/19/2015            Jose L. DeJesus

Notary Public, State of New York

No. 01DE5078255

Qualified in Queens County

Certificate Filed in New York County

Commission Expires May 19, 2015

(Head Lease)

TENNESSEE VALLEY AUTHORITY,

as Head Lessor

By: /s/ Joshua J. Carlon

Name: Joshua John Carlon

Title: Director, Corporate Finance

Date: January 12, 2012

STATE OF NEW YORK)

) ss.:

COUNTY OF NEW YORK )

Personally appeared before me, the undersigned authority in and for the said county and state, on this 12th day of January, 2012, within my jurisdiction, the within named Joshua John Carlon, who acknowledged to me that he is Director, Corporate Finance of Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States of America, and that for and on behalf of the Tennessee Valley Authority, and as its act and deed, he executed the above and foregoing instrument, after first having been duly authorized so to do.

/s/ Jose L. DeJesus

Notary Public

My Commission expires: 5/19/2015            Jose L. DeJesus

Notary Public, State of New York

No. 01DE5078255

Qualified in Queens County

Certificate Filed in New York County

Commission Expires May 19, 2015

(Head Lease)

JOHN SEVIER COMBINED CYCLE GENERATION LLC,

as Head Lessee

By:Wells Fargo Delaware Trust Company, National Association, not in its individual capacity, but solely as Lessor Manager under the Owner Lessor LLC Agreement

By:  /s/ Scott A. Huff

Name: Scott A. Huff

Title: Vice President

Date: January 10, 2012

STATE OF DELAWARE)

) ss.:

COUNTY OF NEW CASTLE)

Personally appeared before me, the undersigned authority in and for the said county and state, on this 10th day of January, 2012, within my jurisdiction, the within named Scott A. Huff, who acknowledged to me that he is Vice President of Wells Fargo Delaware Trust Company, National Association, a national banking association and Lessor Manager of the John Sevier Combined Cycle Generation LLC, a Delaware limited liability company (the “Owner Lessor”), and that for and on behalf of Wells Fargo Delaware Trust Company, National Association solely as Lessor Manager of the Owner Lessor, and as the act and deed of Wells Fargo Delaware Trust Company, National Association solely as Lessor Manager of the Owner Lessor, and as the act and deed of the Owner Lessor, he executed the above and foregoing instrument, after first having been duly authorized by Wells Fargo Delaware Trust Company, National Association and Owner Lessor so to do.

/s/ Amy E. Falcone

Notary Public

My Commission expires:                Amy Elizabeth Falcone

Notary Public

State of Delaware

My Commission Expires 05-23-2013

(Head Lease)

The name and address of the Head Lessor are:

HEAD LESSOR: United States of America

Tennessee Valley Authority

c/o Realty Services

1101 Market Street, SP 3L

Chattanooga, Tennessee 37402-2801

Telephone No.(423) 751-7691

Attention: Senior Manager

The name and address of the Head Lessee are:

HEAD LESSEE:    John Sevier Combined Cycle Generation, LLC

c/o Wells Fargo Delaware Trust Company

Corporate Trust Services

919 Market Street, Suite 1600    

Wilmington, DE 19801

Telephone No.: (302) 575-2025

Facsimile No.:(302) 575-2006

E-mail: scott.a.huff@wellsfargo.com

Attention: Corporate Trust Administration

(Head Lease)

Appendix A

to

Head Lease

DEFINITIONS

Appendix A

___________________________________________

Definitions

___________________________________________

John Sevier Combined Cycle

Generation Facility

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Appendix A - Definitions

GENERAL PROVISIONS

In this Appendix A and each Transaction Document (as hereinafter defined), unless otherwise provided herein or therein:

(a)the terms set forth in this Appendix A or in any such Transaction Document shall have the meanings herein provided for and any term used in a Transaction Document and not defined therein or in this Appendix A but in another Transaction Document shall have the meaning herein or therein provided for in such other Transaction Document;

(b)any term defined in this Appendix A by reference to another document, instrument or agreement shall continue to have the meaning ascribed thereto whether or not such other document, instrument or agreement remains in effect;

(c)words importing the singular include the plural and vice versa;

(d)words importing a gender include either gender;

(e)a reference to a part, clause, section, paragraph, article, party, annex, appendix, exhibit, schedule or other attachment to or in respect of a Transaction Document is a reference to a part, clause, section, paragraph, or article of, or a part, annex, appendix, exhibit, schedule or other attachment to, such Transaction Document unless, in any such case, otherwise expressly provided in any such Transaction Document;

(f)a reference to any statute, regulation, proclamation, ordinance or law includes all statutes, regulations, proclamations, ordinances or laws varying, consolidating or replacing the same from time to time, and a reference to a statute includes all regulations, policies, protocols, codes, proclamations and ordinances issued or otherwise applicable under that statute unless, in any such case, otherwise expressly provided in any such statute or in such Transaction Document;

(g)a definition of or reference to any document, instrument or agreement includes an amendment or supplement to, or restatement, replacement, modification or renovation of, any such document, instrument or agreement unless otherwise specified in such definition or in the context in which such reference is used;

(h)a reference to a particular section, paragraph or other part of a particular statute shall be deemed to be a reference to any other section, paragraph or other part substituted therefor from time to time;

(i)if a capitalized term describes, or shall be defined by reference to, a document, instrument or agreement that has not as of any particular date been executed and delivered and such document, instrument or agreement is attached as an exhibit to the Participation Agreement (as hereinafter defined),

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such reference shall be deemed to be to such form and, following such execution and delivery and subject to paragraph (h) above, to the document, instrument or agreement as so executed and delivered;

(j)a reference to any Person (as hereinafter defined) includes such Person's successors and permitted assigns;

(k)any reference to “days” shall mean calendar days unless “Business Days” (as hereinafter defined) are expressly specified;

(l)if the date as of which any right, option or election is exercisable, or the date upon which any amount is due and payable, is stated to be on a date or day that is not a Business Day, such right, option or election may be exercised, and such amount shall be deemed due and payable, on the next succeeding Business Day with the same effect as if the same was exercised or made on such date or day (without, in the case of any such payment, the payment or accrual of any interest or other late payment or charge, provided such payment is made on such next succeeding Business Day);

(m)words such as “hereunder”, “hereto”, “hereof” and “herein” and other words of similar import shall, unless the context requires otherwise, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof;

(n)a reference to “including” shall mean including without limiting the generality of any description preceding such term, and for purposes hereof and of each Transaction Document the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned;

(o)all accounting terms not specifically defined herein or in any Transaction Document shall be construed in accordance with GAAP; and

(p)unless the context or the specific provision otherwise requires, whenever in the Transaction Documents a provision requires that the rating of a Person or the Lessor Notes be confirmed, such provisions shall be deemed to mean that each Rating Agency shall have confirmed the rating of the senior long term unsecured debt of such Person or the Lessor Notes, if then rated by such Rating Agency, a copy of which confirmation shall be delivered by TVA to the Equity Investor, the Owner Lessor and, so long as the Lien of the Lease Indenture shall not have been terminated or discharged, to the Lease Indenture Trustee and shall be without indication that such Person or the Lessor Notes, as the case may be, has been placed on credit watch, credit review, or any similar status with negative implications or which does not indicate the direction of the potential ratings change.

DEFINED TERMS

“2012 Lessor Notes" shall mean the 4.626% Series 2012 Bonds due January 15, 2042 issued on the Closing Date by the Owner Lessor and any Lessor Notes issued in replacement therefor pursuant to Section 2.9 of the Lease Indenture.

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“Access Property" shall mean the access routes to and from the Facility Site and to and from the Global Common Facilities Site, as more particularly described in Exhibit 3 to the Ground Lease.

“Actual Knowledge" shall mean, with respect to any Transaction Party, actual knowledge of, or receipt of written notice by, an officer (or other employee whose responsibilities include the administration of the Transaction) of such Transaction Party; provided that neither the Lease Indenture Trustee nor the Lessor Manager shall be deemed to have Actual Knowledge of any fact solely by virtue of an officer of the Lease Indenture Trustee or the Lessor Manager, as the case may be, having actual knowledge of such fact unless such officer is an officer in the Corporate Trust Administration Department of the Lease Indenture Trustee or the Lessor Manager, as the case may be, responsible for the administration of this transaction.

“Additional Equity Investment" shall mean the amount, if any, provided by the Equity Investor to finance all or a portion of the cost of any Modification financed pursuant to Section 11.2(a) of the Participation Agreement.

“Additional Facility" shall have the meaning specified in Section 4.4 of the Ground Lease.

“Additional Lessor Notes" shall have the meaning specified in Section 2.12 of the Lease Indenture.

“Additional Owner" shall have the meaning specified in Section 4.4 of the Ground Lease.

“Affiliate" of a particular Person shall mean any Person directly or indirectly controlling, controlled by or under common control with such particular Person. For purposes of this definition, “control” when used with respect to any particular Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing; provided, however, that under no circumstances shall the Trust Company be considered an Affiliate of any of the Owner Lessor or the Equity Investor or any Equity Note Purchaser, nor the Owner Lessor, any Equity Investor or any Equity Note Purchaser be considered an Affiliate of the Trust Company; provided, further, that no Federal Governmental Entity shall be considered to be an Affiliate of TVA.

“After-Tax Basis" shall mean, with respect to any payment to be received by any Person, the amount of such payment (the base payment) supplemented by a further payment (the additional payment) to that Person so that the sum of the base payment plus the additional payment shall, after deduction of the amount of all Federal, state and local income Taxes required to be paid by such Person in respect of the receipt or accrual of the base payment and the additional payment (taking into account any reduction in such income Taxes resulting from Tax benefits realized or to be realized by the recipient as a result of the payment or the event giving rise to the payment), be equal to the amount required to be received. Such calculations shall be made on the basis of the highest generally applicable Federal, state and local income tax rates applicable to the Person for whom the calculation is being made for all relevant periods, and shall take into account the deductibility of state and local income taxes for Federal income tax purposes.

“Applicable Law" shall mean, without limitation, all applicable laws, including all Environmental Laws, and treaties, judgments, decrees, injunctions, writs and orders of any court, arbitration board or Governmental

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Entity and rules, regulations, orders, ordinances, licenses and permits of any Governmental Entity.

“Applicable Permits" shall mean any valid waiver, exemption, variance, franchise, permit, authorization, license or similar order of or from, or filing or registration with, or notice to, any Governmental Entity having jurisdiction over the matter in question, including any decision of a Governmental Entity accompanying any of the foregoing, required by Applicable Law (including Environmental Laws) to be obtained or maintained in connection with the construction, operation and maintenance of the Facility and the Facility Site, transmission of electricity, performance of the Work, testing, commissioning, health and safety or any Environmental Condition.

“Applicable Rate" shall mean 7.100% per annum.

“Appraisal Procedure" shall mean (except with respect to the Closing Appraisal and any appraisal to determine Fair Market Sales Value after a Lease Event of Default shall have occurred and be continuing) an appraisal conducted by an appraiser or appraisers in accordance with the procedures set forth in this definition of “Appraisal Procedure.” The Equity Investor and TVA will consult with the intent of selecting a mutually acceptable Independent Appraiser. If a mutually acceptable Independent Appraiser is selected, the Fair Market Sales Value shall be determined by such Independent Appraiser. If the Equity Investor and TVA are unable to agree upon a single Independent Appraiser within a 15-day period, one shall be appointed by the Equity Investor, and one shall be appointed by TVA (or its designee), which Independent Appraisers shall attempt to agree upon the value, period, amount or other determination that is the subject of the appraisal. If either the Equity Investor or TVA does not appoint its appraiser, the determination of the other appraiser shall be conclusive and binding on the Equity Investor and TVA. If the appraisers appointed by the Equity Investor and TVA are unable to agree upon the value, period, amount or other determination in question, such appraisers shall jointly appoint a third Independent Appraiser or, if such appraisers do not appoint a third Independent Appraiser, the Equity Investor and TVA shall jointly appoint the third Independent Appraiser. In such case, the average of the determinations of the three appraisers shall be conclusive and binding on the Equity Investor and TVA, unless the determination of one appraiser differs from the middle determination by more than twice the amount by which the third determination differs from the middle determination, in which case the determination of the most disparate appraiser shall be excluded, and the average of the remaining two determinations shall be conclusive and binding on the Equity Investor and TVA.

“Appraiser" shall mean MR Valuation Consulting, LLC.

“Arbitration Proceeding" shall mean a procedure whereby the party seeking to arbitrate a dispute concerning an amount payable under the Support Agreement shall provide written notice of its intention to arbitrate at the time and to the other party of the Support Agreement. Such notice (i) shall specify the section or sections of the Support Agreement which authorizes or authorize an Arbitration Proceeding, (ii) provide reasonable detail of the item or items in dispute, and (iii) set forth the name and address of the person designated to act as the arbitrator on behalf of the party providing such notice. Within 20 Business Days after such notice is given, the party to which such notice was given shall give notice to the first party, specifying the name and

5

address of the person designated to act as arbitrator on its behalf. If the second party fails to notify the first party of the appointment of its arbitrator within such 20 Business Day period, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator. The arbitrators so chosen shall meet within 10 Business Days after the second arbitrator is appointed and within 20 Business Days thereafter shall decide the dispute. If within such period they cannot agree upon their decision, they shall within 10 Business Days thereafter appoint a third arbitrator and, if they cannot agree upon such appointment, the third arbitrator shall be appointed upon their application or upon the application of either party, by the American Arbitration Association, or any organization which is a successor thereto from a panel of arbitrators having expertise in the business of operating simple cycle combustion turbines. The three arbitrators shall meet and decide the dispute within 20 Business Days of the appointment of the third arbitrator. Any decision or determination in which two of the three arbitrators shall concur or, if no two of the three arbitrators shall concur, the decision or determination of the arbitrator last selected shall be final and binding upon the parties. In designating arbitrators and in deciding the dispute, the arbitrators shall act in accordance with the rules of the American Arbitration Association then in force, subject, however, to express provisions to the contrary, if any, contained in the Support Agreement. In the event that the American Arbitration Association or a nationally recognized successor shall not then be in existence, the arbitration shall proceed under comparable laws or statutes then in effect. The parties to the arbitration shall be entitled to present evidence and argument to the arbitrators. Each party shall pay (i) the fees and expenses of the arbitrator appointed by or on its behalf, and (ii) equal shares of (a) the other expenses of the arbitration properly incurred and (b) the fees and expenses of the third arbitrator, if any. For purposes of this definition, the Facility User shall be deemed to be one party and TVA shall be deemed to be the other party.

“Assigned Documents" shall have the meaning specified in clause (2) of the Granting Clause of the Lease Indenture.

“Assignment and Assumption Agreement" shall mean an assignment and assumption agreement in form and substance substantially in the form of Exhibit F to the Participation Agreement.

“Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time, 11 U.S.C. §101 et seq.

“Base Rate" shall mean the rate of interest publicly announced from time to time by Citibank, N.A. at its New York office as its base rate for domestic commercial loans, such rate to change as and when such base rate changes. For purpose of this definition, “base rate” shall mean that rate announced by Citibank, N.A. from time to time as its base rate as that rate may change from time to time with changes to occur on the date Citibank, N.A.'s base rate changes.

“Basic Lease Rent" shall have the meaning specified in Section 3.2 of the Facility Lease.

“Basic Lease Rent(Debt Portion)" for any Rent Payment Date shall mean the amount set forth under the heading “Basic Lease Rent (Debt Portion)” on Schedule 1 of the Facility Lease for such Rent Payment Date.

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“Basic Lease Rent (Equity Portion)" for any Rent Payment Date shall mean the amount set forth under the heading “Basic Lease Rent (Equity Portion)” on Schedule 1 of the Facility Lease for such Rent Payment Date.

“Benefit Plan" shall mean an employee benefit plan as defined in Section 3(3) of ERISA that is subject to Title I of ERISA, a plan as defined in Section 4975(e) of the Code that is subject to Section 4975 of the Code or any entity that is deemed to hold the assets of any such employee benefit plan or plan by virtue of such employee benefit plan's or plan's investment in such entity.

“Bond Resolution" shall mean the Basic Tennessee Valley Authority Power Bond Resolution adopted October 6, 1960, as amended.

“Boundary Property" shall have the meaning specified in Section 4.3(a) of the Ground Lease.

“Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which commercial banking institutions are authorized or required by law, regulation or executive order to be closed in Wilmington, Delaware, Knoxville, Tennessee, or the city and the state in which the Corporate Trust Office of the Lease Indenture Trustee, the Lessor Manager or the Equity Manager is located.

“Called Amount" shall mean the amount of the Equity Investment that is being repaid, determined by reference to the Termination Value (Equity Portion) with respect to the applicable Termination Date.

“Capability" shall mean the amount of Energy, expressed in megawatt hours, that can be generated by the Facility.

“Capacity" shall mean megawatts of electric energy generating capacity.

“Capital Expenditure Budget" shall have the meaning set forth in Section 4.4(a) of the Support Agreement.

“Claim" shall mean any liability (including in respect of negligence (whether passive or active or other torts), strict or absolute liability in tort or otherwise, warranty, latent or other defects (regardless of whether or not discoverable), statutory liability, property damage, bodily injury or death), obligation, loss, settlement, damage, penalty, claim, action, suit, proceeding (whether civil or criminal), judgment, penalty, fine and other legal or administrative sanction, judicial or administrative proceeding, cost, expense or disbursement, including reasonable legal, investigation and expert fees, expenses and reasonable related charges, of whatsoever kind and nature, but excluding Taxes.

“Closing" shall have the meaning specified in Section 2.2(a) of the Participation Agreement.

“Closing Appraisal" shall mean the appraisal, dated the Closing Date, prepared by the Appraiser for the use of TVA.

“Closing Date" shall have the meaning specified in Section 2.2(a) of the Participation Agreement.

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“CMA Payment" shall have the meaning specified in Section 6.1 of the Construction Management Agreement.

“Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute.

“Co-Equity Manager" shall mean a co-Manager appointed pursuant to Section 21 of the Equity Investor LLC Agreement.

“Co-Lessor Manager" shall mean a co-Independent Manager appointed pursuant to Section 16.6 of the Owner Lessor LLC Agreement.

“Collateral" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Common Facilities" shall mean all property and facilities intended for common use in the operation of the Units, including but not limited to a Toshiba nominally rated 400 megawatt steam turbine generator, as more particularly described on Exhibit A to the Facility Lease, and shall include any Modifications to such facilities which become subject to the Head Lease during the Facility Lease Term and any Modifications to the Common Facilities made in accordance with the Support Agreement, but shall not include any property or facilities that are used in whole or in part solely for operation or maintenance of other TVA generating units.

“Competitor" shall have the meaning specified in Section 7.1(b) of the Participation Agreement.

“Component" shall mean any appliance, part, instrument, appurtenance, accessory, furnishing, equipment or other property of whatever nature that may from time to time be incorporated in any Unit or the Facility, except to the extent constituting Modifications.

“Confidential Information" shall have the meaning specified in Section 13.2 of the Participation Agreement.

“Construction Cost" shall mean, with respect to any Modification, the actual cost or purchase price (after deducting amounts realized as the salvage value of any component or item of equipment which is being replaced by the Modification, determined in accordance with Prudent Industry Practice), including, without limitation, (i) all costs of architectural and engineering services, labor, materials, equipment, supplies, personnel training, testing, permits and licenses, and legal services, (ii) payroll, including related fringe benefits and payroll taxes, of direct full time employees of TVA allocable on an actual time basis to such acquisition or construction and not included in costs described in clause (vi) below, (iii) reasonable and allocable traveling expenses including use of TVA's transportation equipment, (iv) all costs relating to injury or damage claims and claims by contractors or suppliers arising under construction contracts and arising out of such acquisition or construction, (v) all Taxes legally required to be paid with respect to such acquisition or construction if paid by TVA and (vi) administrative and other overhead costs of TVA as apportioned by TVA to such Modification in accordance with the Uniform System of Accounts, applicable to such acquisition or construction of such Modification, all in accordance with the Capital Expenditure Budget in effect from time to time.

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“Construction Documents" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Construction Management Agreement" shall mean the Construction Management Agreement dated as of the Closing Date between TVA and the Owner Lessor.

“Construction Period Financing Account" shall have the meaning specified in Section 2.17(a) of the Lease Indenture.

“Construction Period Financing Costs" shall mean a dollar amount equal to the sum of (a) $26,444,746 with respect to the Lessor Notes and (b) $3,510,556 with respect to the Equity Investment.

“Contractor" shall mean TVA as contractor under the Construction Management Agreement.

“Contract Year" shall mean the 12-month period commencing at 12:01 a.m. on January 1 of each year and ending at 12:01 a.m. on the following January 1, except that the first Contract Year shall begin on the Service Commencement Date and the last Contract Year shall end on the Final Shutdown Date.

“Debt Portion" shall mean the separate portions of the Net TV Amount (Debt Portion), which portions correspond to the 2012 Lessor Notes and each series of Additional Lessor Notes that may have been issued from time to time and are determined by multiplying (a) the Net TV Amount (Debt Portion), by (b) the fraction (i) the numerator of which is the outstanding principal amount of the applicable 2012 Lessor Notes or such series of Additional Lessor Notes and (ii) the denominator of which is the aggregate outstanding principal amount of the 2012 Lessor Notes and the Additional Lessor Notes.

“Deed of Trust Trustee" shall mean John Seehorn, Esq.

“Design Documents" shall have the meaning specified in Section 2.2.1 of the Construction Management Agreement.

“Discounted Value" shall mean, with respect to the Called Amount of any Equity Investment, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Amount from their respective scheduled due dates to the Settlement Date with respect to such Called Amount, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which return on the Equity Investment is payable) equal to the Reinvestment Yield with respect to such Called Amount.

“Dollars" or the sign “$” shall mean United States dollars or other lawful currency of the United States.

“DTC" shall mean The Depository Trust Company, a New York corporation.

“Early Buy Out" shall have the meaning specified in Section 15.1 of the Facility Lease.

“Early Buy Out Date" shall have the meaning specified in Section 15.1 of the Facility Lease.

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“Early Buy Out Notice" shall have the meaning specified in Section 15.1 of the Facility Lease.

“Effective Date" shall mean January 10, 2012.

“Election Notice" shall have the meaning specified in Section 13.1 of the Facility Lease.

“Energy" shall mean megawatt hours of electric energy.

“Enforcement Notice" shall have the meaning specified in Section 5.1 of the Lease Indenture.

“Engineering Consultant" shall mean Black & Veatch Corporation.

“Engineering Report" shall mean the report of the Engineering Consultant, dated November 16, 2011.

“Environmental Condition" shall mean any action, omission, event, condition or circumstance, including the presence of any Hazardous Substance, that does or reasonably could (i) require assessment, investigation, abatement, correction, removal or remediation under any Environmental Law, (ii) give rise to any obligation or liability of any nature (whether civil or criminal, arising under a theory of negligence or strict liability, or otherwise) under any Environmental Law, or (iii) constitute a violation of or non-compliance with any Environmental Law.

“Environmental Firm" shall mean Skelly and Loy, Inc. or such other nationally recognized environmental consulting or environmental engineering firm selected by TVA.

“Environmental Laws" shall mean any federal, state or local laws, common law, ordinances, rules, orders, statutes, decrees, judgments, injunctions, directives, permits, licenses, approvals, codes and regulations relating to the environment, human health, natural resources or Hazardous Substances, now or hereafter in effect and as each may from time to time be amended, supplemented or supplanted.

“Environmental Site Assessment" shall mean a Phase I or a Phase II.

“Equity Breakage" shall mean, with respect to a Called Amount, an amount equal to the excess, if any, of the Discounted Value with respect to the Called Amount of such Equity Investment over the amount of such Called Amount, provided that the Equity Breakage may in no event be less than zero.

“Equity Collateral Agent" shall mean Wells Fargo Delaware Trust Company, National Association, or any successor thereto, as collateral agent appointed pursuant to the Equity Note Purchase Documents.

“Equity Guarantor" shall have the meaning specified in Section 7.1 of the Participation Agreement.

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“Equity Guaranty" shall mean any guaranty agreement guaranteeing the obligations of the Equity Investor or entered into pursuant to Section 7.1 of the Participation Agreement in form and substance substantially in the form of Exhibit G to the Participation Agreement.

“Equity Investment" shall mean the amount specified under the heading “Equity Investment” in Schedule 4 to the Participation Agreement.

“Equity Investor" shall have the meaning set forth in the introductory paragraph to the Participation Agreement; provided that if the Membership Interests are transferred pursuant to the Participation Agreement such that more than one person is a holder thereof, the term “Equity Investor” shall be deemed to include each holder of the Membership Interests.

“Equity Investor LLC Agreement" shall mean the limited liability company agreement, dated on or about the Effective Date, between the Owner Participant and the Equity Manager.

“Equity Investor's Lien" shall mean, with respect to the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Note Purchaser or the Equity Manager, any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Claims against or any act or omission of the Equity Investor, an Equity Note Purchaser, the Trust Company or the Equity Manager or any Affiliate of any thereof that are not related to, or that are in violation of, any Transaction Document or the transactions contemplated thereby or that are in breach of any covenant or agreement of the Equity Investor, the Trust Company or the Equity Manager set forth therein, (ii) Taxes against the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Manager or any respective Affiliate thereof that are not indemnified against by TVA pursuant to any Transaction Document or (iii) Claims against or affecting the Equity Investor, any Equity Note Purchaser, the Trust Company, the Equity Manager or any respective Affiliate thereof arising out of the voluntary or involuntary transfer by the Trust Company, the Equity Manager or the Equity Investor (except as contemplated or permitted by the Transaction Documents) of any portion of the Equity Investor's Membership Interests.

“Equity Manager" shall have the meaning set forth in the introductory paragraph of the Participation Agreement.

“Equity Note" shall mean, with respect to any Equity Note Purchaser, the Equity Note issued by the Equity Investor as of the Closing Date to such Equity Note Purchaser substantially in the form attached as Exhibit 1 to the Equity Note Purchase Agreement.

“Equity Note Purchase Agreement" shall mean the Note Purchase Agreement, dated as of the Effective Date, between the Equity Investor and the Equity Note Purchasers.

“Equity Note Purchase Documents" shall mean the Equity Note Purchase Agreement, the Equity Notes, the Equity Pledge Agreement and the Equity Investor LLC Agreement.

“Equity Note Purchaser" or “Equity Note Purchasers” shall mean the Persons set forth under the caption “Equity Note Purchaser” on Schedule 4 to the Participation Agreement.

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“Equity Note Purchaser's Percentage Interest of the Notes" shall mean, as of any date of determination, the percentage of the outstanding principal amount of Equity Notes held by the applicable Equity Note Purchaser.

“Equity Placement Agent" shall mean Morgan Stanley & Co. LLC.

“Equity Pledge Agreement" shall mean the Membership Interest Pledge Agreement, dated on or about the Closing Date, between the Equity Investor and the Equity Collateral Agent.

“Equity Portion" shall mean the separate portions of the Net TV Amount (Equity Portion), which portions correspond to the Equity Investment and each series of Additional Equity Investment that may have been issued from time to time and are determined by multiplying (a) the Net TV Amount (Equity Portion), by (b) the fraction (i) the numerator of which is the outstanding principal amount of the applicable Equity Investment or such series of Additional Equity Investment and (ii) the denominator of which is the aggregate outstanding principal amount of the Equity Investment and the Additional Equity Investments.

“ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

“Event of Loss" shall mean, with respect to any Unit or Units, any of the following events:

(a)loss of such Unit or Units or use thereof due to destruction or damage to such Unit or Units, the Common Facilities or the Global Common Facilities that is beyond economic repair or that renders such Unit or Units permanently unfit for normal use;

(b)damage to such Unit or Units, the Common Facilities or the Global Common Facilities that results in an insurance settlement with respect to such Unit or Units on the basis of a total loss or an agreed constructive or a compromised total loss of such Unit or Units; and

(c)seizure, condemnation, confiscation or taking of, or requisition of title to or use of, all or substantially all of a Unit or Units, the Common Facilities or the Global Common Facilities by any Governmental Entity, which in the case of a requisition of use prevents the Facility Lessee from operating and maintaining all or substantially all of the Facility, such Unit or Units or the Facility Site for a period of 365 days or more, in each case following any contest thereof and exhaustion of all permitted appeals or an election by TVA not to pursue such appeals.

“Evidences of Indebtedness" shall have the meaning specified in the Bond Resolution.

“Excepted Payments" shall mean and include (a)(i) any indemnity or other payment (whether or not constituting Supplemental Lease Rent and whether or not a Lease Event of Default exists) payable to the Trust Company, the Equity Investor, the Equity Manager, any Equity Note Purchaser, the Lessor Manager or to their respective successors and permitted assigns (other than the Lease Indenture Trustee) pursuant to Section 2.4, 9.1 or 9.2 of the Participation Agreement and Section 11.1 of the Owner Lessor LLC Agreement or (ii) any amount payable by TVA to the Owner Lessor, the Equity Investor, the Lessor Manager, the Equity

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Manager or any Equity Note Purchaser to reimburse any such Person for its costs and expenses in exercising its rights under the Transaction Documents, (b) insurance proceeds, if any, payable to the Owner Lessor or the Equity Investor under insurance separately maintained by the Owner Lessor or the Equity Investor with respect to the Facility as permitted by Section 11.1 of the Facility Lease, (c) any amount payable to the Equity Investor as the purchase price of the Equity Investor's Membership Interests in connection with any permitted sale or transfer thereof pursuant to Section 7.1 of the Participation Agreement or Section 13 of the Facility Lease, (d) any amounts payable to the Equity Investor upon exercise by TVA of the Special Lessee Transfer pursuant to Section 12 of the Participation Agreement; (e) all other fees expressly payable to the Owner Lessor, the Equity Investor, the Lessor Manager, the Equity Manager or any Equity Note Purchaser under the Transaction Documents; (f) any amounts payable by TVA to the Owner Lessor pursuant to Section 13.2 of the Facility Lease; and (vii) any payments in respect of interest to the extent attributable to payments referred to above that constitute Excepted Payments.

“Excepted Rights" shall mean the rights specified in Section 5.6 of the Lease Indenture.

“Excess Amounts" shall have the meaning specified in Section 9.12 of the Lease Indenture.

“Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

“Exchange Date" shall mean, when used with respect to any Lessor Notes being replaced and exchanged for Replacement Power Bonds, the date fixed for such replacement and exchange by or pursuant to the Lease Indenture or the respective Lessor Notes, which date shall be a Termination Date.

“Excluded Property" shall mean Excepted Payments and rights reserved to the Owner Lessor and included within Excepted Rights, collectively.

“Excluded Taxes" shall have the meaning specified in Section 9.2(b) of the Participation Agreement.

“Expected Completion Date" shall have the meaning specified in Section 4.1.1 of the Construction Management Agreement

“Expiration Date" shall mean January 15, 2042, the scheduled expiration date of the Facility Lease Term.

“Facility" shall have the meaning specified in the first recital of the Participation Agreement.

“Facility Lease" shall mean the Facility Lease-Purchase Agreement, dated as of the Closing Date, between the Owner Lessor and TVA, substantially in the form of Exhibit B to the Participation Agreement.

“Facility Lease Term" shall have the meaning specified in Section 3.1 of the Facility Lease.

“Facility Lessee" shall mean TVA as lessee under the Facility Lease.

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“Facility Lessee's Interest" shall mean the Facility Lessee's interest in and to the Facility under the Facility Lease and the Ground Interest under the Ground Sublease.

“Facility Lessor" shall mean the Owner Lessor as lessor under the Facility Lease.

“Facility Operating Fee" shall have the meaning specified in Section 3.6 of the Support Agreement.

“Facility Operation and Maintenance Expense" shall mean all payments made, costs incurred, and obligations and liabilities incurred, by TVA for or in connection with engineering, contract preparation, purchasing, repairing, insuring, supervising, recruiting, training, expediting, inspecting, accounting, providing legal services, testing, protecting, operating, insuring, using, decommissioning, retiring, and maintaining the Facility, including, but not limited to, Station Service Requirements and all such payments made, and obligations incurred, during an operating emergency, and with respect to the purchase of materials, supplies and spare parts, but excluding the Construction Cost of Modifications and any other cost included in a Capital Expenditures Budget. Facility Operation and Maintenance Expenses shall include the properly allocable direct overheads of TVA in the operation and maintenance of the Facility. Facility Operation and Maintenance Expenses shall be determined under and in accordance with the Uniform System of Accounts and shall be in accordance with the Operation and Maintenance Expense Budget in effect from time to time. There shall be credited against Facility Operation and Maintenance Expenses for such Month the proceeds of the sale by TVA of any surplus materials or supplies constituting part of, or used in connection with, the Facility. Facility Operation and Maintenance Expense shall not include any payments made by the Ground Lessee for Taxes pursuant to Section 3.2 of the Ground Lease and payments made, or costs incurred, for commodities, equipment or services supplied by TVA to the Facility User under separate contract, including transmission services supplied under contracts negotiated pursuant to Section 5 of the Support Agreement.

“Facility Site" shall mean the land on which the Facility is situated, as more particularly described in Exhibit 1 to the Ground Lease.

“Facility User" shall mean (i) the Owner Lessor, (ii) any Person to which the Owner Lessor has transferred its interest in the Facility or is leasing the Facility, or (iii) any other Person during the time and to the extent such Person has possession and control of the Facility, in each case under circumstances giving the Owner Lessor or such Person, as the case may be, the right to market and sell Energy from the Facility for its own account, including any Person designated by the Owner Lessor to be so entitled.

“Fair Market Rental Value" or “Fair Market Sales Value" shall mean with respect to any property or service as of any date, the cash rent or cash price obtainable in an arm's length lease, sale or supply, respectively, between an informed and willing lessee or purchaser under no compulsion to lease or purchase and an informed and willing lessor or seller or supplier under no compulsion to lease or sell or supply the property or service in question, and shall, in the case of an Owner Lessor's Interest, be determined (except as otherwise provided below or in the Transaction Documents) on the basis that (a) the Facility is located on the Facility Site and the conditions contained in Sections 7 and 8 of the Facility Lease shall have been complied with in

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all respects, (b) the lessee or buyer shall have rights in, or an assignment of, the Transaction Documents to which the Owner Lessor is a party and the obligations relating thereto and (c) the Owner Lessor's Interest is free and clear of all Liens (other than Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens) and taking into account (i) the remaining term of the Ground Lease and the Ground Sublease and (ii) in the case of the Fair Market Rental Value, the terms of the Facility Lease and the Transaction Documents. If the Fair Market Sales Value of the Owner Lessor's Interest is to be determined during the continuance of a Lease Event of Default or in connection with the exercise of remedies by the Owner Lessor pursuant to Section 18 of the Facility Lease, such value shall be determined by an appraiser appointed by the Owner Lessor on an “as-is,” “where-is” and “with all faults” basis and shall take into account all Liens (other than Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens); provided, however, in any such case where the Owner Lessor shall be unable to obtain constructive possession sufficient to realize the economic benefit of the Owner Lessor's Interest, Fair Market Sales Value of the Owner Lessor's Interest shall be deemed equal to $0. If in any case other than in the preceding sentence the parties are unable to agree upon a Fair Market Sales Value of the Owner Lessor's Interest within 30 days after a request therefor has been made, the Fair Market Sales Value of the Owner Lessor's Interest shall be determined by appraisal pursuant to the Appraisal Procedures. Any fair market value determination of a Severable Modification shall take into consideration any liens or encumbrances to which the Severable Modification being appraised is subject and which are being assumed by the transferee.

“Federal Power Act" shall mean the Federal Power Act, as amended.

“FERC" shall mean the Federal Energy Regulatory Commission.

“Final Completion" shall have the meaning specified in Section 5.3 of the Construction Management Agreement.

“Final Completion Certificate" shall have the meaning specified in Section 5.4 of the Construction Management Agreement.

“Final Determination" shall mean (i) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals or rehearings by either party to the action have been exhausted or the time for filing such appeal has expired, or in any case where judicial review shall at the time be unavailable because the proposed adjustment involves a decrease in net operating loss carryforward or a business credit carryforward, a decision, judgment, decree or other order of an administrative official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., where all administrative appeals have been exhausted by all parties thereto), (ii) a closing agreement entered into under section 7121 of the Code, or any other settlement agreement entered into in connection with an administrative or judicial proceeding or (iii) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto.

“Final Shutdown" shall mean the permanent removal from operation and commercial service of the Facility.

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“Final Shutdown Date" shall mean the date on which Final Shutdown occurs.

“Fitch" shall mean Fitch, Inc. and any successor thereto.

“FMV Net Termination Value" shall have the meaning set forth in Section 18.2(d) of the Facility Lease.

“GAAP" shall mean generally accepted accounting principles used in the United States consistently applied.

“Global Common Facilities" shall mean all property and facilities intended for use in the operation and maintenance of the Facility and which are common to the operation and maintenance of the Facility, the John Sevier Fossil Plant and any other facility existing on or adjacent to the Facility Site, as more particularly described in Attachment C to the Owner Lessor Mortgage.

“Global Common Facilities Operating Fee" shall have the meaning specified in Section 2.4 of the Support Agreement.

“Global Common Facilities Operation and Maintenance Expense" shall mean all payments made, costs incurred, and obligations and liabilities incurred, by TVA for or in connection with engineering, contract preparation, purchasing, repairing, insuring, supervising, recruiting, training, expediting, inspecting, accounting, providing legal services, testing, protecting, operating, insuring, using, decommissioning, retiring, and maintaining the Global Common Facilities, including depreciation and all such payments made, and obligations incurred, during an operating emergency, and with respect to the purchase of materials, supplies and spare parts. Global Common Facilities Operation and Maintenance Expenses shall include the properly allocable direct overheads of TVA in the operation and maintenance of the Global Common Facility. Global Common Facilities Operation and Maintenance Expenses shall be determined under and in accordance with the Uniform System of Accounts. There shall be credited against Global Common Facilities Operation and Maintenance Expenses for such Month the proceeds of the sale by TVA of any surplus materials or supplies constituting part of, or used in connection with, the Global Common Facilities. Global Common Facilities Operation and Maintenance Expense shall not include any payments made by the Ground Lessee for Taxes pursuant to Section 3.2 of the Ground Lease and any payments made, or costs incurred, for commodities, equipment or services supplied by TVA to the Facility User under separate contract, including transmission services supplied under contracts negotiated pursuant to Section 5 of the Support Agreement.

“Global Common Facilities Percentage" at any point in time, shall mean a percentage equal to a fraction the numerator of which is the then current rated Capacity of the Facility and the denominator of which is the sum of the then current rated Capacities of all generating facilities for the operation of which the Global Common Facilities are then utilized.

“Global Common Facilities Site" shall mean the land on which the Global Common Facilities are located, as more particularly described in Exhibit 2 to the Ground Lease.

“Government" shall mean the United States of America.

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“Governmental Entity" shall mean and include the Government, any national government, any political subdivision of a national government or of any state, county or local jurisdiction therein or any board, commission, department, division, organ, instrumentality, court or agency of any thereof, but shall not include TVA.

“Ground Interest" shall mean (i) a leasehold in the Facility Site, (ii) a nonexclusive easement in, to and over the Global Common Facilities Site and (iii) a nonexclusive easement in, to and over the Access Property, granted pursuant to, and for the purposes and subject to the limitations set forth in, Section 5 of the Ground Lease.

“Ground Lease" shall mean the Ground Lease and Easement Agreement, dated as of the Closing Date, among the Ground Lessor and the Ground Lessee, substantially in the form of Exhibit C to the Participation Agreement.

“Ground Lease Term" shall have the meaning specified in Section 2.2 of the Ground Lease.

“Ground Lessee" shall mean the Owner Lessor as lessee of the Ground Interest under the Ground Lease.

“Ground Lessor" shall mean TVA and the Government (solely for purposes of Section 2.1 of the Ground Lease), as lessor of the Ground Interest under the Ground Lease.

“Ground Lessor's Release Rights" shall have the meaning specified in Section 4.2 of the Ground Lease.

“Ground Sublease" shall mean the Ground Sublease and Easement Agreement, dated as of the Closing Date, among the Ground Sublessor and the Ground Sublessee, substantially in the form of Exhibit D to the Participation Agreement.

“Ground Sublease Term" shall have the meaning specified in Section 2.2 of the Ground Sublease.

“Ground Sublessee" shall mean TVA and the Government (solely for purposes of Section 2.1 of the Ground Sublease) as sublessee of the Ground Interest under the Ground Sublease.

“Ground Sublessor" shall mean the Owner Lessor as sublessor of the Ground Interest under the Ground Sublease.

“Guaranteed Outside Completion Date" shall mean January 14, 2013.

“Hazardous Substance" shall mean any pollutant, contaminant, hazardous substance, hazardous waste, toxic substance, chemical substance, extremely hazardous substance, petroleum or petroleum derived substance, waste, or additive, asbestos, PCBs, radioactive material, corrosive, explosive, flammable or infectious material, lead, radon or other compound, element, material or substance in any form whatsoever (including products) defined, regulated, restricted or controlled by or under any Environmental Law.

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“Head Lease" shall mean the Head Lease Agreement, dated as of the Closing Date, among the Head Lessor and the Head Lessee, substantially in the form of Exhibit A to the Participation Agreement.

“Head Lease Rent" shall have the meaning specified in Section 3.2(a) of the Head Lease.

“Head Lease Term" shall have the meaning specified in Section 3.1 of the Head Lease.

“Head Lessee" shall mean the Owner Lessor as lessee of the Facility under the Head Lease.

“Head Lessor" shall mean TVA and the Government (solely for purposes of Section 2 of the Head Lease) as lessor of the Facility under the Head Lease.

“Indemnitee" shall have the meaning specified in Section 9.1(a) of the Participation Agreement.

“Indemnity Period” shall have the meaning specified in Section 11 of the Ground Lease.

“Independent Appraiser" shall mean a disinterested, licensed industrial property appraiser who is a member of the Appraisal Institute having experience in the business of evaluating facilities similar to the Facility.

“Investment Banker" shall have the meaning specified in Section 2.10(b) of the Lease Indenture.

“John Sevier Fossil Plant" shall mean the John Sevier Fossil Plant consisting of four coal-fired units with a combined summer net generation capacity of 704 MW located at a site adjacent to the Facility Site.

“Kiewit" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Kiewit Construction Contract" shall have the meaning specified in the first recital of the Construction Management Agreement.

“Lease Commencement Date" shall mean the earlier of (i) the date the Facility achieves Substantial Completion in accordance with the Construction Management Agreement and (ii) the Outside Lease Commencement Date.

“Lease Debt Rate" shall mean the interest rate under the 2012 Lessor Notes.

“Lease Default" shall mean any event or circumstance that, with the passage of time or the giving of notice, or both, would become a Lease Event of Default.

“Lease Event of Default" shall have the meaning specified in Section 17 of the Facility Lease.

“Leasehold Deed of Trust Trustee" shall mean Robert R. Campbell, Jr., Esq.

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“Lease Indenture" shall mean the Indenture of Trust, Deed of Trust and Security Agreement, dated as of the Closing Date, among the Owner Lessor, the Lease Indenture Trustee and the Deed of Trust Trustee, substantially in the form of Exhibit E to the Participation Agreement.

“Lease Indenture Bankruptcy Default" shall mean any event or occurrence, which, with the passage of time or the giving of notice or both, would become a Lease Indenture Event of Default under Section 4.2(e) or (f) of the Lease Indenture.

“Lease Indenture Estate" shall have the meaning specified in the Granting Clause of the Lease Indenture.

“Lease Indenture Event of Default" shall have the meaning specified in Section 4.2 of the Lease Indenture.

“Lease Indenture Payment Default" shall mean any event or occurrence, which, with the passage of time or the giving of notice or both, would become an Lease Indenture Event of Default under Section 4.2(b) of the Lease Indenture.

“Lease Indenture Trustee" shall mean Wilmington Trust Company, not in its individual capacity, but solely as Lease Indenture Trustee under the Lease Indenture, and each other Person who may from time to time be acting as Lease Indenture Trustee in accordance with the provisions of the Lease Indenture.

“Lease Indenture Trustee Office" shall mean the office to be used for notices to the Lease Indenture Trustee from time to time pursuant to Section 9.5 of the Lease Indenture.

“Lease Indenture Trustee's Account" shall mean the account identified as the Lease Indenture Trustee's Account on Schedule 4 of the Participation Agreement.

“Lease Indenture Trustee's Liens" shall mean any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Taxes against or affecting the Lease Indenture Trustee, or any Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby, (ii) Claims against or any act or omission of the Lease Indenture Trustee, or Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby or that is in breach of any covenant or agreement of the Lease Indenture Trustee specified therein, (iii) Taxes imposed upon the Lease Indenture Trustee, or any Affiliate thereof, that are not indemnified against by TVA pursuant to any Transaction Document, or (iv) Claims against or affecting the Lease Indenture Trustee, or any Affiliate thereof, arising out of the voluntary or involuntary transfer by the Lease Indenture Trustee of any portion of the interest of the Trust Company or the Lease Indenture Trustee in the Lessor Estate, other than pursuant to the Transaction Documents.

“Lessee Person" shall mean the Facility Lessee, any sublessee of the Facility Lessee or any other Person using or having possession of the Facility during the Facility Lease Term or any portion thereof and any Affiliate, successor, assignee, transferee, agent or employee of any of the foregoing or any Person claiming through any of the foregoing, except that none of the Owner Lessor, the Equity Investor, the Equity Manager, any Equity Note Purchaser nor the Lease Indenture Trustee, nor any Affiliate, successor, assignee, transferee,

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agent or employee of any of the foregoing, nor any Person claiming through any of the foregoing, shall be a Lessee Person.

“Lessor Estate" shall mean all the estate, right, title and interest of the Owner Lessor in, to and under the Facility, the Ground Interest and the Transaction Documents, including all funds advanced to the Owner Lessor by the Equity Investor, all installments and other payments of Basic Lease Rent, Supplemental Lease Rent, Termination Value, condemnation awards, purchase price, sale proceeds and all other proceeds, rights and interests of any kind for or with respect to the estate, right, title and interest of the Owner Lessor in, to and under the Facility, the Ground Interest, the Transaction Documents, and any of the foregoing.

“Lessor Manager" shall have the meaning set forth in the introductory paragraph of the Participation Agreement.

“Lessor Notes" shall mean the 2012 Lessor Notes and any Additional Lessor Notes.

“Lien" shall mean any mortgage, security deed, security title, pledge, lien, charge, encumbrance, lease, or security interest or title retention arrangement.

“List of Competitors" shall mean the initial list attached to the Participation Agreement as Schedule 2, as amended from time to time pursuant to Section 7.1(b) of the Participation Agreement.

“Majority in Interest of Noteholders" as of any date of determination, shall mean Noteholders holding in aggregate more than 50% of the total outstanding principal amount of Lessor Notes; provided, however, that any Lessor Notes held by TVA and/or any Affiliate of TVA shall not be considered outstanding for purposes of this definition unless TVA and/or such Affiliate shall hold title to all the Lessor Notes outstanding.

“Make Whole Premium" shall mean, with respect to the Lessor Notes subject to redemption pursuant to the Lease Indenture, an amount equal to the Discounted Present Value of the Lessor Notes less the unpaid principal amount of such Lessor Notes; provided that the Make Whole Premium shall not be less than zero. For purposes of this definition, the “Discounted Present Value” of any Lessor Notes subject to redemption pursuant to the Lease Indenture shall be equal to the discounted present value of all principal and interest payments scheduled to become due after the date of such redemption in respect of the Lessor Notes, calculated using a discount rate equal to the sum of (i) the yield to maturity on the U.S. Treasury security having a life equal to the remaining average life of the Lessor Notes and (ii) 25 basis points; provided, however, that if there is no U.S. Treasury security having a life equal to the remaining average life of the Lessor Notes, such discount rate shall be calculated using a yield to maturity interpolated or extrapolated on a straight-line basis (rounding to the nearest calendar month, if necessary) from the yields to maturity for two U.S. Treasury securities having lives most closely corresponding to the remaining average life of the Lessor Notes.

“Material Adverse Effect" shall mean with respect to any Person a materially adverse effect on (i) the business, assets, revenues, results of operations, or financial condition of such Person, (ii) the ability of such Person to perform its obligations under the Transaction Documents, or (iii) the validity or enforceability of

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the Transaction Documents, the Liens granted thereunder, or the rights and remedies thereto.

“Maximum Net Generating Capacity" shall mean the maximum net Capability of the Facility to produce Energy under conditions existing from time to time.

“Membership Interests" shall mean the membership interests of the Equity Investor in the Owner Lessor.

“Modification" shall mean a modification, alteration, improvement, addition, betterment or enlargement of the Facility, including any Required Modifications and Optional Modifications, but not Components.

“Month" shall mean a calendar month.

“Moody's" shall mean Moody's Investors Service, Inc. and any successor thereto.

“Net TV Amount" shall mean the FMV Net Termination Value or the Sale Net Termination Value, as applicable.

“Net TV Amount (Debt Portion)" shall be the amount equal to the product of (a) the applicable Net TV Amount as of the applicable Termination Date, multiplied by (b) a fraction (i) the numerator of which is the Termination Value (Debt Portion) as of such Termination Date and (ii) the denominator of which is the Termination Value as of such Termination Date.

“Net TV Amount (Debt Portion) Rate" shall mean, with respect to the applicable Debt Portion, a rate per annum equal to (a) 6.626% per annum with respect to the Debt Portion that corresponds to the 2012 Lessor Notes; or (b) the interest rate on the applicable Additional Lessor Notes plus two percent (2%) per annum with respect to the Debt Portion that corresponds to such Additional Lessor Notes.

“Net TV Amount (Equity Portion)" shall be the amount equal to the product of (a) the applicable Net TV Amount as of the applicable Termination Date, multiplied by (b) a fraction (i) the numerator of which is the Termination Value (Equity Portion) as of such Termination Date and (ii) the denominator of which is the Termination Value as of such Termination Date.

“Net TV Amount (Equity Portion) Rate" shall mean, with respect to the applicable Equity Portion, a rate per annum equal to (a) 9.100% per annum with respect to the Equity Portion that corresponds to the Equity Investment; and (b) the interest rate on the applicable Additional Equity Investment plus two percent (2%) per annum with respect to the Equity Portion that corresponds to such Additional Equity Investment.

“Nonseverable Modifications" shall mean any Modification that is not a Severable Modification.

“Note Register" shall have the meaning specified in Section 2.8 of the Lease Indenture.

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“Noteholder" shall mean any holder from time to time of outstanding Lessor Notes, and each such holder's successors and permitted assigns.

“Offering Circular" shall mean the Offering Circular, dated January 10, 2012, with respect to the 2012 Lessor Notes.

“Officer's Certificate" shall mean with respect to any Person a certificate signed by the Responsible Officer of such Person.

“Operating Fee" shall mean the Global Common Facilities Operating Fee and, if the Owner Lessor shall elect to appoint TVA operator of the Facility pursuant to Section 3.1 of the Support Agreement and TVA shall not be precluded by law from so serving, the Facility Operating Fee.

“Operation and Maintenance Expense" shall mean the Facility Operation and Maintenance Expense and the Global Common Facilities Operation and Maintenance Expense.

“Operation and Maintenance Expense Budget" shall have the meaning set forth in Section 4.4(c) of the Support Agreement.

“Operative Documents" shall mean the Participation Agreement, the Head Lease, the Facility Lease, the Ground Lease, the Ground Sublease, any Equity Guaranty, the Owner Lessor Mortgage, the Lease Indenture, the Lessor Notes, the Owner Lessor LLC Agreement and the Support Agreement.

“Optional Modification" shall have the meaning specified in Section 8.2 of the Facility Lease.

“Other Exchange Date Payment Amounts" shall mean the following amounts (without duplication) to be paid by the Facility Lessee on the Exchange Date: (a) if the Exchange Date is also a Rent Payment Date, Basic Lease Rent payable on such Exchange Date; plus (b) all reasonable documented out-of-pocket costs and expenses incurred by the Owner Lessor, the Equity Investor, the Equity Note Purchasers and the Lease Indenture Trustee in connection with the exercise of the Early Buy Out (without duplication of any such costs and expenses payable pursuant to the Facility Lease); plus (c) any other Supplemental Lease Rent payments due and unpaid on the Exchange Date under any other Transaction Document.

“Other Redemption Date Payment Amounts" shall mean the following amounts (without duplication) to be paid by the Facility Lessee on the Redemption Date: (a) if the Redemption Date is also a Rent Payment Date, Basic Lease Rent payable on such Redemption Date; plus (b) all reasonable documented out-of-pocket costs and expenses incurred by the Owner Lessor, the Equity Investor, the Equity Note Purchasers and the Lease Indenture Trustee in connection with the exercise of the Early Buy Out (without duplication of any such costs and expenses payable pursuant to the Facility Lease); plus (c) any other Supplemental Lease Rent payments due and unpaid on the Redemption Date under any other Transaction Document.

“Outside Lease Commencement Date" shall mean January 14, 2013.

“Overdue Rate" (a) when used with reference to the Lessor Notes, Basic Lease Rent (Debt Portion) or Termination Value (Debt Portion) shall mean two percent (2%) per annum over the greater of (i) the Base

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Rate and (ii) the stated interest rate on the Lessor Notes, (b) when used with reference to the Basic Lease Rent (Equity Portion) or Termination Value (Equity Portion), shall mean two percent (2%) over the greater of (A) the Base Rate and (B) 7.100% per annum or (c) when used with reference to any amount which is due and owing and not referenced in clause (a) or (b) of this definition, the Base Rate plus two percent (2%) per annum.

“Owner Lessor" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Owner Lessor Indemnified Parties" shall have the meaning specified in Section 7.2 of the Construction Management Agreement.

“Owner Lessor LLC Agreement" shall mean the limited liability company agreement of the Owner Lessor, dated on or about the Effective Date, between the Equity Investor, and the Lessor Manager.

“Owner Lessor Mortgage" shall mean the Leasehold Deed of Trust and Security Agreement, dated as of the Closing Date, made by the Owner Lessor to the Leasehold Deed of Trust Trustee and TVA, substantially in the form of Exhibit I to the Participation Agreement.

“Owner Lessor's Account" shall mean the account identified as the Owner Lessor's Account on Schedule 4 to the Participation Agreement.

“Owner Lessor's Interest" shall mean the Owner Lessor's right, title and interest in and to (i) the Facility under the Head Lease, (ii) the Ground Interest under the Ground Lease and (iii) the Support Agreement.

“Owner Lessor's Lien" shall mean any Lien on the Facility, the Global Common Facilities, the Site, the Lessor Estate or any part thereof arising as a result of (i) Taxes against or affecting the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby, (ii) Claims against, or any act or omission of, the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof, that is not related to, or that is in violation of, any Transaction Document or the transactions contemplated thereby or that is in breach of any covenant or agreement of the Trust Company, the Lessor Manager or the Owner Lessor specified therein, (iii) Taxes imposed upon the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof that are not indemnified against by TVA pursuant to any Transaction Document, or (iv) Claims against or affecting the Trust Company, the Lessor Manager or the Owner Lessor, or any respective Affiliate thereof arising out of the voluntary or involuntary transfer by the Trust Company, the Lessor Manager or the Owner Lessor of any portion of the interest of the Trust Company, the Lessor Manager or the Owner Lessor in the Owner Lessor's Interest, other than pursuant to the Transaction Documents.

“Owner Participant" shall mean the owner of the membership interests of the Equity Investor which shall mean GSS Holdings (John Sevier), Inc. until such time, if any, that it has transferred such membership interest in accordance with the Equity Investor LLC Agreement, and, thereafter shall mean such transferee or its permitted successor or assign.

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“Partial Early Buy Out" shall mean TVA's exercise of the Early Buy Out with respect to less than all Units.

“Partial Event of Loss" shall mean an Event of Loss with respect to less than all Units.

“Participation Agreement" shall mean the Participation Agreement, dated as of the Effective Date, among TVA, the Owner Lessor, the Lessor Manager, the Equity Manager, the Equity Investor and the Lease Indenture Trustee.

“Paying Agent" shall have the meaning specified in Section 2.6 of the Lease Indenture.

“Permitted Closing Date Liens" shall mean those matters listed on Exhibit 5 to the Ground Lease.

“Permitted Instruments" shall mean (a) Permitted Securities, (b) overnight loans to or other customary overnight investments in commercial banks of the type referred to in paragraph (d) below, (c) open market commercial paper of any corporation (other than TVA or any Affiliate thereof) incorporated under the laws of the United States or any state thereof which is rated not less than “prime 1” or its equivalent by Moody's and “A 1” or its equivalent by S&P maturing within one year after such investment, or such other comparable rating by a nationally recognized rating agency, (d) certificates of deposit issued by commercial banks organized under the laws of the United States or any state thereof or a domestic branch of a foreign bank (i) having a combined capital and surplus in excess of $500,000,000 and (ii) which are rated “AA” or better by S&P and “Aa2” or better by Moody's, or such other comparable rating by a nationally recognized rating agency; provided that no more than $20,000,000 may be invested in such deposits at any one such bank and (e) a money market fund registered under the Investment Company Act of 1940, as amended, the portfolio of which is limited to Permitted Securities.

“Permitted Liens" shall mean (i) the interests of TVA, the Equity Investor, the Owner Lessor and the Lease Indenture Trustee under any of the Transaction Documents; (ii) all Owner Lessor's Liens, Equity Investor's Liens and Indenture Trustee's Liens; (iii) the interests of TVA in the Facility and the Facility Site; (iv) Permitted Closing Date Liens; (v) Liens for taxes either not delinquent or being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of TVA if required by generally accepted accounting principles, so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (vi) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business for amounts either not delinquent or being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of TVA if required by generally accepted accounting principles, so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (vii) liens arising out of judgments or awards against TVA with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith by TVA, so long as such judgment, award or appeal shall not involve any danger of the sale, forfeiture or loss of any part of the Facility or the Facility Site; (viii) utility rights of way and easements; and (ix) Liens permitted pursuant to Section 4.2 or 4.3 of the Ground Lease.

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“Permitted Post Facility Lease Term Liens" shall mean the Permitted Liens referred to in clauses (ii), (iii) and (ix) of the definition thereof.

“Permitted Securities" shall mean securities (and security entitlements with respect thereto) that (a) are (i) direct obligations of the United States of America or obligations guaranteed as to principal and interest by the full faith and credit of the United States of America, and (ii) securities issued by agencies of the U.S. Federal government whether or not backed by the full faith and credit of the United States rated “AA” and “Aa2” by S&P and Moody's, respectively, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government obligation or a specific payment of interest on or principal of any such U.S. Government obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction in the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government obligation or the specific payment of interest on or principal of the U.S. Government obligation evidenced by such depository receipt and (b) have a stated maturity no later than the date of the expected use of the funds.

“Person" shall mean any individual, corporation, cooperative, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Personalty" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Phase I" means a Phase I environmental site assessment required by Section 5.8 of the Participation Agreement or Section 5.3 of the Facility Lease performed in accordance with the standards set forth in 40 C.F.R. Part 312 and ASTM E-1527-05.

“Phase II" means a Phase II environmental site assessment required by Section 5.8 of the Participation Agreement performed in accordance with the standards set forth in ASTM E-1903-97 (Reapproved 2002) and, to the extent applicable, 40 C.F.R. Part 312.

“Plan" shall mean any “employee benefit plan” (as defined in Section 3(3) of ERISA) that is subject to ERISA, any “plan” (as defined in Section 4975(e)(1) of the Code) that is subject to Section 4975 of the Code, any trust created under any such plan or any “governmental plan” (as defined in Section 3(32) of ERISA or Section 414(d) of the Code) that is organized in a jurisdiction having prohibitions on transactions with government plans similar to those contained in Section 406 of ERISA or Section 4975 of the Code.

“Point or Points of Interconnection" shall mean the points of interconnection of the transmission facilities owned by TVA with regional transmission lines of entities to which TVA wheels power on behalf of the Owner Lessor pursuant to Section 5 of the Support Agreement, as such points may be agreed upon by the Parties from time to time.

“Power" shall mean megawatts of Capacity and associated Energy.

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“Proceeds" shall mean the proceeds from the sale of the 2012 Lessor Notes by the Owner Lessor to the Noteholders on the Closing Date.

“Prudent Industry Practice" shall mean, at a particular time, either (a) any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry with respect to facilities similar in nature to the Facility, or (b) any of the practices, methods and acts which, in the exercise of reasonable judgment at the time the decision was made, could have been expected to accomplish the desired result at the lowest reasonable cost consistent with good business practices, reliability, safety and expedition. “Prudent Industry Practice” is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts.

“Punch List" shall have the meaning specified in Section 2.3.2 of the Construction Management Agreement.

“Quarter" means a calendar three-month period, ending on March 31, June 30, September 30 or December 31.

“Rates" shall have the meaning specified in Section 5.5 of the Participation Agreement.

“Rating Agencies" shall mean S&P, Moody's and Fitch and any other comparable nationally recognized rating agency.

“Real Property" shall have the meaning specified in the Granting Clause of the Owner Lessor Mortgage.

“Reasonable Basis" for a position shall exist if tax counsel may properly advise reporting such position on a tax return in accordance with Formal Opinion 85 352 issued by the Standing Committee on Ethics and Professional Responsibility of the American Bar Association (or any successor to such opinion).

“Rebuilding Closing Date" shall have the meaning specified in Section 10.3(b) of the Facility Lease.

“Redemption Date" shall mean, when used with respect to any Lessor Notes to be redeemed, the date fixed for such redemption by or pursuant to the Lease Indenture or the respective Lessor Notes, which date shall be a Termination Date.

“Registrar" shall have the meaning specified in Section 2.8 of the Lease Indenture.

“Regulatory Event of Loss" shall mean a condition or circumstance where, if elected by the Owner Lessor, the Equity Investor or one or more affected Equity Note Purchasers (by notice to the Facility Lessee) within 12 months of obtaining knowledge of the event or circumstance causing a “Regulatory Event of Loss,” the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers become subject to rate of return regulation or other applicable public utility law or regulation of a Governmental Entity that, in the reasonable opinion of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers, is materially burdensome to the Owner Lessor, the Equity Investor or such affected Equity

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Note Purchaser or Purchasers and cannot be remedied by cooperation among the parties and the taking of reasonable measures to alleviate the source or consequence of any such regulation or law, provided that: (i) such regulation or law is applicable solely as a result of the participation of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers in the transactions contemplated by the Transaction Documents and not as a result of (A) any other investments, loans, or other business activities of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates or the nature of properties or assets owned, held or otherwise available to the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates or (B) a failure of the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates to perform routine, administrative or ministerial actions which would not have a material adverse consequence on the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers or their Affiliates; and (ii) the Owner Lessor, the Equity Investor or such affected Equity Note Purchaser or Purchasers would no longer be subject to such law or regulation if the Owner Lessor terminated the Head Lease and the Facility Lease and transferred possession of the Facility to the Head Lessor, the Equity Investor disposed of its Membership Interests, or such affected Equity Note Purchaser or Purchasers disposed of its or their Equity Notes as the case may be.

“Regulatory Event of Loss Termination Payment" shall mean, with respect to any Termination Date, an amount equal to the product of (a) the Termination Value (Equity Portion) with respect to such Termination Date, multiplied by (b) the applicable Equity Note Purchaser's Percentage Interest of the Notes.

“Related Party" shall mean, with respect to any Person or its successors and assigns, an Affiliate of such Person or its successors and assigns and any director, officer, servant, employee or agent of that Person or any such Affiliate or their respective successors and assigns; provided that the Lessor Manager and the Owner Lessor shall not be treated as Related Parties to each other and neither the Owner Lessor nor the Lessor Manager shall be treated as a Related Party to the Equity Investor except that, for purposes of Section 9 of the Participation Agreement, the Owner Lessor will be treated as a Related Party to the Equity Investor to the extent that the Owner Lessor acts on the express direction or with the express consent of the Equity Investor.

“Released Property" shall have the meaning specified in Section 4.2 of the Ground Lease.

“Relevant Portion" shall mean (a) with respect to Section 10 of the Facility Lease, the Unit or Units suffering an Event of Loss or (b) with respect to Section 15 of the Facility Lease, the Unit or Units subject to TVA's exercise of the Early Buy Out, in either case with respect to a termination of the Facility Lease with respect to less than the entire Facility.

“Reinvestment Yield" shall mean, with respect to the Called Amount of any Equity Investment, 0.50% over the yield to maturity implied by the yield(s) reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Amount, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on-the-run U.S. Treasury securities (“Reported”) having a maturity equal to the Remaining Average Life of such Remaining Scheduled Payments as of such Settlement Date.

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If there are no such U.S. Treasury securities Reported having a maturity equal to such Remaining Average Life, then such implied yield to maturity will be determined by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between the yields Reported for the applicable most recently issued actively traded on-the-run U.S. Treasury securities with the maturities (1) closest to and greater than such Remaining Average Life and (2) closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Equity Investment. If such yields are not Reported or the yields Reported as of such time are not ascertainable (including by way of interpolation), then “Reinvestment Yield” shall mean, with respect to the Called Amount of any Equity Investment, 0.50% over the yield to maturity implied by the U.S. Treasury constant maturity yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Amount, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for the U.S. Treasury constant maturity having a term equal to the Remaining Average Life of such Called Amount as of such Settlement Date. If there is no such U.S. Treasury constant maturity having a term equal to such Remaining Average Life, such implied yield to maturity will be determined by interpolating linearly between (1) the U.S. Treasury constant maturity so reported with the term closest to and greater than such Remaining Average Life and (2) the U.S. Treasury constant maturity so reported with the term closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Equity Investment.

“Remaining Average Life" shall mean, with respect to any Called Amount, the number of years obtained by dividing (i) such Called Amount into (ii) the sum of the products obtained by multiplying (a) the return of equity component of each Remaining Scheduled Payment with respect to such Called Amount by (b) the number of years, computed on the basis of a 360-day year composed of twelve 30-day months, that will elapse between the Settlement Date with respect to such Called Amount and the scheduled due date of such Remaining Scheduled Payment.

“Remaining Scheduled Payments" shall mean, with respect to the Called Amount of any Equity Investment, all payments of Basic Lease Rent (Equity Portion) that would be due after the Settlement Date if no payment of such Called Amount were made prior to its scheduled due date.

“Remediate" or “Remediation” means an action or actions required by a Governmental Entity pursuant to Applicable Law to address an Environmental Condition or a release of Hazardous Substances, including monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or remediation work in connection with such Environmental Conditions or a release of Hazardous Substances.

“Removable Modification" shall have the meaning specified in Section 8.3 of the Facility Lease.

“Rent" shall mean Basic Lease Rent and Supplemental Lease Rent.

“Rent Payment Date" shall mean each January 15 and July 15, commencing July 15, 2012, to and including January 15, 2042.

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“Replacement Component" shall have the meaning specified in Section 7.2 of the Facility Lease.

“Replacement Power Bond" shall have the meaning specified in Section 2.10(c) of the Lease Indenture.

“Reported" shall have the meaning specified in the definition of Reinvestment Yield in this Appendix A.

“Required Modification" shall have the meaning specified in Section 8.1 of the Facility Lease.

“Responsible Officer" shall mean (a) with respect to a corporation or limited liability company, its Chairman of the Board, its President, any Senior Vice President, the Chief Financial Officer, any Vice President, the Treasurer, its Independent Manager or any other management employee (i) that has the power to take the action in question and has been authorized, directly or indirectly, by the Board of Directors (or equivalent body) of such Person, (ii) working under the direct supervision of such Chairman of the Board, President, Senior Vice President, Chief Financial Officer, Vice President or Treasurer, and (iii) whose responsibilities include the administration of the transactions and agreements contemplated by the Transaction Documents, (b) with respect to the Lease Indenture Trustee, an officer in its corporate trust administration department, (c) with respect to TVA, its Chairman of the Board, its President, any Senior Vice President, the Chief Financial Officer, any Vice President, the Treasurer or any other management employee, (d) with respect to the Owner Lessor, the Lessor Manager and (e) with respect to the Equity Investor, the Equity Manager.

“Revenues" shall have the meaning specified in the Granting Clause of the Lease Indenture.

“S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor thereto.

“Sale Net Termination Value" shall have the meaning set forth in Section 18.2(e) of the Facility Lease.

“Scheduled Closing Date" shall mean January 17, 2012 and any date set for the Closing in a notice of postponement pursuant to Section 2.3(a) of the Participation Agreement.

“Scheduled Payment Date" shall mean a Rent Payment Date.

“SEC" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934.

“Secured Indebtedness" shall have the meaning specified in Section 1 of the Lease Indenture.

“Securities Act" shall mean the Securities Act of 1933, as amended.

“Security" shall have the same meaning as in Section 2(a)(1) of the Securities Act.

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“Service Commencement Date" shall mean the date upon which the Facility Lease expires or terminates and possession and control of the Owner Lessor's Interest is delivered to the Owner Lessor or its designee pursuant to Section 5 or Section 18.2 of the Facility Lease.

“Settlement Date" shall mean, with respect to the Called Amount of any Equity Investment, the date, which shall be a Termination Date, on which such Called Amount is to be repaid pursuant to Section 15 of the Facility Lease.

“Severable Modification" shall mean any Modification that is removable without causing material damage to the Facility that cannot readily be repaired.

“Significant Lease Default" shall mean any of: (i) TVA shall fail to make any payment of Basic Lease Rent or Termination Value on the relevant payment date or after the same shall have become due and payable, (ii) TVA shall fail to make any payment of Supplemental Lease Rent in excess of $250,000 (other than Excepted Payments, or Termination Value or any amount determined by reference thereto) on the relevant payment date after the same shall have become due and payable, except to the extent such amounts are the subject of a good faith dispute and have not been established to be due and payable, or (iii) an event which is or, with the passage of time would be, a Lease Event of Default under Section 17(e) or (f) of the Facility Lease.

“Significant Lease Indenture Default" shall mean a failure by the Owner Lessor to make any payment of principal or interest on the Lessor Notes after the same shall have become due and payable.

“Similar Law" shall mean any federal, state or local law that is substantially similar to Title I of ERISA or Section 4975 of the Code.

“Site" shall mean the Facility Site, the Global Common Facilities Site and the Access Property.

“Special Lessee Transfer" shall have the meaning specified in Section 12 of the Participation Agreement.

“Special Lessee Transfer Amount" shall mean for any Termination Date, the amount determined as follows: (i) the Termination Value (Equity Portion) under the Facility Lease on such Termination Date; plus (ii) any unpaid Basic Lease Rent (Equity Portion) due on or before such Termination Date; plus (iii) the Equity Breakage.

“Station Service Requirements" shall mean the Capacity and Energy required during any period (including initial start-up and testing) and supplied from any source other than the Facility for operation of all on-site process and auxiliary equipment and systems used or useful in connection with the operation and maintenance of the Facility.

“Subcontractors" shall have the meaning specified in the third recital of the Construction Management Agreement.

“Subordinated Resolution" shall mean the Tennessee Valley Authority Subordinated Debt resolution adopted March 29, 1995, as amended and supplemented.

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“Substantial Completion" shall have the meaning specified in Section 5.1 of the Construction Management Agreement.

“Substantial Completion Certificate" shall have the meaning specified in Section 5.2 of the Construction Management Agreement.

“Supplemental Financing" shall have the meaning specified in Section 11.2(b) of the Participation Agreement.

“Supplemental Lease Rent" shall mean any and all amounts, liabilities and obligations (other than Basic Lease Rent or any amount determined by reference thereto) that TVA assumes, agrees to or is required to pay under the Transaction Documents (whether or not identified as “Supplemental Lease Rent”) to the Owner Lessor or any other Person, including Termination Value and Make Whole Premium.

“Support Agreement" shall mean the Operating and Support Agreement, dated as of the Closing Date, between the Owner Lessor and TVA, substantially in the form of Exhibit H to the Participation Agreement.

“Tax" or “Taxes" shall mean all fees, taxes (including sales taxes, use taxes, stamp taxes, value added taxes, ad valorem taxes and property taxes (personal and real, tangible and intangible)), levies, assessments, withholdings and other charges and impositions of any nature, plus all related interest, penalties, fines and additions to tax, now or hereafter imposed by any Federal, state, local or foreign government or other taxing authority (including penalties or other amounts payable pursuant to subtitle B of Title I of ERISA).

“Tax Advance" shall have the meaning specified in Section 9.2(g)(iii)(4) of the Participation Agreement.

“Tax Benefit" shall have the meaning specified in Section 9.2(e) of the Participation Agreement.

“Tax Claim" shall have the meaning specified in Section 9.2(g)(i) of the Participation Agreement.

“Tax Event" shall mean any event or transaction that results in a Noteholder being subject to U.S. federal income tax on a different amount, in a different manner or at a different time than would have been the case if such event had not occurred.

“Tax Indemnitee" shall have the meaning specified in Section 9.2(a) of the Participation Agreement.

“Term-Out Notice Date" shall mean the date on which TVA delivers written notice to the Owner Lessor of TVA's election to pay the Net TV Amount in accordance with Section 18.4 of the Facility Lease.

“Term-Out Payment Dates" shall have the meaning specified in Section 18.4 of the Facility Lease.

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“Termination Date" shall mean each of the monthly dates during the Facility Lease Term identified as a “Termination Date” on Schedule 2 of the Facility Lease.

“Termination Value" for any Termination Date shall mean an amount equal to the sum of (a) Termination Value (Debt Portion) and (b) Termination Value (Equity Portion) for such Termination Date.

“Termination Value (Debt Portion)" for any Termination Date shall mean the amount set forth under the heading “Termination Value (Debt Portion)” on Schedule 2 of the Facility Lease for such Termination Date.

“Termination Value (Equity Portion)" for any Termination Date shall mean the amount set forth under the heading “Termination Value (Equity Portion)” on Schedule 2 of the Facility Lease for such Termination Date.

“Transaction" shall mean, collectively, the transactions contemplated under the Participation Agreement and the other Transaction Documents.

“Transaction Costs" shall mean the following costs to the extent substantiated or otherwise supported in reasonable detail:

(i)the cost of reproducing and printing the Transaction Documents and the Offering Circular and all costs and fees, including filing and recording fees and recording, transfer, mortgage, intangible and similar taxes in connection with the execution, delivery, filing and recording of the Head Lease, the Facility Lease, the Ground Lease, the Ground Sublease and any other Transaction Document, and any other document required to be filed or recorded pursuant to the provisions hereof or of any other Transaction Document and any Uniform Commercial Code filing fees in respect of the perfection of any security interests created by any of the Transaction Documents or as otherwise reasonably required by the Owner Lessor or the Lease Indenture Trustee;

(ii)the reasonable fees and expenses of Hunton & Williams LLP, counsel to the Equity Investor and the Equity Note Purchasers, and Winston & Strawn LLP, special counsel to the Equity Note Purchasers for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(iii)the reasonable fees and expenses of Bass, Berry & Sims PLC, Tennessee counsel to the Equity Investor and the Underwriters, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(iv)the reasonable fees and expenses of Orrick, Herrington & Sutcliffe LLP, special counsel to TVA, and Waller, Lansden Dortch & Davis, LLP, Tennessee counsel to TVA, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement, the other Transaction Documents and the Underwriting Agreement and the preparation of the Offering Circular;

32

(v)the reasonable fees and expenses of Morris James LLP, counsel for the Owner Lessor, the Lessor Manager, the Equity Manager and the Equity Collateral Agent, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(vi)the reasonable fees and expenses of White & Case, LLP, counsel to the Underwriters, for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement, the other Transaction Documents and the Underwriting Agreement and the preparation of the Offering Circular;

(vii)the reasonable fees and expenses of Richards, Layton & Finger PA, counsel for the Lease Indenture Trustee for services rendered in connection with the negotiation, execution and delivery of the Participation Agreement and the other Transaction Documents;

(viii)the underwriting discounts and commissions payable to, and reasonable out of pocket expenses of, the Underwriters;

(ix)the reasonable fees and expenses of Ernst & Young LLP for services rendered in connection with the Transaction;

(x)the reasonable, documented out-of-pocket expenses of the Equity Investor, each Equity Note Purchaser, the Owner Participant and the Owner Lessor;

(xi)the initial fees and expenses of the Lease Indenture Trustee in connection with the execution and delivery of the Participation Agreement and the other Transaction Documents to which it is or will be a party;

(xii)the fees and expenses of the Appraiser, for services rendered in connection with delivering the Closing Appraisal required by Section 4 of the Participation Agreement;

(xiii)the fees and expenses of the Engineering Consultant, for services rendered in connection with delivering the Engineering Report required by Section 4 of the Participation Agreement; and

(xiv)the fees and expenses of the Rating Agencies in connection with the rating of the Lessor Notes.

Notwithstanding the foregoing, Transaction Costs shall not include internal costs and expenses such as salaries and overhead of whatsoever kind or nature nor costs incurred by the parties to the Participation Agreement pursuant to arrangements with third parties for services (other than those expressly referred to above), such as the fees and expenses of financial analysis and consulting, advisory services, and costs of a similar nature.

“Transaction Documents" shall meanthe Operative Documents, the Construction Management Agreement and the Equity Note Purchase Documents.

33

“Transaction Party(ies)" shall mean, individually or collectively as the context may require, all or any of the parties to the Transaction Documents (including the Trust Company and Wilmington Trust).

“Transferee" shall have the meaning specified in Section 7.1(a) of the Participation Agreement.

“Transmission Services Guidelines" shall mean the “Transmission Services Guidelines” of TVA or any successor tariff thereto of general applicability governing the provision of such transmission services and associated ancillary services over the TVA transmission facilities.

“Treasury Regulations" shall mean regulations, including temporary regulations, promulgated under the Code.

“Trust Company" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Trust Indenture Act" shall mean the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed except as provided in Section 905 of such act; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

“TVA" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“TVA Act" shall mean the Tennessee Valley Authority Act of 1933, as amended.

“Uncontrollable Forces" shall have the meaning set forth in Section 8.2 of the Support Agreement.

“Underwriters" shall mean Morgan Stanley & Co. LLC, Barclays Capital Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

“Underwriting Agreement" shall mean the Underwriting Agreement, dated the Effective Date, between TVA and the Underwriters.

“Uniform Commercial Code” or “UCC" shall mean the Uniform Commercial Code as in effect in the applicable jurisdiction.

“Uniform System of Accounts" shall mean the Uniform System of Accounts prescribed by FERC, as in effect on the Closing Date and as from time to time and thereafter amended, or the chart of accounts and accounting classifications which may be substituted for such Uniform System of Accounts from time to time by FERC or its successor for such purpose.

“Unit" and collectively the “Units" shall mean each of the three (3) General Electric 7FA.04 combustion turbine generators, together with the related Nooter/Eriksen heat recovery steam generator with supplementary duct firing, and any Components exclusively related thereto, as more particularly described on Exhibit A to the Facility Lease.

34

“URS" shall have the meaning specified in the first recital of the Construction Management Agreement.

“URS Construction Contract" shall have the meaning specified in the first recital of the Construction Management Agreement.

“U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction in the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.

“Verifier" shall have the meaning specified in Section 3.4(c) of the Facility Lease.

“Wilmington Trust" shall have the meaning set forth in the introductory paragraph to the Participation Agreement.

“Work" shall have the meaning specified in Section 2.1(a) of the Construction Management Agreement.

_______________

Copies of the Ground Lease, the Ground Sublease, the Head Lease, the Facility Lease, and the Indenture of Trust are of record with the office of the Register of Deeds of Hawkins County, Tennessee.

35

Index
2012 Lessor Notes..................................................	3	Construction Documents.........................................	9
Access Property......................................................	4	Construction Management Agreement....................	9
Actual Knowledge..................................................	4	Construction Period Financing Account.................	9
Additional Equity Investment.................................	4	Construction Period Financing Costs......................	9
Additional Facility..................................................	4	Contract Year...........................................................	9
Additional Lessor Notes.........................................	4	Contractor................................................................	9
Additional Owner....................................................	4	Debt Portion............................................................	9
Affiliate...................................................................	4	Deed of Trust Trustee..............................................	9
After-Tax Basis.......................................................	4	Design Documents..................................................	10
Applicable Law.......................................................	5	Discount Value........................................................	10
Applicable Permits..................................................	5	Dollars.....................................................................	10
Applicable Rate......................................................	5	DTC.........................................................................	10
Appraisal Procedure................................................	5	Early Buy Out.........................................................	10
Appraiser.................................................................	5	Early Buy Out Date.................................................	10
Arbitration Proceeding............................................	5	Early Buy Out Notice..............................................	10
Assigned Documents..............................................	6	Effective Date..........................................................	10
Assignment and Assumption Agreement................	6	Election Notice........................................................	10
Bankruptcy Code....................................................	6	Energy.....................................................................	10
Base Rate................................................................	6	Enforcement Notice................................................	10
Basic Lease Rent.....................................................	7	Engineering Consultant...........................................	10
Basic Lease Rent (Debt Portion)............................	7	Engineering Report.................................................	10
Basic Lease Rent (Equity Portion).........................	7	Environmental Condition........................................	10
Benefit Plan............................................................	7	Environmental Firm................................................	11
Bond Resolution.....................................................	7	Environmental Laws...............................................	11
Boundary Property..................................................	7	Environmental Site Assessment..............................	11
Business Day...........................................................	7	Equity Breakage......................................................	11
Called Amount........................................................	7	Equity Collateral Agent...........................................	11
Capability................................................................	7	Equity Guarantor.....................................................	11
Capacity..................................................................	7	Equity Guaranty......................................................	11
Capital Expenditure Budget....................................	7	Equity Investment...................................................	11
Claim.......................................................................	7	Equity Investor........................................................	11
Closing....................................................................	8	Equity Investor LLC Agreement.............................	11
Closing Appraisal....................................................	8	Equity Investor's Lien.............................................	11
Closing Date...........................................................	8	Equity Manager.......................................................	12
CMA Payment........................................................	8	Equity Note.............................................................	12
Code........................................................................	8	Equity Note Purchase Agreement...........................	12
Co-Equity Manager.................................................	8	Equity Note Purchase Documents...........................	12
Co-Lessor Manager.................................................	8	Equity Note Purchaser.............................................	12
Collateral.................................................................	8	Equity Note Purchaser's Percentage Interest of the
Common Facilities..................................................	8	Notes....................................................................	12
Competitor..............................................................	8	Equity Placement Agent..........................................	12
Component..............................................................	8	Equity Pledge Agreement........................................	12
Confidential Information........................................	8	Equity Portion.........................................................	12
Construction Cost...................................................	9	ERISA.....................................................................	13

Event of Loss..........................................................	13	Ground Lessor's Release Rights..............................	18
Evidences of Indebtedness......................................	13	Ground Sublease.....................................................	18
Excepted Payments.................................................	13	Ground Sublease Term............................................	18
Excepted Rights......................................................	14	Ground Sublessee....................................................	18
Excess Amounts......................................................	14	Ground Sublessor....................................................	18
Exchange Act..........................................................	14	Guaranteed Outside Completion Date....................	18
Exchange Date........................................................	14	Hazardous Substance..............................................	18
Excluded Property...................................................	14	Head Lease..............................................................	19
Excluded Taxes.......................................................	14	Head Lease Rent.....................................................	19
Expected Completion Date.....................................	14	Head Lease Term.....................................................	19
Expiration Date.......................................................	14	Head Lessee............................................................	19
Facility....................................................................	14	Head Lessor.............................................................	19
Facility Lease..........................................................	14	Indemnitee...............................................................	19
Facility Lease Term................................................	14	Independent Appraiser.............................................	19
Facility Lessee........................................................	14	Investment Banker...................................................	19
Facility Lessee's Interest.........................................	14	John Sevier Fossil Plant..........................................	19
Facility Lessor.........................................................	14	Kiewit......................................................................	19
Facility Operating Fee............................................	15	Kiewit Construction Contract.................................	19
Facility Operation and Maintenance Expense........	15	Lease Commencement Date....................................	19
Facility Site.............................................................	15	Lease Debt Rate......................................................	19
Facility User............................................................	15	Lease Default..........................................................	20
Fair Market Rental Value........................................	15	Lease Event of Default............................................	20
Fair Market Sales Value..........................................	15	Lease Indenture.......................................................	20
Federal Power Act...................................................	16	Lease Indenture Bankruptcy Default......................	20
FERC......................................................................	16	Lease Indenture Estate............................................	20
Final Completion....................................................	16	Lease Indenture Event of Default...........................	20
Final Completion Certificate..................................	16	Lease Indenture Payment Default...........................	20
Final Determination................................................	16	Lease Indenture Trustee..........................................	20
Final Shutdown.......................................................	16	Lease Indenture Trustee Office...............................	20
Final Shutdown Date..............................................	16	Lease Indenture Trustee's Account..........................	20
Fitch........................................................................	16	Lease Indenture Trustee's Liens..............................	20
FMV Net Termination Value..................................	17	Leasehold Deed of Trust Trustee............................	20
GAAP......................................................................	17	Lessee Person..........................................................	21
Global Common Facilities......................................	17	Lessor Estate...........................................................	21
Global Common Facilities Operating Fee..............	17	Lessor Manager.......................................................	21
Global Common Facilities Operation and		Lessor Notes............................................................	21
Maintenance Expenses........................................	17	Lien.........................................................................	21
Global Common Facilities Site...............................	17	List of Competitors.................................................	21
Government............................................................	17	Majority in Interest of Noteholders.........................	21
Governmental Entity...............................................	18	Make Whole Premium............................................	21
Ground Interest.......................................................	18	Material Adverse Effect..........................................	22
Ground Lease..........................................................	18	Maximum Net Generating Capacity........................	22
Ground Lease Term................................................	18	Membership Interests..............................................	22
Ground Lessee........................................................	18	Modification............................................................	22
Ground Lessor.........................................................	18	Month......................................................................	22
		Moody's...................................................................	22

Net TV Amount......................................................	22	Punch List...............................................................	27
Net TV Amount (Debt Portion)..............................	22	Quarter.....................................................................	28
Net TV Amount (Debt Portion) Rate......................	22	Rates........................................................................	28
Net TV Amount (Equity Portion)...........................	23	Rating Agencies......................................................	28
Net TV Amount (Equity Portion) Rate...................	23	Real Property...........................................................	28
Nonseverable Modifications...................................	23	Reasonable Basis.....................................................	28
Note Register..........................................................	23	Rebuilding Closing Date.........................................	28
Noteholder...............................................................	23	Redemption Date.....................................................	28
Offering Circular.....................................................	23	Registrar..................................................................	28
Officer's Certificate.................................................	23	Regulatory Event of Loss........................................	28
Operating Fee..........................................................	23	Regulatory Event of Loss Termination Payment....	29
Operation and Maintenance Expense.....................	23	Reinvestment Yield.................................................	29
Operation and Maintenance Expense Budget.........	23	Related Party...........................................................	29
Operative Documents.............................................	23	Released Property....................................................	29
Optional Modification............................................	23	Relevant Portion......................................................	29
Other Redemption Date Payment Amounts............	24	Remaining Average Life.........................................	30
Outside Lease Commencement Date......................	24	Remaining Scheduled Payments.............................	30
Overdue Rate..........................................................	24	Remediate................................................................	30
Owner Lessor..........................................................	24	Removable Modification.........................................	30
Owner Lessor Indemnified Party............................	24	Rent.........................................................................	30
Owner Lessor LLC Agreement...............................	24	Rent Payment Date..................................................	30
Owner Lessor Mortgage.........................................	24	Replacement Component........................................	30
Owner Lessor's Account.........................................	25	Replacement Power Bond.......................................	30
Owner Lessor's Interest..........................................	25	Reported..................................................................	31
Owner Lessor's Lien...............................................	25	Required Modification............................................	31
Owner Participant...................................................	25	Responsible Officer.................................................	31
Partial Early Buy Out..............................................	25	Revenues.................................................................	31
Partial Event of Loss...............................................	25	S&P..........................................................................	31
Participation Agreement.........................................	25	Sale Net Termination Value.....................................	31
Paying Agent...........................................................	25	Scheduled Closing Date..........................................	31
Permitted Closing Date Liens.................................	25	Scheduled Payment Date........................................	31
Permitted Instruments.............................................	25	SEC.........................................................................	31
Permitted Liens.......................................................	26	Secured Indebtedness..............................................	31
Permitted Post Facility Lease Term Liens..............	26	Securities Act..........................................................	31
Permitted Securities................................................	26	Security....................................................................	31
Person.....................................................................	27	Service Commencement Date.................................	31
Personalty................................................................	27	Settlement Date.......................................................	32
Phase I.....................................................................	27	Severable Modification...........................................	32
Phase II...................................................................	27	Significant Lease Default........................................	32
Plan.........................................................................	27	Significant Lease Indenture Default........................	32
Point or Points of Interconnection..........................	27	Similar Law.............................................................	32
Power......................................................................	27	Site..........................................................................	32
Proceeds..................................................................	27	Special Lessee Transfer...........................................	32
Prudent Industry Practice........................................	27	Special Lessee Transfer Amount.............................	32
		Station Service Requirements.................................	32

Subcontractors.................................................	32	Transaction Documents...........................................	35
Subordinated Resolution.................................	32	Transaction Party(ies).............................................	36
Substantial Completion...................................	33	Transferee................................................................	36
Substantial Completion Certificate.................	33	Transmission Services Guidelines..........................	36
Supplemental Financing..................................	33	Treasury Regulations...............................................	36
Supplemental Lease Rent................................	33	Trust Company........................................................	36
Support Agreement..........................................	33	Trust Indenture Act..................................................	36
Tax...................................................................	33	TVA.........................................................................	36
Tax Advance....................................................	33	TVA Act...................................................................	36
Tax Benefit......................................................	33	U.S. Government Obligations.................................	37
Tax Claim........................................................	33	Uncontrollable Forces.............................................	36
Tax Event.........................................................	33	Underwriters............................................................	36
Tax Indemnitee................................................	33	Underwriting Agreement.........................................	36
Taxes................................................................	33	Uniform Commercial Code” or “UCC....................	36
Termination Date.............................................	34	Uniform System of Accounts..................................	36
Termination Value...........................................	34	Unit..........................................................................	37
Termination Value (Debt Portion)...................	34	Units........................................................................	37
Termination Value (Equity Portion)................	34	URS.........................................................................	37
Term-Out Notice Date.....................................	33	URS Construction Contract....................................	37
Term-Out Payment Dates................................	33	Verifier.....................................................................	37
Transaction......................................................	34	Wilmington Trust....................................................	37
Transaction Costs............................................	34	Work........................................................................	37

Attachment A

to

Head Lease

DESCRIPTION OF THE FACILITY

The Facility consists of the Units, Common Facilities, and any other equipment, material or property, other than real property, associated with the Units and Common Facilities (but not associated with the Global Common Facilities), all of which are located on, under, or over the Facility Site, which Facility Site is the real property located in Hawkins County, Tennessee and is described in greater detail in Exhibit 1 to the Ground Lease.

The Facility will have a three over one combined cycle configuation consisting of three (3) Units and one (1) Toshiba nominally rated 400 megawatt steam turbine generator (the “STG”). Each Unit consists of a General Electric 7FA.04 combustion turbine generator (“CTG”), the related Nooter/Eriksen heat recovery steam generator (“HRSG”) with supplementary duct firing and any ancillary equipment related thereto, except for any Component exclusively constituting Common Facilities.

The Facility will be capable of operating in both simple cycle operation and combined cycle operation. The CTG's primary fuel supply will be natural gas and its secondary fuel supply will be No. 2. Fuel oil. The HRSG's supplemental duct firing will utilize natural gas only.

The CTGs are sometimes referred to as CT1, CT2 and CT3. The serial numbers for each CTG-HRSG pair are as follows:

TVA Tag Number	CTG Serial Number	HRSG Serial Number
Unit 1	298973	083200-1
Unit 2	298974	083200-2
Unit 3	298975	083200-3

The Components for each Unit includes the following:

Mark VIe Gas Turbine Control System

Inlet Filter System

Exhaust System

Exhaust Diverter Damper

Guillotine Isolation Damper to HRSG

Evaporative Cooling System

Cooling Water Module

Water Injection Skid

ATTACH. A-1

Fuel Gas Filter/Separator

CO2 Fire Protection System

Control Cab/(PEECC)

LCI Starting System/Transformer

EX2100 Generator Excitation System

Generator Auxiliary Compartment

Main Step-up Transformer

Fuel Oil Heating System

Fuel Oil Forwarding System

Fuel Gas Module

Lube Oil Mist Eliminator

Atomizing Air/HP Fuel Oil Pump Skid

Emissions Monitoring Systems on CT exhaust, SCR inlet and HRSG exhaust

Feed Water System

Steam System

CO Catalyst

SCR Catalyst

Duct Burners

The Common Facilities are equipment and facilities that are used for the operation of the Units at the Facility, but are not Global Common Facilities. These shared facilities support the Units. The Common Facilities are as follows:

Steam Turbine Generator

Condensate System

Circulating Water System

Closed Cooling Water System

Fuel Oil Storage System

Compressed Air System

Chemical Feed System

Steam Water Sampling System

Nitrogen, Hydrogen, & CO₂ Gas Systems

Fuel Gas Dew Point Heating System

Fuel Gas Pressure Regulation System

Plant Water Supply System

Auxiliary Steam System

Ammonia Supply System

Oil-Water Separation and Discharge System

Fire Loop System

Potable Water System

Eye Wash System

Storm Water Drains

Process Water

Compressor Wash System

ATTACH. A-2

Attachment B

to

Head Lease

PERMITTED CLOSING DATE LIENS

The Liens reflected in the Certificate of Title Examination, prepared by Kennedy & Malcolm, attached to this Attachment B shall constitute Permitted Closing Date Liens.

ATTACH. B1

Kennedy & Malcolm Attorneys and Counselors at Law 625 Anderson Street Bristol, Tennessee 37620 Telephone: (423) 764-7162 Facsimile: (423) 764-8676

CERTIFICATE OF TITLE EXAMINATION

THIS IS TO CERTIFY that I have made a careful examination of the public records of the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee, as indexed, as the same relates to that parcel of real estate situated in the First (1st) Civil District of Hawkins County, Tennessee, and more particularly described as follows:

PARCEL NO. 1:

Tract No. RSP-139:

A strip of land located in the First Civil District of Hawkins County, State of Tennessee, on the left side of the Holston River, approximately 1 mile east of the State Highway No. 70 bridge across the said river, the strip of land lying on each side of the center line of the original main track location of the Southern Railway, the center line of the original location and the boundaries of the strip being more particularly described as follows:

Beginning at the junction of the center lines of the original and relocated main track locations of the Southern Railway at survey station 71 + 85 on the center line of the relocated track, said point being 50 feet south of and opposite the intersection of the north right of way line of the relocation with the north right of way line of the original location, the strip being bounded on the south side by the north right of way line of the relocation, a line 50 feet north of and parallel to the center line of the relocated track, and being bounded on the north side by the original north right of way line, a line 50 feet north of and parallel to the center line of the original track location; thence with the center line of the original track location in an easterly direction, approximately 660 feet to a point opposite which the strip ceases to be bounded on the south side by the north right of way line of the relocation and becomes bounded on the south side by the south right of way line of the original location, a line 50 feet south of and parallel to the center line of the original location, the strip becoming 100 feet wide, lying 50 feet on each side of the center line of the original location; thence, continuing in an easterly direction, approximately 3400 feet to a point approximately 300 feet west of the former site of the McCloud railway station where the width of the strip changes and becomes 200 feet, lying 50 feet on the north side and 150 feet on the south side of the center line; thence continuing in an easterly direction, approximately 600 feet to a point where the width of the strip changes and becomes 100 feet, lying 50 feet on each side of the center line; thence continuing in an easterly direction, approximately 4560 feet to a point opposite which the original south right of way line intersects the northwest right of way line of the relocation, the point of intersection being 25 feet northwest of and opposite approximate survey station 170 + 70 on the center line of the relocation, the strip becoming bounded on the

1

southeast side by the northwest right of way line of the relocation, a line that is 25 feet northwest of and parallel to the center line of the relocated track between survey stations 170 + 70 (approximate) and 175 + 00 and 50 feet northwest of and parallel to the center line of the relocation between survey stations 175 + 00 and 177 + 53; thence continuing with the center line of the original location, as it curves to the left in an easterly direction, approximately 685 feet to the above mentioned survey station 177 + 53 on the center line of the relocated track, the said survey station being 50 feet southeast of and opposite a point where the strip terminates at the intersection of the north right of way line of the original location with the north right of way line of the relocation.

The above described strip of land contains 22.0 acres, more or less.

Being the same property conveyed to the United States of America by Quitclaim Deed dated October 7, 1968, from Virginia & Southwestern Railway Co. and Southern Railway Co., which appears of record in the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee, in Deed Book l58, at page 418.

PARCEL NO. 2:

Tract No. RSP-31:

Situate in the First Civil District of Hawkins County, State of Tennessee, on the south shore of Cherokee Lake, approximately 1/4mile east of the Town of McCloud, and being more particularly described as follows:

Beginning at a point (Coordinates: N. 733,996; E. 2,894,246) in the center line of a county road, in the prolongation of a fence line, and in the boundary line between the lands of Charles W. Sanders and the Dr. R. D. Keller Heirs; thence with the Dr. R. D. Keller Heirs' line and the fence line N. 38° W., 210 feet to a fence angle; thence N. 24° W., 3515 feet, crossing the Southern Railway at approximately 1415 feet, to the original Holston River; thence with the original river as it meanders upstream approximately 1180 feet to a point in the prolongation of a fence line, a corner to the land of W. D. Kenner; thence with W. D. Kenner's line and the fence line S. 16° E., 2475 feet, crossing the Southern Railway at approximately 2065 feet, to a fence angle; thence S. 40° 08' E., 926 feet to a point (Coordinates: N. 734,686; E. 2,895,100) in the center line of the above mentioned county road; thence with a severance line and the center line of the county road as it meanders in a southwesterly direction, 1120 feet, more or less, to the point of beginning, and containing 83. acres, more or less.

There is also conveyed hereby such right, title and interest in the bed of the original Holston River.

The positions of corners and directions of lines are referred to the Tennessee Coordinate System.

2

It is understood and agreed that the above described tract of land is conveyed subject to such rights as may be vested in third parties to rights of way for an electric power distribution line, a telegraph line, a railroad, and a county road which affects 0.3 acre, more or less.

Being the same property conveyed to the United States of America by Warranty Deed dated September 15, 1952, from Charles W. Sanders and wife, Frances H. Sanders, which appears of record in the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee, in Deed Book 110, at page 566.

PARCEL NO. 3:

Tract No. RSP-17:

Situate in the First Civil District of Hawkins County, State of Tennessee, on the south shore of Cherokee Lake, approximately 1/2mile east of the Town of McCloud, the said tract being more particularly described as follows:

Beginning at a point (Coordinates: N. 734,517; E. 2,895,279) in a fence line and in the boundary between the lands of W. D. Kenner and Charles W. Sanders; thence with Charles W. Sanders' line and the fence line N. 46º 35' W., 246 feet to a point in a county road; thence with a fence line N. 40° 08' W., 926 feet to a fence angle; thence N. 16° W., 2475 feet, crossing the Southern Railway at approximately 410 feet, to the original Holston River; thence with the original river as it meanders upstream approximately 6860 feet to a point, a corner to the land of P. H. Davis; thence with P. H. Davis' line, leaving the original river, S. 36° E., 28 feet to a point, a corner of the lands of P. H. Davis and the United States of America (TVA Tract CK-1368); thence with the United States of America's boundary line S. 42° W., 1545 feet to a point; thence S. 48° E., 30 feet to a point in the northwest right of way line of the Southern Railway; thence with a severance lie and the northwest right of way line of the railway, a line 50 feet northwest of and parallel to the center line of the railway tract, as it meanders in a southwesterly direction approximately 2240 feet to a point; thence, leaving the railway right of way line, S. 49° 55' E., 200 feet to a point (Coordinates: N. 737,329; E. 2,897,508); thence S. 38° 24' W., 3587 feet to the point of beginning. Exclude therefrom 8.0 acres, more or less, being that portion of the above described land lying within the Southern Railway right of way, the said right of way being 100 feet wide and having a length of approximately 3500 feet. Also exclude therefrom 0.4 acre, more or less, being that portion of the above described land to be acquired in fee by the Tennessee Valley Authority in the name of the United States of America from Joseph Lawson under the designation of Tract No. RSP-23 and being more particularly described as follows: Beginning at a point (Coordinates: N. 736,680; E. 2,896,683) in the southeast right of way line of the Southern Railway, a corner in the boundary between the lands of W. D. Kenner and Joseph Lawson; thence with the said boundary line and the railway right of way line, a line 50 feet southeast of and parallel to the center line of the railway track, as it curves to the left in a northeasterly direction approximately 270 feet to a point in the center line of an abandoned road; thence with the center line of the abandoned road as it meanders in a southwesterly direction approximately 275 feet to a point; thence, leaving the road, N. 46° 12' W., 97 feet to the point of beginning for the exclusion of 0.4 acres.

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The above described tract of land, after giving effect to the exclusions above noted, contains 207 acres, more or less.

It is understood and agreed that the above described tract of land hereby conveyed subject to such rights as may be vested in third parties to rights of way for an electric power distribution line and a road which affects 0.8 acre, more or less.

It is also understood and agreed that the above described tract of land is hereby conveyed subject to the rights of the first parties, their heirs and assigns, to cross the hereinafter designated portion of the described land over as many access routes leading from their remaining land lying southeast of the described property as may be necessary to provide convenient ingress to and egress from a principal access route consisting of the present county road for a distance of approximately 1500 feet, measured northeasterly from the west boundary of the described land, and a road to be constructed by the Tennessee Valley Authority which will leave the present county road at the northeast end of the designated 1500-foot section and will extend in a northeasterly direction, approximately parallel to that course in the southeast boundary of the described land identified by a bearing and distance of S. 30° 24' W., 3587 feet, to a connection with an existing private road at or near the point where the said private road crosses the railroad. The rights of access hereinabove defined are to apply to that portion of the described land lying southeast of the above described principal access route and that section of the existing private road located southeast of the railroad. It is further understood that the first parties will continue to have full use of their present access facilities pending the completion of the road to be constructed by the Tennessee Valley Authority and hereinabove defined.

The positions of the corners and directions of lines are referred to the Tennessee Coordinate System.

Being the same property conveyed to the United States of America by Warranty Deed dated October 16, 1952, from Kenneth B. Kenner and wife, Charlotte Kenner, which appears of record in the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee, in Deed Book 111, at page 98.

This examination was made as of the 10th day of January, 2012, at 8:00 a.m., and in my opinion good fee simple title as of the date of such examination was vested in the United States of America, by Deeds recorded in Deed Book 158, at page 418, Deed Book 110, at page 566 and Deed Book 111, at page 98, subject to the following:

I.TAXES:

Property is tax exempt.

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II. RESTRICTIONS, CONDITIONS AND EASEMENTS:

A)Permanent easements and rights-of-way for the use and benefit of telephone and utility services.

B)Tract No. RSP-139, was acquired by Quitclaim Deed from Virginia and Southwestern Railway Company, et al, dated October 7, 1958, of record in Deed Book 158, at page 418. This 22-acre tract was conveyed to TVA pursuant to contract Agreement TV-16180A, dated April 8, 1954, in exchange for the conveyance by TVA of a new fee simple right-of-way identified as TVA Disposal Tract XRSP-22. This relocated railroad right-of-way is located to the immediate southeast of the current plant access road and is crossed at open point by said access road. This crossing is identified as a portion of the ingress/egress area on the map. It should be noted that TVA's right to cross the relocated railroad right-of-way is pursuant to a license agreement dated May 7, 2010, between TVA and Norfolk Southern Railway Company (successor to Virginia and Southwestern). Said license agreement provides that it may not be assigned without the written consent of Norfolk Southern, thus it will be necessary to obtain Norfolk Southern's consent if TVA's rights under the license agreement are included in the proposed lease.

C)Tract No. RSP-31, is subject to rights of third parties to electrical distribution line, reserved rights for access points to public roads as set out in Deed Book 110, at page 566.

D)Tract No. RSP-17, is subject to rights of third parties to electrical distribution line, reserved rights for access points to public roads as set out in Deed Book 111, at page 98.

E)Deed of Easement to Hawkins County, Tennessee, as set out in Deed Book 201, at page 367.

F)Subject to all reservations and easements in Deed Book 158, at page 418, Deed Book 110, at page 566 and Deed Book 111, at page 98.

G)Subject to out conveyances as set out in Deed Book 158, at page 452.

III. DEEDS OF TRUST AND/OR PURCHASE LIENS:

None of record.

IV. OTHER:

A)This Certificate of Title Examination is specifically restricted from the period of January 10, 1982, to the present date. No representations are here made as to any state of

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facts affecting the marketability of title or liens, encumbrances, easements, restrictions, taxes or Judgments thereon prior to the aforesaid date.

B)Such state of facts as would be disclosed by an accurate survey, location on the ground and inspection of the premises, including rights of parties in possession other than the owner, shortages of area, description inaccuracies and easements not shown in the public records.

C)Indexing errors and discrepancies and inaccuracies of the public record in the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee.

D)Subject to the validity and regularity of all corporate and judicial actions and proceedings.

E)Corporation taxes and corporate resolutions needed for the execution of corporate Deeds and mortgages are not considered.

F)This Certificate of Title Examination is restricted to the records of the above referenced Register's Office and does not reflect any Federal or State Tax Liens filed in any other Register's Office for the State of Tennessee.

V.

This title report does not make representation with regard to: A) any parties in possession; B) any deficiencies in quantities of land; C) boundary line disputes; D) roadways; E) any unrecorded easements; F) any unrecorded liens; G) accuracy of the index books; H) any matter not of public record which would be disclosed by an accurate survey or inspection of the premises; I) any undisclosed heirs; J) any fraud or forgery in connection with any of the instruments in the chain of title; K) mental incompetence; L) confusion with regard to the name or proper identity of parties; M) improprieties with regard to delivery of any instrument in the chain of title; N) marital rights (spouse or former spouse of past owners not revealed in the chain of title); O) any instrument executed by a minor; P) lack of corporate capacity in the event a corporation is in the chain of title; Q) financing statements filed under the Uniform Commercial Code; R) any undisclosed beneficial interests; S) any law, ordinance or governmental regulation (including but not limited to building or zoning ordinances) restricting or regulating or prohibiting the occupancy, use or enjoyment of the land, or regulating the character, dimensions or location of any improvement now or hereafter erected on the land, or prohibiting a separation in ownership or a reduction in the dimensions or area of the land, or the effect of any violation of any such law, ordinance or governmental regulation; T) any facts that would be revealed by an examination of the records of the Federal District Court and Federal Bankruptcy Court; U) accuracy of tax records in the official's office in the county where the property is located; V) any fact that would not be apparent from an examination of the records of the Register's Office in the county where the property is located.

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These items listed under Item V are matters which would not be revealed by an examination of the records of the Office of the Register of Deeds for Hawkins County, at Rogersville, Tennessee, or are matters not normally determined in the course of title examination and in which we have no means of securing the necessary information, and, therefore, we offer no opinion concerning the same. These matters under A, B, C, D, and E, could be protected against by an accurate survey by a qualified licensed surveyor. Item F, unrecorded liens, could be guarded against by the inspection of the premises for new improvements, and if such appear to have been present, the utilization of the Notice of Completion and waiting ten (10) days to close as per T.C.A. 66-11-143, et seq. The remaining items listed under Item V, G through V may be insured against by the utilization of title insurance, and should you desire more information in that regard, we would be pleased to discuss same with you and our position, and if you desire, to arrange for title insurance to be secured.

This title examination is issued for the sole use and benefit of Fidelity National Title Group and, without our prior written consent, this opinion may not be relied upon, referred to, quoted to, or furnished to (as an original or copy) any other person or entity other than Fidelity National Title Group. Our liability with regard to this title examination letter is limited to Five Hundred Thousand Dollars ($500,000.00).

THIS TITLE EXAMINATION LETTER CANNOT BE USED FOR ISSUANCE OF A TITLE INSURANCE POLICY WITHOUT THE EXPRESS WRITTEN CONSENT OF THE UNDERSIGNED.

By: /s/ Randy M. Kennedy

Randy M. Kennedy

RMK/rjm

11-0711

usasearch.doc

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EX-10.3

Exhibit 10.3

This Construction Management Agreement has been filed to provide investors with information regarding its terms. It is not intended to provide any other factual information about the Tennessee Valley Authority. The representations and warranties of the parties in this Construction Management Agreement were made to, and solely for the benefit of, the other parties to this Construction Management Agreement. The assertions embodied in the representations and warranties may be qualified by information included in schedules, exhibits or other materials exchanged by the parties that may modify or create exceptions to the representations and warranties. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.

EXECUTION VERSION

Construction Management Agreement

Dated as of January 17, 2012

between

John Sevier Combined Cycle Generation LLC,

as Owner Lessor

and

Tennessee Valley Authority,

as Contractor

______________________________________

John Sevier Combined Cycle

Generation Facility

located in Hawkins County, Tennessee

Table of Contents
		Page
ARTICLE 1	DEFINITIONS..................................................................................................	2
1.1	Definitions; Rules of Interpretation..........................................................................	2
ARTICLE 2	DESIGN AND CONSTRUCTION OF FACILITY..........................................	2
2.1	Design and Construction of the Facility...................................................................	2
2.2	Work to Be Performed..............................................................................................	2
2.3	Work Progress; Substantial Completion...................................................................	3
2.4	Suspension of the Work by Contractor.....................................................................	4
2.5	Clean-Up and Disposal.............................................................................................	4
2.6	Hazardous Substances..............................................................................................	4
2.7	Protection of Property...............................................................................................	5
2.8	Availability of Documents to Owner Lessor............................................................	5
2.9	Labor Relations........................................................................................................	5
2.10	Safety Precautions....................................................................................................	5
2.11	Further Assurances...................................................................................................	5
ARTICLE 3	STANDARD OF PERFORMANCE.................................................................	6
3.1	Standard of Performance..........................................................................................	6
ARTICLE 4	OWNER'S INFORMATION; ACCESS TO THE FACILITY; INSPECTIONS.........................................................................................................	6
4.1	Owner Lessor's Information......................................................................................	6
4.2	Facility Site Access...................................................................................................	7
4.3	Inspection by Contractor...........................................................................................	7
4.4	Inspection by Owner Lessor......................................................................................	7
ARTICLE 5	SUBSTANTIAL COMPLETION; FINAL COMPLETION.............................	7
5.1	Substantial Completion.............................................................................................	7
5.2	Achievement of Substantial Completion..................................................................	8
5.3	Final Completion.......................................................................................................	8
5.4	Achievement of Final Completion............................................................................	9
5.5	Acceptance by Owner Lessor Not a Release of Contractor......................................	9
ARTICLE 6	PRICE AND PAYMENT...................................................................................	9
6.1	CMA Payment...........................................................................................................	9

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Table of Contents (continued)
		Page
ARTICLE 7	SUBCONTRACTS............................................................................................	9
7.1	Subcontractors...........................................................................................................	9
7.2	Payments to Subcontractors......................................................................................	9
7.3	No Privity; No Assignment.......................................................................................	10
ARTICLE 8	REPRESENTATIONS AND WARRANTIES...................................................	10
8.1	Representations and Warranties of Contractor..........................................................	10
8.2	Representations and Warranties of Owner Lessor.....................................................	11
ARTICLE 9	LIABILITY AND DAMAGES..........................................................................	12
9.1	CONSEQUENTIAL DAMAGES.............................................................................	12
9.2	Further Limitation of Liability..................................................................................	12
ARTICLE 10	WARRANTIES..................................................................................................	12
10.1	General Warranty.......................................................................................................	12
10.2	EXCLUSIVE WARRANTIES..................................................................................	13
ARTICLE 11	UNCONTROLLABLE FORCES......................................................................	13
11.1	Excused Performance................................................................................................	13
ARTICLE 12	INDEMNIFICATION........................................................................................	13
12.1	Claims Indemnified...................................................................................................	13
12.2	Survival of Agreement..............................................................................................	13
ARTICLE 13	INSURANCE.....................................................................................................	13
13.1	Insurance Obtained by Contractor.............................................................................	13
ARTICLE 14	TERMINATION AND DEFAULT....................................................................	14
14.1	Termination...............................................................................................................	14
14.2	Owner Lessor Remedies...........................................................................................	14
14.3	Surviving Obligations...............................................................................................	14
ARTICLE 15	CONFIDENTIAL INFORMATION..................................................................	14
15.1	Confidentiality...........................................................................................................	14
15.2	Public Statements......................................................................................................	15
ARTICLE 16	DISPUTE RESOLUTION.................................................................................	15
16.1	Resolution of Disputes..............................................................................................	15
ARTICLE 17	TAX MATTERS................................................................................................	15

ii

Table of Contents (continued)
		Page
17.1	Tax Matters................................................................................................................	15
ARTICLE 18	MISCELLANEOUS..........................................................................................	16
18.1	Assignment................................................................................................................	16
18.2	Successors and Assigns.............................................................................................	16
18.3	Collateral Assignment...............................................................................................	16
18.4	Contractor as Owner Lessor's Agent.........................................................................	16
18.5	Waivers......................................................................................................................	17
18.6	CHOICE OF LAW....................................................................................................	17
18.7	Severability................................................................................................................	17
18.8	Notice........................................................................................................................	17
18.9	Headings and Table of Contents................................................................................	18
18.10	Entire Agreement......................................................................................................	18
18.11	Amendments.............................................................................................................	18
18.12	No Third Party Rights...............................................................................................	18
18.13	Limited Recourse......................................................................................................	18
18.14	Limitation of Liability...............................................................................................	18
EXHIBITS:
Exhibit A	Description of Facility
Exhibit B	Form of Substantial Completion Certificate
Exhibit C	Form of Final Completion Certificate

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CONSTRUCTION MANAGEMENT AGREEMENT

This CONSTRUCTION MANAGEMENT AGREEMENT (this “Agreement”), dated as of January 17, 2012, is made by and between John Sevier Combined Cycle Generation LLC, a Delaware limited liability company, as owner lessor (the “Owner Lessor”), and Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States, as contractor (the “Contractor”).

WITNESSETH :

WHEREAS, in connection with the construction of the Facility, the Contractor has entered into (a) the TVA Contract - Construction of John Sevier Combined Cycle Project, dated as of March 8, 2010 (the “Kiewit Construction Contract”), with Kiewit Power Constructors Co. (“Kiewit”), pursuant to which the Contractor engaged Kiewit to perform construction services relating to the Facility, and (b) the Tennessee Valley Authority Contract No. 00066777, dated as of December 14, 2007 (the “URS Construction Contract,” and, together with the Kiewit Construction Contract, the “Construction Documents”), with URS Energy & Construction, Inc., f/k/a Washington Group International, Inc. (“URS”), pursuant to which the Contractor engaged URS to provide certain design and engineering services relating to the Facility;

WHEREAS, in connection with the financing of the construction of the Facility, the Contractor, the Owner Lessor, Wells Fargo Delaware Trust Company, National Association, a national banking association, not in its individual capacity, but solely as manager under the Owner Lessor LLC Agreement (the “Lessor Manager”) and as manager under the Equity Investor LLC Agreement (the “Equity Manager”), John Sevier HoldCo LLC, a Delaware limited liability company (the “Equity Investor”), and Wilmington Trust Company, a Delaware trust company, not in its individual capacity, but solely as trustee under the Lease Indenture (the “Lease Indenture Trustee”), have entered into the Participation Agreement, dated as of January 10, 2012 (the “Participation Agreement”);

WHEREAS, the Contractor has engaged other contractors to perform various services at the Facility (together with Kiewit and URS, the “Subcontractors”);

WHEREAS, pursuant to the Participation Agreement, on the date hereof, the Contractor entered into the Head Lease with the Owner Lessor and leased the partially completed Facility to the Owner Lessor;

WHEREAS, the Owner Lessor desires to engage the Contractor to complete the construction of the Facility on the terms hereof; and

WHEREAS, it is a condition to the lease of the Facility under the Participation Agreement that the parties enter into this Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto, intending to be legally bound, hereby agree as follows:

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ARTICLE 1

DEFINITIONS

1.1    Definitions; Rules of Interpretation. The capitalized terms used in this Agreement, including the foregoing recitals, and not otherwise defined herein shall have the respective meanings specified in Appendix A to the Participation Agreement. The general provisions of Appendix A to the Participation Agreement shall apply to terms used in this Agreement and specifically defined herein.

ARTICLE 2

DESIGN AND CONSTRUCTION OF FACILITY

2.1    Design and Construction of the Facility.

(a)Subject to the terms and conditions hereof, the Contractor shall perform, or cause to be performed, all work (the “Work”) necessary to design, engineer, procure, construct, license, start-up, test, commission and complete the Facility in accordance with the requirements of this Agreement.

(b)The Contractor shall at no time after the date of this Agreement modify, vary, or amend in any material respect any of the features or specifications of the Facility outlined in Exhibit A without first notifying the Owner Lessor in writing and obtaining the Owner Lessor's consent in writing, which consent shall not be unreasonably withheld, provided that it shall not be unreasonable for the Owner Lessor to withhold its consent to any modification, variation or amendment which would, or would be likely to, materially adversely affect the ability of the Contractor to comply with its obligations under this Agreement. Notwithstanding the foregoing, the Contractor shall have the right, at any time, upon notice to, but without a prior approval of, the Owner Lessor, to make changes to any portion of the Work to the extent required to be made to comply with Prudent Industry Practice, including, but not limited to, in connection with the occurrence of Uncontrollable Forces or a change in Applicable Laws.

(c)The Contractor agrees to provide, at its expense, all power system components on the Facility Site, including all transformation, switching and auxiliary equipment, such as synchronizing and protection and control equipment.

2.2    Work to Be Performed. Without limiting the generality of the foregoing, the Contractor shall perform or has performed, or shall cause or has caused to be performed, all Work necessary to complete the Facility described herein or reasonably inferable from the provisions contained herein and the other Transaction Documents and to cause the Facility to be completed, including without limitation each of the following elements of the Work:

2.2.1    design for civil works, structures, mechanical systems, and electrical systems and preparation of drawings and specifications, including design standards, design reports, models and calculations, all as described in the drawings and specifications for the Work (the “Design Documents”);

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2.2.2    procurement of all labor, plant, materials, equipment and an initial spare parts inventory;

2.2.3     handling of material, equipment and construction equipment, including, as necessary, inspection, expediting, shipping, unloading, receiving and transportation to and storage at the Facility Site;

2.2.4    Facility Site preparation and Facility Site security, to the extent required for the completion of the Work;

2.2.5    acquisition of all rights-of-way necessary to complete the Work;

2.2.6    all relocation of utility services, demolition of existing structures as appropriate, construction and installation work, to the extent necessary to complete the Work, including subcontracting;

2.2.7    procurement of Applicable Permits in connection with the design, development, acquisition, equipping or other management of the Facility and rights of way or performance of the Work, or necessary for the operation of the Facility by the Contractor or its duly qualified and licensed designee, including construction approvals and permits for lay-down and staging area, state and federal environmental permits and building and heritage permits, and maintenance thereof to the extent necessary to complete the Work in accordance herewith;

2.2.8    arrangement, installation and payment for all temporary utilities and temporary utilities relocations and supply of all fuel, chemicals and consumables required to perform the Work, including Facility construction, start up and testing;

2.2.9    handling of all safety and industrial relations matters; and

2.2.10    commissioning of the Facility in accordance with the performance, testing and commissioning procedures of the Contractor.

2.3    Work Progress; Substantial Completion.

2.3.1    The Contractor agrees to use its commercially reasonable efforts to ensure that the Facility achieves Substantial Completion by the Guaranteed Outside Completion Date or as soon thereafter as commercially practicable. If the Contractor anticipates that Substantial Completion will not be achieved by the Guaranteed Outside Completion Date, the Contractor shall promptly provide notice of such anticipated delay to the Owner Lessor, together with a corrective action plan the Contractor intends to adopt in order to achieve Substantial Completion as soon after the Guaranteed Outside Completion Date as commercially practicable.

2.3.2    The Contractor shall develop a list of items which, in the Contractor's reasonable discretion, require completion following Substantial Completion in order to achieve Final Completion (the “Punch List”), and following Substantial Completion, shall use its commercially reasonable efforts to complete or procure completion of the items on the Punch List and to ensure that the Facility achieves Final Completion; provided that the Contractor shall have the right to expand, reduce or otherwise modify the

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Punch List at any time in its reasonable discretion.

2.3.3    Notwithstanding anything in this Agreement or any other Operative Document to the contrary, the parties acknowledge and agree that any failure of the Facility to achieve Substantial Completion by the Guaranteed Outside Completion Date or achieve Final Completion by any particular date will not: (a) in and of itself constitute a default of the Contractor under this Agreement or any Operative Document; (b) permit the Owner Lessor or the Contractor to terminate this Agreement or any other Operative Document; (c) be deemed a repudiation by the Contractor of, or give rise to any remedies of the Owner Lessor based on anticipatory repudiation of, this Agreement or any other Operative Document; or (d) result in any liability of the Contractor for the payment of any liquidated damages (including any liquidated damages which may be payable to the Contractor by its subcontractors).

2.4    Suspension of the Work by Contractor. Upon the occurrence and during the continuance of any of the following events, the Contractor shall have the right to suspend performance of all or any portion of the Work: (a) Uncontrollable Forces; (b) change in Applicable Law that has a materially adverse impact on the performance of the Work; (c) the discovery of pre-existing Hazardous Substances on or under the Facility; (d) a request by a Governmental Entity having jurisdiction over the Facility or the Contractor to utilize one or all of the Units to meet electrical demand; or (e) circumstances under which any Subcontractor has the right to suspend the Work or any portion thereof in accordance with the Construction Documents. The Contractor shall provide to the Owner Lessor prompt notice of any such suspension of the Work, and shall recommence performance of the Work as soon as reasonably practicable after the occurrence of any such event, to the extent consistent with Applicable Law and permitted under the Construction Documents.

2.5    Clean-Up and Disposal. The Contractor shall dispose of waste materials, rubbish and other debris developed, obtained or excavated in the course of performance of the Work in compliance with Applicable Law and Prudent Industry Practice.

2.6    Hazardous Substances. The Contractor shall be fully responsible for any Hazardous Substances discovered in, on, under or emanating from, or brought onto, the Facility Site, and for the proper testing, handling, removal, transportation and disposal of such Hazardous Substances, in each case with the exception for any such Hazardous Substances introduced by the Owner Lessor or any of its Affiliates or agents (other than the Contractor or any Subcontractor). Such Hazardous Substances shall be stored and used in accordance with the requirements of Applicable Law and the Applicable Permits. The Contractor shall use reasonable commercial efforts to minimize the use of Hazardous Substances in the construction of the Facility and shall not utilize or cause, and shall use reasonable commercial effort to not permit any Subcontractor to utilize, such Hazardous Substances as are prohibited from being used in the United States or the State of Tennessee under Applicable Law. The Contractor shall be responsible for all clean-up and mitigation required in connection with any spills, emissions or releases of Hazardous Substances on, at or from the Facility Site, whether before or after the date hereof, with the exception of any such Hazardous Substances introduced by the Owner Lessor or any of its Affiliates or agents (other than the Contractor or any Subcontractor). The Contractor shall notify the Owner Lessor within forty-eight (48) hours of obtaining Actual

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Knowledge of any release of a Hazardous Substance on, at or from the Facility which is required under Applicable Laws to be reported to any Governmental Entity.

2.7    Protection of Property. During the performance of the Work, the Contractor shall use reasonable commercial efforts to protect the Facility, the Facility Site, and any and all related materials, construction equipment and tools from damage as a result of the performance of the Work by the Contractor or its Subcontractors. The Contractor shall be responsible for the damage or destruction of any property damaged or destroyed in the course of the performance of the Work, and the Contractor shall at its own expense rebuild, restore or replace such damaged or destroyed property to a condition at least equal to the condition of such property before such damage or destruction occurred. The Contractor shall use reasonable commercial efforts to provide, and to ensure that each Subcontractor provides, in accordance with Prudent Industry Practice, protection from damage or loss to the Facility, the Facility Site, and any and all related materials, construction equipment and tools during the course of performance of the Work hereunder. Where ingress and egress to and from the Facility Site require the traverse of public or private lands, the Contractor (a) shall be fully responsible for any and all damage to such other property resulting from any movement of its crews and equipment (and of all Subcontractors and each of their crews and equipment), (b) shall be fully responsible for, and exercise commercially reasonable efforts to avoid, marring such lands, and (c) shall in all material respects comply with all obligations of, and any restrictions imposed under, Applicable Law.

2.8    Availability of Documents to Owner Lessor. Upon Owner Lessor's request, the Contractor shall make available to the Owner Lessor following reasonable notice by the Owner Lessor to the Contractor and upon such other reasonable conditions as the Contractor may require and subject to any obligation of confidentiality owed to any third party (other than an Affiliate of the Contractor): (i) the Construction Documents and all Applicable Permits (to the extent required at such time in connection with the Work); (ii) to the extent in the possession of the Contractor, any requested Design Documents, safety manuals, operation and instruction manuals, quality plans, or any other such manuals or plans that have been prepared in connection with the Work; and (iii) financial records and books of account of the Contractor pertaining to the Facility and the Work maintained in accordance with generally accepted accounting principles.

2.9    Labor Relations. The Contractor shall be responsible for all labor relations matters with respect to the Contractor's and any Subcontractor's personnel relating to the Work and shall at all times use commercially reasonable efforts to maintain harmony among personnel employed in connection with the Work. The Contractor shall at all times exercise commercially reasonable efforts to avoid work stoppages, slowdowns, disputes and strikes.

2.10    Safety Precautions. The Contractor shall comply, and shall exercise commercially reasonable efforts to ensure that each Subcontractor complies, with the safety procedures and requirements set forth in the Construction Documents and the Contractor's standard safety procedures, including, but not limited to, the safety procedures set forth in the then-current applicable safety manual and procedures.

2.11    Further Assurances. The Contractor shall execute and deliver all further instruments and documents, and take all further action that, in each case, may be reasonably necessary to enable the Contractor

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to perform the Work and achieve Substantial Completion, or cause the Work to be performed and Substantial Completion achieved, or to otherwise effectuate the purposes or intent of this Agreement.

ARTICLE 3

STANDARD OF PERFORMANCE

3.1    Standard of Performance. With respect to the Contractor's performance of the Work, subject to the terms and conditions of this Agreement, the Contractor shall comply with, and shall cause the Work and the Facility and all Components thereof to comply with, Prudent Industry Practice, Applicable Law, all Applicable Permits, all applicable codes and standards, the requirements of all relevant insurance policies and the requirements of this Agreement, and shall use the degree of care, skill and diligence that would be expected to be exercised by a prudent, skilled and experienced contractor engaged in the same types of undertakings as the construction of the Facility under the same or similar circumstances and conditions as those applying to the design, development and construction of the Facility.

ARTICLE 4

OWNER'S INFORMATION; ACCESS TO THE FACILITY; INSPECTIONS

4.1    Owner Lessor's Information.

4.1.1    Commencing on the date of this Agreement and continuing until the date on which Substantial Completion is achieved, the Contractor shall provide to the Owner Lessor each monthly progress report received by the Contractor from Kiewit pursuant to the Kiewit Construction Contract with respect to the progress of the Work and the status of efforts made to achieve Substantial Completion. The Contractor shall not agree to any material change to the monthly progress reporting requirements under the Kiewit Construction Contract that would extend the time to furnish reports or reduce the amount of information to be provided without the consent and approval of the Owner Lessor. The Contractor shall provide such reports to the Owner Lessor promptly following receipt by the Contractor from Kiewit. To the extent that Kiewit fails to provide any such report when required under the Kiewit Construction Contract, the Contractor shall use reasonable commercial efforts to cause Kiewit to deliver such report as promptly as possible. At the Owner Lessor's request, the Contractor shall provide an opportunity during usual business hours for the Owner Lessor (and its authorized representatives), to meet with appropriate personnel of the Contractor to discuss and assess the contents of any such progress report. Following the date of Substantial Completion, the Contractor shall provide to the Owner Lessor any progress reports received by it from Kiewit promptly following receipt of any such reports.

4.1.2    In addition to the reports it is required to provide pursuant to Section 4.1.1, the Contractor shall also provide the Owner Lessor with prompt notice of any material incident, event or concern that may occur or arise during the course of the development, construction or commissioning of the Facility that could reasonably be expected to prevent the Contractor from achieving Substantial Completion by the Guaranteed Outside Completion Date, or, if Substantial Completion has not occurred by the Guaranteed Outside

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Completion Date, by the date most recently projected by the Contractor as the date on which Substantial Completion will occur (the “Expected Completion Date”).

4.2    Facility Site Access. The Contractor, pursuant to the reservation in favor of the Contractor (as Ground Lessor) in Section 4.3 of the Ground Lease, and as owner of the land adjacent to the Facility Site, shall be responsible for ensuring that the Contractor and the Subcontractors, and each of their agents and employees, have unlimited rights of ingress and egress to and from the Facility Site in connection with the performance of the Work.

4.3    Inspection by Contractor. The Contractor shall perform all inspection, expediting, quality surveillance and traffic services that are required for performance of the Work on a timely basis. The Contractor shall perform a detailed inspection of all Work in progress at intervals appropriate to the stage of construction of the Facility Site, as is necessary to ensure that such Work is proceeding in accordance with this Agreement and the Construction Documents and to protect the Owner Lessor against defects and deficiencies in such Work. Contractor's responsibilities under this Section 4.3 shall include inspection of all materials and equipment both on and off the Facility Site that comprise or will comprise the Facility or that are to be used in connection with the performance of the Work hereunder. The Contractor shall notify the Owner Lessor of any significant deficiencies revealed through such inspections which could reasonably be expected to delay the achievement of Substantial Completion beyond the Guaranteed Outside Completion Date, or, if applicable, the Expected Completion Date, and of the measures proposed by the Contractor to remedy such deficiencies.

4.4    Inspection by Owner Lessor. The Owner Lessor (and its authorized representatives) shall have the right to inspect the Work and the Facility Site, and to monitor any material performance tests of the Facility, subject to any conditions on any inspection or monitoring the Contractor or any Subcontractor reasonably determines is necessary or appropriate for safety or security reasons. The Contractor shall use reasonable commercial efforts to provide the Owner Lessor (and its authorized representatives) with advance notice of the scheduled date, time, location and purpose of any material performance tests, if practicable, but failure to do so shall not constitute a default giving rise to any remedies as a result thereof and the Contractor shall have no obligation to provide such Person notice of any acceleration, delay or rescheduling of any such material performance test. All such inspections shall be conducted in a manner that does not unreasonably interfere with the progress of the Work. No inspection performed, witnessed, or failed to be performed or witnessed by the Owner Lessor (or any of its authorized representatives), or any recommendation or lack of recommendation from the Owner Lessor (or any of its authorized representatives) in connection therewith, shall constitute a waiver of any of Contractor's obligations hereunder. The Contractor shall have no obligation to reimburse the Owner Lessor or its Affiliates (or any authorized representative of the Owner Lessor or its Affiliates) in connection with the exercise of any of their rights under this Section 4.4 unless a Lease Event of Default has occurred and is continuing.

ARTICLE 5

SUBSTANTIAL COMPLETION; FINAL COMPLETION

5.1    Substantial Completion. “Substantial Completion” shall be achieved if and only if with respect to the Facility:

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(a)    the Facility and all Work required to be performed under this Agreement on or prior to Substantial Completion have been completed in all material respects excepting Punch List items that do not materially and adversely affect the ability of the Facility to operate in accordance with Prudent Industry Practice;

(b)    the Facility has commenced commercial operations in combined cycle mode with an aggregate net output the Contractor determines to be commercially reasonable for an electric generation facility with the structure and components of the Facility, in light of, and taking into account, the Construction Documents and the results of any performance tests conducted thereunder;

(c)    interconnection and synchronization of the Facility with the electrical grid has been achieved;

(d)    the Contractor has obtained all Applicable Permits for the operation of the Facility by the Contractor under the Facility Lease;

(e)    the Facility is performing in accordance with all Applicable Permits (including air permit emissions limitations);

(f)    the Contractor has developed the Punch List; and

(g)    the Contractor has received from each Subcontractor all documentation deemed necessary by the Contractor for the safe and reliable operation of the Facility and such documentation is in all respects satisfactory to the Contractor (in its sole discretion).

5.2    Achievement of Substantial Completion. No later than five (5) Business Days after the date on which the Contractor determines, in its reasonable discretion, that Substantial Completion has been achieved, the Contractor shall deliver to the Owner Lessor an executed Substantial Completion Certificate, a form of which is attached hereto as Exhibit B (the “Substantial Completion Certificate”). For purposes of this Agreement, the date of achievement of Substantial Completion shall be the date on which the Contractor delivers to the Owner Lessor the Substantial Completion Certificate.

5.3    Final Completion. Following the achievement of Substantial Completion, Contractor shall use its commercially reasonable efforts to ensure that the Facility achieves Final Completion in a timely manner. “Final Completion” shall be achieved hereunder if and only if, with respect to the Facility:

(a)    Substantial Completion has been achieved;

(b)    All items on the Punch List have been completed to the Contractor's satisfaction;

(c)    The Contractor has (i) prepared final drawings, specifications and other documentation that represents the physical placement of all Facility components and systems as installed or constructed at completion or (ii) obtained any such documents that have been prepared on behalf of the Contractor;

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(d)    The Contractor has received all quality assurance documentation with respect to commissioning and testing of the Facility, to the extent deemed necessary by the Contractor for the safe and reliable operation of the Facility; and

(e)    The Contractor has delivered to the Owner Lessor any customary releases of mechanic's liens received by the Contractor from each applicable Subcontractor.

5.4    Achievement of Final Completion. No later than five (5) Business Days after the date on which the Contractor determines, in its reasonable discretion, that it has achieved Final Completion, the Contractor shall deliver to the Owner Lessor an executed Final Completion Certificate, substantially in the form attached hereto as Exhibit C (the “Final Completion Certificate”). For purposes of this Agreement, the date of achievement of Final Completion shall be the date on which the Contractor delivers to the Owner Lessor the Final Completion Certificate.

5.5    Acceptance by Owner Lessor Not a Release of Contractor. No issuance of any Substantial Completion Certificate or Final Completion Certificate shall constitute a waiver or relinquishment by the Owner Lessor of any of its rights under this Agreement, nor exonerate or relieve the Contractor from any obligation, warranty or liability under this Agreement, except to the extent expressly provided herein.

ARTICLE 6

PRICE AND PAYMENT

6.1    CMA Payment. As full consideration to the Contractor for the timely, full and complete

performance of the Work and all costs incurred in connection therewith, the Owner Lessor shall pay, and Contractor shall accept, the sum of $188,044,698 (the “CMA Payment”), to be paid in full in immediately available funds on the Closing Date. The parties acknowledge and agree that the CMA Payment shall not be subject to adjustment for any reason, including for (i) any Facility construction costs or schedule overruns or savings, which shall in any and all cases remain the responsibility of, or accrue to the benefit of, the Contractor, as applicable, or (ii) consequences of any Uncontrollable Forces or change in Applicable Law.

ARTICLE 7

SUBCONTRACTS

7.1    Subcontractors. The Contractor may subcontract the Work, in whole or in part, to any Person without further approval by the Owner Lessor, and the Owner Lessor acknowledges that the Contractor has, prior to the date of this Agreement, engaged Subcontractors to perform the Work. Notwithstanding any agreement with any Subcontractor, the Contractor shall be solely responsible for the Work and shall not be entitled to relief if any portion of the Work is incomplete or delayed due to any disagreement between or among Subcontractors or between any Subcontractor and the Contractor.

7.2    Payments to Subcontractors. The Contractor shall be solely responsible for paying each Subcontractor and any other Person to whom any amount is due from the Contractor in connection with the performance of the Work, and shall fully indemnify, save harmless and defend the Owner Lessor, the Trust Company, the Lessor Manager, the Lease Indenture Trustee

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and Wilmington Trust, and their respective Affiliates, successors, assigns, agents, directors, officers or employees (the “Owner Lessor Indemnified Parties”), from and against any and all Claims of any Subcontractor imposed on or asserted against any Owner Lessor Indemnified Party for any amount due from the Contractor in connection with the performance of the Work. The foregoing indemnity is in addition to the Contractor's indemnity obligations set forth in Section 12.1 and the Operative Documents, and is for the exclusive benefit of the Owner Lessor Indemnified Parties and in no event shall inure to the benefit of any other Person or diminish or otherwise relieve the Contractor from its indemnity obligations set forth in Section 12.1 or the Operative Documents.

7.3     No Privity; No Assignment. The Owner Lessor shall not be deemed by virtue of this Agreement to have any contractual obligation to or relationship with any Subcontractor. The parties acknowledge and agree that (i) none of the Construction Documents have been or are being assigned to the Owner Lessor pursuant to this Agreement or any other Transaction Document, and (ii) as between the Contractor and the Owner Lessor, the Contractor shall have the right, in its sole discretion, to amend, modify or terminate, or waive any requirement under, any Construction Document; provided that no such amendment, modification, termination or waiver shall materially adversely affect the ability of the Contractor to comply with its obligations under this Agreement.

ARTICLE 8

REPRESENTATIONS AND WARRANTIES

8.1    Representations and Warranties of Contractor. The Contractor represents and warrants to the Owner Lessor that:

8.1.1     Legal Status. The Contractor is an instrumentality and agency of the Government duly created and validly existing under the provisions of the TVA Act and has full power and authority to enter into and perform its obligations under this Agreement.

8.1.2    Due Authorization; Enforceability; Etc. This Agreement has been duly authorized, executed and delivered by all necessary corporate action by the Contractor, and, assuming the due authorization, execution and delivery by the Owner Lessor, this Agreement constitutes the legal, valid and binding obligations of the Contractor, enforceable against it in accordance with its terms, except as the same may be limited by fraudulent transfer, moratorium or other laws of general applicability relating to or affecting the rights of creditors and by general principles of equity.

8.1.3    Non-Contravention. The execution, delivery and performance by the Contractor of this Agreement, the consummation by the Contractor of the transaction contemplated hereby, and compliance by the Contractor with the terms and provisions hereof, do not and will not (i) contravene the TVA Act or any other Applicable Law binding the Contractor or its property, or (ii) constitute a default by the Contractor under, or result in the creation of any Lien on the property of the Contractor (other than as contemplated by or permitted pursuant to any Transaction Document) under, or require any approval or consent of, or notice to, any holder of any indebtedness of the Contractor under the Bond Resolution, the Subordinated Resolution or any other similar bond resolution governing the issuance of

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indebtedness of TVA (whether senior or subordinated) or any other material contract, agreement or instrument to which the Contractor is a party or by which the Contractor or any of its property is bound.

8.1.4    Litigation. There is no pending or, to the Actual Knowledge of the Contractor, threatened, action, suit, investigation or proceeding against the Contractor before any Governmental Entity questioning the validity of this Agreement.

8.1.5    Patents, Licenses; Franchises. The Contractor owns or possesses all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to perform the Work without conflict with the rights of others, except where noncompliance will not have a Material Adverse Effect or involve a material risk of (i) foreclosure, sale, forfeiture or loss of, or imposition of a material Lien on, the Facility or the Facility Site, (ii) the impairment of its ability to perform the Work or other services hereunder or (iii) any criminal or material civil liability being incurred by the Lessor Owner, the Equity Investor, the Equity Note Purchasers, the Lessor Manager, the Equity Manager or the Lease Indenture Trustee.

8.1.6    Compliance with Laws. The Contractor is in compliance with Applicable Law relating to the construction of the Facility, except where noncompliance will not have a Material Adverse Effect or involve a material risk of (i) foreclosure, sale, forfeiture or loss of, or imposition of a material Lien on, the Facility or the Facility Site, (ii) the impairment of its ability to perform the Work or other services hereunder or (iii) any criminal or material civil liability being incurred by the Owner Lessor, the Equity Investor, the Equity Note Purchasers, the Lessor Manager, the Equity Manager, the Lease Indenture Trustee or the Noteholders.

8.2    Representations and Warranties of Owner Lessor. The Owner Lessor represents and warrants to Contractor that:

8.2.1    Due Organization. The Owner Lessor is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the power and authority to execute and deliver, and to perform its obligations under, this Agreement.

8.2.2    Due Authorization; Enforceability; Etc. This Agreement has been duly authorized, executed and delivered by the Owner Lessor, and assuming the due authorization, execution and delivery of this Agreement by the Contractor, this Agreement constitutes the legal, valid and binding obligation of the Owner Lessor, enforceable against the Owner Lessor in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, arrangement, moratorium or other laws relating to or affecting the rights of creditors generally and by general principles of equity.

8.2.3    Non-Contravention. The execution and delivery by the Owner Lessor of this Agreement, the consummation by the Owner Lessor of the transactions contemplated hereby and the compliance by the Owner Lessor with the terms and provisions hereof, do not and will not contravene any Applicable Law of the United States of America or the State of Delaware, or the Owner Lessor LLC Agreement or the Owner Lessor's other organizational documents or contravene the provisions of, or

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constitute a default by the Owner Lessor under, any indenture, mortgage or other material contract, agreement or instrument to which the Owner Lessor is a party or by which the Owner Lessor or its property is bound, or result in the creation of any Owner Lessor's Lien upon the Lessor Estate.

8.2.4    Litigation. There is no pending or, to the Actual Knowledge of the Owner Lessor, threatened action, suit, investigation or proceeding against the Owner Lessor before any Governmental Entity.

8.2.5    Compliance With Laws. The Owner Lessor has complied with Applicable Law such that the Owner Lessor is not subject to any fines, penalties, injunctive relief or criminal liabilities which in the aggregate have materially affected or are reasonably likely to have a Material Adverse Effect or impair the Owner Lessor's ability to perform its obligations hereunder.

ARTICLE 9

LIABILITY AND DAMAGES

9.1    CONSEQUENTIAL DAMAGES. NEITHER THE OWNER LESSOR NOR THE CONTRACTOR NOR ANY CONTRACTORS OR AGENTS OF EITHER PROVIDING EQUIPMENT, MATERIALS OR SERVICES FOR THE PERFORMANCE OF THE WORK SHALL BE LIABLE TO THE OTHER OR ANY OF ITS CONTRACTORS OR AGENTS FOR CONSEQUENTIAL LOSSES OR DAMAGES, INCLUDING LOSS OF USE OR LOSS OF PROFIT, AND THE OWNER LESSOR AND THE CONTRACTOR EACH HEREBY RELEASES THE OTHER AND ITS CONTRACTORS AND AGENTS FROM ANY SUCH LIABILITY. THE FOREGOING EXCLUSION SHALL NOT BE CONSTRUED TO LIMIT RECOVERY UNDER ANY INDEMNITY IN ARTICLE 12 IN RESPECT OF THIRD PARTY CLAIMS FOR DAMAGE TO OR DESTRUCTION OF PROPERTY OF, OR DEATH OF OR BODILY INJURY TO, ANY PERSON.

9.2    Further Limitation of Liability. The limitations of liability and the exclusions of consequential damages set forth in this Agreement (including this Article 9) shall apply irrespective of whether a party hereto or any Affiliate thereof, or any partner, shareholder, officer, director or employee of a party hereto or an Affiliate thereof, asserts a theory of liability in contract, tort, negligence, misrepresentation (including negligent misrepresentation), strict liability or any other theory of liability.

ARTICLE 10

WARRANTIES

10.1    General Warranty. The Contractor warrants to the Owner Lessor that throughout the period commencing with Substantial Completion and, if later, the installation of any property or the performance of any service constituting part of the Work, and ending one (1) day prior to the first anniversary of Substantial Completion or such later date: all Work furnished pursuant to this Agreement (a) shall comply with the requirements of this Agreement; (b) will be free from latent and patent defects in construction; and (c) will be suitable and adequate for its intended purpose as reasonably inferable from the terms of this Agreement. During such period, the Contractor shall, at its expense, re-perform, remove, repair,

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replace, and/or reinstall as necessary all Work, or portions thereof, which fail to comply with any or all of the aforementioned warranties.

10.2    EXCLUSIVE WARRANTIES. THERE ARE NO WARRANTIES OF THE CONTRACTOR TO THE OWNER LESSOR HEREUNDER, EXPRESS OR IMPLIED, OTHER THAN AS SET FORTH IN THIS ARTICLE 10. ALL IMPLIED WARRANTIES (INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) ARE HEREBY DISCLAIMED.

ARTICLE 11

UNCONTROLLABLE FORCES

11.1    Excused Performance. Notwithstanding any other provisions of this Agreement, any obligation of either party under this Agreement shall be excused (expect with respect to the Contractor's payment obligations hereunder) to the extent that such party's inability to perform is caused by Uncontrollable Forces. Each party hereto shall use reasonable efforts to cure, minimize, mitigate or remedy the effects of Uncontrollable Forces. In order to cure, minimize, mitigate or remedy the effects of Uncontrollable Forces, the Contractor may, among other things, suspend performance of the Work in accordance with Section 2.4. The rights or the performance by the Contractor of its obligations under this Agreement shall resume upon the cessation of the Uncontrollable Forces.

ARTICLE 12

INDEMNIFICATION

12.1    Claims Indemnified. The Contractor shall fully indemnify, save harmless and defend the Owner Lessor Indemnified Parties from and against any and all Claims imposed on, incurred or suffered by or asserted against any Owner Lessor Indemnified Party in any way relating to or resulting from or arising out of or attributable to (a) the Work (including the design, procurement, construction, installation, start-up or testing of the Facility), including Claims for any damage to or destruction of property of, or death of or bodily injury to, any Person (whether such Person is an Owner Lessor Indemnified Party, the Contractor or any Subcontractor, or is a Person unaffiliated with the Facility or the performance of the Work), or (b) Contractor's fault, breach of this Agreement, tortious act, negligence, or strict liability in the performance of the Contractor's obligations hereunder. The Contractor's indemnity under this Section 12.1 is for the exclusive benefit of the Owner Lessor Indemnified Parties and in no event shall inure to the benefit of any other Person, and is in addition to the obligations of the Contractor under any Operative Document (including Sections 9.1 and 9.2 of the Participation Agreement).

12.2    Survival of Agreement. This Article 12 shall survive the termination or expiration of this Agreement.

ARTICLE 13

INSURANCE

13.1    Insurance Obtained by Contractor. The Contractor shall, or shall cause its Subcontractors to, maintain in full force and effect, at the Contractor's or such Subcontractors' expense, as applicable, the

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insurance coverages required to be maintained under the Construction Documents.

ARTICLE 14

TERMINATION AND DEFAULT

14.1    Termination. Unless terminated by the mutual written agreement of the parties hereto, this Agreement shall terminate on the earlier of (a) the date of termination of the Facility Lease pursuant to the terms thereof, and (b) the date that is two (2) years following the date on which Final Completion is achieved.

14.2    Owner Lessor Remedies. Upon the occurrence of any default by the Contractor of its obligations hereunder, and at any time thereafter so long as the same shall be continuing, the Owner Lessor may, at its option, declare the Contractor to be in default by written notice to the Contractor; and at any time thereafter, so long as the Contractor shall not have remedied all outstanding defaults hereunder, the Owner Lessor may proceed by appropriate court action or actions, either at law or in equity, as its sole and exclusive remedy for any default hereunder, to specifically enforce performance by the Contractor of its obligations hereunder of the applicable covenants and terms of this Agreement or to recover damages for breach thereof, at the Contractor's sole cost and expense. For the avoidance of doubt, any remedies for a default by the Contractor of its obligations hereunder shall not include: (i) termination of this Agreement or any other Transaction Document, or (ii) removal of the Contractor from the performance of its obligations hereunder.

14.3    Surviving Obligations. Termination of this Agreement (a) shall not relieve either party hereto of its obligations with respect to the confidentiality of the other party's information as set forth in Article 15, (b) shall not relieve either party hereto of any obligation hereunder which expressly survives termination hereof, and (c) shall not relieve Contractor of its indemnification obligations under Article 12 hereof or warranty obligations under Section 10.1 hereof. This Section 14.3 shall survive the termination or expiration of this Agreement.

ARTICLE 15

CONFIDENTIAL INFORMATION

15.1    Confidentiality. Except as set forth in this Section 15.1, and, with respect to any Confidential Information contained in, or delivered in connection with, any Construction Documents, subject in all respects to the confidentiality provisions of the applicable Construction Documents, each of the parties hereto shall hold in confidence any Confidential Information for a period ending five (5)years after the earlier of (a) the achievement of Final Completion, or (b) termination of this Agreement; provided, however, that nothing in this Section 15.1 shall prevent any of the parties hereto from disclosing Confidential Information (i) to its, or to its Affiliate's, directors, officers, employees, agents and professional consultants or advisors, including legal counsel and independent auditors, (ii) in connection with any assignment of this Agreement, provided that any potential assignee is subject to confidentiality provisions substantially similar to those set forth herein, (iii) to any Person to whom such disclosure is reasonably required in connection with the exercise of any remedy hereunder or to protect the interests of the disclosing Person thereunder, (iv) to any Federal or state regulatory authority having jurisdiction over

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any disclosing Person, or any Affiliate of such Person, (v) to any other Person to whom disclosure is necessary (A) to comply with any law, rule, regulation or order applicable to the disclosing Person, (B) to comply with any subpoena or other legal or administrative process or informal investigative order applicable to the disclosing Person or (C) in connection with any litigation to which the disclosing Person or any Affiliate of such Person is a party or (vi) to the Equity Investor or to any Equity Note Purchaser; provided further that in the case of any disclosure made pursuant to clause (v) of this Section 15.1, (x) such disclosing Person shall have used its reasonable best efforts to give the other party hereto prior written notice of any disclosure to be made, unless such notice is prohibited by law or court order and (y) such disclosing Person shall not oppose the other party's seeking an appropriate protective order with respect to any Confidential Information to be so disclosed.

15.2    Public Statements. The Owner Lessor and its respective Affiliates, successors, assigns, agents, directors, officers or employees shall not make any press announcements or public statement about the Facility or any of the transactions contemplated herein, nor shall any such Person make any statement that could reasonably be expected to be used by any third party for such purposes without the prior written consent of the Contractor, such consent not to be unreasonably withheld, conditioned or delayed.

ARTICLE 16

DISPUTE RESOLUTION

16.1    Resolution of Disputes. In the event a dispute arises between the Owner Lessor and the Contractor regarding the application or interpretation of this Agreement, the Owner Lessor and the Contractor shall exercise commercially reasonable efforts to reach a reasonable and equitable resolution of the matter. If the Owner Lessor and the Contractor are unable to resolve the matter within thirty (30) days, either party hereto may refer the matter by written notice to the senior officers of the parties hereto. If the Owner Lessor and the Contractor cannot resolve the matter, the parties hereto shall exercise commercially reasonable efforts to agree upon an appropriate method of non-judicial dispute resolution, including mediation, mini-trial, or arbitration. In any event, neither party hereto shall seek judicial resolution of any dispute until thirty (30) days after the matter has been referred in writing to the senior officers of the parties hereto. In the event of a dispute each of the parties hereto shall, subject to any confidentiality obligations owed to any third party unrelated to any of the parties hereto, make available to the other such data and information as may reasonably be requested. The pendency of this dispute resolution mechanism shall not in and of itself relieve either party hereto of its duty to perform under this Agreement.

ARTICLE 17

TAX MATTERS

17.1    Tax Matters. The Owner Lessor shall reasonably cooperate with the Contractor at the Contractor's sole cost and expense to minimize the Contractor's obligation to pay Taxes (if any) in connection with the Work, including by cooperating with the preparation and overall coordination of the making of tax exemption applications and in preparation of tax agency inquiries and presentations to the extent exemptions in the Owner Lessor's name are available, provided that the Owner Lessor shall not be required to take any

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action or refrain from any action that would involve (a) a material risk of foreclosure, sale, forfeiture or loss of, or the imposition of any material Lien (other than a Permitted Lien) on the Owner Lessor's interest in the Facility Site, the Facility, the Ground Interest or any portion or Component thereof or any interest therein or (b) a risk of the imposition of criminal penalties as a result of such action.

ARTICLE 18

MISCELLANEOUS

18.1    Assignment. The Owner Lessor has assigned its right, title and interest in this Agreement to the Lease Indenture Trustee. The Contractor shall not have the right to assign all or part of its right, title, and interest in this Agreement, and shall not be released from its obligations under this Agreement, without the consent of the Owner Lessor, which consent shall not be unreasonably withheld, delayed or conditioned.

18.2    Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and assigns as permitted by and in accordance with the terms hereof. Except as expressly provided herein, no party hereto may assign its interests herein without the consent of the other parties hereto.

18.3    Collateral Assignment. The parties acknowledge that the Owner Lessor's rights in and to the Facility, the Facility Site and this Agreement have been assigned to, and are subject to the Lien of, the Lease Indenture Trustee as security for the performance of the Owner Lessor's obligations under the Lease Indenture. The Contractor hereby consents to such assignment and to the creation of such Lien and acknowledges receipt of copies of the Lease Indenture, it being understood that such consent shall not affect any requirement or the absence of any requirement for any consent of the Contractor under any other circumstances. Unless and until the Contractor shall have received written notice from the Lease Indenture Trustee that the Lien of the Lease Indenture has been fully terminated, the Lease Indenture Trustee shall have the right to exercise the rights of the Owner Lessor under this Agreement to the extent set forth in and subject in each case to the exceptions set forth in the Lease Indenture. Notwithstanding anything to the contrary contained herein, the rights of the Lease Indenture Trustee, as the assignee of the Owner Lessor's interests, in and to the Facility, the Facility Site or this Agreement shall be subject in all respects to the appointment made under Section 4.1(b) of the Facility Lease, as described below.

18.4    Contractor as Owner Lessor's Agent. The parties acknowledge that, pursuant to Section 4.1(b) of the Facility Lease, the Owner Lessor has irrevocably appointed and constituted the Contractor its agent and attorney-in-fact, coupled with an interest, to assert and enforce, from time to time and so long as the Owner Lessor (or the Lease Indenture Trustee) has not exercised remedies pursuant to Section 18.2 of the Facility Lease, in the name and for the account of the Owner Lessor and the Contractor, as their interests may appear, but in all cases at the sole cost and expense of the Contractor, whatever claims and rights the Owner Lessor may have in respect of the Facility or any Component thereof, against any manufacturer, vendor or contractor, or under any express or implied warranties relating to the Facility or any Component thereof (including any such claim or right that the Owner Lessor may have against the

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Contractor under this Agreement); provided, however, that such appointment may be revoked in accordance with Section 4.1(b) of the Facility Lease.

18.5    Waivers. No failure to exercise, and no delay in exercising, any right, power or remedy under this Agreement shall impair any right, power or remedy which any party hereto may have, nor shall such failure or delay be construed to be a waiver of any such rights, powers or remedies, or an acquiescence in any breach or default under this Agreement, nor shall any waiver of any breach or default be deemed a waiver of any default or breach subsequently occurring under this Agreement.

18.6    CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES OTHER THAN AS PROVIDED IN SECTION 5-1401 OF THE NY GENERAL OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT U.S. FEDERAL LAW SHALL APPLY.

18.7    Severability. If any provision in this Agreement shall be invalid, illegal or unenforceable under Applicable Law of any jurisdiction, the validity, legality and enforceability thereof in any other jurisdiction, and of the remaining provisions hereof in any jurisdiction, shall not be affected or impaired thereby.

18.8    Notice. Unless otherwise expressly specified or permitted by this Agreement, all communications and notices provided for herein shall be in writing or by a telecommunications or electronic device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including by overnight mail or courier service, (b) in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in the case of notice by such a telecommunications or electronic device, upon transmission thereof, provided such transmission is promptly confirmed by either of the methods set forth in clauses (a) or (b) above, in each case addressed to the applicable party hereto at its address set forth below, or at such other address as such party may from time to time designate by written notice to the other party hereto:

If to the Owner Lessor:

John Sevier Combined Cycle Generation LLC

c/o Wells Fargo Delaware Trust Company

Corporate Trust Services

919 Market Street, Suite 1600

Wilmington, DE 19801

Telephone No.: (302) 575-2015

Facsimile No.: (302) 575-2006

E-mail: scott.a.huff@wellsfargo.com

Attention: Corporate Trust Administration

If to the Contractor:

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Tennessee Valley Authority

400 West Summit Hill Drive

Knoxville, Tennessee 37902

Telephone No.: (865) 632-3366

Facsimile No.: (865) 632-6597

E-mail: leasenotices@tva.gov

Attention: Treasurer

18.9    Headings and Table of Contents. The headings of the Articles and Sections of this Agreement and the Table of Contents are inserted for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof.

18.10    Entire Agreement. This Agreement contains the entire agreement between the Owner Lessor and the Contractor with respect to the Work and the subject matter hereof, and supersedes any and all prior and contemporaneous written and oral agreements, proposals, negotiations, specifications, understandings and representations pertaining to the Work.

18.11    Amendments. No amendments or modifications hereof shall be valid unless evidenced by a written agreement executed by both parties hereto.

18.12    No Third Party Rights. This Agreement and all rights hereunder are intended for the sole benefit of the Owner Lessor (and permitted successors and assigns thereof), the Contractor and the Owner Lessor Indemnified Parties (to the extent provided in Article 12), and shall not imply or create any rights on the part of, or obligations to, any other Person or any other rights on the part of, or other obligations to, any Owner Lessor Indemnified Party beyond the rights and obligations expressly set forth in such provision.

18.13    Limited Recourse. The Owner Lessor and the Contractor acknowledge that the Owner Lessor has entered into this Agreement entirely on its own behalf, and in no manner on behalf of any parent, subsidiary or affiliate company of the Owner Lessor or any equity holder in or joint venturers of the Owner Lessor or any affiliates of any of them, and that the Contractor shall have no recourse against any parent, subsidiary or affiliate company of the Owner Lessor or any equity holder in or joint venturers of the Owner Lessor or any parent, subsidiary or affiliate company thereof (other than the Owner Lessor), or any partners, shareholders or other equity owners, joint venturers, officers, directors, successors or assigns of any such Person for any reason.

18.14    Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a)  this Agreement is executed and delivered by the Trust Company, not individually or personally but solely as manager of the Owner Lessor under the Owner Lessor LLC Agreement, in the exercise of the powers and authority conferred and vested in it pursuant thereto, (b) each of the representations, undertakings and agreements herein made on the part of the Owner Lessor is made and intended not as personal representations, undertakings and agreements by the Trust Company, but is made and intended for the purpose for binding only the Owner Lessor, (c) nothing herein contained shall be construed as creating any liability on the Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto or by

-18

any Person claiming by, through or under the parties hereto and (d) under no circumstances shall the Trust Company, be personally liable for the payment of any indebtedness or expenses of the Owner Lessor or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Owner Lessor under this Agreement.

[Signature page follows.]

-19

IN WITNESS WHEREOF, the Owner Lessor and the Contractor, intending to be legally bound, have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized on the dates below their respective signatures, but effective as of the date first set forth above.

JOHN SEVIER COMBINED CYCLE GENERATION LLC

By: Wells Fargo Delaware Trust Company, National Association, not in its individual capacity, but solely as Lessor Manager under the Owner Lessor LLC Agreement

By:  /s/ Scott A. Huff

Name: Scott A. Huff

Title: Vice President

Date: January 17, 2012

TENNESSEE VALLEY AUTHORITY

By:  /s/ John M. Hoskins

Name: John M. Hoskins

Title: Senior Vice President and Treasurer

Date: January 17, 2012

(Construction Management Agreement)

EXHIBIT A

to

Construction

Management Agreement

Description of Facility

The Facility consists of the Units, Common Facilities, and any other equipment, material or property, other than real property, associated with the Units and Common Facilities (but not associated with the Global Common Facilities), all of which are located on, under, or over the Facility Site, which Facility Site is the real property located in Hawkins County, Tennessee and is described in greater detail in Exhibit 1 to the Ground Lease.

The Facility will have a three over one combined cycle configuation consisting of three (3) Units and one (1) Toshiba nominally rated 400 megawatt steam turbine generator (the “STG”). Each Unit consists of a General Electric 7FA.04 combustion turbine generator (“CTG”), the related Nooter/Eriksen heat recovery steam generator (“HRSG”) with supplementary duct firing and any ancillary equipment related thereto, except for any Component exclusively constituting Common Facilities.

The Facility will be capable of operating in both simple cycle operation and combined cycle operation. The CTG's primary fuel supply will be natural gas and its secondary fuel supply will be No. 2. Fuel oil. The HRSG's supplemental duct firing will utilize natural gas only.

The CTGs are sometimes referred to as CT1, CT2 and CT3. The serial numbers for each CTG-HRSG pair are as follows:

TVA Tag Number	CTG Serial Number	HRSG Serial Number
Unit 1	298973	083200-1
Unit 2	298974	083200-2
Unit 3	298975	083200-3

The Components for each Unit includes the following:

Mark VIe Gas Turbine Control System

Inlet Filter System

Exhaust System

Exhaust Diverter Damper

Guillotine Isolation Damper to HRSG

Evaporative Cooling System

Cooling Water Module

Water Injection Skid

EXH. A-1

Fuel Gas Filter/Separator

CO2 Fire Protection System

Control Cab/(PEECC)

LCI Starting System/Transformer

EX2100 Generator Excitation System

Generator Auxiliary Compartment

Main Step-up Transformer

Fuel Oil Heating System

Fuel Oil Forwarding System

Fuel Gas Module

Lube Oil Mist Eliminator

Atomizing Air/HP Fuel Oil Pump Skid

Emissions Monitoring Systems on CT exhaust, SCR inlet and HRSG exhaust

Feed Water System

Steam System

CO Catalyst

SCR Catalyst

Duct Burners

The Common Facilities are equipment and facilities that are used for the operation of the Units at the Facility, but are not Global Common Facilities. These shared facilities support the Units. The Common Facilities are as follows:

Steam Turbine Generator

Condensate System

Circulating Water System

Closed Cooling Water System

Fuel Oil Storage System

Compressed Air System

Chemical Feed System

Steam Water Sampling System

Nitrogen, Hydrogen, & CO₂ Gas Systems

Fuel Gas Dew Point Heating System

Fuel Gas Pressure Regulation System

Plant Water Supply System

Auxiliary Steam System

Ammonia Supply System

Oil-Water Separation and Discharge System

Fire Loop System

Potable Water System

Eye Wash System

Storm Water Drains

Process Water

Compressor Wash System

EXH. A-2

EXHIBIT B

to

Construction

Management Agreement

Form of

Substantial Completion Certificate

__________, 20__

SUBSTANTIAL COMPLETION CERTIFICATE

JOHN SEVIER COMBINED CYCLE FACILITY

Reference is made to the Construction Management Agreement, dated as of January 17, 2012 (the “Agreement”), by and between John Sevier Combined Cycle Generation LLC, a Delaware limited liability company (“Owner Lessor”), and Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States (“Contractor”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement.

Pursuant to Sections 5.1 and 5.2 of the Agreement, Contractor hereby certifies that Substantial Completion of the Facility occurred on __________, 20__.

IN WITNESS WHEREOF, the Contractor has caused this Substantial Completion Certificate to be executed and delivered by its duly authorized representative as of the date first set forth above.

TENNESSEE VALLEY AUTHORITY

By: ___________________________________________

Name:

Title:

EXH. B-1

EXHIBIT C

to

Construction

Management Agreement

Form of

Final Completion Certificate

__________, 20__

FINAL COMPLETION CERTIFICATE

JOHN SEVIER COMBINED CYCLE FACILITY

Reference is made to the Construction Management Agreement, dated as of January 17, 2012 (the “Agreement”), by and between John Sevier Combined Cycle Generation LLC, a Delaware limited liability company (“Owner Lessor”), and Tennessee Valley Authority, a wholly owned corporate agency and instrumentality of the United States (“Contractor”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement.

Pursuant to Sections 5.3 and 5.4 of the Agreement, Contractor hereby certifies that Final Completion of the Facility occurred on __________, 20__.

IN WITNESS WHEREOF, the Contractor has caused this Final Completion Certificate to be executed and delivered by its duly authorized representative as of the date first set forth above.

TENNESSEE VALLEY AUTHORITY

By: ___________________________________________

Name:

Title:

EXH. C-1

EX-31.1

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Tom Kilgore, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the Tennessee Valley Authority;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 2, 2012	/s/ Tom Kilgore
		Tom Kilgore
		President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, John M. Thomas, III, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of the Tennessee Valley Authority;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	February 2, 2012	/s/ John M. Thomas, III
		John M. Thomas, III
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION FURNISHED PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(b)

 OR RULE 15d-14(b) AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Tennessee Valley Authority (the “Company”) for the quarter ended December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tom Kilgore, President and Chief Executive Officer of the Company, certify, for the purposes of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tom Kilgore                                       

Tom Kilgore

President and Chief Executive Officer

February 2, 2012

EX-32.2

EXHIBIT 32.2

CERTIFICATION FURNISHED PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(b)

 OR RULE 15d-14(b) AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of the Tennessee Valley Authority (the “Company”) for the quarter ended December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Thomas, III, Chief Financial Officer of the Company, certify, for the purposes of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John M. Thomas, III                                      

John M. Thomas, III

Chief Financial Officer

February 2, 2012

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Inventories, Net

3 Months Ended

Dec. 31, 2011

Inventory Disclosure [Abstract]

Inventories, Net

Inventories, Net

The table below summarizes the types and amounts of TVA’s inventories:

Inventories, Net
	At December 31, 2011			At September 30, 2011
Fuel inventory	$	614		$	489
Materials and supplies inventory	581			555
Emission allowance inventory	11			11
Allowance for inventory obsolescence	(29		)	(27		)
Inventories, net	$	1,177		$	1,028

XML

Accounts Receivable, Net

3 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Accounts Receivable, Net

Accounts Receivable, Net

Accounts receivable primarily consist of amounts due from customers for power sales.  The table below summarizes the types and amounts of TVA’s accounts receivable:

Accounts Receivable, Net
	At December 31, 2011			At September 30, 2011
Power receivables
Billed	$	1,309		$	1,625
Unbilled	16			13
Total power receivables	1,325			1,638
Other receivables	87			102
Allowance for uncollectible accounts	(1		)	(1		)
Accounts receivable, net	$	1,411		$	1,739

XML

STATEMENTS OF OPERATIONS (UNAUDITED) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Operating revenues
Sales of electricity	$ 2,540	$ 2,800
Other revenue	28	28
Total operating revenues	2,568	2,828
Operating expenses
Fuel	640	738
Purchased power	319	360
Operating and maintenance	880	883
Depreciation and amortization	441	432
Tax equivalents	151	145
Total operating expenses	2,431	2,558
Operating income	137	270
Other income (expense), net	9	11
Interest expense
Interest expense	358	358
Allowance for funds used during construction and nuclear fuel expenditures	(39)	(29)
Net interest expense	319	329
Net income (loss)	$ (173)	$ (48)

XML

Summary of Significant Accounting Policies

3 Months Ended

Dec. 31, 2011

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

General

In response to a request by President Franklin D. Roosevelt, the U.S. Congress in 1933 enacted legislation creating the Tennessee Valley Authority (“TVA”), a corporate agency and instrumentality of the United States.  TVA was initially created to, among other things, improve navigation on the Tennessee River, reduce the damage from destructive flood waters within the Tennessee River system and downstream on the lower Ohio and Mississippi Rivers, further the economic development of TVA's service area in the southeastern United States, and sell the electricity generated at the facilities TVA operates.

Today, TVA operates the nation's largest public power system and supplies power in most of Tennessee, northern Alabama, northeastern Mississippi, and southwestern Kentucky and in portions of northern Georgia, western North Carolina, and southwestern Virginia to a population of over nine million people.

TVA also manages the Tennessee River, its tributaries, and certain shorelines to provide, among other things, year-round navigation, flood damage reduction, and affordable and reliable electricity.  Consistent with these primary purposes, TVA also manages the river system to provide recreational opportunities, adequate water supply, improved water quality, natural resource protection, and economic development.

The power program has historically been separate and distinct from the stewardship programs.  It is required to be self-supporting from power revenues and proceeds from power financings, such as proceeds from the issuance of bonds, notes, and other evidences of indebtedness (“Bonds”).  Although TVA does not currently receive congressional appropriations, it is required to make annual payments to the U.S. Treasury in repayment of, and as a return on, the government's appropriation investment in TVA's power facilities (the "Power Program Appropriation Investment").  In the 1998 Energy and Water Development Appropriations Act, Congress directed TVA to fund essential stewardship activities related to its management of the Tennessee River system and nonpower or stewardship properties with power revenues in the event that there were insufficient appropriations or other available funds to pay for such activities in any fiscal year.  Congress has not provided any appropriations to TVA to fund such activities since 1999.  Consequently, during 2000, TVA began paying for essential stewardship activities primarily with power revenues, with the remainder funded with user fees and other forms of revenues derived in connection with those activities.  The activities related to stewardship properties do not meet the criteria of an operating segment under accounting principles generally accepted in the United States of America ("GAAP").  Accordingly, these assets and properties are included as part of the power program, TVA's only operating segment.

Power rates are established by the TVA Board of Directors (“TVA Board”) as authorized by the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. §§ 831-831ee (as amended, the “TVA Act”).  The TVA Act requires TVA to charge rates for power that will produce gross revenues sufficient to provide funds for operation, maintenance, and administration of its power system; payments to states and counties in lieu of taxes ("tax equivalents”); debt service on outstanding indebtedness; payments to the U.S. Treasury in repayment of and as a return on the Power Program Appropriation Investment; and such additional margin as the TVA Board may consider desirable for investment in power system assets, retirement of outstanding Bonds in advance of maturity, additional reduction of the Power Program Appropriation Investment, and other purposes connected with TVA's power business.  In setting TVA's rates, the TVA Board is charged by the TVA Act to have due regard for the primary objectives of the TVA Act, including the objective that power shall be sold at rates as low as are feasible.  Rates set by the TVA Board are not subject to review or approval by any state or federal regulatory body.

Fiscal Year

TVA's fiscal year ends September 30.  Years (2012, 2011, etc.) refer to TVA's fiscal years unless they are proceeded by “CY,” in which case the references are to calendar years.

Cost-Based Regulation

Since the TVA Board is authorized by the TVA Act to set rates for power sold to its customers, TVA is “self regulated.”  Additionally, TVA's regulated rates are designed to recover its costs of providing electricity.  In view of demand for electricity and the level of competition, TVA assumes that rates, set at levels that will recover TVA's costs, can be charged and collected.  As a result of these factors, TVA records certain assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred, because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  TVA assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory changes, potential legislation, and changes in technology.  Based on these assessments, TVA believes the existing regulatory assets are probable of recovery.  This determination reflects the current regulatory and political environment and is subject to change in the future.  If future recovery of regulatory assets ceases to be probable, or any of the other factors described above cease to be applicable, TVA would no longer be considered to be a regulated entity and would be required to write off these costs.  Most regulatory asset write-offs would be required to be recognized in earnings in the period in which future recovery ceases to be probable.

Basis of Presentation

TVA prepares its interim financial statements in conformity with GAAP for interim financial information. Accordingly, TVA's interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. As such, they should be read in conjunction with the audited financial statements for the year ended September 30, 2011, and the notes thereto, which are contained in TVA's Annual Report on Form 10-K for the year ended September 30, 2011 (the “Annual Report”). In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for fair presentation are included.

Use of Estimates

The preparation of financial statements requires TVA to estimate the effects of various matters that are inherently uncertain as of the date of the financial statements.  Although the financial statements are prepared in conformity with GAAP, TVA is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses reported during the reporting period.  Each of these estimates varies in regard to the level of judgment involved and its potential impact on TVA's financial results.  Estimates are deemed critical either when a different estimate could have reasonably been used, or where changes in the estimate are reasonably likely to occur from period to period, and such use or change would materially impact TVA's financial conditions, results of operations, or cash flows.

Reclassifications

                Certain reclassifications have been made to the 2011 financial statement to conform to the 2012 presentation.  In the Cash flows from operating activities section of the Statements of Cash Flows, $17 million previously reported as changes in Accounts payable and accrued liabilities for the three months ended December 31, 2010, was reclassified as Fuel cost tax equivalents.

                Sales of electricity for the three months ended December 31, 2010 previously reported in the Statement of Operations as Sales of electricity to Municipalities and cooperatives of $2,386 million,  Industries directly served of $382 million, and Federal agencies and other of $32 million have been combined and reported as Sales of electricity of $2,800 million.

Operating expense of $1,098 million for the three months ended December 31, 2010, previously reported as Fuel and purchased power expense on the Statement of Operations, have been reclassified as Fuel expense of $738 million and Purchased power expense of $360 million.

        Interest on debt and leaseback obligations and Amortization of debt discount, issue, and reacquisition costs, net have been combined for the three months ended December 31, 2010, and are shown as Interest expense in the Statements of Operations.  Interest expense for the three months ended December 31, 2010, was $353 million and Amortization of debt discount, issue, and reacquisition costs, net was $5 million.

Allowance for Uncollectible Accounts

The allowance for uncollectible accounts reflects TVA's estimate of probable losses inherent in its accounts and loans receivable balances.  TVA determines the allowance based on known accounts, historical experience, and other currently available information including events such as customer bankruptcy and/or a customer failing to fulfill payment arrangements after 90 days.  It also reflects TVA's corporate credit department's assessment of the financial condition of customers and the credit quality of the receivables.

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Subsequent Events

3 Months Ended

Dec. 31, 2011

Subsequent Events [Abstract]

Subsequent Events

Subsequent Events

Bond Redemption

On January 15, 2012, TVA redeemed all of its 2008 4.75 percent electronotes ® due January 15, 2028, CUSIP number 88059TEE7.  The notes were redeemed at 100 percent of par value for a total of $39 million. 

John Sevier Combined Cycle Transaction

On January 17, 2012, TVA entered into a $1.0 billion leasing transaction with John Sevier Combined Cycle Generation LLC (“JSCCG”), a newly formed entity. In connection with this transaction, TVA and the United States of America agreed to lease the John Sevier Combined Cycle Facility (“John Sevier CCF”) located in Hawkins County, Tennessee, to JSCCG for a term of fifty years (the “Head Lease”). TVA also entered into a construction management agreement (“CMA”) with JSCCG under which TVA is obligated to use commercially reasonable efforts to cause the John Sevier CCF to achieve substantial completion by January 14, 2013, or as soon thereafter as commercially practicable. On January 17, 2012, JSCCG raised $1.0 billion through a secured note issuance and an equity investment and, in accordance with the terms of the Head Lease and CMA, paid approximately $970 million to TVA on January 17, 2012. In addition, JSCCG deposited approximately $30 million with a lease indenture trustee to fund JSCCG's first debt service payment and payment of return on equity investment from January 17, 2012 through the first debt service payment date. TVA intends to use the proceeds from the transaction for the benefit of its power program. TVA continues to expect the John Sevier CCF to commence commercial operations by June 2012.

Also on January 17, 2012, TVA and JSCCG entered into an agreement under which TVA will lease the John Sevier CCF from JSCCG (the “Facility Lease”) through January 15, 2042. In accordance with the Facility Lease, TVA will make rental payments to JSCCG on each January 15 and July 15, commencing on July 15, 2012 and ending on January 15, 2042. The rental payments are equal to JSCCG's semi-annual debt service payments and payments of return on equity and return of equity to the equity investor and range from approximately $30 million to approximately $44 million. Throughout the term of the Facility Lease, TVA will operate and maintain (and improve to the extent required by applicable law) John Sevier CCF and will take all power generated by the facility. As long as all payments are made as prescribed by the Facility Lease and there is no significant lease event of default with respect to which JSCCG has exercised dispossessory remedies, the Head Lease will expire on January 17, 2042 and TVA will own John Sevier CCF at no additional cost to TVA. Certain agreements related to this transaction contain default and acceleration provisions.

JSCCG is a special single purpose limited liability company formed to finance the John Sevier CCF through a $900 million secured note issuance and a $100 million equity investment, both of which are secured by TVA's rental payments. The secured notes bear interest at a rate of 4.626 percent and mature on January 15, 2042. Due to its participation in the design, business conduct and financial support of JSCCG, TVA is deemed to have a variable interest in JSCCG. Accordingly,TVA has made a qualitative evaluation of which interest holders have the power to direct the activities that most significantly impact the economic performance of JSCCG and have the obligation to absorb losses or receive benefits that could be significant to JSCCG. Based on its analysis, TVA has determined for accounting purposes that it is the primary beneficiary of JSCCG and, as such, is required to account for the variable interest entity on a consolidated basis.

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Impact of New Accounting Standards and Interpretations

3 Months Ended

Dec. 31, 2011

Accounting Changes and Error Corrections [Abstract]

Impact of New Accounting Standards and Interpretations

Impact of New Accounting Standards and Interpretations

There were no accounting standards and interpretations that became effective for TVA during the quarter ended December 31, 2011 that, if adopted, would have materially affected  its financial condition, results of operations, or cash flows.

            The following accounting standards have been issued, but as of December 31, 2011, were not effective and had not been adopted by TVA.

Fair Value Measurement.  In May 2011, the Financial Accounting Standards Board ("FASB") issued amendments to achieve common fair value measurement and disclosure requirements to create consistency between GAAP and International Financial Reporting Standards ("IFRS”).  TVA does not expect the adoption of this guidance will materially affect its financial condition, results of operations, or cash flows.  These changes became effective for TVA on January 1, 2012.

Comprehensive Income.  In June 2011, the FASB issued guidance that will require adjustments to the presentation of TVA's financial information.  The guidance eliminates the current option to report comprehensive income and its components in the statement of changes in proprietary capital. The guidance allows for presentation of net income and other comprehensive income in one continuous statement or in two separated, but consecutive statements. These changes become effective for TVA on October 1, 2012. 

Balance Sheet. In December 2011, the FASB issued guidance that requires disclosure about balances presented on a net basis in the financial statements, derivative assets and derivative liabilities, repurchase agreements, and financial assets and

financial liabilities executed under a master netting or similar arrangement. These changes become effective for TVA on October 1, 2013.  TVA is currently evaluating the potential impact of these changes on its financial statements and related disclosures.

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BALANCE SHEETS (UNAUDITED) (USD $) In Millions, unless otherwise specified	Dec. 31, 2011	Sep. 30, 2011
Current assets
Cash and cash equivalents	$ 213	$ 507
Restricted cash and investments	11	11
Accounts receivable, net	1,411	1,739
Inventories, net	1,177	1,028
Regulatory assets	769	543
Other current assets	167	215
Total current assets	3,748	4,043
Property, plant, and equipment
Completed plant	44,498	44,187
Less accumulated depreciation	(20,963)	(20,643)
Net completed plant	23,535	23,544
Construction in progress	4,773	4,662
Nuclear fuel	1,193	1,073
Capital leases	31	26
Total property, plant, and equipment, net	29,532	29,305
Investment funds	1,256	1,168
Regulatory and other long-term assets
Regulatory assets	11,384	11,505
Other long-term assets	289	372
Total regulatory and other long-term assets	11,673	11,877
Total assets	46,209	46,393
Current liabilities
Accounts payable and accrued liabilities	1,651	1,840
Environmental cleanup costs - Kingston ash spill	128	182
Accrued interest	351	403
Current portion of leaseback obligations	80	80
Current portion of energy prepayment obligations	105	105
Regulatory liabilities	297	280
Short-term debt, net	785	482
Current maturities of long-term debt	1,558	1,537
Total current liabilities	4,955	4,909
Other liabilities
Post-retirement and post-employment benefit obligations	6,018	6,007
Asset retirement obligations	3,175	3,138
Other long-term liabilities	2,388	2,405
Leaseback obligations	1,197	1,202
Energy prepayment obligations	585	612
Environmental cleanup costs - Kingston ash spill	223	194
Regulatory liabilities	205	285
Total other liabilities	13,791	13,843
Long-term debt, net	22,369	22,412
Total liabilities	41,115	41,164
Proprietary capital
Power program appropriation investment	303	308
Power program retained earnings	4,257	4,429
Total power program proprietary capital	4,560	4,737
Nonpower programs appropriation investment, net	627	630
Accumulated other comprehensive income (loss)	(93)	(138)
Total proprietary capital	5,094	5,229
Total liabilities and proprietary capital	$ 46,209	$ 46,393

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Risk Management Activities and Derivative Transactions

3 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Risk Management Activities and Derivative Transactions

Risk Management Activities and Derivative Transactions

TVA is exposed to various market risks.  These market risks include risks related to commodity prices, investment prices, interest rates, currency exchange rates, inflation, and counterparty credit and counterparty performance risk.  To help manage certain of these risks, TVA has entered into various derivative transactions, principally commodity option contracts, forward contracts, swaps, swaptions, futures, and options on futures.  Other than certain derivative instruments in investment funds, it is TVA's policy to enter into these derivative transactions solely for hedging purposes and not for speculative purposes.

Overview of Accounting Treatment

TVA recognizes certain of its derivative instruments as either assets or liabilities on its balance sheets at fair value.  The accounting for changes in the fair value of these instruments depends on (1) whether TVA uses regulatory accounting to defer the derivative gains and losses, (2) whether the derivative instrument has been designated and qualifies for hedge accounting treatment, and (3) if so, the type of hedge relationship (e.g., cash flow hedge).

The following tables summarize the accounting treatment that certain of TVA's financial derivative transactions receive.

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 1)
Derivatives in Cash Flow Hedging Relationship	Objective of Hedge Transaction	Accounting for Derivative Hedging Instrument	Amount of Mark-to-Market ("MtM") Gain (Loss) Recognized in Other Comprehensive Income (Loss) (“OCI”) Three Months Ended December 31
			2011		2010
Currency swaps	To protect against changes in cash flows caused by changes in foreign currency exchange rates (exchange rate risk)	Cumulative unrealized gains and losses are recorded in OCI and reclassified to interest expense to the extent they are offset by cumulative gains and losses on the hedged transaction	$	42	$	49

Summary of Derivative Instruments That Receive Hedge Accounting Treatment (part 2)
Derivatives in Cash Flow Hedging Relationship	Amount of Gain (Loss) Reclassified from OCI to Interest Expense Three Months Ended December 31(1)
	2011		2010
Currency swaps	$	3	$	7
Note (1)  There were no ineffective portions or amounts excluded from effectiveness testing for any of the periods presented.

Summary of Derivative Instruments That Do Not Receive Hedge Accounting Treatment
Derivative Type	Objective of Derivative	Accounting for Derivative Instrument	Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Ended December 31(1)
			2011		2010
Swaption	To protect against decreases in value of the embedded call (interest rate risk)	MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	$   —		$   —
Interest rate swaps	To fix short-term debt variable rate to a fixed rate (interest rate risk)	MtM gains and losses are recorded as regulatory assets or liabilities until settlement, at which time the gains/losses (if any) are recognized in gain/loss on derivative contracts.	—		—
Commodity contract derivatives	To protect against fluctuations in market prices of purchased coal or natural gas  (price risk)	MtM gains and losses are recorded as regulatory assets or liabilities. Realized gains and losses (if any) due to contract settlements are recognized in fuel expense as incurred.	—		—
Commodity derivatives under financial trading program ("FTP")	To protect against fluctuations in market prices of purchased commodities (price risk)	MtM gains and losses are recorded as regulatory assets or liabilities.  Realized gains and losses are recognized in fuel and purchased power expense when the related commodity is used in production.	(56	)	(42	)
Notes (1) All of TVA's derivative instruments that do not receive hedge accounting treatment have unrealized gains (losses) that would otherwise be recognized in income but instead are deferred as regulatory assets and liabilities. As such, there was no related gain (loss) recognized in income for these unrealized gains (losses) for the three months ended December 31, 2011 and 2010.

MARK-TO-MARKET VALUES OF TVA DERIVATIVES
	At December 31, 2011				At September 30, 2011
Derivatives that Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Currency swaps:
£200 million Sterling	$	(37	)	Other long-term liabilities	$	(44	)	Other long-term liabilities
£250 million Sterling	(2		)	Other long-term liabilities	(24		)	Other long-term liabilities
£150 million Sterling	(50		)	Other long-term liabilities	(63		)	Other long-term liabilities
Derivatives that Do Not Receive Hedge Accounting Treatment:
	Balance			Balance Sheet Presentation	Balance			Balance Sheet Presentation
Swaption:
$1.0 billion notional	$	(1,128	)	Other long-term liabilities	$	(1,077	)	Other long-term liabilities
Interest rate swaps:
$476 million notional	(450		)	Other long-term liabilities	(446		)	Other long-term liabilities
$42 million notional	(17		)	Other long-term liabilities	(17		)	Other long-term liabilities
Commodity contract derivatives	4			Other long-term assets $202; Other current assets $73; Other long-term  liabilities $(155); Accounts payable and accrued liabilities $(116)	239			Other long-term assets $285; Other current assets $150; Other long-term  liabilities $(119); Accounts payable and accrued liabilities $(77)
Derivatives under FTP:
Margin cash account(1)	60			Other current assets	34			Other current assets
Derivatives under FTP(2)	(412		)	Current regulatory assets $(230); Regulatory assets $(192); Current regulatory liabilities $7; Regulatory liabilities $3	(234		)	Current regulatory assets $(135); Regulatory assets $(102); Current regulatory liabilities $3
Note (1)  In accordance with certain credit terms, TVA uses leverage to trade financial instruments under the FTP.  Therefore, the margin cash account balance does not represent 100 percent of the net market value of the derivative positions outstanding as shown in the Derivatives Under Financial Trading Program table. This balance also includes the $26 million currently being held by the MF Global Trustee. See Counterparty Credit Risk for details. (2)  The December 31, 2011 and September 30, 2011 balances in the Derivatives under Financial Trading Program table show all open derivative positions in the FTP.

Cash Flow Hedging Strategy for Currency Swaps

To protect against exchange rate risk related to three British pound sterling denominated Bond transactions, TVA entered into foreign currency hedges at the time the Bond transactions occurred.  TVA had the following currency swaps outstanding as of December 31, 2011:

Currency Swaps Outstanding At December 31, 2011
Effective Date of Currency Swap Contract	Associated TVA Bond Issues Currency Exposure	Expiration Date of Swap	Overall Effective Cost to TVA
1999	£200 million	2021	5.81%
2001	£250 million	2032	6.59%
2003	£150 million	2043	4.96%

When the dollar strengthens against the British pound sterling, the transaction gain on the Bond liability is offset by an exchange loss on the swap contract.  Conversely, when the dollar weakens against the British pound sterling, the transaction loss on the Bond liability is offset by an exchange gain on the swap contract.  All such exchange gains or losses on the Bond liability are included in Long-term debt, net.  The offsetting exchange losses or gains on the swap contracts are recognized in Accumulated other comprehensive income (loss).  If any gain (loss) were to be incurred as a result of the early termination of the foreign currency swap contract, the resulting income (expense) would be amortized over the remaining life of the associated Bond as a component of Interest expense.

Derivatives Not Receiving Hedge Accounting Treatment

Swaption and Interest Rate Swaps.  Prior to 2006, TVA entered into four swaption transactions to monetize the value of call provisions on certain of its Bond issues.  A swaption grants a third party the right to enter into a swap agreement with TVA under which TVA receives a 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 TVA has monetized.  Subsequently, the counterparties to three of the swaptions exercised their rights to enter into interest rate swaps with TVA.

TVA uses regulatory accounting treatment to defer the MtM gains and losses on these swaps and swaption and includes the gain or loss in the ratemaking formula when these transactions settle.  The values of the swaps and swaption and related deferred unrealized gains and losses are recorded on TVA's balance sheets with realized gains or losses, if any, recorded on TVA's statements of operations.  There were no realized gains or losses for the three months ended December 31, 2011 and 2010.

For the three months ended December 31, 2011 and 2010, the changes in market value resulted in deferred unrealized gains (losses) on the value of the interest rate swaps and swaption of $(55) million and $337 million, respectively.  All net deferred unrealized gains and losses are reclassified as regulatory assets or liabilities on the balance sheet.

Commodity Derivatives. TVA enters into certain derivative contracts for coal and natural gas that require physical delivery of the contracted quantity of the commodity. At December 31, 2010, TVA determined that certain quantities under the coal contract derivatives were no longer probable of physical delivery; therefore, these contracts were no longer eligible for normal purchases and normal sales accounting.  Accordingly, TVA began marking to market all of its coal contract derivatives at December 31, 2010.  At December 31, 2011, and September 30, 2011, TVA's coal contract derivatives had net market values of $4 million and $239 million, respectively, which TVA deferred as regulatory assets and liabilities on a gross basis.  At December 31, 2011, TVA's coal contract derivatives had terms of up to six years.

TVA marks to market all of its natural gas derivative contracts that require physical delivery. The total market value of these natural gas derivative contracts at December 31, 2011, and September 30, 2011, was less than $1 million. At December 31, 2011, these natural gas derivative contracts had terms of up to one month.

Commodity Contract Derivatives
	At December 31, 2011			At September 30, 2011
	Number ofContracts	Notional Amount	Fair Value (MtM)	Number of Contracts	Notional Amount	Fair Value (MtM)
Coal Contract Derivatives	20	61 million tons	$4	38	66 million tons	$239
Natural Gas Contract Derivatives	9	8 million mmBtu	$—	13	5 million mmBtu	$—

Derivatives Under FTP. TVA has a FTP under which it purchases and sells futures, swaps, options, and combinations of these instruments (as long as they are standard in the industry) to hedge TVA’s exposure to (1) the price of natural gas, fuel oil, electricity, coal, emission allowances, nuclear fuel, and other commodities included in TVA’s fuel cost adjustment calculation, (2) the price of construction materials, and (3) contracts for goods priced in or indexed to foreign currencies. The combined transaction limit for the fuel cost adjustment and construction material transactions is $130 million (based on one-day value at risk). In addition, the maximum hedge volume for the construction material transactions is 75 percent of the underlying net notional volume of the material that TVA anticipates using in approved TVA projects, and the market value of all outstanding hedging transactions involving construction materials is limited to $100 million at the execution of any new transaction. The portfolio value at risk limit for the foreign currency transactions is $5 million and is separate and distinct from the $130 million transaction limit discussed above. TVA is prohibited from trading financial instruments under the FTP for speculative purposes.

At December 31, 2011, the risks hedged under the FTP were the economic risks associated with the prices of natural gas, fuel oil, crude oil, and coal. Futures contracts and option contracts under the FTP had remaining terms of less than one year. Swap contracts under the FTP had remaining terms of six years or less.

Derivatives Under Financial Trading Program
	At December 31, 2011				At September 30, 2011
	Notional Amount	Fair Value (MtM) (in millions)			Notional Amount	Fair Value (MtM) (in millions)
Natural gas (in mmBtu)
Futures contracts	400,000	$	(2	)	1,300,000	$	(4	)
Swap contracts	321,707,500	(417		)	232,295,000	(223		)
Option contracts	—	(2		)	—	(1		)
Natural gas financial positions	322,107,500	$	(421	)	233,595,000	$	(228	)
Fuel oil/crude oil (in barrels)
Futures contracts	—	$	—		—	$	—
Swap contracts	1,408,000	9			1,591,000	(7		)
Option contracts	—	—			90,000	—
Fuel oil/crude oil financial positions	1,408,000	$	9		1,681,000	$	(7	)
Coal (in tons)
Futures contracts	—	$	—		—	$	—
Swap contracts	120,000	—			120,000	1
Option contracts	—	—			—	—
Coal financial positions	120,000	$	—		120,000	$	1
Note Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the broker or other counterparty. Notional amounts disclosed represent the net absolute value of contractual amounts.

TVA defers all FTP unrealized gains (losses) as regulatory liabilities (assets) and records only realized gains or losses to match the delivery period of the underlying commodity contract. In addition to the open commodity derivatives disclosed above, TVA had closed derivative contracts with market values of $25 million at December 31, 2011, and $(13) million at September 30, 2011. TVA experienced the following unrealized and realized gains and losses related to the FTP during the period:

FTP Unrealized Gains (Losses)
FTP unrealized gains (losses) deferred as regulatory liabilities (assets)	At December 31, 2011			At September 30, 2011
Natural gas	$	(421	)	$	(228	)
Fuel oil/crude oil	9			(7		)
Coal	—			1

FTP Realized Gains (Losses)
	For the Three Months Ended December 31
Decrease (increase) in fuel expense	2011		2010
Fuel oil/crude oil	$	5	$	6
Coal	—		—

FTP Realized Gains (Losses)
	For the Three Months Ended December 31
Decrease (increase) in purchased power expense	2011			2010
Natural gas	$	(61	)	$	(48	)

Other Derivative Instruments

Investment Fund Derivatives.  Investment funds consist primarily of funds held in the Nuclear Decommissioning Trust ("NDT"), Asset Retirement Trust ("ART"), and Supplemental Executive Retirement Plan ("SERP").  All securities in the trusts are classified as trading.  See Note 13 — Investments for a discussion of the trusts' objectives and the types of investments included in the various trusts.  Derivative instruments in these trusts include swaps, futures, options, forwards, and other instruments.  At December 31, 2011 and September 30, 2011, the fair value of derivative instruments in these trusts was not material to TVA's financial statements.

Collateral.  TVA's interest rate swaps, its currency swaps, and its swaption contain contract provisions that require a party to post collateral (in a form such as cash or a letter of credit) when the party's liability balance under the agreement exceeds a certain threshold.  At December 31, 2011, the aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was $1.7 billion.  TVA's collateral obligations at December 31, 2011, under these arrangements was $756 million, for which TVA had posted $756 million in letters of credit.  These letters of credit reduce the available balance under the related credit facility.  TVA's assessment of the risk of its nonperformance includes a reduction in its exposure under the contract as a result of this posted collateral.

For all of its derivative instruments with credit-risk related contingent features:

• If TVA remains a majority-owned U.S. government entity but Standard & Poor's (“S&P”) or Moody's Investors Service ("Moody's") downgrades TVA's credit rating to AA or Aa2, respectively, TVA would be required to post an additional $75 million of collateral in excess of its December 31, 2011, obligation; and

• If TVA ceases to be majority-owned by the U.S. government, TVA's credit rating would likely be downgraded and TVA would be required to post additional capital.

Counterparty Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of a counterparty's nonperformance of its contractual obligations.  Where exposed to counterparty credit risk, TVA analyzes the counterparty's financial condition prior to entering into an agreement, establishes credit limits, monitors the appropriateness of those limits, as well as any changes in the creditworthiness of the counterparty on an ongoing basis, and employs credit mitigation measures, such as collateral or prepayment arrangements and master purchase and sale agreements, to mitigate credit risk.

On October 31, 2011, MF Global Holding Ltd. and its subsidiary MF Global Finance USA Inc. filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. On the same date, a Securities Investor Protection Act proceeding was filed against MF Global Inc. ("MF Global"). TVA had used MF Global to clear certain trades and the MF Global Trustee held $33 million of TVA's cash collateral at that time. TVA has recovered $7 million of this balance from the Trustee. TVA has filed a claim to recover the funds currently being held by the MF Global Trustee and expects to recover some or all of these funds; however, the timing and the amount of the funds' returned and the amount of any potential loss cannot be estimated at this time.

Credit of Customers.  The majority of TVA's counterparty credit risk is associated with trade accounts receivable from delivered power sales to municipal and cooperative distributor customers, all located in the Tennessee Valley region.  To a lesser extent, TVA is exposed to credit risk from industries and federal agencies directly served and from exchange power arrangements with a small number of investor-owned regional utilities related to either delivered power or the replacement of open positions of longer-term purchased power or fuel agreements.  TVA had concentrations of accounts receivable from four customers that represented 27 percent of total outstanding accounts receivable at December 31, 2011. TVA had concentrations of accounts receivable from three customers that represented 26 percent of total outstanding accounts receivable at September 30, 2011. Power sales to TVA's largest directly served industrial customer represented six percent of TVA's total operating revenues for the three months ended December 31, 2011.  This customer's senior unsecured credit ratings are currently CCC- by S&P and Caa2 by Moody's.  As a result of its credit ratings, this customer has provided credit assurance to TVA under the terms of its power contract.

Credit of Derivative Counterparties.  TVA has entered into derivative contracts for hedging purposes, and TVA's NDT fund and defined benefit pension plan have entered into derivative contracts for investment purposes.  If a counterparty to one of TVA's hedging transactions defaults, TVA might incur substantial costs in connection with entering into a replacement hedging transaction.  If a counterparty to the derivative contracts into which the NDT fund and the pension plan have entered for investment purposes defaults, the value of the investment could decline significantly or perhaps become worthless.  TVA has concentrations of credit risk from the banking and coal industries because multiple companies in these industries serve as counterparties to TVA in various derivative transactions.  At December 31, 2011, the swaption and all of TVA's currency swaps, interest rate swaps, and commodity derivatives under the FTP were with counterparties whose Moody's credit rating was A2 or higher.  At December 31, 2011, all of TVA's coal contract derivatives were with counterparties whose Moody's credit rating, or TVA's internal analysis when such information was unavailable, was Caa1 or higher.

Credit of Suppliers.  If one of TVA's fuel or purchased power suppliers fails to perform under the terms of its contract with TVA, TVA might lose the money that it paid to the supplier under the contract and have to purchase replacement fuel or power on the spot market, perhaps at a significantly higher price than TVA was entitled to pay under the contract.  In addition, TVA might not be able to acquire replacement fuel or power in a timely manner and thus might be unable to satisfy its own obligations to deliver power.  To help ensure a reliable supply of coal, TVA had coal contracts with 11 different suppliers at December 31, 2011.  The contracted supply of coal is sourced from multiple geographic regions of the United States and is to be delivered via various transportation methods (e.g., barge, rail, and truck).  TVA purchases all of its natural gas requirements from a variety of suppliers under short-term contracts.

TVA has a power purchase agreement that expires on March 31, 2032, with a supplier of electricity for 440 megawatts ("MW") of summer net capability from a lignite-fired generating plant.  The supplier's senior secured credit ratings are currently CCC- by S&P and Caa1 by Moody's.  As a result of its credit ratings, the supplier has provided credit assurance to TVA under the terms of its agreement.  

The senior unsecured credit ratings of TVA's largest supplier of uranium enrichment services, which is also TVA's largest industrial customer directly served, are currently CCC- by S&P and Caa2 by Moody's.  Any nonperformance by this company could result in TVA incurring additional costs.

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Document and Entity Information Document (USD $) In Millions, except Share data in Thousands, unless otherwise specified	3 Months Ended
	Dec. 31, 2011
Entity Information [Line Items]
Entity Registrant Name	Tennessee Valley Authority
Entity Central Index Key	0001376986
Current Fiscal Year End Date	--09-30
Entity Filer Category	Non-accelerated Filer
Document Type	10-Q
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Amendment Flag	false
Entity Common Stock, Shares Outstanding	0
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float	$ 0

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Fair Value Measurements

3 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the asset or liability's principal market, or in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants. TVA uses market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs.

Valuation Techniques

The measurement of fair value results in classification into a hierarchy by the inputs used to determine the fair value as follows:

Level 1	—	Unadjusted quoted prices in active markets accessible by the reporting entity for identical assets or liabilities.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing.
Level 2	—	Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and that are directly or indirectly observable for substantially the full term of the asset or liability.  These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities and default rates observable at commonly quoted intervals, and inputs derived from observable market data by correlation or other means.
Level 3	—	Pricing inputs that are unobservable, or less observable, from objective sources.  Unobservable inputs are only to be used to the extent observable inputs are not available.  These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants.  An entity should consider all market participant assumptions that are available without unreasonable cost and effort.  These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

A financial instrument's level within the fair value hierarchy (where Level 3 is the lowest and Level 1 is the highest) is based on the lowest level of input significant to the fair value measurement.

The following sections describe the valuation methodologies TVA uses to measure different financial instruments at fair value. Except for gains and losses on SERP assets, all changes in fair value of these assets and liabilities have been reflected as changes in regulatory assets, regulatory liabilities, or accumulated other comprehensive loss on TVA's Balance Sheet as of December 31, 2011, and Statements of Changes in Proprietary Capital for the three months ended December 31, 2011. Except for gains and losses on SERP assets, there has been no impact to the Statements of Operations or the Statements of Cash Flows related to these fair value measurements.

Investments

At December 31, 2011, investment funds were composed of $1.3 billion of securities classified as trading and measured at fair value and $2 million of equity investments not required to be measured at fair value. Trading securities are held in the NDT, ART, and SERP. The NDT holds funds for the ultimate decommissioning of TVA's nuclear power plants. The ART holds funds for the costs related to the future closure and retirement of TVA's long-lived assets. TVA established a SERP for certain executives in critical positions to provide supplemental pension benefits tied to compensation that exceeds limits imposed by Internal Revenue Service (“IRS”) rules applicable to the qualified defined benefit pension plan. The NDT, ART and SERP are invested in securities generally designed to achieve a return in line with overall equity market performance.

The NDT, ART, and SERP are composed of multiple types of investments and are managed by external institutional managers. Most U.S. and international equities, Treasury inflation-protected securities, real estate investment trust (“REIT”) securities, and cash securities, and certain derivative instruments are measured based on quoted exchange prices in active markets and are classified as Level 1 valuations. Fixed-income investments, high-yield fixed-income investments, currencies, and most derivative instruments are non-exchange traded and are classified as Level 2 valuations. These measurements are based on market and income approaches with observable market inputs.

Private partnership investments may include venture capital, buyout, mezzanine or subordinated debt, restructuring or distressed debt, and special situations. Investments in private partnerships generally involve a three to four year period where the investor contributes capital. This is followed by a period of distribution, typically over several years. The investment period is generally, at a minimum, a ten-year or longer investment commitment. The NDT had unfunded commitments related to private partnerships of $72 million at December 31, 2011. These investments have no redemption or limited redemption options and may also have imposed restrictions on the NDT's ability to liquidate its investment interest.  The private partnerships and other similar alternative investments are reported at fair value which is derived by independent appraisals or judgment of the general partners of each such investment. The inputs used in estimating the fair value of the limited partnerships include the original transaction prices, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments of comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows of the limited partnerships. The fair value of these investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discounts estimated by the general partners in the absence of market information. Due to the lack of observable inputs, the determination of the fair value by the general partners may differ materially from the value ultimately realized from the private partnership investments. TVA classifies its interest in these types of investment as Level 3 within the fair value hierarchy. 

Commingled funds represent investment funds comprising multiple individual financial instruments. The commingled funds held by the NDT, ART and SERP consist of a single class of securities, such as equity, debt, or foreign currency securities, or multiple classes of securities. All underlying positions in these commingled funds are either exchange traded (Level 1) or measured using observable inputs for similar instruments (Level 2). The fair value of commingled funds is based on net asset values (“NAV”) per fund share (the unit of account), derived from the prices of the underlying securities in the funds. These commingled funds can be liquidated at the measurement date NAV price and are classified as Level 2 valuations. Required notification periods range from zero to 30 days. The funds can be redeemed unless doing so would violate regulations to which the fund is subject, would be unreasonable or impracticable, or would be seriously prejudicial to the fund.

Realized and unrealized gains and losses on trading securities are recognized in current earnings and are based on average cost. The SERP had unrealized gains of $1 million and $2 million for the three months ended December 31, 2011, and December 31, 2010, respectively. The gains and losses of the NDT and ART are subsequently reclassified to a regulatory liability or asset account in accordance with TVA's regulatory accounting policy. The NDT had unrealized gains of $58 million and $23 million for the three months ended December 31, 2011 and 2010, respectively, and the ART had unrealized gains of $9 million and less than $1 million for the three months ended December 31, 2011 and 2010, respectively.

Currency Swaps, Swaption, and Interest Rate Swaps

See Note 12 — Cash Flow Hedging Strategy for Currency Swaps and Derivatives Not Receiving Hedge Accounting Treatment for a discussion of the nature, purpose, and contingent features of TVA's currency swaps, swaption, and interest rate swaps.

The currency swaps and interest rate swaps are classified as Level 2 valuations and are valued based on income approaches using observable market inputs for similar instruments. The swaption is classified as a Level 3 valuation and is valued based on an income approach. The valuation is computed using a broker-provided pricing model utilizing interest and volatility rates. While most of the fair value measurement is based on observable inputs, volatility for TVA's swaption is generally unobservable. Therefore, the valuation is derived from an observable volatility measure with adjustments.

Commodity Contract Derivatives and Commodity Derivatives under FTP

Commodity Contract Derivatives. These contracts are classified as Level 3 valuations and are valued based on income approaches. TVA develops an overall coal price forecast using widely-used short-term and mid-range market data from an external pricing specialist in addition to long-term internal estimates. To value the volume option component of applicable coal contracts, TVA uses a Black-Scholes pricing model which includes inputs from the overall coal price forecast, contract-specific terms, and other market inputs.

Commodity Derivatives Under FTP. These contracts are valued based on market approaches which utilize Chicago Mercantile Exchange (“CME”) quoted prices and other observable inputs. Futures and options contracts settled on the CME are classified as Level 1 valuations. Swap contracts are valued using a pricing model based on CME inputs and are subject to nonperformance risk outside of the exit price. These contracts are classified as Level 2 valuations.

See Note 12 — Derivatives Not Receiving Hedge Accounting Treatment — Commodity Derivatives and Derivatives Under FTP for a discussion of the nature and purpose of coal contracts and derivatives under TVA's FTP.

Nonperformance Risk

The assessment of nonperformance risk, which includes credit risk, considers changes in current market conditions, readily available information on nonperformance risk, letters of credit, collateral, other arrangements available, and the nature of master netting arrangements. TVA is a counterparty to currency swaps, a swaption, interest rate swaps, commodity contracts, and other derivatives which subject TVA to nonperformance risk. Nonperformance risk on the majority of investments and certain exchange-traded instruments held by TVA is incorporated into the exit price that is derived from quoted market data that is used to mark the investment to market.

Nonperformance risk for most of TVA's derivative instruments is an adjustment to the initial asset/liability fair value. TVA adjusts for nonperformance risk, both of TVA (for liabilities) and the counterparty (for assets), by applying a Credit valuation adjustment (“CVA”). TVA determines an appropriate CVA for each applicable financial instrument based on the term of the instrument and TVA's or the counterparty's credit rating as obtained from Moody's. For companies that do not have an observable credit rating, TVA uses internal analysis to assign a comparable rating to the company. TVA discounts each financial instrument using the historical default rate (as reported by Moody's for CY 1983 to CY 2010) for companies with a similar credit rating over a time period consistent with the remaining term of the contract. The application of CVAs resulted in an $85 million decrease in the fair value of assets and a $2 million decrease in the fair value of liabilities at December 31, 2011.

The following tables set forth by level, within the fair value hierarchy, TVA's financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2011, and September 30, 2011. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. TVA's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the determination of the fair value of the assets and liabilities and their classification in the fair value hierarchy levels.

Fair Value Measurements At December 31, 2011
Assets	Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Investments
Equity securities	$	94	$	—	$	—	$	—		$	94
Debt securities
U.S. government corporations and agencies	107		101		—		—			208
Corporate debt securities	—		155		—		—			155
Residential mortgage-backed securities	—		16		—		—			16
Commercial mortgage-backed securities	—		3		—		—			3
Collateralized debt obligations	—		3		—		—			3
Private partnerships	—		—		28		—			28
Commingled funds(2)										—
Equity security commingled funds	—		543		—		—			543
Debt security commingled funds	—		204		—		—			204
Foreign currency commingled funds	—		—		—		—			—
Other commingled funds	—		—		—		—			—
Total investments	201		1,025		28		—			1,254
Commodity contract derivatives	—		—		275		—			275
Commodity derivatives under FTP
Swap contracts	—		149		—		(139		)	10
Total commodity derivatives under FTP	—		149		—		(139		)	10
Total	$	201	$	1,174	$	303	$	(139	)	$	1,539
Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Currency swaps	$	—	$	89	$	—	$	—		$	89
Interest rate swaps	—		467		—		—			467
Swaption	—		—		1,128		—			1,128
Commodity contract derivatives	—		—		271		—			271
Commodity derivatives under FTP
Futures contracts	2		—		—		—			2
Swap contracts	—		557		—		(139		)	418
Option contracts	2		—		—		—			2
Total commodity derivatives under FTP	4		557		—		(139		)	422
Total	$	4	$	1,113	$	1,399	$	(139	)	$	2,377
Notes (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

Fair Value Measurements At September 30, 2011
Assets	Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Investments
Equity securities	$	73	$	—	$	—	$	—		$	73
Debt securities
U.S. government corporations and agencies	117		79		—		—			196
Corporate debt securities	—		164		—		—			164
Residential mortgage-backed securities	—		17		—		—			17
Commercial mortgage-backed securities	—		3		—		—			3
Collateralized debt obligations	—		3		—		—			3
Private partnerships	—		—		22		—			22
Commingled funds(2)
Equity security commingled funds	—		467		—		—			467
Debt security commingled funds	—		221		—		—			221
Foreign currency commingled funds	—		—		—		—			—
Other commingled funds	—		—		—		—			—
Total investments	190		954		22		—			1,166
Commodity contract derivatives	—		—		436		—			436
Commodity derivatives under FTP
Swap contracts	—		15		—		(14		)	1
Total commodity derivatives under FTP	—		15		—		(14		)	1
Total	$	190	$	969	$	458	$	(14	)	$	1,603
Liabilities	Quoted Prices in Active Markets for Identical Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Netting(1)			Total
Currency swaps	$	—	$	131	$	—	$	—		$	131
Interest rate swaps	—		463		—		—			463
Swaption	—		—		1,077		—			1,077
Commodity contract derivatives	—		—		197		—			197
Commodity derivatives under FTP
Futures contracts	4		—		—		—			4
Swap contracts	—		244		—		(14		)	230
Option contracts	1		—		—		—			1
Total commodity derivatives under FTP	5		244		—		(14		)	235
Total	$	5	$	838	$	1,274	$	(14	)	$	2,103
Notes (1) Due to the right of setoff and method of settlement, TVA elects to record commodity derivatives under the FTP based on its net commodity position with the counterparty or broker. (2) Commingled funds represent investment funds comprising multiple individual financial instruments and are classified in the table based on their existing investment portfolio as of the measurement date. Commingled funds exclusively composed of one class of security are classified in that category. Commingled funds comprising multiple classes of securities are classified as “other commingled funds.”

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair Value Measurements Using Significant Unobservable Inputs For the Three Months Ended December 31
	Private Partnerships			Commodity Contract Derivatives			Swaption
Balances at September 30, 2010	$	13		$	103		$	(804	)
Purchases	4			—			—
Issuances	—			—			—
Sales	—			—			—
Settlements	—			—			—
Total gains or losses (realized or unrealized)
Net unrealized gains (losses) deferred as regulatory assets and liabilities	2			(109		)	221
Balances at December 31, 2010	$	19		$	(6	)	$	(583	)
Balances at September 30, 2011	$	22		$	239		$	(1,077	)
Purchases	6			—			—
Issuances	—			—			—
Sales	(1		)	—			—
Settlements	—			—			—
Total gains or losses (realized or unrealized)
Net unrealized gains (losses) deferred as regulatory assets and liabilities	1			(235		)	(51		)
Balances at December 31, 2011	$	28		$	4		$	(1,128	)

There were no realized gains or losses related to the instruments measured at fair value using significant unobservable inputs that affected net income during the three months ended December 31, 2011. All unrealized gains and losses related to these instruments have been reflected as increases or decreases in regulatory assets and liabilities. See Note 6.

Other Financial Instruments Not Recorded at Fair Value

TVA uses the methods and assumptions described below to estimate the fair value of each significant class of financial instrument. The fair market value of the financial instruments held at December 31, 2011, and September 30, 2011, may not be representative of the actual gains or losses that will be recorded when these instruments mature or are called or presented for early redemption. The estimated values of TVA's financial instruments not recorded at fair value at December 31, 2011, and September 30, 2011, were as follows:

Estimated Values of Financial Instruments
	At December 31, 2011				At September 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Loans and other long-term receivables, net	$	76	$	70	$	74	$	68
Long-term debt (including current portion), net	23,927		28,931		23,949		29,190

Because of the short-term maturity of cash and cash equivalents, restricted cash and investments, and short-term debt, net, the carrying amounts of these instruments approximate their fair values.

Fair value of long-term debt traded in the public market is determined by multiplying the par value of the debt by the indicative market price at the balance sheet date.

Fair values for loans and other long-term receivables are estimated by determining the present value of future cash flows using a discount rate equal to lending rates for similar loans made to borrowers with similar credit ratings and for similar remaining maturities, where applicable.

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STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities
Net income (loss)	$ (173)	$ (48)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization (including amortization of debt issuance costs and premiums/discounts)	446	437
Nuclear refueling outage amortization cost	0	19
Amortization of nuclear fuel cost	67	52
Non-cash retirement benefit expense	152	116
Prepayment credits applied to revenue	(26)	(26)
Fuel cost adjustment deferral	86	98
Fuel cost tax equivalents	10	17
Environmental cleanup costs - Kingston ash spill - non cash	18	19
Changes in current assets and liabilities
Accounts receivable, net	334	248
Inventories and other, net	(338)	(173)
Accounts payable and accrued liabilities	(258)	(143)
Accrued interest	(51)	(52)
Pension contributions	(1)	0
Environmental cleanup costs - Kingston ash spill, net	(25)	(42)
Other, net	16	6
Net cash provided by operating activities	257	528
Cash flows from investing activities
Construction expenditures	(661)	(621)
Nuclear fuel expenditures	(165)	(117)
Loans and other receivables
Advances	0	(11)
Repayments	4	3
Other, net	0	(1)
Net cash used in investing activities	(822)	(747)
Cash flows from financing activities
Redemptions and repurchases	(19)	(5)
Short-term debt issues (redemptions), net	303	192
Payments on leases and leaseback financing	(6)	(47)
Payments to U.S. Treasury	(7)	(7)
Net cash provided by financing activities	271	133
Net change in cash and cash equivalents	(294)	(86)
Cash and cash equivalents at beginning of period	507	328
Cash and cash equivalents at end of period	$ 213	$ 242

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Kingston Fossil Plant Ash Spill

3 Months Ended

Dec. 31, 2011

Environmental Remediation Obligations [Abstract]

Kingston Fossil Plant Ash Spill

Kingston Fossil Plant Ash Spill

The Event

In December 2008, one of the dredge cells at the Kingston Fossil Plant ("Kingston") failed, and approximately five million cubic yards of water and coal fly ash flowed out of the cell. TVA is continuing cleanup and recovery efforts in conjunction with federal and state agencies.  TVA completed the removal of time-critical ash from the river during the third quarter of 2010, and removal of the remaining ash is considered to be non-time-critical.  TVA estimates that the physical cleanup work (final removal) will be completed in the last quarter of 2014.  A final assessment, a completion report, and approval by Tennessee and the Environmental Protection Agency ("EPA") is expected to occur by the second quarter of 2015.  Surveillance and monitoring of the site will continue, but this work is beyond the scope of the cleanup project.

Claims and Litigation

See Note 16 — Legal Proceedings Related to the Kingston Ash Spill and — Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.

Financial Impact

Because of the uncertainty at this time of the final costs to complete the work prescribed by the ash disposal plan, a range of reasonable estimates has been developed by cost category.  Known amounts, most likely scenarios, or the low end of the range for each category have been accumulated and evaluated to determine the total estimate.  The range of costs varies from approximately $1.1 billion to approximately $1.2 billion.

TVA recorded an estimate of $1.1 billion for the cost of cleanup related to this event.  In August 2009, TVA began using regulatory accounting treatment to defer all actual costs already incurred and expected future costs related to the ash spill.  The cost is being charged to expense as it is collected in rates over 15 years, beginning October 1, 2009.  As the estimate changes, additional costs may be deferred and charged to expense prospectively as they are collected in future rates.

As work continues to progress and more information is available, TVA will review its estimates and revise them as appropriate.  TVA has accrued a portion of the estimated cost in current liabilities, with the remaining portion shown as a long-term liability on TVA's balance sheets.  Amounts spent since the event through December 31, 2011, totaled $774 million.  The remaining estimated liability at December 31, 2011, was $351 million.

TVA has not included the following categories of costs in the above estimate since it has been determined that these costs are currently either not probable or not reasonably estimable: penalties (other than the penalties set out in the June 2010 Tennessee Department of Environment and Conservation ("TDEC") order), regulatory directives, natural resources damages (other than payments required under a memorandum of agreement with TDEC and the U.S. Fish and Wildlife Service establishing a process and a method for resolving the natural resource damages claim), future lawsuits, future claims, long-term environmental impact costs, final long-term disposition of the ash processing area, costs associated with new laws and regulations, or cost of remediating any mixed waste discovered during the ash removal process.  There are certain other costs that will be incurred that have not been included in the estimate as they are appropriately accounted for in other areas of the financial statements.  Associated capital asset purchases are recorded in property, plant, and equipment.  Ash handling and disposition costs from current plant operations are recorded in operating expenses.  A portion of the pond and dredge cell closure costs is also not included in the estimate as it is included in the non-nuclear Asset retirement obligation ("ARO") liability.

Insurance

TVA had property and excess liability insurance programs in place at the time of the Kingston ash spill.  TVA pursued claims under both the property and excess liability programs and has settled all of its property insurance claims and some of its excess liability insurance claims.  Through December 31, 2011, TVA received proceeds of $40 million.  TVA continues to provide information about the nature and extent of TVA's claims under the policies to the remaining excess liability insurance companies. It is unclear at this time whether the parties will be able to resolve the outstanding claims without resorting to the policies' dispute resolution procedures.  Any amounts received related to insurance settlements are being recorded as reductions to the regulatory asset and will reduce amounts collected in future rates.

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Regulatory Assets and Liabilities

3 Months Ended

Dec. 31, 2011

Regulatory Assets and Liabilities Disclosure [Abstract]

Regulatory Assets and Liabilities

Regulatory Assets and Liabilities

Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates.  Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred or deferral of gains that will be credited to customers in future periods.  Components of regulatory assets and regulatory liabilities are summarized in the table below.

Regulatory Assets and Liabilities
	At December 31, 2011		At September 30, 2011
Current regulatory assets
Unrealized losses on commodity derivatives	$	371	$	225
Deferred nuclear generating units	236		236
Environmental agreements	87		—
Environmental cleanup costs – Kingston ash spill	73		73
Deferred capital leases	2		2
Fuel cost adjustment receivable	—		7
Total current regulatory assets	769		543
Non-current regulatory assets
Deferred pension costs and other post-retirement benefits costs	5,718		5,807
Unrealized losses on swaps and swaptions	1,220		1,164
Nuclear decommissioning costs	964		1,012
Environmental cleanup costs - Kingston ash spill	856		874
Deferred nuclear generating units	650		709
Construction costs	619		619
Non-nuclear decommissioning costs	526		519
Unrealized losses on commodity derivatives	347		221
Environmental agreements	253		346
Other non-current regulatory assets	231		234
Total non-current regulatory assets	11,384		11,505
Total regulatory assets	$	12,153	$	12,048
Current regulatory liabilities
Fuel cost adjustment tax equivalents	$	137	$	127
Unrealized gains on commodity derivatives	81		153
Fuel cost adjustment liability	79		—
Total current regulatory liabilities	297		280
Non-current regulatory liabilities
Unrealized gains on commodity derivatives	205		285
Total regulatory liabilities	$	502	$	565

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Other Income (Expense), Net

3 Months Ended

Dec. 31, 2011

Other Income and Expenses [Abstract]

Other Income (Expense), Net

Other Income (Expense), Net

Income and expenses not related to TVA’s operating activities are summarized in the following table:

Other Income (Expense), Net
	For the Three Months Ended December 31
	2011		2010
External services	$	4	$	5
Interest income	2		2
Gains (losses) on investments	1		2
Miscellaneous	2		2
Total other income (expense), net	$	9	$	11

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Debt

3 Months Ended

Dec. 31, 2011

Debt Disclosure [Abstract]

Debt

Debt

Debt Outstanding

The TVA Act authorizes TVA to issue Bonds in an amount not to exceed $30.0 billion outstanding at any time.  Debt outstanding at December 31, 2011, and September 30, 2011, including the effect of translations related to Bonds denominated in foreign currencies, consisted of the following:

Debt Outstanding
	At December 31, 2011			At September 30, 2011
Short-term debt
Discount notes (net of discount)	$	785		$	482
Current maturities of long-term debt	1,558			1,537
Total short-term debt, net	2,343			2,019
Long-term debt
Long-term outstanding power bonds	22,604			22,647
Unamortized discount, premiums and other	(235		)	(235		)
Total long-term debt, net	22,369			22,412
Total outstanding debt	$	24,712		$	24,431

Debt Securities Activity

The table below summarizes TVA’s long-term Bond activity for the period from October 1, 2011, to December 31, 2011.

	Date	Amount		Interest Rate
Redemptions/Maturities:
2009 Series A	November 2011	$	2	2.25%
2009 Series B	December 2011	1		3.77%
electronotes®	Three Months Ended December 31, 2011	16		4.82%
Total		$	19

Credit Facility Agreements. TVA and the U.S. Treasury have entered into a memorandum of understanding under which the U.S. Treasury provides TVA with a $150 million credit facility.  This credit facility matures on September 30, 2012, and is expected to be renewed.  This arrangement is pursuant to the TVA Act.  TVA plans to use the U.S. Treasury credit facility as a secondary source of liquidity.  The interest rate on any borrowing under this facility is based on the average rate on outstanding marketable obligations of the United States with maturities from date of issue of one year or less.  There were no borrowings outstanding under the facility at December 31, 2011.

TVA also has funding available in the form of three long-term revolving credit facilities totaling $2.5 billion.  Both the $0.5 billion and one of the $1.0 billion credit facilities mature on January 14, 2014, and the other $1.0 billion credit facility matures on May 11, 2014.  The credit facilities also accommodate the issuance of letters of credit.  The interest rate on any borrowing under these facilities is variable based on market factors and the rating of TVA's senior unsecured long-term non-credit enhanced debt. TVA is required to pay an unused facility fee on the portion of the total $2.5 billion which TVA has not borrowed or committed under letters of credit. This fee, along with letter of credit fees, fluctuates depending on the rating of TVA's senior unsecured long-term non-credit enhanced debt.  At December 31, 2011, and September 30, 2011, there were $756 million and $575 million, respectively, of letters of credit outstanding under the facilities, and there were no borrowings outstanding. See Note 12 — Other Derivative Instruments — Collateral.

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Other Long-Term Liabilities

3 Months Ended

Dec. 31, 2011

Other Liabilities Disclosure [Abstract]

Other Long-Term Liabilities

Other Long-Term Liabilities

Other long-term liabilities consist primarily of liabilities related to certain derivative agreements as well as liabilities under agreements in respect of compliance with certain environmental regulations (see Note 16 — Environmental Agreements). The table below summarizes the types and amounts of liabilities:

Other Long-Term Liabilities
	At December 31, 2011		At September 30, 2011
Swaption liability	$	1,128	$	1,077
Interest rate swap liabilities	467		463
Environmental Agreements liability	254		346
Other	194		191
Coal contract derivative liabilities	155		119
Commodity swap derivative liabilities	101		78
Currency swap liabilities	89		131
Total other long-term liabilities	$	2,388	$	2,405

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Asset Retirement Obligations

3 Months Ended

Dec. 31, 2011

Asset Retirement Obligation Disclosure [Abstract]

Asset Retirement Obligations

Asset Retirement Obligations

During the three months ended December 31, 2011, TVA's total ARO liability increased $37 million due to normal accretion. The increase in the liability was partially offset by ash area settlement projects that were conducted during the three months ended December 31, 2011. The nuclear and non-nuclear accretion were deferred as regulatory assets, and $14 million of the related regulatory assets were amortized into expense since these amounts were collected in rates.

Reconciliation of Asset Retirement Obligation Liability
	Nuclear		Non-nuclear			Total
Balance at September 30, 2011	$	2,091	$	1,047		$	3,138
Settlements (ash storage areas)	—		(5		)	(5		)
Accretion (recorded as regulatory asset)	29		13			42
Change in estimate	—		—			—
Balance at December 31, 2011	$	2,120	$	1,055		$	3,175

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Leaseback Obligations

3 Months Ended

Dec. 31, 2011

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Leaseback Obligations

Leaseback Obligations

Prior to 2004, TVA received approximately $945 million in proceeds by entering into leaseback transactions for 24 new peaking combustion turbine units (“CTs”). TVA also received approximately $389 million in proceeds by entering into a leaseback transaction for qualified technological equipment and software (“QTE”) in 2003. Due to TVA's continuing involvement in the operation and maintenance of the leased units and equipment and its control over the distribution of power produced by the combustion turbine facilities during the leaseback term, TVA accounted for the lease proceeds as financing obligations. At December 31, 2011 and September 30, 2011, the outstanding leaseback obligations, related to CTs and QTE, were $885 million.

Seven States Power Corporation ("Seven States"), through its subsidiary, Seven States Southaven, LLC ("SSSL"), exercised its option to purchase from TVA an undivided 90 percent interest in a combined cycle combustion turbine facility in Southaven, Mississippi.  As part of interim joint-ownership arrangements, Seven States has the right at any time, and for any reason, until the earlier of the date long-term operational and power sales arrangements are in place or April 23, 2013, to require TVA to buy back Seven States's interest in the facility.  TVA will buy back Seven States's interest if long-term operational and power sales arrangements for the facility among TVA, Seven States, and SSSL, or alternative arrangements, are not in place by April 23, 2013.  TVA's buy-back obligation will terminate if such long-term arrangements are in place by that date.  In the event of a buy-back, TVA will re-acquire Seven States's interest in the facility and the related assets.  The carrying amount of the Southaven obligation on TVA's balance sheets was approximately $392 million at December 31, 2011, and $397 million at September 30, 2011. 

On August 8, 2011, a credit rating agency lowered the long-term rating of TVA's rated Bonds from AAA to AA+.  This downgrade constituted an event of default under the Amended and Restated Credit Agreement between Seven States and its lenders.  Upon the occurrence of such an event of default, Seven States's lenders may either impose a higher default interest rate on the loan or exercise an option to require TVA to re-acquire its interest in the Southaven facility and the related assets. 

On November 1, 2011, Seven States and its lenders, with the consent of TVA, executed an Amendment to the Amended and Restated Credit Agreement.  In this amendment, Seven States's lenders agreed to waive this event of default and thus waive the lenders' right to force TVA to re-acquire Seven States's interest in the Southaven facility and the related assets or to force Seven States to pay the default interest rate for this event of default.  Also, the amendment ties the interest rate on Seven States's credit facilities to TVA's credit rating.  Seven States will pay interest on the loan at either 1) LIBOR plus 62.5 basis points if TVA's corporate credit rating is AAA (or its equivalent) by all credit rating agencies, or 2) LIBOR plus 87.5 basis points if TVA's corporate credit rating is AA+ (or its equivalent) by one or more credit rating agencies and AAA (or its equivalent) by the other nationally recognized credit agencies.

Lease Ratings Downgrade

On November 29, 2011, one credit rating agency downgraded its ratings on various TVA long-term lease obligations from AA+ to AA-, and set the outlook on the ratings to stable.  The downgrades include TVA's obligations under long-term leasebacks for various generation facilities and technological equipment, and office real estate.  According to the rating agency, the downgrade reflects the application of newer criteria to the leases, rather than any TVA action, event, or change in business conditions.  At December 31, 2011 and September 30, 2011, the total balances of the leaseback obligations were $1.3 billion.

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Legal Proceedings

3 Months Ended

Dec. 31, 2011

Commitments and Contingencies Disclosure [Abstract]

Legal Proceedings

 Legal Proceedings

From time to time, TVA is a party to lawsuits, claims, proceedings, investigations, and other legal matters ("Legal Proceedings") that have arisen in the ordinary course of conducting TVA's activities, as a result of a catastrophic event or otherwise.  

General. TVA had accrued approximately $386 million of potential losses with respect to Legal Proceedings through December 31, 2011.  Of this amount, $254 million is included in Other long-term liabilities, $122 million is included in Accounts payable and accrued liabilities, and $10 million is included in Regulatory assets.  No assurance can be given that TVA will not be subject to significant additional claims and liabilities.  If actual liabilities significantly exceed the estimates made, TVA's results of operations, liquidity, and financial condition could be materially adversely affected.

Environmental Agreements. In 2011, TVA entered into two substantively similar agreements with EPA and with Alabama, Kentucky, North Carolina, Tennessee, and three environmental advocacy groups: the Sierra Club, National Parks Conservation Association, and Our Children’s Earth Foundation (collectively, the "Environmental Agreements”). They became effective on June 13, 2011.

The liabilities related to the Environmental Agreements are included in Other long-term liabilities on the December 31, 2011 Balance Sheet. In conjunction with the approval of the Environmental Agreements, the TVA Board determined that it was appropriate to record the amounts detailed above as regulatory assets, and they are included as such on the December 31, 2011 Balance Sheet and will be recovered in rates in future periods.

    Several legal and administrative clean air proceedings have already been terminated in connection with the Environmental Agreements. Additionally, the proceedings discussed below involving the John Sevier Fossil Plant ("John Sevier")and Shawnee Fossil Plant (“Shawnee”) Clean Air Act ("CAA") permits are expected to be narrowed in scope.

Legal Proceedings Related to the Kingston Ash Spill. Seventy-eight lawsuits based on the Kingston ash spill have been filed in the United States District Court for the Eastern District of Tennessee. Fifteen of these lawsuits have been dismissed, and 63 lawsuits are active and in various stages of litigation. Plaintiffs are residents, businesses, and property owners in the Kingston area and allege tort claims for damage to property, e.g. nuisance, strict liability, trespass, and negligence, with some plaintiffs also alleging claims for personal injury, business loss, and inverse condemnation. Plaintiffs seek unspecified compensatory and punitive damages, court orders to clean up properties and other relief. TVA is the only active defendant in these actions.

A bench trial on the issue of dike failure causation in the seven earliest cases was held in September and October, 2011 (“Phase I trial”), and a decision on the dike failure causation issues is expected in the spring or summer of 2012. The district court also approved stipulations in 53 of the remaining 56 cases in which plaintiffs and TVA agreed to adopt the Phase I trial record and be bound by the Court’s Phase I trial decision and a temporary stay of proceedings pending the court’s trial decision.

TVA has received several notices of intent to sue under various environmental statutes from both individuals and environmental groups, but no such suits have been filed.

Civil Penalty and Natural Resource Damages for the Kingston Ash Spill.  On June 14, 2010, the TDEC issued a civil penalty order of approximately $12 million to TVA for the Kingston ash spill, citing violations of the Tennessee Solid Waste Disposal Act and the Tennessee Water Quality Control Act.  Of the $12 million, TVA has already satisfied $8 million, and TDEC has approved environmental projects valued at $2 million as a credit against the penalty amount. The remaining $2 million obligation will be paid in a final installment due on or before July 15, 2012. On January 24, 2011, TVA entered into a memorandum of agreement with the TDEC and the U.S. Fish and Wildlife Service establishing a process and a method for resolving the natural resource damage claim associated with the Kingston ash spill.  As part of this memorandum of agreement, TVA agreed to pay $250 thousand each year for three years as a down payment on the amount of natural resource damages ultimately established.  TVA is also required to reimburse TDEC and the U.S. Fish and Wildlife Service for their costs.

Case Involving Tennessee Valley Authority Retirement System.  On March 5, 2010, eight current and former participants in and beneficiaries of Tennessee Valley Authority Retirement System ("TVARS") filed suit in the United States District Court for the Middle District of Tennessee against the six then-current members of the TVARS Board of Directors ("TVARS Board").  The lawsuit challenged the TVARS Board's decision to suspend the TVA contribution requirements for 2010 through 2013, and to amend the TVARS Rules and Regulations to (1) reduce the calculation for cost of living adjustment ("COLA") benefits for CY 2010 through CY 2013, (2) reduce the interest crediting rate for the fixed fund accounts, and (3) increase the eligibility age to receive COLAs from age 55 to 60.  The plaintiffs allege that these actions violated the TVARS Board members' fiduciary duties to the plaintiffs (and the purported class) and the plaintiffs' contractual rights, among other claims.  The plaintiffs sought, among other things, unspecified damages, an order directing the TVARS Board to rescind the amendments, and the appointment of a seventh TVARS Board member.  Five of the six individual defendants filed motions to dismiss the lawsuit, while the remaining defendant filed an answer to the complaint.  On July 28, 2010, TVA moved to intervene in the suit in the event it was not dismissed.  On September 7, 2010, the district court dismissed the breach of fiduciary duty claim against the directors without prejudice, allowing the plaintiffs to file an amended complaint within 14 days against TVARS and TVA but not the individual directors.  The plaintiffs previously had voluntarily withdrawn their constitutional claims, so the court also dismissed those claims without prejudice.  The court dismissed with prejudice the plaintiffs' claims for breach of contract, violation of the Internal Revenue Code, and appointment of a seventh TVARS Board member. 

On September 21, 2010, the plaintiffs filed an amended complaint against TVARS and TVA.  The plaintiffs allege, among other things, violations of their constitutional rights (due process, equal protection, and property rights), violations of the Administrative Procedure Act, and breach of statutory duties owed to the plaintiffs.  They seek a declaratory judgment and appropriate relief for the alleged statutory and constitutional violations and breaches of duty.  TVA filed its answer to the amended complaint on December 27, 2010.  A briefing schedule has been issued and final dispositive motions are due on October 12, 2012.

Case Arising out of Hurricane Katrina.  In April 2006, TVA was added as a defendant to a class action lawsuit brought in the United States District Court for the Southern District of Mississippi by 14 Mississippi residents allegedly injured by Hurricane Katrina.  The plaintiffs sued seven large oil companies and an oil company trade association, three large chemical companies and a chemical trade association, and 31 large companies involved in the mining and/or burning of coal, alleging that the defendants' greenhouse gas ("GHG") emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina's increased destructive force.  Action by the United States Supreme Court on January 10, 2011, ended this case in a manner favorable to TVA.

On May 27, 2011, under a Mississippi state statute that permits the re-filing of lawsuits that were dismissed on procedural grounds, the plaintiffs filed another lawsuit against the same and additional defendants, again alleging that the defendants' GHG emissions contributed to global warming and were a proximate and direct cause of Hurricane Katrina' s increased destructive force. A number of defendants, including TVA, have filed motions to dismiss the complaint.

Global Warming Cases, Southern District of New York.  On July 21, 2004, two lawsuits were filed in the United States District Court for the Southern District of New York against TVA and other companies that generate power from fossil-fuel electric generating facilities. The plaintiffs alleged that carbon dioxide ("CO₂") emissions from such facilities should be ordered abated because they contributed to global warming.   In September 2005, the district court dismissed both lawsuits because they raised political questions that should not be decided by the courts.  Following appellate proceedings, the United States Supreme Court issued a decision on June 16, 2011, that any federal common law cause of action was displaced by the CAA and its implementing regulations. The Supreme Court did not address the plaintiffs' state law claims, but instead remanded the case. The district court entered orders on December 5, 2011, dismissing the federal common law claims in both lawsuits. On December 6, 2011, the plaintiffs voluntarily dismissed the state law claims, ending the lawsuits in a manner favorable to TVA.

Case Regarding Bellefonte Nuclear Plant Units 1 and 2.  On March 9, 2009, in response to a request by TVA, the Nuclear Regulatory Commission ("NRC") issued an order reinstating the construction permits for Bellefonte Nuclear Plant ("Bellefonte").  On March 30, 2009, Blue Ridge Environmental Defense League (“BREDL”) filed a petition in the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) challenging the NRC's authority to reinstate the construction permits and alleging that the NRC failed to follow the requirements of the National Environmental Policy Act (“NEPA”).  TVA was permitted to intervene in this proceeding.  On June 11, 2009, the D.C. Circuit issued an order holding the case in abeyance pending further order of the court.  On March 8, 2010, BREDL filed a second petition in the D.C. Circuit, again challenging the NRC's compliance with NEPA and the NRC's authority to reinstate the construction permits.  TVA was granted intervenor status in this case as well, and requested that the court dismiss this second petition.  On July 26, 2010, the D.C. Circuit consolidated the two BREDL petitions and continued the stay of the case pending the conclusion of an administrative proceeding concerning the same issues.  The administrative proceeding, in which BREDL challenged the reinstatement of the construction permits before an NRC Atomic Safety and Licensing Board (“ASLB”), was completed on September 29, 2010, with the dismissal of all contentions.  Upon completion of the administrative proceeding, the D.C. Circuit on November 5, 2010, issued an order returning the two cases to the court's active docket.  Final briefs have been submitted, and oral arguments took place on October 20, 2011.

Administrative Proceedings Regarding Bellefonte Units 3 and 4.  TVA submitted its combined construction and operating license application ("CCOLA") for two Advanced Passive 1000 reactors at Bellefonte Units 3 and 4 to the NRC in October 2007.  On June 6, 2008, Bellefonte Efficiency and Sustainability Team (“BEST”), BREDL, and Southern Alliance for Clean Energy (“SACE”) submitted to the NRC a joint petition for intervention and a request for a hearing.  The petition raised 20 potential contentions with respect to TVA's CCOLA.  The ASLB denied standing to BEST and admitted four of the 20 contentions submitted by BREDL and SACE.  The NRC later reversed the ASLB's decision to admit two of the four contentions, leaving only two contentions (which involve questions about the estimated costs of the new nuclear plant and the impact of the facility's operations, in particular the plant intake, on aquatic ecology) to be litigated in a future hearing.  On September 29, 2010, TVA notified the NRC that the recently completed final Supplemental Environmental Impact Statement had determined that completion of the partially constructed Bellefonte Unit 1 is the preferred alternative for near-term additional generating capacity at the Bellefonte site.  Consequently, TVA has requested, and the NRC has agreed, to place the CCOLA in “suspended” status indefinitely. On January 6, 2012, TVA also notified the ASLB of the suspended status of the CCOLA, and requested that the ASLB hold the proceeding in abeyance pending a decision by TVA regarding the best path forward with regards to the CCOLA. TVA expects to continue to request that the proceeding be held in abeyance until the risks of completing Bellefonte Unit 1 are substantially understood and construction is resumed.

On August 11, 2011, BREDL and SACE petitioned for the admission of a new, late-filed contention to require the environmental analysis completed for the CCOLA to consider the findings of the NRC's Near-Term Task Force on the Fukushima Event regarding the events at the Fukushima Daiichi Nuclear Power Plant ("Fukushima Daiichi").  On November 30, 2011, the ASLB, after considering the submissions of the parties, determined that the proposed contention failed to meet the standards for admission of a new contention in the proceeding.

Administrative Proceedings Regarding Watts Bar Nuclear Plant Unit 2.  On July 13, 2009, SACE, the Tennessee Environmental Council, the Sierra Club, We the People, and BREDL filed a request for a hearing and petition to intervene in the NRC administrative process reviewing TVA's application for an operating license for Watts Bar Nuclear Plant ("Watts Bar") Unit 2.  The petitioners raised seven contentions related to TVA's environmental review of the project and the NRC's basis for confidence in the availability of safe storage options for spent nuclear fuel.  On November 19, 2009, the ASLB granted SACE's request for hearing, admitted two of SACE's seven contentions for hearing, and denied the request for hearing submitted on behalf of the other four petitioners.  On March 26, 2010, the NRC affirmed the ASLB's decision denying the other petitioners the opportunity to participate.  After providing additional information to the NRC on April 9, 2010, which addressed one of the two admitted contentions, TVA submitted a motion asking the ASLB to dismiss the contention as moot.  The motion was unopposed by SACE and on June 2, 2010, the ASLB granted TVA's motion to dismiss the contention.  SACE also asked the ASLB to waive the NRC's longstanding regulations establishing that, for the purposes of NEPA, the need for power and alternative energy source issues will not be considered in operating license proceedings.  On June 29, 2010, the ASLB denied this request and declined to refer the waiver petition to the NRC for consideration.  SACE subsequently filed a petition for interlocutory review of this decision with the NRC, which the NRC denied on November 30, 2010.  Regarding the sole remaining contention which raises concerns about the aquatic impacts of two-unit operation, several additional reports have been provided to the NRC providing up-to-date information to address this contention.  These reports include a mussel survey report and an entrainment report, both issued on March 24, 2011, and an impingement report issued on March 29, 2011.  A supplement to the impingement report was submitted on April 28, 2011.  A hearing on the remaining contention is expected to take place in the latter part of 2012.  On August 11, 2011, SACE petitioned for the admission of a new, late-filed contention to require the environmental analysis completed for TVA's operating license application to consider the findings of the NRC's Near-Term Task Force on the Fukushima Event regarding the events at the Fukushima Daiichi reactors.  TVA submitted a reply brief on September 6, 2011, opposing admission of such a contention on the grounds it does not satisfy the standards for non-timely contentions or the standards for admitting a new contention. On November 21, 2011, TVA filed a motion for summary disposition, arguing that additional aquatic studies conducted by TVA meant there is no longer a genuine issue of material fact. SACE and the NRC staff filed their answers to the motion on December 20, 2011; SACE opposed TVA's motion while the NRC staff supported it.

John Sevier CAA Permit.  On September 20, 2010, the Environmental Integrity Project, the Southern Environmental Law Center, and the Tennessee Environmental Council filed a petition with the EPA, requesting that the EPA Administrator object to the CAA permit issued to TVA for operation of John Sevier.  Among other things, the petitioners allege that repair, maintenance, or replacement activities undertaken at John Sevier Unit 3 in 1986 triggered the Prevention of Significant Deterioration (“PSD”) requirements for sulfer dioxide ("SO₂") and nitrogen oxides ("NO_x").  The CAA permit, issued by TDEC, remains in effect pending the disposition of the EPA's petition.  The Environmental Agreements should narrow the scope of this proceeding. See Environmental Agreements.

Shawnee CAA Permit.  On December 16, 2010, the Environmental Integrity Project and the SACE filed a petition with the EPA requesting that the EPA Administrator object to the proposed CAA renewal permit issued to TVA for operations at Shawnee.  Among other things, the petitioners allege that repair, maintenance, or replacement undertaken at Shawnee Units 1 and 4 in the 1989-90 period triggered the PSD requirements for SO₂ and NO_x.  The current permit remains in effect pending Kentucky Division for Air Quality finalization of the renewal permit.  The Environmental Agreements should narrow the scope of this proceeding.  See Environmental Agreements.

Kingston NPDES Permit Appeal.  The Sierra Club filed a challenge to the National Pollutant Discharge Elimination System (“NPDES”) permit issued by Tennessee for the scrubber-gypsum pond discharge at Kingston in November 2009 before the Tennessee Water Quality Control Board (“TWQCB”).  This is the second such challenge nationally.  In addition to its allegation that Tennessee violated the Clean Water Act by failing to set specific limits on certain toxic discharges, the Sierra Club alleges that no discharges from the pond infrastructure should be allowed because zero-discharge scrubbers exist.  TDEC is the defendant in the challenge, and TVA has intervened in support of TDEC's decision to issue the permit.  The matter was set for a hearing before the TWQCB in February 2011 but has since been stayed by agreement of the parties.  The other similar challenge involves an Allegheny Power NPDES permit for its scrubber discharge at a Pennsylvania plant.

Bull Run NDPES Permit Appeal.  SACE and the Tennessee Clean Water Network (“TCWN”) filed a challenge to the NPDES permit for Bull Run on November 1, 2010.  TDEC is the defendant in the challenge and TVA's petition to intervene to support TDEC's decision to issue the permit was granted on January 12, 2011.  The matter is expected to go to a hearing before the TWQCB in the spring of 2012.

Johnsonville Fossil Plant NDPES Permit Appeal.  SACE and TCWN filed a challenge to the NPDES permit for Johnsonville Fossil Plant ("Johnsonville") on or about March 10, 2011.  TDEC is the defendant in the challenge.  TVA's motion to intervene was granted on August 3, 2011. The matter has not yet been given a hearing date before the TWQCB.

John Sevier Fossil Plant NDPES Permit Appeal.  SACE and TCWN filed a challenge to the NPDES permit for John Sevier on or about May 31, 2011.  TDEC is the defendant in the challenge.  TVA's motion to intervene was granted on August 3, 2011. The matter has not yet been given a hearing date before the TWQCB.

Information Request from the EPA.  On April 25, 2008, TVA received a request from the EPA under Section 114 of the CAA requesting extensive information about maintenance, repair, and replacement projects at and the operations of 14 coal-fired units. The Environmental Agreements have resolved most issues related to this information request, excluding claims related to sulfuric acid mist.  See Environmental Agreements.

Petitions Resulting from Japanese Nuclear Events. As a result of the March 11, 2011 Japanese nuclear events, petitions have been filed with the NRC which could impact TVA's nuclear program. While some petitions have been dismissed after review, petitions that remain open include the following:

• Petition to Immediately Suspend the Operating Licenses of GE BWR Mark I Units Pending the Full NRC Review With Independent Expert and Public Participation From Affected Emergency Planning Zone Communities

Beyond Nuclear filed a petition on April 13, 2011, requesting that the NRC take emergency enforcement action against all nuclear reactor licensees that operate units that use the General Electric Mark I BWR design. TVA uses this design at Browns Ferry Nuclear Plant ("Browns Ferry") Units 1, 2, and 3. The petition requests the NRC to take several actions, including the suspension of the operating licenses at the affected nuclear units, including Browns Ferry, until several milestones have been met. On December 13, 2011, the NRC provided its initial response to the petition. The NRC accepted five specific requests that would apply directly or indirectly to TVA's Browns Ferry, including issues relating to spent fuel pool use and location, Mark I containment hardened vent systems and design, and backup electrical power. Each of these items was accepted for further investigation, but the requests for immediate action were rejected.

• Twelve separate petitions on various issues

On July 27, 2011, the Natural Resources Defense Council submitted twelve separate letters to the NRC requesting action on various health and safety aspects of operating nuclear facilities in the United States. The NRC is treating these as a single 2.206 Petition, and the issues are currently under review.

• Petition Pursuant to 10 CFR 2.206 - Demand For Information Regarding Compliance with 10 CFR 50, Appendix A, General Design Criterion 44, Cooling Water, and 10 CFR 50.49, Environmental Qualification

A petition was filed by the Union of Concerned Scientists on July 29, 2011, requesting that a demand for information be issued for affected licensees, including TVA with regards to Browns Ferry, to describe how the facility complies with General Design Criterion 44, Cooling Water, within Appendix A to 10 CFR Part 50, and with 10 CFR 50.49, Environmental Qualification of Electric Equipment Important to Safety for Nuclear Power Plants, for all applicable design and licensing bases events. This petition is under review.

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STATEMENTS OF CHANGES IN PROPRIETARY CAPITAL (UNAUDITED) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Balance at Beginning of Period	$ 5,229	$ 5,137
Net income (loss)	(173)	(48)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	42	49
Reclassification to earnings from cash flow hedges	3	7
Total other comprehensive income (loss)	45	56
Return on power program appropriation investment	(2)	(2)
Return of power program appropriation investment	(5)	(5)
Balance at End of Period	5,094	5,138
Power Program Appropriation Investment
Balance at Beginning of Period	308	328
Net income (loss)	0	0
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	0	0
Reclassification to earnings from cash flow hedges	0	0
Total other comprehensive income (loss)	0	0
Return on power program appropriation investment	0	0
Return of power program appropriation investment	(5)	(5)
Balance at End of Period	303	323
Power Program Retained Earnings
Balance at Beginning of Period	4,429	4,264
Net income (loss)	(170)	(45)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	0	0
Reclassification to earnings from cash flow hedges	0	0
Total other comprehensive income (loss)	0	0
Return on power program appropriation investment	(2)	(2)
Return of power program appropriation investment	0	0
Balance at End of Period	4,257	4,217
Nonpower Programs Appropriation Investment, Net
Balance at Beginning of Period	630	640
Net income (loss)	(3)	(3)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	0	0
Reclassification to earnings from cash flow hedges	0	0
Total other comprehensive income (loss)	0	0
Return on power program appropriation investment	0	0
Return of power program appropriation investment	0	0
Balance at End of Period	627	637
Accumulated Other Comprehensive Income (Loss)
Balance at Beginning of Period	(138)	(95)
Net income (loss)	0	0
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	42	49
Reclassification to earnings from cash flow hedges	3	7
Total other comprehensive income (loss)	45	56
Return on power program appropriation investment	0	0
Return of power program appropriation investment	0	0
Balance at End of Period	(93)	(39)
Comprehensive Income (Loss)
Net income (loss)	(173)	(48)
Other comprehensive income (loss)
Net unrealized gain (loss) on future cash flow hedges	42	49
Reclassification to earnings from cash flow hedges	3	7
Total other comprehensive income (loss)	45	56
Total comprehensive income (loss)	$ (128)	$ 8

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Other Long-Term Assets

3 Months Ended

Dec. 31, 2011

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Other Long-Term Assets

Other Long-Term Assets

The table below summarizes the types and amounts of TVA’s other long-term assets:

Other Long-Term Assets
	At December 31, 2011		At September 30, 2011
Coal contract derivative assets	$	202	$	285
Loans and other long-term receivables, net	76		74
Other	11		13
Total other long-term assets	$	289	$	372

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Benefit Plans

3 Months Ended

Dec. 31, 2011

Compensation and Retirement Disclosure [Abstract]

Benefit Plans

Benefit Plans

TVA sponsors a qualified defined benefit pension plan that covers most of its full-time employees, a qualified defined contribution plan that covers most of its full-time employees, two unfunded post-retirement health care plans that provide for non-vested contributions toward the cost of certain retirees' medical coverage, other postemployment benefits such as workers' compensation, and the SERP.

The components of net periodic benefit cost and other amounts recognized as changes in regulatory assets for the three months ended December 31, 2011 and 2010 were as follows:

Components of TVA’s Benefit Plans
	For the Three Months Ended December 31
	Pension Benefits						Other Post-retirement Benefits
	2011			2010			2011			2010
Service cost	$	35		$	30		$	5		$	3
Interest cost	122			125			9			8
Expected return on plan assets	(109		)	(122		)	—			—
Amortization of prior service cost	(6		)	(6		)	(2		)	(1		)
Recognized net actuarial loss	90			71			7			5
Net periodic benefit cost as actuarially determined	132			98			19			15
Amount charged (capitalized) due to actions of regulator	—			3			—			—
Total net periodic benefit cost recognized	$	132		$	101		$	19		$	15

During the three months ended December 31, 2011, TVA did not make contributions to its qualified defined benefit pension plan. TVA does not separately set aside assets to fund other benefit costs, but rather funds such costs on an as-paid basis. TVA provided approximately $13 million and $12 million for other benefit costs during the three months ended December 31, 2011 and 2010, respectively. Net amounts capitalized due to actions of regulators include amounts that have been deemed probable of recovery in future rates.