By DAVID MOON, Moon Capital
October 3, 2004
Imagine you own a gift shop with operations you project to generate 130
thousand dollars of excess cash next year. The following year, you project
it will generate about the same. So far, so good.
But you have to spend
130 or 140 thousand dollars remodeling your store each year, leaving you with
little or nothing with which to buy groceries and school clothes. And you
still owe 110 thousand dollars on your cash register lease.
Depressed yet? There is one final miniscule fact: you borrowed a bunch
of money to open your little gift shop ' and you owe the bank more than $2
You are trying to get the bank off your back. You told them you would
try to pay an extra $22,500 on the principal each year. At that rate, you
could make a significant dent in your debt over the next few years.
But you really don't pay the bank an extra $22,500 this year. You only
pay them $7,230. Next year, you won't meet your debt reduction goal
either; you plan to pay only an extra $8,460. The following year you
expect to pay $980, barely causing a ripple in your $2 million balance. At
that rate, you could get that debt paid off in about 2,000 years. To try
to placate the bank, you try to get them to give you 'debt reduction credit' for
making lease payments on your cash register.
Multiply each of the numbers in this example by ten thousand.
That is the budget just adopted by the Tennessee Valley Authority. Instead
of generating $130,000 in cash from operations, TVA generates about $1.3
billion. Instead of $2 million in long-term debt, TVA owes $21.3
billion. And instead of paying an additional 2006 principal loan payment
of $980, TVA plans to pay an additional $9.8 million ' which is still a rate at
which the debt would be fully paid in 2,000 years. I wonder if the Browns
Ferry nuclear plant will still be in operation then?
The new budget meets its $225 million debt reduction target next year by
including the amount of lease payments TVA is already required to make in its
definition of 'debt reduction.' Including these types of operating
expenses is not what TVA promised when they recently adopted a highly public
debt reduction plan. I could pay off my house mortgage pretty quickly if
the bank also gave me credit for making my car and credit card payments.
The enormous debt from a 1970s era plunge into nuclear power plant
construction creates a daunting financial challenge for TVA. It is
irresponsible to pretend to address this challenge by playing games with the
definition of 'debt reduction.'
There are some promising signs. The newly approved budget was
apparently the source of real debate and discussion, as one of the three
directors (Knoxville's Bill Baxter) voted against its approval. There is
increasing Congressional support for reorganizing TVA's weird management and
governance structure to make it look more like a real business. Our little
multi-billion dollar gift shop needs it.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).