Mom and pop power

By DAVID MOON, Moon Capital Management
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 million dollars.

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).

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