Business Council on fiscal fitness
— an inside look

Understanding of measurements is essential to making right business decisions in fast-paced industry

The business of TVA’s business is a story that can be told in numbers.

	Bulk Power Trading Vice President Amy Burns and Outage Planning & Execution Senior VP Ron Loving listen to a presentation at the April 28 Business Council meeting.

On April 29 and 30, the 58 members of TVA’s Business Council met in Knoxville to study how financial health is measured in the industry, how TVA’s financial health is measured — and how decisions of Business Council members affect TVA’s financial health.

In his keynote remarks, Chairman McCullough said, “Money is the way we keep score. To plan, to carry out our strategies, to stay ahead of fast-paced changes in our industry, we must all understand the full panorama of business measurements that play into every business decision we make.”

Chief Financial Officer David Smith followed with a presentation on a half-dozen key financial-health indicators.

“Debt reduction is the measure we hear most about,” Smith said. “But others that are just as significant include cash flow from operations, net interest expense as a percentage of total revenues, operating costs, cash return on investments and average price comparison with other utilities.”

Wall Street bond analysts use these statistical measures to rate TVA bonds. TVA’s AAA rating — the highest given — enables the corporation to borrow at advantageous interest rates.

“Cash flow is king in the credit marketplace,” McCullough said.

“As leaders of this company, it’s our job to take the measurement of TVA’s financial health and make it personal.”

Generating capacity up, debt down
In recent years, the Board has followed a strategy of investing prudently in new generating capacity and clean-air equipment, while reducing the debt each year. So TVA’s generating capacity has steadily increased, while the total debt and the percentage of revenue dollars paying interest have been reduced.

Director Baxter addressed the difficult tradeoffs that are part of TVA’s budget planning for the coming years.

“We have three initiatives, in addition to operations and maintenance,” he said. “They are Browns Ferry Unit 1, clean air and reducing the debt. How do we balance these things? There are going to have to be some tradeoffs.

Director Harris discussed the importance of communicating those tough decisions — notably the proposed rate adjustment, which would take place on Oct. 1.

“We are proposing a 5.9-percent wholesale-rate increase to cover the increasing costs of clean-air improvements,” she said. “This increase will yield about $365 million in annual revenue, which squares up with the $1 million per day we are spending on clean-air technologies.”

The Board has stressed that these improvements are necessary for continuing compliance with environmental regulations. They also are necessary from a business standpoint, to enable TVA to keep producing low-cost power from its fossil plants well into the 21st century.

From a financial standpoint, however, environmental investments are different from the money being spent to restart Browns Ferry Nuclear Plant’s Unit 1.

In 2007, that unit is scheduled to start producing power and revenues. Estimates are that it will pay for itself by 2015.

Environmental equipment — while making it possible to keep using valuable, efficient units — will not create more revenue, which is an important consideration in TVA’s budget planning.

While Business Council members were taking in the Financial Big Picture, they also saw a dramatic illustration of how the numbers picture always depends on the Operational Big Picture.

The three Board members, President/Chief Operating Officer Ike Zeringue and River System Operations & Environment Executive Vice President Kate Jackson joined in recognizing the post-fire Watts Bar Hydro Recovery Team. The team has brought back two of the Watts Bar hydro units and is ahead of schedule and under budget in bringing back the other three.

“This team has demonstrated excellence in achievement, embodying teamwork, flexibility, dedication and honest communication,” McCullough said. “It has set a high example for all of us to try to follow and learn from.”

— BROOKS CLARK

May 2003

Continuing debt reduction

Reducing TVA’s delivered cost of power