ML20098C883

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Implications of WPPSS Problems on Investor Owned Utils in Pacific Northwest
ML20098C883
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Site: Columbia, 05000000, Satsop
Issue date: 05/27/1983
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ML20093C821 List: ... further results
References
CON-WPPSS-120, FOIA-84-603 NUDOCS 8409270258
Download: ML20098C883 (7)
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%5 l3 LE. ROD 5354 N 10WBD4 55 NVMER ST., NEW K)RK, NEW M 10041 i

Tel 919425-3300 DAMELSCOTTO May 27, 1983 o

n IMPLICM'ICNS CF HASHINGICN PUBLIC POWI:R SUPPLY SYSITM PIOBLDE l N INVISIOR OINED 17fILITIES IN 'IHE PACIFIC NORMEST IFR7f IDNERS RATINGS CH: PACIFIC PONER, PORITAND GENERAL, PUGET SOLND AND NASHIN3ICN WMER PODER OVERVIDi As the Washington Dublic Power Supoly Systan m) #4 and #5 nuclear projects near t the brink of default, an assessnent nust be made cancerning the fate of the PPS #3 nuclear plant in which four investor owned utilities (IOUs)-Pacific Power & Light, Portland General, Puget Sound and Washingtcn Water Power--have a cunnlative 30%

interest. At this juncture, it appears as though project #3 has sufficient funds to continue construction only through the smmer. Approximately $1 billion nust be raised to cxmplete the plant which was scheEhtled for mid-1946 car 1mercial operation. But harmiaa of the Supply Systan'c highly piihlicived problans with -

the #4 and #5 units, along with the Banneville Power Administraticm's (BPA) own budgetary and legal difficulties, the future of NPS #3 is in serious jeopardy.

Cri May 27, 1983 the Su,rply Systan instituted an extended work suspension at project #3. A construction slo.down, frequently the first step toward project tenninaticn, is dictated by a lack of finds and an inability to arms the caoital markets until 4 and 5 problans are resolved. About the only things t@S #3 seans to have going for it right now are that: (1) logic would dictate that a project whidt is 73% otmplete sirild proceed, and (2) the Regional Power Act has s established a need for the plant. Iogic notwithstanding, termination of NDS #3 I

. is a risk which nust be addressed as is the IOU's ability to handle a sizeable WPS #3 writMff, a=ra-4=11y since it is likely that the Skagit nuclear plant has gone sour and will have to be written-off as well. If project #3 is eventually terminated, all four 100 pat +icinants will have to lean ve.y heavily on th '-

respective state ocnnissions in order to maintain their financial integrity.

Given the sizeable asset over-hang and regulatory preewh ts established thus i far, the credit 2npact will not be evenly distributed anrmg the four cxmpanies.

8409270258 840824 PDR FOIA i COHEN 84-603 PDR COPYRIGHT 1983 LF. ROTHSCHILD, UNTERSERG, ToWSIN

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From a credit y .pc.tive, the effects of any write off go beyond Rather, reoorting reduced " pacer" '

i or non-cash losses fcxr a quarter or even the entire year.fleihility, potentia fin =rei=1

, i d eventual write-off tv== ret equity erosion could result from the cancellat on anInasuuch as the current fin I

of the WS #3 investment.

important indicator of the ICO's ability to deal with the write-off l stress of Skagit and WS #3 tamina*iens,in the final analysis, the r-i atory recourse 'Est availahle win be the sian'1a most critical variable feirur each utility.

M11=L'ig table <*- = ^--1ses our view of the financial wherewithal and the r=g'_'1=*a7 myyw L likely to be provided in the event of a termination for each company, along with the Moody's, S&P, and IEM7f ratings.

Fin =rei =1 W1 =*my IERTP Moody's S&P therewithan Swt 'Baa2 Eiii K Pacific Power & Light Favorable Poor Baa2 BBB- BBB3 Poor Poor Portland General Favorable ,Baa2 BBB BBB3 Puget Sound Poor BBB+ BBB3 1

Poor Favorable A3 Washington 1 tater i

W.ile Puget Sound and Washington Water Power tvnld not handle a write-off without same form of offsetting rate recovery, our current view is that iblythe NDS-y v yect for a regulatory " cure" to the Skagit termination-and possMe would be forthecuning.

4e evidence of this in July when win h the Washington i==4rm prescribes treatment for Puget's investment in the Niether or not the July premAarit terminated Pekble Springs nuclear plant.

win carry over to other plants is an uncertainty we are taking into cransidera-l timl at this time by Imairitig our ratings en Puget and WashingtonThe Water fran cornerstone of l MB2 to BBB3-and we place them nid-range within the category.

our rating is an expectaticm that .the Nadirigtan otanissicm can and win support these otepanies; however, as events tatfold we may have to rethink our oosition.

Pacific Power en the other hand, is a mbeed bag--what it lacks in regulatory Pacific's better financial apport is made w for in financial strength.it a decisive edge over the entire resiliance and operating diversity give 14 tile we have also gro@ and we cxmsider it straig within the BBB3 category. revised Portlan growing, reflecting the inordinate degree of regulatary risk facing the atmpany n:-t the W--- -

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'ig atmths we At this point, we feel U h m;7f pleing the ICU's W--

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= offer its smet ints,.6 Fang Est. Par 1Fic FG = , Pt wi S -F=",, and thshin.g'e s

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we h:: Jc less uum#t - iE in FMlarid Giinsral's outlook.

' Die Future of hhir.,Lcs Public Power 9Emly System Projects t With MoS #4 As of this writing, the future of WS is more smoertain than ever.

and #5 en the brink of default, one cannot help but wonder what the consequences Work win be for projects #1, #2, and #3 (the net-bined, IPA backed plants) .

on project #1 was suspended last year har anna of a lower load forecast released by the Bonnevine Power Administration (IPA), a distributor of power in theSince the b Pacific Northwest and an agency of the federal gow. _it.

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, of 1983, work on units #2 and #3 has been pw=3ing at a radmad rate, largely Q as a result of the inability of WPS to market new securities haemm of the

, problems at units #4 and #5. We following table mmmarizes the current status, otmatruction schedules, and estimated financing requirements for each of the five W S projects.

Deroent Cu. w eial Bands Bands 'Ib Be capability Otmolete operation outstanding Issued Project (MarJm mtts) (4/83) Date ($Millims) (SMillicms)

No.1 1,250 63% *?bthballed $2,155 N.A. i No.2 1,100 95 10 1984 2,370 $149 No.3 1,240 l 73 20 1986 1,600 961 No.4 1,250 24 Terminated -

No.5 1,240 3 'IV.rminated **2.250 _

    • ibrk has been suspended,but the last official service date estimate was 2Q 1986.

'Ibtal bands outstanding on projects #4 and #5.

Se two key projects to focus on are #2 and #3, whicti require $149 and $961 millicm, respectively, in order to be cmpleted. At this juncture, it appears as though BPA will put tp the mtmey naadad to finish unit #2 frun its own revenue strean. However, the future of unit #3 is not as bright for two reasons. First, in order for BPA to crme tp with the $1 billion or so for otzpletion, see form of Otmgressional legislation would be required in order to give BPA direct ammis

' to the capital markets. Although bills will be intrr*M to give BPA financing authority, we suspect that any resolution would be ebroiled in the political

( process and, as such, we hold little hope that this endeavor will be successful in.the near term. A second and more prunising option would be to have a new agency created to finance under a different name with BPA throwing its credit behind the entity, thus renoving it as far as possible frun the "100PS" st4gna.

Fran a practical standpoint, this sees to be the nost feasible means of getting the amey to finish unit #3. Yet there is one other sH_=bling block--rmely, in order for a new agency to asstane responsibility for finishing unit #3 (in which the investor owned utilities have a 30% <-lative share) the assets nust be unbtmdled frun the financial liabilities of projects #4 and #5. This is the

, case not cmly be=aa units #3 and #5 share a canon site, but hem = the whole project is held hostage by the FS financing tabrella. It is inclear at this point what ocmoessions will have to be made in order to effect an asset separa-1 ticm. !breover, the separation process would be emplicated by the as yet tm-resolved question of allocating atmnon feility charges to mit #3. WS has i

indicated that these costs oculd total $504 millirwi, consisting of $269 million of already incurred expenditures and $235 million of pwei-ctive charges cm t

unit #5. % e cost-sharing issue is currently in litigation and there exists the possibility that an mount less than $504 million will ultimately be shifted

'to unit #3. In view of this, the previous cost estimate of $2.6 billicm for mit #3 is ur heated and, as a result, it is likely that the $1 billion of financing naaaad to caplete the unit is also low.

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L The over-riding observation to be made from the beleaguered Was situationThe w

  • L is that time, and array, are running out. ,

go m indefinitely, a cash infusicm wouldc40us haveuncertainty been needed by this surromdir - WS, August in orde for further work to sd. Given the L. Thus, w exnected it does not appear that any financing can be dcme at this time.

the WS announment on May 27, 1983 of an extended construction slow-down on The intention behindHowever, this action we would mit #3 and possible mothballing of the plant.be to buy time to investigate and believe that this nove may only ev--=wul the problems facing WPS.With a price tag of the in-service date of unit #3 would increase its cost.

j anywhere desfra of the$2.8 plant already to $3.1 bM11nn in question, it is hard (depending This toisinngine particularlyhow the upon ter l

project could make ar='=ie sense at higher cost levels.

important for the investor-omedThe utilities harmaa their per pricing burden is high-the most expensive nuclear plants in the country.

lighted further when one ocrimidars that the incrementally expensive power fr WS will have to be blended with low cost hydro generation.

Finally, there is an added risk that any form of work suspension As part would of be perceived as the first step toward non-ocmpletion of project #3.

l WS cancellation.

" controlled termination" on units #4 and #5, a work suspe

  1. 5 default, a work suspension on unit #3 would merely owned utilities as it is for the holders of WpS #1, #2 and #3 bands.

l IOUs INVOLVI! MENT IN NUCIDR PR:UBCTS A WS #3 termination would be the largest nuclear plant aber.'.amat in history.

l But it would not be a first for the investor-owned utilities in the region.

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' Of the two other nuclear projects in the regicm, Pebble Springs and Skagit,Alth 4

only

" officially" Pebble Springs a live pro j has ec t, officially been cancelled.Puget Sound, the sptmace, in I

the Nuclear Regulatory Oanmission (NRC) to susoend l certification (a plan which and licens pc _-n Mngs pending adoption of a 20-year Regional Power P anIn view of this, l

I ultimately did not include Skagit but did include WS At see #3). Pacifi for accounting puws.as yet not formally withdrawing as a participant.

point down the road it appears as though Skagit will go the way of Pebb and WS #4 and #5, eventually being cancelled, making it the fourth nuclear The involvement of theiinvestor below: owned plant in the region to be scrgped.t*Hities in planned nuclear projects in the WS NPS *WPS *NPS Skagit_

  1. 5
  • Pebble Springs
  1. 3 #4 Pacific Pwr & Lt
  1. 1&#2 None IR None W 29.4%

47.1%

20%

30%

l None 10% Ncme None 40g Portland General 5% None None 23.5%

Puget Sound None None 10%

I Ncme 5% None None Hashington Water

  • Officially Terminated 4

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The cancellation of Skagit would come as no surprise. For some time now d 'J oanfidence in its ocupletion has been woning on the part of all the par +bi !=nts.

l* In fact, with the exasption of Puget, the remaining owners have ceased taking

) AFDC cm the investment-and only Puget ocmtinues to accrue AFDC on the plant

, under special directive frun the Washington Utilities and Transportion Ommisslan (WDC). Therefore, it seems to us as though the principal quest.im surrounding Skagit is not whether but, rather, when abandcrenant will be made I official. The timing of a <beision regarding Skagit can cmly be complicated by the very uncertain future of WS #3. If WS #3 craters, all four investor owned utilities mM be facing substantial write-offs, placing them squarely at the mercy of their regulators. With this in mind and given the recovery treatment accorded other projects, we think PFL's move to write Skagit off early, r M eing its nuclear asset exposure, will prove beneficial in the long-run.

Nevertheless, all four utilities have a great deal of nuclear investment at stake, as reflected in the following table:

Year-End 1982 Investment in Nuclear Projects

($ Millions)

WS45 Pebble Spring Skac rit NPS#3 Tbtal Pacific Pwr & Lt $47 $ 8F .5 57153 $3T G Portland General None Written off 135.1 208.9 344.0 Puget Sound None $53.5 159.8 96.9 310.2 Washington Water None None 38.7 100.0 138.7 s

Msile the potential for a write-off of WS #3 seems unclear at this point, it is nevertheless a possibility which cannot be ignored. With the asset over-hang i of both Skagit and WPS #3 so large, the effects--depending tasan the regulatory

" resourse available--could be quite substantial. The asset and earnings exposure of these units is stenarized here:

ASSET EXPOSURE 4

Total (SMillicms)

Skagit/HPSf3 IDtaJ.

. . Investment Assets (t) Otran Bauity (t) Retained Earnings (t)

Pacific Pwr & Lt S316.8 ~ $4,412.0 (7.2) $1,233.4 (25.7) $326.8 (%.9)

Portland General 344.0 2.323.0 (14.8) 755.5 (45.5) 143.2 (240.2)

PLxJet Sound 256.7 1,953.8 (13.1) 659.8 (38.9) 167.3 (153.4)

Washington Water 138.7 1,069.2 (13.0) 400.7 (34.6) 85.1 (163.0)

  • EAININ2i EXPOSURE
WpS43 Annual AFDC ($ Millions)

} Accruals an net AFDC/

4 NPS#3 Inoczne ROE Net Inc i '

F Pacific Pwr & Lt $31.0 S157.1 1U% 19.7%

Portland General $18.0 97.1 12.9% 18.5%

i Puget Sound $6.5 77.9 11.8% 8.3%

Washington Water $12.0 48.8 12.2% 24.6%

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  • With the exception of Puget, each utility has staped booking AFDC on Pebble

! Springs.Puget continues to take AFDC under instructicm fran the Washington connission.

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Frtzn an earnings stan@oint, cessation of AFDC m 18PS 43 will not be devastating.

In the worst instance (Nashington Mater Power), net inocane for oczmon will be r=hw=9 by 254 and equity returns, in general,would be shaved fztzn Yet,the 124-13%

whether the

' range to about 104-respectable levels for Triple-B credits.

utilities involved would be~ inclined or rar=_*ed to stop taking AFDC onItNPS #3 i

w..;.a e rwt daimy scenario is tsh. .i.ain. is M' a = _ JE =n/ iss - ,

likely that each campany will have to p=tition its state canaission for aAnd there directive en this issue.

Springs plant-allaring AFDC to accrue on projects which have been cancelled.

i ittile the rnwlaar asset exposure relative to orzmon equity and retained earnings halmoes is heavy, we do not mean to suggest that WS #3 will have to be writtan off against these accounts, or even that these figures will be representative of any write-off levels. Rather, the table is designed to highlight the potential equity risk faced by each utility and, acerwtiingly, the inportance of favorable regulatory treatment should WS #3 be terminated.

Avenues of Regulatory Darmrse The single unst inpc.u.-tant questim to be addramaari in the Pacific Northwest right now is what regulatoer reocurse is available for recovery of investments in terminated projects. This is certainly the case for Skagit and it is an issue

  • which nust be ccmsidered in amaaasing the overall riskiness of a WPS #3 involve-ment. ittile the pt----4ts regarding recovery in the regicm The one areglinmer by andoflarge hope discouraging, we believe that the jury is still out.

raised thus far comes fztzn the Washington canaission which gave Pacific Power & Light a 2.54 mMari equity kicker to recognize expected investor assess- The ment of incranaari risk for the terminatico of WS #5 and Pebble Springs.

conmission denied the u.meeny amortization on the grounds that it would be Moreover, unfair in view of the Oregon and Wytzning rulings denying recovery.

j the canaission suggested in the text of the order that anortization was denied only ber anaa of Pacific's unique ciretznstances, rather than due to the

<==iimaicin's opposition and/or statutory inability to recoup terminated plant in%et fztzn rate payers. The ocamission currently has under consideraticm a i

request by Puget (as part of a general rate yi ----iing) for the amortization of its Pebble Springs investment, thereby providing the r==4maicn with an irkal A e rtunity to establish a position an recovery for "rb - atic" utilities.

Ammari on the overtures made in the ruling is expected by early July, 1983. Pacific Power & Light case as well as a s 5-year anortization, without rate base treatment, for Pebble Springs, we are encouraged about the ei%ts for recovery of future plant terminations in Washington. nhaarvers close to the Mashington otzenission feel that the ocamissioners are well aware of the finarv ial consequences of not allowing sane form of rate recovery and, although the future turn of events will test the mettle, it is felt that this ocumission will be stgiportive. However, we do not maan to inply that whatever treatment is am. G 1 the Pebble Springs investment will carry over to other plants.

The over-riding difference is dollars--the Pebble Springs invest-ment relative to Skagit is about one-third. Instead, it is canoeivable For exanple, that a the met ding treatment will be different in future instances.

nuch langer anortizaticm period could be employed-perhaps 20 years.

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On the other hand, the recovery approaches, or lack thereof, established in Oregon for Pacific Power and Portland General are amuse for carxxtrn. 'Ihe

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,n=ni==irwt has in'- rei=1 the Oregcm statutes as precluding recovery of terminated plant throu@t increased rates. Accordingly, in 1982 Pacific wrote off its invest-

nonts in WS #5 and Pebble Springs and Portland also cleared Pebbie Springs frm its books. 'these onacrdinary lomaaa were offset by gains frm debt /

equity swaps, thereby mitigating the negative effect on earnings and erosien of the equity base. As a practical matter, this "armutting" approacit soens to have solved the write-off problem. .But we sospect that the tecimique has lin:ited appli+ility and future solutions will have to oczna through regulatory channels.

In this regard, the Oregon crunniasion's view is di== raging. Mtile Pacific has requested a darlee.w^y ruMng on this issue, a final demmination is far nere critical for Portland Mm sustanHally all of its %.dans are in Oregon) than for Pacific, titicit derives about 59% of its electric revenues frm Oregcm.

Finally, in Mytzaing, which accxxmts for 19% of Pacific Power's electric revenues, the emnission has also denied recovery of terminated plants through rates.

'the ocupany has filed for a jMir i=1 review of this decision. Manauhile, prraMa fra the 1982 debt / equity swap were applied to this jurisdicticmal write-off. nar.ini,vss frm the California (44 of revenues) and Ptmtana (34) ocamissions are pending, but the autoczne of these < a=== will be less significant for Pacific than those previously discussed.

ADDITICNAL INEMMNPICN IS AVAIIABIE UPCN REDUEST 7

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