ML20112E236
| ML20112E236 | |
| Person / Time | |
|---|---|
| Site: | Shoreham File:Long Island Lighting Company icon.png |
| Issue date: | 04/21/1983 |
| From: | Dircks W NRC OFFICE OF THE EXECUTIVE DIRECTOR FOR OPERATIONS (EDO) |
| To: | Axelrod D NEW YORK, STATE OF |
| Shared Package | |
| ML20105B226 | List: |
| References | |
| FOIA-84-250 NUDOCS 8501150067 | |
| Download: ML20112E236 (16) | |
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UNITED STATES
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April 21,1983 David Axelrod, M.D., Conunissioner State Department of Health Tower Building Empire State Plaza Albany, New York 12237
Dear Dr. Axelrod:
.I read your letter to the Atomic Safety and Licensing Board concerning the LILCO Nuclear Power Plant. You raised some very important and interesting issues in your letter.
I think it would be worthwhile if FEMA and the State and the NRC could meet and discuss some of these points.
If you agree that such a meeting would be beneficial, I would come up to New York, and I am sure that Jeff Bragg of FEMA would also wish to join us.
Sincerely.
William J. Dircks Executive Director
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for Operations JeffreyS.Bragg/ FEMA l cc:
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- GCunningham M~ *A, cys :Di.rc ks Roe STATE OF NEW YORK Rehm LESTER M. STUZ1N SUSLIC SERVICE COMMISSION s*.))o Eve:.tve Cepu'y to tne Chairman.fr) aM D
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Interoffice Memorandum f)
..u rl ey, Reg, I S'at) CA New Y3ra 2 4 Sees.c3 Commess e n Tnree 8tocue'elter State Plaza l ertment o' 7 cbc Service Ascany 12223 4
,9, June 8,'1983 4
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SHOREHAM COMMISSION STUZIN, Executive Deputy to t$e Chairm n
/3 FROM:
LESTER M.
SUBJECT:
Current Public Service Com=ission Proceedings Pertaining to the Long Island Lighting Company 1.
Case 27563 - Shoreham Prudency Proceeding LILCO is building an 820 megawatt nuclear power plant at Shoreham on the North Shore of Long Island.
It is now scheduled for completion in late 1983 at a cost of S3.2 billion.
Shoreham will be one of the most expensive power plants in the United S ates on a dollar-per-megawatt basis.
The Commission is charged by law with ensuring that the rates for utility service are just and reasonable and reflect only prudently incurred costs.
The Commission established this proceeding to investigate the reasons for cost increases at the Shcreham project, and to determine whether and to what extent LILCO's expenditures,on the project were attributable to imprudence, mismanagement or inefficiency.
The Ccmmission will exclude frcm rates that portion of the construction costs.which are found to have been imprudently incurred.
This extremely ccmplex investigation is being conducted by a team
' of high level staff members with the assistance of outside consultants.
It is expected to take approximately one year to complete.
2.
Case 28252 - Shoreham Phase-In Proceeding The Commission initiated this proceeding in August 1982 to explore a possible phase-in of the Shoreham plant into rate base to soften its impact on rates.
Under normal rate-making practices, once a plant becomes operational, the company begins to earn a return on its entire investment.
A phase-in of_the plant into rate base would be an unusual if not unprecedented depa-ture from normal ratemaking and is viewed with great concern by rating agencies and others in the financial ec=munity.
There are, however, special circumstances
-in the case of Shoreham which justify the serious consideration of a phase-in.
First, the cost of the plant is extremely large --
in fact its cost will exceed the total investment in the rest of the company.
Secondly, the extremely high capital costs would be reflected immediately in rates, while the expected off-setting fuel savings would occur gradually over the life of the. plant.
And, thirdly, the rates for LILCO customers are among the highest in the nation.
LILCO, Commission staff and the Consumer Protection Board have submitted phase-in proposals for the Commission's c:nsideration.
Should the Ccemission adopt a phase-in proposal
it would have to balance our interest in minimizing the impact on consumers, with maintaining the financial integrity of the company.
3.
Cases 28553 and 28554 - Electric and Gas Rate Filinas on May 27, 1983, LILCO filed an electric rate increase request of $366.3 million, or 27 percent, which assumes a Shoreham in-service date of April 1, 1984, and the adoption of~the company's Shoreham phase-in plan.
LILCO has.also requested a temporary electric rate increase of S90.6 million, or approximately 6 percent on an annualized basis, to become effective by July 1, 1983.
LILCO is seeking a 15.9 percent return en common equity and a 13.25 percent return on rate base compared to 15.5 percent and 12.79 percent, respectively, authorized in its last rate case on January 24,,1983.
On a conventional basis, LILCO claims a rate increase of 56.5 percent which it reduced to 27 percent in the first year of Shoreham's cperation due to its phase-in plan.
The company indicated second and third year increases of 14.6 percent and 7.5 percent, respectively, under its Shoreham phase-in plan.
On May 27, the company also filed for an $11.8 million or 2.4 percent gas rate increase.
The Commission will render a decision in these rate proceedings by April 27, 1984.
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4.
Case 27811 - Accounting and Ratemaking Treatment Applicable to the Property Loss Arising from the Regulatorv Rejection of LILCO's and NYSE&G's Proposed New Haven Nuclear Power Plant In November of 1978, LILCO and NYSE&G filed an application for a certificate of environmental compatibility and public need, pursuant to Article VIII of the Public Service Law, for two
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1250 megawatt nuclear generating plants at New Haven, New York.
In October 1979, the Article VIII Siting Board dismissed the application because the ownership and use of the proposed facilities were too uncertain to warrant a full proceeding.
In July of 1980, LILCO and NYSE&G filed petitions with the Commission requesting authorization to recover in rates their respective shares of the investments and expenditures made for the rejected project.
Hearings were held between November 1980 and March 1981.
During the proceeding, various parties including Department of Public Service staff, the State Consumer Protection Board and the Counties of Nassau and Suffolk challenged the prudence of the companies' participation in the New Haven project.
In August 1981, the Administrative Law Judge assigned to this case issued his recommended decision in which he concluded that the companies should be allowed to recover in rates the full amount being requested.
As of March 1983, each company's respective investment in.the rejected project, including the accrual of AFC, was approximately $50 million.
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Briefs taking exception to the Administrative Law Judge's reccomended decision were filed by Department of Public Service staff, the Consumer Protection Board and the Counties.
The record in this proceeding is currently being reviewed by the Commission's Office of Opinions and Review and senior advisory staff.
It is expected that this case will be considered by the Commission early this autumn.
5.
Sitinc Board's Consideration of LILCO's Application to Build the Jamesport Plant In September of 1980, LILCO and NYSE&G were granted a certificate of environmental compatibility and public need to build an 200 MW coal fired plant at Jamesport on Long Island.
- YSELG has since de
- ided to withdraw frca the project.
The Siting Board gave LILCC until March of 1983 to advise the Board as to whether it also plans to withdraw from the project, plans to build the facility with a different partner or plans to build a smaller plant.
l On March 11, LILCO responded to the Siting Board's order.
The company has requested that the Siting Board rescind the Jamesport cortificate, however, it has also requested that such action be pcstponcd until the status of the Shoreham s
facilfty is clarified.
The Siting Board, to date, has not convened to censider the future of the Jamesport certificate.
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STATE OF'NEW YORK t
FUBLIC SERVICE COMMISSION j _ b) k.
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N hYune.'13, 1983 Othj/%
TO:
THE SHOREHAM COIC4ISSION FROM:
LESTER M.
STUZIN, Executive Deputy to the Chairman pl }
SUBJECT:
(1) Long Island Lighting Ccapany Financial Review (2) Lcng Island Lighting Cc=pany's 1983 Financings As requested at t.he June 9, 1983 meeting of the Shoreham Commission, attached are the following:
(1) A financial review of Lcng Island Lighting Ccmpany.
(2) Long Isis.r.d Lighting C:: any's 1993 Financings.
Attachments l
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- LONG ISLAND LIGHTING COMPANY Financial Review June, 1983 Ba'ckground - Credit Ratings The securities of a utility (and other corporations and government entitles) are often rated by agencies whose business is to offer financial advice to prospective buyers of debt obligations and equity securities. The two major raters of debt offerings are Moody's and Standard & Poor's (S&P).
On the basis of the rating agencies evaluation of a company's ability to pay I,nterest and principal payments in a timely manner, quality ratings are assigned ranging from gilt-edged "AAA",where payment is virtually certain,to "C", which Indicates that no interest is being paid currently and prospects for payment by the borrower are poor.
The quality of a company's bonds have an impact not only on the rate of Interest paid, but importantly on its access to the capital markets.
pwed powFor example,whenChryslerCorp'sfinancialconditionreacheditsamag[rin1980, and its debt rating was reduced to triple-C, it could market debt obligations cnly with a U.S. government guarantee.
Also, in the 1974-191$ credit crunch, lower credit quality atilities were effectively precluded from the debt and equity markets.
Depending on market conditions, companies with credit ratings below triple-8,-the lowest investment grade rating, may not find buyers of the securities required to raise needed funds.
As an illustration of the cost to a company of a low credit rating, consider LILCO's recent experience. On May 23, Ic83, the company issued
$105 million of bonds to pay maturing debt.
LILCO paid an interest rate of 13-1/24 on these bonds reflecting the market's evaluation of its financial condition, including its Baa3 rating from Moody's and a lower double-B rating
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2 by S&P.* The same day, the A rated bonds of Commonwealth Edison, which have similar maturity, were priced to yield 12.4%.
That one percent difference in yield means that LILCO will pay additional interest of over $1 million each year over the 30 year life of the bonds.
The interest rate premium required by investors in bonds of lower quality can widen c m f4.a ) ep4 oni,Netr, + pdul significantly in markets less g than today's.
Credit Criteria As mentioned above, a credit rating is an evaluation of a company's ability to pay the interest on debt obligations in a timely manner, and to pay the principal upon maturity.
The process is analogous to what happens when a prospective homeowner seeks to finance the purchase of a house.
Before buying a mortgage, a bank will require some downpayment, which is owner's equity in the house.
In addition, the bank will l imit the size of the mortgage depending on the prospective owner's salary and other income. A familiar rule of thumb was that the owner's monthly income be at least twice the monthly mortgage paymen:: (including property taxes). A company's ability to obtain debt from banks and other lenders is subject to similar criteria, several of which are discussed below:
a) Caoltal Structure:
a banker requires a downpayment because it helps insure that the house will have sufficient value, if the owner cannot make mortgage payments, to repay the debt.
Likewise, a prospective
- Baa3 is the lowest investment grade rung in Moody's triple-B category.
Double-8 rated debt is regarded as speculative.
For a complete list of ratings, see Appendl4 A.
3-bondholder will feel more secure, and demand a lower interest cost, if a relatively large portion of a company's assets are financed with equity, rather than debt. With a smaller amount of debt service (periodic interest and principal payments), there is less likelihood that payments will be Interrupted.
b) Return on eoulty: This is the income earned by the common
. stockholder and is similar to the Interest paid to debtholders.
In general, stockholders require a higher return because of their junior position: Interert is paid to bondholders before any common dividends can be paid and, in bankruptcy, debt is repaid before stockholders receive a sett ement. As an illustration of the current premium required for the l
risk of Investing in equities, the returns allowed on equity by the New York Commission are 14-15%, while yleids on investment grade bonds range f rom M.75% to 12.5%.
competitive common equity returns are especially important if a company must attract capital to finance its operations.
c) Intersst coserege:
this is a measure of 5 company's ability tc make interest payments, much like the rule of thumb used in evaluating a homeewner's ability to make mortgage payments.
Generally, a utility cannot issue additional debt unless its earnings (before income taxes) are equal to two times the Interest on its outstanding debt, including the new issue. Interest coverage is very much related to the two criteria
'disetssed above, if a company's earnings are competitive and the proportion of debt to total capital is not too large, its Interest coverage should be adequate.
However, in recent years, investors have also become concerr.ed about the quality as well as the quantity of earnings available to cover interest.
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4 d) Cash Flow from operations and external caottal recuirements: a Campany is in a more secure financial condition if it can finance a large portion of its funding requirements from ongoing operations. The greater the amount of internal funds available, the less dependent is a company upon the capital markets to fund its construction requirements and to pay maturing debt.
This measure is typically expressed as internal funds as a percent of construction requirements.
The higher percentage, the more favorable Investors view the company.
Low percentages, and even worse, negative percentages, indicate poor cash flow.
Although rating agencies prefer internal cash generation equal to at least 50% of total funding requ i remen ts, '
theaestreme pg.QQpg m.-..
e) Asset concentration:
if a single facility represents a large portion of a company's total assets, its financial condition may be impaired should the asset no longer generate earnings.
In a regulatory setting this would occur if a plant were removed in whole or in part from earnings base (rate base).
Construction Work in Progress (CWIP) as a percent of net assets and as a percent of common equity are usually g
a good Indication of asset concentration during construction.
The higher the percentage the more negative the credit impact. However, even after a plant goes into service, asset concentration risks remain when the inves tmen t in one unit is a high percentage of assets.
. LILCO's Financial Condition comoared to the Utility Industry The following table compares LILCO's key financial ratios to those of the industry averages.
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m.wriin 4 "A", r h %
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Baa3/BB. The primary reasons for the company's below average credit ratings are the tremendous drain on the company's financial resources to raise the capital necessary to complete the Shoreham unit, and the possibility that, even if completed, the unit will not operate.
Few other utilities in the country are undertaking a project of Shoreham's nagnitude in relation to total inve;tment base.
LILCO's large investment in Shorenam gives it additional risk in terms of asset concentration.
As shown in the table, LILCO's ratio of plant under construction d
_L.di gt1 1 Li69E ? P 2Cc4 to d W g @ c ;lud.ustry (Most of LlLCO's CWIP balance relates to Shoreham).
This means that the industry has about three dollars of assets generating cash income for each one dollar of asset under construction.
LILCO has less than fifty cents of cash producing assets for each one dollar of plant under cor.struction.
LILCO's percentage of plant under construction to common equity is even higher at 179%, compared to the industry at 66%.
This is of irportance to debt holders because a ratio above 100% is an indication that deot holders may be exposed to loss if LILCO's investment in Shoreham is not included in its earnings base.
The company's common equity ratio (39%) and its return on common equity (13 9% forecast for 1983) are close to the industry average, but its coverage of interest charges is below average, reflecting the company's
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, relatively lower income tax expense (recall that interest coverage is a pre-tax measure).*
While LlLCO's interest coverage is substandard, the quality of its ceverage is exceptionally poor.
This is evident from an examination of the company's interest coverage excluding the allowance for funds used curing construction (AFC) of 1.3x.
A utility's earnings are derived basically from two sources: (a) cash generated from operations and (b) AFC. The Iatter is an accounting mechanism designed to remove from a utility's income statement, interest and other return related to construction projects.
Although the interest expense and preferred and co.T.m n dividends related to construction are paid currently by the company, they are capitalized through AFC accounting, i.e.,
made part of the cost of the plant and recovered from ratepayers over the service life of the unit.
A company with a large construction program and high AFC, is cash poor compared to otter utilities with modest construction budgets.
LILCO's poor cash flow statistics and its nigh near tarn capital requiremerts make it a comparatively poor credit risk. M cave rac e ut i 13 ty. -geneca tirJreiMgM4CtfAT funds ~ Jne.e.ded....f o r: const PU'ct MM
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while-eds must come; frorr rexternal
.e s, Until the Shoreham unit is included in rate base, the company's capital needs are substantial; for the twelve months ending fiarch 31, 1984, LILCO e s t ima tes Lp-w, ra' ar-~-Ma n tittogida;;;~'M :d'h.andyspitwmar,ke tg t
And further delay in placing Shoreham In-service and including it in rate base means that 6 min"P *Pf'"" - jnterest and return cha rges at a ra te of,4boueS300 m{ l _I_on,,jfLMe,Jnltlitt,. year.s.,m.=.]
- LlLCO's income tax expense is low because a large portion of its earnings is AFC Income which is not considered income for tax purposes.
7-Recent Financings and 1983 Estimates LILCO's schedule of permanent financing for 1983 is as follows (millions):
Issued So Far Balance 1983 Total (June 1, 1983)
To Be issued Ja n. -Ma r. 1984 Long Term Debt
$315 million
$235 million S 80 million
$100 million Trusts 157 61 96 51 Preferred Stock 115 65 50 0
Common Stock 65 30 J
16 g million g million
$261 million
$167 million in additior. to the above, the company expects to use bank lines of credit for between $60 and $90 million of outside financing.
LILCO has bank lines of credit of $400 million and is seeking approval for an additional $150 ml11 loa of 1Ines from European banks. Avaltabl1Ity of these 1inss Is subject to a material adverse change clause which would relieve the banks of their commitment to lend if LILCO's financial condition deteriorates significantly, includir.g the compuy's utospacts for repayment.
The exact form of securities to be issued have not as yet been determined.
As notee on the attached schedule,-LILCO does not have sufficient interest coverage to issue planned debt offerings under its GsR bond indenture.
The conpany currently is pursuing alternative non-secured borrowings, and temporary rate relief which would permit the issuance of additional secured debt. A chronological history of the company's security offerings so far this year.follows:
L-
. Amount Cost Rate Long Term Debt 3/28/83
$ 75 million 13.0%
5/23/83 105 13 7 1/83 30 11.5 6/83 25 11.5 S235 Trusts Generally at Bank Prime Nine Mlle 2 56 Lending Rate (currently Nuclear Fuel 5
10.5%)
Preferred Stock 3/28/83 65 13.4%
Coron Equity Periodically through Olvidend Reinvestment Plant 35 n/a
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Financial Indices of LILCO vs. the Industry Industry LILCO Capitalization Ratios Debt Ratio (including short term and Trusts) 51%
48%
Preferred Stock 11 13 Cotre.on Equity 38 39 Interest Coverage All Interest w/AFC 2.8x 2.4x /
1 All. Interest wo/ Arc 2.3x 1.3x Internal Funds'as a percent of Const.
47%
-6%
Plant. Under Construction (CWIPF as a 24%
63%
Percent of Net Plant AFC as a Percent of Common 43%
109%
Plant Under Construction (CWIP) as a 66%
179%
Percent of Common Equity Return on Common Equity Investment 13.6%
13.9%
Sources:
First Boston Industry Review, LILCO Annual Report, Salomon Brothers.
1/LILCO's G&R bond indenture, limits the amount AFC includable in income available for interest coverage.
Currently, the company's coverage is insufficient to permit the issuance of additional-G&R bonds.
STANDARD & POOR'S CORPORATION I
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CORR JRATE AND MUNICIPAL DEST RATING DEFINITIONS e
A Standard & Poor's corporate or'. municipal debt rating is a current assessment of the creditworthiness of an obliger withfespect to a specific obligation.This assessment may take into consideration obligots such as guarantors, insurers, or lessees.
The de:t rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability fcr a particular investor.
The ratings are based on current information furnished by the issuer or cbtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financialinformation, The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other circumstances.
The ratings are based. in varying degrees, on the following considerations:
- 1. Likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principalin accor-dance with the terms of the obligation;
- 11. Nature of and provisions of the obligation; 111. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorgarization or other arrangement under the laws of bankruptcy and other laws affecting cr9citors' rights.
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay A A A mereit ane repay principaus exitemeiy strong.
i g Debt rated AA has a very strong capacity to pay interest and repay principal and di"ers from the highest rated issues only in small degree.
Debt rated A has a strong capacity to pay interest and repay principal althoJch it is A somewhat more susceptibie to the severse efreets of changes in circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay g g principal. Whereas it normally exhibits adecuate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay imerest a.id repay pritirsipal for del.it it' this ci: ego y than in hig',er rated categ Hes.
BB Debt ratee BB, B, ccc ane cc is regareee, on baiance. as oreeeminantry specutetive with g respect to capacity to pay interest and repay principalin accordance with the terms of the obligation. BB. indicates the lowest degree of speculation and CC the highect degree of CCC specuistion. wniie such eee -riiiikeir ha,e some avaiity an= prciective charact.ristica, these are outweighed by large uncertainties or major risk exposures to acverse condi-tions.
C nhe rating c is reserv e for income benes en which no inierest is being paie.
Debt rated D is in default, and payment of interest and/or repayment of principal is in arrears.
Plus (-) or Minus (-):The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories, Provisional Ratings:ine letter "p" indicates that the rating is provisional. A provisional ratm; assumes the successful completion of the project being financed by the debt being rated and indicates that payment of dett service requirenents is largely or entirely depencent upon tne successful and timely completion of the project. This rating, however, wnile accressm; credit cuality subsecuent to completion of the project, makes no comment en the hkelihood of, cr the risk of cefault upon failure of, such completion. The investor Snou'c exercise h's owe jud;mer t with resrect to such likelihcod and risk.
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