HomeMy WebLinkAboutL.I. Without Shoreham Power Plant - 1983 - Financial & Regulatory Conseq. LONG ISLAND LIGHTING COMPANY
WITHOUT THE SHOREHAM POWER PLANT:
'FINANCIAL AND REGULATORY CONSEQUENCES
SUMMARY OF FINDINGS
Prepared for the County of Suffolk
By
Georgetown Consulting Group, Inc.
JULY, 1983
Table of Contents
page
I. Introduction
II. Summary of Conclusions
III. Financial Consequences of the Abandonment
IV. Regulatory Treatment of Abandonments -
The National Experience
V. Appendix
1
3
6
12
14
I. INTRODUCTION
This report presents a summary of
regulatory consequences to Long Island
(LILCO) without the Shoreham Nuclear
the financial and
Lighting Company
Power Plant. The
findings included here rely in part on the work prepared by
the Energy System~ Research Group for the County of Suffolk.
Three specific scenarios are presented in this report to
indicate the financial consequences that would follow in the
event that LILCO was not permitted to place its Shoreham
Nuclear Generating Station into commercial operation.* Each
scenario assumes a different regulatory treatment for LILCO's
investment in the abandoned Shoreham Nuclear Generating
Station. These scenarios are:
1. The Rate Wash Scenario
In this scenario, the revenues paid by LILCO's
ratepayers assuming the Shoreham station is abandoned
are the same as the revenues required were Shoreham to
have been placed into commercial operation.
* There are, of course, other scenarios which could be
developed to deal with variations on the three scenarios
presented here. For purposes of this summary report, however,
the three scenarios provide a range of consequences adequate
to demonstrate that the abandonment of Shoreham would not
yield disastrous financial consequences for LILCO.
2. The ~i~h Return Scenario
In this scenario, LILCO's ratepayers pay the full
amortization of the abandoned investment and a return
on the unamortized abandonment until the investment is
fully recovered.
3. The Low Return Scenario
In this scenario, LILCO's ratepayers pay for a
portion of the costs related to the abandoned Shoreham
station such that the Company can continue its dividend
yield and maintain its bond coverages and internal
generation of cash at an adequate level.
This report also summarizes the national experience
relating to the regulatory treatment of abandonments. It
indicates the range of possible regulatory options that will
be available to the New York Public Service Commission in
reaching the appropriate decision with regard to the
regulatory treatment to be afforded LILCO in the event of the
abandonment of its Shoreham Nuclear Generating Station.
II. SUMMARY OF CONCLUSIONS
Financial Consequences
1. The Rate Wash Scenario
In this scenario, the revenues derived from LILCO's
ratepayers assuming the Shoreham station is abandoned are
equal to the revenues required were Shoreham to have been
placed in commercial operation. In this case, LILCO would be
a financially healthy Company, well able to provide safe and
adequate service to the electric customers on Long Island.
LILCO's financial indicators under this scenario would show a
vast improvement from the poor levels achieved by the Company
in the 1980-1982 time frame. These past poor financials,
especially the low percent of internal cash generation, have
contributed to LILCO's current BB+ rating. Under this Rate
Wash scenario, LILCO will also achieve financial ratios
comparable to those achieved by A and AA rated utilities (See
Table 1). Thus, the Rate Wash scenario leaves LILCO in a
significantly better financial condition than currently
exists.
2. The High Return Scenario
In this scenario, LILCO's ratepayers pay for the full
carrying costs as well as a full return of the capital
invested in the abandoned Shoreham station. In this scenario,
3
LILCO's financial health would be so goo~ as to be comparable
to the financially highest rated electric utilities in the
country (See Table 2).
3. The Low Return Scenario
In this scenario, revenues received from LILCO's
ratepayers associated with the abandonment of the Shoreham
Nuclear Generating Station are approximately 65% of the
revenues required were the plant to have been placed into
commercial operation. The revenues provided under this
scenario enable LILCO to maintain its dividend yield, achieve
pre-tax mortgage indenture interest coverage and SEC interest
coverage ratios of at least 2.4 times* and maintain its
internal generation of cash
construction requirements (See
indicators projected in this
improvement from the poor levels
Company in the recent past.
of at least 40% of its
Table 3). The financial
scenario are a substantial
actually achieved by the
* Interest coverages are measures of the extent to which
pre-tax income exceeds a company's interest cost. LILCO's
minimum indenture coverage requirement is 2.0 times, which is
in general the figure most frequently seen as the minimum
acceptable coverage figure.
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Regulatory Consequences
The ratemaking treatment afforded to LILCO resulting from
not being permitted to place its Shoreham Nuclear Generating
Station into commercial operation will depend upon the
regulatory action taken by the New York Public Service
Commission. We have presented in this report a summary of
rate treatment for abandonment of plant based upon recent
actual experience across the country. This national
experience indicates that in the vast majority of cases the
regulatory treatment afforded the utility resulted in a
sharing of the full cost of abandonment between the utillty's
investors and its ratepayers. Table 4 indicates that
ratepayers provided to investors a return of the abandoned
assets through amortization. However, in most cases
ratepayers were not required to provide a return R~ the
unamortized portion of the investment because the abandoned
assets were excluded from the rate base. Therefore, LILCO's
statement,* indicating that any regulatory treatment resulting
in less than a full recovery of the investment in the
abandoned Shoreham station has no precedent, is a statement
without merit.
*LILCO's "Preliminary Critique Suffolk-County Study of
Shoreham Abandonment", May 1983, page 6.
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III. FINANCIAL CONSEQUENCES OF THE ABANDONMENT
1. The Rate Wash Scenario
In this scenario, the financial consequences to LILCO are
presented under conditions where the revenues paid by
ratepayers under Shoreham abandonment are no greater than the
revenues paid by ratepayers if the plant were to have been
placed into commercial operation. In the Rate Wash scenario,
the revenues paid by ratepayers under abandonment assume 91.5%
of the Company's investment in the abandoned Shoreham Nuclear
Generating Station is recognized for ratemaking purposes.
Table 1 below compares key financial indicators for LILCO with
industry financial performance under this rate wash scenario.
TABLE 1'
RATE WASH SCENARIO - SHOREHAM ABANDONED
FINANCIAL INDICATORS
LONG ISLAND LIGHTING COMPANY
Actual
1980-1982
Target 1980 1981 1982 'A' 'AA'
1985 1986 1987 1988 1989 1990 2000
Coverages:
Indenture 2.6 2.2
~ Incl. AFC 3.0 2.5 2.4 2.6 2.8 3.5
S~C Excl. AFC 2.8 1.7 1.4 1.7 2.4 3.1
3.9 3.5 3.0 4.0 4.2 4.3 4.2
3.2 3.2 3.1 3.5 3.6 3.5 3.5
2.9 2.8 2.5 3.3 3.3 3.2 3.1
% Internal
C~_neration 50 19 5 (5) ...38...
117 86 59 118 121 130 90
* For Sources, see Appendix
6
As indicated by this table, LILCO will be a financially
healthy company, well able to provide safe and adequate
service to its electric customers on Long Island. The
interest coverages shown above are measures of the extent to
which pre-tax income exceeds LILCO's interest cost. Interest
coverages are deemed to be such an important indicator by the
financial community, that certain minimum requirements are
generally written into the Company's mortgage indenture. This
indenture minimum for LILCO is 2.0 times. The averages shown
above for both mortgage indenture and SEC coverages are
comparable to those actually achieved by A and AA rated
utilities. When compared with the poor coverages that the
Company has exhibited in recent years, LILCO would be in
excellent condition.
Another widely watched indicator of a utility's financial
health is the ratio between the amount of cash that the
utility can generate internally compared to its construction
requirements. As indicated by the table, LILCO's internal
generation of cash ranges from a 59% to 130% of its
construction needs under this scenario. This indicates that
LILCO would be able to finance its future constructions
predominantly out of internally generated funds, thereby
lessening its dependence on the capital markets to obtain
future financing.
generation of cash of
and AA utilities, it
strong financial position with regard
When compared to a range of internal
30% to 50% actually achieved by many A
is clear that LILCO will be in a very
to this key indicator.
This rate
departure from
Shoreham station,
scenario would
actually achieved
wash scenario represents only a minimal
full recovery of investment in the abandoned
and the financial health of LILCO under this
be excellent - comparable to the results
by A and AA utilities.
2. The High Return Scenario
In this scenario, the Company would be permitted a full
return of its investment and a full return on its investment
in the abandoned Shoreham Nuclear Generating Station. Table 2
below compares LILCO's key financial indicators under this
scenario to industry performance.
TABLE 2
RIGN RETURN SCENARIO - SHOREHAM ABANDONED
FINANCIAL INDICATORS
LONG ISLAND LIGHTING COMPANY
Actual
1980-1982
LILCO LILfI) Patinq
Target 1980 1981 1982 'A' 'AA'
Pro~ected LIL~O
1985 1986 1987 1988 1989 1990 2000
Coverages:
Indenture 2.6 2.2 4.3 3.8 3.2 4.3 4.4 4.5 4.3
S~C Incl. AFC 3.0 2.5 2.4 2.6 2.8 3.5 3.4 3.4 3.4 3.7 3.7 3.7 3.6
SEC Excl. AFC 2.8 1.7 1.4 1.7 2.4 3.1 3.2 3.0 2.7 3.5 3.5 3.4 3.1
% Internal
Generation 50 19 5 (5) ...38... 150 117 91 129 102 112 92
As can be seen from the table above, the financial
condition of LILCO under this scenario would place it amongst
the strongest and healthiest electric utilities in the
Country. LILCO's coverages, both mortgage indenture and SEC
coverages, exceed those achieved by A and AA or better
electric utilities.
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LILCO's internal generation of cash in this scenario for
the years shown above ranges from 91% to a high of 150%. The
table indicates that there are several years when LILCO's
entire construction requirements would be met through
internally generated funds thereby eliminating the need for
LILCO to seek external financing for its construction.
In summary, LILCO's financial health under this scenario
would be excellent and would vastly exceed its present
condition.
3. The Low Return Scenario
In this scenario, revenues required from LILCO's
ratepayers associated with the abandoned Shoreham Nuclear
Generating Station are sufficient to maintain the mortgage
indenture coverage and the SEC coverage (including AFC) to a
minimum of 2.4 times. In addition, in this scenario, LILCO's
internal generation of cash does not fall below 40%. Finally,
LILCO's dividend yield as a percent of its book equity was
maintained. In this scenario revenues required from
ratepayers associated with the abandoned Shoreham station are
approximately 65% of the revenues required were the plant to
have been placed in commercial operation. The results of the
scenario are presented in Table 3 below:
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TABLE 3
LOW RETURN SCENARIO - SHOREHAM ABANDONED
FINANCIAL INDICATORS
LONG ISLAND LIGHTING COMPANY
Actual
1980-1982
~ I~GO ~atinq
Target ~980 1981 1982 'A' 'AA' 198~ 1986 1987 1988 1989 1990 2000
.Ck~era~es:
Indenture 2.6
SEC Incl. AFC 3.0
S~C Excl. AFC 2.8
% Internal
Generation 50
2.2 2.8 2.4 2.4 2.7 2.7 2.8 2.5
2.5 2.4 2.6 2.8 3.5 2.4 2.4 2.7 2.4 2.4 2.4 2.4
1.7 1.4 1.7 2.4 3.1 2.1 2.0 2.0 2.2 2.2 2.1 1.9
19 5 (5) ...38... 111 80 67 77 52 59 60
As can be seen from the table above,
indenture coverage ranges from 2.4 times to 2.8
SEC coverage, including AFC, ranges from 2.4
times.
With regard to internal generation, LILCO exhibits an
internal generation of between 52% and 111%. This level of
internal generation must be characterized as healthy, and is
an improvement over the poor levels of internal generation of
(5)% to 19% that LILCO has experienced in the recent past.
LILCO's mortgage
times and the
times to 2.7
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IV. REGULATORY TREATMENT OF ABANDONMENT - THE NATIONAL
EXPERIENCE
The increasing number of abandonments of electric
generating plants in recent years has caused regulatory
agencies across the country to squarely face the issue of
determining the appropriate regulatory treatment for these
abandonments. Table 4 of this report summarizes the rate
treatment for abandonment of plant afforded by numerous
regulatory commissions across the country. This list is not
intended to be exhaustive but it does provide a presentation
of the treatment granted by regulatory agencies across the
country. In the vast majority of these cases, the regulatory
treatment has been to provide for a sharing of the cost of
between the utility's investors and its
abandonment
ratepayers.
One of
accomp1 i shed
the ways by which the regulatory agencies
such sharing was to permit a utility to recover
its investment through an appropriate amortization schedule,
but not to permit the utility to recover a carrying charge on
the unamortized balance over the period that the amortization
schedule was set.
It is important to note the Decisions of the New York
Public Service Commission have in the past permitted the
various utilities a full recovery of their investments, both
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amortization and a return on the unamortized investment in the
abandoned project. While this history is important to
understanding the regulatory climate in New York, we believe
the decisions made nationwide provide a range of possible
regulatory treatments available in the case of the abandonment
of the Shoreham Nuclear Generating Station.
The specific rate treatment to be afforded to LILCO for
the abandonment of the Shoreham Nuclear Generating Station
will be determined by the New York Public Service Commission
in a future proceeding. ~owever, based upon the overwhelming
majority of cases experienced on the national level regarding
rate treatment for abandonment of plant, we believe that
LILCO's statement, that any treatment short of a full recovery
associated with the abandonment of its Shor~ham investment is
without precedent, is a statement without merit.
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TABLE 4
RATE TREAT~iENT FOR ABANDONMENT OF PLANT
THE NATIONAL EXPERIENCE
Type Years to Rate Base
State of Plant Write Off Treatment
Atlantic City
Electric Co.
Bostu~ Edison Co.
Central F~ine Po~_r Co.
Electric Corp.
Cc~su~_rs Power Co.
Detroit Edison Co.
Florida Power Co.
Gulf States utilities Co.
~oust~ Lighting &
Electric Co.
Jersey Central Power
& ~.ight Co.
Louisiana Power &
Light co.
Electric Co.
New England Po~r Co.
Northern States Power
Alabama Nuc:l,~ir 5 No
Virginia Fossil 5 No
West Virginia Fossil 10 No
New Jersey Nuclear 30
Massachusetts Sc~ {-~er 10
~a~i ne Nu~l-~r 5
New York Tran~nission 10
Illinois Transmission & 1
Nuclear & Fossil
Michigan Nuc] ~ar · 10
Michigan Nuclear 10
Florida Nucl e~r 3
T~v~s Nuc lear 5
Te~-~s Nuclear 5
Indiana Fossil 3
New Jersey Hydro 10
~'~a~2 Nu=l~r 20
Louisiana Nuclear 5
Wisoc~sin Nuclear 1
~ Fossil-Oil 5
FEBC Nucl-~r 5
New York Nu~] ~r 5
Yes
No
NO
No
No
No
Yes
RATE TREATMENT FOR ABANDONMENT OF PLANT
Utility
Potomac Electric
Power Co.
Public Service
Elec. & Gas Co.
San Diego Gas &
Electric Co.
Sterling Project
Central Hudson
Gas & Elec. Co.
Niagra Mohawk
Power Corp.
Orange & Rock-
land Util. Inc.
Rochester Gas &
Electric Corp.
Southern Calif.
Edison Co.
The Cleveland
Electric
Illuminating Co.
Tucson Electric
Power Co.
Union Electric
Company
Virginia Elec.
& Power Co.
Wisconsin Elec.
Power Co.
Wisconsin Power
& Light Co.
Type of Years to
State Plant Wju~
Virginia) Total
Maryland)
Dist. of Co.)
Nuclear 10
New Jersey Nuclear 20
California Various 5
New York Nuclear 5
New York Nuclear 3
New York Nuclear 10
New York Nuclear . 5
California Various 5
Ohio Nuclear
Rate Base
Arizona
Missouri)
Illinois)Total
Iowa )
FERC )
Virginia)
W. Virginia)Total
N. Carolina)
FERC )
No
No
Yes
Wisconsin
No
No
Yes
Ye_S
Yes
Yes
No
10 No
SNG 10 No
Fossil 5 No
Nuclear 10
Nuclear 3
Wisconsin Nuclear 3
No
Yes
Yes
PRIMARY SOURCE: EEI RATE RESEARCH COMM/TTEE SURVEY
V. ~PPENDIX
SOURCES FOR TABLES %1 - %3=
Actual
1980-1982
LILCO LILCO
Tarqet 1980 1981 1982 'A' 'AA'
(A)
Coverages:
Indenture 2.6 2.2
SEC Incl. AFC 3.0 2.5 2.4 2.6 3.0 3.5
SEC Excl. AFC (C) 2.8 1.7 1.4 1.7 2.6 3.1
% Internal
Generation
(D) 50 19 5 (5) ...38...
(A) LILCO Testimony, PSC Case 28252.
(B) LILCO Testimony, PSC Case 28252, 1982 Annual Report.
(C) Actuals from Electric Utility Quality Measurements,
Average of Median Ratings, Salomon Brothers Inc.,
April, 1983.
(D) LILCO 1980-1982 per LILCO Annual Report, Industry per
Duff & Phelps 1980-1982 Industry Survey Average.
Definitions:
Mortgage Inden. Coverage = Oper. Income + Total Taxes + (Other
Income up to 10% Pretax Operating Income)
Bond Interest Charges
SEC Int. Coy. Ratio
(incl. AFC)
Total Taxes + Net Income Bef.
Preferred Dividends + Gross
Interest Charges
Gross Interest Charges
SEC Int. Cov. Ratio
(excl. AFC)
Total Taxes + Net Income Bef.
Preferred Dividends + Gross
.Interest Charges - Total AFC
Gross Interest Charge~--------
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