20141215Crane Direct.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
rN TrIE MATTER OF TIrE APPLICATION ) CASE NO. PAC-E-14-10
oF ROCKY MOUNTAIN POWER FOR )
AppRovAL oF THE TRANSACTION TO ) DTRECT TESTTMONY OF
CLOSE DEER CREEK MINE AND ) CINDY A. CRANE
FORADEFERREDACCOUNTING ) REDACTEDoRDER )
)
ROCKY MOTINTAIN POWER
CASE NO. PAC.E.14-10
December 2014
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INTRODUCTION
Please state your name, business address and present position with
PacifiCorp dba Rocky Mountain Power (the "Company").
My name is Cindy A. Crane. My business address is 201 South Main Street, Suite
2300, Salt Lake City, Utah 84lll. My position is President and Chief Executive
Offrcer (CEO), Rocky Mountain Power.
QUALIFICATIONS
Briefly describe your professional experience.
I joined PacifiCorp in 1990 and have held positions of increasing responsibility,
including Director of Business Systems Integration, Managing Director of
Business Planning and Strategic Analysis, and Vice President of Strategy and
Division Services. My responsibilities have included the management and
development of the Company's l0-year business plan, assessing individual
business strategies for PacifiCorp Energy, managing the construction of the
Company's Wyoming wind plants, and assessing the feasibility of a nuclear power
plant. In March 2009, I was appointed to Vice President of [nterwest Mining
Company and Fuel Resources. In this position, I was responsible for the
operations of Energy West Mining Company (Energy West) and Bridger Coal
Company, as well as overall coal supply acquisition and fuel management for the
Company's coal-fueled generating plants. On November 1,2014,I was appointed
as President and CEO of Rocky Mountain Power.
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PURPOSE AND SUMMARY
What is the purpose of your testimony?
My testimony supports the Company's application (Application) for approval of
the transaction to close the Deer Creek Mine, which consists of four major
components: (l) the Company will permanently close the Deer Creek Mine and
incur direct closure costs (Closure); (2) Energy West will withdraw from the
United Mine Workers of America (UMWA) 1974 Pension Trust (1974 Pension
Trust) and incur a withdrawal liability; (3) the Company will sell certain mining
assets (Mining Assets); and (4) the Company will execute a replacement coal
supply agreement (CSA) for the Huntington power plant and an amended CSA for
the Hunter power plant. In addition, Energy West has settled its retiree medical
obligation related to Energy West union participants (Retiree Medical Obligation).
Together, the components of the closure and settlement of the Retiree Medical
Obligation constitute the transaction to close the Deer Creek Mine (Transaction).
Please summarize your testimony.
My testimony explains why the Transaction to close the Deer Creek Mine is
prudent and in the public interest. I outline the factors that led to the Company's
decision to close the Deer Creek Mine, and sponsor the Company's present value
revenue requirement analysis demonstrating that the closure of the Deer Creek
Mine, as structured in the Transaction, provides significant benefits to customers.
Does the Transaction require Commission approval by a specific date?
Yes. The sale of the Mining Assets and the CSAs are contingent upon regulatory
approval and the close of the Transaction on or before May 3 I , 2015 .
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Please explain how your testimony is organized.
First, I briefly describe the Deer Creek Mine and the other Mining Assets; and I
explain how these assets are currently utilized to supply the Hunter and
Huntington power plants.
Second, I provide an overview of the Transaction, including the four main
elements: (l) the permanent closure of the Deer Creek Mine; (2) the withdrawal
from the 1974 Pension Trust and transfer of the Retiree Medical Obligations to
the UMWA; (3) the sale of the MiningAssets; and (4) the CSAs.
Third, I describe the main reasons for the Transaction.
Finally, my testimony demonstrates how customers will benefit from the
Transaction. This demonstration includes a description of the studies performed,
the assumptions in those studies, and results of those studies.
Please introduce the other witnesses testifying in support of the Application.
The Application is also supported by the following testimony:
. Douglas K. Stuver, Senior Vice President and Chief Financial Officer of
PacifiCorp, provides testimony on the regulatory and accounting treatment
of the Transaction. Mr. Stuver further explains the financial impacts of
Energy West's withdrawal from the 1974 Pension Trust and settlement of
the Retiree Medical Obligation.
. Seth Schwartz, President of Energy Ventures Analysis, Inc., provides
testimony explaining how the Transaction significantly mitigates Energy
West's liability under the 1974 Pension Trust. Mr. Schwartz also supplies
current and projected Utah coal market data, which supports the decision
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to close the Deer Creek Mine and the prudence of the Company's
Huntington CSA and amended Hunter CSA.
CURRENT USE OF DEER CREEK MINE AND OTHER MINING ASSETS
Please describe the Deer Creek Mine.
The Deer Creek Mine is located in Emery County, Utah. The Deer Creek Mine is
operated by Energy West, a wholly-owned subsidiary of the Company. The
Company acquired a majority of the lands and coal leases that make up the East
Mountain coal reserve complex from Peabody Coal Company in 1977. Since the
acquisition, the East Mountain coal reserves/resources have been supplemented
with adjacent coal leases acquired over the past 35 years to extend mine life.
Together, the original lands and leases in addition to the adjacent leases have been
successfully mined for 37 years.
The East Mountain Logical Mining Unit ("LMU") has included
production from the Deer Creek Mine, the Cottonwood Mine and the Des-Bee-
Dove Mine. The Deer Creek Mine is the only one of the three mines located
within the East Mountain LMU boundaries that is currently operating. The
reserves in the Cottonwood Mine were depleted and the mine closed in 1994. Full
reclamation of the facilities at the Cottonwood Mine began in2014 and should be
completed in 2016. The reserves in the Des-Bee-Dove Mine were depleted and
the mine closed in 1986. The Des-Bee-Dove Mine has been completely sealed
and fully reclaimed in accordance with its approved mine permit.
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Which Company power plants are currently supplied by the Deer Creek
Mine?
The Deer Creek Mine supplies the Huntington and Hunter power plants. The
Huntington power plant currently consumes on average 2.8 to 2.9 million tons of
coal annually. The Deer Creek Mine was expected to meet nearly the entire
supply obligation for the Huntington power plant until the depletion of the Deer
Creek coal reserves in or around the year 2079. After depletion, the Company
planned to procure the Huntington power plant's supply needs from third parties.
Some of the Deer Creek Mine coal is also used to supply the Hunter power plant.
How is coal supplied to the Hunter power plant?
Bowie Resource Partners, LLC ("Bowie"), the Company's counter-party in the
sale of the Mining Assets and CSA components of the Transaction, supplies coal
to the Hunter power plant under a long-term coal supply agreement that went into
effect in 1999 and expires in2020. Bowie supplies coal to the Hunter power plant
primarily from its Sufco Mine, located in Sevier County, Utah. The coal supply
for the Hunter power plant is supplemented with other coal supplies (including
coal from Deer Creek and Murray Energy's West Ridge Mine) based on varying
coal qualities, as well as economic supply opportunities. Prior to consumption, a
large percentage of the Hunter power plant coal supply is blended at the
Company's coal preparation plant ("Preparation Plant"), which is located south of
and adjacent to the Hunter power plant.
Please provide background information on Bowie.
Bowie is one of the nation's largest western bituminous coal producers. Bowie
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has a diverse portfolio of four mining operations in Utah and Colorado that
annually produce an aggregate of up to l4 million tons of high-BTU, low-sulfur
bituminous coal per year. Its mines are some of the safest, most productive and
longest, continuously-operating mines in the westem United States. It has three
longwall mining operations: Bowie Mine, Skyline Mine and Sufco Mine. It also
has one room-and-pillar operation, the Dugout Canyon Mine. Bowie has a
significant reserve base and the ability to expand its production base via organic
growth and bolt-on reserve acquisitions. Bowie has been recognized for its
environmental stewardship and has a strong track record for a reduction of safety
violations and lost-time safety incident rates.
In 2013, Bowie acquired the Arch Coal Sales Company's ("Arch") Utah
mines. Bowie's acquisition of Arch's Utah mines included Canyon Fuels
Company LLC ("Canyon Fuels"), which manages the Utah mining operations
directly. This has resulted in continuity of management and made the ownership
change invisible to the Company. The Company has a long-standing relationship
with Canyon Fuels, which has provided the Company with reliable and economic
coal supply for its Utah coal-fueled plants since 1999. Canyon Fuels is well
regarded for its prudent and cost-effrcient mining.
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Please identiff the other Mining Assets PacifiCorp plans to sell to Bowie in
the Transaction.
The Mining Assets consist of the Preparation Plant and related assetsl located in
Emery County, Utah; the central warehouse facility and related assets2 located in
Emery County, Utah ("Central Warehouse"); and the Trail Mountain Mine and
related assets3 located in Emery County, Utah ("Trail Mountain Mine"). In
addition, the Transaction includes the assets of Fossil Rock Fuels LLC, a wholly-
owned subsidiary of the Company ("Fossil Rock"). Because Fossil Rock has
never been reflected in Idaho rates, however, it is not covered by the application
or addressed further in my testimony.
Please describe how the Company currently utilizes the Preparation Plant.
To achieve coal quality specifications, the Preparation Plant blends coal for the
Hunter power plant which, as noted above, is primarily supplied by Bowie and
supplemented with supply from Murray Energy's West Ridge Mine and the
Company's Deer Creek Mine. For purposes of determining the fuel costs at the
' The Company's assets related to and near the Preparation Plant include real pnrperty located in Emery
County, Utah, together with: (a) buildings, fixtures, and other improvements thereon, including the
Preparation Plant; (b) right, title and interest in and to adjacent streets, easements, and rights-of-way; (c)
certain personal property located on the real property, and (d) other rights and interests appurtenant to the
real property, improvements, and personal property (collectively with the real property, the "Preparation
Plant").2 Those assets include real property located in Emery County, Utah, together with: (a) right, title and
interest in and to adjacent streets, easements, and rights-of-way; (b) buildings, fixtures, and other
improvements on the real property, including the central shop and warehouse facilities; (c) certain personal
properly located on the real properly; and (d) other rights and interests appurtenant to the real prcperty,
improvements, and/or personal property (collectively with the real property, the "Central Warehouse").3 In addition to holding the Trail Mountain Coal Leases, defined below, the Company owns real property
adjacent to the coal leases, together with the following assets: (a) all right, title and interest in and to
appurtenant easements and rights-of-way; (b) any improvements and infrastructure located on the Trail
Mountain Coal Leases or the real property; (c) certain personal property located on the real property; (d) all
data, files, reports, information and records related to the Trail Mountain Coal Leases; and (e) any other
rights and interests appurtenant to the Trail Mountain coal leases or the real property, and any
improvements or infrastructure located thereon (collectively with the Trail Mountain coal leases and the
real property the "Trail Mountain Mine").
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Hunter power plant, the blending costs of the Preparation Plant are in addition to
the delivered third-party supply costs.
Please describe how the Company currently utilizes the Central Warehouse.
The Central Warehouse facility is located near Castle Dale, Utah. The warehouse
is used to store equipment and supply inventories for the Company's nearby
facilities, including the Preparation Plant and the Deer Creek Mine.
Please describe the Trail Mountain Mine.
In September 1992, the Company purchased the Trail Mountain Mine, acquiring
United States coal leases UTU-49332, UTU-64375 and UTU-082996 located in
Emery County, Utah ("Trail Mountain Coal Leases"), along with all existing
surface facilities and underground support systems from Mountain Coal
Company.
At the time, the acquisition of the Trail Mountain reserves provided
certain strategic advantages to the Company. The Trail Mountain Coal Leases are
adjacent to the Cottonwood Mine, which was already owned and operated by the
Company. The close proximity allowed ready access to the Cottonwood Mine
facilities for processing coal extracted from Tiail Mountain and had the potential
to extend the life of the Cottonwood facilities. While coal mining operations at
the Cottonwood Mine ceased in 1994, until the closure of the Trail Mountain
Mine in 2001, the Company continued to use the Cottonwood Mine facilities to
transport coal, via an underground conveyor within the Coffonwood Mine, from
the Trail Mountain Mine to the Cottonwood Mine loadout facilities.
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The Company began coal production at the Trail Mountain Mine with
continuous mining in 1994, but ceased mining operations in 2001 due to the
depletion of existing reserves, the long lead time to acquire adjacent reserves, and
the availability of competitively priced external coal. Although closed in 2001,
the Trail Mountain Mine has not been reclaimed or remediated.
THE TRANSACTION
Please summarize the major elements of the proposed Transaction.
As noted above, the Transaction involves closure of the Deer Creek Mine and the
resulting withdrawal from the 1974 Pension Trust and transfer of the Retiree
Medical Obligation. In addition, it includes two components with Bowie: the sale
of the Mining Assets and the execution and implementation of the Huntington
CSA and Hunter CSA amendment.
The Company will close the Deer Creek Mine in 2015, before the full
depletion of the coal reserves. There are two main reasons for the early closure:
(1) escalating mining costs and pension liabilities; and (2) declining volume and
quality of coal reserves. These factors have combined to make continued
operation of the Deer Creek Mine uneconomic. I provide a more detailed
description of the reasons why the Company is recommending closure of the Deer
Creek Mine in my testimony below.
ln connection with the Deer Creek Mine Closure, the Company was able
to make advantageous sales of some of its remaining Mining Assets to Bowie.
With the closure of the Deer Creek Mine, it is also necessary to replace the
deteriorating coal supply; therefore, the Company executed a CSA with Bowie to
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replace the Deer Creek Mine coal currently being supplied to the Huntington and
Hunter power plants. The sale of the Mining Assets to Bowie is described in more
detail in my testimony below.
The Deer Creek Mine coal supply to the Huntington power plant is being
replaced with a long-term, third-party coal supply agreement with Bowie
("Huntington CSA"). The term of the Huntington CSA is through December 31,
2029.Due to the Utah coal market conditions at this time, the Company was able
to secure a favorable long-term contract to replace the Deer Creek Mine coal
supply. In addition, the Company is amending a long-term coal supply agreement
with Bowie for the Hunter power plant ("Hunter CSA"). The delivered fuel prices
under the CSA are projected to be lower than the estimated costs to continue
mining at Deer Creek and operating the Preparation Plant. Mr. Schwartz provides
additional detail on the economic analysis of the coal contracts relative to long-
term coal forecasts in his testimony.
Please describe the proposed sale of the Preparation Plant Assets.
On December 12,2014, the Company and Bowie entered into the Asset Purchase
and Sale Agreement for the Preparation Plant ("Preparation Plant APA"), attached
to my testimony as Confidential Exhibit No. 1.
Under the Preparation Plant APA, the Company agrees to sell and Bowie
agrees to purchase the Preparation Plant Assets for
In addition, Bowie agrees to pay the Company at
closing the value of the Company's working capital assets (consisting primarily of
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parts and supplies inventories) used in connection with the Preparation Plant
Assets. The value of the working capital assets will be determined no less than ten
days prior to the Transaction closing date, and shall not exceed $I.
Bowie also agrees to assume and discharge certain liabilities, including all
reclamation and all asset retirement obligations with respect to the Preparation
Plant Assets and all environmental remediation obligations.
As a result of the sale to Bowie, the Company will avoid the operating
cost of blending coal for the Hunter power plant (a levelized savings of
approximat.ly $I per year), and will benefit from reduced inventory
costs (a levelized savings of approximut.ly $I per year).
Please describe the sale of the Company's Central Warehouse Property.
On December 12, 2014, the Company and Bowie entered into the Asset Purchase
and Sale Agreement (Central Warehouse Property) (the "Central Warehouse
APA"), attached to my testimony as Confidential Exhibit No. 2.
Under the Central Warehouse APA, there is no stated monetary
consideration for the transfer of the Central Warehouse Property from the
Company to Bowie. As consideration for the transfer, Bowie agrees to assume
and discharge certain liabilities, including all asset retirement obligations with
respect to the Central Warehouse Property and all environmental remediation
obligations.
Please describe the proposed sale of Trail Mountain Mine Assets.
On December 12,2014, the Company and Bowie entered into the Asset Purchase
and Sale Agreement (Trail Mountain Assets) (the "Trail Mountain APA"),
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attached to my testimony as Confidential Exhibit No. 3.
Under the Trail Mountain APA, there is no stated monetary consideration
for the transfer of the Trail Mountain Assets from the Company to Bowie. As
consideration for the transfer, Bowie agrees to assume and discharge certain
liabilities, including all mine reclamation and asset retirement obligations with
respect to the Trail Mountain Assets, the obligation to replace Trail Mountain's
reclamation bonds and/or performance bonds related to the Trail Mountain Assets,
and all environmental remediation obligations.
Are there any contractual conditions precedent to the closing of the asset
purchase agreements ("APAs")?
Yes. The Preparation Plant APA, the Central Warehouse APA, and the Trail
Mountain APA are each contractually conditioned on obtaining all necessary
regulatory approvals and closing of the Transaction on or before May 3l ,2015.
Please describe the Huntington CSA in more detail.
Under the Huntington CSA, Bowie agrees to supply all of the coal
requirements for the Huntington power plant from the Transaction close date to
December 31,2029, according to certain quality specifications. In 2015, Bowie
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agrees to supply I tons of coal. For the remainder of the term, Bowie
agrees to supply a minimum of I tons and a maximum of f tons
per year. The for coal supply is a fixed, delivered price, with capped
Over the term of the Huntington
CSA, the price per ton escalates in steps from S! to $I for the nrst I
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tons delivered in any contract yeag with a reduction in price of $! per ton
for delivery in excess ofI tons during each contractyear.
The Huntington CSA is a "take or pay" agreement, where PacifiCorp has
the obligation to take or pay for a minimum of I tons of coal annually,
subject to a "Legacy Contract" provision allowing for a reduction of the
minimum take amount to account for existing third-party coal supplies through
2020.
All of the coal supplied must meet certain coal quality specifications,
such as size and moisture, ash and sulfur content, as well as Btu content, and
several of these specifications are subject to price penalties. The Huntington CSA
permits the Company to maintain all existing third-party supplies for the p lant
through 2020.
The Huntington CSA is conditioned on obtaining all necessary regulatory
approvals and closing of the Transaction by May 31,2015.
The terms of the Huntington CSA are favorable, and the delivered fuel
prices are projected to be lower than the estimated operating costs for the Deer
Creek Mine until depletion in2019 and projected market pricing through 2029.
The Huntington CSA is attached to my testimony as Confidential Exhibit
No.4.
Does the Huntington CSA include protections for the Company and its
customers with respect to existing or new environmental regulations?
Yes. The Huntington CSA contains a broad termination right in favor of the
Company in the event existing or new environmental obligations adversely affect
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the Company's ability to burn coal at the Huntington power plant.
Please describe the Hunter CSA.
ln 1999, PacifiCorp and Canyon Fuels entered into a coal supply agreement for
the Hunter power plant. That agreement is the primary supplier of coal to the
Hunter power plant. The current term of the agreement extends through
December 31,2020. As noted above, Bowie acquired Arch's Utah mines in2013
and took assignment of that agreement.
Coal for the Hunter power plant is supplemented by other coal supplies,
including from the Deer Creek Mine, based on varying coal qualities and
economic supply opportunities.
In connection with the execution of the Huntington CSA and the transfer
of the Preparation Plant Assets, PacifiCorp and Bowie have agreed to amend
the existing coal supply agreement for the Hunter power plant.
Currently the Preparation Plant is operated by Energy West under an
operating agreement with the Company, the owner of the assets. The Preparation
Plant expense to blend incoming coal to meet the coal specification requirements
for the Hunter power plant is charged to the plant's consumed fuel costs.
Following the close of the Transaction, Bowie will acquire title to the Preparation
Plant Assets, along with the obligation to undertake all required stockpiling and
blending for the Hunter power plant coal specification requirements.' As a result
of the change in ownership and operation, the Hunter CSA amendment changes
the point of delivery and duration at which coal quality is measured and annual
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coal nomination dates. There is no adjustment to the Bowie delivered coal pricing
as a result of the Hunter CSA amendment.
The Hunter CSA is attached to my testimony as Confidential Exhibit
No.5.
REASONS FOR THE TRANSACTION
Why did the Company decide to close the Deer Creek Mine and enter into
the Transaction?
There are two primary reasons the Company is recommending closure of the
Deer Creek Mine at this time. First, Energy West is facing increasing liabilities at
the Deer Creek Mine related to mining costs and obligations, including health
care, but most significantly, escalating pension obligations. Second, Energy
West's coal reserves are scheduled to be depleted by 2019 and the Deer Creek
Mine faces lower quality and volume of reserves which impacts the mine's
production costs going forward. At the same time, the coal market in Utah has
changed, market supplies are more available, and the advantages of owning coal
mining assets in Utah have lessened.
In connection with the Deer Creek Mine Closure, the Company was able
to make advantageous sales of some of its remaining Mining Assets to Bowie.
With the closure of the Deer Creek Mine, it is also necessary to replace the
deteriorating quality of its coal supply; therefore, the Company executed the CSA
with Bowie to replace the Deer Creek Mine coal currently being supplied to the
Huntington power plant.
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Please elaborate on the Company's decision to close the Deer Creek Mine
based on increasing mining costs and pension liabilities.
The Deer Creek Mine is operated by Energy West. Energy West has a long-term
labor relationship with the UMWA. Certain elements of labor costs have
increased, especially pension liabilities. For the past several years, Energy West
has been in a labor dispute with the UMWA over costs and liability escalations,
including the threat of collapse of the 1974 Pension Plan and the huge potential
cost increases to Energy West.
Did Energy West and the UMWA recently reach a settlement of their
protracted labor dispute?
Yes. On October 31,2014, Energy West and the UMWA reached an agreement to
resolve all outstanding disputes. The settlement is comprised of several
Memoranda of Understanding and a 2014 Wage Agreement.
Did the labor settlement resolve the escalation of mining costs and pension
liabilities at the Deer Creek Mine?
No. As addressed below, while the settlement addressed outstanding disputes, it
does not contain the escalating mining costs in a manner that would allow
continued mining at the Deer Creek mine, whether mined by Energy West or
another party.
Please explain the increase in health care costs for active employees.
Under the collective bargaining agreement with UMWA, Energy West is
responsible for effectively 100 percent of the health care costs for active workers,
with employees paying only a very minimal co-payment and with no premium
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cost sharing. As a result, in 2013, Energy West paid $lmonth versus
$lmonth cost for other Company union workforce. In addition, with the
implementation of new health care laws, the health care costs are potentially
subject to an excise tax annually, starting in 2018. Energy West was unable to
achieve any cost containment associated with health care for active workers in the
recent labor settlement.
a. Was Energy West able to negotiate some mitigation of its health care liability
for retired employees under the recent labor settlement?
Yes. Energy West successfully transferred its Retiree Medical Obligation
associated with Energy West union participants to the UMWA. As a result of this
settlement, Energy West is required to transfer $150 million from its plan's trust
to the UMWA s trust in exchange for UMWA assuming the Retiree Medical
Obligation.
This effectively exempts Energy West
from any further obligations associated with retiree medical benefits for the
Energy West union employees and retirees and creates a benefit for customers in
the form of reduced future expense. The accounting impacts associated with this
transfer are addressed in the testimony of Mr. Stuver.
Please explain Energy West's increasing pension liability.
Energy West contributes to the 1974 Pension Trust. Contributions to this pension
plan are based on the terms of the National Collective Bargaining Agreement
between the UMWA and the Bituminous Coal Operators'Association ("BCOA").
In multi-employer pension plans, assets are pooled such that contributions by one
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employer may be used to provide benefits to employees of other participating
employers and plan assets cannot revert back to employers. If an employer ceases
participation in the plan, the employer may be obligated to pay a withdrawal
liability based on the participants'unfunded, vested benefits in the plan. If a mass
withdrawal of participating employers occurs, the unfunded obligations of the
plan may be borne by the remaining participating employers, including any
employers that have withdrawn within the prior three years. Furthermore, to the
extent a participating employer defaults on its obligation to the plan, the
remaining employers may be allocated a share of the defaulting employer's
obligation for unfunded vested benefits.
Under the terms of the 1974 Pension Trust, when mining operations
cease, Energy West will be subject to a withdrawal liability. The testimony of Mr.
Schwartz provides additional details regarding the 1974 Pension Trust and the
potential liabilities under the Trust. In summary Mr. Schwartz explains that the
1974 Pension Trust is seriously underfunded, a circumstance that is likely to get
worse in the coming years given the risk of bankruptcies of other participants,
and that Energy West's withdrawal liability is anticipated to increase substantially
between now and 2019.
How has Enerry West responded to information about the underfunding
levels of the 1974 Pension Trust and the risks of bankruptcy for other
participants?
After learning of the serious underfunding in 2010, Energy West requested
information about its withdrawal liability from the trust administrators. The
Crane, Di - 18
Rocky Mountain Power
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withdrawal liability was determined to be $85.9 million for the plan year ending
June 30, 2010. Energy West has obtained its withdrawal liability amounts
annually since then and the amount has grown to $125.6 million, if a withdrawal
occurred between June 30, 2013 and July 1,2014. This is a 46.5 percent increase
over four years, or an average of 11.63 percent annually. Given an average
increase of 11.63 percent per year withdrawal liability, together with the 1974
Pension Trust's seriously underfunded status and the third-party bankruptcy risk
discussed in Mr. Schwartz's testimony, Energy West is very concemed about the
potential size of the withdrawal liability if the mine is not closed until late 2019.
How has Energy West addressed its growing liability under the 1974 Pension
Trust?
Energy West has assessed its options to withdraw from the 1974 Pension Trust
now and fund the resulting withdrawal obligation. The only options available to
Energy West for withdrawal are cessation of contributions or declaration of
bankruptcy. Cessation is triggered when there are no UMWA worker hours.
Declaration of bankruptcy is not a feasible option. In either event, Energy West
has two payment options when the liability arises, annual payments or a lump sum
payment of the obligation, is described in greater detail in the testimony of Mr.
Stuver.
Why didn't Enerry West withdraw from the 1974 Pension Trust before its
proposal to do so now?
After the 1974 Pension Trust was classified as seriously endangered, the UMWA
and the BCOA initiated national agreement negotiations. Because benefit and
Crane, Di - 19
Rocky Mountain Power
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contribution levels are set through the national agreement negotiations between
the UMWA and the BCOA, and early negotiations had been initiated, Energy
West expected that pension liability issues would be addressed in the new
agreement.
At that time, the quality and volume of coal from the Deer Creek Mine
had not yet begun its decline. In addition, Energy West was in protracted
negotiations with Arch over coal supply to the Hunter power plant, including
litigation that had been filed for an anticipatory breach by Arch of the contract.
The advantages to the Company of maintaining its captive coal supply from the
Deer Creek Mine, including stable supply at reasonable costs, reduced exposure
to market prices and leverage in negotiating other coal contracts, had not begun to
materially diminish.
By mid-2011, the Company had settled its coal supply negotiations with
Arch. The UMWA and BCOA entered into a new national agreement with an
effective date of July 1, 2011, but it did not address the pension issues. In
response, the Company began analyzing its options, ultimately resulting in a
multi-pronged strategy, which included, among other things, pursuit of a mine
sale and a labor strategy for UMWA and Energy West contract negotiations, to
allow Energy West to withdraw from the 1974 Pension Trust.
Please describe how the Company explored the sale of the Deer Creek Mine.
Before deciding to close the Deer Creek Mine, the Company reviewed its
opportunities to exit its coal mining operations at Deer Creek through a sale. The
Company reached out to several parties beginning in 2012. After assessing
Crane, Di -20
Rocky Mountain Power
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expressions of interest from some parties, the Company determined that pursuing
such options would not be in the best interest of its customers. All parties that
expressed interest required Energy West to retain retiree medical liabilities, as
well as retain or backstop the pension liability; therefore, these proposed sale
options would not achieve the Company's goal of capping the liabilities. None of
the sales options were viable and cost-effective for customers.
Did Energy West discuss the option of closing the mine with the union?
Yes. Through the labor dispute process, Energy West conveyed to the union on
numerous occasions, both in writing and in person, that the Company was
pursuing all options available, including sale or closure of the Deer Creek Mine
and contracting out the Preparation Plant. Energy West engaged in full collective
bargaining over these issues.
Does the settlement with the union allow Energy West to withdraw from the
1974 Pension Trust?
Yes, but only if the mine is sold or closed.
Has the Company been able to sell the mine?
No, not on terms that are economic for customers.
Given the Deer Creek Mine scheduled closure in 2019, did the Company
consider having Energy West continue to operate the mine until the
scheduled closure?
Yes, as outlined below, the Company compared closure of the mine to keeping the
mine operating through its reserve depletion in2019. The Company's economic
analysis demonstrates that closure is more cost-effective for customers.
Crane, Di - Zl
Rocky Mountain Power
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a.The second reason you provided in support of the Deer Creek Mine Closure
related to lower quality and volume of reserves. Why are quality and
production decreasing at the Deer Creek Mine?
As Energy West's development advanced within the Northern Mill Fork lease, it
has encountered significant volumes of high ash and high sulfur coal in several of
the planned panels. Additionally, Energy West pursued coal lease expansions
through a lease modification process, but drilling programs have now highlighted
coal quality concerns with elevated ash.
How has Energy West responded to mining of high ash and/or sulfur content
coal?
During periods of high ash and sulfur coal production, the longwall system must
be operated on a single ten-hour shift instead of two ten-hour shifts. The mine's
annual production is therefore reduced significantly during these periods,
resulting in increased overall production costs.
Why is the Deer Creek longwall system limited to a single shift during the
high ash and sulfur production periods?
Deer Creek's coal is consumed by the Hunter and Huntington power plants. Both
plants share a maximum ash target of <15 percent. Accordingly, high ash coal
requires processing or transpotting to be usable in the Company's coal-fueled
plants. All of Deer Creek's production is initially delivered to the Huntington
power plant via an overland conveyor. Once delivered to the Huntington power
plant stockpile, Deer Creek coal can either be diverted to the Carbon power plant,
the Hunter power plant or the Preparation Plant via two truck loadouts or remain
Crane, Di - 22
Rocky Mountain Power
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at the Huntington power plant. The Huntington power plant can typically transfer,
on average, 7,000 tons of Deer Creek coal a day between the two loadouts. With
Deer Creek's ash content approaching 20 percent, on average, during several
months, the majority of the coal will need to be transferred to either the Hunter
power plant or the Preparation Plant and subsequently blended with lower ash
coals to meet plant quality specifications.
How much coal is produced by the Deer Creek longwall in a single shift?
The longwall system will typically produce 8,500 tons per shift per day.
Operating the longwall system more than one shift per day during periods of
elevated ash will exceed the physical transfer capability of the truck loadouts and
will quickly cause the Huntington stockpile to reach capacity and force the mine
to be idled.
Can Deer Creek avoid mining these high sulfur and ash areas?
No. Not without significantly impacting Deer Creek's production volumes and
costs. As discussed later in my testimony, the Company considered the costs of
continued operation of the Deer Creek Mine in assessing the benefits of Closure.
How does the closure of the l)eer Creek Mine relate to sale of the Mining
Assets included in the Transaction?
Many of the changing economic conditions affecting the Deer Creek Mine also
affect the Company's other owned coal-supply assets in Utah. In addition, the
closure of the mine made the sale of the Mining Assets logical from a business
standpoint. As such, the Company negotiated for the sale of the MiningAssets as
part of the Transaction.
Crane, Di -23
Rocky Mountain Power
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Specifically, why are the Mining Assets included in the Transaction?
First, once the Deer Creek Mine is closed and the CSAs go into effect, the burden
of stockpiling and blending coal at current levels to achieve compatible coal
blends for the power plants is shifted almost entirely to Bowie. Accordingly, the
Company no longer needs the Preparation Plant and the Central Warehouse to
ensure fuel supply to its plants.
Second, with respect to the Trail Mountain Mine, the new and existing
CSAs provide the Hunter and Huntington power plants' with an appropriate
volume and quality coal supply at a reasonable cost. Given the competitive third-
party supply option, and for all of the reasons stated above, there is no longer any
reason to maintain these coal-related assets.
The final component of the Transaction relates to the new Huntington CSA
and the amended Hunter CSA. Why are the CSAs included in the proposed
Transaction?
The Huntington and Hunter power plants have a useful life beyond the date of the
expected closure of the Deer Creek Mine. The CSAs assure that a long-term coal
supply is available to fuel the Hunter and Huntington power plants. In addition,
cuffent conditions in the coal market indicate that this is a favorable time to
secure a long-term supply. Mr. Schwartz provides additional analysis of this issue
in his testimony.
Can you briefly explain how the Company currently recovers fuel costs for
the Huntington and Hunter power plants in rates?
Yes. The Company recovers the costs to fuel the Huntington and Hunter power
Crane, Di -24
Rocky Mountain Power
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plants as a component of the Company's net power costs, and it earns a return on
the investments in the Deer Creek Mine and the Mining Assets.
How does the Company propose to reflect fuel costs for these plants in rates
after the Deer Creek Mine closes?
After the Deer Creek Mine closure and sale of the Mining Assets, the Company
will incur costs to fuel these plants through the Huntington and Hunter CSAs. At
the same time, the Company proposes to continue to recover the unamortized
investment in the mine and related assets through net power costs at current
depreciation rates until rates are next reset.
Therefore, the Company proposes to defer as part of net power costs the
difference between (a) amounts currently reflected in rates for investment
associated with the Deer Creek Mine, Mining Assets and the costs to fuel the
Huntington and Hunter power plants, and (b) the costs of continued amortization
of the unrecovered investment plus CSA costs. The Company proposes that the
amount be deferred through the power cost adjustment mechanisms in each state
without application of any existing sharing bands and be subject to a return set at
the Company's allowed rate of retum.
How will the Company compute this differential?
To determine the amount of the incremental fueling cost differential, the
Company proposes to multiply the total MMBtu consumed for the two plants
included in base net power costs times the difference between the weighted-
average cost per MMBtu (consumed) included in the base net power costs for the
Huntington and Hunter power plants and the actual weighted-average cost per
Crane, Di - 25
Rocky Mountain Power
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MMBtu (consumed) during the deferral period. The actual weighted-average cost
per MMBtu during the deferral period will be determined based on the
methodology used to set current rates.
Does the Company propose to cease the deferral once rates are reset?
Yes. When base net power costs are reset in the Company's next general rate case,
the Company proposes that base rates to fuel the Huntington and Hunter power
plants be reset to reflect the CSAs and then-current forecast of costs to fuel the
plants. The Company proposes to include in rate base any unrecovered investment
at that time, to be amortized over a period approved by the Commission and earn
a return at the Company's authorized rute of return.
ANALYSIS OF THE BENEFITS OF THE TRANSACTION
Can you summarize the major benefits of the proposed Transaction?
Yes. The early closure of the Deer Creek Mine is a prudent decision that will limit
the Company's liability under the 1974 Pension Trust compared to a much higher
expected liability if the mine remains open until20l9. Moreover, closing the mine
now avoids other increasing mining costs, such as health care costs that are
disproportionately high to the rest of the union labor force at the Company.
Furthet the CSAs are beneficial to customers compared to the ongoing costs of
operating the mine, especially in light of the declining quality of the reserves in
the mine, which requires single-shift mining, stockpiling and blending of high
ash/sulfur Deer Creek production. Sale of the Mining Assets maximizes their
value for customers and effectuates the shifting of the costs of inventory and
blending to Bowie.
Crane, Di - 26
Rocky Mountain Power
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Why is it in the customers' best interest to close the Deer Creek Mine, sell the
Mining Assets and enter into the CSAs?
The Company's financial analysis, described below in my testimony,
demonstrates the purchase of coal supplies for the Huntington and Hunter power
plants pursuant to the CSAs is a lower cost option compared to continuing to
invest in and operate and maintain the Deer Creek Mine and other Mining Assets.
Will there be a gain or profit on the Closure and sale components of the
Transaction?
No. The closure of the Deer Creek Mine will result in an undepreciated asset due
to the shortened life of the mine. The sales of the Preparation Plant, the Central
Warehouse and the Trail Mountain Mine assets also result in a loss compared to
book value (although this will be more than offset over time by the avoided cost
benefits that will stem from the elimination of the Preparation Plant operating
costs). In addition, the Company has incurred and will incur a variety of costs to
effectuate the Closure and the Transaction. Mr. Stuver identifies these costs and
discusses the accounting effects of the Transaction in his testimony.
Please summarize the revenue requirement impacts of the Transaction.
The Company's analysis clearly demonstrates a substantial level of benefits to be
received by customers from the proposed Closure and Transaction. As discussed
in detail below, the net present value of the revenue requirement associated with
the Closure and Transaction is lower than the net present value of the revenue
requirement associated with continuing to operate the Deer Creek Mine and other
Mining Assets and not entering into the Coal Supply Agreements. In addition, the
Crane, Di -27
Rocky Mountain Power
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Closure and Transaction provide greater certainty of benefits to customers since
keeping the Deer Creek Mine open exposes customers to significant risks of
additional cost increases in the future, particularly due to the inability to mitigate
additional exposure associated with the 1974 Pension Trust withdrawal. As a
result, the proposed Transaction is prudent and in the public interest.
Please describe the studies prepared to analyze the financial impacts of the
Transaction.
The Company analyzed three specific cases: (1) keep the Deer Creek Mine open
and continue to operate it until reserve depletion in 2019, retain all other coal-
related assets, and do not enter into long-term coal supply agreements until Deer
Creek's depletion (the "Keep Case"), (2) close the Deer Creek Mine now, sell the
Mining Assets and enter into the CSAs now (the "Transaction Case"); and (3)
close the Deer Creek Mine now and replace the supply with market purchases (the
"Market Case").
Three present value revenue requirement differential scenarios were
analyzed: (l) the Keep Case vs the Transaction Case, (2) the Keep Case vs the
Market Case, and (3) the Market Case vs the Transaction Case. This analysis
compares the net present value of the revenue requirement for the three scenarios
through 2029 (the term of the Huntington CSA), through 2036 (the current
depreciable life for the Huntington power plant), and through 2042 (the current
depreciable life for the Hunter power plant).
Please describe the components of the Keep, Transaction and Market Cases.
The Company meets the coal requirements of its power plants through a portfolio
Crane, Di - 28
Rocky Mountain Power
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of supplies. The Deer Creek Mine supply, while primarily supplying the
Huntington power plant, is also taken to the Company's Hunter power plant and
the Preparation Plant. Additionally, the Company takes supply from its third-party
contracts to all of its Utah plants and therefore no specific contract is currently
dedicated to a specific plant. This is necessary to achieve an optimal coal blend at
each plant. As such, the Cases have been prepared on a total Utah coal fueling
basis. Within the three Cases, the Company has open coal supply positions that
are assumed to be filled based on market-based pricing information. The timing
and volumes of these open positions differ between the Cases due to the
Transaction Case's inclusion of the Huntington CSA for the Huntington power
plant and the differing Deer Creek Mine closure dates in the Keep and Market
Cases. All three Cases involve a closure of the Deer Creek Mine and a triggering
of a withdrawal liability from the 1974 Pension Trust, just at different times: two
in 201 5 and the other in 20 I 9.
Please describe the major assumptions used to prepare the various scenarios.
All three Cases assume a triggering of the UMWA pension withdrawal obligation
and annual annuity payments for the unfunded liability from the time of
withdrawal. Each case also assumes the annuity payments are in revenue
requirement calculations through the analysis period with a calculation of the
present value of installment payments in perpetuity in the final year of the
analysis. The withdrawal liability annual payments are based on the alternative
Seriously Endangered Funding Improvement Plan contribution schedule. More
information for the calculation of this liability is included in Mr. Schwartz's
Crane, Di - 29
Rocky Mountain Power
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testimony. The Keep Case assumes health care costs for the UMWA workers at
the current health plan costs plus eight percent (8%) cost escalation levels.
The Transaction and Market Cases assume the Company receives full
recovery for the unrecovered investment in the Deer Creek Mine assets (property,
plant and equipment). For the Keep Case, there is no unrecovered investment for
Deer Creek assets (property, plant and equipment) as they are fully depreciated at
the time of mine closure.
The Transaction Case reflects the transfer of the Retiree Medical
The Transaction Case also reflects a regulatory asset for
the relatively minor estimated settlement loss.
All three Cases assume that the Company fully recovers all mine closure
costs and assume that replacement coal for any open coal position for the
Huntington and Hunter power plants is purchased from the market based on
market pricing forecasts from Energy Ventures Analysis ("EVA").
A listing of major assumptions for each case is shown in Confidential
Exhibit No. 6. Assumptions used in the development of the market price forecasts
are also shown in Confidential Exhibit No. 6.
Are there any other important considerations when evaluating the results of
the Keep Case?
Yes. The Company's analysis has not incorporated all of the significant cost
exposures and uncertainties related to continued ownership and operation of the
Crane, Di - 30
Rocky Mountain Power
Obligation to the UMWA demonstrating a benefit to customers as compared to the
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Deer Creek Mine and Mining Assets. These potential exposures include items
such as additional reclamation costs, increased Mine, Safety and Health
Administration ("MSHA") regulations or geologic impacts which could be
determined through the mine's continued development of panels and exploration
drilling, such as rock spars, faults etc. Although the EVA market price forecasts
are based on a 1 percent sulfur content level, the Company has not incorporated
additional plant scrubbing costs in its analysis in conjunction with the EVA
market pricing used for supply post the Deer Creek 2019 closure in the Keep
Case. Finally, as described in greater detail in the testimony of Mr. Schwartz, the
withdrawal liability associated with the 1974 Pension Trust could be far greater
than the amount assumed in the studies, particularly if there are any coal operator
bankruptcies affecting participating employers. As such, the Keep Case is
conservative for comparison purposes.
Does the analysis clearly demonstrate that customers are better off under the
Transaction Case?
Yes. The Transaction Case clearly shows a substantial level of revenue
requirement reductions for customers if the Deer Creek Mine is closed early, the
1974 Pension Trust withdrawal is concurrently triggered, Mining Assets are sold
to Bowie and the Company enters into the CSAs relative to the Keep Case. In
addition, the sale of the Mining Assets and mine's early closure provide greater
certainty of benefits to customers, since keeping the resources exposes customers
to significant risks of additional cost increases in the future. Based on the
Company's analysis, it is clear that the Transaction is in the public interest,
Crane, Di - 3l
Rocky Mountain Power
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beneficial to customers, and a prudent course of action for the Company to
pursue.
Please summarize the results of the Company's three scenarios.
Provided in Confidential Exhibit No. 6, is a summary of the results of the
Company's: (l) Keep Case vs Transaction Case, (2) Market Case vs Transaction
Case and (3) Keep Case vs Market Case. The Company's analysis for all three
analysis periods, 2029,2036 and 2042, shows that customers are better off in the
Transaction Case with between $I und $I in net present
value revenue requirement reductions compared to the Keep or Market Cases. The
Company's Keep Case vs Market Case only produces between $I uro
$I in revenue requirement reduction benefit, therefore demonstrating
even further that the Transaction Case is in the best interest of customers.
Please summarize your testimony.
An early closure of the Deer Creek Mine, the resulting 1974 Pension Trust
withdrawal, the transfer of the Retiree Medical Obligation to the UMWA, the sale
of the Mining Assets and the execution of the CSAs with Bowie provide
significant benefits to customers while eliminating both operating and financial
risks relative to the continued operations of the Deer Creek Mine until its
depletion in 2019. For the reasons stated in my testimony, I request the
Commission approve the Application.
Does this conclude your direct testimony?
Yes, it does.
Crane, Di - 32
Rocky Mountain Power
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Redacted
CONF'IDENTIAL
Case No. PAC-E-14-10
Exhibit No. I
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
CONFIDENTIAL
Exhibit Accompanying Direct Testimony of Cindy A. Crane
Asset Purchase and Sale Agreement (Preparation Plant) between
PacifiCorp and Bowie Resource Partners, December 12,2014
December 2014
THIS EXHIBIT IS CONFIDENTIAL
AND IS PROVIDED UNDER
SEPARATE COVER
CONFIDENTIAL
Case No. PAC-E-14-10
Exhibit No. 2
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOTINTAIN POWER
CONFIDENTIAL
Exhibit Accompanying Direct Testimony of Cindy A. Crane
Asset Purchase and Sale Agreement (Central Warehouse) between
PacifiCorp and Bowie Resource Partners, December 12,2014
December 2014
THIS EXHIBIT IS CONFIDENTIAL
AND IS PROVIDED UNDER
SEPARATE COVER
CONFIDENTIAL
Case No. PAC-E-14-10
Exhibit No. 3
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTATN POWER
CONFIDENTIAL
Exhibit Accompanying Direct Testimony of Cindy A. Crane
Asset Purchase and Sale Agreement (Trail Mountain Mine) between
PacifiCorp and Bowie Resource Partners, December 12,2014
December 2014
THIS EXHIBIT IS CONFIDENTIAL
AND IS PROVIDED UNDER
SEPARATE COVER
CONFIDENTIAL
Case No. PAC-E-14-10
Exhibit No.4
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
CONFIDENTIAL
Exhibit Accompanying Direct Testimony of Cindy A. Crane
Coal Supply Agreement for the Huntington Power Plant between
Bowie Resource Partners and PacifiCorp
December 2014
THIS EXHIBIT IS CONFIDENTIAL
AND IS PROVIDED UNDER
SEPARATE COVER
CONFIDENTIAL
Case No. PAC-E-14-10
Exhibit No. 5
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOLINTATN POWER
CONFIDENTIAL
Exhibit Accompanying Direct Testimony of Cindy A. Crane
Amended Coal Supply Agreement for the Hunter Power Plant
December 2014
THIS EXHIBIT IS CONFIDENTIAL
AND IS PROVIDED UNDER
SEPARATE COVER
REDACTED
Case No. PAC-E-14-10
Exhibit No. 6
Witness: Cindy A. Crane
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
REDACTED
Exhibit Accompanying Direct Testimony of Cindy A. Crane
List of Major Assumptions
December 2014
Rocky Mountain Power
Exhibit No. 6 Page 1 of 2
Case No. PAC-E-14-10
VMtness: Cindy A. Crane
List of major assumptions used in the development of the three cases.
Y82029 Y82036 Y82042
Present Value Revenue Requirement
Keep Case
Transaction Case
LLI-
Transaction Case - Increase (Decrease
Y82029 Y82036
Present Value Revenue Requirement
Market Case
Transaction Case
Transaction Case - Increase (Decrease
LLL
Y82029 Y82036 YE.2042
Present Value Revenue Requirement
Keep Case
Market Case
LLL
Market Case - Increase (Decrease
Rocky Mountain Power
Exhibit No. 6 Page 2 ol2
Case No. PAC-E-14-10
Wtness: Cindy A. Crane
Keep Case
Deer Creek coal terminates in 2019
Transaction Case
ion terminates in 2014
Market Case
uction terminates in 2014