20141215Stuver Direct.pdf

BEFoRE rHE rDAHo puB,,rc urrlrrrEs coMMrssrofflh n[c l5 P]i L: 33
iill;i;,
cAsE No. pAC_E-t#-]S lT! r ii
DIRECT TESTIMONY OF
DOUGLAS K. STUVER
REDACTEI)
ROCKY MOUNTAIN POWER
r-1 ,
/^Ai !r' I lr.;iit rr ril'-l \/ il r:.il L,u I L-,. ;IN THE MATTER OF THE APPLICATION
OF ROCKY MOUNTAIN POWER FOR
APPROVAL OF THE TRANSACTION TO
CLOSE DEER CREEK MINE AND
FOR A DEFERRED ACCOUNTING
ORDER
CASE NO. PAC-E.14.10
December 2014
I
2
3
4
5
6
7
8
9
l0
t1
t2
13
t4
l5
t6
t7
l8
t9
20
2t
22
23
a.
A.
a.
A.
a.
A.
INTRODUCTION
Please state your name, business address, and present position with
PacifiCorp dba Rocky Mountain Power (the "Company").
My name is Douglas K. Stuver and my business address is 825 NE Multnomah
Street, Suite 1900, Portland, Oregon 97232. My present position is Senior Vice
President and Chief Financial Officer.
Briefly describe your education and professional experience.
I have a Bachelor ofAns degree in business administration from the University of
Pittsburgh and am a Certified Public Accountant licensed in Pennsylvania.
I worked for Ernst & Young for eight years in auditing and have since worked for
Enserch Energy Services, CNG Energy Services, and Duke Energy Corporation in
various accounting and risk management capacities. I joined PacifiCorp in 2004
as the controller for the commercial and trading division and moved into my
current role as Senior Vice President and Chief Financial Officer in March 2008.
What are your responsibilities as Senior Vice President and Chief Financial
0flicer?
My primary responsibilities include the accounting, treasury tax, financial
planning and analysis, external financial reporting, commodity risk management,
and internal audit functions for PacifiCorp.
PURPOSE OF TESTIMONY
What is the purpose of your testimony?
My testimony addresses the Company's proposed regulatory and accounting
treatment for the closure of the Deer Creek Mine ("Closure") and related matters.
Stuver, Di - I
Rocky Mountain Power
a.
A.
Redacted
I
2
3
4
5
6
7
8
9
10
ll
t2
l3
t4
l5
t6
t7
18
t9
20
2t
a.
A.
The Closure includes the withdrawal from the United Mine Workers of America
("UMWA") 1974 Pension Trust (*1974 Pension Trust"), the sale of certain mining
assets ("Mining Assets"), and the execution of two coal supply agreements
("CSAs") with Bowie Resource Partners, LLC (or its designated subsidiary)
("Bowie"). Energy West has also settled its retiree medical obligation ("Retiree
Medical Obligation") related to Energy West union participants. Together, the
components of the Closure and settlement of the Retiree Medical Obligation
constitute the transaction to close the Deer Creek Mine ("Transaction").
OVERVIEW
Please describe the Transaction.
The Company is proposing to close the Deer Creek Mine in Emery County, Utah
in 2015. The Closure will include withdrawal from the 1974 Pension Trust and
transfer of the Retiree Medical Obligation associated with Energy West union
participants to the UMWA. The Company has also entered into asset purchase and
sale agreements with Bowie for the Mining Assets, which consist of the coal
preparation plant and related assets located in Emery County, Utah ("Preparation
Planf'); the central warehouse facility and related assets located in Emery County,
Utah ("Central Warehouse"); and the Trail Mountain Mine and related assets
located in Emery County, Utah ("Trail Mountain Mine") (collectively the "Mining
Assets").I The Company has also executed two CSAs with Bowie for continued
fuel supply to its Huntington and Hunter Power Plants.
I The Transaction also includes the sale of the assets of Fossil Rock Fuels LLC (Fossil Rock), a wholly
owned subsidiary ofthe Company. These assets are not in ldaho rates, so the Idaho request for approval
and a deferred accounting order does not address this aspect ofthe Transaction.
Stuver, Di - 2
Rocky Mountain Power
Redacted
I
2
3
4
5
6
7
8
9
10
11
t2
l3
t4
t5
16
t7
18
19
20
2t
22
23
o.
A.
Why is the Company proposing to close the Deer Creek Mine in 2015 and sell
the Mining Assets?
Early closure of the Deer Creek Mine, including withdrawal from the 1974
Pension Trust, transfer of the Retiree Medical Obligation, sale of the Mining
Assets, and execution of the CSAs will provide significant present value benefits
to customers as outlined in Ms. Cindy A. Crane's testimony.
Is the Company able to linancially support the Transaction?
Yes. The Company has significant financial resources including a strong balance
sheet, substantial net cash flows from operations and the ability to borrow any
funds necessary to help finance the Transaction.
Certain costs associated with the Transaction will be incurred over a
period of time (e.g., mine closure costs and CSA costs), while other costs of the
Transaction could be incurred as a one-time event (e.g., pension withdrawal
liability). In either case, the Company will be able to financially support the
Transaction.
During the year ended December 31, 2013, the Company generated
approximately $1.5 billion in net cash flows from operating activities. This
amount of operating cash flows is well beyond what the Transaction is expected
to require over a multi-year period of time. Further, the Company generated
approximately the same amount of net cash flows from operating activities during
the two prior years as well.
In addition to internally-generated funds, the Company has access to the
capital markets and expects to be able to borrow any funds necessary for the
Stuver, Di - 3
Rocky Mountain Power
a.
A.
Redacted
1
2
J
4
5
6
7
8
9
l0
ll
t2
13
t4
t5
t6
t7
l8
t9
20
2t
22
23
a.
A.
Transaction. This access was evidenced most recently by the Company's March
2014 issuance of $425 million of first mortgage bonds due 2024. PacifiCorp
senior secured debt is currently rated'Al'and'A'by Moody's lnvestors Service
and Standard & Poor's Ratings Services, respectively, both of which are
investment grade ratings. The Company also has a commercial paper program that
allows it to borrow funds on a shorter term basis to help finance shorter term cash
needs in anticipation of a long-term financing should the Transaction require
short-term financing.
What are the estimated costs associated with the Transaction?
Estimated costs associated with the Transaction, including estimated unrecovered
investment in the Deer Creek Mine and the Mining Assets, are as follows (in
millions):
Unrecovered investment in Deer Creek Mine
Unrecovered investment in Mining Assets
Closure costs
Retiree Medical settlement loss
1974 Pension Trust withdrawal
Estimated total
Please provide an overview of the Company's proposed regulatory and
accounting treatment for the costs associated with the Transaction.
The Company proposes to defer all costs associated with the Transaction as a
regulatory asset. The Company proposes a carrying charge on the unamortized
regulatory asset equal to its authorizedrate of return. For purposes of determining
Stuver, Di - 4
Rocky Mountain Power
$86
I
I
I
I
I
a.
A.
Redacted
I
2
3
4
5
6
7
8
9
l0
11
t2
l3
t4
l5
t6
t7
l8
t9
20
2l
22
the regulatory asset balance during the deferral period, the Company proposes to
reduce the regulatory asset by any unpaid liabilities associated with the
Transaction.
Until the time when rates next reset, the Company proposes to amortize
the regulatory asset associated with its unrecovered investment at the current rate
of depreciation for the Deer Creek Mine and the Mining Assets now reflected in
base rates. This approach serves to minimize the amount of deferrals and align
costs with amounts currently being recovered in rates.
As described in the Application, the Company also proposes to defer and
amortize the incremental costs or benefits of replacement fuel supply under the
CSAs until these costs are reflected in base rates. Because these costs and the
unrecovered investment costs both relate to fuel supply, the Company proposes to
amortize them through net power costs, subject to the Company's power costs
adjustment mechanisms in each state without application of any existing sharing
bands.
At the time rates are next reset, the Company proposes to add any
unamortized investment to rate base, to be recovered over a period to be approved
by the Commission. The Company will also reset base rates to reflect the CSAs.
The Company proposes to defer the accounting loss associated with the
1974 Pension Trust withdrawal on the basis that recovery of payments to the trust
will continue for the foreseeable future until the Company's withdrawal liability
can be quantified and amortized. The Company proposes rate base treatment of
Stuver, Di - 5
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
10
ll
t2
13
t4
t5
l6
t7
l8
19
20
2t
22
23
a.
A.
both the unamortized regulatory asset and outstanding liability associated with the
withdrawal obligation.
The Company requests an accounting order allowing it to record as a
regulatory asset the estimated l"ccounting loss associated with the
settlement of its Retiree Medical Obligation. The difference between the funds the
Company will transfer to the union and the Company's estimated Retiree Medical
Obligation serves to reduce existing regulatory assets and will benefit customers
through lower future expense, as described later in my testimony.
Have you calculated the approximate amount of the requested regulatory
assets associated with the Transaction?
Yes. As presented in Confidential Exhibit No. 7, the Company has projected the
impacts of the Closure, Mining Asset sales, 1974 Pension Trust withdrawal and
settlement of the Retiree Medical Obligation. The projections are based upon
closure activities commencing after the filing of the application and the
completion of the Mining Asset sales and 1974 Pension Trust withdrawal by May
2015. These projections also assume Energy West continues longwall mining
through early December 2014.
The projected regulatory asset associated with the Mining Asset sales and
Closure, including unrecovered investment, the settlement loss resulting from the
transfer of the Retiree Medical Obligation and closure costs, is approximately
I on a total-company basis. Although the Company will recognize
most of these costs in2014, certain costs will be recognized in 2015 and early
2016. Separately, a regulatory asset and a withdrawal liability of approximately
Stuver, Di - 6
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
l0
ll
t2
13
t4
15
16
17
r8
t9
20
2t
22
23
a.
A.
a.
A.
I are estimated for the 1974 Pension Trust withdrawal, with recovery
based on the estimated annual contribution required to the 1974 Pension Trust and
continuing until contributions are no longer required.
CLOSURE OF THE DEER CREEK MINE
What is the current ratemaking and accounting treatment associated with
the Deer Creek Mine?
Consistent with the Company's 2013 depreciation study, the costs associated with
the Deer Creek Mine are based upon mine closure occurring in 2019.
Depreciation and operating costs are captured in the Company's base net power
costs. The projected net book value of the Deer Creek Mine at December 31,2014
is $86 million on a total-company basis.
What are the accounting implications and proposed ratemaking treatment of
the closure of the Deer Creek Mine?
The Company will be required to remove the net book value of the Deer Creek
Mine from property, plant and equipment under generally accepted accounting
principles ("GAAP"). For purposes of accounting under both GAAP and
ultimately the Federal Energy Regulatory Commission's Uniform System of
Accounts, the Company proposes to reclassifi the net book value of the Deer
Creek Mine assets from property, plant and equipment to a regulatory asset with
rate base treatment.
The Company proposes to commence amortization as soon as depreciation
ceases at an amount equal to the Deer Creek Mine depreciation currently reflected
in rates. The Company proposes that the amortization of this regulatory asset,
Stuver, Di - 7
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
10
ll
t2
l3
t4
l5
r6
t7
18
t9
20
2t
a.
A.
amortization of the undepreciated investment in the Mining Assets (discussed
below), and the costs or benefits realized for replacement coal supply, all of which
are included in net power costs, be subject to the Company's power cost
adjustment mechanisms in each state without application of any existing sharing
bands. At the time rates are next reset, the Company proposes to include in rate
base any remaining investment, to be recovered over a period to be approved by
the Commission.
Further information regarding the estimated accounting impacts of the
Closure of the Deer Creek Mine is provided in Confidential Exhibit No. 7.
DEER CREEK CLOSURE COSTS
Please describe the nature ofthe closure costs.
ln conjunction with cessation of the Deer Creek Mine operations, the Company
will incur certain closure costs. These include costs to remove everything from
within the mine workings, install bulkheads in the coal seams and seal the mine
portals; supplemental unemployment and medical benefits required under the
terms of the labor agreement; severance benefits to be provided to nonunion
employees; and certain royalties. The royalties include those that could potentially
be imposed by the Bureau of Land Management as a result of not mining the
previously planned coal reserve areas. PacifiCorp's current estimate for closure
costs is
-
starting at the time Deer Creek Mine begins closure work,
with certain costs continuing into early 2016.
Stuver, Di - 8
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
l0
11
t2
l3
t4
l5
t6
l7
18
t9
20
2t
22
23
a.
A.
a.
A.
What is the Company's proposed regulatory and accounting treatment for
Deer Creek Mine closure costs?
The Company proposes that all closure costs be deferred in a regulatory asset with
a carrying charge equal to the Company's authorized rate of return. At the time
rates are reset, the Company proposes to include in rate base the unamortized
regulatory asset and recover the costs over a period to be approved by the
Commission.
Further information regarding the estimated accounting impacts of the
Closure of Deer Creek is provided in Confidential Exhibit No. 7.
MINING ASSET SALES
What is the current ratemaking and accounting treatment associated with
Mining Assets?
The Preparation Plant is utilized to stockpile and blend coal for the Hunter Power
Plant. The net book value of the Preparation Plant is projected to be $20 million at
December 31, 2014. Under the 2014 depreciation study, depreciation and
operating costs associated with the Preparation Plant are based on a2042 terminal
life. The depreciation and operating costs for this asset are included in the
Company's net power costs.
The Central Warehouse stores materials and supplies inventory for the
Preparation Plant and the Deer Creek Mine. The net book value of the Central
Warehouse is projected to be $0.3 million as of December 31,2014. Underthe
2014 depreciation study, the Central Warehouse is being depreciated based on a
2019 terminal life.
Stuver, Di - 9
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
l0
ll
t2
l3
t4
l5
l6
t7
l8
t9
20
2t
22
The Trail Mountain Mine assets to be sold are comprised substantially of a
substation. The net book value associated with these assets is projected to be $0.7
million as of December 31, 2014. Recovery of and return on these assets is
currently reflected in rates.
a. What is the Company's proposed regulatory and accounting treatment
associated with the sales of the Mining Assets?
A. The Preparation Plant will be sold in exchange for a
No monetary consideration will be paid for the
Central Warehouse property and the Trail Mountain Mine. As a result, the
unrecovered investment after the sale of these assets is projected to be
approximat"ty I on a total-company basis.
The Company proposes to recover the approximately I
unrecovered investment by establishing a regulatory asset, with amortization
commencing immediately upon its establishment at the level of depreciation now
reflected in rates.
The Company proposes that this amortization be combined with
amortization of the Deer Creek Mine regulatory assets and costs or benefits
realized for the replacement coal supply and be subject to the Company's power
cost adjustment mechanisms in each state without application of any existing
sharing bands. At the time rates are next reset, the Company proposes to include
in rate base any remaining unrecovered investment in the Mining Assets, to be
recovered over a period approved by the Commission.
Stuver, Di - l0
Rocky Mountain Power
Redacted
I
2
3
4
5
6
7
8
9
l0
ll
t2
l3
l4
l5
t6
t7
18
t9
20
2t
22
23
a.
A.
a.
A.
a.
A.
Further information regarding the estimated accounting impacts of the
sales of the Mining Assets is provided in Confidential Exhibit No. 7.
1974 PENSION TRUST
What is the current ratemaking and accounting treatment associated with
the 1974 Pension?
Energy West currently contributes $5.50 per union hour worked to the 1974
Pension Trust. The contributions are included in Energy West's operating costs,
which are charged to the Company's fuel expense. Annually, these contributions
aggregate to approximately $3 million and are currently included in the
Company's base net power costs.
What is the estimated amount of the 1974 Pension Trust withdrawal
payment?
Energy West has the option to make either a lump-sum payment to satisff its
withdrawal obligation or to make annual installment payments. Energy West
intends to negotiate with the 1974 Pension Trust at the time of withdrawal to elect
the most economical choice-annual or lump sum. As of July 1, 2014, the
withdrawal liability for Energy West (if Energy West withdrew before that date)
was estimated to be $125.6 million. Annual payments are determined based upon
the average hours worked and highest contribution rate over the preceding l0 plan
years.
What are the accounting implications associated with Enerry West's
anticipated withdrawal from the 1974 Pension?
Under the installment method, GAAP requires that these types of losses be
Stuver, Di - ll
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
l0
ll
t2
l3
t4
15
t6
t7
l8
t9
20
2t
22
a.
A.
recorded at their present value using a risk-free rate. A 30-year treasury rate will
be used to discount the future payments. On November 4, 2014, the 3O-year
treasury rate projected for November 30,2014 was 3.0848 percent, which results
in an approximate I net present value. This liability, which is lower
than the $125.6 million lump-sum payment, is the amount the Company would be
required to record on its books.
What is the Company's proposed regulatory treatment associated with
anticipated withdrawal from the 1974 Pension?
To cover the Company's annual withdrawal payments, the Company proposes
continuation of the on-going estimated $3 million annual payment already
reflected in rates. The Company would defer the estimated I accounting
loss associated with the withdrawal liability. Neither the regulatory asset nor the
withdrawal liability would adjust over time since the $3 million would not
contribute towards a reduction in principal. At some future date, when the plan
terminates or the accrual of future benefits is frozen, this liability and associated
regulatory asset could be finally quantified and amortized.
Alternatively, if the Company is successful in negotiating a one-time pre-
payment of the annual installments that is more economical to customers, the
Company proposes that the amount be deferred until the next rate reset, with rate
base treatment of the unrecovered amount.
Further information regarding the estimated accounting impacts of the
1974 Pension Trust withdrawal is provided in Confidential Exhibit No. 7.
Stuver, Di - 12
Rocky Mountain Power
Redacted
I
2
J
4
5
6
7
8
9
10
ll
t2
r3
t4
l5
l6
t7
18
t9
20
2t
22
23
o.
A.
RETIREE MEDICAL OBLIGATION
What is the current ratemaking and accounting treatment associated with
the Retiree Medical Obligation?
Energy West employees earn benefits under the Company's retiree medical plan.
The Company accounts for its Retiree Medical Obligation under Accounting
Standards Codification Section 715-60, formerly known as FAS 106 ("FAS 106").
The Company recovers its costs associated with the plan through inclusion of FAS
106 expense in its general rate case filings with the portion attributable to Energy
West participants included in fuel costs.
What is the proposed regulatory and accounting treatment associated with
the proposed sefflement of the Retiree Medical Obligation?
Energy West successfully settled the Retiree Medical Obligation by transferring
assets to the UMWA
This difference of
I serves to reduce existing unrecognized actuarial losses currently
reflected in the Company's regulatory assets that would otherwise have been
amortized to FAS 106 expense in the future and thus represents a significant
benefit to customers. Settlement accounting under GAAP requires that the
Company accelerate recognition of a portion of the remaining unrecognized
actuarial losses. The resulting estimated settlement loss of I represents
accelerated recognition of actuarial losses that would also have been amortized to
FAS 106 expense absent the settlement. For this reason, the Company proposes to
defer the settlement loss for future recovery over a period to be determined by the
Stuver, Di - 13
Rocky Mountain Power
a.
A.
Redacted
I
2
3
4
5
6
7
8
9
l0
ll
12
r3
t4
l5
l6
a.
A.
Commission. As the Retiree Medical Obligation for the Energy West union
participants is a component of the Company's overall retiree medical plan, the
Company proposes that, once reflected in rates, the settlement loss be amortized
to operations and maintenance expense.
INCOME TAX CONSIDERATIONS
What are the income tax implications of the Transaction?
The Company proposes that the regulatory asset for deferred income taxes related
to Deer Creek Mine be recharacterized and included in the regulatory asset for
Closure costs. The income tax benefits associated with the Transaction will be
passed onto customers through a reduction to rate base by the accumulated
deferred income tax liability associated with the regulatory asset and a reduction
in cost of service as the regulatory asset is amortized and the associated timing
difference reverses.
CONCLUSION
Does this conclude your direct testimony?
Yes.
Stuver, Di - 14
Rocky Mountain Power
a.
A.
Redacted
REDACTED
Case No. PAC-E-14-10
Exhibit No. 7
Witness: Douglas K. Stuver
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
REDACTED
Exhibit Accompanying Direct Testimony of Douglas K. Stuver
Summary of Deferral Costs
December 2014
Rocky Mountain Power
Exhibit No. 7 Page 1 of 1
Case No. PAC-E-'14-10
VMtness: Douglas K. Stuver
ox2Eob
= {a{X<d<-6;
&
83E
5p
E
o?E,9
4>
6
I
IU
E
3
E
3
z
E9!U€€
: E -5 5 5 Eb O RS S E E: c a ;E ! ! !il I 1-rE o ; E E6 = -o'F- 9 -e E Efre"F; Egr ? 2Y ?Ez E :;E':E gE i ; a= a
g::"EE Eii;E! €;geE E;.sE*e*
g!ffs!3igEE=3 ggiS: E jlHi;3:ii3==
E
=6= i9
o qoo 9tr
d.Yd; = d:I e9 ' 0 9:
€:'-r I : d o
= r: a . : Ei==i .9.6ESEie ts;t
9!!9 699+ E ts{ d;;E,i,i o g b b. - - .= ! d ds66= i**d Z&/
g
.!
EE
IE
ZA
I
Fg
f,
o
o
F
a
,bH
cAz