20210527Kobliha Direct-Redacted.pdf

BEX'ORE TIIE IDAHO PTJBLIC UTILITIES COMNISSION
IN THE MATIER OF TIIN )
APPLTCATTON OF'ROCKY )
MOUNTATN POWER FOR )
AUTHORTTY TO INCREASE ITS )
RATES AI\ID CIIARGES IN IDAHO )
ANDAPPROVALOX'PROPOSED )
ELECTRIC SERVICE SCIIEDULES )
AND REGT]LATIONS )
ROCKY MOUNTAIN POWER
CASE NO. PAC.E.2I47
Direct Testimony of Nikki L. Kobliha
REDACTEI)
CASE NO. PAC-E.21.07
I$day 2O2l
I.
II
TABLE OF CONTENTS
TNTRODUCTION AND QUALTFTCATTONS ......
SUMMARYAND PURPOSE OF TESTIMONY
III. FINANCING OVERVIEW
Credit Ratings
Rating Agency Debt Imputations..
ry. CAPITAL STRUCTURE DETERMINATION..........
Embedded Cost of Long-Term Debt
V. CONCLUSION..
ATTACIIED EXHIBITS
Exhibit No. 3-Pro fomra Cost of Long-terrr Debt
Exhibit No. ,l--Arizona Public Service Co Letter to Commission
Exhibit No. !-New Debt Issue Spreads
Confidential Exhibit No. 6{redit Factors Utility Industry
Exhibit No. 7-Variable PCRB Rates
ExhibitNo. 8-{ost of Preferred Stock
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I. INTRODUCTIONANDQUALIFICATIONS
Please state your name, business address, and present position with PacifiCorp.
My name is Nikki L. Kobliha and my business address is 825 NE Multromah Street,
Suite 1900, Portland, Oregon 97232.I am currently employed as Vice President, Chief
Financial Officer and Treasurer for PacifiCorp. I am testifuing for PacifiCorp d/b/a
Rocky Mountain Power ("PacifiCorp" or the "Company").
Please describe your education and professional experience.
I received a Bachelor of Business Administration with a concentration in Accounting
from the University of Portland in 1994. I became a Certified Public Accountant in
1996. I joined PacifiCorp in 1997 and have taken on roles of increasing responsibility
before being appointed Chief Financial Offrcer in 2015. I am responsible for all aspects
of PacifiCorp's finance, accounting, income tax, internal audit, Securities and
Exchange Commission reporting, treasury credit risk management, pension, and other
invesftnent management activities.
il. SUMMARYAIID PTIRPOSE OF TESTIMONY
Please summarize the purpose of your testimony.
My testimony covers PacifiCorp's overall cost of capital recommendation, including a
capital structure with a common equity level of 52.83 percent, the proposed cost of
long-term debt of +.26 percent, and cost of preferred stock of 6.75 percent.
What is the purpose of the cost of capital recommendation?
The Company's proposed capital structure with a common equity level of 52.83 percent
is required to maintain PacifiCorp's current credit ratings, which provide for a more
competitive cost of debt. The overall cost of capital facilitates continued access by the
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Company to the capital markets over the long term to the benefit of customers. This
capital structure enables the Company's continued invesfrnent in infrastructure to
provide safe and reliable service from new cost-effective energy resources at
reasonable costs.
What overall cost of capital do you recommend for PacifiCorp?
PacifiCorp proposes an overall cost of capital of 7.63 percent. This cost includes the
return on equity recommendation of 10.20 percent, supported by the direct testimony
of Ms. Ann E. Bulkley, and the capital structure and costs shown in Table I - Overall
Cost of Capital.
Table 1: Overall Cost of Capital
Component $m
Percent
ofTotal
Cost
Percent
Weighted
Ave Cost
Lons-Term Debt
Preferred Stock
Common Stock Equity
$
$
$
8.583
2
47.16%
O.Olo/o
52.83Yo
4.76Yo
6.75o/o
10.20o/o
2.24o/o
0.OOYI
5.39o/o9,6 I 6
$ 18,201 100.00%7.630
What time period does your analysis cover?
The capital structure for the Company is measured over the l2-month period ending
December 31,2021, the test period in this proceeding, using an average of the five
quarter-ending balances, based on known and measurable changes through
December 31,2021. Similarly, the costs of the long-term debt and preferred stock are
an average of the costs measured for each of the five quarter-ending balances spanning
the calendar year 2021 test period, using the Company's actual costs adjusted for
known and measurable changes through December 31,2021.
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1 III. F'INANCING OYERYIEW
Please explain PacifiCorp's need for and sources of new capital.
PacifiCorp requires capital to meet its customers' needs for new cost-effective
transmission and renewable generation, increased reliability, improved power delivery,
and safe operations of its assets. PacifiCorp also needs new capital to fund long-term
debt maturities.
As described in the testimony of Mr. Gary W. Hoogeveen, PacifiCorp has
significantly increased its wind generation and transmission capacity through the
Energy Vision 2020 project and additional cost-effective projects identified in the
integrated resource plan. PacifiCorp spent approximately $3.3 billion for investments
in renewable energy projects and related transmission from 2018 through calendar year
2020 andanticipates spending $2.7 billion lm2}2l through 2023. This capital spending
will require PacifiCorp to raise funds by issuing new long-term debt in the capital
markets, retaining earnings, and if needed, obtaining new capital contributions from its
parent company, Berkshire Hathaway Energy Company ("BHE").
How does PacifiCorp finance its electric utility operations?
Generally, PacifiCorp finances its regulated utility operations using a mix of debt and
common equity capital of approximately 48152 percent, respectively. During periods of
significant capital expenditures, as expected to continue now through calendar year-
end 2024 for potential new investments identified in the 2019 IRP action plan,l the
Company will need to maintain an average cofirmon equity component in excess of
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I PacifiCorp's 2019 Integrated Resource Plan, Case No. PAC-E-I9-16, Chapter I - Executive Summary, p.
22 (Oct. 18, 20 l9).
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52 percent to maintain its credit rating and finance the debt component of the capital
structure at the lowest reasonable cost to customers. Maintaining the Company's credit
rating will provide more flexibility on the type and timing of debt financing, better
access to capital markets, a more competitive cost of debt, and over the long-run, more
stable credit ratings. In addition, PacifiCorp needs a greater corrmon equity component
to offset various adjustments that rating agencies make to the debt component of the
Company's published financial statements. I discuss these adjustrnents in greater detail
later in my testimony.
How does PacifiCorp determine the levels of common equity, debt, and preferred
stock to include in its capital structure?
As a regulated public utility, PacifiCorp has a duty and an obligation to provide safe,
adequate, and reliable service to customers in its Idaho service area while prudently
balancing cost and risk. Major capital expenditures are required in the near-term for
new plant investment to enable PacifiCorp to fulfill its service obligation, including
capital expenditures for new wind and transmission. These capital investrnents also
have associated operating and maintenance costs. As part of its annual business
planning process, PacifiCorp reviews all its estimated cash inflows and outflows to
determine the amount, timing, and type of new financing required to support these
activities and provide for financial results and credit ratings that balance the cost of
capital with continued access to the financial markets.
How does PacifiCorp manage its dividends to BHE?
PacifiCorp benefits from its affiliation with BHE as there is no stated dividend
requirement. Historically, PacifiCorp has paid dividends to BHE to manage the
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common equity component of the capital structure and keep the Company's overall cost
of capital at a prudent level. [n major capital invesftnent periods, PacifiCorp is able to
retain earnings to help finance capital investments and forgo paying dividends to BHE.
For example, following BHE's acquisition of PacifiCorp in 2006, PacifiCorp managed
the capital structure through the timing and amount of long-term debt issuances and
capital contributions from BHE, while forgoing any common dividends for nearly five
years. At other times, absent the payment of dividends, retention of eamings could
cause the percentage of common equity to grow beyond the level necessary to support
the current credit ratings. Accordingly, dividend payments can be necessary in
combination with debt issuances, to maintain the appropriate percentage of equity in
PacifiCorp's capital structure. With the significant capital invesfrnent required for new
renewable generation resources, transmission, and other capital expenditures, however,
the proposed capital structure in this case anticipates no additional cornmon dividend
payments by PacifiCorp to BHE through calendar year 2021.
What type of debt does PacifiCorp use in meeting its financing requirements?
PacifiCorp has completed the majority of its recent long-term financing using secured
first mortgage bonds issued under the Mortgage Indenture dated January 9, 1989.
Exhibit No. 3, Pro forma Cost of Long-Term Debt, shows that, over the test period,
PacifiCorp is projected to have an average of approximately $8.4 billion of first
mortgage bonds outstanding, with an average cost of 4.87 percent. Presently, all
outstanding first mortgage bonds bear interest at fixed rates. Proceeds from the issuance
of the first mortgage bonds (and other financing insffuments) are used to finance utility
operations.
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Another important source of financing in the past has been the tax-exempt
financing associated with certain qualiflring equipment at power generation plants.
Under arrangements with local counties and other tax-exempt entities, these entities
issue securities, and PacifiCorp borrows the proceeds of these issuances and pledges
its credit quality to repay the debt to take advantage of the tax-exempt status of the
financing. During the test period, PacifiCorp's tax-exempt portfolio is projected to be
approximately $218 million, with an average cost of 0.61 percent, including the cost of
issuance and remarketing.
Credit Ratings
What are PacifiCorp's current credit ratings?
PacifiCorp's current ratings are shown in Table 2.
Table 2: PaciliCorp Credit Ratings
Moody's Standard & Poor's
Senior Secured Debt AI A+
Senior Unsecured Debt A3 A
Outlook Stable Stable
How does the maintenance of PacifiCorp's current credit rating benelit
customers?
First, the credit rating of a utility has a direct impact on the price that a utility pays to
attract the capital necessary to support its current and future operating needs. Many
institutional investors have fiduciary responsibilities to their clients, and are typically
not permitted to purchase non-investment grade (i.e., rated below Baa3lBBB-)
securities or in some cases even securities rated below single A. A solid credit rating
directly benefits customers by reducing the immediate and future borrowing costs
related to the financing needed to support regulatory obligations. It also allows the
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Company to avoid posting cash collateral or letters of credit with trading counterparties.
Counterparties generally assess companies based on a leffer grade basis. A downgrade
could possibly trigger the need for additional posted collateral.
Second, credit ratings are an estimate of the probability of default by the issuer
on each rated security. Lower ratings equate to higher risks and higher costs of debt.
The Great Recession of 2008-2009 provides a clear and compelling example of the
benefits of the Company's credit rating because PacifiCorp was able to issue new long-
term debt in the midst of the financial turmoil. Other lower-rated utilities were shut out
of the market and could not obtain new capital.
More recently, at the onset of the pandemic in the Sprrng of 2020, market
uncertainty led to many commercial paper borrowers seeing higher rates, challenges
issuing commercial paper and pressure on longer-term notes with significantly wider
credit spreads. PacifiCorp was able to issue long-term debt in April of 2020 at a rate 50
to 100 basis points lower than similar triple B rated entities.
Third, PacifiCorp has a near constant need for short-term liquidity as well as
periodic long-term debt issuances. PacifiCorp pays significant amounts daily to
suppliers whom we count on to provide necessary goods and services, such as fuel,
energy, and inventory. Being unable to access fi.rnds can risk the successful completion
of necessary capital infrasffucture projects and would increase the chance of outages
and service failures over the long term.
PacifiCorp's creditworthiness, as reflected in its credit ratings, will strongly
influence its ability to attract capital in the competitive markets and the resulting costs
of that capital.
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Please provide examples where poor credit ratings hurt a utility's flexibility in the
credit markets.
During the Great Recession in 2008, Arizona Public Service Company (rated
BaaZIBBB- at that time) filed a letter with the Arizona Corporation Commission in
October 2008 stating that the commercial paper market was completely closed to it and
it likely could not successfully issue long-term debt.2
Further, those issuers who could access the markets paid rates well above the
levels that PacifiCorp was able to obtain. For example, PacifiCorp issued new l0-year
and 3O-year long-term debt in January 2009 with 5.50 percent and 6.00 percent coupon
rates, respectively. Subsequently, Puget Sound Energy (rated Baa2lA- at that time)
issued new seven-year debt at a credit spread over Treasuries of 480.3 basis points
resulting n a 6.75 percent coupon rate.
Can regulatory actions or orders affect PacifiCorp's credit rating?
Yes. Regulated utilities such as PacifiCorp are unique in that they cannot unilaterally
set the price for their services. The financial integrity of a regulated utility is largely a
result of the prudence of utility operations and the corresponding prices set by
regulators. Rates are established by regulators to permit the utility to recover prudently
incurred operating expenses and a reasonable opportunity to eam a fair return on the
capital invested.
Rating agencies and investors have a keen understanding of the importance of
regulatory outcomes. For example, Standard & Poor's ("S&P") has opined on the
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REDACTED
1 correlation between regulatory outcomes and credit ratings, concluding:
Similarly, Moody's recently issued a credit opinion for PacifiCorp, concluding:
As discussed in the testimony of Ms. Bulkley, Section VIII, Regulatory and
Business Risk, the regulatory environment and the rate decisions by utility
commissions have a direct and significant impact on the financial condition of utilities.
How does the maintenance of PacifiCorp's current credit ratings benefit
customers?
PacifiCorp is in the midst of a period of major capital spending and investing in cost-
effective infrastructure to provide electric service that is reliable, clean, and affordable.
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3 S&P Ratings Direct, Assessing U.S. Investor-Owned Utility Regulatory Environments, p.4 (Aug. 10,2016).
a Moody's Credit Opinior. PacifiCorp Update to Credit Analysis,p.2 (June 25,2020).
Kobliha, Di - 9
Rocky Mountain Power
I If PacifiCorp does not have consistent access to the capital markets at reasonable costs,
these borrowings and the resulting costs of building new facilities become more
expensive than they otherwise would be. The inability to access financial markets can
threaten the completion of necessary projects and can impact system reliability and
customer safety. Maintaining the ctrrent single A credit rating makes it more likely
PacifiCorp will have access to the capital markets at reasonable costs even during
periods of financial turmoil.
Can you provide an example of how the current ratings have benefited customers?
Yes. One example is PacifiCorp's ability to significantly reduce its cost of long-term
debt primarily through obtaining new financing at very attractive interest rates. The
lower cost of debt benefits customers through a lower overall rate of return and lower
revenue requirement.
To determine the savings realized from maintaining a higher credit rating, in
Exhibit No. 5 New Debt Issue Spreads, I compare the actual effective interest rate on
the Company's existing long-term debt through March 3l,2OZl, which was issued
since its acquisition by BHE in 2006, comprising 17 series of debt, to what the effective
interest rate would have been with a BBB credit rating. The spread of each issuance
was changed to match what a BBB rated utility achieved at about the same point in
time that PacifiCorp issued the debt. The total result for the 17 series of debt averaging
$7.0 billion, would have been an effective average interest rate of approximately
5.14percent or 60 basis points higher than PacifiCorp's actual effective interest rate.
Combined with the existing pre-acquisition debt, the resulting overall cost of long-term
debt would increase to 5.25 percent if the Company had a BBB rating. PacifiCorp is
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curently projecting an overall cost of long-term debt of 4.76 percent, or approximately
49 basis points lower than it might have otherwise been under the scenario I described
above.
Table 3 below shows the reduction in the Company's cost of long-term debt
since 2010.
Table 3: PacifiCorp's Cost of Long-Term Debt
PacifiCorp's customers have benefited from a I I 2 basis points ( I . 12 percent) reduction
in the Company's cost of long-term debt. The Company estimates that this reduction in
the average cost of debt since 2010 results in a decrease of approximately $7 million in
the revenue requirement in the current case. Customers have also benefited from the
Company's ability to negotiate lower underwriting fees on long-term debt issuances
through BHE's global underwriting fee position.
Are there other identiliable advantages to a favorable rating?
Yes. Higher-rated companies have greater access to the long-term markets for power
purchases and sales. This access provides more alternatives to meet the current and
future load requirements of their customers. Additionally, a company with strong
ratings will often avoid having to meet costly collateral requirements that are typically
imposed on lower-rated companies when securing power in these markets.
In my opinion, maintaining the current singleArating provides the best balance
between costs and continued access to the capital markets, which is necessary to fund
capital projects for the benefit of customers.
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Effective2O22
PAC-E-10-07
Feb.28.2011
Cost of Long-Term Debt 4.76%5.88%
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Is the proposed capital structure consistent with PacifiCorp's current credit
rating?
Yes. This capital structure is intended to help the Company deliver its required capital
expenditures and achieve financial metrics that will meet rating agency expectations.
Does PacifiCorp's credit rating benefit because of BHE and its parent Berkshire
Hathaway Inc.?
Yes. PacifiCorp's credit ratios have been weak for its ratings level. Although ring-
fenced, PacifiCorp has been able to sustain its ratings in part through the acquisition by
BHE and its parent, Berkshire Hathaway Inc. S&P was very clear on this point in its
April202l assessment of PacifiCorp:
Moody's states in their June 2020 credit opinion of PacifiCorp:
These examples are evidence of the credit rating benefit resulting from B[fE's
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5 S&P Ratings Direct, PacifiCorp (April 5, 2021), at9.6Moody's Credit Opinion, PacifiCorp Update to Credit Analysis (June 25, 2020 ), at 6.
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I ownership of Pacifi Corp.
Rating Agency Debt Imputations
Is PacifiCorp subject to rating agency debt imputation associated with power
purchase agreements ("PPAs")?
Yes. Rating agencies and financial analysts consider PPAs to be debt-like and will
impute debt and related interest when calculating financial ratios. For example, S&P
will adjust PacifiCorp's published financial results and impute debt balances and
interest expense resulting from PPAs when assessing creditworthiness. They do so to
obtain a more accurate assessment of a Company's financial commitnents and fixed
payments. S&P Ratings Direct November 19,2013, details its view of the debt aspects
of PPAs and other debt imputations, and is included as Confidential Exhibit No. 6.
How does this impact PacifiCorp?
ln its most recent evaluation of PacifiCorp, S&P added approximately $863 million of
additional debt and $30 million of related interest expense to the Company's debt and
coverage tests for PPAs and other liabilities of the Company that are considered to be
debt-like by S&P.
How does inclusion of the PPA-related debt and these other adjustments affect
PacifiCorp's capital strucfure as S&P reviews the Company's credit metrics?
Negatively. By including the imputed debt resulting from PPAs and these other
adjusnnents, PacifiCorp's capital structure has a lower equity component as a corollary
to the higher debt component, lower coverage ratios, and reduced financial flexibility
than what might otherwise appear to be the case from a review of the book value capital
structure. For example, as shown in Table 4, if one were to apply the total $863 million
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amount of debt adjustments that S&P most recently made to PacifiCorp's proposed
capital structure in this case, the resulting common equity percentage would decline
from 52.83 percent to 50.44 percent.
Table 4: Rating AgencyAdjusted Capital
Proposed
Cap Stnrcture
Book
Values
oh of
Total
Long-Term Debt
Prefened Stock
Common Equity
$ 8,583
2
9,616
47.16%
0.0t%
52.83%
s 18,201 100.00%
Adjusted
Cap Structure
Book
Values
'h of
Totals 9,46
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9,616
49.55%
0.01%
50.44%
$ 19,063 100.00%
Rating
Agency
Admits
$863
(l)
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$ 862
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IV. CAPITALSTRUCTUREDETERMINATION
How did the Company determine its recommended capital structure?
The capital structure is based on the actual capital structure at March 31,2021, and
forecasted capital activity, including known and measurable changes, through
December 31, 2021. PacifiCorp averaged the five quarter-end capital structures
measured beginning at December 31,2020, and concluding with December 31,2021,
resulting in a capital structure with an equity component of 52.83 percent. The capital
activity includes known maturities of certain debt issues that were outstanding at
March 31, 2021, and subsequent issuances of long-term debt. The known and
measurable changes represent forecasted capital activity since March 31,2021.
Why does the Company propose a capital structure calculated using a five.quarter
average?
This approach smooths volatility in the capital structure, which will fluctuate as the
Company expends capital, issues or retires debt, retains earnings, or declares dividends.
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This approach is consistent with the Company's previous general rate cases beginning
with Case No. PAC-E-10-07 ('2010 Rate Case").
How does the Company's proposed capital structure compare to recent actual
capital structures and to the capital structure authorized in PacifiCorp's 2010
Rate Case?
The capital structures are compared in Table 5 below.
Table 5: Forecast and Actual Capital Structures
PacifiCorp's Comparison of Vo Capital Structures
Dec 31,
2021
Forecast*
Dec 31,
2020
Actual*
Dec 31,
20r9
Actual*
Dec 31,
201 8
Actual*
Dec 31,
20r7
Actual*
PAC-E-10-07
Capital
Structure
Long-Term
Preferred
Common
47.1,6 %
0.01 %
52.83 %
48.49 o/o
0.01 %
51.50 o/o
48.36 %
0.02 %
5t.62 %
47.89 %
0.02 %
52.09 %
48.49 Yo
o.o2 %
51.49 o/o
47.60
0.30
52.t0
%
%
%
Totals 100.00 o/o 100.00 %100.00 %100.00 %100.00 %100.00 %
*Five quarter-end average % Capital Structure calculated lbr trailing l2-month period
8 The percentage increase in the common equity component of the capital
9 structure from the actual December 31,2020 five-quarter average to that projected for
l0 the 2021test period is due to earnings offset by debt issuances and the forgoing of any
l1 common dividend payments in 2021. Further, the Company's projected capital
12 structure for 2O2l contains a modestly higher corrunon equity component than what
l3 was approved by the Commission in the 2010 Rate Case.
14 a. Is the capital structure comparable to the capital structures of the proxy group
l5 used in the ROE testimony of Ms. Bulkley?
16 A. Yes, Section IX of Ms. Bulkley's testimony discusses the reasonableness of the
17 proposed 52.83 percent as it closely approximates the average capital structure of the
l8 proxy group at 52.7 percent.
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How did you calculate the Company's embedded costs of long-term debt and
preferred stock?
Consistent with my determination of the percentage capital sffucture discussed
previously, I have similarly calculated the embedded costs of debt and preferred stock
as an average of the five quarter-end cost calculations spanning the test period,
beginning at December 31,2020, and concluding with December 31,2021.
Please explain the cost of long-term debt calculation.
I calculated the embedded cost of debt using the methodology relied upon in the
Company's previous rate cases in Idaho and other jurisdictions. More specifically, I
calculated the cost of debt by issue, based on each debt series' interest rate and net
proceeds at the issuance date, to produce a bond yield to maturity for each series of
debt outstanding as of each of the five quarter-ending dates spanning the l2-month
calendar year 2021test period. It should be noted that in the event a bond was issued
to refinance a higher cost bond, the pre-tax premium and unamortized costs, if any,
associated with the refinancing were subtracted from the net proceeds of the bonds that
were issued. Each bond yield was then multiplied by the principal amount outstanding
of each debt issue, resulting in an annualized cost of each debt issue. Aggregating the
annual cost of each debt issue produces the total annualized cost of debt. Dividing the
total annualized cost of debt by the total principal amount of debt outstanding produces
the weighted average cost for all debt issues.
Please describe the changes to the amount of outstanding long-term debt between
December 31,2020, and December 31, 2021.
$420 million of the Company's fixed rate long-term debt will mature during this period,
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23 A.
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14 a.
15 A.
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and I have therefore removed this debt when appropriate in the determination of the
proposed average cost of debt. Also, as reflected in Exhibit No. 3, Pro forma Cost of
Long-Term Debt, a new long-term debt issuance of $400 million is projected for July
202I, consistent with our forecast and necessary to fund our operations, including to
refinance the $400 million first mortgage bond maturity scheduled for July 2021.
Regarding the new $400 million long-term debt issuance mentioned above, how
did you determine the interest rate for this new debt series?
I projected this debt would be issued at the Company's estimated Aprll2O2l credit
spread overthe projected long-term Treasury rates as of July 15,202I. Finally, I added
in the effect of issuance costs. This reflects the Company's best estimate of the cost of
new debt, assuming the Company's senior secured long-term debt ratings remain
unchanged. Currently the Company's senior secured long-term debt is rated A+ andAl
by Standard & Poor's and Moody's, respectively.
What is the resulting estimated interest rate for this new long-term debt?
The Company's estimated April 2021 credit spread for thirty-year debt was
0.95 percent. The forward long-term Treasury rate for July 15, 2021, is 2.31 percent.
Issuance costs for this type of debt add approximately 5 basis points (i.e., 0.05 percent)
to the all-in cost. Therefore, the projected cost of the new debt is 2.31+ 0.95 + 0.05 :
3.31 percent.
A portion of the securities in PacifiCorp's debt portfolio bears variable rates.
What is the basis for the projected interest rates used by PacifrCorp?
The Company's variable rate long-term debt in this case is in the form of tax-exempt
debt. Exhibit No. 7, Variable Rate Pollution Control Revenue Bonds, shows that, on
Kobliha, Di - 17
Rocky Mountain Power
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average, these securities have been trading at approximately 85 percent of the 30-day
London Inter Bank Offer Rate ("LIBOR") for the period January 2000 through March
2021. Therefore, the Company has applied a factor of 85 percent to the forward 30-day
LIBOR rate as of each of the three remaining quarter-ending dates spanning calendar
year 2021 and then added the respective credit facility and remarketing fees for each
floating rate tax-exempt bond outstanding during the period. Credit facility and
remarketing fees are included in the interest component because these are costs which
contribute directly to the interest rate on the securities and are charged to interest
expense. This method is consistent with the Company's past practices when
determining the cost of debt in previous Idaho general rate cases as well as in other
states that regulate PacifiCorp.
How did you calculate the embedded cost of preferred stock?
The embedded cost of preferred stock was calculated by first determining the cost of
money for each issue. I began by dividing the annual dividend per share by the per
share net proceeds for each series of preferred stock. The resulting rate associated with
each series was then multiplied by the total par or stated value outstanding for each
issue to yield the annualized cost for each issue. The sum of annualized costs for each
issue produces the total annual cost for the entire preferred stock portfolio. I then
divided the total annual cost by the total amount of preferred stock outstanding to
produce the weighted average cost for all issues. The result is PacifiCorp's embedded
cost of preferred stock.
Kobliha, Di - l8
Rocky Mountain Power
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a.
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Embedded Cost of Long-Term Debt
What is PacifrCorp's embedded cost of long-term debt?
The cost of long-term debt is 4.76 percat, as shown in Exhibit No. 3, Pro forma Cost
of Long-Term Debt.
Embedded Cost of Preferred Stock
What is PacifiCorp's embedded cost of preferred stock?
Exhibit No. 8, Cost of Preferred Stock, shows the embedded costs of preferred stock to
be 6.75 percent.
V. CONCLUSION
Please summarize your recommendations to the Commission.
I respectfully request the Commission adopt PacifiCorp's proposed capital sffucture
with a corlmon equity level of 52.83 percent. This capital sffucture balances the
financial integrity of the Company and costs to customers by reflecting the minimum
equity ratio necessary for PacifiCorp to maintain its ratings under current market
conditions. When combined with PacifiCorp's updated cost of long-term debt of
4.76 percent and the cost of equity of 10.20 percent recommended by Ms. Bulkley, this
produces a reasonable overall cost ofcapitalofT.63 percent.
Does this conclude your direct testimony?
Yes.
Kobliha, Di - 19
Rocky Mountain Power
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