1982-08-25 Special Called Meeting

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i Date Subject: ~ - Q~ ator's pe e I 8/18/82 HLbcP RATE INCREASE "`th~ials 3 e 6 of --- i` 3) Limit HL~CP's total participation in the $5.5 billion project to $1,692,460,000 with cost overruns ~ being borne by the investor and not the ratepayer. (This amount excludes AFUDC and sales and property taxes.) 4) Disallow the cost of the lawsuit filed by HLbcP against Brown & Root. 5) Credit any recovery in the lawsuit filed by HL&P against Brown ac Root to the cost of the Project. 6) Disallow recovery from the ratepayer of any damages found to be payable by HLbcP in the lawsuit filed by HLEcP against Brown be Root. Other Major Adjustments Excluding Allen's Creek, HLdcP requests a rate base of $4,006,153,000. The Public Service Department recommends an original cost rate base of $3,953,996,000. Other primary differences between the two rate bases include: (1) elimination of $6,319,000 for certain cost-free capital; (2) elimination of $5,993,000 in deferred taxes; and (3) elimination of $22,954,000-for plant held for future use which includes the site for Allen's Creek. COST OF CAPITAL The average weighted cost of capital proposed by HLbcP is 12.98%. The Public Service Department recommends 12.73% based on the following considerations: (See tiVilton, Schedule I, for • suggested method for determining cost of capital). Average Cost of Debt HLbcP proposes 9.55%. The Public Service Department recommends 9.55%. This percentage is based on the actual average cost of long-term debt for which the Company is presently obligated. Return on Equity HLBcP has requested a 17.50% return on equity. The Public Service Department recommends 16.95%. The recommendation is based on an assessment of risk in raising capital for the Company's massive construction program. Although the Company has indicated that by recovering money for the cancellation of Allen's Creek Nuclear Project they would be able to bring the two lignite projects (4 units) on line one year earlier than originally anticipated, we have had to maintain the original schedule for the lignite plants in order to allow the Company enough internal cash to finance the other projects. By eliminating Allen's Creek as a means for recovery of funds, the Company's ability to generate cash internally is reduced. Both Standard be Poor's Corporation and Moody's Investor Service, the two major securities rating agencies, have downgraded HLacP to A+ and A-1, respectively, from a AA status because of the financial risk associated with the Company's construction program. Further downgrading would lead to higher interest cost to the ratepayer and limit the available financial markets. Therefore, it is important to generate sufficient cash internally to enable the Company to finance the majority of its needs through stocks and bonds. Although the PUC has generally prescribed a parameter of 40% for internal cash generation, our recommendation allows the Company to recover approximately 35% .through rates. A 16.95% return on equity is necessary to achieve the 35% parameter. The recent decline in market interest rates should impact favorably upon the Company's ability to finance its capital needs for the next year. n-0a