Rating Agencies Update March 3 rd and 5th, 2003
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Transcript of Rating Agencies Update March 3 rd and 5th, 2003
Rating Agencies UpdateMarch 3rd and 5th, 2003
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Regional Values
Financials
Safety Net Cost Recovery Adjustment Clause
Liquidity Tools
Energy Northwest
2003 Plan Finance
Summary
Topics to be Covered Today
Confidential – Sensitive Information
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The region still values:
BPA paying Treasury on time Meeting our ESA and Northwest Power Act fish and wildlife performance
obligations Delivering value to the region in the form of public benefits programs and
low rates
However, what we’ve heard from customers is that the pendulum has swung in terms of the focus/underlying goal:
In the early 2000s, the region wanted BPA to emphasize reliability over cost-minimization
Now and for the foreseeable future, our customers are most concerned about the costs and the impact of near-term rates in the context of the depressed regional economy
Regional Values
Confidential – Sensitive Information
We asked the region about values and trade-offs.
Financials
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FY2002 Summary
In FY2002 BPA had positive Net Revenues, but financial reserves dropped $440 million.
Based on audited actuals, BPA ended FY2002 with:
Operating Revenues of $3.5 billion Operating Expenses and Interest of $3.5 billion Net Revenues of $9 million with debt optimization , ($308) million without debt
optimization Financial Reserves of $188 million Non-Federal Project Debt Service Coverage Ratio of 4.9
BPA met its FY2002 payment responsibility to the United States Treasury in full and on time for the 19th consecutive year.
Of BPA’s payments of $1.06 billion in FY2002, approximately $266 million was due to the debt optimization program.
BPA has prepaid a total of $450 million since FY2000.
Confidential – Sensitive Information
6Confidential – Sensitive Information
FY 2003 First Quarter Review: Forecast of Year-End Results ($ in Millions)
Current FY2003 End of Year Forecast
BPA currently expects to end the year with between $100 million to $200 million in reserves.
FY2002 Rate Case TargetActuals for FY2003 Low High
Revenues 3,495 2,989 3,380 3,680
Expenses 3,524 2,878 3,220 3,320
Net Revenues (29) 111 160 360 1/
End of Year Financial Reserves 2/188 1,228 100 200
FY2003
FY2003 Forecast
Footnotes1/ Financial forecasts are highly volatile and will change with market prices and water conditions. Net Revenues forecast based on internal first quarter review. Includes $270 million in expense reductions due to refinancing Energy Northwest debt. Absent these expense reduction, principally resulting from debt management actions, BPA's net revenues would range from ($160) million to $40 million.2/ Financial reserves equal total cash plus deferred borrowing and extraordinary use of cash tools.
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Probability Distribution
In November, prior to any BPA expense reductions (Financial Choices), the Power Business Line forecasted a net revenue gap of $1.2 billion.
$(3,000)
$(2,500)
$(2,000)
$(1,500)
$(1,000)
$(500)
$-
$500
$1,000
$1,500
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%
$ in
Mill
ions
November 2002 FY02-06 Forecasted Net Revenue Gap = ($1.2B)
BPA Financial Condition: November Recap
Confidential – Sensitive Information
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Key Drivers of Remaining Net Revenue Gap• Updated Hydro Forecast• Updated Secondary Revenue Forecast• Other Costs
BPA Financial Condition: Current Update
Confidential – Sensitive Information
Financial Choices Outcomes and Forecast Updates
($ in Millions)
FY02-06 Net Revenue Gap (from November 2002 with FY02 Actuals) ($1,200)
BPA Expense Reductions & Deferrals from Financial Choices 300Additional Revenues in FY04-06 (FB CRAC plus flat rates) 550More Cost Effective Fish Recovery Program 80Estimated Changes in 4(h)(10)(c ) and FCCF Fish Credits 100Reduction in FY03 Revenues Due to Reduced Hydro Supply & Other Changes (200)Reduction in Hydro Supply in FY04 and Secondary Revenues in FY04-06 (550)
New Net Revenue Gap - FY02-06 ($920)
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January - July Runoff at The Dalles1929- 2002
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1929 - 2002
Janu
ary
- Jul
y R
unof
f (m
illio
n ac
re fe
et)
2003 Current Forecast: 75.6 maf
Key Driver• BPA updated its hydro assumption to reflect the current forecast.• BPA updates its hydro assumptions periodically throughout the year.
BPA Financial Condition Update: Hydro Assumption
Confidential – Sensitive Information
103 Average
BPA Lowered its Hydro Assumption from 103 maf (Average) to 75.6 maf
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Trading Floor Revenue(Historical and Projected)
$-
$100.0
$200.0
$300.0
$400.0
$500.0
$600.0
$700.0
$800.0
FY 1996 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006
Mill
ions
of D
olla
rs
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500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
aMW
Current Revenue (millions $'s) Amount (MW-mo) Current Forecast
ForecastedHistorical
Confidential – Sensitive Information
BPA Financial Condition Update: Net Surplus Revenues Assumption
Key Drivers • Updated hydro assumption for FY 03 from 103 maf to 75 maf, which reduced anticipated secondary
sales by around 900 aMW.• Revised price forecasting methodology FY 04-06 to more conservative approach.
Amount (MW-mo) November ForecastNovember Revenue Forecast
BPA currently expects a reduction of $650 million in secondary revenues through 2006.
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BPA continues to look for additional cost reductions to close the net revenue gap. These reductions include, but are not limited to the following:
BPA Financial Condition Update: Additional Potential Cost Reductions
Confidential – Sensitive Information
($ in Millions)
Total FY2003-2006 Additional Potential Cost Reductions
Settlement of Litigation over IOU Residential Benefits $200More Cost Effective Fish Recovery Program Benefits 80Additional Power Resource O&M Cost Reductions 50Power Resource Contract Renegotiation 30Additional Overall Debt Service Reduction 140Total $500
Safety Net Cost Recovery Adjustment Clause
(SN CRAC)
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Bonneville’s long standing goal has been to set rates that achieve an 88% five-year Treasury payment probability. Bonneville expects that it will not use this standard in developing the SN CRAC proposal. Bonneville expects to reserve the ability to adjust rate levels under the SN CRAC again during the FY02-06 rate period if the revenues from this first adjustment are later determined inadequate, causing a multi-year TPP to be less meaningful.
Throughout Rate Period Standard: 50% probability that BPA can make all its Treasury payments in full and on time for the FY 2004 - 2006 rate period.
End of Rate Period Standard: 80% probability that BPA will make its FY 2006 Treasury payment as well as repaying any amounts missed in FY 2003 through FY 2005.
The $920 million net revenue gap for the FY 2002 - 2006 period is forecast to be closed to $0 by the end of FY 2006 and reserves significantly replenished to about $350 million.
SN CRAC: Financial Criteria
Confidential – Sensitive Information
SN CRAC financial criteria assume no use of cash tools (to be discussed later).
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SN CRAC: Key Dates
Confidential – Sensitive Information
BPA will start to receive SN CRAC revenues beginning as soon as October 1, 2003
Initial Proposal March 17Prehearing/BPA Direct Case March 31Parties File Direct Case April 17Litigants File Rebuttal May 2Draft ROD Issued May 23Final ROD- Final Studies June 30Rates Go Into Effect October 1
Draft 2003 SN CRAC Schedule
Liquidity Tools
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Typical Seasonal Net Cash Flow Profile
•Excludes Payment to Treasury
** Values are for illustrative purposes only
Net Cash Out Flows
Net Cash In Flows
($ In Millions)
$(100)
$0-
$100
Spring Summer Fall Winter Spring Summer
Confidential – Sensitive Information
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Pushing the Problem Out
BPA has already used a significant number of “cash tools” that have pushed part of the problem out. Total Committed Cash Tools ( $ in millions )
Reserve Fund Free-ups ~210 Conservation Augmentation (Accounting Change) ~50 Corps Plant-in-service Deferral ~100 Capitalized Spent Fuel Storage Facility ~ 35 ENW Deferral of Condenser Tube Replacement ~35 ENW Fuel Procurement Strategy ~37 IOU Deferral ~55 Unfunded Liability – Decommissioning Fund ~10 Total ~$532
Estimated Annual Impact 2007-11 ~$70 to $85 These changes will create upward pressure on rates starting in 2004, but having
the biggest effect in 2007 and beyond.
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Liquidity Tools to Bridge the Gap
Confidential – Sensitive Information
BPA has a number of liquidity tools to bridge gaps due to short term cash flow shortfalls.
Liquidity Tool ($ in millions)
$250 M Treasury Note 250
Apply Treasury Payment to FY2004-2006 Expenses 315
Recognize Previous Prepayments 470
Defer Treasury Payment 170
TBL Forecasted Positive Net Revenues 25
FY03 Potential
19Confidential – Sensitive Information
Publicly-owned utilities 939 1,797 Aluminum industry 421 58 Investor-owned utilities 701 378 Other power sales 1 1 Sales outside the Northwest Region 1,084 638
Total Sales of Electric Power 3,146 2,872 Transmission and other revenues 1,133 660
Total Operating Revenues 4,279 3,532
Publicly-owned utilities percent of Total Operating Revenues 22% 51%
Net Billing Obligations 733 499
Publicly-owned utilities percent of Net Billing Obligations 128% 360%
D. Load buydown of most DSI load
2) The proportion of Publicly-owned utilities revenues is significantly higher.3) Net Billing Obligations, particularly with the Debt Optimization program, are significantly lower.4) Most, but not all, Publicly-owned utilities are participants in the Net Billed Projects; some transmission revenues are subject to net billing agreements.
C. Settlement of most of the IOU Residential Exchange for cash payments instead of power sales
Additional Key Points:1) The absolute amount of revenues from Publicly-owned utilities has increased significantly, providing substantially more security for the net billed bonds. This increase is due to:
A. Substantial rate increase at the beginning of the new rate period (October 1, 2002)B. Substantial increase in sales commitments to Publicly-owned utilities
Net Billing Timing: Cash Flow and Coverage
Revenues 2001 2002($ in millions)
ENW now receives about 90% of its entire budget only four months into its fiscal year. Revenue from Net Billing Participants is now about half of BPA’s total revenues and double compared to previous years.
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Summary and Basis of BPA’s Credit Strength
BPA has a continuing statutory obligation to set rates to recover all costs.
Despite two years of highly adverse circumstances, BPA has the capability to fully recover its costs through the remainder of the current rate period.
In the face of strong customer resistance, the Administrator of BPA has resolved to trigger the SN CRAC process.
Due to the existence of the timely rate-setting mechanisms and the Slice product for recovering costs, customers absorb more of the risks of hydro supply and secondary market prices.
The necessity for BPA carrying high reserves to mitigate risk has diminished due to the three CRAC mechanisms.
BPA has consistently demonstrated through the last several years and rate periods, that management will seek to assertively apply all available financial and legislative tools necessary to keep the agency on a firm financial footing.
The net billing agreements offer bondholders 4.9 times (x) coverage.
21Confidential – Sensitive Information
Energy Northwest
Columbia Generating Station Performance
Operating Performance/Generation Calendar Year 2002 was the best in history Current run of 372 Days is the longest in history Fiscal Year 2002
9,261,873 megawatts- New Record 92.0% Capacity Factor- New Record 95.4% Plant Availability Factor
Operating Performance/Cost $20.60 per megawatt hour (FY2002) $27.26 per megawatt hour (FY2003)*
*Due To Bi-annual refueling outage
22Confidential – Sensitive Information
Energy Northwest
Nuclear Regulatory Actions/INPO Evaluations
NRC Regulatory Actions Notice of Violation (December 2001) (Yellow Finding)
Emergency Preparedness Program Deficiencies Closed with NRC/ May 2002
Notice of Violation (June 2002) (White Finding) Electrical Breaker Design Modification/Failures Closed with NRC/January 2003
INPO Evaluations September 2002 rating of “1” (Excellent) October 2002 rating of “2” (Exemplary)
Areas for Improvement Equipment Performance Outage Performance Material Condition NRC Actions/Notices
23Confidential – Sensitive Information
Energy Northwest
Columbia Generating Station Refueling Outage
Last Outage- July 2001
Historically Columbia operated on a 12-month fuel cycle
1998 Decision to transition to 24-month fuel cycle
Two transition fuel cycles completed
Next scheduled refueling outage expected to start in May 2003
Increased plan availability and net generation to Bonneville
24Confidential – Sensitive Information
Energy Northwest
Columbia Generating Station Fuel Storage Facility
On-Site storage of spent fuel required by the delay in DOE Site and construction of national repository
Columbia initial Dry Storage Cask System construction completed for $32.7 MM
Casks transported from reactor building (Spent Fuel Pool) to on-site concrete pads Sufficient to handle spent fuel through 2010/Expandable First Cast Transported – September 2002 Total of five casks transported by December 2002
Completed off-loaded of enough spent fuel to provide sufficient room for fuel reloading Next outage expected in May 2003
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Goals of the 2003 installment of the Energy Northwest/ Bonneville Power Administration Debt Optimization Program:
Extend $238,675,000 currently maturing principal (7/1/03);
Current refund $974,950,000 callable bonds (7/1/03) for savings;
Repay Salomon Smith Barney Bridge Loan.
2003 Plan of Finance
Confidential – Sensitive Information
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2003 Plan of Finance (cont’d)
Series 2003 1,2,3-A
Tax-Exempt Fixed Rate Current Refunding Maturities: $670mm 2008-2017 Insurance: XL/MBIA plus uninsured portion
Series 2003 1,2,3-B
Taxable Fixed Rate financing of equity contribution and bridge loan repayment for the nuclear spent fuel facility (Columbia Project)
Maturities: $45mm 2009 Insurance: MBIA
Series 2003 1-C
Tax-Exempt Auction Rate Current Refunding Maturities: $200mm in 2016-2017; Project One Insurance: XL
Series 2003 3-D-1
Tax-Exempt VRDO Current Refunding Maturities: $100mm in 2018; Project Three Insurance: MBIA Liquidity: Dexia
Series 2003-3-D-2
Tax-Exempt VRDO Current Refunding Maturities: $100mm in 2018; Project Three Insurance: FSA Liquidity: Dexia
Series 2003 3-E
Tax-Exempt VRDO Current Refunding Maturities: $100mm in 2016-2017; Project Three Letter of Credit: J.P. Morgan
Confidential – Sensitive Information
27
2003 Financing Schedule
Confidential – Sensitive Information
Ratings Needed March 11
Fixed Rate Pricing – Series 2003 A,B March 18
Fixed Rate Purchase – Series 2003 A,B March 20
Variable Rate Pricing – Series 2003 C,D,E April 8-9
Closing – All Series April 10