The document provides an overview of a utility merger and asset transfer involving Entergy Louisiana, LLC (ELL) and Entergy New Orleans, Inc. (ENO). ELL agreed to transfer its electric service operations and assets serving the Algiers area of New Orleans to ENO. Key points:
1) The transaction consolidated electric service in New Orleans under ENO to reduce costs from regulatory duplication and provide operational efficiencies while maintaining the existing rate structures until a future combined rate case.
2) ELL's Algiers assets were transferred to ENO at net book value to maintain the rate base treatment. Tax liabilities from accumulated deferred income taxes were addressed to avoid tax impacts.
3) Conditions were
2. Introduction
o Victor Prep, P.E. – Executive Consultant
BSME from OU, MBA from Univ. of PA, Wharton
Registered P.E. in CO, LA, and PA, and Certified Energy Manager
Retired Nuclear Submarine Naval Officer
o Byron S. Watson, CFA, CRRA – Senior Consultant
BSEE from SMU, MBA from Emory University
o Members of the Firm act as Advisors to the Council of the City
of New Orleans (“Council”). Our Services as Advisors are in
Certain Ways Comparable to Those of a Commission’s Staff
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4. Introduction: Background
o Prior to September 1, 2015, Retail Electric Service in the City of New
Orleans was Provided by two Separate Entergy Operating Companies
In the 15th Ward of New Orleans (a.k.a. “Algiers” or the “West Bank”),
Entergy Louisiana, LLC (“ELL” or “Seller”) Provided Retail Electric
Service to 22,187 Customers
In New Orleans, Except for Algiers, Entergy New Orleans, Inc. (“ENO”
or “Seller”) Provided Retail Electric Service to 169,856 Customers
o The Council was the Retail Regulator of both Utilities
Each Utility had Separate and Different Rates, a Different Allowed
ROE, and Separate Rate Actions Before the Council
Each Utility Owned or Contracted for its own Generating Capacity,
Largely From Different Generating Units
Each Utility had Separate Transmission and Distribution Plant
O&M-Related Services Were Provided to Both Utilities by a Single
Energy Subsidiary (Entergy Services, Inc.)
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5. Introduction: Background
o As a Result of Negotiations, Seller (ELL) Agreed to Transfer its
Electric Service Operations to Buyer (ENO) and Also Sell
Related Utility Plant and Rights to Generating Capacity
Buyer Would Become the Single Retail Electric Utility Provider for
All of New Orleans
The Council Would be the Retail Regulator of One Electric Utility,
the Buyer, and Would No Longer Regulate the Seller
Buyer Would own, Operate, and Maintain all Electric Utility Plant
Previously Owned by Seller in Algiers
Franchise Rights to Operate in New Orleans Would be Transferred
form Seller to Buyer
Buyer Would Enter into a Purchased Power Agreement (PPA) with
Seller to Continue Access to an Agreed-Upon Portion of Seller’s
Generating Resources
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6. Introduction: Background
o On October 30, 2014, Buyer and Seller Jointly Filed for Approval to:
Sell Seller’s Assets Located in Algiers to Buyer at Net Book Value
Transfer all Franchise Rights to Provide Retail Service to Buyer so that
Seller Would Have no Remaining Operations in New Orleans
Create a New PPA Providing Buyer a “Slice” of Seller’s Generating
Fleet Capacity and Energy (1.84% of Each of Seller’s Units for the Life
of Each Unit)
Leave Retail Base Rates Unchanged (i.e., Two Separate Rate
Structures) Until a Later Combined Rate Case Could Set a New Single
Set of Retail Rates for All of New Orleans
Receive other Related Relief, Such as Modifications to Franchises
o The Filing’s Requested Relief was Collectively Called the “Algiers
Transaction” (“Transaction”)
o Separately, ELL (Seller) and Another Entergy Operating Company,
Entergy Operating Company, Entergy Gulf States Louisiana, L.L.C.
(“EGSL”) were Merging
Closing the Merger After the Transaction was Critical
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8. Net Ratepayer Savings
o Increased Costs are Offset by Administrative Savings Averaging an
Estimated $1.6 million per Year
Regulation at both the FERC and in Local Jurisdiction
Avoided Duplicative Rate Cases and FRP Evaluations
o Annual Revenue Requirement Related to Service Algiers is Expected
to Increase by Approximately $1.5 Million (Average)
Algiers PPA is Based on FERC ROE of 11% vs. Seller’s Allowed ROE of
9.95%.
• FERC May Reduce the ROE as Part of Docket ER13-1508
Recovery of Transaction Implementation Costs
Increased Costs Related to Changes in Participation in RTO Markets
o Net Measurable and Expected Ratepayer Savings Average
Approximately $0.1 Million Annually
o Additional Ratepayer Savings Related to Future Regulatory Actions –
Difficult to Quantify
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9. Advantages – Other
o Reduce Customer Confusion Relating to Differing Rates and
Rate Schedules in the Same City
o Eliminate Uneconomic Signals Presented by Differing
Commercial and Industrial Rates in Same Geographic Area
o Eliminate any Perceived Inequity due to Different Allowed
ROEs
o Reduce Administrative Burden on Local Regulators
o Fewer Interventions at FERC Proceedings
o Allow Relatively Small Algiers to Participate in Economies
Available to Larger Buyer
Direct Ownership of Generating Units
Securitization of Storm Costs
Access to A Large (i.e., $75 Million ) Storm Reserve
Our Review Suggested no new Procurement Economies
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14. Transaction Balance Sheets
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Algiers Asset Summary
Seller Balance Sheet Illustration
($000)
Account Categories / Titles
Seller Pre-
Transaction
Algiers Assets
Seller Additions
to Algiers Assets
Algiers LLC
Utility Plant 9,947,569 88,956 1,700 90,656
Accumulated Provision for Depreciation, Amort, Depl (3,943,655) (28,527) (28,527)
Nuclear Fuel - Net 147,385
Net Utility Plant 6,151,299 60,429 1,700 62,129
Other Property and Investments 1,160,798
Current and Accrued Assets 680,844 3,500 3,500
Deferred Debits (Regulatory Assets) 2,371,276 877 23,698 24,575
Total Assets 10,364,217 64,806 25,398 90,204
Common Equity and Preferred Stock 2,975,652 60,051 60,051
Long-Term Debt 2,961,670
Other Noncurrent Liabilities 664,861 2,106 2,106
Current and Accrued Liabilities 368,612
Accumulated Deferred Income Tax 2,492,629 19,150 8,501 27,651
Deferred Credits 900,793 396 396
Total Liabilities and Stockholder Equity 10,364,217 21,652 68,552 90,204
15. Transaction Balance Sheets
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Algiers Asset Summary
Buyer Balance Sheet Illustration
($000)
Account Categories / Titles
Buyer Pre-
Transaction
Algiers LLC
Buyer Post-
Transaction
Utility Plant 1,141,404 90,656 1,232,060
Accumulated Provision for Depreciation, Amort, Depl (532,067) (28,527) (560,594)
Net Utility Plant 609,337 62,129 671,466
Other Property and Investments 11,533 11,533
Current and Accrued Assets 143,942 3,500 147,442
Accumulated Deferred Income Tax - Step-up 27,651 27,651
Deferred Debits (Regulatory Assets) 201,784 24,575 226,359
Total Assets 966,596 117,855 1,084,451
Common Equity 226,063 28,275 254,338
Long-Term Debt 225,944 28,275 254,219
Other Noncurrent Liabilities 10,253 2,106 12,359
Current and Accrued Liabilities 121,274 121,274
Short-Term Debt (Money Pool or Credit Facility) 3,500 3,500
Accumulated Deferred Income Tax 27,651 27,651
Intercompany Payable (due to Seller) 27,651 27,651
Deferred Credits 383,062 397 383,459
Total Liabilities and Stockholder Equity 966,596 117,855 1,084,451
16. Tax Considerations
o Transaction had to Close Prior to The ELL/EGSL Merger to Avoid Loss
of ADIT and Related Tax Recapture (i.e., Maintain Tax Deferral
Represented In ADIT Balance)
o ADIT as Of Transaction Close Date Associated With Algiers Assets is
Retained by Seller
Seller Must Eventually Pay Taxes Equal to ADIT
Buyer Must Eventually Pay Taxes Equal to any new ADIT That
Accumulates After Transaction Close
o Buyer Records Offsetting ADIT Debits And Credits Associated With
Step-Up ADIT – Substantially Equal to The Algiers Assets’ ADIT as of
The Transaction Close (i.e., Zero Effect on Owner Equity)
o Zero-Interest Note Payable From Buyer to Seller Equal to Step-Up
ADIT.
Intercompany Payable Recreates Effect of ADIT Liability on Buyer’s
Books and Compensates Seller for Increased Tax Liability
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17. III. KEY ASPECTS OF TRANSACTION
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18. Purchase Price
o Purchase Price of Seller’s Assets was Net Book Value
Basis of Rate Base in Ratemaking, Provides Continuity
Accumulated Depreciation Represents Capital Costs Already
Recovered by Ratepayers, So a Higher Amount Could Result in
Double-Recovery of Costs
o Sale at Net-Book Value (Gross Cost less Accumulated Book
Depreciation) Raises Tax Basis
Pre-Transaction, Tax Basis of Assets Were Lower Than Book Basis
Tax Basis is Increased by Related ADIT (Transaction Debits Tax
Basis by ADIT Amount)
ADIT Debit is Paid By Zero-interest Note of Same Amount Payable
to Seller. Note Amortizes as ADIT Balance Reverses
Neither ADIT Debit nor Note Payable are to be Included in Buyer’s
Future Rate Action Cost Studies
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19. Evaluation Issues
o Prior to the Transaction, the Cost to Provide Service in Algiers
was Determined in Large Part by an Allocation of the Seller’s
Overall Costs Throughout its Entire Service Territory
Algiers Represented About 2-3% of Seller’s Overall Costs of
Service
o Also, Seller was in the Process of Merging with EGSL
Merger was Scheduled to Close After the Transaction, in Part to
Prevent a Taxable Gain on ADIT Step-Up
o At the Time of the Transaction, Seller’s Algiers Area was
Subject to a FRP, With Four Annual Evaluations Remaining
o Transaction Made Such FRP Evaluations Unfeasible
Merger of Algiers Assets and Operations into Buyer’s Accounts
Fatally Clouds any Algiers-Specific Accounting
o Parties Agreed to Suspend the Algiers FRP and Freeze Rates
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20. Transaction Conditions
o Conditions on Transaction Approval to Protect the Public Interest
Buyer Not to Request Rate Action that Singles Out One Service Area,
to Prevent “Cherry Picking” Service Areas to Maximize Revenues
Rate Freeze Until the Mid-2018 Combined Rate Case Filing
(Discussed Later)
• Transaction-related Changes To Algiers Base Rate Revenue Requirement
are not Reflected in Rates Until the Combined Rate Case
No Algiers FRP Evaluations (Discussed Later)
• Regulatory Cost Reduced By Eliminating Three FRP Evaluations Previously
Scheduled in Recent Rate Case Settlement
o Transaction Had to Close Prior to The ELL/EGSL to Avoid Loss of ADIT
and Related Tax Recapture
o ADIT Step-up and Intercompany Payable not to be Included in Future
Buyer Rate Action Cost Studies
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21. Rate Making Issues
o The Transaction Closed On September 1, 2015
o The First Full-year Test Year Available for a Cost Of Service
Study on Buyer’s Combined Operations Would be CY 2016
In Our Experience, a Split-Year Test Year had Proven to be
Problematic
o Seller was in The Second Step of a 4-Step Annual Algiers Retail
Rate Ramp-up Scheduled to Finish In 2017
At the End of the 4-step Rate Ramp-up, Algiers Rates Will be
Roughly Comparable to Those Currently Charged by Buyer
o In the Interest of Rate Stability, Parties Negotiated a Rate
Freeze Through 2018, When a Combined Rate Case Based on a
2017 TY For the Buyer’s Combined Operations May Set New
Rates
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22. Interim Ratemaking Issues
o Until New Rates can be Established for all of New Orleans
Through a Combined Rate Case, the Following Interim
Provisions Were Adopted
A Combined Fuel Adjustment Clause
• Important Rate Differences Between Algiers and Buyer’s Original
Service Area
A Combined (Blended) Environmental Adjustment Clause
Separate RTO (i.e., MISO) Cost Recovery Riders
Phase-in Of Previously Approved Rate Increases in Algiers to
Continue
Separate Energy Efficiency / DSM Program Budgets and Funding
Sources
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24. Accounting Methodologies
o Objective to Determine Net-book Value of Assets Sold to Buyer
o Complications
Most Distribution Assets Were Accounted for With Mass Property
Accounting Where Individual Assets were not Identified
• The Original Cost of Most Distribution Assets Physically in Algiers was
Unknowable
• The Sales Price of Most Distribution Assets was Established by Allocating
a Portion of all Of Seller’s Distribution Assets
• Allocation was Based on the Same Factors From the Most Recent Rate
Case for Algiers
Some Transmission Assets Carried Across the Boundary Between
Buyer and Seller
• Asset Purchase Price and Related O&M was Divided Between Buyer and
Seller Based on Length of Transmission on Either Side of Boundary
Accounts Receivable based on Differing Billing Cycles and Different
Collection Rates
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25. Accounting Methodologies
o Complications (Cont.)
Seller and Buyer Have Different Depreciation Rates. Upon Close
of Transaction, Algiers Assets Begin Depreciation According to
Buyer’s Approved Depreciation Rates
Regulatory Assets Were Transferred at Their Book Value net of
Amortization
Property Right to Collect Securitization Bonds’ Servicing Costs
Extends to Algiers
ADIT is Substantially Eliminated on Buyer’s Books due to Tax Basis
Step-up
• Effect of ADIT is Recreated Through Intercompany Note
Algiers Benefits from Buyer’s Existing Storm Reserve
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26. Compliance Filing
o Within Three Months of Close of the Transaction, Buyer was
Required to Make an Accounting Compliance Filing
Identifying and Valuing the Algiers Assets as of Transaction Close
Showing Supporting Data
Showing all Assumptions and Computations, and Formulae
o 60-day Review Period Following Filing of Accounting
Compliance Filing
Upon Completion of Review Period, Parties may File List of
Unresolved Issues
o 6-month Period to Resolve Issues With Accounting
Compliance Filing
Unresolved Issues may Call for Supplemental Procedural Schedule
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28. Considerations for Regulators
o In M&A Activity, How is the Public Interest Determined?
Determination of Regulators of Both Buyer and Seller Required
How to Determine What Benefits Reasonably will Materialize
o How to Treat Seller Assets That are Difficult to Physically
Identify
Allocate Based on Factors From Recent Rate Action
Physical Plant Survey
Detailed Audit of a Statistical Sample of Property Accounting
Entries
o How to Provide Generating Capacity to Sold Region
PPA of Slice Of Seller’s System
PPA or Ownership Interest in Specific Generating Units
Buyer to Purchase Capacity / Energy in RTO Auctions / Markets
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29. Considerations for Regulators
o What are the Tax Effects of an M&A Transaction?
How to Properly Allocate Affected Tax Costs to Appropriate Party
How to Avoid New Tax Expenses
o Prevent Double-Recovery of Plant Investment
Is Accumulated Depreciation Balance Maintained?
If Purchase Price is Above Net Book Value, Should Goodwill be
Recovered?
o What Regulatory Assets, Including Regulatory Assets Related
to Stranded Assets, are Appropriately Transferrable in Utility
M&A?
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