ML18230A820
| ML18230A820 | |
| Person / Time | |
|---|---|
| Site: | Harris  |
| Issue date: | 05/01/1976 |
| From: | Langum J Carolina Power & Light Co |
| To: | Office of Nuclear Reactor Regulation, State of SC, Public Service Commission |
| References | |
| 18361, 18387 | |
| Download: ML18230A820 (194) | |
Text
{{#Wiki_filter:0" +60 <I 9oct<64+ >7,1 r.o I I Cgltf0),f 90t;UtttQA 98 ~90CKEi 86. gg,ugR TG TESTIMONY AND EXH!alTS OF DR. JOHN K. LANGUM CAROLINA POWER & LIGHT COMPANY Before the SOUTH CAROLINA PUBLIC SERVICE COMMISSION Docket Nos. 18361 Application for General Increase 18387 in Rates and Notice of Filing Change of Rates
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South Carolina Public Service Commission Docket Nos. 18,361 and 18,387 CAROLINA POWER 4 LIGHT COMPANY TESTIMONY REGARDING FAIR RATE OF RETURN SOUTH CAROLINA PUBLIC SERVICE COMMISSION DR. JOHN K. LANGUM ECONOMIC CONSULTANT CHICAGO, ILLINOIS MAY 1, 1976
Will you state your name, please? John K. Langum. Where do you live? I live at 477 Oakhill Road, Elgin, Illinois. What is your present occupation? I am an economic consultant, with my offices located at 209 South LaSalle Street in Chicago, Illinois. My work consists of advising and counseling with a wide range of business firms and financial institutions and public bodies on economic matters of concern to them. Much of my work lies in the field of appraising changes in business conditions and their impact on particular firms and industries and in the field of interest rates, the money market, and the capital mar-kets. My clients include some of the largest firms and most prominent trade associations in the fields of investments, banking, industry, transportation, and public utilities. In addition, I am President of Business Economics, Inc., an enterprise engaged in research and publications in the field of business and economics. Business Economics, Inc., provides a continuing service for financial institutions and business enterprises covering in depth the forces at work in the American economy and their significance for the credit and capital markets. What is your educational background?
In 1933, I received a B.A. degree from Colorado College. In 1936, the University of Minnesota awarded me an M.A. In 1943, the University of Minnesota conferred on me the Ph. D. degree. What academic positions have you held? From 1935 to 1940, I was on the faculty of the School of Business Administration at the University of Minnesota. In 1940 and 1941, I was lecturer in Economics at the University of California. In 1945 and 1946, I was part-time lecturer in the Department of Economics at the University of Chicago. In the summer of 1947, and again in the summer of 1951, I was visiting Professor of Economics at Northwestern University. From 1951 through 1962, I served as Professor of Business Administration, on a part-time basis, in the School of Business of Indiana University. What connections have you had with graduate schools sponsored by banking and financial associations? For the last twenty- six years, starting in 1951, I have been a member of the faculty of the Stonier Graduate School of Banking at Rutgers University in New Brunswick, New Jersey, sponsored by the American Bankers Association. Here in June of each year, I give lectures on the business outlook and the credit and capital
markets for the bank officers enrolled in the Graduate School. Each year about 1, ZOO bank officers, from most of the fifty states and from several foreign countries, attend the Graduate School of Banking. In 1945, I was one of the founders of the Graduate School of . Banking at the University of Wisconsin, located at Madison, Wisconsin, That school, with over one thousand bank officers from about thirty-five states, is sponsored by the Central States Conference of sixteen midwestern state banki'ng associations. For thirty-two consecutive years, since the beginning of the Graduate School, I have given basic lectures on the money mar-kets and the American economy. Since 1955, I have lectured on appraisal of the economic outlook, analysis of the individual company and industry in relation to changing business conditions, and the structure and workings of the capital markets at the School'of Banking of the South in Baton Rouge at Louisiana State University. This graduate school for bank officers is sponsored by fifteen southern state banking associations. In several years, I have also lectured at the Graduate Southwestern School of Banking held in Dallas, Texas, at I Southern Methodist University; at the National Trust School held in Evanston, Illinois, at Northwestern University; at the Pacific Coast School of Banking held in Seattle, Washington,
at the University of Washington; and at the Graduate School of Savings and Loan held in Bloomington, Indiana, at Indiana Univer s ity. In many years, starting in 1946, I have lectured at the Life Officers Investment Seminar, sponsored by the American Life Convention, and starting in 1957, at the Financial Analysts Seminar, conducted by the National Federation of Financial Analysts Societies in association with the University of Chicago. What business experience have you had? From 1941 until 1951, I was employed by the Federal Reserve ~ Bank of Chicago, and from 1944 to 1951, I was Vice President of the Bank. As officer in charge of the Research Department during that period, it was my responsibility to direct an extensive research program in monetary and fiscal problems, in the banking mechanism, in business conditions, in agri-cultural and business economics, and in business finance. Also, at the bank I was in charge of its bank: and public relations activities. In addition, for several years I was associate econo-mist of the Federal Open Market Committee of the Federal Reserve System. This is the body in the Federal Reserve System, made up of the members of the Board of Governors
and Presidents of the Federal Reserve Banks, which determines the monetary and credit policies of the nation's central banking system. Since 1951, I have been engaged in private business as an economic consultant. Much of my work lies in the field of appraising changes in business conditions and their impact on particular firms and industries and in the field of interest rates, the money market, and the capital markets. My clients include some of the largest firms and most prominent trade associations in the fields of investments, banking, industry, transportation, and public utilities. Please describe your work in the field of investments. I have been a director of Selected American Shares, Inc. since 1952. I am a director of Selected Special Shares, Inc., and Selected Opportunity Fund, Inc. These Selected Funds are common stock investment funds with offices in Chicago, Illinois. I am Chairman and director of Founders Growth Fund, Inc. and also Founders Special Fund, Inc., common stock investment funds with offices in Denver, Colorado. I have been Chairman or President of Founders Growth Fund, Inc., since February 1, 1969 and I have been Chairman or President of Founders Special Fund, Inc., since December 2 1971. I am a director of First Federal Savings and Loan Association of Elgin, Illinois.
For several years, until late in 1964 when the company was sold to Transamerica, I was a director of Bankers Mortgage Company of California, a mortgage banking firm with offices in San Francisco, California and in New York City. the last twenty-five years, I have met regularly for I'or consultation with the key policy-making officials of many major institutional investors in this country and in Canada. These pension funds, trust funds of commercial banks, mutual funds, and life insurance companies with whom I have worked have total funds under investment administration which comprise a major portion of total institutional investment holdings in the economy. Have you previously testified in rate cases? Yes. I have testified in a number of cases before public utility commissions and courts in twenty-eight states and the District of Columbia, including Illinois, Indiana, Iowa, Michigan, Ohio, Wisconsin, Mas sachus etts, Pennsylvania, Kansas, Missouri, Kentucky, Tennessee, West Virginia, Maryland, North Carolina, South Carolina, Louisiana, Alabama, Arkansas, Mississippi, Florida, Montana, Utah, Texas, Arizona, Oregon, Washington, and California. I have testified before the 1 Interstate Commerce Commission, the Federal Maritime Com-mission, and the Federal Power Commission. In Canada, I
have testified before the Board of Transport Commissioners, the Canadian Transport Commission, the Telecommunications Committee, Canadian Transport Commission, and the National Energy Board. Much of my work as consultant and as an expert witness on fair rate of return has been on behalf of utility companies. My work as consultant and as expert witness on fair rate of return, has, however, by no means been on behalf of utility companies exclusively. In 1970, I testified on behalf of the Attorney General of the State of Illinois in the Commonwealth Edison Case before the Illinois Commerce Commission. In 1971, in 1973, and again in 1975 I was an intervenor in the Commonwealth Edison Com-'any cases before the Illinois Commerce Commission. 1973, I testified before the Illinois Commerce Commission on
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behalf of the City of Chicago regarding fair return for the Peoples Gas Light and Coke Company. In 1972 and 1973, I testified regarding fair rate of return for Illinois Bell before the Illinois Commerce Commission on behalf of the Department of General Services of the State of Illinois. In 1974 I testified before the Illinois Commerce Commission on behalf of the States Attorney, Cook County, Illinois regarding fair rate of return, rate base, and fair return for Illinois Bell. Again
I in 1975, I testified be fore the Illinois Commerce Commission on behalf of the Department of General. Services of the State of Illinois and the States Attorney, Cook County, Illinois regarding fair rate of return, rate base, and fair return for Illinois Bell. In 1971, I testified on behalf of the Arizona Consumers Council in the Tucson Gas and Electric Company case before 1 the Arizona Corporation Commission. In 197K, 1974, and again in II 1976, I testified regarding fair rate of return for Tucson Gas 4 Electric Company on behalf of the Arizona Corporation Com-mission. In 1971, in 1973, and again in 1975 I testified on behalf of the Arizona Corporation Commission in the Arizona Public Service Company cases. In 1972, in 1973, and again in 1975 I testified regarding fair rate of return for Mountain Bell on behalf of the Arizona Corporation Commission. In 1973 I testified regarding fair rate of return for Sun City Water Company, Mohave Electric Division, Mohave Water Division, Santa Cruz Electric Division, and Santa Cruz Gas Division of Citizens Utilities Company before and on b'ehalf of the Arizona Corporation Commission. In 1975 I testified regarding fair rate of return for Santa Cruz Gas Division of Citizens Utilities Com-pany before and on behalf of the Arizona Corporation Commission. In 1976 I testified regarding fair rate of return for Sun City Water Company, and Sun City Sewer Company before and on behalf of
the. Arizona Corporation Commission. In 1974 I testified regarding fair rate of return for Sun City Water Company before the Superior Court in Phoenix and for Mohave Electric Division before the Superior Court in Tucson on behalf of the Arizona Corporation Commis sion. In 1973, I testified before and on behalf of the City of Corpus Christi, Texas, regarding fair return for Central Power and Light Company. In 1973, I testified on behalf of the City of Corpus Christi before the Texas Railroad Commission regarding the financial situation of Lo-Vaca Gathering Company and Coastal States Gas Corporation. In 1973, I testified regarding fair rate of return for Potomac Electric Power Company on behalf of the Peoples Counsel before the Public Service Commission of Maryland. In 1971, I testified on behalf of the Lake Michigan Federa-tion before the Lake Michigan Enforcement Conference. In February, 1972, I testified on behalf of the Lake Michigan Federation before the Price Commission on guidelines for public utility rate increases. Are you the author of any articles and books? During the last forty years, I have had many articles published in leading economic and business journals. For ten years, from 1941 until 1951, I edited "Business Conditions,"
a monthly review published by the Federal Reserve Bank of Chicago. For fifteen years, from 1946 through 1960, I wrote the articles on banking, including investment banking and commercial banking, on the Federal Reserve System and other financial subjects for the Enc clo edia Britannica. Book of the Year. I write the articles on savings banking and on savings and loan associations for the Enc clo edia Britannica. Over the years, several interviews with me on the business outlook and on investment policy have been published in Time, in U. S. News and World Re ort, in Business Week, and in other publications. Are you a member of and have you participated in professional societies and civic activities? Yes. I am a member of several professional societies and have been active in many of them, over several years. On many occasions I have been on the programs of the Conference of Business Economists, the National Association of Business Economists, the National Industrial Conference Board, the National Tax Association, the American Economic Association, and the Financial Analysts Societies. I am an active member of the Conference of Business Economists, with membership limited to fifty business economists, including the top economists of the nation's largest business firms and financial institutions. In addition
to our own meetings, we meet regularly with the Board of Governors of the Federal Reserve System and with the Council of Economic Advisors. In June, 1957, I testified before the Joint Economic Com-mittee of Congress at their invitation on the bearing of the budget outlook and economic situation on growth and inflation in the American economy. In August, 1962, I again testified before the Joint Economic Committee on Corporate Profits, Cash Flow, and Rate of Return. In 1963, 1964 and 1969, I participated in the symposiums on economic growth and public policy in Washington, D. C., sponsored by the American Bankers Association. In 1962, I participated in the conference on fiscal and monetary policy sponsored by the President's Advisory Committee on Labor-Management Policy. In 1962, I participated in the White House Conference on national economic issues. Early in the post World War II period, I served on the research staff of the Committee fo'r Economic Development. For three years, from 1959 through1961, I served as Vice President of the Chicago Association of Commerce and Industry in charge of the work of the Association in business research and statistics. For six years, I served as a director of the A s s o cia tion.
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~ From 1951 through 1953, I served on the Committee on Economic Policy of the Chamber of Commerce of the United States.
In 1964, in my professional capacity, I prepared a study for the City of Chicago on "Implications of Technological Development for the Economy of Chicago." D For twenty years, I have served as Chairman of the Elgin Plan Commission in the city in which I live. For many years I have been a member of the American Society of Planning Officials. I am a affiliate member of the American Institute'of Planners, and a supporting member of the Urban Land Institute. I have served as First Vice-President and Director of the Lake Michigan Federation, President of the Fox Path Association, and Director of the Illinois Planning and Con-servation League. I am a life member of the Sierra Club, The wilderness Society, and The'Nature Conservancy. In 1958, I was made a fellow of the American Association for the Advancement of Science.
SCOPE OF STUDIES AND TESTIMONY Dr. Langum, what is the scope of your studies and testimony in these proceedings? Carolina Power 4 Light Company requested me to make studies for the purpose of forming an opinion as to a fair and reasonable rate of return, applicable to a net original cost rate base, which it should be afforded the opportunity to earn in its retail electric and utility business in South Carolina. By a fair and reasonable rate of return, I mean a rate of return which will enable Carolina Power h Light Company to meet the standard of commensurate return, to attract new capital on fair and reasonable terms, and to assure confidence in its financial integrity and maintain its credit. Determination of such a fair rate of return involves first, determination of the cost of debt and'he cost of preferred stock; second, forming a judgment as to a fair and reasonable earnings rate on the common equity; and finally, the combination of such cost components for these segments of capital in an appropriate capital structure. It is my understanding that this Commission utilizes a net original cost rate base, includes construction work in progress in the rate base, and includes allowance for funds used during construction in return.
The studies which I have made are contained in the exhibit which I have prepared, entitled, "Carolina Power 4 Light Com-pany, Studies Regarding Fair Rate of Return." Dr. Langum, I show you what has been marked k Langum Exhibit No. 1 for identification, consisting of a cover page, a table of contents, and 91 pages and ask if the Exhibit was prepared by you or under your supervision and direction? Yes, it was, except the pages which were taken from articles in Mood 's Bond Surve and Standard 4 Poor's The Fixed Income Investor which I selected for inclusion in the Exhibit. The Exhibit contains my studies leading to a judgment as to a fair rate of return. Are the figures and facts contained in the Exhibit true and correct to the best of your knowledge and belief? Yes, they are. CAPITALIZATIONAND CAPITAL STRUCTURE RATIOS ~ Now, Dr. Langum, turning to Page 1 of the Exhibit, will you comment on the construction expenditures of Carolina Power & Light Company and how they have been financed? Over the years Carolina Power h Light Company has made sub-stantial construction expenditures to expand and to improve its electric facilities. As shown on Page 1 of the Exhibit, gross
property additions, including nuclear fuel additions, reached a record high of $ 422. 5 million in 1974. In the twelve months ended August 31, 1975, such construction expenditures totalled $ 384.4 million. By far the predominant source of funds used for construction expenditures has been external financing--sale of common stock, sale of first mortgage bonds and other long-term debt, sale of preferred stock, and net increase in short-term borrowings. As indicated on Page 2, during the last six years, external financing has comprised from 84 percent to 103 percent of total funds used for construction, excluding amounts charged to utility plant representing the allowance for funds used during construction. These are extremely high ratios of external financing to total funds used for construction. Are construction expenditures by Carolina Power 4 Light Com-pany expected to remain high during the years ahead? Yes, indeed they are. Meeting growing customer needs under conditions of major inflation, and with adequate concern for environmental considerations, necessitates high and rising con-struction expenditures. As indicated by the Company total construction expenditures are projected at $ 271 million for 1976 and subject to continuing review and adjustment, estimated at $ 826 mil)ion for 1976-1978, even after cutbacks in the construction program.
Will these construction expenditures likely necessitate high and rising amounts of external financing? External financing will have to be carried out in substantial amounts because of these large construction expenditures. As can be seen on Page 1 of the Exhibit, internal sources of funds comprise a relatively small portion of total funds used for construction expenditures. In particular, retained earnings from operations, net income less allowance for funds used during construction less dividends for the year, were a negative $ 39, 144, 000 during the twelve months ended August 31, 1975. What has happened to total capitalization of Carolina Power 4 Light Company as a result of the continued sale of securities in the credit and capital markets? The capitalization and capital structure ratios of Carolina Power Ec Light Company for 1962-1975, at year-ends, are shown on Page 3 of the Exhibit. In the twelve-year period total capitalization increased from $ 334. 0 million on December 31, 1972, to $ 2,213.6 million on December 31, 1975, an increase approaching two billion dollars in total capitalization over the period, a six fold increase. In the two year period from December 31, 1973 to December 31, 1975, total capitalization will have increased by $ 550 million.
Still referring to Page 3 of the Exhibit, what comprises the capitalization of Carolina Power 4 Light Company? In terms of the balance sheet, some of the capital of Carolina Power 4 Light Company is debt, some is preferred stock and preference stock, and some is common equity. The Company long-term debt currently includes 22 issues of first mortgage bondsand six-year notes payable to a bank. Notes payable, including both bank loans and commercial paper, have been outstanding in substantial amount, but were of little size at the end of 1975. Details of these issues are shown on I Pages 4 and 5 of the Exhibit. Preferred stock includes eight issues of preferred stock and one issue of preference stock. Details of these issues are shown on Page. 13 of the Exhibit. Common equity consists, of'course, of common stock and retained earnings. Is it your opinion that measurements of capitalization and capital structure ratios should be on the basis of including short-term debt? It is indeed my very strong opinion that capital structure ratios J.. should be computed on the basis of including sh'ort-term debt, that is, notes payable, in the capitalization. Failure to include short-term debt in the capitalization and capital structure ratios for a utility would simply amount to failure to consider adequately the true degree of coverage of interest and
preferred stock dividends and effect of interest charges on earnings for common equity. While certain notes payable are replaced by permanent financing, nevertheless frequently other notes payable before long take their place. The result has been that notes payable have come to constitute a continuing and signi-ficant part of the capitalization and financing of the Company. To assure adequacy of coverage and accuracy of comparison, all my later measurements and consideration of capitalization and capital structure ratios, for Carolina Power 4 Light Company and comparison companies alike, are in terms of total debt, in-cluding bank loans, commercial paper, and any long-term debt due within one year, and the corresponding definition of total capitalization. What have been the capital structure ratios of Carolina Power 4 Light Company during recent years? Page 4 of the Exhibit shows the capital structure ratios for 1962-1975, at year-ends, of Carolina Power 4 Light Company, based on the dollar amounts shown. On December 31, 1975, debt was 52.19 percent of total capitalization; preferred stock was 15.18.percent of total capitalization; and common equity was 32. 63 percent of total capitalization.
During 1975, the capital structure ratios of Carolina Power h Light Company have shown major improvement, with a reduction in the debt ratio and a corresponding increase in the common, equity ratio. At the end of 1974, the common equity ratio for Carolina Power 4 Light Company was at about the. lowest level for any company in the electric utility industry. Page 5 of the Exhibit shows changes in capitalization resulting I from estimated financing of Carolina Power L Light Company during 1976. Under present estimates, some increase in short-term debt wi11 occur, The Company expects to sell Common stock in the amount of $ 65 million and may need to offer long-term debt. Capitalization and capital structure ratios in terms of regulatory concepts for use by this Commission are shown on Page 6 of the Exhibit. On this basis, common equity includes accumulated deferred income taxes - accelerated amortization and deferred job development investment tax credit. Capital structure ratios for December 31, 1975 are debt,
- 51. 99 percent of total capitalization; preferred stock, 15. Ol percent of total capitalization; and common equity, 33.40 percent.
What capital structure patios have you used in your determination of a fair rate of return for Carolina Power k Light Company?
The capital structure ratios which I have used in my study of fair rate of return for Carolina Power 4 Light Company are shown on Page 7 of my Exhibit. In my determination I have used debt, 51. 59 percent; preferred stock and preference stock,
- 15. 01 percent; and common equity, 33.40 pe'r'cent.
I have used these capital structure ratios for'everal reasons. First, they are realistic based on the present situation of the Company and under current plans for financing and operation of the Company. The capital structure ratios which I have used are, in fact, the actual ratios which prevailed on December 31, 1 1975. Second, they are appropriate, in my judgment, within a range, for Carolina Power 8: Light Company in terms of the basic risks and uncertainties of its business. Capital structure ratios are extremely important in a fair rate of return study for two basic reasons. First, they provide the weights to be applied to the cost rates for debt, preferred stock, and common equity in obtaining components of the overall fair rate of return. Second, the cost rates on the various types of capital will vary to some extent with the capital structure ratios. Cost rates on debt will r'ise to some extent with higher debt ratios. Beyond this, the indicated rate of return on common equity which is fair and reasonable will likewise vary to a considerable extent with the common
equity ratio. The lower the common equity ratio, the higher wi1l be the required rate of return on common equity. Rate of return on common equity and common equity ratio must be stated together and expressed side by side for meaningful measurement and interpretation of earnings experience on common equity. For these reasons, components of capital>> ization and the corresponding capital s'tructure ratios must be defined accurately and used'with care. COST OF DEBT Taking up the cost of debt, what was the imbedded cost of debt to Carolina Power 4 Light Company on December 31, 1975? As shown on Page 8 of the Exhibit, the imbedded cost of debt on December 31, 1975 was 7. 74 percent. This gives effect to total first mortgage bonds and the six-year notes payable to a bank included in long-term debt. Interest requirements and net amortization were $ 89,424, 878, and total long-term debt was $ 1, 155, 254, 061. Looking ahead to future debt costs for Carolina Power 4 Light Company, please explain your studies shown on Pages 9 to ll of the Exhibit? These pages show the yield levels in the credit and bond markets in which Carolina Power 4 Light Company has financed during recent years.
First mortgage bonds of Carolina Power L Light Company are now rated Baa. by Moody's and A by Standard Er Poor's. Notes payable to banks are at the prime rate. A study of offering yields on all newly issued public utility bonds rated by Moody's during the last several years is shown on Pages 9 and 10 of the Exhibit. On Page 9 I have shown the averages by years from 1960 through 1975 and for January-March 1 1976, of Moody's averages, computed and published monthly, of yields on newly issued public utility bonds rated Aaa, Aa, A, and Baa and offered publicly. The changing conditions in the bond market are reflected in the annual averages of offering yields on new debt issues. Average offering yields on newly issued public utility bonds were at the unprecedented average level of 9. 19 percent on A-rated issues in 1970. The average declined to
- 7. 93 percent in 1971 and to 7. 60 percent in 1972. During 1973, however, the average rose to 8. 05 percent and went up further to an average of 9. 75 percent for 1974. The annual average for 1975 reached a new record at 10.22 percent. Page ll shows offering yields on newly issued public utility bonds rated Aaa, Aa, A, and Baa by months from May, 1970 through March, 1976. The offering yields on newly issued public utility bonds rated A reached a high monthly average of 9. 67 percent on such offerings in June, 1970. Subsequently, the yield dropped to a low monthly average
of 7. 36 percent in January, 1972. A renewed rise brought average offering yields on A-rated public utility bond offerings to 8. 50 percent in January, 1974. During 1975, interest rates on newly issued public utility bonds showed a further'unprece-dented rise with the average for A-rated public utility offerings reaching 11. 05 percent in August, 1974, as shown in the lower righthand corner on Page 10 of the Exhibit. During 1975, average offering yields on A-rated public utility bonds ranged between
- 9. 42 percent and 10. 94 percent. Recent A-rated public utility bond offerings have been at lower levels. The average offering yield for January-March 1976 was 9.13 percent.
Any debt financing, even at this lower interest rate, would, of course, increase the imbedded cost of debt. Page ll of the Exhibit shows the highs and lows in the com-mercial bank prime loan rate from 1960 to date. The prime rate reached a high of 12 percent in 1974. Currently the predominant rate is 6-3/4 percent. VFhat is the cost of debt to Carolina Power 4 Light Company? In my judgment the cost of debt to Carolina Power 4 Light Company is 7. 74 percent, as shown on Page 12 of the Exhibit. This judgment is based on the imbedded cost of debt, at Decem-ber 31, 1975, as shown on Page 8 of the Exhibit.
COST OF PREFERRED STOCK AND PREFERENCE STOCK What was the imbedded cost of preferred stock and preference stock to Carolina Power 6 Light Company on December 31, 1975? As shown on Page 13 of the Exhibit the imbedded cost of preferred stock and preference stock to Carolina Power 0 Light Company was 8. 01 percent on December 31, 1975. Dividend requirements were $ 26, 925, 795 and amount outstanding was $ 336, 018,400. Please explain Pages 14 and 15 of the Exhibit? Pages 14 and 15 show average offering yields on major non-convertible preferred stock issues by electric utilities, by years from 1966 through 1975 and for January-March 1976, on Page 14 and by months from January 1975, through March 1976, on Page 15. Data are shown for all issues and for issues rated AA, A, and BBB by Standard 4 Poor's. The cost of average offering yields on preferred stock issues has generally paralleled that on new bond issues. As shown on Page 14, the average offering yield on all issues was 8. 98 percent in 1970; declined to 7. 55 percent in 1972 and 7. 70 percent in 1973. Again, there was a sharp rise to 10.27 percent during 1974 and to 10. 71 percent during 1975. For the period January-March 1976, the average has been 9. 08 percent.
E As in the case of debt, any preferred stock financing, even at this lower dividend yield, would, of course, increase the imbedded cost of preferred stock. What is the cost of preferred stock and preference stock to Carolina Power 4 Light Company? In my judgment, as shown on Page 16 of the Exhibit, the cost of preferred stock and preference stock to Carolina Power E: Light Company is 8. 01 percent. This is based on the imbedded cost, as of June 30, 1976 estimated. FAIR RATE OF RETURN ON COMMON EQUITY Turning now to the matter of fair and reasonable earnings on the common equity of Carolina Power 'k Light"< " ompany,'ill you
'g explain your approach to this determination?
In my determination of fair rate of return, I:".ave assumed no basic change in present institutional arrangements for financing electric utilities. By this I mean that the ret'n after income taxes included in revenues paid to the compan'y customers supports the capital structure and attraction of new capital. The criteria for fair rate of return are return commensurate with the earning experience of co;nparison cc mparies'; maintenan -e of, credit and support of financial integrity; a::d attraction of canital-and on fair and reasonable terms. The studies which I have made in this connection are outlined on Page 17 of the Exhibit.
These criteria have been stated in the leading decisions of the United States Supreme Court., The United States Supreme Court stated in the Blucfield Case (1923):
"A utility is entitled to such rates as will'permit it to earn a return on the value of the property which it employs for the convenience of the public eaual to that generally being made at the same time and in the same gener 1 part of the cou.try on investmcnts n other business u".dcr-takings ivhicn are attended by corresponding risks and.
uncc r taintie s... " Tl* '>> ':C '*~H*C II (1943): ll... By that standard the return to the equity owner should be commensurate with thc returns on investments on other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit l and to attract capital, " My approach to determination of fair rate of return on common equity is a combination of commen'surate return of capital on fair and reasonable terms and maintenance and'ttraction of credit and support of financial integrity. It thus is based upon all the established tests of fair rate of return.
'In terms of commensurate return or comparable earnings, selection of comparison companies has been in terms of basic concept, with. consideration given to business
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characteristics, investment stature, similar approaches by regulatory commissions, and comparable accounting and rate-I making treatment. Reliance has been placed on the earnings experience on common equity of electric utilities in original cost jurisdictions without flow-through. By original cost jurisdictions, I mean those states which use book figures only in determination of rate base. By without flow-through I mean those companies and states in which the reduction in current income taxes from liberalized depreciation and invest-ment tax credit are offset by a charge for normalization or amortization in the income statement and do not increase reported operating income and net income for common by such reductions in current income taxes. Operating electric utilities in original cost jurisdictions without flow-through are the most comparable business undertakings and the closest alternative investment opportunities to Carolina Power 4 Light Company in its retail operations in South Carolina. Measurement of earnings experience on common equity has been in terms of rate of return on common equity and the corresponding common equity ratio. Common equity ratios, of course, have critical importance. Thc quality of reported earnings is .,ignificant too, with particulai'egard to i]cc role of allowance for funds used during construction.
In terms of attraction of capital on fair and.reasonable terms and maintenance of credit and support of financial I integrity, emphasis has been placed upon studies of market price of common stock of electric utilities in relation to book value, and upon studies of first mortgage bond offerings and preferred stock offerings of electric utilities with ratings of A and "a" by Moody's and A by Standard k Poor's, a minimum and reasonable goal for ratings on the first mortgage bonds and preferred stock for Carolina Power 5 Light Company. In summary, a fair and reasonable allowance on the common equity of Carolina Power 4 Light Company should be determined in terms of the ratio of net income for common equity to the book value of common equity. It must meet the standard that the return on the common equity investment should be commensurate with the return on common equity investments in other enterprises having corresponding risks. It must thus measure up to, and meet,'he earnings experience on common equity in the closest alternative investment opportunities, taking into account any differences in risk and the common equity J ratio. It must provide for maintenance of credit and assure con-fidence in financial integrity. It'must provide for the attraction of capital - and on fair and reasonable terms.
The American Econom and Cor orate Profitabilit Please discuss the broader matter of earnings experience of companies generally in the American economy, with varying conditions of real growth and inflation? The difficulties which many electric utilities are experiencing are related, of course, to developments in the American economy. The record of changing economic conditions, in the American economy, for 1946 through 1975, is shown on pages'21-22 of the Exhibit in terms of real growth, inflation, and corporate profit-ability in the American economy. Referring to page Zl of the Exhibit, the record of real growth and inflation in the American economy is shown for the post World War II period, from 1946 through 1975 in terms of percentage changes year-to-year. Real growth is shown in terms of gross national product stated in constant dollars. Real growth over the years has been substantial. Recessions occurred in 1949, 1954, 1958, 1961, 1970, and again in 1974 and 1975. Real output in calendar year 1974 was down l. 8 percent from calendar year 1973 and in calendar year 1975 was down 2. 0 percent from calendar year 1974. Similarly, referring to the last column at the right, on page 21 of the Exhibit, total real disposable personal income
declined by l. 7 percent in 1974, the first year-to-year decline in a quarter of a century. In 1975 there was an increase of
- l. 6 percent.. This reflected, in part, the ravages of inflation, as well as the effects of recession.
The record of inflation is shown in the middle columns. Inflation has continued and accelerated. The price indexes for calendar year 1974 ended up at 10 percent and more over 1973 - a two digit degree of inflation. In 1975 the gross national product price index was up 8-.8 percent over 1974. On page 22 of the Exhibit is shown the general record of corporate profitability in the American economy for 1946 through )975. Rate of return on equity for all manufacturing firms reached a new high in 1974 - 14. 92 percent with about a 70 percent equity ratio, Profits of unregulated corporations were generally extremely high in 1974, largely as a result, however, of inventory profits. Operating profits were in a severe squeeze. Reported earnings were down substantially in 1975, largely due to collapse of inventory pro'fits. Operating profits, however, have been surprisingly strong. In 1976 there has been a record resurgence of corporate profits generally, with an increase in aggregate of 25 to 35 percent underway.
With inflation has come the high interest rates and pre-ferred stock dividend yields shown on pages 9-11 and pages 14-15 of the Exhibit. The effects of inflation on operating expenses and on plant costs and on high interest rates and preferred stock dividend yields have been prime causes of the sharp deterioration in the earnings experience of electric utilities. Concurrently, the lower earnings experience on common equity has meant lower coverage ratios on bonds and preferred stock for electric utilities generally. Some electric utilities, have been very hard hit and so much so that the electric utility industry is, in effect, in deep depression. This poses a serious problem of analysis, which I shall deal with in my interpretation of the data on earnings <<x-perience on common equity. This is the r~eason for exclusion of certain companies from use as co'mparison companies in test of commensurate return, in which I use earnings data for 1971, 197Z, 1973, 1974, and 1975. Investment Stature In connection with your test of commensurate return, Dr. Langum, will you comment on the investment stature of Carolina Power k Light Company? Investment stature is an important criterion of comparability. Seven specific tests of investment stature in terms of ratings and characteristics of securities were used in my studies of this criterion.
Page 20 of the Exhibit shows the results of the application of these seven tests to Carolina Power a. Light Company. The first test is Moody's bond ratings of senior debt. The first mortgage bonds of Carolina Power 4 Light Company are rated Baa by Moody's Investors Service, Inc., as shown on page I 20. The second test is Standard 4 Poor's bond quality rating on senior debt. The first mortgage bonds" of Carolina Power 8z Light Company are rated A by Standard a. Poor's, The third test is Moody's rating of preferred stock. The preferred stock of Carolina Power 4 Light Company is rated "baa" by Moody's. The fourth test is Standard L Poor's quality rating of pre-ferred stock. The'preferred stock of Carolina Power L Light Company is rated A by Standar'd L Poor's. Please discuss your fifth, sixth, and seventh tests which have to do, I believe, with common stock? These tests relate to common stock. The fifth test of investment stature is Moody's basic in-vestment quality ratings as stated in Mood 's Handbook of Common Stocks. These quality ratings run from High Grade or High Quality, to on down to Investment Grade, and then to Medium Grade, and to Speculative. The common stock of Carolina Power 4 Light Company is characterized by Moody's as "Medium Grade. "
The sixth test is earnings and dividend rankings for common stocks by Standard Ec Poor's Corporation, Standard 4 Poor's rankings of common stocks are designed to indicate, by use of symbols running from A+ to C, tlic relative stabilit:y and growth of'arnings and relative stabilit,y and growth of dividends. These rankings are published in the Security Owner's Stock Guide. The common stock of Carolina Power 4 Light Company is ranked A- by Standard 4 Poor's Corporation, as shown on page 20. The seventh test of prime investment stature is that of dividend record. Carolina Power 4 Light Company'has paid a dividend on its common stock each year since 1937. The ability of a company to maintain, through good and bad times, an uninterrupted flow of dividend payments to stockholders is a clear indication of underlying strength and stability. Investment comparisons frequently list common stocks with a sustained dividend. record of 25 years or longer. 'Studies of the dividend record have been zrade on the basis of data fr rn oStandard 4 Poor's Corporation published in the ~Securit Owners's St ock Guide, and from Moody's Investors Service, Inc,, published in Mood ' Public Utilit Manual.
%'hat are the electric utilities listed at the left on pages 21>>23 of the Exhibits The 39 electric utilities listed at the left on pages 21-23 of the Exhibit, by jurisdictions, comprise all major electric utility companies in the United States, both those with publicly-held common stock and the operating subsidiaries of holding conipanics, in original cost jurisdictions without flow-through. Investment stature of holding compani'es operating primarily in original cost jurisdictions is also shown.
Dr, Langum, ~hat is the basis for your characteriz',ations of various state jurisdictions as original cost or Lair value jurisdictions 7 l am expressing s) an economic opinion, of course, and not a legal opinion, for I am not a lawyer. The type of rate base used in a given utility jurisdiction is, however, an e.ssential I and commonplace part of financial analysis and investment decision. My judgment as to the regulatory approaches used in these states ha.s three bases'. first, the statutes, court 4 decisions, and commission orders in several of these states to which counsel for various companies and public bodies have directed my attention and special studies which I have
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made on the basis of these decisions and orders; second, the analysis of methods of rate base determination generally
applied given in the pamphlet, Federal and State Commission Jurisdiction and Be ulation of Electric, Gas, and Tele hone Utilities, 1973 prepared by the Federal Power Commission, in cooperation with the National Association of Regulatory Utility Commissioners; and third, the analysis of regulation by state public utility commissions and representative utility rate case decisions prepared by Moody's Investors Service, Inc., and published in Mood 's Public Uti)it Manual, 1967, pages a140-al41, al45-a151. Will you now discuss the investment stature of the electric utilities listed at the left on pages 21-Z3 of the Exhibit? I These electric utilities, in original cost jurisdictions without flow-through, have investment stature, as shown on pages Zl-23. Their senior debt is typically rated Aa and A by Moody's and AA and A by Standard 4 Poor's. Their pre-ferred stock is typically rated "aa" and "a" by Moody's and AA and A by Standard 4 Poor's. Their common stocks have typical investment quality references from Moody's as High Grade or Investment Grade. Their common stocks have typical earnings and dividend rankings by Standard k Poor's or A, with some A+ and some A-. They typically have a long, sustained dividend record, usually of at least 25 years. These companies, on balance, have a degree of investment stature,
closely comparable and even somewhat superior to that of Carolina Power L Light Company. They are very close alter-native investment opportunities to Carolina Power Ez Light Company. Earnin s Ex erience on Common E ui As Guide to Commensurate Return Why is the matter of earnings experience on common equity among close alternative investment opportunities so important for fair rate of return on common equity? Common stock investors are equity investors.'hey are not buying a bond or preferred stock with fixed interest or dividend and limited type of risk. Common stock investors are buying owners'hip in the business enterprise, with the risks and opportunities which that necessarily involves. This means that they expect earnings on their investment, and dividends from those earnings, and growth in dividends and earnings. In short, common stock investors require adequate earnings potential for the future as an inducement to make the investment, It follows that all the ultimate determinants of earning power. on common equity are the basic considerations involved in the cost of common stock capital.< The~ too, and crucial in importance, we must remember that all of these matters for one company arh
necessarily appraised in terms of the corresponding considcra-tions in alternative investmcnt opportunitics. Appraisal of equities in the capital markets=can only bc made.on the basis of comparison. Furthermore, it is the earnings on common equity
~ '
which provid~~ the support for meeting coverage ratios on bon'ds and on preferred stock. Adequate earnings experience on the common equity of Carolina Power 4 Light Company is required to support the attraction of capital, both debt and pre-ferred stock, as well as common stock, which lies ahead. Dr. Langum, in connection with your test of commensurate return, let us now go into the matter of earnings experience on common equity of the comparison companies. Will you explain your studies in this respect? The earnings experience on common equity during recent years of electric utilities in original cost jurisdictions without flow-through is shown on pages 24-27. These are the electric utilities previously described. I shall make use of the earnings exper-ience of certain of these companies in determination of the fair rate of return on common equity of Carolina Power 8z Light Company. For each of the companies for each year 1971 through 1975, the rate of return on the book value of common equity is shown, with the corresponding common-equity, ratio shown just below.
For example, the data in the upper right hand column of page 26 indicate that in 1975 Central Louisiana Electric Company earned a rate of return of 17. 57 percent on common equity, with a 33. 04 percent common equity ratio. Qualit of Re orted Earnin s Allowance for Funds Used Durin Construction Please explain pages 28<<29 of the Exhibit? Allowance for-funds used during construction'as percent of net income for common is shown on pages 28-29 for the 39 electric utilities in original cost jurisdictions without flow-through. Please comment on the record of earnings experience on common equity of the electric utilities during recent years? The record of earnings experience on common equity of the electric utilities during recent years in terms of averages on these broad groups is quite clear. From 1963 through 1966, earnings improved, with higher rate of return on common equity at about the same common equity ratio, and with little role of allowance for funds used during construction. From 1967 through 1970, earnings declined, with lower rate of return on common equity, at lower common equity ratio, and with increased role of allowance for funds used during construction.
From 1971 through 1974, earnings deteriorated sharply, with much lower rate of return on common equity, at even lower common equity ratio, and with poor quality of earnings because of the major role of allowance for funds used during construction. In 1975, the earnings experience remained about'he same as in 1974. %'hat is the significance of this increased role of allowance for funds used during ao'nstruction7 The increased role of allowance for funds used during construction has great significance, in my opinion, at least in three re-spects. First, the inczeased role of allowance for funds used during construction has substantially lessened the quality of reported earnings for common equity. The allowance for funds used during construction is entirely proper but is essentially a bookkeeping adjustment. Earnings from allowance for funds used during construction have an important defect, namely, that there are no current cash
revenues corresponding to these earnings. The portion'f net income for common derived from return, that is, operating income, is far more meaningful and stable than that portion derived from allowance for funds used during construction.
'Second, the increased role of interest charged to construction has vital significance for use of data from comparison companies, particularly for electric utilities, in determination of fair rate of return. %e must consider net .income for common and rate of return on common equity in the light of treatment of allowance for funds used during construction. %e must remember, furthermore, that to some extent the denominator in the computation of the rate of return on common equity, average common equity, is greater than it would have been otherwise because of the cumulative increases in reinvested earnings from interest charged to construction.
Third, the capita'lization of the company has to be supported by return and fair rate of return must be related to a corresponding rate base, including at least some con-struction woxk in progress. This essential, for construction work in pxogress can only be financed through capital.
Will you now describe your study of earnings experience on common equity of Carolina Powe'r k Light Company? Page 30 of the Exhibit shows for Carolina Power 4 Light"'ompany the rate of return on common equity, net income for common divided by average common equity; the common equity ratio, average common equity divided by average total capital; and allowance for funds used during construction as percent of net income for common. In 1975, Carolina Power 8: Light Company earned 11. 94 percent on common equity, with a common equity ratio of 30.14 percent. Allowance for funds used during construction was 79.02 percent of net income for common. These data, of course, cannot be. used in any direct manner as a guide to a fair rate of return on common equity for Carolina Power 4 Light Company. That would involve clearcut circular r easoning. Can the data on earnings experience on common equity for the I various electric utilities in original cost jurisdictions which you have shown on pages 24-27in the Exhibit be used as they stand as a guide to fair rate of return for Carolina Power h Light Company?
The data on earnings experience on common equity for the comparison companies are important. They represent but a starting point, however, as the basis of determination of fair rate of return on common equity for Carolina Power 4 Light Company. They must be given further analysis and proper interpretation in the light of additional considerations. For one thing, the common equity ratio has vital significance in appraisal of data concerning rate of return on common equity and adjustments for differences in common equity ratio between Carolina Power h Light Company and the com-parison companies. For another thing, only companies that are healthy and successful should be used as comparison com-panic s. Common E uit Ratio Will you explain the significance of the common equity ratio in appraisal of data concerning rate of return on common equity? The common equity ratio has vital significance in appraisal of data concerning rate of return on common equity. For any business enterprise, the earnings rate on common equity has three basic determinants. The first of these is the overall rate 'of return on total capital. The second is the cost of senior capital. The third is the common equity ratio, that is, the ratio of the common equity to total capital;
Of these'three factors, by far the most important is the 'rate of return on total capital. This is determined,. of course, by the relationship between sales and expenses and capital in the business undertaking. Necessarily, the overall earnings experienceof the business enterprise is the most important deterMinant of earnings experience on common equity. In turn, the inQuence of the overall rate of return on the rate of return on common equity is influenced and modified by the cost of senior capital and the common equity ratio. The higher the rate of return on total capital< the higher will be the rate of return on common equity, given the same common equity ratio and the same cost of senior capital. The lower the cost of senior capital, the higher will be the rate of return on common equity, given the same rate of return on total capital and the same common equity ratio. The lower the common equity ratio, the higher will be the pate of return on common equity, given the same rate of return on total capital and the same cost of senior capital, assuming as is usually the case that the c'ost of senior capital is below the rate of return on total capital. In these circumstances, the common equity ratio has great significance in appraisal of earnings experience. Both the com-mon equity ratio and corresponding degree of financial risk must
be considered side by side with the percent earned on common equity, that is, the ratio of earnings for common to common equity. The reason for this is that with a given rate of return on total capital, the lower the ratio of common equity to total capital, the higher necessarily should and will be the ratio of earnings to book value of common equity. In turn, the reason for this is that more senior capital, that is more preferred stock and more debt, introduces more leverage for the common stock equity. Page 31 of the Exhibit presents an example of'this relationship. Comparison is made of six companies, each with the same rate of return on total capital, but with different common equity ratios. Suppose that the relationship between sales and expenses and capital in each of these business 'undertakings is such that on the total capital invested of $ 1,000, the total income earned is $ 100. 00, and the rate of return on total capital is10. 00 percent. In Company A, there is no debt and no preferred stock. In these circumstances, all of total capital invested is common equity. The common equity ratio is 100 percent. All of income for capital goes to net income for common. The rate of return on common equity, net income for common divided by common equity, is 10.00 percent, the same as the rate of return on total capital.
In Company B, with $ 400 borrowed funds, the owner has invested only $ 600 of his own common equity money. In this case, with total capital of $ 1, 000 invested in the business, the common equity ratio is 60 percent. 'The senior capital is en-tirely debt. At a debt cost of 7.5 percent, the interest charges would be 7. 5 percent of$ 400or $ 30. 00. When this interest on debt is deducted from the $ 100. 00income for capital, $ 70. 00 would be left for the owner's equity of $ 600. That would be a rate of return on common equity, $ 70.00 divided by $ 600, or ll. 67 percent. In Company C, more is borrowed, say a total of $ 500, The owner would then have to put up only $ 500 of his own common equity capital. In this case, the common equity ratio, $ 500 divided by $ 1,000, is 50 percent. With the interest rate at 7. 5 percent, the interest on debt would be 7.5 percent of $ 500 or $ 37. 50. When this is deducted from the $ 100. 00 total income, $ 62. 50 would be left for the owner's common equity of $ 500. The rate of return on common equity, $ 62. 50 divided by $ 500, would be 12. 50 percent. In Company D, the common equity ratio is 4'0. 0 percent. The rate of return on common equity rises to 13. 75 percent.
In Company E, still more is borrowed, say a total of $ 650. The owner would then have to invest only $ 350 of his own com-mon equity capital. In this case, the common equity ratio, $ 350 divided by $ 1000, is 35.0 percent. If the interest rate is
- 7. 5 percent, the interest on debt would be 7. 5 percent of $ 650 or $ 48, 75. When this is deducted from the $ 100. 00 total income,
$ 51. 25 would be left for the owner's common equity of $ 350. The rate of return en common equity, $ 51,25 divided by $ 350, would be 14. 64 percent. In Company F, the interest rate has gone up to 8. 0 percent as a result of the higher debt r'atio. Interest on debt is now $ 52. 00, and net income for common is $ 48. 00. At the common equity ratio of 35. 0 percent, the resultant rate of return on common equity would be 13; 71 percent. Thus, with the same overall rate of return on total capital, 10. 00 percent, the rate of return on common equity would go up from 10. 00 percent to 14. 64 percent, as the common equity ratio went down from 100 percent to 35.0 percent. An increase, in the rate of return on common equity to 13. 71 percent would come about even with the increase in debt costs which might be expected at a higher debt ratio.
But this, of, course, also means more risk for the common shareholder. The existence of more senior capital in the capital structure, and hence more leverage, creates an .opportunity for higher earnings on the common equity if there are favourable earnings for the Company overall. But it also accentuates the hazard of lower earnings for common equity with an unfavourable rate of return on total capital, for the interest on debt and dividends on preferred stock'must be met before there are any earnings for common equity. In our example, suppose that the total income in Company F were to drop 20 percent, from $ 100. 00 to $ 80. 00. The rate of return on total capital declines from 10. 00 percent to 8. 00 percent. But the income for the owner of the business, with a common equity ratio of 35. 0 percent and debt cost of 8. 0 percent would be cut from $ 48.00 to $ 28.00 or by 42 percent. The rate of return on common equity would drop from 13. 71 percent to
- 8. 00 percent. And if the situation deteriorated further, when total income gets dovrn to $ 52. 00 or a rate of return on total capital of 5.20 percent, the earnings for the owner would be nil.
Beyond that, total income would fall short of meeting the interest due and the owner wouM lose the business.
Thus, the common equity ratio is of vital significance in appraising the earnings record on common equity of a given business undertaking and likewise in comparing rates of earnings on book value among various enterprises. The rates of return on common equity in two businesses of the same risk and un-certainty can be directly compared only if their common equity ratios are close or are the same. 'If their capital structures are different, the fact must be considered and proper I adjustments made in comparing the two rates of return on common equity. How can differences in common equity ratios be considered in comparing rates of return on common equity among various business enterprises with different common equity ratios? E Such differences in common equity ratios may be considered in various ways, depending on the degree of precision desired. First, a judgment adjustment in general terms may be made. In this connection, sometimes rate of return on total P capital is simply compared with rate of return on common equity.
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Second, comparison may be made in terms of components for common equity--the product of rate of return on common equity and common equity ratio. This procedure does not give effect to varying cost components for senior capital with varying capital structures.and is therefore incomplc tc. Comparison of conipon~nts for common equity does,, however, reflect thc conibination ot'ate
49 'of return on common. equity and common equity ratio. Third, proper adjustni'enl,s for differences in cotnnion <<qitity ratio noway bc nxade in precise ternis under specified assoil~>tions. Rate of return on common equity at a given. common equity ratio may be restated in terms of another corn'mon equity ratio. is precisely analagous to restating
'his a distance measured as 7 yards into the equivalent of 21 feet.
Dr. Langum, you have made the statement that if the capital structure ratios are different among various business under-takings, that fact must be considered and proper adjustments made in comparing the rates of return on common equity. Will you explain how such an adjustment can be madel'he method of such an adjustment of rate of return on common equity for a different common equity ratio is shown on page 32 of the Exhibit. Please explain page 32? On page 32 the method of adjustment for different common equity ratio is shown as applied to the earnings experience in 1973 to Kansas Power L-. Light Company, one of the electric utilities in original cost jurisdictions without flow-through. Reference to page 25,of the Exhibit indicates that in 1973 Kansas Power 4 Light I
earned 12. 50 percent on common equity, with a 45. 62 percent common equity ratio. On'this basis, the component "for common equity in the average overall rate of return for this company in 1973 would be 12. 50 percent times .4562 or 5. 702 percent. At a 33. 4 percent common equity, the figure which I am using for Carolina Power 4 Light Company, there would be less common equity, and more debt, a change of .1222 percentage points. At an interest rate of 4. 90 percent--the actual imbedded. interest rate on average total debt for Kansas Power 4 Light in 1973-- this would mean, in terms of the components for overall rate of return, 0. 599 percent more interest and less earnings for common equity. The resultant component for common equity at a 33.40 percent common equity ratio would be 5.103 percent. The resultant rate of return on common equity at a common equity ratio of 33.40 percent would be 15.28 percent. Kansas Power 4 Light in 1973 earned 12. 50 percent on common equity at a common equity ratio of 45.62 percent. Assuming for Kansas Power 5 Light the same rate of return on total capital and the same rate of interest on total debt, as it actually experienced, this was the equivalent of 15. 28 percent at a common equity ratio of 33.4 percent. Again, this is precisely analogous to restating a distance measured as 7 yards into the equivalent of 21 feet.
A common equity ratio of 33. 4 percent is what I am using in my study of fair rate of return for Carolina Power L Light Company in analysis of earnings experience of comparison companies. In the example on page 32, I have adjusted the actual earnings experience of Kansas Power 8: Light to the equivalent at a 33. 40 percent common equity ratio. The in-dication from the earnings experience on common equity in 1973 for Kansas Power k Light is that Carolina Power 4 Light Company should be afforded the opportunity to earn about 15. 28 percent on common equity at its oommon equity ratio of 33. 40 percent. Earnings rates of the comparison companies must be stated in terms of that common equity ratio for accurate comparison and meaningful application to Carolina Power 4 Light Company. Please explain pages 33-34 of the Exhibit? On pages 33-34 of the Exhibit, the rate of return on common equity is shown, as adjusted to the 33.40 percent common equity ratio for Carolina Power 4 Light Company, for the operating electric utilities in original cost jurisdictions without flow-through. For example, the rate of return on common equity, adjusted to
- 33. 40 percent common equity ratio, for Kansas Power 4 Light-
- 15. 28 percent in 1973 - is shown at the lower right on page 33 of the Exhibit. All of the data on rate of return on common equity
shown on pages 24-through 27 have been. so adjusted to the 33. 40 percent common equity ratio 'for Carolina Power Ec Light Company' Earnin s Ex erience on Common E uit 0 eratin Electric Utilities Used as Com arison Com anies In Test of Commensurate Return Dr. Langum, to what factors other than differences in common equity ratios have you given consideration in application of the earnings data for electric utilities in original cost jurisdictions without flow-through in forming a judgment as to fair rate of return for Carolina Power 4 Light Company? Consideration has been given as well to the general economic health, so to speak, of the companies. It is extremely important in using the earnings experience on common equity of other comparable utilities as a guide to fair rate of return for Carolina Power 4 Light Company that only companies that are healthy and successful be used as comparison companies.,Carolina Power 4 Light Company is entitled',to have its fair rate of return determined so as to be commensurate with the returns of other electric utilities, otherwise comparable, that are healthy and successful. Its fair rate of return should not be determined so as to be commensurate with the returns of other electric utilities that
are sick and unsuccessfulor at the other extreme, that are earning excessive and unduly high returns. In this connection, please explain pages 35-39 of the Exhibit? Carolina Power 'k Light Company should be afforded the opportunity of earnings a rate of return commensurate with that earned by healthy, successful companies rather than financially sick and unsuccessful companies. Accordingly, I have excluded certain companies. from use as comparison companies in the test of commensurate rate of return. The companies so excluded from use as comparison companies and the reasons for my judgment are shown on pages 35-39 of the Exhibit. Exclusion has been for the four years 1971 through 1975 or for a single year alone or groups of years. Companies have been so excluded from use as comparison companies on the basis of definite criteria; if allowance for funds used during construction was 50 percent or more of net income for common, if investment stature is inadequate; if the company encountered serious difficultieis in financing because of inadequate coverage ratios; if rate of return on common equity is significantly below that permited by the company's regulatory authority. .At the other extreme, one company, Iowa Southern Utilities Company, has had its rate of return adjusted downward to give effect retroactively to reduction of electric revenues with settle-ment of rate proceeding. Another company, Southwestern
54 Electric Power Company, has been excluded because its earnings experience has been such as to raise a question of excessive and unreasonable rate of return. These data on individual companies, such as shown on pages 35-39 are very important, for they enable me to make sure that I was not relying upon what might be called problem companies which are not earning a fair return and are not being able to finance adequately or properly, as a guide to fair rate of return for Carolina Power L Light Company. Assurance in this respect is crucial for so many electric utility companies have been in such dire circumstances that it can truly be said that the industry has been in deep depression, in serious crisis, or even on the ropes. In the light of this analysis, please explain pages 40-'42 of the Exhibit? The earnings experience on common equity of electric utilities in original cost jurisdictions without flow-through during recent years, that is, 1971, 1972, 1973, 1974, and 1975, is shown on these pages. Rate of return on common equity has been adjusted to the 33. 40 percent common equity ratio which I am using in r forming my judgment as to fair rate of return for Carolina Power k Light Company.
On each page, earnings experience on common equity is shown with the rate of return crossed out for companies ex-eluded from use as comparison companies in test of commen-surate rate of return. Averages for the companies used as comparison companies in test of commensurate return are shown on page 42 of the Exhibit. Rate of return on common equity adjusted to the 33.40 percent common equity ratio, for the electric utilities in original cost jurisdictions without flow-through used as comparison companies in test of commensurate return averaged 14. 44 percent in 1971,
- 14. 79 percent in 1972, 14. 39 percent in 1973, 14. 63 percent in 1974, and 13. 77 percent in 1975. The average for allowance for funds used during construction as percent of net income for common is shown, as is the number of companies used.
What conclusion do you draw from these averages shown on page 42 of the Exhibit? The averages shown on page 42 of the Exhibit point to a judgment as to fair rate of return on common equity from operations for Carolina Power 4 Light Company of 14. 50 percent, at a common equity ratio 'of 33. 40 percent. Have you compared this fair rate of return on common equity from operations for Carolina Power L Light Company with other data to check on its reasonableness?
Yes. I have. The fair rate of return on common equity, ex-cluding allowance for funds used during construction from return, being awarded electric utilities by regulatory com-missions in original cost jurisdictions is at least 12. 50 percent to 13. 00 percent, on average, or somewhat higher. Thus, these judgments including allowance for funds used during construction, support a fair rate of return on common equity of 14. 50 percent. Furthermore, this fair rate of return on common equity from operations is "in line" with historical re'lationships of earnings experience of electric utilities to that of unregulated companies. Earnin s Ex erience on Common E ui Industrial Com anies with Qualit Rankin of Hi h Grade b Mood 's In this connection, please explain the study of industrial companies you have shown on pages 43-47 of the Exhibit? Another study of earnings experience on common equity is shown on pages 43-47 of the Exhibit. Rate of return on common equity and common equity ratio is shown on pages 43-47 of the Exhibit for the 53 industrial companies with quality ranking of High Grade by Moody's. In terms of the averages, shown on page 47, the 10 oil companies on the list have been shown separately because of current attention to their marked step-up in earnings, in connection with the energy crisis.,The other 43 companies
also experience a marked improvement in earning power in 1973 and 1974 as compared with 1972. These companies earned . 18. 29 percent on common equity in 1973, with a common equity ratio of 79.43 percent. Their rate of return on common equity averaged 16. 65 percent in 1974, with a common equity ratio of 78. 14 percent. The general tendency for a corporate, profit squeexe from 1965 to 1972 had affected these companies. These companies, also, have seen a change to a lower common equity ratio over recent years. What are the reasons in particular, for studying unregulated companies, such as the industrial companies rated ."High Grade" by Moody's? In my opinion, there are three basic reasons for, giving con-sideration as background information to the rate of return earned by comparable unregulated companies, such as the industrial companies rate "High Grade" by Moody's. Throughout, in this consideration, we must give adequate weight to the major differences in degree of risk, all factors considered, between even the most comparable unregulated companies and regulated utilities.
First, public utilities must compete in the capital markets not only against other regulated enterprises but against unregulated businesses as well. Hence, the return to capital in such nonregulated enterprises is particularly significant and relevant. The realities of competition by business firms in the capital markets and scope and variety of investor choice necessitate con-sideration of an equally wide range of alternative investment oppor-tunities. Accordingly, a fair rate of return for a given company under consideration must enable that company to compete for debt capital and common stock capital alike for fair and reasonable terms with the full scope of alternative investment opportunities. A second consideration has to do with the very reasons and inherent occasion for regulation. Regulation is the substitute for competition -- the combination of market forces and market power which would determined services and set rates in other circumstances -- for business undertakings in areas where they cannot be allowed to compete. Operating characteristics necessitate generally that utilities operate under franchises and they they do not engage in specific competition in regard to their services and are therefore regulated to assurate fair and reasonable rates for services of good qulity. It likewise follows that fair regulation will set rates for public utilities which will provide a return related<o.that+eing earned by other enterprises
. of comparable nature in respects other than that they are regulated in the price they charge.
The third reason is the necessity of getting outside the circle of regulatory experience. An adequate test of comparable earnings must ncessarily involve consideration of nonregulated enterprises in addition to that of other utilities. As an approxi-mation and initial step in a test of comparable earnings in determination of fair rate of return for a given utility enterprise, we must look at the earnings exper~ceof other public utilities. These are among the closest of other comparable business undertakings. But if we look only at other regulated utilities in a test of comparable earnings, to some .extent we go around in a -circle. Under such procedure, the return to the subject utility would be guided by other regulatory experience rather than by the fundamental concept of regulation as the substitute for competition. Only by consideration of unregulated companies do we take the ultimate and final steps in a test of comparable earnings. Q Please explain your study shown on page 48 of the Exhibit? A On page 48 o.f the Exhibit, I have shown a study of earnings experience on common equity of the 39 operating electric utilities in original cost jurisdictions without flow-through used as com-parison companies in relation to that of the 43 industrial companies, excluding oil- companies, with quality ranking of
-60=
High Grade by Moody's. Bate of return on common equity, common equity ratio, and the corresponding component for common equity for the 43 industrial companies has been shown in the middle on page 48. Rate of return on common equity and common equity ratio for the 39 operating electric utilities in original cost jurisdictions without flow-through on average is shown in the upper portion of page 48. These date for individual companies were shown pre-viously on pages 24-27 for 1971-1975. The component for common equity in rate of return on total capital has been computed by multiplying rate of return on common equity by common equity ratio. The record of earnings experience on common equity of the 39 electric utilities in original cost jurisdictions without flow-through during recent years in terms of averages for this broad group is quite clear. From 1963 through 1966, earnings improved, with higher rate of return on common equity at a somewhat higher common equity ratio, and with little role of allowance for funds used during construction. The component for common equity rose from 4. 848 percent in 1963 to 5. 332 percent in 1966. From 1967 through 1970, earnings declined, with lower common equity ratio, and with increased role of allowance
'I for funds used during construction. The component for
common equity declined from 5.332 percent in 1966 to 4,588 percent in 1970. In 1971, 1972, 1973, and 1974 earnings deteriorated sharply, with much lower rate of return on common equity, at even lower common equity 'ratio, and with poor quality of earnings because of the major role of allowance for funds used during construction. The component for common, equity declined from 4. 588 percent 'in 1970 to 3. 342 percent in 1974. Earnings experience on common equity for the 39 operating electrics in original cost jurisdictions without flow-through used as comparison companies is next related, on page 48, to earnings experience on common'quity of industrial companies with quality ranking of High Grade by Moody's. These are the same 43 industrial companies previously considered on pages 43-47 of the Exhibit, with averages shown on the bottom lines of page 47. For each group for each year, I have computed the component for common equity. The component for common equity is, of course, the product of rate of return on common equity and the corresponding common equity ratio. Thus the common equity component provides an overall measure of earnings experience on common equity. Then I have shown the component for common equity of the above 39 operating electric
utilities in original cost jurisdictions without flow-through used as comparison companies as perce'nt of the component for common equity of the above 43 High Grade industrial companies. The data at the lower left on page '48 relate the earnings experience of the 39 operating electric utilities in original cost jurisdictions without flow-through to that of the 43 High Grade industrial companies. The component for common equity of the 38 comparison companies is shown as percent of component for common equity of the 43 High Grade industrials. The components have been in a fairly consistent relationship to each other. During the years 1967 through 1970, the component for common equity for the electric utilities as percent of the component for common equity for the industrials ranged from 31.51 percent to 33. 35 percent. During the years 1971 and 1972, the relationship was 33,. 55 percent and 35,40 percent. During the years 1973 and 1974, when industrial earnings rose to high levels, largely as a result of inventory profits, and earnings of many electric utilities collapsed, the relationship was 2764percent and .25. 74 percent. The indicated fair rate of return on common equity, 14. 50 percent, at the 33. 40 percent common equity ratio, which I am using for Carolina Power L Light Company, and the resulting
component for common equity of 4. 84 percent to the components for common equity for the High Grade industrials. The relation-ship of the components was 33. 31 percent in 1973, and 37, 20 percent in 1974, of the corresponding components for common equity in overall rate of return for the High Grade industrials. It is clear that the electric utility industry.has been able to operate successfully at a much lower rate of return on common equity and at a much lower common equity ratio and hence at a much lower component for common equity than the corresponding measurements for the High Grade industrial companies. The component for common equity has averaged about one-third of that for the High Grade industrial companies. This evidences a major excess of earnings power on common equity, and, pro-bable degree of risk for the High Grade industrial companies over that for the operating electric utilities. Vfhat other conclusions do you reach from the study on page 48? Other conclusions follow from the study shown on page 48 of the Exhibit. In forming a judgment as to fair rate of return for a subject company, we should give primary consideration
to earnings experience of comparison companies during very recent years - 1971, 1972, 1973,1974, and1975. The decline in
.corporate profitability has been general and substantial, and the higher rates of return and coverage ratios of, say, 1965,
, 1966, and 1967 should not be utilized in 1976 as a guide to fair rate of return. At the. same time, we must not forget that many individual companies in the electric utility business are in nothing less than deep depression in terms of earnings experience on com-mon equity. We should avoid use of earnings experience of sick, problem, unsuccessful companies as a guide to fair rate of return for a subject company. Finally, we can confidently utilize appropriate rate of return data for electric utilities during recent years as a guide to fair rate of return, with no fear whatsoever of circular reasoning. Their earnings experience is, in general, very much "in line" with historical relationships with corporate profitability in the unregulated part of the American economy. The sharp drop in the ratio of the component for common equity for electric utilities to that of the High Grade industrial companies which occurred from 197? to 1973 and 1974, however, must remind us of the. low positon of the electric utility industry in current circumstances H 1 in the American economy.
It is significant and meaningful, therefore, that the indicated fair rate of return on common equity for Carolina Power 4 Light Company - 14. 50 percent at a 33. 40 percent common equity ratio-is very much "in line" with historical relationships with corporate profitability of these closely comparable firms in the regulated part of the American economy. Indicated Fair Rate of Return on Basis of Test of Commensurate Return What conclusions do you draw, Dr. Langum, from your studies comprising the test of commensurate return? As shown on page 49 of the Exhibit, on the basis of the test of commensurate return, the indicated fair rate of return on common equity for Carolina Power 4 L'ight Company is 14, 50 percent for common equity at a common equity ratio of 33. 40 percent. This is on a basis including allowance for funds used during construction. STANDARDS OF MAINTENANCEOF CREDIT AND SUPPORT OF FINANCIALINTEGRITY AND ATTRACTION OF CAPITAL ON FAIR AND REASONABLE TERMS Dr. Langum, referring back to page 17 where you show an outline of the basis of your determination of fair rate of return on
book value of common equity, you refer to standards of main-tenance of credit and support of financial integrity and attraction of capital on fair and reasonable terms as well as the standard of commensurate return. Will you comment on this basis of determination of fair rate of return on common equity'P The standa'rds of attraction of capital on fair and reasonable terms, maintenance of credit, and support of financial integrity have vital bearing on the required earnings rate on common equity. For example, earnings for common should be sufficient, given the general stock market level, to support market price at or above book value and enable sale of common stock on terms which are fair and reasonable to existing common shareholders. Furthermore, it is the earnings on common equity which provide the support for meet-ing adequate coverage ratios on bonds and on preferred stock. Adequate earnings experience on the common equity of Carolina Power 4 Light Company is required to support the attraction of capital, which lies ahead, both debt and preferred stock, as well as common stock. Market Price of Common Stock In Relation to Book Value and Common Stock Offerin s Will you go on now and explain your studies of required earnings rate on common equity for attraction. of, capital on fair and reasonable terms, maintenance of credit, and support of financial integrity?
With respect to these standards of fair return as applicable to common stock, I have made the studies of market appraisal of common stock shown on pages 50-54 of the Exhibit. There has been an exceedingly sharp decline in market appraisal of electric utilities during recent years as shown in terms of price-earnings ratios, dividend yields, and market price as percent of book value. In part, the low market appraisal for the electric utilities was due to the dire situation of the industry. In part, however, it was due to the low level of the stock market generally. What has happened to the market price of Carolina Power 4 Light Company's common stock in the light of its earnings experience? The market price of common stock of Carolina Power E: Light Company has declined - - absolutely and relative to e arning s, dividends, and book value. How does market price now relate to book value? Market price, $ 20. 625, is now, at the close on April 19, 1976, still below book value per share, $ ZZ. 1O on December 31, 1975. What is the significance of a situation in which market price is below book value per share? The significance of this relationship ia that Carolina Power 4 Light Company is not able to attract common stock capital on
fair and reasonable terms. In a common stock offer in these circumstances, the new buyer of common stock will acquire a share of common stock at the offering price, necessarily closely related to the market price, for less than the book value per share of the common equity owned by the existing shareholders. Thus, there is dilution of the book value of common stock'and failure to support the financi'ai integrity of the Company. '.This is a most serious situation for the Company, for its shareholders and customers alike, and for this Commission. Vhy is this a most serious situation'? Carolina Power 4 Light Company must attract common stock capital,. not only to derive capital funds from sale of common stock, but also to support and make possible the attraction of capital funds from sale of first mortgage bonds and preferred stock. How does Carolina Power 4 Light Company compare in this respect with other electric utilities? Market price as percent of book value is shown on pages 50 and 51 of the Exhibit for the 89 major electric utilities with publicly-held common stock. Market price, at the close on October 22, 1975, is related to book value, on December 31, 1974.
The median for the 89 electric utilities is 88. 34 percent. The ratio for Carolina Power Ec Light Company, 77. 96 percent, is shown in the upper portion on page 51. Let us go on now, Dr. Langum, to consider the attraction of common stock capital on fair and reasonable terms. Please describe your study of common stock offerings of electric utilities shown on page 52 of the Exhibit? The study of common stock offerings of electric utilities during 1972, 1973, 1974, 1975, and 1976 thus far, shown on page 52 of the Exhibit points up the serious problem confronting most electric utilities of ability to sell common stock on fair and reasonable terms. In 1972, 41 of 45 common stock offerings were with price to public at or above book value. In 1973, 34 of 47 common stock offerings were with price to public at or above book value, In 1974, only 8 of 54 common stock offerings were with price to public at or above book value. In 1975, only 12 of 94 common stock offerings were with I price to public at or above book value. In 1976 thus far, only 7 o'f 25 common stock offerings were with price to.,public at or above book value. What has been the record of common stock offerings of Carolina Power 4 Light Company?
The record of common stock offerings and offering price in P relation to book value for Carolina Power h Light Company during 197?-1975 is shown on page 53 of the Exhibit. Price to public per share related to book value per share was 77. 68 percent in the offering on October 28, 1975. This ratio was 63. 50 percent in the offering on January 16, 1975. What do you conclude &rom the studies on common stock offerings of electric utilities? In present circumstances of market appraisal of common stocks of electric utilities, a rate of return on common equity of 14. 50 percent at a comzmn equity ratio of 33.40 percent offers reasonable hope but not assurance that a common stock offering by Carolina Power 4 Light Company can be made on fair and reasonable terms to existing investors. Such an earnings rate is necessary for the support of financial integrity of Carolina Power 4 Light Company. Dr. Langum, so far you have been discussing earnings experience on common equity and the difficulties Carolina Power 4 Light Company finds in attracting common stock capital. Does Carolina Power 4 Light Company face similar difficulties in attracting debt capital and preferred stock capital? Indeed Carolina Power 4 Light Company faces equally serious difficulties in attracting debt capital and preferred stock
capital. Long-term interest rates and dividend yields costs are at'high levels. Beyond high interest rates and dividend yields, however, there is the drastic situation of decline in coverage ratios and possible outcome of downgrading in ratings of the first mortgage bonds and the preferred stock of Carolina Power 0 Light Company. Earnings for common equity must be increased or there will be failure to maintain the credit of the Company. What bearing does earnings for common equity have on ratings of first mortgage bonds and preferred stock and the maintenance of the credit of the Company? It's the earnings for common equity. that provide the coverage or the protection of payment of the interest charges and 'referred stock dividends of the Conpany. The present ratings situation on both the first mortgage bonds and of the pre-ferred stock of Carolina Power Ez Light Company is in serious shape because of the sharp drop in earnings experience on common equity in the face of the sharp rise in imbedded costs of debt and preferred stock. Covera e of Fixed Char es Please explain the general system of ratings of debt and preferred stock issues of public utility companies?
Moody's Investors Service, Inc. and Standard 8: Poor's Corporation rate public utility bonds and preferred stock. In terms of their standards and criteria, particularly coverage ratios, Moody's and Standard KzPoor's Corporation rate first mortgage bonds and preferred stock of Carolina Power & Light Company, always when they are issued, but also on a basis of continuing surveillance of credit standing. Explanation and key to Mood 's Cor orate Bond Ratin s is shown on page 54 of the Exhibit. Explanation and key to Standard 4 Poor's Ratin s on Cor orate Bonds is shown on page 55 of the Exhibit. In Moody's ratings, gradations of investment quality are indicated by rating symbols, each symbol representing a r group in which the quality c)aracteristics are broadly the same, ... from that used to designate least investment risk (i. e., highest investment quality) to that devoting greatest investment risk (i. e., lowest investment quality). The first mortgage bonds of Carolina Power L.. Light Company are rated Baa by Moody's and A by Standard 4 Poor's. On pages 56 and 61 are recent articles by Moody's on interest coverage and ratings. The role of allowance for funds used during construction is given major emphasis. On pages 57-60 is a recent
article by Standard'0 Poor's Corporation entitled, "Fundamental I Approach to Public Utility Bond Ratings." Specific guidelines for pre-tax coverage in relation to ratings are stated in the lower right corner of page 56 and the upper left corner of page 58. Please explain pages 61-67 of the Exhibit? On page 61 is shown the comments by Moody's when they reduced the ratings on the Company's first mortgage bonds to Baa in March 1975. On pages 62-64 are shown the rating articles by Moody's on the $ 100 million first mortgage bond issue sold in April.1975. On page 65-67 are shown the rating articles by Standard 4 Poor's on that bond issue. The comments by Moody's, shown at the left, under Quality and Rating, on page 62, and by Standard 0 Poor's, shown at the upper left, in italics, on page 66, will be noted. Please explain pages 68-71 of the Exhibit? The studies shown on pages 68-71 of the Exhibit present in summary form certain results of an exhaustive study. which I have made of every electric utility bond offered during 1975 and 1976 thus far. The study covers identification of the debt offering, quality ratings by Moody's and Standard 4 Poor's, the several fixed charge coverage ratios shown in the prospectuses and by the rating agencies, and the comments and characterizations made by Moody's and Standard 4 Poor's in their rating articles.
The studies shown on pages 68 and 69 relate to coverage of fixed charges from 42 first mortgage bond offerings in 1975 and 1976 of electric utilities rated A by Moody's and Standard 4 Poor's. The various groups of companies may be compared in terms of the coverage of fixed charges after income taxes before construction credits for the last twelve months available at date of offering or rating change. The twenty-one companies with ratings maintained at A by Moody's and A by Standard 4 Poor's, shown on page 68, had such a coverage ratio of l. 98 times. The average coverage ratio was 2.10 times for the twelve issues excluding those where significant rate increases were not reflected. On page 69, the twenty-one companies with A ratings but described as "just barely maintained" or "in lower range" of the category, had such a coverage ratio of l. 69 times. The fourteen issues excluding those where significant rate increases are not fully reflected had an average coverage of l. 75 times. Referring to pages 70-72, the fifty-eight issues with ratings of better than A by Moody's and A by Standard 4 Poor's had an average coverage ratio of 2. 20 times. The thirty-six issues, excluding those where significant rate increases are not fully refle'cted, hah an average coverage ratio of 2.40 times.
Why is the maintenance of at least an A rating on first mortgage bonds so important? First mortgage bonds rated Baa or BBB have a much higherI interest cost. Moreover, in the troubled" capital markets of the last two years, it has been impossible much of the time to sell long-term Baa- and BBB-rated bonds of electric utilities. Until very recently, going back to June 1974, it has been virtually impossible to market long-term Baa- and BBB-"rated first mortgage bonds of electric utilities, in particular, and other utilities as well. This is shown on pages 73-75 of the Exhibit. The Baa- and BBB-rated'bonds which have been sold have been largely of short maturities of five to eight years, as shown on page 73 of the Exhibit. Furthermore, such bonds as have been sold, have been marketed, in general, only at yields at times averaging well above A-rated issues, shown on page 74. The few long-term Baa- and BBB-rated issues which could be sold are shown on page 75 of the Exhibit. The tests of the market in current circumstances demand that successful financing through first mortgage bonds by utilities be based upon at least an A rating by Moody's and Standard h Poor's. The institutional investors who are the major purchasers of utility bonds are simply not interested in Baa- and BBB-rated bonds of utilities. In turn, Aa- and AA-rated utility bonds have stron g advantages over A-rated bonds. Quality counts heavily in the s e tr oub led capital mar kets.
What is the significance of the danger of being downgraded to Baa and BBB? Kn today's capital markets, the downgrading to Baa and BBB has significance far beyond higher interest costs on new issues. Downgrading to Baa and BBB raises the ultimate question of sheer ability to finance on any reasonable terms. Please explain the study shown on page 76 of the Exhibit? Coverage of fixed charges for Carolina Power 4 Light Company from 1968 through 1975 are shown in the study on page 76 of the Exhibit. Definitions for the three coverage ratios for fixed charges are given, as well as the underlying figures. These coverage ratios have dropped drastically. Times interest earned before taxes declined from 4. 46 times in 1969 to l. 96 times in 1974. Times interest earned after taxes declined from
- 2. 86 times in 1969 to l. 94 times in 1974 and 2.13 times in 1975.
Times interest earned after taxes before construction credits (with allowance for funds used during construction not included in earnings) declined from 2. 65 times in 1969 to 1,23 times in 1974 and 1.46 times in 1975. Please explain page 77 of the Exhibit? The study on page 77 of the Exhibit shows the coverage of fixed charges for Carolina Power h Light Company which would result
from the fair rate of return of 14. 50 percent on common equity at the common equity ratio of 33; 40 percent, in combination with the imbedded cost of debt and the debt ratio and the imbedded cost of preferred and the preferred stock ratio. The resultant times interest earned after income taxes would be 2. 51 times. Bearing in mind the relatively heavy role of allowance for funds used during construction in net income for common for Carolina Power Light Company, the resultant times interest earned after income taxes before construction credits, that is, excluding allowance for funds used during construction, would significantly lower. Thus, the fair rate of return on common equity which I have determined would provide a coverage of fixed charges after income taxes before construction credits sufficient to support the A rating by Moody's and Standard L Poor's on the first mortgage bonds of Carolina Power Ez Light Company. I conclude that this standard supports the fair rate of return on common equity indicated by the test of commensurate return. Throughout this discussion of coverage of interest, I have stressed the requirements of the rating agencies for the A rating-a minimum standard for being able to sell the issue. The re-quirement for adequate coverage to permit the rating and the
sa'le of the issue is higher and more stringent than the indenture requirement which merely permits the company to be able legally to sell the issue. In my judgment indenture coverage requirement is no indication of fair rate of return. Meeting the indenture coverage requirement alone does not permit attraction of capital on fair and reasonable terms. It does not support financial integrity. It does not provide for maintenance of credit. Furthermore, Carolina Power h Light Company could h certainly be entitled to achieve a higher rating than A; Covera e of Fixed Char es and Preferred Stock Dividends Taking up preferred stock, please explain Moody's and Standard 8 Poor's rating services on preferred stock? The preferred stock rating symbols used by Moody's and their definitions, and the factors considered in arriving at such ratings, are shown on pages 78 79, Corresponding facts about quality ratings on preferred stock by Standard 4 Poor's are shown on page 80. Please explain pages 81-83 of the Exhibit? These pages show the rating articles by Moody's and by Standard 4 Poor's regarding the preference stock offering in March 1975 by Carolina Power Ez Light Company. On page 81'is stated
the reduction by .Moody's. to "baa" of ratings on the preferred stock of the Company. The preference stock was not rated by Moody's. On pages 82-83 is shown the rating of the prefer'- ence stock at BBB by Standard L Poor's. Please explain your studies shown on pages 84-86 of the Exhibit? Coverage of fixed charges and preferred dividends after income taxes before construction credits for preferred stock offerings of electric utilities rated A or better during 1975 and 1976 thus far, is shown on pages 84-86. The average for the 11 of the 22 issues with ratings maintained at "a" by Moody's and A by Stan- . dard 4 Poor's, where significant rate increases are fully reflected in coverage ratios, is l. 72 times, shown on page 85. The average for the 10 of the 15 issues with ratings better than "a" by Moody's and A by Standard Ez Poor's, where significant rate increases are fully reflected in coverage ratios, is 2, 02 times, shown on page 86. What has happened to coverage of fixed charges and preferred dividends for Carolina Power 4 Light during recent years? The study on page 87 of the Exhibit shows coverage of fixed charges and preferred dividends for Carolina Power 8z Light Company from 1968 through 1975. Coverage ratios for fixed
charges and preferred dividends are given, as well as the underlying figures. These ratios have dropped drastically. Times interest and preferred dividends earned after income , taxes declined from 2. 36 times in 1968 to l. 54 times in 1974 and l. 66 times in 1975. Times interest and preferred dividends earned after taxes before construction credits declined from 2, 19 times in 1969 to 0. 97 times in 1974 and 1.14 times in 1975. Please explain the study on page 88 of the Exhibit? The study on page 88 of the Exhibit shows computation of times fixed charges and preferred stock dividends. earned after income taxes from fair rate of return on common equity of 14. 50 percent and common equity ratio of 33. 40 percent, in combination with imbedded cost rates on debt and preferred stock and their capital structure ratios. Times charges and preferred dividends earned after income taxes would be l. 93 times. The corresponding ratio before construction credits, that is, excluding allowance for funds used during construction, would be significantly lower. What conclusions do you draw from your studies of coverage and ratings of preferred stock? I conclude that the fair rate of return on common equity indicated by the test of commensurate return would serve to support the A rating on preferred stock of Carolina Power 4 Light Company by Standard 4 Poor's and the "a" rating by Moody's.
Does this complete your discussion of attraction of capital on fair and reasonable terms and maintenance of credit and support of financial integrity? Yes, it does. I conclude that the indicated rate of return of 14. 50 percent on common equity, given the capital structure ratios and the cost of debt and preferred stock, will provide the attraction of capital on fair and reasonable terms and for maintenance of credit and support of financial integrity. It will not be adequate, of course, after further increases in operating expenses which outrun revenues and after further increases in the cost of senior capital. Dr. Langum, have you formed a judgment as to fair rate of return on common equity for Carolina Power O'Light Company? Yes, I have. Please state that judgment? My judgment, shown on page 89 of the Exhibit, is that the fair rate of return on common equity which Carolina Power h Light Company should be afforded the opportunity of earning is 14. 50 percent at the common equity ratio of 33. 40 percent. This includes allowance for funds used during construction.
I have formed this judgment on the basis of the standard of commensurate return and the standards of maintenance of credit and support of financial integrity and attraction of capital on fair and reasonable terms. The standard of commensurate return was based upon studies of earnings experience on common equity during 1971, 1972, 1973, 1974, and 1975, of those electric utilities in original cost jurisdictions without flow-through used as comparison companies. I also gave consideration to recent rate orders by regulatory commissions concerning electric utilities and to earnings being "in line" with earnings experience on common equity of High Grade industrial companies. The standards of maintenance of credit and support of financial integrity and attraction of capital on fair and reasonable teims, were'based upon studies of common stock offerings of Carolina Power'h Light t Company during 1972, 1973, 1974, and 1975, and of price to public in common stock offerings of electric utilities in relation to.book value during 1972, 1973, 1974, 1975, and 1976 thus far, upon studies of first mortgage bond offerings of electric utilities during 1975 and 1976 thus far, and required fixed charge coverage ratios to support the A ratings on the first mortgage bonds of Carolina Power k Light Company and upon studies of preferred stock offerings of electric utilities during 1975 and 1976 thus far, and required
fixed charge and preferred stock dividend coverage ratios to support the "a" and A rating on the preferred stock of Carolina Power Ez Light Company. In my judgment, as shown on page 89 of the Exhibit, taking all of the above considerations and studies into account, the I fair rate of return on common equity for Carolina Power 4 Light Company is '14. 50 percent at 33. 40 percent common equity ratio. This includes allowance for funds used during construction. FAIR BATE OF RETURN Dr. Langum, have you formed a judgment as to the fair rate of return on total capital which Carolina Pow.er 4 Light Company should be afforded the opportunity of earning'? Yes, I have. Please state your judgment as to the fair rate of return on total capital? My judgment as to the fair rate of return on total capital which Carolina Power 4 Light Company should be afforded the oppor-tunity to earn is shown on page 90 of the Exhibit. The capital structure ratios are those developed on page 7 of the Exhibit. Cost of debt is shown at 7. 74 percent, from page 12, and cost of preferred stock and preference stock is
shown at 8.01 percent, from page 10. For common equity, I have. utilized the fair rate of return on common equity, just developed on page 89 of the Exhibit, of 14. 50 percent at a common equity ratio of 33.40 percent. I have combined the cost rates for'ach segment of the capitalization with the capital structure ratios to obtain weighted component of the overall fair rate of return. For debt, the cost of 7. 74 percent combined with the capital structure ratio of 51. 59 percent gives a weighted component of 3. 99 percent. For preferred stock and preference stock, the cost of 8. 01 percent and the capital structure ratio of
- 15. 01 percent gives a weighted component of 1.20 percent. For the common equity, the combination of the fair and reasonable earnings rate of 14. 50 percent and the 33. 40 percent ratio of common equity in the capital structure gives a weighted com-
, ponent of 4.84 percent. Addition of the weighted, components results in a total of 10. 00 percent. It is my judgment that the fair rate of return on total capital which Carolina Power 8z Light Company should be afforded the opportunity of earning is 10 percent. It is my judgment that this is the fair rate of return on total capital for Carolina Power 8: Light Company, which is necessary to enable the Company to support
its capital structure, to attr'act needed new capital on fair and reasonable terms, to provide a return on its common equity co'mmensurate with that earned by the most comparable business undertakings and the closest alternative investment opportunities to maintain its credit, and to assure confidence in its financial integrity. Have you formed a judgment as to the fair rate of return on the net original cost rate base applicable to retail operations in South Carolina which Carolina Power 4 Light Company should be afforded the opportunity of earning? Yes, I have. Please state that judgment? In my judgment, the fair rate of return on the net original cost rate base applicable to retail operations in South Carolina which Carolina Power 4 Light Company should be afforded the opportunity of earning is l0 percent. This judgment, shown on page 9l of the Exhibit, is based on the fair return on total capital related to the net original cost rate base which approximates total invested capital.
South Carolina Public Service Commission
'ocket Nos ~ 18,361 and 18,387 I~gum Exhibit No. 1 CAROLINA POWER h LIGHT COMPANY STUDIES REGARDING FAIR RATE OF RETURN BEFORE SOUTH CAROLINA PUBLIC SERVICE COMMISSION DR. JOHN K. LANGUM ECONOMIC CONSULTANT CHICAGO, ILLINOIS MAY 1, 1976
'CAROLINA POWER h LIGHT COMPANY
.STUDIES REGARDING FAIR RATE OF RETURN Page Contents CAPITALIZATIONAND CAPITAL STRUCTURE RATIOS Carolina Power Ec Light Company Statement of Source and Use of Financial Resources 1970-1975 Carolina Power h Light Company External Financing in Relation to Total Funds Used for Construction 1970-1975 Carolina Power 4 Light Company Capitalization 1962-1975 Carolina Power h Light Company, Capital Structure Ratios 1962 <<1975 Carolina Power 8c Light Company Capitalization and Capital Structure Ratios December 31, 1975 and December 31, 1976 Estimated Carolina Power 4c Light Company Capitalization and Capital Structure Ratios In Terms of Regulatory Concepts December 31, 1975 and December 31, 1976 Estimated Carolina Power h Light. Company Capital Structure Ratios Used in Study of Fair Rate of Return COST OF DEBT Carolina Power h Light Company Imbedded Cost of Debt December 31, 1975 Moody's Averages of Yields On Newly-Issued Long-Term Public Utility Bonds Rated Aaa, Aa, A, and Baa .
1960-1976, by Years 10 Moody's Averages of Yields On Newly-Issued Long>> Term Public Utility Bonds Rated Aaa, Aa, A, and Baa 1970-1976, by Months Commercial Bank Prime Loan Rate 1960-1976 Carolina Power & Light Company Cost of Debt
COST OF PREFERRED STOCK AND PREFERENCE STOCK 13 Carolina Power 5 Light Company Imbedded Cost of Preferred Stock and Preference Stock September 30, 1975 and Estimated December 31, 1976 Offering Yields on Major Nonconvertible 'Prefe'rred Stock Issues By Electric Utilities 1966-1975, by Years 15 Offering Yields on Major Nonconvertible Preferred Stock Issues By Electric Utilities 1974-1975, by Months 16 Carolina Power Ec Light Company Cost of Preferred Stock and Preference Stock FAIR RATE OF RETURN ON BOOK VALUE OF COMMON EQUITY 17 Carolina Power 8c Light Company Determination of Fair Rate of Return on Book Value of Common Equity STANDARD OF COMMENSURATE RETURN The American Econom and Cor orate Profitabili
'I 18 Real Growth and InQation in the American Economy Percentage Changes Year-to- Year 1946-1975 19 Corporate Profitability in the American Economy 1946-1975 Investment Stature 20 Investment Stature Carolina Power & Light Company March 1976 21-23 Investment Statur e Electric Utilities in Original Cost Jurisdictions Without Flow- Through March 1976 f
Earnin s Experience on Common E uit As Guide to Commensurate Return 24-27 Rate of Return on Common Equity and Common Equity Ratio Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through 1971-1975 28-29 Allowance for Funds Used During Construction In Relation to Net Income for Common Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through 1971-1975
111 30 Carolina Power & Light Company Rate of Return on Common Equity and Common Equity Ratio Allowance for Funds Used During Construction
~ As Percent of Net Income for Common 1968-1975 Common E ui Ratio 31 Relationship Between Rate of Return on Common Equity and Common Equity Ratio 32 Method of Adjustment For Different Common, Equity Ratio 33-34 Bate of Return on Common Equity Adjusted to 33.40 Percent Common Equity Ratio Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through 1971-1975 Earnin s Ex erience on Common E ui 0 eratin Electric Utilities Used as Com arison Com anies In Test of Commensurate Return 35-39 Companies Excluded from Use as Comparison Companies In Test of Commensurate Return Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through 40-41 Rate of Return on Common Equity Adjusted to 33.40 Percent Common Equity Ratio Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through Used as Comparison Companies 1971-1975 Rate of Return on Common Equity
'Adjusted to 33.40 Percent Common Equity Ratio and Allowance for Funds Used During Construction As Percent of Net Income for Common Operating Electric Utilities in Original Cost Jurisdictions Without Flow- Through Used as Comparison Companies 1971<<1975
.Earnin s Ex erience of Unregulated Enter rises 43-47 Rate of Return on Common Equity and Common Equity Ratio Industrial Companies with Quality Ranking of High Grade by Moody's 196 3-1974 48 Earnings Experience on Common Equity of Operating Electrics in Original Cost Jurisdictions Without Flow-Through Used in Selection of Comparison Companies In Relation to Earnings Experience on Common Equity of Industrial Companies with Quality Ranking of High Grade by Moody's 1963-1974 49 Carolina Power & Light Company Test of Commensurate Return
MARKET APPRAISAL AND COMMON STOCK OFFERINGS TO PUBLIC I 50-51 Electric Utilities in Original Cost and Fair Value Jurisdictions With Publicly-Held Common Stock Market Price as Percent of Book Value~ 1975 Price to Public as Percent of Book Value In Common Stock Offerings Electric Utilities
- 1972-1975 53 Common Stock Offerings And Market Price In Relation to Book Value Carolina Power h Light Company 1972-1975 COVERAGE OF FIXED CHARGES 54 Explanation and Key to Moody's. Corporate Bond Ratings 55 Explanation and Key to Standard h Poor's Corporate Bond Ratings
'I 56 "When Is Interest Coverage a Special Concern?"
Mo'od 's Bond Surve January 5, 1976 Pag es 1781-1782 57-60 "Fundamental Approach to Public Utility Bond Ratings" The Fixed Inco.ne Investor January 3, 1976 Pages 987-990 61 Ratings Reduced Carolina Power h Light Company ood 's Bond Surve March 3, )975 Page 1557 62-64 Rating Articles by Moody's First Mortgage Bonds Q% Series due April 15, 1984 d 's Bond Surve April 7 and 28, 1975 Pages 14Q>>1412, 1340 65-67 Rating Articles by Standard h Poor's First Mortgage Bonds Q% Series due April 15, 1984 The Fixed Income Investor April 12 and 26, 1975 Pages 743-744, 715 Coverage of Fixed Charges First Mortgage Bond Offerings ofiiElectric Utilities By Rating Category 1975-1976
68 Ratings Maintained at A by Moody's and A by Standard & Poor's 69 Ratings of A by Moody's or A by Standard & Poor's Just "Barely Maintained" or in Lower Range" of Category 70-72 Ratings Better than A by Moddy's and A by Standard & Poor's 73 Offering Yields on Newly-Issued,. lecreic Utility Bonds Rated Baa Debt With a Maturity of Ten Years or Less June 1974- February 1976 74 Offering Yields on Newly Issued Elecreic Utility Bonds Rated A Debt With A Maturity of Ten Years or Less June 1974- February 1976 Offering Yields on Newly-Issued Electric Utility Bonds Rated Baa Debt With a Maturity of More Than Ten Years June 1974- February 1976 76 Carolina Power & Light Company Coverage of Fixed Charges 1968-1975 77 Carolina Power & Light Company Computation of Times Interest Earned After Income Taxes From Cost Rates for Capital and Capital Structure Ratios COVERAGE OF. FIXED CHARGES AND PREFERRED DIVIDENDS 78-79 Moody's To Assign Ratings to Preferred Stocks 80 Standard & Poor's Preferred St'ock Ratings 81 Ratings Reduced Carolina Power & Light Company Rating Article by Moody's Cumulative Preference Stock, Series A Mood 's Bond Surve March 3, 1975 Page 1566 82-83 Carolina Power & Light Company Rating Articles by Standard & Poor's Cumulative Preference Stock, Series A The Fixed Income Investor, March 8 and 15, )975 Pages 846, 827 Coverage of Fixed Charges and Preferred Dividends Preferred Stock Offerings by Electric Utilities By Rating Category 1975 84-85 Ratings Maintained at "a" by Moody's and A by Standard & Poor's 86 Ratings Better than "a" by Moody's and A by Standard & Poor's
87 Carolina Power & Light Company Coverage of Fixed Charges and Preferred Dividends 1968-1975 88 Carolina Power & Light Company Computation of Times Fixed Charges and Preferred Stock Dividends Earned After Income Taxes From Cost Rates for Capital and Capital Structure Ratios FAIR RATE OF RETURN ON COMMON EQUITY 89 Carolina Power & Light Company Fair Rate of Return on Common Equity-FAIR RATE OF RETURN 90 Carolina Power & Light Company Fair Rate of Return on Total Capital Using Imbedded Cost of Long-Term Debt and Preferred Stock On December 31, )975 91 Carolina Power & Light Company Fair Rate of Return on Net Original Cost Rate Base
Page 1 CAROLINA PO'tWR & Ll(pIITCOMPANY STATEhtENT OF SOURCE AND USE OF FINA'hsCIAI. RESOI:RCES Twetoe hlonths Ended I)ecengber 31. Auxust 31, 8970 897 l 1972 8973 1974 197 S (Unaudited) Same of Fgnaacisl Resourcec e Current resources provided from opera6onc Nct income S 24,82S $ 31,474 $ 60329 $ 6S,999 $ 72371 S $ 9,165 Items not requirin I providing ) current rcsourca: 51.846 Drprecudon d onlm '19,96$ 28321 37303 40,430 45391 for funds used cunng consuucnon (10405) (14.708) (24.759) (38))93) (54,609) (6).5611 Noocurrent defcrrcdincomc
'llowance taxes-nct I31$ 3,480 5.912 7,430 I I.l$ 8 2'94 lmrllnrott tulle dr I ( )305) 1377 1.756 2.94$ (6341) I 821)
Total cunent tcsources from operations Other esoautecs provided: 3445$ 5$ ~ 80,701 7$ ,114 68)XO 9$ ,123 hddiuons m plant accounts representing capital-hatioo of net cost of funds used during consttuction 10305 14,70$ 24,759 3$ P93 54,609 63361 ttocecds from assignment to lessor of mtcrnal com-bustion turbine gencmtors 44,45$ proceeds from sate and leaseback of nudcar fud 47,593 '7393 dtsccdaneous Det 132$ 109 3.995 9379 Total resoufa>> provided fmm operations and othcru 45.791 71,441 .106i, 123 116,916 218,652 219.456 Fsnancingr Saic oh Ftrst mortgage bonds 89302 134351 99311 199,75$ 150,919 148391 50NO Six year note Preferred stock 29375 '4+$ 49364 49,949 64331 4 ..744 Preference stock Common stock 29,186 33,910 12$ ,039 63,449 3381 59309 Increase (decrease) in shon term ootes payable less scarigwaty cash investments 2.914 12.483 (70.164) 16356 10)301 ( I0.58) I 150.977 2152SO 25).556 329309 3'21.$ 92 24-'.761 Total resources'provided from hnancings Terr ak $ 196.NC $ 286.691 $ 359.679 5446,425 5540344 546-'~11 Usc of Fina ncia) Resources: ah Gross pfopeny adhnons excluding nudear $ 167.741 $ 239391 $ 318382 $ 359A)$ 6 $ )$ 2.602 S)$ g368 furl fuel'udcar 3,722 20332 16.91$ 37,610 39.939 75.495 for the ) cat addiuons'ividends 23,712 30,492 36,1$ 5 4S,708 5$ .04$ 64.748 Hct inmate (de-ease) in working capital, <<xduding ahon term notes payable and temporaty cash in-vestments 1393 (3324) (12.4$ ) 4.0$ 1 59.955 1$ .106 Tetr xL $ 196,NC $ 286.691 $ 359.619 5446.425 $ 540.$ 44 S46 P 317 Increase (Decrease) in IVorkieg Capital. Exduding Shon-term Notes Payab?e and TcfnporZty Cash Investments. by Com-ponent: al ~ llllllsmd r pl'I os I pdo p 1)cfcrad fossil I'ucius;~ntofy costs IIIl $ 11.419 "$ (9.107) $ 5376 $ 105 $ 6933$ 3$ gl)g
$ $ ,914 342
'ccounts rchxgvabte 300 539$ 1.163 2,900 19.$ 69 ( I0.774)
Accounts payable (4374) ~ (2319) ($367) 3357 40,)10) 11.720 Current pormn ofdrferred mcofne taxes 13.5781 ).)3$ Taxes accrued (3~) (S,426) 6 932 (5.6$ 6) (3322) (5376) 3,036 (5,1$ 3) (759)1 (6.071 ) (5.46I) (6 <II I
)atercst and diddcnds payable
'adudes Other-nct 3319 82$ ( I 450) (394) 3381 7 sit Nct bgcrease (decease) in working capital, ex-dulau Ilwrl Ier r psreah S 1393 $ (3324) Sf 12.406) $ 4.051 S $ 9.9$ $ S 15.106 amounn char"ed lo udUrf plant reptescntieg !hc "agcwantu fer (the cost of) funds used during COn) tfttcttnn ~
Scc Notes to Ftnangtal Statctnentg. Source: Cc"olintL Fotter Sc Licht Company, Pro~cetus. 5,0:h0p000 Shares Co~It Stock, October 23p lty75, page 35.
~ ~
1 Page 2 CAROLINA POWER At LIGHT FINANCING IN REIATION TO TOTAL FUlSS USED FOR CONSTRUCTION COMPANY'XTERlQL 1 0-1974 AND TWEWE HOltS ENDED AUGUST 31 1975 TMelve ~baths ~ed 1970 1971 1973 1974 nu~~t 31, 197g5 Gross property additions excluding nuclear fuel and excluding anounts charged to utility plant representing the allowance for funds used during construction $ 157p236p000 $ 224p583p000 $ 293p623p000 $ 320p963p000 .
$ 327p993p000 $ 292 p 307 p 000 Total external financing 150p 977 p 000 2 1 5p 2 50p 000 2 5 3 p 5 56 p 000 329p 509 p 000 32 1 p 892 f 000 241gj76lp000 Total external financing as percent of total funds used for construction 86.35$ 102.66$ 98.14$ 83.73;p gourcti geroltaa poser g tggkt Osepeup,'~pro cetus 5,coo,000 gberes cosuou stackoc, tober 28, lpg5, page 35.
\
0 0 ( t 'I 00 CAPOLDtl ICA>at & LIQlI CXIQ%ÃT I CA ITA LILLT I(O
~,
1 '02-1
)4, ~t
~l Oeee>ber 31 ~
~l O>ee>>ber )ls Ores>eosr 31>
19GL Os>~bar 34 ISIS ~l bees>>ter 31> bees>>ter
~55 )l, bseezler la>
34
~l Osew&er 34 ~ll ~l bee>oper 34 O>eeeber 31,
~I Dseeeber )4 Oeee-aer O>CMer )I ~
Tong-teso gAL nl 030 <<>> 331,033003 3 033,010,0CO
~0~33 P I Itr>t eartgege Otter Iong-taco bo>3'.e gebb 3519,035,0>>
~sco cco . t 550 cco ~lo 31390>>,CCO ,9193.030.0>>
tat 3533,0>sa>> I tlo cco 3>>9,030,tco sts>,030,0>> '303,to>>col S)09>0300000 3 40)b
~I.
Cj5 0 273 4 15 5 I1 >0 Total Iong terse gebt 1 72 j 230> 000 17 I 3 590> 000 200> 950>000 200> 3 1 0> 000 229> 030> 000 t69> 030>000 309> 0)0>CCO 309> 030> 000 j)l,1)2,633 58L,LLO,ttt SSL>282>92 5 > >
~era AAt toter Terable <<,0500>>
San?s 8, )CO>000 ll>000>000 ll>6l00000 246L4857 15>L26>L3ls 37>l 0>COO
~I'OI04too . ~I'>9>> 39>>a>>'tee '~8 I It 0>>
Otbor 355>>3 53>>C>> Oul 5>.ltl Total abort-tera gAt 80)CO>ON ll 000 COO, LL>SLO 002 11>6L4867 15>L26>L)L 56>76T>095 82>163>288 )49990702 30 4>5'3 912,538,72L 4155 752 )LO 0 Total gebt 172>t)0>000 180,090,000 200>950>000 tll,310,000 tl),670>000 280>6'71>867 32L>L)6>L)b )T)>797>C98
'515 315,921 595>139>9LL Tref~ Stock 3)6,018,L02 173>800>900 223>800>900 total preferreg otoab 31,37f,900 3b,37f,900 3l,)7f,000 34375,900 )L>375>9CO 59,375>900 59,375,900 '9>3Tf,CCO 12L>375>900
~OIt 227> 538>989 3 52>775 >85) L15 0 321 >0)5 Ll)072490L '@>6g>691 Oooore eb>eb Sb>LSL,02i Sb>828>)LT 9b,605,780 lent)9,373 01090082 13L,3S),330 16l 32) 588 90>673>379 110>816,532 Setatssot aarestssge Lt>SQ>$ Q 62,502,253 68> 153> 300
~
5 >615>9 T 3 >085>153 >6>>>929 55>)LT>6>A Cop Ital etoeb eepessee fLS>bgb>630 722>285>117
. 527>237> 558 Total eO>ttf 127,398,139 133,181,129 llf 221 'Itf 196 ftl 525 17l>'702,9f7 18476L,011 189 933,016 226,80),SLl 29f >692>289 LL)>LL9>2LO
" 54553>977>198 52>C02>3)f>)b9 82>213>g)gsttl 8))L,COL,))9 8)LT,SL7,029 8)Sb,fb5,727 Sb05,210,L25 SL)2>7bS>857 8573>755>))O 8654975>939 '40)6>38b>110 54323,)9CLOSb ao eee)lh>a ttseer 8 llgbl OsoOeef> 2>os>sat te)s>rt'919 > tegeo ; oog eerrcopo>stts>S pegee fa prev$ eeo eels) reporte.
'3
~
1 ~~ Srgi L CA00LlFA 2CIJBt 4 LIEF CCCVANT carltaL SZRVCBllc SAT100 1 1
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~ ~11 31c bcecatcr 31c
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~IP 31'l fl>>S 5 31.605 ~ 3r;165 f3.025 . 33>>'55 ~ f 36>> 3 5 36.nj fr.f65 P.W 33.005 't.06 5 P 12 5 ~ ft>>lfj trcrcrrel NoA 10.19 T>>ff 11>>38 10,33 13>>tf It,ff 13.16 P>>lt P,co '.63 30,63 00 f3 ~ 33 TF I '
'00,005 100,005, 100,005 Q>>005 ~ 1001005 100.coj lco.005 late.~tt bcldce lacy-tare 6At ~la etttta eec rear act aatca taaletet ta carrcat ll*tllttea hs telcaee Cheat eC acacaari r
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CAROLIM PRJFB & BIGHT COViP/QIY CAPITALIZATIOHAND CAPITAL STRUCTURE RATIOS DECEl4BER 31> 1975 AND DECRIER 31, 1976 ESTINTED December 31 1975 December 31, 1976 Estimated Cap a S ruc ure Cap a S ructurc Capitaliration Ratios Debt Inn'-term debt $ 1,155, 254,06I gl, 155~ 469, 000 Short-term debt 78,3SS 29,700 000 Total debt lgl55g332p446 52.1+ 1, 185~ 169~ 000 50.63$ Preferred Stock 5 Preference Stock 336,018 400 15 18 336~ 018~ 000 14.36 Common Equity Common stock 565,609,691 630~ 410'00 Retained earnings 156 676 428 189 201 000 Total coamon equity 722,286>119 '.63 819~611~000 35. 01 Total Ca italization @>2I3~636,965 100+~ @,340,798,000 100,~
L I N
1 Page 6 CAROLINA POHER 5 LIGHT CONPANX CAPITAI IZATION AND CAPITAL STRUCTURE RATIOS Ijl VWt4S OF REGUIATORX CONCEPTS DECEHBER 3l, 1975 AND DECDIBER 31, 1976 ESTBNTED December 31, 197$ December 31 1976 Estm p S ruc ure Cap a Struc ure Capitalization . Ratios Capitalization Ratio's ted'ebt Total de'l~ Long-term debt Short-term debt 155~ 254~ 061 78 385 1,155~332~446 51.56.
$ 1,155; 469,0oo 29,700,000 1~185~169,000 49,68$
Preferred Stock 6c Preference Stock 336,018, 400 15.01 336,018~ 000 14 08 Connnon Equity Conxnon stock 565, 609,691 630~410~000 Retained earnings. 156,676,428 189,201,000
/
Accumulated Deferred Income Taxes-Accclerated Annrtization 6,761,4o6 6~099~000 Deferred Job .Development. Investment Tax Credit 18,787 931 38,981 000 Total conznon equity 747~ 835 p 456 33 40 864,691,ooo 36.24 C Total Capitalization $ 2,239,186 '02 @,385,878,ooo 100.00$
CAROLD1A POWER Ec LIGHT COEFlQH CAPITAL STRUCTURE RATIOS USED IN STUDY OF FAIR RATE OF RETURN Based on December 31, 1975 Total debt Preferred stock and preference stock 15. 01 Common equity 33.4O Total Capitalization 100.~ (page 6)
Page 9 HOODY'S AYERAGFS OF YIELDS OH RNLY-ISSUED LONG-TERM PUBLIC UTILITY BONDS RATED Aaa, Aa, A, AllD Baa 1960-1976, BY YFJSS AVERAGES OF YIELD Cf DENLY-ISSUFD LONG-TERM WBLIC m'IL'.TY BONDS 4.76$ 4.76$ 4.+Y~ 5.364 1961 4.5'5 4.5&f, 5,08$ 1962 4.43$ 1963 4.66$ 4,4Q 4.56$ 1965 4.64/ 4.72$ 5.6Q 6.05$ 1967 5+ Nt 6.0+ 6.2$ 6.33$ 1968 6.544 6.6yf,
'.95~p 7 1O$
1969 7+% 8.22~ 8.61$ 8.63/ 9 19% 9.6+ 7.5W 9.34>> 1972 7 34 7.4S 7.85$ 7.6'.0Y 7.85, 3 25$ 1974 9 04$ 9+7@ 1975 . 9.110 9.46(, 10.22~ 8.56$ 8.92/ january-lay, 1974
~January-birch 23, 1976 Source; Rely's Investors Service, Inc., hoody's Public Utility ihaual, 19,p, pages a3 a5'oody's nona Survey, D camber, 1975, page 515, Decenber 29, 1975, Page, January 5, 1976, page 1790, February 9, 1976, page 1664, hlarch 8, 1976, page '570 nnd corrc"pending pages in previous issues.
MOODY'G AVERAGF~ OF YIELDS OH NBA ISSUED IDN TEAN FVBLIC UfILITY BON&u HATED Aaa 1970-1976, BY N)tÃitS j Aap AI AND Boa pagg ]p AVEHACFS OF YIFLDS OS mom-XSSUFD XeiC-TFHN PUBLIC urlLITY SomS Aa May 8.9', 9,06fy 9.34 tune 8.96 9.32 9.67 July 8.53 8.94 9 11 9 53 August September 8.?o 8.56 8.72 8.83 1FJ'0.47$ 9 35
,9o32 10,08 9 81.
October 8.86 8.9o 9,40 9.82 8.614 8.63$ 9 9.64 Average 74 Q 7,~'.93$ 8.34$ 1972 . January 7++ ~ 7 11$ 7.36$
..... February 7.26 7 50 7.76$
. March 7 39 , 7.48 7.S9 April 7.39 7.60 7-80 ~ 7.95 7'+ 39 7.42 7.66 7.45 7.45 7.54 7.95 Average January February 7e34 7.81<
8.06g 8.07 7.4g 7.+ 8.3?i 8.13,
'.25$ '.6',
. 8.~
'7.85$
8.95$
~
8.49 8.7o
~ch 8.33 &.61 ., 8.81 9 07 April 8.86 9 08 9.4o 9.53, May 8.85 9 20 9.81 June 9.45 9.30 9.46
'uly 9.65 9.95 11 05 Augu&
September 9 97 10,05 10.75 '0.75 10,05 11,02 October 10.06 D. ~ 33 .10,75 Ravember 9 15 December 9 90 9.52 9.64 10,25 Average 9.04$, 9.75$ 9o16$ << 19?5 January February 8.625';73 9,~ 8.9o 9.71K 9.42 March 9 23 9.52 lo.l6 April May June 9.20 9,00 9,94 10 94 lo.&o l1 10.79
~
9.07 9.23 9.87. July 8.8o 9.63 10,30 11.57 9.6o : 10,76 Scptcmber 9.68 9 875 ,
~
m.&3 October 9,40 9.32 . 'o.46 llovceibcr 9.375 9.75 'o,ll. 11 30 December 9 35 9o60 10,31 .xxo'f0 Ave)'Ngo 9.114 9.46$ 10,22>>~ 11 39'/ January 8.6o>> 8 9 1OII 9o 90>>
~
February March 1-23 8.34 8.61 95>>>> 8.65 8,93 9 ll 9.6o
~ ~
9 20 Average<<<< 9.13>> 9.77>> <<January-kfny 1974 <<<<January-March 23, A'
COMMEReuu, asm ~nZ MAN RATS Page ll 1960-1976 Period 1liph August 23, 1960 >> December 6, 1965 4- i/g
?hrch 25, 1970 - September 21, 1970 hhrch ll, 1971 - May ll, 1971 5 - 1/4 July 7, 1971 - October 20, 1971 January 31, 1972 - March 23, 1972 4 - 1/2 September 14, 1973 - October 24, 1973 10
. March 4, 1974 - March 31, 1974 Nay 1, 1974 - September 30, 1974 October 7, 1974 -'pril 30, 1975 . 7 - 1/2 June 9, 1975 - Ju+ lg 1975 July 18, 1975 - October 27, 1975 February 2S, 1976- 6 - 3/4 Source: Board bf Governors of the Federal. Reserve System, Federal Reserve Bulletin February 1976> page A26~ Mall Street Journal issues during March 1974 >>
CAROLER HNER h LIQIE COHPANY COST OF DEBT Based on Zibedded Cost of Debt Deceiber 31, 1975 Carolina &ver 0 Mght Co any Cost of Debt 7.74$
CAROLINA POSER & LIG1E COMPANY IMBEDDED COST OF HKFERHED STOCK AND PREFERENCE STOCK DECEMBER 31, 1975 Amount Dividend Cost Outstanding,. Requirements Rate Preferred Stock, without par value, cumulative:
$5 (authorized, 300,000 shares; outstanding, 237,259 shares) $ 24,375,900 1,186,295 Serial (authorized, 10 1 000,000 shares):
4.20 Series (outstanding, 100,000 shores 10,000,000 42o,ooo 5.44 Series (outstanding, 250,000 shares 25,000,000 1,360~000 9.10 Series outstanding, 300,000 shares 30,000> 000 2,730,000
$ 7.95 Series outstanding, 350,000 shares) 35,000,000 2,782,500 7.72 Series outstanding, 500,000 shares 49,425,000 3~860,000 8.48 Series outstanding, 650,000 shares) 64~317,500 5~512,000 Preferred Stock A (authorized; 5,000,000 shares);. ~ $7.45 Series (outstanding, 500,000 shares) 3,725,000 Total preferred stock $ 288,118,400 '21'75> 795 ~
7 4S Preference Stock! Preference Stock, Series A, 2,000,000 sharesp
'2.675 sold in March 1+5 5,350,000 1l.17'otal Preferred Stock and Preference Stock, 8,01$
December 31, 1975 $ 336,o18,4oo $ 26,925,795 Source: Carolina Power & Light
. w. i.~l-.: ' "i: -,-l-.'~mml.
Company~ Annual Report, 1974; Financial Statements; pages 17, 19'rospectus Series A, 2,000,000 Shares, Harch 1975> Interim Financial Statements, December 31, 1975. 650,000 Shares'
Page 14 OFKRINtd YIELDS ON hRJOR NONCOlPERTIBLE PREFERRED STOCK ISSUES BY ELECTRIC UTILITIES 1966-19761 BY Y~S Issues Issues Issues A11 1eeaee 'ated AA Rated A Rated BBB 5.6g 1967 5.9? 6.62 1969 1970 8.98 7.89 7.6g heat 7.55 7e3? 7.58 bee ~ 1973 7+70 7e 3? 7.66 1974 10,27 9.24 10,24 12.39 10e71+ 9 70 10 56 11 10 1976~ 9 08 8.62 9 38 9 39 ~verage January-March 23, 1976
+Includes a fev issues rated BB and B.
Source: Standard 5 Poor's Coxporationt The Axed Income Investor, December 27, 1975, page 96 and corresponding pages xn pre ous ssues. RAaodyds Investors Service, Znces hoody's Bond Survey, December 29, 1975, page 460, March 22, 1976, page 15 7 and corresponding pages in previous issues. Wall Street Jou"nal; New York Times; The Commercial and Financial Chronicle; T e Money Y~nager;
~ Investment Dealers Digest.
CBB BB ICB
OFFERING YIELDS ON YAJOR NONCO<iVERTZBIZ PREEKUED STOCK ISSUES BY ELECTRIC UTILITIES Page 15 1975-1976, BY F?ONTHS Issues Issues Issues All Issues listed AA Rated A Rated BBB 1975 January ll;25$ ll 13$ February 9.89
.10.66 AprG. 10 19 9.45 -10a92 11.27- 10a70 10.66 10 21 9.75 10,90 10.35>> 9.44 10 45 10052 August 11.375 Septesber 11,47 10.80 12.37 J '0 October 10 99>> 9B52 58 10,92 November 10 47 10B34 10.88 Dec caber 10,43>> 10 41 9.92 Average 10,71$ 10 56$ I1,1+-
~
January 9B+ 8'57$ . 9.52~a e 9.~ February 9BOO 9 00 Yea'ch 1-23 9 22 8.68 9a25 9-75 9s 0&fy 8.62$ 9 3K '.3S
>>>>Average January-Harch 23, 1976
>>Includes a fev issues rated BB and B.
~ 'age Source." Standard Ec 96 and Inc., Faody's poor's Corporation, corresponding Pond Sruvcy, pages Thc Fixed Income Investor, December 27, lg75B in previous issues. Yeody's Investors Service, Dece:bcr 29B 1975, page 460, Y~rch 22, 1976, page 1 an corrcspon< ng pages in previous issues. Wall Street Journal; Neo York Times; The Co ...ercial and Financial Chronicle; Ane uncy .magcr;
~ ~ ~
Page 16 CAROLINA Hfr6R & LIGHT COMPANY COST OF PREFERRED STOCK AND HEFERENCE STOCK Based on Inhedded Cost of Preferred Stock S ept ember~0~3.97$ ~ and Preference Stock Estimated'ecember 31, 1976 Carolina Pcnrer 5 Light Company Cost of Preferred Stock and. Preference Stock
I: Page 17 CAROLINA PSKR 5 LIGIE COMPANY BPCRHHTNATlON OF FA fH HATH OF Hi".AHlH ON HOOK VA1,lF. OF CORDON KQIJTTY On Basis of Standard of Connensurate Return Earnings experience on common equity of electric utilities in original cost Jurisdictions, without flow-through, used as comparison comIanies, 1971, 1972, 1fj'3, I'fff4 Ad)ustment for differences in coranon equity rntio.. Exclusion of certain carnpanlcc from u"c as compnr1son companies.
"In line" with earnings experience on conmon equity of'igh Grade industrial companies.
Recent rate orders by regulatory commissions. Standards of Maintenance of Credit and Support of Financial Integrity an rnc on o Cap a on 1'n r nn 1 ensonn c Terms Market price of'orrnon stock in relation to book value and common. stock offerings,- 1972 1973 1974 1975 ]976 First mortgage bond offerings of electric utilities with fixed. charge ratios to support A rating, 1975, 1976 Preferred stock offerings of electric utilities with fixed charge and preferred stock dividend caverage ratios to support "a" snd A rating, 1975, 1976
REAL GRORTH AHD INFIATIOH W THE A~ICAN ECOiYQi& FERCBFNGZ CHARGES YrMi-TO-T+AR 1946-1975
~ir Real Growth 19?2 Dollars GHP Deflator Inflat on Consumer Pr ce Index n t Labor Cost Total Real Disposable Personal Income 1946 .8.5g 1947 - 1.6 12.8 14.4 1948 4.1 6.9 7.8 4.4$
1949 0.6 - 1.0 - 1.0 1.6 0,4 1950 8.7 2,0 1.0 - 1.1 8.1 .1951 S.l 6.S 7.9 6.4 2.4 1952 3.8 1.3 2.2 4.1 3.0 1953 39 1.5 0,7 2,0 4.6 1954 le3 1,4 0.5 0.6 1955 6.7 2.2 0.4 - 1.7 6.6 1956 2el 3.1 1.5 6.1 4,2 1957 1.8 3,4 3.5 3.4 2.1 1958 0.2 1.6 2.8 0.9 1959 6.0 2.2 0.8 1,0 4.5 1960 23 1.7 1.6 2.2 2.2 1961 2,5 0;9 leO 0.3 3.1 1962 5.8 1.8 1.1 - 0.3 4.7 1963 4.0 1.5 1.2 0.3 3.8 1964 5e3 . 1.6 . 1.3 1.1 7.0 1965 59. 2 e2 1.7 0.7 6.6 1966 59 3e3 2D9 2.9 5.5 1967 2e7 2.9 2.9 3.6 4.1 1968 4,4 4,5 4.2 4,3 4.5 1969 2.6 5,0 e 5 'e 3 70 2.9 1970 0.3 5-9 I+1 3e0 5 1 4,3 3.4 39 1972 5e7 4.1 3e3 1.9 4,5 1973 5e3 5-9 6.6 4.9 6.7 if(4 . 1.8 97 11,0 12e3 -17 1975 2,0 8.8 9.1 707 1.6
woo ao ~v ooaaa ~ ~ aa \ ~ 1946-1975 Page 19 AI1 Mmufacturing gonfinancial Corporations-Corporat ions Domestic Operations Per cen oi Gross Corporate Yr uct Zmrentory Profits Rate of Return Equity Operating Profits or Before on Equity Ratio Profits Losses (-) '946 iaxaa 16.95$ 5.354 22 2Q 1947 19.37 4.92 24.29 1948 '1.60 1 60 23.21 I 1949 20.10 1.42 I,8.67 1950 22.o8 3 o 29 25.37 1951 21.74 0.60 22.43 1952 19.06 - 0.54 18;57 1953 lo.484 Blo39'g 17.41 0.51 17.92 1954 9.92 82.06 16 59 0.15 16.75 1955 I2.55 82.28 IB.63 0'.78 19. 41 1956 12 28 Bo.76 16,91 1.16 18.o7 1957 10.95 79-96 15.83 o.62 16.45 1958 8.58 Bo.o7 14 19 0 12 14.27 1959 lo.42 80.43 16.23 0.18 16.38 1960 ~ 9.20 Bo.o9 14.75 -0 07 14.68 1961 8.82 14.47 0.03 14.47
'962 9.78 79.67 14.86 - 0 09 1963 10.25 79.53 15.19 o.16 15.34 1964 11.60 79o57 15.95 0.14 16.13 1965 l2.98 78.54 17 01" o.45 17.43 1966 13.43 76.42 I6.82 o.44 17.24 1967 I3. ~ 71 74-35 15 11 Oo25 15.37 1968 12.05 72.97 .14.68 0 70 .15.41 1969 11.47 71.4o 12.47 1.01 13.48 1970 9.32 69.62 9,81 0.92 10.73 9.67 69.24 10. 50 1.84>>,'4.76 o.88 1971 11.39 1972 10.61 69.74 11.28 1.14 12. 42 1973 I2.84 69.58 10 ll 2 23>>
1974 14.92 69.96 7.82 5 02>> 12.84 1975>>>> I3.;lO 70.00 9 16 11.00
>>Includes capital consump.ion allowances
>>>>1975 I-II-III Source: Federal Trade Cot.mission, Quarterly Financial Report for fhnufacturirg,
. i ; .S. Dcpar mcn~oi Commcrce, Bureau of Econom c Ana sos, Vritcd States Department of Commcrce Nevs, thrch 19, 1976.
~ ~
INVESTMENT SX'ATURE CAROLINA FCMER 8s LYGIE COHPAFl MlNCH 1976 Yuody's P~ting on Senior Debt Standard 5 Bond
&or's Quality Rating on Senior Debt Moody's Quality Rating on'ity Preferred Stock Standard h Poor's Rating on Preferred Stock lundy's Rating of Basic Investment uiU.ty Standard 8c Poor's Earnings and DM.dend Ranking Dividend Paid Each Year Since Ban I+~ e Medium GraXe
- 1937 Source:
Standard Ec Poor's Corporation, Bon I u e, pr; hoody's Investors Service, Inc., Moody's Bond Record, April 1976j Security Orner s 'c Moody's Handbook u of e, Gammon pr Stocks Mnter 1976 Edition;
r f s ' h c
't ~
lHY)-.TR)tfF ."TATQIH ELECIRIC UTII ITIES IH OBIOIHAL COOT JURISDICf I%3 KilllOUT FLOl-IlROlllH Preferred Hntock Ccrc.on Stock (Publicly-Held tt a lit o a rs r ere Gtatelard 4 l cores Gtctntlrtttl 4 A)or' Dttslc Invcnttttcctk, )nrnlngs and Each Tear Hoodycs Rating Rating Hoody's Rating Rating . Quality, dividend RuQdngs Siroce AIebhm ll nn n or Connnl "btta" A-ArtAllsas lss L Llsnt connnll Florida FF~rTda Paver Corporation>> A A- ~ oa v BBB ~ Hediute Crade B+ 1937 Florida paver 4 Ught Coapanye A A'A-
~
sass A Iiwestnent Grade A 1944 Gulf Pover Coopaay+ Aa A Tanpa Electric Corprttnytt Aa AA- M High Grade A 1900 Georgia ~corgia Povcr CoxpenIFLL "ba" Hei>> it 7cavaiian Electric Coctpanyc Ino,>> Nasl Upper Hcditse Grade A 1901'921 lcnois llllnols Ltslst Cosnsnro Aa A vert h HL A Central Illinois Public Service Coepuqre ha AA sa hh Imeetncnt Crade A-' 1947 Co~nvealth Edison Cnmponyct Aaa AA ~ saasl AA High Grade 1890
'Illinois Povcr Coopeny+ Aa M AA Inrestctent Grade A- 1947 Io'na
~nerstate povcr Capanye A A. ~ sass A Inrestnent Grade A- 194S Iova Electric Light and povcr Cocpanye - Bea A A- Nedhas Grade b+ 1950 = Iova-Illinbie Ges and Electric Coapu~ Aa AA vaast A High Grade h- .1942 Iova pr~er and Light Conpanye 0 asn A-ha h A HL . 1909 Iova Public Serricc Cocpanye A M. ssav A Investnent Grade A Iova Southern Utilities Cocpsslye Aa AA private private HL A 1991 Esnsas Kansas Pover and Light ~>> RKr~as Gas and Electric Conparqre AA-M A h Inrestnent Grade High Grade A- -'; 19'- 191$ s ~~
'l e ' 'cs ~ ~
t L ltd
~ l rs
VINRfTIIIHT"TATIIRP YIHTIIII:ill'llITIY'I III tain'IINI lac:T .Ill(l::IIIITIs'InlIllvlsefr YIIM.TINunlnl
~
Preferred ntoch Cosnon Stoch (Publfel -Held M~yn irarTnl, ol ~ s ur uor o v u o Standard 5 Ror's , Standard A Poor'a Basic !nvestment Earnings and Each Tear Re~Is R~atfn Bating Hoody's Bating Bating Kentucky, M~en uc Vt fifties Oorpanye ha AA A Invcctncnt Grade A- 1939 Loulsvf lie 'faa alvl Electric excpanye Au a AA A Hlp1I Grade A ~ 1923 Louisiana c,,:: pro <~ t u t ieasyey, ue. ~ A A A Investnent Grade A. 1935 Gulf States Utilities Covpanyu Aa M AA High Grade A 193S ea v Louisiana Povcr L Lftht Conpany
~
~ A A A Kev Orleans Public Service Inc. ~ . A A A Southvestern Electric Pcr~cr Cowpanys ha M AA Hnsauchncctta 5o- on ellson cceqxmyu Baa BBB DBB Lover Medium Grade ltcv Qulford Gao nnl F~lloon Lfeht Cosfvtnye An A Eastern Yassachusctts Electric Coapanye Baa BSB BDB Michigan
~ Fa er Oeyany A Hcdf lao Grade b 1913 Detroit Edison Oorpanye BM hwer Hcdf los Grade B+ 1909
~ Minnesota ltwc 4 usht umpuw Investloent Grade A- 19ll3 Mississippi ear jHi~ssHppf Paver Confeaye A A ~ eau Hlsslssippf Pover 0 Light Coupanye A A f5ssour f
~ ~saollti Bl u Sapling+ 'rivate private Oklahona 5QnEaea Gas and Elcctrlc Colony>> AA M fif+ Orade A 1908 ~
Puhifc Servfce Oocpany oP OkllhooA~ ~ AA AA
Page 23 DVESTYEHT STATURE ELECTRIC Ul'ILITIES IH ORIOIHAL COT JURISDlCTIONS WITHOUT FLCM-THROUOH elRCH Preferred Stock Coceon Stock tpubllcl -Held s a hg 0 ar r a v e ~
~s Rating Standard b 1bor's Rating Hoody's Rating Standard b Rating tuor' Basic Imestnent sift Earnings a."4 Dividend. Rankf ngs Each Tear Since South Carolina Yadfun Grade A- 1946 Holding Coo nles e u illtfes, Inc. ~ Imsstnent Grade A 1949 Hcu England Gas an4 Electric Associations Hsdfun Orade Bs 1941 The Southern Cacguu~ Hodfm Orade A 1948
~ ~
~ In orfgfruLI cost gurfsdfctfons without flov-through. Hole,-Dash fn preferred stock, )body's and 66mderd b Ivor' ratings, indicates prel'erred not yet rate4 by Sade's or holding ccctpanfes or operating conpenfes Wthout preferred stock. Dash in cmsen stock, fkody's end Standard b poor's ratings, and fn dividends pafd, indicates operating subsidiaries without
~
publicly-held c~n stock. Sourcef fbody'e Imestors Servfcc, Inc., Hoody's Public
's Bon4 Survey, 1974 to date; Utility ffsnual 1975; bloody's fhndbook ol'Anuon Stocks Fall lgj Edftfoni andar4 b Poor' Oorporatfon,
~ r 1974 to &tel s eco e
an er eferred i S
~
gs c cr gag. I
~ l9 pQA~ v <<w ~ ~ << t<<
~~
~ ~
Page 24 RATE OF REUJRN ON CONION ACUITY AND CONCON EQUITY RATIO OPERATING ELECTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS WITIDUT FLOW-THROUGH 1971-1975 1971 1972 1973 1974 1975 Alabama K~aama Power Company+ ll. 373II . 10>>12$ 13.8+ 8.61$ 31.34
- 11. 49~ptt 31.04 33 98 33.04 31.87 Arkansas
~rcsnsas Power 8s Light Comps~ 14.25 15.06 13.72 16,09 32.41 32.68 33 22 33.69 Florida . FporTila Earner Corporation>> 13.66 13;78 12.23 8.38 13.42 35.37 33.89 31.74 29.98 30.31 Florida Power 5 Light Comp~ 14.15 13,46 13.26 11.07 13 32'33.41 38.69 38.46 38.71 35.51 12.98 12,67 11.28 3.58 33.45 34.13 34.21 33.36 Tampa Electric Comp~ 9.39 14.08 13.36 11.09 13.72 30.04 30.37 29.10 29.59 30.22'0,59 Georgia tteorgta Parer co>>pear>> 8.52 9.86 8,16 32.56 32.11 31.56 30.63 geo>>it Ca>>>>iten Eleotrto Company" llo49 11,73 11.74 11.75 11.49 29;43 30.01 33.16 32.13 31.28 Illinois 8.82 CenCrsl Illinoio Light Compeer>> 13.80 13.09 10.26 9.76 25.76 33.67 33.67 31.43 27.47 Central Illinois Public Service Company+ 14.76 12>>77 10.88 11,13 13.11 35.35 33. 18 31.90 30,76 30 90 e Commonwealth Edison ComItmqr+ 12.36 13.14 12,06 10.69 11.07 31.61 32.58 34.06 33 Ol 32 91 Illinois Power Compmqr+ 13.31 12.20 12.66 ll 26 34.37 13.23 35 95 35.09 35.80 35.65
RATE OF RHMQI ON COHN3N EQUITY AND COI+DN EQUITY RATIO OPERATING ELECTRIC UTILITIES IN ORIGIML COST JURISDICTIONS WITHOUT FMW-TRROUGN 1971-1975 1 1973 = 1974 1975 Iowa ~in erstate Power Comps~ 11.23$ 11,53$ xo.8+ 11.33$ 11.39~ 30.47 30.66 29.62 28.57 29,61 Iowa Electric Light Iowa-Illinois Gas and Power Coagm~ and Electric
'971 Company>>
9.92 29.40 9.06 30.20 28.47 14.30 33,10 26.97 10,38 37.98
'0.06 3.24 24.76
- 10. 91 36.75 11.93 36.34 Iowa Power and Light Comps~ 11.52 11.38 .13.24 12.03 14.33 31.39 35.14 34.05 34.25 34.21',82 Iowa public Service Company+ 12.64 8.99 10.37 12 75 35.38 33.46 31,63 29.78 31.87 Iowa Southern Utilities,Companys 14.38 14.01 13.51 13.47 46.47 49.94 47.96 43.56 42.12p 5018as Ransas Gas and Electric Company>> 12.95 12.88 . 9.63 9.40 12.78 36.97 34.08 31.61 29.62 29.44 Kansas Power g Light Company>> 14.72 13.33 12.50 '10,19 12. 11 42.71 44.21 . 45.62 44.62 40.91 Kentucky 1~en uc qr Utilities Co'mpany>> 11.82 11.07 "11,28 6.81 12.42 40.29 35.19 36.81 35.44 34.39 Louisville Gas 4 Electric Companys 13.36 I2e22 llo39 9.28 12 57 43.63 40.79 38.84 37.34 36 i 96
RATE OF RETURN ON COhRQN EQUITY AND COM%N EQUITY RATIO OPERATING ELECTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS WITHOUZ FIAT-THROUGH 1971-1975 1971 1972 1974 1975 Louisiana FeenrBT icuieiene Electric Ccmyeny, &c.e 14.8+ 15.48$ 15.2+ 16.47$ 17.57$ 33 57 35.11 35.57 31.59 33.04 Gulf States Utilities Company+ 12.11 12.64 12.96 12.32 33.85 34.i3 33.02 3le90 Louisiana I@ver 8 Light Conya~ 13.43 14.41 14.65 14.81 32 95 33.28 33.47 31.61 Nev Orleans Public Service Inc.+ 7.24 5.80 . 10.70 4.08 35.27 35.01 35.22 35.00 Southvestern Electric Paver Coerp~ 15.51 17.01 17.29 16.46 13.99 40,70 40.00 42.05 41.85 40.m hbssachusetts 12.00 12.3 8.20 28.83 28.9 3':R 29.20 Nev Bedford Gas anl Mison Light Comp~ 9.86 8.59 6.87 5.42 41.63 38,19 41.60 42.59 Western Massachusetts Electric Compazgr+ 29.47'973 9.87 ,8.96 7~ 36.05 34.32 33 59 32.98 Michigan ~oneumere yceer Ccmyenye 10m 23 9.87 8.73 ~ 4.78 35.63 34.24 32.36 29.39 28.27. Detroit E5ison Cony~ 10,44 9.36 7.50 7.88 33.51 33.15 31.85 30.74 Minnesota Rinnescita Paver e8 Light Comp~ i4.53 14.43 11,89 9.76 13m03 31,52 28.35 28.50 30.49
Page 27 RATE OF RETURN ON CONN)N EQUITY AND COMYDN EQUITY RATIO OPERATING ELECZRIC UZILITIES IN ORIGINAL COST JURISDICTIONS WITHOUZ HAP-THROUGH ~ 1971-1975 1971 . 1973 1974 1975 Missiesi pi ss se ppi Poser Company 12.90$ 13.48$ llo 17$ 10.24$ 34.08 34.67 34.43 32.62 Mississippi Power 8 Light Company+ 15.47 17.08 13.26 13.58 32.41 32.53 31 39 31.41'.'39 Missouri
~aeneas-Aiseouri Pover Company+ 10,80 12.48 7.42
,28.18 27.36 32.34 38.67 Oklahoma OEIHioma Gas and Electric Compenys 15.80 15.39 14.87 13.45 36.02 37.77 39.88 40.45 Public Service Company of OlQahoma+ 14,15 14,95 14.04 13.18 40.29 39.46 39.67 38.98 South Carolina 11,05 11,40 10,01 8.56 29.92 31.31 31.50 30+ 10 Preliminary Note.-Conan equity ratio is average total common equity as percent of average total capitalization, including debt due yithin one year.
. Source: Computed from data in 1974 annual reports to stockholders; unif'orm statistical reports; and Moody's Investors Servicey Inc ~ y Moody's Pumic UtilityManual 1975 and Moody's public UtilityNeve R ort 1975 and corresponding sources in earlier years%
page 28 ALM'ytANCE FOR FIG)S USED DURING CONSTRUCTION IN REIATION TO NET INCOME FOR COt9'ION OPERATING ELECTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS WITHOUT FLOH-THROUGH 1971-1975 1971 1972 1973 1974 1975 Alabana XTB~nma Power Compan~ 26.7+ 36.7Q 36.67$ 82.31$ 69.6+ Arkansas rlalnsas poser g Light Compenye 28.33 42.73 51.23 50.25 Florida yyorTda poser Corporations 24.46 37-25 70.19 122,05 ' 57.0S Florida Power Ee Light Company+ 23 33 34 52 25.45 42.54 38.74 Gulf Power Company+ 11.37 28.81 35 55 16.75 Tampa Electric Company>> 12.48 17.59 20,41 37 78 25.0S georgia Georgia tearer Compsnye 46.82 49.18 64.72 92,70 Hawaii
~ia'aitan Eleotrie Company, Ino.e 9. 51 15.62 18.04 24.26 S.S5 Illinois . ~Cen rel Illinois Light Companye 27. 59 ~
22.58 19.16 42.49 62.93 Central Illinois Public Service Company>> 22 55 25.85 20.25 30.91 Commonwealth Edison Comp~ 39.07 34.44 27.00 26.45 29.32 Illinois Power Company+ 11.77 20,69 17.99 21.27 15.07 Iowa Interstate Power Company+ .1.65 2.78 2. 01 7.18 21.38 Iowa Electric Light and Power 41.10 58.78 138.12 222.48 Gas and Electric Company+
'Company>'owa-Illinois 52 29 29.68 10.8S 22.83 26.85 Iowa Power and Light Company 1.78 2.08 '5.99 22.49 20 17 Iowa Public Service Company>> 24.78 23.45 8.16 20.72 28.54 Iowa Southern Utilities Company 1.02 2.74 11.14 24.28 32.74
. Kansas MIsuisas Gas and Electric Company+ 25.43 42.33 29.66 14e29 34.22 Kansas Power and Light Company+ 9.59 0 81 0.99 5.50 Kentucky keen uc g Utilities Comp~ 19.68 21.73 33.57 15. 13 12.49 0,00 LouisviHe Gas and Electric Company+ 0.00 0,00 0,00 0 00 00 m
AIMtlANCE FOR page 29 FUNDS USED DURING CONSTRUCTION IN REIATION To NET INCOG FOH CONON OPERATING ELECTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS ftITHOUT FLOH-THROUGH 1971-1975 1971 1972 1973. 1974 1975 Louisiana CenaT lnnisinna Eleotrlo Company, lno.e 12.41$ 5.64$ 15.46$ - 28.93$ 15.64$ . Gulf States Utilities Company>> 19.75 21.53 23,17 26.7o Louisiana Power I Light Company+ New Orleans Public Service Inc.+ 16.90 2.66 2o.26 23.10 32.02 6.11
. 2.83 1.92 Southwestern Electric Power Company -B.O6 3.53 7.72 8.43 14.65 Massachusetts 62.66 73.12 35.76 57.7l New Redford Gas and Edison Light Companyjp 8.95 7.58 5.6o 13.91 Nestern Massachusetts Electric Companys 35.62 46.88 42.06 56e91 Michigan Consumers Power Company>> 33.8o 38.03 36,78 61.98 35.14 Detroit Edison, Comp~ 43.86 51.39 . 47 82 57.35 6o.37.
Minnesota Tllnnesa,a Power g Light Companye 20.97 42.23 31.26 5.84 10.33 Mississippi Miis" sass ppi lhwer Companye 13.47 27.59 24.63 2o.46 Mississippi Power 5 Light Companys 23.4o 12.36 36,38 49.16 ~ e Missouri Trrsnsas-Mlssonri Power Cospany" 2.62 11.24 9.60 - 13.21 Oklahoma V'.cCaComa Gas and Electric Company+ 7.91 8.76 7.19 15.10 Public Service Company of Oklahoma+ 2,13 5.92 17 94 10,92 South Carolina 33.25 29.53 30;89 21;87 Average - above 39 companies in original 20.76'fi 24.59/ 26.50$ 36.43$ cost Jurisdictions without flow-through+ Sources Computed from data in 1974 annual reports to stockholders; uniform statistical-reports; hhody's Investors Servicef Ines p Moody's Public Utility Manual, 1975 and Moody's public VtilityNews Report 1975 and corresponding sources in earlier. years. 00
1 page 30 CAROLINA PONKR I) LIGNT COMPANY RAIE OF REIVRN ON COP&ION EQUITY AND OXQDN EQJITT RATIO AILQQNCE FOR FUNDS II)ED DURIM CONSIRVCZION AS PIRCHK OF NET INCOME FOR COHEN 1968-1975 1969 1970 1971 1973 1974 Net incnse for coason 4 23,046) 540 4 24,417,813 4 20) 126) 327 4 29,103,019 5 50) 917) 573 4 52) 991) 914 4 51) 598) 075 4 75) 870,000 .Average con)son equity 185)848) 514 210) 448) 509 245 ~ 559) 000 280) 003) 000 373)730)500 499,453,278 539.881)093 635,375,315 "Rate of return on cocson equity 11.60$ 8.2', 10.36 10.82$ 9.56$ 11.94$ Average counon equity $ 185,848,514 @10 448,508 +45,559,000 @80,003,000 $ 373,730,500 $ 489,453,278 f 539,881,093 f 635,375,315 Average total.capital 547) 789) 564 619) 950) 724 742f 255) 506 929f 459) 367 lf178) 280) 554 1) 491) 136) 282 lf834) 295) 312 2)107) 966) 157 Cocs)on equity ratio 33.93$ 33.95'S 33 085 30.16 31 74 32.82$ 29.43), '0)14$ , Allovance for fmis used during construction 2)927)162 f 4f397)118 f 10)504)936 14) 707) 389 f 24) 758) 784 4 39) 092) 921 4 54) 609) 879 f 59) 957) 000 Net Incone for cosign 23,046 540 24,417,823 20, 126 327 29,103,019 50) 917) 573 52) 991) 914 51) 598) 075 75) 870) 000 Allovance for funds used during construction ae percent of net Income for cc)=un 12.7+ 18.01$ 50.54$ 48.63$ 71,90jf 105,84$ Source: Carolina Rfffer 6 Light Oonpanyf 1974 Annual R rt Interi)a Financial Statemente) Decenber 31) 1975.
Pope 3l REIATIGNSHIP BETHEEN RATE OF RETURN ON COHMON ~UITY AND CGtSON VglTI RATIO Chgr ny Il Oneekutr C Goemanr o IOy>> ccnan cq'il 1y no debt rotio 5g coarsen
~ M 7.5$
equity ratio debt east 40$ coeron ooulty rntlo and 7.5'g debt cost 35.0j and c~7.56 cOulty ratio debt cost
~i couxon equity ratio
~ nd 7 54 debt cost 30.0>> exam e~lty ratio and 8.04 debt cost Ineceaa for capital $ 100 00 $ 100.00 4100,00 4100.00 glOO,OO capital gooo $ 1000 Pite of return oo total capital $ 00.00/$ 1000 lo.oof 4100.00//coo i 10.00$ goo,oo/giooo Io,~ +00,00/$ 1000 ~ 10,~ +00,00/eICOO i 10+00$ Blooooo/+000 ~ 10.~
Debt o 5 foO g 6oo g 650 3 300 Cbmon equity ~IOCO P ke ~
~350 ~700 oh'. <<spital +000 COCO +000 T,flax +000
'1000 Cocoon equity ratio +000/+000 i 100+0$ $ 00/$ 000 r 50,+ goo/oooo - 40.og 4350/41000 n 35.0S eo/'.ice - 30.oS . Woo/oooo. 30.oC o Ikhedded cost of debt 7.5S TsfS 7.5S 7.5$ B.og Interest on debt 7~5S x $ 500 ~ OTefo Toff x $ 00 ~ $ 5,00 $ 50 e +,75 7.5$ x f5+ vs~ 50 B.Og x +00 a $ 56.00
%et hmeee for coaeon 445 00 455 oo Aoo 00 V4o75 P Q $5 $ 100.00 4g 50 ~ Prfo 000 oo $ 56 00 ~ Poco Rate of return on cceseon eTulty $ 00.00/$ 000 i i0.00$ gp,fo/~ i Io,ferf 55.00/040 ~ 13.75 0 551.af/550 Il.Q $ 8.50/B300 - 15.8$ dbms.oo/W S.6y
METHOD OF AMUSTMBN2 FOR DIFFERENT COITION EQJlTY RATIO Earnings experience 4 Ehnsas Br'er 5 Light Company Rate of return on common e)uity 12,5+ Comnon equity ratio (45.62~) x .4562 Component for common equity in overall rate of return 5.7O2 At 33.4O common e uity ratio less common equity, .more debt .4562
\
=.IKf
.334o
. Rae interest (4.~ rate in 1973) ~ ~ 1222 x 4.~
less earnings for common equity Resultant conponent for cannon equity '.7O2 ~ 599 5+103
'599 Resultant rate of return on 5.103/.334 common eq y a . conmon e ty ratio 15,28$
00 m
page 33 RATE OF REZUPH ON COIGN EQUITY AMUSTED TO 33.40 PMCENT COMMON EC'UITY RATIO OPERATING EIZCZRIC UZILITIES IN ORIGINAL COST JURISDICTIONS MITHOVZ FLOM-THROUGH 1971 1972 1973 1974 1975 Alabama XTal>arne Power Company>> 11.47$ 10.08$ 8.51$ 11.24$ Arkansas ~Ar ness poser n Light Companrs 13.99 . 14.87 13.68 16.16 Florida Fioer da Power Corporation+ 14.14 13.90 lls95 . 8.33 12.84 Florida Po~er II Light Company+ 15.40 14.52 14.29 11.29 13.32 Gulf Power Company>> 12 99 12.81 11.39 3.59 Tampa Electric Costpanys 9.01 .13 32 12.67 10.54 Georgia Georgia poser Compsnps 8.46, 10.43 9.71 8.12 Hawaii 1f-os iten Electric Companrs 10.84 lis18 11.70 11.56 11.22 Illinois cencrat illinois Light Compsnps 13.86 13.15 10.02 9.30 8.37 Central Illinois Public Service 15,31 12.73 10.67 10.77 12.65 Edison Company+ Company'olcsonwealth 11.99 12.95 10.63 Ilo00 Illinois Power Compa~ 13.73 12.68 13.13 11.40 13.76 Iowa Interstate Power Company>> 10,69 11.00 10.22 10.50 10.76, Iowa Electric Light end Power Company+ 9.39 11.60 .9,60 4.56 Iowa-Illinois Gas and Electric Company>> 8.75 14.23 10.96 11.33 12 45 Iowa Power end Light llsl3 11.54 13.68 12.14 14.55 Public Sexvice Company'owa Company+ 13s09 9.83 8.83 9.86 lz.44 Iowa Southern Utilities Company+ 18.zo 18.72 17GOZ 16.04 15.27 Kansas tnnsas Gas ang Electric Cosgcnrs 13.70 13.01 9.45 9-09 12.06 Kansas Power and Light Companylt 17.44 16.06 15 28 11.77 13 49 Kentucky l(~en ucoy Utilities Company~ 13.09 lls35 llo77 6.83 12.58 Louisville Gas and Electric Compenys .15.94 13,76 9.62 13 22
page 34 HATE OF RETURN ON COHYiON EQUITY AMUSTED TO 33.40 PERCEN1 COKC)N EqUITY RATIO OPERATING ELECTRIC UZILITIES IN ORIGIltAL COST JURISDICTIONS WITHOUT FMM-THROUGH 1971 . 1972 1973 1974 1975 Louisiana c~ccra Ioa1siana Electrtc Company, Inc.a 14.94$ , 15 965 15a78$ 15 9V 17.46$ Gulf States Utilities Company>> 12.19 12.80 12.88 12c05 Loufsiena Power 8 Light Company>> 13 33 14.38 14.67 14.37 New Orleans Public Service, Inc.>> 7.43 5.87 11.04 4.00 Southwestern Electric Power Company>> 17.64, 19 19 20.16 19.l2 15.57 Yaassachusetts ml 11.20 11,55 8.62 8.24 New.'Bedford Gas and Edison Light Company>> 10e94 9a07 6,91 4.72 western lhssachusetts Electric Company>> 10.16 9.97 8.97 7.72 Michigan Consumers Power Company>> 10.55 9 97 8.65 5.00 8.99. Detroit Edison Company>> 9.65 10.45 7.51 7.85. Minnesota Mrnnesota Poner ye Eight Cospanye ~ 13.99 13.31 11.03 9.27. 11.88 tiississippi Mms~mss ppi pacer Compenye 13.13 lla31 10m13 Mississippi Power 5 Light Company>> 15.18 I6.yf 12.82 13m16 Jfissouri Erreeneas-Missocri pacer Ccmpanys 10.04 11.31 7.39 4.08 Oklahoma K~aioma Gas and Electric Company>> 16.66 16,70 16.73 14.90 Public, Service Company of Oklahoma>> 16.17 16.89 15.67 14.40 South Carolina Electric and Gas Company>> 10.55 11,10 9.82 8.40 oo m -* 4l
Cvelvu:irv riCIAJDI D hlCAa USE Ab Vv~tnslSON:COW'AAWh lN Tl'~r vn" vute&ASUlULTB BMllQI OPFJULTIIIC EIIZTRIC UZI ITIFS IN OPIGINAL COST JUBI DZCZIONS WITHOUT FMW-TllllOUGll Page 35
~ ' o ~ ~ ~
hlabama Povcr Company
~ 1 Excluded in 1971, 1972, 1973, 1974 snd 1975.
Difficulties in financing bccau" c of . inadequate coverage ratios. Rate of return corned vas substantially less than that alloved by JGabsma Public Service Commission. ~kansas
'h'rkcnses Pover & Light Company Excluded in 1972, 1973,'nd 1974, In 1973 and 1974, allovcnce for funds u"cd during con~ction ptas
'more t)mn half of net income for conxnon.
'ifficulties in financing becau"c of inadequate ccnrerage ratios.
Inadequate investment stature. I Florida lturida Paver. Corporation Excluded in lcr72, 1973, 1974, and 1975. M 1973 allowance for funds used during construction vas 70.19 percent of net income for connnon and. in 1974 vas 122.05 percent. Inadequate imrestmcnt stature. plorida povcr 5 Light Con@any P Excluded in 1974. Rate of return earned in 1974 vas significantly less than that alloved
~
by Florida Public Sc~ce Ccmd.ssion. Gulf Pover Company Excluded in 1973 and 1974,
, Rate of return enrncd in 1973 and 1974 vas substantially less than that alloved by Florida Public Service Connnission.
tampa Electric Company in 1971 and. 1974.
'xcluded Nct income for connnon in 1972 vns 69.7 percent greater than in )971, as a result of rate increase effective January 1, 1972. Aa4c of return ecrnrd in 1971 and iu 1974 vus cubctentiaUg loss tluLn that allowed by Florida Public Scrvico Cor~isciou, ~ ~
I
COHPANIF EXC11lDED FHOH U..E A COIVARISON COKl'ARIES Ill TF~T OF CO~~SIIi.".UllATE AFTU".N OPERATING ELIXZAIC UI'ILITIFS IN ONIGIl!AL CO"T JUI I. DICTIONS MITlIOUT VIM-TNI'OLX'I[ Page 36
. Georgia Power Company Excluded in 1971, 1972, 1973'nd 1974.
In 1971> 1972, and 1973, allowance for funds used during construction was about half of nct incase for common cnd in 1974 was..92.70 percent of nct income for common. During 1973 Georgia Power vas forced to cancel proposed public sales of first mortgage bonds and preferred stock by reason of inability to meet earnings coverage rcqu'rcments contained in its charter ard bond indenture. (Rocky's Investors Scrv'ce, Inc., Nmdy's Bond Survey, January 1434-1436; Standard 5 Poor's corporation, 'L'nc Fhrcd Incor" investor, 14'/74'ages January 12, 1974, pages 974-975). Inadequate investment stature. Ratings su~ended fo" several months.
~, Inability to finance because of inadc~ coverage ratios.
Hawaiian Electric Company, Inc. Excluded in 1974 and 1975, Rate of return earned in 1974 aud in 1975 was substantially less than that allowed by Hawaii Public Utilities Commission. "ZQ1nois Central Illinois Light Company Central Illinois Public Service Company Cosmonwealth Edison Company ZQinois Pover Company Excluded in 1971, 1972, 1973> 1974, and 1975. Illinois ms fair value 5urisdiction untV changed to original cost 'urisdiction during 1973. Rate was of return earned in 1974 and. in 1975 (~ substantially less than that allowed by Illinois Illinois Power Company)
~ce Comsission.
Interstate Pover Computer Excluded in 1971, 1972, 1973> 1974, and 1975. h Earnings on ccarson equity in 1971, 1972, and 1973 reflect ua5or operating loss in bus operations. Rate of return earned in 1974 and in 1975 was significantly belov that alloved. by ~ Zova State Commcrce Commission.
~ ~ ~
COMAQtIKS FXC1IJDRD FROM U.",E A" CONt'MISOtt CONT'AllIl Ilt TEST OF C(NBA::ttgttttATS H~tttg OPHtATING ELKCTttIC UrILI".IFD ZN OttIGIrNL COST JttttIGDICI'lot:0 NIT.tOUI Hatt-nttto "..;l cont ucd Zova Electric Light snd Pover Company Page 37 Excluded fn 1971, 1972, 1973, and 1974, Zn lc??3 allovance for funds used during construction va" 138.12 percent of net income for common. In )974 allovancc for funds used during construction vas 222.48 percent of net income for common. Zn 1971 and Xc??2 allovancc for funds used during construction .vas about )talf of net incomo for common. Rate proceeding before the Iova State Coarncrcc Ccnmfssion, initiated fn 1971, vas brought to conclu fon by orders dated October 15, 1973 nnd February 15, 1974, rcsu'ting fn sub~tial increase fn.net income for ccxxson over 1971 lcvcl. Inadettuatc investment statured
'cosa-Illfnois Gas and Electric Company I
~ Exclude4 in 1971, 1973, and 1974.
'Net income for contin'%n 1972 vas 73.2 percent greater than fn 1971, as a result of rate increases, Rate of return earne4 fn 1971, 1973, and 1974 vas significantly less tttan that alloved by Iova and Illinois Cotanerce Commfcsfon.
ICAL pover h Xfttht Company Excluded fn 1971 and 1972. Rate of return earned fn 1971 and 1972 vas significantly belov that allctve d by Iova State Coerce Cccnsfssion'. Iowa public Service Compaqr Excluded in 1972, 1973, end 1974. Earnings per average share declined from g 13 in 1971 to and to $1.75 in 1973, a drop over the tvo years of 17.8 percent. g 88 fn 1972 Rate of return earned fn 1972, 1973, and 1974, .vas substantially less than tha alloved by Zova Co=erce ~ssion. Iova Southern Utilities Comp~ Rate of return has been ad)usted dovnvsrd fn 1971, 1972, 1973, and 1974 to give effect to reduction fn electric revenues for 1975, under settlement of rate proceeding.
"The Zova State Ccc cree Commission's investigation of thc reasonableness Southern's se acc rates, fn tfgatcd in thc spring of 1972, edwin"<<tcd "
of'ova in the commission staff f'i'ing a formal rate proceeding on June 15, 1973.
"The Zova State Ca cree Cession approved fn Dccc=bcr a settlemcnt of the rate proceeding izrcolvi" the co~y vhich it launched fn 1972. The scttlcmcnt provided for a $ 500,000 a.-aud rc"uctfon fn electric revenues starting J."ax. 1, 1st?5. Thc comxfssfon 's.a"f orfgitalIy recommended a reduction of ~%,400,000
( 97
ÃcLn"as Gas and ELcctric Comps~
deluded in 1972, 1973> 1974, and 1975,
, . Rate of return enrred i.". 19t., lct73, 19?4, and 1975 ms substantially less than that allowed by Tiic State C"rp.ration Commission of thc State of Yanaas.
glnsas povcr and Llpglt Company Fxcludcd in 1974. Rate of return earn<<4 in 1974 vao substantially less than that a1)ovcd by The State Corporatfon Ccmmfttuiott of tho State of i~ass,
COHPAJJIFQ FXCJ1JDED IRON U."E AS COPS'/BISON CANJOJlll IIJ TF".T 07 CC!"C...l. UWLBF. n ITl BPVJVl'mmT JJJO ELECTJJIC VJ J." IJJ OR>gliIAL CCZ m:XSJJ1cnOJ-.VLTJ J',",tir Am-TJmpi!CJJ cont uuc Kentuelar Page 38 Kentucky Utilitiec Company Excluded in 1972, 1973, and 1974 Rate of return earned Sn 1972, 1973, and lp?4 +as significantly less than that aU.cnrcd by Public Service Commission of Kcntudgr. ennui'svilla Cas and Electric Company Excluded in 1974. Rate of return in 1974 waa significantly less than that alloved by Public Service Cccxair sion of Kentucky. Louisiana Gulf States Qtilities Company
~
Excluded in 1974. Rate of return earned in 1974 @as sub~~ially less than allcnred by Louisiana Public Service Commission.
~
Rer Orleans Public Service Inc. Excluded in 1971, 1972, 1973, and l,974. Set income for c~n in 1973 was 86.2 percent greater than in, 1972, as result of electric and gas rate increase placed in effect January 25, 1973. Net operating loss from transit operations amounted to more then half of nct &come for ccaaen in 1973. Rate of return earned in 1971, 1972, 1973, and 1974 uas sf~ficantly
~
less then that abhorred by the City of Nev Orleans. Southwestern Electric Povcr Company Excluded in 1971, 1972, 1973, le@4, and 1975. Earnings experience is derived in significan part from Texasp loath fair value rate base and limited degree of regulation. .Massachusetts Boston Edison Ccclpsny Excluded in 1971, 1972, 1973, and 1974. Inadequate investment stature. IJifficulties in financing because of inadequate ccnrerage ratios. Ncv Bedford Gas and Edison Iight Compact Excluded in 1971, 1972, 1973, cLnd 1974. Xnadcquatc invcstmcnt stature. Vestcrn hhs~chusctta Electric Company Excluded in 1971, 1972, 1973, and 1974. Xn 1970, 1971, 1972, 1973, and 1974 cL11ownncc for flcnds used during construction uns about half of not incaac for comnon~ XncLdcquatc invcstmcnL stature.
COHPAAZi UCISSD FPOH U>>>>. AS CONNNJAOS CNl'Anil.~>> lii 1tar Vr ~. i--.~>>-. . Ii .":"7 H ~ ormavnio m.rn~lic UTILITIF".'zu onzolf-~L co".T JUtil.",>>zcrzoss Mrrsovi FLO~-ritno:ntt CoAL Auc Blah! gun Page 39 Consumers Ibver Company Excluded in 1971, 1972, 1973, and 1974 Xn 1974 RDovancc for funda used durinS construction.vaa 61.90 percent. of act income for common. Inadequate invcntmcnt stature. Difficulties in finnncinS because of inadequate covcraSC ratios. Detroit FAison Company Excluded in 1971, 1972, 1973, and 1974. Xn 1971, 1972, 1973,. And 1974 allowance for funda uned durinS, construction @on about half of nct income for coneon.
'ntldcquatc invcatmcnt statl1ree
. Hfnnesota Minnesota power & Light Company Excluded in 1972, 1973, 1974, and 19?5. Earned far belav accepted rate of return on conmou equity. l~Kssfani Xtsnistippi Paver Company
'Excluded in 1973 and 1974.
Rate of return earned in 1973 and 1974 was substantially less than that allowed by the Supreme Court of Mississippi. Miasictippi Paver & LiSht Cccgglny udcd in 1973 and 1974 ~ Rate of return earned in 1973 and 1974 vas substantially less than that alhwcd by Supreme Court of Mississippi. sour1 Arkansas-)Knsouri Pcrser Company Excluded in 1971, 1972, 1973, and 1974. In 1974 the Con@any filed for ma)or increase in'lectric cnd Sas rates and received interim increases. Earned far bclov'rate of return on common equity found fair and reasonable for electric utilitics by Public Service Commicsion of State of Mssouri.. Inadequate invc~nt stature. South Carolinn South Carolina FJ.cctrlc & Gas Company Excluded in 1971, 1972, 1973, Rnd 1974. Difficulties in finnneiAC because of inadequate covcrASC ratios. Inadequate iuvustmcnt atatul'co Rate of return earned vaa aillificantly lens thnn that allcntcd Carolina 1'ublfc Srrvicc Corcafnnion, by'outh
J
~ ~
1 s RATE OP RETURN ON COlODH EQUITI Page 40 AMUSTED TO 33.40 PERCENT CONHON EQUITY RATIO OKRATI% EIZCTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS WITHOUZ FL%-THROUGH 1971 .1972 '973 1975 Alabama kaama Power Company>> ~2+ Arkansas Jrsanses lover & L1ght creepany>> 13.99, Florida F]~or da Power Corporation>> Florida Power 5 Light Compazqr>> 14.14 15,40 14.52 . 14,29
~3 ~Mr 13c32 Gulf Power Company>> 12 99 12.81 Tampa Electric Company>> '3,32 ~154 12,96 Georgia Georgia Paver Co>>Easy>> h ~
Hawaii
~availan Electr1c Coepany>> .
10,84 11,18 11,70 Illinois cenCral 1111nois Light Cong>>aye
~3 Central Illinois Publio Service Company>>
Commonwealth Edison Company>> Dlinois Pover Company>> '~ ~ 4~0 13,76 Iowa Tnn;erstate Power Iowa Electric Light Company>> and Power Company>> Iova-Illinois Gas and Electric Company>> Iowa Pover and Light Company>>
)AHiP .
3439 '.' . ~ 14.23
~
13.68
~6.
~~3 12.14 12.45 14.55 Iowa Public Service Company>> 13,09 ~A6- 12.44 Iowa Southern Utilities Company>> 18,20 18.72 17.02 16.04 15.27 Kansas
~scene Gas ang Electric Conpany>> 13,70 Kansas Paver and Light Company>> 17,44 16.06 15.28 ~ - 13.49 Kentu8qr K~tacgy Ctilities Conpany>> 13,09 I2.58 Louisville Gas and Electric Company>> , 15,94 13.76 12;34 13.22
e r~ J t e RATE OF RETURN ON CONAN EQUITY Page 41 AMUSTED TO 33.40 PERCENT CORSN EQUITY RATIO OPERATING ELECTRIC UrrLITIES IN ORIGIIWL COST JURISDICTIONS WITNom FLEAM-TNRomN 1971 1972 1973 1975 Louislena
~>>ntra Loeisieoa Eleotrle Coop>>ay, Ino.>> 14.94$ 15.96$ 15.78$ 15.94$ 17.46$
Gulf States Utilities Company>> 12.19 l2.80 14.38 I2.88 14.67
~5 14.37 Louisiana Poser C Light Company>> 13 35 Q.OO-
~ . Neo'rleans Public Service, Inc.>> South"estern Electric Potger Company>> ~
~9 . +3446 Massachusetts Ne~r Redford Gas en% Etiison Light Company+
Nestern Massachusetts Electric Companty>> igehigan cease..ers po>>vr chap>>ay>> ~we ~ay Detroit'giison Company> Minnesota
~Erne".ota paver L Light Co>>Enny>> >> 13.99 Mississippi Ensslssnppt pover Coop>>or>> 13.13 Mississippi Power 5 Light Company>> 15,18 kaissouri ~rsnsas-Missouri Bwer Company>> ~$ " ~l OQehc=a O.~irma Gas anti Electric Company>> 16.66 16.7O ~ 16.73 lh.
Public Service Company of Oklahoma+
'6nl7 16,89 15.67 g South Carolina ou Electric anti Gas Coetpany>> p45f
Page 4.'. RATE OF RETURN Oll COfRON EQUITX ADJUSTED TO 33o40 PERCEllT COHION E"!UITY RATIO OPERATING ELECTRIC UTILITIES IN ORIGINAL COST JURISDICTIONS MITllOUZ FL%-THROUGH USED AS CAPARISON COMPANIES IN TEST OF CQRENSURATE RETURN 1971-1975 1971 1973 1975 Operating Electric Utilities in Original Cost Jurisdictions. l t out Flow- oug Used as Compar son Compan es In Tes of Conmensura e Re urn Rate of return on common equity ad)usted to 33.40 percent comon equity ratio 14. 44$ 14.7Pfi 14. 39$ 14o 63/ 13o77$ Alla@ance for funds used during construction as percent of net income for common 15 ~ 50$ 15o 46'$14 o 07(i 22 o 2+ 20 o7Pgi Number of companies used 19 15
/~ ~
~, ~ I i~ ? I I
~e 43 BATE OF RETURN ON CQSOV FQUITI AND CO?OS.t 8>UITI RATIO INDUSTRIAL COKPANIES NITH QUALITI RAN?CING OF HIGH GRADE BI FlDODI'S 1963r1974 rq 1963 1964 1965 . 1966
'967 1968 1969 1970
~
h"-ericen Eoae Product! Corporation 27,63$ 27.49$ 26.824 25.55/, 25.35K 25.06$ 26,39i 26.75i 26.63f, ;6.63i a.SSi 93.84 95 '2 88.84 89.94 90.62 91,31 92.30 93.22 9-.51 Beatrice tuoda Cooped 11.31 13.16 15.65 '6.76 17.54 16.38 15.38 15 73 15. 92 7 6.CT 16 og 90 79 88.31 87,91 80.09 83.Sv 83.4o 76.45 71.20 71.99 ",S.cs vu.os Borden, Zne.. ll.50 11.00 10.'79 9.45 8.21 . 4.85 . 8.33 8 cg 9 9.67 Ceog L ietol +ere Coapety'0.92 77.41
- 22. 95 78,47 23.94 81.88 24.85 VS.V3 26.25 74.53 21 16 72.09 19.88 73.30 20.80 74.74 20.15 72ogz 18.23 71 y3 1'?.VS 73+07 19.53 7 ,al 20 ~ 5'I 90,80 93 32. 97.29 95.16 75.93 72.38 74.12 69.81 65.99 6g.go 75.17 78.93 Canpb all Soup CoepaaF 13.04 '3+26 13,37 '3.11 D.48 12.89 , 11.17 13.0? 13.23 11.20 14.CT ' lb.13
~ 100.00 100.00 99.28 90.41 96.3S 95.72 96.77 94,83 gl sg 89.70 15 $ 7.29 Caraatioa Cccrpeny 10.9S 12. 04 13.82 1'4.13 14.48 14.6o 14.66 15.14 15.'6 3,5. LL 15.2T 16.74 81.88 81,23 79 29 '9.VT 70.62 v2.69 75.40 74.76 74.50 . 74.95 75.45 72.~3 Caterpillar Tractor 18.89 73.81 26 05 76.93 27 15 So.23 21,69 81.54 14.'Iz 73.99 15 20 66,62 16.48 65.42 15.30 65.45 12.78 66'.28
-.. 13.84 71.'76 16 67.1T 17.8o 20.03 21. IIO 23.06 23.66 23.36 '3.16 23.74 24.14 24.22
- 96. 29 92.73 .94 14 95,01 95.56 95 03 94,06 94.45 95.33 . 95.76 95.os
~
Coatineatal Oil Conpenp 10.77 11.17 10.10 10,93 11.84 lo.66 10. 69 10.53 7,12 10.64 14.02 -'8>>93 71.47 69.9$ 69+19 70.10 71.33 71.13 67.os 64.02 63.93 64.63 64.65 63.39 Xkl pont (E I ) De Henoure 1S.48 20.42 ~ 21,02 18.81 lb.3o 16,18 1'4 ~ 59 12.75 13.75 18.03 ) 1.16 87.25 80.04 80.08 87.63 87.09 86.84 86.77 86.52 86 05 66.93 75.84 Dm t Bradetreet 1 g. 18 100,00 17.37 100,00
- 20. 56 100.00 zza 10 100,00 22+53 99 SS
~,20.64 99.26 ~
21.29 99.29 99.4 24 ~ Sg 9 .66 21.93 95,26 20.68 97,64 17.4o 21,25 25,65 2S.88 22.80 21.67 20,81 19 02 18,08 21. 14. 22.26 19.24 ~ 99.75 100,00 100.00 I00,00 99.47 97 28 95.67 , 95.89 g6.18 96 41 go.83 "97.IS
~, I
Paje 44 BATE 0F IlETvnN ox coRenl EQvITY Axn coRQN EQUITY BATI0 INDVSIRIAL COlG%NIES MITII QUALITY RANKING OF HIGII GODS BY l4)ODY'S 1963>>1974 1963 1964 1965 1966 1967 l~/i9 1970 12.97)12. ~4 e'>>7 2~ >>e$ Exxon Corporation 13ollS 12 '04 11.4+ 12.02$ 12.61$ 13.28$ 10.51$ 73.44 12.45~~ 72.49 72 31 oe e>>
~
74.91 7-"-2 . 82.13 82.15 82.30 81.51 ~ 78,53 75.10 ~ 16.18 5.a .(15.re?) 2>>07 7+3>>
~
Inleorhridge Nie'tel Mince, ltd, 9.88 - lb.26 16.00 15.41 13.45 17.81 19.60 96.66 90.09 . 99.11 99.21 94.35 89.07 92,69 93,61 81.15 <2,32 4a.99 firestone Tir~ S Rubber 9.59 ll 23 ~ 11.47 12.47 11.60 13.19 llo25 8.54 10, li.l? 64.' O,Po 63.g5 83.16, 79+86 79.20 77.62 74.92 69. 58 65,51 65.16 5'4.?9 Ibrd Mtor Congas 13,69 13.08 16.54 13.39 1 79 13.14 10.75 9.65 D.92 15.12 lb.5b 5>>71 89.82 . 85.70 77.52 72.21 79e21 84.2s 81,05 79.5o 7"".29 89.69 BV 72 General Eleetrie Conquer ~ 15."1 12.81 . 17.84 16.07 16.35 lf.l8 11.44 13.19 17.62 18.01 18.12 17 19 66.63 V9.68 . 75.97 70.65 69.15 69.57 . 68.13 66.vl 67.54 67.83 RQI Oeneral Rode Corporation 17.70 16.99 17,13 16.73 16.59 19.90 ~ 13.8f l'5.52 8.38 3 91+ 50 90. 56 89,4S 00.15 R, 15 n.61 74 03 69.6v 67.v3 63.22 . 67 ~e General )btora Corporation 24.11 24.55 28.17 22.11 18.86 18.94 17.75 6.19 19.35 . <<'9.85 20 37 7.63 .Gillette ~ Golf Oil Canada, Ltd 91.79 35 36 100,00 6.79 92.98 30.36 100.00 7.04 93.57 32.24 91,07 6.91 '.25 93.68 34.45 89.96 93.45 33.32 v8.16 6.93 93.82 30.65 70.71 V-49 94.24 28.03 71.80 7,00 94.29 25-32 72+17 S:Bv
~
93,14
- 21. 3 70.55 7.13 91.65 23 6v.09
'5 8.91 91 72 23.? 3 64.23 13 09 91>>72 2
60.66 23 19,'26 81.83 01,67 82.82 85.08 87,03 85.88 82.37 78.30 77,04 78.39 79 64 O~ Oil Co~ration lli21 11.29 11.53 12.77 13.61 13. 67 12.4S 10.66 10,39 3.60 14.57 17,$ 0
. 07.08 87.86 86.92 03.6V 81.18 77 33 73,84 vlo99 69+92 69,22 Vl.A 7520l Sanna Honing Corpotation 10.29 10.82 11.66 11.98 12.48 12.4S 12.40 12.96 7.43 7.47 7 3f 100,00 100,00 84,95 76.21 .78.85 01 10 '3.98 86.89 50 86.35 axial OQ, Led 9.77 10>>47 11,00 11,35 11 24 11,27 10.22 llo03 13,54 1.4 00 B.CS 21,39 90,9l 91,72 .92.67 93.41 86.07 82,13 81.40 82.23 82.64 83.80 83,0l 'otn' l
h
Pc"e 45 RATS 0F RETilRN 0N colooK EZvIIY AND coLPAN KcvITY RAT:0 INDUSTRIAL COHIANIES NIIli QlALIIY RANKQIG OF HIGH CRAIK BY )INBY'S 1963 1974 1963 1965 1967 1966 969 1970 International Bueineee Naehinee Corp, 19. 54S zo.f6S 19.V45 17.83S ~ 16.21S 20.75S 18.9? S loe13S 17 ~ c.c ~ >> ~t
'6.63 0' 7?.?6 01.34 65.62 66.61 65.01 85.9o 66.40 EV .?I c'9.c'-S rS
>> 90.2< s2-H International IfiAel Co. of Canada'tdc 16.?9 19.05 19.3? 14.96 16.94 16.12 12, 50 Zo.ev 8.y.'0.97
~
A ere 19--3 100.00 100.00 100.00 100. 00 100.00 90.91 83, L6 00.70 o>> i<aS>> Jeune - Manville Corporation 9.47 10.60 10.00 ll.50 9.47 11.13 10 99 6.36 c ~ 1~
~
99.36 99.47 99.57 99.01 100.00 100.00 100,00 100.00 9'-.9? ee oa c 75.'0 J'obneon 4 Johneon 10.50 11.95 13.71 14. 57 ~ 14.91 15.71 16.10 16 cf 17.6'7 7~ lo.53 lv.ge 100.00 100.00 90.69 9?.64 90.05 96.44 90.65 . 96.Z7 s>> 97.22 23 79 23e94 23.36 22.44 21.34 20.06 20.$ 1 2l.e ~ 7$ Zli '3 c1.55 92.53 92.3? 91.13 92.12 92.97 92.06 91 ~ 91.96 CZ e3 91.53 9>.03
~
l?afteo Corporation 10.92 12.20 12.65 12.60 12.53 12.0S 11.74 12.29 12.69 11.7? ~ 2 81.16 83.41 05.41 85.95 85.04 85.64 85.19 65.39 69 c4 IdilF (Eii) d 13.51 lf.97 19m 52 19.86 20.56 23.00 22.62 22.17 20.39 '1.595'3.07 c2.65 9?.77 9?.03 96,69 96.0o 95,42 95,26 96.29 90.24 84.01. 66. $ 0.54 67-29 Mo Intro Mince Ltd, 5.24 5.68 7o00 7.87 6.o6 5 46 585 4.23 (.2.40) (c.'.30) 19.40 vt 3>> 99 96 100.00 99.86 99.70 99.74 99+89 86,41 74,47 66.26 63.65 63.W 67.cO Nerelr. 4 OonpanF, Inc>> 17.00 zo.86 Zf.53 29.17 20.9? 25.76 Zf.38 25.46 25.85 26.05 27 58 2?.8jl 95.33 95.94 96.46 96.00 95 elf 94.77 94.9o 93,62 89.05 66,49 66 19 69.7'-'0 Knneeota Hining and flannfanturing Oo, 21.04 zo.6o Zle13 22.21 20>>73 Zo.o4 19.5o 16.21 55 20.66 >>>> s 97+03 9?.'ZZ 95 39 94.01 95.06 95,44 94.22 91,40 87.73 c6.13 E5.'-7 79.99 8.88 9.06 9.9? 10,26 lo.84 10,34 10.91 11 ~ 5 c 11 ~ 51 15,64 ~A 91 69.51 87.72 88.29 87.94 85.59 64,10 62.35 80.21 eo,?3 77.'78 74.63 Xabieeoe hut>> lvcl4 17~34 17,16 17,29 16.99 15.8S 11,42 14 96 16.15 L'.79 8441 85,21 85 i98 90>>70 '4.00 78.64 74.20 72+55 69.22 6o.79 60.79 . OO tb c
~
Vl
Pnpn 46 RATE OF RETURN ON COPHYl FRUITY AND ColSN EQUITI RATIO lÃMP~VDIAD CleWNll": WTN ymI,lrY DANRlnl: nr llrnll rDADE DY I."NDY'S lg&3 1974 lc63 1964 1965 1967 1968 1969 1970 ov RIIIIpe Petroleun Congeal 8.85$ 9.27$ 10.07< 11,01$ ll.47$ 8.04(, 7.85$ 6.6o'5.92 7 6 2o p
~ e ~ ~
83.77. 82.92 Bo.So 67.95 62.63 67.12 66.vS 66.vk 6v.33 72-73 Prentice-Eall, Inc. Ro.v0 23.37 31.06 33 35 31. 09 '30. 00 29.11 25.36 23.7$
~ e C ~ 2 i ~ 'i aft 79.72 87,81 100.00 100.00 100.00 100.00 100.00 100.00 1GO.CD
'I 'A o>>V }GDioo IGO.CC Procter 1 Ceeble Cocyany 15.31 15.G3 lb.74 lli,o3 17.01 10.11 16.51 17. 40 lvev>> ".c3 >>~ 1't ~ 5 '
OCi,o6 06.95 07.liv O'I.II3 80 00, lil 80.32 . 80.69 Bg.m 67 91 co.oc Quaker Cate ConRenF 12.27 11.52 ll,og 11,31 . 11.99 12.13 13.17 13 99 D.03 ~ -0 'in'5 Vvo 50 00. 53 Oo.94 79.19 79.24 00.33 81.73 72. 31 64.47 ct,gv ReynoISa (R.f+) Induaerlee> Ino 21.07 19.24 20. 14 ~
- 20. 07 20.62 19.06 12.79 18,43 18.85 <<7 F 82 r~
5t,, 10 69.74 70.60 Qi.73 66.40 70.li7 60.51 64.4g 6.0 co 6".. 5 6:-. co Rlcberdeon .Farrell > Ino. .14 75 14.15 14.84 15,89 15 09 13.07 14,69 15.30 l=e30 <<+err 1$ .15 1495 looooo 100,00 looooo 94.23 80.10 04.25 82.05 78.79 75.7'- 76.A~ KD.A 63.-5 Scare, Roebuelc anl Co, ll..23 13.32 69.99 14 Sl 66.36 14.14 62.63 13.51 6o.45 13.10 59 92 13.96 59.93 13,44 60.30 13,10 60.40 lb.24 60.64 '. L4.32 . 60.33 5 &e<<0 9.99 57,22 SalthKLIne CorRoratfon 33.06 33.12 32.66 29.80 28,05 25.94 23.62 23.71 22.72 'l.go 2>>70 21.75 100.00 100,00 100,00 100.00 100.00 90,08 95.6'4 93.76 89.21 6>> $ 5 70 71
~
+ulbb Cogeratlon 12.75 10.74 l2.82 . 13.79 15.46 15.%7 16.25 15.26 81+39 '9.74 75.2o 68.77 . 68. 19 67,7 o 6V.VO 6,.71
~
Stan&art 011 of California 9.28 9.07 g.lB 10. 47 lo>>57 ll.o4 10.5L 10.02 10.69 'io 79 15.30 15.63 93.07 93.71 92,54 9l 31 00,46 06.06 BS.Oo BS'.02 81.59 Vgeoo 81 87.$ 3 Stenaara Om (Inaana) 7.36 7.61 8.21 9.8o 10.27 10.12 g.46 9.83 10.20 lz 90 20.93 86.60 06.94 87.xo 05.26 83.62 80.6o 7$ .86 74.37 75. 54 VE.ZS 76.+a VC 16 fLg4xg Ino<< 39.87 100,00 38.56 95.22 4o.v6 95.49 39 Iio 9$ .6$ . 39.23 95.95 37.76 99,08 36 78 95.99 39 51 9$ ,83 40.81 9$ .90 39eob 56-39 35.72
'6.76 3$
<<18 RIexeeoe Incorporate@ 16 14 15.69 16.10 ]6.58 16.03 16.12 13.45 13.50 13.88 IR.VV 17 04 x8.67 89,11 88.08 er.53 8$ .38 81,33 79.16 79.73 80.7$ Bo.Ro 77>>9T 77 7$ ~ 78 00'
pggo 47
~ RATE OF REG/llll 08 COROÃ EqUITI ARD COHNtl KqUITY RATIO aaeSXalAI, COrrmZS VITH quAEITZ RArX+0 OF HICR CRARE 87 iXO87~8 1963-1974 I
1964 1965 196o 1967 1969 ~ .t
'oion Carbide Corporation'%3 70.27 16.v3$
vo,45 1V.45$ 69.26 16.30$ 69.87 64.79'9~3
'0.43$ 9.33$
61.30 10.74$ 61.38 8.61$ 6o.o9 8.53$ 59,66
$A 61
~+a V~ 4 ~
't2 23o Y$
6-.i6 15.74 16.62 19. 34 17.40 13.64 13.69 14.43 13.<<5 13.-7 3.22 2 .25 05 99+33 99,20 99,00 98.8o 99.46 95.16 94.ZV 90.70 00~64 7~0 ~ I VQ2ar (Qrae) oooderhaa ts Vorte, ltd; 12.00 12.47 12,81 13.24 13.30 13.64 13+72 12.84 11.59 12.53 3,~ 13+07 98.82 97.89 96.53 95.50 95.58 94,54 ~ 90,94 86.07 79.43 10,% e0.99 Vv.63. Qcigley (Ne.) Jr. Cocpenr 12.69 13,49 14.69 15.76 15.5O 15.24 14.68 13.64 14,63 ~
~tL 64 '4.97 13.C2 100.00 100,00 100,00 100,00 100,00 100.00 100.00 98.02 92.17 90.31 95,06 Average above 10 oil conpeniea P0.22$ 10.35$ 10.40$ 11.17$ 11,44$ 11.27$ . 10.32$ 10. 10$ 10.44$ ~
0 35$ 15.20$ 85.63 85.27 84.96 83,20 '1,35 79 40 77 ll 75.66 74.93 i>.CB 75.71 Voe 79 Average abave 43 conpeniee 17.05$ 17,92$ 19 21$ 18.96$ 17.48$ 17.61$ 16,68$ 16.54$ 16.08$ '. '5.48$ 18.29$ 16.65$ excleQng oL1 coapeniee 90.34 9oo98 9o.47 89.27 87:12 85.68 84.92 83.lv 79.41 v9.1 79i43 4 Average ~ above 53 coeyeniu 15.73$ 16.46$ 17 51$ 17.48$ 16.34$ . 16.41$ 15.02$ 14,52$ 1) 71$ 89.43 89.88 89.41 66.10 86.o3 84.5o 83.44 81.VS 78.58 . 78.40 7 +73 77 S. Sourcet Co~ed on baeie of data in
'a Zndnetrial You'll anneal reporte and etatieticel 1974 and prevtooa edktione, aeeariee of ~teed Nag'e Xnveetore service, Inn a
page 4 EARNINGS FXPERIENCE ON CO)RON EQJITY OF OPERATING ELECTRICS IN ORIGINAL COST JURISDICTIONS WITflOUT FLOW-THROUGH USED IN SELECTION OF COMPARISON COMPANIES IN REIATION TO EARNBlGS EXPERIENCE ON CONN)N EQUITY OF INDUSTRIAL COMPANIES WITH QUALITY RANKIN OF HIGH GRADE BY MOODY'S 1963-1974 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 4 39 Companies in Original Cost Jurisdictions Without Flow-Through Used. in Selection of Comparisori Companies ate of return 'oamon on common equity ratio equity 12.42'2.95~< 39.03 39.65 13.2/$ 39.92 13,57+p 39.29 13.33~~ 38.01 12.86~~ 36.97 13.02~@ 36.07 13.004 35.29 12 ~ 34 jp 34.72 12.6'1.62$ 34.44 34.56 9 ~ 33.52 jomponent for ccnmon equity 4.848 5,135 5 305 5,332 5 ~ 067 4,754 4 696 4 588 4 284 4 339 4 016 3.349 (rate of return on cosmon equity x common equity ratio) 43 Industrial Companies with Quality Ranking of High th'ade by Moody's Excluding Oil Companies ate of return: on cannon equity 17+05$ 17 92$ 19 21'$18 98$ 17 48$ 17 61$ 16 68$ 16 54$ 16 08$ 15rgg 18i2+ 16e65$ kmunon equity ratio 90.34 90.98 90,47 . 89,27 . 87 12 85.68 84.92 83,17 79,41 79,17 79.43 78,14 hnyonent for caanon equity 1 5 403 16 304 17 379. 16 943, 1 5 229 15 088 14 165 13 +756 12 e 769 I2 @ 256 14@ 528 13 e 010 Component for Common Equity of Above Electric Utilities Used in Selection of Comparison Companies as Percent of ent for Canaon uit of above 43 High Grade Industrials. 31.47$ 31,5+ 30.53$ 31,47$ 33.27$ 31 5'3, 15$ 33,35$ 33. 55$ 35. ~ 27,64$ 25~74$
Page 49 CAROLINA POMKR 8c LIG1K CONPiQlY TEST OF COMMENSURATE RETURN Indicated Fair Hate of Return on Conraon Equity on Basis of Test of Ccmaensurate Return 14.~ at 33.4g Comnon Equity Ratio Includes A11ownnce for Funds Used During Construction
RIED)lIC UTILIT)):S Ill i~lJGIINJ> COST AND PA'ill VA)ktr. JUHISDICT)ONS lFITH IVUtiJCl.Y-)lt)LD COYJ&tl STOCK. SL)lQT HJICE AG PLZCIZJT OP DCOK VAME~ Page 50 1975 lou'kct Price as Percent of )took Vn)a< i '130 ~ and over Southvcstcrn Public Service Oklahoma Gas and Electric 153.W 142.95 Public Service Indiana 142.70 El Paso Electric 141 10 Central and South Rest 135.80 Central Louisiana Electric 134.59 Texas Utilities 130 57 ~.00 " ')29-95 Illinois Pover 128.58 Tampa Electric 124,91 0,00 - 119.99$ Northern States Pover u.8.99
)hntana Paver 113.33 Misconsin Electric Power . 1)2.46 100.00 - 109.~ .Indianapolis Po<rer F< Light. 109.49 Cleveland. Electr ic Illuminating 106 70 Central Illinois Public Service 105,88
~
Ohio Edison 105.59 Cocrrmonvealth Edison 105,38
- Idaho ~er 102 29 Pacific Power g< Light 102.00 Toledo Edison 101 82 American Electri.c Paver 101 16 Florida Power &, Light 100,59 Southern Indiana Grrs and Electric 100,45 Interstate Pover 100.17 99 998 Gulf States UtQ.itics 99.39
, Havaiisn Electric 99.37 Inuisville Gas and Electric N.13 South Carolina Electric and Cas lFisconsin Public Service 98.38 Cincinnati Gas F. Electric 97.55 Tucson Cas g< Electric 97.21
)Fashington ltater Pcrvcr 96.82 Northern Indiana Public Service 96.71 Qayton Power and Light 95.72 Atlantic City Electric 95.58 Zova'outhern Utilitics 93.25 .
Zcrva Illinois Gas and Electric, 92.89 Allegheny Power 'System 91.76 Iowa Power r<nd Light 90.93 Union Electric 90.14 80.00 - 89,99' Hinncsota Paver, 8< Light 89.98 Public Scrvicc Ncv )~co 89,90 Jtuqucsnc Light 89,)9 Col<m<bus an<i Southern Ohio Flectric 88.39 Public Service Color<<do 88,3>r
)luke Po<ror 00,10 Misconsin )'over and J,ig)rt 87.37 Soutlr crn 86 75 FlorMa Power 06.12 Krursas )<over F; Light 06.)o Lonp Tel<<<<<i Jeip'llting 85.0<9 Otter'ail Power 85 ~ lr 3 CcnLra) I)) lnois ) ii)rt 05.)G
))Mr)le Soul,'h Util)tie c 05,01 Jfourton Jlr,hLIn. Fc lv<rr<rr 03. <r5
~ ~
Zovr< l'ub)lc Srrvlrc 03. <itr
)'<'rrrrry)v<<<0<<)'ower fi )>lr;l<L 03.t<G UL<<lr )'uvn Fc l,il;l<L 03,)G Xnnra<s fa<s <<rr<l E)rcl.rlc Gl
)ra)Llr<rorc 0;<n ural Rl c<'Lrl c )>'0,05 Co<<<<<urrity )'<rb).lc Sc rvlcc< 00.47.
Kentucky ill.illties 00.19
Page 5i. EDCTRIC U1ILITIES JN OIIIGINAL CAT AND FAIR VALUF. JURISDICTIONS ZITI[ PUIII>ICLY-IELDCO(NON STOCK
'NtLRQZ 1%ICY. AG PEACEN'1'F BOOK VALUE 1975 Market Price as Percent of Book Value+
70.00 - 79.~ 'New Et~land Electric 79.84$ Kansas City Power and Light 79.33 Carolina Power 5, Light 77.96 United Illuminating 76.57 Pacific Gas and Electric '> 76.30 Northeast Utilitics '5-76 Dclmarva Power h Light ~ 75.60
~ .Hew England Gas and Electric ~ 75 05 Virginia Electric und Po~er 74.83 Ari.zona .Public Service 73.27 Iliagara Mohawk Power 72.95 Iowa Electric Light and Power 72.37 Madison Gas and Electric 71.86 Philadelphia Electric 71.82 Electric ~
PotomaC Power 71 59 New York State Electric and Gas 71.57 Central Hudson Gas arA Electric 71 16 Public Service Electric and Gas 70.90 General Public Utilities 70. 30 Boston Edison 70 23 Rochester Gas and Electric 70.08 60,00 - 69.99~ Detroit Edison 67.05 Southern California Edison 66.27 San Diego Gas and Electric 65.48 Consumers Power 63,01 50.00 .- 59.~ - Savannah Electric b Power 40.00 - 49.99>>< 'onsolidated Edison 40.62 88.34>> market price at the close on October 22, 1975 related to book value per share on December 31, 1974. Source: Ikc>dy's Investors Scrvicc, Inc., I>~dy's Publ/c Utility News Rcl>orts, 1975 ~ ~ ~
PRICE TO PUBLIC AS PERCENl'F BOOK VALUE IN CO¹tON STOCK OFFERINGS ELECTRIC UTILITIES 1972-1976 Average Price to Public as Percent'of Book Value per Share gures w Faren esca are um er o 0 er gs 1972 1973 1974 1976 All Offerings 128.4'45) 12O.64$ (47) 76.49$ (54) 83.3'94) 94.~ (25) All Offerings vith Price to Public below Book Value 9O.74 { 4) 85.32 (13) 7O.78 (46) 78.27 (82) 88.54 (18) All Offerings with Price to Public,
. at or above Book Value 132,07 {41) 132.14 (34) lO9.36 ( 8) 117.62 (12) 1O9.49 ( 7)
Settee; Cetrttell ttet ~oseeettt fet tach effet,
COPAON STOCK OFFKRIliGS Idge 53 ANrr NARrET PRICS IN RSIATION TO rrOOK vAurg CAROLINA PONS & LIGHT CONPArrX 1972-1975 1972 1973 1974 1975 Rate of prospectus January 19, 1972 November 1, 1972 November 8; 1973 No co~n stock january 16, 1975 October 28, 1975 offerings of 4,000,000 52 0009 000 N7nnber shares 2,000,000 29 500,000 35 000,000
$ 89,3752000 Total price to public f 54,750,000 ) 71,875,000 $ 63,750,000 $ 59,000,000 Price to public per share 21,25 14.75 170875 27.375 28.75 Book value per share 23.22 23.23 23 Ol 19.20 4 20.77 (II/30/71) ( 7/31/72)- ( 8/31/73) ( 8/31/75)
Ratio of price to public'per share Po book value per share 142.58$ 138.42(, 91 52$ 77.68.5 eLast reported market price and ratio of lest reported market price to book value per share. Sourcee Carolina Bwer & Light Companyp Prospcctusp 35000,000 Shares Con7777117'Stocks November 8. I'r732 pages 1, 232 27 and corresponding pages in previous prospcctuscs; Prospectus, 4,000,000 Shares Conlnon Stock, January 165 19752 peace 1, 7,'29; Ira:arear:, 5,000,000 shares geeeae ssaeIIeesaaer 28, 19I5, pagan 1, 7.
Page 54
. I EXPLICATION AND KEY TO KIODYIQ CORPITE .30llD RATXNGS MOODM DOSID RgCOStD Usa pieasttesa sad Key te Corporate bwl Itstlaga, Inc)sad )sag cea>>veHaaaae Issues, ~ aad industrial Revenaso bonds
{For Rating Key anal gsaotsastleoos Mosey' asas liclpal Desae rstasgassse Table ~ I con4OU) + ~ ~ ~ ~ ~ ~ ~ ~ Ferewosatg Moody's Bond Ttecord covers over 10.000 Iwste aad sltuatlons Cenersl.tngermstlsa>> asad Rsnasstaa! ha tnsny faauca. notably foreign gov of which approx)mately C.COO.conmrlslsag tho first section. aro treated ln ~ gnmental bonds. Istcs1 developments are nolcd In )lsu oc ~ latlaucal usu esasu affording the u>>cr sa ~ g)ance tbe cs>>eaual facts fclauag to matkct Iasflllsbed oaa cotporaae IUsns ooa)tlon ao4 ~ tatut)ca) asckgfoaaod, "MCCOY'5 Elolto RAT)sacg Title ss Oases I{sane of corporation. together <<lah coupon and slate or ~ .Cate>> of ms\utuy are given. (where title is printed Io bold race typo such pasrpeseg Tbe syslcaa of l'susag eccuflucs was originated by Jobs Rood: company nss convertible debt lccurlalrs outstanding. Lutcd usucs are In )00S. oreceded by identifying symbol. In ths case of domestic municipal>>. rst ~ T)ae purpose o! Moody ~ Itsttngs Is to provide the American lnvesto; anga are sppucablc to OU general obllgauon bonds o! the ualt named am)ass with s ~ imp)a systesa oc ggadaUoa by <<bleb Lhe rc)sure lave>>uasat quW oaasgwiae speci! Ied. Ues of bonds so ay be aolcd. lot>>feat Dale>>g Interest dates and date of tho month of matuttty glean. Itatlng Symbol>>a CrodsUons'f lnvr>>tmcnt quaUty are Indlratc4 b) Va(saharan lussr ac>>sears sas st>>sf sac>>sf s/ s>>ssvssss. rsung symbvu. each symbol rcpre>>eating ~ group ln <<bach the qusuta RrglsUvrd osndas Bonds Vsucd only Ln fully regtstered Corm ato Lnd)i chataclcrlaUCS ate broadly tho same. Theta ags ntn>> symbol ~ as shows catee <<lah the letter lr). below, from that used Io designate least Invvatsrtnt ruk U.e.. hlfrss Dessutug 1n cases o! interest or pfmc)pal default. the da4 togethar Investgncnt quauty) to that deaoung greatest Invcatmsat ruk {Le., )oases lavestmcat
<<1th appropriate symbol ls uauauy shown ln laterest co)uaaa.
cell pHcer The csn price ss o! the date o! th)s pubucaUoa v gtrca tn aU cases poulble. and avlU be ad)usted to the correct eall price when such chance becomes effcctlve. Symbol {a) after call price Ind)ca4s price ls sub)ect ao change. baa I gmups quaulyL'as Aa 4 sce pago 0). baa ba b For exp)anaUon o! mun)clpsl rating symbols, Ia p~Coo Ca C Absence of Rsungt Occaalonsay no tstlng ls assigned or a rst)nc ls wttb the A 1 ant Mosey'stlngg bloody's Itaung V giren to aa Issues In this pubucatkm drawn or canceued. 'Th)s msy occur If new ctscusnsasnccs aru>>, tne el t>>cti where sufficient data are avsuablc. A diacuulon and esgp)anat)oa oc oc which ate not sstutactoraLT analyzablc. I! infra U no logger avslubl ~ afoody's ratings wul be found oa page L reuonsbly up to esto eats to pegggut ~ Judgment to be formac). )f ~ boos caued Ior redemption. or for olhcr res>>one. Quelauesaas QuotaUons shown are as fouo<<s: where no raung bu been ualgned or <<acro ~ rat.'nf hu been ccnccbs4 Csssnf Isa>>ass Quoasuons for lultd issues represen'I actus) sale prices that fact a)one must not In any wsy be taken as a rcf)ecuon on toa ullcstlon. near as posaus)e lo ths cnd of the month preceding dale O! pub where no recent traaascuon ls topotae4. tho Latest bl4 qusuty ol a bond. Where no raung has been assigned to ~ bond Lhs ressoa cou)d be oae o
~ nd asked prices aso given. the foUowlng.
f)siisss( C>>sp>>ssu in>>su Quotauon>> shown rcptcscnts lhe approx)mate .i. The boad bc)stags to a group of secuHUcs wh)ch aw aot rstcd as s
~ pfes4 between bid s>>g asked prices for )steat svauab)c dsae pre- ~ matter o! poucy, vtz.. rcs) 'csta4 bonds, obugsuons of Iavcauntaa tguga ceding date o! pubucaUcn. Whero Iisg gs{srs rs)r are available, the ~ ad banks. Oad currcauy, beads payable la cufrcmsso other maa Valae.
average of such bldg ia given. Where ssisg yrirss easy ate avalJab4; $ 4tao dollars. the avetsge o! Ihcm V given. Ssrisf )as>>ass Where escb maturity V not quoted separate)y, the quo- t. Where rattngs bere beta requested for privately placed bead Issuer tation shown V uauaay for the averace maturlry. such rat)ngs wu) not be pubUshed. )so ratings are ass!wed or msy b Csssiia>> Iuvrss Issues psyab)e only In Canadian funds and so quoted maintained where pubbc lnttrcst la aay usus ls mmarral. cf lo sny ~ Iaus. are indicated with an asterisk {>>) ln tbe "Current Price" column. tion where It would be du! lcull to msan4)a conaUnt acr>>at)oy o! Uae laau C}uotauons 'are obtained from sources which we beusvs rcuable but becaaue of lack of csseoual 4ats or because of rcd'aced sile aae Um)aea they are not guaranteed. In the case of un)i>>ted issues. quotations do not af tcr-msrkeaabUlty. purport to be ~ record of firm blau or ocfets nor do they necessaruy J. Bonds are not rated In the absence oC ds4 deemed lo be as>>caus) foa
'represent actual transactions. 4 sound )udggn>>nt oo the investment quauty of tae ulu>>s.
fffc price Itangsa The high and Ioar sale for a)l lhl>>S Issues fs Changes ln Rsuntg Tbe quaaty of most bonds U not fixed snd stead: given ns near as posslb)c to the end o! the month. The range for unbated over ~ period of tune. bul leads lo undergo chsnrs. For this rruo: a>>ause represents high and Iow bid prices, baae4 oa rausb) ~ quo\auoa chssagu lsa rstlsags occur so as lo reflect thus rag&usa ~ lga ua ~ Intrinsic records posluon o! Individual honda. Itlt-Tl tHea Iten!el The high aad low sale prfce for all Sssvd Issues A change in raung msy thus occur at any c)ms Ln the case ol rm L>>C aava bosn Uken !rosa records for. that pcrsosL In tbe ca>> o! unbated rldus) issue. Such rating chance shou)4 serve notice Cast 'ocey' absent bonds the high snd )ow bid prices are used. For boaaU Issued since )MC, some sllcraUon ln the tnveaunent risks oc the bond or tact lbe pfevlsu the range covers on)y ihs period ~ inca Usuance rating did not fuuy rct)rct the qusuty of th>> bend as now scen. VV'. because o! their very nature, changes are to be exp>>tied moro Yfstd te Maturllya The yield to maturity ls shown am ab bonds payLng bonds of lower raungg than unong bonds of hlcbcs roun l. never ftcqusnt'mong regular LntarcrL Where sale price ls not available, the yield ls oogapulsd thalass lhe user of bond ratings should keep c)oao ~ ..4 ccnstcnt claorr os on ths bid price for valuauon purposes. ~ U rsung~th high snd low ratings thereby to be able to aou prompuy asay algae oc change la mvoatment smtus which may occur. 0CRT TC) htOODY>>p CO)V>>ORATU RATI)ICS Aaa Sends <<hlch are rated Aas're Judged lo be ef the best quality. Tiaey bo Bonds <<hlch are rated bs are fudged to have epecu)st)re elemes
,csrg tbe smauest degrco of lnveatsncnt gtsk and are generally rclcircd to their future csnnct be considered as well assured. Often the tasotecucaa as gut edge. Cnlcrcst payments crc prolccu>>I by a )srgc or by an tntcresl and principal psymenU mly be very and thereby:
axcepaoaauy stable margins sad print)pal is secure. '17bI)c the vartfsaas +eu ssfegussded durmr both good and b>>dmacerate 1"ncs prolectlvsa elements ass like)y to change. suc:a changes as csn be vuuauged aro uaost luaukcly to Impair tho famdamcatauy strong pcoltloa 0! such Vncefta)nay oc posluon cnaracterlaes bones In this c)aas. over the Isla. lssaam 0 Bonds which srs rated b generaby )sck chsrscttrUucx o! Ihe des!fat Isaveausacnt. Aasasfasace 0! Lsalercaa and pflncapat pa)sgnenas or of As lenance of other tetms oc the contract over any )rag pegged of tuos m S nd which uo rs44 As sre fudged to be o! high quabty by aU stand- be sma)L uda. Together wlua tJa ~ Asa group aber comprise what ue gcnerauy Cas kno<<n u high grade bonds. Tsacy are talcd lower than the best bonds or Bonds which are rated caa are of poor dc!au)1 or there may be present ~ laments standing, Such fssucs may be because gnsfgsns oc protection msy not be as )arcs as ln Aaa secur)urs oc dancer with respect ao prs I)uctusuon of prolrctave c)rmcnU msy be of greeter asnpuaude os'here capal of Intcfcat, may be ot)arr ~ laments pre>>cat w)uch make uae )ong terra risks appear Cs some<<hat larger than tsa Aaa a>>cur)usa. SonaU which are rated Ca repreaenl obus stlona wh!Ch age ala>>cadets
- attrtbutee In ~ high degree. Such taaues ara olacn isa us!su)t or have other mask shortcomings.
Bonds whlrh are rated A possess many favorable Invest>>neat obllrstlona. Factors C and ate to be considered as upprr medium grade Bonds <<hlch are rated C aro the )sweat rated clue o! bonds f~d glvln! security to principal snd lnacrcal ase cosa>>lessee adequate but so rated can be regarded as having extreme)y I>>sor psospecU ot uau ev
~ lcmenU may be present whv)a suggest a eaaaccpubauty to uapaument ~ tasaanang any real lnve ament standing. ~ onaeume In tbe futuro.
ass Bonds which are rated Oas are considerednor aspoasfty ancdlum grade obU-gaunns. L.e., lacy are neither has;hly prot>>Naca) occur>>e. Interest psynacnU snd principal sccuraay aasrru adequate fnr tbc pscacsaa but cvrasasa pros>>cure ~ )rsaaenU n>>y be lsckasag of snay bi characavrl>>alcsuy unreuabl ~ over any great )cngln u! Usnc. Such bonds lack nuutssadang In re>>anent chasactsflsalce and In fact have spaculaUve cbafacacruucs u welL s r
~W's Investors Service, Tnc.s >Body's Bonl Record, October 1974, pages 1 an4 2-s a
e'... ?t Page 55 EXPLQtATION AND KEY TO STANDARD E POOR'S CORPORATE BOND RATl1'.GS STANDARD IyA POOR'S BOND RATINGS CORPORATE BONDS DDVPI ft Ail bonds (ncecsvap (14'0(T, co oA4 D He v>> telo<<ev ulropo vtivL in dtiw(L alvldhe (Iliad ~ BANK OUALfTY BONDS-unCH pre(en( convurctsf bsns (Spv(s(<<na bends U(W<<D( gffID(L (sad IA Iho iop Iow cr ~ Tee>>l tnnn. An. A. Spb or v>><<etvlro(eAU ptn<<ahy caned(AD oa(VHta bfeidt Ho ulad Hi veo seat Cesi ~ ~ I An>>((coh u(DD(s( ~ Ht Itpl(CI4 al ~ i(Debit ll( bank vieu(nffeiL iswos. Tno uhnpl reesrwt vet lava<<4 vtlvo ol Lno boner. Dvi Ltey Do nol A Sends r>lrd AAA srt hithell prldt odipsUOAS.Thry Dalteu (ht vid isu <<ho ~ CCDVAI ~ IC(ffnpt Oad avett vncahHAUSL AAA (eelff Clpet ~ cl p(<<tel>>A u lo 0(Accept( ~ eed velf(SIL Hsewrfft veep MUNICIPAL BONDS aero trip in(troll rll~ I. snd htnce D(ee(ce tht ass(au>> ~ I(tif oh ail cavnlL SOACI nitd AA slee tueie(y u hlph p(141 edep<<cons. Ond ia Iho Siahdl(4 S pott' duhic(yll Soap tie<<Apl cert( eb(id>leans el ~ U ILeit~ or AA a.,teelf Dr ielblhcel deco( i(cni AAA elwfs 4A(f 4 Hea<<dtp(w. Sv(r(nretitnt IA ~ C leon 14 font( ~ I adlteie4(ff, IIUAPS ae ~ tlllCh14 Il Dtnll t(HS ~ Toae P(iCtl AIDrt 'V.rh Iho ICAP It<<a (i(De>>f as(IOL ~ srtbit Iei rhor ~ ~ I eli gtl(l 1(De(i spec(ai ltetAvtl, AAAeP(lect Tall ~ ~ ( ~ Oalifthteff Ol Vi ~ h(Chsll CVI(((y. Tl ty hove Let reroll trends re(IC A are ( ~ TI(414 ss vooft (Atda(et drl41. Thof hset P(Oelbbnr 41 Ctu,L ln ~ Dthad el OCH>>aes SVISI ~ 41, ~ (S rdl <<. Ir U ~ A cen(lctredt incor(r ~ AI I<<tap(n'lel HD ral sabre(y Irw g(ea ~ a<<asi cec(beet t (tetr>> ond irk( 04 tt ~ Il wlc ~
" VI ~ 14 l (tat>>tet etc(rat.
~ Oda(u tptCII el Cht'itl In ~ C4htaiC Hi4 'U ~ 1 ~ Csn(hleDAL <<elteell tnd Vto( bvrc ~ ei il all the(evil(lit hiph. neet(we Iirvclva If ~ ~ ( ~ odtoul( ~ lo fvinciosi ~ rt I~ I(dtd u ~ Ii~, They 0(tcwhentnvf rtaecl aae>>y tilts In lhs<< ~ >>SI IWV(1 Otofei ll(~ .(>>edL Ovti<<y 4( asntclsffn( <<tend noi ~ Di>>V lo' lae(SSI bthtriH bvi ID steat tll~ (iL ~ IID 1co(eD(eeec co(id(leo(et, adlhdt( (tpsyehtn; 01 ghnclaai HI4 IhitrtlL Bgtr Ths sss. or aednrtei eeet cl'JPO(f ll bdcehino I>>lrtfee dlbnhtif Ahf<<th Ottu TI~ Inrtlvnonl CA<<III<<elUCS ot bonds in IIII cravD He 4nly
~ ovhc odeclbsnr ons (not ~ rhtts mr soecvis(ffo ~ Ieeeetnl bepinl li Cavy al ~ IAH\VJI'sll iln rh1lt Oi Ir>> Drenff De(a<<y IIIVOL Scads Illtd AA hset 11 D(tdt+(At(t Thtu A4t alee Sdttvllf ~ Iltl C4ef(tg ~ Wl Atra>>hy ~ (1 Ve ltceeid 14roll ((elf ol ColsvIL D(4(tC(td Iey Il(l(IC(C(r ~ I(nin I, Tn ~ <<Si(ICSDI(H'ierf lo Chanpvip CDAdeVDAI, DthicWIC( ID CtD(fueleff Atl~ llelli~ I Csh<<lnl IIICAIAC, Iltettlrir~ Vff Acgatd tg(ed S((Age jtl end (n(Htti en batps ln (VI~ c ~ It try teo rtl<<do4 u u' . Tt.s rl:v 0 cuc(ibts 0>> lh<<d lorlll sra)Is(le(r ot eertvh. II bends ~ et most telode lnv lo cs<<ntl ~ Hec Us41 candeieerff shia lo aitetll deetrl I(c i vlt tr4 Iecttt (I(eats bfcovst ao( ~ II I<<At rtles ~ II, ~ Un ~ e ln vo ~ slee. Tivs peevp u v>> lore<<vrrch avllehal Iar coen(nates( btoa tn>>aaeAL leCS( tether(et btl ~, lei des( DWdtn. In Vi~ 0 ~ I ~ eiCt t<<e un (OrtAVII leis sends p(ven s ss ubnp are Itps(de4 ss f(nw( ae4iva p(sdo. Thty uotei4<<v(t ~ ~ ( ih cvrie,r 41 atnsptn>>AL Vhdtr cthleei Dc(tet ~ c<<tv(el Inctl QB hart Dn(y (hat( Inetsleffn( cat(scitretacs, lh Uee cue Dl vlelnees, ~ eef ~ e>> Ivcle vt tin ~ I ~ (evphl heeds<<4o abbe(y ~ I ibt (Ill~ ( 14 liettl 4 ~ 11 bill(oil i ~ ~ I(AIO Ceasel;teehf DSI py AH(lr Ill<<pens, Iei bit Cts ~ Ol Dvffr trptl Osaplilan ~ ~ I lorn( i,i,(~ dale, H eb<<pe(s. che(ctt Irt Irenf4 ae Irtuc ~ by ~ I~ I( awpah bv( ln geon po<<44t pplhg(rdera O(tfr TVI~ tr Ihe IOrttl into(lath( freCI I~ CV(iry rtrvep. UnCtr 4 SPCK Opere(cent S( ~ PC<<(bit.
tllt4 Sl ltr I U ~ et loeCVit(lrt per>>eh( cthtih ~ et(11 cc'cnl. ~ tu<<si Dt Iho above IIIIHS col(s ccn<<esvl ~ lo ~ bends Dt In(tres( CtAAOI h(CIH dt:l(U p(OT(Tele(r Tht dec1(taft Otic>>tn
- ln'I Sbb rsvn)l es vill V' g ~
01 allured I'(et( delLced( ~ co(eo(hec coheeUSAL Ichor thort at(1 Cion tat tvndlatnlsl rllintll. AI>>(~ I ~ L'I~ IHa ~ ( ~ (ers Stadt ( ~ (td CCC ond CC a(o wvlpht Ipocvlsdoeff, only ont ctlcetacy I icnp 4t (Sero(I coeffidtffd, CCCACC relh Iht Itrtr It((rip 41(it(i(id Iht Ih(ro sotcwlieee, VLLertr a(Screen C( ~ I ~ Sends in lail 0(tva hlet Ior>> l>>tl(atnl Ch<<sci ~ ( ~ lal<<etl io 01(d, DV( CLUIAVSUSA el DVelUoeiablt <>f AD I'I tr D(edHAIAHL TH Vet (soli pah (hei ( ~ ienp lheeC ~ itl ~ cond(vfnL In llu celt ol CC (llingl Vit DDAds asf bt Ivl an I(ecch>> beds ~ Dtcvll<<rr, no(erne ~ Ivr en( p(odt abiepsUoel f Hid Vio psyasnl vff bt so>>U, ~ LOV Orlde lne ~ lietrk Chtraclfrlt<<CS He Vthutpf hnn>>till~ eil Hid Ct(IVII Cwld bt Ia(alntAL Tho IN'ap er c is tuff(ed tor fncoao (ends oh vh(ch no (hie(os( C ls btind POUL TLT>>(wilwinltrtt(Irdlar 0((hcipat in effoHL INVESTMENT SECURITIES REGULATIONS tptcva SeDL TT. spy. v ~ et>>DUD<<tr.et iha Cweehcy illvtd 4 t toIIDA(np . sfcv(UU ii 4ttl rill bi 'i(do gnevsasan(s VA(ch 1(f p(04tniie>>eepf urcwlpvo ItpviaUDIs ~ DDI(enp ID 'I ~ pwchlle lo( hl Drn ~ ccovnl ~ I eeietll(IIAI Iocv((Uw 4 aslveo, by ~ ASUH>>i bthh o( a SLI(o ala(Der bsnh ot lho ftao(H title(eo Sfsloa. Tht le(re pvbli ~ Icwiiy Incbrdes ODUOIUOAI 0( Iht udltd Sltlts ~ nd peh<<st 4depsvoeff ol ~ (ef Sis(o W Ihe Cgellied SI<<es er 0( 4(ef faiebcli Ivboerlteoa D ptt(itt(pnp. TT>> it(AI Ueevtveeonl Itcvrilrr atlas ~ a<<toledo 1biiplvan ia vff fora Tht I<<VI 041(1 Cli Ivbdeffdbh Ot aeef Slsll. Ue(gvdtt ~ Ctvnlf Ci(y, IDrn ~ 4 bond, (eoa et dabthlwo vh(ch il co>>at@IT (eptrofd os on taros(aan( <<ower Dev(dclpel Corps(eve(L ~ pe(UVA ovveerhf. Ond vena(H(y any Dvbnuy B e r ' I Standard. Bc Poorts Corporation, Bonl CuMO, October 1974p page 6.
""""'""Pa e 56 ANNUALREVIEW AND INVESTMENT L1STS January 5, 197G ~ hfoorly's Bonrl Sttrvcy ~ 1781 When Is Interest Coverage a Special Concern?
4 Lower or declining coverage of interest charges is, natur a))y, ahvays a maner of concern to bloody's. And, it is of very special concern when ft could precipitate desperate and possibly imprudent zneasures. This could happen svhen bond indenture restrictions coine into play. Indenture discip)ines, including covcragc tests. were de-signed to protect the bdndho)der under adverse conditions.
~ Wc must assume that the bond investor put hh money on the line assurnlng that this indenture coverage restriction was a secure last linc of defense. Clrcumvenuon of bond ln-dcnture original cove>>ants is a matter of great concern.
When a company cannot sell bonds because it is not gener. ating enough earnings to cover its hitcrcsc requfreincnts by two times, it must get rate relief or sell stock, zegardlcss of the difficulties involved. Is ft not contrary to the spirit of thc bond contract co zesort heavQy'to altcrnativc forms of debt financing? Such znlght iriclude )cases involving gc>>crating cquipmcnt; high
)cvels of more or.)ess pcrznanent )ayers of shorter tenn credit; and shifts to,debenture financing where co>>straints niay be more inoderate. Wc cannot ovctlook such steps, ivhlch arc for thc most part symptomatic of dccp and unrcso)vcd prob-lans. The fncuzzcncc of fixed ob))gatfons of this type, re.
gard)css of whether or not they arc subordi>>ated to the mortgage bonds, docs not improve chc q>>a)icy of senior debt. Po))ut)on co>>tzo) fhia>>cing, no matter how noble its pur-pose or hoiv cconolllic hs usc, co>>hi become ail increasing threat to t)ic quality of other debt u>>dcr certain circum. stances. If payincnts made to satisfy terms of thc i>>sir>>ment arc not rcf)ected in i>>demure tests pertaining to covcrarc, for cxamplc, how much closer is thc company to that nvo. times coverage )fm)tatfon? Or how much has ic gone bc)ow general. thcsc credits now account for over lo~c of lntcrcst ft? Can pollution control financing be consfdcred aside froin comragc. This, ln our opi>>ion, makes so ca)lcd circumvc>>tive the normal )cvcl of debt? Vge do not thi>>k so. ffnanci>>g all the morc qucstionablc. We bc)ievc ft ls worth mentioning that most indcnturcs lt concerns us great)y that bc)ii>>d thc satisfactio>> cf thc aze si)enc svith regard to thc inclusion of allowance for mortgage fncurrcncc test of nvo.times prctax earnings cov. funds used durl>>g construction in earnings as defined erage of intcrc. t charges thcrc lies a )argi accou>>ting rrcdit. therein. ))owe<<or, this once insignificant accounting item and that, outside of thc co>>irol oi')iat test, there niay bc has become subnanual i>> size, and fn most instances, is in- large a>>iounts of other forms of debt. Any such siiuat!on cluded as an earnings credit for indcnturc coverage pur- wou)d bc a sure sign of wcakncss a>>d would reflect upon d poses. There arc many who question thc quality of such company's financial integrity. caznings crcdfts, and their acceptance has allowed some companies to finance via bonds whcrc othcrivfsc they wou)d ~ ~ ~ not have been pcrmincd to do so. Thc diffcrcncc>>atura)ly vaaies from coinpany to company, but, for thc industry in r Moody's Investors Servfce, Inc., Mood 'r Bond Survey, January 5, 1976, page s 1781-1782,
~ I stns aga resuN of a 20% gals ly increase to the teachers. This raise parallels thc orget $ leee er Mvxeee ~ Trace rcccnt risc of the state minimum teacher's salary, maintsininp Mes. $ 4.I II
~
Pee Ceieie Isreeuee aereec laewae $ 4.1st qlJIC ISD'S Pay SCSIC at S800 abOrC Ihe StaIC minimum. ThC a JOPIiOn Aeeiere Ieeeeeaeal Iul ISSVI IOSII. of Ibis incrcascd salary capcnsc was made posublc by thc new state Meesee I<<eeeee44 hat I4sse ISJ44 funding allocation which increased s'tate aid to Ihc dictrict. Increased e elol xs I$ 4 debt acmee costs of S4Q( tee in this yes I'4 bvdpet are s leo important.
\et Ieeeee44eeeeeees Sllsuuwoeie 44.4 $ 1l aeee4 salle ver cevil $ $ S41 $ Sage tseeeec $ 4ee Si cease ceo<< Saeteaee. Iets eseeeet Tax collecgons on Ihe current )cry have averaged 96.28% for thc bsl five years. Thc diaiiet Iax cate has incrcaccd lrom 12.9 milli in According Io thc 1970 Census. Ihe mcdbn home value for th>> oty 1970 to 14.4 miqb currently, and oAiciab expect it Io remain at this (SIS 000) is higher than that of thc statc 1$ 12 000).
)erd for at bast thrcc morc years. Bonded debt is retired slowty. with 125% retired within five years", snd 296% within ten.
hfrsqidrr iSD hnr rxldhiird good em<<vh rhororrrnirirg ond hnr rico<<aged Ag fino<<rrr <<rfh line rvrr, drbr is hrary ond Ihr rrrirrnirnr Socioeconomic data for the City of Mesquite compares favoraMy gchrdedr ts slow. IVC urr ro<<rbeuing ovr "e4" Cvod Crude roring on Texas: Sdegqutlr fSD. FUNDAMENTAL APPROACH TO PUBLIC UTILITY BOND RATINGS Our Public UtilitySection has prepared the following detailed review setting out our approach and the major analytical considerations involved in rating utility bonds. Hopefully, this survey wi7i cnligh Icn our readerp as to our methods and analysis in (his
*widdyfollowed area and thereby allow them fo follow our individual issue rating re-views in besser pcrspccslve.
~ ~ ~
I n evaluating utility credit risks, our staning point is an andysis of thc varying operating and financial risks that may be being the dectric, gas and telephone i<<durrrirs in the years ahead under ciation tates to be at resiatie levds. based on engineering ond eco-nomic gauges. Although wc have lntle interest in becoming emb roiled in the thcorctical argument of whcthcr or not present customers dilfcring cconomi>> scenario. For the electri utility industry, this in. should pay for needs of future cunomers. <<e recognise that the volvcs thccfcvctopment of sales and Ansncisl state ment forecasts for a practical erect of inAationsry conditions is that Ihe rate-making five-year period using best guess estimates and realistic cconornic procedures of flow.through accounting and accrual of AFDC assumptions, and the derivatio of s eomprchentivc sct of operating (aAowsncc for funds used during conuruetion) exacerbate a'lrcady and Snaneial parameters <<high are used to make comparisons. scriovs cash Ao>>'roblems for growing. capital intensiie companies, Working <<ith this model, <<c investigate industry tolcranecs to worst- resulting in deterioration indebt safety paramctcrs and credit ratings. casc conditions, such as the potential impacts of os-going double<<fig!I inaation, of lscL of access to Ihe capital markets. of rcccssion-induced Coverage As An Analytical Tool kwh sales declines and fast paced load gro<<ch, and of seriousl adverse dcvclopments in such areas as fud supply, enrironmcntd re- Tbc primary earnings adequacy tests remain those centering on quirements snd nuclear po<<er. Wc feel this type of anal)wis (done Axed charge coicrsge, not<<ithnanding the fact thm diffcrcnees in. morc loosely for the gas snd Ielcphonc indunries) provides us with a coverage Icvds have narro<<cd significantly in thc psit decade, as Arm bseLdrop for evaluating long.term general industry risk and actual corcrsgcs have deteriorated. Xercrtheless, these tests, if draws attention to subindustry sectors with psrticubr vulnerabiqities. evaluated in the proper framework, siill provide the niota Jircci in ln Ibis context wc src able meaningfully to compare the rdatire
~
dication of a company's ability to carry its present debt load as <<ell as operating and linsneial positbns of individual utilitics. Thc next step in to take on additional debt. Mp presenay uses foe coicmgc tests of Ihe riskdeterminstion process involves comparisons of individud rorof fixed chatges. thc most iinponsnt of <<hieh fili rsiinp purposes utilitics. the rdativc opcratinp advantages and disadrantagec of each, are the pictax and plctsx excluding AIIDC for the more capital inten. particular sources of instability or uncertainty, and debt safety sire dcct ric and gas utilities. A Acr tac coverage st ill merits serio uc at ~ parameters that should prevail in future years. gircn a realistic ap- tention rdstirc to long tcrni hictorical Iaatiuics <<hrn Jiacrcnccs in praisal of economic and regulatory Climates. While thc einphasis of Iax rates were much less meaningful nnd. Io sonic extent, for ovr analytical worL is on projecting Ihe future. when thc debt is to be tdcphone utilities. as measures of rdatiic aAcr tax carninpa po<<er anil Outgtanding. StrOng eOnSidCratiOn mulct Still bC givCn the track rCeard captat accvllllllallvnpvtclltlalrlfless capital lntclleilC CiluiPanice that of Ihc psst scvrml yean, in that it rcAects management'4 rcbtivc suc. face potentially brl.er csposuice IO eeononiir Jiclvcaiionc und lvnp. cess in tocctinp goals and dealing <<ith problcnt areas. Furthcrmorc. term comprtitnC threats. Our computatioiis uic vll ien rviol fixed bitegrsl inputs into our anal)sic arc most current capita) structure charges, inasmuch as all charges have Io bc mrt tv prevent Jcfault. positions, stated eapitatiration goab and their rcaeonahicnrss, and, in ~ nd we give very little attention Io pro foroia cvrcragc. preferring, Ihc rrgubtory area, Ihc constraints of state laws, FSC policies and hlslead projectrJ ccercragc haled on a full set of ccvnoioic and rate prcccdrnts and indicated luture directions. case assumietivns, ~ At Standard Ik I'ovr'4 <<e hare come Io tbc condusion tlist one of Looking at prrtax coverage shine, and Jicrvssinp rating puidelines thc strongest fumes nf protection of interest paymentg and tinidy rc. in Ihc Ivvadcst of terms. <<r Ciod it csteenlrly Jittiiult Iv nisi<<tain a paymrnt of principal ii a rdisIJC stream of heauhy earnings, bacLCJ AA long tcroi credit rating oo nmit drct lie ulduies lf Coverage ii up by cash Aows that ate satiibctury on their own and not Jiipropor- suhstanJaiJ and docs not shiiw rraconal4y liim piviprcti fvi lionatc Io capital and debt service Iequircnients. We look for dcprc. improvement to Ihe oii<<(<<iv<>phon>> and disadvantages o( thc combined company as an issu>>r. NTiilc com-gas uiiiitics. Correspondingly, fur a medium quality "A" credit panies under thc B>>B System umbrdla clearly benefit in ninny wa>s rating, on an 4>>ctric utility, we would have Io hc aware of seriously from Ibcir association <<ith thc parent. I9)4 dcn<<initiated thai in a comp>>lling reasons to maintain Ihe rating within thai category i( 6nancial pinch individual debt.issuiog suhiidiaries can also be disud. coverage could nol be cxpccied Io improve to or (rarr the 2S0-2.TS vantaged by ihc problems vlf>>>>ting ihc parent holding conipxny. Ilm>>s level in a rcasohaM>> time frame. If pfeiax covcrag>> is only 2.0 limes or I>>ss on both an actual and a projected basis, wc have found A) Tbc mix of a company's revenues, comings, and asset earning that wc mutt seriously question wheiher thc lower medium grade invcsimcnts.and related growth factors provide basis n:easure-
"BBB" investmcnt category is appropriat for ihat issuer's debt mcnts by which onc can gauge rdativc cxposurc Io norivro(
Issues, or whcihcr debt safety cushions are so inadequate thai only a operating. economic and financial ris'ks. Industria sales versus rdxtivdy s pecu)a tive grade "BB" rating can bc assigned to Iong. term oeridential and commercial, higher priority gas sales vvrsur lo<<er Issue priority usage, toll versus local phone revenues, <<holrsalc rdatlve to tetail busmess, jurisdictiona earnings, and invest meni and earn. It should also bc recognized that the above.mentioned minimum ings breakdowns by r>>gulatory jurisdictions are most funda mcniah
>>overage.)eve)s matc allowances (or an clcctric utility indusiry cxperi>>n4ng an unfavorable>>yelc o( serious camings erosion and ~
B) Tbc service area a uiiliiy is responsible for provides ihe un-
.6nancial stress. Thus, the long term character of our bond rating derlying 6nancixi support (or utility operations, Rerognixing Ihat system would require that wc look (or higher minimum coverage customer or demand growth is now more oftrn a burden than a I>>ve)s shouM it bccomc evident that thc industry or individual corn positive attribute, <<e >>i aiuate Ihe varying Iyp>>s of gro<>ations of geographical locxiion. such as su~xi and urban upgrading on its debt issues. character. eni'ironmcntal considerations, climat>> and (uel source While such cov>>rage guidelines are a potentially important proximity on utility operating cost and cllidency I>>i>>is. Iv'ot io bc analytical tool, they could lead to seriously misleading conclusions if cx4uded are political and soci~onomic attitudes towards growth used in a vacuum and irithout a comprehensive appraisat of (unda- and industr.
tncntal op>>rating and 6nancial risks, of sources of votati1it2 and C) The quality of se nice provided and the adequacy of customer stab11ity. of asset and cash 6ow proicetion, and of regulatory and and puMic relations are keys to aseertaining ho<<'cll a uti1ity is management prerogatives. Ahhough <<c 6nd it exceedingly di(6>>ult to shade the above minimum coverage guidelines lower, even when most meeting its (ran>>his>> obligations. Inadequacies in these areas (most p>>itin>>at for telephone companies) potentially threaten achievable other indicators point in favorable directions, we quite often dctcr-Icvcls!rom boih an economic and a regulator> standpoint. 'arnings minc that wc must require modciatdy to significantly higher covcragc Rdiabgity of fuel and po<<er supply. exposure io eni'ircnmental Ievds in individual casa where particular problems, disadvantages or problems, operating e(qcicncies, level of plant modernirarion, gas un>>ehainties exist. r ~ ystem safety'and the adcquaey of maintenance praccecs arc Furthermore, there are many instances where differing types of checked Ior potential problems and shortcomings. coverage ratios arc morc suitable in measuring long term camings aod cash Gow ptotection. and ai least as many cases <<%>>rc 6xed For thc cleeiri>> and gas uiilities, fuel supply position mxy still bc regarded as favorable or unfavorable in terms of cost and charge eovcragc tests must be given only modesi <<eight in thc credit evaluation process. The (ormer ease is typified by natural gas utilities availaHiity. How>>vcr, ihc long term tread to nation<<ide energy
<<itb serious supply problems, where incrcascd auention muu be given poli>>> scning and end us>> allocations and th>> now icry h~ out.
debt scnicc coveragcs. A prime example of thc biter situation is a look regarding most fuels make it dilficult Io satisfscioril> evaluate fast gro<<ing elcctrie uiilii>'hich expects Io tripl or quadtuple its risk in ihis arcs.
>>apitalixaiion In Ihe next five >cars. Thc projected corresponding I>) Tbe overriding intro indkrsri> cconomi>> risks arc, ai we see growth of the debt burden and the earnings rcquircmcnts makes risk them. i) deterioratin <<ellhcad gas supply and an uncertaLn supple.
appraisal all the ninrc dependent on vYiibi1ity of regulatory eliinatc, mentary supply outlook for the gas utilitiev, ii) the Iung term threat financial 0>>xiNity, and ability to carry risk in plant under construc- of comp>>tition in thc mote jiro(itaM>> areas of the telephone in. tion. dustry: and iTi) the risl. of not b>>ing aM>> Io earn a return or recoup Finally. as a tool measuring earnings protection, fixed charge Ihe (ull invest ment in a major unused, unfinishcd. or unusa Hc pbni. coverage analysis musi be supplemented by cash Qow analysis and safety margin anal> sis so as adequately to take into consideration vul.
- 2. fvrduorkm of rhr ronipony'x fivryrnr ronrrrurrion progrom.
Thc larger Ihc sire of Ihr program relaiivc Iu cupitatixation, ihc morc ncrability to sales declines and cost cscalations and potential volatiliiy important aie favorable operating and financial parameims and good factors. v)sitxlity. Our greaiest >>nncerns are <<hcther the hxsii of the program PRIMARY ANALYTICALCONSIDERATIONS rests on high or low esiimaies of demand gro<<th. <<heihrr there is
)ust as the credit rating priicess cannot evaluate fuiute comings sullicicnl Iicxibihiy to adjust ih>> program up<<'aidi or do<<nwards in protection in a vacuum, it assuredly cannot limit its analytical scope future years wiihout endangerin the service obligxriion. and <<briber to caminfs protection atone. The morc important analytical con- rcasonaMc cost escalation (actors arc emplo>cd. UicaLdo<<n of the siderations entering into utBity ratings are the following: prograni into return.jusiiiiable projects and non ieienuc I inducing outlays is revealing. <<bile adjuitnicnis are rnadc for puisihli omitted I. Coniponyslrr oad rypr ofopi rorimis. The potential benefits and projects ur contingent eipenditures. Thc track reroid ul adequacy.
viublity of a large sired eiimpiny can rw more he i>>noted than ihc quality and short(alii o( past ptanniog is sctutinircd for indvrations of
'ossiMe exposures of small utilitics icning limited aicas. The case is potentul Iuluie problems.
far froni >>lear cut hu<<>>ier, ns evhlcn>>ed by Con I dison's ltrN prob
~
lems and thc excellent rei<<irdi chxlL>>d up by ninny niuderatc s'ucd L A'rgrdaruc rlimu(n lm'lading pnxrrihrd rorr oiolihr ond or. utgitics. AI<<ive, we nientiooed ttiai we hioL (or higher covernxcs on ronnrrng rrnvrmnvr. The ah'hiy of a utility sxlnbctorily Io fund iis most gas and telephone uiiliiics. For eonibinaiiun uiiliiics or construction program and io in>>et current and fiiiuicsen<<'e icituirc diversified eunipaoics, wc try, In Ihe cxicnt poisildc, Iu investigate the nients 6 intimately drpendeni on Ilia comings and >>xiii thi<< l>>vels creditworthiness of carh business, and ilien liwL (ur thc advantages or allowed, (although nui guaranteed) by Itic juriidichwnal reauiatory Pago 98$ FIXLI) INCOME IN'VISTOR Standard h Poor'.". Corporation, TI>c Fixed InCOrni~'nVC=tnr, January 3, 1976, ',>aurvC 9ii8.
.l A y~
Page 5 k body. In addAion to being familiar with the basic Iegi)lative statutes service rcquircment). Company Ananelng plans and management'5 snd mandated court interpretation) which )pell out thc (round rules cajital structure objectives. hive) important tr u) arc the percentage under which a regulatory agency must operate. we follow most of ihc of cash rcquiremcnte thai may bc financed from ini!mal sources, and Important general rstr case dc>>i)ion) for guidance as to commie)ion thc implications of tbe program for eoniinw'ng curn)sf) protection fa) poli>>les and precedent). In recent years a wcs! rh of in(ormation has mea)ared by debt to capital)ration, and debt io nct )lani asset ratio)I, become available in this arcs. shhough. un(or)unatdy there is a The latter is regarded as less imporisni on its o<<n t> in it is in relation sparsity of up.)Mate court ruling) regarding the rcasonablene)) o' to its e(feet on probsM>> snd potential earning> pre:>>etio>> under the commi)sion deci)ion) under current inAstionary conditions. Com- con)traint) of regulaiury policy. Thus. certain rum>en)armg br)or) ~ bining mansgcmcnt a))cs)ments o( their companici'sic incr>>a)e such as excellent vi)ibility regardinf a high rctuin on rituity. might ne>>ds and strategic), as well as information and philosophy gleaned allow some utiliiic) to In c <<ith a hi(her debt ratio than other<<i)e fmm past eommi))ion action), wc dree)op a considered judgement as would bc thc case. Thc credit standingi of surh miliiics would, to future rate ca)c outcome) and timing. This evaluation is funda- howcvcr, tend to be mote vulneraMc to un>>spec)sd thon ierm ad-mental to our own projections of b tv re debt safety margins. versities unless they <<erc able to maintain bvoraUc financing Acxi. bility. 4c must bc cxpccted, evaluation of regulatory climate is o(tcn thc mos) dihicult a)pcct of the bond rating process, particularly so since 5. Ffnonrfog Rrxibi((iy. The industry's cxperirn)es in )974 clearly Important changes in commis)ion membership occur with regs>arity, demonstrated what many ob)>>)vers hsd always )caper)ed. that thc and (undamental changes in the governing legi)lative statute) src capital mark>>is src not nece))anly open for most ef the peqple mo)) being made <<ith in>>rca)ing frcqucncy. Accordingly, <<c try to becom>> of th>> lime, and thai )h>> public utiTity industrie), <<ith their huge acquainted <<ith political and consumer auitude) toward utilitics, capital demands, can bc seriou)ly impsard when Ss door) are elo)ed privat entcipri)c and government in thc juri)dictional area to which a for some of thc people some o(ihe iimc. Parti>>vis)i>'n an uncertain uppity bdong). AI)o, wc try to a))cis the degree of eomprtcnce. so. inhsiionary environment. it i) becoming incrcaiici'.y irsportam that phiiticatios and general adequacy of the commis)ion staff. In addition utditics have good financing Acxibiliiyi(they are to retain medium and to being th>> e'orkhorsc of regulation. thc sta(f ii aao able )o provide higher. grade ercdit rating) on ihrir debt issues axd me)tt favorable Isdcpendcnt judgement that oacn )>>hect) a long.ierm understanding consideration <<iih regard to commercial paper a::egs. Our ana)ysi) of particular uti1ity problems snd hdp) a))ure continuity of policy. in this area involve) an evaluation of We do our best not to prejudge the outcome of rotc cases, roeog- f) present and potential bank credit availsblr and back.up on alriog that such quasi judicial proceedings ineoivr a dynqmic cdu>>a. commercial paper issues: tionsl process for all panic). In numerovi in))ance) <<c are in contact ii) Rexibility to issue funded and un)rcurcd debt and preferred eriS commission members snd )heir staffs to ob)ain additional insight stock under thc various re)trictiie >>ovens:i. Cnmpanie) are brio thc philosophies snd implication) o( rcgulaton'ctions, snd wc at a particular diadvsn)age if ihry contin.)ll> bump again)t welcome eommi))ion)'nquiries ai to our rating philo)ophy as <<vlI as restrictio) which src regarded a) reason)Mc in their o<<n Its application to particular eompanie). Wc're)pemfull> emphasize to right. commi)sion), uti)i)ir) and isve))or) thai our only concern is (or our )1i) vulnerabiTity to)hurt.re)mope)sting andre>>nomic risk): rating) to bc as sceuratc sn appraisal of risk si I) humanly possible. iv) s<<ingi in short )erm deb) u)age and (u:ere i<<>~kg in thi) We do not ie)lily in rate cases. ho<<vier. ina)much as we believe that regard. Higher a<<eragc u)e of )hort.ierm "rbi briwecn per. any partiYipaiion is a case could )eriouily in:pair our objectivity in manest Ananeing) ii tceognizcd a) little morc ihsn main-utilit>'orn. rating decisions. In evaluating aie cases <<iihin a particular juri)die. tcnancc of permanent debi in the capital )trerture: tios, <<c look poiiindy on eon)i)tent, <<>>II reasoned policy dec Yiion) v) an ability to finance through prc(errcd )to L. preference stock. Sat addi>>)) )hem)r>vcs to utility pr>>M>>ms. Standard dc Poor's or common equity. thc lacer at rea)ona~.'r marL)t vain>> to usually refrains from taking positions on vs riou) comroi ersial regula. booL value ratio). lory issues. but does rccognitc that both commit)ion) asd ri) relative u)e of olf balance sheet financing ard hcxibgiiy to Icasr ponies wAI have to consider innoistivr regulaiory and Anancing ap. or se>I the morc liquid company a)sets in rr..rigcncim. proache) i( rcspcrtaMe earnings and cash Ao<<protceiion arc to br v)1) AexibAity tc redure the con))rur)ius and m)is)>>nance program maintained. Sy seers) ity, <<c are concerned with: without scriousl>'ndangering seniee or tc have other ponies contribute to (ut urc ca pi)at require ments, I) findings on rates o( return and rate bx)e. adjusted to )ime vru) )<<e).year forward analysis of projected -lsigcly unde(crrablc" frames and equity bs)>> in the >>apl)alias)ion; cxtemsl espial re'quiicmenis ss related io capita)isation sire R) extent of rrfulatory lag. which might con))rain companies and>>oniingcn tly available ca pial source). from camlng the return nBowed. Ix) poliYies and practice as io sale of long.term srruritim, in. m) accouniinf and rate maLing procedures prescribed, which eluding the degree of cons>>res)i)nt cvidrr.:rd in preparin for significsn)ly ishucnee thr "quali:y" of earning) and resultant upcoming rcfundingi. cs)h Ao w protection. x) wars)ware coniingency plans, including run)id>>ration of how Iv) the avai1abihty, or lack thrrrof. of intrrim and/or emergency msnsgrmcnt views As prerogatives and priorities under such rsie rr>icf, and prerondAI<<nns (or approval. condition), v) suitudc) eeidenrrd toward) company arguments ha)cd on in-
)areal coverage requirements anJ the need io mainain credit standing. d. Fvo(voriun of nruooxrmrnrr This i) withnet a doubt thc n<<>)t thc prcsenre or absence o(short term uii1ity protection against diAicult area in <<hieh to maLC sn obirrin>> anal>)ii )hat ha) validiiy vi) vobiilc furl and put>>ha)iJ po<<rr Au>>)us)ion). as s nira)urcmcni of future it>>bi safety. Yrt. )erogniring the im.
portancc of thi) varia)J>>, <<c ilo maLt judgnirats and eva)us)ion) ei) say particular utility repulsion problems wiih respect tn thr adequacy of comnuinicaiiuni, n<<iperatnenc)s and credibility. hami upon
- 4. Finunrbg Rcqv(nrnirnrr, ('o(i(ra'i:>>ruin und Assn Pr irrrrbvr. i) thc Iong term i)set rrriird. hn>> sucrcii(ul management has
>laving translated )lie parameters o( regulatory Mimsrc in terms nf bren in nirciing sliarehnldcr ubjrv)ivce. and <<brihrr such euc.
probsblc bture earning) snd cash iiuw pitrntivl, <<c proceed to ceases or biliwci can be sttrihvirJ io nrsnsgenirnt or tu inhrr cvslustc their adequacy rrbtiic io the Construe)iiin program, debt consideration); Ja)) t)ary 3, 1976 Page 959 Standard E: Poor': Cnrpr>ratinn, The Fixed Incnme Invc Atr>rrJanuary 3, lej".6, "a;e 989.
I) cridencc of sophisticated and well.reasoacd planning for thc csamiaed as to both the covenants agreed to snd thc remcdiec fvlurc and thc hcritulity that msnsgcmcai builds inlo major ,apeeiticd for lack o( complisnec. Thc standard prov>>i>ns are, cf policy decisions; course. looked for, and dilferentistions made, whece morc nc le s pro-gi) dcmonurstioa of conscrvstc'sm in both operations snd plan- Iection is a(lorded Ihe bondholder, or <<herc unduly rennctive prvvu nhcg, snd aggressiveness snd leadership in tackling or taking sions hamper operations snd hesihitity. Liberal>rations ia thc e-posiYions in industry problem areas: dcnture sre questioned <<ith psrticu(sr scriuusncii ss to Ivitilitstits h>) msnsgemcat's views towards balancing of public snd privat and rrasonablcness sad whether they msy lead tv increased crcds priorities. and its awareness o( tbc importance of the debtor- risk. Attempts by companies to circumient restrictive covensn>a crcditor rdationship and responsibilities Iowsrds meeting con- which src not unreasonable in their o<<n right, most often do entLI tractual obligations on time. higher risks for bondholdcrs.
<<) a dcmonstratcd record of credibility snd successful rdstions
<<dth thc bnancisl community, the public, the media, snd of course, the rcg vlato ry agcncics, upon all of whom thc company Tbc total sum o(our analysis. updated (or each utihit! regutsrI!.
tpvst rely. serves as thc basis on which wc compare snd evaluate ietstiic snd At Standard ee poor's, wc fully recognize that thc success or failure absolute credit ris'ks for over 250 utilny issuert. Onc as~I <<e sre of our rating decisions can hinge on thc correct evaluation of mansge- particularly conte'ious of, is msintsininr the most proper shgnment s( tncnt. Yet ovr evaluation must aao be sdf limiting, since vcr( poor credit ratings (or utility lssucrs <<ithin each regutstocy jurisdietio.. management as<<ally is replaced. Abo, we recognize that many Actually. tbe rating decision making process is quite s dinsmi ore. managements bsvc and arc continuing to learn from past hcdvstcy coatinuously requeuioning snd redeicrr..ining the icn basic issues i:~ mistakes, particularly in the (cnancisI area. valved in credit risk and its evaluation-not onli for util>:ces, but fsr
- y. Issuing Dotumtnrr. These documents. snd, particularly, the all issucrs, Ultimatdy. our el(orts src guided b!'s desire to be ss fi:r trust Indcnturc (which spells out the contract between issuer and as pcvssible to the issuer, <<hile providing thc most e bjecto c and a>>
bondholder), are the bedrock ol'hc public capital markets, and arc curate appraisal of risk as iipossible to thc investor. SEASONAL LULL CONTlNUEO Llgh(, profi(-(aking and year-cnd portfolio positioning was in evidence last weel'. nol surpn'sing %et the strong December rally in which yields declined half as much as dun'ng (he whole second half. The advanccin yields las( week was minor co'mpqred <<7'(h lhe dccreasein (he previous l wo weeks or so. There iieet no ncw open'ngs. Thc January calendar will be decidedly ligh(er shan lhe teccn( monthly average ard well below half of last January, a principal cxplana(ion being compara(ivcly good cor-pora(e liquidity. A slower rate of inJla(ion should encourage buyer in(tres(. which would bc enhanced were equi(ies (o conlinue (o recover and become less compelilive on a yield basis. The Fed's morc accommodalive policy since mid foll is ann(her in-duccmen(, (oge(her with lhe rcalizalion that it ac(ed lo help preclude record ra(es in l97S in (hc face ofsomc $ 80 billion offcdcral deb( financin. Thus. lhe markcl should bc rcla(iveiy slcady in the near-(erm, and rcsrmrp(ion of selec(ive purchases is war-
'ranted.
Corporate Anatyses and Briefs NEW ENGLAND TELEPHONE g: TELECRAPH regulatory lsg problem and is maintaining a tight ran on Loth cs(c:sI COMPANY spending snd operating eapenscs, Considrrng rhc pa>mr>'al bt Maintain "AA -" Ra(ing lmproitmtnr (n borh in)trna( tach Strtrarion cad fur furu>t tocnryr ro mort tlostly apprc>ath rht rtcwns af(o>>td. >>t t>t prtsttdu c recently completed a lull rating review of Ihe New England nicn>>raining rht >I>I "rc>ring on all outstanding Dtbt>>cures ofAtw Telephone h. Telegraph Company, appraising thc funds. &gland Tc(tphont dc Tt(tgraph Con:,"any.
mental situation in light of thc Octohec 27, 197S. Mniisehusetts rate derisio and other changes in Ihc outlook. Thc company hsd last been rericwrd on hlsy 24. 197$ (scc page b)9 of thc I'.1.1.1, when, in con. 1NDJANAPOL)S KVATER CO@i PANY section with Ihc sale of SITS cnillion of debentures, wc changed thc denOIStiOa On eahting Sad aew deheature iiauCS IO "AA-."frOm Selling Fi rrl Mnr(gogt Ronds "AA"previously. a mid Ssnuscy, Indisnspvlis Water will ih'cr Slg.(sth.r>r>>I First Kited char(c eovecsges are in Ihc process of hot toniing oul. sided Mnrtgsgc ltondi clue Ivg>b through sn undec>>citiay cyiidiestr ted by thc in(i>sic>n v(SITS nccllion o(eonmion ccluity Inst April, rate rclief by Ouhlmsn, Sachs g: Co. The iiiut <
- c picitrcrecl s(sinit lu>>ec. i et now heing ecclleettd, and a reduction in eonitruclicin ei pcndituce rc- t bcterest toit rc(undin(. for five >cari I'rc>ceca fcum II isle <
- > I uitherriocc. cicoderste icnpruvcnlent in clct>t pcoteclhin used tv ietirc st nistucity sly.725,t>co principii amount ii( it c t:m.
parameters is a reasonable near tcrni espcctstic>n aad we note Ilist puny's I'irst Moctgs(c lhmdi, 2sc'S clue 197t>. <<nh Ihc hslunie o(the the company is diligently pursuing rate rriie( to ameliorate a serious net pic<<Ws Io be adds tv Ilia eumpsn!'s general fundi, In Page990 FIXED INCOMLi INVLSTOR Standard gt Poor's Corporation, The Fixttd Income Inve "tor, January 3, 19(."'...a.;e 9f..
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I Page 61 March 3, 1975 Mocf1JI 8 Bond Snyvcfj ~ 15 part of 1974, c<>vcrngc of fiard cl)nrgcs nml preferred divl.
Public Utilities dcnds hns dcc)i)><n) io uncn(icfi<c(c)Y levels. hicnniviii)c, thc Comment compaiiy's cnnstruciinn progrnui, cvcn after Tubstiuitinl cut.
backs, is call:n' for spcndiiig uf $ ).) lail)ion over tlic 1975-Electric Utility Bond. Ratings 1977 pcr)od. '1'his is n hcavy program rclniivc tu internal Moody'c rcduccd thc bond ratings of 28 clcctric utility cash gcncrntion nnd outshlc fi)):u)ci))gs arc capccicd to con-companies In 1574 and scvcn thus far in 1975. Only two tinue to prcssure thc overall financial pnsnirc ui'hc com-comps(des had bond ratings raised during this, time. 1- pany. ln view uf (hc above. Muddy"s has rcduccd thc ratings vcstors should not conclude that this unusually large num on thc company's first mortgage bond~ to fzna.
bcr of downgradings indicates that wc lack confidence in thc long-term financial viability of the electric utility in- Owa Electric Light S< Power Company dustry. To Ihc contrary, and recognizing that thc(C may be fur(her rating rcducdons, it rou)d ivcll bc that thc worst Rhtq rc)lcf plnccd in effect hi 157) has proiicd )nisi(Efc)cnt may soon be over fcr most of thc companies in this in- to hnh dilution in intcrcst coverage rttios. htcn))yf<I)e, addi.
dustry. Readers of Bofao Sunvgy should bc aware that each tional accumulation of debt without Injec(IOJ<c of equity downward zat)ng adjustmcnt rcflcctcd a specific and idcnd- capital hns rcsulicd in a zclntivcly high debt<~a(in. In view Sable problem related to the company in question. of this, Moody's is )oiiiering thc ratings on thc company's Wh00 each company is different in its stronger and first rnortgagc bonds to San from A and on its pollution weaker elcmcnts, there has been a common problem among control rcvcnuc bonds to f)a froin Sna.
those ivhose debt bas been do<s7)graded. )n a broad sense, many of the things thai could have gone wrong for the New issues industry did just that in 1974..5kyrockcdng oil prices, zun.
aivay inflation, disasferous bond and stock markets, ncnz.
acro sales growth due )arg'e)y to conservation, unpredictable faults in nuclear power units and slow regu)a(ory responses in a political year had a thumping advcrsc cffcct. Com-panies that went into )974 in a stzaincd financial posidon Central llhnois Light Company Rating Aa First Mtge. (J)/4s, 3/1/2005 Amount (hing)
S25.0 CaN Price G)110.00 01!e ring Poise 100.75 Current 9.18%
Yleldo-hia<uriiy 9.18%o were further weakened. And, their problems have been G)Nonrcfundablc prior io s/I/O . with debt at an interest cost o(
less than 9.tsv, annually; otherwise eo)iaiile as a whole or in part complicated ivhcre in(crnal cash gcncradon has been mbi- ai any lime On SO day) nO<iee ~ < IIO.<a> ihraugh t/ZO/ra) ai IOO.CS
)ma) in relation to capital needs. This has zcally been the Ihrcugh tltt/77, prei>><urn deerea>ing Ie><he< S)/IOO o< SS/IOOI an-nually Ihcreaf<c< (los.s on s/I/ssl io )00 on 0/I/."00<. special Te-basic problem of ihc industzy. Reladvcly low cash flow, a de<npilon at 1007S fo< Ihe first nine years. Ioo cr the/a*fico.
function, u)tlmate)y, of inadequate rate structuzcs, neces- Do/ono> Offcrcd on February 25 at 100.75 to yield 9.18% ~
sitates too much reliance on capital markets, particularly for debt cap)(a). lf this cond)don exists ivhen intcrcst Winning bid, 95.G7/I cover pcr bond, S10.20; cost to corn.
pany 9.28%. O(her detal)s in BotrD SURVEY February 17, coverage Is already under prcssure, ive foci ob)igaicd to 1975, page 1619.
take a morc conservative stance with regard Io rating, opinion> These ldgh.grade bonds are satisfactorily priced pending satisfaciory zesnluiion of intcrmediatc tenn prob. against (he secondary market.
)e)ns.
On the other hand, even ivherc there is a current low )cvcl of inierest coverage, we are inclined to a znorc positive Citizens Utilities Company approach if tbe company'c financing rcquircmcnts arc of First Mtge. S Coll. Tr. 8.30s, 3/1/85 a zeasonable s)ze, all cise being equal. This is Amouni Con Off ring Yle!ds particularly'rue Rating (hilu.) Pnee Price Current hlaiurity
)f Ihc compsn) rcccndy zcccivcd reasonable rate re)icf. An $ 17.5 8)) 00 100 8.30% 8.30%o We tv)Q also take a pending ra(c increase npp)icnrion Into consideration, ascmnlng that thc decision ivi)l bc made RlnedeemabIU only beginning SPeeiai Tcdr<nulion a< 100.
sfl/st and ~t 100 Io,>naiurfiy.
reasonably soon a)id that thc regulators have a record indicating they ivill be alczt nnd rcsponslve to thc com- Dalolfs> Offered on February 27 at 100 to yield 8.30%.
pany's needs. Price to company, 55.25: cost to cnnipsny 8.41%. Other de-So, as wc have for many years stated, hfoody's concern tails in Borin Sunvn, Fcb)t)nry 10, 1575, page 1GG).
is,not always ihc absolute level of debt protection measure- opia!on> These bmids offer no special concession; sce mcnts at a given thnc, but rather thc probable trend of opinion unflcr RV>>s, bc)nw.
(hose mcnsnrrmcnts. WRUc (herc are, ccrtahily, other factors that hifl>>rncc debt qnnlity, cspitnl riqnircuicnts Citizens Utilities Company and rcgn)ation hnv<<bren predominant in rccrnt yf nrr. nnd First Mtge. S Coll. Tr. 8y/ss, 3/1/2005 w)ll rcmaln cn. C<ans(n)<(inn budgets hnvc b<icn trhumcd ha<aunt Cali 011< Ting Yields
)la(lug (hIIII.) price p/Ice curre>ii h)Uny concidrrnbly by m.ill)'niiip/ll)irs,aiul (herc nrc r))cnurngh)g cigns froni conic rcguln<ory st>m>>)ice!one. 'I'h>> hnrrc)>d>>us An 820.0 $ 108.G3 55.75> 8.50% 8.50%
problems of )97) nrc nut likely 0> <lictppcnr. )Ri( their (i<Runt< Iunalabla u<inr lu 0/I/co. willa <li lii ai an In<a<os( rosi aif l<ts Ihau n>>si', ann>>.ill)". n<iiolwisa a,ili,ihh as a at>xiii aar in iaa/I.
~
ningnitndc shonlai mn<l<r.ttc. ')')<0 c)cr(r)c uiility ind<<airy ai any <i<a<a' aal;4< I/i>'a IIIIIII'P, III I<a< /1 ll Iau>;la S/ro/74: al I<tsSS
~ ~
<ha<au<.h 0,'."a<7>>,'ia 'IIIIIIIIIa<a'I'Ia'<a<<a<i <a<<ha T ya; IUU <ar so/Iata< an.
~
ctill hnc n ivny tn gn lx fore it T<<gnins part of wl>ni It hns Iaalhli)'lia Ta'afh'I'><17 Is I Il S/I >a<i lai IU<a iaa 0/li'ol, >'Iaa'eaaal oe
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los( Ju fiii,'I'llciillIaa>!(ursa, )<<It fur llo'iv (herr nrc conic hi- ~ II'uai>lian< (Iul~ I Ia ~ I Ihl'a<ill<i<a/al *I>aalu<'a<<a<i) III Ioo di ft)ui