ML19269E504
| ML19269E504 | |
| Person / Time | |
|---|---|
| Site: | 05000471 |
| Issue date: | 05/09/1979 |
| From: | Levy P ARKANSAS, STATE OF |
| To: | |
| Shared Package | |
| ML19269E500 | List: |
| References | |
| NUDOCS 7906290185 | |
| Download: ML19269E504 (110) | |
Text
-~~ s s w cu;.;;u' . , ,:tm:;,;g UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION BEFORE THE ATOMIC SAFETY AND LICENSING BOARD
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RE: BOSTON EDISON COMPANY, et al., )
Pilgrim Nuclear Generating Station, ) Docket No. 50-471 Unit No. 2 )
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TESTIMONY OF PAUL F. LEVY 9g ( 67b > 2 ON BEHALF OF THE ., w ** %
COMMONWEALTH OF MASSACHUSETTS \, ,
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COMMONWEALTH OF MASSACHUSETTS By: FRANCIS X. BELLOTTI, Attorney General Michael B. Meyer Assistant Attorney General Utilities Division Public Protection Bureau Office of the Massachusetts Attorney General One Ashburton Place, 19th Floor May 9, 1979 Boston, Mass. 02108 617-727-9714 7906290165 2145 2l9
- h. Please state your name, address, and current occupation.
A. My name is Paul F. Levy. I live at 94 Parker Street, Newton Center, Massachusetts. I am currently Director of the State of Arkansas Department of Energy.
Q. Please summarize your educational background and your previous employment and professional experience.
A. I graduated from the Massachusetts Institute of Technology in February, 1974 with an S.B. in Economics, an S.B. in Urban Studies and Planning, and a Masters in City Planning. While at M.I.T., I served as a staff assistant to the Governor's Emergency Energy Task Force during the winter of 1973-74, helping to formulate plans to deal with the Oil Embargo. I also served as a Research Assistant in the M.I.T. Energy Laboratory from February, 1973 to June, 1974, performing work on regional energy economics.
In July, 1974, I was appointed Deputy Director of the Massachusetts Energy Policy Office and served in that capacity until January, 1978. Among my responsibilities were to advise the Governor and the Cabinet on issues pertaining to electric utility financing, capacity expansion, and rate design. I also served as Executive Director of the Governor's Public Power Corporation Study Commission, which studied the feasibility and benefits of creating a public power authority for Massachusetts. I also had other administrative and programatic responsibilities in the Energy Policy Office.
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_2-In January, 1978, I was appointed Commissioner of the Massachusetts Department of Public Utilities. In June, 1978, I was appointed Chairman of the Massachusetts Department of Public Utilities and served in that capacity until January, 1979.
In February, 1979, I was appointed a Fellow at the Center for Public Service at Brandeis University, and I served in that capacity, as well as performing consultant work, until this month, when I was appointed Director of the Arkansas Department of Energy.
Q. Have you testified previously before regulatory or legislative bodies?
A. Yes. I testified before this body on the comparative economics of coal-fired and nuclear generating facilities.
I have also testified before the Massachusetts Department of Public Utilities on the subject of electricity rate structures. I have testified before the Federal Energy Administration on a number of topics. In addition, I was invited to testify before the U.S. Senate Subcommittee on Energy Conservation and Regulation on portions of the then-proposed National Energy Act. I have also testified on a number of occasions before the Massachusetts Legislature's Committee on Government Regulations.
Q. Have you published any articles, papers, or reports on matters relating to electric utilities?
A. Yes. My : taster's thesis, which was published in 1973 as a
report of the M.I.T. Energy Laboratory, was an econometric analysis of the residential demand for electricity in New England. I jointly prepared a report with Karen R.
Polenske in 1974 on the multi-regional economic impacts of energy and transporation policies. I jointly prepared a report with Henry Lee and Randall Ellis in 1975 on the economics of coal-fired and nuclear generating facilities in New England. I wrote an article, which was published in Technoloov Reviete in 1978, entitled "The Politics of Rate Reform", and another, published this year in the Boston Bar Journal, entitled "Recent Developments in Massachusetts Public Utility Law". I also published an Op-Ed article in The 3oston Globe this year entitled, "Why 3oston Edison Should Not Build Pilgrim II".
Q. In your capacity as Commissioner and Chairman of the Massachusetts Department of Public Utilities, did you becona familiar with Boston Edison Company?
A. Yes. I participated in a number of decisions and orders relating to the Company. These mainly concerned fuel adjustment cases, electricity rate structures, and orders in the current preceeding on Boston Edison Company's construction program (DPU #19494) . Although I did not participate in any rate cases involving 3oston Edison Company, I became familiar with the cases of the past few years by reading much of the orders, briefs, and/or records of these cases. In addition, in the day-to-day course of 2145 222
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business, I read a number of documents concerning Boston Edison and had many discussion. with the staff and other Ccmmissioners about Boston Edison.
Q. What is the purpose of your testimony?
A. The purpose of my testimony is to give my professional opinion concerning Boston Edison Company's ability to finance its share of the Pilgrim II nuclear power plant.
Q. Please summarize your opinion on this matter.
A. It is my opinion that if Boston Edison tries to maintain its current 59% ownership in Pilgrim II, it will have extreme difficulty in financing the plant. The major constraint to the Company's successful financing of the plant is its heavy dependence on externally generated capital over the coming years. The cost and availability of this externally generated capital (which amounts to 66%
of the total capital requirements for the Company's cost of the plant) is dependent on a number of factors, many of which are beyond the control of the Company.
Q. On what basis do you offer this opinion?
A. I have read a number of documents prepared by officials of Boston Edison Company which support my conclusions. Among the documents I have reviewed, I attach three as Appendices to my testimony for the Board's information and convenience: Appendix I, entitled " Boston Edison Company, Pilgrim Unit II Financial Analysis cf Comparative 5tudies, Treasury Organization, July 17, 1978", which is a public 2145 223
document and is admitted into evidence as Exhibit AG-II-ll in Massachusetts Department of Public Utilities #19494, Investigation by the Department as to the Capacity Needs of Boston Edison Company and the Construction Program Requested to Meet Such Needs; Appendix II, entitled "Soston Edison Company, Board of Directors Meeting, July 27, 1978, Report on Pilgrim 2 Project", wh'ch is a public document and is admitted into evidence as Exhibit AG-II-13 in Massachusetts Department of Public Utilities #19494; and Appendix III, entitled " Testimony of Ralph M. Kelmon",
which is the pre-filed direct testimony of the Treasurer of Boston Edison Company in the Ccmpany's pending rate case, and which was adopted with minor corrections and changes under oath by Mr. Kelmon on May 2, 1979 in Massachusetts Department of Public Utilities #19991, Boston Edison's pending rate case. I have assumed that the data contained in these three documents is substantially accurate, except for the exceptions mentioned below.
Q. Please summarize your major conclusions.
A. My conclusions, having examined the above-mentioned documents, and some of the Company's filings in this cz.se, are as follows:
(1) Boston Edison Company will, between now and 1986, have increasing difficulty in selling stock and issuing bonds.
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(1) The Company is very dependent on its post-1985 earnings potential to attract investors during the period between now and 1986. These ear.lngs are uncertain and appear to be overstated in the Company's documents.
(3) There are two factors that could improve the Company's earnings and earnings potential. The first is allowance of construction work in progress in the rate base. The second is reducing the Company's ahare in Pilgrim II.
Q. Why will Boston Edison have incredsing difficulty in issuing debt and equity securities between now and 1986?
A. There are a number of reasons.
First, the high percentage of allowance for funds used during construction (AFUDC) will reduce the quality of the Company's earnings in the eyes of the investment community. This is because AFUDC is a non-cash item that is dependent on future regulatory action for its collection.
Page 20 *of Appendix I indicates that if Boston Edison retains its 59% share of Pilgrim II, AFUDC as a percentage of earnings per share (EPS) will rise from 35% in 1978 to 95% in 1985. This continuing increase in AFUDC as a percentage of EPS will make the Ccmpany's stock less attractive to the investment ccmmunity compared to other utilities' and other companies' acks. In addition, it will make the Ccmpany's stock less attractive relative to earlier issuances of its own stcck.
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- Page references are to overall pages in document, which are in places un-numbered.
Second, page 9 of Appendix I indicates that the external financing recuirements for a 59% share in' Pilgrim II will result in a cumulative dilution in current stockholders' bcok value of $3.11 per share. This dilution makes the Company a less attractive investment to potential investors who fear that the same thing will happen to them.
Third, as a result of the above, institutional investors who, as mentioned on pages 9 and 10 of Appendix I, are already shying away from the Ccmpany's securities, would not be likely to become more interested in those securities and in fact might become less interested. Thus, the available market for the Company's securities would not grow appreciably and in fact might shrink.
Fourth, interest coverage on bonds (excluding AFUDC) will drop between now and 1986, making the Company's bonds less attractive. This could result in a further downgrading of the Company's bonds by the rating agencies and would almost certainly prevent the upgrading of the Company's bonds.
As a result of all of the above, the cost of externally generated capital is going to be very high for Boston Edison Company. This will in turn increase AFUDC as a percentage of EPS and will cause further reduction in coverage ratios. These will in turn aggravate the above symptoms.
I believe that, based on the above, there is a 2145 226 4
substantial possibility that the market for the Company's securities will become so poor that the Company will be unable to issue securities in accordance with its schedule for financing Pilgrim II.
Q. Why is the Company dependent on its post-1985 earnings potential to attract investors during the next seven years?
A. In light of the above concerns, in order to attract investors during the next seven years, the Company is going to have to demonstrate that its long-term earnings potential (i.e., earnings following 1985) is sound. As I mentioned, these earnings are uncertain and appear to have been overstated in the attached documents.
O. Why are post-1985 earnings uncertain?
A. Besides the usual business factors, post-1985 earnings are especially uncertain for Boston Edison because they depend on the full inclusion of its share of Pilgrim II in the rate base in 1986. This may not occur if the plant's on-line date is delayed. The usual regulatory standard for inclusion of plant in rate base is that the plant be "used and useful" in the service of the utility's customers. If the plant is delayed, which is not uncommon in the construction of central station electric generating facilities, it may not be included immediately in the rate base by the Massachusetts Department of Public Utilities.
Such a delay could cccur for any number of reascns --
political, technological, or regulatory -- and is not an 2145 227
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improbable occurrence.
In addition, there is the potential that the Massachusetts Department of Public Utilities would not permit the full inclusion of the plant in rate base even if it is finished on schedule. This could occur if the plant has a low availability or caEacity factor and is therefore considered excess capacity. As indicated on pages 14 and 15 of Appendix I, Pilgrim II will have unsold megawatthours of 26% to 9% during the period 1986 to 1990. I agree with the statement on those pages that "a relatively low capacity factor after Pilgrim II goes into service could contribute to a delay in adding the unit to rate base."
Q. Why do earnings appear to be overstated?
A. It appears that the Ccmpany's earnings for 1979 to 1987 as are overstated presented in Appendix I/because there is no explicit allowance for reduction in consumption due to increases in prices of electricity during that period, i.e. price elasticity. Turning to page 18 of Appendix I, it can be seen that the Company is expecting rate increases in 1979, 1980, and 1984 totalling $63 million and increases in fuel coats between 1979 and 1985 totalling $218 million. The combination of these two items is likely to have an effect on the overall consumption of electricity by the Company's cus.amers as they respond to higher prices by reducing consumption. The amount of the price elasticity effect is difficult to predict, but any reduction in consumption will 2145 228
adversely affect the Company's revenues and thereby its earnings.
Similarly, the Company is predicting (see page 7 of Appendix I) a net rate increase after Pilgrim II is completed of $86 million ($270 million for Filgrim II's inclusion in rate base minus fuel savings of $184 million). This large increase in total rates in one year is almost certain to produce price elastic demand reductions and thereby reductions in revenues and earnings for a number of years.
In summary, earnings both between now and 1985 and after 1985 appear to be overstated.
Q. Are earnings after 1985 overstated for any other reasons?
A. Yes. Earnings after 1985 are overstated in the attached documents because the Company overestimated (see page 12 of Appendix I) the fuel savings resulting from Pilgrim II's substitution for oil-fired generation. To the extent that fuel savings do not occur, the net ir e. case in electricity rates in 1986 will be greater than the S86 million projected. This additional increase in the cost of electricity will cause a further reduction in consumption due to price elasticity effects and will thereby cause a further reduction in earnings.
C. Why are fuel savings after 1985 overestimated?
A. The fuel savings presented in Appendix I are overestimated because they have been calculated on the basis of a 60%
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e a capacity factor in the early years of the plant's operations. Nuclear power plants usually do not produce power at this high a rate during the early " shakedown" months and often during the early years of a plant's life.
Q. Are there any factors that could improve the Company's earnings or earnings potential and thereby its standing in the financial markets and its abi.ity to raise capital?
A. Yes.,There are three factors.
The first, rate increase granted by the Massachusetts Department of Public Utilities has already been factored into the above analysis. As mentioned several times in Appendix I, and as further indicated in Appendix III the anticipated rate increases are necessary just to maintain the Company's financial condition. (See, for example, page 12 of Appendix I, and page 3 of Appendix III.)
The second is the inclusion of construction work in progress (CWIP) in rate base. This would certainly improve earnings during the plant's construction period. However, the Massachusetts electric utilities have recently promised a Massachusetts Legislative Committee that was considering a bill that would have prohibited CWIP that they would not seek CWIP charges before the Massachusetts Department of Public Utilities for at least one year. Assuming the normal six-month statutory period of review by the Massachusetts Department of Public Utilities, CWIP charges would thus be unlikely to be allowed in rate base before
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mid-1980, at the earliest. However, even that approval is very uncertain given the political concern about CWIP and given the substantial regulatory policy concerns about it.
The third possibility is a reduction in the Company's share in Pilgrim II. The chart on page 49 in Appendix I indicates that a reduction in the Company's ownership share to 30% or 40% would improve the Company's financial position by reducing the percentage of AFUDC and increasing interest coverage. Whether these changes would be of enough magnitude to materially affect the Compan;r's position in the financial markets is problematic. For example, AFUDC as a percentage of EPS would still remain very high.
Cancelling the unit completely would result in a short-term loss to the Company but improved long -term earnings. This is the case, as can be seen from page 49 of Appendix I, whether or not the Massachusetts Department of Public Utilities permitted amortization of the cancelled plant in the most favorable fashion.
Q. Have you considered the ability of the Company to generate sufficient retained earnings to satisfy its requirement for internally generated capital for the construction of Pilgrim II?
A. Yes. I have reviewed this item, particularly in light of Appendix III, and I am reluctant to draw conclusions because the actual earnings over the coming years are quite 2145 231
speculative, depending on inflation, internal cost-control, efficiency of operation, the economy, and so on. I can say that, everything else being equal, to the extent that external funds become more expensive because of the factors I have discussed above, retained earnings will suffer.
This is because more and more of the Company's cash will be required for dividends and interest payments if it is faced with a difficult external financial market.
Q. Does this complete your testimony?
A. Yes.
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PILGRBI UNIT II
' FINANCIAL ANALYSIS OF COMPARATIVE STUDIES
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Treasury Organization July 17,1978 s
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BOSTON EDISON COF2ANY PILGRIF. IniIT II FINANCIAL MIALYSIS OF CCF2 MATIVE S~~JDIES Treasury *0rganization July 17, 1978 2145 235
PILGRIM UNIT II FINANCIAL CONSIDERATIONS The following studies are contained herein:
Tab
- 1. Financing of Pilgrim Unit II with Boston Edison Company retaining a 59 per cent ownership in the unit with an in-service date of Dece=ber 1, 1985.
- 2. Financing of Pilgrim Unic II with Boston Edison Company retaining a 30 per cent evnership in the unit, extend-ing the in-service date from Dece=ber 1985 to Dece=ber 1986, and employing the use of combined cycling units to offset the potential deficiency in the company's peak requirements in the 1986-1987 power year.
- 3. Financing of Pilgrim Unit II with Boston Edison Co=pany retaining a 40 per cent ownership in the unit, extend-ing the in-service date from Dece=ber 1985 to Dece=ber
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1986, and e= ploying the use of eccbined cycling units to offset the potential deficiency in the company's -
peak requirements in the 1986-1987 power year. ,
- 4. The financial effects of cancelling Pilgrim Unit II and absorbing the company's investment in the unit without any rate relief by way of 'morti:stion of the investment write-off.
2145 236
Tab
- 5. The financial effects of cancelling Pilgris Unit II and the granting of rate relief by the DPU ro a=orti:e the investment write-off over a period of thirty years.
- 6. Income tax treatment of the write-off of Pilgrim Unit II and the book accounting treatment with and without amorti:ation and its affect on re-tained earnings.
- 7. A comparative analysis of the critical financial data of the above five-year studies , including:
Caoitalization
- a. Capital expenditures.
- b. Internally generated funds.
- c. Externally generated funds,
- d. AFUDC.
Earnin2s
- a. Earnings per share.
Financines
- a. Debt.
- b. Preferred.
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s Tab Financines (continued)
- c. Cot::=on.
- d. Number of issues.
Revenue Recuirements
- a. Revenue require =ents.
- b. Rate increases.
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FI.ANCIAL N CONSIDE?ATIONS June 15, 1978 A review of the May 19 /8 cen-year financial forecast regarding the financing of Pilgric II indicates that there have been so=e sub-s:antial changes in the forecast since the May 1975 and March 1977 fo recas ts . Exhibit A attached outlines the changes in the najor ele-
=ents of the forecas:. Sone of the = ore significant changes between the 1977 and 1978 figures are outlined below.
- 1. The cost of Pilgri= II has increased frc= Sl.5 billion to S1.95 billica, and the ce=pany's share of this cost has increased frc= 5900 =illien to S1.15 billion.
- 2. Due principally to the increase in constructica ces t, the relationship of internal cash generation to construe: ion expenditures during the si~-year period preceding the in-service date of Pilgri:
II has decreased from 45 to 34".
- 3. Required security issues during the sa=e period have in- -
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creased from S641 =illion to S787 million. .-
- 4. If the forecasted rate increases in the years 1979, 1980 and 1984 are obtained, net operating ince=e during the construction period will concince to grow in a healthy =anner. Ecwever, the
', Page 2 June 15, 1978 increase in =oney costs associated with the new construction expendi-tures places a heavy burden on the co=pany and would result in drastic decreases in earnings per share without the application of an allow-ance for funds used during construction (AFUDC; As a result, AFLTC as a percentage of earnings per share has increased fro: 32*. to 79%
during the construction period.
- 5. The forecas: indicates a substantial drop of 3.1 billion kilowa:thours, or 20", in for-casted sales for the year 1987.
- 6. The annual base rate increase that will be necessary when the uni: goes into operation has increased frc= $190 tillion to $270
=1111:n, and :he net increase af ter giving effect to the fuel clause savings has increased frc= S45 =1111on to $86 =illion.
In su==ary, the changes fro = the 1977 forecas: indicate a decrease in load growth, an increase in cons true: ion expenditures, an increase in the amount of ex:ernal financing require =ents , a greatar dependence upon ATUDC to =aintain earnings, and the necessiry to obtain ,
a larger rate increase at the ti=e the unit goes into operation. ,
An analysis of the 1978 forecas and the effects of the changes since 1977 are discussed below:
- a. During the construction period 1978 through 1985, the co=-
pany's rate base re=ains rela:1vely stable at approxi=ately $1.1 billion; therefore the co=pany will only be allowed rate increases of S24 =illion in 1979, 515 =illion in 1980 and S24 =illion in 1984 2145 240 ny-x ~ e)
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- b. During the period 1978 :hrough 1985, the co=pany's con-struction work in progress (CWIP) vill increase fro = $266 =1111on to S1.1 billion. Because CWI? is not allowed in the rate base and thus the co=pany is not per=1:ted to earn on these funds during con-s: rue: ion, the co=pany has the burden of not only co==itting L:s in:ernal funds and raising substan:ial external funds to finance this progra=, but =us : also finance the =oney costs associated wi th these cons:ruction expendi:ures.
These annual =oney costs necessary to finance the construe: ion expendi:ures increase substantially during the contruction period and place a heavy burden on the co=pany's annual net income and earnings per share.
In order to offse: the drastic decrease in earnings per share during the cons:ruction period due to these additional =oney costs , the co=pany =us: continue to apply AFUDC, which in ef fect represents the -
=eney costs associated with CWIP. Thus AFUDC restores the annual earn
ings per share, but will represent 36% of earnings per share in 1979 and increase annually to the point where it will represent 80% of earn-ings in 1982, 92% in 1983, 93 in 1984 and 95 in 1985.
- c. The co=pany =ust also consider the fac :nat not only =us t approxi=ately S623 =1111on of in:ernally generated funds be co==1::ed 2145 241
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Page 4 June 15, 1978 to the progra=, but S961 =1111on of new external funds =ust be raised in order to co=plete it.
A'look at the program fro = the viewpoint of our stockholders and creditors indicates the following:
The forecast calls for four separate issues of rao =illion shcres of additional co==cn s:ock. The price at which these shares would be sold was deter =ined by the use of the discounced cash flow =e: hod. These calculations indicate that the new shares would be sold below the dr.en current book value.
The cu=ulative dilution of the current stockholders' book value resulting from the sale of eight =illion shares would a=ount to S3.11 per share. Based upon a 13% return on ecui:y, a decrease of $3.11 in book value in effect states that af ter the cons truction progra=, the current stockholders would lose the right to potential ear =ings of 40c per share. I: should be noted, however, that in the utility industry certain ec=panies have repeatedly sold additional co==cn stock below -
book value. -
In considering the ability to attract new stockholders for the purchase of the additional eight =1111on shares, the following data =ust be considered:
(1) The co=pany's =os recent sales have been consu==ated with individual buyers rather than with ins titutions. This in e f f ec:
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Page 5 i June 15, 1978
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vill make 1: more difficult to place the additional shares successfully.
Based upon the facts in the forecast, it does not appear tha: it would be easy to at ract ins:itu: tonal buyers in the future.
,__Lii) Any investment banking firm or new shareholder would very probably take into consideration the fact that the company's earnings per share during the years 1981 through 1985 are represented by AFUDC of 60%, 80%, 92%, 93% and 953, respectively. This indicates that relative to daat of other utili:ies, the quality of the cocpany's co==en stock earnings would be low, and that the co=pany would need a substantial rate increase at the ti=e the unit goes in:o operation in order to main-tain its earnings and che ability to pay its dividends.
j """(iii) The ability to at::act additional co==en s:ockholders
' # vould to a great exten; be based upon the attitude and confidence the
.[s inves tment ec== uni:7 and new s tockholders have in the Depart =ent of Public Utili:ies' willingness to allow proper rate relief and return on co==en equity. .
(iv) To successfully co=plete the sale of the eigh: =1111cn ,
shares, it would be essential that the rate increases forecasted during the construction period be obtained on a ti=ely basis.
- d. The forecas: calls for the sale of $150 =illion of pre-ferred stock. All of the factors that pertain to the co==on stockholders as to quality of earnings and :he need for rate increases in order to 2145 243 A*i- !s - '.: : ^
"';" ', June 15, 1978 assure the continuation of dividends apply equally to the preferred stockholders.
- e. During the period 1979 through 1985, the co=pany =us t issue $770 =illion of additional firs: =or: gage bonds or other long-ter: debt. yro= the point of view of the creditors, it is i=por: ant
- o point ou: that the company is going into this project vi:h a triple 3/Eaa bond rating. Unforrunately, our recent experiences with the Deparr=en: of Public Utilities and the Hassachusetts Supre=e Judicial Cour: do no: presage an i= prove =ent in our bond rating in the near future.
The current inability to i= prove our ratings and the fac:
tha: the company is taking on a substantial financial burden to under-take new construe:1on do not enhance the co=pany's ability to i= prove su:h ra:ings. If during the cons truction period the co=pany were to suffer adverse financial experience and have its ratings lowered to
- hat of double 3 or Sa, the co=pany would in effect be unable to sell addi:icna.' deb securi:f es, or if it did so, such securities could only be sold at a substantial increase in the cost of =eney. The in '
ability to sell first =ortgage bonds would have a serious and adverse.-
effect on the co=pany's abili:y to sell additional co==on or prsferred stock also.
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Page 7 June 15, 1978 If the ce=pany =aintains its current triple 3/Baa rating, I believe the additional bonds could be sold, bu: once again, it would be i= perative to obtain the forecasted rate increases to =aintain and protect our current bond ratings.
- f. One of the major fac: ors that would nor= ally be taken into consideration in a::: acting additional security buyers is that the co=pany would need a substantial rate increase at the very mo=en the uni: goes into operation. The rate increase associated with base revenues is es:i=ated to be $270 =illion, and it will be necessary to argue tha: the unit will eli=ina:e the use of six =illion barrels of oil annually a: a net reduction to the consu=er in fuel adjustment revenues of $184 =1111on, or a net increase to the consu=ar of $86 million. There are two thoughts that must be kept in mind relative to this rate increese:
~~'ll) The S 70 =illion rate increase is predicated on the capital and fuel costs of the nucJear plant. Any additional capt:a1 expendi-tures associa:ed with the plant will of necessi*y increase the required-annual ra:e increases. .
(ii)
The savings in the fuel adjust =ent revenues are predicated ,
on a cost of fuel of $32 per barrel. Because the new uni: is esti=ated to save six =illion barrels of fuel a year, every change of one dollar in the cos: of a barrel of fuel frc= tha: $32 figure would increase or decrease :he savings in fuel clause revenues by S6 =illion.
2145 245
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Page 8 June 15,1978
- g. Over and above the financial risks associated with co==1t-ting the internally generated funds and raising the external funds is the risk that exists in the environ =en: in which we operate, which includes the social, political, legal and regulatory cli= ate. It is apparent tha: there are =any parties involved vi:h different self-interes ts and degrees of financial risk. A diagram of the parties in-volved is attached as Exhibit B, which, al: hough I a= sure it is not all-inclusive, does show:
(1) Tha: there are a nu=ber of independent parties who have the ability to interfere with the construction of a nuclear plant and drastically af fect its cost, construction ti=e requirement and the scheduled operation date.
(ii) Of more i=portance is the fac: that no single party, public or private, has the ability to individually and successfully con-trol either the timely construction, the ulti= ate cost, or the scheduled operation date of the unit. ,
On the other hand, it is quite clear : hat in this frag =en:ed ,
environment the co=pany stockholders and creditors will be carrying the -
financial risk involved both during the construe: ion program and after the plant is ce=pleted. The financial risk to be borne by the stockholders and creditors does not guaran:ee them a return substantially better than =any o:her invest =ent decisions they =ay =ake over the next seven years.
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Page 9 June 15, 1978
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- h. As to generation, although the co=pany's obligation is to plan and provide for the necessary energy for future custo=ers, the i
financial risks involved =ust be taken into account. The company is atte=pting to build its share of the NI?OOL peak, but it must be kept in =ind tha: the necessary revenues come from the capacity fae:c and no. from the peak. It is the capaci:y factor : hat =akes the project financially viable.
As previously =entioned, the co=pany's kilowatthour sales forecast for 1987, a ye2r af ter the plant is presently scheduled to go into opera: ion, has declined approxi=ately 20% from 15.5 billion kilowa:: hours to 12.4 billion kilowatthours. Setting aside the need to =eet the NI?OOL and co=pany peak responsibilities for a =o=ent, Exhibi: C at: ached irlica:es : hat with Pilgri: II in operation the co=-
pany will hr e unsold =egawatthours of frc= 26 to 9% during the period 1956 to 1990.
Building for pea! with relatively low annual capaci:y f actors
~
F' at a cost of $1,700 per kilowat as co= pared to $227 per kilowat: for-F.ystic 7 and $353 per kilowatt for Pilgri= I will result in the ec=- ,
pany's continuing its relatively high rates. ,
Because of the high cost of construe:icn and the related necessary rate increase that =ust follev, the issue of a relatively low capacity factor after Pilgri= II goes into service could cert:1bu:a to a 2145 247
Page 10 July 12, 19 78 delay in aeding the unit to rate base. The financial i=plications of such a delay would obviously be disastrous.
In su==ary, the increased cost of construction, the decreased sales forecast, the current triple 3 rating, the adverse regulatory and judicial cli= ate and possible action on the part of intervenors have substantially increased the financial risks resulting frc: the construction of a nuclear plant for current and future stockholders of both c:==on and preferred stock, bondholders and the =anage=ent of the co=pany.
attach =ents -
e e
2145 248
I:*xlillit t A FItIAtICI Al. FoltECAST C0ilPAltlSull Key, Fac t s 1975 Forecast 1977 Forecast 19711 Forecast KUll Sal es 19 First Year of Operation (til l l i onn ) 11,!!00 ( 'lll) 11,490 ('ll4) 12,000 ('ll5) l(Wil Sales in 19117 (tilI1 lons) 16,!!00 15,500 12,400 Cost of Unit:
Totat $1.2 lit i llon $ 1.5 111111an $2.0 Hillion 11Eco . Sliare $.71 Itlllion S .9 tilllion 41.15 Illllion AfilDC Component o f lin i t Cos t 25% 31% 19%
Capital Expenditures (', Year perloil) $995 Hillion $1.152 Hillion $1,2711 Hillion Internal Funds (6 Year period) $584 Hillion $514 tilllion $414 Illllion Externa 1 Funds (6 Year perinel) $4II HI11fon $638 til11lon $844 HI1 lion Internal Funds as a percent of Construction Expenditures 59% 45% 34%
(6 Year period) tie t Secur it ies issueil during const ruction (6 Year period):
Amount $460 til11lon $64I tilI1fon $7tl7 tiliIlon 10 13 15 tiumlie r
$1.0 nittion $1.2 Illllion $1.1 llillion Rate Ilase ;.t Time of Installatlon 3 7 IIIIII"" 8 9 IIIIII"" OI*I IIIIII""
CWIp at Time of Installation 4
W Hate, Relief Required in First Year of Operatlon: $270 tiillion Cross Amount
$ 110 tiillion $190 tilllion y 16% 37% 50%
4 Pescent Increase of liase fievenues -
$145 tilllion $lll4 tiillion w Fuel Savingu . . o m " 7
D lD D l' '
a e'M #'M 2 -}1 1.2X 3.0X 7.7X -
ti Interest Coverage (6 Year average) 2 ,
21% 52% 79::
AillDC as a percent of I'.arnings (6 Year perInd) .
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1.xliili t t C 1105T0!! EDISoll 00tlPAllY IRJll SaI cr. Capar i ty_
19111 14!!4 19f t 5 1 9116 1987 1 9 1111 1911s le:90 IJi t lions t Eilt a r o r PI Igg im I I, (000's)
Pot ent. lal 18111 Genera t ion Capaci t y
- 14,Il00 14 fl00 14.1100 14 , fl00 14,100 14,400 14,400 14,400 Energy itequirements l'asesi on Current Forecast 14.141 14,373 14,176 14,556 14.993 15.45f 13.ai7 16,431 Excess (Def iciency) Infil Capaci ty 657 427 624 244 ((i93) (1,058) (1,537) (2,03I)
~
5% 3% 4% 2% (5%) (77) (10%) (12%)
IJi tliour Eilgar IJitti 59% Pilgrim II (000's)
Potent ial IPJll Cencrat ion Capac it y
- 14,800 14,1100 16,300 18,400 17,800 17,900 17,900 17,900 Energy itequi rements Baseil on Current Forecast 14,143 14,373 14,176 14,556 14,993 15,458 15,937 16,431 Excess infil capacity 657 427 2,124 3,844 2,807 2,442 1,963 1,469 5% 3% 15% 26% 19% 16% 12% 9%
l!1 t hou t Eilcar tii t ti 307 Pil crim II (000's) 14 , fl00 15,550 16,600 16,050 16,100 16,100 16,100 Potent tal 18J11 Generatinn capaci t y
- 14 , fiOO N
- I ncrp,y itequi rements liaseil on 15,917 16,43I
-P- Cur rent Forecast
- 14,143 14,173 14,176 14,556 14,993 15,458 tri 657 427 1,1f4 2,044 1,057 642 163 (331)
Excess 1n111 Capacity -
N 36% 7% 4'; '%
- 3 5% % 3 "7- -
(23)
P e'
D*' 51 D o dJ .
~ -
"$
- llaneel upon 1970-1977 generat iny, capacity experlenecal for present unit s anel 60% capacity f or Pilrrim II.
PILGRIM II ALTERNATIVES 30 pER CENT O'RiERSHI? A'ID BUILD CCMBINED CYCLE UNITS, If the conpany were to reduce its ownership of Pilgri: II from the current 59 per cent to 30 per cent, it is the opinion of the auclear Organization that obtaining the construction permit would be ds. Layed approximately a year, thus moving the in-service date of the un:~.t from Decenber of 1985 to December of 1986. This delay would result from the Nuclear Regulatory Cocmission's reopening the hearings relative to the need for power and financial capability of those cocpanies that would purchase additional ownership in the plant. This one-year delay would increase the cos t of the plant by $250 million.
An analysis of the financial results of the company's 59 per cent
- v. 30 per cen: ownership in the unit indicates that its financial risk, although reduced, is by no means elisinated during and af ter the con-struction period.
2145 252 e: !s
59?. Fil2ri= II vs. 30". Pil2ri= II BECo. BECo.
597. Ownership In 307. Ownership In Pilgrim II ,
Pil2ri= II Construction Period (1978-1985) (1978-1986)
Capi:21 Expenditures S1.584 Billion $1.599 Billion Internal Funds $623 Million $878 Million Internal Funds as 7. of Capi:a1 Expenditures 397. 557.
External Funds * $961 Million $721 Million Capi:a1 Expendi:ures $1.584 Billion $1.599 Billion
~
AFUDC .531 .391 Total $2.015 Billion $1.990 Billion Nu=ber of Security Issues
- 21 16 AFUCC as 7. of EPS 1978 357. 357.
1979 367. 267.
1980 607. 3 17. .
1981 607. 3 47. , . '
1982 807. 457.
1983 927. 577 937. 657, 1984 1985 -
957. 777.
1986 887.
- Excluding re funding issues.
2145j?5.3_ined Cycle Units co 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Tota Capital Expenditures excluding AFilDC 153 114 98 164 175 187 194 257 257 203 1,00 Internal Funds 94 169 83 101 77 85 92 85 90 252 13 1,67 External Funds 59 (55) 15 63 98 102 102 172 167 (49)
AFtIDC 18 15 20 26 38 49 60 76 89 25 41 Ita te Increase Taken 4 15 12 15 8 -
12 14 7 180 26 Earnings Per Share 3.31 3.91 4.13 4.37 4.82 4.91 5.17 5.20 5.38 6.37 EPS excluding APtIDC 2.13 2.91 2.03 2.89 2.66 2.13 1.80 1.18 .67 5.05 AFUDC as a percent of EPS 36% 26% 31% 34% 45% 57% 65% 77% 88% 21%
Iteturn on luiuity 11.1 12.0 12.2 12.6 13.1 12.6 12.5 12.0 11.7 13.0 Financings Debt 40 135 50 50 100 60 50 150 125 50 81 Preferred 35 35 25 9 Cominon 56 31 8 No. of Issues 1 2 2 1 1 2 3 2 2 2 1 Interest Coverage - SEC Including AFUDC 2.58 2.88 2.93 3.22 3.04 2.86 2.75 2.65 2.39 2.89 Excludilig AFUDC ,
2 . 2 9_
2.61 2.59 2.77 2.47 2.20 2.01 1.81 1.54 2.67
% =' s
- 9 mm m q 9
o a' o. S Q
. l,
PILGRIM II ALTERNATIVES 40 PERCENT CWNERSHIP AND BUILD COMBINED CYCLE UNITS If the co=pany were to reduce its ownership of Pilgrim II from the current 59 per cent to 40 per cent, it is the opinion of the Nuclear Organization that obtaining the construction permit would be delayed approximately a year, thus =oving the in-service date of the unit from Dece=ber of 1985 to December of 1986. This delay would result fro? the Nuclear Regulatory Co-4ssion's reopening
_ hearings relative to the need for power and financial capability of those co=panies that would purchase additional ownership in the plant.
An analysis of the company's 40 per cent ownership in the unit indicates that the company continues to incur a substantial financial risk due to the =agnitude of the construction program and the length of time necessary to complete the construction of the unit.
2145 259 ~..,<. -
59*. Pilerim II vs. 40*. Filerim II BECo. SECo.
597. Cunership In 407. Ownership in Pil2 rim II Pil2 rim II Construction Period (1978-1985) (1978-1986)
Capital Expenditures $1.584 Billion $1.651 31111cn I Internal Funds 623 P.illion 829 P.illion Internal Funds as 7. of Capi:al Expenditures 397. 5 0*.
i External Funds * $ 961 P.1111on S 822 P.illion Capi:21 Expenditures $1.584 31111cn $1.651 Hillion AFUEC .531 470 Total $2.015 Billion $2.121 Billion Nu=ber of security Issues 21 17 AR'OC as 7. of E?S 1978 357. 35".
1979 367. 307.
1980 607, 367.
1981 607. 407 .
1982 8 0*. 577. ,
1983 927. 737.
1984 937. 78*
1985 957 847.
P 1986 897.
- Excluding refuncing issues.
2145 260
//;'
~
,.',)
Annual A= cunts of C'4I?
. BECo. EECo.
59*. Ownership In 40*' Ownership In Pilgrim II Pilgrim II 1978 $ 206 Million S 157 Million 1979 274 188
. 1980 420 247 1981 608 378 i
1982 807 517 1983 960 632 1984 1,125 769 1985 127 935 1986 - 172 Allowable Rate Increases 1978 -
$ 4 Mill _on 1979 $ 23.7 Million 15 1980 15.0 12 1981 - 12 1982 - -
1983 - -
" 20 i'-
1984 23.7
" 18 -"
1985 -
1986 270 15 1987 - 195 Terri:ory Revenue Recuire=ents 1986 31.184 billien $1.105 3illien 1987 1.272 " 1.2f7 2145 261 lv' lL, _ n:. f
Discussion A reduction of from 59 per cent to 40 per cent of :he cost of the uni: results in savings of capital expenditures related to Pilgrim II. However, the construe:1on period relating to Pilgrim II acc the period necessary to finance CWI? before a major rate increase may be obtained has been extended from eight years (1978-1985) 2 to nine years (1978-1986). The nine-year period will of necessity in-clude expenditures for other types of construction, such as trans-
=ission and distribution, expenditures relating to the combined cycle unit and absorption of the company's share of the additional costs of the unit due to a year's delay in its construction period.
As a result, the capital expenditures of the 40 per cent option over its nine-year construction period are slightly higher than the capital expenditures of the 59 per cent option over its eight-year construction period. .
Internally generated funds will a=ount to S829 million and represent 50 per cent of the capital expenditures. The amount of external funds needed to co=plete the construction program will a=oun:
to S822 =illion, and will require seventeen separate security issues.
The a=ount of internal funds generated, the percentage of '
such funds to capital expenditures, and the necessary external fuhds all represent improve =ents over the base case of a 59 per cent owner-ship in Pilgrim II.
During :he nine-year construe:1on program, the amount of AFUDC will decline by approxi=ately S61 million. I: should be noted, hew-ever, hat in the years 1983, 198', 1985 and 1986, AFUDC will s:ill represen: 73 per cen:, 73 per cent, 34 per cent and 39 per cen: of the respective year's annual earnings. Although these percentages 2145 262
- s. o r .uu
represent a slight i= prove =ent over the base case, they will never-theless continue to indicate to the invest =ent co== unity that the co=pany a
vill need a substantial rate increase at the ti=e the unit goes into operation in order to =aintain its earnings and ability to pay its dividends.
I It should be noted that the necessary incr3ase in base revenues at the ti=e Pilgri= II goes into operation aill be reduced fro = S270 =1111on to $195 =1111on, and the net increase in overall rates af ter allowing for the fuel adjus t=ent clause savings will be reduced fro = $86 =1111on to $65 =1111on.
In regard to the security issues, the 40 per cent cwnerahip plan requires the issuance of four =illion shares co==on stock rather than eight =1111on shares, and thereby sucatantially reduces the potential dilution of the current stockholders' equity.
The ability to issue the co==on stock, preferred stock and dei':
necessary to fund the construction progra= will to a great extent be based upon the confidence that the investment co== unity has in the willingness of the Depart =ent of ?ublic Utilities to grant the proper rate relief needed to support the additional plant inves t=ent.
This plan allows the co=pany to = ore flexibly co-~4: capital expenditures in accordance with changes in energy and peak de=and.
f It will reduce the possibility of excess capacity at the ti=e the unit is scheduled to go into operation and correspondingly reduce 2145 263
- - -~ ?
the possibility of the disallowance of any excess invest =ent in rate base at that ti=e, however, it is conceivable that a case can be made for such a disallowance.
The short construction period associated with co=bined cycling i units will reduce the amou. of associated AFUDC and its corresponding effects on the cost of the units during the period following the com-pletion of P11gri= II since large a=ounts of IFUDC continue to accrue with a 40 per cent ownership position.
In su==ary, the financial analysis of a 40 per cent owr.ership in the unit as ec= pared to a 59 per cent ownership indicates that the ce=pany would still be undertaking a substantial financial cor d t=ent.
e 2145 264
/ *, : = ,. .. f..
HOST 0tl EDIS0t1 C0!!PAtIY 40% Ownership in Pilnrtm Il and Ilulld Combined Cycle linita 19711 1979 1980 _19til 19fl2 19fl3 1 911". 1985 19fl6 1987 Total Capital Expendftures excluding AFIIDC 153 121 105 187 196 207 196 231 255 229 1 ,118 0 Internal Fuents 94 144 11 4 101' 6fl 78 90 81 87 255 1,084 External Funds 59 (23) 21 86 128 129 106 150 168 (26) 796 AFIII)C 18 24 32 47 61 74 90 106 26 496 Rate 'increane Taken 4 15 12 12 20 ill 15 195 291 EPS 3.11 4.02 4.29 4.52 4.70 4.78 5.25 5.28 5.88 6.23 EPS excluding AFilDC 2.13 2.82 2.74 2.70 2.03 1.31 1.15 .83 .63 4.94 AFIII)C no e percent of EPS 36% 30% 36% 40% 57% 73% 78% 84% 89% 21%
Return ou E<guity 11.1 12.4 12.6 12.9 12.6 12.2 12.7 12.3 12.8 12.7 Financings Debt 40 135 50 50 175 60 50 150 125 50 885 Preferred 35 35 25 95 Common 56 62 1 111 1 2 2 1 2 2 3 2 2 2 19 No. of Isoues IntercatCoverage - SEC Including AFIIDC 2.58 2.83 2. !!7 3.09 2.53 2.51 2.57 2.45 2.84 Excluding AFilDC 2.29 2.52 2.48 2.57 2.w 1.80 1.70 1.65 1.50 2.62
~
2145 -
, 265
BOSTON EDISON COMPANY FINANCIAL EFFECTS OF A b'RITI-OFF OF PILGRIM II kITHOUT RATE RELIEF AS TO FUTURE AMORT!ZATION 9
The =ajor issues involved in a write-off of the co=pany's invest-
=ent in Pilgri II without rate relief is the effect such action vould have on the co=pany's stockholders, creditors, and the invest =ent co=nunity as a whole. It is assu=ed that such action would be taken only af ter the strategy outlined at the recent Executive Retreat =eet-ings has been co=plet,ed, and adequate relief of the co=pany's f* nan-cial co==it=ents relating er Pilgri= II were not forthco=ing.
A discussion of the strates;y the company would follow at the ti=e of announcing a write-off of the invest =ent is not included in this =e=orandu=.
This study will indicate what the financial effects of such a wri:e-off would be on the co=pany's earnings per share and other critical financial data and ratios in the year of the write-off and in subsequen: fears, taking into consideration the incoce tax con-sequences and rate-naking process af ter such a write-of f. -
The inco=e tax treat =ent of the % rite-off of the inves =en: .-
of Pilgri: II and the book accounting treat =ent and its effect on retained earnings is discussed in Tab 6 of this report.
2145 266
Cat. ' '1 Pilerim II - Writeoff BECo.
597. Ownership In Cancel Pilgrim II -
Pilgrim II Writeoff Constructior Period (1978-1985) (1978-1985)
C:pital Expenditures .$1.584 Billion $1.174 Billion Internal Funds 623 Million 768 Million Internal Funds as % of Capital Expenditures 397. 65%
External Funds * $ 961 Million $ 406 Million Capital Expenditures $1.584 Billion $1.174 Billion AFUDC .531 .109 Total $2.015 Billion $1.283 Billion Number of Security Issues 21 -
10 AFUDC as 7. of EPS 1978 35% 36%
1979 36% -
1980 -
607. 12%
1981 607. 13%
1982 807. 19%
1983 92* 24%
1984 93% 37" 1985 957, 42%
- Excluding refunding issues.
. 2IAS 267
Annual A=ounts of CWIP BECo.
597. Ownership In Cancel Pilgrim II Pilgrim II Write-Off 1978 $ 206 Million $ 44 Million 1979 274' 36 a "
- 1980 420 48 1981 608 80
- a "
1982 807 110 1983 960 " 130 1984 1,125 n 247 1985 127 269 Allowable Rate Increases 1978 -
$ 4 Million 1979 $ 23.7 Million 13 a "
1980 15.0 15 n "
1981 - 10 n "
1982 - -
n "
1983 - 14 1984 _ 23.7 6 n "
1985 - 47 a "
1986 270 50 1987 33 n Territory Revenue Requirements 1986 $1',184 Hillion $1.154 Billion 1937 -
1.272 1.302 2145'268
Discussion If the investment in the unit was written off in 1979 the net loss for the year would be $35,167,000 and if the common dividends were paid the retained earnings as at Dece=ber 31, 1979 after the loss and payment of dividends would be reduced to $41,122,000. A study has been prepared which lists 303 industrial companies that experienced negative earnings during the past five years and paid dividends in the years they experienced the losses.
The write-off would have a per=anent negative effect on the company's earnings, as is more fully discussed under Tab 6 of this report.
The write-off against retained eat tings would result in the following debe equity ratios as at Dece=ber 31, 1979:
Deb t 59 Preferred 15 %
Common Equity 26%
The total effect on the market value of the company's stock and the effect, if any, on the company's securities. ratings is still being explored at this time.
In the years af ter the write-off the study calls for a nt=her of rate increases to cimpensate for future increases in rate base and cost of operations. Earnings per share are forecasted to March 24, 1980, the year af ter the write-off and re=ain relatively stable for a period o f years .
2145 269
Capital Expenditures for the period 1978-1985 which are the
- critical years of base case amount to $1.2 billion and internal funds during that time amount to $768 million, and represent 65%
of such Capital Expenditures. It is important to note that the company would not be required to issue new securities until 1982 thus allowing for a period of recovel before reentering the public
{ markets. However, we would be faced with refinancing $135 millfen
. of long-term debt in 1979 under adverse financial circu= stances.
The amount of AFUDC and its relationship to earnings per share is drastically reduced and improves the quality of the i
company's earnings.
The nu=ber of security issues are reduced frem 22 to 13 and there is an i= prove =ent in the co=pany's inturest coverage.
All these factors will, as time goes by, assise in improv-ing the company's financial stability.
214.5 270
-- . . , . . ~. . ...
BOSTON EDISON COHPANY CANCEL. PII.CRIM II - WRITE-OFF 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Total Capital Expenditurca $153 $ 95 excluding AFUDC $ 79 $101 $119 $154 $217 $256 $200 $177 $1,551 Internal Funds $ 93 $ 81 $149 External Funds $ 75 .
$ 97 $ 77 $ 86 $110
$ 60 $ 14 ($ 70) $ 26 $110 $148 $1,026 AFUDC $ 22 $ 77 $131 $146 $ 90
$ 18 $ 5 $ 6 $ 6 $ 29 $ 525
$ 10 $ 13 $ 20 $ 27 $ 25 $ 19 $ 149 Rate Increase Taken $ 4 $ 13 $ 15 $ 10 -
$ 14 $ 6 $ 47 $ 50 $ 38 $ 197 EPS
$ 3.31 ($ 4.38) $ 3.24 EPS excluding AFUDC
$ 3.33 $ 3.38 $ 3.58 $ 3.43 $ 3.66 $ 3.80 $ 3.88 AFUDC as a percent of EPS $ 36%
2.13 ($ 4.03) $12%
- 2.85 $13% 2.89 $ 19% 2.73 $ 2.73 $ 2.16 $ 2.14 $ 2.53 $ 2.92 Return on Equity 10.7% ( 15.6%) 12.9%
24% 37% 42% 36% 25%
12.9% 12.7% 13.0% 12.1% 12.4% .12.4% 12.3%
Financings Debt $ 40 $135 $ 75 Preferred $ 50 $ 75 $150 $ 60 $ 75 $ 660 Common $ 35 $ 35 $ 70
$ 60 $ 60 No. of Issues 1 2 0 0 1 1 3 2 2 1 13 Interest Coverage - SEC Includink AFUDC 2.53 N/A 2.62 2.64 Excluding AFUDC 2.57 2.48 2.26 2.40 2.36 2.24 N/A 2.52 2.53 2.42 2.62 2.29 2.01 2.08 2.09 2.41 N
b Q
N sa .
w
Cancel Pilgrim II - Recover Costs BECo.
59% ownership In Cancel Pilgrim II -
Pilgrim II Recover Costs
! (1978-1985)
Construction Period (1978-1985)
$1.584 Billion $1.175 Billion Capital Expenditures 623 Million 818 Million
, Internal Funds Internal Funds as 7. of 70%
397.
I Capital Expenditures l
$ 961 Million S 357 Million External Funds *
$1.584 Billion $1.175 Billion Capital Expenditures
.531 .107 AFUDC
$2.015 Billion $1.282 Billion Total 10 Nu=ber of Security Issues 21 AR'DC as 7. of EPS
. 36%
1978 357.
11%
1979 367.
12%
1980 607.
13%
1981 60%
17%
1982 807.
21%
1983 9 27.
31%
1984 937.
36%
1985 957.
- Excluding refunding issues.
214S 272
Annual Amounts of CWIP BECo.
597. Ownership In -
Cancel Pilgrim II -
Pilgrim II Recover Costs 1978 $ 206 Million $ 44 Million 1979 274 "
36 "
1980 420 "
48 "
1981 608 "
80 "
1982 807 " "
110 1983 960 " "
129 1984 1,125 " "
248 1985 127 " "
S 269 Allowable Race Increases 1978 -
$ 4 Million 1979 23.7 Million "
$ 18 1980 15.0 14
. 1981 " "
18 1982 - " -
1983 " "
12 i
1984 23.7 " "
7 t
1985 " "
i -
47 1986 270 " "
50 1987 33 "
Territory Revenue Requirements 1986 $1.184 Billion $1.153 Billion 1987 1.272 " "
1.302 2145 273
l Discussion Even though this study allows the company to recover its
- investment in Pilgrim II through annual a=ounts of rate relief, g it is assumed that the unrecovered investment vill not be allowed i
in the rate base and vill no longer be subject to AFUDC. Therefore,
! the money costs associated with the unrecovered investment vill t
reduce annual earnings per share on a decreasing scale as the
. investment is recovered through amortization.
, Capital expenditures over the eight-year period are reduced by $409 million.
Internally generated funds vill account for 70 per cent of the construction expenditures, a major improvement from the base i
case.
The substantial reduction in CWIP on an annual basis reduces the effect of AFUDC on the company's earnings and greatly i= proves the quality of such earnings.
The company's interest coverages without AITDC will sub-stantially improve and, together with the higher earnings exclusive of AFUDC, will provide the basis for an i=provement in the company's financial viability and ability to undertake its future construction program.
The increases in retained earnings would allow the co=pany to issue additional debt with the necessity to issue only two =1111on shares of ec= mon stock to =aintain the desired debt-equity ratio.
2145 274
The financial analysis calls for annual rate increases which will result in a steady growth in earnings per share.
During the eight-year period only $595 million of additional sceurities need be issued compared to $1.2 billion of new securities, as indicated in the base case.
It is the quickest way for the company to regain its overall financial atrength and viability.
The use of combined cycling units will give the company more flexibility to match construction expenditures with projected increases An its peak demands.
The disadvantages associated with this course of action include:
Additional base load capacity will be postponed for a considerable period of time.
The company would be cecmitting itself to a larger portion of capacity that would be oil-fired
. despite uncertainty as to the ramifications of the future government energy policies.
The use of combined cycling units, although i= proving the company's financial viability during the eight-year period, will very likely increase the cost of power to the customer during the period following 1987.
The company's ability to earn returns ranging between 10 per cent and 12 per cent during the forecast period is dependent upon several timely rate increases from the DPU. ,
2145 275 I
BOSTON EDISON COMPANY Cancel Pilgrim II - Recover Costs 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Total Capital Expenditures excluding AFUDC 153 95 79 100 120 154 218 256 200 177 1,552 Internal Funds 93 90 151 79 101 85 99 120 123 162 1,103 External Funds 60 5 (72) 21 19 69 119 136 77 15 449 AFUDC 18 5 6 7 10 13 20 28 26 20 153 Rate Increase Taken 4 18 14 18 12 7 47 50 38 208 EPS 3.31 3.08 3.46 3.67 4.04 4.22 4.13 4.40 4.66 5.09 EPS excluding AFUDC 2.11 2.75 3.06 3.20 3.37 3.35 2.83 2.81 3.18 3.95 AFUDC as a percent of EPS 36% 11% 12% 13% 17% 21% 31% 36% 32% 22%
Return on Equity 10.7 9.6 10.6 10.9 11.5 11.5 10.9 11.4 11.5 12.0.
Financings Debt 40 135 50 50 75 150 75 575 Preferred 35 35 70 Common 60 60 1 2 0 0 1 1 3 2 1 1 12 No. of Issues InterestCoverage - SEC Including AFUDC 2.54 2.50 2.72 2.81 2.86 2.76 2.55 2.72 2.66 2.84 g
Excluding AFUDC - 2.24 2.41 2.61 2.68 2.69 2.55 2.27 2.37 2.37 2.61 4
LT1 N
N O
PILCRIM II ALTERNATIVES CANCEL PILCRIM II IN 1979, BUILD COM3INED CYCLE UNITS AND RECOVER THE COST OF PILGRIM II THROUGH AMORTIZATION (RATE RELIEF)
This study analyzes the financial implications of cancelling Pilgrim II and amortizing the invest =ent over a thirty-year period.
The future generation construction program consists exclusively of combined cycle units scheduled to go into operation to meet t! e future peak requirements.
A comparative analysis of the financial implications to the company of this plan. compared to the financial implications of a 59 per cent ownership in the unit,is outlined in the following pages.
The income tax treatment of the write-off of Pilgrim II and
- the book accounting treatment with amortization and its effect on retained earnings is discussed under Tab 6 of this report.
2145 277
However, based on forecasted figures, approxi=ately $19,733,000 of the
$26,484,000 investment credit figure will be carried forward to the year
! 1978 and used to recover taxes which were paid in March and Jur.e of 1979 with respect to the 1978 taxable year. That carryforward will result in a cash refund, receivable during the early part of 1980, of approximately i $13,273,000. Thus, the total cash refunds which will be received in 1980 are as follows:
j From the taxable year 1977 $ 970,000 l From the taxable year 1978 13,273,000 Total S14.243.000 j The re=aining $6,751,000 of investment tax credit carryforwards, plus additional credits generated during the years' 1978 through 1981, will be fully absorbed by 1981 based upon current projections.
The Corporate Franchise and Federal income tax savings associated with the
$126.0 million abandonment loss deduction are as follows:
Corporate Franchise $ 4,690 Federal Income 58,229 Total S62,919 t
Accountine .
No Amortization Assuming the cancellation of the Pilgrim II unit in 1979 and no rate relief from the DeU, a $150.0 million expense would be charged against the income of that period. That expense would be reduced by $66,353,000 of book ince=e i
tax savings arising from the loss and $48,480,000 of after tax net income generated during the period producing a net loss, after income taxes, in 1979 of $35,167,000. The table which follows provides a further breakdown of these figures:
Pilcrim II Other Net Book Income (Loss) Before Income Taxes (150,000) 90,734 (59,266)
Ince=c Taxes ( 66,353) 42,254 (24.099)
Net Income (Loss) ( 83,647) 48,480 (35.167)
Retaincd earnings as of December 31, 1979 would be as follows:
Balance, December 31, 1978 $119,726 Net Loss After Inco=e Taxes (35,167)
Preferred and Preference Dividends (15,293)
Common Dividends (S2.44 per share) (23,144)
Balance, December 31, 1979 S 41.122 2145 278 The $83,647,000 reduction in retained earnings, and therefore co==on equity, associated with the af ter-tax loss on the Pilgri= II unit will have far-reaching effects. For example, if the Company were to file a cost of service i==ediately af ter the loss was recognized for account-ing purposes, a per=anent annual decrease in revenues of $6.3 =1111on or 26 cents per share would be incurred, since, based upon a January 1, 1979 capital structure and a 9.65% overall rate of return, an $83,647,000 reduction in coc=on equity would decrease the overall rate of return to 9.39%. A reduction in the overall rate of return vould be produced, since in the cost of capital calculation i==ediately af ter the loss, debt capital with its lower cost will be assigncd a greater weight than the then di=inished equity capital with its higher cost.
In addition, earnings per share vill be further per=anently reduced because of the inability of the Co=pany to recover the on-going =oney costs associated with the Pilgri= II unit either by the accrual of AFUDC during the period of construction or by the inclusion of the net plant invest =ent in the facility in rate base, thus charging these costs di-rectly to co==on stockholders. The absorption of these =oney costs by the Company's cor=on shareholders will cost approxi=ately 67 cents per share annually.
,30 Year Amortization of Pilcri: Unit II L'ith Rate Relief Assu=ing that the Department of Public Utilities agrees to per=1t the Co=pany to a=orti:e the cost of Pilgri= II over a thrity-year period for rate =aking purposes, the write-off of those costs over a ec= parable period for book purposes vill have a less dra=atic effect on book inco=e before ince=e taxes. Annuel revenues will include $5.0 =1111cn in rates designed to recover the costs incurred with respect to Pilgri: II and annual book expenses vill reflect the write-off of Pilgri= II costs over a thirty-year period. This will place the Cc=pany in the position of having an invest-
ent in Pilgri: II net of tax benefits on which we vill be precluded frc
earning a return. This occurs because we are unable to include the invest-ment in rate base or accure AFUDC on it. Thus, until we recover the investment fully we vill incur =oney cost associated with financing the asset and these unrecovered money costs will depress earnings. During the ten-year forecast period our unrecovered invest =ent net of taxes ranges fro = $81 =illion in 1979 to $61 million in 1987 and will have the effect "of depressing the Company's 13% allowed return en co==en equity by 2.1% in 1979 but will gradually decline, as the invest =ent is recovered and as new equity is added to the capital structure, resulting in an effect of depressing that return by 1% in 1987. This differs frc= the per=anent loss in earnings capability that vould be incurred if no recovery were alleved by the DPU. The effect on present co==on stockholders would be equivalent to a loss in earnings per share potential of S.70 declining to S.53 by 1957 compared to a per anent loss in earnings per share potential of $.93 if ne recovery is allowed.
Another effect of this transaction on 1979 book income after inec=e taxes, and therefore on ec==on equity, vill be a reduction in net ince=e after taxes of approx 1=accly $2.0 million (approxi=ately 17 cents per share) due to a lower a=orti:stion of investment tax credit. This lower a=or:1:ation arises frc= the carryforward of invest =ent tax credits which resulted frc=
the carryback of the net operating loss incurred in 1979 to the taxable 2145 279
(*- .
.e years 1976 and 1977. As previously noted, all invest =ent tax credit I carryforwards will be utili:cd for tax purposes by 1981. Thus, the above-mentioned $2.0 loss is a temporary one which will be restored to ince=e by 1981.
100 Write-Off Of P11erim II Costs In 1978: No Amortization i
Should the Company decide to write-off the cost of Pilgrim'II in 1978, rather than in 1979, a book loss of $32,204,000 would be incurred. The income tax consequences of this course of action would be substantially the same as those just outlined, except that the cash refund applicable to the net operating loss carryback would be approximately $1.5 million
{ rather than the $14.2 million figure determined under the previous i
assumption. Of course, the Company will receive further cash benefits from j
its net operating loss deduction by way of eliminating the necessity of j making tax payments in 1978 and the further reduction of income tax payments in future years.
Retained earnings as of December 31, 1978 would be as follows:
Balance, December 31, 1977 $106,037 Net Loss After Inecce Taxes (32,204)
Preferred and Preference Dividends (15,293)
Common Dividends (28,144)
Balance, December 31, 1978 S 30.396 O
e 2145 280 BOSTON EDISON COMPANY INCOME TAX TREA'DfENT OF THE WRITE-OFF OF PILGRIM UNIT #2 AND Ty BOOK ACCOUNTING TREATMENT WITH AND WITHOUT AMORTIZATION AND ITS EFFECT ON RETAINED EARNINGS Income Taxes Assuming that the Pilgrim II project is cancelled in 1979 and that the physical abandon =ent of the property actually occurs in that year, the Company will be entitled to an abandon =ent loss deduction when it files its 1979 income tax return. The income tax deduction associated with that loss. can be calculated as follows:
Book Bas" of Pilgrim II $150.0 Less: AFUDC Capitalized (23.0)
Less: Pensions and Payroll Taxes Capitalized ( 1.0)
Tax Basis S126.0 When the $126.0 million abandonment loss is combined with the $72,154,000 of taxable income which would have been determined in 1979 had no abandonment loss occurred, o net operating loss of $53,846,000 results. The $53,846,000 net operating loss is then carried back to the taxable years 1976 and 1977, and applied against the taxable income of those periods in the following manner:
1976 $33,597 1977 20,249 Total 53,846 The net operating loss carryback to the 1977 taxable year will result in a cash refund, receivable in the early part of 1980 of about $970,000 in Federal tax payments made in March and June of 1978 with respect to the 1977 tax year.
Since the net operating loss carryback completely eliminates the ts: able income determined with respect to the year 1976 and all but $11,766,000 of the 1977 taxable income, an investment tax credit carry-forward will have been created in the following amounts:
1976 $17,760 1977 8,724 Total S26,484 2145 281
N cc
.. CNJ LO' W
BOSTON EDISON COMPANY ck)
Tab 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Total 1 59% Pilgrim II 1985 - Base Case Capital Expenditures 153 153 180 230 232 218 194 224 198 288 2,070 Internal Funds 93 96 67 87 58 62 71 89 314 169 1,106 External Funds 60 57 113 143 174 156 123 135 (116) 119 964 AFUPC 18 25 37 53 74 94 111 119 22 28 581 2 30% Pilgrim II - -
Capital Expenditures 153 114 98 164 175 187 194 257 257 203 1,802 Internal Funds 96 169 83 101 97 85 92 85 90 252 1,130 External Funds 57 (55) 15 63 98 102 102 172 167 (49) 672 AFUDC 18 15 20 - 26 38 49 60 76 89 25 416 3 40% Piir.rlm II Capital Expenditures 153 121 105 187 196 207 196 231 255 229 1,880 Internal Funds 96 144 84 101 68 78 90 81 87 255 1,084 External Funds 57 (23) 21 86 128 129 106 150 168 (26) 796 AFUDC 18 18 24 32 47 61 74 90 106 26 496 4 Cancel Pilgrim II - Write Off, Capital Expenditures l53 95 79 101 119 154 217 256 200
, 177 1,551 Internal Funds 93 81 149 75 97 -
77 86 110 110 148 1,026 External Funds 60 14 (70) 26 22 77 131 146 90 29 525 AFUDC 18 5 6 6 10 13 20 27 25 19 149 5 Cancel Pilgrim II - Recover Costs' Capital Expenditures 153 95 79 100 120 154 218 256 200 177 1,552 Internal Funds 93 90 151 79 101 85 99 120 123 162 1,103
. External Funds 60 5 (72) 21 19 69 119 136 77 15 449
- ' AFUDC 18 5 6 7 10 13 20 28 26 20 153
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- . oc BOSTON EDISON COMPANY ,
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, e-W 31 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 59% Pilgrim II 1985 - Base Case Earnings Per Share $3.25 $3.70 $4.04 $4.38 $4.40 $4.45 $4.10 $4.91 $5.42 $5.43 AFUDC - EPS $1.15 $1.35 $1.83 $2.61 $3.53 $4.08 $4.38 $4.67 $ .85 $1.09 AFUDC as a Percent of EPS 35% 36% 45% 60% 80% 92% 93% 95% 16% 20%
30% Pilgrim II Earnings Per Share $3.31 $3.91 $4.13 $4.37 $4.82 $4.91 $5.17 $5.20 $5.38 $6.37 AFUDC - EPS $1.18 $1.00 $1.30 $1.48 $2.16 $2.78 $3.37 %4.02 $4.71 $1.32 AFUDC as a Percent of EPS 36% 26%. 31% 34% 45% 57% 65% 77% 88%
. 21%
40% Pilgrim II Earnings Per Share $3.31 $4.02 $4.29 $4.52 $4.70 $4.78 $5.25 $5.28 $5.88 $6.23 AFUDC - EPS $1.18 $1.20 $1.55 $1.82 $2.67 $3.47 $4.10 $4 45 $5.25 $1.29 AFUDC as a Percent of EPS 36% 30% 36% 40% 57% 73% 78% 84% 89% 21%
Cancel Pilgrim II - Write Off Earnings Per Share $3.31 ($4.38) $3.24 $3.33 $3.38 $3.58 $3.43 $3.66 $3.80 $3.88 AFUDC - EPS $1.18 $ .35 $ .39 $ .44 .$ .65 $ .85 $1.27 $1.52 $1.37 $ .96 AFUDC as a Percent of EPS 36% -
12% 13% 19% 24% 37% 42% 36% 25%
Cancel Pilgrim II - Recover Costs Earnings Per Share $3.31 $3.08 $3.46 $3.67 $4.04 $4.22 $4.13 $4.40 $4.66 $5.09 AFUDC - EPS $,1,18 $ .33 $ .40 $ .47 $ .67 $ .27 $1.30 $1.59 $1.48 $1.14 AFUDC as a Percent of EPS 36% 11% 12% 13% 17% 21% 31% 36% 32% 22%
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BOSTON EDISON COMPANY tn ad- .
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1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Total ,
1 59% Pilgrim II 1985 - Base Case Financings (Hillions)
Debt 40 185 75 100 125 75 160 50 -
60 870 Preferred - -
25 50 -
25 50 Common 150 52 54 - -
60 62 - - - -
228 No. of Issues 2 4 2 3 3 3 2 2 -
1 22 2 30% Pilgrfm II Financings (Hillions)
Debt 40 135 50 50 100 60 50 150 125 50 810 Preferred - - - - -
35 35 Common 25 95 56 - - -
31 - - -
87 No. of Issues 1 2 2 2 1 1 3 2 2 2 18 3 40% Pilgrim II
- Financings~(Millions)
Debt 40 135 50 50 175 60 50 150 125 50 885 Preferred - - - - -
35 35 - -
25 95 Common - -
56 - - -
62 - - -
118 No. of Issues 1 2 2 1 2 2 3 2 2 2 19 Cancel Pilgrim II - Write Off -
Financings (Hillions) !
Debt 40 135 - -
75 50 ~75 -150 60 75 660 Preferred . ~
35 -
35 -
70 Common - - - - - - 60 - - -
60 No. of Issues 1 2 0 0 1 1 3 2 2 1 13 Cancel Pilgrim II - Recover Costs Financings (NM111ons) 40 135 - -
50 50 75 150 -
75 575 Debt - - - - - -
35 -
35 -
70
/ Preferred 60 - - - 60 Common 1 2 0 0 1 1 3 0 2 2 22 lin . of Tnnuen
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DPU 19494/ Phase II 7/26/78
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Information Request MP1-36 . .
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. . ' ~ Return to S. Stowe Plc77:27-
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BOSTON EDISON COMPANY BOARD OF DIRECTORS MEETING JULY 27, 1978 REPORT ON PILGRIM 2 PROJECT frG W -)E eb1b7-
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LQ/n 2145 286
~ INDEX I. Directors Meeting Objective Est6blish a plan with alternatiws if necessary Agree to financial criteria and time limits for decision-making Agree on an August program II. Summary of June 26th Meeting III. Significant Events Since June 26th IV. Changed Financial Impact Makes Current Program Untenable V. Alternatives to Present Plan VI. Major Constraints to Base Case.
VII. Financial Constraint VIII. Reduce Present Project Commitment IX. C* DIP Constraint Mass Legislature Mass DPU Federal Government X. Ability to Find a Market for Sale of Part of the Unit
~
XI. Sale of Complere Unit r
XII. Cancel and Salvage the Unit -
XIII. August Corporate Action Program ,
2145 287
Report on Pilgrim 2 Recommendations for July 27 Board Meetine I. Meetinc Obiective: Present and discuss the key time and finan-cial constraints impacting the Pilgrin. 2 project and set corporate action plan for the month of August.
II. Summary of June 26 Meeting We first would like to briefly summarize tha areas we reported to the Board on June 26th with our position on them.
- While there are uncertainties in regard to the regional and Company load forecasts, we believe that to economically meet our customers' power needs in the future, Edison will require Pilgrim 2 in 1985. New England and the other joint owners will also have a need for the unit.
The onl y potential economic alternative to Pilgrim 2 is a combined cycle unit for service in the mid-19 80 's. There is a question whether this type of unit, which would have to burn oil and have a potential for conversion to liquifi.ed coal, would be permissible. It is our opinion that a b.ase load coal plant could not be brought in service by that' time, new technologies will not be available, and added conservation measures will not be suf ficient to prevent a capacity shortage.
- We have made considerable Pilgrim 2 licensing progress, but the major open issues at the NRC are financial qualifi-caticas and alternate sites. The Attorney General has asked 2145 288 . s
the ASLB to also reopen the need-for-power issue. The entire licensing process has been cloudec by the interaction of ongoing DPU-EFSC public hearings on our construction pro-gram. We believe we will prevail in *tese hearings except
, on the financial cualifications issue.
- We reviewed the legal situation from a licensing point of view and from the obligations of Directors.
- The positive public attitude towards nuclear power has been decreasing and several of the strong societal trends are running against its use as an energy source. We believe that, considering these societal factors, the plant can still be licensed and constructed to meet our power needs, but in the short term, time is running against us.
- We reviewed the financial problems associated with con-tinuing to build the unit without setting forth any proposed solutions. We also reviewed the cost of cancelling the unit on July 1,1978 or January 1, 1979. As we plan to discuss these financial concerns later in this report, we shall not review them here.
In su==ary, on June 26, we provided the Directors with data on the major elements that are impacting the decision before us',
e J
2145 289
. 1 -
III. Sicnificant Events Since June 26 ,'
~
There have been a nu=ber of significant events since our last meeting that bear on the decision before the Board, and we would like to report on them briefly.
- 1. Seabrook Shutdown The order by the NRC to stop construction at the Seabrook site pending a decision by the EPA on cooling towers is additional evidence of the state of confusion that exists at the federal government level in regard to construction of nuclear power plants. In a state with CWIP in rate base and strong support from the governor, the federal In addition, this process has shut down construction.
situation further supports earlier comments regarding the impact of NRC Commissioners Gilinsky and Bradford, who Our voted for the shutdown in the 2-1 NRC decision.
judgment is that the EPA will uphold their prior decision to permit direct discharge from the Seabrook site, but it is uncertain as to how quickly the NRC will act to allcw construction at the site to start up again. The added delays at Seabrook could also make the New England-power supply situation in the mid-19 80 's more critical.
- 2. NRC Financial Qualifications Letter We included in the "Information for Directors" the letter received from the NRC last Friday in which they stated that based on information provided by the Company in a financial plan ,that the NRC could not conclude the 2l45 290
se e Company's financial qualifications will permit raising necessary funds to build Pilgrim 2 at the present time.
They indicated that at the minimum they would wait to see the results of our third quarter earnings. This means no hearings on Financial Qualifications can take place until November 1978 at the earliest. The impact of the NRC staff letter is to clearly establish Financial Qualifications as the critical licensing path to continue the unit. Although the letter suggests the consideration of an alternative financial plan, we do not believe that the submission of a revised financial plan is a viable alternative to this problem at the present time.
- 3. DPU Changes The makeup of the DPU was finalized on June 29th with the appointment of Commissioner Paul Levy as Chairman. The vacancy on the Co==ission was filled by Donald C.
Hillman. Chairman Levy did not participate in our recent retail rate decision, so it is difficult to predici future actions without a track record. He is generally c$nsidered by external sources as competent and fair. Commi,ssioner Hillman comes to the DPU from the Insurance Commissioner's office, and has no utility experience. Both of these men were appointed to the DFU from Secretary of Consumer Affairs Christine Sullivan's office, which hopefully 2145 291
Will resolve the DPU/EFSC jurisdictional problem but not impact the ultimate DPU decision.
- 4. Massachusetts Lecislature The Massachusetts legislature has ended its regular 1978 session. Any opportunity for emergency legis-lative relief on CWIP prior to the 1979 legislative session has been eliminated.
We have f actored these recent events into the course of action we propose to discuss with you this morning.
2145 2ST2
'IV . Changed Financial Impact Makes Current Program Untenable From the financial data presented to you on June 26th and the discussion, it is clear that management can no longer recommend that we continue to license and construct Pilgrim 2 with a 59% ownership position.
It is appropriate to review with you what financial f actors have changed since the 1975 and 1977 financial forecasts that have led to this conclusion.
These facts have been summarized by Mr. Tyrrell and are shown here a3 Exhibit A. (From 1/17/78 Pilgrim Unit 2 Financial Analysis of Comparative Studies Report - Section 1, Exhibit A. )
- KWH Sales Forecast decreased by 20% in 1987 Cost of Unit increased S800 million to $2.0 billion AFUCC Component of Unit Cost increased to 39% from 25%
- Total External Funds required (six year period) increased from $411 million to S844 million - fifteen financings in six years CWIP at time of cccmercial service increased to Sl.1 billion (excluding AFUDC)
- Rate Relief Required in First Year of Operation inc[ eased to S270 million - 50% of Base Revenues. After expected fuel savings, net annual ra'..e increase of S86 million would occur in 1986 Interest coverage (six year average) decreased to 2.7X including AFUDC 2145 293
- AFUDC as a percentage of earnings (six year average) increased to 79% with a high of 95% in 1985.
The cumulative effect of the above indicates that a revised project program is required.
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2145 294
I' Q 'j,1 T d 'i l M U .
r.nhIhat A EXilIDI'T A Ao o 3 Fir:Atact AI. FOftrCAST r.Otti'ARISoll 1 g g 9 l
w e ju o Ju ,
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- 2 l< cy_F.w t n 1975 Forecast 1977 Forecast 197R Forecan 11,300 ('al) 11.490 ('n4) 12,00:3 ('n5 Infil Sa!es To First Year of Operat ion (ffillionnt 12,400 16.800 15,500 Infil Sales in 1987 (Hillions)
Cost of IJnit: $1.2 niillon $1.5 nlllian $2.0 niillon Total $ .9 niilion $1.15 alliton
$.11 l'Illion DF.Co . Slinre 33% 39%
25%
l Af1lDC Component of linit Cost 6
$1.152 Hillfon $1,274 Hillion
$995 Hiitlon Capital Expenditures (6 Year perfod) $514 Hillion $434 Ittillon
, $5R4 Hillion internst Funds (6 Tear periof) $638 Hillion $844 Hillion
$411 Hillion External Funds (6 Year period)
Intervint Funds as a percent of Construct ton Expendttures ASI 34%
59%
(6 Year period)
$787 Hillion
- Net Securities issued during construction (6 Year period): $460 Hillion $641 Hillion 13 IS 1 Amount 10 18umlie r
.{ $1.2 R1111on $1.1 Billion N
$1.0 nillion h - Rate Base At Time of Inst all.it f on S .7 alliten $ .9 Billion $1.1 Hittio 3
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9 w Cuir at Tisne of Installation N $190 tilllion $270 Hillfo 8
o Rate Relief iteqtif red ist First Year of Operatlon: $ 110 Hillion 3FI 50%
Cross Amount
- - (6Z W $l45 ffillion $1fl4 till f lo l'ercent increnne of Hasta Revenues 1; f l'uel Savis.ru 1.7X 1.0X rj 79%
Interest Coverage (6 Year average) 217 52%
If' a s a crcent of Earnings (6 Year perfoil) s
V. Alternatives to Present Plan While there are many variations and combinations of alterna-tives, there were four principal ones selected for study.
Base Case - Present Plan (59% Ownership - No CNIP Alt. #1 Maintain 59% ownership with CWIP.
Alt. #2 Sell off a substantial additional share of the unit to the minimum consistent with financial risk, assuming no regulatory relief (i.e. , CWIP in rate base) .
Alt. #3 Sell the unit complete with construction management to another utility or the state buying back a manageable amount of power.
Alt. #4 Cancel the unit, minimizing the potential loss to stockholders.
The management's proposal involves the possibility that all of these alternatives may be necessary to implement over a period of time. Attached as Exhibit 3 is a decision flow diagram that would bring us through the various alternatives. .
2145 296
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VI. Major Constraints to Base Case We have identified three major constraints to the Base Case or Alternatives #1 or 2.
- 1. The ability to remain financially viable if we ultimately must cancel the Unit.
- 2. Massachusetts doesn't permit CWIP in the Rate Base.
- 3. The ability to find a market for sale of part of the Unit.
The major constraint is financial and controls all other alte rnatives . It establishes how much time is available to pursue other alternatives . The issue of CWIP in rate base is the constraint to Alternative #1 (59% ownership) which is the most desirable and impacts Alternative #2 by making it only marginally acceptable.
Finding buyers for shares of all of the unit impacts Alternative #2 (sell down) and Alternative #3 (sell the unit).
e' e
9 2145 299
. =
VII. Financial Constraints Our forecasts indicate that if it becomes necessary to cancel the unit and take the loss in 1979, retained earnings after the write-off and the payment of dividends would be reduced to approxi-mately $40 million. The S40 million figure is predicated upon the receipt of rate relief in 1979. Every attempt should be made to prevent the retsbad earnings from falling below this level.
If we cancel in 1979 with rate relief the following occurs.
Pilcrim II Other Net Book Income (Loss) Before Income Taxes (150,000) 90,734 (59,266)
Income Taxes 66,353 42,254 (24,099)
( 83,647 48,480 (35,167)
Net loss for the year 1979 would be $35,167,000 and retained earnings after the payment of preferred and common dividends would be approximately $40 million.
If the unit was written-of f in 1978 the net loss for the year wculd be $32,204,000 and retained earnings after the payment of pre-ferred and ccmmon dividends would be approximately S30 million. In both years $150,000,000 was the amount of the Company 's write-of f.
If cancellation and write-off become necessary, the Company will incur an S84 million reduction in retained earnings and common equity which will have far reaching effects. This reduction in equity would decrease our overall rate of return allowed for rate setting purposes to 9. 39% from 9.65% based on a January 1,1979 capital structure. This would produce a permanent annual decrease in revenues of S6.3 million or 26 cents per share. In addition, earnings per share would be furrher permanently reduced because of the Ccmpany's 2145 300
inability to recover the ongoing money costs associated with Pilgrim 2 either through AFUDC or by inclusion of the net plan *, investment in rate base. The absorption of these money costs by the common stock-holders will further permanently reduce earnings per share by 67 cents annually.
We have also analyzed the impact on earnings if we are allowed by the DPU to recover our investment in Pilgrim 2 ($150 million) through an amortization of the cost over 30 years which would require an additional SS million in revenues annually. In the analysis we assumed that the DPU would not allow inclusion of the unrecovered investment in rate base. This places the Company in a position of having an investment, net of tax benefits associated with a tax write-off, on which we will ce precluded from earning a return. This occurs because we are unable to include the investme *. in rate base or accrue AFUDC on it. The effect on present common stockholders would be equivalent to a loss of earnings per share of S.70 declining to S.53 by 19 87 and to zero by the end of the third year period. This compared to a permanent loss in earnings per share potential of S.93 if no recovery is allowed.
If the net investment is included in rate base during the 9
amortization period, the common stockhciders would incur no los's and this is the treatment we would request of the DPU. .
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'w- ' -
+
VIII. Reduce Current Project Commitment Because of this financial exposure, we propose that the Pilgrim 2 project resourc4 commitment be reduced to the minimum necessary to continue licensing activities and protect our current asset. We would stop all new procurement and reduce the overall ef fort to approximately 30% of current levels. This action would be taken af ter evaluation of meetings with government officials.
If this decision is made by the management it would trigger full disclosure to the public. Going to a reduced effort means accepting a December 1986 in-service date as the earliest possible date and a corresponding increase in the cost of the plant ( S200 million) .
This decision would permit us to continue to approximately July 1, 1979 when the Company's cancellation exposure would reach S167 million. A decision to return the project to current levels, however, would be recuired by February 1, 1979 to meet the December 1986 in-service date. We do not recommend a wait to July but it establishes the outer bounds based on present information thau we can work with to achieve a goal of minimizing our risk by either obtaining CWIP in rate base or selling down our share of the Unit. .
,r O
2145 302 v -: .
IX. CWIP Constraints one constraint which makes it impossible to continue with 59%
ownership is the lack of CWIP in rate base in Massachusetts. It would be necessary for the DPU to allow the inclusion of CWIP in rate base for major projects or to ce directed to do so by legislation. Alternate #1 requires that we assess whether CWIP can be achieved from either group in a timely manner.
Mass Legislature The earliest this could be achieved is the Spring of 1979 as the legislature has prorouged for 1978. This will require that the Governor and State Legislative 1.?aders be advised of the problem and that they indicate potential support for processing new legislation early in 1979. We are faced, of course, with elections in Novenber and known changes in the legislative leadership will occur in 1979.
We also must consider that we are asking for progress payment support through rate increases in addition to rate increases we will regt '.re to recover increased operating costs. Fuel costs will also increase and impact customer bills via ,the fuel adjustment clause. The increases required before.the unit goes into service are summari::ed as follows:
1979 1980 1981 1982 1983 1984 1985 To Fate Increases AsscM =ted with CCP in Rate Base $23 S14 S20 S17 S14 S5 532 S12 No= al Rate Increase 24 15 - - -
24 - 6 Au.matic Fuel Mjuscent Clause Inc: eases 15 28 25 29 20 40 51 2'
'Ibtal Increases Wh $62 557 S45 $46 $44 569 SS3 S4c
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a w .J. \ m 2145 303
. - n a
The rate increases associated with CWIP in Rate Base totals $125 million but it should be understood that cumu-latively these rate increases represent $513 million of additional revenues that customers would pay during the seven year period preceding the Pilgrim 2 in-service date.
In effect, to '2 duce funancial risk to an acceptable level we will be asking customers to make progress payments on the unit before it goes into service and by reducing rate base, receive the benefits over the life of the plant. We propose to meet with the Governor and legislative leaders in August 1978 to evaluate the potential for legislative success in 1979. p Mass DPU The quickest way to ascertain if CWIP is possible is via the DPU. We propose to meet with the Secretary of Consumer Aff airs and the DPU to advise them of the seriousness of the problem.
Care will be taken to prevent third party communications that may impact the current DPU/EFSC hearings on our construction program but these hearings are of little consequence if we must make the decision to cancel the Unit. We recognize that we may be asking the DPU to act prior to the outcome of these hearings but such action is necessary. An alternative i.e for the DPU to speed up the construction program hearings. We propose to advise the DPU in mid-August of our intent to file a new retail rate case in mid September to be effective 4
2145 304
October 1, 1978. Assuming they will suspend the rates, they will have six months, to April 1, 1979, to render a decision.
The rate filing would be based on CNIP in the rate base for Pilgrim 2. This would establish a date certain for a DPU decision on CWIP (4/1/79) which is within our financial solvency constraint. We would ask the DFU to treat this subject as a separats issue first in the proceeding and issue an interim order at the earliest possible date. This could reduce the time exposure of waiting for a decision, however, you should be aware of the potential for significant inter-vention on this issue which might prevent an early decision.
Federal Government While we recommend i==ediate contacts with Administration and Congressional leaders, it is doubtful that Federal legis-lative relief can be achieved before 1980 if at all. Our objective with this effort will be to solicit support for CWIP at the State level from DOE and Congressional leaders.
DOE will be asked to become an intervenor in the State hearings.
Regardless of available alternatives, we plan to continue ef fort at all levels to get CWIP in rate base in Massachusetts. A~I ctor to be continually assessed, however, is how long can we wait in;the CWIP process and maintain our 59% ownership position. We will evaluate this for the Board in August but the latest may be the September Board Meeting. It will take time to move other alternatives to completion within the financial solvency time limit of July 1, 1979.
2145 305
During the August period we propose that informal discussions w .th other utilities and Joint Owners be initiated to sell down or sell off the Unit.
S 2145 306
X. Ability to Find a Market for Sale of Part of the Unit If we are unable to secure CWIP in a reasonable period of time we must go to Alt. #2 and sell down our 59% share of the unit to minimize risk. The validity of this alternative must be determined by first establishing as a criterion the minimum ownership position the Ccmpany will accept without obtaining CWIP in rate base, and secondly, datermining the minimum level of ownership in the unit that we desire to remain as construction managers and plant operators.
To determine the minimum ownership position which would enable us to finance construction, we tested a sell-down to 40% position (Financial Analysis Report', Section 3) and found it unworkable without CWIP, and also tested a 30% ownership position (Financial Analysis Report, Section 2). We believe the 30% ownership level is marginally acceptable as a financial risk without CWIP, and propose that this becoms the sell-down minimum level for continuing with this alternative.
This study assumed that we would meet load requirements for additional capacity by installing a ccmbined cycle plant as needed or by purchase.
Selecring this alternative and staying within the financial solvency time limits to confirm its viability will result in a December.1986 in-service date at the earliest and a $200 million increase inrthe unit cost over the base case.
The reasons for selection of this alternative based on a review of key financial data are as follows (Financial Analysis, Section 2) :
2145 307
+..:
- Construction period extended to 1986 with capital expenditures of approximately S1.6 billion as at present
- Internal funds as a percentage of Capital Expenditures during the period (1978-1986) improve to 55% as compared to 39%. Additionally, the internal funds percentage during the five years of heavy construction (1982-1986) improve to 40% from 33%
External funds will be reduced from S721 million from
$961 millien - sixteen financings over a longer period (nine years)
- AFUDC will decline by $1'O million over the nine-year period and reach 85% of 1986 projected earnings
- The necessary in-service rate increase will be reduced from $270 million to S180 million with the net increase after fuel savings reduced frcm S86 million to $78 million
- Recuired common stock issues decrease from eight million shares to three million shares, reducing potential dilution The company can control the in-service date of neede cycling unit capacity based on more current data, reducing future risk -
We believe this alternative is marginal without CWI?, and would continue ef forts to obtain it to improve this course of action if selected.
2145 308 l- . .
e We do not believe that selli. , down the unit to below this level is acceptable. We could continue to have the management responsibility for licensing and construction of a project in which we would have a minor interest. The 30% level represents 345 MW of' capacity. Additional capacity needs can best be supplied from smaller combined cycle units or purchasing power from a new Pilgrim 2 owner or another plant built by others.
We propose to investigate this alternative informally with potential utility buyers and our Joint Owners in parallel with efforts to achieve CWIP. We shall evaluate the potential for this alternative and report to the Directors at the August meeting.
2145 309 I- .
a e XI. Sale of Comolete Unit In the event we dre unable to establish a market for 29% more of the unit (Edison to retain a minimum of 30%) we shall endeavor to sell the entire unit, including the transfer of project management, to another utility, or if no private buyers can be found, to the Commonwealth (Alt. 6 3) . This step prior to cancellation and salvage would be a last ditch effort to minimize shareholder loss and still continue the project which is necessary for the region. Because of inflation and increasing regulatory requirements, Pilgrim 2 will produce the lowest cost power of any new base load power plant built in New England.
With this decision, which we will face only af ter exhausting all other remedies, the Company will give up the Pilgrim 2 site to a new owner / manager even with Pilgrim 1 operating next to it. We would endeavor to buy as a partner up to 30% of the anit to serve cur cus-teners' energy needs and stay within our financing capabilities .
e 0
2145 310
~
XII. Cancel and Salvace the Unit We have discussed the financial i= pact of canceling the unit
'al*, 44) under Financial Constraints (Section VII). This alternative will only be taken af ter we have exhausted all other avenues to keep the unit for New England and our customers. We are fully cognizant of the impact of such a decision nationally, regionally, in the Commonwealth, on our customers and on the shareholders.
There are various salvage alternatives. The cancellation costs utilized in the studies are based on no salvage value on the Combustion Engineering Nuclear Steam Supply components and the General Electric turbine generator. It is assumed we will pay the full contract price for this equipment. A uranium ore resale credit of $21.5 million has been included.
We would endeavor to sell the complete plant equipment package including engineering if possible or the major components. Due to the uncertainty associated with such sales it is believed prudent to not assume a salvage value.
2145 311 OO
,.s XIII. Aucust Corporate Action Procram Aucust obiectives: Limit increases in financial expostre to the minimum necessary to support licensing and protect the value of the asset; obtain evaluation of potential to get CWIP from State; obtain verbal evaluation of potential to sell down to 30%; continue licensing efforts to achieve all but NRC approval of financial qualifications.
Procram:
A. Proceed on a multiple path action plan to secure CWIP, sell down to 30%, sell the Unit or cancel the Unit.
B. Monitor the program with the Directors monthly and be prepared at any time prior to July 1, 1979 to order cancellation.
C. Initial August 1978 Actions.
- 1. Meet with the Governor, the Secretary of Consumer Af f airs and the DPU to explain the problem and determine feasibility of CWIP relief.
rate base in September would fix the yes/no 'CWIP decision from the DPU at April 1, 1979. The DPU could consider the CWIP issue first in the; case and issue an interim order of this item alone. Also a companion wholesale rate S-5 filing should include CWIP in any event where FERC has emergency regulation
- b. Recuest the Governor to support 1979 legislation on CWl?.
2145 312
t .
- c. Edison could consid9r petitioning the DPU this Fall for generic hearings on its own as an alternative to rate case submission.
- 2. Meet informally with potential large buyers of power to determine if there is any interest in purchasing large additional shares of the Unit. This is not a substitute for a later formal NEPOOL offer to sell but an effort to realistically evaluate the potential for success.
- 3. Meet with the Joint owners Chief Executives to review the project including the situation on CWIP. The objective will be to test the viability verbally, without making an official offer to sell at this time, of our ability to sell down to 30%.
- 4. Cut project back to 30% level to minimize financial exposure and maxir.ize time available before need to make cancellation decision.
- a. Continue licensing effort
- b. Protect our current asset c..Stop new procurements
- d. Accept December 1986 in-service date.
- 5. Prior to August 15, file a letter of intent with' the DPU stating we are planning to file a new retail rate case in mid-Neptember with an effective date of October 1, 1978. The rate case filing will include CWIP in rate base.
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o ...
- 7. Meet with Mass. Congressional leaders with the objective of explaining the problem and enlisting their support for CWIP at the state level as well as at the federal level.
At present, DOE has a study underway on CWIP impact on energy supply. This study and the administrations' support will be an essential part of the federal legislation directing all state's to include CWIP in rate base. Realistically, any final congressional action is estimated to be in 1980.
- 8. Meet with DOE officials with the objective of explaining the CWIP problem and enlisting their support. Support would be to assist in the state's effort with an intervention in DP'J proceedings in support of CWIP. Our project should also impact the current DOE study leading to administration support of legislation on CWIP.
- 9. Continue to seek remaining permits to construct Pilgrim
- 2. Meet with the NRC to seek agreement to expedite all open licensing questions except the issue of financial qualifications.
- 10. Evaluate the results of the above actions and report to the August Board of Directors Meeting the potential for obtaining CWIP and/or selling down to 30%. That repo. . will include a September action plan and measure our progress against goals including- ime constraints.
2145 314 iMee eeee e
APPENDIX III 2145 315
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Boston Edison Company ss ,
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Exhibit No. BE-100 e7 *
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k TESTIMONY
$. N OF RALPH M. KELMON
}; Q. Will you give your name and address, please?
. A. My name is Ralph M. Kelmon. My business address is 800
!- Boylston Street, Boston, Massachusetts.
Q. What position do you hold at Boston Edison Company?
g.
A. I am Treasurer of the Boston Edison Company.
- Q. How long have you been Treasurer?
A. Since August 1, 1975.
t Q. What position did you hold at Boston Edison prior to your j- '
appointment as Treasurer? ,
A. I served as the Company's Assistant Treasurer from 1957 through July 31, 1975.
Q. Would you describe your duties as Treasurer?
- 8- A. My duties include the preparation of financial plans, review
- - and analysis of operations and preparation of financial and statistical reports.
l.,
Q. Please describe briefly your educational background and your experience in the public utility field. .
0 A. I received a Bachelor of Science degree in Business Adminis-tration from the University of Florida in 1941 and an M.B'.A.
degree from the Harvard Graduate School of Business Administra-tion in 1943. Prior to joining Boston Edison Company in
?145 316
I 1951, I was e'mployed as a work controller with Allegheny Ludlum Stee? Corporation; as an assistant professor of accounting at the University of Florida; and as a staff member with Lybrand, Ross Bros. & Montgomery, Accountants I and Auditors. I am a member of the American Institute of Certified Public Accountants; the Massachusetts Society of
[
Certified Public Accountants; the American Accounting Associ-1l ation; the National Association of Accountants; the American Economic Association; and the American Management Association, and I am a Director of the Reading Cooperative Bank.
I was chairman of the Accounting Division Executive l
Committee of the Edison Electric Institute in 1970-1971. I
\. previously was chairman of the EEI Application of Accounting
- i. Principles Committee.
I i Q. Would you describe generally the service area, the operating I system and the electric facilities of Boston Edison Company?
! A. Boston Edison is an operating public utility engaged principally t
I in the generation, purchase, transmission, distribution and i' sale of electric energy. It was incorporated in 1886 under I the laws of the Commonwealth of Massachusetts. The Company I supplies electricity at retail in the cities of Boston, Somerville, Newton, Chelsea, Waltham and Woburn, in the
~
towns of Brookline, Arlington, Watertown and Framingham, and in thirty other towns in eastern Massachusetts covering an area of cpproximately 590 square miles within thirty miles of Boston. The population of the territory served with electricity at retail was approximately 1,600,000 in 1970.
The Company also supplies electricity at wholesale for
_ _ 2145 317
e e resale to other utilities including the total electric
, , requirements of three municipal electric departments in the
., vicinity of Boston'.
,, Q. Mr. Kelmon, why is Boston Edison presently seeking rate relief?
A. The Company's purpose in seeking rate relief is to obtain a
,. , level of rates which will enable the Company to continue to k., provide an adequate and reliable supply of electric energy
., to its customers. The level of rates necessary to provide
, this high quality service is that which will allow the l, Company to fully recover its costs of operation; that is, its total costs of doing business. Persistent inflation is substantially increasing the costs of operation and rate I
relief is essential to offset its effects.
In order to maintain the high quality service I refer j
to, critical improvements are required in the Company's financial condition. The Company must be allowed to attract i
needed capital on economic terms, to improve its internal generation of cash, and to earn a fair return for its inves-tors.
l Q. Mr. Kelmon, can you describe the financial condition of' Boston Edison?
i A. Financially, Boston Edison is not sound. While the Company's results for 1978 showed improvements as a result of increased rates and steps taken by the Company to minimize costs, earnings in 1978 were below the level last attained from 1968 through 1972, a period of 6 to 10 years ago. Earnings in 1977 were 16 percent below the level of common dividends.
3- 2145 318
The Company's 1978 return on year-end common equity, at 9.54% is one of the lowest in the industry, well below the 13% return allowed by the Department. In 1977, the return on equity was 6.33%, less than half the " theoretically" allowed return. Returns on common equity and earnings per common share from 3967 through 1978 are presented below in Table.l.
TABLE 1 Return on Common Equity Earnings Per Year Allowed Earned Common Share 1967 12.02% 10.99% $2.82 1968 12.02 10.91 3.07 1969 12.02 11.22 3.10 1970 12.02 11.54 3.24 1971 12.02 11.76 3.42 1972 12.02 11.22 3.77 1973 12.02 8.21 2.78 1974 13.36 8.09 2.53 1975 13.00 7.70 2.45 1976 13.00 8.56 2.74 1977 13.00 6.33 2.06 1978 13.00 9.54 2.96 The financial deterioration from 1972 i; quite evident.
Exhibit No. BE-101 is a graphical presentation of the re-turn on common equity actually earned from 1967 through 1978 versus that allowed by the Department. Exhibit No. -
BE-102 is a graphical prese~ntation of earnings per common 4- 2145 319
share for the same perio'd. The pattern since 1972 is self-explanatory. Recovery revenues have been insufficient; costs have far outpaced revenues and have thereby created the shortfall in recent earnings performance and actual returns on common equity earned.
Otner indices of performance such as coverages, capitali-zation, and bond ratings also indicate a seriously deterior-athd financial condition. The Company ranks near the bottom in most financial industry-wide comparisons. Later in my testimony I will elaborate on these and on their deleterious effects upon ratepayers.
Overall, the financial health of the Company is poor.
We have strived to make improvements and have succeeded in many areas. But substantial further improvement is necessary before our financial condition can once again be deemed healthy.
Q. You have emphasized the return on equity. Can you please explain why?
A. The return on equity is the most important benchmark of the Company's performance because by nature it reflects any de-ficiencies in rate relief. By this, I mean that it represents the bottom line on the income statement, after operating ex-penses and other capital commitments have been met. The total revenues allowed in a rate proceeding are earmarked so much is earmarked to recover to recover specific costs:
depreciation expenses, so much for taxes, for interest costs, for preferred dividends and so on. However, should
' 2145 320 there be a deficiency in the rtcovery of any of these specific items, it would show ap on the income statement as a deficiency in the recovery of r.ommon equity annual costs.
Should an inadequate allowance be made to depreciation expense, the return on common equity would be affected.
Should an adjustment be made to remove a required investment
. from rate base, the return on common equity would be affected.
The same applies to adjustments to the level of revenues and to the other items comprising the cost of service.
Therefore, the deficiency in earned return on common equity recovery can be, and is, an accumulation of recovery deficiencies for a number of individual. cost of service items.
. Q. Did not the Company show improvement, financially, in 19787 A. The answer to that question is relative. Relative to 1977, 1978 was a year of financial improvement for Boston Edison.
However, It : us look ct that b se year of 1977. Earnings were $2.06 per share, substantially below the dividend level of $2.44 ;ar share. Return on common equity, as mentioned, was 6.33%, well below the theoretically " allowed" level of 13%. 1977 can hardly be termed a reasonable financial year with which to compare later years.
Referring once again to Exhibits No. BE-101 and BE-102 it is evident that comparisons with earnings per share and the return on common equity six years ago indicate that 1978's performance can hardly be termed adequate; it is well below the levels attained then. For the period 1968 through 1972 both earnings per share and returns on common equity 2l'?S 221
s, __-
D
- 90 90 TYE - . .
_aNenAXL . .
6 acceded the comparable figures for 1978. Additionally, inflation's dilutive effects upon earnings and returns since that time underscore the inadequacy of the earnings and return levels attained in 1978. Much higher levels of caraings and returns are necessary before the levels of even 6 to 10 years ago can be attained.
As a means of further comparison, the present yields on Baa/BBB rated long-term bonds are approaching 11%. Certainly common equity is judged riskier than long-term debt and should provide a commensurate yield premium over that which can be obtained with investments in long-term debt. The company's 1978 return on equity, at 9.54% hardly provides that, since it is over a full percentage point below the debt yield.
In summcry, yes, financial improvements were realized in 1978, however, they cannot, per se, be considered adequate and have not placed the Company in a sound financial condition.
They represeat steps towards financial health; however, sub-stantial additional improvement is absolutely essential.
Mr. Kelmon, what are the reasons for the Company's financial performance over the period to which you just referred?
i une of the major reasons for this performance is regulatory lag. By the time past rate increases became effective in-flation had increased the Company's cost to the point where the new rates were not sufficient to fully recover total costs of operation. This was a by-product of an historical test period approach to ratemaking which did not grant suf-1"rient recognition to forward looking test year adjustments.
7- 2145 322
Would you please elaborate?
., Yes. Theoretically, when using the historical test period method for computing t'le cost of service, the costs and revenues of that period are adjusted to reflect the costs and revenues during the period the rates will be in effect.
In this matter an historic test period can reflect a " future" period. However, the forward looking adjustments are critical.
If they are not reflective of what can be expected when the rates are in effect, resultant revenues will not be sufficient to fully offset total costs of operation and the resultant deficiencies will cause shortfalls in the return on eo"# ty and adversely affect other critical financial benchmarks.
.;. Mr. Kelmon, you speak of recovering or offsetting " total costs of operation". Can you define what you are referring to?
- i. When I speak of costs of operation I am referring to operating costs, such as operation and maintenance expenses, depreci-ation, and taxes, and to capital costs, such as :nterest obligations, preferred and preference obligations and the return on common equity allowed by the commission. These cost areas represent total costs to provide adequate and reliable electric service, and are the costs Boston Edison seeks to fully recover through approved rate levels.
Have you looked at the effects of regulatory lag upon this case?
L Yes we have. Assuming that rates based upon the requested revenue level are placed into effect in October, 1979, the 1979 return on equity would be 11.0%, well below the 15%
_3_
2145 323
A cost included in the capital structure. In 1980 the return would be 13.9% and in 1981 it would be 13.0%, both well below the required level of 15%. The reason for this scen-ario is regulatory lag. Little of the relief will be reflected in 1979 since the rates will not be in effect for the entire year. The shortfall in 1979 is due to the regulatory lag of the Company's previous rate case. In 1980 and 1981 when the [
, r rates will be in effect for the entire years the lag is most .'
evident. Additional rates will be needed to offset these O. deficiencies.
1, Q. Mr. Kelmon, is regulatory lag the only reason for the Company's 2, poor financial condition and performance?
A. No, it is not. As I had previously mentioned, the historical 3.
4, test period approach to ratemaking, as applied in the Common-5.
wealth, has deficiencies, many of which are evident in the
- 6. adjustments made to the cost of service.
- 7. Q. Can you explain?
- 8. A. Theoretically, use of the cost of service concept in rate-9.
making is geared to generate sufficient revenues to fully 0,
recover total costs of operation of the Company. A brief
- 1. simplified example would probably best illustrate the concept, 2,
as well as areas of potential deficiency.
3.
In Exhibit No. BE-103 the total annual costs of operation
- 4. for the example.are calculated. Operating and capital costs 25.
have been determined separately to show the derivations.
- 26. Both, however, are integral components of the Company's
- 27. total costs. Operating costs are $315 and capital costs .
2145 324
in the
$110, totalling $425. It must be remembered that case of an actual company these costs would be annual expenses incurred, which would have to be recovered through revenues.
In Exhibit No. BE-104 a proper method of recovering total costs is presented. It conforms to the ratemaking methodology rate used by this Department, employing the cost of service, -
As is evident the base, and rate of return components.
f total recovery revenues exactly offset the total costs o operation, thereby achieving full recovery.
and the Exhibit No. BE-105 contains an income statement In calculation of return on common equity for the example.
h this theoretical example the return on equity is 15%, whic 2.
it should be since the outstanding common equity was assigned
- 3. The next exhibit, 4.
a 15% annual cost in Exhibit No. BE-103.
Exhibit No. BE-106, presents areas of potential deficiency.
5.
The exhibit details three cases where adjtstments have been 6.
made without regard to the total costs to be recovered,
- 7, capital costs, illustrating adjustments to operating costs, L8.
and revenues, respectively. Total recovery revenues are 19.
computed as well as the resultant returns on common equity.
20, that the revenue deficiency from
- 21. In each case it is evident the theoretically required revenue causes substantial short-22.
falls in the required return on equity.
23.
Q.
Mr. Kelmon, if I understand you correctly, you do not object 24.
to the cost of service method of ratemaking in theory?
25.
That is correct.
Theoretically, it does allow for full
- 26. A.
recovery of costs.
It is in the actual implementation of
- 27. 2145 325
- 28. the method that deficiencies arise.
s Q. Do regulatory authorities in ot'her states and FERC utilize this cost of service ratemaking concept?
A. Yes they do.
Q. Have utilities in those jurisdictions been affected as Boston Edison has?
A. Generally no, because other regulatory authorities have recognized the forces of inflation and have made provisions y, r
in their methods used to calculate cost of service, without ?
offsetting them with counterproductive adjustments.
Q. Can you cite examples of these provisions?
A. Other regulatory authorities have recognized end of year rate base and forecasts of operation, maintenance and other expenses. Many use prospective test years. Some jurisdic-tions allow the inclusion of construction work in progress in rate base, either in full or in part. Increases in the allowed return on equity have been allowed. Others provide interim relief when conditions reviewed in prior cases change and speedy relief through cost of capital or rate of return adjustment clauses.
Q. Has Boston Edison been provided with any of these adjustments?
A. No.
Q. Are you requesting any of the provisions you have just mentioned to offset the effects of inflation and regulatory lag?
A. Yes. I believe Edison needs relief from both counter pro-ductive adjustments, and the economic effects of regulatory lag; year-end r.'.e base and a return on common equity of 15% rather than the 13% allowed in DPU 19300.
Q.
Mr. Kelmon, what have been the effects upon the Company of t}e lack of timely and adequate rate relief?
A. As I mentioned at the outset of my testimony, the Company has suffered serious deterioration in its financial condition.
Q. Would you elaborate further on the Company's current financial condition.
A. I have already discussed the earnings and return on equity >
C~
situation. r.
Because the Company's earnings and returns have not been adequate for several years now, the Company's ability to raise capital has suffered an alarming deterioration.
The company's access to the common equity market has been all but cut off because of the depressed price of its stock.
The Company's common stock has continuously sold below its book value for over five years. The amount of bonds the Company can issue has been extremely limited because of poor ratings and poor coverages.
Q. Do you have data which summarizes the Company's deteriorated financial position?
A. Yes. In addition to the return on equity and earnings per share data contained in Exhibits No. BE-101 and BE-102, such data are contained in Exhibit No. BE-107 consisting of seven pages of tables designated collectively as " Boston Edison Company Comparative Financial Statistics 1967 - 1978". The exhibit presents Company financial data on an annual basis for each of the years 1967 - 1978. Pages 1 - 7, respectively, show capital expenditures; the c r :entage of capital funds generated internally and externa._y; year-end capital structure; year-end capitalization ratios: .Aghted cost of debt and 2145 327
preferred stock together with return on common equity; interest coverages both in accordance with the SEC test and in accordance with the Company's mortgage indenture; and the Company's unfinished construction balances.
Q.
What have interest coverages been during the last twelve years? t p
A. Over the past twelve years interest coverage fell from a high in 1967 of 5.03 times to a low in 1974 of 1.74 times.
Since then some recovery has been realized however the coverage ratio must be raised substantially if the Company is to improve its bond ratings. The following table illus-trates the downgrading our bond ratings have undergone, from the " highest quality" to the lowest grade which qualifies for commercial bank investment:
Date of Moody's Standard & Poor's Rating Change Prior to November, 1969 Aaa AAA November, 1969 Aa AAA June, 1979 Aa AA Aa A April, 1973 December, 1973 A A Baa BBB May, 1974 Standard and Poor's ratings literature issued in August 1974-stated that Edison was barely able to maintain even the BBB rating.
, Q. What is the significance of these deratings in terms of Edison's ability to raise capital?
A. The Company's ability to raise significant sums of money through the issuance of long-term debt has been severely restricted. A rating of less than "A" means that certain 13 2145 328
large institutional investors,.such as savings banks, certain life insurance companies and state retirement funds, are legally precluded from purchasing the Company's bonds.
Moreover, the deratings have significantly increased the cost at which the Company has been able to issue bonds.
Q.
What bonds has the Company been able to issue over the last ,
five years? ;
A. The Company did not issue any long-term debt in 1973. An issue then would have resulted in an immediate derating. In 1974, Edison was forced to reduce a planned $75 million issue of long-term debt to a $60 million intermediate term (5 year) issue carrying an effective interest rate of 12. 60%.
This cost was 266 basis points above the cost of $75 million of first mortgage bonds issued by an "Aa" electric utility two days before Edison's issue and 232 basis points above the cost of $150 million of first mortgage bonds issued by another "Aa" electric utility five days after Edison's issue.
In May 1977, Edison issued $60 million of first mortgage bonds to refinance $60 million borrowed from the First National Bank of Chicago in 1973. The terms of that financing were possible only because the bonds were utilized to refinance existing debt. The rating agencies made it clear that any attempt to issue a substantial amount of new debt would probably have resulted in another bond derating. As it was, the rate obtained on these bonds was the highest of any
'. public utility offering at that time.
2145 329 14 -
On December 15, 1978, the Company executed a Bond Pur-chase Agreement for a private placement of $95 million of of first mortgage bonds with a 25 year term and at a cost 9.75%.
The Company delivered $49.5 million of the bonds in December 1978 and used the proceeds to reduce short-term debt.
The remaining $45.5 million are to be delivered in E
August 1979, with the proceeds to be used in 1979 to retire -
d in the $60 million of first mortgage bonds which were issue Our agreement to utilize the second portion to retire 1974.
existing debt was necessary because of the high percentage An our capital of debt and low percentage of common equity structure, What is the Company's common equity ratio?
. Q.
. A. It is presently 29.3%. .
Please explain the importance of a proper common equity
. Q.
'. ratio in the Company's capital structure.
foundation upon A. The Company's common equity base is the The bond B.
which the other financings of the Company rest.
9.
holders and other senior capital holders look to the common
- 0. equity base of the Company for the protec ion of their The Common equity ratio is thus extremelf
- 1. investment. i
- 2. important to the Company's ability to sell its other secur -
the financing flexibility neces-
- 3. ties. In order to exhibit the
- 4. sary to meet capital requirements at reasonable costs, 35%.
- 5. Company's common equity ratio should be raised to about 2145 330
'N, How can Edison improve its common equity ratio? k to Q.
A.
The Company must sell substantial amounts of common stoc regain and maintain a sound capital structure. unts?
Has Edison been able to sell common stock inbook adequate amo Q.
A.
No, because its stock has been selling so far below Edison to do so.
it would not have been prudent value,
- 73. It did not ;
r issued common stock at below bookThe value only in 19 [
1974, 1975 or 1976.
issue any common stock in lded issue since 1973, a $50 million issue in May of 1977, yie The May 1977 issue was net proceeds 20% below book value.
, hen would have originally planned for 1976 but if issued t lly exper-produced even greater dilution than the 20% actua ienced. k What is the significance of the market price of the stoc Q.
beicg below the book value?
- 5. a price below book value, the A.
When a company sells stock at company's
- 6. h 7.
immediate effect of this sale is to reduce t e If the company's actual rate of book value per share.
- 8. then the earnings per return on book equity does not rise, h e 9,
share will decline, as well as the book value perSuppose s ar . a 20.
This can be seen from a simple numericalbook example.
value per 21.
company has 100 shares outstanding and thatf the company 22.
share is $10, so that the total book equity o 23.
is S1,000.
Suppose now that the company sells an additional
- 24. It will thus 10 shares at a price of only $7 per share. will
- 25. i raise $70 in new capital and its total book equ ty
- 26. But the total number of increase from $1,000 to $1,070.
- 27. Thus, book value per shares has-increased from 100 to 110.
share has declined from $10 to S9.73, a decline of 2.7 If the percent. This is the process known as " dilution".
balance available for common were $100 prior to and after the sale, it can be seen that earnings per share were $1.00 prior to the sale but only $0.91 after, a decline of 9%.
Q. What is the effect of dilution on stockholders who owned the stock prior to its sale? :
The book.value per share and the earnings per share decline [
A.
Although, in our example, as a direct effect of the sale.
the previous stockholders contributed 93 percent of the company's equity capital ($1,000 out of $1,070), they own only 91 percent of the company (100 shares out of 110 shares).
If the company is a regulated utility which is selling stock to raise capital in order to meet its public utility obli-gations, the fact that it must sell the stock at less than book value means that the existing stockholders are deprived of part of their ownership share. That is, the effort of the utility to meet its obligation to serve its customers results in a virtual confiscation of part of the property of the stockholders.
, Q.
Does this equally affect the new stockholders?
A. No. The new stockholder will only buy if the price of the stock is low enough to assure him that his interests are protected. However, if there are future sales of stock at less than book value, he will stand to lose along with all other then-existing stockholders.
That expectation will also affect his willingness to buy stock today. Suppose that the investor thinking of 2145 332 buying the newly issued shares of the utility company today expects that the company will engage in a succession of new stock issues in the years to come. If he assumes, quite reasone'oly, that these future sales of stock will be at market prices which imply the same price-earnings ratio as now with a return on book equity the same as now, and hence the same ratio of price to book equity per share as exists t today, then he must expect that future sales of stock will give rise to future declines in book value and earnings per
- j. share. If he forms this expectation he may very well not be willing to buy the stock at the existing price or indeed at any price.
, Q. Is the Company now able to engage in common equity financing?
4, A. Not in sufficient amounts to restore a sound capital structure.
2.
The closing price of the Company's stock was $23.25 on March 3, 9,1979, about 75% of book value of $31 per share at the end of 1978. Barring substantial improvement in price, the 3, Company is this year facing its third successive sale of
- 9. common stock at below book value. Passing the question of 0.
whether a continuous pattern of sale at below book value is
- 1. possible, to do so can only worsen the Company's financial
- 2. condition.
- 3. Q.
What is the rating of the Company's common stock?
- 4. A. The Company's common stock presently carries a B+ rating, 5.
the lowest rating carried by an electric utility listed on
- 6. the New York Stock Exchange.
- 7. Q. Is the Company able to sell preferred stock? ,
A. The Company expects to be able to issue some preferred stock in future years. However, between the preferred and prefer-ence stock, the capital structure already is fairly heavy now in this area. Additional Common Equity mest be issued first to balance the capital structure better.
, Q.
What has the Company done to satisfy its capital requirements in these circumstances?
It has had to resort to nonconventional financing. In 1975 ,
A.
the Company issued " preference" stock, a new type of securdty junior to preferred stock and without the protection of a coverage test as a condition of issuance. Edison was able to raise $47 million at a cost of 12.68%. It issued $40,125,000 of preference stock in May 1976 at a cost of 10.24%. In order to sell the first series of preference stock the Company had to enter into a reperchase commitment that i.:
- intended to maintain the market price.
In December 1975 the Company raised $23 a.,llion through a 10-year note with a sinking fund. As security for this 3.
9, loan the Company was required to pledge moveable gas turbine
- 0. facilities.
- 1. In August 1978 the Company entered into an agreement 9 with Prulease, Inc. whereby the Company is able to finance 3, the acquisition costs of nuclear fuel up to a maximum amount of $50,000,000 at any one time outstanding. Principal is 4.
- 5. paid quarterly and interest is at a rate equal to Prulease's 6.
ninety day commercial paper rate plus 1-1/8%.
7, Q. Can the Company expect to finance its construction program g, by intermediate term financing?
2145 334
A. No. A limited amount of intermediate term financing would not adversely affect the Company. However, for the most part, our financial obligations should conform to the life of the assets in which our capital is invested. This is because we cannot quickly recover the principal amount so committed. Instead we can only recover it slowly through ,
annual depreciation of about 3%. Since we can recover so i little of the capital investment quickly, vm must ensure ,
that no matter how bad capital markets become, our refin-ancings never create a liquidity crisis for us which would affect our ability to serve our customers. Thus, we must maintain long-lived securities to match our long-lived assets. In other words, so that we never need to refinance vast sums in any short period, most of our funds'should come froz long-term debt, preferred stock, or common stock.
Q. How would you summarize the Company's financial picture?
5.
7, A. It shows low internal financing capability, extensive reliance 3,
on outside capital, poor coverage and earnings, and high 9, capital costs. The Company cannot issue common stock without causing substantial dilution. Its weak equity base, low 3,
1.
bond ratings and poor coverage have drastically impaired its 2.
ability to issue first mortgage bonds. It has been able to
- 3. meet its capital requirements up to now only through inno-4 vative nonconventional financing at high cost.
- 5. Q. Mr. Kelmon, would you please describe the Company's construc-6.
tion program and projected cash requirements for construction?
- 7. A. For the period 1979 through 1983 the Company's total cash
.8.
requirement for new construction and nuclear fuel is projected 2145 335
to be $983,000,000. The company will also have to refinance
$173,000,000 of long-term debt. The total amount required
/
for new construction and refinancing is thus over a billion dollars. This means that for every dollar of its $1.1 billion net plant investment as of year end 1978 the Company must raise more than a dollar over the ensuing five years.
The Company's current major construction project is [
Pilgrim 2, a nuclear generating unit with a capability of {
1150 MW. Edison owns 59% of the unit, with the remainder being owned by other New England utilities. The unit is scheduled to go into service in the mid-1980's. Our total to
) ,
cash requirements for the unit's construction will amount
$567,000,000 exclusive of AFUDC over the period 1979-1985.
five years
, Q.
How much of the capital requirement over the next
- 5. must be raised from outside sources?
A. The total amount of required outside financing is projected 6.
to be $775,000,000 including the $173,000,000 of debt to be 7.
- 8. refinanced.
Q.
Can the Company expect to continue to finance its construction 9.
ogram in the same way that it has managed to finance past O.
construction requirements?
1.
- 2. A. The present construction program represents a financ.171 challenge that the Company cannot economically meet unless 3.
it is allowed the opportunity to earn a fair return on 4.
common equity. This conclusion is shared by the investment 5.
community as shown in Exhibit No. BE-108, a report by a
'6.
The analyst recommended 27.
security analyst dated May 8, 1978.
- 28. that Boston Edison's common shareholders sell their common 2145 336 91 -
stock in the Company.
Exhibit No. BE-109, the Electrical Week issue of May 15, 1978, described the analyst's " sale" recommendation as the most " vigorous".the analyst had ever made for the stock of a single company (at 3).
The analyst's report discussed the financial burden its history ahead for Edison in financing the Pilgrim 2 unit, of inadequate earnings, and its proven inability to obtain G timely and sufficient rate relief. It. concluded that in [
H contrast to Edison, there are many electric utilities that not only can cover the dividend adequately but have a reason-able prospect of increasing it gradually over a period of years. The report is a clear indication from the investment community that Edison must improve its earnings.
In particular, it must be able to issue common stock in order to rebuild its common equity base and be able to issue bonds and preferred stocks. But to be able to do that its earnings must improve. The only solution lies in regulation which recognizes that fact by allowing timely rate increases when needed and in adequate amounts, including provision for a fair return on common equity.
, Q. Mr. Kelmon, should the determination of the allowed rate of return be influenced at all by the nature of the Company's construction program?
., A. Only to the extent that it affects the assessment of risk.
The fact that the Company is engaged in construction should 3,
not cause any deviation from firmly established ratemaking 7, precedents. I am greatly troubled by the fact that in recent 2145 337
years regulatory authorities and even'the courts seem to have departed from the traditional standards of the Bluefield and Hope cases which provide, among other things, that the return on equity should be commensurate with returns on investments in other enterprises having corresponding risks
. and should be sufficient to assure confidence in the financial integrity of the enterprise so as to mcintain its credit and f to attract capital. Anything less results in conf'iscation.
1 It appears to have been the view of some regulators in the recent past that the use to which capital is to be put could modify the standard used in determining the allowed
- 2. rate of return which, in turn affects the ability of the
- 3. Company to raise that capital. Even the Court has expressed 4 the view that the Company's construction program, in effect,
- 5. places it in a category of not conducting business as usual
- 6. and, therefore, the traditional policies of confiscation
- 7. mignt not be applicable.
- 8. For a public utility there is only one business and that
- 9. is to discharge its public responsibility to serve its rate-
- 0. payers adequately, reliably and at the lowest passible cost.
- 1. As an integral part of the discharge of those responsibilities
- 2. u*.ilities must from time to time construct facilities in order to ensure sufficient capacity to meet expected demand. That 3.
- 4. is an awesome responsibility, the decisions which must be made
- 5. are difficult, and the risks are great given the uncertainties
- 6. associated with the nation's energy problems which are even
- 7. more acute in New England. But these responsibilities must be 21
_ -~ .
met now'as they have been in the past. The same standards which applied'in the more stable economic times and before energy problems became acute must apply now.
There is no question that because of the energy crisis, inflation and other socio-economic factors the costs of meeting the energy needs of our customers have increased dramatically - ;
r so have the risks. But that does not mean that traditional r.
regulatory principles are to be cast aside. Edison and other :
electric utilities now have a greater need to attract capital.
- 3. Electric utilities have little or no choice in their
- 1. construction programs because they must serve the needs of 2.
their communities despite the negative impact of new higher
- 3. cost facilities on earnings and creditworthiness. Electric
- 4. utilities have also become a focal point of environmental con-
- 5. and consumer discontent which has extended utilities'
- 6. struction periods, increased their costs and raised the risks
- 7. of not completing projects. Electric utilities are unaole
- 8. to sell their plant, to disinvest or refuse to invest in new
- 9. plant when the regulatory environment is unsatisfactory.
'O. Q.
How do these factors affect utilities in general and specif-
>1. ically Boston Edison?
- 2. A. All of these factors indicate unquestionably that the risks
- 3. associated with utilities are substantially greater than
- 74. unregulated enterprises and much greater than the risks of regulated enterprises soge yddhs ago. Therefore, rather than
- 5. m i'
'6. negatively impacting on the allowed rate of return, if any-
- 27. thing, the fact that utilities are engaged in project t1'5 339
^
^-
o
- 1. meet the future needs of their customers leads inevitably to
- 2. the conclusion that under existing regulatory principles the
- 3. allowed rate of return should be increased to allow utilities
- 4. to compete strenuously for the inordinate share of the
- 5. capital market which they require.
- 6. Yet Boston Edison has been and continues to be unable .
- 7. to attract equity capital on reasonable terms because it has E
- 8. not been allowed a rate of return sufficient to restore and
- 9. sustain the price of its stock at or above book value.
- 10. Unless and until that occurs, the Company will be forced to
- 11. pay exorbitant costs for the capital it is able to raise and
- 12. these costs will eventually be passed on to its customers.
- 13. Q. Are you saying, Mr. Kelmon, that ratepayers will have to
- 14. absorb these higher costs?
- 15. A. Yes. Customers are seriously affected. With a deteriorated
- 16. financial position impairing the ability to finance necessary
- 17. facilities at reasonable. costs the Company must obtain the
- 18. required funds at whatever costs the market demands. For
- 19. example, debt costs could easily approach 15% in the forseeable
- 20. future. Since such interest charges are an integral compon-
- 21. ent of the Company's annual capital costs the ratepayer
- 22. would have to bear these higher costs. It is in the best
- 23. interests of ratepayers, of the Company and the economy of
- 24. its service area that lower costs be borne now rather than
- 25. face substantially higher costs in the future.
2145 340
- 26. Q. What should the Department do in this proceeding to assist the
- 27. Company in restoring its financial health so that it can con-
- 28. tinue to provide adequate and reliable service to its customers?
A. The Department should ensure that these proceedings are con-ducted expeditiously such that the final decision is arrived at in a manner that is consistent with proper ratemaking principles and that the proposed adjustments be viewed in for which recovery is an light of the Company's total costs 2,
absolute necessity. It is my firm belief that if full 7, recovery is realized, the concerns of ratepayers and investors {
will have been balanced, for the Company would be recovering i 3,
9, nothing more than its total co.its of operations.
],
I ask the Department to provide the Company with suf-ficient revenues to cover its costs of providing service and 2,
an allowance for a fair return on its equity in this pro-
- 3. ceeding. Only in so doing can it properly discharge its 4,
responsibilities to serve the public interest.
2145 341
A. The Department should ensure that these proceedings are con-ducted expeditiously such that the final decision is arrived at in a manner that is consistent with proper ratemaking principles and that the proposed adjustments be viewed in light of the Company's total costs for which recovery is an absolute necessity. It is my firm belief that if full recovery is realized, the concerns of ratepayers and investors {
will have been balanced, for the Company would be recovering {.
nothing more than its total costs of operations.
1 ask the Department to provide the Company with suf-ficient revenues to cover its costs of providing service and an allowance for a fair return on its equity in this pr ceeding. Only in so doing can it properly discharge its responsibilities to serve the public interest.
I 2145 342
6 ' .'s v
zw. .
,c.,-
- b. . . e vs g
I MAY b 1873 > .
CERTIFICATE OF SERVICE c*?*1%YZ7 b *$ks y thi ,
I, Michael B. Meyer, hereby certify that the attached --
" Testimony of Paul F. Levy on Behalf of the Commonwealth of Massachusetts" has been served on the fo11owing list by hand delivering or by mailing postage prepaid, first class copies to the below parties at their usual business addresses:
Edward Luton, Esq. Barry H. Smith, Esq.
Chairman, Atomic Safety and Marcia E. Mulkey, Esq.
Licensing Board Office of the Executive Legal U.S. Nuclear Regulatory Commission Director Washington, D.C. 20555 U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Dr. A. Dixon Callihan Union Carbide Corporation Atomic Safety and Licensing Board P.O. Box Y Panel Oak Ridge, Tennessee 37830 U.S. Nuclear Regulatory Commission Dr. Richard F. Cole Washington, D.C. 20555 Atomic Safety and Licensing Board U.S. Nuclear Regulatory Commission William S. Abbott, Esq.
Washington, D.C. 20555 50 Congress Street, Suite 925 Boston, Mass. 02109 Atomic Safety and Licensing Appeal Board Mr. Daniel F. Ford U.S. Nuclear Regulatory Commission 1208 Massachusetts Avenue Washington, D.C. 20555 Cambridge, Mass. 02138 Office of the Secretary Henry Hermann, Esq.
Docketing and Service Section 151 Tremont Street U. S. Nuclear Regulatory Commission Boston, Mass. 02111 Washington, D.C. 20555 Chief Librarian George H. Lewald, Esq. Plymouth Public Library Ropes and Gray North Street 225 Franklin Street Plymouth, Mass. 02360 Boston, Mass. 02110 Mr. & Mrs. Ala.4 R. Cleeton Dale G. Stoodley, Esq. 22 Mackintosh Street Boston Edison Company Franklin, Mass. 02039 800 Boylston Street '
Boston, Mass. 02199
. r, May 9, 1979 Michael B. Meyer 2145 343