ML19309F885
| ML19309F885 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 04/30/1980 |
| From: | Osullivan J BANGOR HYDRO-ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML19309F878 | List: |
| References | |
| NUDOCS 8005010548 | |
| Download: ML19309F885 (40) | |
Text
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ATTACHMENT TO ITEM 2(g)
TEMPORARY RATE REQUEST l
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e 1
I Q.
State your name and address.
2 A.
John P.
O'Sullivan.
My business address is 33 State 3
Street, Bangor, Maine, the principal office of Bangor 4
Hydro-Electric Company.
l 5
6 Q.
What is your occupation?
7 A.
I am a Vice President and Treasurer of Bangor Hydro-8 Electric Company.
I have held these positions since 9
joining the Company in January 1979.
10 Q.
outline your educational and professional background 11 12 I graduated from Cheverus High School in Portland, A.
13 Maine in 1960.
In 1964 I received a B.
A. in Economics 14 from Holy Cross College in Worcester, Massachusetts. In 15 1966 I received a M.B.A. from the Amos Tuck' School at 16 Dartmouth College.
17 In July of 1966 I joined the audit staff of Peat, 18 Marwick, Mitchell & Co. (PMM) in Boston, Massachusetts.
19 I became a Certified Public Accountant in 1969.
I am 20 now registered to practice as a CPA in Maine and Mass-21 achusetts.
In 1970 I was promoted to the management 22 audit group of PMM with overall responsibility for 23 several major clients. In 1973 I transferred to Peat, 24 Marwick, Mitchell & Company's tax department in Portland, 25 Maine and w rked as a tax supervisor until 1975. t_____________
I In 1975 I became Maine's Commissioner of-Finance 2
and Administration under Governor James Longley.
As 3
such, I was the State's Chief Financial Officer and 4
responsible for the following bureaus and functions:
5
. Accounts and Controls, Budget, Taxation, Purchases, Central Computer Service, Public Improvements and 6
7 Alcholic Beverages.
l 8
Shortly after joining Bangor Hydro-Electric Company I attended the three week Stone and Webster 9
Utility Management Course.
My professional associations 10 11 include membership in the American Institute of Certified Public Accountants and the Maine Society of Public 12 Accountants.
13 14 Q.
What specifically do your duties at the Company encompass?
15 16 A.
I am the chief financial officer of the Company with 17 responsibility for financial planning, treasury, 18 accounting and data processing.
Since joining the 19 Company I have worked closely on financial matters with 20 Mr. Haskell, the Chairman of the Board of the Company, 21 and Mr. Greenquist, the President of the Company.
22 I determine the financial needs of the Company and 23 participate in the arrangements for Company financing 24 both short-term and long-term.
My controller functions include seeing that proper accounting and accounting 25 L
I controls are maintained with respect to the Company's 2
assets, liabilities, income and expenditures.
3 4
Q.
What is the purpose of your testimony?
5 A.
The purpose of my testimony is to explain why the 6
Company should be granted interim rate relief, pending 7
the outcome of the Commission's investigation of the 8
Company's permanent rate increase request filed on 9
February 25, 1980, Docket No. 80-38.
10 11 0
Why has the Company asked for interi.1 rate relief?
Although we are always hopeful of an expedited proceeding, 12 A.
13 the Company does not expect that any new permanent rates 14 will be effective before December, 1980.
While we 15 are aware that regulatory lag is something we should 16 be able to anticipate, we feel that the circumstances surrounding our current request warrant relief from 7
this regulatory lag.
g 19 20 Q.
Mr. O'Sullivan, what are the circumstances to which 21 Y " f*f*f?
22 A.
The circumstances are tied to the Company's capital 23 construction program and the related financing 24 raquirements.
Accordingly, I shall address the construc-25 tion program first.
j i
1 I
The Company's construction program is an ambitious 2
one which requires extensive financing. We currently 3
have a.37% interest, or about 8.6 megawatts, in the 4
Seabrook nuclear units, and we have contracted to purchase from Public Service Company of New Hampshire e
5
~
(PSNH) another 1.8% interest, or about 41.4 megawatts, 6
in those units.
This latter purchase is part of 7
PSNH's efforts to sell about 15% of the project from the 50% it now owns, due to financial difficulties arising out of the prohibition of construction work in 10 progress (CWIP) in rate base.
11 12 It should be noted here that the purchase from 13 PSNH is to take place over a buy-in period which will 14 commence when regulatory approvals for all purchasers 15 are obtained.
These approvals are being delayed; it 16 was originally expected that the buy-in period would begin in early 1980, but now it appears that it probably 17 18 will not begin until early 1981.
Once the buy-in commences, the purchasers of the 15% will pay all of 19 20 PSNH's construction costs for the Seabrook project 21 until their interests are increased and PSNH's interest 22 is decreased to the new levels of ownership.
We 23 e' stimate that the adjustment period will take approxi-24 mately 18 months. During this time, the Company will be 25 paying about 6% of the project's construction costs.
i - A. - - - -
I This committment is of the utmo?t importance to 2
the Company and its customers.
It has been made in the 3
firm belief that the energy from those units will be 4
the least expensive of all alternatives and is there-f re in the best interests of our customers. The 5
capacity from the units, which are scheduled for 6
7 commercial operation in 1983 and 1985, is required in g
order to partially replace the Company's long-term purchased power contract with Boston Edison Company.
9 10 This contract terminates in 1984 and means a loss of 95 11 megawatts.
12 The Company's investment in Seabrook, based on the 13 latest construction estimates, is expected to be 14
$64,500,000, including $14,500,000 of AFDC.
In addition, 15 the Company's other construction requirements (trans-16 mission, distribution, general plant) call for $5,000,000 17 to S6,000,000 per year.
If the Seabrook buy-in period 18 begins in January 1981, as now expected, the Company 19 will need an estimated $21,400,000 for construction in 20 1981.
21 As we expect the buy-in period will not begin 22 until early 1981, we may be able to delay long-term 23 financing somewhat beyond year-end 1980, but no later 24 than the end of the second quarter of 1981.
J 25 l i
I Q.
Mr. O'Sullivan, could you describe the current financial 2
condition of the Company?
3 A.
Yes.
The Company last had a basic rate increase in 4
November, 1976, and that increase was based on a 1975 5
test year.
Since then, (1) the Company's rate base has 6
increased from S44 million to $70 million, upon which 7
increase no return is being earned; (2) the 1980 8
revenue projections from basic rates have been reduced 9
by $1,850,000 from projections only a year ago; (3) 10 borrowing costs have soared from the 9% projected only 11 a little over a year ago to an effective rate of over 12 20% today; (4) the interest costs of carrying the 13 deferred fuel expense and the significant underrecovery 14 being experienced under the new fuel clause are largely 15 responsible for a current negative cash flow; and (5) 16 the Company has not earned its return on equity since 17 the 1976 rate order, and projected 1980 performance is 18 especially poor.
1 19 In 1979, the Company showed earnings of $1.63 per 20 common share, or a return on equity of 11.6%. However, 21 the deferral of fuel expenses incurred but unrecovered 22 which are being amortized over a three year period 23 pursuant to the implementation of the new fuel adjustment regulati ns (Commission Docket U. #3386) accounted for 24 S1.06 per common share, and the accounting change made 25 I
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l in the first quarter of 1979 to record unbilled revenue 2
increased earnings by S.58 per common share.
These two 3
items represent non-cash earnings, and are of a non-4 recurring nature.
Absent these items, the Company 5
would have reported a loss in l'979 of S.O.1, per common share.
Earnings in 1980 are currently forecasted to be 6
7 S1.00 per common share, or an 7% return on equity.
Of 8
this $1.00, S.64 is expected to be attributable to 9
AFDC, which has an adverse impact on the quality of the earnings.
10 11 I would note here that the above projections for 12 1980 earnings assume that the Seabrook buy-in begins in 13 January, 1981.
We had originally projected that the 14 boy-in would begin in early 1980.
The delay until 1981 a tually decreases the Company's 1980 reported earnings, 15 16 even though it postpones the Company's obligation to 17 pay construction costs.
This is because taxes are not 18 pr vided on AFDC according to past Commission practice, wha <<as income taxes increase as interest expense is 79 reducea.
20 i
21 The return on equity allowed in the last rate case 22 was 13.04%, and the Company has determined that the 23 current return on equity for ratemaking purposes should 24 be 15.4%.
It is evident frc,m the foregoing that the 25 Company is earning significantly less than its allowed l,
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return on equity and will continue to do so until rates 2
are increased.
The inadequacy of the Company's earned 3
return on equity is underscored by noting that the 4
current cost of new long-term debt to the Company would 5
exceed its allowed return on equity.
6 Q.
Mr. O'Sullivan, how does the Company's current financial 7
8 condition and the projected 1980 financial results 9
effect long-term financing efforts?
10 A.
Without improved earnings access to the capital markets 11 would be diffcult.
Even if financing were possible, 12 the cost would be very high. This is due to current 13 market conditions as compounded by the company's 14 depressed financial condition.
15 With earnings in 1980 of $1.00, times interest 16 coverage would be well below the level of 2 times 17 required by the market.
The times fixed costs (interest 18 and preferred dividends) would be below the 1.5 considered 19 to be minimal for preferred stock financing.
20 21 If the Company were to attempt to market common 22 equity, any such issuance would be at prices substan-23 tially below book.
If we were to issue common stock l
24 today, we could expect net proceeds of about $9.75 to 25 S10.00 per share, or about 69% of book value.
Selling l
. i
I common equity below book is confiscatory as to the 2
existing shareholders, and increases the cost of money 3
to the ratepayers.
4 In short, it is doubtful that the Company could 5
finance long-term at reas.onable' costs, and it may not 6
be able to finance long-term at all, prior to the second 7
half of 1981 without improved 1980 earnings.
8 9
Q.
Mr. O'Sullivan, has the Company been involved in a new 10 short term credit arrangement?
11 A.
Yes. We have negotiated for a $30,000,000 revolving 12 credit agreement to replace our short term lines of 13 credit.
The banking group is headed up by Morgan 14 Guaranty Trust Company of New York and The Merrill 15 Trust Company of Bangor.
We expect this arrangement 16 will provide assurance relative to the availability of the funds in these times of uncertain credit as well as 17 i
m re flexibility in the timing of long-term fn.:ncing.
18 However, this agreement has not as yet been finalized.
79 20 21 Q.
Why could not the Company draw upon this new revolving 22 credit agreement until new base rates improve earnings 23 enough to make long term financing more feasible?
24 A.
The Company's plans are not to exceed $20 million 25 outstanding at any one time under the revolving credit j n
I agreement.
We feel that among other considerations, we 2
must retain a cushion for contingencies.
Under the 3
agreement the $30 million is the maximum short-term 4
debt the Company can hold.
It does not seem that a $10 5
million reserve for contingencien'is excessive in 6
today's energy environment, especially for a company 7
which participates in nuclear units.
One need only 8
recall the effect of the nine week shutdown of Maine 9
Yankee last year to support this position.
10 In order not to exceed the $20 million borrowing level and thereby rc lin a $10 million reserve for 11 ntingen ies, our cash needs will require long-term 12 13 financing in 1980, or in the second quarter of 1981 at the latest.
14 15 In addition, at the Company's current level of 16 common stock ($26,337,117 as of February 28, 1980),
17 preferred stock ($9,734,000) and long-term debt 18
($36,515,000), $20,000,000 of short-term debt would 19 push the common stock portion of capitalization below 30%.
A capital structure must be balanced to provide 20 Protection for debt as well as equity investors.
21 22
!!istorically, analysts and investors have considered the structure to be out of balance if the equity portion 23 24 of total capital goes below 35%, a level that we have 25 not yet achieved.
If long-term financing were delayed 1 A
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I until short-term debt surpassed $20 million, the further 2
deterioration of our capital structure would create 3
additional difficulties in that the Company could be 4
forced into the equity market at that time no matter 5
what the market conditions were and before any other 6
financing could be undertaken.
7 8
Q.
Mr. O'Sullivan, in light of the points you've made, why 9
did the Company not file for a rate increase sooner?
1 10 A.
Up until early 1979, our financial projections indicated 11 that earnings in 1980 would be adequate.
However, the 12 decreased sales of $1,850,000, the costs of carrying 13 the higher than anticipated deferred fuel and the 14 increased short term borrowing rates (from a projected 15 9% to an actual 20%) have all been factors which have 16 changed dramatically in the last few months from what 17 was projected a little more than a year ago.
All of
',8 these factors were items beyond the Company's ability 19 to control.
Once we realized that we could no longer i
20 postpone a request for increased rates, we proceeded as 21 expeditiously as possible to prepare and file the case.
22 Obviously, the other side of the point as to why we did not seek relief earlier is that the customers 23 have had the benefit of the Company's efforts to avoid 24 25 a rate increase until absolutely necessary, and it
-2.-
1 A
I would be equitable and reasonable in this instance to 2
recognize these efforts by permitting temporary relief.
3 4
Q.
Mr. O'Sullivan, in your opinion would it be injurious 5
to the business of the Company or to the interests of 6
its customers if this temporary rate relief were not 7
granted?
A.
It could be.
The risk is that we would not be able to 8
9 finance, or at least finance at reasonable costs. If 10 the Company cannot finance, it might have to curtail 11 its construction program, and this would jeopardize 12 service to our customers.
13 14 Q.
Mr. O'Sullivan, what is the amount now sought by the 15 Company in this interim rate request?
16 A.
Based on revised information available since the time 17 of the filing of this request, we now seek a temporary 18 rate increase, effective May 1, 1980, sufficient to 19 produce an additional $3,500,000 on an annual basis, or 20 about 65% of the permanent rate request.
This repre-21 sents a 13% increase in 1979 basic rate revenue, or 22 about 6.7% over total 1979 revenues.
23 l
24 Q.
How did you determine the amount to be requested?
25 A.
We project that this temporary increase would produce.A
,r l
1 earnings sufficient to cover the common dividend in l
l 2
1980, while staying well below the amount we are 3
convinced the Cormission will ultimately permit in the 4
Permanent rate increase.
The resultant earnings, 5
although minimal, would present a much more favorable 6
position from which to accomplish the required financing.
7 The common dividend would have been earned, and the 8
return on equity would be about 11% instead of the 9
currently projected 7%. In addition, the earnings improve-10 ment and the action of the Commission in permitting 11 such relief would not go unnoticed by analysts, rating 12 houses and the investment community, which should also 13 improve the prospects for long-term financing for the 14 Company.
15 16 Q.
Have you prepared exhibits to show the results this 17 temporary increase would produce?
18 A.
Yes.
Exhibit A shows the effect if this temporary 19 increase were implemented from May through November, 20 1980. I have assumed that increased rates from the 21 permanent rate request would begin near the end of 22 November, 1980.
Exhibit B shows the calculation of 23 average common equity for 1980, with and without interim 24 rate relief.
As can be seen, with such interim relief 25 the Company would earn an estimated $1.56 per common l 1
I share, or an 11% return on equity.
2 3
Q.
Mr. O'Sullivan, in your opinion would it be equitable 4
for the Commission to grant this interim request?
5 A.
Yes.
These results would go far toward alleviating the 6
adverse conditions upon which the Company has been 7
perating, largely due to the 59% increase in rate base, the 39% increase in cost of money, and the soaring 8
9 inflation since the Company's last rate request. The Company has made every effort to hold the line and not 10 in rease rates until absolutely necessary.
In fact, 11 the Company did not and now can not earn a return 2
to the extent actual rate base for 1976, 1977, 1978 and 3
1979 was in excess of the 1975 test year average of 15
$44,295,848.
The customer has received the benefit fr m what can be considered in today's economic environ-16 ment a long interval between rate cases.
This benefit 17 has been at the expense of the shareholder.
It would 18 19 seem to be entirely appropriate that the shareholder 20 now receive some consideration in that earnings improve-21 ment is necessary in order to reduce the gap between book and market values.
22 23 24 Q.
Mr. O'Sullivan, has the Company filed proposed rates to 25 produce the additional revenue sought in this proceeding? x
I A.
No.
The Company's suggestior. would be to implement an 2
"across-the-board" increase of each of its existing 3
basic rates by 13%.
However, there may be methods 4
other than an "across-the-board" increase which the 5
Commission vould prefer to produce the requested revenue, 6
and in that regard some examination of the pertinent 7
testimony and exhibits in the permanent rate request a
may be useful.
It would seem that this is a detail 9
that could be worked out after the Commission has 10 determined whether it will grant this petition.
11 12 0
Mr. O'Sullivan, does this conclude your testimony?
13 A.
Yes it does.
14 15 16 17 18 19 20 21 22 23 24 25
. A
EXHIBIT A BANGOR HYDRO-ELECTRIC COMPANY ANALYSIS OF A 13% INTERIM INCREASE IN RATES FROM MAY THROUGH NOVEMBER 1980 L
I N
E 1
Interim Rate Relief Requested - Annualized
$ 3,500,000 2
Effective Period of 7 Months - May through November 1980
$ 2,041,665 3
Income Taxes
$ 1,016,341 4
Increase in Common Earnings
$ 1,025,324 5
Projected 1980 Common Earnings without Interim Relief
$ 1,826,000 6
Projected 1980 Common Earnings with Interim Rate Relief
$ 2.851,324 7
Average Common Equity 1980 - with Interim Rate Relief - Exhibit B
$25,788,000 8
Return on Common Equity 1980 - with Interim Rate Relief 11%
9 Projected Average Common Shares Outstanding 1980 1,830,000 10 Projected Earnings Per Share with Interim Rate Relief
__ $1.56
t EXHIBIT B BANGOR HYDRO-ELECTRIC COMPANY COMPUTATION OF PROJECTED 1980 COMMON EQUITY WITH INTERIM RATE RELIEF OF 13%
L Projected Projected I
Common Equity Interim Common Equity N
Without Rate With E
Interim Relief Relief Interim Relief (000)
(000)
(000)
$ 26,003 1
January
$ 26,003 26,538 2
February 26,538 25,652 3
March 25,652 25,924 4
April 25,924 5
May 26,082 146 26,228 6
June 25,451 147 25,598 7
July 25,655 146 25,801 8
August 25,820 147 25,967 9
September 25,126 146 25,272 10 October 25,426 147 25,573 11 November 25,635 146 25,781 25,128 12 December 25,128 13 Total
$308,440
$1,025
$309,465 14 Average
$ 25,687
$ 25,788
Item: 2.a Provide the following information for each applicant:
Complete the attached schedule entitled, " Sources of Funds for System-Wide Construction Expenditures During the Period of Construction of Subject Nuclear Power Plant", through the years of earliest estimated completion of Units Nos. 1 and 2.
Indicate the assumptions upon which the " Sources of Funds" statement is based.
These assumptions include, but are not necessarily limited to: (a) rate of return on average common equity:
(b) preferred stock dividend rate:
(c) long-term and short-term debt interest rates:
(d) market / book ratio with respect to the projected common stock offerings:
(3) common stock dividend payout ratio:
(f) target and year by year capital structure:
(g) resultant SEC and indenture interest coverages during each year of the period of construction; and (h) annual growth rate in KWH sales and price per KWH.
Provide a brief explanation of the basis for each assumption.
If nuclear fuel for the facility is to be acquired by lease or other arrangement than purchase, briefly describe the terms of the lease or other arrangement.
Response
The attached schedule shows Sources of Funds for System-Wide Construction Expenditures for Bangor Hydro-Electric Company ("BH") during the Period of Construction of the Seabrook Nuclear Units.
The table is based on the following assumptions:
(1)
Return on average common stock equity:
1980 -
7.70%
1981 -
13.25%
i 1982 -
13.25%
1983 -
13.25%
1984 -
13.25%
l 1985 -
13.25%
(2), (3), & (4) - As follows:
1980 1981 1982 1983 1984 1985 i
Preferred Stock 11 11 11 11 11 Dividend Rate Long-Term Debt 11 1/2 11 1/2 11 1/2 11 1/2 11 1/2 Interest Rate Short-Term Debt Interest Rate 17 3/4 13 13 13 13 13 l
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(5)
Market-to-book ratio for projected common stock offerings
.95 (6)
Common stock dividend payout ratio - the goal of BH is to achieve and maintain a payout ratio of 70%-80%.
(7)
Target capital structure - 50% Long-Term Debt, 10% Preferred Stock, 40% Common Stock Equity.
(8)
Year by Year Capital Structure -
1980 1981 1982 19R3 1984 1985 Long-Term Debt 48%
51%
50%
51%
50%
49%
Preferred Stock 15%
13%
12%
11%
123 12%
Common Stock Equity 37%
36%
38%
38%
38%
39%
(9)
Net earnings interest coverage as defined by the Company's indenture will vary as follows:
1980 2.96 1981 3.72 1982 2.73 1983 3.02 1984 3.36 1985 3.48 (10) The average annual growth rate in KWH sales - is 2.8%.
(11) Average price per KWH:
Mills /KWH With Fuel Costs 1980 49.75 1981 55.75 1982 51.72 1983 58.55 1984 66.66 1985 68.49 l
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f Assumptions (1) through (8) above are based upon manage-ment's considered judgment and best estimates, relying upon experience and consultation with the Compeny's investment bankers and other members of the financial community.
BH may ( lter into lease agreements for the acquisition of nuclear fuel, but no such agreements havo been made at this time.
It is expected that such transacttons would be actually conducted on behalf of the Company and the other participants by the lead owner.
The growth rate is derived from a detailed analysis by BH's planning department of population trends, characteristics of electrical load, economic development, and underlying assumptions and projections covering such matters as appliance efficiency and increased self-generation for industrial customers.
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h ATTACIMENT FOR ITDI NO. 2.a 4/18/80 APPt.ICANT: BANCOR HYDRO-ElELTRIC (IMPANY NUCLEAR PLANT: SEABROOK UNITS PRO FORMA SOUNCES OF FUNDS FOR SYSTEN-WIDE CONSTRUCTION EXPENDITURES AND CAPITAL STRUC111RE DURING PERIOD OF CONSTRUCTION OF SUEJECT NUCLEAR POWER PLANT (Nillions of Dollars)
Construction Years of Subject Nuclear Power Plant 1980 1981 1982 1983 1984 1985 EXTERNAL FINANCING:
Common stock 7.55 7.55 1.90 1.90 6.65 Preferred stock 3.00 2.00 2.00 tong-term debt 16.00 8.00 6.00 3.00 8.00 Notes payable 7.20 1.09
.33
.37
.49
.21 Total Enternal Funda 7.20 27.64 15.88 8.27 7.39 16.86 INTERNALLY CENERATED CASH Net income 2.28 5.26 6.60 7.32 8.05 8.88 Le:s Preferred div!Jends
(.66)
(.66)
(.88)
(1.01)
(1.13)
(1.28)
Common dividends (3.49)
(3.67)
(4.67)
(5.20)
(5.75)
(6. 38)
R:tained earnings (1.87)
.93 1.05 1.11 1.17 1.22 Deferred taxes
.33
.26
.27
. 64
.95 1.21 I1 vestment Tax Credit-deferred
.72 2.94 1.19
.64
.60 1,59 Depreciation 2.99 3.12 3.27 3.95 4.61
- 5. *';
Change in working caottal
.95 1.00 (1.00)
(1.00)
(1.00)
- 1.00)
Leis: AFUDC
(.97)
(1.83)
(3.65)
(3.27)
(2.57)
(2. 31)
Total Internal Funde 2.15 6.42 1.13 2.07 3.78 6.04 TOTAL FUNDS 9.15 -
14.06 17.01 1 0. 34 11.17 22.90 CONSTRUCTION EXPENDI1URES Nuclear power plants 1.48 28,99 9.63 4.26 3.C 23 Other 5.70 4.90 6.21 5.91 6.91 21.00 Total Construction Expenditures 7,18 33.89 15.84 10.17 10.00 21.23 Subject Nuclear Plant
_ l.48 28.99 9.6) 4.26 3.09
.23 OTiiER CAPITAL REQUIRDIElfTS Redemption of maturing bonds 2.17
.37 1.37
.17 1.17 1.67 TOTAL CAPITAL REQUIRDfENTS 9.35 34.06 17.01 10.34 11.17 22.90 CAPITAL STRUCTURE ($ & I) long-term debt
$32.35 481
$48.18 511
$55.01 501
$60.84 511
$62.67 501 $69.00 491 Pr2ferred stock 9.73 152 12.73 13I 12.73 12I 12.73 111 14.73 122 16.73 121 Consoon equity 24.85 371 33.33 36Z 41.93 381 44.94 381 48.01 381 55.88 391 TOTAL
$66.93 1001
$94.24 1001
$109.67 1001
$118.51 1001
$125.41 1001 $141.61 1001 I
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1 Item: 2.c Provide copies of the 1979 Report to Stockholders, copies of the prospectus for the Company's most recent security issue and copies of the most recent SEC Form 10-K.
Provide copies of the preliminary prospectus for any pending security issue.
Continue to submit copies of the Annual Report for each year thereafter as required by 10 CFR 50.71(b).
Response
There have been forwarded under separate package 60 copies of Bangor Hydro-Electric Company's Form 10-K for the year 1979, which form incorporates Bangor Hydro-Electric Company's Annual Report to Stockholders.
Otherwise, there is no change to this item since previously answered.
I
I Item: 2.d Provide copies of the most recent Officer's Certificate or j
Net Earnings Certificate prepared in conjunction with the issuance of mortgage bonds or debentures and showing interest coverage calculations using the tests set forth in the applicable indenture.
Explain bondable properyy addition provisions as they relate to restrictions on the issuance of i
new long-term debt.
Provide copies of the portions of the indenture relating to interest coverage tests or alternative earnings tests and bondable property additions.
Provide calculations of net earnings and interest coverage for the most recent 12-month period using the definitions of net earnings and annual interest requirements (on debt presently outstanding) using the most restrictive test set forth in the mortgage bond indenture.
Assuming a range of interest rates considered realistic by the utility, state the additional amount of first mortgage bonds which could be issued under the most restrictive test based on net earnings as defined by the indenture for the most recent 12-month period.
Response
Copies of portions of the indenture relating to interest coverage tests and bondable property additions were filed f
with the NRC in connection with BH's participation in the New England Power Company Nuclear Units, Docket Nos. STN 50-368 and STN 50-369.
Assuming current range of interest rates of 14% to 16% the additional amount of first mortgage bonds which could be issued under the most restrictive test based on net earnings as defined in the indenture, for the 12 months ended March 31, 1980 is as follows:
l Net Earnings per indenture
$ 9,950,567 Maximum interest expense per indenture 4,975,283 Less:
Current interest expense-long-term indentures 2,264,366 Balance available
$ 2,710,918
~ Additional Bonds at 14%
$19,363,000 Additional Bonds at 16%
$16,943,000 I
Enclosed is the most recent Net Earnings Certificate of BH prepared in conjunction with the issuance by BH of its 10 1/4% Series First Mortgage Bond due August 1, 2004, using tests set forth in the applicable indenture.
Under the indenture securing BH's First Mortgage Bonds, all property and all interests in property of whatever kind or nature acquired by BH become automatically subject to the lien of the indenture.
BH may issue additional First Mortgage Bonds from time to-time upon the basis of property additions in an amount equal to 75% of the amount by which property additions exceed property retirements, assuming that the interest coverage tests are met.
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BANGOR HYDRO-ELECTRIC COMPANY MORTGAGE AND DEED OF TRUST DATED AS OF JULY 1, 1936, AS SUPPLEMENTED AND AMENDED NET EARNINGS CERTIFICATE Pursuant to the provisions of Section 1 and of Clause (12) of Paragraph (b) of Section 27 of the Mortgage and Deed of Trust dated as of July 1, 1936, as amended and supplemented (hereinafter called the Indenture), securing First Mortgage Bonds of Bangor Hydro-Electric Company (hereinafter called Company), We, Thomas A.
Greenquist President, and John P.
O'Sullivan, Treasurer, of said Company, do hereby certify as follows:
1.
The net earnings of the Company (as defined in Section 1 of the Indenture) for the twelve months ended June 30, 1979 were as follows:
(a)
(1)
Gross operating revenues derived from the operation of the properties owned by the Company - $47,716,885 (2)
Less:
Taxes of every kind (except taxes on net income) rentals, guaranteed interest and guarant'eed dividends, and all operating expenses, which operating expenses include all charges and expenditures properly and ordinarily chargeable thereto (including insurance and reasonable and i
adequate expenditures and charges for current maintenance and repairs, but excluding provision for depreciation, renewals and retirements)
- $40,649,203 Net Earnings of the Company
- S 7,067,682
2.
The interest charges for one year on the aggregate bonded indebtedness of the Company (as defined in Section 1 of the Indenture) outstanding at the date of the application for authentication of $7,000,000 principal amount of First Mortgage Bonds, 10.25% Series due 2004, including such charges i
on the 10.25% Series due 2004, are $2,565,312.50.
3.
Net Earnings of the Company, therefore, as defined in Section 1 of the Indenture, available for interest charges have been equal to at least twice the interest charges as defined in Clause (12) of Section 27 (b) of the Indenture for a period of 12 calendar months out of the 15 months preceding the application for authentication of $7,000,000 principal amount of First Mortgage Bonds, 10.25% Series due 20*:4.
In respect to the foregoing certificate, the undersigned State:
(a)
We have read the covenants and conditions of said Mortgage and Deed of Trust and of all indentures supplemental thereto with respect to compliance with which the foregoing statements in this certificate are made.
(b)
In the performance,of our duties as President and Treasurer of said Company, respectively, we are familiar with the operations of the Company in respect to the matters hereinabove set forth.
We havn examined the records of the Company relative to said matters and consulted with and received reports from other officers and employees of the Company familiar therewith.
(c)
In our opinion we have made such examination or investigation as is necessary to enable us to express an informed opinion as to whether or not such covenants or conditions have been complied with.
(d)
In our opinion all of such covenants and conditions have been complied with.
/s/ Thomas A.
Greenquist President
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/s/ John P O'Sullivan Treasurer Dated: August 31, 1979 STATE OF MAINE COUNTY OF PENOBSCOT, SS:
The undersigned, John P. O'Sullivan, being duly sworn, deposes and says that he is the Treasurer of Bangor Hydro-Electric Company, has executed the foregoing certificate as such and has noted the contents thereof, and the same are true of his own knowledge save as to matters therein necessarily stated upon information and belief, and as to those matters he believes them to be true.
/s/ John P. O'Sullivan Subscribed and sworn to before me, this 31st. day of August 1979.
/s/ Robert S.
Briggs Notary Public Commission expires 10/1/82 I
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Item: 2.e If the corporate charter contains a preferred stock coverage requirement, provide copies of that portion of the charter.
Assuming a range of dividend yields considered realistic by the utility, state the additional amount of preferred stock that could be issued by applying the most restrictive test for preferred dividend coverage for the most recent 12-month period.
Response
On August 31, 1979 Bangor Hydro-Electric Company issued and sold at private sale 30,000 shares of its 9 1/2% Preferred Stock, $100 par value.
On April 22, 1980, the shareholders voted to increase the amount of Preferred Stock, $100 par value, that Bangor Hydro-Electric Company is authorized to issue from 100,000 shares to 250,000 shares.
Requisite amendments to Bangor Hydro-Electric Company's Articles of Incorporation and By-Laws were also approved and are being accomplished.
Otherwise, this item has not changed since previously answered.
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Ittm: 2(f)
Provide a detailed explanation of all other restrictions or constraints, on the issuance of short and long-term debt, preferred stock, preference stock and common stock.
Short-term debt should include bank lines of credit and commercial paper, if any.
Indicate compensating balance requirements for bank loans.
Response
Subject to market conditions and the approval of the Maine Public Utilities Commission ("MPUC"), there are no other restrictions or constraints on the issuance of long-term debt, preferred stock, preference stock or common stock.
At December 31, 1979 the Company had lines of credit with three banks totaling $15,300,000 as follows:
Amount Available Under Interest Commitment Fee or Line of Credit Rate Compensating Balance Terms
$7,000,000 Prime Rate 4,300,000 Prime Rate
$100,000 compensating balance plus a fee of prime rate applied to 7 1/2% of $3,300,000 of the line plus a fee of the prime rate applied to 7 1/2% of borrowings 4,000,000 108% of'the
$100,000 compensating balance Prime Rate plus a fee of prime rate applied to 8% of $3,000,000 of the line Certain information related to these borrowings for the years 1979 and 1978 is as follows:
1979 1978 Total lines of credit
$15,300,000
$9,000,000 Unused line of credit at end of period S 8,050,000
$2,250,000 Borrowings outstanding at end of period S 7,250,000
$6,750,000 Effective interest rate (exclusive of fees for the lines) on borrowings outstanding at end of period 15.5%
11.75%
Average daily outstanding borrowings for the period S 9,291,000
$2,490,000 Weighted daily average annual interest rate 13.2%
9.8%
Highest level of borrowings outstanding at any month-end during the period
$14,250,000
$6,750,000 The Company is in the process of negotiating an 8 year $30 million revolving credit-term loan facility.
The cost of borrowings under the facility will be tied to the prime rate and there will be commitment fees and compensating balances required.
There is not expected to be any other financial or operating restrictions or covenants under this facility.
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Item: 2.g Describe the nature and amount of the Company's most recent rate relief action and the anticipated effect on revenues.
Provide copies of the rate order and opinion.
In addition, indicate the nature and amount of any pending rate relief action (s).
Use the attached form to provide this information.
Provide copies of the submitted, financially-related testimony and exhibits of the staff and company in the most recent rate relief action or pending rate relief request.
Describe aspects of the Company's regulatory environment including, but not necessarily limited to, the following:
prescribed treatment of allowance for funds used during construction and of construction work in progress (indicate percentage and amount included in rate base); form of rate base (original cost, fair value, other) ;
accounting for deferred income taxes and investment tax credits; and fuel adjustment clauses in effect or proposed.
Response
In January, 1976, Bangor Hydro filed with the Maine Public Utilities Commission ("MPUC") for a 26.8% rate increase and with the Federal Power Commission (now "FERC") for a 26.7% rate increase.
On November 1, 1976 the MPUC issued its decree authorizing an increase of 15.9%, or $2,800,000, and on March 18, 1977, the FERC granted an increase of 15.4%, or $101,000.
Copies of the MPUC and FERC rate orders and opinions were filed with the NRC in connection with participation in the New England Power Company nuclear units, Docket Nos. STN 50-368 and STN 50-369.
On February 25, 1980 Bangor Hydro filed with the MPUC for an increase in its basic rates of $5,373,000, or 19.8% over 1979 basic rate revenue, and on February 28, 1980 Bangor Hydro sought temporary relief from the MPUC in the form of a temporary increase in rates, pending the determination of the permanent rate increase request, sufficient to produce an additional $3,500,000 annually.
Copies of the testimony of John P.
O'Sullivan, Vice President and Treasurer of Bangor Hydro, are submitted herewith.
No other testimony has yet been filed.
The FTUC has not permitted construction work in progress ("CWIP")
in rate base without an offsetting credit of an allowance for funds used during construction ("AFDC") to operating income.
Bangor Hydro has no reason to believe that the MPUC would depart from this policy, although no opinion can be expressed as to the MPUC's treatment of this item in the future.
A bill was introduced in the 109th Maine legislature to prohibit CWIP, and the MPUC opposed the bill, noting in effect that, although they had not allowed CWIP and had no plans to do so, they were not in favor of being divested of the flexibility to do so in a proper case.
This legislation was not enacted.
The FERC did not permit CWIP in rate base at the time of Bangor Hydro's last rate proceeding.
Since then, the FERC has ruled that CWIP will be allowed with respect to pollution control and fuel conversion facilities, or in the event of " severe financial difficulty".
Both the MPUC and the FERC have to date prescribed an original cost less depreciation average year rate base, at least with respect to Bangor Hydro.
The rate-making practice followed by the MPUC in Bangor Hydro's most recent rate order permits Bangcr Hydro to recover, through customer rates, only federal and state income taxes payable currently and deferred taxes when the tax law, in effect, requires such treatment.
The MPUC allowed as a cost of service only the deferred Federal income tax arising from the use, for income tax purposes of accelerated depreciation of property added subsequent to 1969.
The income tax effects of other timing differences between pretax accounting income and taxable income are, in effect, flowed through to the customers.
Prior to 1976, the MPUC permitted recovery of the deferred state tax effects of timing differences.
However, in the 1976 rate order, the MPUC eliminated these deferred taxes from Bangor Hydro's requested rate increase.
Under the Federal income tax laws, Bangor Hydro receives investment tax credits at a rate of 10% (4% in years prior to 1975) on qualified property additions.
Investment credits received are deferred and amortized over the life of the related property.
Beginning with the 1976 tax year, due to the adoption of a Tax Reduction Act Stock Ownership Plan, Bangor Hydro receives an additional 1% investment tax credit which is used to fund the plan.
Effective January 1, 1980, the MPUC's new fuel clause regulations became effective for Bangor Hydro.
Under these regulations, fuel expenses and KWH sales are estimated over a projected 12 month period to arrive at a projected unit fuel cost factor per KWH.
Provision is made for a reconciliation adjustment to the factor to reflect, among other things, prior over or under recoveries and to reflect the recovery of fuel costs outstanding at the time of implementation of the new regulations which were as yet unre-covered under the superceded fuel clause.
Under the latter provision, Bangor Hydro is being permitted to collect such unrecovered fuel costs (approximately $4 million) over a 36 month period beginning January 1, 1980.
Either the utility or the MPUC may petition to change the projected unit fuel cost factor prior to the expiration of the 12 month projection period, and the utility must file for a new factor within 9 months after the effective date of the current factor.
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ATTACHMENT FOR ITEM NO.
2.g.
i RATE DEVELOPMENTS Electric Gas Steam Granted Test year utilized 12/31/75 Annual amount of revenue increase requested- $5,022 test year basis (000's)
Date petition filed 1/30/76' Annual amount of revenue increase allowed-
$2,809 N/A N/A test year basis (000's)
Percent increase in revenues allowed 15.9%
l Date of final order 11/1/76 Effective date 11/1/76 Rate base pending (000's)
- Construction work in progress included in Rate base (000's) Rate of return on rate base authorized 8.521%
Rate of return on common equity authorized 13.04%
Revenue Effect (000's)
Amount received in year granted
$20,550 Amount received in subsequent year 24,598 (If not available, annualize amounts received in year granted)
Pending Requests Test year utilized 1979 l
Amount (000's)
$5,373 Percent increase 10.4% over 1979 total l
Date petition filed 2/25/80 revenues, 19.8%
Date by which decision must be issued 11/25/80 over 1979 basic j
Rate of return on rate base requested 11.46%
rate revenue Rate of return on common equity requested 15.4%
Amount of rate base requested
$70,386,217 Amount of construction work in progress requested for inclusion in rate base 1
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Item: 2(h)
Provide a list of generating units, transmission and distri-bution facilities and general plant projects to be constructed during the period of construction of the subject nuclear power plant, showing the type of facility, net capacity of each generating unit, the dollar amounts to be expended for each facility during each of the years involved, and in-service date of each facility.
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Response
See attached schedule.
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4/25/80 BANGOR IIYDRO-ELECTRIC COMPANY CONSTRUCTION EXPENDITURES 1980-1985 (S's in Thousands) 1980 1981 1982 1983 1984 1985 Total 1)
Company T & D and other
$5700
$4900
$5200
$5400 S5600
$5900
$32600 2)
Public Service of New Hampshire's Seabrook Units, Total Output 2300 MW, BHE share-50 MW:
Unit #1 Completion 1983, Unit 42 Completion 1985 1480 28990 9630 4260 3090 230 47680 3)
Other Generation (70MW)
No commitments made as of this date 1000 510 1310 15200 18020 TOTAL
$7180
$33890
$15830
$10170
$10000
$21230
$98300 1
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Item: 2(1)
Complete the attached form entitled, " Financial Statistics" for the most recent 12-month period and for the years ending December 31, 1979 and December 31, 1978.
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Response
See attached schedule.
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ATTACHMENT FOR ITEM NO. 2.i FINANCIAL STATISTICS 12 Months Ended December 31, March 31, 1980 1979 1978 (dollars in millions)
Earnings available to common equity 2.7 2.9 2.9 Average common equity 25.4 25.3 23.2 Rate of return on average common equity 10.6 11.4 12.5 Times total interest earned before FIT:
Net income (incl. AFDC) + current and deferred FIT + total interest charges +
amortization of debt discount and expense 1.3 1.3 2.1 Times long-term interest earned before FIT:
Net income (incl. AFDC) + current and deferred FIT
- long-term interest charges
+ amortization of debt discount & expense 2.1 2.0 2.4 Bond ratings (last letter rating)
Standard and Poor's A
A A
Moody's A
A A
Times interest and preferred dividends earned after FIT:
Not income (incl. AFDC) + total interest charges + amortization of debt discount &
expense + preferred dividends
.77
.89 1.3 AFUDC
.82
.79 1.2 Net income after preferred dividends 2.7 2.9 2.9 Market price of common (High) 11.5 12.50 14.625 Book value of common (End of Period) 14.09 14.18 14.09 Market-book ratio (End of Period)
.82
.88 1.03 Earnings avail, for common less AFDC +
depreciation 4.7 4.9 4.0 Common dividends 2.7 2.7 2.5 Ratio 1.7 1.8 1.6 Short-term debt Bank loans 11.25 7.55 7.05 Commercial paper Capitalization (Amount & Percent)
Long-term debt 34.5 (49.4%)
34.5 (49.4%)27.7 (46.5%)
Preferred stock 9.7 (13.9%)
9.7 (13.9%) 6.7 (11.2%)
Common equity 25.6 (36.7%)
25.7 (36.7%)25.2 (42.3%)
69.8(100.0%)
69.9(100.0%)S9.6(100.0%)
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