ML19341C501

Testimony & Exhibits of Rj Lurito Re Fair Rate of Return Before Public Svc Commission of State of La

ML19341C501
Person / Time
Site:	Waterford
Issue date:	10/31/1979
From:	Lurito R KOSH, LOUISELLE, LURITO & ASSOCIATES, INC.
To:
Shared Package
ML19341C490	List: ML19341C489 ML19341C492 ML19341C495 ML19341C499 ML19341C501
References
U-14078, NUDOCS 8103030655
Download: ML19341C501 (134)

Text

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l Before the PUBLIC SERVICE COMMISSION of the STATE OF LOUISIANA Ex Parte LOUISIANA POWER & LIGHT COMPANY (Docket No. U-14078)

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.f F J CHAnd, .I 3 LURITO re i

. FAIR RATE OF RETURN October 1979 MO5H IAL'INELLE LL'HITO A ASSOCIATES. INC.

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I A. QUALIFICATIONS I Q. Please state your name and occupation.

2 A. My name is Richard J. Lurito. I am the senior economist with 3 Kosh Louiselle Lurito & Associates Inc. with offices in Arlington, 4 Virginia.

5

- 6 Please outline your education and experience.

Q.

7 A. I received the Bachelor of Arts degree in Economics from the Univer-8 sity of Illinois in 1958 and the Ph.D. degree from Georgetown 9 University in Economics in 1969. My doctoral dissertation concerned 10 itself with measuring economies of scale in production. During my 11 graduate study, I was awarded Fellowships by Georgetown University, I

the Relm Foundation, the H. B. Earhart Foundation and the American 13 Enterprise Institute. I was an Instructor in Economics at Georgetown 14 from 1967-1969 and an Assistant Professor from 1970 to 1973. For two 15 years, I was a Lecturer at the University. During this period, I 16 taught Economic Theory, Labor Economics, Statistics, ladustrial 17 Organization and Government Regulation of Business.

18 In July of 1971 I took leave of ebsence from Georgetown to 19 become Deputy Economic Counselor to the General Services Administration, l 20 In February of 1972, I was proacted to Acting Economic Counselor, a 21 position I held unti) I joined Kosh Louiselle Lurito & Associates in October 1972. As Acting Economic Counselor, it was my responsibility 23 to advise the Administrator of General Services as well as the 24 Commissioner of the Public Buildings Service on economic matters 25 affecting all aspects of GSA's operations. Typical of the issues I 26 dealt with were the economics of the construction-lease alternative, 27 the appropriate level of the social rate of discount, alternative

l l 1 Government procurement policies or regulations to save costs, and I 2 regulatory policies to improve competition. I was the CSA representa-l 3 tive to the Cabinet Committee on Construction, the Interagency Committee 4 on Construction and the Government Regulations and Purchasing Review 5 Board.

I 6 I served as an economic consultant to the Department of dealth, 1

7 Education and Welfare, to General Services Administration, and 8 several law firms dealing with international economic issues and 9 problems, labor economics, industry economic analysis and the 10 economics of human capital. Among the issues and problems I have i

11 dealt.with in this connection were: a) an esaluation of the WIN 12 (Work 'acentive) Program, b) analyses of the effects of U. S.

13 foreign trade policy on American industry, c) an analysis of minimum 14 vage-hour legislation, and d) assembly of information inputs into a 15 computerized retrieval system of anti-trust law and economics. Since 16 joining KoshLouiselle Lurito & Associates, Inc., I have been involved 17 in the research and preparation of financial and economic studies 18 concerning various et,pects of utility rate regulation: fair rate of 39 return, the design of utility rates for various rate classifications, 20 and Se broad subject of cost allocation. I have testified in the 21 District of Columbia and the States of Ohio, Maine, Maryland, North Carolina, New Jersey, New York and Louisiana as well as before 23 the Federal Communications Commission and the Canadian National 24 Energy Board.

25 26 27

I F P. GEh'ERAL PRINCIPLES 1

2 Q. Mr. Lurito, are you familiar in general with the organization, 3

operation and financial structure of the Louisiana Power & Light Company? <

4 A. I am.

5 6

Q. Have you made a detailed study of the cost of capital and fair 7

rate of return for LP&L7 8

A. I have.

9

[I ask that a multi-page document bearing on its cover sheet the title:

10 Before the i 11 Public Service Commission 12 of The 13 State of Louisiana 14

~

Ex Parte 15 Louisiana Power & Light Company 16 (Docket No. U-14078) 17 Study 18 of the 19 Fair Rate of Return 20 Richard J. Lurito October 1979 22 be marked for identification.]

23 24 Q. I show you Exhibit _ for identification, and ask if it was prepared 25 by you or under your supervision and direction.

26 A. It was.

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i 1 Q. Does that exhibit sumarize certain of the basic data upon which 2 you relied in making your study, and your analysis thereof?

i 3 A. Yes it does. I 4

5 Q. What are the principal sources of the data that you used in making 6 your analyses? I 7 A. The Annual Reports to Stockholders, Moody's Manuals, Standard and 8 Poor's Stock Guide, certain financial data contained in the Wall 9 Street Journal, and of course the record and exhibits in the 10 instant proceeding.

11 12 Q. Will you tell the Commission what, in your opinion, is the fair rate 13 of return for the Louisiana Power & Light Company!

14 A. The analyses I propose to present indicate that a fair rate of return 15 for LP&L is from 10.39 to 10.48% to be applied to an original cost 16 rate base.

17 18 Will you briefly describe the function of the fair rate of return in Q.

19 utility rate making?

20 A. Fair rate of return is a basic element in utility rate making, and its 21 role is as follows: the fair rate of return times the rate base equals 22 the fair return; the sum of all operating expenses (including taxes 23 and depreciation) and the fair return equals the utility's revenue

~4 requirement. Rates for the various types of service and v rious

' 5 groups of customers are then designed so as to collect from customers, 26 in the aggregate, a sum equal to the above revenue requirement. It is thus evident that the fair return, i.e., the product of the fair rate L___________

a ,

1 of return and the rate base is one of the costs that makes up the 2 total cost of the service.

3 4 Q. Will you outline briefly why utility prices need to be set by means 5 of a formula involving fair rate of return, whereas the determination 6 of prices in general requires no such formula?

7 A. In a free enterprise economy, the levels of prices and earnings are 8 generally determined by the forces of competition. However, unlimited 9 price competition does not work in the case of public utility pricing.

10 Utilities are for the most part " Natural Monopolies", in which 11 unlimited price competition does not work and consequently tends 12 toward monopoly. Absent such competition - the normal regulator of 13 both . ices and earnings in' the economy - a substitute must be found 14 to maintain utility prices and earnings at competitive levels, a 15 substitute that will simulate the workings of competition for the 16 utility industries.

I7 The substitute that has been developed is regulation. The basic 18 function of regulation is to establish the conditions under which 19 consumers are assured of an adequate supply of good service at 20 In order to do that, regulation must provide the reasonable prices.

1 utility a reasonable chance of earning a fair return on its investment. ,

22 If it does not, investors will shy away from utilities, and service 23 will deteriorate, and eventually may even stop.

24 Thus, to assure good service, regulation must make it possible 25 for the utility to compete in the capital markets for the funds it 26 requires. The utility's earnings, i.e., its RETURN, both actual and 27 prospective, must be sufficient to maintain the credit of the utility

i 1 so that it can attract the required capital on reasonable terms.

2 The rate of return is but an intermediate factor; the basic require-l 3 ment is a fair and reasonable dollar return. I 4 In order to attract capital on reasonable terms, tha utility 5 must be able to pay the going price. Attraction of capital involves 6 the same general conditions as the attraction of any other input the 7 utility needs for efficient and successful operation

labor, materials, 8 plant, managerial skill, etc. The utility must be able to pay the 9 going price for these items as well as for capital. In the last 10 analysis, regulation needs to set utility prices so that, in the 11 long run, the utility can recover all of its costs, including the cost 12 of capital.

13 14 Q. How important is the rate of return in fixing utility rates?

15 A. Rate of return is a most Laportant element. This importance stems 16 not only from the fact that the financial health of the utility, and 17 hence its ability to provide good servics depends on the adequacy of 18 the return, but also because the return is one of the major items of 19 cost of service.

20 According to the Company's data for the twelve months ending 21 December 31, 1978, utility operating income, essentially the dollar 22 return for the Company's Louisiana operations was $69.3 million or 23 approximately 15% of annual revenues of $456.4 million, i.e., 15 cents of 24 each dollar of the operating revenues went to return.

'S Moreover, a small change in the rate of return has a very 26 substantial effect on revenue. For example, a change of 0.1% in the

'7 rate of return applied to a rate base of, say $1.2 billion, equates to

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1 a change in annual revenue requirements of approximately $2,400,000 ,

2 a year.

3 4 Q. In general how does one determine what is a fair rate of return?

5 A. The principles involved in determining a fair rate of return are 6 rather straightforward. What is complex is the application and 7 quantification of those principles.

8 The utility has the responsibility of providing good service 9 to all who demand it, at reasonable and non-discriminatory rates. ,

10 If it is operating efficiently and economically, and fulfilling 11 its public utility responsibility, the utility is entitled to every 12 reasonable opportunity of earning a fair return. That in turn then 13 means that regulation should set rates so that the utility can obtain 14 a sufficient amount of revenue to cover all expenses and have enough 15 left over to cover the cost of capital. If the utility earns its 16 cost of capital, it can attract the required additional capital in 17 reasonable amounts and on reasonable terms. This is the basic 18 principle.

19 In practice, one must analyze the principal factors that affect 20 the costs of the various types of capital -- debt, preferred, and 21 common equity, to arrive at an overall cost of total capital, i.e.,

22 the fair rate of return. The data for such an analysis are found in 23 the market place where capital is hired, the financial markets.

24 In these highly competitive markets the demand for investment 25 funds meets the supply of funds, and out of this competition are 26 developed the terms at which various enterprises, both regulated and 27 unregulated, can satisfy their capital requirements.

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4 0 1 The cost of any form of capital is determined, in principle, by 2 three considerations:

3 1. the pure rate of interest; 4 2. the compensation for inflation; 5 3. the compensation for subjecting one's capital to risk.

6 The pure rate of interest reflects basically the time preference 7 for, and productivity of capital. Pure interest is the payment 8 required to induce the owner of funds to postpone the use of those 9 funds, and to allow someone else to use them for a certain length of 10 time. Pure interest is based on the hypothesis that there is no 11 uncertainty involved in the investment; that is, that there is no 12 doubt that the periodic interest will be paid, and that at maturity 13 the funds will be returned.

14 In actuality there is no such investment (even though Government 15 bonds may at times approach that situation.) First, while the funds 16 may very well be returned, due to inflation they will be returned with 17 a loss in purchasing power. Second, each type of commitment has more 18 or less risk attached to it.

19 Therefore, in addition to pure interest, compensation must be 20 provided tu offset the loss in purchasing power. Furthermore, risk must l

21 be compensated for otherwise the funds will not be forthcoming. Con-22 sequently, the cost of capital is a composite of these three factors:

l 23 1) pure rate of interest, 2) compensation for inflation, and 3) the 24 payment for risk. Obviously the greater the risk, the higher will be 25 the cost of capital.

26 While risk is difficult to quantify, investors must consider and 27 analyze the various factors which aft. -

.isk of an investment, and

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l 1 come to some sort of opinion as to the relative uncertainty, or looking 2 at the other side of the coin, the relative desirability or potenti-3 ality of various investment opportunities. The relative costs of 4 capital, as set by investors, reflect their views as to these 5 relative risks.

6 There are many factors affecting risk, the principal ones being 7 - the type of utility, the type of rate regulation to which it is 8 subj ect , the capital structure, operating ratio, the composition of 9 revenue, the earnings record of the utility, the extent of competition 10 presented by substitute services, the service area, growth potential, 11 and the quality of management.

12 .iovever, for our immediate purpose we are not so much interested 13 in the amount of risk as we are in the rate of return investors demand 14 for subjecting their capital to a given risk situation.

15 The terms on which a company's debt and *iuity securities are 16 traded provide evidence of the cost of that particular type of capital 17 to the issuing company. The yields of a company's bonds will reflect 18 the cost of additional debt to that company and the terms on which the 19 company's common stock is bought and sold provide a basis for estimating 20 the cost of equity.

21 in addition to analyzing the securities of the company in question, 22 and in order to get as much evidence as possible, as well as to guard 23 against the possibility that the data for the company in question may be 24 limited or distorted, it is desirable to select other companies, which 25 are as similar as possible to the one in question, and on the basis of the 26 market's appraisal of those other companies, to impute a cost of capital 27 to the company in question, allowing as best we can for any differences.

i _ - _ . _ _ , - - .- - . . . - .. _ _ _ _ _ _ . _

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1 Obviously the companies whose market experience is to be used 2 in that way reflect a degree of risk similar to that of the utility 3 in question. We are thus led to the consideration of factors which 4 affect risk and, by a qualitative consideration of these factors, to 5 a determination of which companies do present an investment opportuni:y l

l 6 of similar risk to that of the company in question.

7 8 Q. Is the cost of capital determined as a unit, or is it established by 9 determining the cost of its components?

10 A. Since capital is not hcmogeneous, and for the typical utility consists 11 of debt plus equity capital, the measurement of the cost of capital 12 consists of ascertaining:

13 1. The cost of debt capital, 14 2. The cost of preferred stock capital, 15 3. ne cost of equity capital, 16 4. The capital structure, i.e., the composition of total capital 17 on the basis of which the above costs of debt, preferred and 18 equity may be combined to arrive at an over-all cost of 19 total capital.

20 21 Q. How does capital structure affect the cost of capital?

22 A. The capital structure may affect both the cost of debt and the cost of

, 23 equity, the smaller the proportion of debt, the safer is the debt i

24 investment. A company whose total capital is $1.2 billion of which $300 25 million is debt, is in a much less uncertain, much safer position, than 26 if it has S900 million of debt - all other things being the same.

27 Conversely, as leverage gets high, i.e., equity ratio gets low, a l

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I 1 company may run into problems, especially if earnings decline.

2 Declining earnings will have two serious effects. One, the equity 3 earnings decline rapidly and may disappear; and two, the protection 4 for the bonds gets less and less and the hazard for the debt 5 increases. The possibility of a serious decline in the protection of

, 6 the debt will act to increase the cost of debt.

7 8 Q. Why, then, have any ( bt?

9 A. A superficial appraisal of the above considerations might lead one to 10 conclude that a utility should have little or no debt at all. Such a 11 conclusion is, however, unwarranted. Investors in common stocks are not 12 interested solely in .'afety and stability. If they were, they would 13 turn to the generally safer, more stable debt investment. Equity 14 investors are willing to accept hazards and risk, but they want the 15 opportunity to make sufficiently high earnings to compensate them for 16 subjecting their capital to those risks. Further, benefits in terms 17 of a lower overall cost of capital can and should be realized by obt.ain-18 ing capital from all the components of the capital markets, thereby 19 taking advantage of the supply of different types of capital.

1 20 Therefore, in computing the cost of capital it is essential to l

21 use a balanced capital structure which will provide debt with adequate 22 protection and yet will contain enough leverage so that equity earnings 23 are sufficient but are not made so volatile as to become speculative 24 g,,31,,,

25 Of course, the cost rates of debt and equity used must be con-26 sistent with the capital structure used.

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1 Q. Are the " cost of capital" and "f air rate of return", as you use them, 2 essentially equal?

3 A. Yes they are, it should be noted, however, that the problems involved 4 in determining the coJt of capital and its major componen'es are in 5 substantial measure matters of judgment. Necessarily, since many 6 factors enter into a determination of cost of capital, judgments have to 7 be made. If, at each point where a judgment has to be made, or where 8 a question has to be resolved, the benefit of any reasonable doubt 9 is resolve i in the direction of a lower cost of capital then a fair 13 rate of return based on such a cost of capital will tend to be at, or 11 in the direction of, the lower end of the range of fair rate of 12 return. On the other hand, if most reasonable doubts, or questions 13 are resolved in the direction of a higher cost rate of capital, 14 then the end result will be at or near the upper end of the range of 15 cost of capital and fair rate of return.

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1 C. COST OF DEBT 2

3 Q. Mr. Iarito, will you direct your attention to the cost of debt and 4 describe how you proceeded to develop that cost ?

5 A. In the present case, cost of debt has several important aspects.

6 There is the question of the cost of outstanding debt, and whether the 7 cost of a wholly-owned subsidiary, or the cost of the consolidated 8 system, is appropriate for determining the cost of capital to the 9 subsidiary, and there is the question of the cost of additional debt.

10 Before N ussing the development of the cost of debt, I would 11 like to discuw threshold problem: whose cost of debt and whose 12 capital structure are we concerned with? We are ultimately concerned 13 with the rates and hence fair rate of return for Louisiana Power & Light 14 Company. So at first glance it would seem that we should, in fact l '- must, be interested in the cost of debt and capital structure of LP&L.

16 But what.i_s_ the capi al structure of the company; is it the nominal l 17 capital structure as shown on its books of account? This is not true l

18 with respect to the common stock of LP&L, and only partially true 19 with respect to the bonds, because of the 100* stock ownership by 20 Middle South Utilities, Inc. (MSU). A purchaser of an LP&L bond knows 21 that MSU will v.t stand by and allow LP&L to default, As to stock, the 22 influence of !!iddle South is very nearly absalute. ':he safety of 23 LP&L's equity is not influenced by that company's capital structure, 24 since an equity investment in LP&L is but a portion of the equity of the 25 MSU System. Therefore, it is the capital structure of the System that 26 influences an investment in the equity of LP&L and therefore the 27 actual book capital structure of IJ&L is not financially revelant.What is

l 1 significant is the capital structure of Middle South Utilities.

2 Therefore, it is my opinion that the capital structure to be used in 3 arriving at a f air rate of return for Louisiana Power & Light Company is 4 the System capital structttre.

5 Likewise, with respect to the question of whether, in determining 6 the cost of capital of LP&L, it is appropriate to use LP&L's cost of debt, 7 or the cost of debt of MSU, it is my opinion that the appropriate 8 cost is the cost of debt of th' System.

9 The parent company, Middle South Utilities, is a holding company.

10 One of the principal characteristics and ndvantages of a holding 11 company form of organization is the ability it gives management to 12 finance a wide diversity of activities on a system basis. Management 13 retains complete control over the financing decisions. This control 14 gives it great flexibility and the power to direct tue timing and 15 amounts of outside financing so that maximum economy to the System is 16 achieved.

17 A consequence of this flexibility and system orientation is that 18 the actual financing of any component of the system, at any particular 19 time, is completely arbitrary. Thus, you would expect to find, and do 20 find, that the cost rates of debt of similar individual components 21 of a holding company organization vary considerably, while the System's 22 debt cost remains substantially stable. Now I am not suggesting that 23 there is anything necessarily wrong with a holding company form of 2'

organization. But what I am suggesting and recommending is that any 25 cost advantage of the holding company arrangement be shared by all the 26 customers served by its diverse components. This can be accomplished 27 by the use of the System cost of debt as the basis for determining the

1. return requirenent of each operating unit of the System.

2. On Page 1 of Exhibit , I show the outstanding long-term debt

3. for each subsidiary of Middle South Utilities at December 31, 1978. l l

4. The detailed development of the System cost of long-term debt is shown

5. on Appendix Page 1.

6. As shown on Page 1 of the Exhibit, the cost at December 31, 1978

7. of the long-term debt outstanding is 8.56%. In determining the cost

8. of debt at December 31, 1980, I relied in large part on the Company's

9. estimate of MSU's 1979 and 1980 construction programs and its internal

10. financing sources. The Company has indicated that MSU plans to meet

11. part of its $757 million 1979 construction program with $129 million

12. of net internally-generated capital. This leaves $628 million to be

13. externally financed. Based on the kind and amount of external financing

14. MSU has already done this year and what it plans to do, it appears that

15. $220 million of the S628 million in external financing will be met

16. through the flotation of long-term debt. A portion of the funds obtained

17. from such a debt issuance can be used to meet the System's $22.1 million

18. maturing debt and sinking fund requirements. Hence its net long-term debt

19. pos'. tion at year-end 1979 will be S197.9 million higher than its 1978

20. year-end position.

21. The Company has further indicated that its 1980 construction program

22. will be $741 million, of which, it is estimated, $192 million will be

23. internally generated. Thus, S549 million will have to be externally

24. financed. In my opinion, S355 million should be obtained from new long-

25. term debt; however, because of maturing debt and sinking fund requirements l 26. 5107.7 million of the S355 vill represent additional long-term debt. At

27. year-end 1980, MSU's long-term debt position will be some S445.2 million 1

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1. higher than its 1978 year-end position. It should be noted that the MSU

2. subsidiaries have already issued $105 million in new long-term debt this

3. year at a cost rate of 10.67%

4. In view of the fact that the System will have to issue additional

5. long-term debt this year and next, I have presented in the Appendix

6. data on past and present bond yields. In this connection, I have 7 compiled the yields on the four top grades of the Moody Public Utility

8. Bonds. Moody's is a financial reporting organization that rates bonds,

9. i.e., it classifies them by grade; a bond rated AAA is of the highest

10. quality, AA is next, and so on. In addition to rating, or grading bonds,

11. the Moody organization also prepares, keeps current, and publishes an

12. index of the yields of various types r I bonds, by individual grades. The

13. System's subsidiaries' first mortgage bonds are rated "A" or "BAA" by 14 Moody's. ,

15. Page 3 of the Appendix to my Exhibit shows the monthly and annual

16. yields,' beginning with January of 1950, of the Moody AAA Public Utility

17. Bonds. These yields represent the composite or average yield of a group

18. of ten selected AAA bonds. The makeup of the group changes from time

19. to time, and the changes are made so that the group continuously repre-

20. sents (in the opinion of the Moody organization) the current yields of the l 21. top grade utility bonds.

1

22. Page 4 of the Appendix shows corresponding data for AA bonds; Page

23. 5 for A; and Page 6 for BAA bonds.

24. The Moody yields reflect the general course of interest rates.

25. For example, the ef fect of the Treasury Department-Federal Reserve

26. " Accord" early in 1951 is reflected by an upward shift in bond yields.

27. As of August 29, 1979, the Moody AAA yields were 9.51%, AA yields were

1, 9.79%, A yields were 10.25% and BAA yields were 10.53%.

2. On Pages 7-10 of the Appendix I show the derivation of the cost of

3. new debt issues of electric and combination utilities for the years 4 1976,1977,1978 and 1979 to date inclusive. As Appendix Page 10 shows,

5. recent new A rated debt is costing about 10.25%. For purposes of my

6. analysis, I will use 10% as the cost to the System of issuing S470

7. million of new long-term debt this year and in 1980.

8. Given its $1.177 billion external financing needs in 1979 and 1980,

9. it apptars that MSU will have to increase its 1978 year-end, short-term

10. indebtedness by some $50 million. Hence, at year-end 1980, the System

11. will have some $373.44 million of short-term debt outstanding. I estimate

12. that short-term debt at year-end 1980, which will be composed of bank

13. loans and commercial paper, will cost the System 11.5%.

14. As shown on Page 1 to my Exhibit, the cost of debt at December 31,

15. 1980, inclusive of the $373.44 million of short-term debt I recommend be

16. outstanding, is 9.10%. I will use 9.10% as the cost of debt in determining

17. the fair rate of return for the Louisiana Power & Light Company at December

18. 31, 1980.

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1. D. COST OF PREFERRED 2.

3. Q. Please describe your studies and state your conclusions as to the 4 cost of preferred stock to the Middle South Utf.lities System.

5.

6. A. As shown on Page 2 of Exhibit , at December 31, 1978, the MSU

7. System had outstanding S339.5 million of preferred stock at a composite

8. cost of 7.51%. The detailed development of the cost of outstanding

9. preferred is shown on Appendix Page 2.

10. During 1979 and 1980, the MSU System will have to issue additional

11. preferred stock to meet its 1979 and 1980 construction programs. So

12. far this year, the subsidiaries have issued $150 millio of new pre-

13. ferred stock. In my judgment, S60 million more should be issued next

14. year. To determine the cost of this additional preferred, I have shown on

15. Page 11 of the Appendix the Moody indexes for the "High Grade" and

16. " Medium Grade" public utility preferreds by years 1950 - 1978 and by

17. months for 1979 through July. These yields indexes are similar in nature l 18. to the Moody bend yields I previously discussed.

19. In addition, on Pages 12-15 of the Appendix I show preferred stock l 20. offers made directly to the public by electric utilities, including 1

21. combination companies during the years 1976, 1977, 1978 and 1979 to date.

22. As can be seen the cost of new preferred is in tr.a 9.75% area. As Page 2

23. of the Exhibit shows, the cost of preferred at year-end 1980, inclusive 24 of the S60 million of additional preferred to be issued next year is

25. 8.65%. I will use 8.65% as the cost of preferred at December 31, 1980

26. in the determination of the fair rate of return to Louisiana Power & Light.

27.

1 E. COST OF EQUITY 2

3 Q. Turning now to the matter of the cost of equity, would you first 4 discuss briefly just what is meant by the term cost of equity, 5 in the context of utility regulation ?

6 A. The economist's definition of the cost of equity is like the cost of 7 anything else; it is the supply price, it is what the utility has to give 8 up, or hold out by way of earnings to attract the accessary supply of f

9 equity capital. One must not confuse the rate of earnings required by i 10 an investor in a company, the cost of equity or capitalization rate, with 11 the rate of earnings on book value the company must earn in order to 12 be able to attract additional equity capital from investors. And while

13 regulation is concerned with setting rates ao that a utility can 14 realize sufficient earnings in order to be able to attract the required 15 ca -ital at reasonable terms, this capital must be attracted from investors.

16 Hence we are initially concerned with what investors require and what 17 investors can expect by way of earnings on their investment in other 18 enterprises of risk similar to that of the utility in question. Having 19 determined what investors require, i.e., their capitalization rate, 20 we can then establish in the context of regulation what earnings are 21 required to produce the necessary result.

22 Thus, while the economist's definition is formally correct, it is 23 not necessarily a functional or operational definition in the context 24 of regulation. Perhaps a more informative way of defining the cost of l

25 equity capital in the context of regulation is to define it as the 26 earnings on equity which will provide a return to its stockholders 27 equal to that available in the competitive money markets on alternative

l 1 investment 6pportunities of comparable risk. What investors can 2 reasonably expect to earn on the common stock in other companies, l 3 comparable in risk to LP&L or MSU, provides the basis 4 for determining the fa - and reasonable level of earnings on equity.

5 It seems to me as an economist that this is what the Supreme Court 6 was saying in the Bluefield and in the 11 ope decisions. We must not 7 forget that the only way an investor can make an investment in a utility 8 is by buying its securities, and what the equity investor does is to 9 compare the earnings available from alternative conunon stock invest-10 ments in companies of similar risk.

11 This then is the concept of ecst of equity in uttlity regulation.

12 Tne rate of earnings that I recommend meets this regulatory concept 13 exactly since it reflects both the ability of the company to attract 14 the necessary equity capital at reasonable terms, and also the rate 15 of earnings available from common stock investments in LP&L or 16 the MSU and in similar companies.. If the company in fact earns this 17 cost of equity not only will it be able to raise capital on reasonable 18 terms, but it also will be mole to maintain good credit.

19 20 Q. Will you first explain in principle and in theory how to measure the

'l cost of common equity?

l A. As 1 said, the cost of anything is what can be obtained for it in exchange. We must consider, therefore, what it is the investor obtains 24 in exchange for making his capital investment. In effect he becomes 25 entitled to his share of the earnings of the enterprise.

'6 l However, usually only a part of the earnings are distributed in the 27 form of dividends; the remainder is retained by the company and

1 reinvested in the business. These retained earnings are in effect an 2 additional investment on behalf of the stockholders, an additional 3 investment which provides for a growth in earnings and hence a growth 4 in future dividends. Therefore, we may also look at the cost of 5 equity in principle from the poin:. of view that the investor gets 6 dividends plus growth, 7 This approach is called the "DCF" method, i.e., tae " Discounted 8 Cash Flow" method. That method recognizes that the interess of an 9 investor in common stock is in the future dividends and ultimate sales 10 price of the stock. However, the value of a future dollar of income 11 is less than that of a dollar presently available for use or investment.

12 The "DCF" method recognizes that fact by equating the current market 13 price of a share of stock to the p;.esent value of all future cash 14 receipts; i.e., dividends plus ultimate sales price discounf.ed at a 15 capitalization rate. The rate which achieves that equalization is the 16 equity capitalization rate.

17 I should like to illustrate how the DCF method works in theory 18 witn a nighly simplified hypothetical exangle, as shown on Page 3 of 19 my Exhibit, the page entitled: Theoretical Illustration of the Dis-20 counted Cash Flow Method . Assume a stock that can be purchased for 21 $100. I estimate that it will pay a dividend of $4.80 per share, and i

22 that these dividends will grow at the rate of 3.2% per year, as shown 23 in Column (C). The market price can also be expected to grow at a 24 rate of 3.2% per year, so that I estimate that by the end of 1984, i.e.,

25 five years from now, I can sell that stock for $117.06. Now I have to 26 decide whether under those circumstances, that is, having the information 27 listed at the top of Page 3 I will buy that stock for $100 .

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1 The first question I ask myself is "What real return will I get, 2 if I buy this stock for $100, get the dividends listed in Coltan (C) 3 and then sell out at the end of 1984 for $117.06?" On the one hand, 4 I have expectations of a growing stream of income; I know that 5 initially I will receive $4.80 in dividends, i.e., a dividend yield

6 of 4.8%, and I expect that the dividend rate and market price will 7 grow at the rate of 3.2% per year. On the other hand, I also know 8

that a dollar to be received in the future is not worth as much as 9 a dollar in hand today, because first it is not in hand and therefore 10 is not available to me for consumption or investment purposes, and 11 second because of uncertainty, it may never be in hand. In other 12 words, to reflect their present value, future dollars must be 13 discounted for the time value of money and uncertainty.

14 For example, if I go to the bank and borrow $909 for one year, 15 on a 10% basis, I will owe the bank $1,000 at the end of the year; 16 because 10% interest on the note plus the $909 comes to $1,000. In 17 other words at 10%, $1,000 one year from now is worth $909 tod w.

18 With that discounting idea, or time-value-of-money idea in mind, 19 I invite your attention to the table at the bottom of Page 3.

20 Colume (C) shows the expected dividends, i.e., S4.80 the first year, 21 and dividends increasing at 3.2% per year, so that in 1981 the dividend 22 will be $4.96; in 1982 it will be 65.11; in 1983 it will be S5.27; in 23 1984 it will be $5.44; and then at the end of 1984 I sell the shares 24 for $117.06.

25 Now what is the present 1979 discounted .value of these six cash 26 items -- the five dividends and the sales price? If I discount this 27 cash flow, consisting of these six expected amounts at a 6% rate the

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1 1979 discor ed value will be $108.95; if I discount this cash flow 2 at 10% '. get $91.96, and if I discount at 8%, I get exactly $100, 3 Only one discount rate, in this case, 8%, will make the 1979 4

discounted value of the six-itam-cash-flow equal to the 1979 market price 5 of $100. No other rate will equate the discounted value to the recent 6 market price.

7 If I decide that in view of the risks and hazards of this 8

particular investment, that is, in view of the chance that I may not 9

in fact receive the estimated dividends, I want an 8% rate of return, 10 I will buy the stock at $100. And if my estimate of future dividends 11 and sales price does materialize, I will in fact have earned 8% on 12 my investment. If on the other hand I feel that the risk in this 13 investment is such that an 8% return is not enough, and decide that my 14 required return is 10% -- then I will be w2.lling to pay no note than 15 S91.96 for this stock.

16 There is only one assumption in the theoretical demonstration of 17 the method as set forth on Page 3 of my exhibit. The assumption, vnich 18 l seems to be reasonable, is that the investor at any moment in time sets 19 the market price he is willing to pay for ise stock on the expectation 20 that the dividends per share and market price will grow in proportion to l

21 the growth in earnings per share. Hence, if the earnings per share 22 increase by 4% per year, then the market price and dividends per share 23 l

will be expected to go up by 4% per year. However, if in the future 2'

nis cost of equity chianges, the market price he is then willing to pay 25 may also change. These future events in no way invalidate today's 26 cost of equity based upon an analysis of today's market prices.

27 There is a more direct method of determining an equity capitali-

1 zation rate under the Discounted Cash Flow approach, and in this 2 connection I refer you to Page 4 of my Exhibit. The formula that 3 reflects the process shown on the previous page is shown ;t the top 4 of Page 4. It says in theory that the equity capitalization rate is )

5 equal to the dividend yield plus the anticipated growth rate in 6 dividends per share. The formula itself can be appreciated almost as 7 a matter of intuition. An investor earns the current dividend yield, 8 1.e., cash in hand, plus growth. Thus in the theoretical example 1 9 discussed on Page 3 the dividend yield was 4.8%; the growth in dividends 10 per share was 3.2% per year, for a total return to the investor of 8%.

11 For the sake of completeness I have included in the Appendix 12 Pages 16-18 to my Exhibit, the detailed derivation of that formula.

13 The DCF method, if properly used, can form the basis for determining 14 the fair and reasonable cost of equity for a regulated utility.

15 i

16 Q. Up to this point you have described how the DCF method and formula work 17 in principle and in theory. Will you now explain how you intend to use 18 this method as a basis for estimating the cost of equity forLouisiana 19 Power & Light.

20 A. Where regulation is on a net investment or original cost basis we are 21 interested in developing a reasonable rate of return on equity for the

- 22 utility, i.e., a cost of equity in the regulatory sense and not 23 necessarily the minimum rate. The purpose of using a cost rate of 24 equity in excess of the capitalization rate is to provide earnings 25 that will maintain the market price of the company's stock sufficiently 26 above book value so that additional sales of stock can be made at net 27 proceeds no less than book value. The first step is, therefore, to

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1 determine what rate earned on equity, consistent with that cost rate, 2 is needed to allow the investor the opportunity of earning his 3 required return.

4 We are obviously concerned with the Louisiana Power & Light Company.

5 Normally, we would be interested in analyzing the financial market data of 6 LP&L, because these data would provide important evidence for estimating 7 the cost of equity. However, since the common stock of LP&L is not 8 traded we must rely on the financial market data of other companies 9 which are generally similar to LF&L.

10 11 Q. Will you describe briefly how you selected the companies similar to 12 LP&L7 13 A. My selection was based on resolving the problem I was faced with. We 14 are trying to determine the cost of equity to LP&L. Since LP&L 15 obtains all its equity capital from its parcat, Middle South Utilities, 16 we are obviously interested in the parent's cost of equity, as indi-17 cated by the DCF method. We are interested in the cost of equity of 18 companies similar to the parent and we are also interested in the cost 19 of equity of companies similar to LP&L.

20 Consequently, in order to estimate the cost of equity to LP&L, 21 I studied the financial market data as well as other data for MSU 'nd 22 a group of thirteen companies I selected as being of substantially the 23 same investment, risk as MSU and LP&L.

24 In selecting this group of comparable companies, I applied certain l

25 criteria to all electric and combination companies whose stock is 26 traded on the market, and which paid dividends continuously during the 27 period used to analyze dividend yields. The criteria were:

l

. 1 1 1. Total revenues in 1978 in the range of S275 million to 2 $2.0 billion.

l 3 Total revenues for the Middle South System in 1978 were 4 $1.6 billion; for LPEL S456.4 million, all of which came from 5 electric operations.

6 2. Revenues f rom electric operations in 1978 equal to at least 7 80% of total revenues.

8 3. The company was subject during the entire period 1965-1978 9 to state-wide regulation on an original cost rate base basis.

10 4. The ratio of market price to book value did not exceed two 11 times on average during the period 1965-1978.

12 The considerations leading to the last criterion were as follows:

13 Under the type of regulation which uses a rate base equal to, or es-14 sentially equal to, net investment, at least adequate earnings are being 15 allowed if these result in market prices cf the common stock sufficiently 16 above book value, so that the utility can sell additional :ommon stock 17 at net proceeds no less than the book value per share.

18 Common stock can normally be sold at a price some 7% to 10% below 19 the going market price. As is well known, stock prices vary, and if we 20 put the utility in the position of being able to sell stock at no less 21 than net book value when the stock market is down, we may expect to see 22 utility stock prices substantially _more than e 7% to 10% above book at 23 a time when the stock market is high.

2' ilowever, on occasion tSare has been a tendency on the part of 25 regulatory agencies to allow earnings on a more r.han adequate rather 26 then a meager basis. These high earnings contribe ed to maintaining 27 market prices for some regulated companier substantially above net L j

1 book value per share.

2 Then we have another factor to consider: certain stocks catch 3 the fancy of investors, and come close to being speculative invest-4 ments, where the anticipation of quick and substantial market appreci-5 ation far outweighs the consideration of earnings. In such instances the 6 ratio of market to book can get to be quite high.

7 For those reasons, utilities can dif far rather widely with respect 8 to this characteristic, market to book ratio. Therefore, in order 9 to eliminate those companies whose securities may be subject to specu-10 lative pressure, and,as another step in the selection of companies similar 11 to LP&L I elimint:cd those companies whose ratios of market to book were 12 abnormally high during the period of analysis.

13 I limited the companies to those reguicte'd t: th basis of an orig-14 inal cost rate base to further the objective of obtaining a homogeneous 15 group of electric companies. Under original cost regulation, regardless 16 of the jurisdiction, the rate base is --arly uniform in principal and i

17 measurement. This is not the case vii regard to fair value.

18 First, the specification of what is fair value is virtually im-19 possible. One state usas cost of reproduction new less depreciation; 20 another uses an unspecified average of original cost and trended 21 original cost. Still another makes a very small adjustment to original 22 cost, yet calls itself fair value. A fourth uses an arbitrary, rather l

23 small percentage mark-up. Thus, in analyzing securities of companies 24 located in fair value states, we have an unknown as to what investors 25 are really appraising. Consequently, I have relied on those electric 26 companies operating in states where regulation is on an original cost 27 basis.

1 Page 19 of the Appendix indicates those electric companies 2 which qualified on the basis of the four criteria I mentioned, i.e.,

3 size, type of operations, type of regulation, and market to book 4 ratios. Also on Page 19 of the Appendix I show certain comparability 5 data both for.45U and LP&L as well as the thirteen electric companies on 6 the basis of the criteria already discussed. It seems to me that the 7 general investment similarity is clearly indicated. In my opinion, the 8 group of companies selected after application of all the various 9 criteria I described is generally similar to 'LP&L and MSU from an 10 investor's standpoint. Consequently, the determination of a cost of 11 equity based on the experience of these thirteen companies I selected 12 will provide valid evidence on the basis of which the cost of equity 13 for LP&L can be determined.

14 15 Q. At this point, will you explain how you proceeded to develop, for the 16 Middle South Utilities and the select.ed group of companies, the growth 17 rates which you will use as a basis for estimating the cost rate of 18 equity for LP&L?

19 A. The first step was to determine the period of time during which to 20 analyze growth. In 1946 fears of a post-war depression sent the stock 21 market tumbling until it bottomed out in 1949. Late in 1949, it 22 became generally clear that we would not have the classic post-war 23 depression, and business, as well as the stock market, took off. Since 24 the 1949 recession, we have had, with few exceptions, a continued 25 growth in business and prosperity. The exceptions were five short 26 recessions. The first lasted from about the middle of 1953 to the 27 enird q.sarter of 1954; the second lasted from the last quarter of

1 1957 to the middle of 1958; the third one lasted from the middle of 2 1960 through the first quarter of 1961; the fourth one lasted from the 3 end of 1969 to the end of 1970 and the most recent one lasted from 4

the fourth quarter of 1973 to the second quarter of 1975. We may in 5 fact be in a recession at the present time. Given this, it is my 6 opinion, that the period 1965 through 1978 will provide a framework 7

which we may use to estimate a growth rate which may, in turn, be 8

used to develop the cost of equity for Louisiana Power & Light.

9 Since the estimate of the growth plays an important role in the 10 determination of the cost of equity, I have made several different 11 analyses of growth that obtained during the period 1965-1978. My first 12 step was to compute the annual rate of growth for MSU and each of 13 the selected comparable companies of:

l'

l. Dividends per share, and 15

2. Book value per share, 16 for all the periods beginning in each year since 1965 and.ending in 17 1978. The method used was "Least Squares", a standard statistical 18 approach to fitting a line to data to obtain a trend over time. On 1'

Pages 5 through 18 I have plotted the book value per share and 20 dividends per shart for each of the companies, i.e., the Middle South

• 1 3

Utilities and each of the selected comparable companies. There, I 22 show for each company the computed growth rates for selected periods 23 ending 1978.

24

• 5 Q. You have indicated that the Discounted Cash Flow method deals with the 26 growth in dividends per share. That being the case why did you in 27 addition compute the grovth in book value per share?

1 A. There can be no doubt but that the growth in dividends depends in the 2 long run on the growth in per share earnings. In analyzing book value 3 per share I am fundamentally analyzing the growth in earnings per share 4 since the growth in book value per share is equal to the growth in 5 earnings per share adjusted to eliminate any trend in the rate earned 6 on book equity.

7 The reason we must eliminate any trend, up or down, in the rate 8 earned on book is rather obvious. Suppose a company's rate of equity 9 earnings shows a pattern such as this ~9%, 9 1/2%, 10%, 10 1/2%,

10 11%, etc. Can we rationally assume that such a growth will or for that 11 matter can continue indefinitely? Obviously not. Similarly a declining 12 trend of say 11%,101/M,10%, 9 1/2%, etc. , must stop sometime, and 13 soon. else the utility and its customers are in serious trouble.

14 So instead of computing the growth in earnings per share and then 15 eliminating any trend in the rate earned, I short-cut the process by 16 computing the growth in book value per share. And I emphasize that in 17 so doing I have derived the growth in earnings per share properly 18 adjusted to remove the trend. Earnings per sharc properly adjusted I 19 submit, are the best evidence of growth appropriate for developing 20 LP&L's cost rate of equity. Earnings are a better measure than the 21 history of dividends themselves for the following reasons.

• 22 Experienced growth in per share dividends may reflect aberrations 23 which cannot be expected to continue. For example, management may 24 allow the dividend rate to remain the same for a period of years until 25 earnings reach a level where an increase in the dividend is likely to

• 6 " stick"; or management may increase the payout, i.e., increase dividends 2

l more rapidly than earnings; or, if in need of cash, may maintain a con-

1 stant dividend in the face of rising per share earnings. Thus, it is 2 important that the analyst supplement his analysis of past dividend 3 growth by developing additional indicators of future dividend growth.

4 Since dividends flow from earnings, the growth in dividends 5 will tend, in the long run, to follow the growth in earnings. It

- 6 would thus seem that past growth in earnings per share would be of 7 particular interest to the analyst, and it is. And this is why I 8 place primary reliance on the analysis of the growth in earnings per 9 share; the growth most accurately revealed by analyzing the funda-10 mental basis for earnings -- the investment in back of each share --

11 the book value.

12 13 Did you consider other data in arriving at your estimates of growth?

Q.

14 A. Yes. As I previously pointed out, Pages 5 through 18 of the Exhibit 15 not only show the actual dividend and book value growths, but also 16 the computed growth rates for several intermediate periods. I also I7 computed and analyzed the year to year total growth in book value per 18 share and the growth in book value from retained earnings during the 19 period. This is shown graphically for Middle South on Paga 19. Further-20 more, as I will discuss in greater detail later, I have relied on the I

average dividend yield for the 36-sonth period ending June 30, 1979;

- consequently, estimates of growth must reflect the same factors which influenced the level of dividend yields during this 36-month period. '

24 On Page 20 , I have developed the average growth from retained earn-25 ings over the 1976-1978 period for MSU as well as for the thirteen selected comparable companies.

27 I have supplemented these computed figures with graphic analyses

l l

1 of the past growth in book value per share to see if further insight 2 can be obtained. The graphic analyses are in a sense as indicative 3 and valid as the precise numerical computations and I consider then 4 as useful inputs in my ultimate judgment of growth.

5 I have considered these histori:a1 growths and many other factors, 6 including: (1) the growth in total capital for the companies during 7 the entire period and recently; (2) the average historical market to 8 book ratios for the selected companies during the entire period used 9 as a framework for analyzing growth, as compared to the market to book 10 ratios for the companias in recent years and currently; (3) the level, 11 relative stability, and relative trend of equity earnings which pro-12 duced such market to book ratios; and (4) the level, relative stability 13 and trend of each company's dividend payout and earnings retention 14 policy, 15 16 Q. Mr. Lurito, what other factors did you take into account in developing 17 growth rates for MSU and the thirteen companies you selected for 18 analysis?

19 A. I have mentioned previously that I will use the average dividend 20 yield for the 36-month period ending June 30, 1979 in determining the 21 cost of equity for the companies selected and for MSU. I have used 22 the average dividend yield for this recent period to avoid having my 23 results influenced by a spot market situation. Since we are seeking 24 to set rates which can be relatively stable over the near term 25 future, we are interested in determining a fair rate of return and l 26 cost of equity which will obtain over the near term future. We 27 are simply not interested in todsy's or yesterday's spot fair rate of l

i 1 return. To see an example of this consider the recent behavior of 2 the dividend yield of the thirteen companies being analyzed. During 3 September 1978 the average dividend yield of the' thirteen companies was 4 8.74%. It was 9.00% for Middle South Utilities. However, in 5 December of 1978 the decline in the stock markat caused the dividend 6 yield for the thirteen companies to increase to 9.35% and MSU's 7 increased to 9.44%. Thus in chout three months, the dividend yield 8 of these thirteen companies increased by 61 basis points due to a fall 9

in the over-all market. Clearly the over-all pessimism that pre-10 valled in the market had an effect on all stocks. While that 11 pessimism may have been related to investor expectations of inflation, 12 oil price increases, the condition of the dollar on foreign exchange 13 markets and recent Federal Reserve actions, a return to the 1974-1975 14 market does not appear to be 1-inent. While it is impossible to 15 predict the market, in my judgment the recent downside experience 16 is not indicative of the market's longer term prospects. Thus the 17 current, spot situation of the market is not an appropriate basis 18 for the determination of the fair rate of return for regulatory 19 purposes. As mentioned, the 36-month period ending June 30, 1979 20 is appropriate for this purpose.

21 l The market for electric companies during this 36-month period 22 represente a significantly improved situation from what was experi-23 enced during 1974, 1975 and the first half of 1976. The 1974, 1975 24 and the first half of 1976 dividend yields for the thirteen selected

'S companies of 9.952, 9.74: :.nd 8.51 are reflective of the historically 6

unusual behavior of inflation and energy costs that was experienced in those 27 years as well as the recession. MSU's dividend vields were 9.36%, 8.95% and 28 8.87%, respectively.

I

i 1 1 Dividend yields prior to the October 1978 experience just discussed 2 continued to some extent to reflect these adverse factors; however, 3 they had improved significantly. Indeed in the last half of 1976 the ,

4 yield for the thirteen companies averaged 8.24%;in 1977 the yield was 5 8.02*, and it was 8.83% last year. Under the unusual circumstances, .

6 especially of 1974 and 1975, investors in common stock quite 7 rationally placed more importance on tangible dividend yields rather 8 than on future dividend growth. Consequently, dividend yields, rather 9 than growth expectations, had a greater numerical effect in the 10 process of determining the cost of equity under such circumstances.

11 Laring 1974 the electric utility stock market fell sharply.

12 This was undoubtedly the result of fears that not only would past 13 growth not continue, but, in view of the Con Ed dividend situation, 14 that dividends would either be cut back or totally omitted. The 15 electric utility market in 1975 reflected very much the same kind of 16 pessimism as to future growth prospects as was found in 1974; indeed 17 this pessimism to an extent carrie.1 over into 1976. Given the dismal 18 growth expectation situation of those years, it is not surprising, 19 as indicated, that dividend yields reached historic highs. Indeed.

20 the falling market prices and especially the high dividend yields 21 not only were indicative of an increasing cost of equity capital but 22 also of a severe dampening of growth expectations. Up until this 23 period of time, investors in the common stock of electric utilities 24 had become accustomed to the moderate but stable growth in earnings and 25 book value per share which characterized the 1960s and early 1970s; 26 suddenly over a three-year period, these same investors were con-27 fronted with a growing body of evidence which increasingly pointed in

1 l

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1. the direction of lower growth prospects and the likelihocd of unstable 1

2. earnings. As this body of evidence accumlated, investors became in-

3. creasingly pessimistic as to the prospects of future dividend growth.

4 The decline in dividend yields experienced by the electric companies

5. since the last half of 1976 was probably the result of some downward

6. pressure on inflation expectations as also reflected in the decline

7. in long and short term interest rates as well as the increase in

8. economic activity and earnings as compared to the 1974-1975 experience.

9. Consequently, the cost of equity capital must be viewed in the context

10. of the improved market environment that has been enjoyed over the last 11, 36 months by the electrics.

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12.

13. Q. Will you now discuss the use of these factors in arriving at your estimates

14. of the future growth in dividends per share for Middle South Utilities and

15. the thirteen comparable companies you have selected?

16.

17. A. With respect td Middle South Utilities, it should be noted that over the l 18. 1976-1978 period, the Company's growth from retained earnings has averaged

19. 4.44 ; its year-to-year growth in average book value per share over this

20. period was 2.732. The lower book value growth is explained by the fact l 21. that Middle South sold stock at net proceeds below book value per share.

22. A 3.75 growth estimate appears to be justified based on my analysic.

l l 23. Consider Boston Edison. Over the 1976-1978 period, the Company's 24 growth from retained earnings as well as its growth in average book value

25. per share has been negative. However, its longer term book value per share

26. growth has centered in the 1 to 2% area; consequently a 1.5% dividend

27. growth estimate is indicated.

l

1. As far as Detroit Edison is concerned, its growth from retained

2. earnings was 1.64: over the 1976-1970 period while its year-to-year )

3. growth rate in average book value per share was negative .7% due to sales 4.

of new common stock below book value. A 1.50: growth rate estimate seems

5. appropriate.

. 6. Florida Power Corporation's growth from retained earnings was 5.83*.

7. over the 1976-1978 period, while its year-to-year growth in average book

8. value per share was 5.57%. Hotrever, its recent earnings and growth have

9. been well below its prior experience. A 5.00: growth estimate is appro-

10. priate in my opinion.

11. Florida Power & Light experienced a 6.24% growth from retained

12. earnings over the 1976-1978 period and had a 5.73% year-to-year growth

13. in average book value per share. Its recent experience has been consistent 14 with such historical growths. In my judgment, a 6.00: growth rate

15. is justified. -

16. Hawaiian Electric's growth picture is quite stable. Since 1970 the

17. Company's growth from retained earnings and year-to-year growth in average

18. book value per share has varied within the 4-5% area. Over the 1976-1978

19. period, its growth from retained earnings averaged 4.58% and its book value

20. growth was 4.46%. A 4.5% growth rate is clearly indicated.

21. Over the period 1966-1973, Kentucky 11tilities' growth rate in l

l

22. average book value and from retained earnings was generally declining. In

23. 1974 these growths fell precipitously to negative levels. There was a 24 recovery in 1975 and 1976 from the 1974 lows, especially in retained

25. earnings growth. The year-to-year growth in average book value per share

26. over the 1975-1978 period hss averaged 1.1% and it has been declining. The 27 growth f rom retained earnings over a similar period averaged 2.3% due to the

1. sale of stock below book value, but also has been declining. In my

2. judgment, a 3.0% growth rate is indicated.

3. LILCO 's 1976-1978 growth from retained earnings was 4.69%, while ,

4 its year-to-year growth in average book value per share was 2.65%.

5. However, its recent experience is somewhat below these values. A 3.5%

6. growth estimate is indicated.

7. New York State Electric & Gas' growth from retained earnings has 8 been steadily in the 3% to 3.5% range. Its year-to-year growth in i

9. average book value per share has been lower due to sales of common staock

10. at net proceeds below book value per share. A 3.25% growth rate estimate

11. is indicated based on all my analyses.

12. Pacific Power & Lights' growth from retained earnings has averaged

13. 2.96% over the 1976-1978 period while its year-to-year growth in average

14. book value per share was 2.37%. A 3.00% growth estimate is justified.

15. Portland General Electric's growth rates have been adversely af fected

16. in 1977 and 1978 due to payout ratios in excess of 100%. Prior to that

17. time the Company's growth rates centered in the 3-4% range. In view of

18. the realities a 3% growth estimate appears justified.

19. PEPCO's 1976-1978 growth from retained earnings was 3.15% and its

20. year-to-year growth in average book value per share was 2.15%. A 3.25%

21. growth rate is indicated.

22. Over the 1973-1978 period, Utah Power & Light's year-to-year

23. average growth in book value was 2.54%. This growth fell to only .6% over the 24 1974-1976 period reflecting the sale of stock below book value. In 1977- l

25. 1978 the growth recovered to about 3.6%. The Company's growth from

26. retained earnings averaged 3.33% over the 1973-1978 period. 4% over the

27. 1974-1976 period and only about 1.4% over the 1977-1978 period. In my

i

1. judgment a growth rate of 3.75% is justified. j

2. Over the 1976-1978 period, VEPCO's growth from retained earnings

3. was 3.25% whereas its year-to-year growth in average book value per share

4. was 1.78%. Given the Company's recent difficulties with its nuclear power 5.

plants, a 3.0% growth is all that can be reasonably expected.

6 In view of all these considerations and an analysis of the historical

7. and current growth data, I estimate the expected growth rate for Middle

8. South Utilities to be 3.75%; for the selected comparable companies, the

9. estimate of average growth is 3.40%. The growth rate for each individual

10. company is shown on Page 21 of the Exhibit. These are the growth estimates

11. I will use as a basis for estimating Louisiana Power & Light 's cost of

12. equity.

13.

14 Q. Mr. Lurito, will you now discuss how you used these growth rates and

15. dividend yields as a basis for estimating LP&L's cost of equity?

16.

17. A. A proper application of the DCT method requires that the growth rates -

18. used to reflect investor expectations be consistent with the investor

19. expectations as reflected in the market prices used to establish the

20. dividend yields. Clearly, it would be inappropriate to combine yields

21. that obtained during a depression with growth expectations based on

22. conditions of economic prosperity. For example, it would be 23.

24 25.

26.

27.

1 improper to combine the high and rising dividend yields experienced 2 by MSU and the thirteen selected comparable companies during years such 3 as 1974 and 1975 with high growth rate expectations based perhaps on 4 some historical experience which bears little or no relationship to 5 the conditions which produced the high dividend yields. Conversely,

. 6 it would be improper to combine lower and falling dividend yields 7 gener'ted in a rising market environment such as we have experienced 8 since about the middle of 1976 with pessimistic growth rate expec-9 tations that were characteristic solely of the 1974-1975 period.

10 As indicated, the higher market for electric company stock experienced 11 since the middle of 1976 is due to a combination of factors, the most 12 significant of which are the somewhat lower levels of inflation, the 13 rapid economic recovery and a concomitant fall in the cost of equity 14 eapital.

15 While these developments for the thirteen companies and MSU 16 have not necessarily resulted in more optimistic investor growtn 17 expectations, they have contributed to the generally lower yields 18 experienced since mid-1976. Consequently, it would be inappropriate 19 to combine such growth expectations with a dividend yield dominated 20 by the high yields of 1974, 1975 and early 1976 which reflected the 21 dismal economic and financial experience of that period.

22 Given these growth expectations, a proper application of the 23 DCF method requires the use of dividend yields consistent with such 24 expeccations. The fact that dividend yields for electric utilities 25 began their decline around the middle of 1976 indicates that the cost 26 of equity also began its descent at about the same time. Consequently, 27 the dividend yields generated during the 36-month period ending June 30,

9 l .

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1 1979 are the appropriate yields to use in combination with current t

l 2 investor growth axpectations.

3 As shown on Page 21 of my Exhibit, I cosibined the previously 4 developed growth rates with the dividend yield over the 36-month 5 period.ending June 1979. As mentioned, I have used the average 6 monthly dividend yield for the 36-month period, for the reasons already 7 discussed and also to avoid having my results influenced by a spot l 8 market situation.

9 As shown on Page 21 for the thirteen electric companies I combined 10 the 3.40% averan ath rate previously developed with an average 11 dividend yield of 8.60% to arrive at an indicated capitalization rate 12 of 12.00%. For Middle South Utilities I combined the 3.75% growth 13 rate with an 8.84% dividend yield to arrive at an indicated capitali-14 zation rate of 12.59%. Based on this study I concluded that the 15 capitalization rate for LP&L where its stock traded is 12.00% to 16 12.50%.

17 If the Company earns at this rate the market price of the stock 18 if traded would tend, in markets similar to what has been experienced 19 over the last three years or so, to equal its book value, and investors 20 will in fact be receiving what the economist would call the cost of l

21 equity capital. This would also be quite close to what would be an 2 appropriate level of earnings if LP&L's parent, Middle South, 23 were not to finance by the issuance of common stock. Were it necessary l

24 to issue cosanon stock over the period of time rates resulting from 25 this proceeding are likely to be in effect, then the rate of earnings 26 would have to be higher than the 12% to 12.5% capitalization rate, so 27 that the utility can sell stock at no less than book value.

l l

1 Q. Mr. Lurito, does the DCF method meet the criteria of Bluefield and l

2 Hope in that it reflects returns "cosamensurate with returns on invest-3 ments in other enterprises having corresponding riek?"

4 A. Yes, it does, and I would like to discuss the reasons for my opinion.

5 However, it should be mentioned that in discussing the Bluefield 6 and Hope decisions I do so as an economist and financial analyst 7 and not as a lawyer.

8 Under :he DCF approach, the principle is that a utility's earn-9 ings should be sufficient to provide a return to the investor which 10 is equal to, or similar to, the return requirement of investors in the 11 common stock of the company and in the stock of companies similar in 12 risk to the utility. In other words, the DCT method views the in-13 vestor's required rate of return (capitalization rate) as an opportunity 14 cost. The rationale for use of the DCF approach ir that the investors' 15 required rate of return for companies of corresponding risk can only 16 be determined through an analysis of the relative stuck market prices 17 set by investors for their securities. To see why the investors' 18 required rate of return must be analyzed in terms of market place 19 transsetions, consider the following.

20 Suppose there were two companies, one a regulated alectric 21 utility and the other a wild cat oil well drilling company. Suppose 22 further that they are both earning the same rate of return on book 23 equity. Do we have sufficient information upon which to conclude 24 that these two companies provide comparable rett:ns on investments?

25 Clearly not, because we do not know whether the returns earned by 26 nach are commensurate with their relative risks. It must be remembered 27 that it is the investor's required return that is at issue, not the l

5 I companies'.

2 To determine whether the returns are commensurate with risk, the 3 investor's return on the market price of his stock, i.e., his investment.

4 in the two companies must be considered. There can be no doubt that 5 given equal ecrnings, the investor will pay more for the stock of the 6 electric utility since the risks associated with such an investment 7 are less than for the oil well drilling venture. Iience, all other 8 things being the same, the different market prices for the stock of 9 these two companies reflect the differential risks as perceived by the 10 investor despite the fact that the returns on book equity were the same.

11 In other words, it is the market price which balances risk and return.

12 By setting different prices for the stocks, the investor obtains 13 different returns on his investment - returns which reflect the 14 differences in risk as between the companies. It should be noted that 15 it is through the price mechanism that risk differentials can be 16 expressed and differential returns earned; the returns on book 17 equity tell us nothing about relative risk or relative investor 18 return requirements.

19 Now consider two regulated electric utilities with different 20 rates of earnings on book equity but with " corresponding risks."

21 Certainly, all agree with the basic principle of finance that risk 22 *nd required returns are directly related. Thus, sinflar risk companies j

23 have similar return requirements. That being the case, investors 24 will set the market prices for the stock of these two companies at 25 different levels. However, the level esta >11shed for each stock will 26 allow the investor to obtain a similar return on his investment; j

27 this will occur because they view the stocks as having similar risk.

. _ . ..m, ._ 1.m- _ _ - . . . _ -.

g _.

l 1 Thus, it is through the market prices paid by invastors that " returns 2 conumensurate with returns on investments ...having corresponding j 3 risk" are established.

l 4 Both of these examples show clearly that given a level of earnings, 5 the market price of any company's stock reflects the risk and investors' 6 return requirement of that stock relative to all alternative invaatnant 7 opportunities. It is for these reasons that the DOF method, which i 8 relies on an analysis of marketplace transactions, can determine the 9 return required by investors in companies of corresponding risks.

10 11 Q. Mr. Lurito, you stated previously that the first step was to determine 12 the investors' required rate of return (capitalization rate) and then 13 to determine the rate the Company should be allowed to earn on equity.

14 Are those two rates equal?

15 A. They are not necessarily equal. Based on the data shown on Page 21, 16 the capitalization rate for LP&L which I have determined to be 12.0%

I 17 to 12.5% is an economic concept. It is that return on investment 18 which the investor must expect to earn in order to induce him to 19 furnish equity capital to tb company. Clearly, then, this capitali-20 zation rate is essentially independent of whatever rate the company 21 in fact earns on its book value. If investors expect the company 22 will earn considerably above the rate, they will respond by increasing l

23 the price they are willing to pay for the stock to a level above 24 book value. Conversely if the company is expected to earn considerably 25 below the. rate, the investor will bid down the price of the stock to 26 a level below book value. The result is always the same; the investor 27 sets the market price he is willing to pay in order that he be able

1 to realize his required rate of return, that is, his capitalization 2 rate.

3 Now one response to this is since the investor will always set 4 the market price so as to realize his required return, why should res-5 ulation be concerned about allowing the company to earn in excess 6 of the bare cost rate or capitalization rate of equity. The answer 7 is that to set the allowed rate of return at that level would result 8 in dilution of the stockholders' investment were the company to have 9 to issue additionil stock.

10 When the rate earned on book value of the equity is equal to the 11 capitalization rate the market price per share will tend to equal the 12 book value per share. If the company's stock is selling at book 13 value and the company needs to sell stock there is no doubt that the 14 net proceeds from the sale of this additionhl stock will be below book 15 value, i.e., dilution will result. This is because incident to the 16 sale of stock are two costs, the cost of financing and pressure, 17 which act to reduce the net proceeds to the company.

18 By cost of financing I am referring to such costs as legal and 19 brokerage fees, accounting expenses, taxes and the like. Pressure is 20 a little more complex. When additional stock is thrown on the market, 21 it may have the tendency of putting the market price under pressure.

22 1.e., the price may drop. If there is this pressure drop in the market 23 price during an offering period, it should be accounted for, since we 24 are attempting to set equity earnings sufficient to allow for additional 25 financing. Based on studies I have made, shown on Appendix Pages 20 26 to 28 the effects of the cost of financing and pressure would act to i

27 reduce the net proceeds by approximately 7.5%. This indicates that

l .

1 at bare ww=m the allove.d rate earned on equity would have to be l

l 2 sufficient to produce a market price 7.5% above book value, i.e., a l

l 3 market to book ratio of 1.075 if the company needed to sell additional l

4 equity.

5 0'oviously, such a margin is not sufficient under the usual 6 circumstances. As is well known, stock prices fluctuate for two 7 reasons: one, the earnings of the company itself fluctuate causing 8 the market price to change; two, changes in the general level of 9 confidence in the economy cause stock prices generally to change, which 10 in turn tends to pull all stocks up or down. Thus allowing for just 11 a minimum margin would provide no protection against these very real l

i l

12 fluctuations in market prices. In that case, the company would have 13 to be lucky to avoid dilution, i.e., it would have to hope that 14 when it needed to raise equity capital its market price was at or 15 above normal. That is clearly not a reasonable basis for setting 16 rates where the company had the need to sell additional equity.

17 18 What is an appropriate rate to be earned on book at this time in Q.

19 light of the investor's required rate of return of 12% to 12.5%1 20 A. The threshold question is does the Middle South System need to 21 have available to it additional equity in the near term future;

'2 that is, the period of time rates subject to this proceeding are likely to be in effect. The l'iddle South Utilities' equity ratio 24 at year end 1978 was 30.0%. However, given the Company's 1979 and 1980 25 construction program and the financing program I have proposed, its 26 year-end 1980 equity ratio would be 34.0*.. Consequently, the answer 27 to the threshold question is that the MSU does have need for additional l

a - - a - - = . _ _

l l

1 equity in the near term future.

2 Since the Company has the need for additional equity to attain 1

3 a more reasonable equity ratio, the extent to which the allowed  !

4 return on equity should exceed the 12.0% to 12.5% investors' required 5 rate of return must be determined.

6 There are three basic factors that need to be considered in 7 making this determination. First, in what phase of the stock 8 market are we now? Second, what is the probable market drop for 9 MSU's common stock, on a short term basis, say a few months or so, 10 and third what is an appropriate allowance for the cost of financing 11 and pressure? I shall consider these factors in order.

12 As concerns electric companies in general, their current market 13 prices are below the highs over the last five years. The current 14 $14 market price for the common of Middle South Utilities is 15 also low being about 75% of its high price over the last five years.

16 Thus it is clear that we are still in a below average general market 17 situation.

l 18 Second, based on an analysis of market prices over the last two 19 years, which compares the high price in a given month with the low 20 price two months later, it is reasonable to expect that on average 21 a7 margin of protection against short term market declines in the 22 MSU counca stock is all that is required. This is the kind of decline 23 that can be expected at any time in the market cycle. I selected a 24 two-month period because setting of the sales date of a new stock issue l

l 25 usually requires approximately a two-month lead time.

26 Third, as I have previously discussed, studies we have made over 27 a period of many years indicate that the cost of financing and pressure

l 1 is some 7.5%. To take care of these factors on a compound basis 2 a market price 16% above book value would be needed were stock to 3 be sold.

4 5 Q. Have you made a study to determine what rate earned on book equity 6 will produce a markat price 16% above book?

7 A. Yes. It will be recalled that I have found the capitalization rate 8 for LP&L, i.e., the investors' required rate of return, to be 9 12.0% to 12.5%. I have also determined that a reasonable market to book 10 ratio is 1.15. The remaining question is what margin in the rate of 11 earnings above the capitalization rate is necessary to cause the market 12 price to move tol6% above book value.

13 DCF theory, as well as cosumon sense, tells us that as the rate 14 of earnings on book value increases above the investors' required 15 rate of return, the investor will bid up the price of the cosanon 16 stock so that he can anticipate receiving his required return, no 17 more and no less. Assume for a moment that a company pays out all of 18 its earnings in the form of dividends. Then the investor's total 19 return is equal to the dividend yield. Asstume further that the 20 capitalization rate is 11.5% on book value. As a result the investor 21 will set the market price at book value in order to obtain an 11.5%

22 dividend yield, i.e., an 11.5% return Now suppose the company's 23 rate of earnings increases to 12.5% and that it pays it all out in 24 dividends. Investors, still requiring an 11.5% return, will bid up 25 the market prices so that they will establish a market price at 26 1.087 times book value. Obviously, this must happen, since all 27 investors are competing for this return, that is, the 11.5%. In

1 1 that way the 12.5% rate earned on book will produce an 11.5% return 2 on market price.

3 Returning to the real world we find that companies generally 4 do not pay out 100% of earnings in dividends. In the past, 5 Middle South Utilities has paid out about 60% of its earnings as 6 dividends. In view of this the response of the investor will depend 7 primarily on four factors; first, the rate earned on book, second 8 the capitalization rate, third, the dividend payout ratio (or the 9 retention ratio, which is one minus the psyout ratio) and fourth, 10 the growth in total equity capital.

11 The last'f actor bears further discussion. When the company 12 sells stock at net proceeds above book value, the company, and hence 13 the investor, is able to obtain growth in earnings and dividends 14 per share. Assume a company has 100 shares outstanding with a book 15 value per share of $20., i.e., a total equity of $2,000. If that 16 company were to sell an additional 10 shares at net proceeds of say 17 $30, the equity ecpital would increase by $300, so that shares would 18 now total 110 and equity would, total $2,300. This produces a new 19 book value per share of $20.91. Thus, the sale of stock added $ .91 20 to book value per share which resulted in a growth of 4.6%.

21 Now with a constant rate of earnings on book value of say 12% we 22 find that earnings per share based on a $20 book value per share 23 would be $2.40 and on a $20.91 book value per share would be S2.51.

24 Again, an increase of 4.6%. With a constant dividend payout ratio, 25 the dividend would also increase by 4.6%. Summarizing, we see that 26 growth in dividends can come about solely from the sale of stock at 27 net proceeds above book value.

l

~ '

4b 1

The amount of such growth that can be expected is a function of 2

two factors, first the total growth in equity capital the company 3

needs in the future and the portion of this that will be obtained 4 f rom internal sources, i.e. , retained earnings.

l

5. On Page 22 of my Exhibit I show that based on a capitalization rate of 6 12.0% a 1.16 market to book ratio will be obtained with a 12.7% rate of

7. earinings on book value. As shown there, I have based this determination

8. on Middle South Utilities' historical retention ratio of 40% and a growth in total equity capital of 11%. I have also used the 7.5% cost of financing 9.

10. and pressure, which I discussed previously, in determing the net proceeds

11. of stock sales. On Page 23, I show that a 13.25% return on equity is needed

12. to produce a 1.16 market to book ratio based on a 12% capitalization rate.

13. While the formulation appearing on Pages 22 and 23 seems complex,in i 14, reality it is not. Simply put, as shown there, the expected market price is

15. equal to the dividend divided by the difference between the capitalization

16. rate and the growth in book value per share. This basic DCT equation is

17. then expanded to determine the total growth in book value per share from the

18. two sources previously discussed, retained earnings and outside sales. This

19. then permits us to determine what market to book ratio will be associated

20. with a particular rate earned on book and a particular capitalization rate

21. in the kind of situation we have been experiencing.

23. In my judgment if LP&L were to be allowed to earn 13.00% to 13.25% on its

23. book equity, as opposed to rate base, and if, in fact, it earned

24. at that level for a long enough period to demonstrate to investors

25. that this is a sustainable level of earnings, then I think

26. it is a reasonable conclusion that its common stock, if traded,

27. would sell at prices about 16% above book in the kind of market l ,

1 1

1

1 environment we have had.

2 3 Q. Mr. Lurito, what did you mean when you said book value as opposed 4 to rate base?

5 A. Were a utility's total financial capital equal to its rate base, 6 a 10% allowed return on rate base would, of course, equate to a 7 10% allowed return on total capital. However, if rate base exceeds 8 total capital, a 10% allowed return on rate base will produce more 9 than a 10% allowed return on total capital. For example, suppose a 10 utility had $1000 of equity capital in its capital structure and a 11 100% equity ratio. Suppose further thatits rate base were $1200 12 because $200 of plant represented non-investor supplied capital. If 13 a 12.5% return on book equity were found appropriate but such a return 14 were applied to rate base, the allowed dollar return would be $150.

15 Such a dollar return represents a 15% return on book equity and not 16 a 12.5% return on book equity. It is clear that such a result would 17 also obtain even if the utility had an equity ratio of less than 100%.

18 19 Q. What is the relevance of this to the case at hand?

20 A, At year-end 1975, unamortized investment tax credits were about 21 1.7% of LP&L's total investor-supplied capital. Were a 22 10.48% overall rate of return allowed on a $1017 rate base, that is.

23 on a rate base which included $1000 of investor-supplied capital 24 and $17 of unamortized investment tax credits, a company would have a 25 total dollar return of $106.58 ($1017 x 10.48%) . If the company had 26 a capital structure consisting of $57C of debt at a cost rate of 27 9.10%, $90 of preferred at a cost rate of 8.65% and $340 of equity

i l

l 1 capital at a cost rate of 13.25%, its fixed charge obligations would be i 2 S59.66 ($570 x 9.10% plus $90 x 8.65%) . Thus, it would have $46.92 3 ($106.58 - $59.66) in income applicable to its common eouitv. Such 4 an income available for equity would produce a 13.80% return on equity 5 (S46.92f$340.). In other words, a 13.25% allowed return on 6

( equity would actually result in a 13.80% earned return on equity.

7 In view of the f act that in LP&L rate orders this 8 Commission has not deducted unamortized investment tax credits from 9 the Company's rate base, a 13.25% return on equity 10 if adopted till, based on the capital structure and cost rates of j 11 capital I find appropriate for regulatory purposes, provide the l

12 Company the opportunity to earn about13.8% on its equity invesement.

13 Counsel has advised me that based on the recent IRS regulations 14 relating to the issue of unamortized investment tax credits, this 15 Commission can, in determining the appropriate return on equity to be 16 allowed in this case, take into consideration the effect on several 17 financial indicators, such as capital structure, coverage ratios, 18 earnings / price ratios, and market to book ratios, of not deducting 19 'm==artized investment tax credits from rate base and allowing a 20 return on such credits of no less than the overall cost of investor-21 supplied capital. In view of this, I would urge this Cosmtission to 22 consider the fact tt c while the 13.0%-13.25% return on book equity I have 23 recommended would, if earned likely produce al.16 market to book 24 ratio, the effect of not deducting unamortized investment tax credits 25 f rom the rate base will likely generate a significantly higher market l 26 to book ratio than 1.16. I also urge the Commission to take note of l

27 the fact that interest and fixed charge coverage ratios will also be

1 more favorable than what would appear to be implied by an allowed return 2 rn book equity of 13%-13.25%. While I have not reduced my 13%-13.25 return 3 on equity recommendation in light of this discussion, it would be proper

' for this Conunission to give whatever weight it considers appropriate 5 to it in determining the fair rate of return for the Company.

6 7

8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 l

(

l l

l l

~53-1 F. CAPITA 1. STRUCTURE 2

3 Q. Having developed the cost rates of debt, preferred and equity, what 4 was the next step in the determination of the cost of capital and fair 5 rate of rartrn to Louisiana Power & Light?

6 A. Having developed these cost rates, I next developed the applicable 7 capital structure. For the reasons stated previously, I have relied 8 on the cost rates of the various types of capital and the capital 9 structure of the liiddle South Utilities.

10 I therefore developed the capital structure of the ;fSU es of 11 December 31, 1980, by adjusting the capital structure as of December 12 31, 1978 for 1979 and 1980 financing. This produces a cacital structure 13 containing 57.0% debt, 9.0% Preferred, and 34.0% conuson equity.

14 I previously indicated in the discussion of the cost of debt 15 1.nd preferred that MSU should meet its $1.5 billion 1979 and 1980 con-16 struction program through the flotation of $575 million in new long-term 17 debt 3 S210 million of new prefer. red, $470 million of eauity and by increas-18 ing its short-terin debt by $50 million. I also posited that $129.7 19 million of the funds raised externally will be used to meet its maturing 20 debt and sinking fund requirements. Ihe capital structure at December 21 31, 1980 was developed by adjusting the December 31, 1978 capital 22 structure to include the 1979 and 1980 financing described above. In 23 sy opinion this produces a reasonable capital structure: one that l

24 balances safety and economy.

25 26 On what basis do you conclude that a capital structure containing Q.

27 34 .0 % conanon equity is reasonable?

54_

1 2 A. Rate regulation should be based not necessarily on the existing 3 capital structure, but rather on a safe and economical capital 4 structure. The two main criteria in the determination of an appro-5 priate capital structure are economy and safety.

6 The advantage of debt in the capital structure is that it costs 7 less than equity. liot only is debt less costly, but the interest 8 charges are dedt.atible for income tax purposes, and hence act to reduce 9 such taxes. Therefore it would appear that the more of this low cost 10 capital there is in the capital structure, the less should be the over-11 all cost of capital and fair rate of return.

12 Whether that turns out to be the case depends of course on whether 13 the increase in the debt ratio acts to increase the cost rates of both 14 debt and equity so as to over-balance the benefits of the larger 15 proportion of debt. This is the question of economy.

16 in addition there is the overriding question of safety. A 17 company must be sure that it does not take on so much debt that it l

18 cannot cover interest charges during a period of depressed earnings.

19 A balance must therefore be struck between economy on the ona 20 hand, and safety on the other. Of course ultimate safety suggests 21 having no debt at all, but that is totally unrealistic. Not only 22 would 100% equity be overly and unnecessarily conservative, but it would 23 preclude the utility from tapping a large source of capital, i.e., the l

24 institutions that by law or predisposition put all or a large part of 25 their funds into debt securities. Reference here is to pension trusts, 26 and the like.

27 Ultimately the determining factor as to capital structure is the

~55-3 1 factor of safety, because within rather vide limits of capital structure j 2 the cost of overall capital goes down as the debt ratio goes up. The l 3 economy is there; the question is how far may a company go without 4 exposing itself to the danger of impaired credit or worse, possible 5 default during a recession.

6 Theoretical studies have been published that argue that the cost 7 of capital is unaffected by the capital structure. There also have 8 been studies that argue the opposite position; the latter contending i

9 that the former are based on unrealistic asstuspeions, contrary to 10 the facts of corporate life. It would seem beyond argument that if 11 income taxes are taken into account (and the former school does pJo 12 take them into account) the conclusion must be that capital structure 13 does affect the cost of capital.

14 15 Q. With these principles in sind, why shouldn't the fair rate of return 16 always be based on the actual c:pital structure as opposed to the 17 appropriate one?

18 A. Assume first that the utility har a capital structure containing an 19 excessive amount of debt. Use of such a capital structure in the 20 determination of the fair rate of return could result in such lov l

21 earnings as to make it impossible for the company to be able to lower l

22 its debt ratio. I,ow and volatile equity earnings stemming from 23 excessive debt ratios are not conducive to equity financing. If tids 24 situation persists, the credit of the company may well deteriorate 25 to the point where even with its unbalanced capital structure, the 26 cost rates of debt and equity would rise to a point where the overall l

27 rate of return would be higher than it would have been originally if l

+

1 the company had a reasonable capital structure all along.

2 Suppose now the contrary situation exists; namely where the 3 debt ratio is well below a " desirable" debt ratio. Use of such a 4 capital structure would impose an unnecessary penalty on the rate-5 payers, with no real benefit to investors. Thus, here tog, sound regu-6 lation would require the use of a " desirable" capital structure for 7 rate regulatory purposes. Consequently, regardless of the relation-J 8 ship between the actual and the " desirable" cap 1Eal structure, it 9 would seem that regulation should, except in the most unusual circum-10 stances, be based on the " desirable" capital structure, 11 It is not really in the interest of investors to have too low a 12 debt ratio. The extra protection for the debt may neither be necessary 13 nor productive of a lower cost of debt; and the loss of leverage for 14 the equity may adversely affect the quality of the equity investment.

15 Equity investors are willing to assume some ricks, else why would they 16 invest in equities? They also want a chance for higher earnings, 17 else why take the risks? One important way of getting these higher 18 equity earnings is by having leverage (i.e., having part of the 19 operation financed by low cost debt) thus getting a higher return on 20 the equity than is available on the total capital. For example, if 21 total capital earns 9%, but half of it is financed with 6% bonds, the 22 equity will earn 12%. However, if only one-quarter is financed with 23 6% bonds,the equity will earn only 10%. At a given overall level of 24 earnings, the lower the debt ratio, the lower the rate of equity 25 earnings.

! 26 l

l 27 It must be kept in mind that while debt is entitled to adequate

.g_

1 protection, equity is entitled to a reasonable amount of leverage and 2 the increased rate of equity earnings such leverage will produce.

3 Thus even from the investors' point of view, too low a debt ratio is 4 not without its disadvantages.

5 On the other hand, too high a debt ratio will hurt not only the 6 investor, but also the consumer, because too high a debt ratio will 7 eventually harm the utility's ability to attract capital which will 8 result in a higher required rate of return and higher utility rates.

9 Thus looked at with some perspective, it is to everyone's 10 advantage for rate regulation to be based on a reasonable (" desirable")

11 capital structure; one that is safe, but one that also is economical.

12 So while we do not have a conflict to resolve, we do have to strike a 13 balance as to capital structure.

14 With the above principles as a guide, I now turn to the question 15 of whether Middle South Utiliti...' proforma year-end 1980 capital structure 16 is a reasonable one for fair rate of return purposes.

17 I have compared MSU's equity ratio, on a ye.tr-end basis, 18 to thati of all other operating electric and combination companies 19 regulated on an original cost basis, some 64 companies. Tae average 20 year-end equity ratio for these companies in 1977 was 35.3%. MSU's 21 was 30.1%. Thus MSU's year-end 1977 equity ratio was lower 22 than the ratio for the average company. Consequently, I have recom-23 mended that a capital strutture containing 34% equity be used for 2' regulatory purposes in this case since such a ratio is in line with l

l 25 that of the typical electric.

26 27 Mr. Lurito, did you pe,rform any other tests to determine the safety Q.

1 of the capital structure you have recommended?

2 A. Yes I did. I tested a 34% equity ratio given the cost rate of 3 capital I have previously set forth. The study that was performed 4 might best be described as a " variability test." For each year 1960 5 through 1978, I developed the rate earned on average total capital for 6 Middle South Utilities. Using standard statistical techniques, 7 I then developed a measure of the variability of the rate earned on 8 average total capital for MSU during the period, taking the trend in the 9 rate earned on average total capital into account. The rate earned on 10 average total capital for the MSU during, the 1960-1978 period ranged 11 from a low of 6.21% in 1961 to a high of 9.93% in 1978. During this 12 period, the rate of earnings on average total capital grew at a trend 13 rate of 2,28 and the average rate of earnings over the period was 14 7.67%. Given these data, the variability of earnings for MSU 15 was developed during the period, taking the slight upward trend into 16 account.

17 Before we get lost in statistical jaron, this can be explained in 18 more simple terms by way of an example. Suppose a given company has 19 certain rates of earnings over a ten-year period. Suppose further that 20 the company's rate of earnings has been increasing slightly during the 21 period. Using statistical methods, the trend line in the rate of 22 return on average total capital can be computed, and the extent to 23 which the actual returns deviated, or fluctuated, around this trend 24 line can be measured. Tne actual rate of earnings in a given year 25 will most likely be either above or below the trended value for the 26 given year. The question is: "What are the chances that in a given l

27 year, the actual rate of return on average, total capital will be above

1 or below the trended value by a certain amount?" It is here that 2 statistical theory can help. Using standard statistical theory, it 3 can be shown that 67% of the time the actual value will be within one 4 " standard error" of the trended value. Another way of saying this, 5 with respect to the rate of return on average total capital, is that 6 the actual rate of earnings on .verage total capital in a given year 7 can be expected to deviate from the trended value in that year by more 8 than one standard deviation or y one-third of the time, say about 9 three years out of the ten years.

10 Returning now to the case at hand, I computed the standard 11 error of estimate, which is the accepted measure of deviation or 12 fluctuation around a trend line, for the rate of return on average 13 total capital for the MSU for the period 1960 through 1978. The 14 standard error of estimate of the rate earned on average total 15 capital for the MSU during this period was 3.756% which would indicate 16 that we can expect the actual rate of earnings in any given year to 17 deviate either up or down from the trended value by more than 3.756%

18 of the trended value only one out of three times. Not only did I 19 compute the standsrd error of estimate from 1960 to 1978, but also 20 from each of the years in the period to 1978. The average of these 21 standard errors of estimate was 4.437%.

22 Now statistical theory would also indicate that the chances that 23 the actual rate of return on average total capital for the Middle South 24 Utilities would deivate from the trended value, again above or 25 below, by more than 2.5 standard errors of estimate are only 1 in 80, l

l 26 which are thin odds indeed. If we use the average standard error 27 of estimate 4.437% over the 1960-1978 time interval, this means e

i i that the actual value can be expected to deviate below the trended 2 vclue by 11.5% or more in only 1 out of 160 times. The question is, 3 what effect would such an 11.5% deviation below a- 10.48% overall rate 4 of raturn consistent with a 34% equity ratio have on MSU's after 5 tax interest coverage?

6 To answer this quastion, I assume that the MSU was earning a 10.48%

7 overall rate of return and that this rate of return fell by 11.5% that 8 is, it fell by 2.5 standard errors of estimate. If this happened, 9 the rate of return on total capital would be 9.27% (88.5* of 10.48%).

10 The portion of this 9.27% rate of return which the MSU would have to 11 use to meet its interest obligations is 5.19 percentage points (57%

12 of 9.10"). This means then, that the MSU's interest coverage, 13 af ter taxes, would still be 1.8 times. What all this means, of 14 course, is that a capital structure containing 34% equity is eminently 15 safe.

16 It should be remembered that I have based my test on a very drastic 17 possible outcome. That is, I have used the average standard error 18 of estimate found for the period 1960-1978 along with an 11.5" fall in 19 the over-all rate of return - a fall that can be expected to occur 20 in only 1 out of 160 years. Despite these drastic assumptions, we 21 find that a capital structure contahing 34% common equity is capable 22 of withstanding an earnings decline with a 1 in 160 change of occuring 23 and still produce an after tax interest coverage of 1.8 times. Thus, 24 in my opinion, a 34% equity ratio for the MSU is well within the 25 range of reasonableness.

26 27

G. FAIR RATE OF RETURN I 1  :

i  :

2 i

Having developed the cost rates of debt, preferred and equity what Q.

was the next step in the determination of the cost of capital and fair rate of return to the Louisiana Power & Light Company?

A. As shown on Page 23 of my Exhibit, at year-end 1980 Middle South Utilities will have a capital structure consisting of 57.0% debt, 7

. P. referred, aM M.M equity. M uhg the ca %tal structure 8

and the cost rates I have developed produces a cost of capital of 10.39% to 9

10 11 Q. Does the 10.39% to 10.48% rate of return include any margin for safety?

g 13 A. Yes it does. The cost rates of debt and preferred stock fully reflect the increased cost of the additional financing necessary in 1979and 1980.

14 One f the significant causes of the erosion in the rate earned on 15 16 book equity is the sale of additional debt and preferred stock at 17 cost rates in excess of the fair rate of return. By basing the fair 18 rate of return on the costs of debt and preferred inclusive of the 19 additional financing this potential cause of equity earnings erosion 20 vill be nearly eliminated at least through 1980.

21

- 22 Q. What then is your recosamendation as to the fair rate of return for the 23 Louisiana Power & Light Company?

24 A. I find that the fair rate of return for LP&L is from 10.39% to 10.48% to 25 be applied to a net original cost rate base.

26 27

i j

l. Q. Would you discuss the way LP&L is currently treating AFUDC per its books

2. of account?

[

3. A. At the present time, LP&L, per the FERC formula, is capitalizinr, AFUDC on

4. its construction work in progress (CWIP) at a 6.750 rate.

i S.

l .

6. Q. have you analyzed the impact on LP&L were it to begin capitalizing AFUDC

7. at a 10.4% rate?

8. A. I have analyzed several crucial financial indicators over a 10-year time

9. period to determin,e the impact on LP&L's financial integrity were the

10. Commission to determine rates based on the capitalizing of AFUDC on its

11. CWIP at a 10.4% rate.

12. It seems to me that the issue confronting this Commission is whether

13. the financial condition of the Company is and will be such as to permit 14 the capitalizing of AFUDC at this rate. Thus, I propose to analyze the 15 Company's current and future financial condition in light of its proposed

16. 10-year construction program, with a view toward determing whether the

17. capitalizing of AFUDC at this rate is appropriate at this tLee.

18 It is a well recognized principle of regulation that the use of l 19. AFUDC permits the utility a full recovery of the financing costs incurred i

20. on construction work in progress (CWIP) once the plant is in service and

21. providing electricity to consumers. This is accomplished by including in

. 22. rate base the full amount of AFUDC capitalized during the construction

23. period. Thus, investors receive the full return on and of capital at such 24 time that the plant is in service. Capitalizing AFUDC provides the

25. additional benefit of permitting current consumers to pay in rates only for

26. the cost of plant that is currently providing them service. However, under 27, certain circumstances, a company's construction program may be so large

1. and AFUDC so high a percentage of earnings that the capitalizing of

2. AFUDC at the overall rate of return will not permit the company to meet

3. its indenture requirements when new first mortgag'e debt must be issued.

4 In order to most accurately assess the relationship between AFUDC 5.

accounting and the financial health of LP&L, it is necessary to focus

6. squarely on the AFUDC mechanism as it would exist without disturbances

7. caused by other factors originating from other sources. In other words,

8. it would be inappropriate to consider the relative impact of AFUDC on

9. earnings where such earnings are below a fair rate of return. Were this

10. not done, the effect would be to mask the AFUDC issue. The result may

11. well be that whatever financial difficulty the Company may have might be l 12. construed as being caused by AFUDC when in fact the real culprit might l

13. be earnings attrition. Hence, the effect of AFUDC accounting on the present

14. and future health of LP&L can only be appropriately considered under

15. conditions where it is assumed that the Company is earning and will continue

16. to earn its fair rate of return on present and future rate base.

17. .

18. Q. How do you propose to undertake such an analysis?

19. A. It will be recalled that I have found the overall rate of return for LP&L

20. to be 10.4% to 10.5%. This overall rate of return was derived using a 21, capital structure containing 57% debt, 9% preferred and 34% common. equity.

. 22. I determined that this capital structure is the appropriate capital

23. structure upon which to base LP&L's future financing needs.

24. In order to assess the impact of capitalizing AFUDC at a 10.4% rate

25. on LP&L's CWIP, the Company was requested to provide information as to the

26. following:

27.

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1. 1. Its current projection of construction expenditures each year over the 1979-1988 period;

2. The amount of CWIP at year-end 1979; and,

3. Its projection of depreciation expense, deferred 4 federal income taxes resulting from investment tax credits and accelerated depreciation, and

5. other internal sources of funds for each year 1979-1988.

. 6.

7. The Company provided the information as requested.

8.

9. Q. How were these data used in your analysis?

10. A. From data supplied by the Company relative to its projected construction

11. expenditures in 1979 through 1988, the first step was to calculate LP&L's

12. annual external capital needs over the 1979 to 1988 period. (The Company's

13. projected annual construction expenditures appear on Appendix Page 29 of my

14. F.xhibit, line I B). In order to accomplish this it was necessary to

15. determine the level of internal cash generation, including the non-cash

16. effects of AFUDC. For this purpose I used the Company's estimate of such

17. plant-related internal sources of funds as depreciatioa, def erred taxes,

18. investaant tax credits and other sources, which as mentioned, was provided

19. for the 1979-1988 period.

20. Since AFUDC represents a use of funds, the level of internal cash

21. generation from the internal sources already described must be reduced

22. by the level of AFUDC. The Company provided information as to the amount

23. of AFUDC for each year over the 1979-1988 period. These amounts of AFUDC

24. were adjusted upward to reflect the capitalizing of AFUDC at a 10.4% rate.

25. This amount of AFUDC is shown on line I D of Page 29.

26. Having determined the Company's internal cash generation, including

27. the non-cash effects of AFUDC, for each year 1979-1988 and having

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1. information on the Company's forecasted construction expenditures, the

2. difference between the two measures the extent to which the Company must

3. obtain external capital-debt, preferred and equity. For purposes of the 4 analysis it was assumed that external capital would be secured by the

5. Company so as to maintain the capital structure ratios I have found

6. appropriate. In other words, if $100 million of external capital needed

7. to be obtained, it was assumed to be obtained in the form of debt,

8. preferred and equity so as to preserve a capital structure containing i

j 9. 57% debt, 9% preferred and 34% common equity. It should also be noted l 10. that in determining the amount of external capital that must be issued to l

l

11. seet the construction program, the Company's maturing debt and sinking

12. fund requirements on certain debt issues were considered.

13. In the procsss of determing the amount of additional equity

14. necessary to maintain a 34: equity ratio, the composition of this

15. additional equity was also determined. That is, the additional equity was

16. broken into two parts: retained earnings and new equity sales. The amount

17. of retained earnings was estimated by assuming that the Company would earn

18. 13% on equity, which is consistent with the lower end of the rate of return

19. on equity I find appropriate, and that the Company would retain 40% of its

20. equity earnings. The 40 retention ratio is consistent with MSU's historical

21. experience.

22. By summing up in each year the Company's sources of internal cash

23. generation, including the effects on non-cash AFUDC, and adding to it the

24. retained earnings, an estimate of the amount of internal funds available

25. to meet LP&L's forecasted construction expenditures is obtained. Line IB

26. of Page 29 shows the Company's forecasted total construction expenditures

27. while line IBl shows LP&L's internally generated funds for each year 1979-1988.

l

1. The difference between these two lines is the amount of funds that needs

2. to be obtained externally through the issue of new debt and preferred and

3. the receipt of common equity from its parent, MSU'.

4. ,

5. Q. Mr. Lurito, you indicated that in estimating the proportion of external

6. capital needs that will be represented by either new debt, preferred or

7. common equity, you assumed that the capitalization ratios will remain

8. constant. When you found that new debt or preferred had to be issued,

9. what cost of debt.and preferred did you assume would prevail?

10. A. New debt and preferred was added at rates which largely reflect today's

11. historically high capital costs. Specifically, new first mortgage debt

12. was assumed to cost 10%; new preferred was assumed to have a dividend rate

13. of 9.75%. This was done to avoid the possibility of underestimating the

14. future cost of external capital.

15. Page 29, line ICl, shows the increase in the weighted debt component

16. of the overall rate of return resulting from the rising embedded cost of

17. debt due to new debt being sold at a rate (10%) in excess of the embedded

18. cost. Line IC2 shows the same phenomenon in terms of the weighted cost of

19. preferred. Line IC3 shows a constant weighted cost of equity because it

20. was assumed, as already mentioned, that the cost of equity remains fixed

21. at 13%. Line IC4 shows the rising overall rate of return that would be

22. necessary to allow due to increases in the weighted cost of debt and

23. preferred.

24.

l 25. Q. Why is it necessary to determine the future overall rate of return?

26. A. Since we are interested ultimately in the future behavior of certain key

27. financial indicators, such as various measures of interest coverage,  ;

1 l

1. it is necessary first to determine the overall rate of return so that an

2. estimate of after-tax dollars of return can be obtained.

3.

4 Q. How were such estimates derived? .

5. A. To estimate the dollars of af ter-tax return for any given year, the 6.

average total capital (line IAl) was multiplied by the previous year's

7. overall rate of return. This produces a conservative estimate of the

8. dollars of return because it assumes that regulation vill base its f air

9. rate of return determination on historical capital costs rather than on

10. proforma costs. The dollars of after-tax return generated by applying

11. this conservative procedure are shown on line 1H of Page 29 .

12.

13. Q. What other financial variables must be estimated in order to permit a 14 comprehensive coverage analysis and how were they derived?

15. A. The following variables are needed: 1) AFUDC, 2) depreciation expense,

16. 3) interest, and 4) income taxes. The amount of AFUDC in each year was

17. estimated based on the Company's forecasted amount of AFUDC adjusted to

18. a 10.4% overall rate of return.

19. As far as depreciation expense is concerned, the Company provided

20. its estimate of depreciation for the years 1979 through 1988. The

21. depreciation expense for each year 1979-1988 appears on line'IE of.Page 29.

22. Interest expense was derived by multiplying the average total

23. capital, line IA1 of Page 29 , by the weighted cost of debt as shown on

24. line IC1 of that Page. It should be noted that in computing interest ex-l

25. pense it was assumed that the additional debt capital necessary to meet

26. the construction program in any given year was always sold at the

27. beginning of the year rather than in the middle of the year. The effect

l s 9 i

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1. of this is to overest2 mate the Company's interest obligation.

2* Taxes were calculated by subtracting from the af ter-tax dollars of 3* return the interest and the AFUDC and multiplying this result by the tax 4 rate divided by one minus the tax rate. In this calculation the tax rate

5. was assumed to be 35% in 1979 and beyond which is somewhat higher than the

6. approximately 30% affective tax rate the Company had in 1978. Line IG

7. of Page 29 shows the estimated taxes over the 1979-1988 period.

8.

9. Q. Did you also estimate future net income available for equity?

10. A. Yes I did. This was done by multiplying the weighted equity component

11. on line IC3 by the average total capital per line 1Al. The purpose of i

12. deriving this variable was to test the percentage of equity earnings

13. accounted for by AFUDC. .

14.

15. Q. Since the company has an indenture requirement for its first mortgage

16. bonds, did you also compute the variables necessary to determine the

17. interest coverage available to the Company were it to finance its I

18. additional debt capital needs with first mortgage bonds?

19. A. Yes I did. In determining interest coverage under an indenture it is

20. necessary to derive the numerator and the demoninator of the fraction

21. which produces the indenture coverage ratio. The numerator is the net

22. earnings as defined that can be used for coverage; the denominator is the

23. relevant concept of interest. In the case of LP&L's indenture require-

24. ments, net earnings, as defined, are arrived at by deducting from

25. operating revenues plus net non-operating revenue all operating expenses

26. except income taxes and adding an amount not to exceed 15% of operating

27. income. Thus, it appears that about 15% of AFUDC can be included as earnings

l

1. for coverage purposes. Interest expense as defined includes the interest J l

2. on all outstanding first mortgage bonds plus the proforma interest on

3. additional bonds to be issued. The indenture indicates that in order for

4. LP&L to be permitted to issue new first mortgage debt, its before-tax

5. coverage must be at least 2 times for a 12-munth period.

6.

7. Q. Did you compute net earnings and interest for the years 1979-1988

8. consistent with LP&L's indenture?

9. A. No I did not. I used a much more restrictive definition of net earnings

10. than is required by the Company's mortgage indenture. Specifically, I

11. included an amount of AFUDC equal to no more than 10% of operating income

12. per the SEC requirement. For the sake of conservatism I have used

13. the level of dollar return earned in the prior year as the basis for com-14 puting the net earnings in a given year. As far as interest is

15. concerned, I have conformed to the definition per LP&L's indenture.

16. Indenture interest appears on line IN of Page 29 for the years 1980-1988.

17.

18. Q. What measures of financial integrity did you analyze to determine the

19. impact on LP&L were AFUDC capitalized at a 10.4% rate?

20. A. Shown on Page 29 are several key financial indicators generally considered l

21. to be relevant when considering the ability of the Company to meet additional

22. capital needs. These data provide a basis to measure the Company's general

23. financial health. The financial indicators shown are the before and after i

24 tax earnings and cash coverage of interest (lines lJ 1-4), the ratio of

25. internally gen.;ated funds to construction expenditures (line IL 1), and

26. the ratio of AFUDC to equity earnings (line IL 2). On line 10, I show l

27. indenture interest coverage. Tne various coverage ratios provide evidence

. e

1. of the ability of the Company to meet its need to obtain additional

2. capital. While the ratio of internal generation of funds to total con-

~

3. struction expenditures is a relative measure, it provides an indication 4 of the financial flexibility of the Company. The greater the internal

5. generation, the greater ability the Company has to take advantage of

6. favorable capital market situations. The ratio of AFUDC to equity return

7. is frequently employed as measure of the " quality" of a company's earnings.

8. In order to provide a basis of comparison, sOnilar financial indicators

9. are presented on P, age 29 for all publicly-owned electric companies whose

10. stock is traded and whose debt is rated AA or A by Moody's. There are 34

11. companies in the AA rated group and 30 in the A rated group. Since the

12. data for individual companies within the AA and A rated groups vary

13. significantly, I have shown not only the average value for each financial

14. indicator, but also the highest and lowest value. Tnis information

15. appears on lines II A-E of Page 29.

16.

17. Q. What are the results of your analysis?

18. A. Consider first the ratio of AFUDC to net income available for equity

19. were LP&L to capitalize AFUDC on its CWIP at a 10.4% rate. (line I L 2)

20. For the years 1980 and 1981, the ratio is 112% and 120%, respectively,

21. which is far above the typical A or AA rated electric (line II D).

22. Over the 7-year period 1982-1988, LP&L's ratio averages 28% which is

23. below the typical electric. This analysis shows that while it may be

24. appropriate to capitalize AFUDC at a 10.4% rate beginning (say) in 1982,

25. it would not be appropriate at the present time.

I

26. This conclusion is reinforced when one considers the extent to which

27. internally generated funds will offset construction expenditures.

1. For the years 1980 anc 1981, the Company on average will be able to

2. finance only 3% and 11* of its construction program with internally

3. generated funds. Over the 1982-1988 period, LP&L will be able to finance 4 nearly 95% of its construction program internally. This analysis clearly

^

5. shows that it is not appropriate for LP&L to capitalize AFUDC on its CWIP 6 at a 10.4% rate for the near-term future. Starting in about 1982 when the

7. Company will be able to generate internally 77% of the funds it requires

8. to meet its construction program it might be appropriate to begin capi-

9. talizing AFUDC at a 10.4% rate.

10.

11. Q. How will the capitalizing of AFUDC at a 10.4% rate affect the Company's

12. interest coverages?

13. A. As Line I J l of Page 29 can be used to show, the Company's before-tax

14. earnings coverage of all its interest obligations were it capitalized as

15. I have recauended and if it had the same cost of debt as the MSU system,

16. will everage only 1.96 times over the 1980-1981 period; its before-tax i

17. cash coverage will average only 1.54 times (line I J 3). Both of these

18. coverages are will below the range of both the AA and A rated electrics.

19. Af ter-tax aarnings coverage will average just 1.96 times over the 1980-1981

20. period and after-tax cash coverage will average 1.54 times. After 1981,

21. the situation can be seen to improve quite dramatically.

22. As far as LP&L's " indenture" coverage is concernad, line I O can be

23. used to show that this coverage will average only 1.32 times over the 1980-24 1982 period which is well below the 2.0 times indenture restriction.

25. This shows in the starkest terms that were AFUDC capitalized at a 10.4%

26. rate, LP&L could not issue the debt necessary to meet its construction

27. program. Over the 1983-1988 period, ir. denture coverage averages 2.35

1. times which again suggests that in this period of time AFUDC could be

2. capitalized at a 10.4% rate without jeopardizing the Company's financial

~

3. health.

4 What this analysis clearly shows is that LP&L's. financial indicators

5. mean that the Company will not have the ability to meet its proposed

6. construction program over the next two to three years while maintaining

7. a reasonable degree of financial health if it capitalizes AFUDC on its

8. CWIP at a 10.4% rate. Accordingly, I recommend t% a lower rate than 10.4%

9. be used to capitalize AFUDC along the lines suggested by Mr. Louise 11e.

10.

11. Q. Mr. Lurito, have you reviewed the testimony, exhibits and cross-examin-

12. ation of Dr. Langum, the Company's rate of return witness in this case?

13. A. Yes I have.

14

15. Q. What methods did Dr. Langum use in arriving at his 15.5% return on equity

16. reconmendation?

17. A. Dr. Langum's basic approach to the cost of equity is the to-called

18. " comparable earnings" method.

19.

20. Q. Would you describe Dr. Langum's application of that method?

l i

21. A. Dr. Langum studied the allowed rates of return on common equity for

22. electric utilities by State regulatory commissions in original cost

23. jurisdictions during the 1975-1978 period. (Langum Testimony, p.28) 24 He analyzed 25 orders where return was defined as operating income plus

25. AFUDC and found the median allowed rate of return to be 13% and the mean

26. to be 13.14% (Ibid., p.36) For 78 rate orders where return was defined

27. as operating income and when AFUDC was excluded from return, the median

i

1. allowed rate of return was 13% and the average was 13.13% (ld.). The

2. median consnon equity ratio for all 103 orders was 35.09% and the average

3. was 35.60%.

. 4 Dr. Langum considered'it necessary to adjust the allowed rates of

5. return to reflect the fact that LP&L's proforma equity ratio at August 6 31, 1979 would be only 30.622 as compared to the 35% plus equity ratios

7. for the electrics he analyzed in the 103 rate orders. (Page 26 of Ex.

8. JKL-1) His adjustment produced a 14% - 14.5% rate of return. (Page 42

9. of Langua Testimon.y). Because, in Dr. Langum's judgment, there are

10. "special considerations" relating to LP&L, he increased the 14% - 14.5%

ll, return on equity by 1.5 percentage points to 15.5% - 16%. (Page 53 of

12. Testimony)

13. Dr. Langua also analyzed the rate earned on equity, equity ratio and

14. component for equity for several groups of non-regulated firms, such as those

15. included in the Business Week corporate scoreboard, all manufacturing

16. corporations, and a 53 industrial company group with a Moody's "high

~

17. grade" ranking. (Pages 31, 32, 33 of Ex. JKL-1). On the basis of his

18. analysis he concluded that the indicated fair rate of return on equity

19. for LP&L is 15.5% at a 30.62% common equity ratio. (Page 62 of Testimony).

20. Dr. Langum compared the historical price-earnings ratios and dividend

21. yields for MSU with those of the S&P 500 group. (Page 39 Ex. JKL-1).

22. He also selected 3 current price-earnings ratios for MSU and determined

23. what return on equity consistent with these price-earnings ratios would 24 be necessary to produce a 1.16 or a 1.20 market to book ratio. (Page 44

25. of Ex. JKL-1). Based on his analysis he concluded that the return on

26. equity necessary to produce a 1.16 - 1.20 market to book ratio is no less

)

27. than 15.5% (Page 77 of Langum Testimony).

l l

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1. Q. Mr. Lurito, would you comment on Dr. Langu='s conclusion that the return

2. on equity LP&L should be allowed is 15.5%?

l

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3. A. As far as Dr. Langum's analysis of the 103 rate orders is concerned, it  ;

i 4 is interesting to note that the median allowed rate of return is 13% at

5. a 35.09% median equity ratio. I have indicated that in my opinion the

6. fair rate of return on equity for LP&L is 13% to 13.25% at a 34 equity

7. ratio. Using Dr. Langum's own method of adjusting the return on equity

8. for equity ratio differences per Page 26 of Ex. JKL-1 to find what return

9. on equity is consistent with my 34% equity ratio recommendation, I find the

10. result is 13.18%, which is exactly within my 13% - 13.25% recommendation.

11. Even Dr. Langua agreed that the allowed return to MSU's subsidiaries that

! 12. he shows was 13.25% at a 34.7% equity ratio. (TR 240). Thus, Dr. Langum's

13. own method shows that a 13% - 13.25% return on equity is consistent with

14. a 34% equity ratio. This is not to say, however, that I agree with the

15. princi ies f underlying Page 26 of Dr. Langum's Ex. JKL- 1; I don't.

16. There are several fallacies inherent in Dr. Langum's procedure per

17. Page 26 of Ex. JKL-1. They are as follows: Fiist. Dr. Langua's procedure

18. of adjusting the return on equity for equity ratio differences implies

19. that if the given utility subject to regulation had the same embedded

20. cost of debt as the average of all investor-owned utilities, which Dr.

21. Langum used, the cost of capital he would recommend would be identical

22. to that implied for the typical investor-owned utility. Indeed Dr.

23. Langum agreed that this is the case. (TR 216, 219). Thus, his procedure

24. would have all utilities being allowed the same overall rate of return l

l 25 . if they all had the same cost of debt. This is prima facie erroneous

26. because it assumes thatbusiness risk differences can be completely offset

27. by capital structure manipulation, so that all utilities could be viewed

( m l

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1. as being of identical risk. Second, Dr. Langum's procedure implies that l 2. his recommended return on equity for LP&L depends on the embedded cost 3- of debt of all investor-owned electrics. To see that this is the case, 4

assume that the 1977 embedded cost of debt for all investor-owned utilities

5. were 8% instead of 7.3%. Were that the case, Dr. Langum's equivalent

6. return on equity for LP&L vould have been 13.8%, instead of the 13.95

7. he shows on Page 26 of Ex. JKL-1. Thus, the higher the embedded cost of

8. debt for the investor-owned electrics, the lower would be Dr. Langum's

9. return on equity recommendation. */.aw the return on equity that LP&L

10. should be allowed to earn can possibly depend on the, embedded cost of debt

11. of all investor-owned electrics is bayond my understanding, yet this is

12. what Dr. Langum's procedure implies. Finally, it should be noted that

13. Dr. Langum's procedure implies that a 1 percentage point fall in the equity 14 ratio below the 35.6% equity ratio he used requires a one-half percentage Point

15. increase in the return on equity. (TR 218). He had no studies to support

16. this conclusion, (Id_. ) .

17. As mentioned, Dr. Langum's equivalent return on equity analysie led

18. him to a 14% to 14.5% result for LP&L. However, as. a matter of judgment

19. he marked up this return on equity range by 1.5 percentage points for

20. "special considerations" to account for LP&L's greater risk. These

21. considerations were: (a) LP&L's low ratings on its first mortgage bonds

22. and preferred stock (Page 43 of Langum Testimony); (b) LP&L's extremely

23. large utility plant additions and high degree of external financing

24. requirements (Page 45 of Langum Testimony); (c) LP&L's low quality of

25. earnings for common (Page 49 of Langum Testimony); and (d) LP&L's high

26. degree of attrition (Page 51 of Langum Testimony). The fact that Dr.

27. Langum attenpted to make an adjustment for these factors simply underlines

r ~-

1. the problem faced by analysts trying to apply the ." comparable earnings"

2. approach. Had Dr. Langua applied a method of determining the cost of

3. equity based on a market-oriented approach, such as the DCF, and he did

4. not (TR 260), he would not have had to make the kinds of " judgments" he

5. made. Furthermore, this risk adjustment is f allacious because Dr. Langum

6. apparently doesn't understand the significance of the fact that LP&L

7. obtains all of its equity capital from its parent--MSU. Hence, if Dr.

4. Langum wanted to adjust for risk differences his analysis should have

9. focused on MSU vis-a-vis other electrics and not LP&L vis-a-vis other 4

10. electrics.

11. Dr. Langum's analysis of the returns on equity, equity ratios and

12. components for equity for his groups of ron-regulated firms failed to

13. measure in any way the differences in risk between MSU or LP&L and the 14 companies in his various groups of non-regulated firms. He made no

15. studies of the volatility of LP&L's or MSU's earnings as compared to

16. those of non-regulated firms. He made no beta ratio analysis, although he t

17. admitted MSU's beta was lower. (TR 244-45). Not only did Dr. Langum

18. perform no relative risk studies, he didn't even show the market to book

19. ratios for his non-regulated groups. When asked what return on equity he

20. would recommend for a utility if two comparable risk companies earned

21. different returns on equity, he indicated that he would average them.

22. (TR 205). Needless to say this is no way for regulation to proceed.

t 23. If a group of companies of camparable risk to a utility earned 20% on

24. book value and had a 2.0 market to book ratio, there is no reason whatever

25. for regulation to permit a 20% return on equity, because 20% is clearly l

26. not required to allow the utility to attract equity capital on reasonable

27. terms. Nowhere has Dr. Langum indicated that unless LP&L (MSU) were

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1. allowed to earn at ratas comparable to non-regulated firms, capital

2. attraction would be jeopardized.

3. As regards Dr. Langus's price-earnings ratio' analysis as set forth 4 on Page 44 of Ex. JKL-1, it should be noted that this analysis assumes

5. that various price-earnings ratios will remain constant and simply asks

- 6. the question what earnings per share or what return on equity will produce

~

7. a given market to book ratio. Such an analysis suffers from the use of

8. spot market situations to determine the required return on equity.

9. I have already ' discussed in detail why the use of spot market analyses

10. are inappropriate.

11.

12.

13.

14.

15.

16.

17.

18.

19, 20.

l 1

21.

a 22.

23.

l

! 24.

25 .

26.

27.

l

a s .

Before the PUBLIC SERVICE COMMISSION of the STATE OF LOUISIANA Ex Parte LOUISIANA POWER & LIGHT COMPANY (Docket No. U-14078)

EIRIBIT of RICHARD J. LUEITO t re l

FAIR RATE OF RETURN l

October 1979 ROSH LOUISELLE LURITO A ASSOCIATES.IEC.

krtnoton. Vrpne

l 1

9 . i I

i Page 1 MIDDLE SOUTH UTILITIES, INC. CONSOLIDATED COST OF OUTSTANDING DEBT DECEMBER 31, 1980

, (S000)

Amount Net Cost Annual Composite Company Outstanding Rate Charges Cost Rate (A) (B) (C) ,

(D) (E)

Arkansas Power & Light S 756,247 7.83% $ 59,227 Arkansas-Missouri Power 36,865 7.74 2,854 Mississippi Power & Light 278,057 7.36 20,461 New Orleans Public Service 126,250 6.94 8,767 Louisiana Power & Light 728,732 7.64 55,711 Middle South Energy System 400,000 9.29 37,160 Promissory Notes 320,681 13.22 42,394 Total long-term Debt:

12/31/78 $2,646,8321 S226,5 74b! 8.56%

Proforma:

Promissory notes S (81,590) 13.31% S(10,859) l Maturing debt (43,400) 3.03 ( 1,317)

L Sinking fund requirements ( 4,74 8) 4.82 ( 229)

Long-term debt issued in 79 105,000 10.67 11,204 Additional long-term debt 470,000 10.00 2/ 47,000 Short-term debt 373,440 11.50 2/ 42,946 Total Debt: 12/31/80 $3,465,534 315,319 9.10%

NOTr": 1/ See Appendix Page 1 2,/ Estimated

I .

l .

l Page 2 l

l t

l MIDDLE SOUTH UTILITIES, INC. CONSOLIDATED l

COST OF PREFERRED STOCK DECEMEIR 31, 1980

($000)

Amount Net Dividend Composite Company Outstanding Proceeds Requirements Cost Rate (A) (B) (C) (D) (E)

Arkansas Power & Light $171,350 $170,982 S14.020 8.20%

Mississippi Power & Light 37,881 38,053 2,384 6.27 New Orleans Public Service 19,780 20,006 965 4.82 Louisiana Power & Light 110,500 110,304 8,108 7.35 Total 12/31/78 $339,5111/ $ 339,3451 S25.4771 7.51%b Proforma:

Preferred Issued in 1979 S150,000 $147,362 S15,987 Additional preferred 60,000 60,000 5,850 2/

Total Preferred: 12/31/80 $549,511 $546,707 $47,305 8.65%

NOTES: b ee S Appendix Page 9 l Based on 9.75% cost rate l

l

TREDRETICAL Il1USTRATION OF THE " DISCOUNTED CASH FLOW" METis)D Civens a) Furchase Price = $100 per share at end of 1979 b) Dividends = $4.80 per share at end of 1980 c) Dividends and Market Price espected ta increase at constant rate of 3.22 per year, and therefore

• Market Frice at end of 1984 will be equal to $117.06.

To Flad The Capitaltration Rate which will equate the value at date of purchase of espected future cash receipts to the purchase price.

VALUE AT DATE OF FURCHASE OF EIFECTED FUTURE CASH RECFIFTS Cash Dividends Discounted at a Discounted at a Discounted at en Furchase Espected to Espected 62 Capitalisation Rate 102 Capitettaation Rate 81 Capitalization Rate Year Price Re Received Sales Price Factor 1/ Value Factor 1/ Value Factor 1/ Value (A) (R) (C) (D) (E) (F) (G) (H) (I) ._(E) 1979 $100.00 1980 $4.00 .943 $4.53 .909 $4. 36 .926 $4.45 1981 4.96 .890 4.41 .826 4.10 .857 4.25 1982 5.11 .840 4.29 .751 3.84 .794 4.06 1981 5.27 .792 4.17 .683 3.60 .735 3.87 1934 5.44 .747 4.07 .621 3.30 .681 3.70

% 1934 $117.06 .747 $87.48 .621 $72.68 .681 $79.67 TOTAL VAlEE AT DATE OF FURCHASE OF EXPECTED FUTURE CASH RECEIFTS a) Discounted at 62 Capitaliastion Rate = $108.95 (g b) Discounted at 101 Capital! ation Rate = - - -

$91.96 c) Discounted et 81 Capitalisation Rate = --

$100.00 EQUALITY FRODUCED AT 82 RATE

~

).5 82 = CAPITALIZATION RATE NOTE: t/ Factors taken f rom "Present Value of I" table. This f actor indicates the present value of I to be receind in the future in the light of a given discount or capitalisation rate. For esemple. $1 to be received one year in the y f uture, discounted by 61 rate, has a paesent value of 94.1c as shown in Colussi (E). Op S

u

~

l l

. i l

l l 1 Page e i

THEORETICAL DETERMINATION OF AN EQUITY CAPITALIZATION RATE USING THE DISCOUKTED CASH FLOW FORMUIA CAPITALIZATION RATE = DIVIDEND YIELD + GROWTH or 1=y+a where:

i = Capitalization Rate y = Current Dividend Yield = Dividend per share Market Price per share g = Growth = Anticipated Annual Growth Rate in Dividends per Share

Page 5 MIDDLE SOUTH UTILITIES l l

AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE 1965-197A l

$40 ._. .. - . . . , _'

-: 'C - ' -1 :-- :rl"E ::t=._ ~

in.n::i iln_;:' i n...ib.l.i.i iiiiii .E=.-+

Growth In 30 _ Boo Va ue

._. t._ .. . .._.- . ,; , Perio Per Share

- - + - - - ---

1;.

1965-78 6.08%

1 '

1- . . .. j. ' ' '

20 , 1974-78

, ,, t ,,a, , i a -  %

2.50%

2. .  ;,.

- p { y-._,q ;4 ' g l i agir j l T ,

,' l .l: ,

, . . . . . . . , , u, ,

n..i. . .n., , . , , 1976-78 3.78%

, i , . _ . , _ , .-

. .. o-, , , ,,o . , , , , . .... ,u,

.i, e i iii i-i 4,; "e - o i ... .! .i! i,,, ii!. i.,, .it. .i.i ...i un in n.i ... ' - i .. o, no nii pii in, int poi gg

.. . .:6. .

4 - ' l , .., itsi lii' iiji .eist assi iiij tjel t.i ., .i .l.,.j .,l i. . , . . .._...! , -.

lll: tiii ll: :lll lilj llll ri.e. ' ! 's' ltjj tit lllije lgij ijfl

-l g , .i

_m.  :.' :4F H Fu --

_=- :b..- *

.. .. : p . -.

_._p:u--n=:--2.== en--:=

9  :

m "'.n . d: u-.---

q~"J"'p""-~ " . 2: n "=: .,.__::=  ; --- :- 1

.:-  :.. ..: 5 . .

8 - -

z.:,3

n n :"ng: =:==u g . -. .'~ :j ..u .u  : .2 ..n-""

.".. + 'n.=I~":n 2"r --- e- m.=

. =-

7 i:~~id55i5l IIE i : 1IU551UII:i.._f---

$3.00 _.

.._.4. _ . . . _ .

.......l....

m.__ ......t_..,.., . . ...- ,

. _ =

. ._._..._-.E t--

i i Growth In 2.00 . ........_.....,_.d.. , ,

Dividends t

t- ---

, ,, , Period Per Share j

. ~ "9. -. . .

a l

. .i . ,,.. ... .  ;,. ,,,

1965-78 6.56%

m_.- '"

__. . _a -___:. .. }d _ .

'i*

'n o o "*

or o" -

.....j..... 1'. 4. ' 'Ii8 I

,.!. . .; . .. i!!!

..4--- m i."iin up 1974-78

- 4

. .e m ph no io ini ini 4.32%

.it! siti i. . : : i . i:

j,:ii m..i,. . I ' :. .i':Oc::;  : a l i. illIli. s t i tier ,tli 1611 i. il llil tig; jit;

" " I ' ", *, ' ' I " ""U'" ""!"'l"" " " ' " " Uli

$1.00 d....*._'.1 J "# _..

1976-78 4.45%

n -- r __. --c m__ . --:

• 90 ._

- s t --:

rn:= =:

.80 __--. . -- - ..: *- *--n"q . - _g _. ._. _. ..:*;;u.u} _----

m _.-

g .

..e.. .. ....m.

^~._

- . n.--

.60 O -~ T ~ ~~--- i inia.is inifiRfil:Utift 6: mil-' nfMMs=da=-- r 25 5^ .MMth2t M: t ':1 . .C'.^..' ' - ~

.50 namenanamma m ammmmmmmahnamethumummesumiMMmm Faisuush 1965 '67 '69 '71 '73 '75 '77 '78 1

D ""

wam o h* 3" 1.

} h' IrG 1

i

Page 6 BOSTON EDISON AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE 1965-1978

$40 __ _ . _ _.

- _ =

.  : _ , Gro-ch Ir 30 -

Book Value

- 6' '

Period Per Share

, , .;  ;, 1965-78 2.41:

20 '

i

,L ,

i-

, j 1974-78 .85%

., , . . .o

,lll l,l

',: .l,,,

ll ,,..l l..l .. ,l,, .l' l,;[ ,,, ., l,, .l 1976-78 -1.88%

.in ,1,i .in ini ia .in .n., ,,o ..n ,,o e,, . . . . ,,,, ,,,, ,,o no l.., ,,;, ,,ii ,,o ,,,;

i ji lli it{ Illi iiil I!It illi liii late 'lle ll'1 list llti lili iiij etii lllt illi fili siti #1j

! 11 ill (fl lll1 I;il Illt Itil lili till I!il liii ital j!Il ill: 16il Ille illi l!!! i!ij l11; lit I il lil ill lill till illi t!!i lill 46l! illi illl i,ll llti llft liii llll liit (lj1 tjjj ltll ijj_

9 8

7

$3.00

, e - - - - a -

l _i_ , _i- c - . O ,

Growth In 2.00 -

, u ,

> Dividends l ,i! , ".,5e,,, . a.W. , ,. , , , , , .,

,J' Period Per Share n , , ,, , , , , , ,,

,,,i ,,i,c. , , ,,, o ,i u ...,,, , ,,,i . ..., i. , , ..,. .. , ,, . .... .,,

nn ,,,, ,, , ,,n ..o ,,, ..., ,,,, ,.no. ,, . .i., i.o ,,n ,,,, ia, ,,,,,,,, ,,,, ,. ,,,i 1965- 78 3.01:

jin i,ii I, i ini ,,,, nei no ,,o i.,in.n on nii n,i i.,i in! .ni .niini, ,in n,3I no lill lll ll l llll ill! ll l Illl lill lill lilli illi l1ll lill lill Illi I,l! lill lili 1,11 lill l 11

!!!i !il l!ii oli  !!n ii -

i lih!!n! ini unpin nii ini ;iii sig on op ini int ini ilj n 1974-78 0.00%

"I' 'i" "I'I"' "" "" U"h"' ""'"I"" "" '"' '"i I"i "" "U '"I H" I"' IHI

$1.00

.90 == 1976-78 0.00%

.80 __.

.70

.60 s-- - , .q..ag ==== -

.50 Miiisammmmmmmmmmmmmmmsmaerumumminis

-nameumam q 9

}

1965 '67 '69 '71 '73 '75 '77 '78 b iJ #

__ .__ - = -

I Page 7 I

i

{

DETROIT EDISON l

l AVERACE BOOK VALUE PER SHARE i

AND DIVIDENDS PER SHARE I

1965- 1978

$40 .. _ _._ . . . . _ . . _ _ . . _ __.._ ,....

...i........-....._.

--+--

g-j@'H-Q p =.dl.; .

m-- -

Crowth In 30 Book Value

_ . .-.. . . . .~... q . . -

Period Per Share w, -  : -

.. a . .-. . . : ..

'2^

2. -

I emW9- - 1

% m; b L, "

1965-78 1.15%

1o :i 1 - i :.., ., ,

1 o , "i n ,

20 1

' ' m w '

> " o tip tet-t*Mur 4 4 .' "

.- o.n:

'nsoni n

Ml , l  ; i , n-1974-78 -1.79%

r._ ..

. 1 ,  :,.

,u,nn i , i r , i u i i [um

.- m, n n q"....

n r.iii . 4 . .. i.,i i.i ,,;

..o

..ig .,,, i; io . ni, 4 . . ...' . .. .. o., ... n.' .i.. n, i i 1976-78 .21%

j'e3 Ijii ti!i !ali ..ij- i. 74. :s ;i' lii< lil; ll11 l# j fi.t est

!.it

.i

..i .' .?

.4.,l'..-

it'*; 'ij .I ti i itsi l i, t i

^ ^

e llI ll i j I

.i l '*.!.?t*

3 4 * * **# ,' .l.l .i.l

" " _'_.Il . ,,! _a.j j! .I l.t 7 ;' ' *l -

.' ,1ll1 '

' d" *' "" ' '" '"' 'd ' i l i

$10 -m 9 = ===

• 3={:. == u. :=

[ . . ,=. .n. -g= --4. " ==-t=w t=r-'" ~ ~a

--W:: --'

'4 4 ..:.: ; - n. . 7: '. : 4. . . : r :. .

" 2 - =

"""==** ~:=

24 t :.:; ~*

= %m:~.:

n -

l 8 ~""~~ :2 ==

- - --+

7 " Au t- m".d. u nF=n-- u:jnn.:n;g'E.p=+titu,-m-mu .

l E:"@ HME 5 3 MIEiiEEil5 5 5 m: pres'-

S3.00 - x_ .,

-..2....,_......_....._.e .;., .......... .....

. - +.. . .g. .. . _

4._.,.. .l... . , ... _.

i- '

. ..,. _ .._ i Ggg t.*.* i i l ;,-

, 1 2.00 .w. ,.. ,,p.,_ ,._ .. ,.., ,; u, ,

Dividends

. . ri +g . n;. y ,; , q .; ;i; i; l-Period Per Share

~, m- r- . . ;----t~

_ ..t y :-

.r .,i, .,,,,,h. ,  ;,, ,, ,,

,. .,. r .

. . ..na n

.n..: ... . u.. i ,i .

1965-78 .72%

.!1 ,b.i M___d.... . M_ ij ,'

on oir . on - n;re N._. . _4 M.,iin. ni o,",i Y!!N!$,

.. . . q . .g...,... si o -ni iisi hij p un ::o ii;; .,. , ; i . n - sin di ttd iH n il I

i n  ! ii 1974-78 .9 2%

$1.00 '"'

"4 " "'- I ". -' ' " '-. " ' U"'di -

"""U !H -

d I I l 'l 'I IH! l

.90

====" - .m ==r:= m: E:r- - 1976-78 2.39

__:::.;a:n:u:nl:.4 -:----

.80 -=~'"~":::"="~=="~

~~

.70 "_ENEE

_- 4.-

.60 d

n+nO5ffiMIFlidT riiihn u =-wr .r =m

~

12

.se .C.Ki _""'**1 :: s.H.H. _i .H E*:%Ki'- . . ..

ayg 1,6, .., .., .,, .,, .,, .,, ,,8

Page B

)

FLORIDA POWER CORPORATION AVERAGE BOOK VALUE PER SHARE i AND l DIVIDENDS PER SHARE 196 5-107 A

$40 _ _ _ . . _ _ _ . _ _ , _ _ . . _ . . .. ___ _ _ _ .---.. _.. _ _ _ _ _ . -

Growth Ii 30 _ 2 - Book valui 7 Period Per Shart a

1 -

1965-78 6.84%

20 . *

. e

i. .

v .

i

. i 1974-78 4.51%

..n. %o

.... + . - + . i- . > . .

.. . ., 1976-78 6.48%

p,i n., ini .i . .  ; ... .o , . ., .., ,o .- .. ..... , ,, ,,, i:

pit! 11 1 ell, it' .i i i. in si iel I'll a.it siel iii. i il it.lj. 't .it. si i ies ai itse Ilie elli !all .ill 6 ' 1 . . I! ' 6'il illi i:?} a t 11' tili lis' i'I' .i!. .i'i i.Il 1611 liai

$10 U"U" "U '"' '"' ' ' ' "" "U '"' '" ' ' ' " ' "' " '" "" " ' ' " '"!

9 8

7

$3.00 .

.~-

a-e '

- Growth In 2.00 =_:  :

Dividends

u. , 4

l. _u 4, ,  ;

, Period Per Share

.n . .

4

.::: ,;;; ,;;? ,, . '. .'". ', , '

"": .:: 1965-78 5.34%

.n, ,,n 4.. .,w.. ,,,, . .. ......',.,amm 1 .-

~

... ..o o ,,,,

..., ..., .. , .n.

1. 11) eli h lis7 ill' Itti liii l'. 'iii 518 .:st lia.jtia'  !!'il..' ill8 61'6 II.i .I's 'i, ill, ti!I }g74,7g 7.1gg l

illl llI; lill lill 1.ft 't61 14 li. . 'I attl lilli'ill 11 il: I! 1861 , stie ,tle ipsi is:1 ll18 ll l'll il I 'lli ll 'ili Ifil  :,l' f6 ili lift lit ! Illlli'll  !!!!

11 Ilslil .iii t' lill

$1.00 i

__ 1976-78 9.03%

.90 - -

.80 _

.70

.60 y=;..m:_mgg -usn+;manm=r. -.n -. - - .

~ ~~ ~T ~_~~.L.

GHE Z

.50 mannemensammama-ammmmme ._. ..___ _ _ ____ _ _ _ , .

'67 '69 '71 '73 '75 ID " D D'T j 1965 '77'78 U .

.L -

l Page 9 FLORIDA POWER AND LIGHT AVERACE BOOK VALUE PER SHARE AND

' DIVIDENDS PER SHARE 1965-1o7A

$40

,_..__.....d.

ui=lI !;h. l2:i!:4

~

- -+ ----:= : t =.  !:.u.='----. . . . . . . . . . . - . _ . . _ _ _ _ _

--- Growth In

., L.~.q-. =y::: __. .:l:: . t=:': .. . :::::= 1 ---- .=--'

30 _..._.................._.4

Book Value w . - - _....

. _..+. . . . . _1_. . .. ..-,

-. , Period Per Share

~. +- - , ,  ;- <,

1965-78 8.63*.

-4. ... ,.-.4 .m-20 ,

P t-- ----* , o i n 1974-78 5.57%

l I t -.i, M., l ,W.

-i--r-+0 4- - - - + -

i

.. . . .. .'o.. ..

1976-78 i., .* . -

i,. . i i.

_. .it . . ..i. .... i.., i.il 6.53%

i s ..i: - @ .

i, .si,

!. i , i iii. tie.

.sel i.e. ,,,, i!,i

.i.i - :is . ! ii., i !ist_ ._ti;i il6: siji

...i..._ . .. .i....,...,: -

stai

.iii lili leil

l.li ):.t.i.t.!t.. L.l4'P. . .: ...i!

i r

._ .. . .'.i..'.._' '

.. _i '

.. _s .'t .i .'.l.l i

• i Illi -

Illi lill lill -

llit -.

till liti Illi

.. e ll'

• 1.'; i' lllt 11ll l141 llll lltl ll11 ljij 9 ' M d ~= W2 *-4

• t #N" -

g IIf:NN@N:NiU{ 5 -iE :li": TIT 5N-5 @.E-d' - - -----

= q.::r :~.:: a.:nl:::rb..:.1:.u :1. ~ :,::al: . ::i: ..:- .:u us j:u:u.=:u--- v -

.:1:: !. .- :L:.nt: . =t :

7

+-

.*3. .=. .:= . T. ..:......=.. ::. l. .:....... ..-.=.._=....n .. .. ...=.

$3.00 .__.2.'... ..

.. _.'._...t.

. l. . . . . .... _ , .._ . . _ . _; .

..t"....

..4_ ... .....J...._...........

.. _. .1 .1l

....i _ ...... _. . % -

r_ A. .....4 Growth In i..,

_7. . . . ......I.._.... . . . . .

m..i

.. ; .. i, i-2.00 .. . . . . ,

1 0 Dividends

. q}

[. . . . . . .. .. ...- _,y 4...ea. _. I 1, Period Per Share

..p.. . , . . . . . ,. ._

i I

.__,.._..:.__;. I ..

i - .

e RF-

. .i.

e i . .

m -r. , 4_ * " '* '"' 1965-78 7.46%

. . . . r. . ;- .: -. C. ;,!:nn " .o " ,,o ,n '",'n,", n,

. . . _ 6..4. . . . . . . , .. . . - ' .. --i. .- . ......L

,,,, " o" n

., - n ..opin ini ini un un on

,- p:.. .. si,.

.... ini 1974-78

. :. : e

,* .tiu annul un ilu ini un 10.18,.

. .: . . ._ .. i _m _ ._..

, . .p ....f~.. ....

n_u ini in.

• ,... I t ""I"" "U "" "" "" 'HI '"i NH

$1.00 "N ' ~

i I ------ m e- Wirinw.1.w=:n 1976-78 13.23%

1 .90 - - - - - - --- --

.r .::: - 1 : ..f:. _.:t 7. .-..gt. T t

- g: t.:...  ::T.. : . ..g ....

, .70

'-~-

• ------ "-- =

~~

• 3= :-b= 'u -: ru " ar r -- -

i' I

!* ;$.~.;.*;1.';.; **" C:I.C. _ l

.60 - -

---= _+*--- - T ~ ~ .- _

i n.w. . i s.u. . s_ u. .r.r. 7.:m..

n.:p' . : .e. . m..x._

.  :. s y. n. u.m. . .a. .. ;=._= .=.=._.=_=_a_rsi_na:. _

. . . . u - _.._ -

'~~~"'~ ~

"* *

• W ~-' ' - " ~~

.50 1965 '67 '69 '71 '73 '75 '77 '78 D 0

Page 10

)

HAWAIIAN ELECTRIC AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE 1965. 1970 S40 ._.._.__.;._.__._..,.__._.___

I

+

30  :

1 Growth In

' Book Valua

.L Y

Period Per Share y

c' ,

1965-78 5.00%

20 =

1 ,

1974-78 4.49%

+

..T' ~u

i .i 4 i.

..i. 6 ide

.o ., . v.'.

o ,

4 i  ! +i u.'

6- i e *

• i i

i .. i .

,, . ~, ,

,a , ,

1976-78 4.41%

.i. . ., )

't! e i vi ..liesi , 4i is' i,ii 4,,e is,sa ins .f's,.:s i's

.ni . ., .c .in , .. .i, .i i:.. ,a :en .in ,ai. ,o .,n na

, I ite itil  !!il ett. ' ., 't in i,' .i; 4 . ' ti, ;ii  !;.i

'ist fi.i s'li i'll Illi

"" U '" '"' "' ' ' ""

$10 '" " ' '" ' ' thin nu 9 _ . _ _ _. - - . - = . --. - - - -a = = e n=.==-1-__ _ _

- ~. - _. .e _ ==;====u- . .:== ; -

8 -- -

7 --' - ~t- - = = ==: '- i : n = =- i r -- + ---- --

-,__: z

4-

, __ -

@3.00 -- ; , , ;_

I 1

l i

E '

Growth In 2.00  : L

, u Dividends

.x ,

.v.

s. l Period Per Share '

.i.

.cv- .i ..a ,

1965- 78 5.60%

, i se as .. ,. , , , , ,

.o,'

.i.e ri .is, s,i gg ,

l ,

-l tie 1.l .- . ti it i*, s. i.j no i n .o 4., 2,w+ r... 4, , ,. . , .in .o ,o , 4 ,, , 1974-78 6.91%

in! nu ini no i T .o ouj io t.., ..: ,; e,i un .ui .n .. . nu on un nn no

$1.00 '"A"' "' 5 'E '"' " ' "" " "" i ""l"" '"

.90

"""O " k" # " f "' " "

1976-78 8.06%

=

1

.80 -

.70

.60 Imnatscrit c ida HuiL=d.En m'i MMM=iEHimH==Imii=I= E:n - ~---

.50 =2in=_ra::=-: ..- .n= i=u mn==e .=; ---u=_. , _ 5m . . . .- - - --

1965 '67 '69 '71 '73 '75 '77 '78 e

ag' --

j i b

Pap 1

l KENTUCKY UTILITIES AVERAGE BOOK VALUE PER SHARE AND I

DIVIDENDS PER SHARE i 1965-1978 .

540 . _ , _ _

.. m m m. y. - . ___ .; _

.. l. .......l;

--~~-

aa- L=: :: . . : t : u- *

.t=.="I-*~ -- n .=;; :t: :d:r::iu=:--..._.,.tnuin ' ! - --* ? - ~ m 4 :t=%q +

~

- * ~ Growth In 30 .,_ . .,.. . . , .. Book Value

,4_._.,,..,.... . .

...._..~{......-.... - ..... ....t. ...

. . . 4...,

Period Per Share

...t+++++-~

I%~'*q* -*+4

~., -

.g7 .

J -'

_. . , 1965-78 3.54%

20 Y "** M "

l '

p ;M .e e: m ;, ,, . t,i! A h

.i, g . ; ... ._i......--P.

J.

--.r lm 1974-78 1.22%

j.

....,_.r-

. .;- - Mi- -+

+-

t1 Tl .

d_ .

!;; ;l W. $. U U. M.

nu nn

.. .. . . ... u, ,a ,,,,

1976-78

. m g n nn . ' "0

.39%

i .... .

. . . ,. ..o .pi im .. , ,n. 5 l't'I.. .' . Iu;,;.t.it:

ist, i:, .:ia  : - ) _ _e e64i ,,9)

s t I

r. *e.; .4.i j seeg

                                                    .{g.,

i . l ji sti  ;,it

                                                                                                                                                                            '4

_ '! i!st EI, T. II

                                                         ; :llii.                        .                   -.'                                              les'        _.         ;tle           tiil           i       j         j{           il      -

i j i I;l

                                          .l i h. a~ . . . '.
                    ._le :
                   .u ,.l.l.i                                                                              ...i 'I:.              .. a.               ...,n.* .-

e . 1._4-m i: .in . .l i. i. l h- I i. - l-l

                                                                                                                                                                                                                                                                     .           l           l          t_..
        ~
                    }+'sti'                                      l                     ! ...                        I                      'l                           l'           *t'as;l!8                     .lh lll                     lI         h          l           ll     ll              ll u.m                                                                                           "p                                               .. g== " .: _h=rew 9     =-ha s=-.          : . T m --"h-                                                                              '4..: " .g.,.t _h..-=-                                                                                 -

8 EM NN ~ ~ i N M*NE S-~*~ ~~ 7 EIN N d*I N NN!'I 'N!N N' : --- i i I n un - i .=;=nh-e:==lnn!n nn:r= n :d: :.= . : =i:::ud:  :: - unln:=. u:: :m=e.l:=-:n. :m. p >

$3.00 . ~. . _

_. 1,. . ._ .3.. . . 1

                                                                          . . m.        _. ; . ._. . . . ..l ] . . . ....
                                    . -..                                                                              ...                     ....                        ._       .i                :.       ..

p_ 4,.... . % ., . . p . . . . . . . d . 1 . . . . . . L. . .. . 4.

                                                                                                                                                                                   ~.1...

_ . ... . . ,_., ..y......1......t........ ........ ._ , g..

                                                                                                                                                              . 1._._.+"     . . . .. ~$ *:                     .,,
                                                                                                                                                                                                                                                     .1                      ,

Growth In 2.00 . ,_ .. .... f g. m . - 1 .. , Dividends u q. .. . ,p .. l .y.m

                                                                                                                      . . p .,g ,.4,              _.,.g.

• 9;- Period Per Share

_ ;. .y. - y. n$C ',,',R M;; l . N ,;

m. .- 7r  ;;.7

                                                                                                            - .7.

_.ge.... u.. . .- 1

                                                                                                                                                                                                                                          . u.
                                                                                                                                                                                                                                                               ,       g,              , , y.

i. g; i n i... . . T. .. . iii p ,- j . .;,  ; , 4.ji ,,,, ,jii _. m. .a. .... . ,._. .. .. . . ... . . . _

                                                                                                                                                                                                   . . .        .in            ,,         i  n,, .n                          ni .ni                i..i         1965-78    3.48%
                                                                             ... r,,...,                                                                                                                                       o
                                                                                                                                                              ...}..q.I t..                                                                                                o. u_ o nu i:                                                                                                                                                                               n,                               ,o in 1                      .,
                          ,.   ..        ,4                  ...                                                . . .                          . . .u.                       .                     .i,i         .-.

i ilee 14tt ... III I s11 1.,1

                                                                        .it             .        '
                                                                                                                        -_'s
                                                                                                                                                     .             ,,-              ,ji:           118)                            l      i      ll     l                      l          l4l      It       t

i. ' 1974-78 3 3G%

l n i s,o on e,! ._ . uh ij n i i .ni ti i n .o..u...u.n i; i p'n o ~ .. .. .i _: . -- .,1

     $1*00 h '"i "" '"'                                              '     '* "                                                      ;" "' "" U" "H "                                                                 I             III    I      I           '   '       III' IIII
                  --                     =m                                                    -

1976-78

                ' --                                                   "=              = b ~ 4 s=m"-                                                                                                                                                                                                                       3*49%
          .90
                --=:-

_" .. u r: . n p- "ir,3 u4 : :.=.. ___- - -

                                                                                                                                                                          ==~
          .80                                             -                            - -
                                                                                                                  - - ~ " - ~ " * - - * -
                                                                                                                       - - - + -
                                                                       "~d - "" ~h===p~                                                    ~ ' -                   ~
          .70   '---*
                                                                    + .. i .-. 1~~                 M....

.. C - *---- ..

                                                                                                                      "  e _.   +                 8~ - .
          .60                                          -                             :

MhMH stiHMUi siHii Mtimslish iM iiiii a s n +M-bu =

=HliHEur7- E' *HL.RHi ' i H-MM E-Hi :i-IfMHEE-=. 1--" : ~*

          .50 namanannammmmmasummmmmmmmmmm m                                                                                                                          mmmmmmmmmm mmmeimum                                                            mammi                          mammmm 0

1965 '67 '69 '71 '73 '75 '77 '78

l l l 1 Page 12 LONG ISLAND LIGHTING AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE 1965-1978

    $40    _.                                             . - -                       - _ -                   - _ - - - - - . _ . - - - _ . _ - - - -                               - - - - - - - -

Growth It 30 BookValuf Period Per Shara 1 , -i 1965-78 2.91% 20 m , t  ! nv & I alw -'T *t .

                          .                             m                  o                .. * .                            n...                                 ,                         i.                   1974-78       1.35%

o,, .. .. . ., . .c . ., .,  :,. n. ,

            ....       .. i .           .      .6           .gr      8T-                     I.      .            i                 1                        ..        4      .       .I
            ,,9 .oi ..y ... . .u n.                                            ...,      , .           ,     . .                     .. .           ....      . ..   ... + ..           .,i, .           ...,

1976-78 3.73% mn- !in ..n ni. ...u.a. nn u.n..n n., i n i. ,l. .n in, no .ni n., .... .... n., .o! lIll it{F'] I l il6i till slit liii I:6. It's lill til! ell elle l'i. s{l. itse list ltij iiii liit liil pit iill il i ini in, int nu un Uli uti di' ni! ini  :::t tiii liii !ni ini iin int ini ild iiii iti till lin !ni iiil i.tl Illi 6i iiii in: liii :Hi tilll:lli liii illi itil ;itt lill

    $10 9                                                         +

_i 8

                                                                                                                             ^

7 4

   $3.00                                      ,                                      ,

_._.' Growth In Dividends 2.00 . l H!

             .o l .'"

on ... .

                                                            .n.
                                                                                        ..            _n                                      % .,
                                                                                                                                                      . .'!v. .      .. .
                                                                                                                                                                             .      ..          o.

Period Per Share u,, ,,, .n, o, ,, . en ... . . . .. ., . .,. , . .. ..., ..., .. . ,, .

                                                                                                                                                                                                          .o
           .,g on            ini op .o. .y. ni. ..o.                                         .g             s..*  v e .                       -
                                                                                                                                                   'n. ni n.. ..

un

                                                                                                                                                                                    .e no                ."'

1965-78 3.76% no on nn nu n,i 6..i. .n . . e i., vil ni; un oc ..o un nii un .n. no un g liil 1111 itii til w il P.ill~lill liti lili 18.i alli It's at ti illi Illi liil 1181 ti!! ll!! titj , !ni in sig n!nnijnii nii un on op en u! iin on nh en i!n it!! un ini ihl 1974-78 3.65% l iin in iii* ni sininii 'ni ni i!!i .in n.' ini un un <ili :in iin inj ihi nii ini , $1.00 " l .90 -._. 1976-78 3.77% l

     .80
     .70

(#I55Gisi Mi=tssac -~ 2- -: 2- 7:$ iinisiExara=.t g, -._..__==-

     .50  m                 anaa      m        eammmmm mmmmmmm mmalammmmmentum mmmmmu
                                                                                                                                                                                                                  .g.

1965 '67 '69 '71 '73 '75 '77 '78 e - v L s

l l l l l

 .      .                                                                                                                                                                                                                                        \

Page 13 l l l NEW YORK STATE ELECTRIC & CAS AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE I t 1965-1978 S40 ._ _ _._ _ ..._.__._ , _ _ . _ _ . . _ m_y- ..__._- _ y-.._..

                                                                                               +
                                                                                                                                                                                                                -                  Growth In 30                                                                                                                                                                                                                            Book Value
                                                                                                                                                  ,                     ,                                                 Period Per Share 1 -
                                                                                                                                                              .                              i                            1965-78         2.68%

20 .. . .

i. .. . . .~ , ,

l

             ,         n              -i-                             u              -

i . i i i 1974-78 .78%

                     .i.                .         am : =s ;                           ,                .
                                                                                                                                         .                     +               ..                      .
                                     .p.                                              6-               4-                                .                                        i
                         ..o ...i..'
                       . .                                                                                             e                                       I                                       6              .
                   .,                                ,             ,.               .,                 4                                                    .,.           , ,
                                                                                                                                                                                                      .o              .

1976-78 1.98% on ,,;. .,q ..., , ,. ....i..,, .i. . , , i. , .

             .i.i        iiej   .iti      .tsi           . - ,     -in      e it         t  ,e   t.            ti..       i .. in-i.i   li.i             .         . ii..       i, i}:iis 1,il         :4!!   itti       1
                                              ,ti        . i:    .;i.       :t!            i.i   iiril.11 at!!)              .i   I,si      .

i . l. . i' it i..:

                                                                                                                                                                                                    -t   i .i    .it
             "" "" ""                      '"' '"                "U               '         "    """ "'d"                     "       '"              d'          '            '" " "                ""
    $10 9

u __ .

                                                                                                                                         ;- ,==-                                                               ;.--.

7 -

   $3.00 I

Growth In 2.00 Dividends

                                                             .,_                                     .;                                                                           l                    .                  Period Per Shar_e
            .                       .            .             ,. .                 ...                                .               1        x           e                     ,                    ,
                                                           ..n        .               i.               .       . .                     -
                                                                                                                                                         . .o                     .                    i-                 1965-78     2.77%
            ,...        .          . .         .     ....,              ,.          1 .. .           .-.e . u                       ..        .         ..                .                         . ..         . .
            ,,..        ,,o     . . .;       n.            ; , ,: w, m . . v.                        T      .
                                                                                                                   .ino           ..          o         . o               n;           , .
                                                                                                                                                                                                ...n...          ..n ii.,        in. no        .no           .oini                   ni       on      . qso       .ni.ni             'i.. i,'          n.        ..i. o.i no                ,<
                                                                                                                                                                                                      'l-    .

n'i 1974-78 3.65% on nii i;i c ii' on ini on ,ia n oli .

                                                                                                                     +.n          o.       .ni        ou             :. ns          ni.       . ol. o ti:!
               '"'      "^ '""" ""                                          " " "                    I"            #"'"d"                                       "            '
                                                                                                                                                                                      ""                U' ' . ' "        1976-78 l'"'
   $1.00 2.47%
          ~
     .90
     .S0
     .70
     .60                                                                   _n.u_;=a__n_4. u ==2_=ma. an r-51=ti n=_=.u=e=t===- =r-
          .u.n__i.u..n_:n
           . .                ___      w._.e. ._n_u__nsu_.                           ..                                                                                                         :==..=--1
          ._e-M_g.+           e_m-                 .*yee                   =6*=ew                                                                   6 +M-

• wea

     .50                                                                                                                                                                                                                               ,,

rr 9 1965 67 '69 '71 '73 '75 ' 77 '78 0 J Q;9']l y ( )'a

h Page 1; 1 PACIFIC POWER & LIGHT l AVERACE BOOK VALUE PER SHARE AND l DIVIDENDS PER SHARE 1965-1978 S40 _.- - Growth li 30 Book Valui Period Per Sharl l i i i

                                                                                                      ,                                                                                                1965-78             3.65%

20 _,<. a6 .EL i

                                                            ,                      ,:l .. e                             l                     .i-            .L              .l.                       1974-78             2.19%
                                                     .      .    .                 . . .            .i.                              ,         ,               i.            ..                   .
                 ,.      ....    , ,       . , ,  , ,i , ,         ,. ...        ..zo           , ,.                .             ,,        ,         ,      .,.             . .. .          .
               ...,      ....    ...,      n n.,, n . o no.. m ...              ....    ....    ....           .      ...      .          ...         .  ...... o           .., .            ..,

1976-78 2.86% ni, ... c.,wrorno~.u. ..., nii on ..... n. .o. . .. i.ii ini ,in inuni, .... . . . . o. ilil fit llll lill till lill till stil litt alli Is: t. ta jili iegt illi sij li!j ia).i iisi :lll tti iiij  !!l lilI liti 111f Ill! Ilit illi till iiii Ilil I 11 till lill lill Illi fl81 lill till ll15 lit li" "I d' UU ""IN "" 'U' "" "' UU'" '" "U 'U '"' UU "U "" '"' 'U

       $10                                                                                                                                      -

9 8 7

      $3.00 I
                                      .I I
                                                                                                                           ,         a Growth in 2.00       ,                            ,                                                    ,                   ._             l                                                                               Divideuds J: nll
              .n        no on u..      .'Io i

d.

                                                       .. 4 m         , .
                                                                         .!l
                                                                       ..o o
                                                                                               ,    lll'. .O.?.P
                                                                                               ..x..uc.~. .. .                                        .. ..         ...

Period Per Share

              .o        .... o.. ,,              .u. .... ... .... ,4..                 ,.        ..m.     .        . .. .                ...     , .    ....       ...  ..~. ... .o o     I   n. nn u, in ,in ..o on .oww.. ....- ..o .... .... ..n .... .... ,.o .n oo i."                                                                                           ,      1965-78            4.16%

le I lt i IIII lit illi litt bli' ili4k il. 4til IIii illi lill lill illt l'Il liti 1998 IIll i.'I Ili ti i n i lih o! gnkothi

• iii nii uh un thi ini un i h nie on hn nii nii on ll 11 tl# lllk l } IIlfilft 11 ! lill lil! lill lill Illi ll!t !Ill l 18 l'ai l!Il till l'il I.11 ll11 1974-78 3.96%

      $1.00   "         U ' ' U" "U "U "' 'di "U "U " " " " "U "" " " " " "" "" " " " "
                                                                                                                                                                                       '"'.            1976-78            4.60%
        .90
        .80
        .70
        .60 _.-
        .50           namesanannua sunsessamsmem meslussmatearmendimmimmimmimirmire-                                                                             iiismmmmmuisimi q    g-1965               '67          '69             '71              '73              '75                    '77 '78                          3 mD                                                       ,
   ..                                                                                                                                                                       i _w       ____k___       S N_-               =

                                                                                                                                                                                                                                                                                            \

l \  ! 1 Paga 15 i l PORTLAND CENERAL ELECTRIC l l AVERACE BOOK VALUE PER SHARE AxD l DIVIDENDS PER SEARE \* 1965-1978

     $40                -

_ _ _ . __ ._.--.,_r Growth In 30 Book Value l , Period Per Share i ,  ; 1965-78 3.29% I 20

i. -

                                                                                                                                 .. ,                 y         .                                                     .                                              1974-78          .88%
                                                    .                  4                             m         * . -                          ,                   ,                                                  ,
                   .,                            ,                     6               e    ,% .       v-    .i        .i.                    6       .           l.                                           .i
                                               ,i,.                 ..               ...              ...               ,                     i.              . i -,,                 i-                           i,                                          .

1976-78 .62%

               .,,i              .,        .tig.         .
                                                               ... .. *             . ....        . i    , i
                                                                                                                       .it                   is                 .i .,.                                                                  ..                 . ,

iisi  !!. . '! 4 i. 5 ,,.'.!ai eisiisi!* *ise 646, i si. -i . . s. i,.. i i , i 8 i!Il t i t 1F i e . s e i t t etis ilie issatsiis it i . is i.es esti sis' . . iii. ii : ...I si i ti i ilii Illi till ilij litt li!; lil! lilili'el litt ett' illi itil till iali til: lili litililii 'iti 6 ell lit 6 40 I ' ' III'l' '''' '''' ' '

                                                                                                                                                                          ''I' ' '!                                                           '

9 __ 8 7 l

    $3.00                                                                                                                          '

i Growth In 2.00

                                                ,                                                                                                                                                                                                                             Dividends Period Per Share l-                    ,      u,               ,                               ,

1: .. _,_ , , , ., , , ,, , , . .i. . i. ... . . ..e . ,r .,, .o . I , , ,,. .., , i, ,, , ,. ,,i., _ .. - *. . ... .o .-

                                                                                                                                                                                                      .. i                                                           1965-78      4.86%
                                                       .n     .,o ,,,, ,o,                   .n ....,r.                          ,     o,,,                :n,        ,      ...           , ,,         ..                             ,,                  o.,
             ,!st           ,je,     19i6 iir'                ti.i till stir i. 5 stiT.iti i ai iiii e eeli'io si!i rise essi asis                                                                    liti                 assi                            liii no nu                   iin           nii nii                uiten een no ini ini in! ini oli                                                 siii,np           ni,           iai        on                   oi!                             .n!       1974-78      3.02%

lill ist! 1911 till liiLJI!i '"illilill! iill l'to till 1811 Illi li illfil.'1 ,l:liti6 it?l il!i iiil idi "" ' " ' _"'* " I" " U"" ""'"" " " "" " '"' ""I""U"" ""! "U 1976-78 2.28%

    $1.00                          -
      .90
      .80
      .70
      .60                                                                                         -                                      ---                                                      -
                                                                                                                                                                                                                              =====
            =. =awswizu=n g-.
                                                                           ===            ~

p. - ,

      .50                                -                        - - -                                                              -              -                           - - - - - - - - - -                                                       ---
                                                      '67                  '69            '71             '73                 '75 om                                                          W0  1 3 1l l

1965 '77 '78 0 dw w A 'b a

l Page l' POTOMAC ELECTRIC POUER COMPANY AVERACE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE  ! 196 5- 107 R

      $40     _ ___._ _ __., _ __ _ _                                                             _ _ . - __ _..__-_ _ __                                                                    _ _ _

Growth In 30 - Book Value Period Per Share

                      ;.                 I                                                     '
                                                                                                                           ;                                          ,            ,                                            1965-78     2.12%

20 '

                                                                                                                                                            +
                                                                                                                                                                                  ,                     .                       1974-78     1.32%
                  ..    ,   1      .:.          ,,       .L,             l[#.., *i                                       "
                                                                                                                                        ?* T,                                     '

1975-78 2.81% i,o .... i... ,,... n%,-.v .v o, .u ,..., ... . u ..a..I, in: .. , , liil li s t,,i t i $p: ' l "Ft' lia ftil 1 '8 lI'llitti 'it'. it ;lle si s'il i t: 6sig t.:l , .is, ,il till :iiPit!I liis ,'i: itit it:1 1 l' li'llilii 'ti; -11 tii: l> is sii it. ti.I .' till !sti

    $10         ""     ' "       'U         I"'      "'"U '"                   "'         ""'            "      "' ""                   "    '""h  "" "U '"                                               '"I 9

8 7 . l 1

   $3.00
                                                                                                                         \                                                                                                              Growth In 2.00                               ,                                                                                j                                                                                                               Dividends
                                                 ,  ,,       , .                 . .                             l'                     !                                     .i .                                             Period Per Share
              .g         ..,   .. , .         .                    .      .             ....          ,         +                     .,.                                     ...               .           .
              .n,     ,,..

g,. ..q q., ... ,,,. ... .. .... .,. .. . .. . . ... . . .o. 1965-78 3.92% tese eilt atti ,191 It!i site call s'ei 61'a i.!! a:: ll'*t'

                                                                                                                              '       :l.l.,        ' i th              ''         ,t    e614         4.

itt i nii nii ii, ini un iin on n:i ini ni, noinn n.u:.mn: .. tii, nei inn.n, ""

1974-78 l lill llI liij 1;! r, ': * $ ' f MF!I%: illt 3.95% lill I!!! lill lillI!I'i l'Il 1; it'l llIl l'i' is:1 lie! l " " " " "" "#'" "'U"'E'E"P'"U'" "'U"' '" '"' "" '"' "" 'd

   $1.00                                   "".                                                                                                                                                                                 1976-78     7.48%
       .90  . _ _                        .                       --.
       .80                  =
       .70
       *00                                                                                                     =====~

gig 3m3gm==m==;- -- - . = -- ---

                                                                                                                                                                                                                               ,_D g,
       .50                 --    -
                                                   - ~ " - -                                               - -                  ---- --          -             ---       -- -
                                                                                                                                                                                                    ^' ~"*                 '

1965 '67 '69 '71 '73 '75 (@@ $ ~.S - Q

                                                                                                                                            '77 '7@                                     _

Pag 2 17 . l l UTAH POWER & LIGHT AVERAGE BOOK VALUE PER SHARE l 1 AND DIVIDENDS PER SFARE 1965- 1978 S40 __. _ __. . _ _ . _ _ _ _ . _ _ _ r________ _. Growth In 30 Book Value Y Period Per Share 1965-78 3.74% 1 20 ' i m , 1974-78 2.13% _ a v i ,

                  .      > . ,               ,         . .            o              .             ..                                 .                 .                 .                 .

1976-78 3.57% l

                  ,,,    <,                     .,               . .,...          . 1 ,       w ...                               .,                    ,               .,            , ,                          .',                 .,
                ,,o      no                oi,         .. ,       ,

i,,y,m., ..... i. ., , i. . .n,, ..., , .,. 11ll ,llt ~,61 il,Wkte S ,la 'i l i , , l.. l 'ti  ;, j ,r 111 t..t. . .i i.,1 .. ,a. l:,,, ;eti liii  ! !t iq k l8 7.!Il l'lijilli 1;i. gli .ili.e.Il t. i isi it:ii. t, .' ,, i;, i ,1 .t.,i i i:ii lill till fill lllli l'ill!!!! aill I.li 'l!l . i! ll1.61 1111l.'t. 1. ,! 11' l: ,I ~1,lllll ll:1

                    =.2-                                                                                                                                                     ---

9 8 7 " l

   $3.00 E

Growth In 2.00 Dividends A

                     ,t.                             .                     .
                                                                                                                                 .o l

i Period Per Share

                 , ....                              ,                       ,     ...              .,                           .,                    ,       o ,                        .                          .
                                                                                                                                                                                                                                     ~

1965-78 6.10%

                                                                                                    .e                           ...                 .,                 .o              ,o          ,

un ,,,, . .. .., ..o o., i,n on .,u. ., ,. .., . .. . . ., , , ,,,4 un ,ii i ni .o un iin iin ,,o noi.,o , on,,,i T ,ii ,e n.. ,o, e., nii .,,, o'! 1974-78 9.20% un up on iii' no i.ii nu u.i u.in m mvano,! un io oi n.i ., ou ip,

   $1.00      !." ' "E '!",$d'!'" 1" ' . " ". "1"
                                                                                                                                 'I'"            h   d'          '""'          "-         ':'      '                 iih         1976-78   10.24%
     .90   -

_ .= --

     .80                                                       ---
                                                 =
     .70                        =
     .60 wu                          -
                                                    -:. .uis==                  =u. =           .._. =:==w1= =ga                                                  === - - ---- a -= --                                          _;
     .50 Z                    q c

T}

                              - - - -                        ~ -                                          =                                  -

1965 '67 '69 '71 '73 '75 ' 77 '78 h L J o

1 l [ t i Page 18 i VIRGINIA ELECTRIC PO*.;ER COMPANY AVERAGE BOOK VALUE PER SHARE AND DIVIDENDS PER SHARE . 1965-1978 l S40 _.- ___ _ _ _ - . _ _ _ . . - _ . _ . - _ _ . _ . . _ ._ Growth in 30 Book Value Period _ Per Share I 1965-78 4.74% 20 t ai O

                                       .           ,                    ....           . ...                                                                                          ,                     1974-78       1.02:
            .4                   ,                                ,        ... y .,.                                .                   .                            .             .
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1976-78 2.38

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[. , l

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                         'lli oo iin u.,

n

                                                               .4

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                                                                                                                                                                               ..o o , .'      1965-78       2.41%

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                  "U                         ' " * " ' "#"" " " " " ' "" "" M"'                                                                                 "" "" ""I"" I"!
 $1.00
   .90 li"
                       =

(.'!h 1976-78 3.23%

   .80                                                                                                                                                                                                                               :
   .70                                                                                                                                                                                                                               l
   .60 -
                                                                    =-                                                          _ _ ,                                                ----..
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MIDDLE SOUTil UTILITIES, INC. LOUISIANA rO42R & 11C:IT COMPANY GROWTil RATES FROH RETAINED EARNINGS 1976 - 1978 Growth From Retained Earnings Company 1976 1977 1978 Average (A) (B) (C) (D) (E) A. MIDDLE SOU111 UTILITIES 2.95% 4.67% 5.70% 4.44% B. SELECTED COMPARABLE ELECTRICS

1. Boston Edison .86% -1.40% 1.69% .28%

2. Detroit Edison 1.06 2.71 -1.28 .83

3. Florida Power Corporation 3.49 7.69 6.31 5.83

4. Florida Power & Light 3.13 7.46 8.12 6.24

5. llawaiian Electric 4.52 4.55 4.67 4.58 6 Kentucky Utilities 3.70 .26 .34 1.21

7. Long Island Lighting 5.32 5.12 3.62 4.69

8. New York State Elec. & Cas 3.57' 3.18 3.84 3.53

9. Pacific Power & Light 3.76 2.11 3.00 2.96

10. Portland General Electric 3.18 -3.39 .01 .07

11. Potomac Electric Power Co. 3.71 3.50 2.24 3.15

12. Utah Power & Light 5.77 1.18 1.70 2.88

13. Virginia Electric Power Co. 3.15 3.60 3.00 3.25 1 5 i

8

Page 21 LOUISIANA POWER & LIGHT COMPANY CAPITALIZATION RATE OF EQUITY A. BASED ON MIDDLE SOUTH UTILITIES

1. Dividend Yield b! -- - --

8.84%

2. Growth Estimate -- --- 3.75%

3. Capitalization Rate of Equity --

12.59% B. BASED ON SELECTED COMPARA3LE COMPANIES *

1. Dividend Yield -

8.60%

2. Growth Estimate:

a. Boston Edison 1.50%

b. Detroit Edison 1.50

c. Florida Power Corp. 5.00

d. Florida Power & Light 6.00

e. Hawaiian Electric 4.50

f. Kentucky Utilities 3.00

g. Long Island Lighting 3.50

h. New York State Elec. & Gas 3.25

1. Pacific Power & Light 3.00

j. Portland General Electric 3.00

k. Potomac Elec. Power Co. 3.25

1. Utah Power & Light 3.75

m. Virginia Elec. Power Co. 3.00

n. Average Growth Estimate --- --

3.40%

3. Capitalization Rate of Equity --

12.00% l l NOTE: 1/ The average monthly dividend yield for the 36-month period ending June 30, 1979.

1 Page 22 DEMONSTRATION THAT WITH A 12.70% RATE OF EARNINGS ON BOOK EQUITY, CIVEN /. BARE EQUITY CAPITAL.IZATION RATE OF 12.00% THE MARKET PRICE CAN BE EXPECTED TO BE APPROXIMATELY 16% ABOVE BOOK I. Given: r = Rate of Earnings on Book Equity = .127 k = Bare Equity Capitalization Rate = .12 C = Estimated Long Run Crowth in Equity Capital = .11 b = Retention Rate = 40 f = Cost of Financing and Pressure = .075 No/Bo = Expected Market to Book Ratio = 1.16 g3y = Annual growth rate in book value per share D1 = Dividends per share 3Rg = Annual growth rate f rom retained earnings as

                            =

Annual growth rate from sales of stock at net prrceeds above book value II. DCT Formula D1 no . k g3y Dividing both sides by Bo. produces Dl/Bo Mc/Bo = k - gBV where D1 = r(1 - b)Bo k = 1200, as given sBV (1

• SRE)(1 + SS) - 1 where gRE = tb gs = ^' ~* -1

y. (G - rb)

(Mo/Bo)(1 - f) III. Solution Dl/Bo *

                               .127 (.6) Bo         =
                                                       . 0762 Bo gRE
                          =

rb = .127 (.4) = .0508 gS

                          . 1 + ( .11 - .0508) , y , 1 nto' . 1 . 00382
                                        .11   -

1.05517

                                  ,((1.J 6)(1 .05081.075)

E BV

                          =

(1 + .0$08 )(1 + .00382 ) - 1 = 1.0548 - 1 gv" B 5'8 c .W D ' l D A D Ho/Bo

• 0 76 '

                                                                                'l $
                                                                                     '     A" M~l 3
                          =
                                ,        m  '_ ,,.1   =   1.16

Page 23 1 1 DEMO *4STRATION TMAT t!ITH A 13.25% RATE OF EARN *NOS CN BOOK EQUITY. CIVEN A BARE EOUITY CAPITALIZATION RATE OF 12.50% . THE MARKET PRICE CAN BE EXPEC ED TO BE APPROXIMATILY 16*. ABOVE BOOK

1. Given:

r = Rate of Earnings on Book Equity = 1325 k = Bare Equity Capitalization Rate = .123') G = Estimated Long Run Growth in Equity Capital = .11 b = Retention Rcte = 40 f = Cost of Financing and Pressure = .075 Mo/Bo = Expected Market to Book Ratio = 1.16 ggy = Annual growth rate in book value per share D1 = Dividends per share gRI

• Annual growth rate from retained earnings

                           =  Annual growth rate from sales of stock at not proceeds 35 above book value

11. DCF Formula

                           =

DI Mo k - ggy Dividing both sides by Bo. produces I I* Mo/Bo = k gy g where D1 = r(1 - b)Bo k = .125 . as given

                          =

g3y (1 + 3RE)(1 + S S ) ~ l where gRE = tb

                          ,      1 + (C - tb)           ,3 gS

g. (G - rb) l (Mo/Bo)(1 - f)

III. Solution 1 l l Dl/Bo = .60(.13:518o = .0795 Bo FRE

                          =  tb = .40(.1325) = .053
                          =
                                     *     ~
                                              *  '      -1=

3S , (.)1 .0 5 3 _1 O$ -1= 1.'0531 .0037 1 (1.16)(1 .075) g 3y

                          =

(3 + . 053 )(1 + .0037 ) - 1 = 1.0569 - 1 g = 0569 BV Mo/Bo = * *

                               .12     -   .05o9 gg            a  g    rq   3 m e   l\   e   M   k X it o

Page 24 LOUISIANA POWER & LIGHT FAIR RATE OF RETURN BASED ON IESIRABLE CAPITAL STRUCTURE DECEMBER 31. 1980

                                 . Capital           Cost          Weighted    Cost of Type of Capital     Structure           Rates        Cost Rates   Capital (A)              (B)             (C)            (D)         (E)

A. Debt 57.0% 9.10% 5.19% B. Preferred Stock 9.CL 8.65% .78% C. Common Equity 34 .0% 13%-13.25% 4.42%-4.51% D. Total - -- 10.39%-10.48l l I l \ l _m - - _ _

1 Page 1 of 3 ' Page 29 - Footnotes 1/ 1978 LP&L Annual Report. 2/ Includes depreciation, deferred taxes, other, retained earnings less AFUDC. 3/ Previous year's year-end total capital plus given year's external funds plus given year's retained earnings. 4/ Response to Staff Data Request. 5/ Construction expenditures less internal funds. 6/ reg = [(Total year end capital g_1 x .340) + .5 (.340)(External fundst

                 + RE g)] [.13 x .4], where:

REg = retained earnings in a given year

                 .13 = assumed return on equity
                 .40 = assumed retention ratio 7/ AFUDC figures supplied by Company per Staff Data Request increased by 10.4/6.75.

8/ The depreciation figures for 1979 - 1988 were provided by the Company per its response to Data Request C-2. 9/ Line IA (1) times Line IC(l).

        ,l_0_/   FIT = [ Return-Interest-AFUDC) x Effective tax rate 1 - effective tax rate Year              Return            Interest            AFUDC             FIT 1979            [140,717      -      75,524       -

43,133]x35/65 = 11,878 1980 [176,628 - 90,012 - 84,500]x35/65 = 1,139 1981 [204,088 - 103,984 - 103,432]x35/65 = (1,792)

j. 1982 [222,030 - 112,797 -

17,316]x35/65 = 49,494 ' 1983 [250,881 - 128,869 - 45,258]x35/65 = 41,329 1984 [284,700 - 146,607 - 60,560]x35/65 = 41,749 1985 [302,148 - 155,005 - 86,832]x35/65 - 32,475 1986 [309,858 - 159,676 - 5,154]x35/65 = 78,092 1987 [308,274 - 159,560 - 4,814]x35/65 = 77,485 1988 [307,670 - 158,660 - 5,099]x35/65 = 73,183 11/ Returnt = line I C (4)t_1 times line I A(1)g. 12/ Line I A(1) times line I C (3) . 13/ Line I H plus line I G divided by line I F. 14/ Line I H divided by I F. Q

l Page 2 of 3' Page 29 - Footnotes 15/ Line I H plus Line I E plus line I G minus line 1 D divided by line I F. 16/ Line I H plus line I E minus line I D divided by line I F. 17/ Line I B (1) divided by line I B. 18/ Line I D divided by line I K. 19/ While LP&L's indenture permits 15% of AFUDC to be included in earnings as defined, indenture earnings will be defined as including an amount of AFUDC equal to no more than 10% of operating income consistent with SEC requirements. In calculating indenture earnings there are two possibilities: first that in a given year AFUDC is more than 10% of operating income and second that AFUDC is less than 10%. Thus, two calculations are necessary, the first covers case 1 and the second covers case 2. Whichever calculation produces the lower indenture earnings is used. CASE 1 Year Return + FIT - AFUDC +9= Earnings 1980 140,717 11,878 43,133 121,624* 1981 176,628 1,139 84,500 103,630* 1982 204,088 (1,792) 103,432 109,849* 1983 222,030 49,494 17,316 282,453 1984 250,881 41,329 45,258 274,391* 1985 284,700 41,749 60,560 295,432* 1986 302,148 32,475 86,832 275,323* 1987 309,858 78,092 5,154 425,329 1988 308,274 77,435 4,814 423,272 CASE 2 Year Return + FIT = Earnings 1980 140,717 11,878 152,595 1981 176,628 1,139 177,767 1982 204,088 (1,792) 202,296 1983 222,030 49,494 271,524* 1984 250,881 41,329 292,210 1985 284,700 41,749 326,449 1986 302,148 32,475 334,623 l 1987 309,858 78,092 387,950* 1988 308,274 77,485 385,759*

• used in calculation

r Page 3 of 3 Page 29 - Footnotes 20/ Proforma Tirst Mortgage Intereste = interest at 12/31g _ y + Proforma Interest-Retirement of First Nortgage Debt Interest Without Year 1st Mortg. + Proforma - Retirements = Interest Retirement 1980 58,598 15,807 297 74,108 74,405 1981 74,108 17,999 4750 87,357 92,107 1982 87,357 5,112 - 92,469 92,469 1983 92,469 30,687 4688 118,468 123,156 1984 118,468 10,119 563 128,024 128,587 1985 128,024 8,710 - 136,734 136,734 1986 136,734 6,883 6750 136,867 143,617 1987 136,867 318 950 136,235 137,185 1988 136,235 135 - 136,370 136,370 The interest used is the larger of the two which assumes ther all new debt is sold at the beginning of the year. 21/ line I M divided by line I N. 4 4

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Appenta x . Pese 2  ! PC:IT.2 SKUTH t?"IU7Y SYr:De C20*RIC CPDut?. DC CDWANIES CT* & CL"T"NCDC PRUDUC S'!TA IE: DEER 31, 1970 Artet Not DLvidend Not Cost Issup Outstandino Pmsmeds hacraimuurit hata (A. (Bi (Cl (D) (Ei ANWEAS POCR At 1.1"f_47 4.32% 5100 Par 8 7,000,000 8 6,H 3,583 3 302,400 4.724 $100 Par 9,350,000 9,291.115 441,320 4.566 5100 Par 7,500,000 7,473,620 342,000 4.Mt 5100 Par 7,500,000 7,482,556 342,000 6.08% 5100 Par 10,000,000 9,H 5,495 608,000 7.326 5100 Par 10,000,000 9,994,147 732,000 7.806 8100 Par 15,000,000 14.994,177 1,170,000 7.40% $100 Par 20,000,000 19,997,086 1,480.000 7.004 5100 Par 15,000,000 14.996,445 1,182,000 10.604 5100 M 20,000,000 19,H9,993 2,120,000 11.04% 5100 Par 40,000,000 39,926,588 4.416,000 8.846 8 25 Par 10,000,000 9,927,485 884,000 7Jmt, $171,350,000 5170,982,290 $14.019,720 e.20s 1DL?!SIANh POER NO 1.73f7 4.164 8100 Par 5 7,000,000 $ 6,901,784 $ 291,200 4.44% 5100 Par 7,000,000 6,976,497 310,000 4.946 $100 Par 6,000,000 5.978,846 297,000 5.164 5100 Par 7,500,000 7.482,014 387,000 5.40% S100 Par 0,000,000 7,980,944 432,000 6.446 $100 Par 8,000,000 8,003,655 515,200 9.526 5100 Per 7,000,000 6,991,622 666,400 7.844 8100 Par 10,000,000 10,004,547 784,000 7.366 $100 Par 10,000,000 10,000,125 7M,000 8.564 8100 Par 10.000.0nn 9.9 % .509 856.000

     , 9.444                 $100 Par      x ,000,000                  29,918,900         2,932,03 FJgg                    $110,500,000                $110,303,843       s 3,108,200          7.356 PCSSISSIPPI POEDt Me I.T3fr

4. Mt $100 Par 5 5,992,000 3 5,959,890 $ 261,251 4.56% $100 Per 4,388,800 4.553,176 200,129 4.92% $100 Par 10,000,000 10,0 4 ,676 492.000 9,164 5100 Par 7,500,000 7,491,439 657,000 7.44% 8100 Par 10,C00,000* 9,980,416 744,000 7J22 8 37,880,000 8 38,053,597 8 2,384,380 6.274 MDi cit:2 NEB PLE:JO SIWICE 4.756 5100 Par 5 7,779,800 $ 8,023,049 8 M9,540

4. M4 $100 Par 6.000,000 5,991,091 261.600 5.56% $100 P u 6,000,000 5,991,4 M 333,600 70: 2 $ 19,779,800 $ 20,005,576 8 964,740 4.824

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Append & Page 2 moody'S BOND TIELD AVERAGES FUBLIC L'TILIIT BONDS RATING AAA YEAR JE TEB. MAR. APR. MAY JUNE JULT AUG. SEPT. OCT. NOV. DEC. AVERA0E 1950 2.56 2.56 2.37 2.59 2.61 2.62 2.64 2.61 2.65 2.66 2.66 2.67 2.62 1951 2.65 2.67 2.80 2.89 2.91 2.99 2.97 2.90 2.87 2.92 3.00 3.03 2.88 1952 3.01 2.96 2.99 2.96 2.96 2.97 3.00 3.00 3.00 3.04 3.00 2.99 2.99 1953 3.05 3.13 3.18 3.30 3.40 3.41 3.32 3.30 3.35 3.20 3.12 3.15 3.24 8954 3.07 2.96 2.87 2.87 2.90 2.92 2.92 2.90 2.94 2.92 2.92 2.93 2.93 1955 2.95 3.01 3.05 3.03 3.07 3.08 3.09 3.15 3.19 3.14 3.13 3.17 3.D9 1956 3.14 3.10 3.11 3.23 3.30 3.29 3.30 3.44 3.58 3.63 3.72 3.79 3.39 1957 3.81 3.74 3.71 3.71 3.77 3.89 4.05 4.21 4.26 4.25 4.22 3.93 3.96 1958 3.68 3.62 3.67 3.66 3.63 3. 64 3.74 3.94 4.17 4.25 4.22 4.19 3 . 87 1959 4.23 4.25 4.24 4.31 4.48 4.56 4.60 4.54 4.62 4.74 4.66 4.65 4.49 1960 4.68 4.63 4.54 4.50 4.54 4.54 4.48 4.31 4.29 4.37 .4.36 4.38 4.47 1961 4.35 4.29 4.23 4.28 4.29 4.31 4.41 4.48 4.47 4.46 4.44 4.44 4.37 1962 4.44 4.45 4.42 4.38 4.34 4.32 4.35 4.36 4.35 4.30 4.25 4.22 4.35 1963 4.19 4.19 4.20 4.21 4.23 4.25 4.29 4.31 4.33 4.33 4.34 4.37 4.27 1964 4. a t' 4.38 4.39 4.41 4.42 4.44 4.43 4.43 4.43 4.42 4.43 4.44 4.42 1965 4.41 4.42 4.43 4.42 4.45 4.47 4.48 4.50 4.54 4.57 4.61 4.72 4.50 1966 4.76 4.82 4.98 5.08 5.10 5.17 5.22 5.34 5.56 5.50 5.40 5.39 5.19 1967 5.17 5.01 5.16 5.14 5.34 5.55 5.70 5.76 5.82 5.89 6.16 6.30 5.58 8968 6.24 6.14 6.13 6.26 6.31 6.32 6.28 6.07 6.03 6.14 6.25 6.52 6.22 8969 6.70 6.78 6.97 6.96 6.88 7.08 7.11 6.99 7.24 7.44 7.48 7.86 7.12 1970 8.07 8.12 8.07 8.08 8.45 8.79 8.68 8.42 8.39 8.30 8.34 7.97 8.31 1971 7.70 7.49 7.62 7.59 7.86 8.01 7.96 7.89 7.74 7.69 7.55 7.54 7.72 1972 7.48 7.53 7.54 7.59 7.61 7.53 7.43 7.41 7.41 7.40 7.30 7.26 7.46 1973 7.33 7.41 7.45 7.44 7.44 7.51 7.62 7.81 7.78 7.77 7.83 7.86 7.60 1974 8.00 8.01 8.14 8.36 8.47 8.58 8.83 9.09 9.36 9.50 9.10 .9.02 8.70 1975 6.99 8.79 8.82 9.11 9.05 8.93 9.04 9.20 9.21 9.14 9.03 9.07 9.03 3976 8.86 8.80 8.74 8.59 8.73 8.84 8.78 8.64 8.57 8.50 8.39 8.15 8.63 1977 8.14 S.21 8.27 8.21 8.22 S.12 8.10 B.13 8.07 8.18 8.23 8.34 8.19 1978 8.52 8.57 8.57 8.69 8.83 8.92 9.02 8. 86 8. 84 9.04 9.19 9.34 8.87 1979 9.48 9.51 9.61 9.61 9.71 9.49 9.42 9.46 i l 1 i l

6 Appea Fage MOODY'S BOND YIELD AVERAO'S Pt*BLIC UTILITY BONDS RATINO AA YEAR JAN. TED. MAR. APR. MAY JUNI JULY AUO. SUT. 007. NOV. DEC. AVERAOI 1950 2.64 2.64 2.64 2.65 2.69 2.69 2.71 2.66 2.71 2.72 2.72 2.72 2.68 1951 2.71 2.73 2.87 2.98 2.97 3.06 3.04 2.96 2.92 2.98 3.09 3.11 2.95 1952 3.06 3.01 3.05 3.02 3.02 3.04 3.05 3.06 3.06 3.05 3.05 3.05 3.05 1953 3.11 3.18 3.22 3.35 3.5C 3.57 3.41 3.38 3.42 3.27 3.20 3.21 3.32 1954 3.14 3.03 2.92 2.94 2.97 3.00 2.99 2.98 3.00 2.99 2.99 2.99 3.00 1955 3.01 3.06 3.09 3.08 3.11 3.12 3.13 3.17 3.21 3.18 3.17 3.23 3.13 1956 3.17 3.13 3.16 3.30 3.34 3.34 3.37 3.48 3.61 3.69 3.76 3. 84 3.43 1957 3.87 3.81 3.80 3.80 3.85 3.94 4.10 4.25 4.31 4.32 4.30 4.05 4.03 1958 3.73 3.68 3.73 3.72 3.69 3.70 3.79 3.98 4.24 4.29 4.25 4.22 3.92 1959 4.27 4.31 4.30 4.40 4.57 4.67 4. 64 4.60 4.72 4.79 4.68 4.71 4.56 1960 4.76 4.68 4.58 4.54 4.57 4.58 4.54 4.36 4.36 4.42 4.45 4.49 4.53 1961 4.48 4.39 4.29 4.34 4.38 4.42 4.50 4.57 4.58 4.53 4.49 4.50 4.46 1962 4.50 4.52 4.50 4.47 4.41 4.38 4.40 4.40 4.37 4.35 4.33 4.31 4. 4?. 1963 4.28 4.28 4.27 4.29 4.29 4.29 4.32 4.33 4.35 4.37 4.37 4.39 4.* 2 1964 4.42 4.60 4.42 4.45 4.45 4.46 4.45 4.45 4.44 4.44 4.45 4.46 4.44 1965 4.44 4.43 4.44 4.44 4.46 4.49 4.50 4.53 4.57 4.60 4.64 4.75 4.52 1966 4.78 4.84 5.02 5.12 5.12 5.19 5.28 5.44 5.69 5.55 5.48 5.46 5.25 1967 5.23 5,06 5.20 5.18 5.42 5.67 5.76 5.82 5.90 5.99 6.29 6.40 5.66 1968 6.33 6.24 6.26 6. 38 6.46 6.46 6.38 6.13 6.12 6.26 6.47 6.75 6.35 1969 6.90 6.89 7.08 7.11 6.99 7.25 7.38 7.34 7.50 7.71 7.75 8.23 7. 34 1970 8.40 8.30 8.17 9.16 8.54 8.90 8.81 8.67 8.66 8.62 8.63 8.33 8.52 1971 8.08 7.85 8.00 7.96 8.05 8.28 B.16 8.12 7.98 7.87 7. 84 .7.82 8.00 1972 7.76 7.71 7.69 7.75 7.76 7.71 7.58 7.49 7.48 7.50 7.42 7.38 7.60 1973 7.42 7.52 7.50 7.51 7.51 7.59 7.70 7.92 7.94 7.94 8.01 8.07 7.72 1974 8.15 8.20 8.35 8.56 8.71 8.93 9.17 9.53 10.05 9.93 9.54 9.37 9.04 1975 9.45 9.23 9.17 9.48 9.50 9. 34 9.38 9.52 9.64 9.55 9.45 9*51 9.44 1976 9.39 9.16 9.12 9.00 9.06 9.07 9.02 8.83 s.69 8.60 8.61 8 45 8.92 1977 8.41 8.46 8.49 8.51 8.49 8.37 8.32 8.36 8.32 8.44 8.48 8.55 8.43 1978 8.76 8.79 8.79 8.86 9.02 9.19 9.26 9.11 9.09 9.28 9.46 9.56 9.10 1979 9.70 9.74 9.89 9.92 10.19 9.95 9.72 9.75 l i . I 1

l i

        .                                                                                    Appendix N000f'S 80ND YIELD AVERACTS P:ge 5 PUBLIC UT!LITY RONDS RA!7NC A YEJA     JAN. FEB. MAR. APR. MAY     JUNE     JUlf   AUG. SEPT. OCY. NOV. DEC. AVERACI 1950     2.76 2.76    2.76  2.77  2.79    2.79     2.79   2.76    2.80   2.83  2.86  2.86    2.79 1951     2.83 2 . 84  2.95  3.09  3.13    3.21     3.26   3.19    3.14   3.17  3.24  3.29    3.11 1952     3.29 3.23    3.25  3.23  3.22    3.22     3.22   3.24    3.24   3.26  3.24  3.22    3.24 1953     3.25 3.30    3.36  3.47  3.63    3.71     3.66   3.61    3.62   3.49  3.40  3.38    3.49 1954     3.32 3.23    3.16  3.16  3.14    3.16     3.14   3.13    3.12   3.12  3.11  3.11    3.16 r.

j 1955 3.13 3.14 3.15 3.15 3.19 3.21 3.21 3.24 3.27 3.30 3.32 3.35 3.22 i 1956 3.31 3.29 3.29 3.40 3.48 3.49 3.55 3.63 3.72 3.79 3.82 3.91 3.56 1957 3.96 4.05 4.05 4.01 4.01 4.09 4.20 4.37 4.55 4.61 4.62 4.36 4.24 1958 3.93 3.96 4.13 3.95 4.01 3.99 4.04 4.29 4.55 4.56 4.47 4.49 4.20 1959 4.52 4.50 4.47 4.56 4.77 4.86 4.88 4.89 5.03 4.96 4.90 4.96 4.78 1960 5.02 5.00 4.91 4.79 4.86 4. 84 4.79 4.64 4.57 4.61 4.62 4.65 4.78 1961 4.64 4.59 4.48 4.48 4.52 4.57 4.65 4.73 4.73 4.71 4.68 4.65 4. 62 1962 4.65 4.66 4.64 4.59 4.51 4.47 4.50 4.53 4.51 4.49 4.45 4.44 4.54 1963 4.39 4.37 4.37 4.37 .4.37 4.37 4.39 4.38 4.40 4.41 4.42 4.46 4.39 1964 4.49 4.50 4.51 4.52 4.53 4.55 4.54 4.54 4.53 4.51 4.53 4.54 4.52 1965 4.53 4.51 4.50 4.49 4.50 4.52 4.54 4.58 4.63 4.66 4.71 4.83 4.58 1966 4.86 4.92 5.14 5.25 5.25 5.40 5.45 5.58 5.81 5.74 5.63 5.67 5.39 1967 5.46 5.28 5.44 5.42 5.66 5.84 5.94 5.96 6.05 6.18 6.48 6.67 5.86 1968 6.54 6.37 6.41 6.58 6.62 6.62 6.53 6.27 6.27 6.40 6.59 6.87 6.51 1969 7.04 7.13 7.27 7.30 7.16 7.41 7.52 7.44 7.63 8.02 8.G0 8.59 7.54 1970 8.69 8.51 9.31 8.31 8.67 9.04 9.06 8.88 8.82 8.76 8.y) E.48 8.69 1971 8.15 7.89 8.05 8.07 8.34 8.45 8.45 8.40 8.18 8.10 7.96 7.90 8.16 1972 7.79 7.18 7.77 7.82 7.84 7.77 7.82 7.64 7.61 7.66 7.60 7.48 7.72 1973 7.52 7.62 7.66 7.63 7.63 7.71 7.82 8.04 8.04 8.02 8.15 8.24 7.84 1974 8.36 8.42 8.46 8.77 8.99 9.32 9.65 10.03 10.45 10.78 10.46 10.27 9.50 1975 10.37 9.99 9.72 10.06 10.23 10.10 10.01 10.12 10.19 10.16 10.04 10.11 10.09 1976 9.90 9.71 9.67 9.53 9.55 9.54 9.37 9.13 8.90 8.79 8.76 8.62 9.29 l 1977 8.61 8.65 8.70 8.71 8.71 8.58 8.51 8.49 8.46 8.61 8.64 8.64 8.61 1978 8.92 8.97 8.98 9.09 9.22 9.40 9.51 9 . 32 9.28 9.46 9.68 9.70 9.29 1979 9.30 9.84 10.04 10.10 10.30 10.14 9.98 10.14 l-

                                #                                                                                   0 Appe(

MOODY'S BOND YIELD AVERAGES Page; PUBLIC UTILIM BONDS RATING BAA l l YEAR JAN. FEB. MAR. APR. MAY JUNE .7ULY AUG. SEPT. 03 NOV. DEC. AVERACE A950 3.18 3.17 3.16 3.15 3.15 3.15 3.18 3.18 3.19 3.20 3.21 3.21 3.18 A951 3.21 3.21 3.23 3.31 3.38 3.45 3.49 3.48 3.44 3.49 3.49 3.53 3.39 1952 3.57 3.55 3.55 3.54 3.54 3.55 3.53 3.50 3.50 3.50 3.47 3.50 3.52 1953 3.51 3.53 3.56 3.62 3.76 3.80 3.83 3.88 3.93 3.86 3.78 3.72 3.73 1954 3.72 3.69 3.58 3.53 3.51 3.50 3.48 3.47 3.44 3.41 3.39 3.38 3.51 1955 3.37 3.38 3.38 3.40 3.40 3.41 3.43 3.46 3.48 3.47 3.48 3.50 3.43 1956 3.50 3.50 3.51 3.59 3.62 3.65 3.70 3.84 4.02 4.15 4.15 4.18 3.78 A957 4.26 4.26 4.25 4.24 4.28 4.33 4.41 4.49 4.66 4.73 4.82 4.81 4.46 1958 4.60 4.23 4.25 4.25 4.23 4.20 4.19 4.44 4.69 4.74 4.67 4.65 4.43 1959 4.71 4.77 4.69 4.68 4.87 4.97 5.03 5.04 5.17 5.29 5.20 5.13 4.96 1960 5.20 5.23 5.11 4.96 5.08 5.05 5.03 4.81 4.71 4.82 4.80 4.78 4.96 1961 4.79 4.76 4.72 4.74 4.77 4.78 4.84 4.90 4.91 4.92 4.89 4.88 4 .82 - 1962 4.86 4. 66 4.85 4.81 4.74 4.68 4.6S 4.72 4.74 4.71 4.65 4.66 4.75 8963 4.65 4.65 4.66 4.67 4.67 4.67 4.67 4.66 4.69 4.66 4.68 4.73 4.67 1964 4.74 4.74 4.73 4.75 4.73 4.74 4.75 4.75 4.73 4.72 4.72 4.72 4.74 1965 4.71 4.69 4.68 4.e9 4.71 4.77 4.78 4.79 4.82 4.85 4.89 4.97 4.78 1966 4.99 5.02 5.19 5.39 5.44 5.52 5.61 5.79 6.06 6.07 6.06 6.09 5.60 1967 5.83 5.63 5.69 5.74 5.93 6.14 6.23 6.29 6.32 6.42 6.63 6.91 6.15 1968 6.67 6.68 6.75 6.94 6.99 7.01 6.92 6.72 6.67 6.74 7.01 7.23 6.86 1969 7.42 7.39 7.61 7.68 7.56 7.77 7.92 7.82 8.11 8.47 8.53 8.89 7.93 A970 9.00 8.96 8.81 8.94 9.20 9.52 9.48 9.34 9.32 9.27 9.29 9.04 9.18 1971 8.76 8.55 8.63 8.58 8.68 8.79 8.78 8.80 8.59 8.48 8.47 8.44 8.63 1972 8.37 8.32 8.26 8.30 8.30 8. 31 8.36 8.22 8.01 7.94 7.86 7.78 8.17 1973 7.77 7.88 7.95 7.96 7.91 7.94 8.10 8.47 8.61 8.44 8.44 8.51 8.16 1974 8.58 8.68 8.81 9.04 9.23 9.48 9.72 10.14 10.59 11.03 11.38 11.40 9.84 1975 11.57 11.32 10.94 10.86 10.95 10.85 10.80 10.87 10.89 10.89 10.78 10.79 10.96 1976 10.55 10.31 10.17 1.95 9.~91 10.01 9.88 9.67 9.47 9.41 9.34 9.21 9.82 1977 9.17 9.19 9.20 9.17 9.13 9.02 8.97 8.91 8.85 9.01 9.06 9.08 9.06 1978 9.27 9.29 9.37 9.54 9.70 9.78 9.73 9.53 9.47 9.69 9.99 10.08 9.62 1979 10.29 10.27 10.53 10.56 10.70 10.56 10.48 10.50 i i l l l

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• _ o peer 1st morteese 96 20E6 naa est. 6 40.000.000 RE 00 9.00 W.16  % 14 meneses Ltaattes & Posee les meressee 4 3/06 2006 m Ost. 7 12 % 000.000 itI1. 90 4.3) 90.65 8.68 Dese Peser het ami. mort. 8 3/8b 2006 a es t. 13 LOC 000.000 99 51 L *2 W.66 L e9 Caeteen 113ame6a P=6444 serv &as les perteeee 4 3/06 2006 m est. 14 Sh 000. 000 100.00 L)$ at sa ylee&as Pese let hertgese $ 3/44 2006 a es t. 19 80.CDO. 000 101.6D 4.60 100.76 8.68 seremere lastano Puente servtee 1st murtaaes 8 3/06 2006 m es t. 19 60.000.000 ,9 50 8.no 96. )* L 53 Cama &enest see a 31esatte les moetenee 4.554 2006 m ou t. 20 7 % 000.000 100.00 8.55 46. em 4.65 Puget Semes Peuer & L&aet les nortgese 8 7/95 2006 ama es t. 20 6C.0EXi. 000 99.22 L 95 97 9) 9 07 Pubtle terwtee ed see Mee let mortgese 9 1/85 20t6 as ou t. 21 t% 00C. 000 L00. 00 9 12 98.3) 9 29 Seetesey Pesef Les hastaese $ 7/84 2006 a Ost. 26 30.000.000 1C1. 50 8. 1E22 p..60 Leoteeelle Gee & Sletttte let meetgeee 8 1/25 2c16 an ou t. F? 25. 00L. 000 101. 6= 0. 3$ 100.62 teentassem tieter Poset let mortasse 6 3 set 20 3 a ce t. 20 30. 00E,. ;EE 100.S) 4. 0 99.25 S.82 persen Poset 6 L&ent les perteese 8 3/e6 2006 a Dee. 16 30.000. 00C 1E75 4.64 99. 8m 6.77 teseers -- ese theetete Let morteeee 91/e4 2006 au see. 16 30,0tx1. 000 101 5) 9.10 99. e6 9 24 mas Peset les mortaees 9 liet 20tn saa see. 17 8C 000.000 101 5) 9.10 99 m 9.26 Caettet 111& mete Peelte Derwtee les mortgese L *)n 20[b aa eso. 17  !$. 00C. 000 10G. 0C 8. ei e6.To 4 57 leene Pesos let meetgese 8 1/24 2006 m see. 14 30.000.000 101.38 63' 100.31 8. h?

Lane lonene L&eatsas see. 6 set. 85,8s acs:6 a see. 22 Sc. 00c. 00C 101.)$ 8.50 99. J7 8.68 Chesolaes Eneettte !!'== stas les portaase 4 J/96 2011 AA see. 23 12 % 000. 000 101.43 4.23 100 31 4-35 tesaf te see & R&estese let 6 set. 4 1/64 2006 m see. 33 1*L OOC.000 99. M 8.28 98.70 8. JT Bassee City Poser 6 Laget les mortaase 8 1/8e 2006 u ass. 7 3L OOC. 0C0 10G. 50 8.08 99. e4 L R7 ente satsee les mortgese 8 1/2g 20nb a see. 8 60.000.000 1C1.00 S. 6 L 99.7) 4. $3 Peetf 64 Peser 6 Lasse 1st hertgese 4 S/95 2tXn saa ene. 9 50.00C. 000 10C.27 4.60 99.3) 8.H testa Carottae R&eetrae a see les 6 Bel. 4.605 2CI3 a bee . 9 $0. 00C. 000 130.00 L 60 96. 4m 8.33 Lassesse* Peser 6 Lasee 1st partaete 8 3/e4 2006 au bes. le mC. 000. 000 101.36 8.62 SE 00 8,78 Poemettuaata teuer a L& ate les perteese 8 1/e4 203 e tea. 14 150.033.000 1E 00 L PS 99.00 L Jn

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D* 0 D'T C @ . ,, ,; 3 As pe r $ n Pa- 9 mm ._,,m, tit 0*W **" ?*w OPf EATTs0 C09Mt!!5 E.?.E Priscapal laterest Metertry Moody's Offer Amee t Tield to per Cast to Ceoveat 1seve ._ De'e Date tattna _ (F) tote M M aete) PA :fr Cosrae (c) d ;> ' ($ tat (as foi tri Jesuery 10 8 9.03; g.Itt Pterade Power & Light 1st Martlese 9 1/04 2008 A 75 love southern St111 ties is t Mort gese 8 3/4 2008 Aa January 10 15 8.85 4.96 Alansaa Power 1st Mortsaae 9 1/2 2008 Sea Janvery 25 103 9.53 9.43 Jersey Central Power & Lisnt 1st Mortsase 9 2004 taa Joseary 26 50 9.05 9.15 levan Cars 11as ties. & Gea lot & Aa f. 8.9 2008 A Pettuary 1 30 0.95 9.02 let mortsase 8 3/e 2004 As Peeruary 9 35 8.80 4.9e menses Power 6 Lisnt 9 1/2 2008 asa Petruary 28 100 9.45 9.56 Indiana & Mataisan ties. 1st Mortgese S.75 8. De

  +   Seethwestern Putits service       1st Mor:8*se    8 3/6           2008         he  March 8             45 Philadalenia Electris              1st & nat.      9 1/8           2006         A   March 7             100           9.05             9.13 Ohle Power                        las Merttage    9 1/4           2008         Bas merch 16            38            9.20             9.30 Alatoaa Power                     lat Mortsase    9 5/8           2008         taa March 15            100           9.65             9 .80 kansas Cao & Electris              let Mertpage    4 7/8           2004         A   March Il            30            8.05             8.98 Cena. Lignt & Power                1st Raf.        9 1/4           2004         A   March 22            &C            9.18             9. 30 1sterstate Power                  1st Mortsase    9               2004         A   Merch 28            15            9.10             9.21 Ges. & Raf.      9.2             2006             April 4             75            9.32            9.51 Lens !aland Lientist                                                            A 9.34 M1an. Power & Lis%t               1st Mert8ese    9 1/6           2008         A   Aertl 5             50            9.25 Pennsylvania Power                1st Meetsase    9 1/2           2004         Sea April  19           25            9.42             9.59 Ist Mortsase    9 1/8           2008         As  April  20           75            9.00             9.06 C1stianett Gas & Electri?                                                                              60            9. 35           9.45 Bartford Electria Lasht           1st Mortssee    9 3/8           2008         A   April  20 Public Servies of Mew Mestes      let Mortsase    9               2004         As  April  25           65            9.10             9.17 8 7/8          2004         As   May 11              80            0.90            m/s Wiscoaste Electric Power          1st Mortgese 9.8B 9 3/6          2008         sea  Mey 11              50            9.75 See Diese Gee & Electris        1st Mortsase                                                                        9.45             9.54 ist Martpage     9 1/2           2004         A   May 16              120 Chie Edinen                                                                       May 17              1M            9.73             */*

1st Mertte,e 95/4 2008 Saa Ceersia Po or 30 9.13 9.20 ttan Fewsr & Light 1st Mortsete 91/8 2004 A Maw 18 9 1/6 2004 Aa Me? 23 25 9.25 9.37 tanees City Power & Lasht let Mortsase 9.03 9.11 Wiecenaan Power & Light 1st Mart 6ste 9 1/4 2004 As Mav 24 35 Detreat Edgeen Gen. & hef. 97/8 M4 See June & 70 10.00 10.13 Per,1f te Gas & Electric 1st & Ref. 93/8 is As Joe 7 20e 9.42 m/s 9 1/2 244 A Jeae 13 45 9.35 9.66 Pennsylvania Electria let Morteese 9.17 9.33 Carolina Power & L16ht 1st Morttage 9 1/4 2004 A J oe 16 100 telaarve Power & Lisat 1st & Coll. 9 5/8 2004 A Joe 22 50 9.60 9.70 taltteere Gas & Electria 1st & Baf. 9 3/8 2000 Aa Joe 27 75 9.34 9.47 Puget Sewed Power & L4aht let mort gere e 7/9 20M &as July 11 65 9.95 10.07 laussions Power & Light let Mortsase 10 2004 tes July 12 60 9.97 10.04 ytr81ala Electria and Power Co. let & Ref. 9 5/8 2008 & July 20 150 9.83 9.73 Arkaesse Power & Lasht let Mortgese 9 7/8 2538 naa Jul 20 75 9.75 9.8A usw Emsland Power Gen. & hof. 9 1/2 2000 & July 25 50 9.58 9.68 Duke Power 1st & Saf. 9 3/8 2004 A July 26 125 9.45 9.51 leetnwestern Electric let Mortsase 4 3/6 2008 Aa Assuet 8 S3 4.75 8.86 Idene Power let Mortgese 9 2008 A autuet 9 60 8.90 8.99 lapsre District Electris let Mortgase 91/8 2008 A Avsuet 10 15 9.13 9,30 towa Publia Servlee 1st Mortsase 8 3/4 2004 Aa Aus=st 22 25 8.90 9.06 1111aste Power ist Mortgese 8 7/8 2004 As August 23 100 8.88 8.99 noustes Lashtaas & Power 1st Morttage 87/8 2000 Aa August 29 125 3.8s 8.93 Central Power & Light 1st Mortgage 8 7/8 2004 Aa Sept. 7 75 8.05 8.93 love-1111asta 44a & Elee ac 'ist Mortsseo 8 3 2003 Aa Sept. 13 20 8.75 8.92 Coas mars Power let Mer:8 age 9 2006 A Sept. 14 75 9.00 9.08 Culf Power 1st Mortsase 9 2000 A sept. 19 25 9.00 9.14 Metropoliten Idtoen let Mortsass 9 2000 A Sept. 20 50 9.05 9.15 Publas Service of ladlana 1st Meetsste 8 7/9 2008 As sees. 25 100 8.95 9.05 lac Mortsase 91/6 2008 &a sept. 26 50 9.18 9.24 Puh114 Service of Colorade central 1111eele tuotte service 1st Meetsste 91/8 2004 A4 cet. 3 25 9.24 9.61 Detroit 141 eon Gen. & nef. 9.80 2008 Saa Oct. 11 70 9.80 9.93 1st Morttage 9 5/8 2004 Saa Oct. 12 65 9.43 9.70 Telede Edkeen Consonwealth Ediese 1st Mortsase 9 1/8 2000 Ana Det. 17 25* 9.20 9.29 new Orlease Public Service 1st Mortgese 9 1/2 2000 A Oct. 17 11 9.50 9.67 1st Mortsa8e 93/4 2004 Sea Oct. 18 loc 9.40 9.90 Geor81a Fewer 9.79 Se. CaLiferate Ediese 1st Mortssee 9 5/8 2003 Aa Oct. 31 2CC 9 .70 2c 9.63 9.76 Otter fall Power 1st Mortsats 9 5/8 2008 A see. It 9 18 9 3/8 200s Aa pov. 15 100 P. 5. Electri.e

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i 'j ji i y Ft'3*.1c tt*P 11ttTS titrTWTC t*?tt?Y offJLaTief nWoAE1F$ D Principal Yield laterest Meterity heedy's Offer Amount ts het CpFE Cemeen,

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(.e 1swa Power & Light let Itertgese 9 3/41 2009 As January 17 8 30 e. 851 9.951 peostaea Power 1st Mortgese 9 7/8 2009 A Jeeverv 18 50 e.e5 10.07 ltdsana & Micasse.* Elaetric 1st Mortsase 10 1/4 1987 tas Ja= mary 23 80 16.25 1ri.11 Ar*.anese Power 6 La sht let Martsase 10 1/6 2009 Sea Januarv 2e to 13.15 10.26 11sao Power & Lisnt 1st Mortgese 93/8 2309 Asa February 6 100 9.42 9.30 TIsan Electric Servise 1st Mortsaae 9 1/2 2000 Asa potreary 21 73 9.37 9.69 ceergte Power 1st Mortsase 10 1/2 2009 See february 21 100 IC.S0 10.38 Dwomeone Light 1st Hertsase 10 1/8 2009 A February 22 100 10.1$ h C11clonets Lee 6 tieettle 1st Mertgese 10 2009 As Marrh 21 100 9.87 9.% Menomaanale Powe, let harts.se 10 1/2 2009 bee Merrh 22 45 10.41 ma firstesa tiestric & Power 1st 6 Def. 10 1/4 2009 A April 3 1CC 1C.30 10.46 Gulf States Utilities let tiertsase 10 1/8 2009 A ape 81 6 75 1C.13 1C.22 Ptetite Power & Light let hartgage 10 1/4 20C9 tea seril to 100 10.12 10.42 Gerrsia Power 1st Mertsese 11 2009 Bao Ayrtl 18 125 11.0c 11.12 ! South Carellea ElectrJg & Coe let & Ser. 10 1/8 2009 A April 18 35 10. .5 10.28 Uti.h Power & L33ht let MortgeDe 10 1/8 2009 A April 14 33 10.05 10.18 Consimere Power let Morttage 10 3/8 2009 A April 23 100 10.65 10.37 cult tower let Mortgese 10 1/4 2009 A Aer11 24 30 10.30 1C.47 53tthweesars Public Service 1st hertgase 9 5/8 1986 As Aptli 25 30 9.63 9.se Loosetana Power 6 Lisut ist mortgese 10 7/8 1989 Saa Aptt! 26 45 14.90 11.22 re tits Servare of ledsana 1st Mertsope 9 1/2 19ES As May in 50 9.S!, 9 . 71 best Tanae Det11tsee 1st Martsase 9 7/8 2009 As Iery la 25 9. 82 9.93 Appalattae Power let hertgest 11 1987 has May 13 70 11.00 11.*1 Meetens-Dahata Utilities let Mortsase 10 1/4 2006 A Me* 17 15 1C.28 13.64 Cstoltes Power & Lt eht 1st Mortsase 10 1/2 2009 A her 22 123 10. M 10.58 Puf fic Gee 6 Electria 1st 4 Raf. 10 1/8 2012 Am June 6 200 10.15 10.16 unha Power 1st 6 Ref. 10 1/8 2009 A June ' 150 10.16 sa Pubit e Servlee of Oklahene let Mo rt gese 9 5/8 2009 Aa June 11 73 9.63 9.?! Sewth Caro 1&me fleerrte & Gee let e Aef. 9 7/8 2009 A Jane 11 50 9.94 10.06 Coweestth Idlese let teertgase 9 1/4 1984 Aa ' Jesse 16 200 4.30 RA Peelte Servlee Electrit & Gee 1st & Ref. 9 3/4 2009 Ae July IF 100 g .72 g.31 kastecey Wt111ttee let unessese 9 5/8 2009 Aa Amenet 8 50 9.50 e.no 1swa Puolle Service let hartsase 9 3/6 2009 Aa fuseet 28 M 9.53 9.91 Detrett Edleen Geo. 6 ser Mort. 10 1/8 2009 boa Sept e r 12 100 1C.97 11.M l Glah Power & Light 1st Mortgese 10 1/4 2009 A Septegner 12 3C.M 65 10.22 l l 1

APE %* Page 11 PREFERRED STOCK YIELDS Year Moody' s (A) High Grade Medium Grade (B) (C) 1950 3.75% 4.18% 1951 4.02 4.43 1952 4.03 4.44 1953 4.22 4.62 1954 3.94 4.27 1955 3.94% 4.25% 1956 4.18 4.49 1957 4.72 5.01 1958 4.51 4.83 1959 4.79 5.01 1960 4.85% 5.06% 1961 4 . 71 4.90 1962 4.52 4.74 1963 4.38 4.58 1964 4.49 4.68 1965 4.53% 4.72% 1966 5.19 5.41 1967 5.54 5.77 1968 6.07 6.28 1969 6.76 6.91 1970 7.55% 7.77% 1971 7.10 7.36 1972 7.23 7.43 1973 7.56 7.78 1974 9.26 9.79 1975 9.44% 10.63% 1976 8.71 9.26 1977 8.12 8.50 1978 8.54 9.10 1979 January 9.05 9.61 February 9.11 9.66 March 9.10 9.63 April 9.15 9.71 Itay 9.20 9.99 June 9.03 9.55 July 8.98 9.60 l August 9.05 9.72 l l l

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                                                             ' Par      Davidend        Trice te       of fe rie$  Proceeds       te
                 <*esent           Os te     (1.000)         Value         hate           Public        Pries      (81.000)     Canoesy tai               (p,        (;.          T             m               r              (-          in temas Electris Service         January 31       300         " ho      8 8.32           8 100.00           8.32:

lewa Publie Servlee Festuary 8 8 30.000 8.471 150 ae 8.52 100.00 8.52 15.000 8.66 Public Service of indiens February 9 450 8100 8. 38 100.00 8.38 45.000 8.50 San Diego Ces 6 Electric February 22 1.000 2.68 me 27.50 9.00 17.500 9.39 ladaene 6 Mick 15an Electris february 28 1.600 8 25 2 15 25.00 9.00 Weentatten heter Power March 8 40.000 9.3. 150 $100 9.00 100.00 9.00 25.000 9.16 Chis tower narch 16 1.600 8 25 2.27 25.00 9.08 60.000 9.48 Mieseurs Publie Service narch 21 600 he 2.81 27.50 9.50 Public Service of new nessee 11.000 9.87 Merci 49 260 De 8.00 100.00 8.80 Ceemon.ealth Edimen April 11 26.000 8.93 750 to 8.40 100.00 8.40 75.000 8.48 oklahome Gee & tiectria April 19 150 8100 8.541 100.00 8.54 P;ettit Power 6 L18ht may 10 15.000 8.68 1.600 no 2.29 25.00 9.16 60.000 9.53 Pacific Ces 6 Electris May 24 5.000 8 25 2.57 27.50 9. 35 Caldue 6 Southern chie June 21 137.500 9.70 400 8100 9.503 100.00 9.50 40.000 Ceneumere Power June 27 9.65 1.600 81 2.50 25.00 10.00 40.000 10.43 Lauteville Cse & Electric June 27 250 to 8.90 100.00 8.90 buse Power 15.000 8.98 Au8ust 8 400 8100 8.842 101.03 8.75 40.000 8.86 Floride Power & L18ht Ae8 vat 22 500 8100 8.842 101.00 8.75 Ohie 8dioen Sept. 19 50.000 8.85 450 $100 9.122 100.00 9. 12 Delmarve Power & Light Bee. 9 45.000 9.31 20 $100 9.001 101.12 8.90 Culf States Utilities Nov. 30 50.0 20.000 9.03

                                                            $100       4 8.00             100,00           8.80      5G.605       3/A Decrett Ediaan                 Dec. 7          600         8100          9.721            100.00          9 .72 W1oconsis Electric Power                                                                                            60.000       9.88 Dec. 7          600         8100          8.001            100.00          8.80      60.000       8.90
 $3. Caroline Eles. & Gee       De c. 12        400         8 50          8 .723              50.00        8.72      20.000       8.85 D

mm D o D er < A _ o AA m

IDFC Pate : 7tremttr stocr ervins ST AFC* TO PUti!! rit**RTO t*1'.T*? 0*t1A*TWC COMP ATf t3 O number Yield at Aggresare not Cost Offertas of Sharea Par Dividend Price to offertag Proceeds to Ceesse, Late f1,000) Talt, mate Public Prt ce ($1.000) Compan*

                  <ai                en3         r**              ras      J)                 (T'       (C)           m         (It Gulf States t:111stes             Jan. 16            350       8100        8 e.96         $ 101.6 3       e.801       35.000   9 . 9 71 Arkansee Power 6 Lash             Jan. 24            600          25        10.601           26.00      10.00         15.000  1".31 Public Servsce of how Mesief    Jan. 25             400        100           8.75%         100.00        8.75        40.000   8.87 Kousten Lssettas 6 Power         Jea. 30             300        No         5 9.04           100.00        9.06        30.000   9.17

7. mas Power & LaSat Tet. 6 300 Ee s 8.84 99.33 8.90 29.798 9.00 Puset seed Power 6 Lasht Fet. 6 2.000 25 9. 561 25.00 9 .36 50.000 9.69 Artaena Public Service Peb to 600 100 $ 8.80 100.00 8.80 60.000 8.91 Cearsta Power ree 21 2.000 se 9 2.56 25.10 10.20 50.200 10.59 Lautstana Power 6 Light Peb 22 350 100 11.68: 102.50 11.20 35.000 NA Public Service of ladiana Apr. 3 35 0 100 8.961 100.00 8.96 35.000 9.08 tsah Power & Liths Ap r. 19 000 25 8 2 .36 25.54 9.26 20.000 9.99 Culf Power Apr. 26 100 100 9.521 100.00 9.52 10.000 9.70 traerstate Power Mme 10 202 50 93 50.00 9.00 10.100 MA Appalachiae Power Mew 15 1.600 s. 8 2.65 25.00 10.60 40.000 10.84 Pue11e Service of new nampaatre 'ter 15 1.200 25 11.261 25.00 11.24 30.000 11 .75 Ouse Power June 7 500 100 8.842 100.00 8.86 50.000 MA trhassas Power & Lasht Jwee 21 1.600 25 9.92 25.70 9.45 40.000 9 . 85 Leussana Power & Lsthe July 12 2,400 25 10. 72 25.00 10.72 60.000 11.30 Rechestar Ces 6 Electric July 12 250 100 8.602 100.00 8.60 25.000 8.74 central Power & Lasht July 23 500 100 8.722 100.00 8.72 50.000 8.00 P temet Electric Power July 31 700 50 $ 4.23 30.00 8.46 35.000 8.54 Culf States Uttlities August 2 350 100 4.641 100.00 8.64 35.000 8.75 Lon8 Island L18ating Autuat 28 750 100 9.801 100.00 9.80 75.000 9.97 Southern Ca11ternas Ediaen September 6 750 100 8.541 100.00 4 .56 75.000 A.65 D**D T $

wo o 1. li% l 1 l l l l

Appendi: Page 16 1 DERIVATION OF FolOGRJ Let bo= Market price at D=0 k = Dividend per share at time 8# l b = Capitalization rate Then the present value of hg , i.e. , the dividend to h:

                       + .n or i   received in year      L       is equal to De

1) [/ + j]I Th e. present value of eli future dividends is the stan of the inetvidual present values, and that by definition is equal to the current market price g.

Therefore

                                ~

E 5 #M0 ~g,j E f/ +De l} $ Asauming the continuous discounting of a continuously growing dividend we obtain so

3) No a (dee-ifdf

                             ).

liowever De=D[iy]*

Appendix Page 17 Since dividend is assumed to grow continously, then De= D,e'* Substituting in Equation (3) we get so st u> M o=,fD,e e-ildi O e M.= D, e"l~Qt M.= D. zy or D. i - y = M. g 5)i =y+y. where o = Current dividend yield, i.e., he M. That is, the capitalization rate equals the growth rate plus the current dividend yield.

Appendi Page IS' AtiTigC*I? AFFLICAT13 Dieeeu.t PRESSirf D&seemst passtrr Otwidene Factor (fs) valgt g g (A) (3) (C) (3) (3) (p) l l

1) s t . .wu 0.92593 30 77223 36 3 3.55567 0.135a0 4 0.h8@

j) 1. ICJV 0.857 % 0.9m522 27 3.733h6 0.12519 0.6679

         .)   1.15763          0.79383          0 91896                          24      3 99013           0.11591           0.6%$

6) 1.21551 0.73503 0. 8C.= 29 4.11614 0.1M33 0.hh1?

        ;)    1. .'763 .       0 68m2           0.86861                          30)     4.32196           0.09938           0.4295 e.)   1. j.. . a .     . 63.)l7         0. 8m449                         31)     4 53km            0.0W0s            t h159

7) 1. k ert t o 0. 56 A j 0.82103 32) 4.76691 0.085a0 b) 1.67 ( e 0. % C27 0 79823 33) 5 00319 0. M889 0.40F 0 396

9) 1.55133 C. 5Cm5 C.77605 3hj 5 25335 c.M305 c.3437 Ic) 1.62889 0.66319 0.7969 35' 1 5 5160e 0.06763 0.3730

11) 1.710 A 0.k2888 0.73353 36J 5 7918e 0.06a6a O'36a6

34) 1.79586 0 39711 0.71315 37) 6.ce161 0.0579) 0.3526 1.3 ) 1. 885M c.3677n 0.69335 34] 6.385h8 0.05369 0.3nad

1) 1 97%j 0 Ja' e 0.67kO9 39 6 70h75 0.0b971 0 3332 IS) s.07893 0 31524 0.65536 40 p) 7 03999 0.0h603 C.324Q

16) 2.18287 0.29189 0.63716 41 i 7 39199 0.cha62 0.3150

17) 2.29202 0.27027 0.619b6 42 7 76199 0.039h6 0 306d I t. ) 2 kn662

• 2 ' CL' - 0.60226 43 )J 8.thW7 0.036 % 0.

sy) 4 5aw u. cs u 1 0 58552 hh) 8.55715 0.03383 C. ',

2r,) 2.65330 0.2th55 0.56927 65) 8 98501 0.03133 0.3811 l

21) 2.785J6 0.19666 0.55366 h6) 9 434a6 0.m901 0.2734 i d2) 2.92526 0.18396 0 5386 k7 9 90597 0.m6M 0.a66c

23) 3.07152 0.17032 0 52314 68 10.4013 0.cs487 0.35h Pl. ) 3.2251n 0.15770 0.50860 49 10 9213 0.0E3Q3 0.2515

5) 3.38635 0.16602 0.69647 50 11.6676 0.ca13a 0.a h4 E 1= 50..................... 36.hk I 51 = 75..................... h.58 E 76 = 1CC . . . . . . . . . . . . . ........ 2.25 g . . . . . . . . . . . . . . . . . . 113.27 eoee corrent vsm14 = $1 e 433 27 = 3 05 see sh =

a g.......... g l

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     ..e Present Telus
                        ....          ei..            e.   .            per v..r           am .              per n vr..

50 11.47 . .ames .

                                                                                          .183 a 25     =       $4 54 75           38.83         .003113               .1309
                                                                                          #~9 n R       =      fBG1

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     - - - - eseet e.eesum.            e a.see.w sneense                        a.wa.n6      ,s.se         ,s.es           $s.,s         so. nl     39.m      u.m        39.es       es.m Fleeus Pesee CemoeeeeLes tene& apeesueee             4 711.330 sneseene                         754.aro tes.es          18h.05           43 66         89 5       13-96     3e 96      63.a6       85 46 tierue tweeg a Laeme to.e4 emerseases            4 L.6et.ar6 Sneeerts                       n.e 7.ast ten.es          4e0.06           Ss.es5 /      44.e6 l'

ji 3/ 33 16 48 75 St.6s RountLes fleseets te e4 es...ssene 4 ses.rn Shoosets 95.fM 1e5.06 800.05 33.6s 36. 4 34. M 33. e6 94 J6 88.66 meseeeer settittee tee.1 esseessene 4 306.116 jf sne sete M.M sam. ta. Len.as neo.os 31.16 }/ 31.)$ 43.6s es.es inne v.t us.iise

t. eel enre...see e ces.w 3, seeeerte TM.333 m. 86 as 96 47.85 6S.75 ji 3e.as 39.ca an.46 men vere sence si.eveu a ese seeer epee uese 4 33e. ITI sneee rse 633.77e sa 96 44.ps 69 66 RS 86 to es 3B 96 35.es to. 66 e

Peelf te Pese, & Laett tossa eseesssene 4 9as. Sit }/ anseesse e$3.333 3, w as.es 3a 9s 67.e6 3a.66 a0 36 ji 69 se perinese esenet twerts tes.1 enesessene 4 3es.474 ansees te ace.479 3e0. el 480.03 47 46 93 46 IT 36 St.se 84.06 67.66 teemme steeeete Posee seena auseouses 8 714.713 saenese 754.713 met lesL e6 95 75 90.M 81 9s 3s.46 M. 36 16 h enen tause 61.aeme feasi esee ume 8 es t.ee6 s hoseets aeo, gn? pp es 9e es es.nl 49.M 93 75 M.66 WS.fr 78 e6 ettanese Ebntvit rme feees speeestsee 8 1.466.905 l taessete L.613.ae6 g6 $6 16 96 39. pl M.79 44.93 33.es 89.46 TG es em j/ seassetten esseeems eten ensenessen. jf temee es If77 eese. I l l l l pp p .- -  ; r-D D D -i l A oo) o 1 M]d\l o

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     "'" Pet 1&e seewtes                   ear. f$           3co.0         11.M          3.%3.eg          .34               R6        et       at Pomeylaceas pusse & uste               mar. 30      kleo..Do   o                  70w e00.0.e        .99               .sh       .63      3.4 ekte edaeas                           ape. 6        4.een eus         eL.eo

17. 71.3eo eae .47 .en .31 39 maammeese pesos 6 Meht aes. 13 Tse.am 19.50 .66 .18 no.cas.amo .ta 6.o Belltesse ens & Sheettle ass. 1.9eQ.e.e 23 80 )h.3ee.eee .87 .05 .73 3.1 Eteemene pobl&e servies aes. 1.100.eno a.73 Centre 1 means peer &&.ne5.eno .98 .07 .49 3.9 aps. 37 eso.emo 15.13 13.613.emo .33 .e4 e61 6.e t ape. e8 1.a m ese Skas RLiph.eso .e8 senses fe==' poser &4eht .6m .78 3.4 ettet Test may 6 Me.eso 17. 5 4.469.000 .75 .am .9s 5.5 Clemahand Bneeette filamenetaes may la a.6es.emo 34.se 67 eas.ess .95 .e6 p 61ae servise of Reuene mey at .99 L95

1. Ten.seo Eco 64.210,s . 9o .e6 .e6 3.7 Colemmes 6 samaasee chae may 19 2. con.cso 32.62 43.350.gue .e6 ameneesses puser may 39

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• stenere memesa remos Jaar 13 4.eus.eso 13.37 $3.See.emo .44 .e5 .53

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                                                                                                         .45                          .71      36 164.7 % 000        .7)               . 0m         77     La Saarte restfie Posee                   Sept. 31      1.000.000         13.12       13.125.000        .51                .11       .62      6.7 Comumetty Puente seretas                sept. 22         3 % 000       &&.87          1.831. (Ee        7)              .75      1.00       $.3 sten Penst 6 taans                     seet. 22     1.000.000         37.75        37.3 % 000        .79               .R           86     13 atiensis Casy 14eet La                  sept. 29     1.000.000         20.00        20.0005000        .67               .11        .79 Poussenph&e 14estrae                                                                                                                       39 oss. 6       6.000.000         17.3 0       70,000.000           54             .03        .63      35 Cerename Peer & L&ett                  Ost. IJ       S 000.000         22.75        6e.750.000        .63                  0=      .6a      29 811& seas Penes                       est. 19       2.}0C 000         PS.30        63.7% C00         .69               .09 Lam.&osalle ese 6 Inestrie            Os t. 70 79       .I e00.000 Petite eerwtas of amo mespektre       Os t. M    1.000.000 F).00 21.50 20.000.000 21.$00.000 72
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                                                                                                                                              . AD     49 potes servaes of ese -                                                                      3c67en.me        .49              .13       .M       3.4 agues 40            1.3ma, Gee          3L 3e         eg,3sh. css         39            .es      .64       3.3 seytes paese & Lasse                    essene 36         3.900 m             es.89         9e 479.m            9e             .M       .66       3.3 66 sees pecifle posee                   amouse 10          L.eDO.EES          54.42         44.125.000       .3b               .00         43     3. e endtese ene 4 Eneeette                   este.          S      7% eBD          17.eD         12.790. gee         91             . 52     .M       39 toesteesee pause                      espe.        32       Gme,eme         87.39         RL 8he, ego                        .11 ansees spece anesette                   Beet.        30        35e, ene
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        .  .                                                                                                                                  I 7JTCO2x Fee 22 came steer cryttf titre' Te P"t*.TC EttcT1Tc t'T!tt?Y CPERAftNo C094FIE5 1121 po. of Offering         sharea            Price to       Aggregate        Sellian Costs

• C ow3 a = Date (1.00M Putit e Procee6p liiti d m m m m _

m m it January 11 1.000 822.00 822.000.000 $ .60 2 .72 toua Public Servate 3.175.000 .83 5.2

• ruseourt Public Service January 12 200 15.88 January 26 28.00 168.000.000 .99 1.2 Commo.m.salth Edison 6.000 12.00 18.000.000 .65 5 .'.

El Paso Electrat January 25 1.500 18.15 49.913.000 .43 3.5 Duqueena Light featuary 1 2.750 Faernary 1 1.500 18.25 27.375.000 .60 3.3 seeth Careltaa E1. 6 Gee

                                                                                                                .82         3.8 central hudsee ca.        atric   February 9           500             21. 30         10.650.000 february 22      2.000               29.30          58.600.000      .99         3.0 tausten Industries                                                                                                3.1 March 2          5.500               20.00       110.000.000        .61 Due Power                                                                                             . 86        3.0 Lansas City Power & Light         March 15         1.200               28.25          33.900.000 22.75           6.825.000      N/A         N/A slack tills Pa.et & Lasht         March 16             300 16.13          25.000.000      N/A         N/A Central naine Power               March 16         1.600 March 21          2.000              18.63          37.250.000      .59         3.2 bow York 3:ste Elsetrie & Cas                                                                          .68        3.1 Pennsylvente Power & Light        March 29          3.000              22.13          66.375.000 h onesota Power 6 Light           April 5          1.500               21.00          31.250.000      .67         3.2
     '                                      April 17         1.000               2125           23.250.000      . 75        3.2 ladianasolas Power 6 Lisht                                                                             .81        3.7 ottar fail Power                  May 3                450             21.75            9.788.000 3.500              1 8.75         65.625.000       .61        3.3 Portland comeral Electrie         ney 6
                                                                                                                 .53        3.3 Tucase Gas & Electric             May 6             2.500               16.13         40.313.000 hay 9             2.500              26.25          60.625.000       .78        3.2 1111 asis Power                                                                                        . 71       3.7 Pub 11e service of new namesnare   May 9            1.300              19.00          24.700.000 nay 11            2.500              15.00          37.500.000       .52        3.5 Ean Diese cae & Electric                                                                               .73        3.2 Tolede E41aan                     May 16            2.000               22.50         45.000.000 Eansas Power & Light               ne; 17           1.700              20.63          35.063.000        .67       3. 2 ney 23              200             20.38            4.075.000    1.13         5.5 Co-. wry Public servlee hoy 23           2.200               17.90         39.300.000        .57       3.2 Utah Power & Lisht                                                                                    .63        3.3 Cleveland Elaetric Illussmatlag   ney 26           3.000               19.38         58.125.000 June 1           1.600               19.63         31.400.000       .61        3.1 Public Service of new manico                                                                            .52        3.6 Nia6are nehmth Power              June 6           3.500               14.25         49.875.000 Joe 7            2.500               19 .75        69.375.000       N/A        E/A Artsons Public Service                                                                                 .94       6.3 tanger tydre-Electrie             J oe 16              300             15.25           4.575.000 Central 1111 mete Public Servlee  J oe 14          1.700               13.63         23.163.000        .53        3.9 3.000               2 2.75        68.250.000        .74        3.3 Public Servlee Electric & Gas     Joe 21
                                                                                                                  .67        3.8 pershwestern Public Service       June 22              400             17.75           7.100.000 United Illuminatang               July 24          1.000               26.25         26.250.000     1.00          3.8 August 3             750             23.38          17.531.000       N/A        N/A noveda Power Aveus t 8        1.200               27.00          32.400.000       .73        2.7 Idahe Power                                                                                             .64       4.2 Empire District Electric          August 10            660             15.13           9.983.000 August 15        1.000               11.75          11.750.000        .60       5.2 El Pase Electric                                                                                        .52       3.2 Detrett Edison                    August 16        5,000               16.38          81.875.000 towe.1111 mete Gas & Electric      seen. 12             750             21.63          16.219.000        .77       3.6 Chimnena Gas & Electric           Sept. 12          3.000              18.13          54.375.000        .57       3.1 Censumere Power                   sept. 13         4,000               23.88          95.500.000        .72       3.0 Daten Electrie                    Sept. 19         4.000               15.00          60.000.000        .53       3.5 Rochester Ces & Electric          Sept. 20          1.250              18.75          23.438.000        .48       3.6 Dayton Power & Light              Sept. 21         2.500               17.00          42,500.000       N/4        5/A washin8:ee water Power             sept. 21             900             23.50          21.150.000        .78       3.3 Pub 11e servlee of Indiana        Sept. 27         2.000               26.50          53.000.000        .82       3.1 Public Service of how menteo      Oct. 4           2.000               20.50          41.000.000        .63       3.1 Sierra Pacific Power              Oct. 6           1.000               14.00          14.000.000        .59       4.2 Carol'ma Power & Light            Oct. 11           3.500              22.88          80.063.000        .67       2.9 Eeuthern Ca11foreta Edleen        Oct. 17          6.000               25.38       152.250.000          . 75      2.9 Pacif ts Power & Light            Oct.18           2.500               21.00          32.500.000        .53       2.5
    .      Gulf States Ett11 ties            Oct. 19           5.000              13.f4          65.000.000        .38       2.9 how Terk State Elaetrie 6 Cas      Oct. 31          2.000               16.88          33,750.000        .45       3.8 Public Service of Celerado        pov. 1            3.000              16.13          68.375.000        .63       3.9 American Electric Power           mov. 8             6.000              21.00        126.000.000          .71       3.6 Emasas cas & Electric             mov. 8            1.600              18.00          28,800.000        .66       3.7 Puget Se.mnd Power & Light         new 14           2.000               13.75          31.500.000        .61       3.9 Cinciamatt Gao 6 Electric         now. 20          2.000               19.75          $5.30C.000        .71       3.1 Arisena Publit Service             Mov. 21           3.500              19.63          68.680.000        .60        3.1 las Diego Ces & Electric           Mov. 28          2.000               15.00          30.000.000         .60      4.0 St. Joseph Lasht & Power           now. 30              400             13.00            5.200.000        .69      5.3 Easterm L'tilities Assoc.          Dec. 4               600             15. 38           8.225.000        .78      5.1 Castral Illinois Public Service    Dec. 6            1. 700             13.00          22.100.000         .53      4.1 Virginia Eleettse Power Company    Lee. 12          5.000               14.13          70.625.000         .50       3.5 Utan Power 6 light                 Cec. 13          1.800               19.25          b.450.000          .64       3.3 herthwestern Publie Servies        Dec. 21              400             17.00            6.800.000        .69      4.1 s

[

   .         e                                              .

377C.7 iny CJPDED4 STOCF C'7Tt! TIREC* TO Pt'Bitt ELECTRIC C"ILITY CPERATINC COWAMIES D us. Offertag shares Price to aggregate sellina Costs C. wan, bate (1.000) Public Proceede Wota 1 (A, (3) (C) (p) (g) (7) gg, MAddie Seeth Utilities Jan. 9 8.500 8 15.30 8130.050.000 8 .40 2.61 Leuteville Cao 6 Electric Jea. 10 1.000 21.00 21.000.000 . 75 3.6 Publat Service of New tempshire Jan. le 2.000 20.50 41.000.000 .75 3.7

 . Iowa Power 6 Lasht                  Jan. 18       375              25.39             9.516.000   .74           249 11 Pass tiectric                    Jan. 23    1.500               11.00           16.500.000    .52           6.7 T =as 0:111ttes                     Jan 23     5.000               19.50           97.500.000     .59          3.0 Atlantic City tiectric              Jan. 26    1.000               19.88           19.875.000    .69           3.5 uousten ladustries                  Feb. 7     2.000               29.13           58.250.000    . 79          2.7 Connorm.eelsh Edison                Feb. 8     7.000               26.75         187.250.000     .91           3.6 Chie Edison                         Feb. 16    6.0%                16.50           e9.000.000      MA           NA PIrtland Gas Electric               Teb. 27    5.000               17.88           M . 375.000   .58           3.1 Miameesta Power & Light             Mar. 13    1.000               20.15           20.150.000    .73           3.6 Duke Power                          Mar. la    3.500               19.50         107.250.000     .60           3.0 te Atucky Utilities                 Mar. 28    1.000               '0.00           20.000.000    . 71          3.6 Phtiseelphia risetric               Apr. 3   4.000               16.34           65.000.000    .55           3.4 tows Publit Service                 Apr. 3   1.000               21.50           21.500.000    .52           2.4 Ottar fail Power                    Apr. 11     500              21.75           10.875.000    .77           3.5 S sta Caro 11ea Electrie & Cas      Apr. 18  1.000               16.88           16,875.000    .60           3.6 Illisets Power                      Aar. 19    3.000               22.25          66.750.000     .78           3.5 Pubits servtee of Celerade          Apr. 24    2,500               16.13          40.313.000     .57           3.5 Black Rille Power 6 Liamt           New 2         350              25.50             4.925.000 1.04            4.2 Eaasse City Power & Light           May 8      1.600               25.50          40.000.000     .83           3. 3 Public Service of new Messee        May 15     2.500               19.25          48.125.000     .64           3.3 Delaarva Power 6 Lisht              May 23     2.000               12.63           25.250.000    .52           4.1 Masseurs Public service             June 6        300              11.75             3.525.000  . 72           4.1 merthere imetma Pubitc Servlee      June 13    2.000               15.25           30.500.000    .57           3.7 T11edo Edisen                       June 19    2.000               21.13          42.250.000     .73           3.5 Utah Power 6 Lasht                   Jame 21   2.200               19.00           41.800.000    .66           3.5 trisees Public servise              June 27    2.500               19.63          49.063.000       EA           NA Pubits seretee of new mampshire     July 11    2.000               19.50           39.000.000    .69           3.5 See Diese ces & Electric            July 17    3.000               15.00          45.000.000    .35            3.7 Detrett Edison                       July 17   6.000               14.88                         .50           2.6 seetoe Idioes                       July 31    2.000               22.38           09*250l000 64.750  000   .73           %.3 Clevelass Electris Illum.           Aug. 1     6.y00               16.00           81            .62           3.4 El Pase Electric                    Ams. i     1.. -               11.00           16l l         .32           4.7 oklanoma Gaa & Electric             Aug. 14    2.500               16.75          41.875.000     .59           3.5 3 dame Power                        Aue. 15    1.500               25.63           38.434.000      71          2.8 neveda Power                        Aus. 21       750              26.63           19.969.000    .92           3.5 Public Service of ladiese           Aus. 28    2.000               15.25           50.500.000    .74           2.9 l

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e Tg on nuclear power and coal to DUPLICATE DOCUMENT 7 meet the demand for electricity l Entire document previously

                                                                                          /[7                      over the next several decade 3, l according to a four-year, entered into system under:                                  - j{$$   y p.-[p/             $4.1 million National Academy

'l W." ;' W ." ^ of Sciences study for the e ANO hS ' ' H UCPartment of Energy. " National kpoh.cy should support nuclearthe y' No. of pages: _ _ continued use of power

                                                                                                               , for the next few decades," said the studv. " Coal and nuclear power a're the only economic
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.g                           _4         J      l              ' ..                                             . this century . A balanced mix

• of coal- and nuclear-generated

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                                                                                                               >'         These findings parallel I.                                 O      i       e,   a 4                                                          and support the decision by y ry                . g' . i .-4            :    .[     k;                                                      , management of the Sliddle South
                                   ' ' } . ,l
                                                                                                    ~

9 Utilities System,in the mid-1960s. [ 8. T "/ 1 to diversify our fuel mix by g P T* pl

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                                                                                                            , building nuclear- and coal-fueled S                t'          -

1  : generating plants. l E ' . T- *I.Sd4.$ P In the wake of Three Mile 3

                    -d                                                                                      I Island, with the heightened
                                                                                                            ' concernabout nuclearpower,the American public needs reliable I                                                                                                          i j information about our nation's i_ energy supply picture, the

realistic choices available to us

                                                                                                            ; and where nuclear and coal fit 0 into this picture.

• F We at Middle South Utilities want you to have such

[E information. We also want you to v I know about the positive actions under mty as a result of lessons learned at 'Ihree Mile Island. This report is dedicated to di that end. V r f

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Middle South Utilitie.2, Inc. Pcrf;rmanc3 Highlights Percent 1979 1978 Increase Total Operating Revenues $ 1,823.1 million $1,622.2 million 12.4 Total Operating Expenses

                                                                                                                     $1,604.9 million                ._ $1,393.9 million                                                                               15.1 Fuel Costs
                                                         - . . . . -                                          __    -$ 697.6 million                    . $ 623.4 million                                     -             _ . .

11.9 Net income $ 182.1 million $ 185.4 million ( l.8) Earnings Per Share $ 2.13 $ 2.46 ( 13.4) piyidends Pakl per Share _, $ 1.52 __

                                                                                                                                                               $                   1.44                                                      _

5.6 Custon'ers (Electric - Year end) 1,520,142 1,489,188 2.1

                                                                                                                                                               ~

Electric Energy Sales [ Total [ 53.0 billiori kwh 52.0 billion kwh 1.9 System Peak Load 10,687,000 kw 10,648,000 kw 04 Gross Utility Plant (Year-end) 7.0 billion $ 6.1 billion 14.8 Construction Expenditures $1,024.7 million 5 901.0 million 13.7 MSU Common Stock $16 3/8 Illgh $1'7 3/811igh _ .Marktt

                                                               . _ . _ .price
                                                                           . . . _per
                                                                                    . - _s!_ . . _ _ ' _ . . . .. _ _$121

_.~ . _ _ /4 Low

                                                                                                                                   ._ _ _.. _ __.                   $ 14 1/_4 Low __ _

Contents .- - . . . .. 2 Letter to Stocid1olders 1 Ik>ard of Diredors & Officers 5 Customer & stocMioider Information 8 Load Man gement/Research

                                                                                                                                                                 & Desek.pment
                                                                                                 ,                                                      10 Construmon 14 Iucls for Electric Generation

( 16 Financial Resiew . - - . _ . . l r 20 Consolidated Financial Statements 32 Management's Discussion and Analysis of the Summary of Operations 311%9 19'9 Finandal Record

                                                                                                                                        ' -            36 System Ekuric statistics l

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