ML19347D282
| ML19347D282 | |
| Person / Time | |
|---|---|
| Site: | San Onofre  |
| Issue date: | 12/31/1980 |
| From: | Korpan R SAN DIEGO GAS & ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML13302A498 | List: |
| References | |
| 59788, NUDOCS 8103110736 | |
| Download: ML19347D282 (91) | |
Text
. - . - - .
h APPLICATION NO. 59788 (AMENDED)
- EXHIBIT NO. (SDG&E - 101)
WITNESS: R. KORPAN i DATE: ,
r San Diego Gas & Electric 1982 TEST YEAR COST OF CAPITAL AND RATE OF RETURN INCLUDING PREPARED TESTIMONY i
BEFORE THE PUBLIC UTILITIES COMMISSION l OF THE STATE OF CALIFORNIA l DECEMBER 1980 '
10103110 Tbb :
1 EXHIBIT (SDGLE-1)
- COST OF CAPITAL AND RATE OF RETURN 2 PREPARED DIRECT TESTIMONY OF RICHARD KORPAN 3 1. O. Mr. Korpan, what is the purpose of your testimony in 4 this proceeding?
5 A. 'The purpose of my testimony in this proceeding is to 6 demonstrate the increased cost of capital in 1982 and 7 1983 and to substantiate the need for an increase in 8 the authorized rate of return from the level adopted 9 in the Company's last General Rate Case Decision 10 90405 of June 5,1979.
11 2. Q. Would you please explain how the cost of capital 12 for Test Year 1982 was calculated?
13 A. The cost of capital for the 1982 Test Year was p,repared 14 using the same methodology included in the first phase 15 of Application 59788, except that the return on 16 equity was increased to a level necessary to give 17 SDGLE the opportunity to progress from its current 1
- 18 financial situation towards a single A bond rating 1
19 level by 1984., The ultimate achievement of this goal 20 will require the completion of SONGS Units 2 and 3 21 as well as their inclusion in rate base.
22 The cost of long-term debt, preferred stock and 23 bankers' acceptances were updated to reflect current 24 assumptions for money cos'_s and happenings subsequent 25 to the 1981 case. Historical data on the coste of 26 capital are provided as background information for 27 the cost estimates through 1983.
28 In addition, comparisons with the utility l
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9 j 1 industry by credit rating groups, measurements of 2 market performance, comparisons to other indus-3 tries, and other analyses and studies are included 4 to substantiate the need for continued improvement 5 in the Company's financial condition.
6 3. O. Mr. Korpan, in past proceedings, your Company has 7 compared itself with other electric or c'ombination 8 companies of similar size for your comparable 9 earnings test. Why have you chosen a different 10 approach?
11 A. Given the generally mediocre financial condition 12 of the utility industry today, particularly for 13 Companies of comparable financial risk to SDGEE, 14l it would be 1sdicrous to measure this Company's 15 financial results against an average of a score of 16 compan'ies which are also suffering. Even if their 17 overall results are somewhat better than SDG&E's, 18 improvement to that level would be inadequate in l
19 terms of the needs of SDGLE and the industry as a 20 whole.
21 i I have heard the argument that utilities do 22 not compete with industrials for the same invest- .
23 ment dollar; that utility stocks are usually 24 purchased strictly for their et cent dividend and 25 steady annual dividends growth. Industrial stocks, 26 on the other hand, are evaluated for their poten-27 tial appreciation in market price, with less 28 emphasis placed on dividends, and therefore have a 1
I different purpose in portfolios.
2 It is true that utility stocks are usually 3 Purchased strictly for their dividends and potential 4 dividend growth. Utility investors are painfully 5 aware that there has been little appreciation in 6 stoct prices. However, investors insist on a 7 return consistent with other investment opportuni-8 ties and a risk premium consistent with their 9 perception of the industry. Investors accomplish 10 this return by valuing common stock to provide a ,
11 yield to approximate opportunity costs, plus a 12 risk premium.
13 This is a symptom of the industry's ills.
14 Insufficient cash reinvestment year after year 15 results in investors having to rely solely on 16 dividends fer return. Exclusive reliance strictly 17 ,on higher dividends to prop up the Company's stock l 18 , price is dangerous. In order to continue dividend 19 , growth, return on equity must increase commensurately 20 or there will be little earnings left for reinvestment.
21 The resulting need to bolster common equity balances 22 by the issuance of larger and larger numbers of 23 common shares , compounds the dividend problem.
24 The point is, the utility industry must be in 25 a position to compete with other segments of the 26 financial marketplace or face an eventual financial 27 breakdown.
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28 4. Q. In general terms, Mr. Korpan, why do you think an 4
I increase in the return on equity is necessary?
2 A. An increase in SDCLE's authorized return on equity 3 is definitely in order in light of (1) the continued 4 erosion of earnings due to persistently high 5 in flation , (2) increasing cost of money, and (3) 6 the levels of rate of return and return on equity 7 author.ized for other California utilities in 8 recent Commission decisions. As substantiated in i 9 the exhibits filed with SDGLE's Amended Application, 10 SDGLE's financial results are inferior. With 11 . continuing earnings erosion, particularly under 12 weak security market conditions, the measurement 13 l of a fair and reasonable return on equity on a 14 .h traditional basis is no longer relevant. In order v.
15 to finance its construction program at a fair and i 16 reasonable cost, the Company must substantally 17 improve its financial condition.
18 Expeditious treatment of its request is 19 essential to the financial wellheing of SDGEE.
20 Substantial rate relief must be received by January 1, 21 1982, in order to reverse the steep decline in 22 financial condition projected for 1982 at present 23 rates and in order to finance the necessarily 24 1arge construction , budget.
l 25 5.- O. Would you please describe the general financial l
26 results the Company would achieve if its rate 27 request for 1982 were granted?
28 A. Yes, Table 1 presents the primary statistics l
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1 relating to the Company's rate request. Total 2 revenues (Line 1) would increase S227.5 million 3 based on the 1982 Test Year, assuming an annualized 4 increase of $103.1 million from the 1981 Test Year 5 in 1982. The total rate of return on rate base 6 ,
requested is 13.97. (Line 5) compared to the 10.59%
. 7 currently authorized in D.90405. The requested 8 return on equity is 19%, compared to the 14.50%
9 allowed in D.00405. In view of the Company's poor 10 quality of earnings (earnings excluding non-cash 11 credits, such as AFDC), the increases in rate of 12 return and return on equity are necessary in order 13 to move toward the goal of improving the Company's 14 internal cash flow generation. Ultimately, with
\ 15 regard to cash flow, the Company must be at least 16 on a comparable basis with the rest of the electric 17 utility industry. This should be accomplished 18 after SONGS Units 2 and 3 are in service and 19 included in rate base.
20 Weighted average rate base (Line 7 on Table 1) 21 l includes about $16.4 million for the debt and 22 preferred portions of ave, rage Construction Work in 23 Progress (CWIP) associated with the APS/SDG&E 24 Interconnection Proj ect, during . 982.
25 Embedded costs (lines 11-13) reflect the 26 financing assumptions detailed on subsequent 27 Tables. Higher interest rates will cause embedded 28 costs to increase through 1982.
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1 The common equity ratio (Line 14) is lower than the 2 Company's goal of reaching 40% (including leases) 3 in its efforts to achieve a Single A bond rating.
4 This ratio on Line 14 does not reflect outstanding 5 leases such as Encina 5 in the capital structure, 6 ,
which are considered debt by most analysts and 7 investors. The rating agencies, in particular, ,
8 include leases as a part of debt in the capital 9 structure in their analysis of a company's bond 10 rating level. As a rule, one would subtract about 3%
11 from the common equity ratio to reflect the effect 12 of leases for SDGEE. This means that 43% is the 13 Company's true goal for the proportion of common 14 equity in the capital structure.
15 6. O. Mr. Korpan, you stated that you propose to increase 16 the return on equity from 14.50% to 19%. Why an i
17 increase of this magnitude?
18 A. Rate base in proportion to total assets is becoming 19 smaller and smaller. This is almost entirely due
- 20 to the higher and higher proportion of CWIP the l
21 Company must carry. In 1975, the proportion of 22 CWIP to rate base was 21%. By 1979 the same ratio 23 reached 41%, and by the end of 1962, without SONGS 24 completed and in service, this ratio will reach 25 At the requested rate of return of 13.9%,
58%.
- 6 the real rate of return by 1982 will be only 8.80%
27 This means in terms of cash return on assests.
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that the Company will receive no cash compensation l
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I for a significant portion of it's capital cost 2 during 1982. As a consequence, the Company must 3 earn a significantly higher return to maintain an 4 acceptable level of cash flow.
5 7. O. Is the common equity ratio the only financial goal 6 to be achieved in your efforts to regain the
. 7 Single A rating?
8 A. No. As will be discussed further, there are 9 additional goals which must be reached. Specifically, 10 they are 3 times pretax interest coverage, 40%
11 internal generation of capital requirements, and 12 maintainence of a steady, competitive dividend 13 growth.
14 The interrelationship of these objectives has
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15 prompted the Company to stress the additional goal 16 of holding its cash construction expenditures 17 (exluding AFDC) to 10% of total capitalization or 18 less. This is not expected to be achieved until l 19 SONGS Units 2 and 3 and the APS/SDGLE Interconnec-l 20 tion Project are completed and in rate base.
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, 21 Lower construction expenditures require a
. 22 lower return on rate base over the long run to 23 achieve the Company's financial goals. The. result 24 would be lower cost to the customer.
25 8. O. Mr. Korpan, would you please elaborate on the 26 Company's past financial resslts?
27 A. Yes. Table 2 depicts dismal financial results
( 28 over the last five years. These dismal results 1 reflect accelerating money costs, the cost of 2 inflation, high customer growth and high capital 3 needs. The Company's poor quality of earnings is 4 evidenced by a high proportion of AFDC to earnings 5 (Table 2, Line 1), a poor before tax interest 6 coverage (Line 4), and low internal generation of i 7 cash (Line 7).
i 8 All other parameters are below par, flat, and 9 without direction, with the exception of the common 10 equity ratio (Line 9) which increased from 31.2%
11 in 1975 (Column A) to 37.2% (34% including leacas) 12 in 1979. This improvement was caused by (1) accept-13 able earnings results in 1977, which, although 14 of poor quality, increased retained earnings, and 15 j (2) the Company's efforts to improve the ratio ,
16 !'!! through the sale of common stock.
17 Poor coverage ratios (Lines 4-6), the prospect 18 of high interest rates, weak markets and debenture
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19 indenture restrictions, have sometimes limited debt -
20 financings. Improvement in the common stock ratio 21 reduces the amount of leverage inherent in the 22 capital structure. By leverage, I mean the combina-l 23 tion of both the amount and cost of debt in the 24 capital structure. These debt factors can change 25 separately, or in combination, and affect the relative 26 amount of leverage in the capital structure. I 27 term this to mean the double leverage concept
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28 which points out the weighted cost as the most s
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1 impo rtant factor. Reduced leverage decreases the 2 risk associated with the debt and of f-balance 3 sheet debt (leases) outstanding and, therefore, 4 improves the prospect of an upgrading. Moreover, 5 the cost of these common sales below book value 6 (see Line 13) is expensive to shareholders and 7 customers alike, as substantiated in subsequent 8 Tables.
9 9. Q. How would you view these results in terms of 10 investor needs and expectations?
11 A. The investor view of an investment results from a 12 combination of his perception of past performance 13 and future potential. Investors' expectat. ions 14 were relatively optimistic in the late sixties and x 15 early seventies. Results, as I have discussed, are 16 less than satisfactory. No wonder, then, that 17 investors are currently discounting the Company's, 18 and the utility industry's, securities to account 19 for a higher risk which they perceive in SDG&E's 20 financial future. This makes all security issues 21 more expensive to both SDGLE's customers and 22 current investors.
23 10. O. Mr. Korpan, why cannot the Company meet the limita-24 tion of 10% cash constructior. expenditures to 25 total capitalization?
26 A. The construction program is comprised of essen-27 tially five elements: 1) San Onofre Units 2 and k 28 3; 2) connection of new gas and electric customers;
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1 3) improvements in system reliability; 4) the 2 APS/SDGEE Interconnection Project; and 5) the cost 3 of mandated programs such as conservation, pollution i
4 control, and conversion projects. These components 5 of the construction program cannot be reduced, while 6 at the same time, allow SDGLE to meet its customers' 7 current and future needs, and satisfy regulatory .
8 compliance requirements.
9i Aside fr om the rising cost of inflation, 10 utilities are faced with continuous additional 11 pressures which impact heavily on the use of
, 12 capital, including stricter environmental controls ,
13 and more complex regulatory restrictions, require-l 14 ments, and restraints. These are positive social 15 needs, but they do little in terms of financial 16 r.esults.
17 11. O. Would you please describe the financial results 18 for SDGLE without rate relief and the results if 19 the Company is allowed its rate request?
20 A. Table 3 shows the projected decline in the Company's 21 financial results assuming no rate relief at 22 present rates. From poor results in 1980, 1981 23 reflects disastrous results, and 1982 is, of 24 course, worse. The 1982 Test Year at proposed 25 rates (Column D) allows some improvement toward 26 financial results c'omparable with Single A companies, 27 but they still remain below the needed levela, 28 For instance, the Company's financial goals O.
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I include pretax coverage o. i. times, 40% of cash 1
2 construction expendituren generated internally and 3 a common equity ratio of 40% (43% or more excluding 4 leases). As I mentioned, with the requested relief, 5 the pretax interest coverage shown on Line 4, Column 6 D is 2.98X; the percent internal generation is 28.4%;
7 and, the common equity ratio is 37.32%. Sustained finan-8 cial results at these levels would give the Company 9 optimism for an eventual return to a Single A bond 10 rating during 1984. Financial results at these 11 improved, but sub-Si.ngle A bond rating levels, 12 must become a reality (actually earned) in order 13 to demonstrate healthy progress in the interim.
14 The only way to turn investors' expectations 15 around and reduce the element of risk perceived by 16 investors in the Company's securities, is to 17 improve financial results on a sustained basis.
18 Return on equity must he improved dramatically to 19 accomplish this.
20 12. Q. Mr. Korpan, what is the solution to SDGLE's financial 21 problems?
22 A. As I have mentioned, SDGLE has kept its construction l
23 budget as low as possible, commensurate with its 24 customers needs and has kept its operating expenses 25 to a minimum. But, the Company's costs rise with 26 the economy as in any other company or industry.
27 This includes the rising cost of money. Return on
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28 equity must improve to change investor expectations I about SDGLE's financial future. Investors must 2 have evidence that SDGLE will be able to increase 3 dividends at a competitive rate and support them 4 with earnings. Further, the quality of earnings 5 in terms of cash flow must also improve. The more 6 cash generated internally, the less often the 7 Company will need to go to the financial markets 8 for cash.
9 13. Q. What specific steps is the Company proposing in 10 this to Application improve cash flow?
11 A. 1) First, the Company has included the debt and 12 preferred equity portions of CUIP for the APS/SDG&E 13 Interconnection Project in rate base. While the 14 Commission has not, in the past,' allowed CWIP in 15 .
rate base, the Company feels its current proposal 16 represents a new perspective. There are two pri-17 mary reasons for this: first, the APS/SDGEE 18 Interconnection Project will have substantial 19 beneficial impact on customer rates by reducing 20 reliance on imported fuel oil, and second, omitting 21 the common equity component of the capital cost 22 creates an incentive to complete the project as 23 expeditiously as possible. Including the debt and 24 preferred equity portions of CWIP in rate base 25 will help relieve the strain caused by the large 26 capital budget by compensating SDG&E for a portion 27 of the carrying costs. This will also improve the 28 Company's quality of earnings by reducing AFDC, I
which provides no cash flow, and by improving internal 2 generation of cash. The energy to be received through 3 this transmission line will replace high cost, fuel oil-4 based generation which will have a beneficial 5 impact on customer rates.
6 Other state regulatory bodies have recognized 7 the need to include CWIP in rate base and the 8 importance of providing adeojute returns. This 9 year, Utah Power and Light was allowed CWIP in 10 rate base and a 16.8% return on equity.
11 2) The second step for improving cash flow is 12 the Company's proposal for a customer connection 13 charge which would substantially reduce construc-14 tion expenditures. This reduction in cash needs 15 would require fewer and smaller financings over 16 the long run. In addition, a lower level of j 17 general revenue would be necessary for the Company 18 to achieve Single A financial results. Furthermore, l
19 the connection charge eliminates the need for 20 current customers to pay for the construction cost l
21 of new customers. This reduction in construction 22 expenditures would bring the ratio of the 1982 23 cash budget to total capitalization down from 24 13.8% to 11.0%, which is much closer to the Company's 25 10% goal.
26 3) Third, the Company is proposing an attri-27 tion allowance, effective January 1,1983, which
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28 vill offset increases in the cost of doing business l l I
1 during that year. The offect of tho incrocco will 2 be to partially offset the ef fect of attrition on 3 internal cash flow and to reduce the negstive 4 effect of attrit' ion on earnings betweer rate case 5 .
years.
6g . 4) Fourth, costs associated with the CVR I
7( Program, PURPA meters and load management (resi-8 dential peak shift program) are treated in this 9 . Application as expense items and are not capitalized. j 10 These items are excluded from rate base and will, 11 therefore, not earn a return. Programs such as 12 these have positive social benefits. But because 13 of SDG&E's current financial condition, these 14 projects would not be included in the capital 15 budget if they were not required by governing and 16 regu' 2 ting agencies.
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17 The removal of these costs from the construc-18 tion program will further the Company's objective 19 . of reaching a 10% proportion of cash construction l ,
20 to total capitalization which will in turn make it 21 easier for the Company to reach its other financial 22 objectives. Furthermore, the Company has done 23 well in its conservation efforts and, therefore, 24 should be rewarded with expense treatment for 25 those costs.
26 5) Fifth, the Company is proposing a more liberal 27 method of determining the depreciation lives of 28 plant in service. Higher depreciation will bring
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1 improved cash flow.
2 6) Sixth, the Company is proposing an increase !
3 intheretdrnonequity,overandabovetheamount 1 4 which would otherwise be found appropriate to 5 compensate for the loss of return on rate base 6 due to the sale and lease-back of the Encina 5 7 Power plant.
g l 14. O. Mr. Korpan, would you please elaborate more on the 1
9 ; penalties associated with riigher risk?
10 A. SDG&E must compete for funds in the securities
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11 ! markets in order to finance its construction
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Program. As I mentioned, risk manifests itself in 12 'f l 13 ~ the return the investor feels is necessary to 14 safeguard investments.
( 15 With the higher costs of debt and preferred 16 stock and saturated market conditions, the diffi-17 culties associated with the Company's financing 18 ' efforts tend to compcund. It is difficult, parti-19 cularly for the lower rated utilities, to obtain 20 30-year deb + nancing because of the investor's 21 fear of risk associated with long-term financing.
22 Interest rates on long-term securities are exhor-23 bitant in weak markets,- especially for the weaker 24 rated companies, forcing them to go to shorter 25 maturities in many cases. If at all possible, 26 however, it is more prudent to obtain long-term 27 financing in order to reduce refunding needs and
( 28 more closely match the life of the assets with the
I term of the financing. Shorter maturition mocn i 2 higher capital refunding requirements sooner, thus 3 compounding the company's financing needs.
4 15. O. Mr. Korpan, would you describe the current and 5 projected financial market conditions and how they 6 affect a Baa/BBB company's ability to finance?
7 A. In 1980, we have seen a period of historically 8
high interest rates coupled with sharply increased 9 volumes of new debt securities by both government 10 and private sectors. In fact, interest rates are 11 at their highest level since the civil War when 12 the country's financial environment was in a 13 shambles.
14 The projected dollar volume of public debt by 15 i utilities in 1980 is up 47 percent from 1979, and i 16 1981 is expected to attain the 1980 dollar volume.
17 In addition, the total public debt volume is up 53 18 percent over 1979 and is expected to increase 19 further in 1981. This tremendous increase in new 20 issues, coupled with a 42 percent increase in 21 incremental government financing, places a strain 22 on investors' ability to absorb this volume, 23 particularly issues of the weaker rated entities. .
24 The market's inability (or unwillingness) to 1 25 absorb BBB securities can be demonstrated by 26 several events. .In late July 1980, both SDG&E and 27 Portland General Electric sold $75 million of 30 28 year bonds. While SDGEE issued at 13-5/84 and had
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S 1 a 100% initial reception, Portland General cold 2 only two days later with a 25 basis point increase 3 and had only a 50% initial reception.
4 In September 1980, four BBB utilities attempted 5 to come to market within two days of each other.
6 only the first three, Connecticut Light and Power, 7 Western Massachusetts Electric, and Alabama Power 8 were sold. The third issue, Alabama Power, was 9 sold at 80 basis points more than first issue and 10 had only a 30% initial reception. The fourth 11 issue, Pennsylvania Power, was postponed due to 12 lack of demand and high cost.
13 In addition to the thin markets for BBB 14 securities, interest rates in 1980 have experienced 15 two historically high peaks which illustrate that
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16 the first peak in March / April was not a one time 17 aberration. SDG&E had to issue 30 year bonds at 18 16% in March 1980 and Alabama Power recently 19 postponed a 30 year bond issue planned for 20 December 10, 1980, which would have had a coupon 21 between 17 and 18%. The anticipated large public 22 financings planned for 1981, coupled with double-23' digit inflation projections, indicate that higher 24 returns will continue to be required for the same 25 levels of risk. Institutions in particular have 26 begun shifting funds away from long-term debt 27 securities and into equities, due to the large t 28 losses experienced on their debt portfolios.
1 Thoco foetors will corvo to nccoositato high 2 rates for SDG&E debt securities and require investors 3 to demand even higher returns on equity in order to 4 receive a premium for the additional risk. It 5 also appears likely that high rates of .-v.orn for 6 all securities will be necessary for 1987, and 7 beyond, even assuming more " normal" markets, since 8 interest rates have continued to trend upward in 9 each succeeding cycle.
9 10 16. o. Before we continue with a more detailed explana-11 tion of your remaining Tables Mr. Korpan, do you 12 have anything to add with respect to the company's 13 need for a higher return?
14 !! A. Only to sum up the benefits associated with a 15 higher bond rating. With.a higher rating the la Company would benefit from lower rates for its
! 17 customers, improved financing flexibility, improved 18 ability to compete for funds at reascnable rates, l 19 lower cost, and less financing.
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- 17. O. Mr. Korpan, would you elaborate on the various'finan-21 cial parameters necessary to achieve a Single A rating?
l l 22 A. The most important parameter is the return on 23 equity. Return on equity is closely associated 24 with the other financial parameters, such as 25 . coveragas, internal generation of cash, common equity l
26 ratio, and dividend growth, which must be improved 27 in order to give ;DG&E the opportunity to achieve 28 a Single A bond rating.
} The first, intoroot coverage, in the most 2 important of the key financial parameters which
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3 investors, securities analysts, and rating agencies 4 use to evaluate the financial viability of a 5 company. Coverage is the ratio of earnings to 6 interest and is stated as a multiple of the amount 7 of interest a company pays in a year. Interest 8 coverage represents the margin of safety - the 9 ability to pay debt obligations - available to 10 holders of long-term securities.
11 Table 4 shows before tax interest coverages 12 on a historical and projected basis for Moody's, i
13 ' the First Mortgage Indenture, and the Debenture 14 (: Indentures. The trend of Moody's before tax 15 coverage (Column B) has declined since 1976 (Lines 2
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16 through 5). This critical indicator will continue
- 17 to decline in 1980-1982, as shown on Lines 6-8, 18 unless substantial rate relief is granted in a 19 timely manner, in this case, by January 1, 1982.
20 Moody's before tax coverage ac proposed rates on
! 21 Line 9 is projected to be 2.98 times, and the 22 after tax coverage'i:s estimated at 2.31, times, 23 which is well below the 2.7 times coverage found i 24 reasonable in Decision 90405.
l 25 In comparison to other utilities in the 26 industry, SDG&E's interest coverage has been below 27 or at the level of the average of the lowest 1 28 investment grade category since 1974. Chart 1
I comparco the protax coveraga oxpericnccd by tho 2 electric utility industry for the years 1974-1975 3 using the utility compustat II data base. This is 4 the same pretax coverage computation used in Table 4, 5 column B.
6 As you can see, the average pretax coverage 7 for straight Single A companies is between 2.8 8 and 3.0 times since 1976. 1974 and 1975 were 9 particularly difficult years for the industry as 10 the data suggests. Based on this data, the Company 11 has established a financial goal of 3 times coverage 12 as the level necessary to be maintained on a sus-13 tained basis. This would provide the company with 14 the opportunity to improve to an investment grade of 15 single A. Interest coverage can be improved through 16 higher earnings, less leverage, and lower interest 17 rates. As one of the most closely watched financial 18 measures, the importance of interest coverage 19 cannot be understated.
20 18. O. Will you also elaborate on internal generation of 21 cash which you also mentioned as important in 22 obtaining a single A rating?
23 A. Yes. Internal generation of cash is a parameter 24 that the rating agencies consider crucial. The 25 more cash generated internally, the less pressure 26 there is on outside financing. This is particularly 27 important when construction dollars are large in 28 proportion to total capitalization. Lower outside I fincncing requircmsnto, in turn, loccan the nocd
, 2 for constant rate increases to compensate for the 3 increased cost of capital.
4 Table 5 shows historical and projected capital 5 expenditures and external and. internal sources of 6 funds. Since 1975, SDG&E has averaged only 16%
7 internal generation. This distinct lack of cash 8 flow has placed considerable pressure on financing l 9 the Company's cash construction program shown in 10 Column C.
11 The Company has not exceeded a level higher 12 than 20% from 1975 to date, and, at present rates, 13 the Company will not be able to fund all of its 14 day-to-day operations internally, let alone finance its construction. This is evidenced by a negative
( 15 16 31% internal generation in 1981 and a negative 73%
17 internal generation in 1982, at present rates.
18 At proposed rates, the requested rate increase 19 is expected to provide internal generation of cash 20 of 28% as shown on Line 10, Column F.
I 21 This compares to an acceptable level of 40%,
l l 22 as shown on Line 11, Column F. The percentage of 23 internal generation which would result from approval 24 of the Company's full rate request for 1982, is below 25 the optimum level. However, it is acceptable 26 given the anticipated completion of SONGS Units 2 27 and 3. With SONGS Units 2 and 3 in rate base and
( 28 earning an acceptable return, the Company should f
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l 1 b2 ablo to generato oufficient cach flow to fully 2 achieve its financial goals by 1984. Retirements l 3 (Column B) are not included in the computation of 4 the percentage, although to include them is the 5 accepted methodology of the investment community.
6 The amount of retirements in 1982, about S53 7 million (Line 5), are higher than normal and are i
8 thus excluded.
9 19. O. Mr. Korpan, how does SDG&E compare with other i
10 companies in tha industry with respect to internal 11 generation of cash needs? ;
1 12 A. Chart 2 compares percent internal generation.of j 13 cash for the electric utility industry with SDG&E.
14 As I mentioned earlier, percent internal generation 15 for SDG&E has averaged about 16% since 1974. This d 16 compares to a 47% average for straight AA rated 17 companies and a 42% average for straight single A 18 companies for the same period. Even straight BBB 19 companics have averaged 30% over that time frame.
l l 20 which is almost twice the result for SDG&E.
21 20. O. Can you point to any specific reasons for SDG&E's l
22 inordinately low performance during that time?
23 A. Yes. The primary causes for the low results are 24 high construction budgets, the accelerating cost 25 of money (interest rates on short-term debt in 26 particular) and insufficient revenues to cover 27 associated costs, all of which results in insuffi-28 cient cash flow. Furthermore, insufficient cash I .. . _ _ _ _ - _ _ - _ _ . _ _.
[ is also significantly impaired by two regulatory 2 accounting methods used in California which disguise i
3 the lack of cash flow as part of earnings 4 levels. The two methods are flow through tax 5 accounting and the use of AFDC.
6 I should emphasize here that the Commission 7 has taken several important regulatory steps to 8 combat the negative effects of inflation and an 9 unstable energy situation in order to give utilities 10 in California a better opportunity to earn their 11 allowed return on equity. Improved ECAC procedures l
12 and the Regulatory Lag Plan are examples. However, 13 we have much farther to go.
14 security analysts are fully aware of the 15 problems and take into consideration oarnings
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16 levels for companies which use flow through tax l 17 accounting and AFDC in making comparisons with 18 companies which normalize income taxes and include 19 CWIP in rate base. Using analyst language, those 20 companies which normalize taxes and/or include all or 21 a part of CWIP in rate base, generally have a 22 better " quality" of earnings. This means that the 23 cash flows for those companies more closely approxi-24 mate their earnings levels.
25 There are two key indicators which are used 26 by utility industry security analysts to evaluate 27 earnings levels for flow through and AFDC companies.
( 28 They are the effective tax rate and percent of AFDC I
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} to corningo. For inotenco, SDG&E'o offcetivo tcx 2 rate has averaged 3% since 1974. This compares to 3 17% for flow through companies and 33% for companies 4 which normalize income taxes. SDG&E's percent of 5 AFDC to earnings has averaged 40% since 1974 in 6 the face of its high level of construction expen-7 ditures. This compares to 36% for the rest of the 8 industry during that time.
9 Another way to measure the effect of flow 10 through, tax accounting is to compare the average 11 interest coverage and percent internal generation 12 for those companies which follow this practice 13 against those which normalize income taxes.
14 Charts 3 and 4 clearly indicate the financial 15 advantages of normalizing companies which fare 16 better than flow through companies over the 1974-17 1979 time frame. It is easily seen that SDG&E is 18 well below the industry average.
19 21. o. Mr. Korpan, what financial advantages are enjoyed l 20 by companies with higher proportions of their cash l
, 21 needs generated internally?
l 22 A. As I have discussed before, companies with better 23 cash flow can finance in smaller amounts or less 24 oft'en, or both. This means lesser reliance on 25 short-term debt, and the added ability to be more 26 flexib.le as to the timing, amount, and type of 27 securities in order to obtain permanent financing 28 at the lowest rates possible. Further, the Company I- --
I has on occasion been required to finance securities 2 at shorter maturities than desired. Thus, its 3 capitalization turnover rate will be relatively 4 high in the future. For instance, $220 million of 5 long-term debt will have to be refunded over the 6 next decade. This amounts to 30% of the total 7 long-term debt now outstanding. This relationship 8 would seem appropriate at face value. However, 9 brief analysis .eveals that 30% is extraordinarily 10 high. The proportion should be much lower given 11 SDG&E's heavy debt financing in recent years.
12 For various reasons, the Commission has not 13 adopted CWIP in rate base or normalized' income 14 taxes; therefore, it is even more important that 15 the return on equity be corrrespondingly higher for
(
16 SDG&E to reap the benefits of improved internal 17 cash generation.
18 22. O. Would you please elaborate on the common equity 19 ratio which is the third financial parameter you 20 mentioned as important in connection with achieving 21 a single A bond rating?
22 A. Yes. The common equity ratio is important in 23 terms of a margin of safety for the company's' 24 bondholders. Too much debt in the capital structure 25 is an indication that a company is over-leveraged.
26 This is particulary important during these times 27 of high interest rates, especially for a BBB
( 28 rated company which must pay relatively high
1 intoroot ratos in any evant. Chart 5 comparoo tho 2 common equity ratio for SDG&E with the electric 3 industry by bond rating groups from 1974-1979.
4 The Company has improved its ratio dramatically 5 since 1974. This was accomplished through the 6 sale of more than 15 million shares of common 7 stock from 1974 through 1979 representing a dilution 8 of more than 100%. The Company sold another 4.5 9 million shares in 1980 and plans to sell approximately 10 -
11 million more in 1981 and 1982. This represents 11 an additional dilution of 35% for the years 1980 12 through 1982.
13 The causes for this need are several fold.
14 The Company must continue to provide adequate 15 protection for its debt securities holders in the 16 face of the prospect of further dilution of common 17 stock and the prospect of selling at prices well 18 below book value. The Company is continuing to 19 strive for a 40% common equity ratio including 20 leases. Adequate protection means reduced leverage 21 which involves both the. amount and cost of debt.
22 SDGEE should be able to improve its equity ratio 23 with a balanced contribution of earnings and 24 common stock sales at reasonable pri^es. c SDG&E's 25 goal is to accomplish this in the future through 26 more competitive earnings results.
27 23. O. Mr. Korpan, can you quantify SDG&E's historical 28 and projected financings for the years 1975 - 19827
] A. Yes. Table 6 depicts SDG&E's financings since
, 2 1974 and projected financings for 1980 - 1982.
3 SDG&E has issued $219 million of common stock over j 4 the last five years. Thie amounts to 29% of l
5 long-term financing over that time, over the next 6 three years (1980-1982) SDG&E must issue another 7 S194 million, about 37% of total financing. All 8 of these issues will be below book value, even at 9 Proposed rates.
10 Table 6 also illustrates a disconcerting 11 Problem facing SDG&E which is its high reliance on 12 short-term debt. Since 1974, short-term balances 13 have increased by $124 million. They are 14 expected to increase another S145 million, at
( 15 proposed rates, by the end of 1982. one additional 16 financial parameter which rating agencies watch 17 closely is the proportion of short-term debt to 18 total capitalization. Over-reliance on short-term 19 debt reduces the company's options because of maximum 20 limits on short-term debt. The reduced financial 21 . flexibility can force the company to market under 22 unfavorable conditions. Rating agencies set a 23 rule of thumb proportion of 5%. The company's 24 ratio of short-term debt to total capitalization 25 was 11% at the end of 1979 and is expected to be 26 16% at the end of 1982 at proposed rates.
27 In view of the high anticipated cost of money
( 28 l
l 1 over the noxt four yocro, and in view of tho I
- 2 magnitude of financings SDG&E will find necessary 3 during that time, the company must be able to 4 compete in the market place for funds. This l
5 requires returns on equity at levels high enough l
! 6 to attract funds which would otherwise be invested 7 in other industries.
I l l
1 8 24. O. Mr. Ko rpan, would you comment on the fourth finan-9 cial objective necessary to achieve a single A bond 1
10 , rating, adequate dividend growth?
I 11 A. Yes. It is imperative to maintain soma level of 12 dividend growth in order to keep the Company's 13 common stock price at a competitive level with 14 other companies in the industry, and, just as 15 importantly, to improve its competitive level with 16 other industries.
17 Public utilities have not provided the re' turns 18 earned by other industries. A prudent, consistent 19 policy of dividend growth is necessary simply to 20 compete. Chart 6 compares percent dividend growth l 21 per share for SDGEE, the S&P 400, and the electric 22 industry for the years 1974 - 1979.
23 The S&P 400 represents a cross section of 24 industries across the nation which as a group has 25 not only increased its dividend rate dramatically 26 since 1974, it has approximated the rate of inflation l
27 during that time.
28 The straight BBB carpanies have shown improve-
! l
. I
I ment in 1979, but as a group have been inconsistent.
2 The high dividend growth for BBB rated companies in v
3 the last few years reflects pressure to sell common 4 stock competitively.
5 The straight AA and A companies are the most 6 indicative of industry dividend results since most 7 of the companies fall into those two categories.
8 Dividend increases have continued steadily over 9 the time frame but have lagged far behind general 10 inflation and other industries as exemplifica by 11 the S&P 400 results. SDG&E has attempted to stay 12 in line with the electric industry since 1977 when 13 the annual dividend rate was increased from S1.20 14 to $1.36 per year. The data shown on Chart 6 15 reflects dividends declared so that the full
(
16 effect of that increase was not felt until 1978.
17 25. O. Mr. Korpan, what is dividend coverage?
18 A. Dividend coverage is a parameter used by security 19 analysts to measure common dividend protection.
2G l The calculation is similar to interest coverage I
21 except that depreciation and AFDC are removed from 22 earning: before finding a multiple of dividends i 23 paid.
'2? As shown by Table 7, SDG&E has 25 experienced a decline in dividend coverage 26 compared to the rest of the electric industry.
27 Low dividend coverage increases investor's per-k 28 ception of the risk associated with an invest-I E
I 1 ment in SDG&E common otock, rcquiring a highor 2 dividend yield to accommodate this risk in propor-3 tion to the industry as a whole.- In other words, 4 low dividend coverage indicates an impaired ability 5 to pay future dividends.
6 i26. o. Are dividend increases the only way to raise 7 ,1 common stock prices?
l 8 A. No. Improved earnings would improve investor 9 expectations about the financial future of the 10 company. This would bring the risk premium por-l 11 tion of the yield downward and thereby increase 0
l 12 the price of the stock. of course, both approaches, .
l 13 higher cividends and better earnings, are used by l
l 14 l utilities whenever possible. I am convinced that 15 f the market price of SDG&E's stock would be even
! 16 worse today if the company had not also reduced 17 leverage and construction expenditures, in additio'n ..
! 18 to increasing its dividend.
l 19 without adequate earnings, however, stock 20 must be sold at am price to bolster common equity 21 because of insufficient retained earnings. Without 22 growth in market value, that is, when dividend 23 increases only are available for return on invest-24 ment, a company's dividend payments increase 25 rapidly because a larger number of shares must be 26 issued to make up for the loss of retained earnings 27 and to make up for a lowe: price per share. This 28 often results in poor dividend coverage. Further, 1 the Company cannot expect to continuo dividend 2 increases indefinitely under these circumstances.
3 The payout ratio, the proportion of dividends to earnings, has been unusually high in recent years 4g 5i due to inadequate earnings. Without sufficient 6 rate relief in 1982 the payout ratio will be 7 negative. This means the Company will, for all 8 intents and purposes, be required to borrow to pay 9 3 dividends and part of expenses as well.
I 10 27. O. What quantifiable measures did you use to dete_mine 11 I that the Company's common stock price is too 1cw?
12 A. There are two basic measures to indicate whether a
-13 common price is higher or lower than it should be.
14 The first is the relationship between the market
- 15 f price and book value, called the market to book i
If the ratio is below one, then investor 16 ratio.
17 expectations are interpreted to be pessimistic as 18 to future results. Sales of common stock below 19 book value are damaging to both investors and 20 customers. Low stock prices require the sale of 21 more stock to obtain the necessary proceeds and 22 higher dividend requirements which lowers the 23 amount of funds available to be reinvested in
. 24 operations. Investors are aware that a portion of 25 their equity share of the Company is diluted as 26 sales below book continue. Therefore, new share-27 holders further discount market value knowing the i, - 28 risk to their investment. Conversely, higher b 1 i
f L - i ,
I common otock pricoc avail tha Company of additional 2 cash per share, therefore, lowering the total necesaary 3 dividend payments by lowering the number of shares 4 needed to be sold.
5 Success feeds upon itself. Better earnings 6 and a strong dividend policy will move up the 7 price, making it less costly and less difficult to 8 finance the Company's construction program.
9 28. Q. How does the Company compare to the utility industry 10 and other industries in terms of market to book 11 value?
12 A. Chart 7 compares market to book values since 1974 13 ;! between SDG&E, the utility industry by bond rating 14 croups and the S&P 400. The S&P 400 has averaged t
15 better than one since 1974. Public utilities have 16 fared worse in general, although the higher rated 17 companies have fared better than the lower rated 18 companies. This reflects the lower perceived l
l 19 element of risk in the higher rated companies.
20 SDG&E's market to book ratio has generally held up 21 well in recent years mainly because a portion of 22 SDG&E's dividends are a return of capital for tax 23 purposes (not currently taxable). In other words, 24 SDG&E's price is supportet by poor financial 25 performance. A financially healthy company would 26 '
have no return of capital.
27 29. Q. Mr. Korpan, is there a way to quantify the cost to 28 the Company's customers of selling below book i .
I value?
2 A. Yes, Tables 8 and 9 show the derivation of the 3 reduction in revenue requirements assuming the 4 sale of common stock at book value given the same 5 proceeds from each sale. The proceeds to the 6 Company (Line 3) are divided by the book value at 7 the end of the month prior to the sale (Line 5) to 8 derive the number of shares needed to accomplish a 9 .
sale at book value. This result is then subtracted
.I 10 from the actual amount of shares sold to arrive at 11 ] the decrease in shares needed to be sold at book.
12 The total number of shares needed for the i
13 sales at below book valve, given the same proceeds 14 (Table 8, Line 8), multiplied by the dividend rate 15 in 1982 (Line 9), provides the dividend savings 16 with sales at book valve. To achieve the same 17 cash flow to the company (i.e., given the same 18 internal generation) the Company would have been 19 able to reduce rates by $18.8 million on an annual 20 . basis in 1982 (Line 12) after grossing up for taxes.
21 For the sake of simplicity, this illustration fails 22 to account for the cumulative effect of the lower 23 number of shares needed to be issued if sold at 24 book value. Table 9 illustrates the savings on an 25 annual basis for the projected common stock sales 26 through 1982 using the same' methodology. Revenues 27 could be reduced by another $7.3 million given 28 sales.at book value.
' (-
I-
1 30. O. Mr. Korpsn, how ccn SDG&E mitignto its financial 2 difficulties in the future?
3 A. As I've mentioned, the Company has taken several 4 steps to alleviate insufficient earnings and cash 5 flow. The primary solution, however, is to increase 6 the return on equity to a level sufficient to 7 improve interest coverage, the percent internal 8 generation of cash, the common equity ratio, and 9 dividend coverage.
10 Return on equity is the earnings measure 11 which provides investors and analysts with insight 12 into the dividend and earnings growth potential 13 for any investor owned company. Historical returns 14 ; are the primary basis for investors' expectations for future earnings and dividends.
15 {
16 31. Q. Mr. Korpa , does SOG&E usually earn its allowed 17 return on equity?
18 A. No. Table 10 sets forth the returns authorized by 19 the PUC from 1975-1979 (Column B), the actual 20 returns using the matrix method (Column C) and the 21 financial return on equity (Column D). The financial 22 return on equity is the ratio of common stock 23 earnings (net income after deducting preferred 24 dividend requirements) to the average of common 25 equity at the beginning and the end of the year.
26 SDG&E has not been able to earn its authorized 27 return on equity (Column C) in any year except 1977.
28
1 !!o w e v e r , it should be noted that 1977 was just as 2 weak as any of the other years in terms of quality 3 of earnings and cash flow.
4 Financial return on equity, Column D, has 5 declined steeply during the last two years in 6 spite of rate relief during the middle of 1979.
7 1980 earnings will experience a further 8 decline due to low sales, higher prices for goods 9 and services, and a much higher than anticipated 10 cost of money. Furthermore, approximately 219% of 11 1980 as expected earnings is AFDC, which reflects 12 an impossibly low quality of earnings.
13 Return on equity at proposed rates (Line 9) 14 is at or exceeds 19% on both a ratemaking and finan-( 15 cial basis. Due to the Company's poor quality of 16 earnings caused by high amounts of AFDC and tax 17 flow through rateme. king policies, the financial 18 return on equity must be increased to a higher 19 level in order to bring cash flow in line on a 20 comparative basis with'other companies in the 21 industry.
22 As I mentioned before, the fact that CWIP is 23
~
generally not included in rate base requires a 1 24 higher ratemaking return on equity in order to 25 achieve the necessary cash flow. If rate base 26 includes all or part of CWIP, a lower rate of 27 return and return on equity would bie necessary to
- k. 28 achieve the same financial results.
1 I
1 32. O. Ilow does SDG&E'o roturn on cquity compare with 2- other utilities and industries?
3 A. Chart 8 compares financial return on equity for 4 SDG&E and the electric utility industry by bond 5 rating groups with return on equity for the S&P 400.
6 The S&P 400 earned returns in excess of 14%
7 in every year with the exception of 1975, and 8 reaches a high of 16.7% in 1979.
9 The electric industry categorized by bond 10 rating groups have had generally little improvement 11 since 1974. The industry therefore has fallen -
i 12 y further behind other investment categories.
13 Electric industry returns have not kept up with l 14 inflation, thus we can only expect investors to l 15 view electric industry securities as less attrac-16 tive than other industries in the competition for 17 funds.
18 The returns for SDG&E are even less impressive l
19 than the electric industry as a whole through 1979 20 and are expected to fare worse in 1980. Returns 21 in 1981 and 1982 are obviously unacceptable at 22 present rates.
23 The return on equity for 1982 of 19% is at 24 the level necessary to achieve the interest coverage 25 and internal generation necessary for the company 26 . to progress toward comparability with Single A 27 companies. In order for SDG&E and the industry to
.28 successfully. compete for funds, returns must be W
1 increased to a level commensurate with other
- 2 industries. .
3 33. O. How does SDG&E compare to other California utilities 4 in terms of growth and associated risk?
5 A. SDG&E's financial risk is greater than that associated 6 with SCE and PGandE because it is a much smaller 7 company with a faster growth rate.
8 SDG&E has been faced with the financial 9 difficulties associated with its very high customer 10 growth over the last ten years, particularly compared 11 to the larger utilities in California.
12 Table 11 compares the annual growth rates of 13 SDG&E, SCE, and PGandE from 1969-1979. In every i
14 category, except total operating expense for PGandE,
( -15 SDG&E has grown at a faster rate than both companies.
( 16 The 43% growth in AFDC for SDG&E (Line 7) compares 17 to 21% for SCE and 33% for PGandE. This is indicative 18 of the poor quality of earnings for SDG&E compared 19 to the larger utilities. Without AFDC the Company's 20 financial return on equity would have been about l 21 3% lower compared to a 1% decrease for the others.
22 SDG&E's electric and gas sales and customers 23 (lines 13-15) have grown at a substantially higher l -
l- 24 rate than those of the other companies. This
~25 rapid growth, which has occurred in coincidence with 26 a highly inflationary economy, has burdened SDG&E 27 with a relatively higher financial risk in terms i
(
28 of building and paying for the facilities to meet
r e
I the higher demnnd.
2 Lines 5 and 6 show the utilities' growth 3 rates for operating revenues and expenses. operating 4 expsnses have grown faster than operating revenues 5 by an annual rate of at least one percentage point 6 over the last ten years for all three companies.
7 SDG&E must achieve a higher return to accommodate 8 the financial strain of a higher rate of growth.
9 34. O. Mr. Korpan, what other methods have you used to 10 analyze the reasonableness of the 19% return on 11 i, equity requested for the 1982 Test Year?
12 ' A. One approach I used is based on the hi'torical s and 13h projected rise in the embedded cost of debt. This 14 approach is shown on Table 12.
15 It is generally considered that, in the i 16 mid-to-late sixties (1965-1969), public utilities 1
17 were financially healthy and inflation did not 18 Pose a serious problem. During this period the 19 inflation rate averaged 3.4%. For the years 1965-20 1969, some of SDG&E's key financial measures 21 averaged as follows: return on equity, 11.78%;
22 market to book ratio, 1.69 times; before tax 23 coverage, 4.62 times; and embedded cost of debt, 24 4.27%. Because of the relative financial stability 25 during this period, the years 1965-1969 were used 26 as the base period for the analysis.
27 Debt holders have required higher returns. as 28 reflected in SDG&E's increasing embedded cost of
I debt. It is reasonable, thereforo, to assume that 2 equity holders will at the very least require the 3 same increases for their investment-4 Column C shows the difference between the 5 average embedded cost of debt for the rariod 6 1965-1969 (4.27%) and the historical and projected 7 increases in the embedded cost of debt for the 8 period.1970-1983. This calculated difference is 9 then added to the average return on equity for the 10 period 1965-1969 (11.78%), Column A. An adjusted
- rate of return is made by adding Columns A and C 11 12 and is shown in Column D. In 1982, for example, 13 the adjusted return is in the 18% range, which is
.14 a conservative estimate. Equity holders bear more 15 risk than debt holders.
('
16 Also, the additional equity needed could be i
17 illustrated using the matrix method for calculating 18 interest coverage. It has been shown that the 19 - rise in the cost of equity capital must be propor-20 tionally higher than the rise in the cost of debt" l.
21 to maintain the same level of interest coverage.
22 I also investigated the relationship of the 23 authorized return and embedded cost of debt from 24 the Company's 1979 Test Year Decision to our 1982 25 Test Year results. Lines 1 and 3, Column B, Table 19, 26 reference the Company's 14.5% authorized return on j
27 equity.and the 8.10% embedded cost of debt. The 20
( projected embedded ' cost of debt for 1982 is 10.57%,
4
ao chown in Column B, Table 12. On thio'bnaio the I
2 embedded cost of debt is projected to increase by 3 30.5%. A 30.5% increase in our authorized return 4 on equity of 14.5% indicates a needed return on 5 equity of approximately 19% for 1982.
6 35. O. What return on equity is necessary to achieve the 7 2.7X interest coverage assumed in Decision 904057 g A. A 22.18% return on equity, using the matrix method, 9 is necessary to achieve the 2.7x after tax co. verge 10 assumed in Decision 90405 as depicted by Table 13.
11 The 19% return on equity requested in this pro-12 ceeding provides a much lower 2.49X after tax 13 coverage. This confirms that the requested 19%
14 return is insufficient in itself to achieve the 15 company's goals, and is acceptable only in view of 16 prospects for future improvement.
1 17 36. Q. How did you determine the dividend and interst l
18 rates for new preferred stock, long-term, and l
19 bankers' acceptances for your embedded cost projec-l 20 tions? -
21 A. Cost of new preferred stock, new long-term debt 22 . and bankers' acceptances are based on projections 23 for 1982 published by Data Resources, Inc. (DRI),
24 a nationally known forecasting service. The money 25 rate assumptions used here are based on forecasts 26 included in DRI's monthly publication entitled j 27 "The Data Resources Review of the U.S. Economy",
28 December 1982.
_40_
1 The interest rates on new long-term debt are 1
2 based on DRI's AA bond projections. I added 100 J
\
3 basis points to the projections to accommodate the !
4 ;
higher risk associated with SDG&E's BBB bond 5 rating. For new preferred stock I added 12.5 basis l l
6 pointa to the cost of new debt to accommodate the l 7 slightly higher cost of preferred stock.
8 For bankers' acceptances I added 75 basis 9 points to DRI's 3-month prime commercial paper 10 rate projections, once again, to accommodate the 11 higher risk associated with SDG&E's lower credit 12 rating.
13 I should mention that the new money rate pro-14 jections used in the embedded cost estimates 15 described in more detail later in my testimony 16 could be conservative. At about the time of this 17 Application, short-term money rates exceed 20% and 18 the costs of new longterm debt and preferred stock 19 for triple BBB companies exceed 17%.
L 20 Money rates have now reached these levels for the
! 21 second time this year. There are no real answers as to 22 how long these conditions will last or as to how often i 23 these' conditions will recur.
l 24 37. O. Would you explain how you determined the embedded 25 cost of preferred stock?
l 26 A. Table 14 lists the recorded cost of preferred 27 stock for 1979 and 1980 through 1981 as expected. The i 28 i embedded cost of preferred stock for 1979 was
I 8.20% chown on Lino 15, Column E. This is vary 2 close to the 8.21% adopted in D. 90405. No pre-3 ferred stock is planned to be issued in 1980.
4 In 1981, the Company tentatively plans to 5 issue S25 million of $14.375 Series preference 6 stock. The issuance of this series raises the 7 projected embedded cost of preferred capital stock 8 from the 1979 level of 8.20% to 8.85% in 1980 9 (Line 19, Column E).
10 In 1982, the Company tentatively plans to 11 l issue another $30 million of $14.750 Series pre-t 12 l ference stock raising the projected embedded cost 13 to 9.52% at the end of the year (Line 21, Column E).
14 38. O. Mr. Korpan, wo'uld you please explain how you 15 arrived at the embedded cost of long-term debt?
16 A. Table 15 lists the embedded cost of long-term debt 17 for December 31, 1979 recorded. There is no 18 change in methodology in these calculations from 19 previous general rate cases. The embedded cost of 20 -
long-term debt for 1979 was 8.49% as shown on Line 21 29, Column E. This is substantially above the 22 8.10% cost adopted in D. 90405. The primary 23 reason for the increase was the 14.85% rate incurred 24 on the Foreign Term loans which were issued in 25 1979.
26 As far as 1980 is concerned (Table 16), SDG&E 27 issued two series of First Mortgage Bonds in the 28 amounts of S50 million (Series S) in March, and
4 1 $75 million (Series T) in August. The cost of 2 these issues are 16% and 13-5/8%, respectively.
3 The Company also repaid $30 million of the Foreign 4 Term loans during 1980 (Line 6).
5 The embedded cost of long-term debt projected L
6y for year end 1980 is 9.18% as shown on Line 13, 7i Column E.
N 8I In 1981, assuming receipt of the rate increase 9 requested, SDG&E anticipates only one S75 million 10 sale of bonds. The rate of this Series U is 11 assumed to be 14.125%. The projected embedded 12 cost of debt for year end 1981 is projected to be 13 l 9.66% (Line 22, Column E).
li 14 5 Table 17 lists the long-term debt financing' i
15 I
{ activity assumed in 1982. The Company plans two 16 $75 million bond issues, Series V & W, at coupon 17 rates of 14.625% and 15.250%, respectively. The 18 Company will also retire its Series O & D bonds 19 totaling S52 million during the year. The pro-20 jected embedded cost of long-term debt at the end 21 of 1982 is 10.57% (Line 13, Column E).
22 39. O. Would you describe how you derived the capitaliza-23 tion ratios for common equity, preferred stock, 24 long-term debt, and Bankers' Acceptances?
25 A. Yes. Table 18 shows the Company's historical
-26 capital structure from 1975 through 1979 and 27 projected capital structure for 1980-82. The 28 proportion of Common Equity shows the same improve-J t
i; i
. I m:nt shown on Chart 5. Note the continuing incronse 2 in Bankers' Acceptances in proportion to total 3 Capitalization shown in Column I, Table 18. il 4 Tables 19 and 20 list the Company's rates of 5 return as authorized in Decision 90405, 1979 6 actual results, 1980 and 1981 as expected results 7 (present rates) and 1982 Test Year at present and 8 proposed rates.
9 Despite the fact that all sales of common-10 stock have been below book value since 1972, SDG&E 11 continues to issue substantial amounts of common 12 equity. These issues are necessary to finance the 13 Company's ongoing construction program.
14 Specific issues of common stock, both historical 15 and projected, are shown on Tables 8 & 9.
16 The common equity ratio for 1979 recorded, 17 shown in Table 19, is 37.20% (Line 7, Column A),
18 compared to the 38.09% adopted in D. 90405.
19 The major reason for this shortfall is the fact 20 that the final decision came in the middle of 21 1979. Thus, the full impact of the increase in 22 rates authorized was not experienced until mid-23 1980.
j 24 Substantial increases in the cost of money 1
25 and escalating expenses are projected to erode 26 this ratio even further. Consequently, the common 27 equity ratio calculated for the 1980 as expected 28 is actually below that adopted for 1979 (Line 13,
. _44-
\S
I 1 Column A).
,. 2 The common equity ratio for 1981 as expected 3 will further erode and the common equity ratio 4 will drop to an obviously unacceptable 24.2%
5 (Table 20, Line 1, Column A) in 1982 without rate 6 relief in 1981 and 1982.
7 SDG&E believes that the ratio of preferred 8 -stock should be in the 12% range and is, therefore, 9 managing to that level. The major reason for this 10 policy is an attempt to reduce the amount of risk 11 inherent in the capital structure. SDG&E 12 plans preferred stock issues in 1981 and 1982 as 13 I discussed.
14 As Table 19 demonstrates at Line 9, Column A,
( 15 the ratio of long-term debt for 1979 recorded was 16 44.00%. This is compared to the 44.99% level 17 adopted in D. 90405.- The major reason for the 18 decline is the fact that $150 million in debt 19 projected to be sold was cut back to S65 million 20 'due to an adverse financial condition (i.e.,
21 insufficient debenture indenture coverage) in the
.22 latter half of 1979.. By the end of 1982, the debt 23 ' ratio is projected to be 43.26%. As in the case 24 of common equity, this ratio is lower than adopted 25 ,
in D. 90405 because of the' tremendous' increase in 26 the proportion of Bankers' Acceptances in the i 27 capital structure.
- d. - 28 As ebown on Table 20, Line 3,- Column A, the
I debt ratio 10 projccted to increase to 52.32% at 2 present rates, leaving the Company with a negative 3 matrix interest coverge of 0.56X. Even at proposed 4 rates, coverage would be only 2.49X.
5 In D. 90405 the Commission adopted a 10% cost 6 o-f Bankers' Acceptances and a 2.76% proportion in 7 the capital structure (Table 19, Line 4, Columns 8 B&A). The impact of higher-than-anticipated costs l
l 9 of fuel not only causes cash flow problems but 10 also skews the cost of capital and the rate of 11 return. Therefore, the percentage of Bankers' 12 Acceptances in the 1981 capital structure is 6.67%
13 (Table 19, Line 16, Column A) and the cost of l
l 14 those acceptances is assumed to be 13.50%. The 15 resulting weighted cost is 62 basis points higher 16 than the level adopted in D. 90405.
l 17 At the end of 1982, the proportion of Bankers' l 18 Acceptances in the capital structure is 8.00% at l
! 19 present rates (Table 20, Line 4, Column A) and .
1 20 6.62% at proposed rates (Line 10, Column A). At .
. 21 the end of 1982, the weighted cost of Bankers' 22 ,
Acceptances is projected to be 74 basis points 23 higher than authorized in 1979.
24 40. O. What is the purpose of Table 217 25 A. Table 21 teste the sensitivity of the rate of l 26 return to various returns on equity. Note that a 27 50 basis point change in return on equity equates l 28 to an 18-19 basis point change in rate of return.
l
I g As a rule of thumb, the relationship is about 2.5 2 to one. Also note that matrix interest coverage
/
3 changes about 0.03X for every 50 basis point 4 change in return on equity. As I mentioned, the 5 return on equity must exceed 22% in order to .
6 achieve the 2.7X coverage found reasonable by the 7 Commission in D.90405.
8 41. O. Mr. Korpan, are there any other specific comments 9 you would like to make with respect to rate of 10 return?
11 d. Yes, in 197B the Company sold and leased back its 12 Encina 5 power plant facility for approximately 13 S130 million. The Company found it necessary to 14 pursue an alternative source of financing in the 15 face of debenture indenture coverage restrictions.
{
16 In fact, the Commission addressed this trans-17 action in its Decision 90405, for the 1979 Test 18 Year. In-the discussion of rate or return on 19 Page 67, the Commission said the following regarding 20 rate of return and rate base treatments:
21 "The Commission recognizes also that such a transaction removes a substantial capital 22 investment from utility ownership and therefore
. from rate base treatment. We do.not believe 23 that a company should be penalized because it is denied future earnings on rate base as a 24 result of an action which was clearly beneficial to all parties. We therefore, recognize-in 25 . setting SDG&E's return on common equity the need to provide additional earnings to compensate 26 for this loss."
27 The 1982 average depreciated rate base would 28 have included $105 million for Encina 5 if it had
.(
_i.,
i I been allowcd in the 1982 Test Ycar. At the Company's 2 requested rate of return of 13.9% in this proceeding, b
3 an additional S31 million in revenues would be 4 required using a 2.1X gross up factor.
5 In my opinion, a fair and equitable compensa-6 tion to SDG&E for this loss would be a one-third ,
7 share of the lost revenue or about $10 million.
~
8 This equates to about $4.75 million in net operating 9 I income which requires an additional 0.34% rate of 10 return and 0.91% in additonal return on equity 11 using a 1982 weighted average rate base of $1,386 12 million. These amounts should be added to the 13 rate of return and return on equity the Commission 14
~
l finds fair and reasonable for the 1982 Test Year.
l 15 The Commission should also add the appropriate 16 amounts to the rate of return and return on equity i
17 for the 1983 attrition allowance.
l I8 42. Q. Mr. Korpan, would you explain the financial ramifi-19 cations of the connection ~ charge which the Company l
20 is proposing in this Appli, cation?
21' A. Yes. SDG&E's construction program is one reason 22 for it's financial difficultiss. As I have explained before, a smaller construction program will make 4 it more feasible to achieve Single A results 25 without additional expense to the ratepayer. As 26 I have already testified at length, the Company's
-27 construction program is composed of elements which 28 are needed to maintain the Company's ability to
]
. ! t l C 1
I serve, plus the undertaking of mandated programs.
< 2 ,
As discussed in more detail in the connection 3 charge Exhibit (SDG&E-120), the construction 4 program would be much lower except for the cost of 5 current and anticipated customer additions. The
. 6 Company is proposing to partially mitigate the 7hj financial burden of customer additions on its 8 il present customers by charging new customers for 9 the overall cost of placing them in service.
10 Through this means, the Company will still 11 have the opportunity to eventually achieve Single A 12 results and achieve lower rates for its general 13 customers at the same time. The cumulative effect I4j <
of the benefit of lower financing needs will
( 15 d furth'er reduce the amount and cost of future 16 financings, lowering rates even further.
l} I must emphasize that SDG&E does not expect 18 to achieve Single A results through the connection 19 charge during 1982 or 1983. The cumulative benefits 20 of lower construction costs, combined with the 21 inclusion of SONGS Units 2 and 3 in rate base when 22 complete and in service, should bring the Company 23 to the level of Single A res'ults during 1984.
24 This is assuming that the company is authorized 95 realistic returns and is able to earn them in the
'26 . .
Interim.
27 43.. O. Would you explain Tables 1-A, 1-B, and 1-C included k 28
_49_
i l _
. 1 in the connection charge Exhibit (SDG&E-102)?
2 A. Yes. These tables show the effect of the connection 3 charge for 1982 at proposed rates and the effect 4 of the connection charge on the 1983 attrition 5 allowance. As discussed in the attrition allowance 6 Exhibit (SDG&E-119), the 1983 data reflected in all 7 exhibits is for informational purposes only and 8i does not reflect thee Company's proposed procedures 9 and methodologies reflected therein.
10 Table 1-A compares the nrimary ratemaking para-11 meters (set forth at proposed rates), to the data 12 which would be included in SDG&E's submittal if 13 connection charges were incorporated.
j 14 As shown in Line 3, the requested annual base 15 - revenue increase without connection charges would 16 exceed the requested annual increase with connection 17 charges by about S32 million in 1982 (Column E); and 18 the requested annual base revenue increase without 19 connection charges would exceed the requested annual l
20 increase with connection charges by about $16 million 21 in 1983 under the attrition allowance proposal 22 (Column H). Base revenues are the amount charged 23 to customers for energy usage, i.e., the amount 24 - associated with the customers' bills.
l l
25 As reflected on Lines 4-6, the reveaue request 26 changes for all departments because the resulting 27 rate of return is maintained the same for each.
28 Since the company's cash needs in relation to l ___ws
1 cash construction expenditures are lower with the 7 2 connection charge, the necessary rate of return and 3 return on equity (Lines 7 and 8) are reduced by 1.21%
4 and 3.13% (Column E), respectively. The 1983 rates 5j of return and return on equity are reduced in about
. 6 the same magnitude (column H).
7 Embedded costs (Lines 13-15) do not change in 8 1982 because the difference in cash flow, with and 9 without connection charges, does not necessitate a 10 revision of the financing plan for 1982.
11 Note, h oweve r, the slight decrease in embedded 12 cost in 1983 (Lines 13 and 14, Column H) as the 13 need for financing decreases. These financial 14 benefits will grow in later years as the cumulative
( 15 effect of the connection charge increases, impacting 16 favorably both the company and its customers.
. Table 1-B compares earnings and capitalization 18 data at 1982 Test Year proposed rates, with and 19 without connection charges, and, for informational 20 purposes, the 1983 attrition allowance with and l 21 without connection charges. To achieve the bene-22 ficial impact of reduced internal cash flow needs 23 with connection charges, the company would be able
- 24 to trade off significant decreases in the returns 25 on equity (Lines 2 & 3) and interest coverages 26 (Lines 4-6). Internal generation as a percent of 27 cash construction expenditures (Line 7) remains at k 20 28.4% for 1982.
1 For 1983, ratemaking return on equity (Lins 3) 2 is held to 1982 levels. Internal generation 3 (Line 7) decreases accordingly.
4 Construction as a percent of capitalization 5 (Line 8) would decrease to a more favorable 11%
6 (column B), and would also improve for 1983.
7 I must repeat that financial results are not 8 at Single A levels. If these returns are earned, 9 .
however, the company stands an excellent chance of 10 achieving Single A results in 1984, with SONGS Units 11 2 and 3 in rate base and earning a return. Table 1-C 12 (Line 14) shows the return on rate base with (12.69%)
13 and without (13.90%) the connection charge in 1982, 14 and with (12.90%) and without (14.31%) the connection 15 ' charge in 1983 under the attrition allowance proposal.
16 44. Q. Mr. Korpan, would you please summarize your testi-17 mony and its overall financial implications?
18 A. Yes. The thrust of my testimony is to substantiate 19 that SDG&E must earn a 19% return on equity in 20 order to achieve satisfactory improvement in 21 SDG&E's financial results. This is necessary in 22 order to give SDG&E the opportunity to achieve 23 Single A performance during 1984, which is 24 predicated on the completion of SONGS Units 2 & 3 25 on a timely basis and their inclusion in rate base 26 and earning a return.
27 SDG&E has rarely earned its authorized rate 20 of return over the last 5 years and is not expected I to carn its cuthorized rate of return in 1980 or 2 in 19RI.
3 The Company must substantially improve its 4
financial results in order to competitively finance 5
a high, largely inflexible construction budget 6 which is beset by inflation and socially needed, 7 but nonproductive programs.
gf Improved financial results involves the improve-
, 9 ment of several key financial parameters with 10 eventual attainment of Single A results in the 11 face of exorbitant interest rates. They are:
12 interest coverage (3X), percent internal generation 13 of cash construction (40%), common equity ratio 14 (43%), sustained dividend growth, and a lower 15 proportion of cash construction to total capitaliza-16 tion (10%).
17 cash flow has been a particular problem for ,
18 SDG&E due to a combination of insufficient financial 19 results and accounting practices which have deteriorated 20 SDG&E's quality of earnings. This deterioration 21 has caused poor acceptance of SDG&E's securities 22 in the marketplace. The poor reception is compounded 23 by overwhelming competition from the rest of the
~
24 industry, industrial companies, and government 25 securities which have saturated the securities 26 market.
27 As a BBB rated company, SDG&E cannot hope to 28 compete effectively except under the most favorable
(
I
1 market conditions. Highor returns and improvad 2 cash flow will allow the company to offer securities 3 less often and in smaller amounts, and thus improve 4 its acceptance in the marketplace. Improved acceptance 5 through lower perceived risk and fewer financings 6 will improve the market to book ratio which would 7 reduce costs for the Company's customers and 8 shareholders alike.
9 -
This commission has accomplished much to give 10 the company the opportunity to earn a fair and 11 reasonable rate of return, but much more needs to 12 be done. Examples are (1) the inclusion of the 13 . debt and preferred equity portions of the APS/SDG&E 14 Interconnection Project in rate base, (2) approval of 15 the connection charge proposal, (3) approval.of 16 the 1983 attrition allowance, (4) expense treatment .
17 for mandated conservation and load management 18 programs, (5) approval of liberalized depreciation 19 lives, and (6) approval of a return on eg.2ity 20 which compensates SDG&E for the loss of future.
. 21 earnings on the Encina 5 capital investment.
22 The final solution, however, is a substantial 23 increase in the authorized return on equity for 24 SDG&E sufficient to attract funds at a reasonable 25 cost in tomorrow's adverse financial marketplace.
26 I am certain that the commission will see the provi-27 dence of this request and respond accordingly.
28 .
=
1 '4 5. O. Mr. Korpan, does that conclude your Prepared Direct 2 Testimony?
3 A.' Yes.
4 5
6 7
~
8
.9 10 .
s 11 12 13 14 - t I
- :. . :15 5
16 .'
- 17
- ~ 18-l 19 l
20 .
21-
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- '1 123--
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/
TABLE OF CONTENTS TABLE CHART TITLE PAGE Introduction 1 1982 Test Year Rate Request Summary 1 2 Earnings and Capitalization Data 1975 - 1979 2 3 Projected Earnings and Capitalization Data, 1980 - 1982 3 4 Historical and Projected Interest Coverage Ratios, 1975 - 1979 Recorded, 1980 - 1982 Proj ected 4 1 Pretax Interest Coverage Comparison Industry Bond Rating Groups vs. SDG&E
(- 1974 - 1979 Historical, 1980 - 1982 Proj ected 5
'5 Capital Expenditures & Sources of Funds 1975 - 1979 Historical, 1980 - 1982 Projected 6 2 Percent Internal Generation Comparison Industry Bond Rating Groups vs. SDG&E 1974 - 1979 Historical, 1980 - 1982 Proj ected 7 3 Pretax Interest Coverage Comparison Industry vs. SDG&E (Flow Through vs.
. Normalized) 1974 - 1979 8 4 Percent Internal Generation Comparison Industry vs. SDG&E (Flow Through vs.
L Normalized) 1974 - 1979 9
-5 Common Equity Ratio Comparison, Industry Bond Rating Groups vs. SDG&E 1974 - 1979 l Historical, 1980 - 1982 Projected 10
(
i
TABLE CHART TITLE PAGE 6 Financings Required, 1975 - 1979 Historical, 1980 - 1982 Projected 11 6 Dividend Growth Comparison, S&P 400 and Industry Bond Rating Groups vs. SDG&E, 1974 - 1979 Historical, 1980 - 1982 Proj ected 12 i 7 Dividend Coverage Comparison, Electric i Industry & SDG&E, 1971 - 1979 13 7 Market to Book Ratio Comparison, S&P 400 and Industry Bond Rating Groups vs. SDG&E, 1974 - 1979 Historical, 1980 - 1982 Proj ected 14 8 Common Stock Issues, Cost of Sales Below Book Value, 1973 - March, 1980 15 9 Common Stock Issues, Projected Cost of Sales Below Book Value, 1980 - 1982 16
- 10 Historical and Projected Return on Equity
(_' 1975 - 1979 Historical, 1980 - 1982 Projected 17 8 Return on Average Equity Comparison S&P 400 and Industry Bond Rating Groups vs. SDG&E, 1974 - 1979 Historical, 1980 -
1982 Projected 18
- 11 California Utilities Comparison, Growth l
Rates, 1969 - 1979 19 1
l 12 Return on Equity - Embedded Cost Analysis, 1970 1979 Recorded, 1980 -
l 1982 Projected 20 13 Computation of Return on Equity Necessary to Attain 2.7X Interest Coverage, 1982 Prc,osed Rates 21' l
14 Embedded Cost of Preferred Capital Stock Recorded 1979 and Projected 1980 - 1982 22
'15 Embedded Cost Of Long-Term Debt Recorded December 31, 1979 23 l .
TABLE CHART TITLE PAGE 16 Projected Embedded Cost of Long-Term Deb t , 1980 and 1981 24 17 Projected Embedded Cost of Long-Term Debt, 1982 25 18 Capital Structure, 1975 - 1979 Recorded, 1980 - 1982 Projected 26 i
~
19 1979 Authorized Rate of Return vs. 1979 Recorded, 1980 - 1981 As Expected 27 20 Rate of Return, 1982 Test Year Present and Proposed Rates 28 21 Cost of Capital at Various Returns on Equity, 1982 Proposed Rates 29
(-
e e
COST Oi 'APITAL AND RATE OF RETURN INTRODUCTION The following tables set forth the cost of capital for San Diego Gas & Electric for the 1982 Test Year. Infor-mation is provided on the capital structure and the costs of the capital elements as recorded in 1979 and projected for 1980 As Expected, 1981 As Expected, and 1982 Test Year.
Historical data on the c.rts of capital are -
provided as background information for the cost estimates through 1982. In addition, comparisons with the utility industry by credit rating groups, measurements of market
{ performance, comparisons to other industries, and other analyses and studies are included to substantiate the need for continued improvement in the Company's financial condition.
l A composite cost of capital is established in the l exhibit. The requested rate relief is $227 million. Real-ization of the requested rate relief in an expedited manner is essential to progress toward attainment of the Company's l primary financial objective of regaining its Single "A" bond rating.
Note: Projected data in these exhibits are based on the following:
- 1. Data at present rates exclude rate relief in 1981,
- 2. Proposed rates for 1982 include esti-mated rate relief in 1981 in the amount
(
of $100 million. This is necessary in order to avoid unrealistic skewing of certain financial data for 1982.
1GARCE TABLE 1 1982 TEST YEAR RATE REQUEST
SUMMARY
(Millions of Dollars)
LINE NO. TITLE
- 1. Total Revenue Increase $ 227.5
- 2. Electric $ 200.9
- 3. Gas S 26.4
- 4. Steam $ 0.2
- 5. Composite Rate of Return 13.907.
- 6. Ratemaking Return on Equity 19.00%
- 7. Weighted Average Rate Base $ 1,386.0
- 8. Electric $ 1,213.8
- 9. Gas $ 171.7
( 10. Steam $ 0.5 EMBEDDED COSTS:
- 11. Preferred Stock 9.52%
- 12. Long-Term Debt 10.577.
- 13. Bankers' Acceptances 15.417.
CAPITALIZATION RATIOS:
- 14. Common Equity 3 7. 3 2*/.
- 15. Preferred Stock 12.807.
- 16. Long-Term Debt 43.267.
l
- 17. Bankers' Acceptances 6.62%
- 18. Total 100.007.
- e. .
TABLE 2 SAN DIEGO CAS & ELECTRIC EARNINGS AND CAPITALIZATION DATA 1975 - 1979 LINE RECORDED DATA HO. TITLE 1975 1976 IV77 1978 1979 ~~
(A) (B) (C) (D) (E)
- 1. AFDC % Earnings 52% 36% 44% 44%
4 8*.
- 2. Financial Return on Equity (1) 5.9% 12.9% 13.0% 11.3% 10.3%
- 3. Ratemaking Return on Equity 4.3% 12.1% 14.6% 12.7% 11.'07, 4 Before Tax Interest Coverage 1.66X 2.38X 2.21X 2.25X 2.18X
- 5. Debenture Indenture Coverage 1.66X 2.53X 2.20X 2.42X 2.37X
- 6. Matrix Interest Coverage
- 1.63X 2.32X 2.49X 2.51X 2.23X
- 7. % Internal Generation (2) 1 ~, . 01 19.6% 16.8% 14.6% 15.3%
- 8. Construction % Capitalization 15.1% 17.5% 17.2% 16.4% 1 4 . 77.
CAPITALIZATION RATIOS
- 9. Conson Equity 31.2% 32.2% 32.87. 37.27 17.27
- 12. Preferred Stock 15.1% 15.8% 15.7% 16.6% 14.7%
- 11. Bankers' Acceptances 3.7% 3.0% 3.8% 1.8% 4.1%
- 12. Long-Term Debt 50.0% 49.0% 47.7% 44.41 44.07.
- 13. Market to Book Ratio 68% 87% 89% 85% 76%
Y w
(1) Simple average.
- E (2) Percent internal generation of cash construction. "
Source: 1979 Annual Report and Statistical Supplement.
rm m , .
TABLE 3 SAN DIEGO GAS & ELECTRIC PROJECTED EARNINGS AND CAPITALIZATION DATA 1980-1982 1982 1982 LINE 1980 1981 TEST YEAR TEST YEAR NO. TITLE AS EXPECTED AS EXPECTED PRESENT RATES PROPOSED RATES (A) (B) (C) (D)
- 1. AFDC % Earnings - - -
51%
- 2. Financial Return on Equity 3.23% (2.57%) (26.89%) 19.87%
- 3. Ratemaking Return on Equity 2.22% (12.84%) (49.60%) 19.00%
- 4. Before Tax Interest Coverage 1.39X 1.05X 0.33X 2.98X
- 5. Debenture Indenture Coverage 1.83X 0.87X (0.15X) 3.61X
[ 6. Matrix Interest Covera 2.19X 2.08X 1.74X 2.49X T 7. % Internal Generation (ge 1) (11.17.) (31.4%) (72.8%) 28.47.
(;. Construction % Capitalization 11.6% 13.1% 16.9% 13.8%
Capitalization Ratios
- 9. Common Equity 34.77% 32.19% 24.20% 37.32%
- 10. Preferrec, Stock. 13.07% 13.89% 15.48% 12.80%
- 11 Long-Term Debt 45.26% 47.25% 52.32% 43.26%
- 12. Bankers' Acceptances 6.90% 6.67% 8.00% 6.62%
~ '
- 13. Market to Book Ratio 79% 1037. 153% 82%
4 e
(1) Percent internal generation of cash construction. -
g; E,
m
maEL57o TABLE 4 SAN DIEGO GAS & ELECTRIC ~
HISTORICAL AND PROJECTED INTEREST )
COVERAGE RATIOS 1975-1979 RECORDED, 1980-1982 PROJECTED MOODY'S TIMES INTEREST EARNED CONTRACTUAL REQUIREMENTS LINE BEFORE AFTER 1ST MORT. DEBENTURE NO. RECORDED TAX TAX INDENTURE INDENTURE (A) (B) (C) (D) (E)
(2.5 Min) (2.0 Min)
- 1. 1975 1.66X 1.76X 2.33X 1.66X
- 2. 1976 2.38X 2.25X 2.98X 2.53X
- 3. 1977 2.20X 2.22X 2.83X 2.20X
- 4. 1978 2.25X 2.17X 3.79X 2.42X
- 5. 1979 2.18X 2.11X 4.66X 2.37X
.i PROJECTED PERIOD WITHOUT RATE RELIEF
- 6. 1980(1) 1.39X 1.39X 3.17X 1.83X
- 7. 1981(1} 1.05X 1.06X 1.88X 0.87X l 8. 1982(2) 0.33X 0.33X 0.80X (0.15X)
TEST YEAR AT PROPOSED RATES -
- 9. 1982 2.98X 2.31X 5.24X 3.61X
'10. Rating Agency Guideline 3.00X (1) As Expected.
(2) Test Year at Present Rates.
CHART 1 CHART 'i
- 5. 0 -
SAN DIEGO GAS & ELECTRIC PRETAX INTEREST COVERAGE COMPARISON INDUSTRY BOND RATING GROUPS VS SDGE t
4* 5- A = STRAIGHT AA/AA !
B = STRAIGHT A/A l C = STRAIGHT BAA/RBB D = SDGE HISTORICAL
- 4. 0 -
l
- 3. 5 -
- 3. 0 - g 3.ox
- p. (proposed ra tes)
( z w
- 2. 5 - g 7 '.
w ,/As ss O. \
g j
^
/ s #~~ ,
V /
- 2. 0 - c \ [
\ /
\ /
! \/
t s
- 1. 5 -
. 1. 0 -
- 0. 5 -
k 0.3X (present ra tes) 1974 8 1975 1 1976 3 1977 3 1978 8 1979 8 1980 3 1981 1 1982 YEAR PROJECTED
TABLE 5 SAN DIEGO GAS & ELECTRIC
- CAPITAL EXPENDITURES & SOURCES OF FUNDS 1975-1979 HISTORICAL & 1980- 1982 PROJECTED CAPITAL EXPENDITURES SOURCES OF FUNDS (Millions of Dollars)
LINE YEAR MANDATORY CONSTRUCTION (1) PERCENT PERCENT (2)
NO. RECORDED PERIOD REFUNDINGS EXPENDITURES TOTAL EXTERNAL INTERNAL (A) (B) (C) (D) (E) (F)
- 1. 1975 $1 $128 $129 877. 137.
- 2. 1976 1 170 171 80 20
- 3. '1977 2 199 201 83 17
- 4. 1978 13 207 220 85 15
- 5. 1979 53 205 258 85 15
- 6. Average 14 182 196 84 16
- 7. 1980 As Expected 3(3) 177 180 111 (11)
- 8. 1981 As Expected 3 210 213 131 (31) 1982 Test Year:
- 9. At Present Rates 54 269 323 173 (73)
- 10. At Proposed Rates 54 269 323 72 28 i
11.. Rating Agency Guideline - Single A 60 40 (1) Exclusive of AFDC. H (2) Percent internal generation of cash construction.
' 2 *
(3) This does not include $30.0M of variable interest rate foreign term loans which were
! voluntarily refunded in July, August, and September of 1980.
- l l
l l
. . - a
CHART 2 Cit-\RT 2
- 75. ~ - ~ ~ ~ - -- -
SAN DIEGO GAS & ELCCTRIC PERCENT INTERNAL GENERATION COMPARISON 70.- INDUSTRY BOND RATING GROUPS VS SDGE l A = STRAIGHT AA/AA
- 65. - B = STRAIGHT A/A C = STRAIGHT BAA/BBB D = SUGE HISTORICAL 60.- l 1
i l l 55.- ;
i " *
- 50. -
i i 45.- ,
l l
40.- l i
g 35.-
l
(' Z l
g .
l U 30.-
l tr g i W q 28.47.
- n. 25. - s g (proposed l rates) d \ l
\
l 20.- \
/ a%
g %'
\ / 's. ,
15.- g
'e' 'e- - - - -e '
b 10.-
- 5. -
1 O. -
-5.-
- -10.-
-15. 8 1974 1 1975 3 1976 1 1977 1 1978 8 1979 1 1980 %1981 19g . 87.
YEAR (present rates)
StJL@ h @ R 1 D
CHART 3 CHART 3
- 5. 0 T 1 SAN DIEGO GAS & ELECTRIC PRETAX INTEREST COVERAGE COMPARISON INDUSTRY VS SOGE 4.5- A = FLOW THROUGH B = NORMALIZED C = SDGE HISTORICAL
- 4. 0 -
- 3. 5 -
- 3. 0 -
l-- . .
b U 2.5-0: c\
W \ hw G- y ,/ s~~, ,, #*~~~,
\ /
\ /
- 2. 0 - \ /
\ /
\ /
\ /
Y 1.5-
- 1. 0 -
- 0. 5-
- 0. 0 i 1974 3 1975 1978 1 1977 8 1978 8 1979 8 1980 YEAR I CHART 4 l
75, ._
SAN OIEGO GAS & ELECTRIC PERCENT INTERNAL GENERATION COMPARISON 70.- INDUSTRY VS SDGE A = FLOW THROUGH
- 85. - B = NORMALIZED C = SDGE HISTORICAL
~
i 55.-
m 50.-
45.-
40.-
g 35.-
( Z w
U 30.-
at 1 25.- \
N
\
\
\
20.- \
\
s / ,4 . s' N .
l 15 -
s
\ /
/
%~%,'M-----<
Y 10.-
- 5. -
O. -
-5.-
( -10.-
~
1974 3 1975 3 1976 3 1977 1 1978 3 1979 3 1980 YEAR
_ q9
CHART 5 45.0 --
s
)'
SAN DIEGO GAS & ELECTRIC l 44*0- COMMON EQUITY RATIO COMPARISDN i INDUSTRY BOND RATING GROUPS VS SOGE i I
43.0- A = STRAIGHT AA/AA j B = STRAIGHT A/A i C = STRAIGHT BAA/BBB '
42.0- 0 = SOGE HISTORICAL i
41.0- i e :
40.0- 40.57. i (proposed rates) 39.O- l
,- 1 38.0- y
/ !
/
/ i 37.0- / I
/ !
F-36. 0- /
i Z #
W /
U35. 0- # !
x / s W /
Q-34. 0- ,
) -
l
- i
- 33. 0 -- N -
.a' i s - !
N,'
l 32.0- '
( .
l 31. 0- !
l l
30.0-l 29.0-l l
28.0-27.0-26.0- 26.77.
, (present rate l
I 25.0 1974 3 1975 3 1976 I 1977 3 1978 8 1979 8 1980 1 1981 8 1982 I
YEAR a ruuauuuuuua
a TABLE 6 SAN DIEGO CAS & ELECTRIC FINANCINGS REQUIRED 1975-1979 HISTORICAL & 1980-1982 PROJECTED (Dollars in Millions)
LDNC-TERM FUNDS SHORT-TERM FUNDS LINE LONG-It.KM rRr.r t.nRED -CO M BANK COPtERCTAL KANKER5' NO. YEAR DEBT STOCK STOCK TOTAL LOANS PAPER ACCEPTANCES TOTAL W (B) (C) (D) W W (G) (H) 'T W RECORDED PERIOD
- 1. 1975 $ 62 $ -
$ 15 $ 77 $ 12 S5 S 33 S 50 g, 2. 1976 54 26 30 110 15 10 (3) 22
- 3. 1977 94 30 50 174 (27) 22 16 11 7'
- 4. 1978 186(1) 26 72 284 -
(46) (23) (69)
- 5. 1979 70 - 52 122 - 74 36 110 66 166 (35) 53 la
- 6. 1980 As Expected 100(2) . ,
65 165 15 140 2 157
- 7. 1981 As Expected 75 25 1982 Test Year:
30 79 259 324 7 24 355
- 8. At Present Rates 150 259 55 24 79
- 9. At Proposed Rates I #.0 30 79 -
(1) Includes $131.6M2 from sale of Encina 5. g (2) This amount is net of $30.0M2 of variable interest rate foreign term loans which were voluntarily refunded in July. E M
August, and September of 1980. as e
CHART 6
- 25. 0 ')
24.0- SAN DIEGO GAS & ELECTRIC OIVIDEND GROWTH COMPARISDN 23.0- S&P 400 AND INDUSTRY BONO RATING GROUPS VS SOGE 22.0- A = STRAIGHT AA'AA B = STRAIGHT A/n
- 21. 0- C = STRAIGHT BAA/BBB 0 = SOGE HISTORICAL 20.0- E = S&P 400 19.0-18.0-17.0-18.0-15.0-14.0-13.0-12.0-I-
, Z11. 0-1.d ~
U10. 0-Z W E O- f s l / \
L O- ,/ \
l
\
- 7. 0- g s.
- ~
- 5. 0 - /
/ '
% /
/
- 4. 0 - l
- 3. 0-
/
2.0- [
- 1. 0-
[
- 0. 0 - D-- g---M
-1.0- ,/
-2. 0 - 2
-3.0-
-4.0-
~
1974 3 1975 8 1978 8 1977 3 1978 8 1979 3 1980 1 1981 3 1982 YEAR a m
- TABLE '7 TABLE 7 DIVIDEND COVERAGE COMPARISON BETWEEN ELECTRIC INDUSTRY AND SDG&E 1971 - 1979 LINE NO.
YEAR INDUSTRY SDG&E (A) (B) (C)
- 1. 1979 2.6X 1.4X
- 2. 1978 2.8 1.9
- 3. 1977 2.9 1.0
- 4. 1976 3.2 3.3 5, 1975 2.9 1.8
- 6. 1974 2.6 3.0
- 7. 1973 2.7 2.8
- 8. 1972 2.8 3.2
- 9. 1971 2.5 3.3
~ Source: Salomon Brothers Stock Research Industry Analysis, June 16, 1980.
asms- y ;
I
, i l
2.50 CERT 7 i SAN DIEGO GAS & ELECTRIC 2.40- MARKET TO BOOK RATIO COMPARISON S&P 400 AND INDUSTRY BOND RATING GROUPS VS SOGE
- 2. 30 -
A = STRAIGHT AA/AA
- 2. 20 - B = STRAIGHT A/A C = STRAIGHT BAA/BBB i 0 = SOGE HISTORICAL
- 2. 10- E = S&P 400 1
- 2. 00 -
- 1. 90-
- 1. 80 -
1.70-1.53 I" ~
(present rates)
- 1. 50-g .40-l Z
wl.30-
! O l -
@l.20-1.10-l l
1 1.00-
- 0. 90 - __,,__,,,_ ,
- 0. 0 - , / N Ni 0.82 0.70- g
/ '
(proposed rates) 0.60- V' I 0.50-D.40-D.30-l O.20-O.10-i
- 0. 00 1974 3 1975 3 1978 8 1977 1 1978 8 1979 8 1980 1 1981 1 1982 YEAR PROJECTED m %,
p-~. \ ,
TABLE 8 SAN DIEGO CAS & ELECTRIC COMMON STOCK ISSUES
- COST OF SALES BELOW BOOK VALUE 1973 - March,1980 (Dollars in Thousands Except Per Share Amounts) 1978 1978 1979 1980 LINE 1974 1975 1976 1977 NO.
1973 TBT TCT ( D) TfI TFT TGT F tit COLUMN TAT 1
- 1. Date of Sale 12/04/73 11/19/74 05/06/75 07/15/16 10/18/77 05/18/78 12/05i 8 07/24/79 03'27/80 2,000 3,000 2,500
- 2. Number of Shares 2,000 2,000 1,500 2,000 3,000 2,500
. (Thousands) w Y' 3. . Proceeds to Company $26,000 $45,270 $36,325 $28,960 S43,500 527.100
$26,810 $21,630 $15,570 (Thousands) $10.84
$15.09 $14.53 $14.48 $14.50
$13.405 $10.815 $10.38 $13.00
- 4. Proceeds Per Share S17.22
$17.49 $17.73 $17.86 $17.25
$17.89 $18.19 $16.84 $17.01
- 5. Book Value Per Share 11/30/73 10/31/74 04/30/75 06/30/76 08/31/77 05/31/78 11/30/78 06/30/7a 02/28/80
- 6. Ratio of Proceeds to Company 81.1% 84.1% 63.8%
Per Share to Book Value 74.9% 59.4% 61.6% 76.4% 86.3% 82.0%
Per Share
- 7. Decrease in Shares if 478 904 Sold at Book Value 471 412 451 378 501 811 575 (Thousands) p; 4,981 Total Extra Shares Sold
- 8. *
- 9. Times 1982 Dividend Rate $1.80
- 10. Total Loss of Cash Flow $8,966 2.1
- 11. Times Cross Up factor
$137373 Source: Prospectuses of respective issues.
- 12. Annual Cost to Customers SDC&E operating reports.
TABLE 9 SAN DIEGO GAS & ELECTRIC COMMON STOCK ISSUES PROJECTED COST OF SALES BELOW BOOK VALUE (Dollars in Thousands Except Per Share Amounts) t LINE NO. 1980 1981 1981 1982 1982 W W W W W
- 1. Month of Sale September April October March October
- 2. Number of Shares (Thousands)
. 2000 2000 2000 3000 2000 -
- 3. Proceeds to Company $27,020 $26,500 $26,750 $39,375 $26,250
- 4. Proceeds Per Share $13.51 $13.25 $13.38 $13.13 $13.13 '
- 5. Book Value Per Share $16.64 $15.73 $15.84 $15.85 $16.54
- 6. Ratio of Proceeds to Company to Book Value ~
Per Share (%) 81.2% 84.2% 84.4% 82.8% 79.4%
- 7. Decrease in Shares if Sold at Book Value (Thousands) 376 315 311 516 413
- 8. Total Extra Shares Sold 1,931
- 9. Times 1982 Dividend Rate $1.80
- 10. Total Loss of Cash Flow $3,476
- 11. Times Gross Up Factor '
2.1 N
- 12. Annual Cost to Customers 57,299
{
e
^ q .
TABLE 10 -
SAN DIEGO GAS & ELECTRIC HISTORICAL AND PROJECTED RETURN ON EQUITY (1975-79 HISTORICAL AND 1980-82 PROJECTED)
HISTORICAL RATEMAKING RATEMAKING FINANCIAL RETURN ON EQUITY RETURN ON EQUITY RETURN ON EQUITY LINE NO. YEAR (Authorized) (Actual) (Actual)
(A) (B)
(C) (D)
- 1. 1975 12.38% 4.07% 5.93%
- 2. 1976 12.38 12.06 12.92 ;
- 3. 1977 13.03 14.58 12.99
- 4. 1978 13.03 12.66 11.35
- 5. 1979 14.50 11.00 10.28 b PRESENT RATES
- 6. 1980 As Expected 2.22 3.23
.7. 1981 As Expected (12.84) (2.57) 8 '. 1982 Test Year (49.60) (26.89)
PROPOSED RATES
- 9. 1982 Test Year 19.00% 19.87%
Y P
m O
r m CHART 8 23.D.
22.0- SAN DIEGO GAS & ELECTRIC RETURN ON AVERAGE EQUITY COMPARISON S&P 400 AND INDUSTRY BONO RATING GROUPS VS SDGE 21.0-A = STRAICHT AA/AA 20.0- B = STRAIGHT A/A C = STRAIGHT BAA/BBB O '
19.0- O = SOGE HISTORICAL 19.9%
E = S&P 400 (proposed rates) 18.0-17.0-16.0-15.0-E e- ,
14.0-11 0-. --
s N >
s
[:
~
!":- 's E 9 o- \
'7/
B. 0- \
\
\ /
l
- 7. 0 - \ f
\/
- 6. 0 - '
I
- 5. 0 -
- 4. 0-
- 3. 0- -
- 2. 0-
- 1. 0-
- 0. 0 -
- 1. 0 -
-2. 0 -
~
1974 8 1975 8 1976 8 1977 3 1978 3 1979 1 1980 1 1 1 1982
-26.97.
YEAR (pr ene races) in P D nT F rTFn
r %, ~ .
TABLE 11 FINANCIAL DATA CALIFORNIA UTILITIES COMPARISON GROWTH RATES 1969-1979 LINE NO. SDG&E GROWTH RATE SCE GROWTH RATE PG&E GROWTH RATE
- 1. NET UTILITY PLANT
. (Excluding CWIP) 8.6% 5.0% 4.6%
- 2. CONSTRUCTION WORK IN PROGRESS 45.27. 17.5% 28.37.
- 3. TorAL ASSETS 15. 17. 8.87. 9.77.
~
- 4. TOTAL CAPITALIZATION 14.47. 8.07. 8.4%
- 5. TOTAL OPERATING REVENUES 18.27. 14.87. 15.27. i
- 6. TOTAL OPERATING EXPENSES 19.27. 16.37. 21.87.
- 7. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION 43.27, 2 1. 17. 33.47.
- 8. AFDC AS A 7. OF COMMON EARNINGS 29.07. 8.27. 2 2. 17.
- 9. TOTAL INTEREST CHARGES 20.37. . 11.67. 13.17.
- 10. EMBEDDED COST OF DEBT 6.27. 4.27. 5 47.
- 11. EMBEDDED CCST OF PREFERRED 6.07. 3.97. 4.C*4
- 12. AVG. SHARES OUTSTANDING 11.37. 4.77. 5.8%
- 13. ELECTRIC SALES - Kwh 6.37. 3.47. 4.07.
- 14. GAS SALES - Therms 1.77. -
(0.17.)
- 15. TOTAL CUSTOMERS 4.47. 2.67. 2.77.
- 16. PEAK LOAD - Kw 5.27. 4.87. 4.37.
Y to Source: Annual reports and statistical supplements of respective companies. p C
TABLE 12 O
TABLE 12 SAN DIEGO GAS & ELECTRIC RETURN ON EQUITY - EMBEDDED COST ANALYSIS 1970-1979 RECORDED 1980-1983 ESTIMATED AVERAGE RETURN ADJUSTED LINE ON COMMON EQUITY Y/E EMBEDDED ADJ.
NO. YEAR (1965-1969) COST OF DEBT (B)-4.277.0pTURN (A) ON EQUITY
+ (C) i (A) (B) (C) (D)
- l. 1970 11.787. 5.457. 1.187. 12.967.
- 2. 1971 11.78 5.88 1.61 13.39
- 3. 1972 11.78 6.04 1.77 13.55
- 4. 1973 11.78 6.37 2.10 13.88
- 5. -1974 11.78 6.82 2.55 14.33
- 6. 1975 11.78 7.18 2.91 14.09
- 7. 1976 11.78 7.47 3.20 14.98
- 8. 1977 11.78 7.67 3.40 15.18
- 9. 1978 11.78 7.92 3.65 15.43
- 10. 1979 11.78 8.49 4.22 16.00
- 11. 1980E 11.78 9.19 4.92 16.70
- 12. 1981E 11.78 9.66 5.39 17.17
- 13. . 1982E 11.78 10.57 6.30 18.08
- 14. 1983E 11.78 11.13 6.86 18.64
(
Average of SDG&E's embedded cost of debt 1965-1969.
. TABLE 13 TABLE 13 SAN DIEGO GAS & ELECTRIC COMPUTATION OF RETURN ON EQUITY NECESSARY TO ATTAIN 2.7X INTEREST COVERAGE 1982 PROPOSED RATES LINE CAPITALIZATION COST WEIGHTED NO. RATIOS FACTORS COSTS (A) (B) (C)
PER FILING:
- 1. Common Equity 37.32% 19.00% 7.09%
- 2. Preferred Stock 12.80 9.52 1.22
- 3. Long-Term Lebt 43.26 10.57 4.57
- 4. Bankers' Acceptances 6.62 15.41 1.02
- 5. Total 100.00% 13.90%
- 6. COVERAGE: 2.49X 3X COVERAGE:
- 7. Common Equity 37.32% 22.18% 8.28%
(
- 8. Preferred Stock 12.80 9.52 1.22
- 9. Long-Term Debt 43.26 10.57 4.57
- 10. Bankers' Acceptances 6.62 15.41 1.02
- 11. Total 100.00% 15.09% -
- 12. COVERAGE: 2.70X A return on equity of 22.18% is required to e/ctain a 2.70X interest coverage ratio.
k TABLE 14 SAN DIECO GAS & ELECTRIC EMBEDDED COST OF PREFERRED CAPITAL STOCr.
RECORDED 1979 AND PROJECTED 1980-1982 (Thousands of Dollars)
PROCEEDS OF EFFECT I'.'E LINE NET COST SALE ANNUAL COST (*4)
No. TITLE AMOUNT OF ISSUE (Cols. A-B) DIVIDEND (Col s . D. C )
--[D)
(A) (B) (C) (E)
Cumulative Preferred Stock
- 1. 5.00% Series S 7.500.0 $( 196.2) $ 7.696.2 $ 375.0 4.87%
- 2. 4.50% Series 6.000.0 - 6,000.0 270.0 4.50
- 3. 4.40% Series . 6,500.0 ( 103.5) 6,603.5 286.0 4.33
- 4. 4.60% Series 7,500.0 53.3 7,446.7 345.0 4.63
- 5. Total Preferred Stock 27.500.0 ( 246.4) __27.746.4 1,276.5 4 60 Prmferred Stock (Cumulative)
- 6. $9.84 Series 16,000.0 314.6 15,685.4 1.574.4 10.04
- 7. $7.80 Series 20.000.0 321.7 19.678.3 1.560.0 7.93
- 8. $7.20 Series 15.000.0 222.6 14.777.4 1,080.0 7.31
- 9. $7.325 Series 30.000.0 116.6 29.883.4 2.197.5 7.35
- 00. $8.25 Series 25,000.0 100.6 24.899.4 2.062.5 8.28
- 11. $2.68 Series 25.000.0 (1,215.9) 26,215.9 2.680.0 10.22 B2. $9.125 Series 30,000.0 191.7 29.808.3 2.737.5 9.18
- 13. $2.475 Series 25,000.0 (1,359.2) 26,359.2 2.475.0 9.39
- 04. Total Preference Stock 186,000.0 (1,307.3) 157,307.3 16.366.9 8 74 B5. Total 12/31/79 213,500.0 (1,553.7) 215.053.7 17.642.9 8.20 PROJECTED CHANCES DURING 1980-1982:(I)
- 36. No lasue in 1980 - - - - -
- 37. Projected 12/31/80 213.500.0 (1,553.7) 215.053.7 17.642.9 8.20
- 38. $14.375 Series 25,000.0 187.5 24,812.5 3,593.8 14.48 B;
- 39. Projected 12/31/81 238.500.0 (1.366.2) 239.866.2 21,236.7 8.85% 5
- 20. $14.7$0 Series 30,000.0 225.0 29.775.0 4,425.0 14.86% 7
- 21. Projected 12/31/82 $268,500.0 $(1,141.2) $269,641. 2 - $25,661.7 9.52%
- 31) Projected changes are issues of preference stock (cumulative).
TABLE 15 TABLE 15 SAN DIEGO GAS & ELECTRIC EMBEDDED COST OF LONG-TERM DEBT RECORDED DECEMBER 31, 1979 (Thousands of Dollars)
TOTAL ANNUAL AMORT. OF ANNUAL EFFECTIVE LINE PRINCIPAL INTEREST PREM. , DISC. EXPENSE COST (%)
NO. TITLE AMOUNT PAYMENT & EXPENSE (Cols.B&C ) (Cols. D/A)
(A) (B) (C) (D) (E)
FIRST MORTCACE BONDS
- 1. 35% Series "D", Due 4/1/82 $ 12,000.0 $ 390.0 $ (2.8) $ 387.2 3.23%
- 2. 2-7/8% Series "E", Due 4/1/84 17,000.0 488.8 11.7 500.5 2.94
- 3. 3k% Series "F", Due 10/1/85 18,000.0 585.0 8.1 593.1 3.30
- 4. 4-7/8% Series "G", Due 10/1/87 12,000.0 585.0 3.5 588.5 4.90
- 5. 4-5/8% Series "H", Due 10/1/90 30,000.0 1,387.5 10.1 1,397.6 4.66
- 6. 5\% Series "I", Due 3/1/97 25,000.0 1,375.0 (4.5) 1,370.5 5.48
- 7. 7% Series "J", Due 12/1/98 35,000.0 2,450.0 12.0 2,462.9 7.04
- 8. 8-3/4% Series "K", Due 2/1/00 40,000.0 3,500.0 5.0 3,505.0 8.76 Q. 8% Series "L", Due 9/1/01 45,000.0 3,600.0 12.6 3,612.6 8.03
- 10. 8-3/8% Series "M", Due 1/1/04 75,000.0 6,281.2 30.0 6,312.1 8.42
- 11. 10.7% Series "0", Due 5/1/82 40,000.0 4,280.0 85.1 4,365.1 10.91
'. 10% Series "P", Due 7/15/06 45,000.0 4,50d 0 20.1 4,520.1 10.04
.J. 8-3/4% Series "Q", Due 3/15/07 50,000.0 4,375.0 38.1 4,413.1 8.83 14 9-3/4% Series "R", Due 5/1/08 50,000.0 4.875.0 21.0 3,896.0 9.79 l 15. Total First Mortgage Bonds 494.000.0 38,672.5 250.0 38,922.5 7.88 l
SINKING FUND DEBENTURES
- 16. 4-5/8%, Due 1/15/84 9,000.0 416.3 5.8 422.1 4.69 l 17. 4 %, Due 9/1/94 15,600.0 702.0 7.1 709.1 4.55
- 18. Total Sinking Fund Debentures 24,600.0 1,118.3 12.9 1.131.2 4.60 l
OTHER LONG-TERM DEBT l
- 19. Foreign Term Loans (Variable) 65,000.0 9,644.8 8.5 9,653.3 14.85
- 20. Pollution Control Bonds (6-3/8%) 9,575.0 610.4 11.0 621.4 6.49
- 21. Pollution Control Bonds (7.2%) 5,700.0 410.4 8.3 418.7 7.35
- 22. Term Loan (8-3/4%) 40,000.0 3,500.0 16.0 3,516.0 8.79
- 23. Sundesert Properties (7.85%) 4,876.9 382.6 -
382.6 7.85
- 24. N.M. Rothchild & Sons, Ltd.,
Promissory Notes (5.5%) 3,142.3 290.5(1) 11.3 301.8 9.60
- 25. General Electric ( of Prime) 152.0 11.6 -
11.6 7.63
- 26. W.D. Cannon (7.49%) 239.1 17.9 -
17.9 7.50 27 Other (7.72%)(2) 145.1 11.2 -
10.7 7.37
- 28. Total Other Long-Term Debt 128,830.4' 14,879.4 55.1 14,934.5 11.59
'a. TOTAL LONG-TERM DEBT .S647,430.4 $54,670.2 $318.0 - $54,988.2 8.49%
(1) Outstandin8 amount in pounds x 5.5% x Dec. 31, 1979 exchange rate ($2,232/ pound).
(2) Various amounts at various interest rates and maturities.
n,
TABI,E 16 SAN DIEGO GAS & ELECTRIC PROJECTED EMBEDDED COST OF LONG-TERM DEST 1980 and 1981
(' thousands of Dollar's)
TOTAL ANNUAL EFFECTIVE PRINCIPAL ANNUAL INTEREST AMORT. OF PREM., EXPENSE COST (%)
LINE (Cols.D/A)
No. TITLE AMOUNT PAYMENT DISC. & EAPENSE (Cols. B+C)
(A) (B) (C) (D) (E)
EFFECTIVE DECEMBER 31, 1979 $647,430.4 $54.670.2 $318.0 $54.988.2 8.49%
1.
PROJECTED CHANCES DURING 1980:
First Mortgage Bonds:
50,000.0 8,000.0 22.3 8,022.3 16.05 2, 16% Series "S", Due 3/10 27.7 10,246.5 13.66
- 3. 13 5/8% Series "T", Due 8/10 75,000.0 10.218.8 Sinking Fund Debentures:
- 4. 4 5/8% Retired ( 375.0) ( 17.3) (0.2) ( 17.5) ( 4.67)
- 5. 4 1/2% Retired ( 400.0) ( 18.0) (0.2) ( 18.2) ( i.55)
Other long-Term Debt:
- 6. Foreign Term Loan (30,000.0) ( 4.467.9) - (4,467.9) (14.89)
- 7. Sundesert Properties ( 1,206.5) ( 92.5) - ( 92.5) ( ?.67) e 8. N.M. Rathschild & Sons, Ltd., Prom. Notes ( 812.4) ( 72.6) -
( 72.6) ( 8.94) 7 9. Foreign Term loan (Variable)(1) -
( 714.4) -
( 714.4) -
'- 10. General Electric ( 152.0) ( 11.6) - ( 11.6) ( 7.63)
- 11. W.D. Cannon ( 63.8) ( 4.8) -
( 4.8) ( 7.52)
- 12. Other -( 48.5) ( 3.9) - ( 3.9) ( 8.04)
Projected December 31, 1980 739 372.2 67,486.0 367.6 67,853.6 9.18
- 13. 3 PROJECTED CF.ANCES DURING 1981:
First Mortgage Bonds: 14.17 D a 10/11 75,000.0 10,593.8 36.0 10.629.8
- 14. 11 5/8% Series "U",
Sinking Fund Debentures: ( 4.67)
- 15.
- 4 5/8% Retired ( 375.0) ( 17.3) (0.2) ( 17.5)
- 16. 4.1/2% Retired ( 400.0) ( 18.0) (0.2) ( 18.2) ( 4.55) 4 Other Long-Tern Debt 87.5 D
- 17. Foreign Term Loan (Variable)(2) - 87.5 - -
- 18. Sundesert Properties ( 1,206.5) ( 92.5) -
( 92.5) ( 7.67) G
- 19. N.M. Rothschild & Sons, Ltd. Prom. Notes ( 786.8) ( 72.6) - ( 72.6) ( 9.23)
- 20. W.D. Cannon ( 63.8) ( 4.8) - ( 4.8) ( 7.52) @
- 21. Other ( 48.5) ( 3.9) - ( 3 . 9_) ( 8.04)
$811,491.6 $77,958.2 $403.2 $76,361.4 9.66L
- 22. Projected December 31, 1981 (1) Adjustment intended to reflect a projected decrease in the foreign term loan's variabic intere:t rate frc- 14. 7911 to 12.75%
=crecnt. 12. 7L' t o 1 1. n T'. .
(3) .'.J.
- uc t ,e n t intended to reficce a swlected increa :e in the forci.-a tera loan's variable interest rate fro -
a t
m .
TABLE 17 SAN DIEGO GAS & ELECTRIC PROJECTED EMBEDDED COST OF 14NG-TERM DEBT 1982 (Thousands of Dollars)
TOTAL ANNUAL EFFECTIVE PRINCIPAL ANN'JAL INTEREST AMORT. OF PREM.. EXPENSE COST (%)
LINE AMDUltr PAY 1ENT DISC. & EXPENSE (Cols. B+C) (Cols.D/A)
NO. TITLE (C) (D) (E)
(A) (B)
$403.2 $78.361.4 9.66%
PROJECTED DECEMBE.R 31, 1981 $811,491.6 $77.958.2 1.
PROJECTED CHANGES DURINC 1982:
First Mortgage Bonds: 36.0 11,004.8 14.67 75,000.0 10.968.8 15.30
- 2. 14 5/8% Series "V", Due 5/12 75,000.0 11.437.5 36.0 11.473.5
- 3. 15 1/4% Series "W", Due 10/12 (12,000.0) ( 390.0) 2.8 ( 387.2) ( 3.23)
- 4. 3 1/4% Series "D", Retired (40,000.0) (4,280.0) (84.7) (4.364.7) (10.91)
- 5. 10.7% Series "O", Retired Sinking Fund Debentures: 17.3) ( 0.2) ( 17.5) ( 4.67)
- 6. 4 5/8% Retired ( 375.0) (
18.2) ( 4.55) 4 1/2% Retired ( 400.0) ( 18.0) ( 0.2) (
7.
Other Long-Tera Debt: .
643.8) ( 48.3) - ( 48.3) ( 7.50)
- 8. Sundesert Properties ( ( 72.6) ( 9.38)
N.M. Rothschilds & Sons Ltd., Prom. Notes ( 774.4) ( 72.6) -
( 7.52)
. 9. ( 63.8) ( 4.8) -
( 4.8) 3* . 10. W.P. Cannon ( 29.6) ( 1.9) - ( 1.9) ( 6.42)
- 11. Other $95.924.5 10.57%
$907,205.0 $95.531.6 $392.9
- 12. Projected December 31, 1982 Y
F m
TABLE 18 SANDIECOCAS&ELECg)IC CAPITAL STRUCTURE 1975-1979 RECORDED - 1980-1982 PROJECTED (Dollars in Millions)
MILLIONS PERCENT LINE I4mu-It.nM PRt.r1RRED CON 1DN BANKERS' I.T)NG-TERit PRETERRED CON 10N BANKERS' NO. YEAR DEST STOCK E ITY . TOTAL DEBT STOCK EQUITY ACCEPTANCES (A) (8)
ACCEPTANCES ~
(D) W ( F-) (G) (H) (I)
RECORDED
- 1. 1975 $440.5 $133.5 $274.8 $33.1 881.9 49.97, 15.1% 31.27, 3.87,
- 2. 1976 491.0 158.5 322.5 30.5 1,002.5 49.0 15.8 32.2 3.0
- 3. 1977 572.6 188.5 393.2 46.2 1,200.5 47.7 15.7 32.8 3.8
- 4. 1978 573.1 213.5 480.4 23.6 1,290.6 44.4 16.6 37.2 1.8
- 5. 1979 640.1 213.5 541.2 60.0 1,454.8 44.0 14 .7 37.2 4.1 1980 As Expected 739.4 213.5 568.0 1:c 2. 7 1,633.6 45.2 13.1 34.8 6.9 j 6. 1981 As Expected 811.5 238.5 552.9 114.4 1,717.3 47.2 13.9 32.2 6.7 7.
1982 Test Year
- 8. At Present Rates 907.2 268.5 419.6 138.8 1,734.1 52.3 15.5 24.2 8.0
- 9. At Proposed Antes 90/.2 268.5 782.5 138.8 2,097.0 43.3 12.8 37.3 6.6
- 10. Rating agency guideline-Single A. 43.0 Y
F m
II) Excludes leases.
e
' TABLE 19 TABLE 19 SAN DIEGO GAS & ELECTRIC 1979 AUTHORIZED RATE OF RETURN VS. 1979 RECORDED. 1980-1981 AS EXPECTED LINE CAPITAL COST WEIGHTED NO. RATIOS FACTORS COST (A) (B) (C) 1979 AUTHORIZED (1)
- 1. Common Ec uity 38.09% 14.50% 5.52%
- 2. Preferrec Stock 14.16 8.21 1.16
- 3. Long-Term Debt 44.99 8.10 3.64
- 4. Bankers' Acceptances 2.76 10.00 0.27
- 5. Total 100.00% 10.59%
- 6. Coverage 2.71X 1979 RECORDED
- 7. Common Ec uity 37.20% 10.97% 4.08%
(
- 8. Preferrec Stock 14.68 8.20 1.21
- 9. Long-Term Debt 44.00 8.49 3.74
- 10. Bankers' Acceptances 4.12 12.45 0.51
- 11. Total 100.00% 9.54%
- 12. Coverage 2.24X 1980 AS EXPECTED
- 13. Common Ec uity 34.77% 2.21% 0.77%
l
- 14. Preferrecl Stock 13.07 8.20 1.07
- 15. Long-Term Debt 45.26 9.19 4.16
- 16. Bankers' Acceptances 6.90 13.99 0.97
- 17. Total 100.00%
6.97%
. 18. Coverage l.36X 1981 AS EXPECTED
- 19. Common Equity 32. 19% (12.83%) (4.13%)
- 20. Preferred Stock 13.89 8.85 1.23
- 21. Long-Term Debt 47.25 9.66 4.56
- 22. Bankers' Acceptances 6.67 13.50 0.90
- 23. Total 100.00% 2.56%
24 Coverage 0.47X
{
(1) Per Decision 90405.
[ _
TABLE 20 l
TABLE 20 SAN DIEGO GAS & ELECTRIC !
RATE OF RETURN 1982 TEST YEAR PRESENT AND PROPOSED RATES '
l LINE CAPITAL COST WEIGHTED NO. RATIOS FACTORS COST (A) (B) (C)
- 1982 Test Year Present Rates
- 1. Conunon Equity 24.207. (49.557.) (11.997.)
- 2. Preferred Stock 15.48 9.52 1.47
- 3. Long-Term Debt 52.32 10.57 5.53
- 4. Bankers' Acceptances 8.00 15.41 1.23
- 5. Total 100.007. ( 3. 767.)
- 6. Coverage (0.56X) 1982 Test Year Proposed Rates -
-7. Common Equity 37.32% 19.007. 7.097.
- 8. Preferred Stock 12.80 9.52 1.22
- 9. Long-Term Debt 43.26 10.57 4.57
- 10. Bankers' Acceptances 6.62 15.41 1.02
~ '
- 11. Total 100.007. 13.907.
-12. Coverage 2.49X
.A .m b
TABLE 21 SAN DIEGO GAS & ELECTRIC COST OF CAPITAL AT VARIOUS RETURNS ON EQUITY 1982 PROPOSED RATES LINE CAPITALIZATION WEIGHTED CAPITALIZATION WEIGHTED NO. ,
RATIOS RATES COSTS RATIOS RATES COSTS (A) (B) (C) (D) (E) (F)
- 1. Common Equity 37.32% 18.00% 6.72% 37.32% 18.50% 6.90%
- 2. Preferred Stock' 12.80 9.52 1.22 12.80 9.52 1.22
- 3. Long-Term Debt 43.26 10.57 4.57 43.26 10.57 4.57
- 4. Bankers' Acceptances 6.62 15.41 1.02 6.62 15.41 1.02
-5. Rate of Return 13.53% 13.71%
~
- 6. Coverage 2.42X 2.45X
- 7. Common Equity 37.32% 19.00% 7.09% 37.32% 19.50% 7.28%
- 8. Preferred Stock 12.80 9.52 1.22 12.80 9.52 1.22
- 9. Long-Term Debt 43.26 10.57 4.57 43.26 10.57 4.57
- 10. Bankers' Acceptances 6.62 15.41 1.02 6.62 15.41 1.02
- 11. Rate of Return 13.90% 14.09%
- 12. Coverage 2.49X 2.52X Y
m s
A t