ML20003E995
| ML20003E995 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 12/31/1979 |
| From: | Swiger S TEXAS POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML19240B984 | List:
|
| References | |
| 3006, NUDOCS 8104170642 | |
| Download: ML20003E995 (52) | |
Text
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beeked A)o, 3 o er.
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DIRECT TESTIMONY OF 9
10 11 S. S. SWIGER 12 13 14 FOR 15 16 17 TEXAS POWER & LIGHT COMPANY 18 19 20 DECEMBER 19 '9 21 22 23 24 25 26 27 1810;4170 &Y/
28 TEXAS POWER & LIGIIT COMPANY
Swiger I CI 3I PAGE 1
DIRECT TESTIMONY OF S. S. SW7CER 2
Q.
WOULD YOU PLEASE STATE YOUR NAME AND BUSINESS ADDRESS?
3 A.
My name is S. S. Swiger. My business address is 1511 Bryan Street, Dallas, Texas.
4 Q.
BY WHOM ARE YOU EMPLOYED?
5 A.
I am employed by Texas Power & Light Company.
6 Q. WHAT IS THE NATURE OF YOUR DUTIES AND YOUR POSITION WITH TEXAS 7
POWER & LIGHT COMPANY?
8 A.
I am Treasurer and Assistant Secretary.
I have overall responsibility for 9
accounting matters and the cash requirements of the Company. I also participate 10 in arrangements for long-term financing of the Company.
11 Q.
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND BUSINESS 12 EX PE'RIENCE.
13 A.
I graduated from Eastern New Mexico University in Portales, New Mexico in 1961 14 with a B.A. degree in General Business. I was employed in that same year by 15 Texas Power & Light Company as a junior accountant in the Company's Financial 16
& Accounting Department. My first two years were spent in a training program 17 involving all aspects of Company operations, primarily dealing with financial and 18 accounting matters; however, this training also included a brief period in our field 19 operations. In 1963 I assumed the responsibility of Supervisor of Budgets. In 1964 20 I passed the examination to become a Certified Public Accountant in the State of 21 Texas and I am now a member of the Texas Society of Certified Public 22 Accountants and the American Institute of Certified Public Accountants. In 1966 23 I obtained a Masters Degree in Business Administration from Southern Methodist 24 University, with a major in accounting. This degree was earned at night while 25 being employed during the day by Texas Power & Light Company. In 1967 I 26 assumed the position of Manager of General Accounting for the Company. This 27 responsibility included preparation of all tax returns, all financial reports to 28 regulatory agencies, stockholders, and in-hoose financial reports.
I was also h TEXAS IUWER & LIGliT COMPANY
Swiger PAGE 2 cf 31 I
responsible for the Company's general ledger, accounts payable and accounts 2
receivable, in 1972 I was elected Assistant Secretary and Assistant Treasurer of 3
the Company and my responsibilities included general accounting, plar.t account-4 ing, budgeting, payroll and disbursing.
In 1975 I was elected Treasurer and 5
Assistant Secretary and I have held that position until the present.
6 Q. TO WHAT EXTENT DO YOUR DUTIES BRING YOU INTO CONTACT WITH THE 7
INVESTMENT COMMUNITY?
8 A.
My conta, cts with the investment community include meeting with investment 9
banking firms during the issuance of new securities and consultation with 10 individual investors, security analysts and other parties interested in Texas 11 Power & Light's securities, including agencies that rate the Company's securities.
12 Q. HAVE YOU PREVIOUSLY APPEARED AS A WITNESS IN A RATE PROCEEDING 13 BEFORE THE TEXAS PUBLIC UTILITY COMMISSION?
14 A.
Yes, I testified in our previous rate proceedings before this Commission, those 15 being Dockets 178 and 1517 heard in 1977 and 1978 respectively.
16 Q.
WHAT IS THE GENERAL PURPOSE OF YOUR TESTIMONY IN THIS PROCEED-17 ING?
18 A.
The purpose of my testimony is:
19 1.
To discuss the need to raise substantial amounts of capital and the various 20 sources of long term capital available to the Company, together with some 21 of the related covenants and restrictions contained in our Mortgage and 22 Deed of Trust, our debenture agreements, and other financing agreements 23 such as those related to pollution control facilities and our obligations under 24 contracts with Texas Utilities Fuel Company (TUFCO) and Texas Utilities 25 Generating Company (TUGCO).
26 2.
To present my determination of the overall cost of capital in order to 27 recommend a rate of return to be applied to the Company's original cost and 28 adjusted value rate bases.
TEXAS l'OWER & LIGIIT COMPANY
~.
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4 Swiger PAGE 3 Cf 31 l'
3.
To discuss some of the financial difficulties the Company has experienced in i
2 its efforts to maintain quality of earnings and interest coverage protection, 3
and to discuss the capital structure that is necessary to preserve the 4
financial integrity of the Company.
5 4.
To discuss the adverse effects of increases in the Company's cost of doing 6
business experienced in the past and expected in the future.
)
7 Q. WHY IS THE COMPANY'S NEED TO RAISE CAPITAL SO GREAT AT THIS TIME?
8 A.
As discussed in Mr. Campbell's testimony, the Company is in the midst of a large 9
construction program in order to build power plants that utilize lignite and 1
10 nuclear as opposed to gas and oil.
Mr. Campbell discussed the construction 11 expenditures of past years and viose that will be required in the future. It is 1
12 recognized that this construcNn program cannot be funded entirely from i
13 internally generated funds, but it is important that a substantial portion of these 14 annual expenditures be met from internal sources. Any amounts required in 15 excess of this internal generation must come from selling the Company's 16 securities to the public; therefore, the Company must have access to the capital 17 markets at all times and at the lowest possible cost over the long-term for the i
18 benefit of our customers, i
19 Q.
PLEASE DESCRIBE THE VARIOUS TYPES OF CAPITAL TEXAS POWER &
20 LIGHT COMPANY UTILIZES IN ITS BUSINESS.
21 A.
I have prepared Exhibit SSS-1 which reflects, in Column (b) of page 1, the capital 22 (per books) of the Company at September 30,1979. This page is segregated as to 23 fong-term debt, preferred stock, common stock equity, and unamortized invest-j 24 ment credits.
25 Q. ARE THE AMOUNTS IN COLUMN (b) OF PAGE 1 THE ACTUAL AMOUNTS OF 26 OUTSTANDING LONG-TERM DEBT, PREFERRED STOCK, COMMON STOCK 27 EQUITY AND UNAMORTIZED INVESTMENT CREDITS OF THE COMPANY AT 28 SEPTEMBER 30,1979?
TEXAS POWER & L.lGirr COMPANY
Swiger PAGE 4 of 31 1
A.
Yes, that is correct except for the exclusion of $87,000 of Sinking Fund 2
Debentures due currently.
3 Q. TOULD YOU PLEASE DESCRIBE THE COMPANY'S OUTSTANDING LONG-4 TERM DEBT AS TO ITS GENERAL TERMS AND CONDITIONS?
5 A.
At September 30, 1979, the Company had three general types of long-term debt 6
outstanding. The vast majority of the Company's outstanding long-term debt is in 7
the form of first mortgage bonds. As reflected on page 2 of Exhibit SSS-1, the 8
Company had twenty-one individual series of thirty-year first mortgage bonds 9
outstanding in the principal amount of $847.5 million. These series range in 10 principal amounts from $10 million un to $100 million and have maturity dates 11 ranging from 1982 through 2009. Interest rates vary from a low of 31/8% to a 12 high of 101/8%. Our latest offering of first mortgage bonds ($100 million) was 13 issued in early 1979 at an interest rate of 9 3/8%. The outstanding mortgage 14 bonds and any new series of mortgage bonds are issued under the Company's 15 Mortgage and Deed of Trust, dated as of May 1,1945, with the Republic National 16
% - M Dallas, Trustee. Interest is paid on a semi-annual basis. There is no 17 stated maximum principal amount of mortgage bonds which may be issued, but 18 new issues of mortgage bonds must be based on property additions, the maximum i
19 amount of new issues being limited to 60% of such additions. Eligible property 20 additions generally include all electric utility property acquired by the Company 21 af ter December 31,1944, with certain minor exceptions. New issues of mortgage 22 bonds may generally g be made unless, for twelve consecutive months out of the 23 last preceding fif teen months, earnings before income taxes were at least twice 24 the annual interest requirements on all the bonds at that time outstanding, 25 including the new additional issue proposed. The Mortgage generally constitutes a 26 first lien on all the Company's present properties.
27 The Company had outstanding at September 30, 1979, $35.7 million of 28 sinking fund debentures (excluding $87,000 due currently). This type of security TEXAS POWER & LIGlIT COMPANY
Swiger PAGE 5 Ff 31 I
differs from first mortgage bonds in one major aspect. It is not secured by any 2
lien on Company property and is issued on the basis of the Company's general 3
credit. As reflected on page 2 of Exhibit 555-1 there are three separate issues of 4
twenty-five year debentures outstanding. The interest rates vary from a low of 5
41/2% to a high of 7 3/4%. Each issue of debentures was made under a separate 6
agreement between the Company and the First National Bank in Dallas, as 7
Trustee.
The debenture agreements provide, among other things, that no 8
additional junior funded debt (debentures or debt ranking equal thereto) may be 9
issued unless earnings for twelve consecutive months out of the last fifteen 10 months, computed before income taxes, were at least twice the annual interest 11 requirements on all outstanding indebtedness of the Company, including interest 12 on the proposed junior funded debt. Af ter incurrence of the additional debt, all 13 similar amounts of debt of the Company may not exceed 25% of the outstanding 14 mortgage bonds plus capital stock and surplus. The debenture agreements also 15 contain dividend restrictions on common stock which are designed to maintain the 16 aggregate preferred and common stock equity above 331/3% of total capitaliza-17 tion. Each issue of the sinking fund debentures has a cash sinking fund provision 18 which requires a 2% annual sinking fund requirement commencing in the fif th year 19 following issuance of the debentures, so that 40% of the issue will be redeemed by 20 tlw sinking fund prior to final maturity.
21 Also as reflected on page 2 of Exhibit 555-1, the Company had other junior 22 funded debt consisting of three series of thirty-year pollution control revenue 23 bonds outstanding as of September 30, 1979 in the amount of $43.4 million, net of 24 funds on deposit with the trustee. These three series were sold by the Sabine 25 River Authority of Texas (SRA), a governmental agency of the State of Texas, for 26 the purpose of constructing pollution control equipment at certain jointly-owned generating stations of the Company, Dallas Power & Light Company (E,P&L) and 27 Texas Electric Service Company (TES). Interest on the bonds is exempt from 28 se e 6
e e
Swiger PAGE 6 cf 31 4
1 Federal income taxes to the holder. Upon completion of the facilities, title will 2
pass to the Company, DP&L, and TES under the terms of an installment' sale 3
agreement between the Companies and SRA.
This agreement obligates the 4
Company to make payments equal to the periodic principal and interest require-5 ments of the bonds. This type of security is similar to the sinking fund debentures 6
in that they are secured only by the Company's general credit and not by the 7
property of the Company. Each issue has a sinking fund commencing fif teen years 8
af ter issuance and providing for redemption of 25% of the bonds prior to final 9
maturity.
10 Q. DOES THE COA 1PANY HAVE ANY OTHER OBLIGATIONS THAT SHOULD BE 11 CONSIDERED JUNIOR FUNDED DEBT AT SEPTEA1BER 30,1979?
12 A.
Yes. Through our Operating Agreement with TUGCO, the Company is in effect 13 obligated, along with TES and DP&L, for $200 million of 9.20% Senior Notes due 14 September,1998 issued by TUGCO.
15 Q. COULD YOU EXPLAIN THE AGREEA1ENT UNDER WHICH THE COA 1PANY'S 16 OBLIG ATION IS CREATED?
17 A.
Under the provisions of the Company's Operating Agreement with TUGCO, the 18 Company is obligated to pay to TUGCO amounts equal to the cost of services 19 received, and such payments, in total, are required by the agreement to be "at 20 least equivalent in the aggregate to the annual charge to income on the books" of 21 TUGCO.
22 Q.
WHAT PORTION OF THE TUGCO SENIOR NOTES AND RELATED 1NTEREST 23 REQUIREA1ENTS CONSTITUTES TEXAS POWER & LIGHT COA 1PANY'S OBLI-24 GATIONS AS OF SEPTEA1BER 30,1979?
25 A.
Of the outstanding $200 million of Senior Notes at September 30, 1979 the 26 Company is obligated for $95 million (47.5%) with an annual interest obligation of 27 approximately $8.7 million.
28 Q.
WHY HAS TUGCO ISSUED THESE SENIOR NOTES?
TEXAS POWER & LIGIIT COMPANY
4 Swig:r PAGE 7 f f 31 1
A.
To cover a portion of TUCCO's capital requirements to fund lignite mining and i
2 related equipment in order to mine and ddiver lignite to the Company's lignite 3
fired generating plants.
4 Q.
ARE THERE ANY ADDITIONAL DEBT OFFERINGS BY TUGCO THAT WILL BE 5
CONSUMATED BY THE TIME RATES SET IN THIS PROCEEDING GO INTO 6
EFFECT?
7 A.
Yes. An additional $200 million offering of Senior Notes (negotiated in late 1979) 8 bearing interest at 10.45% will be outstanding, assuming rates set in this 9
proceeding will go into effect sometime in mid-1980. Giving effect to this 10 financing, ti.e Cornpany will then be obligated for a total principal amount of $190 11 million with an.nual interest obligation of tgproximately $18.7 million. Also,it 12 is important to note that the Company's obligation for a portion of the principal 13 amount of TUGCO's Senior Notes must be considered under the Company's 14 debenture agreements with reference to the 25% debt limitation and minimum 15 interest coverage limitation as previously discussed.
16 Q.
WHAT IS THE PURPOSE OF THE ADDITIONAL $200 MILLION ISSUE OF SENIOR 17 NOTES SUBSEQUENT TO SEPTEMBER 30,19797 18 A.
This second issuance of Senior Notes by TUGCO is to refinance the principal 19 amount of outstanding short-term borrowings by TUGCO which were incurred to 20 fund additional mining and other related equipment at the Company's lignite fired 21 power plants.
22 Q. MR. SWIGER, DOES TUFCO ALSO ISSUE SENIOR NOTES TO FINANCE ITS 23 OPERATION AND IF SO, DO THE NOTES INVOLVE ANY ADDITIONAL OBLIG A-24 TIONS FOR THE COMPANY?
25 A.
Yes. TUFCO has also financed its operation through the issuance of Senior Notes 26 and the Company is obligated under an Operating Agreement with TUFCO which 27 is similar to the TUCCO Operating Agreement as it relates to payments to 28 TUFCO by the Company for goods and services provided.
- d e
Swiger PAGE LOL11 1
Q. WHAT WAS THE PRINCIPAL AMOUNT OF TUFCO'S SENIOR NOTES OUT-2 STANDING AT SEPTEMBER 30,1979 AND WHAT PORTION CONSTITUTES THE 3
OBLIGATION OF TEXAS POWER & LIGHT COMPANY?
4 A.
At September 30, 1979, TUFCO had outstanding $100 million of 8.50% Senior 5
Notes due December 1996.
During the test year the Company purchased 6
approximately 62.5% of TUFCO's available gas supplies and under the terms of 7
the Operating Agreement with TUFCO we, in effect, were obligated for payment i
8 of a like percentage of interest on the Senior Notes outstanding.
9 Q. MR. SWIGER, WHY ARE THE SENIOR NOTES OF TUCCO AND TUFCO NOT 10 INCLUDED IN THE LIABILITIES AND CAPITALIZATION OF TEXAS POWER &
11 LIGHT COMPANY?
12 A.
Because these obligations are $ct a direct debt liability of Texas Power & Light 13 Company. Our obligation arises from the terms of our Operating Agreement with 14 TUGCO and TUFCO which, in effect, says we will pay all of their costs for 15 rendering services to the Company.
16 Q. ARE TEXAS POWER & LIGHT COMPANY'S CAPITAL STRUCTURE REQUIRE-17 MENTS AND INTEREST COVERAGE REQUIREMENTS AFFECTED BY THE 18 TUGCO AND TUFCO SENIOR NOTES OUTSTANDING?
19 A.
Yes, sir, they are most definitely. Under the SEC requirements, we must include 20 our pro rata portion of interest on TUGCO and TUFCO Senior Notes in the 21 calculation of our fixed charge coverage as if it were our own interest require-22 ment. In order to maintain an adequate SEC fixed charge coverage, including 23 interest on the Senior Notes, the Company must maintain capital structure ratios 24 which will permit adequate interest coverage when such interest components are 25 included.
26 Q. WHAT ARE THE RATINGS THAT HAVE BEEN ASSIGNED TO THE COMPANY'S 27 FIRST MORTGAGE BONDS, SINKING FUND DEBENTURES, POLLUTION 28 CONTROL REVENUE BONDS, AND THE SENIOR NOTES OF TUGCO AND TEXAS IOWER & LIGIIT COMPANY
Swig:r PAGE 9 of 31 1
TUFCO, BY THE TWO MAJOR RATING AGENCIES, MOODY'S INVESTORS 2
SERVICES, INC. AND STANDARD & POOR'S CORPORATION?
3 A.
The Company's First Mortgage Bonds have been designated with the highest bond 4
rating by both rating agencies, that being triple A. The Sinking Fund Debentures 5
and Pollution Control Revenue Bonds have been assigned a double A rating by both 6
rating agencies since they are not secured by property but only by the general 7
credit of the Company. The debt in the form of Senior Notes issued by TUFCO s
s 8
and TUGCO has also been assigned a double A rating.
9 Q. DOES THE COMPANY HAVE ANY OTHER TYPES OF LONG-TERM DEBT?
10 A.
As far as being material in financing the Company's business, no. However, there 11 are a number of minor notes payable that have longer than one year maturities 12 which I have included in the debt component of the capital structure.
13 Q. WHAT PRIMARILY COMPRISES THE NOTES PAYABLE?
14 A.
The notes pa>able baiance of $1.9 million constitutes numerous notes payable 15 principally in connection with the acquisition of land and land rights for plant 16 sites, lignite reserves and water rights.
17 Q.
ACCORDING TO EXHIBIT SSS-1, TOTAL LONG-TERM DEBT OF THE COM-18 PANY AT SEPTEMBER 30,1979, WAS $923.2 MILLION. IS THAT CORRECT?
19 A.
Yes, sir, that is correct.
20 Q. WOULD YOU PLEASE DESCRIBE THE~ PREFERRED STOCK PORTION OF THE 21 CAPITAL OF THE COMPANY AS REFLECTED ON EXHIBIT SSS-l?
22 A.
The Company had at September 30, 1979, approximately $256.1 million outstand-23 ing in the form of preferred stock. As detailed on page 3 of Exhibit SSS-1, t!Js 24 amount was comprised of 2,573,786 shares cutstanding (5,000,000 shares author-25 ized)in the form of twelve different series of stock that are cumulative, without 26 par value and entitled to $100 a share on liquidation. Ahnual cumulative dividend rates range from a low of $ts per share to a'high of $9.32 per snare Our latest 27 28 offering (300,000 shares) of preferred stock was in early 1979 at a dividend rate of l
h TEXAS POWER & LIGirr COMPANY
Swig;r PAGE10 of 31 1
$8.84 per share. None of the outstanding preferred stock is subject to any sinking 2
fund requirement.
3 Q. WHAT RATING HAS BEEN ASSIGNED TO THE COMPANY'S PREFERRED 4
STOCK BY MOODY'S INVESTORS SERVICES, INC. AND STANDARD & POOR'S 5
CORPORATION?
6 A.
The Company's preferred stock is rated double A by both rating agencies, similar 7
to our debentures, pollution control revenue bonds, and the TUFCO and TUGCO 8
Senior Notes.
9 Q.
ALL RIGHT, MR. SWIGER, !;OW THAT WE HAVE TALKED ABOUT THE COM-10 PANY'S DEBT AND PREFERRED STOCK AT SEPTEMBER 30, 1979, WHAT 11 ABOUT THE COMPANY'S COMMON STOCK EQUITY?
12 A.
Once again please refer to page 1 of Exhibit 555-1. At September 30, 1979, 13 common stock equity on the books amounted to $303.2 million. Mr. Campbell has 14 testified that all of the common stock of the Company is owned by Texas Utilities 15 Company (TU). At September 30, 1979, the Company had 32,350,000 shares of 16 common stock outstanding with a total of 80,000,000 shares authorized to be 17 issued.
18 Q. IS ANYTHING ELSE INCLUDED IN THE CAPITAL STRUCTURE OF THE 19 COMPANY FOR PURPOSES OF THIS PROCEEDING?
20 A.
Yes, the unamortized job development investment credits of the Company are 21 also included. As I will discuss later, these amounts are being included for 22 purposes of this proceeding in order to preserve the Company's right to these 23 credits under Sec. 46(f)(2) of the Internal Revenue Code.
24 Q. MR. SWIGER, DO YOU BELIEVE THAT THE BOOK AMOUNTS AT SEPTEM-25 BER 30,1979 NEED TO BE ADJUSTED TO DETERMINE THE PROPER CAPITAL 26 STRUCTURE OF THE COMPANY FOR THIS PROCEEDING?
27 A.
Yes, sir, as shown in column (c) en page 1 of Exhibit SSS-1, I have made 28 adjustments to the capital structure representing actual debt and known equity TEXAS POWER & LIGn IT COMPANY
l swsger II I 3I PAGE i
1 offerings that will occur before these rates go into effect. I have also adjusted 2
the capital structure in column (e) to eliminate the portion of capital required to 3
construct the Sandow #4 generating unit dedicated to a large industrial customer 4
in accordance with the discussion by Mr. Campbell in his testimony.
5 Q. MR. SWIGER, WHY IN YOUR OPINION ARE THESE AD3USTMENTS NECES-6 SARY?
7 A.
In regard to the new financing, these adjustments are known and measurable and 8
are necessary in order to more nearly reflect the capital structure which the 9
Company will actually experience as it relates to the rate base at September 30, 10 1979. In December,1979, the Brazos River Authority, Texas issued $50 million 11 principal amount of pollution control revenue bonds to finance pollution control 12 equipment for the Company's Sandow Unit #4. Fif teen million dollars principal 13 amount of these bonds will be due in 2004 at an annual interest rate of 71/2% and 14 the remaining $35 million will be due in 2009 and bear interest at 7 5/8% with a 15 sinking fund requirement commencing in the year 2005. In addition, the Company 16 plans to sell additional shares of, common stock to Texas Utilities Company in 17 early 1980 for $50 million in order to provide common equity capital to support 18 the new pollution control revenue _ bonds and.TUGCO Senior Notes as previously 19 described. The adjustment in columo (e) on page 1 of Exhibit SSS-1 regarding the 20 Sandow #4 generating unit is calculated on page 4 of Exhibit SSS-1. The purpose 21 of this adjustment is to eliminate, from the Company's cost of capital and capital 22 structure, the impact of the capital acquired to fund the portion of this project 23 dedicated to the industrial customer's operations.
24 Q.
DOES PAGE 1 OF EXHIBIT SSS-1 DESCRIBE THE PROPER CAPITALIZATION 25 RATIOS OF THE COMPANY FOR THE PURPOSE OF THIS HEARING?
26 A.
Yes, sir. The proper ratios of capital structure are reflected in column (g) on 27 page 1 of Exhibit SSS-1 af ter adjustments to the actual book amounts at 28 September 30, 1979 for those amounts contained in columns (c) and (e). Column TEXAS POWER & LIGilT COMPANY
1 Swig:r l
PAGE12 of 31 1
(g) shows that, af ter adjustments, debt will comprise 44.04%, preferred stock 2
11.59%, common stock equity 38.61%, and unamortized investment credits 5.76%
3 of total capital. Exhibit SSS-2 reflects the capital structure on a corparate basis 4
and on a supplemental basis (af ter inclusion of the Company's allocable share of 5
TUFCO and TUGCO Senior Notes). In my opinion, although the supplemental 6
ratios on Exhibit SSS-2 clearly indicate a need for more common equity infusion 7
in the future, the proposed capitalization is reasonable and appropriate for this 8
proceeding.
9 Q.
MR. SWIGER, YOU HAVE DISCUSSED HOW THE COMPANY, TUGCO, AND 10 TUFCO OBTAIN LONG-TERM FINANCING FOR THEIR CAPITAL NEEDS. ARE 11 THERE ANY SHORT-TERM FINANCING REQUIREMENTS?
12 A.
Yes, there are. From time to time the Company and other subsidiaries of TU, 13 including TUGCO, TUFCO, and TUSI, require short-term financing to bridge the 14 gap between any long-term financing arrangements.
15 Q.
HOW IS THIS SHORT-TERM FINANCING ARRANGED?
16 A.
Our general practice in the TU system has been for TU to provide such short-term 17 financing by making loans to the various subsidiaries.
18 Q.
WHAT IS THE SOURCE OF CAPITAL TO TU TO MAKE THESE LOANS?
19 A.
The primary source of such funds is the sale of commercial paper or bank 20 borrowings.
For example, at September 30, 1979, TU had short-term loans 21 outstanding to all of its subsidiaries (with the except;or. of the Company) in the 22 amount of $313.8 million.
In order to make these loans, it had outstanding 23 commercial paper of $305.9 million of varying maturities at a weighted average 24 interest cost of 11.67%. The commercial paper outstanding was backed up by a 25 line of credit with several major commercial banks. At various times TU will be 26 issuing commercial paper and/or borrowing direct from major commercial banks 27 on a short-term basis (generally at the prime rate existing at that time) depending 28 upon the availability and cost of alternative funds and requirements of the l'EXAS PO VER & LIGilT COMi%NY
Swigtr PAGE13 of 31 I
system.
t 2
Q. MR. SWIGER, WHY HAS THIS METHODOLOGY BEEN ADOPTED TO OBTAIN 3
SHORT-TERM FINANCING FOR THE VARIOUS SUBSIDIARIES OF TU?
4 A.
We believe this method to be the cheapest possible approach to raising the short-5 term capital requirements of the companies. It allows the system to pool its 6
borrowing capacity which provides a vehicle that we believe obtains the lowest 7
possible short-term borrowing costs.
8 Q. WHAT IS THE INTEREST RATE PAID BY THE SUBSIDIARIES TO TU FOR THIS 9
SHORT-TERM BORROWING?
10 A.
In regard to all subsidiaries except TUGCO, TUFCO, and TUSI, the following 11 methodology is used. Each company pays interest on the unpaid balance of any 12 such short-term borrowings on the first day of each month for loans outstanding 13 each day during the previous month. The interest rate charged is based on actual 14 cost and is computed by calculating the actual weighted daily average borrowing 15 cost of TU on all short-term debt outstanding in the form of bank loans and/or 16 commercial paper and any fees which may be incurred from time to time to 17 maintain existing credit arrangements. This rate is determined based upon the 18 outstanding balance of TU's short-term debt at the end of each day. In periods 19 when TU may have no outstanding short-term debt, the daily interest rate equals 20 the rate published in The Wall Street Journal for "high grade unsecured notes sold 21 through dealers by major corporations for 30 days". This method of determining 22 the interest to be paid TU is currently in effect throughout the TU system with 23 the exceptions listed above. TU has, since January 1,1978, provided interim 24 financing for TUGCO, TUFCO, and TUSI at a flat rate of 91/2% per annum. TU l
25 has notified these three service companies that it will not continue to make these 26 loans at that rate on and af ter April 1,1980, and that all existing loans as well as 27 any new loans made af ter that date must be on the same basis as the loans made 28 to the other subsidiaries. Therefore, any such loans to TUGCO, TUFCO, and TUSI 4
e
SwigIr s
PAGEl4 of 31 1
af ter that date will bear interest computed in the manner mentioned above rather 2
than at the 91/2% flat rate. This method of calculation, when irnplemented, will 3
assure that the rate charged by TU to all of the subsidiaries is reasorable and in 4
the public interest and based upon the actual cost determined by the then 5
prevailing money market.
6 Q. MR. SWIGER, COULD YOU PLEASE NOW DISCUSS THE OVERALL COST OF 7
CAPITAL AS PRESENTED IN YOUR EXHIBIT SSS-l?
8 A.
Yes, the cost of capital is defined as the composite cost of various classes of 9
capital used by the Company. The cost of debt capital is the embedded cost of 10 debt. The cost of preferred stock capital is its annual dividend requirement. The 11 cost of common stock equity capital is the amount necessary to yield a fair return 12 under the criterion described in the testimony of Dr. Eugene Brigham and Mr.
13 Mark Luf tig. Unamortized investment credits should receive a return equal to the 14 overall cost of capital. The sum of the cost, or fair return, on each element of 15 capital weighted according to its relative proportion to total capital yields the 16 overall, or composite cost of capital. In order to use the cost of capital in 17 determining a fair rate of return, each cost element is expressed as a percentage 18 rate.
19 Q. WILL YOU PLEASE DESCRIBE PAGE 2 OF EXHIBIT SSS-1 AS IT RELATES TO 20 THE COST OF DEBT CAPITAL?
21 A.
Page 2 reflects the computation of the average cost of long-term debt at l
22 September 30, 1979. In addition, I have made adjustments to the actual book 23 amounts at September 30, 1979, to take into account the issuance of the Brazos 24 River Authority Pollution Control Revenue Bonds in the principal amount of 25
$15 million and $35 million and an adjustment for debt capital utilized in funding t
26 the portion of the Sandow #4 generating unit dedicated to a large industrial 27 customer. Utilizing the annual interest and amortization requirement contained 28 in column (e) of page 2 of approximately $70.4 million and the principal amount of l
TEXAS LOWER & LIGilT COMPANY
s' Swig;r PAGE15 of 31 1
all long-term debt of approximately $903.5 million, I have computed the average 2
cost of long-term debt, as adjusted, to be 7.79%.
3 Q. MR. SWIGER, WILL YOU DISCUSS PAGE 3 OF EXHIBIT 555-1 AS IT RELATES 4
TO THE COST OF PREFERRED STOCK CAPITAL?
5 A.
This page details all outstanding series of the Company's preferred stock and 6
includes an adjustment for preferred stock capital required for the portion of the 7
Sandow #4 generating unit dedicated to a large industrial customer. Column (e) 8 reflects the annual dividend requirement to be approximately $17.9 million on an 9
outstanding stated amount of preferred stock of $237.8 million with a resulting 10 average cost on all preferred stock to be 7.51%.
11 O.
WHAT HAVE YOU DETERMINED TO BE THE COST OF COMMON EQUITY?
12 A.
I have relied upon the expert opinions of Dr. Eugene Brigham and Mr. Mark Luf tig, 13 who will testify in this proceeding. Dr. Brigham determined that the Company 14 needed a realized return between a minimum of 15.8% and a maximum of 16.9%
15 and Mr. Luf tig recomended a return between 16% and 17%. Af ter consideration 16 of the testimony of these two witnesses, I have selected a minimum level of 17 return on comen stock equity of 16% to be actually earned by the Company when 18 the new rates go into effect.
19 Q. MR. SWIGER, WHAT DO YOU CONSIDER TO BE THE APPROPRIATE RATE OF 20 RETURN ON THE COMPANY'S UNAMORTIZED INVESTMENT TAX CREDITS?
21 A.
In my recommendation, I have used an 11.12% return on unamortized investment 22 credits which is the overall or composite cost of capital. This recommendation is 23 based on final regulations issued by the Internal Revenue Service on March 15, 24
- 1979, 25 In the past there has been some disagreement as to the er.2ct meaning of the 26 limitations of the statute; however, the final regulations with respect to Section 27 46 of the Internal Revenue Code dealing with proper regulatory treatment of 28 ir. vestment tax credits established that the return to be earned on investment tax
'I EXAS POWER & LIGilT COMPANY
Swig:r s
PAGE16 of 31 1
credits is to be the composite cost of capital. That such a return be earned is in 2
keeping with the Congressional purpose behind the investment credit provisions of 3
the Revenue Act of 1971 and the Tax Reduction Act of 1975, i.e., to provide 4
assistance and an incentive to invest in the modernization and expansion of plant.
5 To assure that the credit was used for its intended purpose, certain limitations 6
were placed on the availability of the credit to certain regulated public utilities, 7
including the Company. The limitations applicable to the Company, since it is an 8
Option 2 Company, are that the credit is not available if the benefits are flowed 9
through to income faster than ratably over the useful life of the property, and 10 further that there can be no reduction in rate base by. reason of the credit.
11 Customers receive the credit la full (with resulting lower rates) over the 12 estimated lives of the related properties. Thus, the Company adequately shares in 13 the benefits of the credits which, of course, protects the retention of the credit in 14 the best interests of our customers as well.
15 These final regulations speak clearly to the point that improper regulatory 16 treatment can result in loss of the investment credit.
17 Q.
MR. SWIGER, WHAT HAVE YOU DETERMINED TO BE THE APPROPRIATE 18 RATE OF RETURN TO BE APPLIED TO THE COMPANY'S ORIGINAL COST 19 RATE BASE?
20 A.
As shown on page 1 of Exhibit SSS-1, I have weighted the various components of 21 capital structure by their relative proportion to total capitalization. Using the 22 embedded costs of debt and preferred stock, the 16% return on common stock 23 equity, and the composite cost of capital applied to the unamortized investment 24 credits, I have found the everall fair rate of return to.be 11.12% widch should be 25 applied to an original cost rate base.
26 Q. HAVE YOU MADE A CALCULATION OF THE RETURN DOLLARS THAT THE 27 11.12% RATE OF RETURN WOULD PRODUCE AND ALSO WHAT RATE OF 28 RETURN THOSE DOLLARS WOULD PRODUCE ON AN AD3USTED VALUE TEXAS POWER & LIGIIT COMPANY
Swig:r s
PAGE17 of 31 1
RATE BASE?
2 A.
Yes, I have as shown on page 5 of Exhibit SSS-1. I have calculated the total 3
dollars of return to be $210.6 million based on an overall cost of capital of 11.12%
4 applied to an original cost rate base of $1,894.0 million which I obtained from 5
Mr. Price. If the mathematical approach employed by the Commission in the past 6
is followed in this case, the return dollars of $210.6 million would provide an 7
8.65% return on the adjusted value rate base of $2,434.7 million which I also 8
obtained from Mr. Price.
9 Q.
MR. SWIGER, EARLIER IN YOUR TESTIMONY YOU TOUCHED UPON THE 10 COMPANY'S NEED TO FINANCE ITS LARGE CONSTRUCTION PROGRAM.
11 COULD YOU PLEASE DISCUSS NOW SOME OF THE FINANCIAL DIFFICULTIES 12 THE COMPANY FACES?
13 A.
Yes. As Mr. Campbell discussed, the Company's construction program is designed 14 to move the Company away from natural gas and oil as fast as economically 15 possible. This is a program that has benefited our customers greatly in the past 16 and the benefit will increase in the future if we are allowed to continue our 17 construction program. This construction program, although very expensive when 18 compared to historic conditions, is far cheaper and more dependable than the 19 alternative of the continued use of gas and oil (even if gas and oil were available 20 to the Company in the future which, of course,is a false assumption).
21 Mr. Campbell has presented testimony regarding the Company's construction 22 expenditures from 1969 through 1978 and projected through 1981. While the 23 addition of lignite and nuclear fueled plants will mean lower fuel costs to 24 customers as opposed to gas and oil, the capital costs.on the sustained high level 25 of expenditures demands higher base rates. As Mr. Luf tig will testify, a company 26 in our position needs to maintain the ability to finance about 50% of its capital 27 requirements through internal generation of cash. Internal generation includes 28 net earnings of the common stockholder af ter all dividend payments, plus TEXAS POWER & LIGIIT COMPANY
Swiger e
PAGEl8 of 31 1
recovery of investor capital (depreciation) and expenses not requiring a current 2
cash outlay such as deferred taxes and investment credits, and reduced by noncash 3
earnings such as the Allowance for Funds Used During Construction (AFUDC).
4 For the twelve months ended September 30, 1979, the Company generated 44.7%
5 of construction expenditures internally. A schedule of the percent of construction 6
expenditures generated internally from 1970 through September 30, 1979 is 7
provided in Exhibit SSS-3.
8 Q. PLEASE DESCRIBE THE ROLE OF AFUDC AND HOW IT AFFECTS THE 9
COMPANY'S FINANCIAL INTEGRITY AND ITS RELATIONSHIP TO YOUR 10 REQUESTED RATE OF RETURN.
11 A.
Simply stated, the use of AFUDC in lieu of the current recovery of financing 12 costs has a negative influence on the Company's financial integrity and internal 13 cash generation. It represents a deferral for later recovery of financing costs 14 which the Company must pay today. Exhibit SSS-4 shows Construction Work in 15 Progress (CWIP) (excluding amounts applicable to Forest Grove and 82.569% of 16 Sandow #4) as a percent of total plant investment excluding such items over a 17 period of years.
18 Per Exhibit SSS-4, such CWIP as a percent of total plant at September 30, 19 1979 was 18.1% with CWIP amounting to approximately $450.8 million. Due to 20 the large capital expenditures on Commanche Peak Units #1 and #2, we estimate 21 that CWIP (excluding Forest Grove and 82.569% of Sandow #4) will be approx-22 imately $471.9 million and $597.7 million at December 31, 1979 and 1980 23 respectively, and will approximate $614.0 million in 1981 prior to the completion 24 of Commanche Peak Unit #1.
25 Since AFUDC is directly related to the level of CWIP, the increasing 26 significance of AFUDC in the Company's earnings can casily be seen. Shown 27 another way, Exhibit SSS-5 shows AFUDC as a percent of net income available to i
28 common shareholders. For the twelve months ended September 30,1979, AFUDC I EXAS POWER & LIGilT COMPANY
Swig:r 1
I9 Cf 31 PAGE 1
as a percent of income available to common shareholders approximated 19.3%.
f 2
Without an increase in the level of Construction Work in Progress included in the 3
rate base of the Company, this percentage of AFUDC of net income available to 4
common shareholders will increase dramatically in 1980 and 1931 as a result of 5
the data reflected in Exhibit SSS-4. In addition, in November 1979, the Company 6
changed its AFUDC accrual rate from 7% to 8% (net of tax) in recognition of the 7
increased capital costs associated with the Company's construction program, 8
The Company's regulatory authorities have recognized to a degree the 9
problem of AFUDC and its effect on the quality of earnings of the Company in 10 prior rate decisions, and because of the magnitude of CWIP in the next two years, 11 the Company is asking that 75% of CWIP (excluding, of course, all of Forest 12 Grove and 82.569% of Sandow #4) at September 30,1979, be included in the rate 13 base. If this request is granted, it will not eliminate the accrual of AFUDC 14 because the Company is only requesting $338.1 million of CWIP be included in the 15 rate base in this application and we expect the future balances of CWIP to 16 approximate the amounts previously stated. However, I must add that the return 17 on common equity requested in this application is based upon the Company being 18 allowed 75% of CWIP in the rate base. It is my opinion that if this Commission 19 were to grant an amount less than the requested CWIP in the rate base, then it 20 would be necessary to increase the 16% minimum return on common equity in 21 order to produce the cash return necessary to maintain the Company's financial 22 integrity. We are requesting the very minimum level necessary to maintain our 23 financial integrity and to stay within the established price guidelines of the 24 President's Council on Wage and Price Stability.
25 Q.
MR. SWIGER, YOU HAVE DISCUSSED THE EFFECTS OF AFUDC ON THE 26 QUALITY OF EARNINGS AND YOU HAVE ALSO DISCUSSED THE INTERNAL 27 GENERATION OF CASH THAT IS USED TO FUND THE COMPANY'S CON-28 STRUCTION PROGRAM. COULD YOU PLEASE DISCUSS FACTORS WHICH TEXAS POWER & LIGIIT COMPANY
Swig:r PAGE2n of 11 1
AFFECT THE COST AND AVAILABILITY OF EXTERNAL FINANCING?
2 A.
Yes, I can. Aside from factors over which the Company has little or no control 3
such as the general level of interest rates, inflation and economic recessions, and 4
actions of foreign governments, etc., the credit rating of the Company is the 5
overriding factor. In my opinion, aside from the quality of earnings and internal 6
generation of capital requirements, the two major financial factors influencing 7
the Company's credit rating are capital structure and interest coverage.
8 Internally generated funds are the first source of capital for the construc-9 tion program. The remaining portion must be funded with outside financing.
10 While the Company has, in part because of its good credit rating, some flexibility 11 in the timing of its financing, the delicate balance of its capital structure leaves 12 little flexibility in the general types of securities it can sell (i.e. debt or equity).
13 Mr. Luf tig states that 40% of a triple-A electric utility company's capital should 14 be in the form of common equity, af ter taking into account any debt obligations 15 of affiliated companies which must be supported by the common equity of that 16 electric utility.
17 Investors in fixed income capital are quite concerned with interest cover-18 age.
As a practical matter,.nvestors in all securities are concerned with 19 coverage because it is a measure of protection and safety of their investment.
20 Mr. Luf tig has stated that the Company, in order to maintain its triple-A bond t
1 21 i
rating, must earn a minimum of 4.0 times pretax interest coverage on an ongoing i
22 basis and 3.0 times af ter tax and that the interest component of this coverage 23 requirement must include the Company's portion of TUGCO and TUFCO interest 24 cost. Exhibit SSS-6 shows the Company's coverages since 1968 including and 25 excluding AFUDC. We were consistently above these minimums prior to 1975. It 26 is imperative for the protection and maintenance of our financial integrity and 7
credit standing that we maintain the minimum coverage levels stated by Mr.
28 Luf tig. i believe very strongly that our customers will be best served in the long TEXAS IUWER & LIGIIT COMPANY
Swiger PAGE 21 rf 31 I
run by maintenance of our current triple-A bond ratings.
2 As Mr. Luf tig will testify, 4.0 times pretax coverage as an ongoing 3
minimum, by necessity implies that the test year should produce coverages in 4
excess of this amount in order to offset regulatory delays and increasing costs.
5 Based on the rates we are requesting, our pro forma coverages for the test year 6
adjusted are within the range air. Luf tig recommended as shown in Schedule H-7 7
of the rate filing package.
8 Q. MR. SWIGER, YOU HAVE SHOWN INTERNAL GENERATION OF CAPITAL 9
REQUIREMENTS, VARIOUS MEASURES OF THE IMPACT OF AFUDC, AND 10 INTEREST COVERAGES THROUGH THE 12 MONTHS ENDED SEPTEMBER 30, 11 1979.
HASN'T THERE BEEN SIGNIFICANT IMPROVEMENT IN THESE 12 MEASURES?
13 A.
Yes, there has been notable improvement in these measures since year-end 1975, 14 which was an all-time low point in the history of the Company. The improvement 15 in these measures, however, is mostly attributable to a combination of two of the 16 coldest winters and two of the hottest summers in recent history, in 1977 and 17 1978, even though this past summer of 1979 was milder than normal.
18 It would be a gross mistake, however, to look solely at the past in 19 determining our future needs. We must assume normal weather conditions in 20 looking to the future and every measure that I have examined indicates that our 21 Company's earnings and the various financial barometers that I have mentioned 22 will deteriorate rapidly in the near future unless proper rate relief is obtained.
23 The magnitude of the capital requirements of our Company dictate that we not 24 wait until we are in severe financial trouble before requesting and receiving 25 proper rate relief. I might add that your question assumes that the returns and 26 the various measures of financial help since 1975 have oeen adequate in the eyes 27 of investors. My belief is that, while they might have been adequate at some time 28 period in the past,in today's market it is clearly evident that they are inadequate.
TEXAS LOWER & LIGIIT COMPANY
Swig:r PAGE22 of 31 1
Mr. Luf tig and Dr. Brigham believe that a minimum allowed return of 16% on 2
common equity is required in today's capital market and we are obviously earning 3
significantly less than that by any measure of calculation of return on common 4
equity. In our Order in Docket 1517, the return on common equity granted by this 5
Commission, according to some of the testimony presented, was designed to 6
produce a market to book ratio of at least 1.1 to 1. However, this ratio has been 7
achieved in only one month since the rates granted in Docket 1517 were put into 8
effect and that was during the month of August 1978. Since September 1978, the 9
average market price has consistently been below book and for September 1979, 10 was only 89% of TU book value as illustrated on page 2 of Exhibit SSS-7 attached.
11 Q. M R. SW!GER, HAS THE COMPANY ACTUALLY EARNED THE RATE OF 12 RETURN ALLOWED BY THIS COMMISSION IN ITS LAST RATE ORDER ON ITS 13 COMMON EQUITY AND UNAMORTIZED INVESTMENT TAX CREDITS?
14 A.
If you take into account the effects of the very cold winters and hot summers in 15 1977 and 1978, we have for certain periods; however, if you adjust the data for 16 the calendar years 1977 and 1978 and the twelve months ended September 30, 17 1979 for the effects of weather, we have not earned the allowed rate of return on 18 common equity and unamortized investment credits. This calculation is reflected 19 in Exhibit SSS-8 attached hereto. I might mention that the effect of weather on 20 the Company was provided to me by Mr. Simpson, who is also testifying for the-21 Company in this proceeding.
22 Q. DOES THE INABILITY TO EARN THE ALLOWED RETURN HAVE A LABEL 23 GENERALLY REFERRED TO IN THE UTILITY INDUSTRY?
24 A.
Yes. The terms " attrition" and "carnings erosion" are used to refer to this matter.
25 Both terms have the same meaning.
26 Q.
PLEASE DEFINE ATTRITION.
27 A.
Attrition is literally defined as "the act of wearing down." While the term is 28 sometimes defined in the narrow context as the result of increasing investment I
/
4
+
Swigtr PAGE23 cf 31 1
cost only, I will use it in the broader context as the result of erosion of earnings 2
f rom unit cost increases in ag areas of Company activities. This, of course, would 3
include increases in the unit cost of plant investment, operating expenses and 4
capital costs. If the revenue / cost relationships of each of these areas are not 5
properly maintained, earnings will deteriorate.
Unit cost increases in our 6
Company are being experienced in all areas and customer growth and usage are 7
not adequately working to offset the adverse effect on earnings. The net result of 8
attrition is ultimately impacted in reduced residual earnings available for the 9
common shareholder.
10 Q. BUT AREN'T UTILITIES GUARANTEED A LEVEL OF EARNINGS BY REGU-11 LATORY AUTHORITIES?
12 A.
Definitely not. Any claim that utilities are guaranteed earnings is totally false 13 and misleading. In this day of continually rising costs, utility companies seldom 14 earn the rate of return deemed necessary and authorized by commissions.
15 Although regulators have a responsibility to permit rates which adequately cover 16 the costs of service (which includes a fair return), the regulator cannot guarantee 17 that the rates will do the job they were designed to do.
18 Q.
DOES THE USE OF AN HISTORICAL TEST YEAR AGGRAVATE THE ATTRITION 19 PROBLEM?
20 A.
Yes, use of an historical test year captures the Company's rate base and cost of 21 service at a point in time in the past-September 30, 1979 in this case. In our 22 last proceeding, for instance, it was almost nine months af ter the end of the test 23 year before we were able to begin billing increased rates, despite a commendable 24 job on the part of the Commission to dispose of our. case quickly. During that 25 period of time, the Company's costs continued to increase, making the test year 26 out-of-date well before rates went into effect. This creates constraints which 27 make it improbable that the rate of return granted will be earned. If the rate of 28 return granted is strictly the bare cost of capital, the investor's property will TEXAS IOWER & LIGIIT COMi%NY
d Swigir PAGE24 of 31 s
1 obviously be confiscated.
While it is true that some known and measurable 2
adjustments have been made for post-test year events, this is only a partial 3
solution.
4 Q.
PLEASE DESCRIBE THE AREAS OF A COMPANY'S OPERATIONS WHERE COST 5
INCREASES RESULT IN ATTRITION OF EARNINGS.
6 A.
Attrition can result from cost increases in every area of the Company's 7
operations. These include the cost of adding new facilities (increased plant 8
investment), the increased costs of operating and maintaining facilities (increased 9
operating expenses), and the increased costs of obtaining funds with which to 10 finance the expansion of facilities (increased capital costs). Therefore, attrition 11 can easily be classified into the following categories for discussion purposes:
12 a.
Investment attrition 13 b.
Expense attrition 14 c.
Capital attrition 15 If the revenue / cost relationships are not properly maintained in each of these 16 areas, earnings will deteriorate. The combination of attrition in each of the three 17 areas directly reduces the return actually earned by the common stockholder.
18 Inflation in the Company's costs of doing business bears a unique relationship 19 to attrition. And, this is not limited to just current inflation. In the investment 20 area, the combined inflation of past years would cause attrition even if today's 21 inflation rate was zero. Today's prices reflect the sum of prior years' inflation 22 and result in the current cost of plant items being higher than the embedded cost 23 upon which rates are set.
24 In the operating expense area, current inflation is the culprit. I know of no 25 economic forecast today that does not include a continuation of a relatively high 26 inflation rate and, as you are probably aware, inflation is presently around 13% on 27 an annual basis. However, an even more fundamental problem regarding operating 28 expense exists in our business. The nature of our operation is changing. The TEXAS POWER & LIGIIT COMPANY
Swiger PAGE25 of 31 1
lignite fired plants we are putting into operation today cost much more to operate 2
than the gas fired plants whose costs are built into our rates, even if inflation is 3
not considered.
4 Capital attrition, that is the interest and dividend rates we must pay on 5
debt and preferred stock, has elements of both past and current inflation.
6 Current inflation rates have a strong bering on the rates we must pay when we 7
go to the market but capital attrition is also very similar to investment attrition 8
in that, to the extent that past inflation has resulted in current capital costs 9
exceeding embedded capital cost, new capital issues will continue to create 10 problems even without additional inflation.
11 Q.
DO YOU HAVE ANY EXAMPLES OF HOW INVESTMENT ATTRITION HAS 12 IMPACTED TEXAS POWER & LIGHT?
13 A.
Yes. I have prepared Exhibit SSS-9 to illustrate how our costs have increased in 14 relation to sales. In 1971, total plant investment per customer was $1,686 and 15 investment in completed plant was $ 1,540.
At September 30, 1979, total 16 investment had increased to $3,667 per customer, on increase of over 117%
17 Investment in completed plant had increased to $2,960 per customer, or over 92%
18 compared to 1971. During the same time frame, kilowatthour usage per customer 19 only increased a little over 39%
Based upon our Company's construction 20 forecasts through 1981, total plant investment per customer will increase to 21
$4,049 or 140% over the 1971 base. Using a most realistic forecast of customer 22 usage, which is detailed on page 2 of exhibit SSS-9, the gap between the measures 23 will continue to widen. This means that, without some offset in operating cost or 24 capital cost, the price charged per kwh must increase through periodic rate 25 adjustments.
26 Exhibit SSS-10 serves to further demonstrate the increasing investment 27 costs. Until 1973, the Company's embedded cost per kw of production plant was 28 relatively stable and increases were largely offset by increases in customer usage.
TEXAS l'OWER & LIGIIT COMPANY
Swiger PAGE26 of 31 s
1 In 1974, with the placing of Monticello Unit #1 into service, the Company's embedded cost per kw started to increase sharply and this increase is expected to 2
continue for as far as we can see into the future. At year-end 1973, embedded 3
4 cost per kw was $73. By December 30, 1979 this will have increased 78% to 5
approximately $130. This rising trend will continue as illustrated by the following 6
generating unit data:
Capacity (KW) 7 Net Year Estimated Capability to 8
Generating Unit in Service Cost per KW Total Company 9
(a)
(b)
(c)
(d)
(e) 10 Sandow #4 1981
$393 545,000 545,000(1) 11 Commanche Peak #1 & 2 1981/1983
$740 2,300,000 766,666 12 13 (1) 450,000 Kw dedicated to a large industrial customer with the remaining 14 95,000 Kw available for use in the TP&L system.
When the above units are completed and placed in service, our embedded 15 16 cost per kw will have increased to the neighborhood of $201, a 175% increase over 17 the 1973 base, and I see no change in the trend for the years af ter 1983.
18 Q. DO YOU HAVE AN EXHIBIT TO DEMONSTRATE THE IMPACT OF ATTRITION l
19 ON THE COMPANY DUE TO OPERATING EXPENSE INCREASES?
20 A.
Yes, Exhibit S55-11 plots the increase in operation and maintenance expenses per 21 customer since the base year of 1971. I have excluded fuel and purchased power 22 from my analysis. Also, I have separated power production expenses from all 23 other expenses, in order to emphasize where the bulk of the increase is being i
l 24 experienced.
From 1971 to the twelve months ended September 30, 1979, 25 production expenses per customer increased approximately 503% and other l
26 operation and maintenance expenses increased approximately 85% At the same 27 time, Kwh usage per customer only increased a little over 39% These amounts l
l 28 have been projectcd through 1981 at which time production expenses will have l
TEXAS LOWER & LIGIIT COMPANY
Swig:r PAGE27 of 31 1
increased 671% over 1971, and other expenses about 140%, while at the same time 2
Kwh usage will have increased only 52%.
Just as with investment-related 3
attrition, this means that without some offset, the price charged must increase 4
through periodic rate increases.
5 Q. CAN YOU NOW DEMONSTRATE THE IMPACT OF CAPITAL ATTRITION UPON 6
TEXAS POWER & LIGHT?
7 A.
Yes, sir. Exhibit SSS-12 shows the delicate balance between interest costs and
~
8 preferred dividend costs as they relate to overall return and return on equity.
9 Exhibit 555-12 illustrates that when embedded costs of debt and preferred 10 increases, the overall return must also increase proportionately or common equity 11 suffers. From 1971 to year-end 1978, embedded interest cost had risen from 5.5%
12 to 7.6%, a 38% increase. Embedded preferred dividend cost had risen to 7.4%.
13 The 1979 issues have increased these still further as indicated in Exhibit SSS-1.
14 Any additional issues of First Mortgage Bonds or Preferred Stock that we sell in 15 the 1980-81 time period will probably exceed these rates. Return on net plant 16 investment at year-end 1978 was equal to the 1971 level. The resulting eifect 17 through 1978 on common equity return can be noted on the chart.
18 Despite the fact that the required returns for debt and preferred have 19 continued to increase, the realized return to the common stockholder has failed to 20 keep pace. Consequently, the price per share of common stock in the market 21 place has declined to its present level which is significantly below book value as l
l 22 reflected in Exhibit SSS-7.
f 23 Q. MR. SWIGER, WOULD YOU BRIEFLY SUMMARIZE THE HISTORICAL TEST 24 YEAR PROBLEM AND THE ATTRITIONAL EXPERIENCE OF TEXAS POWER &
25 LIGHT THAT YOU HAVE BEEN DESCRIBING?
26 A.
Yes, I believe it can be illustrated in a graphic form as follows:
27 28 TEXAS LOWER & l.IGIIT COMPANY
Swig;r 28 cf 31 PAGE 1
2 Cost of 3
Service
-Test Year r
4 New Rate Level p____________
i 5
l l
8 l
7 Old Rate Level I
__________-J 8
Full Effect 9
of New File Hearing Decision implement Rate 10
}
}
}
/New Rate 2
1 1
1 h
11 o ct.
Sept.
Dec.
M ar.
May June July
'76
'77
'77
'78
'78
'78
'79 12 13 14 The slope of the cost of service line is illustrative and is not intended to be 15 exact. However the time frame is reasonably accurate based on our last rate 16 case. As can be deduced from the above, without some recognition by regulatory 17 authorities, the composite impact of the increasing costs, fixed rates, and time lags, make the new rates inadequate the day they go into effect and they continue 18 19 to become more inadequate as time passes.
20 As the conditions revealed in the exhibits indicate, the earnings of Texas 21 Power & Light have been and are continuing to be adversely affected from cost 22 increases in plant investments, operations, and capital, in each of these areas, 1
23 and on a composite basis, the costs per customer have been increasing at a more Con-24 rapid pace than related kwh usage and related revenues per customer.
sequently, a persistent downward pressure on earnings has been and is continuing l
25 f
26 to be experienced.
27 Q.
ARE THESE CONDITIONS IN EFFECT TODAY?
I 28 A.
Yes. There has been little or no recent change in these conditions which have f
TEXAS POWER & LIGHT COMPANY
Swigt:r PAGE29 ef 31 1
produced attrition in the past.
2 Q. IS THERE ANY JUSTIFIABLE BASIS TO ASSUME THAT THERE WILL BE ANY 3
APPRECIABLE CHANGES IN THESE CONDITIONS IN THE NEXT 12 TO 24 4
MONTHS?
5 A.
Absolutely none. These conditions are essentially locked in. Texas Power & Light 6
is committed to plant additions whose present costs are well in excess of average 7
embedded costs. These additions must be financed with capital whose costs also 8
are well in excess of embedded costs (as well as retirements of older low cost 9
issues). Finally, operating costs show every indication of continuing on an upward 10 spiral. It is simply inconceivable that these conditions can be avoided, and as I 11 mentioned earlier in my testimony, the adjustments made for some post " test 12 year" events are only a partial solution. V'hile not precisely measurable we know 13 that we can expect increases in our cost of service which Mr. Price has not 14 provided for. Just a few examples of these increases are:
15 (1)
General price increases for goods and services we purchase will occur af ter 16 the end of the test period.
17 (2)
Although general wage adjustments occurring in late 1979 were provided for 18 by Mr. Price, there will undoubtedly be similar adjustments in 1980 and 1981 19 if inflation continues.
20 (3)
Rate and wage base increases for social security taxes were provided for 21 1980 by Mr. Price, but these items will increase again in 1981 according to 22 present law.
23 (4)
Sales of new first mortgage bonds and preferred stock that the Company 24 may make in 1980-81 will undoubtedly increase.the embedded cost of such 25 items.
26 (5)
Ad Valorem tax rates and valuations are continuously being increased in 27 different parts of our service area by the taxing authorities.
28 (6)
When new facilities are placed in service at cost higher than the existing TEXAS POWER & LIGIIT COMPANY
Swig;r PAGE30 of 31 1
embedded cost of similar facilities, the electric service rates then in effect, 2
become inadequate and this phenomenon presently occurs every time we 3
place a new facility in service-from a new service truck to a distribution 4
line-to a new generating plant.
5 Q.
ARE THERE ANY REMEDIES AVAILABLE TO TEXAS POWER & LIGHT WHICH 6
WILL NEUTRALIZE THESE PRESSURES?
7 A.
Adequate and timely rate relief is the only realistic solution. In theory, the 8
Company could promote sales to the point that the sales growth rate per customer 9
would match the growth rate of unit cost of service to the customer so that 10 present base rates would provide comparable earnings increr.ses, assuming ade-11 quate fuel supplies at any cost. This is contrary to both public policy on energy 12 conservation and economic reality. Also, in theory, the Company could simply 13 make selected cost reductions in operations and investments to the point that 14 earnings stopped declining. Such reductions would very shortly, if not imme-15 diately, be reflected in the quality and dependability of service and would 16 ultimately result in violation of the Company's obligation to serve.
17 The only remaining solution of which I am aware is rate relief. This is the 18 action that we are seeking through this application.
19 Q. MR. SWIGER, ARE YOU REQUESTING A SPECIFIC ATTRITION ADJUSTMENT l
20 IN THIS PROCEEDING?
l 21 A.
Although the information which I have presented proves that the Company has 22 experienced attrition and will continue to experience attrition in the future, I 23 have not requested a specific attrition allowance, in order that the Company 24 might be in compliance with the voluntary price guidelines as prescribed by the 25 President's Council on Wage and Price Stability. However, I must again add that 26 this request is the minimum level the Company must have to maintain its l
27 financial integrity. A failure to recognize the full cost of service as established I
l 28 in this application will compound the adverse effects of attrition we know will TEXAS IOWER & LIGIIT COMPANY
Swigtr PAGE31 of 31 I
take place, and as a result will require us to seek additional rate relief sooner 2
than otherwise would have been necessary.
i 3
Q. MR. SWIGER, DOES THIS CONCLUDE YOUR TESTIMONY?
4 A.
Yes, sir, it does.
5 6
7 8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TEXAS POWER & LIGliT COMPANY
TEXA5 POWER & LIGHT COMPANY Schedule of Capital and Overall Cost of Capital (Dollars in Thousands) i Adjustment Capital at 9/30/79 Amounts at Per Cent Cost Weighted Line Capital at for New Adjusted for Sandow #4 9/30/79 of of Cost si
-N r.
Description 9/30/79 Financing New Financing Adjustment
- Adjusted Total Capital Capital l
(a)
(b)
(c)
(d)
(c)
(f)
(g)
(h) h)
1 Long-Term Debt
$ 923,187
$ 50,000
$ 973,187
$ (69,725)
$ 903,462 44.04 %
7.79 %
3.43%
]
2 Preferred Stock 256,112 256,112 (18,353) 237,759 11.59 7.51
.87 3
Common Stock Equity 803 205 50,000 853,205 (61,130) 792,075 38.61 16.00 6.18-y 4
Unamortized investment
's Credits 131,066 131,066 (13,024) 118,042 5.76_
11.12
.64 5
Total
$2,113,570
$100,000
$2,213,570
$ (162,232)
$2,051,338 100.00 %
11.12 %
- Elimination of capital attributed to that portion (82.569%) of Sandow #4 dedicated to a large industrial customer.
rn
%5
~M
-r w-
Exhibit 555-1 Page 3 of 5 TEXA5 POWER & LIGHT COMPANY Schedule of Long-Term Debt and Composite Cost j
Annual Principal Interest or Line Issue Maturity Amount Amortization Average Title Date Date Outstanding Requirement Cost (a)
(b)
(c)
(d)
(e)
(f)
(Thousands of Dollars)
FIRST MORTGAGE BOND 5:
1
- 31/4%5eries 04-01-52 04-01-82
$ 14,000
$ 455 2
3 1/8% 5eries 10-01-54 10-01-84 20,000 625 3
4 3/8%5eries
!!-01 56 11-01-86 10,000 437 4
4 1/2% 5eries 12-01 58 12-01-88 12,500 563 5
4 1/2% 5eries U1-01-61 01-01-91 12,000 540 6
4 3/8%5eries 02-01-63 02-01-93 10,000 438 7
4 1/2% 5eries 01-01 65 01-01-95 14,000 630 8
5
% 5eries 02-01-66 0241-%
20,000 1,000 9
5 1/2% 5eries 02-01 67 02-01-97 30,000 1,650 10 -
6 5/8% 5eries 01-01-68 01-01-98 25,000 1,656 11 8 5/8%5eries 02-01-70 02 01-00 30,000 2,587 12 8 7/8%5eries 09-01-70 09-01-00 30,000 2,663 13 7 t/8%5eries 02-01 71 02-01-01 30,000 2,137 14 7 1/2% 5 cries 02-01 72 02-01-02 40,000 3,000 15 7 I/2%5eries 02-01-73 02-01-03 50,000 3,750 16 8 1/4% 5eries 02-01-74 02-01-04 50,(,00 4,125 17 10 1/8% 5eries 10-01 74 10-01-04 50,000 5,063 18 9 1/2% 5eries 04-01-75 04-01-05 100,000 9,500 19 8.60 %5eries 01-01-76 01-01-06 100,000 8,600 20 8 1/4% 5eries 02-01-77 02 01 07 100,000 8,250 21 9 3/8%5eries 02-01-79 02-01-09 100,000 9,375 SINKING FUND DEBENTURES:
22 4 5/8%5 cries 01-01-62 01-01-87 7.176 332 23 4 1/2% 5 cries 01-01-64 01-01-89 11,351 511 24 7 3/4%5eries 04-01-69 04-01-94 17,200( A) 1,333
. POLLUTION CONTROL REVENUE BOND 5 (net):
Sabine River Authority of Texas 25 6 I/4%5eries 12-01-76 12-01-06 27.903 1,744 26 5.70 %5eries 07-01-77 12-01-07 11,235 640 27 6.60 %5eries 03-01-79 12-01-08 4,298 284 28 NOTES PAYABLE Various Various 1,880 141 29 UNAMORTIZED DEBT DISCOUNT (3,174) 201 30 UNAMORTIZED DEBT EXPENSE (2.182) 31 TOTAL LONG-TERM DEBT @ 09-30-79 (Actual)......................... $923,187
$72,230 7.82%
ADJUSTMENTS:
New issues Pollution Control Revenue Bonds Brazos River Authority. Texas l
32 7 1/2% 5eries 12-01-79 12-01-04 15,000 1.125 33 7 5/8%5eries 12-01-79 12-01-09 35,000 2,669 l
Sandow #4 Eliminations 34 82.569% of BRA 71/2% Pollution Control Revenue Bonds (12,386)
(929) 35 82.569% of BR A 7 5/8% Pollution Control Revenue Bonds (28,899)
(2,204) 36 First Mortgage Bonds at average incremental rate of 8.93%
(28,440)
(2.540) 37 TOTAL LONG-TERM DEBT @ 09-30-79 (Adjusted)................... $903,462
$70,351 7.79 %
(A) Excludes $87 due currently.
O e
TEXAS POWER & LIGHT COMPANY Schedule of Preferred Stock and Composite Cost No. of Line Shares Amount Annual Dividend
% Average No.
Description Outstanding issued Per Books Requirement Cost (a)
(b)
(c)
(d)
(e)
(f)
(Thousands of Dollars) 1
$4.56 Series...........
133,786 04/50
$ 13,379 610 2
$4.00 Series...........
70,000 04/50 7,000 280 4
i 3
$4.84 Series...........
70,000 05/53 7,000 339 4
$4.76 Serles...........
100,000 10/56 10,000 476 5
$4.44 Series...........
150,000 01/65 15,061 666 6
$7.80 Series...........
300,000 04/69 30,030 2,340 7
$7.24 Series...........
250,000 02/72 25,113 1,810 8
$8.20 Series...........
300,000 02/74 30,108 2,460 9
$9.32 Series...........
300,000 03/75 29,625 2,796 10
$8.68 Series...........
300,000 01/76 29,550 2,604 11
$8.16 Series...........
300,000 01/77 29,655 2,448 12
$8.84 Series...........
300,000 02/79 29,591 2,652 13 Total Preferred Stock
@ 9-30-79 (Actual) 2,573,786
$256,112
$19,481 7.61 %
ADJUSTMENTS 14 Sandow #4 Eliminations 15 Preferred Stock at average incremental cost of 8.87%
(18,353)
(1,628) rn 16 Total Preferred Stock m 5-
@ 9-30-79 (Adjusted)
$217,7s9
$17,853 7.51 % $E an u-
Eshibit 555 8 Pqp 6 4 S e
TEX A5 POeER & LICHT CDasPANY Scheede of e*apital Structure Adpestments far Elamination of Capital Attributed to imat Portaan of Sandow #e
{
Ded*cated to a Large Industrial Customer (Thousands of Douars)
Portion Deecated 1973 thris Oct.1979 thru to a Large
\\
Sept.1979 Dec.1960 Industrial Customer Line
~
Description Actual Estimated Total (32.% 9 0 No.
(a)
(b) 7F (d)
SANDD* #e C APITAL REWipfMENTS I Total Chas8es to Construction eark m Progress -
$139.508
$ 31,334
$210,862
$ 174,107 Less 2
Adowance for Funds Used During Construction 1,309 2.091 3.400 2,807 3
Defer.ed FederalIncome Tames 1.796 -
e. 7 30
- 6. 92e 9.38 7 4 - Salance to be forwnced by Debt, Preferred Stock, Common Egaty and Unamortared Investment Credits
}_156,609
$ 44.91) 200.938 165,983 '
. Les Amoet fananced throgh Unamortised investment Creets 13,773 13.026
'S lenuary 1973. September 8979 4.458 3.641 6
October 1979. December 1980 7 Balance to be financed by First Mortgage acads, Pollutuin Control Revenue
$180 m707
$ 149.2t8 Bonds, Preferred Stock and Common Egaty A vf M ACF S EICHTfD INCREMENTAL COST OF FIRST HopTC ACE RDNDS AND Annual "PfUfUtMTNYIT&TSTWTWCTTRAT PORTION or 5AET50s de Principal. Interest /Davidend % Average DINCA?!FY57TXDGE INDU5TRTKIMT5 DER Amouni.
R equirement Cost gest stortaaae Bonds 8
89?S. 91/2% 5erws -
$100.000
$ 9,500 9
1976 8.60% Wies 100.000 -
8,600 to 1977 8 8/44 Series 100.000 8,250 Ii 1978. None 9.375 100.093 12 8979 9 3/8% 5eries 13 TOTAL
. $400.000 -
M7y 8.91%
Preferred Stock in 1975. $9.32 Series
$ 29.623
$ 2.796 13 1976. $8.68 5erses 29,550 2.604 16 1977. $8.16. nes 29.633 2,448 s
17 1978. None 18 1979. $$Je Ser.es
- 29. Sal 2.652 19 TOTAL
$i18,621 Moo 8.87 %
Detaal of Principal 4 of 4 Average Debt Amount Total (f)
Cost C APITAL TO BE ELIMIN ATED FOR 5ANDow #4 20 First Mortgage Bonds
$28,640 (64 8.93%
Pollutaan Centrol Revenue Bonds 32,386 (6) 7 t/2%
21-BR A 7 t/2% Series 28.899 (3) 7 $/84 -
22 BR A 7 S/8% 5eries 69,725 (2) 66.73 %
23 Tc ' Debt 18,333 (2) 12.30 %
8.87%
24 Preferred Stock 6I,130 (2) 60.97%
25 Comenon Equity 11.02e (3) 26 Unamortised Investment Credits
}.162 232 100.00 %
27 TOTAL Capitalisatean percentages based on pe. cent Debt P.eferred Stock and Common Equity is of Total of same at 9 30 79 adjusted for
(!)
EsNtit 5551.page I, column dh Percent Description Amount._
of Total Lons. term Debt
$ 973,187 e6.73%
Preferred Stock 234,112 I2.30 Common Stock Eqiary 891.209 20g Total
}2Eg LOOg4 Capitalisation percentage t.mes Total to be fananced by First Mort 8 age Sands. Pouut an Controf Revenue Bonds, Preferred Stock an
~ (2)
(Lane 7,cotwnn (d)of stus EsNbit).
82.369% of Oasmartared Investment Credit applicaWe to Sando #4 at 9 30 79 (Line 3, column (d) of stus EsNbit)
. (3)
(4) 42.369% of 7 t/2% BR A Ponution Control Revenue Bonds issued in December 1979.
(S) 82.369% of 7 S/8% BR A Pollution Centrol Revenue Bonds issued in December 1979.
(6) Total Debt appiscable to Sandow #4 less Pollutaan Centrol Revenue Bonds.
~
Exhibit 555-1 Pige 5cf5 TEXAS POWER & LIGHT COMPANY Schedule of Return on Original Cost Rate Base and Adjusted Value Rate Base Weighted Cost Original Cost Return No.
Descri ation of Capital Rate Base Amount (a;I (b)
(c)
(d)
Original Cost Rate Base Long-Term Debt 3.43 %
$1,893,953,491
$ 64,962,605 2
Preferred Stock
.87 1,893,953,491 16,477,395 3
Common Stock Equity 6.18 1,893,953,491 117,046,326 4
Unamortized Investments Credits
.64 1,393,953,491 12,121,302 5
Total 11.12 %
1,893,953,491
$210,607,628 Rate of Return on Adjusted Value Rate Base 6
$210,607,628 (Return): $2,434,695,467 (Adjusted Value Rate Base) = 8.65%
l l
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TEX A5 POWER & LIGHT COMPANY Comparative Capital Structure Ratios December 31,1972 through 1978 And Test Year-End September 30,1979
($000's Omitted)
Test Yeer-End Line September 30, 1979 g
Description 7972 1973 f974 1975 1976 1977 1978 As Adjus'ed 4)
(b)
(c) id)
(e?
(!)
(g)
'h) 0)
Corporate I
Total Capital
'$803,630
$913,766
$1,129.119
$1,3CSM
}',541,710
$1.794.782
$l.875.301
$2,051,338 2
Capital Structure:
3 Debt 48.74 %
47.78 %
47.44 %
46.08 %
45.9?%
45.73%
43.89 %
44.04 %
4 Preferred Stock 13.39 11.77 12.19 12.78 17.77 12.62 12.08 11.59 5
Common Stock Equity M.90 39.32 38.94 39.02 38.31 37.61 38.31 38.61 6
Unamortized Investment Credits
.97 1.13
- 1. i. :
2.12 2.94 4.04 5.52 5.76 l
7 Total 100.00 %
100.00 %
100.00 %
100.00 %
100.00 %
10".00 %
100.00 %
100.90 %
l i
Supplemental l
Oncludes allocable share of TUFCO and TUCCO Senior Notes)*
8 Tote' Capita!
, /
N 76,660
$1,843.112
$2,018.111
$2,303,827 9
Cspital Structure
~
10 Debt 47.18 %
47.15 %
47.86 %
30.18 %
Preferred Stock 17.48 12.29 11.22 10.32 12 Common Stock Equity 37.*6
%.63 33.79 34.38 l
13 Unamortized Investment l
Credits 2.88 3.93 5.13 5.12 l
i 14 Total 100 g %
100.00 %
_ 100.00 %
100.00 %
l
- Senior Notes Outstanding:
TUFCO Principal amount outstanding
$ 100,000
$ 100,000
$ 100.000
$ 100,000 I
l Percent applicable to TP&L
- 34. 75 %
48.33%
47.81 %
62.489 %
Principal applicable to TP&L 5
34,956 1 48,330
{ 47,810 5
62,489 TUCCO (Test Year as adjusted includes additiorul $200 million of Senior Notes negotiated in late 1979) l Principal amount outstanding
$ 200,000
$ 400,000 47.5%
47.5%
uy Perunt applicable to TP&L Principal applicable to TP&L 5
95,000 5 190,000 Ap l
.O. v.
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TEXAS POWE.1 & LIGHT COMPANY Int-rnal Generation of Capital Reqmreen uts 1970 through Twelve Months Ended Septemtre 30,1979
($000 Omitted) 12 Months Line Entied No.
Description 1970 1971 1972 1973
-1974 19M 1976 1977 1975 9-30-79 (a)
(b)
(c)
(d)
(c) tt)
(g)
Ci) 6)
(j)
(k) 1 Cash Construction Requirements:
2 Total Construction Expenditures
$ 37,922
$100.604
$107,764
$152,542
$203,771
$264,776
$261,571
$273,075
$305,095
$ 364.234 3
Less AFUDC 3,935 5,912 4,969 5,400 11,606 I4,504 19,103 20,667 13,120
/l,431 4
Total Cash Construction Requirements
$ 33,937
$ 94,692
$102,795
$147,142
$19?y
$250,272
$242 06)
$257 40_3
$6,975
$342,303 1
5 Funds f rom Internal Operation:
6 Net income af ter Preferred and Common Dividends
$ 13,343
$ 14.919
$ 19,435
$ 17,721
$ 20,364
$ 11,117
$ 19,315
$ 34,470
$ 47,217
$ 43,102 7
Depreciation Provisions 17,251 13,312 21,953 25,?l7 29,513 38,064 43,671 49,009 56,312 62,660 3
Deferred Federal Income Tax - Net (129)
I,I72 2.631 5,399 6,699 9,413 11,152 13,I92 20.327 26.103 9
Federal lnvestment Credit Adjustments 3,013 4.790 2,493 5,363 12,312 19,647 31,113 35,021 37,734 10 A!!owance for Funds Used During Constrtetion (3,935)
(5,912)
(4,969)
(5,400)
(11,606)
(14,004)
(19,103)
(20,667)
(13,120)
(21,431)
Total Funds f rom interna! Operation
$ 26,430
$ 32,004
$ 43,945
$ 45,435
$ 50,R33
$ 56,402
$ 75,577
$107,122
$14l,257
$153,133 12 Per Cent Internal Genert, tion (Line 11 + Line 4) 31.5%
33.3%
42.3%
30.9 %
26.5 %
22.M 31.1 %
41.6 %
49.2 %
44.7 %
rn es9*i 3-r
-w
4 2,800 2'600 C.W.I.P. AS PERCENT OF TOTAL ELECTRIC PLANT (EXCLUDING FOREST GROVE AND 82.569% OF S ANDOW #4)
$2,487 2,400
$ 2,283
'l---
2,200 1
I TOTAL ELECTRIC PLANT
$2,042
-T i
2,000 FWE C.W.I.P.
- i-- +
$i,608
< 1,800
-J
=
-1 Q 1,600
$i,56i
- p
-=-
_q
- =-
=
w
=
__x
-y 1
i-o 1,400 m
g= -_
_= -_
?
J -
{T
~
y 1,200 33,307
+
e 1,000
$960
= -
~ = -
+-
I
$857
-._ 6 -
- (_
~
~
+ - -
= - - "
__ ~
i 800
$760
$676 5' '
600
- 545
~_
23.6%
22DI 17.6%
400
=
16.5%
,glp.
- h)6gd E+
T 11.8%
200 S
plhe f!
l 3,z 3x-10 s%
lo.2%
a.6%
s.8%
R 0
O-
'E I~'
3 5 19G7 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979*
E "i YEAR END
'At % t. 30 A
4 i
120 A.F.U.D.C. AS PERCENT OF NET INCOME 5,,,
AVAILABLE TO COMMON SHAREHOLDERS 1
~
100 L=WE 47 e
I 90 589
^~
g r=-'1 INCOME AVAILABLE TO COMMON SHAREHOLDERS G
N ih ]jp j80 A.F.U.D.C.
.m y
jj{fi M l
@ 70-568
- r. -
.a=y
=-e yg m
Gif 15 5 M
Ji o 60
$5s--
554 g
+7 gg 44 m
gg p
7;y 4
p=
)
50
$d8 o
~;
u2 3 ??
GT X%
M
??
- I-f Mis J= fM VM-ins M J~
XV
?
d 40
$37
++-
i E
E-;
E "M
M9 iW M
i?
~~ _~
- = - -
532
- ss =
g K
Sp
=g;_
-_7irj(-
5:pp
~ _[=f -f
-:;g 7- ;
l 30-s29
$28
=z c
._ _1:5i dx
=
wr
=-
M m
M M
Tm max 2
20
- 1-V1
'7'%
NN Nk
-bb hfbh h2hf b1 iTG~
- hys%
268 l
10 N$
$S E857 siF
??
IJ, N
y m
++
c=--
14.2%
ia4x io7z h
h.
b
,h, III
,Q 0
>z 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979*
aj YEAR ENDED OE
- 12 Mos. Ended Sept. 30 1
TEXAS POWER & LIGHT COMPANY INTEREST COVERAGES (S.E.C. Basis) INCLUDING ALLOCABLE PORTION OF INTEREST ON TUFCO AND TUGCO SENIOR NOTES l
7-64 6.3 f, - q PRE -TAX COVERAGE
\\ /(Including AFUDC) 6-N h\\
6.1 6.1 \\ \\ 5.6 g
\\ Q
\\
i m
N PP E - TAX
\\
5.4 \\
4U I
5-COVERAGE N N 4 j
(Excluding AFUDC)
N (.8 g
I
..g g
C N
s Ys 4.0
.3 N
38 0
8 AFTER -TAX COVERAGE g\\
3.7 j
3.6 g
g 3.6 (including AFUDC) g
^
35 i
- '1%
C T%
3.3 3.2 3.
\\
3'6 %
m 3.6 3.6 i
g s 3.2 32 d
M.
/I
\\
I I\\
I 3.0 N
/ 3.3 I
z-4
\\(
\\ 2. _.9___y, 3.2 l
2.9 3.2 3-N 27 i
3.0 3.0 2.6 i
N i
i AFTER -TAX COVERAGE (Excludmg AFU0C) 2
\\
''" D
^
7 2.3 2.3 g
2-2.1 2.1 c) is
- G i
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"m 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979* O g I
YEAR ENDED
- 12 Mos. Ended Sept. 30 m
~
TEXAS UTIL; TIES COMPANY AVERAGE MARKET PRICE Vs. BOOK VALUE OF STOCK 32 -
02 29.66 l
28.85 28.44
[
I
/
27.54 27.51 28 -
i 1
27 14 l
I AVERAGE MARKET PRICE '
24 -
(MONTHLY AVERAGE HIGH-LOW) b 20.92 20 2 20 81 19.69 l
20.19 19.76 l
l l /
E E 20 -
19 10 g
I O',
19,21 o
17.07 /
{
- 16. 0 15.09 /
16 -
l-13.40 YEAR END 6
800K VALUE 11.18 [
12 -
I 10.42 e
l /.!-
0.34
~
8.80
- I#
m oX 8-
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Q 1906 1967 1968 1969 1970 1971 1972 1973 1974 ISb 1976 1977 1978 1979'
-' m Om YEAR
- AS OF SEPT. 30 uI w
TEXAS UTILITIES COMPANY AVERAGE MARKET PRICE Vs. BOOK VALUE OF STOCK 32 -
28 -
AVERAGE MARKET PRICE tuomm.v avonace sion-town g,
21.88 w
l 20.81 20.81 20.94 20.63 20 50 20 43 20.17 19.89 20.09 20.24 19.99 20.17 i
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[
19.98 20.14 E
I 20.0G 20.13
\\'
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L-Al-L 19.75 i
39 94 5
20 -
~-
i
' --- -- - ~
- ' ---~~T' 20.02
[
l l
1 l
F N
m
_l Ff 19.17 19.18 29 19 01 M 19.25 M 19.38 19.13 19 13 19 19 19.31 6 l
M 18 95 18.56 2
BOOK VALUE 16 -
BY MONTH 12 -
m 8-sE j
i 4
A 4
J A
A S
6 4
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6 4
A a
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A 1
25 l
" en l
1979 1978 ON wI YEAR w
TEXAS POWER & LIGHT COMPANY Comparison of Earned Return vs. Authorized Return on Common Equity and Unamortized Investment Tax Credits
($000 Omitted)
Actual
- As Adjusted for Normal Weather 12 Months 12 Months Line Ended EMed No.
Description 1977 1978 Sept. 30,1979 1977 1978 Sept. 30,1979 (a)
(b)
(c)
(d)
(e)
(f)
(g)
Earned Return Calculation:
1 Average Common Equity
$ 632,811 $ 698,655 $
759,149
$ 629,009 $ 693,845 $
758,772 2
Average Unamortized Investment Tax Credits 58,917 87,948 114,657 53,917 87,948 114,657 3
Total 5 691,728 5 786,603 5 873,806 5 687,976 5 781,793 5 873,429 4
Earnings Available for Common Equity and Investment Tax Credits 88,520 $ 106,257 $
111,244 80,917
%,637 $
110,490 5
Earned Return on Average Common Equity and Investment Tax Credits (Line 4 > Line 3) 12.80 %
13.51 %
12.73 %
11.76 %
12.36 %
12.65 %
6 Authorized Return (A) 13.45 %
13.40 %
13.40 %
13.45 %
13.40 %
13.40 %
7 Earned Return Excess (Deficiency)
(.65%)
.1 f4.
(.67%)
( l.69%)
( l.04%)
(.75%)
Per Docket 178 (1977)
Per Docket 1517 (1978)
(A) Authorized Return Calculation:
Amount Rate Return Amount R' ate Return-
~
Common Equity
$492,088 13.75 % $67,667
$670,120 13.75 % $92,142 i
l Unamortized Investment Tax Credits 40,779 9.86 %
4,021 68,891 9.99 %
6,882 Total 5532,867 571,683 5739,011 599,024 Total Authorized Return 13.45 %
13.40 %
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I TEXAS POWER & LIGHT COMPANY 3,g,
140-PLANT INVESTMENT Vs. KWH SALES
,1,.,
(Excluding Forest Grove and 82.569% of Sandt.w #4) 130 -
i
/
/ '29.2 t i 7.5 120 -
p i
10'0 110 -
/
/
- 6 100 -
/
W s
"i g
/I 90-E 79.5
/
92.2 80-TOTAL PLANT 84,7 j
g PER CUSTOMER j
b
$ 70-
/
COMPLETED PLANT b
d
/
PER CUSTOMER c
)
~
/
65.2 Z
/p b
H 5 50 -
/
"'I 4
52.8 h
31.6
,,,f
""~,e"#
uJ
/
49.2 C
40-
/ 46.8
/
,s#
41.6 39.6
/
/,/__ 29_2 30 -
2n_2
,s#
3,,
s' f,/, / **f
~~~T...
1 20 -
12.9 24.6 KWH SALES PER CUSTOMER 5l 20.1
,,,a*
11.2 17.4 0-16.0 m
J' s
mX 1.s
>Z l
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l 8
8 8
I 1971 1972 1973 1974 1975 1976 1977 1978 Sept. 30 1980*
1981*
o $"
1979 m
YEAR ENDED uI
.g37,ygg
TEXAS POWER & LIGHT COMPANY j
Gross and Completed Plant Investment and KWH Sales Per Customer KWH Sales Total P! ant Investment Plant in Service Per Customer (A)
Per Customer (D)
Per Customer (B)
Line Total
% increase O nc~rease
% Increase No.
Year End Customers (A)
Amount from 1971 Amount from 1971 Amount from 1971 (a)
(b)
(c)
(d)
(e)
(f)
(g) 1 1971 507,943 22,777
$1,686
$1,540 2
1972 528,162 25,709 12.9 1,817 7.8 1,712 11.2 3
1973 546,156 26,747 17.4 2,026 20.2 1,786 16.0 4
1974 559,983 27?344 20.1 2,320 37.6 1,990 29.2 5
1975 574,497 27,957 22.7 2,716 61.1 2,260 46.8 6
1976 597,437 28,369 24.6 3,026 79.5 2,298 49.2 7
1977 622,407 30,563 34.2 3,281 94.6 2,544 65.2 8
1978 654,096 32,250 41.6 3,490 107.0 2,844 84.7 9
9-30-79 678,236 31,787 39.6 3,667 117.5 2,960 92.2 10 1980 (est.)
721,138 33,333 46.3 3,916 132.3 3,034 97.0 11 1981 (est.)
755,753 34,800 52.8 4,049 140.2 3,529 129.2 (A)
Trended for future years using 3-year average growth f rom 1976 through the twelece months ended September 30,1979.
p (B)
Estimated for future years using Company construction program described yE in the testimony of Mr. R. K. Campbell. (Exchding Forest Grove and 82.569% of Sandow #4) g,E
"!$?
w.
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4 TEXAS POWER & LIGHT COMPANY EMBEDDED COST PER KW OF PRODUCTION PLANT s230 -
IN SERVICE (Excluding 82.569% of Sandow #4) 210 -
$201.10 1"0-
$178.45
$175.08 170-1lf' h
150-cc
$134.26 E
$129.69
\\
h 130-
$120.29 u
N I
~
$101.83 m
N X
i
$5 o es
$83.57 $ 84.53 ma 90 -
$82.56 l
I "m
l 70 i
i i
i i
r i
i
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1973 1974 1975 1976 1977 1978 1979*
1980' 1981*
1982*
1983*
YEAR END
- ESTIM AT ED
700-TEXAS POWER & LIGHT COMPANY 6 71.5 EY. PENSE GROWTH Vs. KWH SALES e i..,
i l /
600-
/
503.1 E 500-CD 5
c3 l
/
378 6 5400-
>O w
h l
w
$300-265.9 Z
PRODUCTION O & M z
PER CUSTOMER W
O E200-a,,
158.6 /
OTHER O & M 122.9 104.6 PER CUSTOMER f
100-m
=>a.7
/
60.9 X
40.4 45.0 KWH USAGE PER CUSTOMER 3E
,,L.
,o.,
g;q
,f,3r ',_p17 4---
3,
t,---- i -~~
3T,,,,__4i.6 ___}________7__
- "a 2a.3 n.2 3
46.3 3..
g O"
- N12.9
' N.6 9
1971 1972 1973 1974 1975 1976 1977 1578 Sept 30 1980*
1981*
i M
1979 YEAR ENDED
- tsviuarto C
1
Exhibit 555-11 Pag 2 2 cf 2 TEXAS POWER & LIGHT COMPANY Operation & Maintenance Per Customer Production Expenses Other Operation Per Customer (A) and Maintenance (Excl. Fuel & Purch. Power)
Per Customer (B)
Line Increase Increase No.
Year Ended Amount from 1971 Amount from 1971 (a)
(b)
(c)
(d) 1 1971
$13.01
$ 59.95 2
1972 14.72 13.1 69.05 15.2 3
1973 18.27 40.4 65.71 9.6 4
1974 20.65 38.7 69.65 16.2 5
1975 26.62 104.6 76.91 28.3 6
1976 33.64 158.6 86.92 45.0 7
1977 47.60 265.9 96.48 60.9 8
1978 62.?7 378.6 106.37 78.3 9
9-30-79 78.46 503.1 118.19 97.1 10 1980 (est.)
93.01 614.9 133.64 122.9 11 1981 (est.)
100.37 671.5 144.23 140.6 l
Trended for 1979 based on increase for twelve months ended September 30,1979, with 1980 (A) and 1981 trended based on 7-year average for Other Operation and Maintenance Expense due to the change in the rate of new generating plant additions.
(B)
Trended for future years using 7-year average increase from 1972 through the twelve months ended September 30,1979.
J e
TEXAS POWER & LIGHT COMPANY COMPARATIVE CAPITAL RETURNS EMBEDDED INTEREST 38.2 38.2 36.4 I
i
+ 40 -
32.7 29 8 T
~~""T~~~~~A
+30-I
'28.1 w
2Ss 20.0 g
EMBEDDED PREFERPED
[
+20-DIVIDEND
/g/
2 9.1 g
f
~
,-f RETURN ON NET 4.2 1
7.o I"'O PLANT INVESTMENT O-lh T
I 1
2.s i.o z
N 6 - 7.3
- 6.7
- 6.1
/$,
>z
- 11.7
- 14.1 RETURN ON AVERAGE N COMMON EQUITY
- 23.9
, -- 30.1 *--6% R ATE
- 10% RATE
+-9.6% R ATE
~11.6% R ATE
-6.8% RATE m
INCREASE INCREASE INCREASE INCREASE INCREASE
,g (APRIL.i72)
(MARCH 1974)
(OCT. 1975)
(JUNE 1977)
(JUNE 1975)
.g 6
1 i
i i
i i
mg 1971 1972 1973 1974 1975 1976 1977 1978 "m
N YEAR ENDED w
t
"D e
TEXAS POWER & LIGHT COMPANY Comparative Capital Returns Return on Total Embedded Embedded Return on Plant (Less Reserve)
Interest Preferred Dividend Equity Line increase Increase Increase Increase No.
Year Amount from 1971 Amount from 1971 Amount from 1971 Amount from 1971 (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h) 1 1971 9.6 5.5 5.7 16.3 2
1972 10.0 4.2 5.7 3.6 6.1 7.0 16.7 2.5 3
1973 9.4 (2.1) 6.0 9.1 6.1 7.0 15.3 (6.1) 4 1974 9.7 1.0 6.6 20.0 6.5 14.0 14.4 (11.7) 5 1975 8.9 (7.3) 7.3 32.7 7.0 22.3 11.4 (30.1) 6 1976 9.3 (3.1) 7.5 36.4 7.3 28.1 12.4 (23,9) 7 1977 9.7 1.0 7.6 38.2 7.4 29.8 14.0 (14.1) 8 1978 9.6 7.6 38.2 7.4 29,8 15.2 (6.7) 4 4
a :r 5a-ar "O
4 o
THE STATE OF TEXAS l
COUNTY OF DALLAS l
BEFORE the undersigned authority on this day personally appeared S. S. SWIGER, who, having been placed ur. der oath by me, did depose as follows:
"My name is S. S. Swiger.
I am of legal age and a resident of the State of Texas.
The foregoing testimony, and exhibits, offered by me on behalf of Texas Power & Light Company, are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
ff S. II. SWIISER /
[
SUBSCRIBED AND SWORN TO BEFORE ME by the said S. S. SWIGER this 18th day of December, A. D. 1979.
Ul
' 4 t (f.'
/
Notary Public in and for
.... s.. P:;. '
y
, (_@$
., g -
Dallas County, Texas
/
,s (A/
-,jg My commission expires 8-31-80
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