ML20003F002
| ML20003F002 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 12/31/1979 |
| From: | Kilcrease J TEXAS, STATE OF |
| To: | |
| Shared Package | |
| ML19240B984 | List:
|
| References | |
| 3006, NUDOCS 8104170653 | |
| Download: ML20003F002 (91) | |
Text
{{#Wiki_filter:, St# hhWf Mo.E a g DOCKET NO 3006 RE: APPLICATION OF TEXAS Q PUBLIC UTILITY COMMISSION POWER & LIGIITCOMPANY FOR 0 AUTIIORITY TO CIIANGE RATES Q OF TEXAS ~ BIREG-T-TESTIMONEOF J. "l ORT *+RILCREASE4I Q. Please state your name and business address. A. J. Worth Kilcrease,7800 Shoal Creek Boulevard, Suite 400N, Austin, Texas. Q. By whom are you employed? A. I am employed by the Public Utility Commission of Texas in the Economic Research Division. Q. What are your principal areas of responsibility? A. I have responsibility for determining the fair rate of return requirements and financial integrity concerning public utilities regulated by this Commission. I also participate in the administration of the Division and assist in statistical analyses and research on topics of special interest to the Commission. Q. Please state briefly your educational background, professional qualifications, and business experience. A. I received a B.S. degree and an M.A. degree in chemistry from the University of Texas at Austin. I subsequently received a M.B.A. degree with a concentration in finance and accounting from the same university. Also, I am a member of the Financial Management Association and the Planning Executives Institute. Q. IInve you previously testified before this Commission? A. Yes, I have testified in previous rate hearings. 1810.41700fN
o 2 Q. Would you please state the intent of your testimony in' Docket No. 300G, Texas Power and Light Company, and describe the scope of your review and ' analysis in this case? A. The purpose of this testimony is basically threefold. Initially, I will recom-mend a reasonable balance between the original cost of plant less depreciation and the current cost less an adjustment for present age and condition. This mix between net original and current cost is used by Ms. Blumenthal to compute the adjusted value of Texas Power and Light Company's (TP&L's) invested capital devoted to providing utility service. Secondly, an analysis into the cost of equity to Texas Utilitics Company will be conducted to estimate the return required by investors for the use of their funds as equity capital by the parent company. Using this return as a benchmark, a fair return on the equity invested in TP&L will be determined { which, in turn, will lead to my recommendation as to a fair composite rate of return on the original cost of invested capital. Finally, this testimony will evaluate the adequacy of the Staff's recommended revenue requirements in an effort to ensure that the proposed rates will be sufficient to maintain TP&L's financial integrity. To address these issues, this prepared testimony has been on;anized into seven scetions: I. Adjusted Value Mix II. Cost of Equity to Texas Utilitics III. Market-to-Book Adjustment IV. Return to Equity of TP&L V. Composite Rate of Return VI. FinancialIntegrity and Adequacy VII. Shortterm Interest Rates Charged by Texas Utilitics to TUGCO ( and TUFCO VIII. Conclusions and Summary of Recommendations
3 o ( I. ADJUETED VALUE MIX Q. Would you please define the adjusted value of invested capital A. The adjusted value of invested capital is the weighted average of the original cost of property used and usefulin providing utility service,less depreciation, and the current cost of that property less an adjustment for age and condition, balanced within the limits prescribed by the Public Utility Regulatory Act. According to Section 41 of the Act, the adjusted value of invested capital must reflect a balance of between 60 and 75 percent net original cost and between 40 and 25 percent net current cost. Q. Upon what basis have you determined the balance between net original cost and net current cost? A. The balance between net original cost and not current cost has been developed under the assumption that more current cost should be included during periods of high inflation and deflation, end more original cost should be included during periods of low inflation and deflation. This approach takes into account two aspects of the adjusted value of invested capital. First, the impact of past inflation (deflation) on the Company is accounted for by means of trending the original cost of the Company's property. The resulting net current cost, as calculated by Mr. Saathoff, is directly determined by the age of the property and by the inflation (deflation) that has taken place up to the present. Second, the balance between net original and not current cost reflects the current annual rate of inflation or deflation. Thus, the present state of the economy is used to weight the extent to which past inflation and deflation is taken into account. Q. IIave you accounted for the other factors that may be considered when arriving at the mix between not original cost and not current cost?
4 A. The issue of the quality of service being provided by TP&L is addressed by Mr. Saathoff. Since the Company's overall quality of service appears adequate, this factor dces not seem to merit additional attention in the adjusted value mix. Similarly, because the growth rate in TP&L's service area does not appear abnormal-having historically averaged in the range of between four to six percent annually-neither does this item warrant special consideration. Finally, the issue of TP&L's need to attract. capital will be addressed and accounted for later in my testimony; thus, it does not appear necessary to also consider this factor in determining the balance between net original cost and net current cost plant. Q. Please explain, then, your derivation of the mix between net original cost and net current cost. A. The mix between net current cost invested capital and original cost invested ( capital has been determined so that the statutory limits for inclusion of net current cost coincide with historical experience of price level changes. Over the 33-year period from 1946 to the present, the most extreme inflation or deflation rate as measured by the GNP Price Deflator was the 11.8 percent inflation in 1947; therefore,12 percent has been selected as the outside limits. These boundaries have been linearly connected with the origin under the presumption that, in the absence of either inflation or deflation, the invested capital mix should reflect 25 percent net current cost and 75 percent net original cost. For each additional percent of inflation or deflation, an incremental 1.25 percent of net current cost should be included in the invested capital mix. The derivation of this relationship is shown in Exhibit I JWK I, page 1 of 2. Exhibit JWK11, page 2 of 2, shows the balance that would have been used in the past, based upon that relationship. k Q. What current inflation (deflation) rate has been used to arrive at the balance between net original and net current cost of invested capital for TP&L in this case?
5 A. { As reported in Nationel-Economie-Trends prepared by the Federal Reserve ~ Bank of St. Louis, the seasonally adjusted annual inflation rate (based upon the Gross National Product Implicit Price Deflator) for the year ending September 30,1979 was 9.0 percent. This time period has been selected so as to conform as nearly as possible to the test year and be representative of the present state of the economy. Substituting the-9.0 percent in the equation ceveloped in Exhibit JWKil, page 1 of 1, produces a mix comprised of 36.25 percent net current cost and 63.75 percent net original cost investment. The use of this mix in computing the adjusted value of TP&L's invested capital is detailed in Ms. Blumenthal's Exhibi44I, eage-1. 4 h e ~ _,
6 C II. GOST-OF-EQUIT4-TO-T"" W-U-TEl-TES Q. Would you please explain the purpose of this portion of your testimony? A. This section is intended to identify the cost of equity capital to Texas Utilities Company; or in other words, to estimate the minimum return that potential investors would require to induce them to purchasc shares of common stock. Q. Why have you initially focused on the cost of equity to Texas Utilities rather than the minimum return required from TP&L? t. A. TP&L is a wholly-owned subsidiary of Texas Utilitics Company (along with i Dallas Power and Light Company, Texas Electric Service Company, and several other companies), and all equity is financed through the Parent. While we are ultimately concerned with a fair return to the equity capital invested in TP&L, the logical starting point for determining the quantity is where the subsidiary effectively meets the investor directly-in the market-place at the parent, or consolidated, level. Q. Would you please elaborate on the cost of equity concept? A. As indicated, the cost of equity is the minimum price that must be paid to investors for the use of their money. Equity capital is a resource which, like debt funds, labor, fuel, etc., has a cost, or rent, associated with its usage. By identifying the cost of this resource and allowing a utility the opportunity to earn at approximately this rate, consumers are essentially paying only for the actual cost of the money invested in plant and facilitics. At the same time, however, because the price of equity capitalis determined by its alternative uses, the expected return is commensurate with those of other investments of similar risk. If equity capital is authorized to carn its opportunity cost, the Company should experience little difficulty raising additional funds. In short, a
7 by allowing a utility company to carn its cost of equity, stockholders neither receive windfall gains nor is their investment confiscated; yet the return is sufficient to attract new capital so that service can be maintained and expanded as needed. Q. Is the cost of equity the same as a fair return to equity? A. Not necessarily; while the terms are often used synonymously, there can be a difference between the two if there are other objectives that would cause the values to be different. One sucii objective might be to encourage a desired ratio of market price to book value. In any event, the cost of equity concept provides a rational basis upon which to develop a fair return to common equity. Q. How is the cost of capital determined? A. The cost of capital is a function of two things: the time value of money and the risk to which the capital will be exposed. In other words, the cost of all capital can be generally described as: Cost of Capital Risk-Free Rate + Risk Premium = Thus, as the capital is put to riskier uses, the greater the return that is required. Five risk-return continuums have been illustrated in Exhibit JWK12 where capital market lines for long-term or permanent utility industry capital in 1978 and 1979 have been depicted. As shown, virtually risk-free assets, c.g., U.S. Treasury Bonds, require only a minimum yield to account for the pure time value of money and long-term inflation expectations. As risk increases, the total required return rises as investors demand additional comoensation for bearing additional risk. This is particularly evident in the case of bonds and preferred stocks where risk levels, as indicated by ratings, and required yields are fairly well-defined. Q. What other observations can be made from the capital market lines in Exhibit JWK-2?
8 A. Two other items of significance should be noted from this discussion of the capital market line. First, inflation has implicitly been taken into account by the marketplace. In other worda, the current rbturns required by investors for the use of their money already reflect their expectations of inflation. They continually adjust returns for anticipated loss of purchasing power while their funds are loaned out. Secondly, the capital market line is not a fixed function but moves over time. Not only does the slope of the line change, but also vertical shifts occur as in'<estors revise expectations of overall economic conditions. This is illustrated in Exhibit JWK12 where a current capital market line is compared with ones existing in early 1979 and at the time of the hearing for the last three major rate cases. As evidenced here, the capital market line has continually shifted upwards and the slope has drastically increased since a year ago;'in all likelihood, this reflects revised { expectations of price level changes'due to the recently experienced increases in rates of mflation and the apparent inability of the federal government to control economic forces. Q. Are the capital market lines in Exhibit JWK12 fairly accurate, and what are f their implications? A. The graphs in Exhibit JWK12 are, in my opinion, fairly representative of the capital market line as it existed a year ago and as it exists now given prevailing economic conditions and investor expectations. If a return on l eqmty consistent with the current capital market line is authorized, not only I will it include adequate compensation for the expected effects of inflation, i but it will also be commensurate with the returns available from' other l investment opportunities given current market prices. Q. You have pinpointed the returns required for various fixed income securities ( in Exhibit JWK12; why not do the same for common equities? l i
9 A. - C. Extrapolating from fixed income securitics to common stock on the risk premium is imprecise in that risk and required returns for equities are not directly observable. Unlike bond and preferred stocks, the' dividends and capital gains that common stockholders expect to receive from their investments are not directly observable. There is no stated or contractural rate on equity securities; and consequently, it is impossble to. compute the precise rate of return that investors require from a share of common stock. Further complicating the effort to determine the investors' minimums required return is the problem of specifying the risk level of different companics since a multitude of factors contribute to investors' perceptions of the risk of r particular share of common stock. Nevertheless, the riskereturn trade-off concept shown by bonds and preferred stocks undoubtedly extends to common equitics as well. Thus, a lower expected return is required with { lower risk equitics, and increasing expected returns are required with higher 5 risk equities. Q. How, then, does one determine the investors' required return from or coct of equity for a particular company? A. Obviously, this is a difficult task because the capital market line is not well defined past the point of fixed income securities. However, by analyzing l information about a company and others judged to be of comparable risk, a ~ reasonable estimate of a firm's cost of equity can be made. While various quantitative approaches are used as guides to investors' minimum required l returns; in the final analysis, the cost of equity estimate is largely i l judgemental, being based upon the information available to the analyst. l l Q. Ilow have you gono about estimating the cost of equity to Texas Utilities 1 f Company? ! b i I l t
s 10 A. I have approached the issue of determining Texas Utilitics' cost of equity in a variety of ways. Initially, the fundamental financial and operating character-istics of Texas Utilitics have been evaluated and compared with those for the electrie utility industry and the unregulated sector to gauge the Company's i risk relative to other companics. Concurrently, today's market conditions have been contrasted with those in the near past and recent developments have been explored in an effort to better understand any changes in investor + cxpectations, perceptions, and requirements. Secondly, a conventional discounted cash flow analysis has been performed which attempts to replicate market expectations and impute investors' required return from Texas Utilitics given the Company's current market price. in connection with this, a variation of the traditional discounted cash flow model utilizing investment analysts' carnings forecasts has also been employed ' to estimate the { Company's cost of equity. Thirdly, I have also analyzed a recently conducted survey of investors which inquired directly as to the return they require from l an investment in the common stock of an electric utility. company. Next, I t j have examined the equity returns realized by other firms judged to have similar risks to see what investors might - expect from alternative 1 mvestments. A final test has been to examine the risk premium, or additional t return, that investors require for holding common stock instead of lo.1g-term bonds. Even though each of these methods is useful in that it is somewhat 1 i L indicative of investors' required returns, the results between methodologies may vary substantially. Because some tests are stronger than others, though, careful consideration must be given to the validity of each before arriving at a final cost of equity estimate to the Company. l-Q. Ilow does the risk of the electric utility industry compare with the j ( unregulated sector _? 4 i r = ,v,-- 3- -v-r o e,-, .y,-,. e--r .,-:--,,,=,%-- .v,-
11 A. C - Electric utilities have traditionally been considered one of the least risky groups of stocks available. This is in large part due to the essential nature of electric service and the market protection afforded by regulation. Beginning in the early and mid-1970s, regulatory lag in some jurisdictions, consumer militancy, fuel problems, economic uncertainties, and the industry's need to raise substantial amounts of external capital for growth, conversion and poll'ution control caused electric utilities to lose some of their market favor. Even during this period, though, electrics were still considered relatively safe investments since most nonregulated companies were facing similar problems with the energy crisis, inflation, and rising capital costs. During 1977 and 1978, regulation generally improved nationwide, boiler fuel prices be~gan to stabilize, and capital expenditures showed some promise of leveling out; hence, some of the historical stability returned to the industry. ( Last year, though, saw the improving trend disrupted by numerous events and conditions. The mandatory shutdown of several nuclear stations before and after the Three Mile Island incident shocked the industry. Recurring oil shortages coupled with a looming recession has catased investor wariness in the economy as a whole. Continued environmental concerns, recant abnormal weather patterns, anti-nuclear demonstrations, and unparalleled inflation pushing up long-term interest rates to historical highs have also resulted in additional uncertainties, with the electric industry being particularly susceptibic to the adverse financial consequences of these last items. Thus, the relative risk of the electric utility industry has been erratic of late and is currently deteriorating. The overall risk of the electric util'ity industry has undoubtedly increased somewhat from ten to fifteen years ago. While the last two years had shown a general decline in uncertainty, the events and circumstances through especially the last half of 1979 have rekindled investor ,,~ ,-,w
t e-12 Even in light of this, however, the industry is still typically viewed concern. as being, by.and large, no more risky than the unregulated sector and the market as a whole. As cicctricity becomes a more desirable source of energy to households and businesses because of its availability and reliability 4 compared to direct consumption of fuels, the outlook for the industry, despite the near-term problems, still appears favorable with modest growth being projected for many years into the future. Q. Ilow do investors view Texas Utilities as compared with other electrics? 3 A. As everyone is well aware, the Texas Utilities Companies are the only electric utilitics with long-term bonds rated Triple A by both major bond rating agencies. The low risk reflected by this rating is a function of many factors. The Company's fundamer.tal business position is enhanced by its location in the Sunbelt and, in particular, in Texas. Its service area is { diversified geographically and its revenue composition is reasonably well I balanced across customer classes (43?6 residential, 29% commercial, 21% industrial,7% other). Texas Utilities' fuel conversion effort and its long-term access to lignite deposits provide the System with relatively low cost, reliable fuel supplies, even though there is some uncertainty as to whether Texans will fully enjoy these resources due to the Texas Interconnect controversy over forced interstate power pooling. Texas Utilities' involvement in the Comanche Peak Nuclear Units is a source of some concern, especially in the wake of Three Mile Island; but even with both units on-line in 1983, nuclear 4 power will comprise only slightly in excess of ten percent of the System's 4 generating capacity and should not significantly affect its overall risk. Recently, the use of fuel oil as a boiler fuel has become an important negative factor in investor asses.; ment of risk. However, only 1.4?6 of the i total fuel requirements of the Company are supplied by fuel oil. As a large system, with essets of nearly $6 billion and significant generating capacity _
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1 13 reserve margins, the Company enjoys substantial financial flexibility. While the Company ' has reecntly undergone a massive construction program, planned capital expenditures in the near future will level off. Each of Texas Utilities' operating subsidiaries falls under the jurisdiction of the Texas Public Utility Commission, either directly or indirectly, which a generally considered by investors to be a responsible and. fair regulatory. body. The business-oriented political and social climate in the State also makes the Comoany's service area a desirable environment in which to operate. The .I capital structure and conservative accour. ling policies, such as normalized income tax treatment and pot-of-dollars approach to determining AFUDC, of the Company are generally viewed favorably by investors. Finally, the j management of the Texas Utilities System has proven itself to be an i efficient, progressive team quite capable of handling the affairs of the { Company and generally well-respected by investors for. their past accomplishments. Hence, even though some of the fundamental characteristics of the Texas Utilities System suggest that, in absolute terms,. the Utility may have become more risky of late, the underlying causes tend to. l i be almost entirely industry-and economy-wide factors common to all firms rather than company-specific changes. As a result, Texas ~ Utilities' risk j relative to other electric companies does not seem to have changed i appreciacly and the System still appears to be one of, if not the, least risky i electric utilities in the country. ( Q. What has been the recent experience in the capital markets for debt? i l A. During the last year, the capital markets have undergone significant shifts with bond yields increasing and stock prices generally remaining unchanged 1 despite increased carnings and book values. The exact causes behind this are L k-1 ./ -- ..._.~..._.,._. _,.._. _ _,,_. _ _-_ _,.._...~,_.__._,_.__ _
14 not c!cnr but probably reflect a ecmbination of forces including an anticipated recession, disillusionment with the current Administration, persistent inflation, oil shorta;ee, and so en. This deterioration in the espital rnar':ets over the last 12 menths and the impact en the electric utility indust y can best be demonstrated.vith some selected financial indicaters. Listed below are yields on publie utility fixed inecme securities in February 1979 and Feb naq 1950 (from '.ioedy's News Reporth 19 191 Differc e Ana Bonds 9.53?5
- 12. 47c5 2.9494 An Eends 9.74?6 12.90B 3.16:5 A Bends 9.31?5 13.39:5 3.53%-
Eaa Ecnds 10.22?5 14.12?5 3.90?5 ca Preferred Stock 9.03% 11.2005 2.17% e a Preferred Steck 9.52?5
- 12. 27c5 2.75?5 k
bca Preferred Stock 10.32% 13.09:5 2.7745 As indicated, investers are requiring roughly 300 basis points more now than a year cgc to incuee them to purchase fixed ine:me securities of comparatie risk. The progressive steps in this unparalleled increase in yields is illustrated in Exhibit J'.Vi{-2. The exhibit shows that for the first seven months of 1979, the change in yields were not nearly as drastic as in the last five menths. As yet, no amelioration in this trend of increasing required returns is evident. Q. What has been the recent experience in the capital markets for equity? A. The experience of electrie utilities in the equity rnsrkets shows a similar pattern. Below are some average selected financial measures for the 100 lar;;est electric utilities in 1978 and 1979 (frcm Salemen Brothers' Stt-6 Eam@, February 1,1979 and February 4,1950; bock values are fo.- third
15 { quarter of the previous year): 1N8 1M9 - Di h ee Dividend Yield 9.33?5 11.61% 2.28?5 Price-Earnings Ratio 8.0X 6.7X - 1. 3X Market-to-Book Ratio 91.0 % 77.0?5 14e0% Payout Ratio 75.0 % 77.0% 2.0% Return on Average Equity 11.8?6 11.895 0.0?6 Since this time a year ago, dividend yields have risen 223 basis points while i priec-earnings ratios declined over 16 percent. Similarly, market prices have - dropoed from an average of 91 to 77 percent of book value. Probably most importantly, however, is that these declines in market prices have occurred during a period when payout ratios increased and realized return on equity
- (
remained constant. In all, these statistics present strong evidence that over the last 12 months, there has been a significant increase in the returns i required by investors. This general upward shift in the capital market line has been illustrated in Exhibit JWK12 to visually demonstrate the difference between the market returns demanded a year ago, and even six months ago, versus those required by investors today. Q. How have the changes in the capital markets affected the Texas Utilities ~ companics? A. The general changes in ceonomic and financial market conditions have had a j similar impact on the Texas. Utilitics System. The operating companies' cost of borrowing - has increased from slightly over 9.5 percent a year ago to i i approximately 13.0 percent today. The more serious impact of current conditions has been on the common equity of the System. For the first time l in many years, Texas Utilitics' common stock is consistently selling at below i book value (approximately 75% of estimated 1979 book value) in the i l I .-,_ __-.,_._.. _____.-_ _.._ _.~.,__..- _ __
16 { marketplace. This indicates that the returns investors are expecting from Texas Utilities are no longer sufficient to make them willing to pay a price for a share of the Company's stock equal to or greater than bcok value. Q. Does this mean that the returns on equity authorized in the past were inadequate? ~ A. Not at all, the returns allowed by the Commission in previous casm were appropriate given the economic and financial conditions at the time. This is evidenced by the fact that Texas Utilities' market price consistently sold at I or above book value. Only of late have market conditions changed and investors' required returns increased to the point where the level of returns historically authorized are no longer adequate. The implications o'f this j recent experience seem fairly clear. If this Commission intends to encourage 3 a market price equal to or greater than book value so as to prevent dilution of ( present stockholder's investment, then the returns authorized on equity must be revised upward to reflect changes in capital market conditions and increases in the rates of return demanded by investors. Q. What tests have you performed to identify the level of investors' required returns from Texas Utilities? A. First of all, I have used the traditional discounted cash flow (DCF) model to l l estimate Texas Utilities' cost of equity. The DCF method of gauging 4 1 investors' required returns is derived from.the familiar Gordon dividend L growth model. This theory of valuation postulates that the price of a share of l common stock is equal to the present value of all its future dividends. These i dividends are assumed to grow at a constant rate into infinity and are - l discounted by a rate that is the minimum return required by investors given the risk of the security: k M , + < -m,ndw n a s.* -
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( O O . 17 { Do.(.1.+. g,)I D.,.(.1. +. g).. D. o.(.1.+. g).U.. p - (1 + k)I (l'+k) (1+k) e This equation can be conveniently reduced to the more manageable form of: D - - -l-p = o k g; and the company's cost of capital can be isolated by rearranging terms: D k= h+g 4 o Essentially, the DCF model recognizes that the return to the stockholder consists of two parts: dividend yield and growth. Equity investors expect to j l receive a portion. of their total required return in the form cf current j dividends and the remainder through price appreciation. The modelis based. { upon two fundamental assumptions. Initially, it presumes that investors 7 evaluate the risk and expected return of all securities in the capital markets.~ Secondly, given these expected returns, investors then adjust the price of f each stock so that they are adequately compensated for the risks to which they are exposed. The use of the DCF model to estimate the cost of equity is essentially an attempt to replicate the market pricing mechanism described above. Since we can look to the market to determine what investors feel a ~ share cf Texas Utilities' commen stock is worth, the rate of return required j by investors can be imputed by approximating their expectations cf future dividend growth. i 1 i Q. In your DCF ana!yses, what is the dividend yield of Texas Utilities Company? 4 A. When an investor purchases a share of stock, he is buying expected future dividends and price appreciation; he is not buying past dividends paid to t j ( someone else. Therefore, the dividend yield component of the DCF model should be computed by dividing the dividends expceted to be received in the l a a e - e+ m es+evwe - -ew v - n -t v+-ww -t wyw y -w-r -w s ee re m e-tM a - We w ar -- re-wr M = e-3-ve ap+m-'-T* =s v 97v' - - ' - ' '"*'fr*T'?'*N'99--"f'^m'm-rirv'9""f=*-*'*"ve7-*-'**"'"*hg-FN-We Y"W Tr""W~
18 coming year (D ) by the current market price (P ). Texas Utilities' dividends 7 9 through 1979 totalled St.G4 per share; however, in light of the Company's i long-standing policy of inercasing dividends annually, I have used $1.7G per share in my calculations. This amount has been selected on the basis that investors anticipate Texas Utilities to raise dividends in 1980 in a manner consistent with 197S and 1979,ia $0.12 annual increase beginning in the first quarter, which will result in stockholders receiving a $0.44 dividend per share in each of the four. quarters of 1980. The market price of the Company's stock has hovered between $15.50 and $19.50 over the last few months so a price of $17.50 has been used in this analysis. This recent average market price has been selected because the cost of equity is a current and forward-looking concept, and a recent market price is a better indication of investors' present requirements than would be a historical point estimate or a long-run ( average. Based on these values, the market presently expects a dividend , ( yield of approximately 10.0 percent from Texas Utilities. Q. Please describe the growth (g) component of-the DCF model. A. In using the DCF model to estimate a company's cost of equity, we are not I conectned with the rate at which the firm will actually grow (that is - primarily a function of this Commission's decision, management prowess, weather, economic conditions. and chance); rather, at issue is the growth expectations which investors have embodied in the current price of the stock. Furthermore, the DCF model technically maintains that investors are concerned with the expected inercase in dividends into infinity; in other words, their emphasis is on average long-term growth rather than short-run growth. Consequently, in estimating the growth component of the DCF model, an attempt is made to determine what investors think long-term J ( growth will be. A . m.
= o 19 Q. C How have you analyzed the growth expectations of Texas Utilities' investors?= A. Two approaches have been used to ' estimate the long-term growth that investors.might expect from Texas Utilities. The first focuses on the Company's expected earnings retention ratio.and carned returns on equity, and the second approach considers historical trends in growth. These methods- ~ taken together presumably examine, by and large, many of the same factors which investors evaluate when forming their long-term growth expectations 4 and setting the price of a share of Texas Utilities' common stock. t. j Q. Please explain your first approach. A. 'In general, a firm's internal growth results from the retention and reinvest-ment of earnings. In other words, any increase in a stockholder's inter 6st in a utility company occurs primarily because some profits are retained by the firm and invested in additional assets upon which a return is earned. This { being the case, investors v;ould probably look to a company's retention ratio - i (1 - dividend payout ratio) and the expected returns to be earned on equity as I l an indication of what future growth is apt to be. Reviewing Texas Utilities' history (Exhibit JWK-3, page 1), the Company has consistently maintained a payout ratio in the 50 to 60 percent range (or a retention rate of 40 to 50 i percent), with more recent experience towards the upper (lower) end of this l range, as dividends have increased without corresponding improvements in ~ I earnings pa share. The most recent three years between 1976 and 1978, however,.have probably had a very significant effect on the formation of i { investor perceptions regarding Texas Utilities' prospects, as the investment ~ l l community closely monitored the Company's performance under statewide l regulation. During this period, Texas Utilities' retention rate has persistently declined each year to approximately 40 percent in 1978 and 3G percent for , '( the test year. Meanwhile, the Company's realized return on eqt.ity during this l { i i ~.,.-..-,...,...,...._._,-.__..,-,,_.....v,.,,,.,,,,,,m_,., m,,-,,
- ._---,,.-w.,,_,.,--,--.,.-,,,..,---,,.,,-,
20 three-year period has ranged between 12.9 and 13.1 percent annually with a realized return of 12.0 percent for the test year. Complicating this further is the fact that Texas Utilitics' stock is now selling at below book value, and investors recognize that any sales of additional equity to continue financing the System's construction program are apt to be dilutive and have a negative 4 impact on future growth. Considering these factors, investors are likely anticipating Texas Utilities' future retention ratio to be around the 36 to 38 percentlevel and, based upon recent past experience, expect the Ccmpany's earned return tc be in the j 12.75 to 13.25 percent range. This }vould imply that the market expects a prospective growth rate for Texas Utilities of something in the vicinity of 4.6 to 5.0 percent annually on an ongoing basis, probably with some downward adjustment for possible dilutive effects. There are, of course, an infinite f( number of growth rates that can be computed depending upon the combination of the retention ratio and return on equity used (Exhibit JWK13, page 1), but growth rates around 4.7 percent seem most consistent with what investors would likely project based upon reasonable expectations of the Company's future retention ratio, earned return on equity, and dilutive l l cffects. I Q. What is involved in your second approach for estimating investor expectations of Texas Utilities' future growth? A. Besides looking directly to those factors resulting in growth, investors probably also form their expectations of future grc vth by analyzing historical experience and trends as a guide to the direction which the company is heading, especially for a relatively stable firm such as Texas Utilitics. Three factors which would seem most indicative of Texas Utilities' future dividend !i ( potential would be growth in net book value, earnings per share, and dividends i .e ,9.m_ . ~.., _ <-,.y --,.,,,,.,-_-.,3-,._g y3.,.,, ... ~ -. -..vy y.--..n , -,,y.
21 per sharc. C' On page 2 of Exhibit JWK13, the historical values for Texas Utilitics' net book value (NBY), earnings per share (EPS), and dividends per share (DPS) are shown since the early 1960s. For each of these variables, annual compound growth rates for the three periods, 197411973,19G911978, and 196411978, have been computed and are listed on page 5 of the same
- exhibit, in addition, because compound growth ; rates are sensitive to beginning and ending values, l_have also " smoothed *' the NBV, EPS, and DPS values through linear regression models (pages 3 and 4 of Exhibit JWK'3).
The annual compound growth. rates using these normalized values for the same 5,10, and 15 year periods are also shown in Exhibit JWK2, page 5. Q. What are the implications of these historical analyses? A. As shown on page 5 of Exhibit JWK13, NBV and EPS growth trends -are declining over time (especially when smoothed values are observed), although there is an increasing trend in dividend growth. Recent trends (1978-1969 to 1973-1974) indicate that NBV and EPS are declining by -2G.7% and -2G.5% respectively while DPS is increasing 19% Preliminary 1979 results suggest that this trend is continuing. While this rising dividend trend might suggest high market growth expectations, investors recognize that such increases cannot be sustained without corresponding growth in Texas Utilities' earnings per share and investment base (book value). In other words, the rising growth in dividends per share can largely be attributable to the Company increasing its payout ratio over the last few years; a practice which, of course, cannot be continued indefinitely. Since the increased dividend payout ratio results in - less earnings being retained and reinvested, investors are likely anticipating t!'at the Company's growth will continue to subside somewhat more in coming years. This is further reinforced by the performance experienced since 1976 ( when the System became subject to more centralized regulation. The general
5 4 i 22 decline in grcwth rates in the last two to three years relative to prior periods strongly suggests that Texas.Utilitics' heyday of high growth is past. Consequently, investors are beginning to view the Company as a potential income security instead of a growth stock. Q. What does this analysis of historical trends suggest as to the long-term growth that investors are expecting from Texas Utilities? A. The marked downward trend in recent earnings and net book value per share growth rates suggest that investors are not incorporating into Texas Utilities' stock price growth expectations corresponding to the growth rates experienced over the last 10 to 15 years. Texas Utilities is becoming perceived as a maturing electric utility having growth prospects more ~similar to those of the industry as a whole than it has had in the past, However, its location in Texas and the Sunbelt still results in growth at the high end of the { industry average. Thus, considering the trends and implications of the historical numbers, the market's perception of - the carnings level and 4 consistency that will result from the more centralized regulatory process, and the Company's apparent transition from a growth to income security, my analysis leads me to believe that investors project Texas Utilities' future long-term growth to be less than that generally indicated by the Company's historical growth but something in the upper end of the 3.0 to 5.0 percent range expected for the industry. Somewhere in the 4.5 to 5.5 percent range i seems to be a reasonable growth estimate for Texas Utilities from an analysis of historic NBV, EPS and DPS. I Q. Would you briefly recap your growth analyses and state your conclusions? A. As discussed previously, the intent of these growth analyses has been to 1 estimate the long-term growth expectations that investors have embodied in ( the current priec of Tcxas Utilities' stock. I have attempted to do this by l l i _ - _., _,... _ _,.., _ _ _ _.. -.. -. - - - ~ _ - _,,. _ _, _ _. _ _. _. _ _..
~ 23 i i replicating the thought processes of investors and how they might form their growth expectations for the: Company. To do this, I have analyzed 1 information which is presumably similar to that which the market would evaluate in assessing Texas Utilities'long-term growth prospects. Based upon - these analyses and giving appropriate weight to the recent developments and experiences of the Company, I believe that investors expect Texas Utilities' future long-term growth to be in the 4.5 to 5.5 percent range with a more precise estimate being in the neighborhood of to 5.0 percent.' Q. Please summarize your analysis of Texas Utilitics' cost of equity using the DCF approach.
- ~
A. The DCF model is a market oriented, forward-looking method of estimating a company's cost of equity which is based upon a reasonably sound theory of stock valuation. It is particularly applicable to a utility such as Texas Utilities where investors expect a large portion of their total return to be in the form of dividend yield. The advantages of the DCF model are that (1)it focuses solely on the firm in question, and (2) the company's relative risk is not of explicit concern since this is implicitly accounted for by investors when they set the stock price in the market. For Texas Utilitics, my DCF. t i analysis indicates that investors anticipate a dividend yield from the Company of approximately 10.0 percent and expect the Utility's future long-l term growth to be in the 4.70 to 5.0 percent vicinity. Summing these two components of return, Texas Utilities' cost of equity appears to be in the r range of 14.70 to 15.0 percent. i Q. In what other ways have you estimated Texas Utilities' cost of equity? A. Another -approach to estimate Texas Utilitics' cost of equity is through a t variation of the DCF model which uses investment analysts' forecasts of the lj( Company's earnings as its basis. Taking the discounted cash flow formula l presented earlicr: i l i ., _ ~ -. -. _ - ~.,... - -.. - - -, -. _,...-. -,-,.-,_....,m..-..., _._..v,,_-
t 24 1 1 - ( D k= +g o the dividend (D ) and expected growth (g) components can be described as: y E,7 (1 - b) k= + (br + vs) po 4 In thie %rmulation, b represents the Company's-expected earnings retention ratio, ; !s the expected realized return' on book equity, and the 'vs term describes the dilution or accretion attributable to sales of new common stock at belcw or above boo'c value (Exhibit JWKM, page 1). What this equation a says is that D will be equal to expected earnings per share in the coming 1 period (E ) timt ; the Company's payout ratio (1 - retention ratio) and powth 1 will be equal to the rate of retaining earnings times the return earned on equity adjusted for the effects of issuing new equity at a market price ~ i i / different from book.
- (
Like the DCF method discussed previously, this approach is an expectations model; in other words, proper implementation 1 requires that its parameters (except price) be estimated as investors would forecast them. Q. Where have you obtained values for implementating this approach? l A. The sources of data for this model have been taken from Texas Utilities' Annual Report; TP&L's Rate-Filing Package; Salomon Brothers E1cet-!: l Utility ihmiethn, Guality, Eerninas; Veiu: Lir and Standard and Poor's Eernin & creerter. This latter publication is a compilation of earnings projections made by various investment services, and while it does not include r estimates from all analysts, the 51 firms contributing to the Eeh F e eter represent a fairly broad cross-section of the-investment community (Exhibit JWKM, page 2). The investment advisory service ( forecasts contained in this service have been used as surrogates for investor e l i i 4 - < m vi v w-. c.-.-,,,yy ...p.c y,...,- ,,, h ew._,-, ,_g,..-men n, .ne_i.,. ,%.e,-_,y-,,.,,,.
25 j { expectations of Texas Utilitics' future carnings. As shown on page 2 of Exhibit JWlQ, those services projecting Texas Utilities' carnings are forecasting 1979 EPS of between $2.80 and $3.00, with an average estimate of $2.89. From Exhibit JWK-3, page 1 and the rate filing package, I have also obtained the following data for the last three years: IM6 IM-7 19"r8 T-Y b - Earnings Retention Ratio 41.4?6-41.7?6 .40.2?6 35.9?6 (1-b) - Payout Ratio 57.6 % 58.3% 59.8% 64.196 - Realized Return on Equity 13.096 13.0?6 1 3.096 12.0?6 r 4 Based on this recent financial information, it seems reasonable-to assume that investors would project a 1980 earnings retention rate of approx!mately 39 percent, a payout ratio of G1 percent, and a return on equity in the neighborhood of 13.0 percent. Finally, investor expectations of the effects of f. k additional common equity sales on future growth can be approximated from i data contained in TP&L's Rate-Filing Package. As mentioned, the "vs" term in the equation reflects the increase (decrease) in expected growth attributable to selling new common stock at above (below) book value. To estimate the magnitude of this factor, some basic data is required. Texas i Utilities has recently sold about 5,000,000 shares of new common each year (in 1976 it sold 10 million shares), typically incurring flotation costs slightly-( over $0.62 per share. As of the end of the test year, the Company's book l value was $20.81 per share for the 8G million plus shares outstanding. Now, if Texas Utilities were to issue five million shares of new stock at the current market pri:e of $17.50 per share, the Company would net about $16.88 per r i share. Since this is less than book value, the "s" term in the equation would be 81.1 percent. Furthermore, existing stockholders would forfeit some of L their ownership and earnings participation in the Company to the new --..,.w. ,. -~, -v ,w --~.,y..-~,,.-_--,-,-,,r,rr-,w,,,-,-,,..3 ,,,,yy..,,,,., ,,...,,.w.mm-,,.,y m m e., - p ...w. u_.,, r.m.--w -4...--.- .w r
26 shareholders. The "v" term in this case becomes -1.03 percent, and the product of these two values implies that existing owners' expected growth would be 0.84 percent less than it otherwise would have been. Put another way, the book value of the Company's stock would drop from $20.81 before the sale to $20.G0 after, a decline in value of 1.03 percent. Thus, if investors anticipated five million new shares of common.stoen to be soli at current market prices to finance the Company's construction program, they would also expect a reduction in the expected growth rate ~on the order of 0.84 percent. Of course, if more shares were likely to be sold, the negative impact on growth would be even greater. Q. What, then, does this test suggest as to the cost of equity for Texas Utilities? A. In Exhibit JWK-4, page 1, the various computations discussed above are detailed. As shown there, combining investment analysts' forecasts of the Company's future carnings, reasanable estimates of an expected retention ratio and earned return on equity, 'and conservative external financing figures, this approach indicates that the cost of equity to Texas Utilities is approximately 14.3 percent. Q. Ilow else have you gone about estimating Texas Utilities' cost of equity? A. The t.revious method measures a company's cost of equity indirectly; i.e., given various pieces of information about a company and current prices, investors' required returns are imputed. My second approach involves a direct query of investors as to the rate of return they require from a company or industry. In August 1979, the financial consulting firm of Mitchell, Hutchins, Inc. surveyed 68 institutional investors (with '105 responses) about their attitudes toward the electrie utility industry. One of the questions included in the survey inquired as to the total return expec'ed from an investment in {. the common stock of electric utility companies. A summary of the responses to this question have been reproduced in Exhibit JWK15, page 1. As 1 i
~ _ _,. l 27 P illustrated, the. majority of the respondents-(85 percenti indicated that a . return between 13 and 16 percent would be attractive from this group. 3 Q. Are there any eavents regarding the interpretation of this survey? 'A. There are several points meriting mention with respect to this direct measure ~ of investor's required returns. First, it should be noted that this survey is the-. i most currently available and thus is the mos.t recent information available from investors. Also, the survey was conducted after to the Three Mile Island incident and reflects the impact that this event had on the perceived risk of the industry. Sceondly, however, the standard upon which these expected returns are based is a utility of Double A risk. Since Texas Utilities Company is rated Triple-A and is generally considered to be a less risky investment than the average Double A utility, the Company's cost of equity is likely to be at the bottom of this range, even after an adjustment is made for the change i in Double-A yields from 9.5% to the higher yields of today. Fina41y, the t results of this poll are subject to the limitations of any survey with respect to the truthfulness of responses, proper interpretation of the questions, sample size and representativeness, and so forth. Q. Taking these factors into account, what does this survey imply as to Texas Utilities' cost of equity? l l A. Adjusting the survey results for subsequent events, such as pre. tent inflation j rates and the presently collapsing bond markets accounting for risk differentials, and recognizing the study methodology, this test indicates that' 4 Texas Utilities' cost of equity would fallin the 14.50 to 15.00 percent range. i Q. What other methodology have you used to estimate Texas Utilities' cost of j equity? 4 j A. Another approach for estimating the Company's cost of equity has been to I i t (. examine the additional return that investers have demanded for holding Texas l Utilities' common stock instead of its senior fixed securities. This bond r ~. _ _... _ _,. _. _. -
28 yield / risk premium analysis is intended to reflect the effect of interest rate changes on investors' required returns and is an offshoot of the idea discussed earlier that expected returns are comprised of scme time value of mency plus a risk premium. Q. Please explain this method. A. This test has involved computing the spread (or risk premium) between the yield on modj's Aaa bonds and the return required on the equity invested in Texas Utilitics for each year bet teen 1974 and 1978. Since we do not know what the cost of equity to the Company in each of these periods was, investo:s' required returns at the various points in time must be estimated. Using Texas Utilities' realized returns as a proxy for the cost of equity would be inappropriate since this would only maintain the status ouo of the Company and would be circular. Therefore, I have used a DCF model tu estimate investor requirements which assumes that investors formed their growth expectations based solely on historical experience. A mechanical growth estimation technique has been employed that averages the compound growth rates for the 5,10, and 15 year periods prior to the year under examination. The net effect of this averaging method is to emphasize the most recent past (the preceding five years are weighted 50 percent, the preceding ten years are weighted 33 percent, and the preceding 15 years are weighted 17 percent) under the assumntion that investors place greater emphasis on more current growth rates. The resulting growth estimates have then been summed with the dividend yicid to obtain a cost of equity estimate for each year. As shown in Exhibit JWK-G, page 1, using this approach to estimate the cost of equity indicates that the risk premium for Texas Utilities common stock between 1974 and 1973 has ranged, on average, from ( between 4.5 percent and G.3 percent above the Aaa bond yield. If this
29 ~ reintionship is assumed to be relatively constant over time, then adding these risk premiums to the present Ana bond yield of approximately 12.47 percent. su; gests that Texas Utilitics' present cost of equity is between 17.0-and 18.8 percent. Q.' Do you have any reservations about this type of bond yield / risk premium methodology? A. While this type of analysis has considerable appeal, difficulties implementing the concept require that the results be scrutini::ed carefully. Initially, the underlying assumptions that risk premiums are constant over time and independent of the level of interest rates may not be entirely correct. For example, the spreads between different quality bonds vary over time even though the risk differences between rating groups remain fairly. constant. Presumably, the same phenomenon would be experienced between common stocks and bonds as economic conditions, interest rate levels, and investors' sensitivity to relative levels of risk change. Probably the most severe limitation of this approach, however, lies in estimating investors' required returns at different points back in time. Blindly accepting mechanically determined growth estimates may overlook some -important items and / changes tFat have occurred or which investors are expecting. For example, in i Texas Utilitics' case, the growth estimates suggest that investors' ~ i expcetations have remained v,Jtually unchanged over the five year study c period, yet the rise in dividend yield from G.3 to 8.1 percent (while interest rates only increased 20 basis points) would suggest that investors were i anticipating Texas Utilitics' transition from a growth stock to more of an income security. Because of this type of qualifiention, the results of this I analysis must be interpreted judiciously. !{ Q. Have you performed any comparable earnings analyses? l l l
30 A. . ( Yes, as my last step in estimating Texas Utilitics' cost of equity, the returns 4 carned on book equity by other firms having purportedly corresponding risks have been evaluated. For this methodology to be useful in identifying investors' required returns, it must be assumed that.ott'er comoanies, on averate, have earned their cost of couity on net book value - rio more and n less. Furthermore, it must be established that.the risks to the stockholders of the other companies selected for comparison are similar to the risks of - owning Texas Utilities' common stock. It is not appropriate to compare Texas Utilities Company with all other stocks nor is it proper to classify the risks to stockholders by looking at the risks of holding bonds as' indicated by bond ra tings. Similarly, " risk" measures which are, in part, a function of the Companies' level of return on equity are inappropriate for use in identifying the cost of equity. For example, Standard and Poor's Earnings and Dividend Ranking for Common Stocks and Value Line's Rank for Safety are both largely arrived at by evaluating financial criteria which are related to realized returns on equity. Thus, thost firms that have historically earned high returns on equity are deemed less risky while those companies that have carned a lower return on book equity are considered having higher risk. I have measured the risk to the investor of pt'rchasing common stock in two ways: by the companies' Beta and by the companies' Value-Line Price Stability Index (formerly the Value Line Safety Rank). i 1 ( Q. Please explain these measures of risk. A. For the widely diversified investor, Beta seems a more practical measure of investment safety or risk. Beta measures the sensitivity of the stock's price to fluctuations in the general market.. A stock with a high Beta is riskier i because its price tends to fluctuate more vis a vis the stock market as a I/- whole than does a stock with a low Beta. The Value Line Price Stability Index 'N is based on the total volatility of a stock's price. In other words, the Price
31 C. Stability Index is a measure of total risk, not only that growing out of the stock's sensitivity to fluctuations in the general market, but also that due to its inherent _ volatility. This includes not only the_ systematic risk, or the volatility attributable to general market movements, but also the nonsystematic risk, or those price fluctuations unique to that c~ompany and its industry. This measure of risk seems particularly well-suited to the investor who owns just a few stocks. Q. Why have you used Beta and the Value Line Price Stability Index as your measures of risk? A. Beta and the Value Line Price Stability Index appear to be appropriate measures of the risk of owning common stock for the large and small investor, respectively. First, both Beta and the Value-Line Price Stability Index avoid having to speculate as to how investors perceive changes in a company's operating and finnneial characteristics. Rather than making conjectures as to what specific factors (such as capital structure, market conditions, supply availability, etc.) investors might view as affecting e company's prospects, they directly observe the investors' evaluation of these l items as reficcted in stock pric,es. Then, by measuring the investors' responses, not only are all of the factors considered, but their relative importance to the shareholder is considered. The second advantage with using these risk measures is that both focus on what constitutes risk to the investor, i.e., the volatility of his common stock holdings and the changes in their value. For these reasons, Beta and the Value-Line Price Stability Index would seem to be the most objective measures of the risk to investors of owning a company's common stock. Q. IIow have you used Beta in your comparable earnings? A. The Deta comparab!c carnings analysis involves an evaluation of the returns t j realized on average book equity between 1964 and 1978 by those companies included in Standard and Poor's 500 Composite Index. The returns earned on I
32 average equity by each of the 500 firms in the study over the 5,10, and 15 year periods between 1964 and 1978 have been computed and combined according to the companies' Value-Line Beta. Because Beta tends to be a ~ somewhat unstable risk measure, the firms have been grouped using a range of Beta values to account for any nonstationarity of the " risk measure. Furthermore, the long-term tendency of Betas to regress toward the mean has aircady been compensated for by Value-Line through an adjustment to each company's actual Beta; thus, Texas Utilitics' reported Beta of.85 reflects an adjustment to the Company's actual Beta of approximately.75. As shown in Exhibit JWK-7, page 1, firms with adjusted Betas of.80 to.90 earned an average of 14.0 percent during the most recent five-yede period 1974 to 1977,13.7 percent between 1969 and 1978 and 13.8 percent over the 15 year period 1964 to 1978. Excluding utilities these averages are slightly {.j{, changed to 14.0 percent,13.6 percent, and 13.8 percent, respectively. Q. What are the results of the Price Stability test? A. Value Line has assigned a Price Stability Index c.f 95 to Texas Utilities -the Index ranges from 100 (least risky) to five (most risky). Using identical computational methods and similar grouping procedures as in the Beta analysis, the results of this study are presented in Exhibit JWK-7, page 2. As illustrated, firms with Price Stability Indices comparable to Texas Utilitics' realized a 14.2 percent on average book equity between 1974 and 1978,14.7 perce:.t between 1969 and 1978, and 13.6 percent during the 1964 to 1978 period. After excluding utilities, the averages became 14.9%,15.6%, and. 13.2% for the respective time periods. Q. Would you briefly summarize your interpretation of these analysis? A. While there are useful insights from there comparable earnings analyses, one i (-.; must be careful accepting them as being truly representative of the sample r --p_.a. . =,, s. w y ___.u____%. 9 _ _~+ p s 9-sp y y ,_,,-.-m ..p_.
33 firms' costs of equity. First, the basic assumption upon which they are founded; i,c., that on average companies realize their cost of equity on book value, must be seriously questioned. While in the theory of competitive markets this assumption holds; few, if any, companies in the U.S. economy operate in truly competitive markets. Firms that enjoy marketing, monopolistic, or patent advantages, such as Jnost drug companies, some chemical companies, IBM, Coca-Cola, and so on, are likely to have realized returns on book equity in excess of those required by investors.at the market level. Meanwhile, other firms such as railroads, some electric utilities, etc. have undoubtedly earned less than their cost of equity on book values. Presuming that those earning more and those realizing less offset each other exactiv is tenuous at best and the results of these tests must be interpreted accordingly. In addition, it is disappointing to note that there is little relationship between bond yields and the returns realized over the 15-year period 1963 to 1977 (Exhibit JWK-7, page 3). If returns on book equity were truly reflective of the cost of equity, one might expect to find a much higher correlation between the required return from bonds and the realized book returns. Moreover, relying on returns that have been carned in the past under i varied financial and economic conditions fails to recognize the current nature and market orientation of investors' required rates of return. Finally, it is disturbing that there is not a distinct positive trade-off between the risk measured by either the Price Stability Index or Beta and earned equity returns. Whether these measures are inadequate descriptions of risk or whether realized returns bear little resemblance to the cost of equity is not clear; regardless, the validity of this, as with any comparable earnings test, must be questioned.
34 Q. (. What has been the major thrust of this portion of your testimony? l A. In this section, I have tried to identify the cost of a resource - equity capital to Texas Utilities Company - as the basis for making a recommendation as to a fair return on the equity invested in Texas Power and Light Company. Probably the most important conclusion to come out of my study has been that the cost of money to the Texas Utilities System, both debt and equity, has recently increased appreciably. This increase is largely due to the fact that the capital markets have undergone significant changes over the last 12 months and, unfortunately, Texas Utilities has not been immune. Not only are interest rates higher now than a year ago, but also the risks of the electric utility industry have increased, especially in the wake of Three Mile Island and the recurring oil shortage. These industry-specific and other economy-wide factors have caused Texas Utilities' common stock to now sell consistently below its book value. In light of this analysis, it seems clear that the equity return authorized in the past for the Texas Utilities companies is no longer adequate, and current economic conditions dictate that it be revised accordingly. Q. From your analysis, what do you feel the cost of equity is for Texas Utilities? A. Despite the events discussed above, I continue to believe that the electric utility industry is generally no more risky than the nonregulated sector as a whole, and _that within the industry, Texas Utilities Company is one of the least risky electric utilities in the country. Thus, the return required by investors from the Company is stillless than that demanded from most other utilitics in the industry and other firms in general. I have conducted various tests to locate the minimum return required by the Company's investors (Exhibit JWK-8), and while each of these were useful, the resulting cost of { equity estimates vary in magnitude and credibility (the first three being the
- 35~ stronger set). Consequently, my final conclusion, as that of every analyst, is one largely based upon judgement, giving consideration to the relative strengths and weaknesses of.the different methodologies, but I feel that.the evidence is clear that Texas Utilities' cost of equity is currently in the range of 14.25 to 14.75 percent. l 1 i e i i r 4 0 1 4 E' i i i ) \\ 4 -_-_..,-_....,_.__,._...-,........---_..._.,m.
~ 36 C 111. M A R K ET-TO-BOOK -ADJUSTMENT Q. What is the purpose of this portion of your testimony? A. As discussed earlier, the cost of equity provides a basis for determining a fair return to equity. Other considerations, however, might, warrant an adjustment to this minimum rent for the use of capitalin an effort to achieve other objectives deemed to be in the public interest. Q. Please provide an example of such an adjustment. A. It is generally preferable for the market price of a utility's stock to sell above its book value so that the existing stockholders' equity in the company is not reduced on a per share basis in the event that additional common stock is sold. The importance of this is that a firm can only sell new stock at below book value for so long before it becomes nearly impossible to resume a growing earnings trend or before existing stockholders take action to block further dilutive sales of stock. Therefore, especially during periods of heavy construction expenditures and external equity financing, it seems desirable to improve the probability that the utility will not have to dilute existing stockholders' equity as the utility continues to meet its service obligations to its customers. Q. Briefly explain the relationship between market price and book value. A. The cost of equity is a market-oriented concept. Thus, if a market determined cost of equity is applied to an investment base valued at original cost, the market priec of the utility's common stock will be driven towards book value (up if the existing market-to-book ratio is less than one and down if it is greater than unity). The reason for this is that if a company is authorized a level of earnings on book value that investors had expected on market value, they will adjust the equilibrium price so that the expected rate of return on market investment remains the sa m e. Since regulatory
d 37 f. i( authorities are constrained to allowing a return on booked values rather than market values, if an equal market-to-book relationship is to be avoided, the cost of equity needs to be adjusted. - Q. What can cause the market price to book value ratio to fall below unity? A. A variety-of factors can result in the market price falling to below book 4 value. Other things being equal, allowing a return less than the cost of equity .<ill cause a market-to-book ratio of less than one. Similarly, if investors' required returns increase after rates have been set at the cost of equity, the market-to-book' relationship will become less than equal. Theoretically, issuance and flotation costs incurred in connection with a new issue of common stock have a depressing effect on price. Finally, purported market ^ i. pre:.-"*e associated with the sale of additional equity could cause the market price to fall below book value. ( Q. Please discuss the effects of flotation costs. j A. When a company sells new equity, flotation costs are incurred as a result of fees paid to investment bankers to handle the underwriting and distribution 4 functions and other related issuance expenses. These costs reduce the net-procceds realized by the company from the additional securities. Typically, flotation and issuance costs amount to between three and five percent of the t i new issue, but the " dilutive effect" is infinitely smaller than these { percentages would indicate. The reason for this is that the flotation costs are borne by all of the issuing company's stockholders; therefore, the dilution of a j existing equity is equal to the flotation costs divided by all shares i outstanding. Exhibit JWii-9, page 1 shows these computations for three of { Texas Utilitics' latest stock offerings. As indicated, the dilution effect i attributable to flotation costs has averaged about negative 0.05 percent. '[( That is, investors that bought stock from those issues increased the NBV per share for all stockholders by as much as $0.0G per share. For TU, this _-,_.._._..__._____.__,__-..-_._._,_.-__2.___.__-_
.i 38 i contribution resulted in only n 0.33 per-cent increase in the NBV per share. Of course, this negative dilution is possible only if the market-to-book is greater than 1.0 a condition that no longer exists. For all of the issues, the effects of all issuance expenses on -NBV, are less th n 1.0 percent and certainly not very significant. ~ Q. Please explain the market pressure argument. A. Market pressure is the purported drop in price that occurs when new issues are placed in the market because of the sudden excess supply of a particular security. If this market pressure exists, the effect would be tc push the ~ market price below book value and the sale of additional shares would have a dilutive impact similar to that described previously. An extensiv6 study (M. Scholes, "The Market for Securities: Substitution Versus Price Pressure and the Effects of Information of Share Prices," Journal of Business. April { 1972) has indicated that any market pressure associated with the issuance of l additional common stock is negligible, and that the security markets are capable of absorbing new securities without abnormal price responses. Q. Since flotation costs and market pressure appear to be insignificant factors in diluting existing common equity, what reason is there for adjusting the cost i l of equity? l A. As mentioned, a market-to-book ratio less than one can be brought about by an increase in the cost of equity over time; or alternatively, by fluctuations in Texas Utilities' stock price attributable to changing interest rates and market movements in general. In order to reduce the likelihood (in light of Texas Utilitics' recent experience, obviously not eliminate the possibility) of l the Company having.to issue new stock at below book value, a cushion to partially absorb market fluctuations seems appropriate. This essentially gives
\\ 39 Texas Utilities something better than an even chance to sell additional equity without diluting existing shareholders' interests a fair exchange since the Company is expected to continuously meet its service obligations to consumers. j Q. What is an appropriate market-to-book ratio? ~ A. While selecting any target market-to-book ratio is arbitrary, a ten percent cushion for a company such as Texas Utilities seems adequate. This means that the Company's market price must drop approximately ten percent before Texas Utilities is in a potential dilutive situation. Equally important, because Texas Utilities' actual Beta - the responsiveness of its stock price to changes in the market as a whole - is approximately.75 on average it would take over a 12 percent decline in general market levels to cause the Company's market price to fall below book. Considering the Texas Utilities System's financial t { strength, a ten percent market-to-book adjustment seems to be a sufficient cushion to provide additional financing flexibility and largely protect existing shareholders against possible dilutive effects resulting from new issues of common stock. Q. Ilow rjo you compute the amount of the adjustment necessary to ' achieve a l target market-to-book ratio? j A. As explained earlier, if a market determined cost of equity is applied to ( l accounting numbers, then price will be forced to book value. Assuming that th DCF model of valuation explained in the previous section is a fair Jes cription of the pricing mechanism for Texas Utilities' stock, then allowing i the Company only its cost of equity, k, will result in market price (P) l equalling book value (B): I D {k P=B= l \\ L
40 If market price is to be equal to some target multiple of book value (al/B), then the price of the stock can be expressed as: D P = B (31/B) = - I x* g (.'1/B) Solving fur k*, the return necessary to encourage a target market-to-book ratio, results in the following (details of this computation are shown on page 4 of Exhibit JWK-9): D k*= (S!/B) + g Therefc e, the adjustment to the cost of equity required to encourage a target market-to-book ratio is equal to the company's dividend yield times the desired cushicn. Q. What adjustment, then, would be required to achieve a market-to-book ratio of 1.1 ? ( A. Since the Company's dividend yield is currently expected to be about 10.0 percent, if it were deemed appropriate for Texas Utilities' market price to sell 10 percent above book value, increasing the cost of equity by 100 bas.'s points should be sufficient to encourage a ma-ket-to-book ratio of approximately 1.1. The resulting recommended return on equity for TU is 15.25 to 15.75 percent. (s
41 IV. RETURN TO EOUlTY Ol' TEXAS POWER-AND LIGIIT I h_. Q. You have indicated that the cost of equity to the Teas Utilitics System is in the 14.25 to 14.75 percent range. Ilow does this range relate to Texas Power and Light Company's cost of equity? 8 So far, my analysis has only focused on identifying the average cost of equity A. ~ capital to the Texas Utilities System given the consolidated company's composite risk. It is important' to recognize, however, that the total risk of Texas Utilitics is comprised of the individual risks of the various parts of the System. In other words, when investors evaluate the risk of investing in Texas Utilities' stock, they look at the various components and activities included in the total holding company portfolio. After evaluating the ' level of risk attributable to each part of the System and weighing its relative proportion, an assessment of Texas Utilitics' overall risk is made. i h Q. Would you please elaborate on this? 1 A. The Texas Utilities System is essentially made up of eight parts: the three operating companies, Texas Electric Service Company, Dallas Power and Light Company, and Texas Power and Light Company; the three service companies, Texas Utilities Generating Company, Texas Utilities Service Inc., and Texas Utilities Fuel Company; and the two unregulated subsidiaries, Chaco Energy Company and Basic Resources, Inc. Many of the functions of these entities are similar cnd related, but each has different operating and financial characteristics and, consequently, varying levels of risk. For example, the risks of Chaco and Basic, which are involved in the develop-ment, acquisition, production, and delivery of fuels and alternative energy sources, are significantly greater than those of TUGCO, whose primnry function is as an ngent in the operation of jointly-owned generating stations. h In the same vein, the three operating companies, DP&L, TESCO, and TP&L, d
42 { each have different risks although not as extreme as those between Chaeo/Dasic and TUGCO. Nevertheless, the total risk of the Texas Utilities System, which has been examined previously in the determination of an overall cost of equity, is a combination of the individual risks of these various i compenents. Q. Ilow does this affect the cost of equity assigned to each component? A. To the extent that the various parts of the Texas Utilities System have varyin; levels of risk, the cost of equity capital assigned to each component should be adjusted upward or downward from the System average aceceding to the risk that it contributes to the holding company in total. This is consistent with the principle of identifying the costs of a resource, in this case, equity funds, used in providing service and allocating these correctly. The issue is not one of fairnest to Texas Utilities but rather, one of equity among ( consumers. Ratepayers should be responsible for the costs incurred in serving them and should not subsidize or be subsidized by customers in other service areas or other parts of the System. Considering the amount of capital invested to serve each customer, this is a nontrivial matter. Q. Ilow do the relative risks of the various Texas Utilities subsidiaries compare? A. TUGCO and TUFCO are nominally wholly debt-financed, and because TUSIis a service group, the equity investment in it verges on being inconsequential Moreover, at the present time, Chaco and Basic comprise only a relatively insignificant portion of the System's assets. Therefore, the realissue centers on the relative risks of the three operating companies, DP&L, TESCO, and TP&L. I am of the opinion that while the three operating subsidiaries' risks l are somewhnt similar, they are not identical. Flowever, the differences are i not of a sufficient mcgnitude to warrant assigning different costs of equity to each company at this time.
j 43 Q. Ilow did you arrive at this conclusion? A. I have examined each of the three companies' operating traits, financial position, earnings history, service areas and customer mixes, construction programs, and so on to evaluate the subsidiaries' relative risks. Since the companies share many common characteristics through their ties to Texas ~ Utilitics, all three operate in essentially the same regulatory environment,- I and there are no overriding factors which create significant distinctions i between the companies;I can find no reason to assign a cost of equity to any operating company. Q. What, then, is your recommendation as to a fair return on the equity capital I invested in Texas Power and Light' Company? ~ 1 l A. Considering the fairly equal risk of TP&L to the entire Texas Utilities System, I believe that the Company's cost of equity is in the same range of l(. 14.25 to 14.75 percent cost of equity range estimated for the Texas Utilities i System as a whole. In light of the continuing construction program facing TP&L and the corresponding need to raise external equity through the Parent j I to finance these expenditures, I feel that an adjustment to encourage a i l market-to-book ratio greater than one is warranted. Because of the financial strength of TP&L and the flexibility afforded by its association with Texas Utilities, adjusting the cost of equity to encourage a market-to-book ratio of 110 percent should help provide protection against potential dilutive sales of new common stock. Consequently, combining a 100 basis point market-to-book adjustment with the mid-range of my es*imate of Texas Utilities' cost of equity, I would recommend that a return of approximately 15.50 percent be authorized on the equity capital invested in Texas Power and Light Company. i{ 4
44 i V. COMPOSITE RATE OF RETURN Q. llave you examined the test year capital structure proposed by TP&L? i A. Yes, I have. The Company has proposec a capital structure composed essentially of 46.7 percent long-term debt,12.3 percent preferred stock, and 41.0 percent common equity. This comparcs to a September 30,1979 ~ j capitalization for Texas Utilitics of 48.6 percent debt,11.7 percent preferred 4 stock, and 39.6 percent common equity. Thus, at the end of the test year, TP&L was strong in equity compared to the entire System, to TP&L's recent past (Exhibit JWK-10, page 1 of 2), and to the 100 electric utilities shown in Exhibit JWK-10, page 2 of 2. Q. W Ke C. p.ny preposed any a4Jasimenf s to Ns fesi ycar carnal sfractu re ? i A. Yes, it has. First of all, the company has included the sale of $50 million of i pollution control bonds which were sold through the Brazos River Authority. 1 Second, the Company has also included $50 million for the sale of stock to l Texas Utilitics. Even though these sales occur outside of the.est year, the i funds have already been received by the Company. Therefore, I have considered these adjustments to properly be classified as known and measurable changes and have included them in the final recommended capital i structure. l l Q. Ilave any other adjustments been made in the capital structure? l A. The Company has also made an adjustment in all sources of capital for the exclusion of 82.5G9% of Sandow Onit #4. Since this portion of the plant is dedicated solely to one industrial customer, and the capital costs are i recovered from this customcc, this treatment also seems quite proper and 1 have included this adjustment in my capital structure. j Q. llave you made any adjustments to the proposed capital structure? A. Yes, I have also seperated the short-term debt outstanding at the end of the ,(' lV test year in the amount of $1,879,553 from the long-term debt component and 4 included the shortterm debt as a seperate item. i {
45 Q. Ilow have you approached the problem of assigning a return on TP&L's accumulated deferred investment tax credits? A. In assigning a return to the cost-free funds, I have followed the past practices of the Commission and the ruling of the Internal Revenue Service. The return for TP&L's accumulated deferred tax credits has been set at the composite cost of '_Inpital. Q. Would you please summarize your recommended overall rate of return to Texas Power and Light Company? A. As shown in Exhibit JWK-12, I recommend that the overall rate of return to be applied to the original cost of TP&L's invested capital be 10.91 percent. This represents a return of 9.04 percent on the adjusted value of -TP&L's invested capital. (. i
t 46 1 I VI. FIN ANCIAL INTEGillTY AND ADEOUACY 4 i Q. Please explain the purpose of this section. A. This section will examine various criteria which investors consider when cvaluating a company's overall financial strength and position., The purpose of this discussion is to provide an indication of the levels of alternative adequacy measures necessary for a company to realize so as to maintain its financial integrity and investor appeal. Through this process, I have established some general guidelines applicable to the test year for Ms. Blumenthal's use in making a determination as to the amount of construction work in progress (CWIP) to include in TP&L's rate base. Finally, the Staff's recommendation will be analyzed in an effort to ensure that TP&L's financial integrity can be maintained on a prospective basis. 4 Q. What types of things are usually evaluated by investors when they analyze the ( financial strength and position of a company? A. A variety of factors are considered by investors-some quantifiable and others more judgemental-when they assess the financial position and prospects of a particular utility. While equity investors are typically more conectned with some indicators and creditors more interested in others, all measures of adequacy are of some concern to both categories of investors since they are reflective of the general health of the company. As mentioned, many of the things that investors evaluate are nonquantifiable, such as management quality, regulatory climate, social and political environments, fuel supplies, etc., but there are a number of factors that can l be reduced to numbers or ratios and are often quoted as being indicative of financial integrity or the lack of it. These typically include such ratios as the i percent of common carnings attributable to allowance for funds used during ' ( construction (AFUDC), cash flow coverage of dividends, pre-tax interest
- 47 coverage ratios (including and excluding AFUDC), and the percent of cash needs generated internally. Other measures of quality typically include the market-to-book ratio, capitalization ratios, return on equity, etc., which have been discussed elsewhere in this testimony and will not be dwelled upon again. Q. What financial indicators do equity investors usually look at? A. Besides the level of carnings as reflected in -the return on equity, equity investors also focus heavily on the quality of a utility's earnings. In other words, investors are concerned not only with the magnitude of reported earnings but also with whether these profits are backed-up with adequate cash flow to pay current dividends and finance a part of the company's expansion needs. If a company's earnings are considered of poor quality (i.e., a significant portion is noncash, current expenses are deferred, depreciation rates are low, the relationship between actual and reported taxes is high, {. etc.), future returns are perceived to be less certain and the company to be riskier; consequently, investors demand a higher rate of return and are more wary of purchasing shares. Those measures typically considered as being most reflective of a company's quality of earnings and its relative safety of dividends are internal cash generation as a percent of total cash needs, cash coverage of dividends, and AFUDC as a percent of income available for com m on. Q. What are typical levels of internal cash generation and dividend coverage? A. Exhibit JWK-12, page 1, shows the level of internal cash generation for 100 clectric utilities projected for 1980 through 1982 as well as those companies' dividend coverages for 1977, 1978 and the first ' half of 1979. While the internal cash generation percentages will obviously vary widely among these utilities depending, in part, upon the size of each utility's construction budget ( relative to its existing capitalization and also its level and quality of
48 carnings, the industry mean is projected to be in the vicinity of 49 percent. The median of the cash coverage of dividends for the 100 utilities was approximately 2.8 times. This ratio is heavily influenced by the company's payout ratio and capital structure which cause the coverages to vary considerably. ~ Q. Please explain allowance for funds used during construction. A. The practice of capitalizing interest - charging an allowance for funds used during construction to plant and crediting income for an equal amount-results in a unique situation for public utility companies. The AFUDC credit does not give rise to present cash flows but, rather, a claim to future Consequently, many investors consider AFUDC earnings to be revenues. somewhat inferior to income from operating revenues. The certainty of the investor receiving these carnings is somewhat diminished since they cannot be { used to pay current dividends. While the exact extent to.which common ~ stockholders are concerned with the level of AFUDC in earnings is uncertain, the percentage of net income attributable to the noncash AFUDC can definitely become excessive. An additional element of risk is thereby introduced which will ultimately affect the company's cost of equity and may. ultimately interfere with future sales of additional equity. In Exhibit JWK-10, the percentage of net income attributable to AFUDC for 100 electric utility companies during the first half of 1979 has been reproduced. Again, it is apparent that the ratio of noncash to total earnings varies significantly within this sample, but the median level is 37 percent. During major construction phases, a larger percentage of AFUDC to earnings tends to be acceptable since investors are aware that this is largely a temporary situation. That is, as construction tapers off so that expenditures level out in ( relation to capitalization and regulatory proceedings recognize plants coming
49 6 in-line, these postponed AFUDC earnings will be realized as cash. The acceptable limiting percent of AFUDC to net income can vary from company to company depending upon other quality indicators, the overall strength of the utility in question, payout ratios, etc. before the utility's health is adversely affected. If the percentage begins to become too large, though, I believe that investors can become quite skeptical of the financialintegrity of the company, especially if the company maintains a high dividend payout ratio. At this point, the utility's financial health begins to be questioned and, if the AFUDC level is not corrected, its financial integrity can become seriously jeopardized to the detriment of not only the investors but also the customers in the long run. Q. What do bondholders consider when analyzing a company? A. Fixed income investors, like stockholders, consider many factors when evaluating the quality of a company's debt. However, the most visible and quantifiable measures that are typically cited as being indicative of creditworthiness are interest coverage ratios, or the margin of earnings (and associated taxes) in execss of what is needed to meet interest payments. The most frequently analyzed credit indientor is the pre-tax interest coverage ratio. The columns labeled (A) in Exhibit JWK-13, illustrate this coverage ratio for most of the electric utilities in the country classified by bond ratings. As.shown, the pre-tax coverages realized in the recent past have varied substantially within a rating class. A second measure of creditworthiness that has gained increased acceptance and importance is the pre-tax coveraga ratio excluding AFUDC. Since the allowance for funds used during construction does not represent cash available to meet interest charges, this measure provides a better indication of the actual cash Q protection afforded bondholders. Exhibit JWK-13 also contains coverage
50 ratios computed in thir manner under the column heading (B). Again, there is substantial variabili: umong companics within rating categories. Q. Would you please summarize this discussion? A. Investors co 1. many factors when evaluating the financial strength of a firm, many of which are nonquantifiable. For erample, TP&L's policy of accounting for deferred taxes and investment. tax credits on a normalized basis contributes to the quality of the Company's earnings as does its relatively thick equity ratio. Moreover, the quality of management, the regulatory climate, and the economic-social-political environment within which TP&L operates favorably affect investors' assessment of the financial health of the Company. Similarly, while TP&L's general level of return on equity may need improving somewhat and even in spite of its Parent's recently deteriorating market-to-book ratio (Exhibit JWK-13), the Company { still compares favorably with the industry and is viewed positively by investors. Besides these considerations, there are a variety of other ratios which are usefulin analyzing TP&L's financial stature from both stockholders' i and creditors' standpoints. This section has attempted to identify the most l important of these which, in turn, provide a means by which the adequacy of the Staff's recommendation can be compared so as to ensure the maintenance of TP&L's financial integrity. Q. What is the financial outlook for Texas Power and Light Company? A. TP&L's financial prospects appear to be improving. The massive construction phase to convert to alternate fuels is largely behind the Company with annual capital expenditures projected for 1980 and 1981 being less than those experienced in the 1978 to 1979 period. Moreover, TP&L's need to raise j external funds should become more manageable in the near _ term due to the j (' scaling down of construction. Probably most important is that the Comanche ..~
51 n, Peak Unit No.1 is less than two years away from coming on-line in Fall 1981. l Because of the substantial investment in this generating station, I would expect the Company to return to the Commission for rate relief to include the nuclear unit in the rate base in the coming 18 to 21 months. Consequently, the rates authorized in this proceeding will, in a11 likelihood, only need to be sufficient for that period of time. Furthermore, during this 18 to 21 month interval, no other extraordinary events are anticipated which merit special consideration. Q. Ms. Blumenthal has requested that you provide her with some guidelines upon i which to base her construction work in progress (CWIP) decision. What have you provided her? ~ A. In response to Ms. Blumenthal's request, I suggested that she consider those 4 financial integrity factors most critically affected by the CWIP inclusion- {m exclusion decision: pre-tax interest coverage excluding AFUDC, AFUDC as a percent of income available to common, and internal cash generation. In arriving at the guidelines to be used with test year data, I took into acecant TP&L's expected growth in sales, the magnitude of its construction program relative to the Company's size, and other factors. Considering the target levels to be realized prospectively, I judgementally factored these back to test year levels. Based upon Texas Power and Light Company's present circumstances, I suggested the following test year parameters as guides to Ms. Blumenthal for determining a level of CWIP: a) AFUDC should be no more than 20 percent of income available to j comm on. b) Pre-tax interest coverage, excluding AFUDC and including affiliate l interest, should be in the range of 3.75 to 4.'?S times. i[ c) Internally generated cash should be no less than 40 percent and no more than 60 percent. 4 r-,, -3,,,- .-w, , -, -..--,y-- -,-.,.,----,,,.-.w,-.,-..,-,-mey- ,p.,- ,-,,-,,.,,,,-,r,,,--,-,,.,.,--.---..-,..,...---=,,.~m,.-.o-- 7.-.,...-,_c.<9 ,,,yo,
52 Q. Arc the test year guidelines that you have provided to Ms. Blumenthal {. applienble to all companies? A. Definitely not, financial integrity is a prospective concept unique to each company taking into account its outlook and future needs. The test year guidelines that I have suggested for TP&L are company-specific and consider that particular utility's current financial and operating characteristics and trends. Because of differences in service areas, load requirements, construction plans, customer mix, etc., this set of guidelines is not appropriate for even all of the Texas Utilities Companies or much less for all electric utilities. In addition, I should stress that these guidelines are merely rules-of-thumb; The final determination of the recommended level of CWIP is based on a judgemental analysis of prospective ratios. Q. Based upon these guidelines, Ms. Blumenthal has included 40 percent of TP&L's CWIP in the Company's rate base. Do you feel that this level is adequate to maintain the Company's financialintegrity over the expected life of the rates? A. Yes, I do. While I recognize that the test year indicators will deteriorate going forward, there seems to be an adequate cushion built into the Staff's recommended rates to account for this. The modest grov;th in revenues expected over the next year should be sufficient to offset any increases in operation and maintenance expenses. In fact, assuming all other costs of service remain constant, a twelve percent increase in expenses can be offset by a 3.0 percent increase in base rate revenues and still produce the same dollars of return. Internal cash generation should be more than ample ever the next 18 to 21 months. Finally, taking into account the construction programs for 1979,1980, and 1981, the level of AFI'DC to net income does not appear to become so excessive so as to jeopardize the Company's financial health prior to the filing for additior.11 rate relief. This is shown in I4 Exhibit JWK-}6 where the ratios of AFUDC as a percent of net income have
53 been estimated for the test year,1980, and part of 1981. As indicated there, the AFUDC level approaches 17.4 percent in the test year, 21 percent in 1980, and 23.4 percent by the third quarter of 1981. Finally, in all cases, there is sufficient cash return to meet dividend payout i ratios. For these reasons, the Staff's recommendation seems sufficient to maintain Texas Power and Light Company's financial integrity until rate relief is sought again. Q. You mentioned a 3.2 % growth in base rate revenues. Have you tested the reasonableness of this number? A. Yes, I have. Exhibit JWK-15 shows the annual growth rates for number of customers, kwh sales, and kw demand over the last five years. The average annual growth rates range from 3.96% to 8.34%. These results tend to indicate that all of the determinants of base rate revenues (demand charge - i kw demand, customer charge - number of customers, and energy charge - kwh sales) will all grow by more than 3.2%. Therefore, a 3.2% growth in base rate i revenues is probably quite conservative and contributes to an under-estimate of the future levels of all of the adequacy measures. i Q. Referring to Exhibit JWK-14, would you please identify the time periods indicated for the column headings? A. The heading TP refers to the test period. 1980 and 1981 represent the four I I quarters ending September 30,1980 and 198Jrrespectively. Q. Ilow was the return component determined? A. The test period returns was from Ms. Blumenthal's testimony.1980 and 1981 returns are the result of the following: increased interest expenses from an assumed bond sale ($100,000,000 @ 12%) in the second quarter of fiscal year 1980 and 2) increased quarterly depreciation expense from new plant going (- on-line (per Schedule C-4 of the Rate Filing Package).
= 54 Q. Did you assume any other changes in long-term capitalization besides the bond rale? A. Yes, consistent with the Company's past financing experiences, I assumed a preferred stock sale ($30,000,000 @ 10%) in the Third quarter of fiscal year 1980 and a common stock sale (2,000,000 shares) in the first quarter of fiscal year 1981. Q. Ilow did you determine the common stock dividends? A. First of all, I determined the number of shares represented by common equity in the capital structure by dividing $792,074,899 by the net book value of $24.83. Consistent with the average quarterly dividend paid by TP&L (Schedule H-2, page 1 of 2), the following dividend rates were developed: IV.1978 $ 0.48 I. 1979 0.51 II. 1979 0.51 Ill 1979 0.50 ( IV,1979 0.44 1. 1980 0.50 II. 1980 0.50 Ill 1980 0.50 IV.1980 0.50 1. 1981 0.51 II. 1981 0.51 IIL 1981 0.51 IV.1981 0.51 From this chart, it is evident that the 1979 dividends total $1.96 and increase $0.04 per year through 1981. This same trend is shown in Schedule H-2, page 1 of 2. Q. Why did you not use the outstanding number of shares in Schedule II-2? A. I have attempted to exclude those shares which represent investment in 82.5G9% of Sandow #4. Q. liow did you determine the Investment Tax Credits? A. For the test period, I used the ITC amount from Ms. Blumenthal's testimony. { For the '980 column, I took 10% of the sum of one-fourth of 1979 actual not construction (total construction less AFUDC, nuclear fuel, and the dedicated portion of Sandow #4) and three-fourths of the 1980 projected - net
55 construction. The same relationship of 1980 and 1981 net constructions was used for developing the 1981 ITC figure. Q. Did you use the above construction figures in the determination of cash generation? i A. No, to the above construction amounts, I added back nuclear fuel.- Q. Please explain how you calculated AFUDC. j A. For the test period, the total booked CWIP (after excluding 82.5G9% of Sandow #4) was multiplied l'; 60% From this amount $11,423,582, which represents all projects under $100,000, was subtracted. The resulting figure was multiplied by 8E Since the Company has started compounding semiannually, the effective annual rate is 8.16% or 2.04% per quarter: Thus, i each quarter's cumulative AFUDC was calculated according to the following equation: i AFUDC AFUDCt-1 + (0.0204) (0.5) (quarterly construction - t new plant on-hne)t-1 + (0.0204)(0.5)(quarterly construction - new plant on-line)t where t is the quarterly time period. Q. What quarterly construction amounts did you use? A. The quarterly construction amounts were one-fourth of the total construction I for the fiscal year less AFUDC, nuclear fuel, Sandow #4, and all projects less than $100,000. Q. Why did you exclude all projects less.than $100,000? A. In the pot-of-dollars approach used by the company for determining AFUDC, the amount of CWIP allowed in the last rate case (the " pot-of-dollars") is subtracted from total booked CWIP. The resulting net CWIP accrues AFUDC and these accruals are allocated to projects over $100,000. The composition of the pot-of-dollars is implicitly or explicitly based on one of the following:
- 1) all projects less than $100,000, 2) all projects over $100,000, and 3) some combination of both. Since the company does not allocate AFUDC accruals
- - - ~ - - ~ - - --'
_ -. ~ - w_ 56 to projects less than $100,000, logie dictates that these projects should not h'. accrue AFUDC. Therefore, the company's methodology implicitly included j projects less than $100,000 as the first component of the pot-ofdollars with the remaining component being large projects. In my calculation of AFUDC, I have explicitly established the pot-of-dollars as being composed of large projects. Projects less than $100,000 (and 90 days) should not accrue AFUDC and therefore are excluded before AFUDC is determined. This methodology I tends to produce a lower AFUDC amount than would result under the Company's methodology. Q. Why do you think it is important to make this designation as to the i i composition of CWIP in the rate base? A. First of all, as I stated above, reported AFUDC for the company is lowered. i Second, this treatment is consistent with the reason CWIP is included in the rate base-fincncial integrity. Financial integrity' of the utility industry, including that in Texas, is of concern not because of small, relatively inexpensive and quick projects that have minimal carrying costs and can 1 quickly become revenue-producing; but rather, because of large, very expensive and lengthly projects that have huge carrying costs and can not become revenue-producing for up to years. Therefore, it is only reasonable to - include the necessary amount of these latter projects in the rate base to protect the financial integrity of.the company. Finally, I feel it.is in the long-range best interest of the ratepayers to minimize AFUDC by ensuring not only that small projects do not accrue unnecessary AFUDC but also that j small projects do not allow for unnecessary accrual of ^FUDC on large 4 projects. i I 4 h-e-u--seru+ "-m., g p. -g---y --ww-ew 9m,-q-iq mi m q w-a-g--TM'M"*P*' 'T7#"N"P"*'
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57 Q. Would you please summarize your overall approach to considering the CWIP/AFUDC trade-off. A. Stated simply, I am proposing a composition for the " pot of dollars" but am not proposing that those dollars be traced on a project-by-project basis. The pot of dollars should represent only those projects which would otherviise accrue AFUDC under the Company's policy for accruing AFUDC. Dollars representing non-AFUDC accruing projects, such as projects less than $100,000 and nuclearfuel, should g be considered as being part of the pot of dollars. f i' l 1
58 VII. SilORT TERM INTEREST RATES Q. llave you reviewed Texas Utilitics proposed method of charging short-term interest rates to TUGCO and TUFCO which would be borne by TP&L's ratepayers through its fuel clause? A. Yec, I have reviewed the proposed methodology. Considering the currently widely gyrating capital markets, I think any fixed short-term rate is not feasible. A fixed rate that is above prevailing short-term interest rates unfairly over-compensates the stockholders at the expense of the ratepayers. On the other hand, a fixed rate that is below prevailing short-term interest rates, such as the case today, does not allow the company to fully recover its costs. For example, as shown in Schedule H-5, page 5 of 5, Texas Utilities' weighted average cost of notes payable is 11.674% or 2.174% greater than the currently charged 9.5%. Schedule H-5, page 5 of 5 also shows how these rates { have varied from 10.521% to 12.210% in less than two months. Therefore, a daily floating short-term interest rate charged by Texas Utilities to TUGCO i and TUFCO (collected through TP&L's fuel clause) seems the most fair and equitable method of recovering these costs. Q. Do you have any other comments about the short-term debt of Texas Utilitics and TP&L? A. One final concern I have about short-term debt is the apparent extent to which short. term cash requirements and availabilities are co-ordinated within the TU System. At the present time, the operating companics seem to be meeting their short-term cash requirements and investing excess cash independently of each other. Coordinated cash management through a type 1 of brokerage management within the TU System which would minimize contact with outside money markets might provide some cost savings for the (~ Texas Utilitics operating companics. To this end, I recommend that TP&L, in L I _._.m .,,.w., ,,,_,,y _____,.y__ ...,_-m__-,y__, -_-y ,-.,.,y,,,.,-_ ,.y .,.o_,
59 concert with Texas Utilities Company, investigate the possible cost savings that could be realized by alternative cash management policies, includig an internal brokerage management, within the Texas Utilities System. Q. Would you please elaborate on the type of arrangement you envision? A. A possible scenario might involve a money brokerage arrangement where the broker provides funds to an operating company fr,om surplus funds available to the broker from eash - rich sister operating companies. If no sister operating companies has any excess cash, TU corporate funds might be the next alternative. The final alternative would be short-term borrowings outside of the TU System. Interest rates for intra-System borrowings could be tied to commercial papet rates or the prevailing prime rate. ( l e l l l h 1 l l l
j 60 Vill CONCLUSIONS AND SUMM ARY OF RECOMMENDATIONS Q. Would you briefly recapitulate the major points discussed in your testimony? ^ A. The major issues in my testimony have centered around specifying a fair value mix, determining a fair rate of return on Texas Power and Light Company's invested equity capital, computing a composite rate of return, and l evaluating the adequacy of the Staff's proposed cost of service. The 1 conclusions that I have reached on the various issues are summarized below: 1 i -A fair mix upon which to determine the adjusted value of invested capital is 36.25 percent net current cost and 63.75 percent net original cost (Exhibit JWK-1). -The capital markets have undergone significant shifts over the last 12 months with investors requiring higher yields to induce them to make investments. The net effect of this on the Texas Utilitier System has been that the market price of the Company's common stock is now consistently selling below its book value. In light of this, it seems apparent that the returns authorized the Texas Utilitics System in the past are no longer adequate, and they must ( be revised to reflect current economic conditions (Exhibit JWK-2.) -Because Texas Utilities continues to be one of the least risky electrie utilities in the country, the return required by investors from the Company is less than that demanded from most other companies in the industry and other firms in general. Based upon my analysis, I believe Texas Utilitics' cost of equity to now be between 14.25 and 14.75 percent (Exhibit JWK-8). -If a market-to-book ratio greater than one is to be sought, only l the dividend yield portion of total return need be adjusted. Thus, j to enecurage Texas Utilitics' common stock to sell at approxi- { mately 110 percent of book value, a 100 basis point upward adjustment to the cost of equity is appropriate (Exhibit JWK-9). -In light of the continuing construction program facing TP&L and the corresponding probability of having to raise additional equity capital, I feel that a market-to-book adjustment of 110 percent is warranted. Combining the 100 basis point market-to-book j adjustment with the estimated cost of equity to the Company of 14.5 percent results in a fair rate of return to the equity invested in TP&L of approximately 15.50 percent.- -Based upon a return to equity of 15.50 percent, I feel that a composite rate of return of 10.91 percent should be applied to TP&L's invested capital (Exhibit JWK-12). This represents an 9.05 (~ percent return on the adjusted value of the Company's invested capital (Exhibit JWK-12). 1
G1 CT. -Based upon an analysis of the financial circumstances facing TP&L between now and when the Company will likely scck rate relief again, I believe that the Staff's proposed revenue requirements are sufficient to maintain the financial health of TP&L and that the Company's financial integrity will not be jeopardized (Exhibit J W li-16). Q. Does this conclude your direct testimony in this case? A. Yes, it does. O 9 ib e L f, (
PMAG-UTIE4T-Y-GO4aiESI(W O TEX AS Exhibit JWK-1 T'"' *.S-POWER-AND-IAGHT GOMP 'J:'.' DERi W 4G:4-O r..... - u. i -rent. v.. iv;.. .... c AL ":rL *. TION iw n-r* r.wrs+. -.. a r.= . u strror. a. 3 -> c . a...= . vsH }., d G i LiI V. i'*tt*tta l J ~ 40?5 i - Proportion Net Current Cost Investment .......................g59......................'. 12 % uetiation Dio inflation 127a AnnualInflation/ Deflation Rate The mix between net current cost invested capital and original cost invested capital has been determined so that the statutory liraits for inclusion of net current cost coineices with historical experience. Over the 33-year period from 1946 to 1973, the most extreme inflatien or deflation rate was the 11.8 percent inflation in 1947; therefore,12 percent has been selected as the outside limits. These boundaries have been linearly connected with the origin under the presumption that, in the absence of either inflation or deflation, the invested capital mix should reflect 25 percent net current cost and 75 percent net original cost. For each additional percent of inflation o-deflation, an incremental 1.25 percent of net current cost should be included in the invested capital mix. The relationship between the proportion of net current cost investment included in the mix and the annual inflation / deflation rate can be expressed as: Y = 0.25 + 1.25 X where: Y = proportion of net current cost investment X = annualinflation/ deflation rate (:( ,r
PUBIAC U-TILI@Y-GOW11SSION-OF TEM AS Exhibit JWK-1 f (- Page 2 of 2 T4X-AS-PGWE41-AND-LIGHT CO?! PAN-Y MIN-OF-NL-t-wiiit& AL coa.iai;..L i L t didNT COST 4F lieth:resia+sntw+rsd L..u. . un ci,Gd 1940 Annual Proportion - Proportion Percentage of Net of Net Year --Change - (a) Gweent Cost Oriainal-Gost 1979(b) 9.0?6 3G.25?6 63.75?6 1978 8.3% 35.375?6 64.625?6 1977 6.1% 32.625?6 67.375?6 1 1976 4.7% 30.875?6 69.125?6 1975 7.5?6 34.37596 65.625?6 1974 11.0?6 38.750?6 61.25096 1973 7.5?6 34.375?6 65.625?6 1972
- 3. 2%
29.000?6 71.00096 1971
- 4. 7?6 30.875?5 69.125?6 1970
- 5. 5%
31.875?6 68.125 % 1969
- 4. 8?6 31.00096 69.000?6 1968 4.0?6 30.000 %
70.000 % 1967
- 3. 2%
29.000?6 71.000?6 1966
- 2. 7?6 28.375?6 71.62596 7
1965
- 1. 9%
27.250?6 7.2.750?6 ( 1964
- 1. 4?6 26.750?6 73.250%
1963
- 1. 3%
26.625?6 73.37596 1962 1.1?6 26.375 % 73.625?6 19G1 1. 3 96 26.625?6 73.375?6 1960
- 1. 7%
27.12596 72.875?6 1959 1.6?6 27.000?6 73.00096 1958
- 2. 6%
28.250?6 71.750% 1957 3.7% 29.625?6 70.375 % l 1956 3.4?6 29.250?6 70.75096 l 1955
- 1. 5%
26.87596 73.125o6 i 1954 1.5?6 26.875?6 73.125?6 1953
- 0. 9%
26.125 % 73.875 % ~ l 1952
- 2. 2%
27.750?6 72.250% 1951 6.7% 33.375 % 66.625 % 1950
- 1. 4%
26.75096 73.25096 1949 -0.6% 25.750?6 74.250 % ( 1948
- 6. 7?6 33.375%
66.625 % 1947 11.8 % 39.750?6 60.250 % t 1946 11.7?6 30.62596 60.375 % l (a) Source for 194G-1972: Gross National Product Implicit Price Deflator as reported in the U.S. Department of Commerce's Suevew>f-Geent-Business. Source for 1973-1978: Gross National Produce Implicit Price Deflator for Year Ended December 31, 1978, as reported in the Federal Reserve Bank of St. Louis' il (,~ Netional-Economie4 rends. t (b) For the year ended September 30,1979. l
PUBLIC UTILITY COMMISSION OF TEXAS Exhibit JiiK-2 1 Page 1 of 2 TEXAS poi 1ER & LIC11T COMPANY MARKET LINES FOR PERE \\NENT CAPITAL 16 - 4 4 4 15 - O E 4 y 14 - X
- D y
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O O ', I - PLMLIC UT!!.ITY CO?Cf!SS10ti 0F TFXAS Exhibit JVK-2 TEXAS hL :R & f.!CTIT CO?trA?.T l' age 2 of 2 YIf!DS ON LONC-1rci ItDTRAL AND Puht.!C tJTILITY SECURITIES (1) Federal AAA AA A Baa as a bas c Line Date Securities (2) Bonds (3) Bonds (3) Bonds (3) Bonds (3) Pref. Stock (2) . Pref. Stock (2) Pref. Stock (2) A 7/30/79 8.88 9.44 9.77 10.08 10.52 8.96 9.49 10.34 8 2/15/79 8.96 9.53 9.74 9.81 10.22 9.03 9.52 10.32 C 9/27/79 9.18 9.72 10.06 10.42 11.05 9.60 10.34 10.97 D 12/17/79 10.08 10.99 11.56 11.91 12.62 10.68 11.42 12.63 E 2/13/80 11.76 12.47 12.90 13.39 14.12 11.20 12.27 13.09 e (1) Veckly average for week containing the date. (2) Tederal Reserve Bank of St. Louis. U.S. Finanef al Data. ( 3) Moody's Utility News Report.
( ,G A PUBLIC UTILITY CuttllISSI0110F TEXAS Exhibit JWK-3 Page 1 of 5 TEXAS POUER 3 LIGHT C0tiPArlf ItirLIED GROUTil RATES [A1 c 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1960 1967 1966 1965 1964 1963 RETENTION RATE (%) 40.16 41.67 12.36 38.61 48.62 48.26 48.72 44.83 45.78 44.37 40.74 42.42 41.46 40.8? 40.74 41.13 RETURN ON EQUITY (%) 12.95 12.91 13.03 12.11 13.89 14.11 15.09 14.73 15.37 15.28 14.88 15.43 15.38 15.31 15.43 16.11 I -ItiPLIED GROUTH l RATESt%)tB) 5.20 5.38 5.52 4.67 6.75 6.81 7.35-6.60 7.04 6.73 6.06 6.57 6.33 6.26 6.37 6.64 REALIZED RATE OF RETURN (%) 12.0 12.5 13.0 13.5 14.0 14.5 15.0 EARNINGS RETENTION RATIO (%) 32.0 3.8 4.0 4.2 4.3 4.5 4.6 4.8 34.0 4.1 4.3 4.4 4.6 4.0 4.9 5.1 36.0 4.3 4.5 4.7 4.9 5.0 5.2 5.4 38.0 4.6 4.8 4.9 5.1 5.3 5.5 5.7 l 40.0 4.8 5.0. 5.2 5.4 5.6 5'. 8 6.0 42.0 5.0 5.3 5.5 5.7 5.7 6.1 6.3. 44.0 5.3 5.5 5.7 5.9 6.2 6.4 6.6 ' i 46.0 5.5 5.8 6.0 6.2 6.4 6.7 6.9 EA) EXilIBIT JUK-3 FAGE 2 0F 5 EARNINGS RETENTION RATIO C0l1PUTED AS 100% LESS " DIVIDENDS DECLARED Otl C0Ht10tl STOCK, PERCENT OF HET INC0llE" ANI) REALIZED RETURN ON EQUITY BASED ON EARt!!NGS 0H AVERAGE BOOK VALUE. [B] PRODUCT OF EARNINGS RETENTI0il RATIO AND REALIZED RETURN ON EQUITY.
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s PUBIJC UTILITY CO?!'.!ISSIOP OF TEXAS Exhibit JWK-4 TMS-POWER ^.MD L!GIFF-GOAHM-N-Y eau s tr e h a uOed E (1 - b) ~ I"y ~ ' ' + (br + vs) k= where, k cost of equity = E = 1 expected earnings in next period b = expected earnings retention ratio P market price of common stock = expected realized return on common equity r = percent of funds from sale of new stock accruing to existing steekholders v = ratio of proceeds from new stock to existing book value s = TEY AS U'"! LEES CO31PANY E (1 - b) -g'" k= + (br + vs) P k = ' 1,9 -( rGI-) + (0.39 x 0.130) + (-0.0103 x 0.811) t2-8 '(- 216.au k = 0.101 + 0.042 l k = 0.143 or 14.3% l l $2.89 Average f analysts' forecasts, Exhibit JWK-4, page 2. E = l l b = .39 Extrapolation from Exhibit JWK-3, page 2 of 5. P = $17.50 Text of testimony. r = .130 Extrapolation from Exhibit JWK-3, page 2 of 5. v = .0103 . Net Proceeds ($16.88) less Book Value ($20.81) times New Shares (5,000,000) equals Total Dilution ($19,650,000) divided by product of Existing Shares (91,768,295) and Book Value ($20.81) equals Percent Dilution of Existing Shares (-1.03%). i .811 Proceeds New Stock ($16.88) divided by Book Value ($20.81). s = l i
FUniAC UT!I. TY CC'!'.iGSON OF TEX?.S Exhibit J'3K-4 4 Page 2 of 2 T.'"..~ '. " '.' u^ n* _ u... 2. 'n_ -I.JG~ 't~ 'v ' ' '. '. " '.' u g. y..... -.,. nt1.tcet t u. - C n.. :vt:s tr U.6-c.au; L1. t d.. .T [. I'
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.3 1980 'CT.nte Bache Halsey Stuart Shields $2.80 Rauscher Pierce Securities Corporation $2.80 Shearson Hayden Stone Inc. $3.00 Moc e & Schley, Cameren & Co. $2.90 Standard and Pocr's Corporation $2.93 1 Value Line $ o.a -..o Salomen B.es. AVERAGE 2M i Sources: Standard and Poor's Lerninn Fc ecc--ter Salomon Brother's E!:etri; Uti :..a;reacn. qualit c ^nd c--i.:; W'M-ine I i f I \\ l l 1 I [
e PUilLIC UTILITY COSMISSION OF TEXAS Exhibit A"tt-5 TEXAS POWER & LICilT COMPANY ~[ . SURVEY OF INVESTORS INOUIRING AS TO THEIR REOUIRED RATE OF RETURN Assum.ng that a coubse A. long term utahty bond current'y yietcs atout 9% %. the unehty commen stock for the same company would t,e attractne to you retaine to the cond at ats espected tetai return o as at seast to. m.v. w.re.., n,s. p w e.as.s so.aens = over19*h crer9CO 18-19 900 17 18 800 16-17 700 15-16 6CO 14 15 500 13-14 aco 12.t 3 300 11-12 200 uncer11 under 200 MOST INVE STC AS WOULO REOutAE A 14 7015% TOTAL RETURN CR E;0 B ASI5 POINTS CVER THE EOND ALTERNATIVE... Tew**va ps.he w Pe<c eu et a*soeaa*=,...* y,eg%,ee a .e. a.s. prew ? Il Over 19% Over900 0 *4 0.00 basis scints 13 19 900 845 m -d l 17 18 400 34*4 ~ 33 43 16-t 7 7CO 2% 13 33 4 15-16 E03 d 12 %
- 14.28 e
la i$ egg 48 % 238.10 13 la 400 25 % 91C5 = 12 13 300 1 7% 20 01 1112 000 1% 1.90 1,1% uNet I t .,noce
- 00 1.93 487 41 cases po.nts
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E _ 6 13 5 002 G _ 350 03 8 A _ K1 R _ 64 4 077 W E _ 1 1 1 Jf V. o A _. t i1 b i e h g ) xa 7 F _ EP 4 I. T 2 N E. 1 R. R. U. C _ L _ E _ D. 4 _ 0 894 99 4 0 394 O. 7 _ 3 0 073 54 7 1 06 S - 9 _ i t A. 1 6 876 432 0 653 ) l l E - R _ 1 1 1 T Y _ U _ N _ T F A _ E _ 0 _. P _ R _ t 1 0 _ D _ O _ C _ E _ 5 _ 0 1 55 1 55 0 1 55 I T _ 7 _ 4 344 706 0 780 S _ i _ C _ 9 _ S _ l E _ 1 6 856 41 2 7 523 1 Gi P _ 1 1 1 1 I _ X. t t L _ E. f 0 _ C _ 3 _ S _ I Y _ R _ S _ T _ E. Y _ I W _ L _ 4 _ 0 43 6 4D6 0 436 L _ O _ A _ 7 _ 1 934 04 l 5 6 4 89 I _ P _ l 9 _ T _ A. 1 7 764 53 3 8 44 4 U _ S _ l 1 1 1 A _ l C _ X _ U _ I _ E _ I L _ T _ l D _ El _ U _ R _ P _ P _ 7 _ 0 77 2 772 0 772 M _ 7 _ 3 765 098 2 076 S _ 9 _ I 1 7 756 523 8 645 R _ 1 1 1 8 _ 0 4 6 7 4 67 0 4 6 7 7 _ 1 289 39 0 9 4 01 9 _ 1 8 756 53 5 8 656 1 1 1 J 3 G B C [ ) ) ( Y f S T T J E E ) E I E I E A T ER C ER l ER U ER C A R A C R A l ] R A Q RA ) R A H ) A H i E A H E AH l HS HS U) [ HS HS ( iES ( ES D ) ES rES D T U R Y U R CC %U R GU R L ULRE T LRE I ) ( LRE LRE E O AEP I AEF L% nAEF T AEF I RVP UVP B ( UVP SVP Y G S Q S UD 1 S ')
- SD S
KS D E: SD PL 1 4S D rl 1 t D l E E T 0 l ll TOG l F0NE S I R0 ir D 1 Bl D l 0G : E E 0Gi 0 G!t i O l D OB! D T F B ! r l t t t f E E UB I D C i V T TP V bD i T RV R T R ' l I lf I Y HI E i l I F T R l V dEAI SEAI 0l SEAI I C1 ED GiED 0 9 I RE A i 1 l t D C E 1 1 R ! ED UNED t C
RISK F REMIUM ANAL YSIS-EXPECTED REIURN MODEL......C0ilTINUED FDOTil0 TES
=
[A] CCHPUTED AS DIVIDEllD IN YEAR T+1 DTVIDED BY AVERAGE PRICE IN YEAR T; RATE FILING PACKAGE SCttEDULE H-2 PAGE 2 0F 2. [B] GROUTli COMPUTED A6 THE AVERAGE OF THE COMPOUND GROUTH RATES FOR PRECEDING FIVE,TEll, AND FIFTEEN YEAR PERIOD'3 FOR Nf V,Ef%i'PS. [C] SUt1 0F DIVIDEND YIELD AND C0tiPOUND GROUTH RATES. [D] YIELD FCR T AS REPORTED BY N00Df'S INVESTORS SERVICE, INC. [E] DIFFERENCE BETUEEN COST OF EDUITY AND HOODY'S PUBLIC UTILITT BOND YIELD. [F] N00DY'S UTILITY NEUS REPORT., AVERAGE UEEK EtlDIllG FEBRUARY 13 1900.. [G3 SUM 0F AVERAGE PREHIUM [E] AtlD SPOT BOND YIELD EF3. 4 e S v a
PUP >hiG-U-TRITV-GOMMISSIGN-4F TEXAS Exhibit JWK-7 ( '. Page 1 of 3 TE&\\S-POWER-AND-LIGHT-GOMPAN-Y L u... .....r. u L,.it M M is... .L i dis EAM+r:ti-:Li L so-o 1 diar, e aAin dETA Goverinnee-witMiecke14Velue-bine-Adjusted Bets) ~ Adjusted _- - - Average -R e tum on-Book -Ecuity- - - - - - - - - - - - - Beta - - IW 4-4M8 IM9-lMis 1W 4-1-9,"I 0.40 - 0.60 16.0?6 14.4?6 14.8 % l 0.65 - 0.75 15.3?6 12.796 12.8?6 0.80 - 0.90 14.096 13.796 13.896 .95 - 1.05 15.196 14.996 14.4?6 1.10 - 1.20 14.5?6 15.2 % 14.9?6 1.25 - 1.35 15.296 15.596 16.4?6 1.40 - 1.50 13.5?6 13.596 15.196 1.55 - 1.75 12.0?6 13.996 13.0?6 Data not available TOTAL / AVERAGE 1-h-6 ?6 14A?6 14,4 % {, Note: Value-bme has assigned Texas Utilities Company a Beta of 0.85. e .y
PUlli:IC-U-TILITY CGWFISSION OI' TEN-A8 Exhibit JWK-7 ( Page 2 of 3 T E\\S-POW-ER-AND-LIGH-T CO?!P.1NY mv... innu t. 'i.d+istid.. iniS!6 EMinED.... v n.w c 1 n-t6n L L.ies--.%c c 6T.1E!hl-T>( Totel-Weiebilitu-(%+1ue-Line-Pelee-SteMiity Inde:d - Price Stability - - - - - - - Aversne -Re tum on-Book -Eauity- - - - - - - - - - - Index - 107 ETCs 19 tic - 1673 .195: 1973 100 - 90 14.2% 14.7 % 13.6 % 85 - 75 15.9% 15.5% 15.2 % 70 - 60 15.4% 15.8 % 15.5% 55 - 45 15.4% 15.2% 14.7 % 40 - 30 12.1 % 12.6% ' 13.6% 25 - 15 11.7 % 11.2 % 12.7 % 10 - 5 4.4% 6.7% 9.3% Data not available l TOTA L/ AVER AG E IM% W4% 14r5% Note: W14te-bine has assigned Texas Utilities Company a Price Stability Iadex of 95. 1 i 1 l l l l f..
.=- O PUBL4G-UTEI-T4Y-GGAE4ISSIO:: OF TEKAS Exhibit Jh'K-7 (> Page 3 of 3 TEM AS POW-ER AND LIC".T COMPANY Go.,.. i n - 2 0 05 L..;ter-,6 5....;L i dis E *.n'; et+-at., v.avo-st-=i...., n. u av.. u 1 IELBS ~ Moody's Average Return Composite Bond Veer ort Book-Ecuite - Yield -Averaoe - 1977 13.3 % 8.4% 1976 14.6 % 9.0% 1975 13.6?6 9.6% 1974 15.8 % 9.0% 1973 15.5% 7.8% 1972 13.8% 7.6% - 1971 13.196 '7.9% 1970 13.2% 8.5% 1969 14.8% 7.4% 1968 15.3 % 6.5?6 1967 15.5% 5.8% 1966 16.1?6 5.3% i 1965 15.3 % 4.6% 1964 14.4 %
- 4. 6?6 1963 13.1%
4.5% I I l e I l l I
o. PUiEIC '.'~"El'i"i CO"'*!SSIO" OF TE.XAS Exhibit JWK-8 ( Page1of1 - TE?'AS "OWER \\ND-LICIIT CO?!PANY SWW.v.. ur vedi ur c. Li; ;._; i.. '.T"S i Cost of Equity j EelsfieticMeehnieue - - -Estimate - - Discounted Cash Flow ^ h
- a. Rotention Growth 14.6_ -
15.c%
- b. Adjusted Historical Trend
- 14.5 -' 15.5 %
i i Projceted Earnings
- a. Investment Analyst Forecasts 14.3 %
i i Direct Inquiry
- a. - Mitchel Hutchins Survey 14.5 15.0%.
2 1 Bond Yield / Risk Premium
- a. Expectations Model 17.0 18.8 %
t t i Comparable Earnings [ i
- a. Adjusted Beta 13.6-
14.0 %
- b. Value Line Price Stability Index 13.2 - 15.6 %
~ -i Judgemental Conclusion 14.25 -' 14.75 % l f i f I 4 I l L ? r ? I, I \\ . - -. -. - -,.... ~, -..,. - _ _,., _. -. _.
f O 6 I i PUBLIG-UMIMY CO -!ISSIGN-OF-T-EL%S Exhibit JWK-9 C./, 'l L Page 1 of 2 TEX iS POWER A!!D LICIIT COMPANY i l>tbu-tto:, aiibrFts-UMe<e+rt-F.% f i January March May i 19"rG@Merine IMG-O#eemg 1977 Offering Pre-Issue NBV/ Share $20.14 $19.10 $18.09 i Post-Issue NBV/ Share $20.08 $19.14 $18.15 l Dilution l per Share $ 0.06 $ (0.04) $ (0.06) % Dilution ~ per Share 0.30 % (0.21)% (Cr.33)% i Cost of Issue 3.06 % 2.98 % 3.07 % 4 sc' ' j i I t
i l a e. (. P UB blG-U-TEI-T-Y-GOMMISSIGN-O F-TEXAS Exhibit JWK-9 Page 2 of 2 TENA8-PO'?EP. AND LICIIT-GOM4%N-Y DERI4%-thhvet..ulam+seen-49ev6T"ENT P = market price of common share ~ B = book value of common share M/B = target market price to book value ratio cost of equity ) k = k* = cost of equity adjusted to encourage a target market-to-book ratio D = 1 expected dividend per share in next period expected long-term growth g = D P = B = k -g 1 P = B (M/B) = (M/B) D " '1' ' (_ P = k+ g (M/B) D P - - -l- - = Ul/ d) k+ - g Pk* - Pg = D1 (M/B) Pk* = D1 (M/B) +-Pg .D.1.(.M./.B.)..+..P. g P D h (M/B) + g k* = 4
f, (% ^ . ~ PtfBf.IC UTit. TTY C0!tt!SSION CF TFXAS Exhibit J' 'K-10 Page 1 of 3 EAS l'Oh'rR & I.1Citr COMPANY cal'1 TAI.17Al' ION ANAT.YSIS (1000's) September 30. 1979 Occcmber 31. 1978 December M. 1977 December 31. 1976 Amount Percent /. mount Percent Amount I'c r e e n t geg I'ercent Lor.7.-term debt (1) $ 923.576 46.6% 820,113 46.4% 815,047 47.5% 695.709 46.9% Preferred Stock 256.112 12.9% 226.521 12.8% 226.521 13.2% 196.866 13.3% Common Equity 803.205 40.5% 722.263 40.8% 675.046 39.3% 590.576 39.8% TOTAL $1,982,893 100.0% $ 1,768,897 100.0% $ 1,716,614 100.0% $ 1,483.151 100.0% e 4 9 i
e o PUBLIC UTILYTY CO.9 FISSION OF TE US Exhibit A*K-10 TEXAS POWER & LICHT COMPANY IMI' ORT /'*T OU.1LITY MEAst:RDENTS OF 100 ELECTRIC t!TTLITIES-6/30/79_ l 6/30/79 _6/30/79 6/30n 1-6/3tn 9 6/13/79 Pre-Ta x _ capital nattes S-T De n t 6/3q/79 tt'ettive Fetern or_- B o r"f n a t i m s interest % L-I b % of AT EC % o f I r.C. Tas Corson rocev's s6e u6Fe Coverase De ti t Pfd. Cen. L-T Cac. _ Nit tarn. _ Rate teutty (A6 (M 1 ALLECHtNY PCata -(A) to; 2.4/2.1 54 11 25-7 44% 33% 44g 10.95 2 Art 4ICAN CLtc Paa 2.1/ 3. 9 56 10 34 6 36 25 32 10.1 3 Ant 2CN A PUdLIC svc A A-7
- 2. 5/1. 9 49 14 37 4
57 11 19 12.0 4 ATLAATIC CITY titC Aa A+ 4 3.8/3.5 46 14 40 21 36 41 ,11.7 5 BAL71;: Cat' CAs & EL Aa AA-3 3.3/3.2 51 10 39 11 37, -39 11.6 6 sesTON E015cN ^ Bai 838 7 2.6/2.3 - 57 14 29-5 51 46 54 11.1 7 CAECL:NA P. R & LT A A 5
- 3. 4 / 2. 6 51 12 37 2
71 43 64-12.1 8 Ct;; TRAL HUO5CN C&E A A-6 2.7/2. 3 49 15 36 7 9 CtNTR AL ILL LIC4T A A+ 4 3.7/3.6 51 16 33
- 39 25' 32 11.6 10 CIN ILL PU3 Svc AA AA 5
3.9/3.5 51 13 36 6 28 45 51 14.8 9 44 49 -11.9 j 11 CENTpAL LA Estacy A A 5 5.2/5.1. 49 7 44 2 'E 43 45 22.4 12 CtNTRAL P AINE 8% R A 823+ 7 3.1/2.7 47 13 40 9 34 41 51-14.8 13 C E::!AAL SOUTM htST 35 41 12.4 4.1/3.5 51 7 42 4 37 14 CENTRAL VT PV3 Svc Ba a 888
- 3. 9 / 3. 4 44 14 42 5
29 +31 37 14.5 j
- 11. C:NC 1::NATI Cst Aa
,AA-4 2.9/2.4 52 13 35 44 26 35- .12.5 i 16 CLtytLAND EL ILLU Aa AA-5 2.5/2.0 49 16 35 5 17 COL & SO CHIO ELEC A esa+ 7 2.3/2.0 $1 13 36 9 . 55 16 24 11.0 18 CC 90FatALTH ED A AA-4
- 2. 4/ l. 8
' 53 14 33 3 80 26 47 10.2 45 26 35 9.0 i 19 CCr-UN17Y Pvt SVC A A 2.9/2.9 52 10 38 to 1 41 42 '13.0 30 CON 50LICATro CD A A 7 3.4/3.3 45 12 43 3. 30 33 9.8 21 C:sst:=tss FCsta A A-8 2.6/2.0 51 15 34 58 19 29 12.3 22 CATTP-PCa t A & LT A A 7 2.6/2.0 47 16 37 1 63 20 31 10.0 23 CELMAavA s%R & L2 A A 7 2.9/2,6 49 13 38 1 32 29 3G 12.1 ' (', 2 4 LITS 0!T LOICON Saa Bea 9
- 2. 5/ 2. 0 5*
13 33 1 62 29 43 10.4 35 cvxt P::sta A A+ 4
- 3. 7/2. 7 48 15 37 70 33 52 12.9 4
26 CuOUISNC LICHT A AA-6 2.5/2.2 52 117 31 52 35 46
- 7. 5 37 EL FA03 ELCCTRIC A
AA-6
- 2. 7/1. 9.
46 14 40 19 76 26 48 13.3 28 EMPIEt 0!07 Ett" A A 5 3.1/ 2. 7 54 8 38 33 39 47 13.1 e 29 FLNat:A fcst4 CCAP A A* 3
- 3. 3/3. 3 51 12 37 13 2
49 50 10.0 30 TLCA!:A 8%E & LT A A+ 3 3.3/3.0 52 11 37 6 29 46. 53 12.4 31 CtstaAL pus UTits + 2.5/2.1 53 13 34 4 52 32 43 9.4 32 Cutr
- ATE 0 UTIL3 A
A+ 7 3.2/2.5 55 10 35 6 66 38 57 10.3 l_ 33 HA-AIIAN ELICTa!C A A 4 3.5/h4 51 12 37 1 11 44 46 12.7 34 Novs7Ca gr.LusTA:ts A.: AA 2 3.6/3.3 51 9 40 26 39 46 14.2 35 ILAHo rcata A A 5 2.1/1.8 57 7 36 7 41 24 32 9.0 36 ILL! nots Pcwta Aa AA 3 3.3/2.8 48 13 39 48 38 50 11.8 4. 37 InDI A:.AML(3 P&L Ad AA 3 4.0/3.9 51 12 37 1 10 47 49 la.1 Ja IrtTLn; TATE PC4La A A 7 3.1/ 2. 7 54 14 32 34 38 46 13.1 37 its A LLtc LT 6 twa A A 6 2.8/2.6 49 17 34 8 24 40 45 12.0 4 40 10=A-{LL CAS & EL A4 AA 3 4.1/3.6 47 14 39 30 41 48 13.7 41 I OW A PCOCUFCrs A. A 5 3.5/3.0 -50 11 39 5 35 36 45 13.2 4 2 I C'. A P4ssLIC W Aa AA 4 3.5/2.8 46 14 4Q =0-51 29 42 17.0 *
- 4) ILwA SCv7Hinn u*t L Aa AA
- 3. 4/ 3. 3 53 6
41 31 36 44 13.1 j 44 FAN:lAs CIT 7 P&L An A 6
- 2. 7/1. 9 51 13 36 5
90 34 62 12.6 4 5 EA;.5AG CA5 & ELLC A A-6 2.2/1.6 56 12 32 7 108 33 67 7.5 46 FANC A S FCa*1R & LT Aa AA 4 3.4/2.9 50 11 39 6 43 40 5! 11.4 47 rLNTVCat uttLIT t3 Aa AA 3 3.2/3.2 51 11 38 9 48 41 12.1 4 8 LC?**; ISLAh G LT!*G A A-7 2.5/1.8 48 14 38 4 63 4 49 LOJI;v!LLE C&E Aa4 AA 1 3.1/ 3.1 49 14 37 7 47 4* S.4 12.2 S C n c f:,c:e CAS 6 ELtc Aa AA 4.4/4.4 44 14 42 2 51 J2 11.4 1 i 4 .'s 4
i a PUBLIC UTILITY COMMISSIO:: OF TEXAS-Exhibit Mr:-10 TEXAS PO'.iER & LIGHT COMPANY Page 3 of 3 IMPORTA';T GUALITY MEASUREMENTS OF 100 ELECTRIC UTILITIES: 6/30/79 ( 6/JO/79 6/30/79 6/30/79 6/3E/79 6/30/79 Pre-Tar Canteal pactos s-T cent 6/30/7s Et t ec tive return.a Bond Matinos Interest t L-T t t % of ATDC 1 of Inc. Ta x Cornon M.coav's 56P D6P' Coverase Debt Pfd. Com. L-T Cao. Net Esf9 Date Ecuity ~ ~(A) (ap-51 micDLE SO' TM UTILS J (A) to) ~ ~ ~ . 2.C/1. 3 59 - 9 32 8 851 11 24% 14.2% 52 MINNESOTA Dda & LT A A 7 3.6/3.4 53 12 35 12 44 47 18.1 53 Mo!.TANA DAxCT4 UT A A
- 3. 7 / 3. 4 53 11
- 36. 21 42 47 12.7 54 MONTANA PCWER A A 7 2.3/2.2 52 -9 39 10 27 29 10.3 55 NEVAOA PCWER Baa 898 7 3.0/2.9 51 15 ~3 4 10 5 26 27 14.5 56 NEW EMCLAND ELEC 3.5/3.2 53 - 12 35 2 27 43 49 14.3 57 NEd ENC C6E ASSO
- 3. 7/3. 6 50 12 38 2
9 42 44 14.1 58 NEd YORK STAT 5 E&C A A-7 2.4/2.1 49 13 18 32 12 16 ,-11.3 5 9 rd!ACARA POMAaK P1R A A-8 2.7/2.2 45 14 38 1 40 10 14 11.8-60 NORTMEAST UTILS, 2.2/1.9 56 12 32 4 42. 26 34 10.6 61 NCRTHER*J IND P S Aa AA 4 3.1/2.6 50 14 36 52 41 54 1c.3 62 NOATHERN STA*ES FR Aa AA 2 4.9/4.7 46 12 42 -0* 63 NORTEaESTERN P5 Eaa 888 2.3/1.8 56 11 33 4 62 24 39 13.6 11 51 54 13.9 64 CHto EctScu A A-8 1.8/1.2 51 15 34 4 107' (-N e g. -1 7.9 65 CK*AHCMA CAS 6 EL Aa AA-3 2.7/2.2 51 13 36 7 56 36 50 9.4 66 C# ANCE s RCCE UTIL A A-6 3.4/3.2 48' 15 ~ 37 16 - 38 . 42 .12. 7
- 67 CTT!A TAIL P0dI A A
A 5 4.1/3.7 48 15 37 2 28 45 51 14.7 68 PAC *r!C CAS & ELEC Aa AA-4 3.3/2.7 47 14 39 2 41 24 31 12.9 6 9 PAC:FIC PC'a'E2 & LT Baa 889+ 7 2.3/2.0 60 19 31 37 11 15 11.5 70 PENNSYLVANIA P&L Aa A+ 6 2.9/2.1 49 18 33 2 72 26 53 12.2 71 PatLA:ELPatA EttC A A-8 2.4/1.9 52 13 35 1 67 25 40 10.4 72 PONTLAND GEN ELEC Baa 888-8 2.0/1.4 52 10 38 3 102 20 52 8.4 73 FOTOMAC ELEC Pct.ER A A+ 5 3.0/3.0 53 10 37 3-43 41 10.4 74 PUB SYC CCL0aA00 Aa AA-5 2.8/2.4 48 14 38 12 36 . 33 41 9.2 ~ ^ - 75 P"s SVC ELEC & CAS Aa AA 4 3.8/3.5 46 13 41 1 22 38 43 11.8 (? V 16 PUB SVC 1MOIANA Aa AA 2 4.1/3.5 48 14 38 1 41 42 51 15.0 7 7 PUB S *.T NEW MANP 84a 883 8 2.6/1.9 43 17 40 17. 72 32 54 13.0 7E PU3 SVC NEw MExtCO Aa AA 4 3.8/3.0 45 17 38 6 58 30 43 11.4 19 PUCIT SOUND P6L Baa 888 8 2.6/2.2 48 15 37 4 37 20 26 11.1 80 RC;HL57EA CAS 6 EL A . A 6 2.5/2.0 47 12 41 4 45 11 17 11.0 81 3AN DI!CO CAS & EL Baa Bb8 8 2.1/3.8 50 15 35 ^ 82 SAVArmAM ELs & PA Baa Bbb-1.9/1.4 63 9 28 1 84 19 41 12.0 3 50 '9 13 8.6 83 SIEAaA PAC rwa Co A A 6 3.0/2.6 51 10 39 30 31 38 12.5 84 SCOTH CAACLINA E&C A A 5 2.3/1.8 55 12 33 1 69 34 52
- 9. 8 85 SCUTHEkN CALII' ED A.
AA 4 3.1/ 2. 6 48 13 39 1 37 23 30 12.9 86 SC' THLRN CCMPusY J 2.1/1.7 59 11 30 3 80 42 63 8.2 8 7 LOUTHt.HN Ino 06L A.s AA 2 4.4/3.7 48 12 40 1 42 42 -53 14.2 8 8 SCUTudtSTChN PS Aa AA 3 2.7/2.$ 5) 11 36 1 16 1 3 16.4 89 TA.PA ELECintC Aa AA 2
- 3. G/ 3. 5 51 8
41 8 5 44 45 12.5 90 TEXAb UT:L; TIES 3.3/3.0 49 12 39 5 26 39 45 13.3 91 *CLECO EDISON 8aa A-7 2.7/2.2 49 14 37 3 58 28 41 12.1 92 TLCSCN CA3 6 dLEC A A* 4 2.9/2.4 51 10 39 1 38 13 le 14.9 9 3 Urs! Ora ELLCTn t
- A A
7 3.0 / 2. 6 - 50 16 34 3 43 37 48 12.4 94 u:s!TED I LLLMI:.ATI.sc A bub 2.4/1.9 47 17 36 32 51 10 17 12.4 95 UTAH PCaLR 4 LIGHT A AA-4
- 2. 7/ 2. 6 49 11 40 4
12 36 38 9.2 96 Vlf.C1tsti ELEC & PA A A 7 2.3/1.9 52 14 34 4 58 26 37 8.9 9 7 WASHIMTON hTM 5% A A A 7 2.8/2.6 55 5 40 18 22 26 11.5 98 w!:Ccn".IN ELEC 5%n Aa AA 2 4.1/3.9 45 12 43 6 13 47 50 12.3 9 9 w!:;CC:.01s r*da & LT Aa AA 2 4.1/ 4.1 48 13 37 2 51 51 12.7 100 w t0CCN3 tn rua ";VC AJ AA 1 6.2/6.1 41 14 45 1 1 53 51 15.0 Hl4h 6.2/6.1 631 194 455 176 1084 534 67% 22.4% kanse - Low 1.8/1.2 41 5 28 the7.ItNe1.) 7.5 Pedian 3.0/2.6 51 13 37 2 37 34 44 12.1 hates: (1) Moldin3 Carpany (2) {A) Total AFCC inc191ed in pre-tJs income (33 (B)
- ot al A FEC esetuJed (4)
Copyttght 1979 Out! & Phelps. Inc. and pub 11sned with its permisstors
P U B LIC.-U-TRITY-GOMAT ISSIO N-O F-T-rWrAS ~ Exhibit JWK-11 T-Er AS-PO4GR-A14B-blGHT-GGMPr\\i4-Y r WEIGR4-ee ^. v n a hm-606i-et-thhC A PITA L Component Component Weighted Percent Percentage Average Gomeon<mt Amotmt of-Total - - - Cost - - - - Cos t- - - Long-Term Debt " $ 901,582,328 43.95 % 7.79 % 3.42?6 Notes Payable 1,879,553 0.09 7.49?6 0.01 } Preferred Stock 237,759,654 11.59 7.51 % 0.87 Accumulated Deferred Investment Tax Credits (d) 118,041,518 5.75 10.91 % 0.63 Common Equity (*) ---792;074;899 38261 15.50?6 -h 98 TOTAL $,2 051 337;952 100r00?6 14.91 % g g ( (a) Schedule H 6, page 1 of 1 less notes payable. (b) Schedule H-5, page 2 of 4 of Rate-Filing Package. (c) Schedule 11-4, page 1 of 1 of Rate-Filing Package. (d) Schedule !!, page 2 of 2 of Rate-Filing Package. (e) Schedule 11, page. of 2 of Rate-Filing Package. k
(,p m O PUBLIC UTILITY C. 1:ISSION OF TEXAS s Enhibit M -12 Page 1 of 1 TEXAS POWER & LICIIT C0!!PANY CAS!! DIVIDEND COVERACE AND INTERNAL CASil CENERATION 1980-82f: 4 Internal 6/10/19 J_2/31/7e 12/31/77 Ca s?. I ALLECHENY POWER 2.8 2.0 3.5 ?S 51 MIDDLC SOUTH UTIL 1.8 1.8 2.5 gg 2 AmtRICAN ELLC FwR 1.9 2.1 1.9 33 52 Mi m SOTA P&L 4.1-3.5 3.1 3 )e, 3 AkIZCN A PunLIC SVC 1.7 2.1 2.3 25 53 MONTANA DAWTA UT
- 3. 5 3.5 3.8 20 4 ATLANTIC CITY ELEC 3.0 2.9 2.7 35 54 70NTANA P o'* E R 3.0 3.0 2.6 31 5 BALTIMohE CAS & EL 2.8 3.0 2.7 80 55 NEVADA P0WLR 4.4 3.7 6.4 37 6 DOSTON LDISON 3.4 3.2 3.5 40 56 NEW ENGLAND ELEC 3.2 3.2 3.3 44 7 CAROLINA 1% R & LT 2.7 4.5 3.4 28 57 NLW E;.C C&E ASSO 3.3 3.3 3.5 g3.
8 CLNTNAL HUDSON C&E 2.9 2.8 3.0 39 56 h De YOHK STATE E&C 2.2 2,3 1.1 }} 9 CLNTRAL ILL LIGHT 4.0 4.0 4.0 34 Ys N tst/.f. Hu .m
- b. l.
e 3 t o C Lt4 T6. AL ILL rua Syc 3.4 3.3 3.3 124 60 Hol.THLAST UTIL 2.6 2.9 3.1 8 3.. 11 C[NTRAL LA ENrpGY 4.9 3.9 4.2 56 61 N0flTif ERN IND P S 2.6 2.4 3.1 32 12 CENTRAL MAINE PWR 2.6 2.4 2.4 33 62 NoitTHEHN STATES PR 4.1 4.1 4.1 73 13 CENTRAL SOUTN WEST 3.3 3.4 3.6 40 63 nonTHaESTthN P S 2.1 2.6 3.9 100 14 CENTRAL VT PUB Syc 2.7 2.7 2.2 39 64 OHIO EDISON e e e 15 C!hCINNATt G&E p e p 8 65 OktAHOMA CAS & EL 2.2
- 2. 5.
2.4 57 16 CLEVELAND EL ILL 1.7 1.8 2.6 33 66 ORANGE & ROCK UTIL 2.0 2.4 2.5 88 17 COL & So CHto 1.9 1.0 1.9 60 67 OTTER TAIL POWER 3.9 4.4 4.7 53 18 COMMONWEALTH EO
- 2. 3 2.7 3.0 50 68 PACIFIC CAS & ELEC 1.4 1.9 2.2 64 19 CCMMUNITY PUS SVC 3.9 4.J 4.2 74 69 PACIPIC POWER & LT 2.0 2.4 2.1 29 20 CONSOLIDATED ED 3.5 3.6 3.3 95 70 PENNSYLvAri!A P&L 1.7 1.6 2.6 19 21 CONSUMERS PWR 0
9 0 0 71 PHILADELPHIA ELEC 1.8 1.8 1.8 48 22 DAYTON POWER & LT 1.5 ~ 1. 7 1.9 48 72 PoleTLAND GEN ELEC 0 t g 23 DELMARVA IWR & LT 2.5 2.5 2.4 67 7 3 POTOMAC ELEC POWER 2.8 2.9 3.2 70 24 DETHOIT EDISDN 2.3 2.2 2.9 45 74 PUG SVC COLORADO 2.5 2.6 2.4 42 25 DUKE POWER 2.5 2.5 2.7 56 75 P00 Syc ELEC & CAS
- 3. 6.
3.6 3.6 46 26 DUQUESNC LIGHT 1.9 2.1 2.1 52 76 PUD SVC INDI ANA 3.2 3.0 2.9 48 27 EL PASO ELECTRIC 1.6 1.9 2.0 28 17 Pun Svc NEW HAMP 1.5 2.1 1.1 20 28 ErPluC DIST ELEC 2.8 3.2 3.0 50 75 PUG S'. ' NEW MExtCO ' 2.0 2.4 2.6 25 29 ELONICA POWER CCRP 3.4 4.4 5.0 31 79 PUCET 50UuD P&L 2.5 2.5 2.8 10 3 0 f t.OR IDA PWR & LT 4.5 5.1 5.8 55 80 ROCHESTER CAS & EL 3.2 3.3 3.2 45 31 CENERAL PUB UTILS 3.4 2.8 2.7 IO SI SAN DIEGO CAS & EL 1.6 1.9 1.0 '30 32 CULF STATES UTILS 2.7 3.1 3.0 31 82 SAVANNAH ELEC & PR 3.0 3.5 5.9 56 33 usWAllAu ELEC1RIC 3.6 3.7 3.9-61 8 3 SIE814 PAC PWR CO 2.7 1.0" 3.7 40 34 HOUSTON INDUSTRIES-3.8 3.7 4.4 29 8 4 SOUTH OROLINA E&G 1.8 2.3 2.5 Jg 35 IDAHO POWER 2.0 2.5 1.9 59 85 SOUTHERN CALIP ED 2.6 4.6 3.6 40 36 ILLIN0!S POWER 2.3 2.1 2.3 42 + 86 SOUTHERN COMPANY 2.3 2.5 2.9 52 37 INDI ANAPOLIS P&L 3.4 3.2 3.2 54 8 7 SOUTHERN IND G&E 4.1 3.9 4.5 54 . 38 tuTCHSTATE POWER 2.5 2.1 2.5 57 88 SOUTHWESTERN PS 2.0 2.2 1.9 34 39 ICWA ELEC LT & PWR 4.4 4.9 3.8 44 89 TAMPA ELECTHIC 3.8 4.3 4.4 78 40 IDWA-ILL CAS & EL 2.8 2.6 3.1 33 90 TEXAS UTILITIES .3.4 3.5 3.3 -62 41 IOWA PESCURCES 3.0 2.7 2.7 57 91 TOLEDO EDISON 1.8 2.0 0.7 24 42 towA PUBLIC SVC 3.0 3.2 3.6 15 92 TUCSON ELEC POWER 2.1 1.8 2.6 47 4 3 t oW A SOUTHEEN UTIL 3.3 3.2 3.2 93 93 UNION ELECTRIC 2.6 2.9 ' 2. 9 21 44 FANbAS CITY P&L 2.7 2.7. 4.8 3* 94 UNIND ILLUMINATING 1.8 1.7 2.6 85 45 FANSAS CAS 6 ELEC 1.9 2.6 2.7 25 - 9 5 UTAH POWLR & LIGHT 2.1 2.2 8.6 40 46 FANSs.S POWER & LT 2.6 2.6 2.9 38 96 VIECIN!A ELEC & PR 2.3 2.3 2.1 38 4 7 FLNTLCFY UTIL 4.5 3.7 3.7 3I 97 WAiHINSTON WTR PW R 1.9 2.9 1.5 10 48 LOm; ISLAnu LTNG l.3 1.4 1.) 4I 98 WI.' ICON $lN Et.EC twR 3.6 3.5 3.f 52 49 LcutLvtLLL C&E 3.7 3.8 3.7 42 9 9 WISCONSIN ('h R & LT. 38 3.7 3.5-65 50 P ADISON GAS & ELEC 3.9 3.9 4.0 8I 100 Wi!.CONSIN Puu Syc 4.6 4.3 4.0 '60 49 H ICtt' 4.9 5.1 6.4 LOW
- 0.8 0.0 0.7 MEDIAN *
^2.7 2.8 2.9
1 4 PlmLIC UTILITY ComISSION OF TEXAS Exhibit JWK-13 Page 1 of 2 TEXAS POWER & LIGHT COMPANY ELECTRIC UTILITY INTEREST COVERAGE RATIOS Rattnew Pre-Tau interest Charees terne 4 12 "os. tndeds ._Noody's b6E L6&e 6/30/7) 3/31/is 12/31/74 12/31/i7 liA31ei-ii/3iti's 12/3.i. _12/31/73 Stral9ht Aaa/AAA (A) (B) (A) (b) (A) (s) (A) (a) (A) (A) (A) (A)
- a ca.ias r6L gfi7[
Aaa AAA 1 3.7 / 3.1 3.1/ 2. 6 3.1/ 2. 6 3.5/3.0
- 2. 9 3.3
- 3. 3 4.2 1x teams tiec. Ser,(rx3) Aaa AAA 1-3.9/3.54.1/3.6 4.1/3.7 3.3/2.8 3.6 3.8 4.8 5.1 1*x 7esas P&L [TXu) Aaa AAA 1 4.2/4.04.2/3.9 4.1/ 3. 9 3.7/3.4 3.2 3.2 4.1 4.6 Split Ama/A A a Lowase.6;e GEC Aaa AA - 1 3.1/3.1 3.0/3.0 3.0/3.0 3.8/3.8 4.0 4.1 .3.4 4.3 Strateht Aa/AA 3 saitanare 6 4 Aa AA-3 3.3/3.23.3/3.2 3.4/3.3 2.9/2.9 2.9
- 2. 6 2.2 3.2 Central til. Pub. Ser.
Aa AA 5 3.9/3.53.8/3.5 3.2/2.9 3.1/2. 7 .3.0 2.9 2.8 3.0 Central P&L (CSA) Aa AA 3 4.0/3.14.2/3.3 4.2/3.5 5.2/4.8 4.0 3.8 4.0 5.6 Cincinnati C&E Aa AA-4 2.9/2.4 3. 2 /2. 8 3.2/2.7
- 3. 4 / 3. 0 2.6 2.6 2.8
- 3. 9 1
Cleveland Elec. Illu. Aa AA-5 2.5/2.0 2.6/2.1 2.7/2.2 3.3/2.6 2.7 2.5
- 2. 7 -
2.7 1m houston L&P Aa AA 2 3.6/3.3 3.7/3.3 3.6/3.3 4.1/3.8 4.0 2.8 3.5 4.6 Illinois Power Aa AA 3 3.3/2.8 3.4/2.8
- 3. 5/ 3. 0 J.8/3.3 3.7 3.8 3.2
- 3. 9 t
Indsanspolis P&L Aa AA 3 4.0/3.9 3.7/3.6 3.4/3.3 3.8/3.0 2.9 2.8 2.7 3.6 1 lowa-Illinois C6C Aa AA 3 4.1/3.6 3. 9/ 3. 4 3.3/2.7
- 3. 4 / 3. 0 4.1 4.1 3.4 3.4 1
lowa Public Service' A4 AA 4 3.5/2.8 3.0/2.3 3.0/2.3 2.9/2.4 3.4 3.8 3.4 3.3 lowa Southern util. Aa AA 3.8/3.33.7/3.2
- 3. 8 / 3. 4 4.9/4.7 4.0 4.1 3.8
- 5. 3.
kansas Pst A4 AA 4 3.4/2.9 3.5/2.8 3.4/2.6 3.6/2.6 3.8 . 4.0 4.6 6.3 Kentvety utilities Aa AA 3 3.2/3.23.1/3.1 2.7/2.7 2.8/2.6 3.3 3.4 %. 5
- 3. 3 Madison Cat Aa AA 4.4/4.4 4.3/4.2 4.2/4.1 3.9/3.7 2.9 2.9 2.2 2.6 No. Ir. diana Pub. Jer.
Aa AA 4 3.1/2.62.9/2.5 2.7/2.3 3.1/2.7 3.2 2.7 2.6 J. 6 x Northern States Pswer Aa AA 2 4.9/4.7 4.7/4.6 4.7/4.5 4.1/4.0 3.7 3.5 2.7 2.9 2 Oslabona C6C Ad AA - 3 2.7/2.22.9/2.4 3.0/2.5 2.9/2.4 2.8
- 3. 3 3.8 5.1 2
Paettic G&E Aa AA-4 3.3/2.7 3.2/2.6 3.1/2.5 2.8/2.3 2.3 2.3 2.9 3.1 p Pub. Ser. of Colorado Aa AA-5 2.5/2.4 2.8/2.4 2.7/2.4 2.5/2.3
- 2. 9 3.1 2.3 2.8 2*a Pub. Ser. C&C Aa AA 4
3.8/3.5 3.9/3.6 3.7/3.4 3.5/3.1 3.3 2.6 2.3 2.2 =x Pub. Ser. ot Indiana Aa AA 2 4.1/3.5 3. 9 / 3. 3 3.7 / 3.1 4.3/3.7 4.6 3.7 4.2
- 4. 8 pud. Ser. o f New desico Aa AA 4
3.8/3.0 3.3/2.7 3.3/2.7 3.0/2.5 2.9 3.0 3.0 3.7 1 Pub. Ser. of 041anoma (CSA) Aa AA 3
- 4. 4 / 3.1 a 6/4.0 4.6/4.0 4.5/4.3 4.0 4.0 4.2 4.9 x co. solitornia Edison Aa AA 4
3.1/2.43.0/2.5 2.7/2.3 1.0/2.6 3.0 2.9 4.1 2.9 2 e So. f r. diana C6 t AJ AA 2 4.4/3.75.2/4.2 4.9/4.0 5.1/4.6 6.1 5.4 4.8
- 4. 3 Southwestern Elec. Pu r. ( CO A)
Aa
- AA 2
3.6/3.3 3.9/3.6 3.9/3.5 3.9/3.5 3.6 4.5 5.4 5.1 Southwester n Public Ser. AJ AA 3-2.7/2.52.9/2.6 3.1/2.8 - 3. 5/ 3. 2
- 3. 6 3.7 4.5 4.4 Tampa Electric A4 AA 2
3.6/3.5 3.9/3.9 4.1/4.0 3.4/3.4 3.1 2.8 2.3 3.3 t
- best Penn Power (4YP)
Aa AA 3 3.5/2.93.6/3.0
- 3. 2/ 2. 6 4.1/3.7 3.6
- 3. 7
- 2. 9 3.1 hest 7esas util. (C;41 Aa AA 3
5.4/5.3 6.1/6.0 5.5/5.5 6.7/6.4 6.4 6.7 6.2
- 7. 2 1 x hicconsin Electric Power AJ AA 2
4.1/3.94.1/3.9 4.3/4.2 5.1/5.1 4.6 4.1 3.9 4.2 2 wisconsin P6L A4 AA 2 4.1/4.1 4.1/4.1 3.9/3.9 4.4/4.2 4.5 3.7 2.7 2.9 Wisconsan Puc. Ser. Aa AA 1 6.2/6.3 5.9/5.9 5.7/5.7 5.5/5.4 5.2 4.2 2.9 3.1 High 6.2/6.1 6.1/6.0 5.7/5.7 6.7/6.4 6.4 6.7 6.2
- 7. 2 mange - Low 2.5/2.0 2.6/2.1 2.7, 2. 2 2.5/2.2 2.3 2.3 2.2 2.2 med ian 3.6/3.3 3.7/3.3 3.4'3.1 3.6/3.2 3.6 3.5 3.0 3.6 soitt Aa/a or A/AA Ata...tas saty sau.
Aa Ae 5 3.8/3.5 3.8/3.5 3.6/3.3 3.1/2.8 3.1 2.8 2.3 2.6 2., Cotwsnec41th Cdison A AA-4 2.4/1.8 2.5/1.9 2.8/2.2 2.7/2.2 3.4 3.4 3.1
- 3. 5
- Duqwesne Liyht A
AA-6 2.5/2.2 2. 6 / 2. 3 2.6/2.3
- 2. 8 / 2. 5
- 7. 8 3.1 2.7
- 2. 8 El Paso Electric A
AA-5 2.7/1.9 2.7/2.0 2.6/2.0 2.7/2.3 3.4 2.8 3.2 4.4 lowa F6L Aa A 5 3.5/3.03.5/2.9
- 3. 6 /2. 8
- 3. 6 / 3. 0 3.8 3.6 3.3
- 4. 7 kansas C6ty P&L Aa A
6 2,7/1.9 2.7/2.1 3.0/2.3 2.8/2.3 3.1 3.0 2.8
- 2. 7 1
b'* kn11and F1wer (NCS) Aa A+ 3 3.0/2.6 3. 2/ 2. 7
- 2. 9 / 2. 5 2.9/2.6 3.8 2.7 2.3 2.5 1
Pennsylvanta P6L Aa A+ 6 2.9/2.1 3.1/ 2. 3 3.0/2.3 3.4/2.8 2.6 2.8
- 2.9 3
utan P&L A AA-4 2.7/2.6 2.8/2.6 2.8/2.5 2.4/1.9 3.4 2.9 2.5 2.6 High ~3.8/3.5 3.8/3.5 3.6/3.3 3.6/3.0 3.8 3.6 3.3 4.7 Range - Low 2.4/1.0 2.5/1.9
- 2. 6 / 2. 0 2.4/1.9 2.6 2.7 2.3 2.5 Medlan 2.7/2.22.8/2.3 2.9/2.3 2.8/2.5 3.4 2.9 2.8 2.8 Notest II)
(At Total Af DC incIwied in pre-tar income ( 4 [8) to t a l A F LC e s c l ud ed from the calculations. i (23
- ar+dt Company symbol s:
ATP - A 1
- e-t h-ny Po=e r Sy s t em hts - New England Electric System i
atP - Aner as se Elec tr ac Power Wu - t.ortheast utnlities Cta - Centr al . Sauth "est Otc - Chio EJhson a CPU
- Ceneral twolle utilities 50 - Souther n Ca9pany MSU - Padste Soutn utti ttnes Tau - 7es as ut11 stans (33 N.A.
- bot available due to interia restatement.
(41 e Co/yr11ht 1979 Duff 6 Phelps. Inc. and published with its permission.
t a PL*3LIC LTILITY CO:"!ISSIO I OF TEXAS Exhibit A L 13 Page 2 of 2 TE:G5 PC*'EE & LICliT CO!'?A.T ELECTRIC UTILITY I::TEREST CO'!ER.\\GE PATIOS
- etia?s pre-?ae !aterest Charges taremo I?
.gs, tec.se Pooa< a s.- O*ve 6/ Ne?, 3/ }as!) 4'/s. '.trefo%e ara .. /14 /. 12/ia/Je../; > s TJe;,2a ai/;.f13 (A, ses 6Ah $6s 6As t sa (A) ass (As tas (As ta,
- s.:ana.wslic Service A
A-7
- 2. 5/1. 9 2.6/2.0
- 2. 7 / 2. 2
- 2. 6 / 2.1 2.3 2.5 2.0 2.3 Careltaa P6L A
A 5 3.4/2.6 3.7/3.0 3.7/3.1 3.4/'.9 3.2 2.3 2.0 2.4 Central P.Jso9 C&L A A-6 2.7/2.32.9/2,5 3.2/2.6 2.1/ 2. 6
- 2. 7 2.4 les
- 2. 6 Central 111 noas L13nt A*
A+ 4 3.7/3.6 3.6/3.5 3.4/3.4 2.s/2.2 2.7 2.3 2.2 3.1 Central La. Elec. A A 5 5.2/5.1 4.5/4.4 4.0/3.9 4.2/4.1 4.2
- 3. 7 3.3
- 3. 7 Connecticut L&P (NU)
A A-8 2.3/1.9 2.4/2.1 2.3/1.9 2.3/1.9 2.4 2.2
- 2. 4 2.4 CassolidateJ E31sen A
A 8 3.4/3.33.3/3.3 3.5/3.4
- 3. 6 / 3. 6 J.3 2.7
- 2. 2 2.2 a Cons.ner s rowe r A
A-4 2.6/2.0 2.7/2.1 2.6/2..
- 2. 6 /2. 2 2.9 2.4 1.9 2.7 Cayton P&L A
A 7
- 2. 6 / 2. 0 2.6/2.0 2.5/2.0 2.2/1.8 2.8
- 2. 9 2.1 2.4 t*
Oelsarva f&L A A 7 2.9/2.6 2.9/2.6 2.9/2.6 2.4/2.1
- 3. 4 2.*
2.3 2.6 1 *a Ow=e Fe.er A A+ 4 3.7/2.7 3.1/2.3 3.:/2.2 2.9/2.3
- 3. 0 2.3 2.1
- 2. 5 tapste Listrict Elee.
A A 5 3.1/2.7 3.5/3.1.3.4/3.2 4.3/4.1 3.5 3.1 3.0 3.0 s Flors=a rc.er A A+ 3 3.3/3.3 3.9/3.9 '4.3/4.3. 4.2/4.1 3.1 3.C 2.0
- 2. 8
- *a flertJa r&L A
A+ 3 3.3/3.0 3.6/3.3 4.5/3.6 3.5/3.3 2.4 3.0 2.4 3.2 Call Fo.er (:0) A A+ 4 3.2/2.8 3. 4 / 3.. 3.3/3.0 3.C/2.7 3.5 3.9 1.9 3.1 Cw!! States utal. A A+ 7 3.2/2.5 2.7/2.2 2.7/2.3 2.9/2.4 2.7 2.6 3.1 3.5 i Hartford Elec. (h3J A A-7 2.5/2.22.7/2.4 J. r. 2. 2 2.7/2.4 2.7 2.4 2.0 2.5 Ha.astan Elec. A A 4 3.5/3.4 3.4/3.3 3.t"J.4 3.2/3.2 3.1 3.0 2.8 2.9
- Idaho Pe.er A
A 5 2.1/ 3. 8 2.1/1. 9
- 2. 4 / 2.!
2.3/2.1 3.0 2.2 2.4 3.2 a Irterstate Fo.er A A 7 3.1/2.72.7/2.6 2.6/2.3 2.6/2.2 2.9 3.1 3.1 3.5 lo.a tiec. 167 A A 6 2.$/2.6 3.C/2.2 3.1/ 2. 9
- 3. 4 / 3. 4 2.7 2.1 1.4 2.2 ransas C6C A
A-6 2.2/1.6 2.6/2.1 2.9/2.2 2.8/2.2 2.8 2.8
- 2. 3 2.5 2
Leag Island Lt. A A-7 2.5/1.8 2.5/1.9 2.7/2.0 2.6/1.9 2.6 2.5 2.3
- 2. 5 Passachusetts Elec. (stSt.
A A 4 4.5/4.54.3/4.3 3.9/3.9 3.3/3.3 2.8 3.7 3.3 3.1 Ptenesota PLL A A 7 3.6/3.4 3.7/3.5 tJ.4/3.1 3.3/3.0 3.4 3.3 2.6
- 2. 6 3
Misssssa;rs Po.er (50) A A 6 2.7/2.7 2.6/2.6 2.9/2.9 3.4/3.0 3.3 2.6 2.6 2.9 elssassap;s P&L (*EJ) A A 6
- 3. 4 / 3. J 3.3/3.3 3.3/3.3 3.2/3.2 3.1 2.6 2.5 3.1 Pontaea aasta utal.
A A 3./3.43.1/2.9 3.2/3.0 2.5/2.5 3.7 3.2 2.7 3.c ren ta n a Pe.er A A 7 2.3/2.2 2.3/2.2
- 2. 4 / 2. 3 2.1/2.0 2.1 3.0
- 3. 3 4.7 barra1ansett Elec. (SI51 A
A 5
- 4. 3/ 4. 2 4.1/4.0 3.1/3.7 2.2/2.1 1.7
- 2.7 2.8 3.5 be. crie s s Psm. :er. (..5U) A A 6
- 2. ! / 2. 8 3.:/3.2. 3.1/ 3. c 3.2 / 3. 2 3.4 1.7 1.6 4.2 ea b. Y.
state E4; A A-7 2.4/2.1 2.7/2.4 2.4/2.1 2.2/1.7
- 2. 4 2.4 2.5 2.5
- a hlagara FaSa.= P.er A
A-0
- 2. 7 / 2. 2 2.6/2.2
- 2. 6 / 2.1 2.3/2.1 2.4 2.4 2.1 2.0
- F c%so Edsson A
A-8 1.1/1.2 1.8/1.1 1.7/1.2 2.5/1.9 2.5 2.6 2.3 3.1 Crange & secelane Ltil. A A-6
- 3. 4 / 3. 2 3.3/3.2
- 3. 4 / 3. 2
- 2. 6 / 2. 4
- 2. 7 2.3 1.9 2.2 Ctter tant Power A
A 4.1/3.7 4.1/3.3
- 4. 3/ 4. 0 3.6/3.5 3.2 2.5 2.5
- 3. 3 s ins 14Jel;5:4 Elec.
A A-3
- 2. 4 /1. 9 2.6/2.1
- 2. 4 /1. 9 2.5/2.0 2.6 2.4 2.4 2.8 Petoase Elet. FJ.er A
A* 5 3.0/3.0 3.0/3.C 3.0/3.0 3.1/3.1 2.6 1.8 2.4 2.7 Eocrester ;tt A A 6
- 2. 5 / 2. C 2.5/2.0
- 2. 8 / 2. 3 2.5/2.1 2.9 2.6 2.2 3.1 Sierra Pacarse Pa.er A
A 6 3.0/2.6 3.1/2.7 2.9/2.6 3.3/3.; 2.9 2.3 2.2 2.4 [ so. Ca r ol s e a E6: A A 5
- 2. 3/1. 8 2.5/2."
2.7/2.2 2.8/2.3 2.7 2.9 2.3
- 2. 5 Twcson rice.
,wr. A A+ 4 2.9/2.4 2. ' ' 2. 3 2.6/2.s 3.2/2.6 3.5 2.6 1.7 2.4 a t,sen Electric A A 7 3.0/2.6 3.2/2.8 3.2/2.9 2.8/2.6 2.9 2.5 1.9 2.4 vertants ter A A 7 2.3/1.91.4/1.9 2.4/2.0 2.4/1.9 2.4 2.3 1.9 2.5 wasnar.1 ton aster Power A A 7 2.?#?.E J.0/2.9 3.0/2.7 7.1/ 3. 9 2.7 2.4 2.3 2.4 Mist 5.2/5.1 4.5/4.4 4.3/4.3 4.3/4.1 4.2 3.9 3.'1 ' 4.1 Eang e - Lc. 1.6/1.2 1.1/1.1 1.7/1.2 2.1/1.7 1.7 1.7 1.4 2.C P.a d s a n 2.9/2.6 3.c/2.6 3.0/2.8 2.8/2.4 2.8
- 2. 5 2.3 2.7 split ar*t* er 9aara
!.. c....... ..es A 89.5 7 3.1/2.7 3.2/2.7 3.1/2.5 2.5/2.1 2.5 2.6 2.4 3.0 Co l ua. 6 53. Uits L1tc.
- A REs*
7 2.3/2.0 2.0/1.6 1.7/1.3
- 2. 4/1. 9 2.5 2.5 1.6
- 2. 3 Jersey Central F.L (0733 tea A-7 2.4/1.9 2.6/2.1 2.6/2.2 3.C/2.5 2.6 2.4 2.5 2.5 e
roaoesahela so.er (AsPt Eaa A-8 2.1/1.6 2.1/1. 6 2.0/1.1
- 2. 2 /1. 9 2.2
- 2. 5
- 2. 7
- 3. 0 Peamsf tvassa Fo..r ICIC)
.Baa A 8 2.3/1.3 2.2/1.7 2.2/1.6 2.3/1.6 2.4 3.1 3.1 2.5 ro t o sa c tctsun (Atri E4 a A-8 1.9/1.7 1.6/1.5 1.5/1.4
- 2. 2/ 2.1 2.7 2.9 1.7
- 2. 4
~ Telese IJ s so m 6aa A-7 2.7/'.2 2.6/2.2 2.8/2.2 2.3/1.1 2.6 2.8 2.2 3.1 'In s t e J t i 1 %s. ( 2e b s. ) A 859
- 2. 4 /1. 9 2.3/1.9 2.*/1.7
- 2. 6 # 2. 3 2.2 2.1 2.3 2.7 High 3.1/ 2. 7 3.2/*.7
'3.1/2.5 3.0/2.5 2.7 2.9 3.1 3.1 ko ng e - Lo, 1.7/1.7 1.6/1.5 1.5/1.J
- 2. 2/1.1 2.2 2.1 1.6 2.3 Pedsas 2.4/2.92.3/1.9 2.1/1.7 2.4/2.C 2.5 2.6 2.4 2.6 Strat,*, E. e r m.
A*;;%7 .. 77~T;;3 asa ese-1 1.5/1.1 1.5/1.2 1.5/1.1 2.5/1.9 2.1 2.5
- 2. 3 3.1 4
sa assetocnias to.., gaa r 64a 803-9 1.5/1.5 1.4/1.5 3.7/1.4 1.6/1.4 2.C 1.9 2.0 2.1 a Ar.ansas r6L g ,43 Eaa see 7 2.4/1.5 2.5/3.7 2.6/1.8 3.2/2.5
- 2. 3
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1 _PtfBLIC UTTLITY Cn?t415S10N FF TEXAS Exhibit A*K-14 TEXAS Pot.'ER AND LTCNT COPfPAf# Page 1 of 1 FIMANCIAL ADEOL%CY MEASLIRES (401 CalP) Internal C.wh Ceneratton_ g _1980 Return _1931 (Interest) 186,736 188.819 189,928 (Pref. Stock Dtv.) (70,351) (76.351) (82,351) (Corvnon Stock Div.) (17,853) (18,602) (20,852) Depreciation (63,800) (61,886) (68,817) Deferred Taxes 67.818 69,074 72,128 ITC 22,284 22,284 22,284 33,179 25,710 34,042 TOTAL AVAILASLE 158,013 149,048 136.362 Construction 308,8'46 263,890 250,836 % Cash Cencration 51.2% 56.5: 54.4% _ aft'DC As Percent Net income Available For Coe:non Return (Interest) 186,736 188,819 189',928 (Pref. Stock Div.) (70,351) (76.351) (82,351) ATL'DC (17,853) (18,602) (20,852) 20,791 24 734 26,541 TOTAL AVAILA8LE 119,323 118,600 I ATL'DC 113,266 17.4% 20.9% 23.4% Interest Coversee Excluding AFUDC Return i TIT 186,736 188,819 189.928 104.741_ J 01. 406 97 513 o o TOTA!. AVA11ABLE 291,477 290,225 287,438 Coverage V,se (Supplemental) A*ex
- 3.80X 3.491 i
(+rfex) 3.W Interest Coverace includinz AFUDC Return TIT 186,736 188.819 189,928 ATUDC 104,741 101,406 97.513 20,791 24,734 26,541 TOTAL AVA1!ABLE 312,268 314,959 313,982 I Coverage (Supplemental) 4.44X 4.13X 3.81% (3.702) _ Cash Cov. of Comon Div. Internal Cash I Cossoon Stock Div. 158,013 149,007 136,362 63,800 _61.886 68,817 TOTAL AVA11ABLE t 221,813 210,893 205.179 Cover 3Ce 3.48X 3.41X 2.98K ) y = e W ~ \\ t.
I E Pt3! !C L*!L!TY CTO:ISS!C'l OF TT. MAS Exh il, L t J."/-14 Pa,;e 1 TrX'2 70%'E9 *?:D f.TCr? ce"PA',r F I '. *;C I A L, W 'CY ?* FAN U E (4 6 C41P) Intern 11 c. inh Ceneritten y _1 HO 19R1 ~ Return 156,733 158,365 169,925 (Interest) (70,351) (76.351) (82,351) (Pref. Stock Div.) (17,853) (13,602) (20,852) (Common Stock Div.) (63,800) (61.ES6) (68,817) Ikpreciation 67,954 69,210 72,264 Deferred Taxes 21,993 21,933 21,993 ITC 33.179 _25.710 24,0:2 TOTAL AVAIL' OLE 157,355 148,939 136,204 Construction 323,S46 263,290 250,836
- Cash Ceneration 51.1%
56.4% 54.3% Art DC As Percent Net 19eo e _Avaalabic for Cc 'on Return 156,733 188,565 189,925 (Interest) (70,351) (76,351) (S2,351) (Pref. Stock Div.) (17,353) (IS,602) (20.352) ATUCC 20.791 24,734 26,541 TOTAL AVAILA3LE 119,320 115,646 113,262 1 ATU0C 17.4% 20.8% 23.4% Interest Coveraec Ereludine AFU0C Keturn 156,733 186,E65 IS9,925 FIT 103.976 100,533 96,475 TOT.u. AVAIL' ALE 250,709 2S9,503 286,400 Cove rage 4.13X 3.79X 3.48X (Supplemental) (3.44X) Interest Coverare inclu line ArrC-2 Return 156,733 183,365 189,925 TIT 103.976 100,633 96,475 AF' DC 20,791 24,714 26,541 G l TOTAL AVAILA3LE 311,500 314,237 312,941 Coverage 4,43X 4.12X 3.80X (S u p plemen t.il) (3.69X) Cash Caversee Of Cn-non Div. Internal Cash 157,355 148,939 136,204 Cun,un S toc k Div. 63.S00 r,1, e S 6 _ 68,H17 i TOTAL AVAIL.utt 221,655 210,S25 205,021 l Coverage 3.47X 3.41X 2.98X 1
C' O O PUBLIC UTILITY COFDfISSION OF TEXAS Exhibi t Jh'K-15 Page 1 of 1 TEXAS P01JER & LICilT COMPAhl CR0h'Til IN BASI: RATE REVENUE CotiPONENTS Number of Ulli D? Customers Change Sales (000)(1) Change Demand (1) Change 1974 559,984 15312 4071 1975 574,498 2.59 16061 4.89 4121 1.23 1976 597,438 3.99 16949 5.53 4283 3.93 1977 622,408 4.18 19023 12.24 4477 4.53 1978 654,097 5.09 21095 10.89 4926 10.03 AVERAGE 3.96 8.34 4,88 (1) excludes interruptible sales to large commercial customer 9}}