ML20038B220
| ML20038B220 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 02/26/1981 |
| From: | Price G TEXAS POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML20038B200 | List: |
| References | |
| NUDOCS 8111240895 | |
| Download: ML20038B220 (32) | |
Text
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s PAGE 1 of 18 a e 3
DIRECT TESTIMONY OF G ARY L. PRICE
'l 4 2
Q. WILL YOU STATE YOUR NAME AND ADDRESS PLEASE?
,1 A. Gary L. Price, Texas Power & Light Company, P. O. Box 226331, Dallas, Texas.
3 g ".4 Q. WHAT ARE YOUR POSITION AND RESPONSIBILITY FOR TEXAS POTER &
J.
3 i LIGHT COMPANY?
5 6
A. I m reasurer and Assistant Secretary. As the chief accounting officer of the
[ 7 Company, I have overall responsibility for accounting matters and cash manage-
, g ment. I also participate in arrangements for long-term financing of t'ie Company.
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2.
g Q. WOULD YOU BRIEFLY DESCRIBE YOUR EDUCATION, PROFESSIONAL 10 QUALIFICATIONS AND COMPANY EXPERIENCE?
. gj A. I received a B.B.A. degree from Baylor University in 1966. I began my career i- o g with Texas Power & Light as a trainee immediately following graduation. In 1969, h } j3 I became Supervisor of Budgets and in 1972, I became Manager of General p Accounting. I was elected Assistant Treasurer in 1975, and in November of 1980,
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g I was elected Treasurer and Assistant Secretary. Included in my fourteen years y 16 with the Company are appearances before numerous city councils and the Public l P i 7g Utility Commission of Texas concerning rate applications of the Company.
- f'18 I became Certified Public Accountant in 1968, and I belong to the Texas l
- gg Society of Certified Public Accountants, the Dallas Chapter of Certified Public
?'
yl Accountants and the American Institute of Certified Public Accountants.
7 p O. TO WHAT EXTENT DO YOUR DUTIES BRING YOU INTO CONTACT 'VITH THE I.
4 g INVESTMENT COMMUNITY?
For the past few years I have been involved in meeting with investment banking
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73 A.
- firms during the issuance of new securities and consultation with individual
- 3 investors, security analysts and other parties interested in Texas Power & Light's
.a p 3 securtties, including agencies that rate the Company's securities, d ;p Q. MR. PRIC E, WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
{3 8111240895 811118 1 .
' I TEXAS POWER & LIGHT COMPANY
3 PAGE 2 of 18
- A. There are several areas of major importance that I will address in my testimony.
y 2 First, I will discuss the present financial position of the Company and 3
describe some of the events that have contributed to the Company's current
- 4 financial status. At the same time, I will comment on the capitalization of the 5
Company as it relates to Schedule H of the rate filing package which I am 6
sponsoring in this proceeding.
3 7 Secondly, I will discuss the return on common equity that the Company is j{g requesting in view of the recommendations contained
- in the testimony of Mr.
7
{ g Luf tig and Dr. Brigham.
g Third, I will discuss the composite overall cost of capital we are requesting
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- and how the requested return relates to and affects the Company's fir'ancial integrity.
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-g Fourth, I will discuss the necessity for inclusion of 100% of the adjusted f g test-year-end level of CWIP in the rate base and a continuation of the current recovery of fuel costs through the fuel adjustment clause.
) ' 15
, g Q. PLEASE DISCUSS THE COMPANY'S PRESENT FINANCIAL CONDITION.
e g A. The Company has, over the past ten years or so, been involved in a massive m g construction program to convert from natural gas as a boiler fuel to more t g abundant and less expensive lignite and nuclear fuels as Mr. Spence has previously
- ' L j 1; y testified. This program has been detrimental to the investor but the customer l i 21 has benefited significantly in that the fuel cost savings through the use of lignite y have amounted to millions of dollars. As a result of our construction program, we g have nearly quadrupled our plant investment during this period which has resulted p in great pressure being exerted upon the Company's financial position.
.g Q. MR. PRICE, COULD YOU EXPLAIN EXACTLY WHAT YOU MEAN WHEN YOU 3 SAY PRESSURE HAS BEEN EXERTED UPON THE COMPANY'S FINANCIAL j -
p POSITION?
l A. Yes. As shown on Exhibit GLP-1, our total electric plant has increased from $760 (3
l e
- TEXAS POWER & LIGliT COMPANY
". 's
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PAGE 3 of 18 j million at the end of 1970 to over $2.9 billion at the end of 1980. As shown on 2 Exhibit GLP-2, the Company's internal generation of capital requirements has 3 been inadequate for many years. As a result of the Company's cash earnings 4 having been inadequate, the Company has had to acquire a disproportionately 5 large share of its capital requirements externally. Due to this circumstance, e coupled with the fact that interest rates on new debt are substantially higher than 7 our embedded cost of debt, fixed-charge coverages have declined significantly to 8 3.3 times in 1980, as shown in Exhibit GLP-3. This exhibit shows TP&L's 9 supplemental coverages which include our allocable portion of the interest on 10 Texas Utilities Fuel Company (TUFCO) and Texas Utilities Generating Company 11 (TUGCO) senior notes. Exhibit GLP 4 shows that, while AFUDC as a percent of 12 net income available for common has remained in the 20 percent range over the 13 Past few years, it increased significantly in 1980 over 1979 and will increase even 14 further as a result of construction expenditures averaging over $400 million per 15 year over the next few years, unless adequate amounts of CWIP are included in 16 the Company's rate base. As the CWIP balance increases, without corresponding 17 rate base inclusion, the AFUDC to balance for common ratio becomes con-18 siderably higher and, thus, the quality of our earnings much lower.
19 Q. M R. PRICE, WHILE THE FINANCIAL INDICATORS YOU JUST DISCUSSED 20 HAVE DETERIORATED OR R EM AIN ED BELOW ACCEPTABLE MINIMUMS, 21 HASN'T THE COMPANY ACTUALLY EXPERIENCED AN INCREASE IN THE 22 RETURN ON COMMON EQUITY TO A LEVEL ABOVE THE 15.5% AUTHORIZED 23 IN DOCKET 3006?
24 A. On the surface it might appear that we earned our authorized return; however, if 25 we examine the numbers, taking into consideration that the Company was granted 26 a return on unamortized investment tax credits at the composite cost of capital, 27 we actually fell short by 116 basis points as shown in Exhibit GLP-5. In addition,-
28 I when our actual earnings are adjusted to remove the effects of the abnormally hot TEXAS LOWER & LIGHT COMPANY
PAGE 4 of 18 1 summer we experienced in 1980, the earned return falls short of the authorized 2 return by 219 basis points. Th;s is especially troublesome in an inflationary 3 period such as that of the past few years since the Company's base rates must be 4 adequate to cover the cost of service including an adequate return on the 5 Company's common equity without relying on increased revenues due to abnormal 6 weather. The C,ompany was fortunate that we did have a hot summer, since it 7 helped to partially offset the impact of inflation and the ongoing effects of 8 at trition. As shown in this filing, rates are not adequate and it would not be 9 prudent to hope for another record-breaking heat wave to produce the necessary 10 base rate revenue. Moreover, a 15.5% return on common equity is inadequate in 11 view of today's market conditions as verified by Mr. Luf tig and Dr. Brigham. As1 12 stated before, we have saved the customer millions of dollars while the common 13 stockholder has not been receiving an adequate return. As shown on Exhibit 14 GLP-6 the market price of the stock of Texas Utilities has not been above book 15 value since about September 1973. It is very obvious that the market place is 16 telling us that our earnings are inadequate.
17 Q. MR. PRICE, DID THE ABNORMAL WEATHER EXPERIENCED IN 1980 AFFECT 18 THE FINANCIAL INDICATORS SHOWN ON EXHIBITS GLP-2, GLP-3, AND 19 CLP 4.
I 20 ! A. Yes. Each of these financial indicators were improved by reason of the l
21 abnormally hot weather experienced in 1980 over what they would have been had l
i 22 i we experienced normal weather. Internal cash generaton for 1980 was 42.8%;
23 even that inadequate percent of internal generation was better than what it would 24 l have been had we experienced normal weather (39.3%). The inadequate fixed-25 charge coverage realized in 1980 (3.34 times) would have been 3.15 times if 26 l normal weather had been experienced. The AFUDC as a percent of net income 27 i available for common, which rose to the unacceptable level of 27.0% would have 28 risen to 29.3% had the 1930 weather been normal.
TEXAS POWER & LIGHT COMPANY
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PAGE 5 of 18 1 Q. \tR. PRICE, WOULD YOU PLEASE DESCRIBE THE COMPONENTS OF THE 2 COMPANY'S CAPITAL STRUCTURE?
3 A. Yes. I have prepared Exhibit GLP-7 which shows, in column (b), the Company's 4 actual capital by source at December 31, 1980. At the end of 1980, the Company 5 had total capitalization of $2.4 billion made up of long term debt, preferred stock, 6 common stock . equity and unamortized investment tax credits. I will discuss this 7 exhibit and the adjustments I have made to the capital structure at a later point 8 in my testimony.
9 O. MR. PRICE, WOULD YOU BRIEFLY DESCRIBE ANY FINANCING RESTRIC-10 TIONS IMPOSED BY THE COMPANY'S MORTGAGE, DEBENTURE AGREE-11 MENTS AND ARTICLES OF INCORPORATION?
12 A. Yes, sir. With respect to our mortgage bonds, new issues must be based on 13 property additions, with the maximum amount of new issues being limited to 60 6 14 of such additions. New issues of mortgage bonds may not be made unless, for 15 twelve consecutive months out of the last preceding fif teen months, earnings 16 before income taxes were at least twice the annual interest requirements on all 17 bonds at that time outstanding, including the additional new issue proposed.
l 18 The Company's sinking fund debenture agreements provide, among other 19 things, that no additional junior funded debt (debentures or debt ranking equal l
l 20 thereto) may be issued unless earnings for twelve consecutive months out of the 21 last fif teen months, computed before income taxes, were at least twice the 22 annual interest requirement on all outstanding indebtedness of the Company, 23 including interest on the proposed junior funded debt. Af ter incurrence of the 24 additional debt, all similar amounts of debt of the Company may not exceed 2506 25 of the outstanding mortgage bonds plus capital stock and surplus. The debenture 26 agreements also contain dividend restrictions on common stock which are 27 designed to maintain the aggregate preferred and common stock equity above 33 28 1/3% of total capitalization. Also, each issue of the sinking fund debentures has a TEXAS POWER & LIGHT COMPANY
PAGE 6 of 18 1 cash sinking fund provision which requires a 2% annual sinking fund requirement 2 commencing in the fif th year following issuance of the debentures, so that 40% of 3 the issue will be redeemed by the sinking fund prior to final maturity.
4 The Company is also obligated for several series of pollution control revenue 5 bonds rold by the Sabine River Authority of Texas and the Brazos River Authority 6 of Texas to finance construction of pollution control facilities at several of the 7 Company's jointly-owned generating stations.
8 With reference to the Comoany's preferred stock, new issues may not be 9 made unless, for twelve consecutive months out of the last fif teen months, 10 earnings before income taxes were at least i 1/2 times the sum of (1) the annual 11 interest requirement on all indebtedness, and (2) the annual dividend requirement 12 on all shares of preferred stock outstanding including the proposed issue.
13 Q. WHAT QUALITY RATINGS HAVE BEEN ASSIGNED TO THE COMPANY'S OUT-14 STANDING DEBT AND PREFERRED STOCK ISSUES BY THE TWO MAJOR 15 RATING AGENCIES, MOODY'S INVESTORS SERVICE, INC. AND STANDARD &
16 POOR'S CORPORATION?
17 A. The Company's First Mortgage Bonds have been des',gnated triple A. the highest 18 bond rating of both agencies. The Sinking Fund Deber.tures and Pollution Control 19 Revenue Bonds have been assigned a double A rating )y both agencies since they 20 are not secured by property but only by the general credit of the Company.
21l The Company's preferred stock is rated double A by both rating agencies, I
22 similar to our debentures and po!!ution control revenue bonds.
23 In order to maintain these ratings, the deterioration of the Company's 24 financial indicators must be reversed.
25 O. DOES THE COMPANY HAVE ANY OBLIGATIONS NOT INCLUDED IN THE 26 ! CAPITALIZATION SHOWN IN EXHIBIT GLP-7?
l 27 l A. Yes. Through our Operating Agreement with Texas Utilities Generating Company 28 (TUCCO), the Company is, in effect, obligated, along with Texas Electric Service TEXAS POWER & I IGHT COMPANY
PAGE 7 of 18
\
1 Company (TES) and Dallas Power & Light (DP&L), for $400 million of Senior 2
Notes issued by TUGCO to finance its lignite mining operations. There are two separate issues of TUCCO Senior Notes, one issue in the principal amount of $200 3
4 million due in September 1998 with an interest rate of 9.20% and a second issue of 5
$200 million due November 1999 bearing interest at 10.45%
6 Under a separate but similar Operating Agreement with Texas Utilities Fuel 7
Company (TUFCO), the Company is obligated along with TES and DP&L for $100 million of 3.50% Senior Notes due December 1996. In addition, before rates from 8
9 this proceeding go into effect, TUFCO will issue an additional $50 million of 10 Seni r Notes.
11 Q. MR. PRICE, SINCE THE PRINCIPAL AMOUNTS OF THE TUGCO AND TUFCO 12 SENIOR NOTES DO NOT APPEAR ON THE COMPANY'S FINANCIAL STATE-MENTS AS A DIRECT LIABILITY, WHAT IS THE IMPACT OF THESE NOTES ON 13 14 THE COMPANY'S CAPITAL REQUIREMENTS AND INTEREST COVERAGE 15 REQUIR EMENTS?
16 A. Under the requirements of the Securities and Exchange Commission (SEC), we 17 must include our pro rata portion of interest on the TUGCO and TUFCO Senior 18 Notes in the calculation of our fixed charge coverage as if it were our own direct 19 liability. In order to maintain an adequate SEC fixed charge coverage, including i
20 the Senior Note interest, the Company must maintain a capital structure with an 21 equity base sufficient to support the additional debt requirements and earnings l
22 j that will produce adequate fixed charge coverage when the additional or supple-23 mental interest components are included. Exhibits GLP-3 and GLP-8 illustrate 24 this more clearly.
25 Tith reference to interest coverage, the significance of debt in the capital 26 structure revolves, in the short run, around the Company's ability to pay the 27 interest as it comes due. Interest payments, of course, come from current 28 ! earnings; the ability to meet those payments is gauged in terms of interest gg U.XAS POWER & LIGHT COMPANY
PAGE 8 of 18 s 1 coverage or how many times current earnings will cover the interest require-2 ments. Even though the actual principal obligation for the TUGCO and TUFCO 3 Senior Notes does not appear on the Company's balance sheet, the Company is 4 directly obligated to pay its a!!ocated share of the interest costs under the S Operating Agreements.
6 Q. MR. PRICE, FOR WHAT PORTION OF THE TUGCO AND TUFCO NOTES IS 7 TP&L RESPONSIBLE?
8 A. Of the $400 million of TUGCO Senior Notes outstanding at December 31, 1980, 9 the Company is obligated for 43.7% or $174.8 million with a corresponding annual 10 interest obligation cf approximately $17.1 million.
11 Of the $88.2 mi!! ion (excluding amounts due currently) of TUFCO Senior 12 Notes outstanding at December 31, 1980, the Company is obligated for 45.68% or 13 $40.3 million with an annual interest obligation of approximately $3.4 million. In 14 addition, the Company will also be obligated for a like percentage of the 15 additional $50 million of Senior Notes.
16 Q. MR. PRICE, YOU PREVIOUSLY DISCUSSED THE COM PANY'S CAPITAL 17 STRUCTURE AT DECEMBER 31, 1980, AS SHOWN IN EXHIBIT GLP-7. WOULD 18 YOU PLEASE EXPLAIN THE ADJUSTMENTS YOU HAVE MADE TO THE 19 COMPANY'S CAPITAL STRUCTURE?
20 A. Yes. I have adjusted the capital structure per books at December 31,1980, as 21 shown in column (b) of Exhibit GLP-7, page 1 of 5, to reflect new fin ncing for 22 the Company in the form of $85.5 million additional common stock to be sold to 23 Texas Utilities Company prior to the rates set in this proceeding going into 24 eff ect. I have also adjusted the capital structure to include the remaining W.6 25 million funds on deposit with the trustee for the BRA Pollution Control Revenue 26 Bonds which were issued to construct pollution control facilities at Sandow #4.
27 The adjustment in column (e) on page 1 of 5 of Exhibit GLP-7 is to remove 28 from the capital structure amounts related to the portion (82.569%) of Sandow TEXAS POWER & LIGHT COMPANY
PAGE 9 of 10 1 Unit #4 that is dedicated by contract to Alcoa. The adjustment is prepared on a 2 consistent basis with the Sandow #4 elimination approved by this Commission in 3 Docket No. 3006. The mechanics of this adjustment are shown in detail in Exhibit 4 GLF-7, page 4 of 5.
5 O. IN YOUR OPINION, DOES THE COMPANY'S CAPITAL STRUCTURE AS AD-6 ]USTED REFLECT AN APPROPRIATE CAPITAL STRUCTURE FOR PURPOSES 7 OF THIS RATE PROCEEDING?
8 A. Yes, sir. The adjusted capitalization ratios, as shown in column (g) on page 1 of 9 Exhibit GLP-7, are the proper ratios for use in this proceeding and show that the 10l adjusted capital structure consists of 41.25% debt, 11.54% preferred stock, 11 40.63% common equity and 6.58% unamortized investment tax credits. While the 12 capital structure I have proposed is appropriate for the purposes of this particular 13 proceeding, it is clear that, in order to support the supplemental interest 14 obligation, the Company will need to continue to increase the common equity 15 component in the future as can be seen from Exhibit GLP-8, which shows the 16 effects of the Company's portion of the TUGCO and TUFCO Senior Notes on the 17 capital structure. In addition, the Company needs to increase its equity 18 component to partially offset increasing risks.
I 19 l Q. M R. PR!CE, WOULD YOU DISCUSS THE COSTS APPLICABLE TO EACH 20 COMPONENT OF THE CAPITAL STRUCTURE AS AD3USTED, AS WELL AS l
21 WHAT YOU HAVE DETERMINED TO BE THE OVERALL OR COMPOSITE COST l
22 OF CAPITAL?
l 23 ! A. I have prepared several schedules included in Exhibit GLP-7 to show the costs of 24 each component of the capital structure of the Company, as adjusted, at 25 December 1980. Page 2 of 5 of this exhibit shows, in detail, the components 26 of the Company's long-term debt and the associated interest costs used to arrive 27 l at an average cost of 8.02%. Af ter adjusting for me elimination of 32.569% of 28 l Sandow #4, the average or embedd d cost of the Company's long-term debt is 1
h TEXAS POWER & LIGHT CON!PANY
PAGE lo of la 1 7.99%.
2 Page 3 of 5 of Exhibit GLP-7 shows, in detail, the outstanding issues of the 3 Company's Preferred Stock and the annual dividend requirement of each issue 4 used to arrive at the average cost of 7.96%. After adjusting the Preferred Stock 5 for the 82.569% Sandow #4 elimination, the average or embedded cost is 7.86%.
6 0. HOW DID YOU DETERMINE THE COMPANY'S COST OF COMMON EQUITY 7 CAPITAL?
8 A. I have relied upon the expert opinions of Dr. Eugene Brigham and Mr. Mark Luf tig 9 whose testimonies are included in this proceeding. Dr. Brigham has recommended 10 that the Company needs to earn and actually realize a return between 17.7% and 11 18.9%, and Mr. Luf tig has determined that TP&L must actually earn a minimum 12 return of 18%. Af ter careful consideration of the testimony of these two expert 13 rate of return witnesses, I have selected a 17.75% return and have included this 14 return in column (h) of Exhibit GLP-7 and as a part of the computation of the 15 overall cost of capital shown in column (i) on page 1 of 5 of that exhibit.
16 Both Mr. Luf tig and Dr. Brigham have recommended returns on common 17 equity that will, if earned, enable TU to sell new issues of common stock at book 18 value. As shown in Exhibit GLP-6, the returns earned by the Company over the 19 past two years have not been sufficient to attain a market to book ratio of 1. As 20 a result, Texas Utilities has sold its last two issues of common stock at prices well 21 below book value. In March 1981, Texas Utilities will sell 5,000,000 additional 22 I shares of common stock and, in all likelihood, it will be the third consecutive issue 23 ; scid below book value.
I i 24 f O.
HAVE YOU DETERMINED AN APPROPRIATE RATE OF RETURN ON THE 1
25 COMPANY'S INVESTMENT TAX CREDITS INCLUDED IN THE CAPITAL 26 , STRUCTURE?
27 A. Yes. Af ter years of controversy surrounding the intent of Congress in providing 28 l for the investment tax credit and the appropriate return that should be earned on I
TEXAS POWER & l.IGHT COMPANY
PAGE 11 of 18 1
the unamortized portion of investment tax credits, the Internal Revenue Service s
2 has issued final regulations pertaining to section 46 of the Internal Revenue Code.
The regulations, issued on March 15, 1979, deal specifically with proper regulatory 3l 4 treatment of investment tax credits and establish the composite cost of capital as 5 the appropriate return to be earned on the tax credits. I have, therefore, applied 6 the composite cost of capital to the unamortized investment tax credits in the 7
capital structure shown on page 1 of 5 of Exhibit GLP-7. Also, the limitations 8 applicable to the Company, since it is an option 2 company, are that the credit is 9 not available if the benefits are flowed through to income faster than ratably over 10 the useful life of the property and, further, that there can be no reduction in rate 11 base by reason of the credit.
12 Q. WHAT HAVE YOU DETERMINED TO BE THE OVERALL RATE OF RETURN TO 13 BE APPLIED TO THE COMPANY'S ORIGINAL COST RATE BASE?
14 A. I have determined the overall fair rate of return on invested capital of the 15 Company at December 31,1980, to be 12.22% as shown in Exhibit GLP-7, page 1 16 of 5. When applied to the Company's requested original cost rate base, as 17 furnished by Mr. McDonough, the composite race will produce a total dollar return 18 of $280,778,897. If the mathematical approach employed by the Commission in 19 the past is followed in this case, the return dollars of $280,778,397 would provide 20 f a 9.57% return on the adjusted value rate base. This computation appears in l
21 l Exhibit GLP-7, page 5 of 5.
22 l Q. MR. PRICE, WHEN THE COMMISSION GRANTS THE COMPANY A SPECIFIC 23 RATE OF RETURN, DOES THAT, IN EFFECT, GUARANTEE THAT THE 24 GRANTED RETURN WILL BE EARNED?
l 25 ! A. No, sir. There is no guarantee that the authorized return will be earned. The I
26 l regulator should, however, take steps to afford the Company a reasonable 27 opportunity to earn the return that the regulator finds to be fair, reasonable and 28 l necessary. Being granted the means or opportunity to earn the allowed return on I
h TEXAS POWER & LIGHT COMPANY
PAGE 12 of 18 1
common equity is at least as important as the determination of the cost of s
2 common equity.
3 Q. WOULD YOU DISCUSS WHAT YOU NiEAN, IN \iORE SPECIFIC TERhiS?
4 A. Yes, sir. There are several major considerations that impact the authorized 5 return and the Company's ability to actually earn that return. First of all, our 6 Company is fac,ed with a construction program of approximately $400 million per 7 year and is going to have to raise significant amounts of capital from external 8 sources. It is a fact that, in the inflationary period of the past fif teen years, new 9 issues of, First \tortgage Bonds have carried an interest rate in excess of the 10 embedded cost of debt. A good example of this is our \tay 1980 offering of $50 11 million of First \iortgage Bonds with an annual coupon rate of 113/8%. I might 12 add that the 113/8% rate was near the market minimum rate for electric utilities 13 for the year. Our embedded cost of debt included in the rates in effect at the 14 time was 7.79E This, of course, is the phenomenon we refer to as capital 15 attrition.
16 In the same fashion, our other cosis of doing business do not remain at test 17 year levels during the period rates are in ef fect. Inflation, as well as other 18 factors, increase the Company's operating expenses over the average leve of 19 Operating expenses allowed in the Company's cost of service. The result is 20 expense attrition.
21 Anoiher consideration is investment attrition. Even if inflation were 22 , completely eliminated, investment attrition would still be a factor contributing to 23 the inability of the Company to earn the authorized return. This will occur 24 ! because the Company is adding plant at a unit cost higher than the embedded cost 25 of similar plant.
26 In summary, the combined effects of capital attrition, expense attrition and 27 investment attrition assure that the Company w ill not have a reasonable 28 opportunity to earn the authorized return unless the regulator recognizes the h TEXAS POWER & LIGHT CO.\lPANY
PAGE 13 of 18 1
economic realities under which we operate and takes steps to offset the adverse 2
effects of attrition.
Q. M R. PRICE, WHAT PORTION OF THE CONiPANY'S CONSTRUCTION WORK IN 3
4 PROGRESS ARE YOU REQUESTING TO BE INCLUDED IN THE RATE BASE?
5 A. We are requesting the inc'usion of 100% of CWIP at December 31, 1980, as 6 adjusted, in the Company's rate base.
7 Q. IN YOUR JUDGMENT,15 THE INCLUSION OF 100% OF CWIP IN THE RATE 8 BASE ESSENTIAL TO THE FINANCIAL INTEGRITY OF TP&L?
9 A. Very definitely. The rate of return requested on common equity in this 10 Proceeding is predicated on a rate base which includes the requested amount of 11 CWIP. Exclusion of CTIP from the rate base would undermine the viability of the 12 requested return, which is tL very minimum return recommended by Mr. Luf tig 13 and Dr. Brigham, and will impose obstacles to our financing program. The ability 14 of the Company to currently recover the financing costs of its construction 15 Program has a major impact on its risk position. Cash flow is extremely 16 important to the Company; bills must be paid with real money, not AFUDC.
17 The alternative to inclusion of CTIP in the rate base is to defer the 18 recovery of the financing costs associated with the construction program by 19 capitalizing them as AFUDC. The payment of actual financing costs, however, 20 cannot be deferred, and, as a result, the Company's cash earnings are reduced.
21 With less cash earnings, the Company's internal generation of funds is reduced; 22 therefore, the need for external financing is increased. As discussed earlier in my 23 testimony, this results in more pressure being exerted on the Company's financial 24 position and a higher embedded cost of capital.
25 With $637 million in CWIP (as adjusted) at December 31, 1980, the Company 26 must have a substantial increase in the leve! of Construction Work in Progress 27 included in the rate base or the amount of AFUDC will increase even more 28 dramatically in 1981. Referring again to GLP-1 and GLP 4, the amount of CWIP
@ TEXAS POWER & LIGHT COMPANY
PAGE 14 of 18 1
in relation to total electric plant is 25.4% and the percent AFUDC is of balance 2 for common is 27.0%; both have increased significantly over the previous years.
3 The increasing amount of Ai UDC in lieu of cash earnings is undermining the 4 Company's financial integrity.
5 Q. WHAT OTHER DISADVANTAGES RESULT FROM EXCLUDING CWIP FROM THE i
6' RATE BASE? ,
7 A. There are a number of disadvantages in addition to those I have already 8 mentioned. The major ones are (1) a decline in the quality of earnings, (2) reduced 9 interest c, overage and (3) higher rates in the future.
10 Q. WHY DOES THE QUALITY OF EARNINGS DECLINE?
11 A. Simply stated, non-cash income is substituted for cash income. This income is 12 simply the result of a journal entry rather than actual cash earnings. As a result, 13 l the quality of earnings declines. In other words, as AFUDC becomes a higher 14 Percentage of the Company's earnings, the quality of earnings declines. Full 15 inclusion of CTIP in the rate base would not eliminate the accrual of AFUDC 16 because the CWIP balance at the time these rates go inte effect will be 17 substantially higher than the level we are requesting in the rate base in this 18 proceeding.
19 ; O. HOT 15 INTEREST COVER AGE REDUCED?
20 ' A. As I mentioned earlier, exclusion of CTIP from the rate base lowers cash flow and 21 increases the need for external financing. This will result in more interest costs 22 l to be covered. Also, earnings that are received in lieu of AFUDC would have to 23 cover their tax liability. Since interest coverage is computed on a pre-tax basis, 24 ,l the use of AFUDC in place of real earnings would result in lower coverages.
I 25 l Q. HOW WOULD FUTURE RATES BE INCREASED?
26 l A. By capitalizing AFUDC, the total cost of f acilities is increased and this, in turn, 27 increases future revenue requirements which customers must pay. Another factor 28 is the higher cost of capital to the Company due to an increased risk position and i
a e a e e d
PAGE 15 of 18 s 1 the Company's external financing requirements being increased. This higher cost 2 of capital will directly increase the revenue requirements from the Company's 3 customers.
4 Q. DOES THE CUSTO\iER PAY FOR CONSTRUCTION IF CWIP IS INCLUDED IN 5 THE RATE BASE?
6 A. No. The investor is still paying for the construction. The customer is only paying 7 the " interest" or carrying cost on the money used for construction.
8 Q. MR. PRICE, ' ARE THERE ANY FACTORS IN ADDITION TO THE ITEMS 9 MENTIONED THUS FAR THAT WILL HAVE AN IMPACT ON THE COMPANY'S 10 ABILITY TO MAINTAIN ITS FINANCIAL INTEGRITY UNDER THE RATES TO BE 11 SET IN THIS PROCEEDING?
12 A. Yes. There is one facter in particular that has a very significant impact on our 13 cash flow and quality of earnings. It is very important that the Company be 14 allowed to continue to have the ability to utilize the FCF tariff to recover 15 currently the Company's cost of fuel used in generating electricity.
16 Q. WHY IS THE FUEL TARIFF SCHEDULE NECESSARY?
17 A. The necessity of an FCF tariff schedule is still readily apparent when one realizes 18 that this is the cheapest method for the customer and that the Company is still 19 faced with fluctuating fuel costs due to the fuel mix and the varying costs of each 20 type of fuel. Even minor fluctuations in the cost of gas, oil or lignite multiply out 21 to a large amount of money when one considers the vast quantities of fuel that we burn. Through the use of a Fuel Cost Fautor tariff schedule, the inevitable delay 22 l 23 between the happening of an event (lower or higher fuel costs) that entitles a 24 party (customer -- lower fuei costs; Company -- higher fuel costs) to legal relief 25 and the date when he gets relief is overcome. The customer receives the benefit 26 of lower fuel costs immediately, and the Company is protected when fue' costs 27 incret e. The uncertainty surrounding unit outages, abnormal weather, and the 28 availablility and arice of gas and oil are but a few of the factors that make it
. . h TEXAS IUWER & LIGHT COMi%NY
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PAGE 16 of is 1 impossible to accurately predict our fuel mix and the corresponding fuel costs.
s 2 During 1980, fuel costs represented approximately 51% of our total operating 3 expenses. If we were unable to recover these costs on a current basis, our cash 4 fl w w uld be adversely affected and our financial position weakened.
5 Q. HAS THE PERIOD OF RAPIDLY ESCALATING FUEL COSTS SUBSIDED FOR 6 TEXAS POWER & LIGHT?
7 A. Texas Power & Light is still subjected to fluctuating fuel costs. Weather, type of 8 fuel used (fuel mix) and the difference in the cost of each type of fuel used are 9 major factors of varying fuel costs. The Company uses the power plants which 10 burn the cheapest fuel first (base load) and then uses the power plants using the 11 more expensive fuels to meet the change in the Company's load. Therefore, 12 changes in the customers' electrical requirements due to weather can and do 13 cause wide fluctuation in fuel costs. Another reason for fluctuation in fuel costs 14 is the wide difference in the cost of lignite versus natural gas. When a lignite unit 15 is not operating (due to planned maintenance or unscheduled outage), the lost 16 generation must be replaced by generation from a gas-fired unit. The net result 17 is that the same amount of kilowatt hours are produced, but the fuel cost for 18 those same kilowatt hours is acreased approximately three times (lignite @ 70c 19 per MMBTU-gas @ $2.00 - $2.50 per MMBTU).
20 Q. IS IT PROPER RATE-MAKING PROCEDURE TO GRANT THE SAME RETURN 21 ON COMMON EOUITY AND THE SAME ALLOWANCE FOR WORKING CAPITAL
! 22 IF FULL FUEL COST RECOVERY IS NOT PERMITTED ON A CURRENT BASIS?
23 A. No; any knowledgeable authority will verify that there is more risk associated 24 with a company that does not have a tariff which permits the current recovery of 25 its full fuel costs than a company that has such a tariff. The increased risk 26 requires a higher return on capital to compensate investors for this increased risk.
l 27 Of course, any comparison between the working capital requirements of a l
! 28 company with full current fuel recovery and a company with a fuel limitation or
__. . _ - --_ - I.
PAGE 17 of 18 1 lag in the collection period (all other things being equal) will show that the 2 working capital requirements of a company with a fuel limitation or lag will be 3 greater due to the funds of that company being used longer before their collection 4 f rom the customer.
I 5 Q. DID THE PUBLIC UTILITY COMMISSION IN DOCKET NO.178, DOCKET NO.
6 1517 AND ALSO IN DOCKET NO. 3006 DETERMINE THE COMPANY'S 7 WORKING CAPITAL REQUIREMENTS AND ITS COST OF CAPITAL 8 RECOGNIZING THE FCF TARIFF SCHEDULE WOULD PROVIDE FOR FULL 9 CURRENT RECOVERY OF FUEL COSTS?
I 10 A. Yes. In all previous proceedings before this Commission, the working capital 11 requirements and the cost of capital were determined on the basis that the cost of 12 fuel used in generating electricity would be billed currently to all customers based 13 on the electricity consumed.
14 Q. IS THERE ANY OTHER BENEFIT BESIDES REDUCED WORKING CAPITAL 15 REQUIREMENTS AND A LOWER COST OF CAPITAL DIRECTLY ATTRIBUT-16 ABLE TO THE USE OF A FUEL COST FACTOR TARIFF SCHEDULE WHICH 17 PROVIDES FOR FULL CURRENT RECOVERY OF FUEL COSTS?
18 A. Yes. Rate case expenses are reduced due to the simple fact that the Company 19 does not have to file for increased rates as of ten. In the last rate proceeding, the i
Company's rate case expenses were approximately $500,000 and took approxi-20 l 21 mately eight to nine months to complete. Since fuel is the largest operating 22 f expense of the Company, any restriction placed upon the collection of fuel costs 23 will reduce the time between rate cases. Under present economic conditions, 24 Texas Power & Light must get rate relief almost annually even with full recovery l
l 25 l of its fuel expense. With anything less than full recovery of fuel expense, the 1
26l Company would be placed in the position of having to ask for rate relief every few 27 months, which not only would be extremely expensive but also would be an 28 l administrative nightmare due to the fact that there are 190 cities which exercise l l g MAS LOWER & LIGHT COMPANY
PAGE 18 of 18 j original jurisdiction over the rates and services of Texas Power & Light within s
2 their corporate limits as well as the original jurisdiction of this Commission over 3 the rates and services provided in the remainder of our service area. Lower rate 4 case expenses, lower working capital requirements and a lower cost of capital all 5 directly benefit the customer through lower base rates.
6 Q. MR. PRICE, WOULD YOU PLEASE SUMLIARIZE YOUR TESTIMONY?
7 A. Yes. The main thrust of my testimony is that it is extremely important for TP&L 8 to maintain its financial integrity. The high credit rating we have had in the past 9 has enabled us to achieve the substantial benefits that our customers are enjoying 10 today. Our financial flexibility and strength played a significant role in our 11 ability to utilize lignite-fueled generation in place of high cost natural gas 12 generation, saving our customers hundreds of millions of dollars in the ten years 13 or so since we began utilizing lignite as a boiler fuel. During this period, we have 14 seen times when it was very difficult for utilities to obtain long-term financing,-
15 especially on reasonable terms, but, because of our credit rating, we had access to 16 the markets at lower costs and reasonable terms. I strongly believe that it is in 17 the long term best interest of our customers for TP&L to maintain its triple A 18 bond rating. Our requested inclusion of CWIP in the rate base and the requested 19 12.22% overall return in this proceeding are the minimums necessary to preserve 20 our financial integrity and provide a fair return on common equity.
21 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
! 22 A. Yes, it does.
i 23 ,
24 25 26 i
I 28 TliXAS LOWER & LIGilT COMPANY
! 3,000 -
C.W.I.P. AS PERCENT OF TOTAL ELECTRIC PLANT .
! 52.950 -
(EXCLUDING 82.569% OF S ANDOW #4) ~
i 2,800 -
I l
i 2,600 -
[ --
2,400 ~
~
l ~ l TOTAL ELECTRIC PLANT 52.295
+-
2,200 M C.W.I.P.
~
'2.053
., =:+= -
2,000 -
1- :_.;. JG 3;f -
E si NN NN if ~=
< 1,800 -
.lais CM M :5 1 d- -
kNb $kh 1- ~[
y z- _.
,600 ppf (({ %K j 5i;-[6j o 1,400 -
NA5 N5 $S rD lN I ~
v>
5'3os W; iM M V~ ;E ~ ~ ~
~
' 51,107
~
E- =.
"^"
D
== + _ _ = c :L _ l~ 2 1_ L -
e 1,000 5960 Mo Xm :: - -
2 ~g_ 7_.
I $857 - i- c i- if Mi- f --- '~.---
1+ _--- i~
i 800 -
5760
=Q:l
-31.
h?
L- '
- '?'
g
~C
~
hi j~
[
l_ ~
.~ ~E :
^_
.-t -
2s.4%
l 600 ri sw J
~
i=-
--"=
-- . .19.s: '-
S- n Jf' 23.9% 22.4% 3g
_=_-] .
6m
~~
.- 3=
400
=- = 16.6%
11N%
jgE 200 10;2% : o.6% = 3.e%
0 E- E- " -
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 d YEAR END
TEX A5 POWER & LIGitT COMI'ANY internal Generation of Capital Requirements 1971 through 1980
($000 Omitted) 1972 1973 1974 1976 1977 1978 1979 1980 No. Description 1971 ~1975 (a) ~S~ (c) (d) (e) (i) ~fgI~ ~(hT- -(F G~ ~M-1 Cash Construction Requirements:
$100,604 $107,764 $152,542 $203,771 $264,776 $261,171 $278,075 $ 305.095 $363,049 $420,829 2 Total Construction Expenditures 5,912 4,969 5,400 lig 14,504 19,108 20,667 18,120 23,825 37,745 3 Less AFUDC t Total Cash Construction Requirements $ 94 692 $102,795 $147, l_42 $192,165 $250,272 $242,063 $257.,408 $286,975 $339,224, $ 38,} t08_4, 5 Funds from Internal Operation:
6 Net income af ter Preferred and $ 34,470 $ 47,217 $ 44,070 $ 64,021 Common Dividends $ 14,919 $ 19,485 $ 17,721 $ 20,364 $ 11,117 $ 19,815 18,812 21,958 25,217 29,518 38,064 43,671 49,009 56,312 64,152 69,880 7 Depreciation Provisions 1,172 2,681 5,399 6,699 9,413 11,152 13,192 20,827 27,164 33,551 8 Deferred Federal Income Tax - Net 3,0!3 2,498 5,863 12.312 19,647 31,118 35,021 42,993 h,062 9 Federal investment Credit Adjustments 4,790 10 Allowance for Funds Used During (23,825) ( 37,745)
Construc tion (5,912) (4,969) (5,400) (11,606) (14,504) (19,108) (20,6g ) (18,120)
Total Funds f rom Internal Operatior D2,004 $43,945 $45,435 $ 50,838 $ 56,402 $ 75g $ 1_22 $141,257, $154,554, $16},769 11 12 Per Cent Internal Generation (Line 11 + Line 4) 33.8% 4 2.8%_ _30.9% 26.5% _ _22A 31.1 % __41.6%_, J9.2%_ _4).6%_ _4 2. 8%
7
?Ii 9;
-?
R7
-~
TEXAS POWER & LIGHT COMPANY '
FIXED CHARGE COVERAGES (S.E.C. Basis) INCLUDING ALLOCABLE PORTION OF INTEREST ON TUFCO AND TUGCO SENIOR NOTES T
G-PRE - TAX COVERAGE Di ,
5.6 (including AFUDC) h PRE-TAX COVERAGE
!d 5- 5.4 \ \ 4 49 (Excluding AFUDC) ui
\ \D.8 -%
5 '
g p ]}% s tu 4,5 N N O Ys 4.0
$ 4- AFTER - TAX COVERAGE (including AFUDC)
N N
( 3.6 38
'$ 3.6 g y 3;3 J 3.2 3. N / \
g ' s 3.2 3.2 /
'E \\ l 3.0 N NI -
/i3.3 N 3.0
< 3.4 \p'DN \ N 3.0 y 3- a 3.0 3.2 %3.0 I 2 N. 9--- >/
2.0 6
2.7 1
4___3 2.5 2.5 g
N 2.5 2.5 1
N E
AFTtR - TAX COVERAGE N 'D I m (Excluding AFUDC) 2.6 K _ . # y,
^ % y X
~
L 2.3
.2 N $h 2.1 2.1 2.1 *R "a
i i l l l 1 I l 1 I og 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 ,,
YEAR ENDED
i 150 ~
A.F.U.D.C. AS PERCENT OF NET INCOME ,,,o 140 _
AVAILABLE TO COMMON SHAREHOLDERS -A 130
) 120 -
w= -
pm
- T 110 I- 1 INCOME AVAILABLE TO sio6 $ -
m COMMON SHAREHOLDERS My if Di-u 100 i _
- s r- ;;-w E:
l j 90 -
M A.F.U.D.C. 589 hhh f;jhh N _
i o sin ani! %z 9 m
80 -
M y , [j y g
= M
[ffi M
Q+-
o :=- -
l m 70 -
568 s $si NN y@ ;; -
- z -
- m y gg sim :
! 9 60 ssa d?; PMn; Os; i? - ;
- -i w 554 (gl+
- av 5: L, +-; p
! 5 50 -
548 55
[j? ] (;jy 3p F[ R ;:l:j = -
- $42 525=- s.3 m r w m;' m O
! 40 537 gn MR S 22 36; _ s " q; F4r MS_- &5 -
re-= wz = m ==- m
=. u -
30 M $[ [fy; Rj[f thP ~
-l '-N 22 fjif NE -
20 A b b --
e,, - 3,g _
26,a i
NN $Nn 13? 1 2o.2x l 10
[ %Ax }of io,7x 73 l
0- - - - - -
l 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 a0 YEAR ENDED
Exhibit GLP-5 Page 1ofI s
TEXAS POWER & LIGHT COMPANY Compa.ison of Earned Return vs. Authorized Return on Common Equity and Unamortized Investment Tax Credits
~
($000 Omitted)
As Adjusted Actual For Normal Weather Line .
12 Months 12 Months No. Description Ended 1980 Ended 1980 (a) (b) (c)
Earned Return Calculation:
1 Average Common Equity $ 863,345 $ 857,776 2 Average Unamortized Investment Tax Credits 155,078 155,078 3 Total $1,018,423 $1,012,854 4 Earnings Available for Common Equity and Investmed Tax Credits $ 139,885 $ 12S,748 5 Earned Return on Average Common Equity and Investment Tax Credits (Line 4 + Line 3) 13.74 % 12.71 %
6 Authorized Return (A) 14.90 % 14.90 %
7 Earned Return Excess (Deficiency) ( 1.16)% ( 2.19)%
Per Docket 3006 (1980)
(A) Authorized Return Calculation: Amount Rate Return -
Common Equity $792,075 15.50 % $122,77:
Unamortized Investment Tax Credits 118,042 10.91 % 12,87:
Total $910,i17 $135,65f Total Authorized Return 14.90 %
TEXAS UTILITIES COMPANY 32 -
AVERAGE MARKET PRICE Vs. BOOK VALUE OF STOCK 29.66 j 28.85 l
27.51 I 28 - / ,
24 - AVERAGE /"
,y MARKET PRICE g (MONTitLY AVEllAGE tilGil- LOW) 21.76 4 -
20.92 20.80 l b 19.69 0.58 20.19 ! #
19.76 m
E 20 - l 19.10 l '/-
$ 18 09 f ' 20.14 o
{
16.30 17.07 f' 18.95 g
16 - 15.09 17.34 le 13.40 12 _
f'/1/ \ YEAR END BOOK VALUE a
ss 8- . OE m -t "O
1970 i
1971 i
1972 i
1973 i
1974 i
1975 1
1976 1977 I I 1978 3 8 Og
'979 1980 wI YEAR
- TEXAS UTILITIES COMPANY AVERAGE MARKET PRICE Vs. BOOK VALUE OF STOCK 24 -
BOOK VALUE '
BY MONTli 21.54 g 20.63 20 81 20 80 '
IPW 20.45 20.51
! 20.14 '
20.09
/ - / \ I/
e j 20 - - N 'I 's/'\'V- iu V
~ l N 20.02 l l ,
19.50 l, 19.38
$ 19.25 o 18 -
18.63 l I
{ AVERAGE 18.25 18.06
- g MARKET PRICE I 17.38 17.56 (MONTiiLY AVER AGE tilGil- LOW) 16 - I l m 16.13 gy a ;;;
"4 O
i i i i i i i i i i i i i i O
e N D J M e
A J A e i e e i a i i e i i
@Q S F M J S O N D J F M A M J J A S O N D ui I !
1978 1979 1980 I
- YEAR
. . . _ . . ______,.._.,.m =- . - . - - _
1
/ .
}
1 i -
4 J
i ,
4 1
j TEXAS POWER & LIGitT COMPANY Schedule of Capital arx!
! Overall Cost of Capital -
l (Dollars in Thousands) -
i Adjustment i i
Capital at 12/31/80 Amounts at Per Cent Cost Weighted '
ine Capital at for New Adjusted for Sandow #4 12/31/80 of of . Cost of i No. Description 12/31/80 Financing New Financing Adjustment (C)
~
(a) (b)
Adjusted Total- ~
Capital C ital Ja
[ (c) (d) (e) fil (g) (if .
OF ;
i I Long-Term Debt $1,013,642 $ 7,591( A) $1,021,233 $ (72,987) $ 948,246 41.25 % 7.99 % 3.30 %
) 2 Preferred Stock 285,782 285,782 (20,433) 265,349 1
11.54 7.86 .91 3 Common Stock Equity 920,355 85,500(B) 1,005,855 (71,895) 933,960
]
i 40.63 17.75 7.21 4
4 Unamortized Investment
, Credits 169,645 169,645 (18,478) 151,167 6.58 j
12.22 .80
'5 Total 12389,424 jy,091, 2 $M2dl3 M 83,793) $L298,722 100.00 % 12.22 % t I
j (A) HR A Pollution Control Revenue Bonds - funds on deposit with trustee per Exhibit GLP-7, page 4 of 5 (B) Proceeds f rom sale of comon stock to Texas Utilitics (Parent) k (C) Elimination of capital attributed to that portion (82.569%) of Sandow #4 dedicated to Alcoa.
rn Er 2's .
9=
-P a?
l t
Exhibit GLP.7 Page 2 of 5 TEX AS POWER & LIGHT COMPANY Schedule of Long-Term Debt and Composite Cost Annual Principal Interest or %
issue Maturity Amount Amortization Average Line Outst anding Requirement Cost No. Titre Date Date
~
la) (b) (c) (d) (e) (f)
(Thousands of Dollars)
FIRST MORTGACE SOND5s a 31/4% 5eries 04 01 52 04 01 82 $ 14,000 $ 455 2 31/8% Series 10 01 54 10 01 84 20,000 625 3 43/8% Series 11 01. % 11 01 86 10,000 437 4 41/2% Series 12 01 58 12 01 88 12,500 %)
5 41/2% Series 01 01 61 01 01 91 '12,000 540 6 4 3/8% Series 02 01 63 02 01 93 10,000 438 7 4 1/2% 5eries. 01 01 65 01 01 95 14,000 630 5 % 5eries ' 02 01 66 02 01 96 20,000 1,000 8
02 01 67 02 01 97 30,000 1,650 9 5 t/2% 5eries 1,656 10 6 5/8% Series 01 01 68 C1 01 98 25,000 II 8 5/8% Series 02 01 70 02 01 00 30,000 2.587 09 01 70 09.01 00 30,000 2,663 12 8 7/8% Series 71/8% Series 02 01 71 02 01 01 y),000 2,137 13 -
02 01 72 02 01 02 'l.000 3,000 14 7 1/2% 5eries 3,750 15 7 t/2% Series 02 01 73 02 01 03 A ,000 16 8 t/4% Series 02 01 74 02 01 04 50,000 4,125 10 01 74 10 01 04 50,000 5,063 17 to 1/8% Series 18 91/2% Series C4 01 75 04 0l.05 100,000 9,500 19 8.60 % Series 01 01 76 01 01 06 100,000 8,600 20 8 t/4% Series 02 01 77 02 0l.07 100,000 8,250 21 93/8% Series 02 01 79 02 01 09 100,000 9,375 22 11 3/8 % Series 05 01 80 05 01 10 30,000 5,688 SINKING FUND DEBENTURES:
23 4 5/8% 5eries 01 01 62 01 01 87 6,711 310 24 41/2% Series 01 01 64 01 01 89 10,773 485 25 73/4% 5eries 04 01 69 04 01 94 16.228 1.258 POLLUTION CONTROL REVENUE BONDS (net):
Sabine River Authority of Texas 26 61/4% 5eries 12 01 76 12.01 06 29,773 1,861 27 3.70 % Series 07.01 77 12 01 07 !!,235 640 28 6.60 % Series 03 01 79 12 01 08 4,652 307 Brazos River Authority, Texas 29 7 t/2% Series 12 01 79 12.01 04 12,723 954 30 75/8% 5eries 12 01 79 12 01 09 29.686 2,264 31 NOTESPAYABLE various ' Various 1,969 151 32 UNAMORTIZED DEST DISCOUNT (3,760)
(3,848) 292 33 UNAMORTIZED DEST EXPEN5E _
34 TOTAL LONG. TERM DEBT @ 12 31 80 (Actual). . . . . . . . . . . ............$1,013,642 $31,254 J%
8 AD3USTMENTS:
Sandow de Eliminations 33 82.569% of BRA 71/2% Pollution Control Revenue Bonds (12,386) (929) 36 82.%9% of BRA 7 5/8% Pollution Control Revenue Bonds (28,899) (2,204) 37 First Mortgage Bonds at average incremental rate of 9.2% '(31,702) (2,917)
Financing Adiustments l 38 Polution Control Revenue Bonds . funds on deposit 1 39 BRA 71/2% Series 2,277 171 40 BRA 7 5/8% 5eries 5,314 405 _
41 TOTAL LONG. TERM DEST @ 12 31 80 ( Adjusted) . . . . . . . . . . . . . . . . $ 948,246 $75,780 7.99 %
=
s,
/ .
TEXAS POWER & LIGHT COMPANY Schedule of Preferred Stock .
and Composite Cost No. of Line Shares Amount No. Annual Dividend % Average Description Outstanding issued Per Books Requirement Cost (a) (b) 7cT (d) (e) (f)
(Thousands of Dollars) 1 $4.56 Ser les. . . . . . . . . . . 133,786 04/30 $ 13,379 $ 610 2 $4.00 Ser les. . . . . . . . . . . 70,000 04/30 7,000 280 3 $4.84 Series. . . . . . . . . . . 70,000 05/53 7,000 339. -
4 $4.76 Serles. . . . . . . . . . 100,000 10/56 10,000 476 5 $4.44 Serles. . . . . . . . . . . 150,.000 01/65 15,061 666 6 $7.80 Serie: 300,000 04/69 30,030
......... 2,340 7 $7.24 Ser les. . . . . . . . . . . 250,000 02/72 25,113 1,810 8 $8.20 Series. . . . . . . . . . . 300,000 02/74 30,108 2,460 9 $9.32 Series. . . . . . . . . . . 300,000 03/75 29,675 2,796 10 $8.68 Serles. . . . . . . . . . . 300,000 01/76 29,550 2,604 11 $8.16 Serles. . . . . . . . . . . 300,000 0'/77 29,655 2,448 12 $8.84 Serles. . . . . . . . . . . 300,000 02/79 29,59I. 2,652 13 $10.92 Series. . . . . . . . . . 300,000 05/80 29,670 ,_3,276 14 Total Preferred Stock
@l2-31-80 ( Actual) 2,873,786 $285,782 $22,757 7.96 %
ADJUSTMENTS 15 Sandow #4 Eliminations Preferred Stock at average incremental cost of 9.3% rn 16 (20,433) (1,900) 17 Total Preferred Stock .o .4
@l2-31-80 (Adjusted) $265,349 $20,857 7.86 %
&{*
"ar-dT u4 1 - -
, , e Eshibat CLP.7 Page4ef3 TEXA5 POWER & LICHT COVPANY 5chedule of Capital Structure Adiustments for Etimination of Capital Attributed to that Porteon of Sandow #4 Dedicated to Alcoa (Thousands of Dollars)
Portion Dedicated to Alcoa total (82.369 %)
(a) 6)
SANDOW #4 C APITAL REOUIREMENTS I Total Charges to Construction $crk in Progress $234,032 $ 193,238 Less:
2 Allowance for Funds used During Construction 4,130 1,427 3 Deterred Federal income Tases 7,289 6,018 4 Balance to be financed by Debt, Preferred 5tock, Common Equity and Unamortized investment Credits 222 393 183,799 3 Less Amount financed through Unamortiaed Investment Credits 22 379 18, as 7 8 6 Balance to be financed by First Morigage Bonds, Pollution Control Revenue Bonds. Preferred Stock and common Equity L2E24 $ 163.3I3 AVER ACE WEICHTED INCR EMENTAL COST OF FIRST uoRTCACE ROND5 AND Annual PREFERR ED 5TOCK USED TO FIN ANCE TH AT PORTION OF 5 AND0% se Principal Interest / Dividend % Average OEDIC ATED T0 ALCO A ,
A mount Requirement Cost (c) (d) (e)
First Mattate Ronds 7 1973 91/2% 5eries $100,000 $ 9.300 8 1976 8.60% 5eries 100,000 8,600 9 1977 8 t/4% 5eries 100.000 8,230 10 1978 None . .
!! 1979. 9 3/84 5eries 100.004 9,373 42 1980. Il 3/8% Series 30.000 3,688 13 TOTAL $430.009 $ 41,413 9.20 %
Preferred Stock 16 1973 . $9.32 Scr ees $ 29,623 $ 2,796 13 1976. $8.68 Series 29,330 2.6G4 16 1977 - $8.16 5eries 29,633 2,648
!? 1978 . None , . .
18 1979. $8.84 5eries 29,391 2.632 19 1980. $10.92 5eries 29,670 3.276 20 TOTAL $148.091 $ 13,776- 9.30 %
Detail of Principal % of % Average C APITAL TO RE EllulN ATED FOR SANDOT #4 Debt Amnung Tsal f I) Cost
(!) (g) (hi (i) 21 First ucrtgage Bonds $31,702 (6) $ 9.20 %
Pollution Control Revenue Bonds 22 BR A 71/2% 5 cries 12.386 (4) 71/2%
23 BRA 7 3/8% 5 cries 28,899 (3) 73/8%
24 Total Debt 72,987 (2) 44.13 %
23 Preferred Stock 20,rs33 (2) 12.36 % 9. 30 %
26 Common Equity 71,893 (2) 43.49 %
27 Unamortized investment Credits 18,478 (3) 28 TOTAL $183,793 gQ (1) Capitalization percentages based on percent Debt, Preferred Stock and Common Equity is of Total of same at 12 31 80 adl usted for nes financing per Enhibit CLP.7, page I, column (dh Percent Descrm' ion Amount of Total Long-term Debt $1,021.233 44.83 %
Preferred Stock 283,782 12.%
Common Stock Equity 1 903.833 43.49 Total $2.312.870- 100.00 %
(2) Capitalization pe.centage times Total to be financed by First Martgage Bonds, Pollution Ccntrol Revenue Bonds Preferred Stock and Common Equity (Line 6, column (b) of this Enh4 bit).
(3) 82.369% of Unamortized Investment Credits applicable to Sandow #4 at 12 31 80 (Line 3, column (b)of this Eshibit)
(4) 82.369% of 7 t/2% BRA Pollution Control Revenue Bonds issued in December 1979.
(3) 82.369% of 7 $/8% BRA Pollution Control Revenue Bonds issued in December 1979.
(6) Total Debt applicable to Sandow in less Pollutaan Control Revenue Bonds.
Exhibit GLP-7 Page 5of5 s
TEXAS POWER & LIGHT COMPANY Schedule of Return on Original Cost Rate Base and Adjusted Value Rate Base Weighted Cost Original Cost Return No. Description of Capital Rate Base Amount (a) (b) (c) (d)
Original Cost Rate Base 1 Long-Term , 3.30 % $2,297,699,650 $ 75,824,088 2 Preferred Stock .91 2,297,699,650 20,909,067 3 Common Stock Equity 7.21 2,297,699,650 165,664,145 4' Unamortized Investments Credits .80 2,297,699,650 18,381,597 5 Total 12.22 % 2,297,699,650 $280,778,897 Rate of Return on Adjusted Value Rate Base 6 $280,778,897 (Return) + $2,933,650,570 (Adjusted Value Rate Base) = 9.57%
'l
7 TEX A5 l'OWER & LIGHT CO'.tPANY Comparative Capital Structure Ratios .
December 31, 1973 through 1980
($000's Omitted)
Line 1980 No. Descri ytion '1973 1974 1975 1976 1977 1978 1979 usted fa) 6)~ (c I --(d) fel- -(0- - (g) - (i3~ As Ad{i~
h Cor pora te i Total Capital M3,766 $1,129,119 11,308,924 $1,M L710 $1,73,782 $1;83 @ 12152,641 j2,298,722 1
2 Capital Structure:
3 Debt 47.78 % 47.44 % 46.08 % 45.98 % 45.73 % 43.89 % 44.12 % 41.25 %
4 Preferred Stock 11.77 12.19 12.78 12.77 12.62 12.08 11.W ll . h 5 Common Stock Equity 19.32 38.94 39.02 38.31 37.61 38.51 -
37.4 6 40.63 6 Unamor tized Investrnent Credits 1.13 1.43 2.12 2.94 4.04 5.52 6.52 6.58 7 Total _ 100.00 % _ 100.00 % 100.00 % _ 100 M b _ I00.00 % 100.00 %
_ _ _100.00% _ 100.00_%
Sipplemental (includes allocable share of TUFCO and TUGCO Senior Notes)*
8 Total Capital $1,576f60 181 84112 12,018,111 $2183dO2 1 }2 1513 1
8}8 9 Capital Structure:
10 Debt 47.18 % 47.15 % 47.86 % 49. M % 46. 28't Il Preferred Stock 12.48 12.29 11.22 10.74 10.56 12 Common Stock Equity 37.46 36.63 35.79 33.83 37 15 13 Unamortized Investment Credits 2.88 3.93 5.13 5.89 6.01 14 Total 100.00 % 100.00% 100.00 % 100.00 % 100.00 %
m
- 3 -
$5 in 9
r , ,
THE STATE OF TEXAS X COUNTY OF DALLAS X BEFORE the undersigned authority on this day personally appeared GARY L.
PRICE, who, having been placed under oath by me, did depose as follows:
"My name is Gary L. Price. I am of legal age and a resident of the State of Texas. The foregoing testimony, and exhibits, offered by me on behalf of Texas Power & Light . Company, are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
.#:n YYA<
GARY LbSJCE SUBSCRIBED AND SWORN TO BEFORE ME by the said Gary L. Price this f[; day of February, A. D.1981.
^
kf /Robert
& fD.dDaniels b Q -1c 0 l J
['[
.O: .- Notary Public in and
- l," 1.,
. . for the State of Texas I' i , .
~
My Commission expires h8/Yk J
5 t
( M -
. iw6
\
C?}fl?
STATE OF TEXAS )
'81 NOV 19 P4:11 Philip K. Brown, being duly sworn, deposes and says:
. c r. - v
- 1. That he is the Assistant Director of the Pnb1'ip;M$hties Department of the City of Dallas, Texas; 3ftANCH
- 2. That included in his duties is the keeping of the original official transcript of hearings held in Dallas, Texas on the request of Dallas Power and Light Company for permission to increase rates;
- 3. That he is the keeper of the original official transcript of Dallas Power & Light rate hearings held November 24, 25, and 26, 1980; and
- 4. That the attached pages T 5 6, 2. 84 - t so , tot . g.93 . s o r. - s i o s e 4. - 3 3, are true and correct copies of the transcript referenced in~ item 3 preceding.
Philip K.4 Brown SWORN T0 and Subscribgd before me on this /3 day of November, 1981.
2 Notary Public My Commission expires: 4e.27/[
VOLUME II 1
,0 2
3 4 DALLAS POWER AND LIGHT COMPANY 5
6 APPLICATION FOR RATE CHANGE SUBMITTED TO THE CITY OF DALLAS 7 ,
8 9
10 _
11 w n m .ea.a y e= .- .~:2 N
- CZM t, Testimony taken November 25, 1990 c 'st
@ }l r.r1 2 14 Cc: J (Pages 256 to 490) tir. J 15 P.)
16 17 18 19 20 21 .
22 23 24 25 STANLEY HARRIS. RICE, t ANGFORO & Assoc 1ATEs REGesTERED PROFESSIONAL REPORTERS
25f 1 (The proceedings were e resumed November 25, 1980, 2 at 9:00 o' clock A.M., and the following persons were 3 present: Mr. James, Mr. Sparks, Mr. Wooldridge, 4 Mr. Engelland, Ms. Batchelc 8 Mrs. Ellis, Ms. Simmons, 5 Mr. Gay, Mr. Joyner and Ms. O'Brien. The follow-6 ing proceedings were had) 7 THE EXAMINER: The hearing is called to order .
~
8 Mr. Sparks, when we recessed last evening, you were 9 questioning Dr. Olson. Are you ready?
10 MR. SPARKS: Yes, sir.
11 G (By Mr. Sparks) Dr. Olson, as you will M recall, I believe we were talking about your discounted is cash flow analysis, and we had discussed sort of genera l 14 terms, how it works, some of the things that go into 15 it, and we had discussed the fact, I believe, that is if everything else stays the same but the price of the 17 stock goes down, it tends to make the result of the 18 DCF to come out higher. Do you recall that?
19 A Yes, I do.
20 0 Okay. Now, let's talk some_more about the 21 dividend yield part of DCF. Do I understand correctly 22 that you used the ctrrent dividend yield and is that 23 10.3 percent, is that correct?
24 A I used a dividend yield based on the current 25 indicated dividend rate of a dollar seventy-six and an STANLEY, HARRIS, Rice. LANoromo & AssoctATES REGISTERED PROFESSIONAL REPORTERS
284 1 A Yes.
0 2 O And tha t 4 0 percent might be threshold?
3 A I think as we get below 40 percent things 4 start to get a lot more iffy as far as the rat'ing of 5 financial possibilities.
6 Just a minute. I had another question, I've G
7 got to track it down.
8 I believe you've answered my question, thank 8
you, Dr. Olson.
10 Thank you.
A 11 The witness is excused.
THE EXAMINER:
MR. WOOLDRIDGE: Call Mr. Karney, 13 Mr. Examiner.
14 KARNEY, JOE D.
15 having been previously sworn to testify the truth, the le whole truth and nothing but the truth, testified on 17 his oath as follows:
18 DIRECT EXAMINATION 19 BY MR. WOOLDRIDGE:
"U g Will you state your name, please, sir?
21 A Joe D. Karney.
22 O Mr. Karney, the testimony in the ra te filing 23 package in the first volume, under your name, is that 24 your testimony?
25 A Yes, it is.
STANLEY. HAmmis, Mter, L ANGFORO & ASSOCIATES ReGisTanto PeortSsCNAL REPORTERS
- - - - - - - - - - . . - _ , , _ - . . _ _ . . . _ _ _ DALLAS. TEXAS 75201 _
285 1 G Do you have any corrections or changes to D
2 make in that testimony?
3 A I have one minor correction to make on page 4 7 of that testimony.
5 G All right.
6 A It's on line 3, it's a typographical error.
7 It reads, "Also, from 1969 to the end of 1979," it 8 should read, "Also f ron. 19 6 8 to the end of 1979."
9 That is the only' correction.
10 0 All right. And with that correction, is your 11 testimony true and correct and do yo'u adopt it as your 12 testimony in this hearing?
13 A Yes, I do.
14 MR. WOOLDRIDGE: Mr. Examiner, we would offez 15 the testimony of Mr. Karney as so corrected and offer 16 Mr. Karney for cross-examination.
17 '
CROSS EXAMINATION 18 BY MR. JOYNER:
19 0 . Good morning, sir.
20 A . Good morning.
21 O How are you doing? I will start the sub-22 stance of my examination by asking you, would you give as me your personal definition of' financial integrity as 24 it applies to Dallas Power E Light.
25 A Well, my personal definition of financial STANLEY. HARRfs. RICE. LANGFORD & ASSOCIATES REcssTERED PROFEsseoNAL REPORTERS DALLAS. TEXAS 75201
280 1 integrity is the ability of a company to pay its obli-0 2 gations on a timely basis and to pay a reasonable retuz n 3 to the investors for risking the capital in that compar y 4 Certainly it's also the ability to borrow money at a 5 reasonable rate, to have a good credit rating, to
~
6 maintain flexibility within your dealings in the 7 financial community and in obtaining capital. .
8 G All right. So would it be, in your opinion, 8 that in order for the company to maintain its financia]
10 integrity, it would be necessary for the city to allow 11 it to recover its construction work in progress 12 expenses as you've asked for in this rate case?
13 A In my opinion, it is necessary to include 14 construction work in progress in order to maintain
" financial integrity, yes.
le 'Could the company decide to build O All right.
17 a generating plant that had less expensive constructior
" costs provide energy for the customers?
18 I'm sorry, I didn't understand the question.
A 20 g Could the company decide to build a generatirq
- 1 plant that had less expensive construction costs and provide energy for the customers?
- 3 That really falls a little more under A
- ' Mr. Tanner's testimony, but I would say no, that we're 25 building plants as cheaply as we know how and to STANLEY. HARRIS. RICE. LANGFORD & ASSOCIATES REGisTrato PeortsSIONAL REPowtEns N GTvX37M
287 1 utilize the fuels --
the lower-cost fuels for the bene--
0 2 fit of our customers.
3 g I believe you alluded to, in your testimony, 4 that tone of the benefits of the generating plants 5 that's under construction work in progress to the 6 current customer is that it will u'se cheaper fuels and 7 in the future, it will provide some assurance that 8 power will be available to them if they live in the 9 service area at the time that the plant came on line, 10 is that correct?
11 A I think'the purpose of our construction 12 program is to cssure an adequate supply of electricity
'13 for our customers at a reasonable price, yes.
14 g But you would agree to me that one central 15 purpose is that it would benefit the customers, would le you not?
17 A Yes, it benefits the customer.
18 G All right. So if it wouldn't serve any bene-19 fit to the cus?.omer, if you couldn't definitely say 20 that, then it should not be included in the rate base, 21 should it not?
22 A I think the only purpose of the construction 23 program and of construction work in progress is to 84 benefit the customer. They are the only reason that 25 we build additional electric plants. And it would be 3 '1,,
7 .- STANLEY. HARR:S, RfCE. LANGFORc & Assoc 1ATES REGISTERED PROFESSIONAL REPORTERS 0
288 1 entirely, in my opinion, inappropriate to exclude o
2 construc tion work in progress, and I guess this is 3 your question --
4 G No, let me restate it.
5 A All right.
6 0 I think you ' ve go tten away from it. I simply 7 asked if you could not definitely say thst construction a work in progress would serve as a benefit to the 9 Dallas consumer, it should be excluded from the rate 10 base, isn't that a correct statement?
11 A If you can say th'ai it is not of benefit to 12 the consumer as a whole, I would agree to that.
O All right. Now Dallas Power & Light, they l' have exclusive control and management on your con-15 struction work in progress in terms of its management, i le and when it's constructing a new generation plant 17 and what have you, is that correct?
18 A I think that's essentially true, although we 18 do have some properties that we are jo'intly building 20 with Texas Power & Light Company and Texas Electric U1 Service Company.
- Do you have any generating plants that you O
23 have joint control over?
24 A Yes, we have several.
25 Could you tell me those?
0 STANLEY. H ARRIS. Rict. LANGFORD & ASSOCIATES REGISTERED PROFESSION AI. REPORTERS DALLAS. TEXAS 75201
289 1 A Yes, that's the Big Brown lignite plant near a
2 Fairfield. The Monticello plant near Mount Pleasant 3 and the Martin Lake plant near Henderson, as well as 4 the Comanche Peak plant that's under construction in 5 Glen Rose.
6 g So by joint control, then, am I correct to 7 assume that you can't unilaterally make a decision as 8 to what to de with the plants, is that correct?
9 A You cannot unilaterally because there are 10 three --
11 0 That's fine.
12 A - . participants in that plant.
'33 That's fine, thank you.
G 14 Now, I believe you state in your testimony 15 that one of the central problems that Dallas Power &
16 Light is currently f acing and in the past has f ace diis 17 the fact that not a sufficient amount of CWIP 'has been la included in the rate base, is that correct, sir? .
19 A I think that's part of the problem, yes.
20 0 Well', what was the other problem?
21 A Another problem is an insufficient return 22 on common equity.
as G In the past the commission has allowed 34 certain portions of CWIP to be included in the rate 25 base, is that correct?
STANLEY. HAnats. Rice. LANGFORD & ASSOCIATES REGISTERED PROFESSONAL REPORTEns N .GAO72E1
290 1 A That is true.
o 2 O All right. Now what percentage does the AFUDC 3 presently represent of the earnings available to the 4 company? You can take your time.
5 A 36.7 percent f o r t'..e history.
6 Okay. Now, as a matter of fact, it has been 0
7 trending down since 1977, isn't that correct?
8 A I would say it's been substantially f_at 8 since 1977. It actually trended up slightly and has 18 decreased in the last several months only because we
~
11 sold a portion of our generation plant, and that's the 12 reason for the decline.
O Okay. Now you refer to Forest Grove. Okay.
14 Now Forest. Grove, are you going to have more AFUDC?
15 A There will not be a, I don't think, a I8 substantial increase in AFUDC as a result of Forest I
17 Yes, there will be some, but the primary reasor t
. Grove.
18 which will not be significant, is that there have not i
19 been that many expenditures to date on Forest Grove.
20 You only get a substantial increase in AFUDC when a l
21 plant is deferrnG is when you have incurred substantia:
- expendituree .t .he time you defer it, and tha t ' s not the case w.yth svtest. Grove.
I
"' AFUDC, that's directly related
! - 4 i.1.1 right.
25 to the construction program, is that correct?
STANLEY. HAnnis. Rice. LANGPf. AO & Assoc 3ATES REGesTERED PeortsslONAL REPORTERS I
_ o4LLAs. TuxAs vsao s . _
292 1 A Yes, it is.
O 2 G All right. Now, have you peaked out on any 3 of the construction programs?
4 A I believe our construction numbers for, at 5 least in our near-term projection, would indicate that 6 we may have peaked, I believe, in 1978, '79, I don't 7 remember the numbers, approximately 180 million.
8 g Ara that's going to add to AFUDC, isn't it, 9 would it no t?
10 A The --fI'm sorry, I don't understand the 11 question.
12 g . Let me just scratch it, I'll ask that later.
13 All right, now what about the proposed l' construction expenditures in the future. Would there 15 be less expenditures in cost in 1980 and 'Bl?
16 A I can't seem to find the numbers right now, 17 but the expenditures for that period of time are on the 18 order of 130 million, if you're - .I don't have the II exact numbers. I have them somewhere.
20 g Well', subject to check, I'll get that 21 information later.
- All right, now how does your AFUDC as a per-83 centage of earnings figure in with the economy compared 24 to the industry average or mean?
25 I would say for the entire industry, it's A
STANLEY. HARRts, RICE, LANGFORD & ASSOCIATES REGISTERED PRortssioNAL REPonTEns DALLAS, TEXAS 75201
293' 1 near the average.
C 2 O Is it higher than the average Double A?
3 A For the average Double A, I would say it's 4 probably lower.
5 0 Is it higher than average Triple A?
6 A It's lower than the Triple A.
7 0 It's lower?
8 A Than the average, yes.
9 O During the time that you have haa this high 10 level of AFUDC, you have not been denied any access 11 to the market, have you? You have b~een able to issue 12 not only new debt but new preferred common stock, haver,
'13
- you?
14 A No, we have not.
15 g When --
16 A We have not issued any debt since 1977.
~
17 We've not issued any preferred since 1973, if memory la serves me correct.
l 19 Now I believe you stated earlier that CWIP -
l G i
20 should not -.I believe you agreed with me earlier that 21 CWIP should not be included in the rate base if it wouJ c t
22 not serve as a benefit to the customer, we came to 23 agreement on that earlier, right?
24 A I agreed to that only to the extent that 25 we're talking about the customer as a whole.
I STANLEY. HARRts. RsCE. LANGFORD & ASSOCIATES REGISTERED PROFESSIONAL REPORTERS
. MD
306' I to your knowledge, have to borrow money to pay their
- 2 electric bill?
3 A I'm not aware of it, no.
4 g If they did -- never mind. Withdraw that 5
question.
6 On page 6, line 18, you're talking about the 7 net earnings which are reinvested by the company in the 8 construction program, and you refer to your' Exhibit I
No. 4. ,
10 A Yes.
11 g When did the last rate increase go into 12 effect?
13 A I believe it was September of 1979. Late 14 September or early October.
15 Did the last rate increase help to change g
16 those figures, change this graph?
17 A It certainly helped from what it would have 18 .
been otherwise.
19 g Will the hot weather that we have had this 20 year help in the picture for next year?
21 A It will only help insofar as those -- some 22 three or four months are concerned. This is another 23 number that's computed on.a twelve-month basis, so you' 24 looking at a twelve-month period rather than one summer 25 g But the earnings this year, because of the STANLEY. HARRIS, RICE LANGFORD & AssocrATES REGISTERED PROFESSIONAL REPORTER 3 M %XAS 75201
307 1 hot summer, were up considerably, were they not?
O 2 A Not in the test year. In the test year, 3 there's essentially not that much effect of the hot 4 weather.
5 g Right, I understand that, but when you con-6 sider what the graph's going to look like next year, 7 there will be quite an increase there, will there not?
8 A I wouldn't say quite an increase, there 9 will be some increase because of it.
10 0 All right. On page 7, line 3, you state that 11 from 1968 to the end of 1979, construction expenditurer 12 Why have they have increased more than four times.
13 .
Increased?
14 About 1969 or thereabouts, that we began onr-A 15 construction program to change to alternate fuels, is to build the lignite plants and so that's the reason 17 that they have increased. We began a pretty ambitious 18 construction program in, I believe 1969, to build those 18 lignite plants.
20 All right. That answers part of my question, G
21 but since that time, haven't we also seen a great 22 increase, for instance at Comanche Peak plant, the cost 83 of construction has risen from 777 million to a current
- 2.35 ibillion, isn't that correct?
25 A The cost of all construction has increased STANLEY. HARRts, Rtct LANGFORD & ASSOCIATES REGISTERED PROFESS 4ONAL REPORTras
308 1 over that period of time, yes.
O 2 G But the cost of that plant has incre'ased to 3 that magnitude, has it not?
4 A As well as other plants, yes.
5 4 None of the others have increased to that 6 extent, have they?
7 A I can't speak to other plants but there are 8 substantial increases in not only that one but as to 9 the Forest. Grove.
10 G Have the Forest. Grove estimates increased, 11 have they tripled?
12 A I'm not sure, I can't quote any numbers on
'13 They have increased substantially.
that, Mrs. Ellis.
14 Who would have those numbers?
G 15 A I am sure Mr. Tanner would probably have le some numbers on construction-costs.
17 All right. Regarding the Comanche Peak plant 0
18 that plant has had quite a few problems, too, in the 18 construction itself, has it not, things that have 20 had to be redone and so forth, or reworked?
21 A I would only be -- it would only be hearsay whatever I could -- I'm not --
83 Mr. Tanner --
4 24 A -- construction program at Comanche Peak.
25 Mr. Tanner would be able to answer that?
4 STANLEY, H ARRIS, RfCE. UNGFORO & ASSOCIATES REGISTERED PROFESSIONAL REponTEns
loc 1 A Yes.
O 2 O On the same page, page 7, line 10, you state 3 that Dallas Powerr& Light should generate on a con-4 sistent basis 50 percent of its capital needs internal 1f 5 What is your basis for that statement?
6 A It's based primarily on my experience in the 7 company and in the electric utility industry. I feel 8 that we should be generating about 50 percent of that 8 construction. It simply means that we're having to 10 obtain less funds externally at some pretty high 11 rates at the present time. The -- a's a matter of fact, 12 our regulatory commissions have acknowledged that 13 range of 4 0 5to 60 percent should be generated interna 13 :.
l' Are there any studies or anything, any G
15 reports that you know of that might back up this 16 statement?
17 A I think the only studies would be what other la companies are doing and things published periodically 18 that show what other companies are doing, wnat percent 20 or funds that they have generated internally.
21 I would like to follow up on a few things O
- that were said in cross-examination by Mr. Joyner.
- 3 When you have a situation where you're gettir u 8' a return on the rate base of the portion that you get 25 included in construction work in progress, isn't it STANLEY. HARRIS. RfCE, LANGFORO & AssOctATES REGISTERED PROFESSIONAL REPORTERS -
__,_, _.. . DA LLA S TEXAS 7520.1_ __ _ _ , _ _ _ , , ,_
310 ;
1 in effect, all other considerations aside, just D
2 strictly from a monetary viewpoint of the company, is 3 it not in the company's best interest from that viewpoi n 4 alone to build the most expensive possible plant?
5 A No, I would say the opposite is true. Our 6 construction has benefited our customers, the sharehold.e 7 are not benefiting at all. In actualit,y, it's been 8 to the detriment of the shareholders and the customers
.9 have benefited from construction.
10 0 But if you do have a certain amount of return 11 on construction work in progress, then the more expen-12 sive the plant, the more that you get included in the rate base, the more money that's going to come into 14 the company. is that not correct?
15 A The more you get in the rate base, the more 16 of a rate increase that you could expect to get. But 17 you still can't build a plant, borrow money to build a 18 plant at the rate we're having to build now and -- with .
19 our earnings where they are. It would be ridiculous fm 20 us to build a plant or to spend money unnecessarily, 21 that's the reason our earnings are low, because of our l
22 construction program.
2s G I believe at one point you made a statement 24 that the purpose is to a s:_ u r e the reliable electricity 25 at a reasonable cost, is that correct?
STANLEY, HARRIS. Rice. LANGFORO & Assoc ATEs REGISTERED PROFESSIONAL REPORTERS DALL.AS. TEXA5 75201 __ __ _ _ _ _ _ _ _
324 1 very general way about your testimony regarding the a
2 Triple A bond rating, Mr. Karney, and I want to 3 approach this a little bit carefully. And before I as) 4 you a question, let me state to you that we're not in 5 any disagreement, I think, with the general propositior 6 that a good bond rating is advantageous both to the 7 company and to the rate payers. Do you agree with that ?
8 A I certainly would.
9 G Do you understanck my statement to you, that 10 we're not in disagreement with you on that proposition?
4 11 A Yes.
12 G On cross-examination previously, I believe yc e
'13 Let me gave your definition of financial integrity.
14 ask you one more time to tell us what you think the 15 term " financial integrity" means.
Is A. Well, as I said in my previous answer, cer-17 tainly one of the things, the primary indicator of what 18 2 would think financial integrity is is that you pay 18 reasonable returns to your investors. To pay -- to i
20 meet your obligation, all of your financial obligations 21 on a timely basis, the ability to borrow money and the 22 ability to borrow at a reasonable cost. And certain --
23 if you are going to have financial integrity, you need 24 a certain amount of flexibility. You should be able tc i
25 operate,n from a position of strength in financial STANLEY. HARRIS, RfCE. LANGPORO & ASSOCIATES REGISTERED PROFESSONAL REPORTERS
- - _ - . _ , _ _ _ . _ _ _ _ _ _ _ . . . , _ _ _ . , _ _ _ _ , _ , , _ . , _ _ _ _ . _ _ _. M SQ m Q yqQ31 _ ___ _ , __ ___ ._ _
f 325 1 markets rather than from a position of weakness.
o 2 g All right, sir. And would you agree with me, 3 then, that the substance of that answer would lead one 4 to conclude that a high bond rating would result if 5 those. things were accomplished?
6 A Yes, I think if you accomplish all those 7 things, you very likely would have a good bond rating.
8 @ A good bond rating?
9 A Yes.
10 G I'm not going to ask you to testify to any 11 type of legal conclusion, but I am going to ask you E3 if you're familiar with the Texas Public Utility Regult tory Act.
14 A Yes.
15 G Are you aware of anything in that act that le eithe. directs or authorizes the regulatory authority 17 to set rates at a level which are designed and intendect 18 to protect any specific level of bond rating?
18 A I believe the act speaks to financial 20 integrity.
21 That's right, to financial integrity. It G
22 doesn't say anything about bond ratings, does it?
23 A No, it doesn't.
24 g would you agree with me, at least generally, 25 that the duty of the regulatory authority, then, is to STANLEY, harms RICE. LANGFORD & AssoctATES REGISTERED PRoFEsssONAL REPORTERS DALLAS. TEXAS 75201
326 1 set rates at a level which will permit the utility 0
2 to recover its operating expenses and a reasonable 3 return on invested capital?
4 A I believe that's what the act says.
5 0 And that the regulatory authority in good 6 faith makes every effort to achieve that goal as it's 7 required to do under the law, then would you agree witt 8 me that the bond rating agencies can then take the 8 results of that and do whatever they think is appro-10 priate?
11 A I believe that's correct.
12 So it's not necessarily the duty of the 0
regulatory authority to set rates to protect any spe .
14 cific bond rating, is it?
15 I think it's the duty of the regulator to A
le assure financial integrity.
17 g All right.
18 A And if you assure financial integrity, there 18 is a good chance that you will be able to maintain boncL 20 ratings.
21 g A good bond rating?
22 Well, maintain bond ratings. If you have a A
2s Triple A and you do not maintain that, I think you have !
8' lost a certain degree of financial integrity.
25 g Where do these bond ratings come from?
STANLEY. HAmmis. Rict. LANGFORD & ASSOCIATES REGISTERED PROFESSIONAL REroRTEns
. . . _ . _ _ _ _ _ _ _ _ _ _ _ _ . _ _ N N MO
327:
1 A There are four dif f erent rating agencies out O
2 of New York that rate bonds. I believe one's out of 3 Chicago, if I am not mistaken.
4 G Can you tell us who they are, sir?
je 5 A Standard & Poorh, Moody's, are the two major 6 ones. The two minor ones are Fitzhugh's and Dun &
7 Phelps.
8 O And would it be correct to say that these are 9 private sector agencies which provide advice to _
10 investors?
11 A There are certainly privat'e sector agencies D3 that operate independent of any influence from a 13 company, specific companies or industries, or the inves l'
ment community as a whole. There are independents --
15 They are also independent of the regulators, 16 are they not, sir?
17 That's correct.
A I
18 And can you just give us at least a brief G
8 description of your general understanding of how they 20 go about setting a bond rating?
l l
21 A Well, the rating agencies look at a number of 22 One l
criteria in determining a specific bond rating.
- 3 of the things that they are looking at specifically is 24 the achievement, financial cachievements of a company 25 over time, not in any specific year. You cannot be STANLEY. HARRIS. Rict. LANGFORD & AssoclATES REsisTERao PRortssCNAL REPORTERS DALLAS, TEXAS 75201
328 1 expected to either be downgraded or upgraded on the a
2 basis of one year's performance. They look at your 3 record over time. And that's , - I thinkw'.especially 4 meaningful in'that for a bond rating, they are rating 5 30-year bonds and it's appropriate that they look at 6 what that company can be expected to do or whether that 7 company can contain -- attain and maintain the necessar 8 financial' integrity to meet the obligations on those 8 bonds over time.
10 So again, they are looking at a company, not 11 only their historical performance but on their future 12 performance .
As far as financial results, the -- one 13 of the primary indicators, the one we have been talking l'
about, the interest coverage, basically the earning 15 protection for the bondholders, they lock at the --
16 certainly, also, the return on equity and the return,.
17 rate basis to some extent. They place an awful lot of 18 dependence on the balance sheet, on the debt leverage 1 or to put it another way, the amount of common equit*,'
20 which the company has. The more common equity, the 21 more chance you have that"ycu will get a higher rating.
As you are aware, there is a certain mix that should 23 be there.
24 They look to the -- well, the accounting 25 quality, do you have conservative acccunting practices STANLEY. HARRIS, RfCE. LANGFORD & ASSOCIATES REGISTERED PRortssioNAL REPORTERS DALLAS. TEXAS 75201
329 1 and to estim6 se, they look at financial projections, as D
2 I have mentioned, because they are looking in the futur 3 They also look at non-financial indicators, 4 the service area, your fuel supply, and your management.
5 and things like that.
6 G All right. Thank you very much. Let me see 7 if I understand your answer. I believe you would
~
8 probably agree with me that predominantly, they look 9 at the financial results and the numbers, is that 10 correct?
11 A I think that's basically true, but I think 12 you also have to keep in mind that the other factors
'D come into play and as I say, they will not necessarily 14 upgrade you because you have two or three years of 15 good performance. They look at what can be expected 16 in the future. There are some companies that have good 17 coverages right now that are Double A's, and they are 18 probably going to remain Double A's because of what 18 might 'an c be expected in the not-too-distant future.
go All right, sir. Well, in any event, they do G
21 look at the numbers and the financial results, the 22 balance sheet, the coverage ratios and all these fairly 2s objective things that you mentioned. And I believe you 24 also said, did you not, that they also<look at such 25 things as the nature of the service area?
STANLEY. HAnnes. Rect.1.ANGFORD & AssoclArts REGesTERED PaoFEsseONAL. REPomTras DALt.AS. TEXAS 75201
330 1 A Yes, that's true.
o 2 And do they make some sort of subjective G
3 judgment with regard 'to that?
4 A Yes.
5 And do they look at such things as their 0
6 perception of the quality of management?
A Yes, they do.
8 And do they make some subjective judgments G
such as that?
10 A Yes.
11 G And would you agree with me that these are 12 things that generally are not directly affected by the 13 rates -hat the regulator may set in the rate making 14 proceeding?
15 A I think that's true for most of those that 16 you mentioned, are not directly affected by rates.
17 So then would you agree with me G All right.
18 that the regulator,in setting rates to meet the standar.
19 ith set forth in the statute, can only go so fa.
20 regard to maintaining the bond rating?
21 A Well, yes. I believe that to be true.
22 G All right, sir. That's fine.
23 Let me ask you about On another subject now.
24 some et your testimony regarding quality of service, 25 Do you have an whien I believe is on page 13 and 14.
STANLEY, HARR1s. Rice. LANGFORD & AssoctATEs REGisTEPro PRoFEsSCNAL REPORTERS DALLAS. TEXAS 75201
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