ML19270H264

Direct Testimony on Financial Qualifications of Intervenor State of Ma Contention 5.Delineates RM Kelmon Role in License Application & General Financial Duties.Elaborates on Tj May Financial Responsibilities

ML19270H264
Person / Time
Site:	05000471
Issue date:	05/11/1979
From:	Kelmon R, May T BOSTON EDISON CO.
To:
References
NUDOCS 7906260032
Download: ML19270H264 (13)

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UNITED STATES OF AMERICA fgg oJ, N- (b

NUCLEAR REGULATORY COMMISSION / , ,o g'

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BEFORE THE ATOMIC SAFETY & LICENSING BOARD \trs Sld) fpy ,

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l In the Matter of )

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BOSTON EDISON COMPANY, et al ) Docket No. 50-471

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j (Pilgrim Nuclear Generating Station, )

Unit 2) )

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APPLICANT'S DIRECT TESTIMONY l

ON FINANCIAL QUALIFICATIONS 2314 084 7 9 0 6 2 6 0o3>

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APPLICANT'S DIRECT TESTIMONY ON FINANCIAL QUALIFICATIONS

• PANELISTS: Ralph M. Kelmon, Treasurer, Boston Edison

. Company Thomas J. May, Assistant Treasurer, ,

Boston Edison Company L.

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• Intervenor Commonwealth of Massachusetts Contention 5

Applicant's Direct Testimony On Financial Qualifications 1 Q. Mr. Kelmon, would you please state your name and business i

2 address for the record?

3 A. My name is Ralph M. Kelmon. My business address is

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4 800 Boylston Street, Boston, Massachusetts.

5 Q. By whom are you employed?

6 A. Boston Edison Company.

7 Q. What is your position at Boston Edison Company?

8 A. I am Treasurer of the Boston Edison Company.

, 9 Q. Will you briefly describe your educational and professional 10 background?

11 A. I received a Bachelor of Science degree in Business 12 Administration from the University of Florida in 1941 and I

13 an M.B.A. degree from the Harvard Graduate School of ,

14 Business Administration in 1943. Prior to joining 15 Boston Edison Company in 1951, I was employed as a work 16 controller with Allegheny Ludlum Steel Corporation; as an 17 assistant professor of accounting at the University of 18 Florida; and a staff member with Lybrand, Ross Bros. &

19 Montgomery, Accountants and Auditors. I am a member of 2314 086

1 the American Institute of Certified Public Accountants; 2 the American Accounting Association; the National 3 Association of A ccountants; the American Economic Associ-4 ation; and the American Management Association, and I am 5 a Director of the Reading Cooperative Bank.

6 I was chairman of the Accounting Division Executive 7 Committee of the Edison Electric Institute in 1970-1971.

8 I previously was chairman of the EEI Application of 1

9 Accounting Principles Committee.

10 Q. Please describe your duties at Boston Edison Company.

11 A. As Treasurer of Boston Edison Company, I supervise the 12 four departments whose primary functions are the fore-l 13 casting of company earnings and financing requirements, 14 financial management, review and analysis of the financial L. 15 aspects of company operations, determination of revenue p 16 requirements, taxes, preparation of reports and pension 17 cost administration.

18 Q. Mr. Kelmon, would you please state what your role was with 19 respect to the information appearing in the Applicant's 20 license Application (NRC Docket 50-471) relating to the 21 financial qualifications of Boston Edison Company?

22 A. All of such material relating to the financial qualifi-23 cations of Boston Edison Company has been prepared under 24 my general supervision and has been reviewed and approved 25 by me.

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1 Q. Mr. May, would you please state your name and business 2 address for the record?

3 A. My name is Thomas J. May. My business address is 4 800 Boylston Street, Boston, Massachusetts.

5 Q. By whom are you employed?

[ 6 A. Boston Edison Company.

7 Q. What is your position at Boston Edison Company?

l 8 A. I am Assistant Treasurer and head of the Financial 9 Management Department.

10 Q. Will you briefly describe your educational and professional

] 11 background?

J 12 A. I received a Bachelor of Science degree in Business 13 Administration from Stonehill College in 1969. Prior to 14 -

joining Boston Edison Company, I was employed as a General L- 15 Practice Manager with Coopers and Lybrand, an international R 16 firm of Certified Public Accountants. I am a member of the L

17 American Institute of Certified Public Accountants, the r,

18 Massachusetts Society of Certified Public Accountants, and 19 the Financial Executives Institute.

20 Q. Please describe your duties at Boston Edison Company.

21 A. My duties largely involve the review and preparation of 22 financial plans and the review and analysis of financial 23 aspects of Company operations.

24 Q. Mr. May, would you please state what your role was with 25 respect to the information appearing in the Applicants' 000

PM 1 License Application (NRC Docket 50-471) relating to the 2 financial qualifications of Boston Edison company?

3 A. Since June 28, 1976, the information relating to the 4 financial qualifications has either been prepared by me 5 or under my direct supervision. This includes Amendments 6 to the License Application Numbers 5, 6, 7, 8 and 9, filed 7 7/25/77, 11/10/77, 12/20/77, S/5/78 and 9/27/78 respective-n

_j 8 ly. Also prepared under my supervision and direction has y 9 been information forwarded to NRC Staff by ' letters dated o 10 5/28/78, 6/2/78, 6/23/78, 6/30/78, 9/1/78, 9/15/78, 10/16/78, 11 11/3/78, 1177/78, 11/15/78, 1/29/79'/'and 4/17/79.

12 Q. Please provide the estimated construction costs for the 13 Pilgrim 2 Unit.

14 A. Excluding allowance for funds used during construction the tj 15 costs for the unit, per Amendment 9, were estimated to be 16 $1,319,000,000. The breakdown of this cost is as follows

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17 (millions of dollars):

18 Nuclear Plant $1,210 19 Site and Common Facilities 26 I

J 20 Initial Core of Nuclear Fuel 64 21 Transmission & Switching Facilities 19 22 $1,319 23 Subsequent to the filing of mendment 9,~an updated esti-24 mate was prepared. The current estimate of costs, dated 25 January 31, 1979, resulted in a S9 million expected 2314 089 w =

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l increase in nuclear plant cost, raising the estimate 2 from $1,210 million to $1,219 million. The cost estimates 3 for site and common facilities, initial core of nuclear 4

4 fuel, and transmission and switching facilities remain 5 the same at $26 million, S64 million, and $19 million 6 respectively.

fa 7 Since the cost changed by such a small margin and since n

jj 8 the cost estimation process includes a potential contin-9 gency that recognizes that costs could vary'within a range,

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(; 10 we believe the $1,319 million cost is still a reasonable

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11 cost estimate and the recent change does not require an L

12 amendment to the license application.

l 13 Q. How much has already been spent on the Pilgrim 2 project?

14 A. Approximately $226,000,000 has been expended to December U 15 31, 1978.

p 16 Q. Has a more current financial forecast been prepared since U

17 the date of Amendment 8, May 5, 1978?

18 A. Yes, an updated forecast dated March 7, 1979 has been m

, 19 prepared.

20 Q. What effect does this forecast have upon Boston Edison's 21 financial plan as filed in Amendment 8 of the license 22 application?

23 A. This new forecast, in effect, paints the same financial

., 24 picture that existed as of May 5, 1978, the date of

'a 25 Amendment 8. Key comparisons of the May 1978 forecast and

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l the March 7, 1979 forecast for the seven year period 2 1979 to 1985 are as follows:

3 May 1978 March 1979.

Forecast Forecast r, 4 Average annual kWh sales growth rate 3.1% 3.01 5 Increases in base rates during $62.5 million $51 million Pilgrim 2 construction 6 Internal cash flow percentage 37% 36%

L 7 Average return on common equity 12.3% 12.1%

o Lj 8 Average interest coverage-SEC method 2.7X 2.6X

, 9 Construction expenditures $1,431 million $1,367 million i

10 External financing $1,096 million $1,009 million 11 As can be seen, the new 10 year forecast is substantially the

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12 same as the forecast implicit in the financial plan as amended l

3 13 May 5, 1978. Therefore, the filed financial plan properly

, 14 reflects the current financial forecast for the construction d 15 period.

n 16 Q. Would you briefly explain Boston Edison Company's general 17 financial plan for financing its 59.026% share of the cost of b 18 Pilgrim 2?

19 A. A detailed Sources of Funds statement indicating forecasted 20 cash requirements, assumptions made in developing the forecast 21 and a plan for financing is presented in Amendment 8 to 22 Section VI, pages VI-a-1 to VI-a-ll of the License Application.

23 In general Boston Edison will be relying upon a combination of 24 internally generated funds and the sale of debt and equity 25 securities to finance the construction of Pilgrim 2. It is 2314 091

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1 estimated that approximately 39% of the construction funds

' necessary will be generated from operations for the eight 2

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3 year period 1978 - 1985. The funds statement indicates t

4 that the major sources of cash will be retained earnings

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5 adjusted for the following non cash income and expense

. 6 items: AFUDC, deferred taxes, and depreciation. The re-l 7 maining 61% of funds will be financed externally.

l 8 Q. What sources of funds will the participants be relying

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9 upon to meet the obligations of the 40.974%'of the plant 10 not owned by Boston Edison?

11 A. Schedules for each of the other participants showing the i

12 various sources of funds for each company are included l 13 in the License Application section VI. As indicated in 14 these schedules, each owner will be relying upon a~ combi-G 15 nation of internally generated funds and external funds n 16 in the form of debt and/or equity securities.

17 Q. Mr. Kelmon and Mr. May, in your opinions, is there reason-18 able assurance that Boston Edison can obtain the funds LJ 19 necessary to finance its portion of Pilgrim 2?

r 20 A. Yes. First, the construction expenditures for the 1978 21 to 1985 period of construction, while of considerable

' magnitude, are not as major on a relative basis as the 22 23 construction expenditures undertaken in the past 8 years.

t 24 In the period 1970 to 1977, construction expenditures 25 were $878 million. S617 million, net, in outside financing 2314 092

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1 was raised by the company. In this 8-year period, total 2 assets of the company grew from $652 million at 12/31/69 3 to $1,468 million at 12/31/77. This represents an in-r.

4 crease in company assets by a factor of 2.25. Total 5 capitalization during this same period grew from 5516 6 _ million t.o $1,123 million,_an increase of 2[18 times.

7 During the period 1978 to 1985 construction expendi-P tures of $1,584 million and net external financing of $961

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8 9 million are projected. From 12/31/77 to 12/31/85, total i

10 assets are forecasted to increase to $2,991 million and 11 total capitalization is expected to increase to $2,335 L,

12 million. These figures represent increases by factors 13 of 2.04 and 2.08 respect'ively. Therefore, on a relative 14 basis, the growth in assets and in capitalization during b 15 the period 1978 to 1985 will not be as great as that pre-P 16 viously experienced by the company from 1970 - 1977.

17 Secondly, a marked improvement in internal funds as 18 a source of cash for construction is expected in the 1978 7-19 to 1985 period of Pilgrim 2 construction. During the 20 8 year period ending December 31, 1977, internal funds 21 averaged 29% of the company's total construction expendi-22 ture,s. The 8-year forecast for the construction period 23 of Pilgrim 2 indicates that internal funds will average 24 approximately 39% of the company's total construction 25 budget. This means that reliance on external funds will

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k 1 be less in the 1978 to 1985 period than it had been in 2 the 1970 to 1977 period. This improved cash flow r-3 percentage is due mainly to income tax normalization L1 4 practices, which began in 1974 with DPU order 17795, and r

i m 5 increased depreciation expense providing an increased 6 source of internal cash generation.

7 Finally, based upon forecasted earnings, return on r--

8 equity, capital structIure, and coverage ratios, a market 9 for the company's stocks and bonds should b*e maintained L 10 which will enable the company to raise sufficient exter-p 11 nal funds to finance construction. A major determinant 12 of the company's ability to finance centers around the 13 ratings of securities as established by Moody's and 14 Standard and Poors. The criteria for the determination T?

j 15 of ratings are difficult to state with precision. No 16 fixed mathematical formula automatically produces any U 17 particular rating. Many subjective factors play an la important role. However, both organizations place special 19 emphasis on such ratios as interest coverages, return on In fact, it is necessary L 20 equity, and debt-aquity ratios.

r' 21 for a company's financial ratios to fall within specific 22 bands to even be considered for a particular rating.

23 Based upon statistics for the twelve months ended 24 September 30, 1978, the range in interest coverage, return a 25 on equity, and debt-equity ratios for single A* utilities

• Bonds which are rated A are considered " upper medium grade obligations" by Moody's.

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was as follows:

2 Range Median 3 Interest coverage (pre-tax) 2.0X to . 3X 3.0X w.

4 Return on Equity 7.4% to 15.7% 12.1%

5 Long Term Debt 45% to 55% 51%

r 6 Preferred Stock 5% to 18% 13%

L 31% to 43%

7 Common Stock 36%

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8 In comparison, Boston Edison's forecast indicates that i..

9 interest coverage, return on equity, and de'bt-equity ratios L. 10 for the construction period 1979 to 1985 are expected to p 11 fall within the following range:

L 12 Interest Coverage (pre-tax) 2.5X to 3.0X c,

13 Return on Equity 11.9% to 12.9%

14 Long Term Debt 51% to 53%

. 15 Preferred Stock 12% to 14%

16 Common Stock 33% to 36%

17 Boston Edison's projected performance compares favorably 18 with that of the single A rated utilities. For this 19 reason we believe that the company will have the financial 20 strength to undertake the Pilgrim 2 construction program.

21 Q. Much of the forecasted internal cash position, earnings, 22 rate of return on common equity, and coverage ratios 23 depends upon receiving adequate and timely rate relief 24 from the DPU. Do you believe that the rate relief 25 necessary to actually earn a 10% to 13% return on common

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.- 1 equity will be granted by the appropriate regulatory 2 authority?

3 A. Clearly, an important assumption that underlies the L

4 financing plan is one of obtaining adequate rate relief.

r' 5 It is Boston Edison's opinion that forecasted rate in-6 creases, both retail and wholesale, will be shown to be

{- 7 necessary and reasonable and will be granted by the 8 appropriate regulatory authority. With a DPU allowed

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9 rate of return on common equity of 13% it certainly is 10 not unreasonable to assume an actual return in the range

- 11 of 10 to 13%. We believe that regulatory authorities 12 will act responsibily and will provide adequate and

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13 timely rate relief and that the company will be able to 14 obtain the capital funds necessary to complete the g 15 project.

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