ML20009C975
| ML20009C975 | |
| Person / Time | |
|---|---|
| Site: | Callaway  |
| Issue date: | 02/03/1981 |
| From: | Birdsong J UNION ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML20009C973 | List: |
| References | |
| ER-81-180, NUDOCS 8107220270 | |
| Download: ML20009C975 (36) | |
Text
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UNION ELECTRJC CCMPANY DOCKET NO. ER-31-180 DIRECT TESTIMONY OF JERRE E. BIRDSONG
(
Q.
Please state your name, address and position with Union Electric Company.
A.
My name is Jerre C. Birdsong, and I reside in St. Louis County, Missouri.
My position at Union Electric Company is that of economist.
In this position I am
{)
responsible for conducting economic, financial, and statistical studies for the company, including those related to its rate case activities.
Q.
Please describe your educaticnal background.
A.
I received a Bachelor of Arts degree in Econocics and Mathematics from Southwestern at Memphis in 1976 and a Master of Science degree in Management from Purdue University in 1977.
My area of concentration in the Master's program was Managerial Applications of Mathematical Modeling.
I was inducted into Phi Beta Kappa in April, 1976.
Q.
Do you have any professional af.filiations?
A.
Yes, I do.
I am a member of the National Association of Business Economists, its St. Louis Gateway Chapter, the National Society of Rate of Return Analysts, and the Financial Management Association.
Q.
What is the purpose of your testimony in this proceeding?
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-2 A.
The purpose of my testimony is to arrive at a fair rate of return on the retail operations of the electric utility function of Union Electric Company in the state of Miscouri.
To this end, I have determined the cost of capital for the Company utilizing quantitative and qualitatire analyses of historical and forward-looking data.
O.
What is the primary standard for. determining a fabr rate of return?
O.
A.
The primary standard for determining a fair rate of return is the cost of capital.
Based on this cost, the rate of return that is established must enable the Company to:
1.
Maintain the financial integrity of its existing invested capital; 2.
Maintain it's credit standing; and 3.
Attract sufficient capital on competitive 7b terms to meet the needs of its customers.
Inherent in this relationship is the premise that return to the equity owners, those exposed to the 9Isatest business risk, should be commensurate with returns on investments in other enterprises having corresponding risks and uncertainties.
Since the Company must openly compete in financial markets for the use of the available funds provided by investors, Union Electric must earn, as an
~
absolute minimum, its cost of capital as determined by the returns on investments in c,ther enterprises having corresponding risks and uncertainties in order to satisfy the demands of its customers.
If the Company's rate ot return fails to cover its cost of capital, its financial position will deteriorate.
This deterioration will appear as a lack of flexihility in
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the Company's financing plans and higher financing costs.
For example, if the Company fails to earn its cost of capital, it may be unable to meet the indenture requirements of its outstanding lorg term debt.
Then, the Company would be precluded from raising funds in the bond market, and its only source of external capital weild be equity cap tal.
This will necessarily r'esult in higher financing costs.
These higher costs, which result from the failure of the Company to earn its cost of capital and from the subsequent
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inflexibility of financing alternatives, would be borne by the customers of Union Ele:Lric Company.
If uncorrected, l
I this deterioration would discourage all investment in the Company, regardless of cost.
The Company would then be j
prevented from adequately and efficiently serving the energy l
needs of its customers at any price.
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Q.
Why must the cost of capital be determined by l
returns on investments in other enterprises having i
l corresponding risks and uncertainties?
l
4-A.
Investors in the common stocks of electric utilities have the alternative of placit.g their funds in many other investments.
If the returns offered by industrial or government securities are more attractive to investors than thoae oftered by electric utilities in light of the risks, then the other industrials or government will receive the use of the funds -- to the exclusion of electric utilities.
In other wordo, investors compare the returns
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they can expect to receive from placing their funds in any other investment..
Then, they choose that investment which best rewards them for the corresponding risks and uncertainties.
No one will be prompted to invest in electric utilities simply because the industry needs the funds.
The only way to insure that the Company obtains its r acessary funds is for it to earn a return which compensates investors for their incurred risks.
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If the cost of capital is determined by considering only other electric utilities as comperable to Union Electric, many of the alternatives considered by investors will be ignored.
Thus, the cost of capital to Union Electric would be misstated, and the Company would not have an opportunity to earn its fair rate of return.
Q.
What exhibits are you sponsoring?
A.
I am sponsoring Exhibits (JEB-1) through (JEB-6).
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. Q.
Were Exhibits (JEB-1) through (JEB-6) prepared by you or under your direction and supervision?
A.
Yes, they were.
Q.
Please describe generally Exhibits (JEB-1) through (JEB-6).
- 7.,
Exhibitn (JEB-1) through
_ (JEB-6) present the statistical data used in th? determination of
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the Company's cost of capital and fair rate of return.
Q.
What methods did you use in arriving at the cost of capital for Union Electric Company?
A.
I have determined the cost of capital for Union Electric based upon its historical cost of long-term debt and preferred stock and a discounted cash flow (DCF) analysis of its equity requirements.
Q.
What capital structure have you used in your cost of capital determination?
A.
I have used a capital structure consisting of 48.15 percent lcng-term debt, 15.78 percent preferred stock, and 36.07 percent coraon equity.
This is the pro forma capital structure for Union Electric Company at September 30, 1981.
Pro forma adjustments include the sale of $100 million of long term debt, $60 million of preferred stock, and $66 million of common stock.
However, the Company's present financing plans are to sell $150 million of mortgage bonds in February 1981 and $75 million of preferred stock in i
May.
In addition, the Company received $56 million from its sale of con:. ton stock in December 1980 an6 expects to receive
$72 million from a sale of common stock in the fall of 1981.
Q.
What is the embedded cost of the long-term debt portion of the capital structure?
A.
Based on figures contained in Exhibit (JEB-1), I have determined this cost to be 8.20 percent.
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Q.
What is the embediud cost of the preferred stock component of Union Electric's capital structure?
A.
The embedded cost of preferred stock is 8.47 percent, as shown on Exhibit (JEB-2).
Q.
What basic m9theds did you use to determine the 4
cost of equity?
1 A.
I have used a combination of the comparative i
earnings and the discounted cash flow approaches in
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determining the egnity return portion of my recommendation.
The comparative e.arnings approach is a direct reflection of ne of the traditional regulatory standards of a fair return set forth in the Hope and Bluefield Supreme Court crisas -- that tt.a return allowed to investors be comparable to that being earne9 on investments in oMier business undertakings with corresponding risks and
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uncertainties.
At the heart of this approach is the undisputed principle that in"estments of high risk must generally yield
high average returns in order to maintain financial integrity, while investments of low risk can yield relatively low average returns.
Tne relationship between risk and return is undoubtedly recognized by all investors, whether or not they are familiar with more sophisticated i
th3ories of investment analysis.
Those who choose to invest their money in a passbook savings account, tor example, (jq normally realize t hat the.i; return will be lower than that which is potentially available from investing in the gold market.
The lower return, of course, is compensated for by the fact that passbook savings invalve almost no risk to the
- investor, On the other hand, those who invest in gold do so recognizing that they are subject to relatively higher risks, but with potentially higher re' turns as well.
The tiade-off between risk and return is insured by the continuous fluctuations in the price and return of all potential investments.
For example. if stockholders in a certain company were earning a return of 20%, and if the investment in that company suddenly became more risky, other things being equal, the price per share for the stock in that company would be bid down on the stock exchange.
Potential investors would refuse to buy at the old higher price, oecause the return of 20% would no longer adequately compensate them for the higher risk.
However, when the price per share does decline in response to the higher risk,
. the new investor will earn a higher return because his initial investment is at a lower price per share.
The market place in effect provides a general equilibrium between risk and return for all investments by allowing stock prices to f1 actuate.
Thus the potential investor r sceives an appropriate retern at whatever level of risk he chooses to invert.
Unfortunately, the existing stockholder
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(past in" stor) is harmed by the decline in market price.
Q.
What steps are involved in applying the comparable earnings apprcech in this proceeding?
A.
The allowed return on equity for a regulated public utility should be set equal to that which is earned from investmente of comparable risk.
It therefore follows
~
that th.* first step in setting the appropriate return for Union Electric is to determine which other investments are of comparable risk to an investment in Union Electric common equity.
The second step is to use DCF analysis to calculate the return which is required by the investors of this comparable set of companies.
Then, by setting the allowed return for Union Electric equal to the DCF return of the comparable group, the Union Electric stockholder would be allowed the same return which is required from alternative investments of comparable risk.
However, it is common knowledge that a utility seldom earns the return that it is actually allowed in a
m
. 4 rate case.
For example, Union Electric has not earned its allowed rate of return since 1970.
In the years 1971-1980, Union Electric's earnings have averaged about 170 basis f
points below that authorized by the Missouri Public Service Commission.
In those years, the Company's earnings have been a4 much as 350-400 basis potats below the authorized rate of return.
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Therefare, by setting the utility's allowed rate of return equal to that which is actually required by its investors, the result is almost always a return which is substantially lower than that which adequately compennates them for the r isks they incur.
It should be noted that if the investment in a particular public utility stock is in fact of relatively low r!sk, undet this approach the group of companies determined (at to be comparable will also have the same relatively low risks.
This comparable group would require a relatively low return in ligi.. of their low risks, and thus the result would appropriately be a relatively low rate of return f r the utility.
J.
How did you measure tzsk in finding the group comparable to Union Electric?
A.
"his process is relatively simple once it is recognized what investors consider as thu " risk" of their investment.
Using my earlier example, the passbook savings
. account is generally considered to be almost risk-free because the investor knows exactly how much his investment will earn in the future.
His " expected" return on his-savinos is equal to the stated rate of interest ~, and virtually without exception the actual return paid by the bank will.in fact equal the investor's expected rate of return.
The lack cf risk, in other words, exists by the fact that the actual return does not vary from the investor's e::pected return.
One investing in gold also has some " expected" return.
However, the actual return for any particular investor at any given time will depend upon whether the
~
price of gold rises or fa'.ls, and by how much.
This fluctuation in turn depends upon a variety of other factors which cannot be accurately forecast, and thus the actual return on the investment could be significantly higher or
-U lower than the expected return.
This greater variation or spread in actual returns for gold is in effect what makes this a more risky investment than the passbook savings account.
If the return on gold could be guaranteed to always equal its expected return in the future, it too would be risk-free.
Then, just as the stock exchanges provide a general equilibrium between risk and return for common stock equities, the gold market would insure that the price of gold would stabilize and the expected return would be 4
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- 11 lowered to a level comparable to other risk-free investments.
The risk of investing in common stock is likewise caused by the expected variability of its rates of return and is reflected in the volatility of its price per share.
For common ctocks the total varian'ce, or risk, is actually a j
product of two separate parts.
First, there are factors which affect the price of all common stocks on the parket,
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and thus cause variability in tl.e returns received by holuers of all such investments.
This variability is termed t
systematic risk.
Second, there is a variance in returns caused bi factors unique to a given company.
This second
- cause of variability in the return is termed unsystematic risk.
In combination, the ",ystematic and unsystematic risk cause a variance in the actual rates of return from the investor's expected rate of return.
As with the savings e
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account and gold investmeat, the greater the variation in actual returns from ine expected return, the greater is the i
risk of that investment to the stockholder.
It follows from the above that the relative risk of a common Etock investment is equivalent to the relative e
variance of the actaal rates of return from the expected rate of return.
Furthermore, companies with equal or nearly equal vario ces in reteen have stoca prices that fluctuate similarly and can be considered of comparable risk.
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. Therefore, the process of finding companies which are similar to Union Electric in terms of risk can be undertaken by finding the group of companies which have stock price fluctuations which are similar to those of Union Electric.
Q.
What specific measures of variability di6 you i
use in measuring risk?
A.
Several 'nvestment firms regularly publish measures of risk, based upon variability of stock priceu.
'ye investment community has developed a high regard for the analytical services provided by the Valee Lit.e Investment Survey, and I have therefore used their risk neasures " beta" and " safety", to Jelect the comparable set of companies.
Specifically, I used the Value Line data to develop a range around the beta and safety of Union Electric, and companies having a beta and safety within this range must be comparable to Union Electric.
k3.)
Q.
What is the value Line Investment Survey?
A.
The Value Line Investment Survey contains reports of financial data and evaluations of the future performance of 1700 companies.
Each company is evaluated at
' aast once every quarter, possibly making Value Line the broadest continuing coverage of common stock equities available.
The 1700 stocks evaluated by Valca Line accourt for about 96% of the trading volume on all stock exchanges in tne United States.
- 13 The evaluations made in the value Line Investment Survey are widely available to the public since it is the largest of all investment advisocy services.
It has twice as many subscribers as its nearest competitor -- Standard and Poor's.
Subscribers include private investors, professional analysts, investment institutions, universities and public libraries.
All of the data I have utilized from c3 the value Line Investment Survey is readily available to k/
almost all investors in the Union Electric service area since it appears in the St. Louis Public Library, St. Louis Count c Public Library and many smaller public libraries such as Kirkwood and Webster Groves.
Q.
What specifically are betas and safety ranks, and how are they calculated by Value Line?
A.
Betas measura the systematic risk of a stock and'are determined by che sensitivity of the stock's price (q !
to overall fluctuations in the New Y'rk Stock Exchange Composite average.
For example, a beta of 1.0 indicates that the stock price tends to rise or fall proportionately with the composite of all stocks on the New York Exchange.
Union Electric stock has a beta of 0.55 which indicates that Union Electric's stock price fluctuates less than the composite average.
A stuck with a beca greater than 1.0 denotes greater price fluctuations of that stock than those of ti~e composite average.
Thus, the beta of a stock is a r
~
. measure of the risk which is inherent in including that stock in a diversified portfolio.
It is calculated from a least-squares regression analysis between weekly percent changes in the price of a stock and weekly percent changes in the NYSE average over a five year period.
Safety ranks measure the total risk (systemat',e and unsystematic,) and reflect the potential risk associated with indiv; dual common stocks rather than large portfolios.
They
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range from 1 (safest) to 5 (riskiest) and are based upon the standard deviation of weekly price changes over the last five years adjusted for trend, company size, company's penetration of its markets, product market volatility, iegree of financial leverage, earnings quality, and overall condition of the balance sheet.
It is impor~ tant to consider both measures cf risk since the beta measure is relevant to stockholders who have gr.,
Mi large diversified portfolios and the safety measure is relevant to the small, undiversified investor.
Q.
How did you utilize the beta and safety of l
Union Electric Company to select a set of comparable companies?
A.
I levelopec a range for each of the risk measures by computing the standard deviation of each measure for the electric utility industry.
The standard deviation gives information about how much the risk measures can l
l
- 15 change before its variation becomes atypical of the electric utility industry.
For the second quarter of 1980, the betas of the 97 electile utilities reported by Value Line (excluding Union Electric) had a stand.7rd deviation of 0.07.
When this standard deviation was used to bracket Union Electric's beta of 0.55, the range of 0.48 to 0.62 was obtained.
Since Value Line reports their betas to the nearest 0.05, the range for the betas was rourc$ed to 0.50-0.60.
The same process was performed for the safety ranks nnd a standard deviation of 0.63 was calculated for the electric utility industry.
The range of '.37 to 2.63 was obtained by bracketing the standard deviation around Union Electric's safety ranking of 2.
In order for the rounding to be consistent with that used by Value Line, the range was es rounded to the nearest whole numbers of 1-3.
The botas and
%i safety ranks for the elec ric utility industry are shown as Exhibit (JEB-3).
I then returned to the Value Line Investment survey and selected all companies whose betas and safeties fill within my established ranges.
This method produced 100 companies which have consistently over time performed comparably to Union Electric.
The companies, 51 electric utilities, 13 companies in the natural gas industry, 7 companies in the telecommunications industry, one water
\\ -
company, and 23 other firms, are listed in Exhibit (J EB-4 ).
Q.
Having determined the set of comparable companies, how did you apply the DCP methodology in determir.ing their required rate of return?
A.
The DCF formula for the required return on raising additional common equity is D
O R=
-+G P
where R = required return on raising additional common equity, D = expected dividends per share in the coming
- year, P = market price per share in the present
- year, G = growth rate in expected future dividends.
The DCP return, R,
is the rate at which investors are discounting the future dollars they expect to receive from
,7
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hoiding the stock.
It is based upon the premise that investors decide how much they are willing to pay for a share of common stock by estimating the cash they expect to receive from holding (and ultimately colling) thet share of stock.
Then, the expected cash inflows are discounted because of two factors -- the time value of money and the riskiness of the cash flow.
This rate at which investors are discounting the future income s: reams is the return required in order to induce them to make the investment.
- 17 Thus, the DCF methodology is forward looking and tequires an l
assessment of investor expectations.
In order to calculate the DCF return for each of the comparable companies, I again used the value Line i
Investment Survey.
The average of the high and low market price per share of common stock during 1979 was used for P, the 1977-79 to 1982-24 Value Line estimate of annual growth
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rate in dividends for G, and the dividends per share paid during 1979 increased by the above creuth rate were uesd for 4
D.
The cost of raising additional common equity for Union Electric Company is equal to the average DCF :oturn of the 100 companies of comparable risk.
As shown on Page 3 of Exhibit (JEB-4), the average DCF return for the 100 comparable companies is 15.60%.
Q.
Should the average DCF return of 15.60% be used in determining Union Electric Cc7pany's embedded cost of
-)
aapital?
A.
No, it should not.
The DCF return is widely used and generally accepted as an appropriate tool for determining the cost of equity capital in rate proceedings.
However, insufficient attention has been given to the form in which it should be applied in this context.
The DCF return is valid for evaluating the returns required by investors seeking to make new purchases in the equity market.
Therefore, companies need to earn that
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return on their incremental investments.
This is not possible when the DCF return is applied to the net original cost of their existing investments unless the net original cost is equal to its present market value.
That is, the DCP return should not be applied to the book value of a firm unless its book value is equal to its market price.
In the managemen'. and regulation of utilities, the
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allowed rate of return will be multiplied by the book value of the utility's assets in order to determine the allowable revenue.
Thus, in order to calculate the required rate of return on the book value of the Company's common equity, the DCP return must be adjusted by its market-to-book ratio.
If the yield portion of the DCF return is multiplied by the company's mar ket-to-book ratio, the resulting adjusted DCF return is the embedded cost of equity.
This is the return LI, which is implicitly required by investors on the book value s
of the securities and which will insure that the actual DCF return is earned on incremental investments.
Q.
What required return on common equity did you derive from your analysis?
A.
My analysis on Exhibit (JEB-5) shows that the average DCP return for the comparable companies, adjusted by their market-to-book ratios, is 15.11%.
When an allowance for flotation costs of 4% is made, the result is a l
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- 19 required rate of return of 15.47%.
I have rounded this return to 15.50% for use in this case.
Q.
Are the 100 companies listed in Exhibit (JEB-5) the only companies which were in your ranges for beta and safety in the second quarter of 1980?
A.
No, Southeastern Public Service Company had a beta of.50 and a safety of 3 in the second quarter of 1980.
Yet, I did not include it in my set of comparable companies
)
because it paid no dividends during 1979.
If a company pays no dividends, the DCF formulation does not yield a unique number which can be used as the company's cost of capital.
Because Southeastern Public Service Company's cost of capital cannot be uniquely determined, I have eliminated it from considerati,n as a comparable company.
Q.
What ic your recommendation for the overall rate of return that should be allowed on net original cost-rate base in this~ case?
A.
Exhibit (JEB-6) shows that weighting the previously determined coats of the three types of securities (debt, preferred and common stock) by the portion of each type of security in Union Electric's capital structure results in an overall cost of capital of 10.88 percent.
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UNION ELECTRIC COMPANY EXHIBIT (JEB-1) T0 (JEB-6)
WITNESS:
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CASE NO. ER-81-180 EXHIBIT (JEB-2)
PAGE 2 of 2 UNION ELECTRIC COMPARY - CORPORATE COST OF !=REFEMED STOCK DECEMBER 31, 1967 - DECEMBER 31, 1980 AND PRO FORtM AT SEPTEMBER 30, 1981 TOTAL PP EFEllff9 VElGHTED STOCK ANNUAi.
AVERAGE ISSUED COST COST 12/31/67
$103,360
$ 4,983 4.82%
12/31/68 103,360 4,983 4.82
- 2/31/69 135,647 7,824 5.77 12/31/70 135,647 7,824 5.77 12/31/71 177,084 11,280 6.37 12/31/72 232,c84 15,427 6.65 12/31/73 232,084 15,427 C,65 12/31/74 272,084 20,019 7.36 g
12/31/75 272,08i 20,019 7.36 12/31/76 272,084 20,019 7.36 12/31/77 b.
312,084 23,555 7.55 12/31/78 312,084 23,555 7.55 12/31/79 385,08h 30,271 7.86 12/31/80 383,084 30,041 7.84~
9/30/81 443,084 37,541 8.47 PRO FORMA
CASE N0, TP-81-180 EXHIBIT (JEB-3)
PAGE 1 of 3 UNION ELECTRIC COMPANY BETAS AND SAFETY RANKINGS ELECTRIC UTil.lTY INDUSTRY 2ND QUARTER 1980 BETA COMPANY (IN HUNDREDTHS)-
SAIETY Allegheny Power System 65 3
American Electric Power 65 2
Atlantic City Electric 60
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Baltimore Gas & Electric 70 1
Boston Edison 60 1
2 Carolina Power & Light 70-2 Central Hudson Gas & Electric 50 2
eg Central Maine power 50 2
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Consolidated Edison 65 2
Delmarva Power & Light 63 2
Duke Power 70 1
Duquanne Light 55 2
Eastern Utilities Assn.
55 3
Florida Power Corp, 65 2
Florida Power & Light 75 2
General Public Ut'11 tics 80 3
Long Island Lighting 65 2
New England Electric System
"' 60 1
New England Gas & Electric 50 2
New York State Flectric & Gas 60 1
Niagara - Prhawk 60 2
Northeast Ot'llities 55 2
Orange & Rockland Utilities 55 3
Ptansylvania Power & Light 60 1
f7 Philade'iphia Electric 60 2
Potomac Electric Power 60 2
Public Service Electile & Gas 7U 1
Public Service of New Hampshire 65 2
Rochester Gas & Electric 55 2
Cavannah Electric Power 65 3
South Ca.olina Electric & Gar 65 1
Southern Co.
65 2
Tampa Electric 75 2
United illuminating 50 7
Virginia Electric & Power 70 2
Consumers Power 70 2
Central and South West 85 1
Centrel lilinois Light 60 2
Central Illino:s Public Service 55 2
Cincinnati Cas & Electric 65 1
Cleveland Electric 65 1
Commonwealth Edison 70 1
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- PAGE 2 of 3 BETA COMPANY (sd HUNDREDTHS)
SAFETY Dayton Power & Light 60 1
Detroit Edison 60 2
El Paso Electric 65 2
Empire District Electric 60 2
Gulf States UtIIItles 70 3
Houston Industries 80 2
Illinois Power 65 1
tr.Jianapolis Power & Light 65 2
Interstate Power 55 1
lowa Electric Light & Power 60 3
loga-Illinois Gas & Electric 60 2
lowa raroorces i
55 1
low 1 Public Service 60 1
lowa Southern Utilities 55 1
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Kansas City Power & Light 60 1
Kansas Gas & Electric 60 2
Kansas Power & Light 60 1
Kentucky t'tilities 55 2
Louisville Gas & Electric 65 1
Middle South Utilities 70 2
Minnesota Power & Light 55 2
Missouri Public Service 60 3
Montana-Dakota Util ities 70 3
Northern Indiant Public Service 60 2
Northern States Power 65 1
Ohio Edison 65 2
Oklahoma Gas & Electric 65 2
Otter Tail Power 60 2
Public Service' of Indiana 65 i
St. Joseph Light & Power 50 3
Southern Indiana Gas & Electric 60 2
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Southwestern Public Service 60 1
l Texas utIIIties 80 1
Toledo Edison 60 2
Wisconsi-Electric Power 65 1
Wi scons !!. Power & Light 50 1
Wisconsin Public Service 60 1
Arizona Public Service 70 2
Citizens Utilities 55 1
Hawaiian Electric 55 2
Idaho Power 55 2
Hontana Power 70 2
Nevada Powcr 75 3
Pacific Gas & Electric 55 1
Pacific Power & Light 60 1
Portland General Electric 60 2
Pubile Service of Colorado 75 2
Public Service of New Mexico 70 2
Puget Sound Power & Light 65 2
CASE N0. Ek-81-180 EXHIBIT (JEB-3)
PAGE 3 of 3
-3 BETA COMPANY (IN HUNDREDTHS)
SAFETY San Diego Gas & Electric 60 2
Sierra Pacific Power 70 2
Southern California Edison 70 1
Tucson Electric & Power 55 1
Utah Power & Light 75 2
Washington Water Power 60' 2
Ave rage 62.89 1 78 Standard Deviation 7 35 0.63 i
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CASE N0. ER-81-180 PAGE 1 cTT- (JEB-4)
EXHIBIT DCF RETURN 100 COMPANIES COMPARABLE TO UNION ELECTRIC COMPANY YlELD GROWTH TOTAL Allied Products 4.25 16.5 20.75 American Sea tir.g 3.26 4,0 7.26 Atlanta Gas Light 10.07 8.0 18.07 Atlantic City E;actric 10.17 5.5 15.67 Bay S'ste Gas 9.26 8.0 17.26 Bell Wephone of Canada 7.96 7.5 15.46 Boston Edison 11.76 b5 16.26 CP Na t iona l Co rp.
11.57 5.5 17.07 Canal-Randolph Corp.
5.51 14.0 19.51 Canon Inc.
2.36 21.0 23.36
! Cascade Natural Gas 9.73 14.5 24.23
' Central Hudson Gas & Electric 11.16 6.0 17.16 Central Illinois Light 11.04 3.5 14.54 Cent ra l Illinois Public service 10.82 3.5 14.32
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Cent ral Ma ine Powe r 11.25 3.0 14.25 Cincinnatl Bell 9.10 9.5 18.60 Citizens Utilities 8.53 7.5 16.03 Copperweld Corp.
7.88 8.0 15.88 Dayton Power & Light 11.44 3.5 14.94 Detroit Edison 11.78 3.5 15.28 Dillon Cos.
5.08 14.0 19.08 Dominion Stores 6.15 7.0 13.15 Duquesne Light 11.60 0.5 12.10 Eastern Utilities Assoc.
12.03 2.0 14.03 Empire, District Electric 11.34 3.0 14.34 Equi fax inc.
10.77 6.5 17.27 Fidelity Union Bancorp.
8.82 4.5 13.32 First National St. Bancorp.
9.99 3.0 12.99 Fuji Photo 1.16 12.0 13.16 Gas Service Co.
9.22 4.5 13.72
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General Bancshares 5.50 7.0 12.50 Hackensack Water 9.83 9.0 18.83 Handy & Hartman 2.56 15.0 17.56 Hawailar. Electric 9.65 7.5 17.15 Hitachi 2.58 14.5 17.08 Hollinger Argus 6.34 4.0 10,34 Honda Motor 1.64 14.0 15.64 Houghton Mifflin 5.25 14.5 19.75 Idaho Power 10.47 4.0 14.47 Indiana Gas 9.21 7.5 16.71 Interstate Power 11.04 3.0 14.04 lowa Electric Light & Power 11.01 3.0 14.01 Iowa-111inois Gas & Electric 10.77 4.0 14.77 lowa Pebile Service 10.07 4.0 14.07 lowa Resources 10.94 4.5 15.44 lowa Southern Utilities 9.97 5.0 14.97
.. -,,.. - ~, -
CASE No. ER-81-180 EXHIBIT ' (JEB-4)
PAGE 2 of 3 COMPANY YlELD GROWTH TOTAL Kansas City Power & Light 11.12 3.5 14.62 Kansas Gas & Electric 11.27 2.5 13.77 Kansas Power & Licht 11.42 4.5 15.92 Kentucky Utilities 10.72 3.5 14.22 Michigan Gas Utilities 9.86 7.0 16.86 Minnesota Gas 3.99 5.0 13.*3 Minnesota Power & Light 10.38 5.0 15.38 Missouri Public Se"sice 8.49 4.5 12.99
- buntain States Telephone 9.43 4.0 13.43 nunsingwear 8.16 2.0 10.16 National Fuel Gas 9.42 7.5 16.92 National Utilities 8.39 7.0 15.39 New England Electric 10.93 5.5 16.43 1
New England Gas & Elect-Ic 10.90 3.5 14.40 New England Telephone e, Telegraph 10.06 5.0 15.06 New York State Electric & Gas 10.90 5.0 15.90 N iaga ra-Mohawk 10.79 3.5 14.29 O-Northeest utiiit<=s ii.95 8.5 20.u5 Northern Indiana Public Service 10.34 3.0 13.34 Opelika Mfg. Corp.
7.60 3.5 11.10 Orange & Rockland Utilities 11.33 4.0 15.39 Otter Tail Power 13.28 7.0 20.28 Pacific Gas & Electric 11.00 8.0 19.00 Pacific N.V. Bell 9.35 4.0 13.35 Pacific Power & Light 10.50 6.0 16.50 Pacific Telephone & Telegraph 10.53 2.0 12.53 Pennsylvania Power & Light 10.92 3.0 13.92 Philadelphia Electric 11.92 3.5 15.42 Philips NV 8.62 6.0 14.6; Piedmont Natural Gas 8.91 9.0 17.91 Portland General Electric 11.05 2.0 13.05 Potomac Electric Power 11.14 5.5 16.64 Rochester Gas & Electric 9.41 5.5 14.91
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St. Joseph Light & Power 11.39 4.0 15.39 San Diego Gas & Electric 10.91 5.5 16.41.
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Shell Transport 13.05 12.0 3.05 Southern Indiana Gas & Electric 8.96 8.0 16.96 Southern New England Telephone 10.03 4.0 14.03 South Jersey Ind.
9.40 6.5 15.90 Southwestern Public Service 10.24 5.0 15.24 SteriIng Bancorp.
8.25 0.0 8.25 Toledo Edison 11.01 2.0 13.01 Tucson Electric & Power 9.93 7.5 17.43 UnIIever Ltd.
5.02 7.5 12.52 Unilever NV 8.98 7.0 15.98 United 111uminating 11.37 2.5 13.87 Washington Gas Light 10.46 6.5 16.96 Washington Water 10.20 4.5 14.70
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CASE No. ER-81-180 EXHIB IT ' (JEB-4) 3-PAGE 3 of 3 C OMPANY YlELD GROWTH TOTAL Wels Markets 3.63 15.5 19.13 Wicor Inc.
9.75 9.0 18.75 Winn-Dixie 5.44 12.0 17.44 Wisconsin Power & Light 10.01 5.0 15.01 Wisconsin Public Service 9.83 6.0 15.83 Wrigley (Wm.) Jr.
7.00 10.5 17.50 AVERAGE 9.26 6.34 15.60 l
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CASE NO. ER-81-180 EXHIBIT '
(JEB-5)
PAGE 1 of 3 DCF RETURN 100 COMPANIES COMPARABLE TO UNION ELECTRIC MARKET-ADJUSTED ADJUSTED COMPANY T0-B00K YlELD GROWTH TOTAL Al? ud Products 0.5759 2 45 16.5 18.95 American Seating 0.5870 1.92 4.0 5.92 Atlanta Gas Light 0.7019 7.07 8.0 15.07 Atlantic City Electric 0.8937 9.09 5.5 14.59 Bty State Gas 1.0273 9.51 8.0 17.51 Ball Telephone of Canada 1.1947 9.51 7.5 f7.01 Boston Edison 0.8588 10.10 4.5 14d0 CP National Corp.
0.7193 8.32 5.5 13.82 Canal-Randolph Corp.
1.6583 9.13 14.0 23.13 Canon inc.
1.1483 2.72 21.0 23.72 Cascade Natural Gas 0.9048 0,80 14.5 23.30 entral Hudson Gas & Electric 0.7941 8.36 6.0 14.86 Cent ral Illinois Light 0.8399 9.27 3.5 12.77 Ccntral Illinois Public Service 0.9271 10.04 3.5 13.54 Central Maine Power 0.8596 9.67 3.0 12.67 Cincinnati Bell 0.8681 7.90 9.5 17.40 Citizens Ut11Itles 1.5144 12.92 7.5 20.42 Copperweld Corp.
0.7303 5.75 8.0 13.75 Dayton Power & Light 0.9530 10.90 3.5 14.40 D2troit Edison 0.7808 9.19 3.5 12.69 Dillon Ct;.
2.3810 12.09 14.0 26.09 Dominion Stores 0.9730 5.99 7.0 12.99 Duquesne Light 0.9032 10.48 0.5 10.9S Eastern Utilities Assoc.
0.d202 9.87 2.0 11.87 Empire District Electric c.8898 10.09 3.0 13.09 Equi fax inc.
1.6135 17.38 6.5 23.38 Fidelity Union Bancorp.
0.7117 6.27 4.5 10.77 First National St. Bancorp.
0.6807 6.80 3.0 9.80
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(~. Fuj i Photu 1.2181 1.42 12.0 13.42 t
i Gt, Service Co.
0.7846 7.24 4.5 11.74 l
General Bancshares 0.6381 3.51 7.0 10.51 l
Hackensack Water 0.8705 8.56 9.0 17.56 H2ndy & Hartman 2.3830 6.11 15.0 21.11 Hawaiian Electric 0.8940 8.63 7.5 16.13 l
Hitachi 0.8429 2.18 14.5 16.68 Hollinger Argus 1.0375 6.58 4.0 10.58 Honda Motor 1.6959
. 78 14.0 16.78 Houghton Mifflin 1.4213 7.46 14.5 21.96 Idaho Power 0.8953 9.37 4.0 13.37 indiana Gas 0.9426 8.69 7,5 16.19 Interstate Pov..
0.8720
?.62 3.0 12.62 I
lowa Electric Light & Power 0.8111 6.93 3.0 11.93 lows-1111nois Gas & Electric 0.9407 10.13 4.0 14.13 lowa Pubite Service 0.9722 9.79 4.0 13.79 lowa Res:m ees 0.9482 10.37 4.5 14.87 lowa Southern Utilities 0.8383 8.36 5.0 13.36 i
CASE NO. ER-81-180 EXHlBil
(JEB-5) PAGE 2 of 3 MARKET-ADJUSTED ADJUSTED COMPANY T0-BOOK YlELD GROWTH TOT 11 Kcnsas City Power & Light 0.7753 8.62 3.5 12.12 Kansas Gas & Electric 0.8406 9.47 2.5 11.97
- K nsas Power & Light 0.8017 9.15 4.5 13.65 KIntucky Utilities 0.8122 8.71 3.5 12.21 Michigan Gas Utilities 1.1377 11.22 7.0 18.22 Minnesota Gas 0.9347 8.41 5.0 13.41 Minnesota Power & Light 0.9103 9.45 5.0
- 14. 4 Missouri Pubile Service 0.8478 7.20 4.5 11.70 Mountain States Telephone 0.9464 8.92 4.0 12.92 Munsingwear 0.5086 4.15 2.0 6.15 National Fuel Ga7 0.7313 6.89 7.5 14.39 Nstlona1 UtI1Ities 0.8758 7.34 7.0 14.34 N w England Electric 0.8830 9.65 5.5 15.15 New England Gas & Electric 0.8286 9.03 3.5 12.53 New England Telephone & Telegraph 0.9512 9.56 5.0 14.56
.uw York State Electric & (:ss 0.8246 8.99 5.0 13.99 Niaga ra-Mohawk 0.8438 9.10 3.5 12.60 Northeast Utilities 0.7508 8.97 8.5 17.47 Northern Indiana Public Service 0.8201 8.48 3.0 11.48 Opelika Mfg. Corp.
0.5151 3.92 3.5 7.42 Orange & Rockland Utilities 0.9032
.10.29 4.0 14.29 Ot te r Tall Powe r 0.6978 9.27 7.0 16.27 P:cific Gas & Elee;ric 0.7905 8.69 8.0 16.69 Pacific N.W. Bell 0.9337 8.73 4.0 12.73 Pacific Power & Light 1.0308 11.35 6.0 17.35 Pacific Telephone & Telegraph 0.6624 6.97 2.0 8.97 Hnnsylvania Power & LTght 0.7006 8.63 3.0 11.63 Philadelphia Electric 0.h04 9.78 3.5 13.28 Philips NV 0.3454 2.98 6.0 8.98 Piedmont Natural Gas 1.0432 9.29 9.0 18.29 Portland General Electric 0.8962 9.91 2.0 11.91
{i Rochester Gas & Electric c tomac Electric Power 0.8943 9.85 5.5 15.35 o
0.7966 7.49 5.5 12.99 St. Joseph Licht & Power 0.8000 9.12 4.0 13.12 San Diego Gas & Electric 1.0012 10.92 5.5 16.42 Shell Transport 1.0622 13.87 12.0 25.87 Southern Indiana Gas & Electric 0.8781 7.87 8.0 15.87 l
Southern New England Telephone 0.7745 7.77 4.0 11.77 l
South Jersey ind.
1.4158 13.31 6.5 19.81 Southwestern Public Service 1.3629 13.96 5.0 18.96 Sterling Bancorp.
4.3127 35.58 0.0 35.58 Toledo Edison 0.9011 9.92 2.0 11.92 Tucson Electric & Power 1.0707 10.63 7.5 18.13 Unilever Ltd.
0.9783 4.91 7.5 12.41 Unilever NV 0.7938 7.13 7.0 14.13 Unite.d illeninating 0.81C2 9.39 2.5 11.89 Washington Gas Light 0.8971 9.38 6.5 15.88 Washington Water 0.9061 9.24 4.5 13.74 4
CASE NO. ER-81-180 EXHIBIT ' ~ ' (JEB-5)
.
- PAGE 3 of 3 i
MARKET-ADJUSTED ADJUSTED COMPANY T0-BOOK YlELD GROWTH TOTAL Wels Markets 1.6166 5.87 15.5 11.37 Vicor Inc.
0.8785 8.57 9.0 17.57 Winn-Dixie 1.6620 9.05 12.0 21.05
" Wisconsin Power & Light 0.9950 9.96 5.0 14.96 Wisconsin Pubile Service 0.9346 9.19 6.0 15.19 V rigley (Wm.) Jr.
1.3323 9.33 10.5 19.83 Average 0.991C 8.77 6.34 15.11 6
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EXHIBIT PAGE 1 of 1 4
COST OF CAPITAL PRO FORMA AS OF SEPTEMBER 30, 1981
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AMOUNT PROPORTION COST OF TYPE OF CAPITAL (000) 0F TOTAL EACH TYPE COST Long Term Debt
$1,356,894 48.1S%
8.20%
3.95%
Preferred Stock 444,571 15.78%
8.47%
1.34%
Common Stock 1,016,441 36.07%
15.50%
5.59%
TOTAL
$2,817,906 10.88%
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.y.
O BEFORE THE PUBLIC SERVICE COMMISSION OF THE STATE OF MISSOURI
~
In the matter of the Union
)
clectric Company of St. Louis,
)
Missouri for authority to file )
tariffs increasing rates for
)
service provided to customers
)
in the Missouri service area.
)
e Case Number ER 81-180 AFFIDAVIT OF Ronald L. Shackelford STATE OF MISSOURI
)
) SS COUNTY OF COLE
)
4 Renald L. Shackelford of lawful age, on his oath statss:
that he has participated in the preparation of the attached written testi-mony in question and answer fom, consisting of 37 pager a be presented in the above case; that the answers in the attacned wri
? i.eitimony were l
given by him; that he has knowledge of the matters set is t;i i' such answers; and that such matters are true to the best of his knowledg 6
. belief.
o<.adz'Alad.bh4
~
Ronald L. Shackelfor/
\\
Subscribed and sworn to before me this cM TM day of Y1,n
, 1981.
l O
l o
n*
,D>
l Not2ry Put$lic, Cole County, Missouri i
MXAU Puu.ic start of wssonas My commission expires amiisminius nuo mi l
l t