ML20003F010
| ML20003F010 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 07/31/1980 |
| From: | Child C TEXAS, STATE OF |
| To: | |
| Shared Package | |
| ML19240B984 | List:
|
| References | |
| 3250, NUDOCS 8104170671 | |
| Download: ML20003F010 (78) | |
Text
'
1-DOCKET NO. 3250 APPLICATION OF TEXAS ELECTRIC-1 PUBLIC UTILITY COMMISSION SERVICE COMPANY FOR AUTHORITY l
TO CHANGE RATES I
0F TEXAS DIRECT TESTIMONY OF CHRISTOPHER CHILD ECONOMIC RESEARCH DIVISION PUBLIC UTILITY COMMISSION OF TEXAS JULY, 1980
.810.41' Ob
Docket No.
3250 Page 1 of 52 l
Q.
Please state your name_and business address.
2 A.
My name is Ch'ristopher C. Child.
My business address is 7800 Shoal Creek 3
4 Q. _ In what capacity are you employed by the Public Utility Commission of Texas?
5 A.
I am employed in the Economic Research Division as a Senior Analyst.
I am 6
responsible for the determination of rate of return requirements and rate 7
design for water and electric utilities regulated by this Commission.
In 8
addition, I am also involved in various research projects of the Comission.
9 Q.
Will you' briefly describe your educational training and professional 10 experience?
11 A.
I received my B.S. degree in Advertising from the University of Texas at 12 Austin in 1975.
I have completed all coursework toward an MBA with a 13 concentration in finance and accounting, and I will receive:my degree in 14 August 1980.
From 1978 to 1980 I was employed by Gulf States Utilities 15 Company as a Financial Analyst in its Financial Services and F,inancial 16 Planning and Analysis Departments.
I was invol'ved in numerous conventional 17 financings including the sales of common and preferred stock and first 18 mortgage bonds, and I also participated in other unconventional types of 19 utility finance transactions.
I was also responsible for various SEC'and 20 FERC reporting requirements and worked on many of the company's presentations 21 to the financial comunity. Additionally, I_ participated in GSU's 1978 and 22 1979 rate cases, including the preparaP.qn of testimony, analyses, and 23 exhibits, and worked closely in the development of a five-year forecasting 24 model for the company.
I have been employed by the Commission in my present 2'S capacity since January 1980.
Docket No. 3250 Page L of 52 1
Q.
Have you previously-testified before the Commission?'
2 A.
Yes, I have' testified in previous rate cases.
3 Q.
Would you please state the intent of your testimony in Docket No. 3250, 4
Texas Electric Service' Company, and describe the scope of your review and 5
analysis in this case?
6 A.
The purpose of this testimony is basically threefold.
Initially, I will 7
recomend a reasonable balance between the _ original cost of plant less 8
. depreciation and the current cost less an adjustment for present age and 9
condition.
This mix between net original and current cost is used by Ms.
10 Jones to compute the adjusted value of Texas Electric Service Company's 11 (TESCO's) invested capital devoted to providing utility service. Secondly, 12 an analysis into the cost of equity to Texas Utilities Company will be -
13 conducted to estimate the return required by investors for the use of their 14 funds as equity capital by the parent company.
Using this return as a 15 benchmark, a f air return on the equity invested in TESCO will be determined 16 which, in turn, will lead to my recommendation as-to a fair composite rai.e of 17 return on the original cost of invested capital.
Finally,_this testimony.
18 will evaluate the adequacy of the Staff's recomended revenue requirements in 19 an effort to ensure that the proposed rates will be sufficient to maintain i
20 TESCO's financial integrity.
To address these issues, this prepared j.
21 testimony has been organized into seven sections:
i 22 I.
Adjusted Value Mix 23 II. Cost of Equity to Texas Utilities 24 III. Market-to-Book Adjustment 1
25 IV. Return to Equity of TESCO i
i
Docket No. 3250 Page 2 of _E2 V
1 V.
Composite Rate of Return 2
VI. Fin'ancial Integrity and Adequacy 3
VII. Conclusions and Summary of Recommendations 4
I. -ADJUSTED VALUE MIX 5
Q.
Would yoU please define the adjusted value of invested capital 6
A.
The adjusted value of invested capital is the weighted average of the 7
original cost of property used and useful in providing utility service, less 8
depreciation, and the current cost of that property less an adjustment for 9
age and condition, balanced within the limits prescribed by the Public 10 Utility Regulatory Act.
According to Section 41 of the Act, the adjusted 11 value of invested capital must reflect a balance of between 60 and 75 percent 12 net original cost and between 40 and 25 percent net current cost.
o 13 Q.
Upon what basis have you determined the balance between net original cost and 14 net current cost?
15 A.
The balance between net original cost and net current cost has been developed 16 under the assumption that more current cost should be included during periods 17 of high inflation and deflation, and more original cost should be included 18 during periods of low inflation and deflation.
This approach takes into 19 account two aspects of the adjusted value of invested capital.
First,'the 20 impact of past inflation (deflation) on the Cm pany is accounted for by means 21 of trending the original cost of the Company's property. The resulting net i
22 current cost, as calculated by Mr. Saathoff, is directly determined by the 23' age of the property and by the inflation (deflation) that has taken place up 24 to the present.
Second, the balance between net original and net current
~
25 cost reflects the current annual rate of inflation or deflation. Thus, the e
4 52 Docket No.
Pago of s=
1 present state of the economy is used to weight the extent to which past 2
inflation and deflation is taken into account.
3 Q.
Have you accounted for the other factors that may be considered when arriving -
4
_ at the mix between net original cost and net current cost?
5 A.
The issue of the quality of service being provided by TESCO is addressed by 6
Mr. Saathoff.
Since the Company's overall quality of service appears 7
adequate, this factor does not seem to merit additional attention in the 8
adjusted value mix.
Similarly, because the growth rate in TESCO's service 9
area does not appear abnormal - having historically averaged in the range of 10 between four to six percent annually - neither does this item warrant special 11 consideration. Finally, the issue of TESCO's need to attract capital will be 12 addressed and accounted for later in my testimony; thus, it does not appear 13 necessary to also consider this factor in determining the balance between n,et 14 original cost and net current cost plant.
15 Q.
Please explain, then, your derivation of the mix between net original cost 16 and net current cost.
17 A.
7 The mix between net current cost invasted capital and original cost invested i
18 capital hris been determined so that the statutory limits for inclusion of net 19 current cost coincide with historical experience of price level changes.
20 Over the 32-year period from 1947 to the present, the most extreme inflation 21 or deflation rate as measured by the Grip Price Deflator was the ll.8. percent l
22 inflation in 1947; therefore,12 percent has been selected as the outside i
23 limits. These boundaries have been linearly connected with the origin under 24 the presumption that, in the absence of either inflation or deflation, the 25 invested capital mix should reflect 25 percent net current cost and 75 l
l
Docket No.
3250 Page 5 of 52 1
percent net original cost.
For each additional percent of inflation or 2
deflation, an' incremental 1.25 percent of net current cost should be included 3
in the invested capital mix. The derivation of this relationship is shown in 4
Schedule I, page 1 of 2.
Schedule I, page 2 of 2, shows the balance that -
5 would have been used in the past, based upon that relationship.
6 Q.
What current inflation (deflation) rate has been used to arrive at the 7
balance between net original and net current cost of invested capital for 8
TESCO in this case?
9 A.
As reported in National Economic Trends prepared by the Federal Reserve Bank 10 of St. Louis, the seasonally adjusted annual inflation rate (based upon the 11 Gross National Product Implicit Price Deflator) for the year ending March 12 31,1980, was 8.9 percent.
This time period has been selected so as to 13 conform as nearly as possible to the test year and be representative of the 14 present state of the economy. Substituting.the 8.9 percent in the equation 15 developed in Schedule I, page 1 of 1, produces a mix comprised of 36.125 16 percent net current cost and 63.875 percent net original cost investment.
17 The use of this mix in computing the adjusted value of TESCO's invested l
' 18 capital is detailed in Ms. Jones Schedule I, paae 1.
I
~
19 II. COST OF EQUITY TO TEXAS UTILITIES 20 Q.
Would you please explain the purpose of this portion of your testimony?
21 A.
This section is intended to identify the cost of equity capital to Texas 22 Utilities Company; or in other words, to estimate the minimum return that 23 potential investors would require to induce them to purchase shares of common 24 stock.
25 Q.
Why have you initially focused on the cost of equity to Texas Utilities l
l
Docket No.
Page 6 of 52 2
c.
I rather-than the minimum return required from TESCO?.
2 A.
TESCO is a wholly-owned subsidiary of Texas Utilities Company (along 'with 3
Dallas Power and Light Company, Texas Power and Light Company, and several-4 other companies), and all equity is financed through the Parent.. While we 5
are ultimately concerned with a fair return to the equity capital invested in' 6
TESCO, the logical starting point for determining the quantity is~where the 7
subsidiary effectively meets the investor directly - in the marketplace at 8
the parent, or consolidated,. level.
9 Q.
Would you please elaborate on the cost of equity concept?
10 A.
As indicated, the cost of equity is the minimum price that must be paid to 11 investors for the use of their money.
Equity capital is a resource which, 12 like debt funds, labor, fuel, etc., has a cost, or rent, associated with its 13 usage. By identifying the cost of this resource and allowing a utility the 14 opportunity to earn at approximately this rate," consumers are essentially 15 paying only for the actual cost of the money invested. in plant and 16 facilities. At the same time, however, because the price.of equity ca tal 17 is determined by its alternative uses, the expected. return is comensurate 18 with those of other investments of similar risk.
If equity capital is 19 authorized to earn its opportunity cost, the Company should experience little 20 difficulty raising additional funds..In short, by allowing a utility company 21 to earn its cost of equity, stockholders neither receive windfall gains'nor 22 is their investment confiscated; yet the return is sufficient to attract new 23 capital so that service can be maintained and expander as needed.
24 Q.
Is the cost of equity the same as a fair return to equity?
25 A.
Not necessarily; while the terms are often used synonymously, there can be a l
-+--.9-e,
-w ev,
4
..-,-.p
.g.-..
3,,_
c
...m_.,..-_w,
,.ty,
..,--..r.
.,.-r,w.,
..-,-..er
Docket No.
3250 Page 7' ' of 52 I
difference between the two 'if.there are other objectives that would cause the.
2 values to be different. One such objective-might be-to encourage a. desired 3
ratio of market price to book value. In any event, the cost of equity concept 4
provides a rational basis upon' which to develop a fair ~ return to comon.
5 equity.
l 6
Q.
How is the cost of capital determined?
7 A.
The cost of capital is a function of two things: the time value of money and 8
the risk to which the capital will be exposed..In other words, the cost of-9 all capital can be generally described as:
10 Cost of Capital Risk-Free Rate _+ Risk Premium
=
11 Thus, as the capital is put to riskier uses, the greater the return that is 4
12 required.
Virtually risk-free assets, 'e.g.,
U.S. Treasury Bonds, require 13 only a minimum yield to account for the pure-time value of money and long-14 term inflation expectations.
As risk increases, the total required return 15 rises as investors demand additional compensation for. bearing additional 16 risk. This is particularly evident i.n the case of bonds and preferred stocks 17 where risk levels, as indicated by ratings, and required yields are fairly l
18 well-defined.
19 Two other items of significance should be nc' d.
First, inflation ~has 20 implicitly been taken into account by the marketplace.
In other words,'the 2l current returns required by investors for the use of their money already 22 reflect their expectations of inflation. They continually adjust returns for i
23 anticipated loss of purchasing power while their funds are loaned. out.
I 24 Secondly, the cost of capital is not a fixed function but ' moves over time as 25 investors revise expectations of overall economic conditions.
~
l l
l l.
- ~. _
....u...
..~ _ _._ - _,_
.... _ _~.,
Docket No.
3250 Page 8 of 52 1
Q.
You have pinpointed the returns required for various fixed income securities 2
in Schedule II; why not do the same for common equities?
3 A.
Extrapolating from fixed income securities to common stock on the risk 4
premium is imprecise in that risk and required returns for equities are not 5
directly observable.
Unlike bond and preferred stocks, the dividends and 6
capital gains that coninon stockholders expect to receive from their
'7 investments are not directly observable. There is no stated or contractural 8
rate on equity securities; and consequently, it is impossible to compute the 9
precise rate of return that investors require from a share of conrnon stock.
10 Further complicating the effort to determine the investors' minimum required 11 return is the problem of specifying the risk level of different companies 12 since a multitude of factors contribute to investors' perceptions of the risk 13 of a particular share of common stock. Nevertheless, the risk-return trade-14 off concept shown by bonds and preferred stocks undoubtedly extends to common 15 equities as well. Thus, a lower expected return is required with lower risk 16 equities, and increasing expected returns are required with higher risk 17 equities.
18 Q.
How, then, does one determine the investors' required return from or cost of 19 equity for a particular company?
20 A.
Obviously, this is a = difficult task because the capital market line is not 21 well defined past the point of fixed income securities.
However, by 22 analyzing information about a company and others judged to be of comparable 23 risk, a reasonable estimate of a firm's cost of equity can be made. While 24 various quantitative approaches are used as guides to investors' minimum 25 required returns; in the final analysis, the cost of equity ' estimate is
--.-,m
,..r y
-.,r
Docke2 No.
3250 Page 9 of 52 I
largely judgemental, being based upon the information available to the 2
analyst.
3 Q.
How have you gone about estimating the cost of equity to Texas Utilities 4
Company?
5 A.
I have approached the issbe of determining Texas Utilities' cost of equity in 6
a variety of ways.
Initially, the fundamental financial and operating.
. 7 characteristics of Texas Utilitfes have been evaluated and compared with 8
those for the electric utility industry and the unregulated sector to gauge 9
the Company's risk relative to other companies. Concurrently, today's market 10 conditions have been contrasted with those in the near past and recent 11 developments have been explored in an effort to better understand any changes 12 in investor expectations, perceptions, and requirements.
Secondly, a 13 conventional discounted cash flow analysis has been performed which attempts 14 to replicate market expectations and impute investors' required return from 15 Texas Utilities given the Company's current market price. In connection with 16 this, a variation of the traditional discounted cash flow model utilizing 17 investment analysts' earnings forecasts has also been employed to estimate 18 the Company's cost of equity.
Thirdly, I have also analyzed a recently l
19 conducted survey of investors which inquired directly as to the return they 20 require from an investment in the common stock of an electric utility 21 company. Next, I have examined the equity returns realized by other firms to 22 see what investors might expect from alternative investments. A final test 23 has been to examine the risk premium, or additional return, that investors 24 require for holding common stock instead of long-term bonds.
Even though 25 each of these methods is useful in that it is somewhat indicative of l
l
Docket No.
3250 Page 10 of 52 a
e 1
investors' required returns, the results between methodologies may vary 2
substantially.' Because some tests are stronger than others, though, careful 3
considsration must be given to the validity of each before arriving at a 4
final cost of equity estimate to the Company.
5 Q.-How does the risk of the electric utility industry compare with the 6
unregulated sector?
7 A.
Electric utilities have traditionally been considered one of the least risky 8
groups of stocks available.
This is in large part due to. the essential 9
nature of electric service and the market protection afforded by regulation.
10 Beginning in the early and mid-1970s, regulatory tag in some jurisdiction's, 11 consumer militancy, fuel
- problems, economic uncertainties, and the 12 industry's need to raise substantial amounts of external capital for growth, 13 conversion and pollution control caused electric utilities to lose some of 14 their market favor.
Even during this period, though, electrics were still 15 considered relatively safe investments since most nonregulated companies 16 were facing similar problems with the energy crisis, inflation, and rising 17 capital costs.
During 1477 and 1978, regulation generally improved 18 nationwide, boiler fuel prices began to stabilize, and capital expenditures 19 showed some promise of leveling out; hence, some of the historical stability 20 returned to the industry.
21 Last year..though, saw the improving trend disrupted by numerous events 22 and conditions.
The mandatory shutdown of several nuclear stations before 23 and after the Three Mile Island incident shocked the industry. Recurring oil 24 shortages coupled with a looming recession has caused investor wariness in,
25 the economy as a whole.
Continued environmental concerns, recent abnormal w--
-e n
,,e
~ - +
- ~,
.e
-r
11 52 Docket No.
3250 Page of I
weather patterns, anti-nuclear demonstrations, and unparalleled inflation 2
pushing up long-term interest rates to historical highs have also resulted in 3
additional uncertainties, with the electric industry being particularly 4
susceptible to the adverse financial consequences of these last items. Thus, 5
the relative risk of the electric utility industry has been erratic of late 6
and is currently deteriorating.
The overall risk of the electric utility 7
industry has undoubtedly increased somewhat from ten to fifteen years ago.
8 While the last two years had shown a general decline in uncertainty, the 9
events and circumstances through especially the last half of 1979 and the 10 first half of 1930 have rekindled investor concern. Even in light of this, 11 however, the industry is still typically viewed as being, by and large, no 12 more risky than. the unregulated sector and the market as a whole.
As 13 electricity becomes a more desirable source of energy to households and 14 businesses because of its availability and reliability compared to direct 15 consumption of fuels, the outlook for the industry, despite the near-term 16 problems, still appears favorable with modest growth being projected for many 17 years into the future.
18 Q.
How do investors view Texas Utilities as compared with other electrics?
I 19 A.
As everyone is well aware, the Texas Utilities Companies are the Only
(
20 electric utilities with long-term bonds rated Triple A by both major bond i.
21 rating agencies. The low risk reflected by this rating is a function of many 22 factors.
The Company's fundamental business position is enhanced by its 23 location in the Sunbelt and, in particular, in Texas.
Its service area is l
24 diversified geographically and its revenue composition is reasonably well 25 balanced across customer classes (38% residential, 28% commercial, 24%
t
12 of 52
, Docket No. 3250 page 1
1 industrial,10% other).
Texas Utilities' fuel conversion effort and its 2
long-term access to lignite' deposits provide the System with relatively low 3
cost, reliable fuel supplies, even though there is some uncertainty as to
, hether Texans will fully enjoy these resources due to the Texas Interconnect 4
w 5
controversy over forced interstate power pooling.
Texas' Utilities' 6
involvement in the Comanche Peak Nuclear Units is a source of some concern, 7
especially in the wake of Three Mile Island; but even with both units on-line 8
in 1983, nuclear power will comprise only slightly in excess of ten percent 9
of the System's generating capacity and should not significantly affect its 10 overall risk. -Recently, the use of fuel oil as a boiler fuel has become an 11 important negative factor in investor assessment of risk. However, only 1.4%
12 of the total fuel requirements of the Company are supplied by fuel oil. As a 13 large system, with assets of nearly $6 billion and significant generating -
14 capacity reserve margins, the Company enjoys substantial financial 15 flexibility. While th'. Company has recently undergone a massive construction 1
16 program, planned capital expenditures in the near future will _ level off.
17 Each of Texas Utilities
- operating subsidiaries falls under the jurisdiction 18 of the Texas Public Utility Commission, either directly or indirectly, which 19 is generally considered by investors to be a responsible and fair regulatory l
20 body. The business-oriented political and social climate in the State also 21 makes the Company's service area a desirable environment in which to operate.
l 22 The capital structure and conservative accounting policies, such as t
23 normalized income tax treatment and pot-of-dollars approach to determining
(
24 AFUDC, of the Company are generally viewed favorably by investors. Finally, 25 the management of the Texas Utilities System has proven itself to be an i
l
13 of 52 Docket No.-
3250 Page t
1
' efficient, progressive team quite capable of handling the affairs of the-2 Company and generally well-respected by. investors for their past 3
accomplishments. Hence, even though some of the fundamental characteristics.
4 of the Texas Utilities System suggest that,Jin absolute terms, the Utility 5
may have become more risky of late, the underlying causes tend to be almost-l
. 6 entirely industry-and economy-wide factors common to all firms rather than 7
company-specific changes.
As a result, Texas Utilities' risk relative to 8
other electric companies does not'seem to have changed appreciably and the 9
System still appears to be one of, if not the, least risky electric utilities 10 in the country.
11 Q.
What has been the recent experience in the capital markets for debt?
12 A.
During the last year, the capital markets have undergone several significant 13 sitifts with interest rates and bond yields increasing,'then decreasing in a-14 dramatic and rapid f ashion and stock prices generally remaining unchanged 15 despite increased earnings and book values. The exact causes behind this are 16 not clear but probably reflect a combination of forces including anticipation 17 and eventual onset of the current recession, disillusionment with the Carter l
18 Administration's economic policies, persistent inflation, potential and 19 realized oil shortages, and so on.
The wide swings.in the capital. markets 20 over the last 12 months and the impact on the electric utility industry can 21 best be demonstrated with some selected financial indicators.
Listed below 22 are yields on public utility fixed income securities in July 1979, February-23 1980, and July 1980 (from Moody's News Report):
24 l
25
<-=-=-t
=w reem--ye,=r--
- -r
.~r- + -
-s--
<+e v
,w s-
-*r7-
't 9-e-e--
--tc*+c+
s-v r
-e*-'
+t-r+e-
, Docket No.
3250 Page 14 of 52 1
July 1979 Feb. 1980 July 1980 2
Aaa Bond's 9.39%
12.47%
10.96%
3 Aa Bonds 9.73%
12.90%
11.63%
4 A Bonds 10.04%
13.39%
12.00%
5 Baa Bonds
- 10.45%
14.12%
12.54%
6 aa Preferred Stock 9.03%
11.20%
10.59%
7 a Preferred Stock 9.55%
12.27%
10.97%
8 baa Preferred Stock 10.49%
13.09%
12.05%
9 10 As indicated, investors are requiring roughly 150-190 basis points more 11 now than a year ago to induce them to purchase fixed income securities of 12 comparable risk.. The progressive steps in this unparalleled increase and 13 decrease in yields is illustrated in Schedule II.
The schedule shows that for the first seven months of 1979, the change in yields were not nearly as 14 15 drastic' as in the last five months. Similarily, the schedule also shows the 16 rapid rise and fall in yields in the first half of 1980.
17 Q.
What has been the recent experience in the capital markets for equity?
i 18 A.
The experience of electric utilities in the equity markets shows a similar 19 pattern.
Below are some average selected financial measures for the 100 20 largest electric utilities in 1979 and 1980 (from Salomon Brothers' Stock 21 Research', June 1,1979, and June 3,1980, book values are for the first 22 quarter of 1979 and 1980, respectively):
23 l
24 l
25 i
w y
w w
y w
g mww v-=
e,-
q
g
-e e
swam r
Docket No. '3250 Page E of 3 7
1 1979 1980 Dif.
2 Dividend Yield 10.07%
10.97%
0.90%
3 Price-Earnings Ratio 7.3X 7.4X 0.1X 4
Market-to-Book Ratio 86%
80%
-6.0%
5 Payout Ratio 74%
82%
- 8. %
6 Return on Average 7
Equity 12.2%
11.1%
-1.1%
8 9
Since this time a year ago, dividend yields have risen 90 basis points 10 while price-earnings ratios improved marginally..Similarly, market prices 11 have dropped from an average of 86 to 80 percent of book value. Probably most 12 importantly, however, is that these declines in market prices have occurred i
13 during a period when payout ratios increased and realized return on equity 14 declined.
In all, these statistics present strong evidence that over the ~
15 last 12 months, there has been a increase in the returns required by 16 investors.
17 Q.
How have the changes in the capital markets-affected the Texas Utilities 18 companies?
19 A.
The general changes in economic and financial market conditions have had a 20 similar impact on the Texas Utilities System. The operating companies' cost 21 of borrowing has increased from slightly over 9.4 percent a year ago to 22 approximately 11.9 percent today.
The more serious impact of current 23 conditions has Nen on the common equity of the System. For the first time in 24 many years. Yexas Utilities' common stock is consistently selling at below g
book value (currently at about 85-88% of year-end 1979 book value) in the
3250 Page 16 of 52-Docket No.
I marketplace.
This indicates that the rt; turns investors are expecting from 2
Texas Utilities are no longer sufficient, to make them willing t.o pay a price 3
for a share of the Company's stock equal to or greater than book value.
4 Q.
Does this mean that the returns on equity authorized in the past were 5
inadequate?
6 A.
Not at all, the returns allowed by the Commission in previous cases were 7
appropriate given the economic and financial conditions at the time. This is 8
evidenced by the fact that Texas Utilities' market price consistently sold at 9
or above book value.
Only of late have market conditions changed and 10 investors' required returns increased to the point where the level.of returns 11 historically authorized are no longer adequate.
The implications of this 12 recent experience seem fairly clear. If this Commission intends to encourage 13 a market price equal to or greater than book value so as to prevent dilution 14 of present stockholder's investment, then the returns authorized on equity 15 must be revised upward to reflect changes in capital market conditions and 16 increases in the rates of return demanded by investors.
17 Q.
What tests have you performed to identify the level of investors' required 18 returns from Texas Utilities?
19 A.
First of all, I have used the traditional discounted cash flow (DCF) model to 20 estimate Texas Utilities' cost of equity.
The DCF method of gauging 21 investors' required returns is derived from the familiar Gordon dividend 22 growth model. This theory of valuation postulates that the price of a share 23 of common stock is equal to the present value of all its future dividends.
24 These dividends are assumed to grow at a constant rate into infinity and are 25 discounted by a rate that is the minimum return required by investors given
Docket No.
3250 Page 17 - 6f. 52 I
the risk of the security:
~
2 o (1 + g)I D.(1 + g)2 Do (1 + g) "
D g
3 P
=
+
+
+
(1 + k)1 (1 + k)2 (1 + k)00 O
4 5
This equation can be conveniently reduced to the more manageable form of:
6 D
3 7
P, =
k-g 8
and the company's cost of capital can be isolated by rearranging terms:
9 D
10 k=
+ g p
o 11 Essentially, the DCF model recognizes that the return to the stockholder 12 consists of two parts: dividend yield and growth. Equity investors expect 13 to receive a portion of their total required return in the form of current 14 dividends and the remainder thrcugh price appreciation. The model is based 15 upon two fundamental assumptions., Initially, it presumes that investors 16 evaluate the risk and expected return of all securities in the capital 17 mar kets.
Secondly, given these expected returns,-investors then adjust the 18 price of each stock so that they are adequately compensated for the risks to 19 which they are exposed.
The use of the DCF model to estimate the cost of 20 equity is essentially an attempt to replicate the market pricing mechanism 21 described above. Since we can look to the market to determine what inve'stors-22 feel a share of Texas Utilities' comon stock is worth, the rate of return 23 required by investors can be imputed by approximating their expectations of 24 future dividend growth.
f 25 Q.
In your DCF analyses, what is the dividend yield of Texas Utilities Company?
Docket No.
3250 Page 18 of 52 v
1 A.
When an investor purchases a share of stock, he is buying expected future 2
dividends and' price appreciation; he is not buying past dividends paid to-3 someone else.
Therefore, the dividend yield component-of the DCF model 4
should be computed by dividing the' dividends expected to be received in the 5
coming year (D ) by the current market price (P ).
I have used $1.82.per y
g 6
share in my calculations.
This amount has been selected on the basis that 7
investors anticipate Texas Utilities to raise dividends in 1981 in a manner 8
consistent with 1979 and 1980; that is, a $0.12 annual increase beginning in
{
g the first quarter, which will result in stockholders receiving a $0.44 10 dividend per share.in each of the last two quarters of 1980 and $0.47 per 11 share in the first two' quarters of 1981. The market price of the Company's 12 stock has hovered between $18.00 and $19.00 over the last few months so a 13 price of $18.375 has been used in this analysis. This recent average market 14 price has been selected because the cost of equity is a current and forward-15 looking concept, and a recent market price is a better indication of 16 investors' present requirements than would be a historical point estimate or 17 a long-run average.
Based on these values, the market presently expects a 18 dividend yield of approximately 9.9 percent from Texas Utilities.
19 Q.
Please describe the growth (g) component of the DCF model.
20 A.
In using the DCF model to estimate a company's cost of equity, we are not i
21
. concerned with the rate at which the firm will actually grow (that is 22 primarily a function of this Commission's decision, management prowess, 23 weather, economic conditions, and chance); rather, at issue is the growth 24 expectations which investors have embodied in the current price of the stock.
25 Furthermore, the DCF model technically maintains that investors are
.. ~
19 52 Docket No.
3250 Pagg of I
concerned with the expected increase in dividends into infinity; in other 2
words, their. emphasis is on average long-term growth rather than short-run 3
growth. Consequently, in estimating the growth component of the DCF model, 4
,an attempt is made to determine what investors think long-term growth will 5
be.
6 Q.
How have you analyzed the growth expectations of Texas Utilities' investors?
7 A.
Two approaches have been used to estimate the long-term growth that investors.
8 might expect from Texas Utilities.
The first focuses on the Company's 9
expected earnings retention ratio and earned returns on equity, and the 10 second approach considers historical trends in growth. These methods taken 11 together presumably examine, by and large, many of the same factors which -
12 investors evaluate when forming their long-term growth expectations and 13 setting the price of a share of Texas Utilities' co:rnon stock.
14 Q.
Please explain your first approach.
~
15 A.
In general, a firm's internal growth results from the retention and reinvest-16 ment of earnings.
In other words, any increase in a stockholder's interest 17 in a utility company occurs primarily because some profits are retained by 18 the firm and invested in additional assets uoon which a return is earned.
19 This being the case, investors would probably lo to a company's retention 20 ratio (1 - dividend payout ratio) and the expected returns to be earned on 21 equity as an indication of what future growth is apt to be. Reviewing Texas 22 Utilities' history (Schedule III, page 1), the Company has in general 23 maintained a payout ratio in the 50 to 60 percent range (or a retention rate 24 of 40 to 50 percent), with more recent experience towards the upper (lower) 25 end of this range, as dividends have increased without corresponding
-~-
~~
- - ~ ~
-,-_7 gow-
-,u e+-
r-
3250 Page 20 cf 52 Docket No.
1 improvements in earnings per share. The most recent four years between 1976 2
and 1979, however, have probably had a very significant effect on the 3
formation of investor perceptions regarding Texas Utilities' prospects, as 4
the investment community closely monitored the Company's performance under 5
statewide regulation.
During this period, Texas Utilities' retention rate 6
has persistently declined each year to approximately 33 percent in 1979 and 7
31 percent for the test year.
Meanwhile, the Company's realized return on 8
equity during this four year period has ranged between 12.2 and 13.1 percent 9
annually with a realized return of 12.0 percent for the test year.
10 Complicating this further is the fact that Texas Utilities' stock is now 11 selling at below book value, and investors recognize that any sales of 12 additional equity to continue financing the System's construction program 13 are apt to be dilutive and have a negative impact on future growth.
14 Considering these factors, investors are likely anticipating Texas 15 Utilities' future retention ratio to be around the 36 to 38 percent level 16 and, based upon recent past experience, expect the Company's earned return to 17 be in the 12.75 to 13.25 percent range.
This would imply that the market 18 expects a prospective growth rate for Texas Utilities of somethin,g in the 19 vicinity of 4.6 to 5.0 percent annually on an ongoing basis, probably with 20 some downward adjustment for possible dilutive effects.
There are, of 21 course, an infinite number of growth rates that can be computed depending 22 upon the combination of the retention ratio and return on equity used 23 (Schedule III, page 1), but growth rates around 4.6 to 5.0 percent seem most 24 consistent with what investors would likely project based upon reasonable 25 expectations of the Company's future retention ratio, earned return on
3250 Page 21 of 52 Docket No.
i 1
equity, and dilutive effects.
2 Q.
What is involved in your second approach for estimating investor expectations 3
of Texas Utilities' future growth?
4 A.
.Besides looking directly to those factors resulting in growth, investors 5
probably also form their -expectations of future growth by analyzing 6
historical experience and trends as a guide to the direction which the 7
company is heading, especially for a relatively stable firm such as Texas 8
Utilities.
Three factors which would seem most indicative - of Texas 9
Utilities' future dividend potential would be growth in net book value, 10 earnings per share, and dividends per share. On page 2 of Schedule III, the 11 historical values for Texas Utilities' net book value (NBV), earnings per 12 share (EPS), and dividends per share (DPS) are shown since the early 1960s.
13 For each of these variables, annual compound growth rates for.the three j
14 periods, 1975-1979, 1970-1979, and 1965-1979, have been computed and are 15 listed on page 5 of the same schedule. In addition, because compound growth 16 rates are sensitive to beginning and ending values, I have'also " smoothed" 17 the NBV, EPS, and DPS values through linear regression models (pages 3 and 4 i
18 of Schedule III).
The annual compound growth rates using these normalized l
19 values for the same 5,
10, and 15 year periods are also shown in I
20 Schedule III, page 5.
21 Q.
What are the implications of these historical analyses?
22 A.
As shown on page 5 of Schedule III, NBV and EPS growth trends are declining 23 over time although there is an increasing trend in dividend growth. While 24 this rising dividend trend might suggest high market growth expectations, 25 investors recognize that such increases cannot be sustained without i
l l
l
. Docket No.
3250 Page 22 of 52 I
corresponding growth in Texas Utilities' earnings per share and investment 2
base (book value). 'In other words, the rising growth in dividends per share 3
can largely be attributable to the Company increasing its payout ratio over 4
the last few years; a practice which, of course,-
cannot be continued 5
indefinitely.
Since th'e increased dividend payout ratio results in less 6
earnings being retained and reinvested, investors are likely anticipating 7
that the Company's growth will continue to subside somewhat more in coming 8
years. This is further reinforced by the performance experienced since 1976 l
9 when the System became subject to more centralized regulation. The general 10 decline in growth rates in the last three to four years relative to prior-11 periods strongly suggests that Texas Utilities' heyday of high growth is 12 past.
Consequently, investors are beginning to view the Ctrnpeny as a 13 pote'ntial income security instead of a growth stock.
14 Q.
What does this analysis of historical trends suggest as to the long-tern 15 growth that investors are expecting from Texas Utilities?
16 A.
The marked downward trend in racent earnings and net book value per share 17 growth rates suggest that investors-are not incorporating,into Texas 18 Utilities' stock price growth expectations corresponding to the growth rates 19 experienced over the last 10 to 15 years.
Texas Utilities is undoubtedly 20 perceived as a maturing electric utility having growth prospects more similar 21 to those of the industry as a whole than it has had in the past. However, its 22 location in Texas and the Sunbelt still results in growth at the high end of 23 the industry average. Thus, considering the trends and implications of the 24 historical numbers che market's perception of the earnings level and 25 consistency that will result from the more centralized regulatory process,
Docket No.
3250 Page 23 of.
52 1
and the Company's apparent transition from a growth to income security, my.
2 analysis lead's me to believe that. investors project Texas Utilities' future 3
long-term growth to be less than that generally indicated by the Company's 4
historical growth but something in the upper end of the 3.0 to 5.0 percent 5
range expected for the industry. Somewhere in.the 4.7 to 5.5 percent range 6
seems to be a reasonable growth estimate for Texas Utilities from an analysis 7
8 Q.
Would you briefly recap your growth analyses and state your conclusions?
9 A.
As discussed previously, the intent of these growth analyses has been to 10 estimate the long-term growth expectations that investors have embodied in 11 the current price of Texas Utilities' stock.
I have attempted to do this by 12 replicating the thought processes of investors and how they might form their 13 growth expectations for the Company. To do this, I have analyzed information 14 which is presumably similar to that which the market would evaluate in 15 assessing Texas Utilities' long-term growth prospects.
Based upon these 16 analyses and giving appropriate weight to the recent developments and 17 experiences of the Company, I believe that investors expect Texas Utilities' 18 future long-term growth to be in the 4.5 to 5.5 percent range with a more 19 precise estimate being in the neighborhood of 4.7 to 5.0 percent.
20 Q.
Please summarize your analysis of Texas Utilities' cost of equity using the 21 DCF approach.
22 A.
The DCF model is a market oriented, forward-looking method of estimating a 23 company's cost of equity which is based upon a reasonably sound theory of 24 stock valuation.
It is particularly applicable to a utility such as Texas 25 Utilities, where investors expect a large portion of their total return to be
Docket No.
3250 Page 24 of 52 1
in the form of dividend yield.
The advantages of the DCF model are that 2
(1) it focuses' solely on the firm in question, and (2) the company's relative 3
risk is not of explicit concern since this is implicitly accounted for by 4
investors when they set the stock price in the market. For Texas Utilities, 5
my DCF analysis indicates that investors anticipate a dividend yield from the 6
Company of approximately 9.9 percent and expect the Utility's future long-7 term growth to be in the 4.6 to 5.0 percent vicinity.
Summing these two 8
components of return, Texas Utilities' cost of equity appears to be in the 9
range of 14.5 to 14.9 percent.
10 Q.
In what other ways have you estimated Texas Utilities' cost of equity?
11 A.
Another approach to estimate Texas Utilities' cost of equity is through a 12 variation of the.DCF model which uses investment analysts' forecasts of the 13 Company's earnings as its basis.
Taking the discounted cash flow formula 14 presented earlier:
15 D
1 k=
+g p
16 o
17 the dividend (D ) and expected growth (g) components can be described as:
1 18 El (1 - b) k=
+ (br + vs) p 19 o
20 In this reformulation, b represents the Company's expected earnings 21 retention ratio, r is the expected realized return on book equity, and the vs 22 term describes the dilution or accretion attributable to sales of new common 23 stock at below or above book value (Schedule IV, page 1). What this equation 24 says is that D will be equal to expected earnings per share in the coming 1
25 period (E ) times the Company's payout ratio (1 - retention ratio) and growth y
25 Docket No.
3250 Page of 52 l
will be equal to the rate of retaining earnings times the return earned on 2
equity adjusthd for the effects of issuing new e'quity at a market price 3
different from book. Like the DCF method discussed previously, this approach 4
is an expectations model; in other words, proper implementation requires that 5
its parameters (except price) be estimated as investors would forecast them.
6 Q.
Where have you obtained values for implementating this approach?
7 A.
Tne sources of data for this model have been taken from Texas Utilities' 8
Annual Report; TESCO's Rate-Filing Package; Salomon Brothers Electric 9
Utility Regulation, Quality, Earnings; Value Line and Standard and Poor's 10 Earnings Forecaster.
This latter publication is a compilation of earnings 11 projections made by various investment services, and while it does not 12 include estimates from all analysts, the 51 firms contributing to the 13 Earnings Forecaster represent a fairly broad cross-section of the invesiment 14 comunity (Schedule IV, page 2). The investment advisory service forecasts 15 contained in this service have been used as surrogates for investor 16 expectations of Texas Utilities' future earnings.
As shown on page 2 of 17 Schedule IV, those services projecting Texas Utilities' earnings are 18 forecasting 1980 EPS of between $2.80 and $3.00, with an average estimate of 19
$2.86.
From Schedule III, page 1 and the rate filing package, I have also 20 obtained the following data for the last three years:
21 1977 1978 1979 H
Earnings Retention Ratio 41.7%
40.2%
33.1%
30.7%
22 b
23 (1-b)- Payout Ratio 58.3%
59.8%
66.9%
69.3%
Realized Return on 24 r
25 Equity 13.0%
13.0%
12.0%
11.6%
Occket flo.
3250 Page 26 of 52 1
Based on this recent financial information, it. seems reasonable to 2
assume that investors would project a 1980 earnings retention rate of 3
approximately 39 percent, a payout ratio of 61 percent, and a return on 4
equity in the neighborhood of 13.0 percent. Finally, investor expectations 5
of the effects of additional comon equity sales on future growth can be 6
approximated from data contained in TP&L's Rate-Filing Package.
As 7
mentioned, the "vs" term in the equation reflects the increase (decrease) in 8
expected growth attributable to selling new 'comon stock at above (below) g book value.
To estimate the magnitude of this factor, some basic data is 10 required.
Texas Utilities has recently sold about 5,000,000 shares of new 11 comon each year (in 1976 it sold 10 million shares), recently incurring 12 flotation costs slightly over $0.65 per share.
As of the end of the test 13 year, the Company's book value was $20.45 per share for the 93 million plus 14 shares outstanding.
Now, if Texas Utilities were to issue five million 15 shares of new stock at the current market price of $18.375 per share, the 16 Company would net about $17.73 per share.
Since this is less than book 17 value, the "s" term in the equation would be 86.7 percent.
Furthermore, 18 existing stockholders would forfeit some of their ownership and earnings 19 participation in the Company to the new shareholders. The "v" term in this 20 case becomes -0.71 percent, and the product of these two values implies that 21 existing owners' expected growth would be 0.62 percent less than it otherwise 22 would have been.
Put another way, the book value of the Company's stock 23 would drop from S20.45 before the sale to $20.31 af ter, a decline in value of 24 0.68 percent.
Thus, if investors anticipated five million new shares of 25 comon stock to be sold at current market prices to finance the Company's
't Docket No.
3250 Page 27-of 52 I
construction program, they would also expect a reduction in the expected 2
growth rate on the order of 0.62 percent.
Of course, if more shares were 3
likely to be sold, the negative impact on growth would be even greater.
4 Q.
What, then, does this test suggest as to the. cost of equity for. Texas 5
Utilities?
6 A.
In Schedule IV, page 1, the various computations discussed above are 7
detailed.
As shown there, combining investment analysts'. forecasts of the 8
Company's future earnings, reasonable estimates of an expected retention 9
ratio ana earned return on equity, and conservative external financing 10 figures, this approach indicates that the cost of equity to Texas Utilities 11 is approximately 14.0 percent.
12 Q.
How else have you gone about estimating Texas Utilities' cost of equity?
13 A.
The previous method measures a company's cost of equity indirectly;- i.e.,
14 given various pieces of information about a company and current prices, 1,5 investors' required returns are imputed.
My second approach involves a 16 direct query of investors as to the rate of return they require' from a 17 company or industry.
In June 1980, the financial consulting firm of 18 Mitchell, Hutchins, Inc. surveyed 158 institutional investors (with 116 19 responses) about their attitudes toward tha electric utility industry. One 20 of the questions included in the survey inquired as to the total return 21 expected from an investment in the co. rnon stock of electric utility 22 companies. A surrnary of the responses to this question have been reproduced 23 in Schedule V, page 1.
As illustrated, the majority of the respondents 24 (75 percent) indicated that a return between 15 and 18 percent would be 25 attractive from this group.
Docket No.
3250 Page 28 of Et, 1
Q.
Are there any caveats'regarding the interpretation of this survey?
2 A.
There are several points meriting mention with respect to this direct measure 3
of investor's required returns. First,.it should be noted that this survey 4
is the most currently available and thus is the most recent information 5
available from investors.. Also, the survey was conducted after this spring's 6
wild gyrations in the money and credit markets and reflects the impact that 7
this had on the perceived risk of the industry.
Secondly, however, the 8
standard upon which these expected returns are based is a utility of Double A 9
risk.
Since Texas Utilities Company is rated Triple-A and is generally 10 considered to be a less risky investment than the average Double A utility, 11 the Company's cost of equity is likely to be at the bottom of this range, even 12 after an adjustment is made for the change in Double-A yields from 12.5 to 13 the slightly lower yields of today.
Finally, the 'results of this poll are 14 subject to the limitations of any survey with respect to the truthfulness of 15 responses, proper interpretation of the questions, sample size and 16 representativeness, and so forth.
17 Q.
Taking these factors into account, what does this survey imply as to Texas 18 Utilities' cost of equity?
19 A.
Adjusting the survey results for subsequent events, such as present inflation 20
- rates, accounting for risk differentials, and recognizing the study 21 methodology, this test indicates that Texas Utilities' cost of equity would 22 fall in the 14.50 to 15.00 percent range.
23 Q.
What other methodology have you used to estimate Texas Utilities'. cost of 24 equity?
25 A.
Another approach for estimating the Company's cost of equity has been to
Docket No.
3250 Page 29 of 52 1
examine the additional retarn that investors have demanded for holding Texas 2
Utilities' coltrnon stock instead of its senior fixed securities.
This bond 3
yield / risk premium analysis is intended to reflect the effect of interest 4
rate changes on investors' required returns and is an offshoot of the idea 5
discussed earlier that expected returns are comprised of some time value of 6
money plus a risk premium.
7 Q.
Please explain this method.
8 A.
This test has involved computing the spread (or risk premium) between the 9
yield on Moody's Aaa bonds and the return required on the equity invested in 10 Texas Utilities for each year between 1975 and 1979.
Since we do not know 11 what the cost of equity to the Company in each of these periods was, 12 investors' required returns at the various points in time must t,e estimated.
13 Using Texas Utilities' realized returns as a proxy for the cost of equity 14 would be inappropriate since this would only maintain the status ouo of the 15 Company and would be circular.
Therefore, I have used a DCF model to 16 estimate investor requirements which assumes that investors formed their l
17 growth expectations based solely on historical experience.
A mechanical l
18 growth estimation technique has been employed that averages the compound l
19 growth rates for the 5,10, and 15 year periods prior to the year under l
l 20 examination.
The net effect of this averaging method is to emphasize the 21 most recent past (the preceding five years are weighted 50 percent, the l
22 preceding ten years are weighted 33 percent, and the preceding 15 years are 23 weighted 17 percent) under the ' assumption that investors place greater l
l 24 emphasis on more current growth rates. The resulting growth estimates have 25 then been summed with the dividend yield to obtain a cost of equity estimate i
l I
Docket No.
3250 Page 30 of g 1
for each year.
As shown in Schedule VI, page 1, using this approach to 2
estimate the' cost of equity indicates that the risk premium for Texas 3
Utilities common stock between 1975 and 1979 has ranged, on average, from 4
between 4.3 percent and 6.3 percent above the. Aaa bond yield.
If this 5
relationship is assumed to be relatively constant over time, then adding 6
these risk premiums to the present Aaa bond yield of approximately 7
10.96 percent suggests that Texas Utilities' present cost of equity is 8
between 15.2 and 17.2 percent.
9 Q.
Do yeu have any reservations about this type of bond yield / risk premium 10 methodology?
11 A.
While this type of analysis has considerable
- appeal, difficulties 12 implementing the. concept require that the results be scrutinized carefully.
13 Initially, the underlying assumptions that risk premiums are constant over 14 time and independent of the level of interest rates may not be entirely 15 correct. For example, the spreads between different qualit,y bonds vary over 16 time even though the risk differences' between rating groups remain fairly
~
17 constant.
Presumably, the same phenomenon would be experienced between 18 comon stocks and bonds as economic conditions, interest rate levels, and 19 investors' sensitivity tc relative levels of risk change. Probably the most
- ~ 20 severe limitation of this approach, however, lies in estimating investors' 21 required returns at different points back in time.
Blindly accepting 22 mechanically determined growth estimates may overlook some important itcs 23 and changes that have occurred or which investors are expecting.
For 24 example, in Texas Utilities' case, the growth estimates suggest that 25 investors' expectations have rema'ined virtually unchanged over the five year
(
Docket No.
3250 Page 31 of 52 I
study period, yet the rise in dividend yield from 6.4 to 9.3 percent (while 2
interest' rate's only increased 90 basis points) would suggest that investors 3
were anticipating Texas Utilities' transition from a growth stock to more of 4
an income security.
Because of this type of qualification, the results of 5
this analysis must be interpreted judiciously..
6 Q.
Have you performed any comparable earnings analyses?
)
7 A.
Yes, as my last step in estimating Texas Utilities' cost of equity, the 8
returns earned on common equity by other firms across a wide spectrum of the 9
American economy have been evaluated. For this methodology to be useful in 10 identifying investors' required returns, it must be assumed that other 11 companies, on average, have earned their cost of equity on net book value -
12 no more and no less.
My examination of these results 13 indicates that there have been very wide variations in the returns earned by 14 American industry in the period 1975-1979.
For instance, in 1979 the mean 15 return was 16.4 percent with a standard deviation of 4.05 percent. Similar
~
16 results are found in analyses of other years.
17 However, while there are useful insights from this comparable earnings 18 analysis, one must be careful accepting it'as being truly representative of 4
19 the sample firms' costs of equity. First, the basic assumption upon which it
' 20 is founded; i.e., that on average companies realize their cost of equity on 21 book value, must be seriously questioned. While in the theory'of competitive 22 markets this assumption holds; few, if any, companies in the U.S. economy 23 operate in truly competitive markets.
Firms that enjoy marketing, 24 monopolistic, or patent advantages, such as most drug companies, some 25 chemical companies, IBM, Coca-Cola, and so'on, are likely to have realized
)
-w4
+--r y -,
-w, v--
w y -
r---
-r-
--et--
Oocke@ No.
3250 page 32. of 52 I
returns on book equity in excess of those required by investors at the market 2
level.
Meanwhile, other firms such as railroads, some electric utilities, 3
etc. have undoubtedly earned less than their cost of equity on book values.
4 Presuming that those earning more and those realizing less offset each other 5
exactly is tenuous at best. Most importantly, relying on returns that have 6
been earned in the past under varied financial and economic conditions fails 7
to recognize the current nature and market orientation of investors' required 8
rates of return.
Whether realized returns bear little resemblance to the 9
cost of equity is not clear; regardless, the validity of this, as with any 10 comparable earnings test, must be questioned.
11 Q.
What has been the major thrust of this portion of your testimony?
12 A.
In this section, I-have tried to identify the cost of a resource -equity 13 capital to Texas Utilities Company -as the basis for making a recommendation 14 as to a fair return on the equity invested in Texas Electric Service Company.
15 Probably the most important conclusion to come out of my study has been that 16 the cost of money to the Texas Utilities System, both debt and equity, has 17 recently increased appreciably.
This increase is largely due to the fact 18 that the capital markets have undergone significant changes over the last 12 19 months and, unfortunately, Texas Utilities has not been immune. Not only are
20 interest rates higher now than a year ago, but also the risks of the electric 21 utility industry have increased. These industry-specific and other economy-22 wide factors have caused Texas Utilities' common stock to now sell 23 consistently below its book value. In light of this analysis, it seems clear 24 that the equity return authorized in the past for the Texas Utilities 25 companies is no longer adequate, and current economic conditions dictate that
Docket No.
3250 Page 33 of 52 m
I it be revised accordingly.
2 Q.
From your analysis, what do you feel the cost of equity is for Texas 3
Utilities?
4 A.
Despite the events discussed above.-I continue to believe that the electric 5
utility industry is generally no more risky than the nonregulated sector as a 6
whole, and that within the industry, Texas Utilities Company is one of the 7
least risky electric utilities in the country. Thus, the return required by 8
investors from the Company is still less than that demanded from most other 9
utilities in the industry and other firms in general.
I have conducted 10 various tests to locate. the minimum return required by the Company's 11 investors (Schedule VIII), and while each of these were useful, the resulting 12 cost of equity estimates vary in magnitude and credibiitty (the first three 13 being the stronger set). Consequently, my final conclusion, as that of every 14 analyst, is one largely based upon judgement, giving consideration to the 15 relative strengths and weaknesses of the different methodologies, but I feel 16 that the evidence is clear that Texas Utilities' cost of equity is currently 17 in the range of 14.50 to 14.90 percent.
18 III. MARKET-TO-BOOK ADJUSTMENT 19 Q.
What is the purpose of this portion of your testimony?
20 Ai As discussed earlier, the cost of equity provides a basis for determining a f air return to equity.
Other considerations, however, might warrant an 21 22 adjustment to this minimum rent for the use of capital in an effort to 23 achieve other objectives deemed to be in the public interest.
24 Q.
Please provide an example of such an adjustment.
25 A.
It is generally preferable for the market price o'f a utility's stock to sell
Docket No.
3250 Page 34 of L i
1 above its book value so that the existing stockholders' equity in the company l
2 is not reduced on a per share basis in the event that additional comon stock 3
is sold.
The importance of this is that a firm can only. sell new stock at 4
below book value for so long before it becomes nearly impossible to resume a 1
i 5
growing earnings trend or before existing stockholders take action to block 6
further dilutive sales of stock.
Therefore, especially during periods of 7
heavy construction expenditures and external equity financing, it seems 8
desirable.to improve the probability that the utility will not have to dilute 9
existing stockholders' equity as the utility continues to meet its service 10 obligations to its customers.
11 0.
Briefly explain the relationship between market price and book value.
12 A.
The cost of equity is a market-oriented concept.
Thus, if a market 13 determined cost of equity is applied to an investment base valued at original 14 cost, the market price of the utility's comon stock will be driven towards 15 book value (up if the existing market-to-book ratio is less than one and down l
16 if it is greater than unity).
The reason for this is that if.a' company is l
17 authorized a level of earnings on book value that investors had expected on i
l 18 market value, they will adjust the equilibrium price so that the expected I
Ig rate of return on market investment remains the same.
Since regulatory 20 authorities are constrained to allowing a return on booked values rather than 21 market values, if an equal market-to-book relationship is to be avoided, the 22 cost of equity needs to be adjusted.
23 Q.
What can cause the market price to book value ratio to fall below. unity?
l-j 24 A.
A variety of factors can result in the market price falling to below book 25 value.
Other things being equal, allowing a return less than the cost of j
l i
)
L
)
35 3250 Page of 52
, Docket No..
I equity will cause a market-to-book ratio of less than one.
Similarly, if 2
investors' req'uired returns increase after rates have been set at the cost of 3
equity, the market-to-book relationship will become less than equal.
4
. Theoretically, issuance and flotation costs incurred in connection with a new 5
issue of common stock have a depressing effect on price. Finally, purported 6
market pressure associated with the sale of additional equity could cause the 7
market price to-fall below book value.
8 Q.
Please discuss the effe:ts of flotation costs.
9 A.
When a company sells new equity, flotation costs are incurred as a result of 10 fees paid to investment bankers to handle the underwriting and distribution 11 functions and other related issuance expenses.
These costs reduce the net 12 proceeds realized by the company from the additional securities. Typically, 13 flotation and issuance costs amount to between three and five percent of the 14 new issue, but the " dilutive effect" is infinitely smaller than these 15 percentages would indicate. The reason for this is that the flota1; ion costs 16 are borne by all of the issuing company's stockholders; therefore, the 17 dilution of existing equity is equal to the flotation costs disided by all 18.
shares outstanding. Schedule IX, page 1 shows these computations for three 19 of Texas Utilities' latest stock offerings.
As indicated, the dilution 20 effect attributable to flotation costs has. averaged about negative 21 0.54 percent.
That is, investors that bought stock from those issues 22 decreased the NBV per share for all stockholders by as much as 50.32 per 23 share. For TU, this dilution resulted in a 1.54 per-cent decrease in the NBV 24 per share. Of course, negative dilution is possible only if the market-to-25 book is greater than 1.0, a condition that no longer exists. For all of the
36 3250 Page of 52'
, Docket No.
1 issues, the effects of all issuance expenses on 'NBV, are less - than 1.0 2
percent and ce'rtainly not very significant.
3 Q.
Please explain the market pressure argument.
4 A.
Market pressure is the purported drop in price that occurs when new issues 5
are placed in the market because of the sudden excess supply of a particular 6
security.
If this market pressure exists, the effect would be to push the 7
market price below book value and the sale of additional shares would have a 8
dilutive impact similar to that described previously.
An extensive study 9
(M. Scholes, "The Market for Securities: Substitution Versus Price Pressure 10 and the Effects of Information of Share Prices," Journal of Business, April 11 197) has indicated that any market pressure associated with the issuance of 12 additional comon, stock is negligible, and that the security markets are 13 capable of absorbing new securities without abnormal price responses.'
14 Q.
Since flotation costs and market pressure appear to be insignificant factors 15 in diluting existing comon equity, what reason is there for adjusting the 16 cost of equity?
17 A.
As mentioned, a market-to-book ratio less than one can be brought about by an 18 increase in the cost of equity over time; or alternatively, by fluctuations 19 in Texas Utilities' stock price attributable to changing interest rates and f
20 market movements in general. In order to reduce the likelihood (in light of 21 Texas Utilities' recent experience, obviously not eliminate the possibility) 22 of the Company having to issue new stock at below book value, a cushion to 23 partially absorb market flectusions seems appropriate.
This essentially 24 gives Texas Utilities sm #' ; bNter than an even chance to sell additional 25 equity without dilus % 3 3
,kJ shareholders' interests a fair exchange r'+
'"T----
52 Docket No.
3250 Page of
~
1 tince the Company is expected to continuously meet its service obligations to 2
consumers.
3 Q.
What is an appropriate market-to-book ratio?
4 A.
While selecting any target market-to-book ratio is arbitrary, a' ten percent 5
~ cushion for a company such. as Texas Utilities seems adequate.
This means 6
that the Company's market price must drop approximately ten percent before 7
Texas Utilities is in a potential dilutive. situation.
Equally important, 8
because Texas Utilities' actual Beta - the responsiveness of its stock price 9
to changes in the market as a whole - is approximately.80 on average 'it 10 would take over a 12 -percent decline in general market levels to cause the 11 Company's market pri:e to fall below book. Considering the Texas Utilities 12 System's financial strength, a ten percent market-to-book adjustment seems 13 to be a sufficient cushion to provide additional financing flexibility and j
14
. largely protect existing shareholders against possible' dilutive effects 15 resulting from new issues of cormon stock.
16 Q.
How do you compute the amount of the adjustment necessary to achieve a target 17 market-to-book ratio?
18 A.
As explained earlier, if a market determined cost of. equity is applied to i
19 accounting numbers, then price will be forced to book value. Assuming that 20 the DCF model of valuation explained in the previous section is a fair
(
21 description of the pricing mechanism for Texas Utilities' stock, then 22 allowing the Company only its cost of equity, h, will result in market price 23 (P) equalling book value (B):
24 25 P=B=k-g
Docket No.
3250 Page 38l of 52 4
1 If market price is to be equal to some target multiple of book value (M/B),
2 then the price of the stock can be expressed as:
3 D1 P =.B (M/B)==
k* - g ("IO) 5 Solving for k*, the return necessary to encourage a target market-to-book.
6 ratio, results in the following (details of this computation are shown on 7
a page 4 of Schedule IX):
8 D-1 k*= - g (M/B) + g 9
r-10 Therefore, the adjustment to the cost of equity required to encourage' a 11 target market-to-book ratio is equal to the company's dividend yield times 12 the desired cushion.
13 Q.
What adjustnent, then, would be required to achieve a market-to-book ratio 14 of 1.17 15 A.
Since the Company's dividend yield is currently expected to be about 9.9 16 percent, if it were deemed appropriate for Texas Utilities' market price to 17 sell 10 percent above book value, increasing the cost of equity by 100 basis 18 points should be sufficient to encourage a market-to-book ratio of.
19 approximately 1.1.
The resulting recommended return on equity for TU is i
20 15.50 to 15.90 percent.
21 IV. RETURN TO EQUITY OF TEXAS ELECTRIC SERVICE COMPANY 22 Q.
You have indicated that the cost of equity to the Texas Utilities System 23 is in the 14.25 to 14.75 percent range. How does this range relate to Texas-l 24 Electric Service Company's cost of equity?
l 25 A.
So far, my analysis has only focused on identifying the average cost of I
, Docket No.
3250 Page 39 of 52 1
equity capital to the Texas Utilities System given the consolidated 2
company's com'posite risk.
It is important to recognize,'however, that the-3 total risk of Texas Utilities is comprised of the individual risks of the various parts of the System.
In other words, when investors evaluate the-risk of in~ vesting in Texas Utilities' stock, they look at the various 6
components and activities included in the total holding company portfolio.
7 After evaluating the level of risk attributable to each part of the System 8
and weighing its relative proportion, an assessment of Texas Utilities' 9
overall risk is made.
10 Q.
Would you please elaborate on this?
11 A.
The Texas Utilities System is essentially made up of eight parts: the three 12 operating companies, Texas Electric Service Company, Dallas Power and Light 13 Company, and Texas Power and Light Company; the three service companies, 14 Texas Utilities Generating Company, Texas Utilities Service Inc., and Texas 15 Utilities Fuel Company; and the two unregulated subsidiaries,~Chaco Energy 16 Company and Basic Resources, Inc. Many of the functions of these entities 17 are similar and related, but each has different operating and-financial 18 characteristics and, consequently, varying levels of risk. For exa ple, the 19 risks of Chaco and Basic, which are involved in the development, 20 acquisition, production, and delivery of fuels and alternative energy 21 sources, are significantly greater than those of TUGCO, whose primary 22 function is as an agent in the operation of jointly-owned generating i
23 stations. In the same vein, the three operating companies, DP&L, TESCO, and 24 TP&L, each have different risks although not as extreme as those between l
25 Chaco/ Basic and TUGCO. Nevertheless, the total risk of the Texas Utilities l
l l
I i
c i
Docket No.
3250 Page 40 of g 1
System, which has been examined previously in the determination of an 2
overall cost"of equity, is a combination of the individual risks of these-3 various components.
I 4
Q.
How does this affect the cost of equity assigned to each component?
5 A.
To the extent that the various parts of the Texas Utilities System have 6
varying levels of risk, the cost of equity capital assigned to each 7
component should be adjusted upward or downward from the System average 8
according to the risk that it contributes to the holding company in total.
9 This is consistent with the principle of identifying the costs of a 10 resource, in this case, equity funds, used in providing service and 11 allocating these correctly.
The issue is not one of f airness to Texas 12 Utilities but rather, one of equity among consumers. Ratepayers should be 13 responsible for the costs incurred in serving them and should not subsidize 14 or be subsidized by customers in other service areas or other parts of the 15 System. Consi,dering the amount of capital invested to serve each customer, 16 this is a nontrivial matter.
17 Q.
How do the relative risks of the various Texas Utilities subsidiaries 18 compare?
19 A.
TUGC0 and TUFC0 are nominally wholly debt-financed, and because TUSI is a 20 service group, the equity investment in it verges on being inconst.,antial.
21 Moreover, at the present time, Chaco and Basic comprise only a.relatively 22 insignificant portion of the System's assets.
Therefore, the real issue 23 centers on the relative risks of the three operating companies, DP&L, TESCO, 24 and TP&L.
I am of the opinion that while the three operating subsidiaries' 25 risks are somewhat similar, they are not identical. However, the differences
41 of 52 Docket No.
3250 Page 1
are not of a sufficient magnitude to warrant assigning.different costs of 2
equity to each company at this time.
3 Q.
How did you arrive at this conclusion?
4 A.
I have examined each of -the three companies' operating traits, financial 5
position, earnings history, service areas and customer mixes, construction 6
programs, and so on to evaluate the subsidiaries' relative risks. Since 7
the companies share many common characteristics through their ties _ to Texas 8
Utilities, all three operate in~ essentially-the same regulatory 9
environment, and there are no overriding factors which create significant 10 distinctions between the companies; I can find no reason to assign a cost of 11 equity to any operating company.
12 Q.
What, then, is your recommendation as to a fair return on the equity capital 13 invested in Texas Electric Service Company?
14 A.
Considering the fairly equal risk of TESCO to the entire Texas Utilities 15 System, I believe that the Company's cost of equity is in the same range of 16 14.50 to 15.00 percent cost of equity range estimated for the Texas 17 Utilities System as a whole.
In light of the continuing construction 18 program facing TESCO and the corresponding need to raise external equity 19 through the Parent to finance these expenditures, I feel that an adjustment 20 to encourage a market-to-book ratio greater than one is warranted. Because 21 of the financial strength of TESCO and the flexibility afforded by its 22 association with Texas Utilities, adjusting the cost of equity to encourage 23 a market-to-book ratio of 110 percent should help provide protection against 24 potential dilutive sales of new common stock.
Consequently, combining a 25 basis point market-to-book adjustment with the low end-range of my estimate
Page 42 cf E 3250-
.Decket No.
1 of Texas Utilities' cost of equity, I would recoccend that.a return of 2
approximately 15.50 percent be authorized on the epuity capital invested in 3
Texas Electric Service Company.
4 V.
COMP 0 SITE RATE OF RETURN 5
Q.
Have you examined the test year capital structure proposed by TESCO?
6 A.
Yes, I have.
The Cor.pany has proposed a. capital structure cocposed -
7 essentially of 44.4 percent long-term debt, 13.5' percent preferred stock, 8
and 42.1 percent coccon equity.
This cccpares to a March 31, _1930, 9
capitalization for Texas Utilities. of 50.3S percent debt, 10.85 percent 10 preferred stock, and 3S.76 percent ccmon equity. Thus, at the end of _ the -
11 test year, TESCO was strong in equity compared to the entire ~5ystem, to 12 TESCO's recent past (Schedule-X, page_1 of 2), and to the 100 electric 13 utilities shown in Schedule X, page 2 of 2.
la Q.
Has the Company proposed any adjustments to the capital structure?
15 A.
Yes, it has. First of all, the company has included the sale of $35 million 16 of preferred stock at an estimated dividend rate 'of $12.00 per share.. This 17 sale was consu cated in June 1980 at a diridend rate of $10.12 per share.
18 Even though this sale occurred outside of the test year, the funds hae 19 already been received by the Company.
Therefcre, I have considered this 20 adjust =ent to be properly classified as a known and measurable change and 21 have included it in the final recocnended caDital structure.
22 Q.
How have you approached the problem of assigning a return en TESCO's 23 accumulated deferred investment tax credits?
24 A.
In assigning a return to the cost-free funds, I have followed the past 25 practices of the Cocnission and the ruling of the Internal Revenue Service.
43 of 52 Docket No.
3250 Page s
1 The return for TESCO's accumulated deferred tax credits has been set at the 2
composite cost of capital.
3 Q.
Would you please summarize your recommended overall rate of return to Texas 4
Electric Service Company?
5 A.
As shown in Schedule XII, I reconnend that the overall rate of return to be 6
applied to the original cost of TESCO's invested capital be 11.312 percent.
7 This represents a return of 9.23 percent on the adjusted value of TESCO's 8
invested capital.
9 VI. FINANCIAL' INTEGRITY AND ADE00ACY
~
10 Q.
Please explain the purpose of this section.
11 A.
This section will examine various criteria which investors consider when 12 evaluating a company's overall financial strength and position. The purpose 13 of this discussion is to provide an indication of the levels of alternative 14 adequacy measures necessary for a company to realize so as to maintain its 15 financial integrity and investor appeal.
Through this process, I have 16 established some general guidelines applicable to the test year for 17 Ms. Jones' use in making a determination as to the amount of construction 18 work in progress (CWIP) to include in TESCO's rate base.
Finally, the 19 Staff's recommendation will be analyzed in an effort to ensure that TESCO's 20 financial integrity can be maintained on a prospective basis.
21 Q.
What types of things are usually evaluated by investors when tney analyze 22 the financial strength and position of a company?
23 A.
A variety of factors are considered by investors - some quantifiable and 24 others more judgemental - when they assess the financial position and 25 prospects of a particular utility.
While equity inve'stors are typically D
44 of 52 Docket No.
3250 Page 1
more concerned with some indicators and creditors more interested in others, 2
all measures of adequacy are of'some concern to both categories of investors.
3 since they are reflective of the general health of a company. As mentioned, 4
many of the things that investors evaluate are nonquantifiable,'such as 5
me agement quality, regulatory climate, social and political environments,.
6 fuel supplies, etc., but there are a number of factors that can be reduced 7
to numbers or ratios and are often quoted as being indicative of financial 8
integrity or the lack of it.
These typically include such ratios as the 9
percent of common earnings attributable to allowance for funds used during 10 construction (AFUDC), cash flow coverage of dividends, pre-tax interest 11 coverage ratios (including and excluding AFUDC), and the percent ok cash 12 needs generated. internally. Other measures of quality typically include the 13 market-to-book ratio, capitalization ratios, return on equity, etc., which 14 have been discussed elsewhere in this testimony and will not be dwelt upon 15 again.
16 Q.
What financial indicators do equity investors usually look at?
17 A.
Besides the level of earnings as reflected in the return on equity, equity 18 investors also focus heavily on the quality of a utility's earnings.
In 19 other words, investors are concerned not only with the magnitude of reported 20 earnings but also with whether these profits are backed-up with adequate 21 cash flow to pay current dividends and finance a part of the company's 22 expansion needs.
If a company's earnings are considered of poor quality 23 (i.e.,
a significant portion is noncash, current expenses are deferred, 24 depreciation rates are low, the relationship between actual and reported 25 taxes is high, etc.), future returns are perceived to be less certain and
, -.. - ~ - -..,
,.. ~ - -
Docket tio.
3250 Page 45 of_52 I
the company to be riskier; consequently, investors demand a higher rate of-2 return and are more wary of purchasing shares.
Those measures typically 3
considered as being most reflective of a company's quality of. earnings and 4
its relative safety of dividends are internal cash generation as a percent 5
of total cash needs, cash coverage of dividends, and AFUDC as a percent of 6
income available for common.
7 Q.
What are typical levels of internal cash generation and dividend coverage?
8 A.
Schedule XII, page 1, shows the level of internal cash generation for 100 9
clectric utilities projected for 1980 through 1982 as well as those 10 companies' dividend coverages for 1978 and 1979.
While the internal cash 11 generation percentages will obviously vary widely among these utilities 12 depending,. in part, upon the size of each utility's construction budget 13 relative to its existing capitalization and also its level and quality of 14 earnings, the industry mean is projected to be in the vicinity of 49 15 percent. The median of the cash coverage of dividends for the 100 utilities 16 was approximately 2.8 times.
This ratio is heavily influenced by the 17 company's payout ratio and capital structure which cause the coverages to 18 vary considerably.
19 Q.
Please explain allowance for funds used during construction.
20 A.
The practice of capitalizing interest - charging an allowance for funds used 21 during construction to plant and crediting income for an equal amount -
22 results in a unique situation for public utility companies.
The AFUDC 23 credit does not give rise to present cash flows but, rather, a claim to 24 future revenues. Consequently, many investors consider AFUDC earnings to be 25 somewhat inferior to income from operating revenues. The certainty of the
3250 Pagi.46 of 52 Docket No.
1 investor receiving these earnings is somewhat diminished since they cannot 2
be used to. pay current dividends.
While the exact extent to which common 3
stockholders are concerned with the level of AFUDC in earnings is uncertain, 4
the percentage of net income attributable-to the noncash AFUDC can 5
definitely become excessive.
An additional element of risk is thereby 6
introduced which will ultimately affect the company's cost of equity and may
' 7 ultimately interfere with future sales of additional equity. In Schedule X, 8
the percentage of net income attributable to AFUDC for 100 electric utility 9
companies during 1979 has been reproduced. Again, it is apparent that the 10 ratio of noncash to total earnings varies significantly within this sample, 11 but the median level is 45 percent.
During major construction phases, a 12 larger _ ercentage of AFUDC to earnings tends to be acceptable since p
13 investors are aware that this is largely a temporary situation. That is, as 14 construction tapers off so
.at expenditures level out in relation to 15 capitalization and regulatory proceedings recognize plants coming in-line, 16 these postponed AFUDC earnings will be realized as cash.
The acceptable 17 limiting percent of AFUDC to net income can vary from company to company 18 depending upon other quality indicatcrs, the overall strength of the utility 19 in question, payout ratios, etc. before the utility's health is adversely 20 affected.
If the percentage begins to become too large, though, I believe 21 that investors ca,n become quite skeptical of the financial integrity of the l'
22 company, especially if the company maintains a high dividend payout ratio.
l 23 At this point, the utility's financial health begins to be questioned and, 1
i 24 if the AFUDC level is not corrected, its financial integrity can become 25 seriously jeopardized to the detriment of riot only the investors but also l
l 1
Page 47 of 52 Docket tio.
3250 1
the customert in the long run.
2 Q.
What oc bondholders consider when analyzing a company?
3 A.
Fixed income investors, like.' stockholders, consider many f actors when 4
evaluating the quality of a company's debt. However, the most: visible and 5
quantifiable measures that are typically cited as being indicative of 6
creditworthiness are interest coverage ratios, or the margin of earnings 7
(and associated taxes) in excess of what is needed to meet interest 8
payments.
The most frequently analyzed credit indica. tor is the pre-tax 9
interest coverage ratio.
The columns labeled (A) in Schedule XIII, 10 illustrate this coverage ratio for most of the electric utilities in the 11 country classified by bond ratings.
As shown, the pre-tax coverages 12 realized in the recent past have varied substantially within a rating class.
13 A second measure of creditworthiness that has gained increased acceptance 14 and importance is the pre-tax coverage ratio excluding AFUDC.
Since the 15 al'~/ance for funds used during construction does not represent cash 16 avi.il able to meet interest charges, this measure provides a better 17 indication of the actual cash protection affordad bondholders.
18 Schedule XIII also contains coverage ratios computed in this manner under 19 the column heading (B).
Again, there is substantial variability among 20 companies within rating categories.
i 21 Q.
Would you please sur:rnarize this discussion?
22 A.
Investors ccnsider many factors when evaluating the financial strength of a 23 firm, many of which are nonquantifiable.
For example, TESCO's policy of 24 accounting for deferred taxes and investment tax credits on a normalized 25 basis contributes to the quality of the Company's earnings as does its
-Occket No.
3250 Page 48 cf 52 I
relatively thick equity ratio.
Moreover, the quality. of management, the 2
regulatory climate, and the 'econom*.c-social-political-environment within 3
which TESCO operates favorably affect' investors' assessment of the.
4 financial health of the Company. Similarly, while TESCO's general level of 5
return on equity may need improving somewhat and even in spite of its 6
Parent's below market-to-book ratio, the Company still compares favorably 7
with the industry and is viewed positively by investors.
Besidas these 8
considerations, there are a variety of other ratios which are useful. in 9
analyzing TESCO's financial stature from both stockholders' and creditors' 10 standpoints. This section has attempted to identify the most important of 11 these which, in turn, provide a means by-which the adequacy of the Staff's 12 recommendation can be compared so as to ensure the maintenance of TESCO's 13 financial integrity.
14 Q.
What is the financial outlook for Texas Electric Service Company?
15 A.
TESCO's financial prospects appear to be improving.
.The massive 16 construction phase to convert to alternate fuels is largely behind the 17 Company with annual capital expenditures projected for 1981 and 1982 being 18 less than those experienced in the 1979 to 1980 period. Moreover, TESCO's 19 need to raise external funds should become more manageable in the near term 20 due to the scaling down of construction.
Probably most important-is that 21 the Comanche Peak Unit No.1 is a little more than one year away from coming 22 on-line :n Fall 1981.
Because of the substantial investment in this 23 generating station, I would expect the Company to return to the Commission 24 for rate relief to include the nuclear unit in the rate base in the coming 10 25 to 14 months. Consequently, the rates authorized in this proceeding will,
, Docket flo. 3250 Page 49 -of 52 1
in all likelihood, only need to be sufficient for that period of time.
2
- Furthermore,'during this 10 to 14 month interval, no other extraordinary
~
3 events are anticipated which merit special consideration.
4 Q.. Ms. Jones has requested that you provide her with some guidelines upon which 5
to base her construction work in progress (CWIP) decision.
What have"you 6
provided her?
7 A.
In response to Ms. Jones' request, I suggested that she _ consider those 8
financial integrity. factors most critically affected by the CWIP inclusion-9 exclusion decision: pre-tax interest coverage excluding AFUDC,'AFUDC as a 10 percent of income available to common, and internal cash generation.
In 11
_ arriving at the guidelines to be used with test year data, I took into 12 account TESCO's expected growth in sales, the magnitude of its construction-13 program relative to the Company's size, and other factors. Based upon Texas
~. 4 Electric Service Company's present circumstances, I suggested the following 15 test year parameters as guides to Ms. Jones for determining a level of CWIP:
16 a)
AFUDC should be no more than 20 to 25 percent of income available 17 to common.
18 b)
Pre-tax interest coverage, excluding AFUDC should t,e in the range
~
19 of 3.75 to 4.25 times.
20 c)
Internally generated cash should be no less than 40 percent and no 21 more than 60 percent.
22 Q.
Are the test year guidelines that you have provided to Ms. Jones applicable 23 to all companies?
24 A.
Definitely not, financial integrity is a prospective concept unique to each 25 company taking into account its outlook and future needs.
The test year
D 3250 Page 50 of 52
. ocket No.
I guidelines that I have suggested for TESCO are company-specific and consider 2
that particu'lar utility's current -financial and operating characteristics 3
and trends.
Because of-differences in service areas, load requirements, 4
construction plans, customer mix, etc., this. set of guidelines is not 5
appropriate for even all of the Texas Utilities Companies or much less for 6
all electric utilities. In addition, I should stress that these guidelines-7 are merely rules-of-thumb; The final determination of the recommended ic!el 8
of CWIP is based on a judgemental analysis of prospective ratios.
9 Q.
Based upon these guidelines, Ms. Jones has included 50 percent of TESCO's 10 CWIP in the Company's rate base. Do you feel that this level is adequate to 11 maintain the Company's financial integrity over the expected life: of the 12 rates?
13 A.
Yes, I do. While I recognize that the test year indicators will deteriorate-14 going forward, there seems to be an' adequate cushion built into the Staff's 15 reconmended rates to account for this. The growth in KWH sales and revenues 16 projected by the Company over the next two years should be sufficient to 17 offset any increases in operation and maintenance expenses.
In fact, 18 assuming all other costs of service remain constant, a twelve percent i
19 increase in expenses can be offset by a 3.2 percent increase in base Iate 20 revenues and still produce the same dollars of return.
Internal cash 21 generation' should be more than ample over the next 10 to 14 months.
22 Finally, taking into account the construction programs for the remainder of 23 1980 and 1981, the level of AFUDC to net income does not appear to be so 24 excessive so as to jeopardize the Company's financial health prior to the 25 filing for additional rate relief.
For~ these reasons, the Staff's t
I:
Docket No.
3250 Pago 51 of 52 i
~
l recommendation seems sufficient to maintain Texas Electric Service 2
Company's financial integrity until rate relief is sought again.
3 VII. CONCLUSI0kS AND
SUMMARY
OF RECOMMENDATIONS 4
Q.
Would you briefly recapitulate the major points discussed in your testimony?
5 A.
The major issues in my testimony have centered around specifying a fair 6
value mix, determining a fair rate of return on Texas Electric Service 7
Company's invested equity capital, computing a composite rate of return, and 8
evaluating the adequacy of the Staff's proposed cost of service.
The 9
conclusions that I have reached on the various issues are sunnarized below:
10
-A fair mix upon which to determine the adjusted value of invested capital 36.125 percent net current cost and 63.875 11 percent net original cost.
12
-The capital markets have undergone significant shifts over the last 12 months with investors requiring higher yields 13 to induce them to make investments. The net effect of this on the Texas Utilities System has been that the market price 14 of the Company's common stock is now consistently selling-below its book value.
In light of this, it seems apparent 15 that, the returns authorized the Texas Utilities System in the past are no longer adequate, and they must be revised to 16 reflect current economic conditions.
17
-Because Texas Utilities continues to be one of the least risky electric utilities in the country, the return 18 required by investors from the Company is less than that l
demanded from most other companies in the industry and
~
19 other firms in general. Based upon my analysis, I believe Texas Utilities' cost of equity to now be between 14.25 and i
20 14.75 percent.
21
-If a market-to-book ratio greater than one is to be sought, only the dividend yield portion of total return need be l
22 adjusted. Thus, to encourage Texas Utilities' common stock l
to sell at approximately 110 percent of book value, a 100 23 basis point upward adjustment to the cost of equity is appropriate.
24 l
25
-In light of the continuing construction program f acing TESCO and the corresponding probability of having to raise l
Docket No.
3250
.Page 52-of 52 v
l 9
l additional equity capital, I feel that a market-to-book adjustment of 110 percent is warranted. Combining the 100 2
basis point market-to-book adjustment with the estimated.
- ost of equity-to the Company of 14.5 percent results in a 3
3 f air rate of return to the equity invested in TESCO of -
approximately 15.50 percent.
4 5
.-Based upon a return to equity of 15.50 percent, I feel that a composite rate _ of. return of 11.312 percent-should be ~
6 applied to TESCO's invested capital.
This represents an 9.23 percent return on the adjusted value of the Company's 7
invested capital.
8
-Based upon an analysis of the Ifinancial circumstances facing TESCO between now and when the Company will likely 9
seek rate relief again, I believe that the Staff's proposed revenue requirements are sufficient to maintain the 10 financial health of TESCO and that the Company's financial integrity will not be jeopardized.
11 12 Q.
Does this conclude your direct testimony in this case?-
13 A.
Yes, it does.
14 15 16 17 18 i
19
~
20 j
21 h
22 23 l
24 25
(
PUBLIC UTILITY COMMISSION OF TEXAS Schedule I Page 1 of 2 TEXAS ELECTRIC SERVICE COMPANY DERIVATION OF THE RELATIONSHIP BETWEEN ANNUAL INFLATION AND DEFLATION RATES AND PROPORTION OF NET CURRENT COST INVESTED CAPITAL 0%
Proportion Net Current Cost Investment 12 %
Deflation 0%
inflation 12 %
Annual inflation / Deflation Rate Tho mix between net current cost invested capital and original cost invested capital has been determined so that the statutory limits for inclusion of net current :
cost coincides with historical experience. Over the 33-year period from 1947 to 1979, the most extreme inflation or deflation rate was the 11.8 percent inflation in 1947; therefore, 12 percent has been selected as the outside limits.
These boundaries have been linearly connected with the origin under the presumption
- that, in the absence of either inflation or deflation, the invested capital mix should reflect 25 percent net current cost and 75 percent net original cost. For each additional percent of inflation or deflation, an incremental 1.25 percent of net current cost should be included in the invested capital mix.
The relationship between the proportion of net current cost avestment included in the mix and the annual inflation / deflation rate can be expre. d as:
Y = 0.25 + 1.25 X proportion of net current cost investment where: Y
=
annual inflation / deflation rate X
=
PUBLIC UTILITY COMMISSION OF TEXAS Schedule I Page 2 of 2 e
TEXAS ELECTRIC SERVICE COMPANY MIX OF NET ORIGINAL COST AND NET CURRENT COST OF INVESTED CAPITAL FOR EACH YEAR SINCE 1947 Annual Proportion Proportion Percentage of Net of Net Year Change (a)
Current Cost Original Cost 1980 8.9%
36.125 %
63.875 %
1979 8.9%
36.125 %
63.875 %
1978 8.3%
35.375 %
64.625 %
1977 6.1%
32.625 %
67.375 %
1976 4.7%
30.875 %
69.125 %
1975 7.5%
34.375 %
65.625 %
1974 11.0 %
38.750 %
61.250 %
1973 7.5%
34.375 %
65.625 %
1972 3.2%
29.000 %
71.000 %
1971 4.7%
30.875 %
69.125 %
1970 5.5%
31.875 %
68.125 %
1969 4.8%
31.000 %
69.000 %
1968 4.0%
30.000 %
70.000 %
1967 3.2%
29.000 %
71.00096 1966 2.7%
28.375 %
71.625 %
1965 1.9%
27.250 %
72.75C %
1964
- 1. 4%
26.750 %
73.250 %
1963
- 1. 3 %
26.625 %
73.375 %
1962 1.1%
26.375 %
1961
- 1. 3%
26.625 %
73.625 %
73.375 %
1960 1.7%
27.125 %
72.875 %
1959 1.6%
27.000 %
73.000 %
1958 2.6%
28.250 %
71.750 %
1957 3.7%
29.625 %
70.375 %
1956 3.4%
29.250 %
70.750 %
1955
- 1. 5 %
26.875 %
73.125 %
1954
- 1. 5%
26.875 %
73.125 %
1953 0.9%
26.125 %
73.875 %.
1952 2.2%
27.750 %
72.250 %
1951 6.7%
33.375 %
66.625 %
1950 1.4 %
26.750 %
73.250 %
1949
- 0. 6%
25.750 %
74.250 %
1948 6.7%
33.375 %
66.625 %
1947 11.8 %
39.750 %
-60.250 %
(a) Source for 1946-1972:
Gross National Product implicit Price Deflator as reported in the U.S. Department of Commerce's Survey of Current Business.
Source for 1973-1979: Gross National Produce Implicit Price Deflator for Year Ended December 31, 1979, as' reported in the Federal Reserve Bank of St. Louis' National Economic Trends.
(b) For the year ended March 31, 1980.
1
9 i
3 1
1 Schedule 11 Page1 of I PL'BLIC UTILITY CotPtISSION OF TEXAS
)
TEXAS POWER & !.1011T COMPANY YIELDS ON LONC-TER.'t FEli7.RAI, AND PilBl.lc UTil. TTY SECURITIES (1) l i
Federal AAA AA A
Baa as a
baa j
Line Date Securttles(2)
Bonds (3)
Bonds (3)
Bona (3)
Bonds (3)
Py b Stock (2)
Pref. Stock (2)
Pref. Stock (2) i i
A 7/30/79 8.88 9.44 9.77 10.08 10.52 8 96 9.49 10.34 i
i B
2/15/79 8.96 9.53 9.74 9.81 10.22 9.03 9.52 10.32 C
9/27/79 9.18 9.72 10.06 10.42 11.05 9.60 10.34 10.97 i
D 12/17/79 10.08 10.99 11.56 11.91 12.62-10.68 11.42 12.63 E
2/13/80 11.76 12.47 12.90 13.39 14.12 11.20 12.27 13.09 F
6/27/80 7.65 10.96 11.63 12.00
'12.34 10.59 10.97 12.05
]
(1) Weekly everage for week containing the date.
]
(2) Federal Reserve Bank of St. Louts. U.S. Financial Data.
(3) Hoody's Utility News Report.
1 i
i 4
4 4
4 I
Nndl.:...uM i be.4i. A !mitiM.#Niin.u25Gna b dl$tc.aw.} O udbk.it. $.[dh.c. '.b sw.urMN.....d. kn rud!fstos t /.'.5.wr.nh.:.:edi.s.a e
' 4:
I PUBLIC UTILITY COMMISSION OF TEXAS Schedule III Page 1 of 5 TEXAS ELECTRIC SERVICE COMPANY IMPLIED GROWTH RATESEA]
5 07/11/88 1979 1978 1977 1976 1975 1974 1973 1972 1971 197f 1969 1968 1967 1966 1965 1964 RETENTION RATE (I) 33.56 46.16 41.47 42.36 38.61 48.62 48.26 48.72 44.83 45.78 44.37 49.74 42.42 41.46 40.87 49.74 RETURN ON EQUITY (I) 11.97 12.95 12.91 13.03 12.11 13.89 14.11 15.99 14.?3 15.37 15.28 14.88 15.48 15.38 15.31 15.63 IMPLIED GROUTH RATES (I)[B]
3.96 5.29 5.38 5.52 4.67 6.75 6.81 7.35 6.60 7.04 6.78 6.96 6.57 6.38 6.26 6.37 4
4 i
REALIZED RATE OF RETURN (I) 12.0 12.5 13.5 13.5 14.0 14.5 15.0 EARNINOS RETENTION RATIO (I)
A 32.0 3.8 4.5 4.2 4.3 4.5 4.6 4.8 A
34.0 4.1 4.3 4.4 4.6 4.8 4.9 5.1 A
36.0 4.3 4.5 4.7 4.9 5.0 5.2 5.4 A
38.8 4.6 4.8 4.9 5.1 5.3 5.5 5.7 A
40.0 4.8 5.0 5.2 5.4 5.6 5.8 6.0 l
A 42.5 5.0 5.3 5.5 5.7 5.9 6.1 6.3 A
44.0 5.3 5.5 5.7 5.9 6.2 6.4 6.6 A
46.0 5.5 5.8 6.0 6.2 6.4 6.7 6.9 EA3 VALUES TAKEN FROM TEXAS UTILITY'S ANNUAL REPORTS 3
EARNINGS RETENTION RATIO EOMPUTED AS IffI LESS " DIVIDENDS DECLARED ON COMMON STOCK, PERCENT OF NET INCOME" AND REALIZED RETURN ON EQUITY BASED ON EARNINGS ON AVERAGE BOOK VALUE.
ES] PRODUCT OF EARNINGS RETENTION RA110 AND REALIZED RETURN ON EQUITY.
i
M $kl5!
,' h!!f!
h, l$fh,, h!!k! bl
} f.
h.
i I I' l ;
PAGE 2 0F 5 PUBLIC UTILITY COMMISSION OF TEXAS Schedule III TEXAS ELECTRIC SERVICE EOMPAHY HISTORICAL GROUTH TRENDS FOR NET B00K VALUE, EARNINGS PER SHARE, DIVIDENDS PER SHAREEA) 07/11/89 1979 1978 1977 1976 1975 1974 1973 1972 1971 1979 1969 1968 1967 1966 1965 1944 NBV($)
29.80 29.14 19.19 18.99 17.07 16.30 15.99 13.49 12.45 11.18 19.42 9.34 8.8f 8.25 7.75 7.27 ANNUAL GROUTH (I) 3.28 5.45 5.58 5.98 4.72 8.02 12.61 7.63 11.36 7.29 11.56 6.14 6.67 6.45 6.69 10.99 EPSil) 2.45 2.54 2.40 2.29 2.82 2.18 2.81 t.95 1.74 1.66 1.51 1.35 1.32 1.23 1.15 1.98 ANNUAL GROUTH(I)
-3.54 5.83 4.89 13.37
-7.34 8.46 3.08 12.87 4.82 9.93 11.85 2.27 7.32 6.96 6.48 5.88 DPS(l) 1.64 1.52 1.49 1.32 1.24 1.12 1.94 l.99
.96
.99
.84
.88
.76
.72
.68
.64 ANNUAL GROUTH(I) 7.89 8.57 6.06 6.45 10.71 7.69 4.98 4.17 6.67 7.14 5.99 5.26 5.56 5.88 6.25 6.67 IA) TEXAS UTILITY'S ANNUAL REPORTS 4
PAGE 3 0F 5 PUBLIC UTILITY CONMISSION OF TEXAS Schedule III TEXAS ELECTRIC SERVICE COMPANY LINEAR REGRESSION VALUES [A]
07/11/88 EQUATION EDUATION INTERCEPT SLOPE 1979 1978 1977 1976 1975 1974 1973 1972 1971 NBV 5 YEARS 16.19
.95 29.94 19.99 19.54 18.09 17.14 16.19
.99
.99
.00 j
If YEARS 15.41 1.98 21.24 29.15 19.97 17.99 16.99 15.82 14.74 13.65 12.57 15 YEARS 4.95 1.01 25.96 19.95 18.05 17.84 16.93 15.93 14.02 13.91 12.98 EFS 5 YEARS 2.01
.11 2.56 2.45 2.34 2.23 2.12 2.91
.98
.50
.55 If YEARS 1.69
.99 2.55 2.46 2.36 2.27 2.17 2.98 1.98 1.89 1.79 15 YEARS 1.58
.15 2.63 2.53 2.42 2.32 2.22 2.11 2.51 1.91 1.80 DPS 5 YEARS 1.12
.lf 1.62 1.52 1.42 1.32 1.22 1.12
.99 off
.99 10 YEARS
.76
.58 1.58 1.59 1.42 1.34 1.26 1.17 1.99 1.01
.93 15 YEARS
.53
.57 1,53 1.46 1.39 1.33 1.26 1.1?'
l.13 1.06 1.ff l
EA3 BASED ON VALUES AS REPORTED IN TEXAS UTILITY'S ANNUAL REPORTS.
4 i
PAGE 4 0F 5 PUBLIC UTILITY COMMISSION OF TEXAS Schedule III TEXAS ELECTRIC SERVICE COMPANY j
LINEAR REGRESSION VALUESEA3
)
97/11/89 k,
- i 1978 1969 1968 1967 1966 1965 1964 NBV l
5 YEARS
.99
,.00
.99
.99 off
.59_
.99 If YEARS 11.49 10.41
.99 off
.99
.f9
.9f
}
15 YEARS 11.50 9.99 8.98 7.98 6.97 5.96 4.95 1
EPS 5 YEARS
.99
..f f
.00
.00
.f9
.99
.95 l
If YEARS 1.75 l.60
.99
.98
.99
.90
.59 15 YEARS 1.78 1.59 1.49 1.39 1.28 1.18 1.08 DPS 5 YEARS
.99 off
.99
.00
.99
.98
.59 l
If YEARS
.84
.76
.99
.00
.95
.50
.00 15 YEARS
.93
.86
.85
.73
.67
.69
.53 4
1 i
5
'j.' lev )it:pdfj,k!, M t:*M; f
!g,f it;[.:
,j, 8
l.
I' h
y,,. ' '.
?.1 d} Og..
',1 S ';,. gjo'fId'Jp s
., i
,e lh d.a..
?
- f'Iit j /,,f q /
..@. m 1;..y e v
[
t-3 I'<h je'.b,,k.:;!fj!
k i
,j k
i j
" 'Jj ? M: b?-
U ^ j. '
^ ?. ( -
,. )
IE &
F l! C s,P.1[j'$s ',j:'f iflb ).,p plq.fj h'.l.f.
' [.f.). 'i,
. 4 ;6 )vh., ft
., E'.
s l,l[.lUj' } p 3 i
[J
' -T' t
I.
~
- )e.r;p. -. E f',);
i
' b.
. Q,f.I
- f
.Y
]
yt i, E]f ;
! d h'E,p/.l.'l.f.8 pi.e..h;.hbdh bl..ljf l f ' 3
$N Ib. s.t.
d$h],bs f$kN..
if hi i
g.;t i
}
bd,";-,]i*
!g [.1 '" j i d. l.,,'
g :t. ;f '
'f
?
?
a :
..c.q,e i
,?
.li 1 -t a!.
M q
v il.! l,4.%! N. +.;
c
.' M i.,,'r i p b,p[ h i m '.; N d N,1 i{ l}M;i U
$likf: '. l gp!
[
i 0
.Af'3 e
- !i' i
- O I %
-f t
l q
q PAGE 5 0F 5 PUBLIC UTILITY COMMISSION OF TEXAS Schedule III TEXAS ELECTRIC SERVICE COMPANY
SUMMARY
OF COMPOUND GROUTH RATES [A]
97/11/89 1979-75 1979 79 1979 65 NET 300K YALUE ACTUAL (I) 5.ff 7.16 7.26 REGRESSION (I) 5.29 7.39 9.78 EARNINGS PER SHARE ACTUAL (I) 2.36 4.96 5.62 REGRESSION (I) 5.09 4.76 6.13 DIYlDENDS PER SHARE ACTUAL (I) 7.93 6.92 6.48 REGRESSION (I) 7.64 7.58 7.26
[A] COMPOUND GROUTH RATES CALCULATED FROM CCC-3 PAGES 2,3,4.
PUBLIC UTILITY COMMISSION OF TEXAS Schedule IV Page 1 of 2 TEXAS ELECTRIC SERVICE COMPANY EARNINGS PROJECTIONS E (1 - b) g k=
+ (br + vs) p cost of equity where, k
=
Eg= expected earnings in next period expected earnings retention ratio b =
market price of common stock P
=
expected realized return on common equity r =
percent of funds from sale of new stock accruing to existing stockholders v =
- s = _ ratio of proceeds from new stock to existing book value TEXAS UTILITIES COMPANY E (1 - b) g k=
+ (br + vs) p k = $2 6
(0.39 x 0.130) + (-0.0071 x 0.367)
+
g, k = 0.095 + 0.045 k = 0.140 or 14.0%
$2.86 Average of analysts' forecasts, Schedule IV, page 2.
E
=
g
.39 Extrapolation from Schedule III, page 2 of 5.
b
=
$13.375 Text of testimony.
P
=
.130 Extrapolation from Schedule Ill, page 2 of 5.
t r
=
y
= -.0071 Net Proceeds ($17.73)less Book Value ($20.45) times New Shares (5,000,000) equals Total Dilution ($13,600,000) divided by product of Existing Shares (93,513,635) and Book Value ($20.45) equals Percent Dilution of Existing Shares (-0.71%).
.867 Proceeds New Stock ($17.73) divided by Book Value ($20.45).
s
=
i i
,e, a
,ee e.-
w
PUBLIC UTILITY COMMISSION OF TEXAS Schedule IV -
Page 2 of 2 o
TEXAS ELECTRIC SERVICE OMPANY EARNINGS PROJECTIONS FORECAST BY INVESTMENT ANALYSTS 1980 Estimate Bache Halsey Stuart Shields
$3.00 Rauscher Pierce Securities Corporation
$2.60 Shearson Hayden Stone Inc.
$2.65 Moore & Schley, Cameron & Co.
$2.90-Standard and Poor's Corporation
$2.90 Thompson McKinnon
$3.00 Value Line
$2.85 Salomon Bros.
$3.00 AVERAGE
$2.86 l
l Sources: Standard and Poor's Earnings Forecaster Salomon Brother's Electric Utility Regulation. Quality and Earnings value Line
Schidulo V-Page 1 of 1 PUBLIC UTILITY COMMISSION OF TEXAS TEXAS ELECTRIC SERVICE COMPANY SURVEY OF INVESTORS INQUIRING AS TO THEIR REQUIRED RATE OF RETURN Assuming that a "AA",
long-term utility bond currently yields about 12.5%, the utility common stock for.the same company would be attractive to you relative to the bond if its expec-ted total return was at least:
Total Return Indicated Risk Premium (basis points) over 22%
over 900 3
21-22 900 20-21 800 19-20 700 18-19 600 17-18 500 16-17 400 15-16 300 14-14
-200 under 14 under 200 MOST INVESTORS WOULD REQUIRE A 15 TO 18% TOTAL RETURN OR 423~
BASIS POINTS OVER THE BOND ALTERNATIVE.
Total Risk Percent'of Weighted Average Return Premium Respondents
- Risk Premium l
over 227.
over 900 1%
9 basis points 21-22 900 2%
18 r
20-21 800 3%
24 19-20 700 2%
14 18-19 600 7%
42 17-18 500 23%
115 16-17 400 25%
100 15-16 300 27%
81 14-15 200 7;
14
~
under 14 under 200 3%
6 423 basis points
- May not add due to rounding.
~.,.__,.
PAGE 10F 2 PUBLIC UTILITY COMMISSION OF TEXAS Schedule VI TEXAS ELECIRIC SERVICE COMPANY RISK PREMIUM ANALYSIS-EXPECTED RETURN MODEL 07/14/88 1979 1978 1977 1976 1975 CURRENTIF)
AVERAGE DIVIDEND YIELD (I)(A) 9.35 8.18 7.39 7.10 6.40 COMPOUND GROUTH RATES (I)[D3 NET BOOK VALUE 6.47 7.24 7.77 7.94 8.31 EARNINGS SCR SHARE 4.31 5.86 5.67 6.38 5.45 DIVIDENDS PER SHARE 7.11 6.97 6.52 6.46 6.45 COST OF EQUITY (I)[C]
NET BOOK VALUE 15.77 15.34 15,e7 15.84 14.71 EARNINGS PER SHARE 13.61 13.96 12.97 13.48 11.85 DIVIDENDS PER SHARE 16.41 15.07 13.82 13.56 12.85 MOODY'S PUBLIC UTILITY BOND VIELD(%)[D3 9.?f 8.90 8.25 8.60 9.00 19.96 RISK PREMIUM (I)[E)
-NET BOOK VALUE 5.87 6.44 6.87 6.44 5.71 4.27 EARNINGS PER SHARE 3.71 5.96 4.77 4.88 2.85 4.26 DIVIDENDS PER SHARE 6.51 6.17 5.62 4.96 3.85 5.42 CURRENT COST OF EQUITY (I)(G)
NET BOOK VALUE 17.23 EARNINGS PER SHARE 15.22 DIVIDENDS PER SHARE 16.38
. =
- _ _ ~.
.~ t
,([h lf d}
, ',$ jrfh[f; [gl6.,';jf.,' i l
.... - 'd
.U.
i $f.k ;
5'.l*b
[.f f.
'i '. ', 'j '
Ali PUBLIC UTILITY Com!ISSION OF TEXAS SCIIEDULE VI TEXAS El.ECTRIC SERVICE cot 1PANY Page 2 of 2 RISK PREMIUM ANALYSIS-EXPECTED RETURN MODEL...... CONTINUED FOOTNOTES
=E=E=ESEE
[A3 COMPUTED AS DIVIDEND IN YEAR T+1 DIVIDED BY AVERAGE PRICE IN YEAR T FROM SCHEDULE H-2 0F RATE FILING PACKAGE
[B3 GROUTH COMPUTED AS THE AVERAGE OF THE COMPOUND GROUTH RATES FOR PRECEDING FIVE, TEN,AND FIFTEEN YEAR PERIO9S FOR NBY,EPS,DPS.
[C] SUM OF DIVIDEND YIELD AND COMPOUND GROUTH RATES.
[D] YIELD FOR T AS REPORTED BY MOODY'S INVESTORS SERVICE, INC.
[E] DIFFERENCE BETWEEN COST OF EQUITY AND MOODY'S PUBLIC UTILITY BOND YIELD.
[F3 M0GDY'S UTILITY NEWS REPORT;3 SPOT BOND DATES.
[G3 SUM OF AVERAGE PREMIUM [E] AND SPOT BOND YIELD [F3.
i e
e PUBLIC CTILITY COMMISSIOM OF TEXA5 Schedule VII Page 1 of 1 Texas Electrie-Service Comeanv Conposite Returns on common Ecuttv 1975-1979 Industrv Crouo g
g 1977 g
g Aerospace 11.9%
13.9%
15.3%
20.3%
21.7%
Airlines
-1. 8 8.0 13.4 20.0 6.8 Appliances 5.7 16.0 18.5 13.7 9.3 Automotive 6.5 17.2 19.1 16.8 11.3-Banks & Bank Holding Cos.
12.4 11.7 12.2 14.3 15.2 i
Beverages 13.6 18.2 17.5 13.2 14.6 Suilding Materials 9.6 14.0 14.6 16.9 15.8 thesicals 14.9 16.6 13.5 14.4 17.1 i
Conglomerates 11.3 13.2 12.9 13.5 18.0 Containers 12.0 12.7 11.9 12.1 13.4 Drugs 18.9 17.8 18.2 20.4 20.8 Electrical. Electronics 12.3 18.1 18.2 18.6 19.7 FooJ Processing 14.8 14.9 14.2 14.8 15.4 Food & Lodging 11.6 15.1 15.7 18.1 17.1 Ceneral Machinery 13.1 14.3 14.2 15.3 15.9 Instruments 14.4 14.9 14.8 15.3 15.9 Leisure Time Indust:1es 12.9 14.6 15.5 18.8 18.0 Metals & Minina 7.1
- 7. 7 6.3 10.0 19.4 11.0 14.1 14.8 16.0 19.3 Miscellaneous Manufacturing)
Natural Resources (Fuel) (1 13.1 14.4 13.4 13.9 21.5 Nonbank Financial 11.4 13.1 16.1 18.8 17.1 Office Equipment. Computers 16.4 17.9 19.0 20.4 19.5 011 Service & Supply 21.8 24.0 21.0 20.5 20.6 Paper and Forest Products 13.7
'15.6 14.3 15.5 17.7 Personal care FrcJucts 17.8 19.5 19.2 20.0 18.2 Publishing 12.6 13.1 18.6 19.4 20.6 Radio & TV Broadcasting 14.7 20.0 21.7 22.3 22.0 Railroads 6.4 8.0 8.9 9.3 12.9 Real Estate & Housirts 3.2 10.1 14.0 18.4 21.0 Retailing (Food)
~
7.4 11.7 11.7 L5.4 15.5 Retailing (Nonfood) 9.1 13.2 14.6 14.9 14.5 Savings and Loan 9.8 13.6 17.2 18.4 15.4 service Industries 15.3 16.0 16.3 18.2 19.3 special Machinery 17.4 18.7 18.6 18.4 16.5 Steel 9.5 7.6 0.8 7.8 5.4 Textiles & Apparel 7.2 12.1 11.9 12.7 13.5 Tire & Rubber 7.9 7.7 10.2 5.4 7.8 Tobacco 17.3 16.6 NA 19.7 TO.5 I
?rucking N.A 21.2 21.6 21.4 16.9 Utilities 11.2 11.9 12.4 12.7 12.8 All Industry Composite 11.8 14.0
.14.1 15.1 16.6 (1) 011 companies only ource: Bo<fness week.
4 r
m-m m
PUBLIC UTILITY COMMISSION OF TEXAS Schedule Vill -
Page 1 of1 TEXAS ELECTRIC SERVICE COMPANY
SUMMARY
OF CO5T OF EQUITY ESTIMATES
' Cost of Equity Estimation Technicue Estimate Discounted Cash Flow
- a. Retention Growth 14.5%
~14.9%
- b. Adjusted Historical Trend 14.4 % - 15.5 %
Projected Earnings
- a. Investment Analyst Forecasts 14.0 %
Direct Inquiry
- a. Mitchel Hutchins Survey 14.0 - 17.0*
Bond Yield / Risk Premium
- a. Expectations Model 15.2 17.2 %
Comparable Earnings Judgemental Conclusion 14.50'- 15.00 %
i I
\\
4 l
_.m
PUBLIC UTILITY COMMISSION OF TEXAS Schedule IX
- Page 1 of 2 TEXAS ELECTRIC SERVICE COMPANY DILUTION EFFECTS OF STOCK ISSUES January January March 1980 Offering 1979 Of fering 1978 Of fering Pre-issue NBV/ Share
$20.80
$20.14
$19.10 Post-Issue NBV/ Share
$20.48
$20.08
$19.14' Dilution per Share
$0.32
$0.06
$(0.04)
% Dilution per Share 1.54 %
0.30 %
(0.21)%
Cost of issue 4.48 %
3.06 %
2.98 %
O e
PUBLIC UTILITY COMMISSION OF TEXAS Schedule IX Page 2 of 2 4
TEXAS ELECTRIC SERVICE COMPANY DERIVATION OF MARKET-TO-BOOK ADJUSTMENT market price of common share P
=
book value of common share B
=
M/B = target market price to book value ratio k
=
cost of equity k*
cost of equity adjusted to encourage a target market-to-book ratio
=
D g expected dividend per share in next period
=
expected long-term growth g
=
D i P=B=k-g D
P = B (M/B) = k* - g ( /B)
D P=k* g( /B)
D P
3 (M/B)
- k* - g Pk* - Pg = D1 (M/B)
Pk* = DI (M/B) + P8 D3 (M/B) + P*
k* =
p l
D j
k* =
(M/B) + g
?
w l
l 1
i PUBLIC UTILITY COMMISSluN OF 1EXAS Schedule X TEXAS ELECTRIC SERVICE COMPANY CXFIlAlltATlun AHAt.f515 0F ltSCO (1000s)
December 31, 1977 December 31, 1978 December 31, 1979 March 31, 1980 Amount Percent Amount Percent Amount Percent Amount Percent Long-Term Debt
$ $54,942 4/.2%
$ b54,925 '
43.2%
$ 618,4ub 94.4w.
$ 090,136 44.4%
Preferred Stock 145,330 12.3%
174,991 13.6%
174,991 12.5%
209,624 13.5%.
Common Equity 477,953 40.5%
553,850 43.2%
600,40,2 43.1%
653,739 42.1%
TOTAL
$1,178,231 100.0%
$1,283,766 100.0%
$1,393,798 100.0%
$1,bS3 619 100.0%
t 9
4
Schedula X Page 2 of 3 e
PUBLIC UTILITY COMMISSION OF TEXAS TEXAS ELECTRIC SERVICE COMPANY Important Quality Measurements of 100 Electric Utilities: 12/31/79 12/31M9 12/31M 9 12/31/79 12/31M9 12/31/79 Pre-Tax Capital Ratios 5-7 Dett 12/31/79 Effective Retum on Bord Ratinas Interest t L-T 4
6
% of AFIC t of Inc. Tax Coman Mooc y ' s Sep C4P Coveraoe Dett Pfd. ~
L-T Cap.
het tarn.
Rate Equity Com.
~~
(A) (&j (A)
(8) 1 ALIEHD*f P>u 2.5/2.3 53 11 36 3
30%
364 434 10.9%
2 AMERICAN ELEC NR 2.1/1.9 54 10 36 5
35 25 32 10.8 3 AA121A PWLIC SW A
A-7 2.4/1.8 49 12 39 2
63 11 20 12.7 4 A7.AttfIC CIM ELEC Aa A+
4 3.6/3.3 45 13 42 6
22 35 40 11.0 5 BA;.TLacAE CAS & EL As AA-3 3.3/3.1 50 12 38 16 36 39 11.4 6 BCSTON CISCN 8a4 BB8 7 2.6/2.2 54 13 33 5
59 43 57 11.$
7 CAROLIhA W R 6 LT A
A 5
3.0/2.2 51 13 36 3
80 37 63 12.3 8 CDMAL HLMON C&E A
A-6 2.3/1.9 50 15 35 11 46 18 26 12.3 9 CDiRAL ILL LICHT A
A+
4 3.8/3.7 50 16 34 4
10 47 49 12.3 10 CD ILL PW SW AA AA 4
3.2/2.8 50 12 38 5
39 40 49 12.7 11 CD':EAL MAINE WR A
588+ 7 2.9/2.6 47 13 40 11 15 36 42 12.1 12 CD" SAL SOUTH htST 3.7/2.9 48 9
43 6
50 38 53 14.2 13 CD':EAL VT PUB SW Bea B88 3.6/3.0 44 14 42 9
39 32 41 13.1 14 CINCINhATI C&E As AA-4 2.7/2.1 53 12 35 5
53 20 31 12.7 15 CLC.II. Arc EL ILLU Aa AA-5 2.7/2.1 47 15 38 4
53 20 30 12.1 16 CCL & S0 CH10 ELIC A
488+ 7 2.4/2.1 52 13 35 4
41 27 35 10.9 17 CCPa,TETK*N ID A
'AA-4 2.0/1.4 54 14 32 5
103 14 39 8.6 18 C39tJNITf PUB SW A
A 2.4/2.4 52 10 38 13 1
39 39 10.2 19 CCNSOLIrATID ED A
A 7
3.6/3.6 ' 44 12 44 2 31 31 10.6 20 C:2.S'.POS 70.n A
A-8 2.2/1.6 50 15 35 7
74 12 23 11.5 21 CAY 7tr MER & LT A
A 7
2.6/1.9 51 15 34 72 18 33 10.8 22 CELwvA f%R 6 LT A
A 7
3.0/2.6 51 12 37 2
38 31 39 12.1 23 Cr:HOIT CISCW Baa ass 9 2.3/1.9 53 13 34 4
61 26 39 10.2 24 DUKE P@tR A
A+
4 3.0/2.1 49 14 37 2
73 26 46 13.4 25 CUQUE::NE LIOHT A
AA.
6 2.8/2.4 51 16 33 1
45 37 46 9.3 26 EL PASO ELEC':91C A
A4 6
3.0/2.1 45 17 38 13 84 34 63 14.2 27 EMPIRE DIST ELIC A
A 5
2.8/2.3 52 12 36 45 29 40 11.8 28 ft::R! A PSER CORP A
A+
3 3.4/3.4 48 15 37 12 2
48 48 11.7 29 FLORIrA 8%R 6 LT A
A+
3 3.3/2.9 51 12 37 1
34 43 52 12.9 30 CSIRAL Pt.8 WILS 2.1/1.8 53 13 34 4
45 31 40 6.9 31 CUII STATES W!!3 A
A 8
2.4/1.8 54 11 35 5
78 31 55 11.2 3I HAaAIIAN EI.E."TRIC A
A 4
3.3/3.1 51 12 37 1
16 41 45 12.9
3.6/3.1
$1 8
41 29 37 45 14.3 34 ITANO PST.R A
A 5
1.9/1.5 57 7
36 3
62 20 35 8.5 35 ILLINcIS 5% ER Aa AA 3
3.2/2.6 50 12 38 2
51 35 48 12.3 36 INOIANAFCLIS P6L As AA 3
4.2/4.0 48 13 39 2
13 46 48 15.2 37 IFTERSTATE IG ER A
A 7
3.0/2.8 54 14 32 3
25 41 46 12.2 38 I SA ELIC LT & fu A
A 6
2.6/2.3 50 15 35 2
32 35 42 11.2 39 IO*A-ILL CAS & EL Aa AA 3
4.1/3.8 48 14 38 24 43 48 13.4 40 ISA Rf50CRCES An A
5 3.4/3.1 49 11 40 9
22 40 45 13.6 41 13.A 5%LIC SW Aa AA 4
3.1/2.5 51 13 36 49 35 47 12.9 42 taA S0ctERN UT:L Aa AA 3.1/2.5 51 10 39 2
43 30 42 12.8 43 FANSAre CITY EbL Aa A
6 2.1/2.3 53 13 34 4
117 18 65 9.3 44 rat 4AS CAS & ELIC Baa BBS 6 2.0/1. 3 50 15 35 5
123 20 68 8.2 45 FMSAS MER 6 LT Aa AA 4
3.2/2.6 45 14 41 1
48 33 46 12.0 46 KDrnOY UTILITIES As AA 3
2.8/2.8 51 13 36 6 47 47 10.4 47 LOC !$1AND L7'C A
A-7 2.5/1.8 45 16 39 62 1
2 12.2 48 14U:SVILLE CsE Ana AA 1
3.3/3.3 48 17 35 9 47 47 9.1 49 >A::! SON CAS & C:.EC Aa AA 4.3/4.3 43 14 43 2 52 52 10.0 50 matc;I Scimt ttr!LS 1.7/0.9 59 10 31 5
117
(-wg4 11.5
PUBLIC UTILITY COMMISSION OF TEXAS Schedule X Page 3 of 3 TEXAS ELECTRIC SERVICE COMPANY 12/31M 9 12/31/79 12/31/79 12/32n9 12/31M 9 Pro-Tas Cacital Ration S-T Debt 12/31/79 tifeetive return on ten! Eathms Interest t L-7 6
g t of Amt 4 of Inc. Tan Cossman mocu s Se P ;* P Coverage Lebt Pfd. Com.
L-T Cac.
het Earn.
Rate Equity g.i t ea (As
( 64 51 P;NNESC"A f%.R 6 LT A
A 7
2.7/2.,
M 12 34 3
SCt 38 52 12.9%
52 m!SSaJt! Pub SW het rated (5) 2.2/1.9 in 15 30 9
50 27 37 11.4 53 KETANA OAMA UT A
A 3.2/3.0 51 11 39 5
16 39 43 13.4 54 "CNTAhA PO=ER A
A 7
2.1/2.2 52 9
39 5
14 27 30 10.6 55 hE W A P3.tn haa Bas - 7 3.3/3.3 48 14 38 5
3 32 32 16.5 56 Nov DCIAC LE 3.3.3.0 51 12 37 1
30 40 47 13.7 57 6D4 DC C6E ASSO 3.3/3.2 48 13 39 8
12 29 42 13.3 58 hDs YORK STATE RA0 A
A-7 2.8/2.4 50 13 37 2
35 17 22 13.2 59 h!AWA rohMk M A
A-8 2.6/2.1 49 13 38 3
45 12 17 11.5 60 NORTHEAST WIIA 2.0/1.7 55 12 33 6
48 21 29 9.2 61 NORTHERN thD P S Aa AA-4 3.0/2.5 51 13 36 1
55 42 56 9.8 62 h0R7hERN STATES TR Aa AA 2
4.5/4.4 46 12 42 1
12 48 51 1).2 63 hCR % tsis N P S baa Bad 2.4/2.0 55 13 32 1
55 27 40 12.9
- 64 CMIO CISON A
988* 8 2.4/1.6 51 16 33 7
92 22 50 11.0 65 Ok: Aman CAS 6 EL As AA-3 2.5/2.1 49 20 39 5
57 34 44.
8.1 66 CAAFCE 6 R:IX WIL A
A-6 3.3/3.0 48 14 38 19 37 41 11.6 67 c:"ER TAIL PO=t*
A A
5 3.7/3.3 52 16 32
-o-36 42 51 14.4 68 FACIF10 CAS 6 ELIC Aa AA-4 2.8/2.2 44 15 41 6
53 18 28 11.6 69 FA0!FIC PO=tR 6 LT baa BB6 7 2.0/1.7 59 10 31 2
44 9
14 11.7 70 FEM 6YLW.IA P6L Aa A+
F 2.7/1.9 47 20 33 1
79 22 40 13.1 71 PM! K ELPH:A ELEC A
A-8 2.2/1.6 52 13 35 2
76 19 36 9.6 72 PORT *AND GEN E!IC Bea bB6-8 1.7/1.0 53 10 37 9
166 23 heg 5.7 73 PCWAC ELEO PoetR A
A+
5 3.0/2.9 51 11 38 2
10 40 43 10.6 74 P'.3 SW CCWLADO A
A 5
2.5/2.2 50 14 36 4
45 32 42 7.7 75 PU6 SW ELE: 6 CAS Aa AA - 4 3.4/3.0 48 12 40 2
30 35 42 10.8 76 PLS FC I!cIAAA As AA 2
4.2/3.6 46 13 41 2
40 42 52 16.1 77 PLS FC hD HAPP Baa has 8 2.3/1.5 45 15 40 15 114 27 to 11.4 78 PUB SW hDd pix!C0 Aa AA 4
3.7/2.9 47 15 34 10 51 29 to 13.5 79 P'.CET Sa2C P6L haa B68 8 2.2/1.8 49 14 37 4
54 11 17 8.9 80 ROCHESTER CAS 6 EL A
A 6
2.2/1.7 46 14 40 6
53 4
7 10.0 81 SAN CICO CAS 6 EL Baa Bas 8 2.2/1.8 46 15 39 11 48 6
10 10.3 82 SA/ AMAN EI.EC 6 PR Baa BB6-1.7/1.5 63 8
29 2
52 31 41 7.1 83 SITARA PAC 54.R CO A
A 6
2.8/2.5 51 10 39 7
32 32 40 12.7 84 S3% CAROL 1hA EL:
A A
5 2.3/1.8 55 11 34 3
E6 32 49
'10.3 85 SOL % ERN CALIF ID An AA 4
3.1/2.5 48 14 38 3
41 18 25 13.7 86 SOL %ERN C39ANY 2.1/1.8 59 11 30 4
78 43 64 8.9 87 SOL %ERN IC C6E Aa AA 2 0 3.9/3.6 46 12 42 2
21 45 50 10.8 88 SOL'nt.ES*ERN P S Aa AA 3
2.5/2.2 53 -
11 36 8
28 14 18 13.3 89 TAMPA EII 7R!c Aa AA 2
3.3/3.3 51 8
41 5
5 42 43 12.1 90 TEXAS WILITIES 3.0/2.7 50 11 39 4
28 37 44 12.0 917ttE:c CISON Bea A-7 2.4/1.8 51 15 34 2
75 22 to 10.9 92 TUCSch Ell: PCWER A
A+
4 3.1/2.5 50 10 40 2
40 20 27 14.7 93 UNIO. ELECTRIC A
A 2.6/2.1 50 15 35 4
64 32 45 10.6 94 UNITC ILLIF.thAT!<
A F 58 2.4/1.8 48 16 36 16 65 14 26 13.2 95 UTAri P3=IR 6 LIOMT A
AA-4 2.8/2.7 49 13 38 2
18 31 34 11.2 96 V!3CINIA E;IC & PR A
A 7
2.2/1.8 53 13 34 3
68 26 41 8.4 97 hASHIC7JN W:.'R $%R A
A-7 2.5/2.3 58 4
38 22 18 21 11.5 96 WISCCES:h E I M M
AA 2
4.0/3.7 47 11 42 10 20 44 49 d2.5 99 htSCO.Sih Pha 6 LT M
AA 2
4.1/4.1 47 13 40 1
1 52 52 13.0 100 hISctNS!h Pun sw Aa AA
,1 5.6/5.6 43 13 44 2
2 53 54 14.s high 5.6/5.6 63%
204 444 16t 186%
534 80s 16.5%
hange - Low 1.7/0.9 43 4
29 1Mg.) (heg.)
5.7 median 2.8/2.3 50 13 37 4
45 32 42 11.7 tetes: - (1) miding Conpany (2) (A) Total AITC ancides in pre-taa incme (3) ( B) % tal A CC esci d ed (4) Copyright 1980, Af f 6 Peelps, Inc. and pelisned wita its permission (5) ho long-term debt pAlicly outstanding 9
u
PUBLIC UTILITY COMMISSION OF TEXAS Schedule XI Page 1 of 1 TEXAS ELECTRIC SERVICE COMPANY WEIGHTED AVERAGE COST OF INVESTED CAPITAL Component Component Weighted Percent Percentage Average Component Amount of Total Cost Cost Long-Term Debt (*
690,195,916 41.78 %
8.324 %
3.478 %
' Notes Payable (b) 859,097 0.05%
6.189 %
0.003 Preferred Stock (c) 209,623,859 12.69 8.110 %
1.029 Common Equity (d) 653,798,504 39.58 15.500%
6.135 '
Accumulated Deferred investment Tax Credits
- 97.352,327 5.90 11.312%
0.667 TOTAL
$ 1,651,829,703 100.00%
11.312%
(a)
Schedule H-6, pag'e 1 of 1 (b)
Schedule H-5, page 2 of 4 of Rate-Filing Package.
(c)
Schedule H-4, page 1 of I of Rate-Filing Package as adjusted.
(d)
Schedule H, page 2 of 2 of Rate Filing Package.
(e)
Schedule H, page 2 of 2 of Rate-Filing Package.
Pim!.a t, UTitt!Y CutltitSSION OF TEXAS SChcdulo XII TEXAS ELECTRIC SERVICE C0!!PANY l
CASH DIVIDEND COVERAGE AND INTERNAL CASH CENERATION 1980-82E t
Internal I7IO/19 12/)l D Q l7]I777*
Cash I ALLECMENT POWER 2.0 2.0 3.5 50 53 MIDDLE SOUTN UTIL 1.0 8.0 2.5 16 2 AMLRIC AN ELEC PWR 1.9 2.1 1.9
))
52 MINucSOTA PSL 4.8
- 3. 5
).I 19A 3 AR120NA PUOLIC SVC l.7 2.1 2.)
25
).5 3.0 20 4 ATLANTIC CITV ELEC 3.0 2.9 2.7 45 54 rosTA 4 PukER 3.0 1.0 2.6
)!
5 OALTIMORE CAS & EL 2.0 3.0 2.7 80 55 NEVADA POWER 4.4 27 6.4 37 6 00STON EDISON
).4
).2 3.5 40 56 NtW LNCLAND ELEC
).2
).2 3.3 46 7 CAROLINA PW R & LT 2.7 4.5
).4 20 57 Ntw ENG C6E ASSO 1.)
3.)
3.5 00 0 CLNTNAL HUDSON CLE 2.9 2.0 3.0 30 50 NLW V0as STATE E6G 2.2 2.)
't.7 23 9 CENThAL ILL LIGHT 4.0 4.0 4.0 34 YJ N I# GAke Ap.s.h Ph 6
6.
G 8
10 C LNTLAL ILL rue SVC
).4 3.)
3.3 124 60 NokTMLAST UTIL 2.6 2.9 3.1 8)
Il ClNTRAL LA FNrRCY 4.9 J.9 4.2 56 61 NDHTNERN IND P S 2.6 2.4 3.8 32 8 2 CENTRAL MAINE PWR 2.6 2.4 J.4 3) 62 NORTHERN STATES PR 4.1 4.8 4.1 75
% ) C*NTR AL SOUTH WEST
).)
3.4 3.6 40
4 4
g 15 CINCINNAtt CLE g
g g
4 6 5 OK L A NOM A CAS 6 EL 2.2 2.5 2.4
$7 16 CLEVELAND EL ILL 1.7 1.0 2.6 33 66 ORANGE 6 ROCK UTIL 2.0 2.4 2.5 et 17 COL & SO OHIO
!.9 1.0 1.9 60 67 OTTER TAIL POWER 3.9 4.4 4.7 50 IS CCMMONWEALTN ED
- 2.,)
2.7 3.0 50 60 PACIFIC CAS & ELEC l.4
!.9 2.2 44 19 COMMUNITY PUB SVC
).
4.)
4.2 74 69 PACIFIC POWER & LT 2.0
'2.4 2.4 29 20 CONSOLIDATED ED 3.5 3.6 3.0 95 70 PEbNbVLVAtllA P&L 3.7 8.6 2.6 19 21 CONSUMERS PWR 0
0 0
0
?! PHILADELPHIA ELEC l.0 1.0 1.0 40 22 D AVTON POWE R 6 LT 1.5 1.7 1.9 40 72 POuTLAND GEN ELEC 4
4 8
3
- 2) DELMARVA 6>WR & LT 2.5 2.5 2.4 67
- 7) POTOMAC ELtc POWtn 2.0 2.9 3.2 70 24 DETROIT tDISON 2.)
2.2 2.9 45 74 PUS SVC COLORADO 2.5 2.6
. 2. 4 42 25 DUME POWER 2.5 2.6 2.7 56 75 PUS SVC ELEC 6 CAS 3.6 3.6 3.6 44 26 DUQUESNE LICHT
!.9 2.1 2.1 52 76 PUS SVC INDIANA
).2 3.0 2.9 40 27 EL PASO ELECTRIC 1.6 1.9 2.0 20 77 PUB SVC NEW NAMP
!.5 2.1 8.7 20 24 EMPIRE DIST ELEC 2.0 1.2
).O 50 70 pus Svc NEW MEXICO 2.0 2.4 2.6 25 29 FLORIDA POWER CORP 3.4 4.4 5.0 31 19 PUCET SOUND P6L
- 2. 5 '
2.5 2.0 10 30 FLORIDA PW R & LT 4.5 5.1 5.0 55 00 ROCHESTER CAS & EL 3.2 3.)
}.2 45 31 CENERAL PU8 UTILS 3.4 2.0 2.7 50 St SAN DIECO CAS & EL 1.6 1.9 1.0 39 32 CULF STATES UtlLS 2.7 3.1 3.0 31 02 SAVANNAH ELEC & PR 3.0 3.5 5.9 56
)) HAW All AN ELECTRIC
).6 37 3.9 61 g) SIERRA PAC PWR CO 2.7 2.0
).7 40 34 HOUSTON INDUSTRIES
).O
).7 4.4 79 04 SOUTN s.5ROLINA C&G l.8 2.)
2.5 gg 3 5 IDAHO POWER 2.0 2.5 1.9 59 45 SDUTMERN CALir ED 2.6 4.6 3.6 40 36 ILLINOl$ POWER 2.)
2.1 2.3 42 06 SOUTHERN COMPANY 2.)
2.5
' 2.9 Sa 37 INDIANAPOLIS P&L 3.4 3.2 3.2 54 07 SouinERN IND C&E 4.8 3.9 4.5 54
)$ INTEnSTATE POWER 2.5 2.1 2.5 SI 08 SOUrpWESTERN PS 2.0 2.2 1.9 34 39 IOWA ELEC LT & PWR 4.4 4.9 3.0 44 49 TAMI'4 ELECTMIC 3.0 4.!
4.4 70 40 IOWA-ILL CAS 4 EL 2.0 2.5 3.1 33 90 TEMAS UTILITIES 3.4 3.5 3.)
62 48 80WA RESOURCES 3.0 2.7 2.7 57 98 TOLtDO EptSON 1.0 2.0 0.7 24 42 toWA PunLIC SVC
).O 3.2 3.6 75 9 2 TUCSON ELEC POWER 2.1 1.0 2.6 47 43 IOWA SOUTilERN UTIL 3.)
3.2 3.2 99
- 9) UNION ELECTRIC 2.6 2.9 2.9 21 44 FAN $AS CITV P&L 2.7 2.7 4.0 I
94 UNIFJO ILLUMINATING l.0 2.7 2.4 05 45 sANSAS CAS 6 ELEC 1.9 2.6 2.7 25 95 UTAN PUWER & LICHT 2.1 2.2 8.6 40 46 FANSAS POWER & LT 2.6 2.6 2.9 30 96 VlkCINIA ELEC & PR 2.)
- 2. )
2.8 30 4 7 FL NTbCKY UTIL 4.5 3.7 3.7 II 97 WAEHINGTON WTR PWR l.9 2.9 1.5 10 40 LONG ISLAND LTNG l.)
1.4 I.)
41 99 WBECONSIN ELEC lWR
).6
).5 3.6 52 49 LOUILVILLE C6E 3.7 3.0 3.9 42 99 WISCONSIN rWR 6 LT 3.8 3.7
).5 45 50 PADISON CAS 6 ELEC 3.9
).9 4.0
'I 300 WibCONSIN Puis SVC 4.6 4.)
4.0 60 49 HlCH*
4.9
- 5. $ '
6.4 I DW*
n.0 0.0 0.7 MLDIAN*
2.7 2.0 2.9
Sch;duls XIII Prg2 1 of 2 4
o PUBLIC UTILITY COMMISSION OF TEXAS TEX AS ELECTRIC SERVICE COMPANY Electric Utility Intered Coverage. Ratios Classified by Bond Rating Groups tat true Pr o-7au Interest Charges taree9 !? aes. tru$ade Stra@t Ama/AAA shacy's ~
- 6. P sap
~ J/)a 9 /X /M 6/3G 4
..J3 L 78 iis J.,..../)L76.. /3.J5 1a/3154
( As 40 (As (&#
(A) (8J
( AJ (Si 44 45)
(A4 (As
~ (A4
- Imaise &
6n is Ana.
AAA 3 3.2/2.7 3.2/2.7 3.7/3.1 3.V2.6 3.S/3.0 2.9 3.3 3.3 as 7esas slee. ser.(7XV)
Ana AAA 1 3.8/3.4 3.9/3.S 3.9/3.S 4.1/3.7 3.3/2.0 3.6 3.8 4.0 as 7esas P66 (7Xul Ana AAA 1 3.8/3.3 4.0/3.7 4.2/4.0 4.1/3.9 3.7/3.4 3.2 3.2 4.1 spilt naa/aa a G.aeva..e 4E Ana AA 1
3.3/3.3 3.1/3.2 3.3/3.1 3.0/3.0 3.04.8 4.0 4.1 3.4 strascot Av&A 8
Aest.wse at Aa AA-3 3.3/3.3 3.4/3.2 3.V3.2 3.4/3.3 2.9/2.9 2.9 2.6 2.2 Central Ill. Pun. Ser.
As AA 4
3.2/2.8 3.7/3.3 3.9/3.S 3.2/2.3 3.V2.7 3.0 2.9 2.0 Central Psk (CSA)
As AA 2
3.9/2.9 4.0/3.1 4.0/3.1 4.2/3.S 1.2/4.0 4.0 3.3 4.0 Cincamatt C65 As AA-4 2.7/2.1 2.9/2.4 2.9/2.4 3.2/3.7 3.4/ 3.0 2.6 2.6 2.8 8 CaswelaM 11ee. Ille.
As AM S 2.7/2.3 2.7/2.2 2.5/2.0 2.7/2.2 3.V2.6 2.7 3.S 2.1 t*a howstan LAP As AA 2
3.6/3.1 3.7/3.3 3.6/3.3 3.6/3.3 4.U3.0 4.0 2.0 3.5 e a 111ansas Power As AA 3
3.2/2.6 3. 4/2.8 3.3/2.8 3.1/3.0 3.8/3.3 3.7 3.0 3.2 Indianapslas Pat As A4 3
4.2/4.0 4.3/4.2 4.0/3.9 3.4/3. 3 3.8/3.0 2.9 2.8 2.7 t*
towe-111&nssa Cet As AA 3
4.V3.8 4.2/3.8 4.1/3. 6 3.3/2.7 3.4/3.0 4.1 4.1 3.4 lowe P@lic Service As AA 4
3.V2.5 3.3/2.6 3.5/2.8 3.0/2.3 2.9/2.4 3.4 3.0 3.4 news htbern utti.
As AA 3.V2.5 3.U2.0 3.8/3.3 3.8/3.4 4.9/ 4.7 4.0 4.1 3.8 saraas P6L As AA 4
3.2/2.6 3.2/2.7 3.4/2.9 3.4/2.6 3.u2.6 3.8 4.0 4.6 pentucey utt11tles As AA 3
2.8/2.8 3.0/3.0 3.24.2 2.7/2.7 2.8/2.6 3.3 3.4 2.5 e.asamen Get Aa AA 4.3/4.3 4.3/4.3 4.4/4.4 4.2/4.1 3.9/3.7 3.9 2.9 2.2 so. Indiana Pub. ser.
As AA-4 3.0/2.5 3.0/2.5 3.V2.6 2.7/2.3 3.V2.7 3.2 2.7 2.6 Destnern States power As A4 2
4.1/4.4 4.7/4.5 4.9/4.7 4.7/4.S 4.1/4.0 3.7 3.1 2.7 t'
Oklanoma Get
- As A4 3 2.5/2.2 2.4/2.0 2.7/2.2 3.0/2.5 2.9/2.4 2.0 3.3 3.8 t Pactist Cet
- As An-4 2.8/2.2 3.2/2.6 3.3/2.7 3.U2.5 2.8/2.3 2.3 2.3 2.9 t ! P,.n. ser.14 Aa AA 4
3.4/3.0 3.6/3.3 3.8/3.S 3.7/3.4 3.1/3.1 3.3 2.6 2.3 Puo. Ser. of indiana As AA 2
4.2/3.6 4.2/3.6 4.1/3.5 3.7/3.1 4.3/3.7 4.4 3.7 4.2 s Pe. Ser. of how mruace As AA 4
3.7/2.9 3.4/2.7 3.8/3.0 3.3/2.7 3.0/2.S 2.9 3.0 3.0 t
PLO. ser, of (alarussa (CSA1 As AA 3
3.8/2.9 4.0/3.3 4.4/3.7 4.6/ 4.0 4.5/ 4.3 4.0 4.0 4.2 8 a so. Calaterma Edasan As AA 4
- 3. V2.5 3.2/2.7 3.U2.6 2.7/2.3 3.0/2.6 3.0 2.9 4.1 So.1Miana Cat Aa AA 2
3.9/3.6 4.V3.6 4.4/3.7 4.9/4.0 S.U4.6 6.1 S.4 4.8 i
Soutawstern Elee. Pwr.lCSA)
As AA 2
3.3/2.9 3.3/2.9. 3.6/3.3 3.9/3.S 3.9/3.S 3.6 4.5 S. 4 hthestern Pue1&c Ser.
As AA 3
2.5/2.2 2.1/2.3 2.7/2.5 3.1/2.8 3.1/3.2 3.6 3.7 4.5 7 ave tie:tric As AA 2
3.3/ 3.3 3.6/3.6 3.6/3.5 4.V4.0 3.4/3.4 3.1 2.8
- 2. 3 1
i West Pem Po.et ( ArP)
Aa AA 3
3.U3.2 3.5/3.1 3.5/2.9 3.2/2.6 4.V3.7 3.6 3.7 2.9 test 7esas util. (CSAJ As AA 1
4.9/4.9 S.3/51 S 4/S.3 S.5/S.S 6.7/6.4 6.4 6.7 6.2 8 hawcesan taectrat Po=or As AA 2
4.0/3.7 4.1/3.9 4.1/3.9 4.3/4.2 S.VS.1 4.6 4.1 3.9 1
mi consin P6L Aa AA 2
4.1/4.1 4.2/4.2 4.V4.1 3.9/3.9
- 4. 4/ 4. 2 4.5 3.7 2.7
- :4aconsan Pun. Ser.
As AA 3
S.6 /S.4 S.9 5.s 6.2/6.1 S.74.7 S.S '$.4 S.2 4.2 2.9 kagn S.6/S.6 S.9/S.8 6.2/6.1 S.7/S.7 6.7/6.4 6.4 6.7 6.2 hange - Low 2.5/2.1 2.4/2.0 2.5/2.0 2.7/2.2 2.8/2.3 2.3 2.3 2.2
- wdaan 3.4/2.9 3.6/3.2 3.7/3.3 3.5/3.2 3.7/3.3 3.6 3.6 3.1 Spilt Ava er A/AA AGa-tic city L;ec.
As A+
4 3.U3.3 3.4/3.S 3.8 /3.5 3.U3.3 3.V2.8 3.1 2.8 2.3 i s Cassmen-ealth EJason A
AA-4 2.0/1.4 2.4/1.7 2.s/1.s 2.4/ 2.2 2.7/2.2 3.4
- 3. 4 3.1 l
D.guesne Light A
AA-6 2.8/2.4 2.7/2.3 2.1/2.2 2.&2.3 2.4/2.$
2.8 3.1 2.7 t
El Pase taectric A
AA-6 3.0/2.1 3.0/2.1 2.7/1.9 2.4/2.0 2.7/2.3 3.4 1.9 3.2 le.a PsL Aa A
S 3.4/3.3 3.4 '3.1 3.5/3.0 3.U2.8 3.U3.0 3.8 3.6 3.3 1
8 mansas Caty P6L As A
6 2.V1.3 2.5/1.6 2.7/1.9 3.0/2.3 2.8/2.3 3.1 3.0 2.8 l
i how Dglamt muer 46t3)
As A=
3 3.0/2.4 3.0/2.5 3.0/2.6 2.9/2.S 2.9/2.6 3.9 2.7 2.3 1 a Pema ivansa 76L As A*
6 2.7/1.9 2.8/2.1 2.9/2.1 3.0/2.3 3.4/2.8 2.6 2.8 2.9 r
I utan P6L A
AA-4 2.8 /2.*
2.6/2.5 2.7/2.6 2.9 /2.5 2.4 /.9 3.4 2.9 M
4 l
hton 3.6/3.3 3.8/3.5 3.8/3.5 3.6/ 3.3 3.4/3.0 3.0 3.6 3.3 l
herge - ta=
2.0/1.3 2.4/1.6 2.4/1.8 2.6/2.0 2.4/1.9 2.6 2.7 2.3 r
sedaan 2.8/2.4 2.8/2.3 2.7/2.2 2.9/2.3 2.8/2.5 3.4 2.9 2.s t
l wtes: (1) ( A) 7Dtal AFIC incialef an pre-tas &ncesie.
(
~
(Si 70tal AFLC asclased from tree calculations.
(2) Parent Cts pany synamiss ATP
- Alleanony so.et Systen eds new thelarus 51settie lpysten AD + Ameraten Electrit Pomer IRJ - Bertneest Utilitjes Csa - Central 6 hth test CEC + cnne Ediam i
l Cru - General Pelle Ut111ttes 50 - htnern Comsany Msu. maddle hta uttastaes 710 - 7esas uttilties (3) h.A.. set evallable h to interam restatrunt.
l
?4) Copyright 1986, th!! 6 Phelse. Inc. ams pelasheis witA Sts permaanion.
i I
I l
r
e o
PUBLIC UTILITY COMMISSION OF TEXAS Schedule XIII Page 2 of 2 TEXAS ELECTRIC SERVICE COMPANY Rat t res Pr>To interest Oiarges tarned 12 era. thbede
. hv s Le F MF. is J. F, 9 %- 7 6, us,
.J4g ;; ji. 7; j i'J y 7g ;;JW 4jg4 Straight A/A
~ ~ M (AJ ( 5, D) 6As (B)
(A4 (8)
( Ae
' (As (As Arisons Ntale service A
7 2.4/1.0 2.44.0 2.5/3.9 2.7/2.2 2.6/2.2 2.3 2.5 2.0 t
Carellne P6L A
A 5
3.G/2.2 3.3/2.5 3.4/2.6 3.7/3.1 3.4/2.8 3.2 2.3 2.0 Central smasman C6C A
A-6 2.34.9 2.5/2.1 2.7/2.3 3.2/2.0 2.8/2.6 2.7 2.4 1.8 t
Central Ulanoss Light A
4 3.4/3.7 3.4/3.7 3.7/3.6 3.44.4 2.8/2.0 2.7 2.3 2.2 8
Qmpecticut lap (NU)
A 7
2.0n.7 2.2/1.9 2.3/1.9 2.3/1.9 2.3/1.9 2.4 2.2 2.4 s connoiteatet utson A
7 3.U3.6 3.5/3.4 2.4/3.3 3.5/3.4 3.u3.6 3.3 2.7 2.2 2
Conswers Power A
h 8
2.24.6 2.5/1.9 2.6/2.0 2.6/2.2 2.64.2 2.9 2.4 1.9 Leyton P6L A
A 7
2.U2.9 2.7/2.0 2.6/2.0 2.5/2.0 2.2/1.8 2.8 2.9 2.1 e
tennerva P6L A
A 7
3.0/2.6 3.0/2.6 2.9/2.6 2.9/2.6 2.4/2.1 2.4 2.1 23 e
tune Po=or A
A*
4 3.0/2.1 3.1/2.3 3.7/2.7 3.0/2.3 2.9/2.3 3.0 2.3 2.1 tapare Castrict tiec.
A A
5 2.8/2.3 2.9/2.4 3.U2.7 3.4/3.2 4.3/4.1 3.5 3.1 3.0 m Florida Power A
A*
3 3.4/3.4 3.1/3.3 3.1/3.3 4.3/4.3 4.2/41 3.1 3.0 2.0 t
Florida P6L A
3 3.3/2.9 3.3/3.0 3.3/3.0 3.8/3.6 3.5/3.3 2.4 3.0 24 Cult Ftmer (50)
A
> e 2.7/2.4 3.0/2.7 3.2/2.8 3.3/3.0 3.0/2.7 3.5 3.9
- 1. 9 e
cult states ut:1.
A A
8 2.4/1.8
- 2. 4/1.9 3.2/2.5 2.7/2.3 2.9/2.4 2.7 2.6 3.1 hertford Use. (uut A
A 7
2.3/2.0 2.5/2.2 2.5/2.2 2.4/2.2 2.7/2.4 2.7 2.4 2.0 meenlan ties.
A A
4 3.3/3.1 3.4/3.3 3.5/3.4 3.5/3.4 3.2/3.2 3.1 3.0 2.8 t
Idano pe=er A
A 5
1.9/1.5 1.9/1.5 2.1/1.8 2.4/2.2 2.3/2.1 3.0 2.2 2.4 Interstate Po.or A
A 7
3.0/2.0 2.9/2.6 3.1/2.7 2.6/ 2.3 2.6/2.2 2.9 3.1 3.1 lows Elec.1er A
A 6
2.6/2.3 2.7/2.5 2.8/2.6 3.1/2.9 3.4/3.4 2.7 2.1 1.4 lang Island Lt.
A A-7 2.54.4 2.54.8 2.5/1.8 2.7/2.0 2.6/1.9 2.6 2.5
- 2. 3 messacnusetts tasc. (mts)
A A
4 4.4/4.4 4.4/4.4 4.5/4.5 3.9/3.9 3.3/3.3 2.8 J.7 3.3 Mannesota 76L A
A 7
2.7/2.2 2.7/ 2.3 2.9/2.6 2.9/2.5 3.3/3.0 3.4 3.3 2.6 Misassanw! Po=er 1509 A
A 6
2.3/2.2 2.4/2.3 2.7/2.7 2.9/2.9 3.4n.0 3.3 2.6 2.6 montana teasta util.
A A
3.2/3.0 3.1/2.8 3.7/3.4 3.2/3.0 2.5/2.,
3.7 3.2 2.7 Ptetana Po==r A
A 7
2.3/2.2 2.2/2.J 2.3/2.2 2.4/2.3 2.U2.0 2.1 3.0
- 3. 3 herraiansett Elec. (hts)
A A
5 3.8/3.7 4.U4.0 4.3/4.2 3.7/3.7 2.2/2.1 1.7 2.7 2.0 t
k.Y. State IA*.
A 7
2.8/2.4 2.8/2.4 2.4/2.1 2.4/2.1 2.2/1.7 2.4 2.4 2.5 t*
NLagare roten poner A
8 2.V2.2 2.W2.1 2.7/2.2 26/2.1 2.5/2.2 2* 4 2.4 21 crange a reculand utti.
A A-6 3.3/3.0 3.3/3.1 3.4/3.2 3.4/3.2 2.6/2.4 2.7 2.3 1.9 otter 7a11 so==r A
A 5
3.7/3.3 4.u3.7 4.V3.7 4.3/4.0 3.U3.5 3.2 2.5 2.5 Philadel;r.la nee.
A A-8 2.24.6 2.34.7 2.4n.9 2.44.9 2.5/2.0 2.6 2.4 2.4 Potanse nec.Poer A
A*
5 3.0/2.3 3.0/3.0 3.0/3.0 3.0/3.0 3.U3.1 2.6 1.8 2.4 P2. Ser. of Qalaraso A
A 5
2.5/2.2 2.5/2.2 2.8/2.4 2.7/2.4 2.5/2.3 2.9 3.1 2.3 moeester cet A
A 6
2.24.7 2.4n.8 2.5/2.0 2.8/2.3 2.5/2.1 2.9 2.6 2.2 51erra Pacitle Po.or A
A 6
2.8/2.5 3.0/3.0 3.0/2.6 2.9/2.6 3.3/3.0 2.9 2.3 2.2 So. Carolina E6, A
A 5
2.3/1.8 2.3/1.9 2.14.0 2.7/2.2 2.8/2.3 2.7 2.9 2.3 Tucson nec. poner A
4 3.U2.5 3.u2.5 2.9/2.4 2.6/1.9 3.2/2.6 3.5 2.4 1.7 tmson Electric A
A 7
2.U2.1 2.7/2.2 3.0/2.6 3.2/2.9 2.8/2.6 2.9 2.5 1.9 virginia tep A
A 7
2.2/3.8 2.3/1.9 2.3/1.9 2.4/2.0 2.en.9 2.4 2.3 1.9 mestargten meter poner A
7 2.5/2.3 2.4 /2.4 2.8 /2.4 3.0/2.0 2.1/2.9 2.7 2.4
- 2. 3 Magn 4.4/4.4 4.4/4.4 4.5/4.5 4.3/4.3 4'.3/4.1 3.7 3.9 3.3 Aarge - Low
- 1.9/1.5 1.9/1.5 2.1/1.4 2.3/1.9 2.V1.7 1.7 1.8 1.4 median 2.7/2.2 2.7/2.4 2.9/2.6 2.9/2.6 2.8/2.4 2.0 2.5 2.3 fplit AftBP or haa/A Centra; me.r., wr A
tab 7
- 2. 9/2.6 3.0/2.7 3.1/2.7 3.1/2.5 2.5/2.1 2.5 2.6 2.4 t'
Q>1a. 6 So. Oslo Elec.
A sak 7 2.4/ 2 - 1 4.3/2.0 2.3/ 2.0 1.7/1.3 ;.4/1.9 2.5 2.5 1.6 Massassippa P6L (MSU)
A Sak 4 2.7/26 3.1/3.1 3.4/3.3 3.3/3.3 3.2/3.2 3.1 2.6 2.5 3
venongenela Po.er IAm
. asa b
8 1.9/. 8 2.U1.9 2.1/3.8 2.04.7 2 34.9 2.2 2-5 2.7 hew Crleans pub. Ser. (MSU)
A Sak 6 2.3/2.3 2.7/2.7 2.8/2.8 3.V3.0 3.2/3.2 3.4 1.7 1.6 Q te utsen A
ana* 8 2.44.6 2.ul.4 1.8/1.2 1.7/1.2 2.5/3.9 2.5 2.6
- 2. 3 ea Pennsylvanaa pe=er (CtQ asa A
8 2.5/2.0 2.U2.0 2.3/1.8 2.0/1.6 2.3/1.6 2.4 3.1 3.1 1
Potense Wison (AYP)
Sea b
2.0/1.9 1.94.8 1.9n.7 1.54.4 2.2/2.1 2.7 2.9 1.7 t
1tlese I:Samen asa A-7
- 2. 4/1.4 2.6/2.1 2.7/2.2 2.8/2.2 2.1/1.1 2.6 2.0 2.2 tmited 111.m. (Cats.)
A BE8 2.44.8 2.54.9 2.4/1.9 1.1/1.7 2.4/2.3 M
2.1 2.3 magh 2.9/2.6
- 3. U3.1 3.4/3.3 3.3/3.3 3.24.2 3.4 3.1 3.1 Aange - im 1.9n.4 1.9n.4 1.8n.2 1.5/1.2 2.24.1 2.2 1.7 1.4 Median 2.4/2.0 2.U2.0 2.4/2.0 2.1/1.7 2.5/2.0
- 2. 5 2.6 2.3 Stret?nt havB68 Aiewa 6=r IICI has esp 9 1.7n.3 1.54.2 1.54.1 1.5/3.1. 2.5/1.9 2.1 2.5 2.3 A@elacnian Power (AIP) naa Ba6-9 2.U1.7 1.7n.4 1.0n.5 1.7/1.4 1.6/1.4 2.0 1.9 2.0 3
Araansas ML (MSU) hoa 558 7 2.0/3.2 2.2/1.3 2.44.5 2.6/1.8 3.2/2.5 2.3 2.3 2.7 haston Ulaan esa Sea 7 2.6/2.2 2.6/2.2 2.6/2.3 2.6/2.3 2.3/2.2 2.3 2.1 1.0 Central Yt. Pub. Ser.
haa 888 3.U3.0 3.4/3.1 3.9/3.4 4.2/3.8 4.2/4.0 2.8 2.5 1.7 tetroit Mason ene t&d 9 2.3n.9 2.4/1.9 2.5/2.0 2.4/1.9 2.4/2.2 2.2 2.2 2.0 Georgia Po.or (50) asa B66 7 2.7/2.2 2.&2.2 2.6/2.2 2.8/2.4 2.7/2.4 2.7 34 1.7
' 1s Indaana 6 Pachagan 13ec. (ACP) has Baa 9 2.6/2.2 2.44.0 2.4/2.0 2.4/1.9 2.44.9 1.6 1.9 1.4 t
Fanssa Get baa Det 6 2.0/1.3
- 2. U1.4 2.2/1.6 2.9/2.2 2.8/2.2
- 2. 0 2.8 2.3 e
lowlsta a 76L (PSJ) boa tab 8 2.In.4 2.1/1.6 2.4/1.9 2.U1.6 2.34.9 2.4 2.0 2.7 havada Power baa 888 7 3.3/3.3 3.2/3.1 3.0/2.9 2.4/2.3 3.1/3.1 2.0 1.6 1.8 Chao Po==r (AfF) haa Bak 8 2.3/2.2 2.2/2.1 2.U2.0 2.04.9 2.2/2.0 2.7 2.1 1.7 3
Pacitte hL tea ase* 7 2.0/1.7 2.2/1.8 2.3/2.0 2.6/2.3 2.3/2.1
- 2. 4 2.2 2.1 Portland General Else, has thb-8 1.7/2.0 2.0/1.3 2.0/1.4 1.44.4 1.8n.5 2.2 2.2 2.1 Pub. Eer. of hew hanpenire tsa BBS 8 2.1/2.5 2.5/1.7 2.64.9 2.9/2.4 2.4/1.8 2.7 2.7 2.1 Pwet Sound P6L taa aos e 2.2/3.8 2.4/2.0 2.6/2.2 2.6/2.3 2.4/2.2 2.5 2.2 2.2 San c4eooCat has asa e 2.2/1.0 2.24.8
- 2. !/1.8 2.3/1.9 2.2/1.8 2.4 1.1 2.4 5.evannan Electrac asa sak 1.7/1.5 1.sn.4 1.9n.4 2.44.8 2.3n.9 2.0 2.0 1.7 8
bestern Mass. tiectric (NU) haa
$48 6 2.1/3.8
- 2. 3 /2.0 2.5/2.1 2.5 /2.2 2.5 '2. 2 11 1.7 1.9 Magh 3.6/3.3 3.4/3.1 3.9/3.4 4.2/3.8 4.2/4.0 2.4 3.0 2.7 Aarge - imw
- 1. 7/'.0 1.54.2 1.5/1.1 1.5/1.1 1.UI.4 1.6 1.6 1.4 podian 2.2n.8 2.2n.4 2.4/2.0 2.4/1.9 2.4/2.1 2.3 2.2 2.0 selow naarnaa Jerser centsa; P6L ICptn as sak 8 2.U2.6 2.2n.7 2.4/1.9 2.6/2.2 3.0/2.5 2.6 2.4 2.5 potressistan (dason (Cru) a as 9
1.7/1.6 2.0n.9 2.5/2.0 2.8/2.2 3.2/2.6 3.1 3.5 3.7 Pennsylvansa Electric (GPU) to ash 8 2.8/2.7 2.9/2.8 3.0/2.7 2.64.3 2.6/2.2 2.8 2.9 2.5 C09PCs171 MI:1AN 2.8/2.3 30/2.5 3.0/2.6 3.0/2.5 2.9/2.6 2.9 2.0 2.4
e O. ?
Pt'?tTC L*TILITY COMM fSION CT TEXAS Schedule X I'.'
Page 1 of 2 TEXAS ELFCTRIC SERVICE CC" A'Y FINANCI.\\L ADEOU ACY MEASUPES AT 500 C'.'IP Internal Cs<5 Ceneration Test Year Return
$ 155,405 (a)
Interest
( 57,503)
(b)
Preferred Dividends
( 17,659)
(c)
Common Dividends
( 62,077)
(d:
Depreciation 50.986 (e)
Deterred Taxes 15,946 (f)
ITC 25,534 (g)
Property Insurance 1,320 (h)
EE1 contribution 275 (i)
Lignite Depletion 3.175 (j)
Total Avs11able
$ 115,402 Construction
$ 254.000 (k)
- Cash Ceneration 45.4%
:C M AVAI!>BLE FOR C050t0N Return 155,605 Interest (57,503)
Preferred Dividends (17.659)
AFUDC 21.523 (1)
Total Available
$ 101.766
% ATUCC 21.1 INTEREST COVERACF EXCLUDINC AITDC Return
$155.40)
FIT 86.658 (m)
Total Available
$242.063 Interest 4 57,503 Coverage 4.21x INTEREST COVERACE TNCI.UDI::C Art'DC Return
$155.405 FIT Sb.65E ATUDC 21.57?
Total Available Interest 57,503 g,
Coverage 4.533
~..
J
PUBLIC UTILITY COMMISSION OF TEXAS; Schedule XIV-
,,y Page 2 of 2 TEXAS ELECTRIC SERVICE COMPAhT-FINANCIAL ADEQUACY MEASURES AT $0* C'.'IP Sourees:
(a) Jones Schedule I (b) Schedule H, Page 2 of 2 s
(c) Schedule H. Page'2 of 2, as adjusted
- (d)
'Su= of (a), (b), (c) and (d)' times 61% payout ratio.-
(e) Jones Schedule I (f) Jones,.Accoun:ing Division (g) _ Jones, Accounting Division (h) Jones, Accounting Division (i) Jones, Accounting Division-(j) Jones, Accosm. ting Division-(k) TESCO Rate Package' (1) Jones,' Accounting. Division (n) Jones Schedule I
^
e 4
4 h
.