ML20030B627
| ML20030B627 | |
| Person / Time | |
|---|---|
| Site: | Allens Creek File:Houston Lighting and Power Company icon.png |
| Issue date: | 06/30/1980 |
| From: | Dean H HOUSTON LIGHTING & POWER CO. |
| To: | |
| Shared Package | |
| ML20030B571 | List: |
| References | |
| NUDOCS 8108180365 | |
| Download: ML20030B627 (27) | |
Text
_
s k
r i
i 1
r i
-I 4
Direct Testimony of i
i Hollis R. Dean i
For Houston Lighting & Power Company 1
June, 1980 t
t-l
?
.i t
i t
1 8108190365 810812
PDR ADOCK 05000466 i
I i
- pop, i
m m
1 20 t'~
PAGE OF 1
TESTIt1ONY OF HOLLIS R.
DEAN 2
3 O.
PLEASE STA"E YOUR NAf1C, BUSINESS ADDRESS, AND POSITION 4
UITH HOUST0tl LIGHTING & POWER COMPANY.
5 A.
!!y name is Hollis R.
Dean and my address is 611 Walker 6
Avenue, Houston, Texas.
As Group Vice President -
7 Accounting & Finance, I am the chief financial officer 8
of the Company and have ultimate responsibility for the 9
Accounting, Auditing, Computer Services, and Treasury i
10 Departments.
I am also a director of the Company.
Il Q.
PLEASE BRIEFLY DESCRIBC YOUR EDUCATIONAL BACKGROUND 12 AND BUSINESS EXPERIENCE.
13 A.
I received a Bachelor of Science Degree in Accounting 14 from Bowling Green College of Commerce, Bowling Green, 15 Kentucky, in 1946 and joined the Accounting Departnent l
16 of Houston Lighting & Power Company that same year.
I 17 became Comptroller in 1966, Vice President in 1970 and 18 Group Vice President in 1973.
In April, 1977, I was 19 elected a director of the Company.
I am a Certified
{
{
20 Public Accountant and a member of the American 21 Institute of Certified Public Accountants, the Texas 22 Society of Certified Public Accountants, the Financial 23 Executives Institute, and the Finance Committee of the 24 Edison Electric Institute.
25 26 27 28 HOUSTON LIGHTING & POWER COMPANY x
2 20 PAGE OF 1
Q.
?!R. DEAN, PLEASE SU?iMARIZE YOUR TESTIf10NY IN THIS 2
PROCEEDING.
3 A.
My testimony:
4 1)
Outlines the Company's rationale for seeking rate 5
relief at this time and describes the manner in 6
which the size and nature of this request were 7
determined, 8
2)
Discusses HL&P's requirements and responsibilities 9
for maintaining financial integrity, and identifies 10 the parameters which have been developed to enabic 11 it to have reliable access to the financial narkets 12 and to minimize capital costs, and 13 3)
Describes the Company's capital structure and the 14 cost of capital.
15 16 17 18 19 20 21 22 23 24 25 26 27 28 HOUSTON LIGliTING & POWER COMPANY
3 20 PAGE OF I
DESCRIPTION OF THE REQUEST 2
3 Q.
IIHAT IS TIIE SIZE AND OBJECTIVE OF TIII3 REQUEST FOR 4
ADDITIONAL REVENUE?
5 A.
IIL&P has found it necessary to request additional base 6
revenues of approximately S215 million to recover the 7
cost of serving its present customers with electric 8
service and to provide a reasonable return on invested 9
capital of 11.36%.
Such an increase will provide llL&P 10 with an opportunity to attain the results required to remain in a competitive position in the financial 12 markets and to generate internally the necessary cash 13 to support its nassive construction program which is 14 essential to meeting its expanding customer demand.
15 Q.
lHIY IS IT NECESSARY FOR HL&P TO INCREASE RATES AFTER 16 HAVING DONE SO LESS TIIAN A YEAR AGO?
17 A.
The rat, increase authorized in Docket 2676 is 18 insufficient to enabic the Company to meet the 19 requirements of the financial community and to obtain 20 the funds needed to support the Company's construction 2) program.
In addition to the Company's needs for 22 internally generated funds, it is now required to 23 return to the capital markets with greater frequency 24 than in years past to offer.cubstantial new issues of 25 debt and equity.
It is therefore imperative that the 26 Company have the opportunity to maintain its financial 27 integrity and avoid further deterioration of its 28 position in.the financial marketplace.
HOUSTON LIGHTING & POWER COMPANY we
,e
~
--r-
l 4
20 PAGF OF 1
Q.
IJOl'LD YOU IDENTIFY THE CONCEPTS UPON UHICH THE 2
NECESSARY ADDITIONAL REVEf1UE HAS BEEN DETERf1If1ED?
3 A.
The requested revenue increase reflects the rapid rise 4
in costs of operating and naintaining the Company's 5
electric system and its need for new construction 6
financing.
The Company continues its efforts to hold 7
costs down, but it can do very little about prevailing 8
economic conditions nor can it substantially alter its 9
operating erv.__onment.
10 While expenses are rising as a result of inflatior.
11 and increasing customer demand, the costs of equity and 12 debt have also increased dramatically.
Revenues must 13 be sufficient to provide the opportunity to earn a 14 reasonable returr. on common equity and to sell stock 15 above book value as discussed by Dr. Sherwin.
- Further, 16 the Company must have the opportunity to attain its 17 financial regairements and, as discussed by !!r. fleyer, 18 maintain its AA bond quality ratings to ensure 19 continued access to the financial markets.
20 0
f1R. DEAN, UHAT ARE YOUR SPECIFIC CONCERNS ABOUT THE 21 DETERIORATION OF HL&P's FINANCIAL INTEGRITY?
22 A.
The most serious aspect of this problem is the 23 potential restriction of access to the financial 24 markets resulting from a downgrading o'f HL&P's 25 securities from AA/aa.
Given the economic conditions 26 which have persisted throughout 1979 and 1980, the 27 implications of such a downgrading are magnified 28 tremendously.
Of particular concern is the likelihood HOUSTON LIGHTING & POWER COMPANY
5 20 PAGE OF I
thct HL&P's access to the financial markets will be 2
under greater restrictions if a downgrading of the 3
Company's securities results from the continued 4
deterioration of the indicators of the Company's 5
financial strength.
If downgraded, HL&P vould 6
experience difficulty in selling its securities at any 7
reasonable price each time there is a significant 8
contraction in the supply of funds available for 9
investnent.
The trends displayed in Exhibit IIRD-1 1
10 through HRD-3 are the bases for this concern.
11 A second major concern is the market price of 12 Houston Industries' common stock, which has sold below 13 book value in six of the ITst seven new issues and 14 which continues to trade substantially below book 15 value.
This is a serious problem in light of the fact 16 that HL&P's large construction progran will require 17 continual equity financing.
By way of illustration, III 18 has sold 7,500,000 shares of common stock in public i
19 offerings since February 1979.
This quantity is almost j
20 25% of the total number of shares that were outstanding 21 at the end of 1978, and equity capital requirements 22 will be even greater in the future.
If HI is to ensure 23 its ability to offer new stock for sale, the equity 24 investor simply must be of fered an opportunity to earn 25 a reasonable return.
26 Continued damage to the Company's financial 27 integrity which can result from either of these 28 problems will seriously jeopardize the efficient and HOUSTON LIGHTING & POWER COMPANY
6 20 PAGE OF 1
cconomical implementation of its required capital 2
funding program.
3 4
5 6
7 8
9 10 11 12 13 14 15 16 11 18 19 20 21 22 2.
24 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
7 20 PAGE OF 1
FINANCIAL REQUIRE!!ENT_S 2
3 C.
!!R. DEAN, WOULD YOU DESCRIBE HL&P's FINANCIAL 4
REQUIREt1ENTS?
5 A.
t!anagement's evaluation of the financial requirements 6
necessary for satisfactory financial performance are as 7
follows:
8 1)
Achieve a pre-tax interest coverage of not less 9
than 3.5 times.
10 2)
Generate at least 40% of construction requirements 11 fron internal sources.
12 3)
Linit the percentage of AFUDC to income available 13 to common to a reasonabic level.
14 4)
Attain a targeted capital structure of 45% common 15 equity, debt less than 50% with preferred stock 16 making up the difference.
17 Maintenance of the quality of the Company's fixed 18 income securities and improvement of common stock 19 performance are contingent upon the actual realization 20 of these parameters.
The proposed level of revenues 21 should afford HL&P the cpportunity to satisfy the 22 requiremen? ; of investors.
23 Q.
UHAT IS THE PRACTICAL BASIS WHICH UNDERLIES T!!ESE 24 FINANCIAL REQUIPE!!ENTS?
25 A.
The principal concern at the current time is 26 maintaining the AA rating on the company's securities.
27 Given the economic conditions which have persisted 28 recently, the rating agencies and the investment HOUSTON LIGHTING & POWER COMPANY
8 20 PAGE O F.
I community are stringently analyzing and re-evaluating 2
the quality of fixed income securities.
Through my 3
discussions with the financial community and <ating 4
agencies, and from published 'information, I have been 5
able to identify the criteria by which securities are 6
rated.
For example, Standard & Pcor's has recently 7
indicated that an AA electric utility should carry a 8
pre-tax. interest coverage of 3.25 to 5.0 times 9
(limiting AFUDC to 10% of total coverage).
- Further, 10 utilities which are characterized as " neutral" to 11
" favorable" experience carned returns on average equity 12 in e'ccess of 14%, maintain a debt ratio of 13 approximately 50%, and exparience internal cash 14 generation approaching 50% of construction 15 requirements.
These considerations, along with capital 16 attraction standards, conservative accounting policies, 17 fuel mix and operational factors, managenert ability 18 and philosophy, and the regulatory environment impact 19 the rating decision and the attractiveness of the 20 Company's securities in the market place.
With this in 2'
nind, management has determined the financial criteria 22 necessary to attain these minimum requirements and 23 retain access to the investment markets with AA rated 24 securities.
25 O.
UILL TIIE CO!!PANY BE AFFORDED AN OPPORTUNITY TO 26
!!AINTAiH ITS FINANCIAL INTEGRITY IF TIIESE REQUIREMENTS 27 ARE APPLIED ON A TEST YEAR BASIS?
28 HOUSTON LIGHTING & POWER COMPANY
9 20 PAGF OF I
A.
No.
The determination of adequate revenues must be a 2
forward looking process as the Company's financial 3
position will not remain constant at its test-year 4
1cvel.
A simple application Of these targets to a 5
historical financial position for tests of adequacy is 6
therefore inappropriate.
To avoid continued attrition 7
of earnings, proposed revenues must incorporate 8
considerations of future capital levels, financing 9
costs, ar.d other anticipated financial developnents.
10 Mr. Letbetter will address this issue in greater detail 11 in his testimony but it is essential that the revenue 12 1cvels effective in 1981 be sufficient to provide the 13 Company the opportunity to achieve its financial 14-requirements'in 1981.
15 Q.
UOULD YOU PLEASE DISCUSS THE REQUIREMENT FOR A PRE-TAX 16 INTEREST COVERAGE OF NOT LESS THAN 3.5 TIMES.
17 A.
The financial risk associated with a company's debt 18 securities is whether earnings are sufficient to cover 19 contractual interest payments when due.
20 In order to quantify this risk, bond rating 21 agencies utilize coverage ratios in assigning credit 22 ratings.
As outlined by Mr. Meyer, if AA ratings are 23 to be naintained, electric r bilities must consistantly 24 achieve interest coverages in the 3.5x to 4.0x range.
25 HLLP's target is within this range to allow for 26 financing ficxibility and to keep pro forma coverages 27 from dropping below acceptable levels at the point of 28 sale of new bonds.
HOUSTON LIGHTING & POWER COMPANY
10 20 PAGE OF 1
Q.
tillAT It1 PACT DO IllTERNALLY GENERATED FUNDS IIAVE ON 2
IllVESTOR EXPECTATIONS?
3 A.
HL&P's financial requirement of at least 40%
4 internally generated funds reflects a realistic 5
appraisal of the constraints to external financing.
As 6
the high level of construction expenditures places 1
7 pressure on the Company's cash position, investors
{
t 8
recognize that additional external financing must be i
9 undertaken.
Furthermore, additional common equity 10 financing in significant amounts, occurring at times 11 when book value exceeds market price, will continue to 12 dilute current shareholders' ownership.
13 Q.
f1R. DEAN, llOULD YOU COfitiENT Oh TIIE " QUALITY OF 14 EARNII;GS" AS IT RELATES TO Ti!E CONSTRUCTION BUDGET AND
)
15 THE LEVEL OF AFUDC?
'16 A.
Cash earnings, the underlying support for meeting 17 construction expenditures, interest coverage, and 18 securing investor confidence are considered quality 19 earnings.
This support is undermined by the deferral l
20 of cash returns through the exclusion of IIL&P's l
l 21 investment in construction from rate base.
Deferred 22 cash earnings do not provide current funds for capital 23 expansion, nor do they assist in meeting increased l
24 interest costs from construction financing.
fianagement 25 is concerned about the negative respo.ase that investors 26 may have to an increasing percentage of deferred cash 27 income (AFUDC) included in not income.
Expectations of r
28 inadequate cash generation, increased external l
l l
l HOUSTON LIGHTING & POWER COMPANY l
l
11 20 PAGE OF 1
financing, and prospective limits to dividend growth 2
may prevent sales of common stock at or above book 3
value and adversely affect the risk posture of the 4
Company's debt securities.
It is precisely these, 5
expectations that will determine the Company's actual 6
cost of capital and market accessibility.
7 Q.
UOULD YOU EXPLAIN Tile DETURf!INATION OF HL&F's TARGE'..;
8 CAPITAL STRUCTURE?
9 A.
A sound capital structure will provide financial 10 stability and flexibility at a mininun capital cost.
11 Thus, the capital structure must change over time to 12 reflect changing conditions, costs and risks associated 13 with various sources of capital.
Required return on 14 equity, interest coverages, and embedded and current 15 costs of debt affect the development of an appropriate 16 capital structure.
HL&P's current capital structure 17 objectives represent an increase in the equity portion 18 of permanent capital.
This is in response to the 19 increased risk associated with electric utility 20 operating environments in general, volatile financial 21 markets, economic uncertainty and the construction 22 demands made of HL&P.
i 23 24 25 26 27 28 i
HOUSTON LIGHTING & POWER COMPANY
________m
12 20 PAGE OF I
I CAPITAL STRUCTURE AND COST OF CAPITAL 2
3 Q.
PLEASE SUt!!!ARIZE HL&P'S EXISTING CAPITAL STRUCTURE AT 4
THE END OF THE TEST YEAR.
5 A.
As shown in Schedule H, IIL&P's capitalization at flarch 6
31, 1980, plus common stock issued in April, 1980, 7
cc sisted of:
8 A;nount (000 Omi*
dl Percent Long Term Debt S 1,483,004 49.17 %
10 Preferred Stock 243,518 8.07 %
11 Common Equity 1,289,531 42.76 %
12 13 This capital structure reflects a movement toward 14 the ranges established in our statement of financial 15 requirements.
It is therefore an appropriate basis for 16 the determination of HL&P's overall cost of capital.
17 Q.
BASED ON TIIE ABOVE CAPITAL STRUCTURE, UllAT IS HL&P'S i
18 OVERALL COST OF CAPITAL?
19 A.
As Schedule II indicates, the capital components with 20 their associated individual costs result in a composite 21 cost of capital of 11.36%.
22 l
Q.
IICU DO Thost: COSTS CO!! PARE TO HL&P'S CURRENT COST OF 23 CAPITAL?
24 A.
As (tr. !) eyer discusses in his testimony, the cost to 25 the Company of funds raised through the issuance of 26 debt and preferred stock till be substantially higher 27 in the future than the embedded costs shown in Schedule 28 H as returns demanded in the market for fixed income HOUSTON LIGHTING & POWER COMPANY
3 PAGE OF 1
securities are at record levels.
This is one of the 2
reasons why it is imperative that the Company retain 3
its AA rating on its fixed income obligations.
4 Q.
UllAT FACTORS DETERf1INE THE COST TO Tilp COf1PANY OF 5
FUNDS RAISED Ti!ROUGli T!!E S ALE OF FIXED I!!CG.'!C 6
SCCURITIES?
7 A.
tir. Meyer will explore this area in greater detail, 8
but, simply put, the cost to the Company is a product 9
of the investor's perception of the risk associated 10 with an investment in HL&P.
!n adaition, the in'vestor 11 currently expects a continued high rate of inflatior 12 which serves to drive up yicids on all fixed incone 13 securities.
HL&P is not unique in this respect, siner 14 borrowers are now psying a higher cost for funds than 15 they have paid in the past.
16 Q.
110U DOES THE INVESTOR EVALUATE THE FACTORS THAT ARE 17 UNIQUE TO HIS ItNESTt1ENT IN HL&P?
18 A.
The investor gauges the risk inherent in IIL&P's 19 overall financial position, the size of the regoired 20 construction program, Company management and the 21 regulatory climate.
The investor in fixed income 22 securities of the Company ultimately evaluates the 23 probability that interest and preferred dividends will 24 be paid (and, in the case of debt, that the principal 25 will be repaid) when due.
As this probability 26 diminishes, the risk of the investment increases and a 27 greater return is demanded.
28 HOUSTON LIGHTING & POWER COMPANY
14 20 PAGF OF I
Q.
tillAT ARE SO!!C OF Tile INDICATORS OF llL&P'S FINANCIAL 2
STRENGTII?
3 A.
One of the most popular measures used by investors to 4
assess a conpany's financial integrity is interest 5
coverage.
As Exhibit ilRD-1 shows, IIL&P's pre-tax 6
interest coverage is falling below the ninimum level 7
established as the Company's requirement. Anothcr 8
measure is the proportion of its conatruction 9
expenditures that a company can meet through internally 10 generated funds; the smaller this percentage, the more 11 the company will be required to seek capital from 12 external sources, For HL&P, this percentage has 13 declined in recent years and, as shown in Exhibit 14 IIRD-2, the Company will almost achieve its requirement 15 of 40% only if granted the full amount of rate relief 16 requested.
Finally, the investor looks to the adequacy 17 of the Company's cash earnings to meet the cash 18 requirenents of debt and preferred stock.
Exhibit 19 HRD-2 shows how the percentage of non-cash earnings -
20 (AFUDC) has increased as a portion of net income
?!
available to common.
These measures of financial 22 integrity are also the basic criteria by which the 23 rating agencies assign investment ratings to HL&P's i
24 securities.
25 O.
IIHAT FACTOPS INFLUENCE TIIC COST OF COMf10H EQUITY?
26 A.
From thc standpoint of risk and return, there is a a
i 27 significant parallel between the cost of common equity 28 and the cost of fixed income securities.
Again, the HOUSTON LIGHTING & POWER COMPANY
.m
15 20 PAGE OF I
greater the perceived risk of an investeent in llL&P, 2
the greater the return demanded.
Ilovove r, the connon i
3 equity investor does not seek only a fixed return, so I
4 his concern is not just with the dividend payout, but 5
aleo with the Company's future financial performance, 6
such that his investment will appreciate in value.
7 Therefore, the investor must evaluate the future 1
8 earnings potential of the Company (1.c, the growth, 9
stability, and quality of earnings in the future). Dr.
10 Sherwin will discuss this concern in some depth in his 11 testimony.
12 Q.
IIOU DOES THE EARNED RETURN ON CO!!!!OU CQUITY RELATE TO i3 THE COST OF COMf10N EQUITY?
14 A.
The actual return (including AFUDC) that IIL&P has been 15 abic to earn on its invested connon equity in the last 16 five years is outlined in Exhibit ilRD-4.
IIad the 17 investor found this return on book equity to be
!8 sufficient, one would expect to see the market price of 19 Houston Industries' common stock approximate book value 20 por share.
Exhibit HRD-5 clearly demonstrates that 21 this has not been the case.
During the preceding five 22 years, the market price of HI's common stock has been 23 significantly below book value, except for a brief 2/
period in 1978.
In the absence of any changes in their 25 expectations as to the future growth potential of the.
26 Company, investors will bid down the price of the 27 common stock to drive up current yield so that they 28 will receive the total HOUSTON LICHTING & POWER COMPANY e
16 20 PAGE_.
OF I
return that they require.
2 Q.
WHAT ARE THC I!!PLICATIONS OF SCLLING llI'S CO!! MON STOCK 3
BCLOU BOOK VALUE?
4 A.
One area of corcorn is the problen of dilution of the 5
existing ownership interests when new stock is sold 6
below book value.
In April, 1980, III was again 7
compelled to sell connon stock below book value.
HI 8
sold 3,000,000 shares of common stock for not proceeds 9
of $26.48 per share at a time when book value per share i
10 was $34.71.
After the sale, the common equity had 11 increased to S1.33 billion from $1.25 billion.
The 12 book value of the prior shareholders' equity was 13 reduced 630 por share while the new investor paid only 14 S27.38 for $34.08 of equity.
This is not only unfair 15 to existing stockholders, but it will make it more l
16 difficult for the Company to attract additional common 17 equity investors in the future.
Should the Company be 18 forced to continue to sell new common stock below book 19 value in order to finance essential construction, the 20 ef fects will be detrimental to both the stockholder and 21 the ratepayer.
While the stockholder is clearly 22 penalized through dilution of his equity, the cost of 23 electric service will ultimately rise as the cost of 24 common equity financing increases, tir. !!cycr will 25 discuss in detail the implications of sales of HI's 26 common stock at a price below book value in terms of 27 the effect on the Company's financial flexibility and 28 cost to the ratepayer.
HOUSTON LIGHTING & POWER COMPANY
1 17 20 PAGF OF
- l 1
Q.
HOU DO THE COMPANY'S OPERATING CHARACTERISTICS AFFECT 2
?!fE INVESTOR'S PERCEPTION OF RISK?
3 A.
Thus far, I have discussed the concept of the risk to 4
the investor in terms of investor's expectations of 5
future financial performance, since this is of ultinate 6
concern to the investor.
However, both the common 7
equity investor and the investor in fixed income 8
securities are aware that the future financial 9
performance of the Company is contingent upon the 10 operating characteristics of the Company.
In this 11 respect, the risk associated with an investment in HL&P 12 has increased considerably in recent years.
An I
13 electric utility is viewed as being more risky to the 14 cxtent that it is characterized by a rapidly growing 15 service area, a high dependence on natural gas for 16 fuel requirenonts, and a large construction progran to 17 neet capacity demands.
This is the very nature of 18 HL&P's operating environment, as Mr. !!cyer and Dr.
19 Sherwin will discuss in their testimony.
20 An additional factor that has contributed to 21 HL&P's increased operating risk resulted from the final 22 order rendered by the Commission in Docket 2676.
In 23 limiting HL&P's recovery of the cost of the coal it 24 receives from its affiliate, UF1, the final order does 25 not provide the Company with the opportunity to recover 26 all reasonable and necessary costs incurred in serving 27 its customers.
Viewed from the perspective of the 28 financial community, the inability of the company to HOUSTON LIGHTING & POWER COMPANY 0
---,,,n<,
s
-e
---,ww w+w
^
18 20 PAGF OF I
recover such operating costs increases _the risk of an 2
inves tment in the Company and this additional risk is 3
one for which the investor must be compensated.
4 Removal of the restrictions on the recovery allowed 5
through the fuel adjuutment clause would eliminate this 6
risk, and sould be censistent with the Company's return 7
on common equity of 16% which is based on the 8
assumption that these restrictions will be removed.
9 0
!!R. DEAN, !!OU DOES HL&P INTEND TO RESPOND TO Ti!E l
10 ANTI-INFLATIO!! PROGRA!!?
I 11 A.
!!anagement is acutely aware of the economic problems 12 associated with the inflation which now exists in this 13 country. and '.ully supports the government's objectives 14 of fighting inflation and achieving wage and price 15 stability.
Iloweve r, an exemption from the 16 anti-inflation standards is made essential by the large 17 construction program and planned conversion to fucis 18 other than natural gas.
Uhile the rate incroace which 19 HL&P is requesting is sufficient to enable the Company 20 to attain its financial requirements and to continue to 21 Provide reliable electric service, it is not 22 excessive.
Further, future price increases will be 23 held to minimum acceptable levels as in this request.
24 0
t!R. DEAN, UllAT DOLLAR RETUr IS REQUIRED BY IIL&P IN 25 ORDER TO t!EE" THE FINANCIAL OBJECTIVES YOU IIAVE 26 DISCUSSED?
27 A.
IIL&P's managment has determined that rates should be 28 increased to generate an additional $215 nillion of l
HOUSTON LIGHTING & POWER COMPANY e
i 19 20 PAGF OF I
operat.ing revenues.
Included as a part of our cost of 2
service is S 363 nillion which reprcsonts return on the 3
Company's invested capital.
4 As Schedule !! of the rate filing package i
5 indicates, this request is based on a return on common i
6 equity of 16%, which is supported by Dr. Sherwin.
As I 7
discussed previously, this return must actually bc 8
carned in 1981 if the Company is to naintain its 9
financial integrity and to be in a position to attract i
j 10 needed capital.
This requested return would be 11 suf ficient to enable IIL&P to achieve its desired 12 financial objectives in 1981:
4 13 1)
Interest coverage would be 3.6 times 14 excluding AFUDC and A.1 times including AFUDC.
1 15 2)
Internally generated funds as a percent of 16 capital requirements would be 39%.
17 3)
AFUDC, as a percent of income available to 18 common, would be 25%.
19 4)
Capitalization ratios would be:
20 Debt 49%
21 Preferred 8%
j 22 Common 43%
i 23 Q.
!!R. DEAN, DOES TifIS CONCLUDE YOUR TESTI!!ONY?
24 A.
Yes, it does.
i 25 26 f
27 i
28 HOUSTON LIGHTING & POWER COMPANY
20 20 PAGE OF 1
EXilIBITS TO TESTIt!ONY OF II.
R.
D E Ati 2
3 liRD - 1 Pro-Tax Interest Coverage 4
IIRD - 2 Sources of Capital Requirements 5
liRD - 3 AFUDC as a Percent of Net Income Available 6
to Common 7
liRD - 4 HL&P Earned Return on Equity 8
IIRD - 5 flarket Price and Book Value Per Share 9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 HOUSTON LIGitTING & POWER COMPANY
THE STATE OF TEXAS COUNTY OF HARRIS Before me, the undersigned authority, on thi s day personally appeared Hollis R. Dean, who, having been duly sworn, upon oath says-.
Ay name is Hollis R. Dean, I am of legal age and a re
- dent of the Stc' a of Texas.
The foregoing testimony, and exhibits, offered by i on behalf of Houston Lighting & Power Comoany, are true and correct, and the opinions stated therein are, in my judgment and based upon my professional experience, true and correct."
e _c N D>-
Hollis R. Dean Subscribed and sworn to before me to by the said Hollis R. Dean this 17th day of June 1980.
My Commission Expires:
'Sh an%f >
March 14, 1984 Notary Public in and for Harris County, Texas
i i
i
-0_S~~0\\
_ I G -l~~ ::i\\ G 8:
30WER CO.
PRE-TAX INTEREST COEERAGE i
1975 TO 1982E s-
.,f a
~_
5
[a-/
5 m
5 x
e-I 2
(4 Y
p H
1-I
'U CJ l
B i
i i
i i
i i
- ^
1975 1976 1977 1978 1979 1989E 1981E 1982E YE/.RS
i i
-OUS~~0N
_::Gi
~~:: \\ G 30W ER CO.
1 SOURCES OF CAPITAL REQUIREMENTS i
1975 TO 1982E i
i l
1115 -
j l2 i
les-EXTERNAL FINANCING i
5 1
8 W as -
l m
l
[,
N E
E INTERNALLY GENERATED FUNDS.
'-i i
as -
II l
O j
I 8
i i
N j
1975 1976 1977 1978 1979 190sE 1991E 1982E I
YEARS l
i
-0_S-~0\\
_ I G
~~ :: NG 8
30WER CO.
AFUDC AS A PERCENT OF NET AVAILABLE TO COMMON j
1975 TO 1982E i
i I
t l
58 -
1 40 -
30 -
j' d
g o
i 5
m
' 20 -
xI H
i s
CD 4
H 10 -
H 4
I
{
x B
o i
i i
i i
g i
1975 1978 1977 1978 1979 198BE 1981E 1982E g
YEARS 4
t 1
1
i I,
iOUS-~O N
__.:G
~~I NG 30W E R CO.
~~
j RETURN ON AVERAGE COMMON EQUITY 1975 TO 1982E 25 -
15 -
I J
m 1s -
m X
4 I
i H
I s
l 5-
--I i
I I
O i
4 s
i i
i i
i i
A 1975 1978 1977 1979 1979 198BE 1981E 1982E N
i I
-0_S~~0\\
_ :: G
~~ ::\\ G 8,
30WER CO.
MARKET PRICE AND BOOK VALUE PER SHARE l
1972 TO 3-31-80
~
umee 4
60 -
NArNET PRIE i
sooK VAi.UE j
50 -
l 40 -
a j * <'
W
] 30 -
I TH I
o
/
Y Y
S
- -i i
o nI 4
su U 10 -
O i
I U1 0
..iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii i
192 LT3 IW4 LT5
. LTS 197 19B LT9 19B i
j YEARS l
- 0_ S-~O s
_ :: G
~~ ::\\ G 8,
30WER CO.
MARKET PRICE AS A PERCENT OF BOOK VALUE 1972 TO 3-31-80 300 -
250 -.
200 -
y d 150 -
m 5
X I
T AN
$w 108--
D[1 "-
bw '^
AH m -l O
50 -
'I mI O
I B
singgggsessisasIgiI iaas' 8811118888'1111'''1113'''llll'''IIII'''IIII'Iii m
m 1974 E
M N
M E
E YEARS m
-