ML20030D454
| ML20030D454 | |
| Person / Time | |
|---|---|
| Site: | Waterford  |
| Issue date: | 08/31/1981 |
| From: | Hanley F ASSOCIATED UTILITY SERVICES, INC. |
| To: | |
| Shared Package | |
| ML20030D434 | List:
|
| References | |
| NUDOCS 8109010413 | |
| Download: ML20030D454 (75) | |
Text
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City of New Orleans City Council In the Matter of the Revisf.
of Rates Filed by New Orleans Public Service, Inc.
Direct Testimony of Frank J. Hanley, Senior Vice Presid.ent l
Associated Utility Services, Inc.
Concerning Fair Rate of Return h
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i 8109010413 810831 PDR ADOCK 05000382 T
PDR'
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1 Q.
Please state your name, occupation and business address.
2 A.
My name is Frank J. Hanley and I am a Senior Vice President of Associated 3
Utility Services, Inc. My business address is P.O. Box 650, 155 Gaither 4
Drive, Moorestown, NJ 08057.
5 Q.
Have you prepared a summary of your educational background and professional 6
experience?
7 A.
Yes, and that information is set forth in Appendix A supplementing this 8
testimony.
9 Q.
What is the purpose of your testimony in this case?
10 A.
My assignment on behalf of the City Council, has been to prepare a study 11 of the cost ?f capitt,and fair rate of return which New Orleans Public 12 Service, Inc. (NOPSI) should be affo,rded an opportunity to earn during 13 the near-term future and to testify to the findings of that study.
14 Q.
Have vou summarized the results of your cost of capital and fair rate of 15 return study?
16 A.
Yes. My entire study is set forth in Exhibit No. CC-5 and my conclusion 17 is summarized on Schedule 1.
As can be seen, I use the weighted cost of 18 capital approach.
I observed the actual historical capital structure
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19 ratios and fixed capital cost rates of NOPSI as well as those expected 20 at Decenner 31, 1980.
Because rate making is prospective and since my 21 Associates, Messrs. Williams and McDaniel believe a test period of the 22 calendar year 1980 be utilized, I believe the expected December 31, 1980 23 capital structure ratios are the most appropriate for use in this 24 proceeding.
25 The cost rates for fixed capital can be readily calculated.
How-26 ever, the cost rate for common equity capital must be e matter of expert
,1 informed judgment, since there can be no contractual agreement for return 2
on common equitv, Since regulation is a substitue for the competition 3
of the narketplace, analysis of marketplace transactions provides the 4
most meaningful insight to the determination of a common equity cost rate.
5 In arriving at my conclusion of cost rate for common equity capital, 6
I took into account a number of methodologies rather than rely exclusively 7
upon a single methodology.
The principal market-based methedologies 8
employed to determine the cost of common equity were earnings / price 9
ratios and earnings / net proceeds ratios. Also, I performed analyses 10 utilizing the discounted cash flow, capital asset pricing, and bare rent 11 methodologies.
After arriving at my common equity cost rate conclusion, 12 I then utilized the comparable earnings methodology in a manner which 13 avoids circular reasoning and then p'erformed an analysis of the indicated 14 coverage of fixed charges as a means of checking the propriety'of 15 my conclusions.
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16 As can be seen on Schedule 1 of Exhibit No. CC-5, my conclusion 17 of a proper overall cost of capital and fair rate of return is 9.78%.
18 Q.
What general principles have you considered in your determination of 19 the cost of capital and fair rate or return?
20 A.
In unregulated industries, competition in the marketplace is the principal 21 determinant in establishing the price of a product or service.
In the 22 case of regulated public utilities where there is, for the most part, 23 an absense of such competition, regulation must act as a substitute for 24 the competition of the marketplace. Therefore, in my determination of 25 a fair rate of return, I have made every affort to evaluate data gathered 26 from the marketplace for similar-risk enterprises.
'1 my opinion, a 1
fair rate of return should never be less than the overall cost of 2
capital, including the embedded cost of fixed capital, expected tc be 3
experienced duringa reasonable period of time in the future when any 4
new service rates would be in effect.
The conclusion as to a fair rate of 5
return must be the result of informed judgment af ter consideration of the 6
cost of capital and other factors such as attrition and regulatory lag.
7 Q.
liave you reviewed NOPSI's rate request and supporting exhibits filed 8
in this proceeding?
9 A.
Yes, I have.
10 Q.
Please explain the approach you employ in your determination of the cost 11 of capital and fair rate or return.
12 A.
I rely principally on market-determined data for determing the cost rate 13 for common equity capital.
I observe the past, present and near-term 14 future.
NOPSI should be viewed as a going concern seeking capital in 15 the marketplace on a reasonable basis commensurate with its business and 16 financial risks.
Since new rates are always set to be in effect for a 17 period of time in the future, a reasonabla opportunity, not a guarantee, 18 should be afforded to earn the cost of capital related to that prcspective 19 time period.
20 During that prospective period of time, as rate base increases over 21 that used in rate proceedings, the liklihood of achieving the allowed 22 fair rate of return diminishes.
Other factors influenced by inflation 23 are expense and capital attrition.
Combined with investment attrition, 24 or' rate base growth, they erode the allowed fair rate of return.
25 Q.
What capital structure ratios are the mos; appropriate for usa in your 26 cost of capital and fair rate of return determination?
, t-
The expected capital structure rati.os at Dec1mbsr 31, 1980 are cost 1
A.
indientive of the near-term future, the period of time any new rates 2
3 likely would be in effect.
The details of the capital structure and related ratios are shown on Schedule 2 for the actual at December 31, 1979 4
5 aui those expected at December 31, 1980. As can be seen, the ratios that 6
I will adopt, at December 31, 1980, are 54.64% long-term debt, 15.20%
7 preferred stock and 30.16% common equity capital.
Subsequent comparison reveals that the expected common equity ratio is lower than is typically 8
How-maintained by similar risk combination electric and gas companies.
9 Thus, I ever, the 30.16% ratio is not yet out of a range of reason.
10 11 will use the 30.16% common equity ratio.
In addition, notwithstanding NOPSI's projected net loss for both the electric snd gas departments 12 during the last 4 months of 1980, the equity ratio would be higher than 13 30.16% were not NOPSI paying out in excess of $10 million in common 14 15 dividends to its parent during-1980.
In addition, it is important to
new common stock investment has been made by its parent, 16 note that Middle South Utilities. Inc. subsequent to January,1975.
17 18 Q.
Have you analy' zed historical financial data of NOPSI?
I have I have mcde such an analysis and it is shown on Schedule 3.
19 A.
Yes.
20 shown data for the years 1975-79 inclusive on page 1.
Shown at the upper The actual capital 21 part of page 1 is the actual capital employed.
structure ratios based upon parmanent capital as well as total capital 22 23 employed cre shown below that.
In 1979, NOPSI employed approximately S225 million in total investor provided capital or only a scant 4.4%
24 more than it employed in 1975 indicating that there has been very little i
25 growth azi therefore, virtually no attrition could have resulted from 26 - - -
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1 rate base growth.
2 The average achieved return on book common equity during the five j
3 year period 1975-79 inclusive was only.0.7% and not much higher than the 4
average 9.6% yield on public utility A rated bonds during the same period.
5 Comparison of this historical performance with electric utility barometer 6
groups confirms the need for higher achieved return rates on book common 7
equity.
Because achieved earnings rates on the book equity of electric 8
utilities have been too low, investors have been consistently discounting 9
the prices of the stocks to below book value.
Because of inadequate 10 coverage levels, especially in before income tax cove: age of interest 11 charges, the rating agencies have downgraded the bond ratings of many 12 electric utilities in the last five or six years.
Capital structure 13 ratico also play an important role in bond ratings. However, many 14 ot'aer factors are also taken into account by the rating agencies in making 15 rate changes.
Those other factors can be collectively referred to as 16 business risk.
17 Q.
What do you mean by business risk?
18 A.
Business risk is a collective term representing all of the risks of an 19
. enterprise other than financial risk.
There are many examples of busintass 20 risk, such as regulatory accounting / rate treatment including quality 21 of earnings, quality of management, sales mix, prospcetive growth, etc.
22 Clearly, the various types of energy crises and high inflation rates 23 in the last decade have increased the businews risk cf utilities in thi 24 eyes of investors.
25 It is seen in Schedule 4 that the competitive position of uti'ities 26 in the money market is weak in contrast to unregulated enterprises as.
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1 measured by the Standard & Poor's 400 f.ndustrials. While the market /
2 book ratio of the S&P 400 declined between 1975 and 1979, it ranged 3
between 155% and 126%.
In other words, even in the lowest year, the 4
integrity of the common stockholders' investment in the unregulated 5
companies was not violated.
This is in direct contrast to the two 6
barometer groups of electric utilities.
The Hoody's 24 Utilities had a 7
modest increase in the market / book ratio between 1975 and 1979 but in no 8
year did the average market value equal or exceed book value and in 1979 9
market prices were about 18% below book vcit*.
The seven barometer 10 electric companies experienced a similar pattern and in 1979 the average 11 market / book ratio was only 79.3%.
As can also be seen, the S&P 400 Indus-12 trials experienced a significant increase in the earnings / book ratio 13 during the period which was 17.4% in 1979 or nearly 32% higher than in 14 1975. This perfort:nce reflected a continually rising cost of capital.
15 In contrast, the Moody's 24 increased by only 3.7% to 11.3% in 1979 16 and the s;5en barometer companies increased by 12.0% to 11.2% in 1979.
17 It seems tha* the inability of the utility groups to achieve sufficiently 18 high common equity return rates account for their continued poor perfor-19 mance as measured by market / book ratios consistently below 100%.
Since 20 there has been no change of substance in the degree of financial risk l
21 for the barometer companies during the period, it seems clear that the 22 continued discounting of their stocks by investors to below book value 23 is largely attributable to a' perceived increase in business l
24 risk which includes, among other things, the regulatory climate, quality 25 of earnings, etc.
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1 Q.
What is financial risk?
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A.
Financial risk is the additional risk that is induced by the use of financial 3
- leverage, i.e., the employment of fixed capital in the capitalization.
4 Utilities used to be a much lesser business risk vis-a-vis unregulated 5
enterprises. They were then able to employ a greater degree of financial 6
leverage than did unregulated enterprises.
However, in the last decade 7
or so, a relative increase in the business risk has occurred.
Consequent!.,
8 there exists, in my opinion, an imbalance between investors' current 9
and prospective perception of the business r.tsk of utilities and the actual 10 degree of financial risk.
It is my belief that b vestors still perceive 11 utilities to be lesser business risks in the absolute sense vis-a-vin 12 unregulated enterprises.
However, I believe that the relative difference 13 has narrowed.
Since the degree of financial risk is essentially the same, 14 the total risk of investment (i.e. the sum of business risks and financial 15 risk) is greater than was the case prior to the era of energy crises and 16 double digit inflation. Therefore, the trend has been toward a slight 17 increase in the common equity ratio of utilities.
However, of late, 18 NOPSI's dividend policy has been out of keeping with that objective.
19 Q.
Please explain.
20 A.
During the five years ended 1979, similar risk utilities (to NOPSI) had 21 dividend payout ratios on average in the 72%- 75% range as can be seen 22 by reference to page 1 of Schedules 7 and 9.
On the other hand, during l
23 the same period of time NOPSI had an average dividend payout ratio of I
24 102.8% (refer to page 1 of Schedule 3).
Also it appears as though the l
25 1980 dividend payout ratio for NOPSI will be over 900% - about 26
$10.1 million in common dividends related to only about $1.1 million 1
1.
1 available to pay such dividends from 1980 earnings.
Thus, in my opinion, 2
the decline in the common equity ratio is much more the result of the 3
common dividend payout policy combined with a lack of cash common equity 4
investment by the parent over these past six years than to an inadequate 5
earnings level.
6 Q.
What cost rate will you adopt relative to long-term debt in your cost 7
of capital determination?
8 A.
I will adopt a long-term debt cosc rate of 6.95%.
This cost rate is 9
summarized on page 1 of Schedule 5 and is the same cost rate utilized by 10 NOPSI witness, Dr. Dietz. The details of the long-term debt cost rates to 11 maturity re shown by issue on page 2 of Schedule 5.
12 Q.
Why do you include recognition for premium, discount and other costs of 3
issuance in determining the embedded cost rates of lcng-term debt by issue?
14 A.
The interest cost represents the greatest portion of the total cost of such 15 capital. Eowever, there are other costs involved in connection with 15 borrowing such funds which are necessar.
If such costs are not permitted 17 to be recovered via the long-term debt cost rate, recovery would be at 18 the expense of the common shareholders and the cost rate for common equity 19 capital would then be higher than otherwise.
I have taken these expenses 20 into accoune in the development of the long-term debt cost rates by 21 issue as shown on page 2 of Schedule 5.
22 Q.
What cost rate will you adopt relative to preferred stock capital?
23 A.
I will adopt a cost rate of 9.63% at Dacember 31, 1980.
As can be 24 seen on page 1 of Schedule 6, the cost rate has increased from 4.83% at 25 December 31, 1979 to 9.63% at December 31, 1980.
These cost rates 26 reilect the impact of the expenses of 1ssuance as explained above with
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I regard to cl.e long-term dabt cost rates.
The details of the cost rate 2
for each series of preferred stock are set forth on'page 2 of Schedule 6.
3 Q.
NOPSI witness, Dr. Dietr, utilized a preferred stock cost rate of 9.42%
4 and maintained the correctness of that rate during his cross examination 5
on September 16, 1980.
Why is your cost rate higher than that of 6
Dr. Diet:?
7 A.
I believe Dr. Dietz is incorrect in his assessment of the preferred stock 8
cost rate because he has not considered the expenses of issuance in 9
connection with the various series which are outstanding.
There is no 10 accounting treatment of such expenses that permits a utility to recover 11 them if they are not reflected in the cost of capital.
Such expenses of 12 issuance are not allowable above the line expenses used in determining the 13 revenue requirement and, since they are not a rate base item, the enly 14 way recovery ~can be effected is by reflection in the cost of capital.
15 Thus, I adopt a cost rate for preferred stock capital of 9.63%.
16 Q.
How did you arrive at a cost rate relative to common equity in your 17 cost of capital and fair rate of return determination?
18 A.
In my opinion, a market-determined cost rate is the most significant 19 indicator in arriving at a cost rate for common equity when properly 20 interpreted. However, there is no single method through which a proper 21 cost rate for common equity capital can be precisely determined.
I 22 believe tnat a proper cost rate must be the result of informed judgment 23 after all possible criteria have been evaulated 24 The Company's common stock is not publicly traded.
I believe.the best 25 indicators of common equity cost rate are available from analyses of 26 marketplace transactions.
Therefore, I have chosen to observe several,
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groups of similar risk operating electric companies whose stocks are 2
publicly traded. Analyses of such barometer groups aid in the determination 3
of a proper coccon equity cost rate by minimizing the probability of bias 4
likely when market data for only a single comparable company is observed.
5 Thus, the barometer companies provide valuable insight to investors' 6
coucon equity cost rate requirements.
7 Q.
What periods of time have you observed in your ar.alyses of these barometer
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8 groups of companies?
9 A I hive evaluated.the data for all companies eudied during the most i
10 recent five calendar years for which data is available, i.e. 1975 through 11 1979, inclusive. Also, on Schedule 14 on a much more limited basis, I 12 have reviewed the most recent interim 1980 data available.
Data at any 13 particular point in time may be distorted for many reasons. For instance, 14 the price of a company's stock'in one yest may'be higher than earnings 15 in that year could justify because of investor anticipation of prospective 16 rate relief. After rate relief, the price often declines as attrition 17 erodes the level of earnings allowed, to a level less than that which had 18 been anticipate 1 by investors.
In the final analysis, the cost of common 19 equity must not be measured solely by spot conditions. However, spot i
20 costs may be indir.stive of the future if analysis of trends over a period l
21 of time confirms that such costs ars likely to recain in effect during the 22 near-term future.
23 Q.
What are some factors other than timingwhich affect t'e cost rate of common 24 eqitity capital?
25 A.
Some other factors are size, common equity ratio, coverage and the quality 26 of earnings.
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1 Q.
How do size and common equity ratio affect the cost rate of common equity 2
capital?
3 A.
Larger companies generally tend to experience lower cost rates for capital 4
than do smaller companies. The principal reason is greater marketability, 5
or liquidity, for the securities of larger companies because of a greater 6
degree of investor recognition.
Also, larger companies generally have 7
a greater dispersion of revenues, expenses and earnings which tends to 8
make thec less susceptible to sudden dranatic changes in the economy of 9
their own service area.
10 companies with lower common equity ratios generally experience a 11 higher cost of common equiry capitsi than those with higher common 12 equity ratios.
This is generally. cue because those with lower common 13 equity ratios have more creditor claimants (secured debt and preferred 14 stockholders) on assets and earnings ahead of them, ther3Ev making the 15 investment in common stock more risky.
I 16 Q.
How does coverage affect the cost rate of common equity capital?
17 A.
Interest coverage is usually defined as the number of times annual interest 18 on debt has been earned.
It is the multiple relationship between the l
19 income available to pay interest charges divided by those charges.
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20 Earnings available for common equity provide the margin by which fixed 21 charges are covered more than one time.
Inadequate coverage usually 22 stems from an inadequate achieved rate of earnings on book common equity.
t 23 Investors use coverage as a tool to measure the relative safety of their 24 investment and as an indicator of the relative level of profitability.
25 Coverage is measured both before and after income taxes.
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Before-income tax coverage requirements are found in most Trust l
2 Indentures. Many institutional investors require achieved coverage of 3
at least 2 1/2 times before-income taxes before they will seriously 4
consider makLng an investment in a company in order to avoid the need for 5
setting up a reserve fur.f.
Consequently, such a requirement is often 6
a minimum to even warrant serious consideration.
Rating agencies, such a
7 as Moody's Investors Service and Standard & Poor's Corporation, place 8
great emphasis on coverage.
Standard and Poor's does not include i
j 9
Allowance for Funds Used During Construction (AFC) in c ticulating 10 coverage.
In fact, many Trust Indentures limit the amount of AFC earninge 11 which can be considered in calculating over=Se in order to determine 12 if new debt,may be issued.
The rating agencies have stated the importance 13 of before-income tax coverage because before-income tax coverage levels 14 out the financial risk differences between enterprises. Therefore, 15 companies which have a high effective income tax rate are in a better 16 beinte-income cax coverage position than those with lower effective income l
17 tax rates.
I will have more to say about the quality of earnings 18 later on in this testimony.
i 19 Coverage of preferred stock is usually measured by relating the 1
20 af ter-income tax income available for fixed charges to total fixed charges 21 (the sum of all interest charges plus preferred dividends).
I 22 Investors and rating agencies determine adequate coverage by l
23 observing historical experience over a period of time such as five years 1
24 and anticipated trends in the future as opposed to relying on coverages 25 during a single year or two.
Confirmation of the importance of trends 26 is evident in that the Securities and Exchange Commission in prospectuses
. 1
1 requites that data be shown for at least five years.
2 Q.
Is coverage ever abused through incorrect comparison and/or interpretation?
3 A.
Yes.
An example of incorrect coverage comparison would be trying to compare 4
coverages, after income taxes, between computier with distinctly different 5
capital sr ucture ratios and/or embedded cost rates of fixed capital.
6 An incorrect and misinformed interpretation would be the assumption that 7
the level of coverage required to attract new capital is somehow celated 8
to provisions of Trust Indentures or Preferred Stock Ageements.
Those 9
provisions are tests of protectior; for already existing fixed capital.
10 investors. The level.of coverage needed to attract new capital is much 11 greater than the minimum protection level for present investors.
Such 12 contractual tests ususally do not represent the coverage requirements of 13 prospective investors in the marketplace.
14 Q.
What techniques have you considered in order to make a determination of
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15 cost rate for common equity capital?
16 A.
Since a contractual agreement cannot be made with common shareholders with t
17 respect to cost rate, it is necessary to utilize expert informed judgment 18 which is well recognired in the regulatory proccss.
In order to avoid 19 the pitfalls of relying exclusively upon a single methed, I utilize a 20 number of methods in order to arrive at my conclusion of c;mmon equity l
21 cost rate.
1 22 The principal market-based methodolgies I employ are applications of 23 earnings / price ratios and c;rnings/ net proceeds ratios.
I also utilize I
24 market-based discounted cash flow or DCF analysis, the capital asset 25 pricing model (CAPM) and the bare rent theory.
After arriving at my 26 conclusion, I then utilize the comparable earnings techoiQae in a manner 1
1 which avoids circular reasoning.
As an adoitional tool, in the form of a 2
checking device I alta rerformed an analysis of the coverage of fixed 3
charges.
I do not rely exclusively upon the use of averages or the specific 4
data at a given poinc in time.
Rather, I utilize all of the data with ths.
5 objective of determining a trend.
Since rate mak'ag is prospective, a 6
common equity cost rate should be matched up to a prospective period of 7
time new rates are likely ra be in effect, i.e. between rate cases.
8 Q.
Are es.ings/ price ratios an excellent indicator of the cost of common equity?
9 A.
Yes, although, they should usually be adjusted to reflect the costs of 10 issuance. As with the use of any methodology, unwarranted emphasis should 11 not be placed upon coaditions of a single year of a spot moment in time.
1 12 Of ten, even when adjusted for costs of issuance, earnings / price ratios do 13 not represent the full cost of common equity as perceived in the minds of 14 investors since the price paid for the stock reflects more than the latest 15 actual earnings per share, i.e: and anticipated higher level of earnings.
l 16 Thus, such an imbalance in the relationship between actual reported l
17 earnings and the price of the stock results in an understatement of the 18 cost rate tor common equicy.
This is especially true when the dividend 19 yield on market price is lower than a yield available from a secured 20 bond in the same, or stailar, company.
Under such a circumstance, it is 21 obvious that the common stock investor expects future growth.
Otherwise 22 there would be negative compensation despite the risk of being unsecured 23 and last in line in claim on acsets and earnings.
24 Q.
Will you now please describa the data shown on Schedule 7?
25 A.
There are no companies that I know of which are exact replicas of N0 PSI.
26 For this reason, I begin my anysis by utilizing a barometer group which.
1 can be said to be nationally recognized, namely Moody's 24 Public 2
Utilities.
3 Ffnarcial data for Moody's 24 Public Utilities for the five-year 4
period '175 through 1979 is set forth on page 1.
The names of the companies 5
in the group are shown on page 2.
Their bond ratings by year by both 6
Moody's and Standard and Poor's are shown on page 3 while their preferred 7
stock ratings by year are shown on page 4.
At the top of page 1, it can 8
be seen that the average amount of investor-provided capital increased 9
by about 40% to $2.887 billion in 1979, bcsed on total capital employed.
10 During the period, the earnings / book ratio ranged between 10.9%
11 and 11.5% and average 11.3% for the five years.
An averaga earnings /
12 book ratio of 11.3% resulted in an average market / book raria of 88.2%
13 during the period. Those earnings / book ratios were experienced relative 14 to an average common equity ratio of neerly 36% based on permanent capital 15 employed.
The unadjusted earnings / price ratios ranged between 11.8% and 16 14.7% during the five-year period and averaged 13.2%.
Those earnings /
17 price ratios are without regard to investors' expectation of future 13 growth in earnings per.thare and any allousnee in recognition of the costs l
19 of issuance.
20 It is also seen that the average spread between the earnings / book 21 ratios and the composite long-term debt cost rate was 4.2% during th e 22 period.
23 Cavarage of all interest charges before income taxes excluding AFC 24 averaged 5 times for the group and was also 2.8 times when AFC is 25 included.
After-income tax coverages of all interest charges including I
l 26 and excluding AFC respectively were 2.3 ar.d 1.9 times.
Had the integrity I
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1 1
of the stocks r_ot been violated by market values consistently below 2
book value year after year, those coverages would have been somewhat 3
higher.
4 From a quality of earnings viewpoint, observe that the five-year 5
average percentage of net income available for common equity represented 6
by AFC was 36.9%, while the effective income tax rate was 28.2% and 47.7%
7 of gross construction requirements were generated internally.
8 Q.
Is the quality of earnings also important to investors?
9 A.
Yes.
Investors have become very aware of the importance of the quality 10 of earnings and cash flow in recent years. They have observed that 11 dividends ond other expenses can be paid only from cash earnings, i.e.
12 those derived from revenues.
They are also concerned with companies 13 which require a larger than normal percentage of external cash in order 14 to meet cl. air obligations because that has an impact of: (1) in:reasing 15 the embedded costs of fixed capital shich is a major element of attrition 16 in the rate of return on common equity and (2) in recent years.most new common 17 stock which has been sold results in dilution in.the book value and earnings 18 per share of common stock.
Thus, whon non-cash earnings such as those l
l l
19 from AFC (Allowance for Funds Used During Constructiord become a sig-20 nificant part of total earnings, investors demand greater premiums for 21 risk.
22 In addition, investors have become aware of the importance of a high 23 effective income tax rate and place more value on higher rather than 24 lower effective income tax rates.
Investors recognize th2t an inferior 25 quality of earnings contributes to the downgrading of rated securities 26 or a decline in the equivalent financial profile for companies with _-.
1 unrated securities. A downgrading or decline in equivalent financial 2
profile has an adverse effect on the financial intergrity of existing 3
investors.
4 Q.
Can you demonstrate the importance of a company possessing a relatively 5
high effective income tax rate?
6 A.
As I stated previously, the effective income tax rate affects the quality 7
of earnings, and, hence, the cost of capital.
As can be seen on Schedule 8
8, in a hypothetical example, a similar increase in expenses between two 9
otherwise identical companies results in a much greater declir.e in income 10 available for common equity of Company B which has the lower effective 11 income tax rate.
This "olatility also results in more significant 12 declines in interest coverage before. income taxes.
While Cotpacy B's 13 interest coverages before income taxes, befor e the increasa v.. expenses, 14 was not as competitive or attractive to investors as A's, after the 15 impact it declined to a totally inferior and unsaleable level.
This 16 demonstrates why fully normalized companies (higher effective income 17 tax rates) have lower capital costs than flow-thru companies (lower 18 effective income tax rates).
It is my opinion that a fully normalitad 19 company's overall cost of capital may be c. much as 50 basis points less 20 than that of a flow-thru cccpa.1y ov-:r she long run after the investing (21 community has had a chance to review actual results on a sustained basis.
21 The Federal Energy Adminsitration in a Report to Congresa concluded 23 similarly that "...It would appear that the overall cost of capital for 24 a normalized coupany is at least.25 to.50 percentage points lower than 25 for a flow-thru company" (source:
Electrical Week, January 31, 1977).
1 Q.
Please explain Schedule 9.
2 A.
Schedule 9 contains five-year financial data for seven barcmeter operating 3
combination electric and gas companies for the period 1975-79, inclusive.
4 Ti.eir identity rad basis of selection are shown on page 2 of Schedule 5
9.
To the best of my knowledge these seven companies are the only 6
companies that meet the criteria set forth on page 2 under the caption 7
" basis of selection". On page 3 average revenue data for the group for 8
1979 are shown in comparison to NOPSI's.
Pages 4 and 5 contain a year 9
by year comparison of Moody's and S&P's ratings for bonds and preferred 10 stock respectively.
11 At the top of page 1, it is seen that total investor-provided capital 12 increased 29.8% during the period 1975-79 to about $496 million in 1979.
13 The average capital structure racios based on permanent capital employed 14 were 52.3% long-term debt, 13.9% preferred stock and 33.8% common equity 15 capital.
16 The average market / book ratio was 85.2% and ranged between 72% and 27 96%.
The average earnings / book ratio was 10.8% while unadjusted earnings /
18 price ratios ranged between 10.9% and 14.2% and averaged 12.9% during 19 the five-year period. As with Moody's 24 barometer group, the market 20 price dividend yield averaged less than the average yield available 21 from purchase of bonds in the same, or similar, A-rated companies during 22 the five-year period. That indicates that investors expected future growth 23 l
in earnings and dividends. The average achieved spread between 24 earnings / book ratios and the composite long-term debt cost rate was 25 3.8%.
The average achieved coverage of interest charges before income 26 taxes during the five years was 2.7 tit includius AFC and 2.5 times 1
.i excluding AFC, while the after tax coverages were 2.2 and 1.8 times, 1
2 respectively.
Overall coverages of interest charges and preferred 3
dividends were 1.7 and 1.5 times respectively.
j 4
From a quality of earnings standpoint, it is seen that the five-e 1
5 year averages were as follows:
percentage of net income te common 6
equity represented by AFC 29.9%; effective income tax rate 32.8%;
7 and 60.1% of gross construction needs generated internally.
I I
i t
t l.. _ _ _.....,. _ _ -. -
-. ~ - - -. -
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ " ~ ~ ~
~~~~
~ ~
1 Q.
Since the Company is a wholly awned subsidiary of Middle South Utilities, 2
Inc. (MSU), have you studied the cost of common equity to MSU?
3 A.
Yes.
However, I must emphasize that such data must be reviewed with 4
caution. MSU is comprised of a number of operating utilities and other 5
subsidiaries.
Several of the operating subsidiaries have bonds rated 6
Baa; another has bonds' outstanding which are unrated; while NOPSI has 7
A-rated bonds.
All of these ratings are by Moody's.
Operations are in 8
a number of different regulatory climates.
There is no justification 9
whereby one can rationally conclude that the common equity investment 10 in NOPSI is automatically similar to the risk of common equity invest-11 ment in MSU as a whole because of the balancing effect on risk of various 12 size companies operating in different jurisdictions, etc.
It must be 13 remembered that the fair rate of return allowed is applied to a property 14 rate base.
Thus, it is the risk of common stock favestment in NOPSI's 15 rate base (property) which is to be determined.
That risk does not 16 (by common sense) change depending upon the name on a stock certificate.
17 Also, it must be pointed out that my studies (discussed below) re-18 veal that the quclity of earnings of MSU on a consolidated basis is 19 greatly inferior to NOPSI's.
In my opinion, the quality of earnings 20 differences are distinctly different because of the various regulatory 1
1 l
21 climates and the fact that NOPSI, in contrast to its sister companies, 22 has little growth potential due to the nature of its service territory.
23 Thus, by using MSU as the proxy for deteruining a proper common equity 24 cost rate, NOPSI's consumers would be penalized because of the problems 25 of NOPSI's sister compenies.
Therefore, while I have made an analysis j
26 of MSU on a consolidated basis for the period 1975-1979, inclusive, as.
1 shown on Schedule 10, I do not piece a great deal of significance on it
~
2 in arriving at a common equity cest rate.
3 Q.
Please explain Schedule 10.
4 A.
Schedule 10 is a summary of the historical financial performance of the 5
MSU system for the five calendar years onded 1979.
Data shown is based 6
on as reported figures in each year.
MSU stock is actively traded and 7
it is on those data that investor decisions were made.
8 It is seen that the total capital employed increased by nearly 81%
9 during the period in contrast to a growth of only 4.4% for NOPSI during 10 the same time.
The market / book ratio ranged between 77.5% and 95.3%.
11 Earnings / price ratios ranged between 11.7% and 14.9% and averaged 13.4%
12 during the five-year period.
The dividend / market price yield ranged 13 between 8.4% and 10.7% and averaged 9.2% during the period.
The average 14 capital structure ratios employed consisted of 59.7% long-term debt, 9.3%
~
15 preierret stock and 31.0% cocmon equity capital' based on permanent capi-16 tal employed.
The average achieved earnings / book ratio was 12.3% and 17 the average achieved spread of earnings / book ratio over the embedded 18 cost of long-term debt was 4.6% and the average market / book ratio wts 19 87.3%.
The five-year average percentage of net income to common equity 20 represented by AFC was 75.6%; the effective income tax rate averaged 21 17.1%; and only 15.8% of gross construction needs were generated in-22 ternally.
23 Q.
Have you prepared an analysis of sales of new common stock since 1975 24 by ccmpanies in the seven company barometer group?
25 A.
Yes, and the analysis is shown on Schedule 11 which consists of two 26 pages.
I have shown the results of 19 new common stock sales by the -
1 seven companies in the group betweea January 1, 1975 and August 31, 1980.
2 As can be' seen, the earnings / net proceeds ratios ranged between 10.16%
3 and 21.01%.
They averaged 13.71% for all 19 issues for the entire 4
period and 15.89% for 5 issues during the period 1978 to date.
As can 5
be ceen, the average common equity ratio during the entire period rela-6 tive to the 19 issues was about 32.6%.
It should be noted that all of 7
the issues were to the public and no rights offerings were involved.
t 8
Q.
Notwithstanding your position relative to the usefulness of MSU as a 9
proxy to establishing a common equity cost rate for NOPSI, did you make 10 an analysis of new common stock sales by MSU since 19757 11 A.
Yes. My analysis is eat forth on Schedule 12.
As can be seen, there 12 were 7 new issues betwenn January 1, 1975 and August 31, 1980, none of 13 which was a rights offering.
The average earnings / net proceeds ratio 14 for all seven issues was 14.88% relative to an average common equity 15 ratio of about 30.6%..
16 Q.
Have you prepared a comparative summary of quality of earnings factors?
17 A.
Yes.
It is shown on Schedule 13.
On this Schedule I have sacnarized 18 the principal quality of earnings considerations taken into account by 19 investors.
The data are derived from Schedules 3, 7, 9 snd 10.
Review 20 of this Schedule quickly reveals that NOPSI and MSU are at the oppositt 21 ends of the spectrum, i.e.,
NOPSI has by far the best quality of earn-22 ings while MSU has the poorest wich the two barometer groups in between.
23 This is another vivid illustration as to why MSU should not be the proxy 24 for determining a common equity cost rate for NOPSI.
If it were the 25 proxy, NOPSI's c :stomers would be penalized in the form of higher rates 26 because of higher cost of capital resulting from MSU's poor quality of._..
1 earnings among other things.
2 Q.
Have you also reviewed recent 1980 market data for the barometer com-3 panies and MSU for an indication of common equity cost rate?
4 A.
Yes.
The data are set forth on Schedule 14.
For the reasons previously 5
stated, MSU results are not a valid indicator of the risk rate to which 6
the common equity portion of NOPSI's property rate base is exposed.
7 Common sense mandates that if the stock were sold to me tomorrow, the 8
risk of investment in that property would not change with the name on 9
the stock ccrtificate.
Thus, MSU data is shown only for information 10 purposes.
11 I utilized market prices of the various stocks as of September 25, 12 1980, and the latest earnings and indicated annual dividends per share.
13 As can be seen, the earnings / price ratios averaged 14.6% for the Moody's 14 24 and 14.2% for the seven barometer companies.
The market / book ratios 15 of the groups are still well under 100% which is attributable in my mind 16 to the low achieved earnings rates on book common equity. As can be 17 seen, the current average earnings / book ratio is only 9.9% for the seven 18 barometer companies and 10.9% for the Moody's 24.
13 Q.
Did you also perform a discounted cash flow analysis as a means to de-20 termine a common equity ecst rate?
21 A.
Yes.
The theory of discounted cash flow analysis (DCF) is not a new It has been used for many years in industry in evaluating the 22 one.
23 viability of capital projects, etc.
It is also known as the present 24 value method.
25 Very simply, it means finding the present value of an expected 26 future stream of net cash flows during the investment period discounted.
'~
v n
w-w e
w 4
w w
1 at the cost of capital (czpitalization reto).
In short, ths DCF applica-2 tion for determining the capitalization rate for common equity capital is 3
that an investor buys a stock for an expected total return which is to 4
be derived from cash flous in the form of dividends and appreciation in 5
market price.
Thus, the dividend yield on market price plus a grcwth 6
rate equals the capitalization rate (D/P + G).
7 The capitalization rate is the return rate expected by investors and 8
may be realized only if the utility actually achieves such a rate on its 9
common equity.and the stock sells at book value.
10 The DCF principle, t.hile it appears to be mathematically precise, 11 has certain constraints inherent in its application to determine the cost 12 of common equity.
Its application implicitly assumes a constant dividend 13 payout ratio and that the stock will be sold at the same price / earnings 14 multiple upon which it was purchased.
Some who use DCF in a rate pro-15 ceeding such as this, assume that investors wil.1 hold the stock in per-16 petuity.
Such an assumption is invalid.
Others assume holding periods i
l 17 of 5 or 10 ys.ars and/or that price / earnings multiples will remain constant, l
18 which they do not.
What is important is to remember that the cost rate 19 for common equity capital changes from time to time.
An estimate of its 20 cost must not reflect perpetuity or any other arbitrarily fixed period of 21 time, but rather the likely time span between rate adjustments when the 22 common equity cost rate and overall cost of capital is reviewed and 23 adjusted as may then be required.
Realistically, in these times for a 24 typical electric or combination electric and gas company, such a period 1
25 is probably two years to a maximum of three years.
Consequently, the 26 DCF theory and rate making are prospective.
On Schedule 15 I have shown ~
1 the results of my DCF analysis.
2 Q.
Please explain Schedule 15.
3 A.
On Schedule 15 I have shown market price dividend yields taken from my 4
Exhibit and historical and future growth rates from Value Line Invest-5 ment Surveys.
Value Line probably has the largest circulation of any 6
investment service in the country.
It is safe to say that all investors 7
do not utilize Value Line's data and forecasts carte blanche.
Neverthe-8 less, Value Line's forecasts are probably representative of the average 9
or cross section of the market as a whole.
I have shown two year (1978-10 1979) average dividend yields as well as the most current dividend yield 11 available (Schedule 14).
I believe that investors look to past or his-12 torical growth rates as a guide in their assessment as well as lookin; 13 at estimates of future growth rates.
If investors utilized historical 14 growth in earnings plus the current dividend yield, the seven company 15 barometer group total return rate is 14.7%, while the similar one for 16 the Moody's 24 is 14.1%.
Averaging the total return rates derived by adding 17 the sum of the currgnt. dividend yield to the average of the historical and
~
18 future expected growth rates indicates return rates of 15.6% for MSU, 19 15.9% for the seven barometer companies and 15.8% for the Moody's.24 by use 20 of this technique alone.
A review of the entire Schedule reveals that 21 considerable variation in total return rate is effected depending upon 22 the yield and growth rate selected.
23 Q.
Have you also employed the bare rent theory to measure the cost of common 24 equity capital for NOPSI?
25 A.
Yes.
My analysis leads me to the conclusion that the bare rent or pe e.
26 interest rate without regard to inflation is in the range of 2.0% - 2.5%.
- 25 '
i
1 My analysis is set forth on page 1 of Schedule 16.
In effect, high 2
quality bonds such as utility bonds rated Aa yield on average over time 3
a rate equivalent to inflationary expectations and the bare rent rate.
4 Companies such as NOPSI, which have lower rated bonds, need to pay an 5
additional premium because of a higher risk associated with a lower 6
rating.
Finally, to arrive at the cost for common equity capital, there 7
must be added an equity risk premium which takes into account the added 8
risk borne by a common stockholder.
An equity risk premium is necessary 9
because a common stockholder bears the risk of attrition and stands 10 last in line in claim on assets and earnings.
It is important to re-11 member that we are not attempting to establish a common equity cost 12 rate which will remain fixed (as do bond yields) over a very long span 13 of years.
Rather, it is more important to view the average inflationary 14 rate which may reasonably be expected during a prospective several year 15 period when new rates would be effective, i.e.,
between current and next 16 rate case.
17 On page 2 of Schedule 16, I have summarized my bare rent rate con-18 clusion.
NOPSI's bonds are rated A by Moody's.
The Federal Government's 19 estimates of inflation for 1981 and 1982 average out to 8.2%.
With an 20 estimate of equity risk premium of 4.3%- 4.: % (see note 3), a common 8
21 equity cost rate ranging from 14.5 % to 15.8 % is indicated with the mid-22 point of the range being 15.2%.
23 Q.
Have you also made an analysis of the indicated cost rate for common l
l 24 equity capital thru the use of the capital asset pricing model (CAPM)?
25 A.
Yes, I have.
I 26 Q.
Will you briefly discuss the CAPM theory?
- t
1 A.
The CAPM theory states that the expected rate of return is equal to a 2
riskless rate of return plus a risk premium which is proportional to the 3
systematic risk of a security.
A riskless rate of return is more often 4
equated to returns on U. S. Government securities such as U. S. Treasury 5
Bills or 3 year Treasury Notes.
The treasury bills tend to be more 6
volatile than the 3 year notes.
Cc;.aequently, I believe that the 3 7
year notes are a better and more stable indicator of a prospective 8
riskless rate of return.
The systematic risk of a security is the risk 9
which cannot be reduced by diversification.
It is related to general 10 price movements in the security market not directly attributable to a 11 specific company or security.
The beta coefficient is a measure of 12 systematic risk.
A beta of 1.0 would indicate that the systematic risk 13 of a specific security is equal to that of the market as a whole while 14 batas of more or less than 1.0 would indicate greater or lesser systematic 15 risk respectively.
Most utilities are found to have less systematic risk 16 than the market as a whole.
17 The CAPM does not measure unsystematic risk or that which can be 18 diversified.
Unsystematic risk represents essentially all business 19 risks and financial risk.
Such risks are quite important to investors 20 and represent a much greater percentage of the total investment risk than 21 does the systematic risk.
Therefore, the CAPM is appropriate to utilize 22 in establishing a diversified portfolio whereby systematic risk is, hope-23 fully, minimized.
CAPM is not ideally suited for determining the cost 24 rate for common equity capital of a single criterprise because it does 25 not consider diversifiable, unsystematic risk shich is substantial.
26 Nevertheless, I have made a CAPM analysis which is set forth on Schedule 17. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
1 Q.
Please explain Schedule 17.
2 A.
Three distinct elements are needed to apply CAPM theory viz. a riskless 3
rate of return, a beta coefficient and a market premium.
All three are 4
set forth in this Schedule.
I reviewed yields on 91 day U. S. Treasury Bills 5
and 3 year Treasury Notes (page 2) and believe the 3 year notes are the more 6
indicative indicator of a riskless rate of return for the reason pre-7 viously mentioned.
I have shown such rates by month for the years 1975 8
thru 1979 and by month between September 1979 and August 1980.
Based on 9
the trend of those rates and a realistic assessment of near-term inflation, 10 I believe a representative average riskless rate thru 1982 is 9.0%.
It 11 has already been much higher and will no doubt fluctuate and at times 12 be lower.
In other words, 9.0% is my judgment of a reasonable average 13 thru calendar 1982.
14 For beta coefficient, I have chosen to utilize the most recent for 15 MSU and the average of each barometer group as computed and published 16 by Value Line Investment Survey.
As is seen, it is.70 for MSU;.64 for 17 Moody's 24 Utilities and.55 for the seven barometer companies.
For an 18 equity risk premium, I used the arithmetic average results of a study of 19 historical returns covering the period 1926-78 to 8.7% - see note 2 on 20 page 1.
21 As can be seen, application of the CAPM theory results in common 22 equity cost rates of 15.1% for MSU; 14.6% for the Moody's 24 and 13.8%
23 for the seven barometer companies.
24 Q.
Does that conclude your analysis of market-oriented techniques.
25 A.
Yes.
-s 1
Q.
What is your conclusion as to a commen equity cost rate Fnced on an 2
analysis el carketplace data?
P 3
A.
My conclusion relative to NOPSI is a cost rate of 15% relative to a 4
common equity ratio of about 30% (30.16%).
If the common equity 5
ratio were higher, my cost rate conclusion would be lower and vice versa, 6
all other things being equal.
In arriving et my conclusion I specifically 7
have taken into account the fact that a calendar 1980 test year is 8
recommended by my associates, Messrs. McDaniel and Williams in lieu oi 9
an historical test year such as calendar 1979 and that the quality of 10 NOPSI's earnings is superior.
I also have assumed that the 11 proposed change in the fuel adjustment clause (FAC) by NOPSI will 12 ultimately be approved since this will have a positive effect on NOPSI 13 by speeding up the recovery of fuel costs.
The FAC will be addressed 14 during the PURPA hearings by my associate, Mr. Richard H. Pierce.
15 Q.
You mention the FAC. Have you given any consideration to the NOPSI 16 proposed Generating Capability Adjustment Clause (GCAC) in arriving 17 at your conclusion of the cost rate for common equity capital?
i 18 A.
No.
This is a very complex matter.
On the surface there are some 19 seemingly apparent advantages to such a clause.
On the other hand there 20 are implications of contingent liabilities which could befall NOPSI 21 and its consumers of such magnitude that would dwarf NOPSI's electric 1
22 department rate base.
In a nutshell, the matter is not appropriste for 23 consideration in this rate case. There are potentially huge implications 24 on the cost of capital depending upon the final disposition of the matter.
25 While its inclusion may have no direct bearing on the determination 26 of the revenue requirement, it can and likely would, affect the cost I
I l l
1 1
of capital and fair rate of return conclusion, thereby indirectly 2
altering the revenue requirement.
Therefore, the Council should be 3
advised that any action of approving or disapproving the GCAC prior to the 4
disposition of the rate case, may affect my rate of return conclusion.
5 Obviously, only a complete airing of all the factors involved and their 6
sources will permit an evaluation of the implications on the cost of 7
capital.
8 Q.
Does your recommended cost rate for common equity capital of 15% and 9
overall cost of capital of 9.78% apply equally to the electric and gas 10 departments?
11 A.
Yes.
NOPSI must be viewed as one corporate entity.
Thus, it must 12 logically be presumed that its electric and gas rate bases are financed 13 in the same proportions.
Normally,'however, gas companies have a sig-14 nificantly higher common equity cost ratio. The combination of these 15 elements means that if the gas ' department were on a stand-alone basis 16 the revenue cost of capital to consumers would be greater.
Fortunately, 17 however, combination companies are not unique. That is why most of the 18 Moody's 24 and all of my seven barometer companies are combination 19 electric and gas companies.
In evaluating combination companies 20 similar to NOPSI, I have taken into account the composite risk of providing 21 electric and gas service to the public and it is reflected in my conclusion.
22 Q.
Throughout your testimony you have made reference to various cost rates 23 before any adjustment for the costs of issuing new common stock.
Have 24 you performed a study to determine the magnitude of such costs?
25 A.
Yes, and it is set forth in Appendix B to my direct testimony. Appendix 26 B is, I believe, self-explanatory.
It contains an analysis of the costs l Il. --
1 of issuing new coumon stock including market pressure.
In order to 2
compete successfully for capital, a utility must have an adequate 3
return rate on common equity capital.
There is a correlation between 4
common equity return rates and coverage levels of fixed charges.
It is 5
proper to allow for and reflect such cor.s in all but the most unusual 6
of circumstances.
In Appendix B, I show.my analysis of such costs 7
for MSU and the seven barometer companies.
In my opinion,' a total adjust-8 ment of 7% is proper including ah allowance for market pressure. Thus, 9
an unadjusted cost rate would represent 93% of the indicated cost rate 10 after recognition of the costs of issuance.
11 I mus; however, point out to Council that NOPSI's common equity.
12 ratio is low and if any further lowering occurs, the probability 13 of downgrading of its bonds by the rating agencies will increase.
I have 14 spoken previously about the unduly high dividend payout ratio which has 15 been maintained on the one hand, while on the other no new common equity 16 capital has been invested for years.
Clearly, an injection of common 17 equity capital is required in the near-term future.
In my opinion, it 18 is already overdue.
If there is no commitment made to bolster NOPSI's 19 common equity ratio by an infusion of new common stock capital in the 20 near-term future, I believe Council should consider providing for a l
I l
21 lesser (or perhaps no) allowance in recognition of issuance expenses, 22 etc. than that which I recommend and is an integral part of my common 23 equity cost rate. conclusion of 15%.
24 Q.
What are the results of your comparable earnings analysis?
25 A.
My comparable earnings analysis is set forth in Schedule 18, which con-26 sists of 4 pages.
I conclude that a comparable earnings achieved rate l t
1 which avoids circular reasoning is 13.1% relative to a 30.16% cc5aen 2
equity ratio.
Obviously, when attrition and regulatory lag are con-3 sidered, a much higher opportunity rate (before attritien and lag) is 4
required, such as the 14.9% indicated in Note 4 to Schedule ?O.
There-5 fore, I believe that the compr.rable earnings technique affirms my 6
market-determined conclusion of a 15% opportunity common equity cost 7
rate.
8 I begin my analysis by utilizing the results of a nationally 9
recognized indicator cf unregulated enterprises - namely, the Standard 10
& Poor's 400 Industrials. To utilize the comparable earnin. of other s
11 utilities without regard to the marketplace is the height of circular '
12 reasoning.
13 My analysis begins with before-income tax overall rates of return 14 for the S&P 400 Group for the;most recent five years available. This 15 time period is consistent with the period studied for NOPSI, MSU and 16 the barometer groups. Use of before-income tax data eltainates the 17 need to analyze differences attributable to financial risk.
Therefore, 18 the principal objective is to arrive at an informed judgment of the 19 level of business risk for NOPSI and similar risk utilities vis-a-vis l
20 the S&P 400 Group.
l l
21 The purpose of the summarized data shown on pages 3 and 4 is to 22 determine the degree of change in after-income tax common equity cost l
23 rate caused by a change in common equity ratio. The result is important 24 to an ultimate determination of business risk differential. As can 25 be seen on line 14 of page 3, it indicates that an average percentage i
26 point change in common equity ratio brings about an approximate 0.3%.
l
1 inverse change in common equity cost rate.
2 The purpose of the data on page 2 is to ascertain relative busi-3 ness risk dif ferentials vis-a-vis the S&F 400 Group.
It is seen on page 4
2 that for the five years ended 1979, the. business risk of the utilities is 5
indicated to be 58% - 61% of.the S&P 400 Group-.
Expressed another way, the util-6 ities have been about 40% less risky than the industrials.
Prospectively, 7
however, I believe that investors will view the risk of the utilities 8
to be even greater, or about 65% of that of the industrials.
Utilizing 9
before-income tax overall rates of return as the starting point of the 10 calcalation (line 1 of page 1) eliminates the need for adjustment of any 11 financial risk differences because interest on debt is deductible in 12 arriving at taxable income which reduces income taxes.
In effect, a 13 before-income tax overall rate of return is the same, all other things 14 being equal, regardless of the capital structure ratios of a company.
15 The details of the derived achieved comparable' earnings rate of 13.1%
16 are set forth on page 1 of Schedule 18.
17 Q.
Please explain Schedule 19.
18 A.
As can be seen on Schedule 19, public utilities have been paying more 19 for their long-term debt capital than have similarly rated industrials.
20 Of course, there is no way to ascertain with certninty whether or to 21 what degree a spread would exist if both groups had similar debt ratios.
22 I concluded in my comparable earnings analysis that NOPSI prospectively 23 has about 35% (100% - 65%) less business risk than the S&P Industrials.
24 It does not appear that the lower business risk offsets the greater 25 level of financial risk employed.
One thing is certain, however, and 26 that is that as debt costs more, so does equity.
It can be seen that 1, _ - _
4 1
during periods of high interest rates and tight money such as 1975 and 2
early 1980 die spread increases, which means that capital becomes more 3
costly than usual for the utilities versus the industrials.
4 Also, it can be seen that lower rated utilities pay more for their 5
debt capital than those with higher ratings.
During tight money, high 6
interest rate peziods, the lower rated utilities pay even more on a 7
relative basis.
It is sr, tbst on average during the 1975-79 period 8
A-rated utilities paid a$ verage of.33% more for their bonds than 9
Aa-rated utilities, whits oa-rated utilities paid an average of.86%
10 more than Aa-rated utilities (.53% more than the A-rated utilities).
11 It is for this reason that I am concerned about the NOPSI common divi-12 dend policy, combined with no new infusion of common stock cacital 13 by the parent for many years.
If this trend continues, there is little 14 doubt in my mind that Moody's will downgrade the bonds to Baa, which 15 will result in a higher cost of debt and equity capital which will have 16 to be borne by the consumers.
17 Q.
Have you summarized the highlights of the various measures or indica-18 tions of common equity cost rate?
19 A.
Yes, I have and they are shown on Schedule 20.
I have shown, at the 20 top half of the Schedule, the more relevaat ratios, but not all.
Please 21 keep in mind chat I have not ignored any of the data in my entire Exhibit 22 in arrfring at my judgment. These ratios are highlights. As I mentioned 23 earlier, no single ratio or technique is so precise as to be relied 24 upon exclusively.
I place greatest emphasis upon the reven barometer 25 company group for reasons previously set forth.
Based on a majority 26 of the techniques, it is my opinion that the cost rate for common equity i '
1 1
capital for NOPSI is 14% before any adjustment for financing costs.
2 It is aroper to reflect these costs under normal conditions. I believe 3
that a proper cost rate ir 15% af ter adjustment for financing costs 4
which reflects NOPSI's circumstances, quality of earnings, etc.
- However, 5
the potential negative impact on NOPSI's consumers is serious if the 6
common equity ratio is permitted to decline further because of the 7
cash needs of NOPSI's common shareholders.
Thus, MSU should take ap-8 propriate action to revarse the trend which I have mentioned previously 9
and Standard & Poor's has duly noted relative to NOPSI in the Fixed 10 Income Investor dated March 8, 1980 at page 933:
11
" Capital ratios are below average for the 'A' rating 12 category (notably the common equity base) and are more typical of 13 a company experiencing the stress associated with a major spending 14 program.
Financial flexibility is also limited by Middle South 15 Utilities' deteriorated ability to provide financial support during 16 a period of growing system-wide capital expenditures."
17 There is no reakun why NOPSI's consumers should be penalized for 18 huge g.awth problems of the parent which they do not cause.
It is 19 obvious that NOPSI has, for a long time, been contributing bpstream 20 to MSU more than its fair share of cash.
If the trend is not soon 21 reversed or a good faith commitment received, a r;;nal could be given 22 by the City Council to indicate that this situation is unacceptable.
23 Q.
Does your conclusion of a 15% cost rate for common equity capital include 24 any provision for attrition and regulatory lag?
25 A.
My conclusion does not contain any separate provision or allowance for 26 attrition or regulatory lag. My conclusion is derived from analyses of 1
market data established thru investors' r:ansactions.
Investors are 2
keenly aware that these elements exist fe'r public utilities - although 3
perhaps to a greater extert for some utilities than for others.
Conse-4 quently, the prices paid by investors reflect their average assessment 5
of the impact of those elements. Thus, it is not neccesary to establish 6
a separate,'and additional, cost rate factor in recognition of those 7
elements - and I have not done so in thia instance.
In fact, I believe 8
that in this instance with a.980 test year (instead of an historical 9
one such as 1979); little in the way of subsequent plant additions; 10 and no new fixed capital financing planned in the immediate future, 11 attrition for NOPSI will occur at a much lesser rate than investors l'2 may normally expect of a similar utility.
13 Q.
What coverage ratios and return rate on common equity are indicated if 14 an overall rate of return of 9.78% is allowed?
15 A.
The likely experienced results are set forth on Schedule 21.
16 It is seen that the indicated coverages of all interest charges are 17 3.9 times before income taxes and 2.6 times after income taxes. Overall 18 coverage of interest charges and preferred dividends are indicated to 19 be earned 1.9 times. As can also be seen, those coverages are favorable 20 when compared to the two barcmeter groups and are better than the five-21 j
year average coverages experienced by NOPSI itself.
Clearly, there is i
l 22 a superior advantage in the before-income tax coverage of interest 23 charges of 3.9 times compared to the 2.7 - 2.8 times historical experi-24 ence of the barometer companies.
These coverages indicate the appropri-25 ateness,of an'overall c.ost-of capital of 9.78%.
26 Q.
Does that conclude your direct testimony?-
27 A.
Yes, it does. ~
i CITY OF NEW ORLEANS CITY COUNCIL In the Matter of the Revision of Rates Filed by New Orleans Public Service, Inc.
APPENDIX A (to Direct Testimony of Frank J. Har. ley)
EDUCATIONAL BACKGROUND AND PRCFESSIONAL T.XPERIENCE i
l
_ _. _ _ _.,,, -. _.. _ _ _ _. ~..,... _ _. _,... _. _.. ~.. -,.,.... _ _ _ _....
APPENDIX A Pegs 1 of 4 1
EDUCATIONAL BACKGROUND 2
I am a graduate of Drexel University where I received e Bachelor of 3
Science Degree from the College of Business Administration.
The principal 4
courses required for thir Degree include accounting, economics, finance 5
and other related courses.
6 PROFESSIONAL EXPERIENCE 7
In 1959, I was employed by Americar Water Works Service Company, Inc.
8 which is a wholly owned subsidiary of American Water Works Company, Inc.,
9 the largest investor-owned water works operition in the United Ststes.
I 10 was assigncd to its Treasury Department in Philadelphia until 1961.
During 11 that period of time, I was heavily involved in the development of cash flow 12 projections, and negotiations with banks' for the establishment of lines of 13 credit for all of the operating and subholding companies in the system, 14 which normally aggregated more than $100 million per year.
l 15 In 1961, I was assigned to its Accounting Department where I remained l
16 until 1963.
During that two-year period, I became intimately faciliar with 17 all aspects of a service c.ompany accounting system, the nature of the ser-18 vices' performed, and the meth ds of allocating costs.
In 1963, I was re-9 19 assigned to its Treasury Depretment as a Financial Anal /st.
My duties 20 consisted of those previously performed, as well as the expanded respon-21 sibilities of assisting in the preparation of testimony and exhibits to be 22 presented to various public utility commissions in regard to fair rate of 23 return and other financial matters.
I also designed and recommended financing 24 programs for many of American's operating subsidiaries and negotiated sales 25 of long-term debt securities a-d preferred stock on their behalf either i
26 directly with institutional investors or through investment bankers.
I l
l
{
\\
APPENDIX A Paga 2 of 4 1
was elected Assistant Treasurer of a number of operating subsidiaries 2
in the Fall of 1967, just prior to accepting employment Jith the Communi-3 cations and Technical Services Division of the Philco-Ford Corporation 4
located in Fort Washington, Pennsylvania.
While in the employ of the 5
Philco-Ford organization, as a Senior Financial Analyst, I had respon-6 sibility for the pricing negotiations and analysis of acceptable rates of 7
return to the corporation for all types of contract proposals with various 8
agencies of the U.S. Government and Foreign Governments.
l 9
In the Summer of 1969, I accepted a position in the Financial Division 10 of The Philadelphia National Bank.
I was elected Financial Planning Officer 11 of the bank in December 1970. While employed with The Philadelphia National j
12 Bank, my responsibilities included prep ~aration of the annual and five-year 13 profit plans.
In the compilation of these plans, I had to perform detailed 14 analyses and measure the various 1evels of profitability for ecch organiza-15 tional unit.
I also assisted correspondent banks in matters of recapital-l 16 ization and merger, made ecommendations and studies for their use before 17 the various regulatory bodies having jurisdiction over them.
In September
~
18 1971, I joined Associated Utility Services, Inc., as Vice President.
I was 19 elected Senior Vice President in May 1975.
The principal services provided 20 by my firm are fair rate of return, depreciation, valuation and cost of ser-21 vice studies.
We also arrange the private placement of fixed securities 22 with institutional investors for small and medium-sized utilities and pre-l 23 pare studies cn financial policy.
24 EXPERT WITNESS QUALIFICATIONS 25 I have offered testimony as an expert witness on the subjects of fair 26 rate of return and utility fin.ancial matters before the Alaska Public Utilities
APPENDIX A Pags 3 of 4 1
Commission, the Public Utilities Control Authority of Connecticut, the 2
Delaware Public Service Commission, the Florida Public Service Commission, 3
the Public Service Commission of Kentucky, the Maryland Public Service 4
Commission, the Massachusetts Department of Public Utilities, the Michigan 5
Public Service Commission, the Board of Public Utility Commissioners of the 6
State of New Jersey, the Public Service Commission of the State of New York, 7
the North Carolina Utilities Commission, the Ohio Public Utilities Commis-8 sion, the Pennsylvania Public Utility Commission, the Teer.essee Public Ser-9 vice Commission, the Public Service Board of the State of Vermont, the 10 Virginia State Corporation Commission, the Public Service Commission of 11 West Virginia, the Federal Power Commission and its successor, the Federal 12 Energy Regulatory Cc mission. With regard to cable television, I have alsc l
13 testified before a number of local and county regulatory bodies in various 1
14 states on the subject of fair rate of return as well as before an Arbitra-15 elon Panel in Ohio and a District Court in Texas.
In addition, I have testi-16 fied before the New Jersey Division of Tax Appeals with regard to the 17 economic valuation of property. Also, in the past I have appeared as the 18 Delaware Public Service Commission's Staff rate of return witness on the 19 subject of Fair Kate of Ret. urn in a number of proceedings.
Currently, I am 20 scheduled to offer testimony on behalf of the Arizona Corporation Commission l
21 in re Southwest Gas Company.
22 PROFESSIONAL ASSOCIATIONS AND GUEST SPEAKER APPEARANCES 23 I am a member of the Philadelphia-Delaware Valley Chcpter of the 24 Planning Executives Institute, the National Society of Rate of Return 25 Analysts and an Associate Member of the National Association of Water 26 Companies.
APPENDIX A Paga 4 of 4 1
My firm is a member of S. American Gas Association and the United 2
States Independent Telep' at Association, and is an associate member of 3
the National Cable Ie' vision Association.
4 I have appearem as a guest speaker before an anrual convention of the 5
Mid-America Cable Television Association in Kansas City, Missouri.
I have 6
also appeared as a guest panelist on the small water companies' operation 7
seminar of the National Association of Water Corepanies' 77th Annual Conven-8 tion in Hollywood, Florida. My topic was the subject of Fair Rate of Return.
9 In addition, I addressed the Second Annual Seminar on Regulation of Water 10 Utilities, sponsored by N. A.R.U.C., at the University of South Flord ia's 11 St. Petersburg campus.
The subject matter conL:rn !d methods of determining 12 a fair rate of return.
Recently, I also " addressed the Third Annual Sotithwest 13 Utilities Conference sponsored by New Mexico ocate University in El Paso, 14 Texas, on the subject of fair rate of return.
15 16 17 18 l
19 20 21 22 23 24 25 26 e
. = < -
CITY OF NEW ORLEANS CITY COUNCIL l
In the Matter of the Revision of Rates Filed by New Orleans Public Service, Inc.
r APPENDIX B (to Direct Testimony of Frank J. Hanley)
COSTS OF ISSUING NEW COMMON STOCK CAPITAL l
l m.
4 w
+-.m-
,w w-w,s
,rw-e ww-e.--
++
APPENDIX B Pcg3 1 of 12 1
STUDY OF MARKE'2 PRESSURE, SELLING AND ISSUANCE EXPENSES FOR RECENT COMMON STOCK SALES BY MIDDLE SOUTH UTILITIES, INC.
2 3
Although I do not believe Middle South Utilities, Inc. is an appro-4 priate proxy, of and by itself, for determining the cost of comma: equity 5
capital to New Orleans Pu lic Service, Inc., I have made such a study 6
nevertheless.
7 The purpose of the study is to determine the total cost incurred by l
8 P.SU in connection with sales of new common stock since 1975.
Costs of is-9 suance consist of three major components:
10 (1)
Underwriting Comissions 11 (2)
Company Related Expenses (printing, legal, etc.)
12 (3) Market Pressure 13 Underwriting Commissions 14 Information was obtained from prospectusta.
The commissions expressed l
15 as a percent of the total offering price, ranged 2 rom 2.35% to 5.29% and 1
16 averaged 3.12% for all seven issues.
(See page 4 of this Appendix.)
17 Issuance Excenses i
18 Company issuance expenses expressed as a percent of total offering 19 price ranged from 0.20% to 0.48% and averaged 0.28% for all seven issues.
20 (See page 4 of this Appendix.)
21 Market Pressure 22 Market pressure is defined as the adjustment in the market price of 23 the stock due to economic law of supply and demand.
When investo'is be-24 come aware that an added supply of shares JOs available, the price of the i
25 stock can be expected to. decline without a. corresponding' increase in demand.
1 26 In any attempt to measure market pressure, it is necessary to determine
APPENDIX B Pcg2 2 of 12 1
when the news of a new issue is available to investors and a technique 2
should be emplo; ed to adjust the market price of the stock so as to remove 3
any bias from a conclusion of market pressure which is attributable to 4
general market conditions and not because of the increased supply of shares.
5 An indexing procedure was employed utilizing the Dow Jones Utilities 6
Index to remove general market variations.
7 It is difficult to know when investors actually become aware of a new 8
issue.
Such conclusions could be drawn from information contained in re-9 ports to stockholders, or mentioned in presentations to financial analyst 10 groups and reported in the media prior to any official announcement of a 11 sale of new stock.
For this purpose, the date of registration with the 12 SEC was used.
This date represents a common date at which all investors 13 would surely become cognizant of a new offering, 14 Computation of market pressure for each of the last seven MSU stock is sales be:wern January 1975 and the present time averaged 1.75% and ranged 16 from (3.48%) to 12.27% (see pages 4 through 11 of this Appendix).
Thus, a 17 conservative estimate of issuance costs would be:
18 Underwriting Commissions 3.1%
19 Company Expenses 0.3 20 Market Pressure 1.8 21 5.2%
-:=: -
22 Seven Barometer Electric and Gas Companies 23 Analysis of Issuance and Selling Expenses 24 As can be seen on page 12 of this Appendix, I have maue an analysis of 25 the underwriting camissions and company issuance expenses for all new com-26 mon stock offerings by companies in this group between January 1, 1975 and
APPENDIX B Pego 3 of 12 1
August 31, 1980.
The seven companies had a total of 19 new common stock 2
offerings, all of which were to the public (no rights offerings).
Under-3 writing commissions averaged 3.60% of the offering price while company 4
issuance expenses averaged 0.95%.
The total expenses (exclusive of market 5
pressure) consumed 4.55% of the offering price which is comparable to the 6
3.4% for MSU referred to above as representative.
I believe that when 7
market pressure is censidered, a total adjustment of about 7% is indicated.
f
(
i i
i
_ _ _.,, -, -.,, ~.
Middle South Utilities, Inc.
Market Pressure, Issuance and Selling Expenses Study for Public Of ferings of Connon Stocks 1975 to Date I
Dte of Offering Prospectus 1-21-75 1-13-76 1-11-77 1-10-78 1-9-79 11-13-79 4-29-80 Average Indsrwriters'CommissionsasaPercent of Offering Price 5.29%
2.91%
2.65%
2.64%
2.35%
2.92%
3.08%
3.12%
fomp:ny Issuance Expenses as a Percent l
cf Offering Price 0.29 0.25 0.25 0.23 0.25 0.48 0.20 0.28 l
l
[stal Icauance and Selling Expenses 5.58 3.16 2.90 2.87 2.60 3.40 3.28 3.40 rket Pressure on Offering Price Using i Avnraga Closing Price During Ten Day lPariod Preceding the S-7 Registration
( D ta 12.27 (3.46)
,4.48 (0.26)
.l.25 1.32 (3.31) 1.75 ptal Market Pressure, Issuance and
- Salling Expenses 17.85%
te.32)%
7.38%
2.61%
3.85%
4.72%
(0.03%)
5.15%
l bto (1) Rf ghts offering.
?urce of Information: Prospectus for each offering and S&P Daily Stock Price Record The Wall Street Journal ED m~
"R P., *
=
tJ
Appendix B Page 5 of 12 Middle South Utilities, Inc.
Market Pressure for Public Offering of Common Stock on April 29, 1980 Middle South Utilities, Inc.
Dow Jones Closing Utility Indicated Trading Date Price Index Average (l)
Inder Pressure 3-11-80
$11.50 104.57 3-12-80 11.25 103.38 3-13-80 11.375 103.21 3-14-80 11.375 102.81 3-17-80 11.25 100.54 3-18-80 11.50 101.29 3-19-80 11.50 101.79 3-20-80 11.25 101.79 3-21-80 10.75 100.88 3-24-80 10.75 98.27 Average Price During Ten Day Period Preceding S-7 Date
$11.25 101.85 3-25-80 (2)
S10.75 97.36 4-29-80 (3)
$12.375
,110.00 108.66 106.69 (3.31%)(3)
Offering Price to Public (4)
$12.65 112.44 108.66 106.69 (5.75%)(6)
Notes:
(1) Dow Jones Utilities closing aversges.
(2) Company files Form S-7 Registration Statement with the S.E.C.
(3)
Last re. ported sale price as taken from cover of prospectus.
(4) Date of offering (5) Market pressure on last reported sale price = Dow Jones Utility Index of 4-29-80 minus Middle South Utilities Index on 4-29-80 (106.69 - 110.00 = (3.31)).
(6) Market pressure on offering price = Dow Jones Utility Index of 4-29-80 minus Middle south Utilicies Index on offering price (106.69 - 112.44 = (5.75)).
Source of Information:
Company's Offering Prospectus S&P Daily Stock Price Record The Wall Street Journal
1 Appindix B Pcgo 6 of 12 Middle South Utilities, Inc.
Market Pressure f or Public Of f ering of Common Stock on November 13, 1979 Middle South Utilities, Inc.
Dow Jones Closing Utility Indicated Trrding Date Price Index Average (1)
Index Pressure 9-25-79
$14.125 105.68 9-26-79 14.00 106.36 9-27-79 13.875 107.17 9-28-79 14.00 106.90 10- 1-79 13.875 105.92 10- 2-79 13.875 106.80 10- 3-79 14.00 107.37 10- 4-79 14.00 107.58 10- 5-79 13.875 108.12 10- 8-79 14.125 107.41 avarage Price During Ten Day Period Preceding S-7 Date S13.98 106.93 10- 9-79 (2)
$13.50 104.84 11-13-79 (3)
$13.00
, 92.99 100.85 94.31 1.32 (5)
Offering Price to Public (4)
$13.00 92.99 100.85 94.31 1.32%(6)
Notes:
(1) Dow Jones Utilities closing averages.
(2)
Company files Form S-7 Registration Statement with the S.E.C.
(3)
Last reported sale price as taken from cover of prospectus.
(4)
Date of offering (11-13-79).
(5) Marke: pressure on last reported sale price = D: Jones Utility Index of 11-13-79 minus Middle South Utilities Index on 11-13-79 (94.31 - 92.99 = 1.32).
(6) Market pressure on offering price = Dow Jones Utility Index of 11-13-79 minus Middle South Utilities Index on offering price (94.31 - 92.99 - 1.32).
Source of Information:
Company's Offering Prospectus S&P Daily Stock Price Record The Wall Street Journal
APPENDIX B Paga 7 of 12 Middle South Utilities, Inc.
Market Pressure for Public Offering of Common Stock on January 9, 1979 Middle South Utilities Dow Jones Closing Utility Indicated Trading Date Price Index Average (1)
Index
_ Pressure 11-14-78
$14.625 96.35 11-15-78 14.50 96.55 11-16-78 14.75 97.36 11-17-78 14.875 98.04 11-20-78 15.00 99.02 11-21-78 15.25 99.15 11-22-78 15.25 99.46 11-23-78 Holiday Holiday 11-2, 78 15.50 99.32 11-27-78 15.50 99.73 11-28-78 15.375 99.90 Average Price During Ten Day Period Preceding S-7 Date
$15.06 98.49 11-29-78 (2)
$15.125 99.26 1-9-79 (3) 15.00 99.60 101.29 102.84 3.24% (5)
Offering Price to Public (L)
$15.30 101.59 101.29 102.84 1.25% (6)
Notes:
(1) Dow Jones Utilities closing averages.
(2)
Company files Form S-7 Registration Statement with the S.E.C. (11-29-78).
(3)
Last reported sale price as taken from cover of prospectus.
(4) Date of Offering (1-9-79).
s'5) Market Pressure on Last Reported Sale Price = Dow Jones Utility Index of 1-9-79 minus Middle South Utilities' Index of I-9-79 (102.84 -
09.60 = 3.24).
(6) Market Pressure on Offering Price = Dow Jones Utility Index of 1-9-79 minus hiddle South Utilities' Index on Offering Price (102.d4 - 101.59 = 1.25).
Source of Information:
Company's Offering Prospectus The Wall Street Journal
Appsndix B Page 8 of 12 Kiddle South Utilities, Inc.
Market Pressure for Public Offering of Common Stock on Januarv 10. 1978 Middle South Utilities. Inc.
Dow Jones Closing Utility Indicated Trading Date Price Index Average (l)
Index Pressure 11-16-7'
$17.125 111.74 11-17-7's 17.25 111.97 11-18-77 17.25 112.10 11-21.-77 17.25 111.74 11-22-77 1/.50 112.33 11-23-77 17.375 112.56 11-24-77 Holiday Holiday 11-25-77 17.50 113.06 11-28-77 17.375 113.09 11-29-77 17.25 112.04 11-30-77 17.25 112.00 Average Price During Ten Day Period Preceding S-7 Date
$17.31 112.26 12-1-77 (2)
$17.50 112.69 1-10-78 (3) 16.375
- 94.60 107.04 95.35 0.75% (5^
Offering Price to Public (4)
$16.55 95.61 107.04 95.35 (0.26%)(6:
Notes:
(1)
Dow Jones Utilities closing averages.
(2)
Company files Form S-7 Registration Statement with the S.E.C.
(3)
Last reported sale price as taken from cover of prospectus.
(4)
Date of Offering (1-10-78).
(5) Market pressure on last reported sale price = Oow Jones Utility Index of 1-10-78 minus Middle South Utilities index on 1-10-7f: (95.35 - 94.60 = 0.75)
(6) Market pressure on offering price = Dow Joner Utility Index of 1-10-78 minus Middle South Utilities' index on offering price (95.35 - 95.61 - (0.26)).
Source of Information:
Company's Offer.ng Prospectus S&P Daily Stock Price Record l
The Wall Street Journal l
l
l.
Appandix B Page 9 of 12 Middle South Utilities, Inc.
Market Pressure f or Public Of fering of Common Stock on January 11. 1977 Middle South Utilities, Inc.
Dow Jones Closing Utility Indicated Trsding Date Price Index Average (1)
_Index Pressure
~
11-23-76
$11.65G 101.26 11-24-76 16.625 101.99 l
11-25-76 Holiday Holiday l
11-26-76 16.625 102.76 l
11-29-76 16.50 101.99 11-30-76 16.50 101.77 12-1-76 16.75 101.71 l
12-2-76 16.75 101.96 12-3-76 17.125 103.14 12-6-76 17.125 104.20 12-7-76 16.50 104.77 Average Price During Teu Day Price Preceding S-7 Date S16.70 102.56 12-8-76 (2)
$16.375 105.16 1-11-77 (3) 16.50
,98.80 107.46 104.78 5.98%(5)
Offering Price to Fublic (4)
$16.75 100.30 107.46 104.78 4.48%(6)
Notes:
(1)
Dow Jones Utilities closing averages.
(2)
Company files Form S-7 Registration Statement with the S.E.C.
(
(3)
Last reported sale price as taken from cover of prospectus.
(4)
Date of Offering (1-11-77).
i (5) Market pressure on last reported sale price = Dow Jones Utility Index cf 1-11-77 l
minus Middle South Utilities' index of 1-11-77 (104.78 - 98.80 = 5.98).
(6)
Market pressure on offering price = Dow Jones Utility Index of 1-11-76 minus Middle South Utilities inder on offering price (104.78 - 100.30 = 4.48).
Source of Information:
Company's Offering Prospectus S&P Daily Stock Price Record The Wall Street Journal
~
AppIndix B Page 10 of 12 Middle South Utilities, Inc.
Market Pressure for Public Offering of Common Stock on January 13, 1976 Middle South Utilicies, Inc.
Dow Jones Closing Utility Indicated Trading Date Price Index Average (l)
Index Pressure 11-25-75
$14.625 83.05 11-26-75 14.875 83.17 11-27-75 Holiday Holiday 11-28-75 14.875 83.27 12-1-75 14.50 82.89 12-2-75 14.625 82.63 l
12-3-75 14.375 81.06 12-4-75 14.375 80.71 12-5 '
14.625 80.81 12-14.75 80.65 12 14.375 80.65 Average Price During Ten Day Period Preceding S-7 Date
$11.460 81.89 12-10-75 (2)
$14.25 81.03 1-13-76 (3) 15.875
" 108.73 88.29 107.82 (0. 91%) (!
Offering Price to Public (4)
$16.25 111.30 88.29 107.82 (3. 48 7.) ((
l Notes:
1 (1) Dow Jones Utilities closing nyerages.
(2) Company files Form S-7 Registration Statement with the S.E.C.
(3) Last reported sale price as taken from page 10 of the prospectus.
(4) Date of Of fering (1-13-76).
(S) Market pressure on last reported sale price = Dow Jones Utility Index of l-13-76 minus Middle South Utilities' Index on 1-13-76 (107.82 - IG8.73 = (.0.91)l.
(6) Market pressure on offering price = Dow Jones Utility Index of 1-23-76 minus Middle South Utilities index on offering price (107.82 - 111.30 = (.3.48)).
Source of Information:
Company's Offering Prospectus S&F Daily Stock Price Record The Wall Street Journal es
~
Appendix B Page 11 of 12 l
Middle South Utilities, Inc.
Market Pressure for Public Off ering of Common Stock on Januarv 21, 1975 Middle South Utilities. Inc.
Dow Jones Closing Utility Indicated Trtding Date Price Index Averaze(l)
Index Pressure 11-25-74
$13.875 66.24 11-26-74 13.875 66.94 11-27-74 14.25 67.29 11-28-74 HOLIDAY HOLIDAY 11-29-74 13.75 67.39 12-2-74 13.625 66.46 12-3-74 13.50 66.11 12-4-74 13.50 66.59 12-5-74 13.00 66.40 12-6-74 12.75 65.89 12-9-74 13.00 65.86 Average Price During Ten Day Period Preceding S-7 Date S13.51 66.52
\\
12-10-74 (2)
$13.00 67.55
~
~
1-20-75 (3)
$14.00 103.63 77.23 116.10 12.47,.s5)
Offering Price to Public (4)
$14.00 103.63 77.10 115.90 12.27%(6)
Notca:
(1)
Dow Jones Utilities closing averages.
(2)
Company files Fort S-7 Registration Statement with the S.E.C.
(3)
Last reported sdie price as taken from cover of prospectus.
(4)
Date of offering (1-21-75).
(5)
Market pressure on last reported sale price = Dcw Jones Utility Index of 1-20-75 minus Middle South Utilities Index of 1-20-75 (116.10 - 103.63 = 12.47).
(6)
Market pressure on offerin, price = Dow Jones Utility Index of 1-21-75 minus Middle South Utilities Index on offering price (115.90 - 103.63 = 12.27).
Source of Information:
Company's Offering Prospectus S&P Daily Stock Price Record The Wall Street Journal
Analysis of Issuance and Selling Expenses as a Percent of Offering Price for the Seven Barometer Electric Companies Incurred During Offerings Between January 1, 1975 and August 31, 1980 (E)
Sum of Underwriting (B)
(C)
(D)
Discount and l
(A)
Date of Underwriting Company Company Expenses 2
Company Offering Discount (1)
Expenses (1)
(1) (2)
Crntral Illinois Light Company 2-25-75 4.97%
0.48%
5.45%
Interstate Power Company 8-6-75 3.86 0.76 4.62 Rochester Cas and Elec. Corp.
10- 7-75 4.22 0.78 5.00 4
Saint Joseph Light and Power Co.
10-21-75 5.33 3.13 8.46
}
Crntral Iludson Gas and Electric Co.
11-6-75 3.97 0.83 4.80 C2ntral Illinois Light Company 1-21-76 3.78 0.53
_4.31 Saint Joseph Light and Power Co.
3-23-76 4.94 1.70 6.64 Interstate Power Company 5-19-76 3.00 0.60 3.60 j
Iows Electric Light and Power Co.
6-10-70 2.89 0.87 3.76 l
Smint Joseph Light and Power Co.
5-10-77 3.88 1.51 5.39
}
Central Illinois Light Company 6-15-77 2.77 0.51 3.28 Iown Electric Light and Power Co.
6-16-77 2.26 0.48 2.74 Interstate Pc-er Company 9-12-77 2.28' O.62 2.90 i
Rochester Cas and Electric Corp.
9-22-77 2.90 0.57 3.57
)
Cintral Hudson Cas and Electric Co.
2-9-78 2.91 0.94 3.85 l
Rochester Cas and Electric Co.
9-20-78 2.99 0.61 3.60 j
Saint Joseph Light and Power Co.
11-30-78 3.85 1.45 5.30 Iowa Electric Light and Power Co.
12-4-79 3.01 0.65 3.66 Central Iludson Cas and Electric Co.
2-21-80 4.67 1.02 5.69 Average (19 Issues) 3.60%
0.95%
4.55%
N:tes:
(1)
Expressed as a percentage of offering price.
(2) Sum of Columns (C) and (D).
pg
$E4.
Scurce of Information:
Exhibit CC-5, Schedule 11 "p
S co C
O Exhibit CC-5 s
City of New Orleans City Council In the Matter of the Revision of Rates Filed by New Orleans Public Service, Inc.
Exhibit (Consisting of 21 Schedules) to Accompany l
the Direct Testimony
~
l l
of Frank J. Hanley, Senior Vice President Associated Utility Services, Inc.
Concerning Fair Rate of Return
Exhibit CC-5 e
Schsdule 1 New Orleans Public Service, Inc.
Summary of Cost of Capital and Fair Rate of Return Estimated at December 31, 1980 Cost Weighted Type of Capital Ratios (1)
Rate Cost Rate Long-Term Debt 54.64%
6.95% (2) 3.80%
Preferred Stock 15.20 9.63 (3) 1.46 Common Equity 30.16 15.00 (4) 4.52 Total 100.00%
9.78%
Notes:
(1)
Ratios are taken from page 1 of Schedule 2 (2)
From Schedule 5, page 1.
(3)
From Schedule 6, page 1.
(4)
From study of entire exhibit, summary is on Schedule 20.
Ncw Orleano Public Service, Inc.
Capital Structure and helated Ratios Based Upon Investor-Provided Capital Actual at December 31, 1979 and Estimated at December 31, 1980 December 31, 1979 (Actual)
December 31, 1980 (Estimated)
Ra tios Ratios Amount Excl.
Incl.
Amount Excl.
Incl.
Outstanding S-T Debt S-T Debt Outstanding S-T Debt S-T Debt
($ 000's)
($ 000's)
Long-Tsrm Debt (1)
$126,250 56.10%
56.10%
$124,250 54.64%
54.64%
Preferred Stock:
(2)
With ut Sinking Fund 19,780 19,780 With Sinking Fund 15,000 Prenium on Preferred Stock 337 337 Total Preferred Stock 20,117 8.94 8.94 35,117 15.20 15.20 Common Equity:
Common Stock 59,359 59,359 Rzteined Earnings 19,309 10,334(3)
Total Common Equity 78,668 34.96 34.96 69,693 30.16 30.16
~
Total Permanent Capital 225,035 100.00%
231,060 100.00%
Short-Term Debt Tctal Capital Employed
$225,035 100.00%
$231,060, 100.00%
Notes:
(1)
Excludes unamortized premiums and discounts on First Mortgage Bonds.
(2)
Excludes unamortized discount and capital stock expense.
(3) Company provided estimate based upon 8-31-80 balance plus four months estimated net income to common equity (after common dividend requirement).
EE iif E lt E S:urce of Information:
Company provided data E"
w8 d.
NEW ORLEANS PurLIC SERVICE, INC.
CAPITALIZATION AND FINANCIAL STATISTICS 1975 - 1979, INCLUSIVE d
PERCENT INCREASE 1979 1978 1977 1976 1975 1979 OVER 1975
- AMOUNT OF CAPITAL EMP!4YED (THOUSAeIDS~5T DOLLARS)
TOTAL PERMANENT CAPITAL
$ 225,330
$ 225,490
$ 219,370
$ 216,680
$ 213,380 SHORT-TERM DEST O
O O
O 2,500 TOTAL CAPITAL EPPI4YED
$ 225,330
$ 225,490
$ 219,370
$ 216,680
$ 215,860 4.4%
INDICATED AVERAG!! CAPITAL COST RATES (1)
LONG-TERM DEUT 6.9%
6.3%
6.3%
6.34 6.34 9.5%
PREFERRED STOCK 4.8 4.8 4.0 4.8 4.8 0.0 iFINANCIAL RATIOS-MARKET DASED 5 YEAR AVERAGE EARNINGS / PRICE RATIO MARKET / AVERAGE BOOK RATIO t
DIVIDEND YIELD 2
PERCENT CHANGE IN EARNINGS PER SHARE YEARLY DIVIDEND PAYOUT RATIO 101.6 87.1 71.5 64.8 189.1 102.8 1 CAPITAL STRUCTURE RATIOS EASED ON TOTAL PERMANENT CAPITAL:
IANG-TERM DEBT 56.2%
56.1%
55.5%
56.24 57.1%
56.2%
PREFERRED STOCK 8.9 8.9 9.1 9.3 9.4 9.1 COMMON EQUITY 34.9 35.0 35.4 34.5 33.5 34.7 I
100.0%
100.0%
100.0%
100.01 100.0%
ITbiT38 EASED ON TOTAL CAPITAL:
TOTAL DEBT, INCLUDING SilORT ?ERM 56.2%
56.1%
55.5%
56.2%
57.6%
56.3%
PREFERRED STOCK 8.9 8.9 9.1 9.J 9.3 9.1 COMMON EQUITY 34.9 35.0 35.4 34.5 33.1 34.6 T5D 34 100.0%
100.0%
100.0%
100 0%
100.0%
- RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY 11.5%
12.4%
12.5%
12.9%
4.1%
10.7%
-RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY OVER INDICATED AVERAGE IANG TERM DEBT COST RATE 4.6%
6.1%
6.2%
6.51 (2.2)t 4.3%
- COVERAGES-INCLUDING ALL AFC (2)
BEFORE INCOME TAXES: ALL INTEREST CilARGES 2.3X 3.2X 3.4X 3.4X 1.8X 2.8X AFTER INCOME TAXES: ALL INTEREST CHARGES 2.1 2.2 2.3 2.3 1.5 2.1 OVERALL COVERAGE: ALL INTEREST + PFD. Div.
1.9 2.0 2.1 2.3 1.3 1.9 COVERAGES-EXCLUDING ALL AFC (3)
EEFORE INCOME TAXES: ALL INTEREST CilARuES 2.3X 3.2X 3.4X 3.4X 1.8x 2.8X AFTER INCOME TAXES: ALL INTEREST CHARGES 2.0 2.2 2.3 2.3 1.5 2.1 CVERALL COVERAGE: ALL INTEREST + PFD. DIV.
1.8 2.0 2.1 2.0 1.3 1.8
'OUALITY OF EARNINGS mmp AFC/ INCOME AVAILABLE FOR COMMON EQUITY 2.6 1.4 0.5 1.7 7.6 2.8
$Oyy EFFECTIVE INCOME TAX RATE 17.2 44.5 44.2 46.4 38.8 38.2 mmr INTERNAL CASit GENERATION / GROSS CONSTR. (4) 66.1 85.5 136.5 168.7 76.0 103.6 g E" %
O n P%
SEE PAGE 2 FOR NOTES.
La3 Q g
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Exhibit CC-5 Schidule 3 Page 2 of 2 l
New Orleans Public Service, Inc.
Capitalization and Financial Statistics 1975-1979, Inclusive Notes:
(1)
Computed by relatir.g actual long-term debt interest or preferred stock dividends booked to average of beginning and ending long-term debt or preferred stock reported to be outstanding.
(2)
Coverages--including all AFC--represent the number of times avail-able earnings, including AFC (allowance for funds used during construction) as reported in its entirety included as income, cover fixed charges.
(3)
Coverages-excluding all AFC-represent the number of times avail-able earnings, excluding AFC, cover fixed charges.
(4) Internal cash generation / Gross construction is the percentage.f gross construction axpenditures, excluding all AFC, provided by internally generated funds from operations, excluding all AFC, and after payment of all cash dividends.
Jource of Information:
Standard & Poor's Compustat Services, Inc.
Utility Compustat II
Comparison of Investor Confidence Moody's 24 Utilities, Barometer Group of Seven Combination Electric and Cas Companies and S&P 400 Industrials Common Stocks (1) for the Years 1975-1979, Inclusive Ratio of Market Value of Common Stocks to Average Book Value of Common Stocks (2)
Earnings Ratio Seven Hoody's 24 Seven Barometer Standard & Poor's Moody's 24 Barometer Standard &
Utility Companies Combination Companies 400 Industrials Utility Combination Poor's 400 Earnings /
Earnings /
. Earnings /
Earnings /
Earnings /
Earnings /
ti; Companies Companies Industrials Book (3)
Price (4)
Book (3)
Price (4)
Book (3)
Price (4)
'S 77.4%
72.2%
142.6%
10.9%.
14.7%
10.0%
14.2%
13.2%
10.9%
'6 92.8 89.2 155.0 11.4 12.6 11.2 12.4 14.4 11.0 f7 99.2 96.2 137.8 11.5 11.8 10.3 10.9 13.7 10.4
'8 89.7 89.2 129.6 11.3 12.8 11.4 12.9 14.6 11.7
'9 81.7 79.3 126.3 11.3 '
14.1 11.2 14.2 17.4 13.3 reent Change:
'9 va. 1975 5.6%
9.8%
(11.47' 3.7%
(4.1%)
12.0%
0.0%
31.8%
22.0%
cs:
(1) All financial ratios represent the arithmetic average of the achieved results for all individual companies in each group.
(2)
Represents the average of yearly high/ low market price divided by the average beginning and ending year's book value per share.
(3)
Earnings / book ratio reflects return on average book common equity which equals income available for common equity divided by cuerage beginning and ending year's balance of book common equity.
(4)
Represents the repotted earnings per share as originally reported dividet by the average yearly high/ low mar-ket price per share.
)rce of Information:
Standcrd & Poor's Compustat Services, Inc., Utility Compustat II, Compustat II
?r:r 8.9 E.R
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m
Exhibit CC-5 Sch:dula 5 Page 1 of 2 New Orleans Public Service, Inc.
Composite Cost. Rate of Debt Capital Actual at December 31, 1979 and Estimated at December 31, 1980 Effective Amount Percent Cost Rate Composite Outstanding to Total (1)
Cost Rate
($ 000's)
First Mortgage Bonds:
4 1/8% Series due 1983
$ 6,000 4.75:
4.07%
0.19%
3 1/4% Series due 1984 6,000 4.75 3.19 0.15 4 1/2% Series due 1987 6,000 4.75 4.55 0.22 5
% Series due 1991' 15,000 11.88 5.03 0.60 4 1/2% Series due 1992 8,000 6.34 4.53 0.29 5 5/8% 52 ries due 1996 23,250 18.42 5.61 1.03 5 7/8% Scries due 1997 12,000 9.51 5.90 0.56 10
% Series due 2004 35,000 27.72 9.94 2.76 9 1/2% Series due 2008 15.000 11.88 9.69 1.15 Total Long-Term Debt at Dectmber 31, 1979 (Actual)
$126,250 jp0.00%
6.95%
- The Company does not expect to incur any short-term debt by year-end 1980.
Nste:
(1)
Effective cost rate for each series as taken from page 2 of this Schedule.
Source of Information:
Company provided data
New Orlesna Public Service, Inc.
Calculation of the Effective Cost Rate of Long-Term Debt by Series Nominal Average Principal Premium er Company Net Ef f ective Date of Date of Years to Amount (Discount)
Issuance Net Proceeds Cost Rate Series Issuance Maturity Maturity Issued at Issuance Expenses Proceeds Ratio (1)
($ 000's) mt Mortgage Bonds:
1/8% Series due 1983 4-1-53 4-1-83 30
$ 6,000
$125,940
$ 65,713 $ 6,060,227 101.00%
4.07%
1/4% Ssries due 1984 12-1-54 12-1-84 30 6,000 125,994 55,268 6,070,726 101.18 3.19 1/2% Series due 1987 4-1-57 4-1-87 30 6,000 7,980 54,346 5,953,634 99.23 4.55
% Series due 1991 6-1-61 6-1-91 30 15,000 10,350 70,824 14,939,526 99.60 5.03 1/2% Series due 1992 4-1-62 4-1-92 30 8,000 13,360 51,172 7,962,188 99.53 4.53 5/8% Ssries due 1996 4-1-66 4-1-96 30 23,250 118,575 71,026 23,297,549 100.20 5.61 7/8% Series due 1997 4-1-67 4-1-97 30 12,000 8,520 53,109 11,955,411 99.63 5.90
% Saries due 2004 5-1-74 5-1-04 30 35,000 332,500 128,784 35,203,716 100.58 9.94 1/2% Snries due 2008 10- 1-78 10- 1-08 30 15,000 (97,800) 173,698 14,728,502 98.19 9.69 4
(1) The effective cost rate for each issue is the cost rate to maturity using as inputs the average term of issue, coupon rate and net proceeds ratio.
cm of Information:
Company provided data gs p g 555
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."a v.R
~.
Exhibit CC-5 Schrdule 6 Page 1 of 2 New Orleans Public Service, Inc.
Composite Cost Rate of Preferred Stock Actual at December 31, 1979 and Estimated at December 31, 1980 Effective Amount Percent Cost Rate Weighted i
Series Outstanding to Total (1)
Cost Rate i
4 3/4% Cumulative Preferred
$ 7,779,800 39.34%
4.61%
1.81%
4.36 % Cumulative Preferred 6,000,000 30.33 4.37 1.33 5.56 % Cumulative Preferred 6,000,000 30.33 5.57 1.69 Total Preferred Stock Outstanding at December 31, 1979 (Actual)
$19,779,800 100.00%
4.83%
4 3/4% Cumulative Preferred
$ 7,779,800 22.37%
4.61%
l.03%
4.36'% cvwilative Preferred 6,000,000 17.25 4.37 0.75 5.56 % Cumulative Preferred 6,000,000 17.25 5.57 0.96 15.44 % Cumulative Preferred 15,000,000 43.13 15.98 6.89 Total Preferred Stock Outstanding at December 31, 1980 (Estimated)
$34,779,800 100.00%
9.63%
)
l l
l Note:
(1)
The effectivc cost rate for each issue as taken from page 2 of this Schedule.
i Source of Information:
Company provided data
- ~
New Orleens Public Snrvice, Inc.
Calculation of the Effective Cest Rate of Preferred Stock by Series Nominal Original Premium or Company Net Effective Dividend Amount (Discount)
Issuance Net Proceeds Cost Rate Series Rate Issued at Issuance Expenses Proceeds Ratio (1) 4 3/4% Cumulative Preferred 4.75%
$ 7,779,800
$ 276,953
$ 33,704
$ 8,023,049 103.13%
4.617.
4.36 % Cumulative Preferred 4.36 6,000,000 42,000 52,764 5,989,236 99.8'i 4.37 5.56 % Cumulative Preferred 5.56 6,000,000 18,600 27,164 5,991,436 99.80 5.57 15.44 % Cumulative Preferred 15.44 15,000,000 (280,350) 172,599 14,547,051 96.98 15.98 (2)
Fotes:
(1)
The effective cost rates for the 4 3/4%, 4.36% and 5.56% Series, which have no sinking fund requirements, are com-puted by dividing the nominal dividend rate by the net pro,ceeds ratio.
12)
Based upon a yield to maturity calculation using an average life of the issue sirilar to a cost rate to maturity calculatiun for a bond, the effective cost rate is 15.98% using as. inputs a 14 1 2 year average term of issue, the 15.44% nominal dividend rate and a 96.98% net proceeds ratio.
curce of Information:
Company provided data m
% iii E
~&E O*
O m
M u.
MOODY'S 24_PUBLIC UTILITIES CAPITALIZATION AND FINANCIAL STATISTICS (1) 1975 - 1979, INCLUSIVE PERCENT INCREASE
- 1979 1978 1977 1976 1975 1979 OVER 1975 AMOUNT OF CAPITAL EMPLOYED _
(THOUSAilDS OF DOLLARS)
TOTAL PERMANENT CAPITAL S2,789,570
$2,532,460
$2,345,420
$2,160,710
$2,019,570 SHORT-TERM DEBT 98,120 46,790 46,240 42,450 49,650 TOTAL CAPITAL EMPLOYED
$2,887,690 12,579,250
$2,391,660
$2,223,160
$2,069,220 39.6%
INDICATED AVERAGE CAPITAL COST RATES (2)
LONG-TERM DEBT 7.6%
7.2%
7.1%
6.9%
6.7%
13.4%
PREFERRED STOCK 7.5 7.5 7.4 7.5 7.1 5.6 FINANCIAL RATIOS - MARKET BASED 5 YEAR AVEHACE EARNINGS / PRICE RATIO 14.1%
12.0%
11.8%
12.6%
14.74 13.24 MARKET / AVERAGE BOOK RATIO 81.7 89.7 99.2 92.8 77.4 88.2 DIVIDEND YIELD 10.2 9.0 8.1 8.3 9.8 9.1 PERCENT CIIANGE IN EARNINGS PER SilARE YEARLY 3.1 4.1 5.0 7.3 6.7 5.2 DIVIDEND PAYOUT RATIO 76.8 73.0 72.4 69.0 71.1 72.5 CAPITAL STRUCTURE RATIOS BASED ON TOTAL PERMANENT CAPITAL:
LONG-TERM DEBT 50.3%
50.24 50.6%
52.2%
53.01 51.31 PREFERRED STOCK 12.9 12.9 13.3 13.0 13.1 13.0 COMMON EQUITY 36.8 36,9
_36.1 34.8 33.9 35.7 100.0%
100.04 100.04 100.0%
100.01 Ed.0%
BASED ON TOTAL CAPITAL:
TOTAL DEBT, INCLUDING SHORT-TERM 52.0t 51.3%
51.9%
53.2%
54.4%
52.6%
DREFERRED STOCK 12.4 12.6 13.0 12.8 12.7 12.7 COMMON EQUITY 35.6 36.1 35.1 34.0 32.9 34.7 100.0%
100.0%
100.0%
100.0L H Ca.04 100.0%
RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY 11.3%
11.3%
11.5%
11.4%
10.9%
- 11. [4 RATE OF RETURN ON AVE' AE BOOK COMMON EQUITY Cd';R INDICATED AVERAGE LONG-TERM DEBT COST RATE 3.7%
4.1%
4.41 4.5%
4.26 4.2%
COVERAGES - INCLUDING ALL AFC (3)
BEFORE INCOME TAXES: ALL INTEREST CHARGES 2.7X 3.0X 2.9X 2.8X 2.6X 2.8X AFTER INCOME TAXES: ALL INTEREST CIIARGES 2.2 2.3 2.3 2.3 2.2 2.3 OVERALL COVERAGE: ALL INTEREST + PFD. DIV.
1.8 1.9 1.9 1.8 1.8 1.8 COVERAGES - EXCLUDIM ALL AFC (4)
BEFORE INCOME TAXES: ALL INTEREST CIIARGES 2.3X 2.6X 2.6X 2.5X 2.3X 2.5X AFTER INCOME TAXES: ALL INTEREST CHARGES 1.8 2.0 2.0 2.0 1.9 1.9 OVERALL COVERAGE: ALL INTEREST + PFD. DIV.
1.5 1.6 1.6 1.6
..S 1.6
- o en n ta nx OUALITY OF EARNINGS E$$
ch cr AFC/ INCOME AVAILABLE FOR COMMON EQUITY 44.9 36.7 35.3 33.4 34.4 36.9 "b$
EFFECTIVE INCOME TAX RATE 25.4 32.2 30.2 28.1 24.9 28.2 oe r
INTERNAL CASII GENERATION / GROSS CONSTR. (5) 46.1 48.7 53.0 51.8 38.9 47.7 uQ s
v SEE PAGE 2 FOR NOTES.
Exhibit CC-3 Schedule 7 Moody's 24 Public Utilities Capitalization and Financial Statistics (1)
Page 2 of 4 1975-1979, Inclusive
-Notes:
(1)
All Capitalization and Financial Statistics for Moody's 24 Public Utilities are the arithmetic average of the achieved results for each individual com-pany in the group.
(2)
Computed by relating actual long-term debt interest or pref erred stock div-idends booked to average of beginning and ending long-term debt or preferred stock reported to be outstanding.
(3)
Coverages - including all AFC represent the number of times available earn-ings including AFC (allowance for funds used during aonstruction) as re-ported in its entirety included as income. cover fixed charges.
For the years 1978 and 1977, AFC includes allowance for borrowed and,other funds used during construction.
(4)
Covsrages - excluding all AFC represent the number of times available earn-ings, excluding all AFC, cover fixed charges.
(5) Internal cash generation / Gross constructiod is the percentage of gross construction expenditures, excluding all'AFC, provided by internally gen-erated funds from operations, excluding all AFC, and af ter payment of all cash dividends.
l The names of the companies are:
Baltimore Gas and Electric Company Florida Power Corporation Boston Edison Company Hous' ton Industries Incorporated Carolina Power and Light Company Idaho Power Company Central Hudson Gas & Electric Ccrp.
Indianapolis Power and Light Company Central Maine Power Company Northeast Utilitics Cincinnati Gas & Electric Company Pacific Cas and Ilectric Company Cleveland Electric Illuminacing Co.
Pennsylvania Power & Light Company Commonwealth Edison Company Philadelphia Electric Company i
Consolidated Edison Company of New Public Service Company of Colorado York, Inc.
Southern California Edison Company Dayton Power & Light Company Tampa Electric Company Delmarva Povar & Light Company Utah ruyer & Light Company Detroit Edison Company Source of Information:
Standard & Poor's Compustat Services, Inc. Utility Compustat II Interactive Data Corporation
-- - - ~ ~
~
boody's 24 Public Utilitiec' Bond Ratings by Moody's end Stend:rd end Poor'c ct Years' End 1975-1979 Years Ended 1979 1976 1977 1976 1975 Moody's S&P Moody's S&P Moody's S&P Moody's S6P Moody's
~
S&P Moody's 24 Publie ?ltilities:
Dalticore Gas & Electric Company Aa AA-Aa AA-Aa AA-Aa AA-Aa(2)
AA-Boston Edison Company Baa BBB Baa BBB Baa BBB Baa BBB Baa(2)
BBB Carolina Power & Light Company A
A A
A Baa A
Baa A
A A
Central Hudson Gas & Electric Corp.
A A-A A-A A-A A-Aa A-Central Maine Power Company A
BBBF A
BBB+
A BBB+
A BBBt A
BBBi Cincinnati Gas & Electric Company Aa AA-Aa AA Aa AA Aa AA Aa(2)
AA Cleveland Electrxe Illuminating Co.
Aa AA-Aa AA Aa AA Aa AA Aaa AA Commonwealth Edison Company Aa(4)
AA-Ana AA Ana AA Ana AA Ana AA Consolidated Edison Company of NY Baa A
Baa A
Baa A-Baa BBBt
--(3)
BBB Dayton Power & Light Company A
A A
A A
A A
A A (2)
A Delmarva Power & Light Company A
A A
A A
A A
A A (2)
A Detroit Edison Company Baa BBB Baa BBB Baa BBB Bac BBB Baa (2)
BBB Florida Power Corporation A
A+
A A+
A A+
A A
A (2)
A louston Lighting and Power Company Aa AA Aa AA Aa AA Aa AA Ana AA Idaho Power Company A
A Aa A
Aa A
Aa A
Aa A+
Indianapolis Power & Light Company An AA Aa AA Aa AA-Aa AA-Aa AA-Mortheast Utilities Company (1)
Pacific Gas & Electric Company Aa AA-An AA-Aa A A-Aa AA-Aa AA-Pcunsylvania Power,6 Light Company Aa A+
Aa A+
Ae AF Aa A+
Aa A+
Philadelphia Electric Company A
A-A A-A A-A A-A (2)
A Public Service Company of Colorado An AA-Aa AA-Aa AA Aa AA Aa AA Southern California Edison Company An AA Aa AA Aa AA Aa AA Aa AA ranpa Electric Company Aa AA A2 AA Aa AA Aa AA Aa AA-Utth Power & Light Company A
AA-A AA A
AA A
AA A
A
- lo tes:
(1) Northeast Utilities, a holding company, does not have bonds which are rated by Moody's or Standard 6 Poor's.
The operating subsidiarias of Northeast Utilities have various bond ratings.
(2)
Downgraded during 1974.
(3)
Bond rating suspended by Hoody's.
(4)
Effective January 12, 1979 Moody's Investor Services downgraded the Company's bond rating from an Ana to an Aa reting.
m y, uaE Source of Information: Moody's Bond Survey, Moody's Public Utility Manual E[h Standard & Poor's Corporation Bond Guide u5g
Moody's 24 Public Utilitica' Preferred Stock Ratings by Moody's and Standard and Poor's at Years' End 1975-1979 Years Ended 1979 1978 1977 1976 1975 Moody's S6P Moody's S&P Moody's S&P Moody 's '
S&P Moody's S&P
'ody'n 24 Public Utilities:
.1timore Gas & Electric Company "aa" AA-
"aa" AA-
"aa" AA-
"aa" AA-
"aa" AA-iston Edison Company N/R BBB N/R BBB N/R BBB N/.
BBB N/R BBB
.rolina Power & Light Company "a"
A "baa" A
"baa" A
"baa" A
"baa" A
mtral Hudson Cas & Elec. Corp.
"a" A-
"a" A-
"a" A-
"a" A-N/R A-2 tral Maine Power Company N/R BBB N/R BBB N/R BBB N/R BBB N/R BBB meinnati Cas & Electric Company "a"
A-
"aa" A
"aa" A
"aa" A
"aa" A
cvelend Electric Illum. Company "a"
A-
"a" A
"a" A
"a" A
"a" A
mmonwralth Edison Company "baa" AA-
"aa" AA "aa" AA "aa" AA "aa" AA nsolidated Edison Company N/R A-N/R A-N/R BBB N/R BBB N/R BB yton Power & Light Company "a"
BBB "a"
BBB "a"
BBB "a"
BBB "a"
BBB learva Power & Light Company "a"
A "a"
A N/R A
N/R A
N/R A
.roit Edison Company "baa" BBB "baa" BBB
,"baa" BBB "baa" BBB "baa" BBB orida Power Corporation "a"
A "a"
A "a"
A "a"
A "a"
A
'ston Lighting and Power Co.
"aa" AA "aa" AA "aa" AA "aa" AA "aa" AA-ho Power Company "a"
A "a"
A "a"
A "a"
A "a"
A Lanapolis Power & Light Co.
"aa" A+
"aa" A
. "aa" A
"aa" At "aa" At theast Utilities Company (1) ific Gas & Electric Company "a"
A "a"
A "a"
A "a"
A "a'
A n=ylvania Power & Light Co.
"a" A
"a" A
"a" A
"a" A
"a" A
1adelphia Electric Company (2)
"a" BBB "a"
BBB "a"
BBB "a"
BBB "a"
BBB lic Service Company of Colorado "a"
A+
"a" A+
"a" A+
"a" AA "a"
AA thern California Edison Company "aa" AA "aa" AA "aa" AA "aa" AA "aa" AA gpn Electric Company N/R AA N/R AA N/R AA N/R AA N/R AA th Power & Light Company "a"
AA-
"a" AA "a"
AA "a"
A "a"
A les:
(1) Northeast Utilities, a holding company, does not have bonds which are rated by Moody's.
The opera ing sub-sidiaries of Northeast Utilities have various ratings.
(2) S&P lowered Philadelphia Electric Company's preferred stock rating to BBB-in April 1980.
Moody's lowered their rating to "baa" in arch 1980.
EEE on w w orce of Information:
Moody's Public Utility Manual; Moody's Bond Survey m y:
8 Standard and Poor's Stock Guide
- 'f.p oa M
Us
T Exhibit CC-5 Schedule 8 Hypo thetical Illustration of I= pact of Different Effective Income Tax Rates on Change in Earnings Available for Interest Coverage and Common Equity Between Two Companies Alike in Every Other Reseect l
(Thousand,s of Dollars)
Coccany A (Higher Tax Rate)
Company B (Lower Tax Rate)
From To From To Rsysnues
$1,000
$1,000
$1,000 S1,000 Oparating Expenses:
All except income taxes 695 795 765 865 Income taxes 85 37 15 780 832 780
__,865 Not operating income 220 168 220 135 Interest expense 90 90 90 90 Nat income to co= mon S
13 0 S
78 S
130 S
45 l
B: ginning effective income tax rate 39.5%
10.3%
l Parcentage decline in nst income to common
-40.0%
-65.4%
Interest Coverage:
Bsfore income taxes 3.39 x 2.28 x 2.61 x 1.50 x After income taxes 2.44 x 1.87 x 2.44 x 1.50 x l
l t
t
DAROMETER GROUP OF SEVEN ELECTRIC COMPANIES WPITAL12ATION AND FINANCIAL STATISTICS (1) 1975 - 1979, INCLUSIVE PERCEt3T INCREASE 1979 1978 1977 1976 1975 1979 OVER i 175 AMOUNT OF CAPITAL EMPLOYED (THOUSANDS OF DOLLARS)
TOl'AL PERMANENT CAPITAL
$ 476,240
$ 455,540
$ 427,470
$ 391.570
$ 364,520 SHORT-TERM DEBT 19,T;0 11,020 10,010 21,700 17,590 TOTAL CAPITAL EMPLOYED
$ 496,035
$ 466,Ho S 437,400
$ 413,275
$ 302.11o 29.84
.......==
....==.==
INDICATED AVERAGE CAPITAL COST RATES (2)
LONG-TERM DEBT 7.6%
7.1%
7.1%
6.9%
6.54 16.94 ivFERRED STOCK 7.7 7.3 7.3 6.9 6.5 18.5 FINANCIAL RATIOS-MARVET BASED 5 YEAR AVERAGE EARNINGS / PRICE RATIO 14.24 12.9%
10.9%
12.44 14.2%
12.9%
MARKET / AVERAGE BOOK RATIO 79.3 89.2 96.2 89.2 72.2 85.2 DIVIDEND YIELD 10.4 9.1 8.3 8.8 10.6 9.4 PERCENT CHANGE IN EARNINGS PER SilARE YEARLY 2.3 13.9 (4.4) 11.1 31.8 10.9 DIVIDEND PAYOUT RATIO 74.8 72.0 78.2 71.0 77.2 74.6 CAPITAL STRUCTURE RATIOS DASED ON TOTAL PERMANENT CAPITAL:
LONG-TERM DEBT 51.1%
51.5%
51.6%
52.4%
54.6%
52.31 PREFERRED STOCK 14.2 13.8 14.2 14.2 13.3 13.9 COMMON EQUITY 34.7 34.7 34.2 33.4 32.1 33.8 EASED ON TOTAL CAPITAL
~100.0%
100.0%
100.0%
100.0%
100.0%
100.04
~
TOTAL DEBT, INCLUDING SHORT TERM 52.8%
52.9%
52.8%
55.1%
56.4%
54.01 PREFERRED STOCK 13.7 13.4 13.9 13.4 12.7 13.4 COMMON EQUITY 33.5 33.7 33.3 31.5 30.9 32.6 100.0%
100.0%
100.04 100.04 100.04 100.01 RATE OF RETURN ON AVERAGE DOOK COMMON EQUITY 11.2%
11.3%
10.31 11.2%
10.04 10.01 RATE OF RETURN ON AVERAGE BOOK COP. MON EQUITY OVER INDICATED AVERAGE LONG TERM DEBT COST RATE 3.6%
4.2%
3.2%
4.3%
3.5%
3.8%
COVERAGES-INCLUDING ALL AFC (3)
REFORE INCOME TAXES: ALL INTEREST CilARGES 2.7X 3.OX 2.8X 2.7X 2.5X 2.7X AFTER INCOME TAXES: ALL INTEREST CHARGES 2.2 2.3 2.1 2.2 2.0 2.2 OVERALL COVERAGE: ALL INTEREST + PFD. DIV.
1.7 1.8 1.7 1.7 1.7 1.7 COVERAGES-EXCLUDING ALL A'FC (4)
BEFORE INCOME TAXES: ALL INTEREST CHARGES 2.4X 2.7X 2.5X 2.5X 2.2X 2.5X AFTER INCOME TAXES: ALL, INTEREST CHARGES 1.8 1.9 1.9 1.9 1.9 1.9 OVERALL COVERAGE: AL' INTEREST + PFD. DIV.
1.4 1.5 1.5 1.6 1.5 1.5 u
- o en
$. h. p QUALITY OF EARNINGS y-AFC/ INCOME AVAILABLE FOR COMMON EQUITY 45.8 31.9 27.8 24.9 19.2 29.9 gI%
EFFECTIVE INCOME TAX RATE 29.6 36.2 33.3 33.5 31.4 32.8 H rv INTERNAL CASH GENERATION / GROSS CONSTR.
(5) 56.3 54.4 64.8 64.1 61.0 60.1 R*o e
w n
l SEE PAGE 2 FOR NOTES.
V'
Exhibit CC-5 Schsdule 9 Page 2 of 5
_ Barometer Group of Lever Combination Electric and Gas Cocoanies Capitalization and Financial Statist 1,s 1975-1979, Inclusive Notes:
(1)
All capitalization and financial statistics for Baromater Group of Seven Electric Companies are the arithmetic average of the achieved results for each iudividual compary in the group.
(2)
Computed by relating actual long-term debt interest or preferred stock dividends booked to average of beginning and ending long-term debt or pre-ferred stock reported to be outstancing.
(3)
Coverages - including all AFC - represent the number of times available earnings, including AFC (allowance for funds used during construction) as report zd in its entirety included as income, cover fixed charges.
For the years 1979,1978 and 1977, AFC includes allowance for borrowed and other funds used during construction.
(4)
Coverages - exc'uding all AFC - represent. the number of times available earnings, excluding all AFC, cover fixed charges.
(5)
Internal cash generation / Gross construction is the percentage of gross con-struction expenditures, excluding al-1 AFC, provided.by internally generated funds from operations, excluding all AFC, and after payment of all cash dividencs.
I Bnsis of Selection:
j To study a representative group of combi:2. tion electric and gas companies, I believe it is necessary to select a large enough group of companies, such as seven, so as to avoid any one company of the group causing a mathematical distortion.
The coven selected companies contained the following characteristics:
companies which operate in the continental United States (lower 48), have a bond rating of A as of J;nuary 1, 1980 by Moody's Investors Services, Inc., have common stock which is actively traded, have a total capitalization between $100 million and $1 billion and have electric revenues which comprise at leaot 60%, but not more than 90%, of their total revenues with the remainder essentially representing gas revenues.
The names of the companies which comprise the group include:
Czntral Hudson Gas & Electric Corp.
Central Illinois Light Company Orange and Rockland Utilities, Inc.
Interstate Power Company Rochester Gas and Electric Corp.
Iowa Electric Light and Power Co.
St. Joseph Light and Power Company
Exhibit CC-5 Schedule 9 Page 3 of 5 Barometer Group of Seven Combination Electric and Gas Companies Capitalization and Financial statistics (1) 1975
'979, Inclusive Further items of comparison between the barometer group and New Orleans Public Service, Inc., are shown below.
Average for Seven Barometer New Orleans Group Companies Public Service, Inc.
1979 Operating Revenues
$268.1
$362.7
($ Millions) 1979 Operating Revenues, Percent Distribution Electric 71.5%
66.4%
Oas 27.0 23.7 Other 1.5 9.9 100.0%
100.0%
4 I
{
{
l l
N;w Orleans Public Service, Inc.
and Barometer Group of Seven Combination Electric and Cas Companies, Moody's and Standard and Poor's Bond Ratings at Years' End Ib. -1979 Years Ended 1979 1978 1977 1976 1975 Moody 's S&P Moody's S&P Moody's S&P Moody's S&P Moody's S&P N w Orleans Public Service, Inc.
A A
A A
A A
A A
A A
Barorster Group of Seven Combination Electric and Gas Co.'s C3ntral Hudson Cas & Electric Corp.
A A-A A-A A-A A-A A-Central Illinois Light Company A
A+
A A
A A
A A
Aa A
Interstate Powar Company A
A A
A A
A A
A A
A lows Electric Light & Power Co.
A A
A A
Baa A
Baa A-Baa A-Orrngs and Rockland Utilities, Inc.
A A-Baa A-Baa BBBt Baa BBB Baa BBB Roch::ter Gas and Electric Corp.
A A
A A
A A
A A
A A
S t. Joseph I,ight & Power Company A
A A
A A
A A
A A
A Source of Information:
Moody's Bond Survey, Moody's Public Utility Manual Standard & Poor's Corporation Bond Guide ENE
%TE tPE oNR V
l AJe
New Or! erns Public Service, Inc.
and Barometec Group of Seven Combination Electric and Cas Companies, Hoody's and Standard and Poor's Preferred Stock Ratings at Years' End 1975-1979 Years Ended 1979 1978 1977 1976 1975 Moody 's S&P Moody's S&P Hoody's S&P Moody's S&P Moody's S&P New Orleans Public Service, Inc.
N/R N/R N/R N/R N/R N/R N/R N/R N/R N/R Barometer Group of Seven Combinstion Electric and Cas Co.'s Crntral Hudson Cas & Electric Corp.
"a" N/R "a"
N/R "a"
N/R N/R N/R N/R N/R C:ntral Illinois Light Company "a"
A "a"
A "a"
A "a"
A "a"
A Interstate Power Company "a"
BBB "a"
BBB "a"
BBB "a"
BBB "a"
N/R Iows Electric Light & Power Co.
N/R N/R N/R N/R N/R N/R N/R N/R N/R N/R Ortngs and Rockland UtU.ities, Inc.
N/R N/R N/R N/R N/R N/R N/R N/R N/R N/R Roch. :tcr Gas and Electric Corp.
"a" N/R "a"
N/R "c"
N/R "a"
A "a"
A St. Joseph Light & Power Crmpany N/R N/R N/R
.N/R
':4lR N/R N/R N/R N/R N/R Source of Information:
Moody's Bond Survey, Hoody's Public Utility Manual Standard & Poor's Corporation Bond Guide 2EE
% i ff wPK oe" c.
Ut O
v.
MIDDLE SOUTil UTILITIES. INC. AND SUBSIDIARIES 7M' ALTZATINnUFFINANCIWAYI5TTCB~
1975 - 1979, INCLUSIVE PERCENT INCREASE 1979 1978 1977 1976 1975 1979 OVER 1975 AMOUNT OF CAPITAL EMPIDYED (THOUSANDS OF DOLLARS)
TOTAL PERMANENT CAPITAL
$5,356,180
$4,408,760
$ 3,744,090
$3,304,530
$2.913,6h SHORT-TERM DEDT 284,910 323.440 249,470 196,540 207.55G TOTAL CAPITAL EMPLOYED
$5,641.090
$4,732,200
$3,993,560
$3.501,070
$ 3,121. 2 20 80.75 INDICATED AVERAGE CAPITAL COST RATES (1)
IDNG-TERM DEBT 8.8%
8.2%
7.3%
7.14 6.9%
27.5%
PRE' ERRED PTOCK 8.3 7.5 7.1 7.1 6.2 33.9 FIIANCIAL RATIOS-MARKET BASED 5 YEAR AVERAGE EARNINGS / PRICE RATIO 14.94 15.6%
13.14 11.7%
11.84 13.44 MARKET / AVERAGE BOOK RATIO 77.5 86.8 95.3 91.7 85.4 87.3 DIVIDEND YIELD 10.7 9.2 8.4 8.6 8.9 9.2 FERCENT CHANGE IN EARNINGS PER SHARE YEARLY (13.4) 12.8 19.8 7.1 (23.1) 0.6 DIVIDEND PAYOUT RATIO 72.9 59.8 64.5 74.0 75.9 69.4 CAPITAL STRUCTURE RAT]OS BASED ON TOTAL PERMANENT CAPITAL:
IDNG-TERM DEBT 59.1%
60.2%
58.9%
60.2%
60.25 59.7%
PREFERRED STOCK 10.0 7.7 9.1 9.4 10.3 9.3 COMMON EQUITY 30.9 32.1 32.0 30.4 29.5 31.0 1,,00. 0 %
'100.0%
LQLQ,8 LQLDS 1QQat LQLDS EASED ON TOTAL CAPITAL:
TOTAL DEBT, INCLUDING SHORT TEP1 61.24 62.9%
61.5%
62.4%
62.9%
62.24 PREFERRED STOCK 9.4 7.2 8.5 8.9 9.6 8.7 COMMON EQUITY 29.4 29.9 30.0 28.7 27.5 29.1 100.0%
100.0%
100.04 IDif."Dt 100.0%
f007 4 RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY 11.9%
14 2%
13.24 11.4%
10.74 12.3%
RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY OVER INDICATED AVERAGE IDNC TERM DEBT COST RATE 3.1%
6.01 5.9%
4.3%
3.83 4.6%
COVEf>0ES-TNCLUDING ALL AFC (2)
EEFORE TACOME TAXES: ALL INTEREST CHARCES 1.7X 2.1X 2.4X 2.2X 2.OX 2.1X AFTER INN TAXES: AIL INTEREST CHARGES 1.7 2.0 2.0 1.9 1.8 1.9 OVERALL COVECAGE: ALL ItrFEREST + PFD. DIV.
1.5 1.7 1.7 1.6 1.6 1.6 COVERAGES-EXCLUDING ALL AFC (3)
EEFORP, INCOME TAXES: ALL INTEREST CHARGES 0.9X 1.4X 1.8X 1.8K 1.7X 1.5X yyp AFTER *NCOME TAXES: ALL INTEREST CHARGES 1.0 1.3 1.4 1.4 1.4 1.3 m :r r OVZRALL COVERAGES ALL INTEREST + PFD. DIV.
0.9 1.2 1.2 1.3 1.3 1.2 m g **
g
>* c n QUALITY OF EARNINOS o, o" "
n AFC/ INCOME AVAILABLE FOR COMMON EQUITY 117.2 8u.0 68.6 58.6 5?.4 75.6 yyy
~4FFECTIVE INCOME TAX RATE (12.9) 14.5 29.s 28.3 26.5 17.1 u
INTERNAL CASH GENERATION / GROSS CONSTR. (4)
'(7.4) 11.8 23.4 23.8 27.5 15.8 SEE PAGE 2 FOR NOTES.
Exhibit cC-5 Schedulo 10 Pego 2 of 2 Middle South Utilities, Inc. and 3ubsidiaries Capitalization and Financial Statistics 1975-1979. Inclusive Notes:
(1)
Computed by relating actual long-term debt interest or preferred stock divi-dends booked to average of beginning and ending long-term debt or preferred stock reported to be outstanding.
(2)
Coverages - including all AFC - represent the number of times available earn-ings, including AFC (allowance for* funds used during construction) as reported in its entirety included as income, cover fix64 charges.
(3)
Coverages.- excluding all AFC - represent the nu=ber of times available earn-ings, excluding all AFC, cover fixed charges.
(4)
Internal cash generation / Gross construction is the percentage of gross con-struction expenditures, excluding all AFC, provided by internally generated funds from operations, excluding all AFC, and after payment of all cash dividends.
t Source of Information:
Standard & Poor's Compustat Services, Inc.
Utility Compustat II l
l l
l 1
Analysis of Public Offerings of Common Stock by Companies in the Seven Company Barometer Croup Between January 1, 1975 and August 31, 1980 Central Rochester Saint Hudson Saint towa Saint l
Central Cas and Joseph Cas and Central Joseph Electric Joseph Illinois Interstate Electric Light and Electait Illinois Light and Interstate Light and Light and Light Co.
Power Co.
Corp.
Power Co.
Company Light Co.
Power Co.
Power Co.
Power Co.
Powe r Co.
race of Prospectus 2/25/79 8/6/75 10/7/75 10/21/75 11/6/75 I/21/76 3/23/76 5/19/76 6/10/76
$/10/77 No. of Shares Offered 1,000,000 1,100,000 1,000,000 250,000 50a,000 1,000,000 3rA,WO 1,200.000 950,000 350,000 Cffering Price 15.500 15,000 15.375 10.875 16.875 18.000 11.73 15.375 14.500 12.875 Underwriting Discouat 0.770
.579 0.650 0.580 0.670 0.680 0.58 0.462 0.419 0.500 Cross k r* <eeds to Co.
14.730 14.421 14.77.5 10.295 16.205 17.320 11.17 14.913 14.081 12.375 E:timated Co. Expenaes 0.075' O.Il4 0.120 0.340 0.140 0.095 0.20 0.092 0.176 0.194 N:t Proceeds Per Share 14.655 14.307 14.605 9.955,
16.065 17.225 10.97 14.821 13.955 12.181 II.tes : Actual Reported l
Earnings Per Share at Prospectus Date
$1.95 31.58
$2.59
$1.42
$2.58
$1.75
$1.59
$1.71
$1.78
$1.46 Latest Annualized Divi-deods Per Share at Prospectus Date
$1.60
$1.40
$1.28
$1.12 31.72
$1.60
$1.12
$1.45
$1.40
$1.12 Actual at Calendar Year End Preceding Prospectus Dates Book Value/ Share
$19.81
$14.85
$e2.06
$15.34
$23.86
$18.98
$14.83
$15.00
$17.11
$14.48 l
Conson Equity Ratio (1) 28.81 28.4%
38.41 33.0%
34.0%
29.3%
32.11 31.01 24.6Z 33.6Z Earnings / Net Proceeds Ratio 13.311 11.041 17.73Z 14.26E 16.06Z 10.16Z 14.491 11.54Z 12.76Z 11.991 Net Proceeds / Book Value Ratio 73.98 96.34 66.21 64.90 67.33 90.75 73.97 98.81 81.56 84.12 Dividend Yield on Offering l
Price 10.32 9.33 8.33 10.30 10.19 8.89 9.53 9.43 9.66 8.70 Notes (1) Based on Total Permanent Capital
[$E Sorree of Informations Ebasco Services. Inc. - Analysis of Public Utility Financing Standard & Poor's Compostat Services, Inc. - Utility Campustat II g { {*
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Analysis of Public Offerings of Common Stock by Middle South Utilities, Inc.
Between January 1, 1975 and August 31, 1980 Data cf Prospectus 1-21-75 1-13-76 1-11-77 1-10-78 1-9-79 11-13-79 4-29-80' Hu;bc. of Shares Offered 7,000,000 7,500,000 8,000,000 8,500,000 8,500,000 5,000,000 7,000,000 Offsring Price
$14.00
$16.250
$16.750
$16.550
$15.300
$13.000
$12.650 Undsrwriting Discount 0.74 0.473 0.444 0.437 0.360 0.380 0.390 Crc:a Proceeds to Company 13.26 15.777 16.306 16.113 14.940 12.620 12.260 E2timated Company Expenses 0.04 0.040 0.040 0.038 0.038 0.063 0.025 Net Proceeds Per Share
$13.22
$15.i37
$16.266
$16.075
$14.902
$12.557
$12.235 Latect Actual Reported Earnings Par Share at Prospectus Date
$2.22
$1.76
$1.72
$2.09
$2.36
$2.51
$2.13 Latest Annualized Dividend Per Shsra at Prospectus Date
$1.26
$1.32
$1.38
$1.44
$1.52
$1.52
$1.58 Act n1 at Calendar Year End Prgerding Prospectus Date:
Book Value Per Share
$16.90
$16.74
$17.07
$17.82
$18.60
$18.60
$18.32 Common Equity Ratio (1) 29.67%
29.47%
- 30.41%
31.99%
32.10%
32.10%
30.94%
Earnings /Het Proceeds Ratio 16.79%
11.18%
10.57%
13.00%
15.84%
19.99%
17.41%
90.21 80.12 67.51 66.78 Nat Prcceeds/ Book Value Ratio 78.22 94.01 95.29 Dividend Yield on Offering Price 9.00 8.12 8.24 8.70 9.93 11.69 12.49 j
Averages I
lo75-Da te 1975-1979 1978 1979 1978-Date 7
Number of Issues 6
1 2
4 14*08%
Earnings / Net Proceeds 14.56%
13.00%
17.92%
16.56%
9*24 Yield on Of fering Price 9.28 8.70 10.81 10.70 30.50 Common Equity Ratio 30.73 31.99 32.10 31.68 E9
- r :r Note:
( J ', Based on total permanent capital.
g, p f- $
a Source of Information:
Ebasco Services Inc. - Analysis of Public Utility Financing n
Standard & Poor's Compustat Services, Inc. - Utility Compustat II go v.
Comperctive Quality of Ecrningo Facters Average 1975-1979 1979 1978 1977 1976 1975 Inclusive Allowan
- for Funds Used During Construction as a Parcent of Income Available for Common Equity Ntw Orleans Public Service, Inc.
2.6%
1.4%
0.5%
1.7%
7.6%
2.8%
Middle South Utilities, Inc. and Subs.
117.2 80.0 68.6 58.6 53.4 75.6 Bsroreter Groups:
44.9 36.7 35.3 33.4 34.4 36.9 Hoody's 24 Utility Companies 45.8 31.9 27.8 24.9 19.2 29.9
)
Siven Comb. Elec. & Gas Cos.
L Effective Income Tax Rate 44.5%
44.2%
46.4%
38.8%
38.2%
New Orleans Public Service, Inc.
17.2%,
Middle South Utilities, Inc. and Subs.
(12.9) 14.5 29.0 28.3 26.5 17.1 Baroxeter Groups:
25.4 32.2 30.2 28.1 24.9 28.2 Hoody's 24 Utility Companies 29.6 36.2 33.3 33.5 31.4 32.8 Seven Comb. Elec. & Gas Cos.
Percentage of Gross Construction Grnarated Internally 66.1%
85.5%
136.5%
168.7%
76.0%
106.6%
Ntw Orleans Public Service, Inc.
Middle South Utilities, Inc. and Subs.
(7.4) 11.8 23.4 23.8 27.5 15.8 EY 7 $~
46.1 48.7 53.0 51.8 38.9 47.7
@ 5:
B=receter Groups:
Moody's 24 Utility Companies 56.3 54.4 64.8 64.1 61.n 60.1 g'"
Seven Comb. Elec. & Cas Cos.
S
" 5, Scurce of Information: Schedules 3, 7, 9 and 10
Spot Indication of Market Based Equity Cost Rate of Similar Risk Enterprises Without Regard to Impact of Growth 1979 Latest Twelve Current 9-25-80 Year-End Ea rningn/
Earnings /
Harket/
Hontha Reported Dividend Harket Book Price Book Dividend Book Earnings Per C: are Per Share Price Value Ratio,
Ratio Yield Ratio i Middle South Utilities, Inc.
$1.92 (7-31-80)
$1.58
$11.625
$ 18.32 16.5%
10.5%
13.6%
j[361%
Hoody'o 24 Public Utilities (1) (9-25-80 Market Prices) 14.6%
'.9%
11.9%
75.1%
BaromiterCrp. of 7 Comb. Elec. & Gas Cos. :
' C ntral Hudson Cas & Electric (A)
$3.21 (6-30-80)
$2.16
$18.25
$27.51 17.6%
11.7%
8%
66.3%
Centrol 1111nc23 Light Co. (B) 2.08 (7-31-80) 1.70 13.125 19.62 15.8 10.6 13.0 66.9 Interstate Power Company 1.47 (6-30-80) 1.56 12.125 17.00 12.1 8.6 12.9 71.3 Iows Electric Light & Power Co.
1.83 (7-31-80) 1.60 12.50 18.00 14.6 10.2 12.8 69.4 Ortngs & Rockland Utilities (A) 2.02 (6-30-80) 1.60 13.25 17.28 15.2 11.7 12.1 76.7 Rochester Cas & Electric (A)(B) 1.92 (6-30-80) 1.52 14.375 21.26 13.4 9.0 10.6 67.6 St. Jereph Light & Power Co.
1.05 (6-30-80) 1.26 10.00 14.50 10.5 7.2 12.6 69.0 Avsrtge for Barometer Group 14.2%
9.9%
12.3%
69.6%
iNatens (1) Arithmetic average of individual ratio for each company in the group using latest reported earnings per share, current dividends per sharc, current market prices and 1979 year-end book value.
(A)
Rote increase has recently been granted, but is not yet fully reflected.
(B) Rate application has been filed.
Snurcs of Information: Hoody's Public Utility Manual and Supplements Associated Utility Services, Inc. computerized data base The Wall Street Journs; mp e$
&K g.n 70 v
New Orleans Public Service, Inc.
Discounted Cash Flow Analysis Average 2-Year Average 1978-79 Crowth Rate (1)
Dividend Yield Plus Current Yield Plus Dividend Current llistorical Future Ilis t c rical future llistorical Futur$~
Yield Yield (2)
Earnings Earnings Earnings Earnings Ea rnings Earnings Based on Value Line Invutment Survey Middle South Utilities 10.0%
13.6%
1.5%
2.5%
11.5%
12.5%
15.1 % (3) 16.1% (3)
S:ven Barometer Companies C:ntral Iludson Gas & Electric Ccrp.
9.8%
11.8%
0.5%
4.5%
10.3%
14.3%
12.3%
16.3%
Central Illinois Light Company 10.2 13.0 (2.5) 5.0 7.7 15.2 10.5 18.0 Intsrstate Power Company 10.1 12.9 1.5 4.5 11.6 14.6 14.4 17.4 Iows Electric Light & Power Company 10.1 12.8 5.0 3.0 15.1 13.1 17.8 15.8 Orange & Rockland Utilities, Inc.
10.2 12.1 8,. 0 5.5 18.2 15.7 20.1 17.6 Rochester Cas & Electric Corp.
8.2 10.6 4.0 4.5 12.2 12.7 14.6 15.1 f.t. Joseph Light & Power Company 10.2 12.6 0.5 6.5 10.7 16.7 13.1 19.1 erage 9.8%
12.3%
2.41 4.8%
12.3%
14.6%
- 14. 7 % (4) 17.0% (4)
Avarage of Hoody's 24 Public Utilities 9.6%
11.9%'
2.2%
5.5%
11.8%
15.1%
14.1 % (5) 17.4 % (5)
NOTES:
f's Source: Value Line Inves. ment Surveys (see below). llistorical growth rate 5 years ended 1979. Future growth rate is average proiected 3-5 years into future.
(2) As taken from Schedule **.
(3) Average of these two ip>'
>4 total return rates is 15.6%.
(4) Average of these two ind:
.otal return rates is 15.9%.
(5) Average of these two indi%1 ital -eturn rates is 15.8%.
Source of Information: Value Line Investment Survey:
Electric Utility Industry East, Edition 1, July 4, 1930 hh Electric Utility Industry Central, Edition 5 August 1, 1980 m --
{h Electric Utility Industry West, Edi tion 11, September 12, 1930 a
w
4 Indication of Bare Rent Rare for Use of Capital Exposed to the Public Utility Risk l
and Sensitivity of Intereat Rates to Annual Rate of Inflation COLUHN C COLUMN A COLUMN D Indicated Bare Rent I
Average Yield on Hoody's Indicated Average Rate Rate for Use of Capital at Avarsge for Years Ah Hated Pulite Utilft,v Bonds (1) of Inflation (2) low Secured Hisk (A-B) 1953-1960 Inclusive 3.74%
1.39%
2.35%
1961-1968 Inclusive 4.93 2.04 2.89 1969-1976, Inclusive 8.32 6.38 1.94 1977 8.43%
6.5%
1.93%
1978 (3) 9.10 7.7 1.40 1979 10.22 11.3 (1.11) l Notes:
(1) Distributed yields as published by Hoody's Investors Services, Inc.
I (2) As measured by the annual change in the Consumer Price Index (where 1967 is equal to 100), as published by the
{
United States Bureau of labor Statistics.
(3) A study of this nature is subject to caution simply because there are dangers in confining one's observations to one year er a group of years.
Results for individual, years or groups of years may be affected, at least in part, to fiscal, monetary and economic policy of the U. S. Covernment.
It is also noteworthy that one must be guare that investors in the short run are constantly Jrying to achieve a return that is higher than their per-ception of the prospective rate of inflation.
It is necessary, therefore, to observe the various results over a very long period of time, preferably in eight year intervals.
The choice of viewing the data in eight year intervals is based upon an approximation of a length of eight years for a complete business cycle. lie data was grouped together in eight year intervals beginning with the year 1953.
ENU
% ll E osa m.g
Exhibit CC-5 Schedule 16 Page 2 of 2 New Orleans Public Service, Inc.
Indicated Common Equity Cost Rate by Use of the Bare Rent Technique Indicated Bare Rent Rate (Pure Interest Without Regard to Inflation) 2.0% - 2.5%
Inflationary Expectations on Average 1981 1982 U.S. Budget Fiscal '81 - Calendar Year 1981 8.6%
8.2 (1)
Calendar Year 1982 7.8 Adjustment for New Orleans Public Service Greater Risk 0.3 (2)
Equity Risk Premium 4.0 4.8 (3)
Total 14.5% - 15.8%
Kid-Point of Range 15 2j[
3 Notes:
(1)
Two year average prospective rate of inflation for calendar years.
1930 and 1981 as contained in U.S. Budget for fiscal 1981.
(2)
Average spread of A over Aa bonds - from Schedule 19.
(3) Judgment based on my analysis. For example, the 5 year averaga E/P ratio of 7 barometer companies 1975-79 inclusive is 12.9% and when adjusted for issuance w penses, etc. of 7% (12.9% + 93% = 13.9%),
i
(
there is an average indicated equity risk premium of 4.3% versus A rated public utility bonds which averaged 9.6% de*:ing tha 1975-79 inclusive period (from Schedule 19) 13.9% less 9.6%.
Also, the historical market based equity risk premium has been 8.7% for the market as a whole (Schedule 17, pg. 1) and adjusted for risk differential by beta for the seven barometer companies, an equity risk premium of 4.8% is indicated (8.7% x.55).
Exhibit CC-5 Schedule 17 Paga 1 of 2 New Orleans.Public Service. Inc.
Capital Asset Pricing Model (CAPM) Analysis Ry
- B (KM - Ry) = Ki, where R7 - Riskiess rate of retarn B = Seta KM = Return rate on the market or RF + equity risk prenium Ki = Return rate on inves tment RF = 9.5% (Judgment of prospective riskiess rate of return through 1981 based on analysis of trends in 91-day treasury bills and 3-year treasury notes (see page 2 of this Schedule)
B=
Average Betas from Value Line Investment Survey (1):
Middle South Utilities, Inc.
.70 Seven Barometer Electric Companies
.55 Moody's 24 Utilities
.64 KM = Riskiess Rate plus Market Premium
~
Ecuity Risk Premium (2) oasec on aritnmetic mean return rates (1926-1978 (2)):
Mean Return Rate on. Common Stocks 11.2%
Less Mean Return Rcte on U. S. Treasury Bills (2.5)
Equity Risk Premium 8.7%
Indicated CAPM Re "arn Rate Through 1982 RT + B (KM - Ry) = Ki 9.0% +.64 (18.2 - 9.5) = 14.6%
Moody's 24 Utilities l
l 9.0% +.55 (18.2-9.5) = 13.8% Seven Barometer Companies 9.0% +.70 (18.2-9.5) = 15.1%
Middle South Utilities, Inc.
Notes:
(1)
From Value Line Investment Surveys of Electric Utility Industry East - July 4, 1980; Central-August 1, 1980; West - September 12, 1980 (2)
Stocks, Bonds, Bills and Inflation: Historical Returns (1926-1978) by Roger G. Ibbotson and Rex A. Sinquefield--The Financial Analysts Researyb Foundation. 1978.
Exhibit CC-5 Sch2dule 17 Page 2 of 2 91-Dav Treasury Bill Yicids and Yields on 3-Year Treasurv Issue Index Years 1975-1979 and the Most Recent Twelve Months Years 91-Day (1) 3-Year (2) 1975 5.757%
7.37%
1976 4.949 6.69 1977 5.309 6.69 1978 7.369 8.31 1979 10.040 9.73 Sept. 1979 9.989 1.60 Oct. 1979 12.256 11.60 Nov. 1979 11.018 10.58 Dec. 1979 12.105 10.72 Jan. 1980 12.038 11.06 Feb. 1980 13.700 13.79 Mar. 1980 15.037 13.76 Apr. 1980 10.788 10.32 May 1980 7.675 8.92 June 1980 8.149 9.27 July 1980 8.221 9.44 j
Aug. 1980 10.124 11.64 l
i Notes:
(1)
Average for last offering of month.
(2)
Taken from a yield curve on last Tuesday of month.
Source of Information:
Moody's Municipal and Government Manual Moody's Bond Survey l
l
~
Exhibit CC-5 e
hedule 18 i
tage 1 of 4
~
Indicated Return Rate Requirement on Common Equity Capital Beginning with the Before-Income Tax Overall Rate of Return Using the Standard & Poor's 400 Industrials Adjusted in Recognition of Financial and Business Risk Differences if They Had Been Financed Similarly to New Orleans Public Service. Inc.
Line No.
Description Ratios.
1.
Prospective achieved before-income tax overall rate of return for S&P 400 Industrials based on analysis of 8 year average and trend (per page 3 of this Schedule) 21.00%
2.
Business risk adjustment vis-a-vis S&P 400 Industrials -
conservative judgment based on entire analysis in this Exhibit and supported by following pages of this Schedule 18 65%
3.
Required achieved before-income tax'overall rate after recognition of business risk differential vis-a-vis S&P 400 Industrials (line 1 times line 2) 13.65%
I;.
Less: Provision for income taxes based upon an assumed 45% affective income tax rate (line 3 less line 6 1
times 45%)
4.43 5.
Required achieved after income tax overall rate of return 9.22 6.
Less:
Long-term debt component (54.64% ratio times 6.95%
cost rate)
(3.80) 7.
Component available for preferred stock and common equity (line 5 less line 6) 5.42 8.
Less:
Preferred stock component (15.20% ratio times 9.63%
cost rate)
(1.46) 9.
Component available for common equity (line 7 less line 8) 3.96%
10.
Indicated required achieved retur.n rate on a 30.16% common equity ratio (3.96% line 9 divided by 30.16% common equity ratio)
M
~
i l
~
Indication of Business Risk Differences Between the Moody's 24 Public Utilties Earameter Group of Seven Combination Electric and Gaa Companies, Middle South Utilties, Inc. and S&P 400 Industrtals(3)
Five Year Average Ended 1979
_Hoody's 24 Barometer Group Middle Line Public of 7 Electric South No.
Utilities (2)
Companies (2)
Utilities, Inc.
1.
Earnings / Price Ratio 13.2%
12.9%
13.4%
==
S&P 400 Industrials:
2.
Earnings / Price Ratio 11.5%
11.5%
11.5%
Common Equity Ra;io (Based Upon Total Capital Employed):
3.
S&P 400 Industrials 68.4%
68.4%
68.4%
4.
Common Equity Ratio 34.7 32.6 29.1 5.
Difference (line 3 less line 4) 33.7%
35.8%
39.3%
Calculation of Equivalent E/B Requirement for the S&P 400 Industrials in Recognition of Financial Risk Differences:
6.
Additional Rate of Return Requirement for S&P 400 Industriale in Recognition of Lower Fiancial Risk (1) 10.1%
10.7%
11.8%
7.
S&P 400 Industrials Earnings / Price Ratio (from line 2) 11.5 11.5 11.5 8.
Total (line 6 plus line 7) 21.6%
22.2%
23.3%
9.
Indication of Business Risk Differences (line 1 + line 8) 61%
58%
58%
Notes:
(1) Computed by multiplying line 5 by the indicated common equity cost rate movement relative to change in common equity ratio as developed for each company or group of companies on page 3 ymn of Schedule 18.
The indicated common equity cost rate movement of 0.30% was employed for g @. s.
the Moody's 24 Public Utilities Barometer Gro p of 7 Combination Electric and Gas Companies and Middle South Utilities, Inc.
"57 0 *n (2) Based upon an arithmetic average of the individual ratios for each company and the group.
e$'?
(3) 1979 S&P Data are preliminary.
Source of Information:
Interactive Data Corporation Standard and Poor's Compustat Services. Inc. Comnustar il nnel tir f 11 rv comnientar IT
Indicction of Common Equity Cost Rate Hovement Relativa to a Chrnge in Common Equity Ratio Based Upon S&P 400 Hefore Incoms Tax Overall Achieved Rate of Return if Financed Like Hoody's 24 Public Utilities, Barometer Group of Seven Electric Companies and Middle South Utilities. Inc. (4) j Five Year Average Ended 1979 Barometer Group I
Hoody's 24 of 7 Combination Middle South I
Linn Public Electric and Utilities, N 3.
Utilities Gas Companies Inc.
1.
Before income tax overall rate of return for S&P 400 Industrials 21.22%
21.22%
21.22%
2.
Less:
Provision for income taxes based upots an assumed 45% effective income tax rate (line 1 less line 4 x 45%)
.7.91 7.90 7.48 3.
After income tax overall rate of return 13.31 13.32 13.74 4.
Long-term debt component as developed on line 17 below 3.64 3.66 4.60 5.
Component available for preferred stock 1
and common equity (line 3 less line 4) 9.67 9.66 9.14 6.
Preferred stock component as developed i
on line 20 below 0.96 0.99 0.67 7.
Component available for common equity
}
(line 5 less line 6) 8.71%
8.67%
8.47%
1 8.
Indicated return rate (line 7+ line 12) 24.4%
25.7%
27.3%
9.
Achieved rate of return on average book q
l common equity for S&P 400 Industrials 14.7 14.7 14.7 l
10.
Difference (line 8 less line 9) 9.7%
11.0%
12.6%
I 11.
S&P 400 Industrials common equity ratio (1) 70.9%
70.9%
70.9%
12.
Common equity ratio (2) 35.7 33.8 31.0 13.
Difference (line 11 less line 12) 35.2%
37.1%
39.9%
14.
Indicated common equity cost rate movement relative to change in common equity ratio (line 10 t line 13) 0.28%
0.30%
0.32%
, y, EE$
~~
Continued on page 4.
"b$
s" n
- t. M P, v
Indiccticn of Common Equity Cort Rata Hovement R21stiva to a Chrngs in Common Equity Racio B ctd Upon S&P 400 Baforo Income Tex Ovarall Achieved Rate of Return if Financed Like Hoody's 24 Public Utilities, Braeter Group of Seven Electric Companies and Itiddle South Utilities, Inc. (41 Five Year Average Ended 1979 Barometer Hoody's 24 Croup of 7 Middle South
.no Public Electric Utilities, 2._
Utilities Compsnies Inc.
Long-term debt ratio (2) 51.3%
52.3%
59.7%
Indicated long-term debt cost rate (3) 7.1 7.0 7.7 Long-term debt component (line 15 x line 16) 3.64%
3.6b%
4.60%
Praferred stock ratio (2) 13.0%
13.9%
9.3%
Indicated preferred stock cost rate (3) 7.4 7.1 7.2 Preferred stock component (line 18 x line 19) 0.96%
0.99%
0.67%
mm:nt: Data for the barometer group shown on lines 1, 9, 11, 12, 15, 16, 18 and 19 are arithmetic average of the individual ratios for each company in the respective groups..
tes:
D Common equity ratio for S&P 400 Industrials based upon total permanent capital excluding short-term debt.
D Crpital structure ratios based upon total permanent capital excluding short-term debt.
4 Indicated long-term debt cost rate and preferred stock cost rate computed by relating actual long-term debt interest or preferred stock dividends booked to average beginning and ending long-term debt or preferred ctock reported to be outstanding.
)
1979 S&P data are preliminary, nrce of Information: Standard & Poor's Compustat Services, Inc. Compustat II and Utility Compustat II Interactive Data Corporation 3, y, n
$$ S 5
- a. 9
- h$
- n e;?
w
Comparison of Interest Rate Trends for Investor-Owned Public Utility and Industrial Companies Years 1975 to Date Aa Ra t ed A Rated Baa Kated Public Public Public Spread on Utility Bonds fears Utilities pd_ustria)s Spread Utilities Industrials Spread Utilities Industrials !.pread A Over Aa Baa Over Aa L975 9.44 8.90
.54 10.09 9.21
.88 10.96 10.26
.70
.65 1.52 L976 8.92 8.59
.33 9.29 8.88
.41 9.82 9.67
.15
.37
.90 1977 8.43 8.04
.39 8.61 8.36
.25 9.06 8.87
.19
.18
.63 l978 9.10 8.74
.36 9.29 8.94
.35 9.62 9.35
.27
.19
.52 l979 10.22 9.65
.57 10.49 9.91
.58 10.96 10.42
.54
.27
.74 lan. 1980 11.95 11.16
.79 12.27 11.48
.79 12.92 11.92 1.00
.32
.97 tb. 1980 13.19 12.26
.93 13.55 12.42 1.13 14.42 12.73 1.69
.36 1.23 1:r. 1980 14.09 12.93 1.16 14.65 13.29 1.36 15.26 13.64 1.62
.56 1.17 (pr. 1980 13.49 12.63 0.86 13.87 13.23 0.64 14.15 14.03 0.32
.38
.86 tay 1980 11.99 11.82 0.17 12.53 12.18 0.35 12.9J 13.41 (0.48)
.54
.94 funn 1980 11.73 11.03 0.70 12.21
.11.57 0.64 12.63 12.78 (0.15)
.48
.90 luly 1980 11.96 10.89 1.07 12.26 11.63 0.63 12.75 12.54 0.21
.30
.79 Lu g. 1980 12.73 11.45 1.28 12.96 11:93 1.03 13.50 12.79 0.71
.23
.77 Average Spread 1975 thru 1979
.33
.8J Iote: All yields are distributed yields, r..
&E iource of Information: Hoody's Investors Service, Inc. (Public Utility Hanuals and Bond Surveys) 7" w0
Exhibit CC-5 Sch:dule 20 New Orleans Public Service, Inc.
Summary of Measures of Common Eopjty Cost Rate Seven Moody's Middle Barometer 24 South Companies Utilities Utilities l
Earnings / Price Ratio
{
1980 Spot Ratios (Sched. 14) 14.2%
14.6%
16.5%
Two year average 1978-79 incl. (1) 13.6 13.5 15.3 Five year average 1975 7e incl. (1) 12.9 13.2 13.4 Earnings / Net Proceeds Katios-(2)
Two year average 1976-78 incl.
15.9%
N/A 16.3%
Five year average 1975-79 incl.
13.3 N/A 14.6 Discounted Cash Flow Analvsis (Sched. 15) 15.9 15.8 15.6 Bare Rent Theory (Sched. 16) (3) 15.2 Capital Asset Pricing Model (Sched.17) 13.8 14.6 15.1 Comparable Earnigns (Sched. 18) (4) 13.1
~
Judgmenr.of common equity cost rate for a barometer company similar to NOPSI before allowance for issuance costs.
14~ - 14 1/2%
i Cost rate for NOPSI before issuance costs allowanca (NOPSI's higher quality of earnings offsets its lower common equity ratio vis-a-vis barometer companies and also taking NOPSI's low embedded debt cost rat.e into account).
14.0%
Cost rate for NOPSI after allowance for issuance expenses, etc. -
See Appendix B (14.0% + 93%)
15.05%
Use 15%
Notes:
(1) From Schedules 7, 9 and 10.
l (2) From Schedules 11 and 12.
l (3) Applicable to an A rated (by Moody's) utility like NOPSI (4) This is an achieved rate.
If attrition were to occur prospectively l
atan apaual rate of 1/4 of 1% of the overall rate of return,then an opporrunity rate of 13.9% is indicated (13.1% + 0.25 + 30.16% = 0.8%).
Af ter adjustment for issuance expenses, a 14.9% full opportunity rate is indicated (13.9% + 93%).
,y
r Exhibit CC-5 Sch2dula 21
- }..
New Orleans Public Service, Inc.
Indicators of Common Equity Return Rate and Averages of Fixed Charges Based on Overall Cost of Capital of 9.78% Relative to an Original Cost Rate Base 1.
Overall Cost of Capital 9.78%
2.
Less Expectation of Annual Rate of Attrition 3.
Experienced Overall Cost of Capital 9.77 4.
Less:
Weighted Cost of:
a.
Long-Term Debt 3.80 b.
Preferred Stock 1.46 c.
5.25 4 C L C-5.
Balance for Common Equity (line 3 less line 4c) 4.52%
6.
Common Equity Return Rate (line 5
+ 30.16% Common Equity Ratio) 15.0%
~
Actual Expericnced Indicated Coverages:
Coverages 1975-79 Inclusive (2)
Seven Moody's Barometer 24 NOPSI Companies Utilities 7.
Ji.1 Interest Before Income Taxes (1) 3.9 2.8 2.7 2.8 8.
'11 Interest After Income Taxes (line 3 + line 4a) 2.6 2.1 2.2 2.3 9
Overall Coverage of Interest and Preferred Dividends (line 3 +
line 4c) 1.9 1.9 1.7
1.9 Notes
(1)
Line 3 less line 4a = x + 55% complem2nt of assumed effective income tax rate cf 45% = y plus line 4a = z t line 4a.
(2)
From Schedules 3, 7, 9 and 10 - including AFC.
.