ML17033B056

Direct Testimony of John M. Haynes, Vice President and Treasurer, Niagara Mohawk Power Corporation, Before the Public Service Commission

ML17033B056
Person / Time
Site:	Nine Mile Point
Issue date:	02/02/2017
From:	Niagara Mohawk Power Corp
To:	Office of Nuclear Reactor Regulation
References
Download: ML17033B056 (24)

Text

Before the Public Service Commission Niagara Mohawk Power Corporation DXBECT TESTlMONY of John N. Haynes Vice President, and Treasurer

Q.

Will you please state your name and business address?

A.

John M. Haynes, 300 Erie Boulevard West,

Syracuse, Ne>> York 13202.

Q.

What office do you hold with N agara Mohawk Power Corporation, and what are your principal duties?

A. I am Vice President and Treasurer.

I am in charge of financing-both short-term and long-term, as well as investor relations programs.

Q.

What i your educational and business background and qualifications?

A.

Z graduated from Utica College of Syracuse University in 1952 10 with a Bachelor of Science degree and a major in Accounting.

Prior to joining Niagara Mohawk in 1961, 1 worked for Price Waterhouse 8c Co. in New York and Syracuse.

After joining 13 Niagara Mohawk that year, 1 worked as a senior auditor, admin-istrative assistant in the Treasury Department of the

Company, 15 Assistant Treasurer, Treasurer and was elected to my present 16 17 position on August 15,'973.

What is the scope of your testimony?

18 A.

My testimony encompasses the following ma jor areas:

19 20 21 l.

Need for the requested temporary electric rate relief in 1976.

2.

Financing policies, specific financings planned for 1976 22 and 1977 and general levels of required financing through 23 1979 3.

hP views regarding the investment quality of the Company's

rp JOH51 i3. HAYES securities.

4.

Tne Company's overall cost of capital estimated at June 30, 1977, approximately the mid-point of the first full year the requested permanent increase in rates, if'and to the extent granted, would be in effect.

5.

The maintenance of compensating bank balances.

>lhat do you wish to present with specific reference to the Company's I

request for temporary electric rate relief?

A.

The requested temporary electric rate. relief'is required to 12 13 provide immediate support for our planned financings, on

" reasonable

terms, scheduled for October, 1976 and early 1977.

During this period, debt, preferred stock and common stock are all planned for sale.

Failure to achieve such relief will necessitate modifications to our program, with potentially grave consequences.

$That are the Company's financial policies and how are they applied?

En order to provide a background framework on which to 18 19 evaluate our specific financing plans, an understanding'f

=

our financial policies is important.

20 Our goal is to maintain a sound financial program to 21 22 achieve a balanced capital structure, to be achieved on a continuing basis on reasonable terms from a position of 23 flexibilityin determining the type, timing and amount of various securities issued.

These securities include a range

JOHIl I'I. HAYNES of possibilities beyond the more traditional long-term financing of mortgage debt, preferred stock and common stock, such as short-term bank loans, corrmercial paper, bankers acceptances and leasing arrangements.

I In arriving at a specific financing program, consideration is first given to our forecasted cash demands both from operations and from our construction program.

Operations periodically give rise to short-term financing requirements 10 while the construction program, due to the inadequacy of internally generated funds, gives rise to long-term financing.

12 13 The bankers acceptances, used to finance our seasonal winter storage of oil for oui Oswego generating units would be an example of borrowings related to operations, and are repaid as the oil is used up.

Financing related to our construction program also begins through short-tern borrowings.

These borrowings,

however, must be repaid from the proceeds of 17 long-term securities sales (debt and stock, equities).

The 18 Company attempts to accomplish these sales on an orderly 19 basis at'reasonable intervals, remembering that such sales 20 can only be accomplished by attracting potential investors.

'rlhat is the Company's financing program for 1976'and 1977'?

'22 A.

Applying the above policy to our specific 1976 and 1977 23 financings, 1 will outline the program as it presently exists lf the requested temporary rate increase is not

granted, modifications in our financing program will have to be made.

1 76 Financin Program Short-term debt at the end of 1975 is expected to be approximately.

$60-65 million, consisting of bankers acceptances, bank loans and commercial paper.

For the first eight months of 3,976, short-tenn debt is projected to average between

$40-10 12

@50 million, with a range of under 410 million in May and just short of QO million in June, At August 31, 1976, the balance is projected to,approximate

~~40 million rnthout rate relief.

ln September and early October, the oalance would approximate y100 million and, i'f not reduced oy major long-13.

15 term financing, rise to over

~ql30 million by the end of the year.

Based upon our experience, and looking ahead to the additional needs arising during 1977, this would be an un-acceptably high level of short-term debt to carry into 1977.

17 18 19

instead, we propose

$50 million of mortgage bonds and approxi-mately 3.5 million shares of common stock in October,

1976, to substantially clean up all short-term debt at that time 20 21 and insure our ratings for commercial paper.

Sales of our commercial paper are vital to our short-term oorrowing 22

.program.

Any reduction in our, conanercial paper rating of A-2 would-probably preclude any such sales.

Lle estimate financing proceeds to approximate q93 million and thu" reduce end of

0

JOSE bl. HAYES 1976 short-term indebtedness to about

~j35 - PiO million.

To complete the description of our long-term financing program in 1976@

we would anticipate issuance of some

~pl6 million of common stock through the Employee Savings Fund Plan and the Dividend Reinvestment Plan.

1

77. Financin Pro ram C

With a starting point of short-term debt estimated at

~35 - ~40 million at the end of 1976, projected cash con-struction requirements for 1977 aggregate nearly $250 million, 10 up substantially from, the 1976 level.

During 1977, we would, anticipate total public sales of y100 million of General llortgage Bonds, ql25 million in Preferred Stock and a public 13 15 sale of about 3.0 million shares of Common stock.

Also, our program to sell Common shares through the Employee Savings Fund Plan and tne Dividend Reinvestment Plan would 16 continue.

ln order to accomplish this program in an orderly

fashion, these issues>>ould be split up.

Debt and either Preferred or Common stock irould be issued early in the year-lhrch or April - and the balance in September or October.

20 Obviously, whether the reauested temporary rate relief has 21 been granted will have a bearing on this as will consideration 22 of market conditions at the time.

Me>>ould also have to 23 consider the outlook for 1978 where construction expenditures

increase, and therefore an expanded financing program is

JOHiV b1.

1! '.Yi)rS necessary.

Q.

Please explain the m aning of "reasonable terms" as mentioned in your L

explanation of the Company's financial policies.

A.

I:.easonable terms encompass s different ch"racteristic" when applied to our various securities.

Taking bonds for example,

~ two out of our last three mortgage oond issues had to be sold on seven and ten-year tenn, bases, respectively.

Informal, and what we would consider, reasonable terms would have been thirty years, more closely approximating the li e of our plant.acilities being financed.

The cost of issuing securities 13

'n an intermediate term is costly to the rate payer, princip-ally because the mortgage tax on a $50 million issue would add about,"p325,000 to the cost.

Also, poorer credit risks are faced with making cash sinking fund provisions starting 15 17 18 early; i.e., at the"end of the fifth year and this reduces the ave age life of'he issue.

Again considering reasonableness, our common stock has b'een selling at a price below its book value since 1973, 19 causing unhealthy dilution in the then existing ownership 20 21 22 23 intere'st each time it has had to bc sold.

At the end of 1974, the price was eauivalent to approximately 50~q of book value and presently (early December 1975) approximates only 7@~ of book value.

This unhealthy situation should be corrected as soon as possible, and improved earnings I

JOHN t4.

HAYiiES and general financial strength should achieve that. end.

2 Q.

Could you give us your views on tne investment quality of the Company's securities?

A.

The ouestion of the quality of securities has become more important to investors.

Utility securities ratings have been 10 crucial not only in determining the cost of their issuance but in whether investors will buy them at all.

Earnings levels, for protection of the dividend is crucial to common stock quality (as is the quality of the earnings composition).

Our mortgage debt securities are split rated "A"/"BBBplus" yet, we must compete for investor monies with other large

'12 13 15 utilities and non-utilities which carry ratings much higher "AAA" and "AA".

Because of our ratings and coverage ratios in the last debt issue, we were unable to qualify with several state banking departments as a qualified investment.

Among these is New York State'.

This is also true of our preferred 19 stock.

Our preferred stocks are rated only triple "B".

Clearly our ratings are too low to effectively compete for capital funds on reasonable terms.

Some investors will

~ 20 not purcha e "BBB" securities.

'1he temporary relief is 21 22 essential to protect existing ratings from slipping still

further, a matter of real concern in light of the 1976 23 forecast.

Along with subsequent permanent rate relief, the temporary relief increa es the prospects for a necessary

JOHN N.

HAYNES upgrading 'in our quality rating.

2 Q.

Mhat are the Company's mortgage bond ratings by the various agencies?

A.

The.Company is rated "A" by~'-'oody's end Fitch's, and "BBB plus" by Standard Ec Poor's.

Standard ac Poor's, in the fall of 1974 prior to the sale of 12.6~p Bonds, down rated the Company from "A",

Obviously, the higher the interest rates, the more difficult it is to maintain and improve interest coverages.

10 Based on discussions with the rating agencies, our projections for capitalization ratios arc in good.order', our construction programs have been reduced to reasonable amounts that can be financed - and therefore, the main ingredient of which we are aware necessary to restore and solidi'-'y our "A" rating would be higher interest coverages.

Another point that should be made here is to emphasize the importance of maintaining, with the recognized rating

agencies, the highest possible rating on the securities that we must issue from time to time.

Niagara Mohawk's external 18 19 financing requirements during the period 1975 - 1979 vill approximate

$780,000,000 of which about.p372,000,000 ~ill 20 be raise'd in the form of new debt capital.

Given a 1+~

21 differential oetween single "A" and triple "B" rated securities, 22 our customers could oe reouired to pay, over the 30-year 23 bond life, an estimated additional ~111,600,000

(~372,000,000 X l~p X 30 years) through higher rates as a penalty for

JOHN N.

HAYNFS Niagara's low credit rating.

Q.

17hat would the financing program you have outlined produce for capitalization ratios and cost of capital in June of 1977?

A.

Based on Exhibit tl showing tne financing considerations, we have taken one-half of the 1977 financings to develop the capitalization for June which would be 51.7~I~

debt, 13.5~p preferred stock, and 34.8~p~

common equity.

10 The overall cost of capital expected, including estimated interest and preferred dividend rates. on the 1976-1977 financings, is 9.96~q and has been used by hh.. Sanguinein 12

'alculating revenue reauirements on a "permanent" basis.

Q.

ls thc common equity percen.age of 3~i,8",~ higher than you have 13 experienced in the past?

15 A.

Yes. lt would appear that in order'to. achieve and maintain the higher coverage ratios necessary to upgrade our auality

.16 ratings and to provide flexibilityto finance-under the 17

, varied conditions confronting the Company during each year, a larger eauity ratio is necessary.

This equity component

. '19 may have to be increased still further to 36~p -

37',~ or even 20 higher in the ye'ars ahead if the presently high interest 21 22 rates continue, in order to maintain adequate debt coverage.

Have you had prepared 'under your direction an exhibit entitled 23 "Niagara l'mohawk Power= Corporation, A Financial Forecast" which shows

'construction expenditures and. sources of capital for 1976 through 1979? '

JOHiil lf. HAs.[PS 2

A.

Yes, Exhibit 12 shows our projections of direct construction expenditures during the years 1976 through 1979 totaling about @60 million plus Allowance for 'uncs Used During Construction of about

$140 million and approximately,",~110 million of other costs capitalized..

Together, they aggregate 6

about

~<1.1 billion. It is anticipated during these years that over.'+00 million will need to be raised in the capital markets.

In recent months, the Company has.taken significant 10 initiatives in arranging sharings of plan. construction, 12 13 in part to m"-ke the construction program more manageable to finance.

However, future financing requirements remain formidable since internally generated funds are expected to provide less than hal of our revised cash needs.

This 15 16 17 is one important reason for the Company's proposal to include additional construction work in progress in rate P

base.

18-Q.

'lith respec to short-term borro>>ings, will you please state whether 19 20 21 or not -the Company is required to maintain compensating balances in the banks with which you do business?

A.

Yes.

Compensating balances are required in the various 22 23 banks with which the Company maintains short-term arrangements.

4'hat are the lines of credit that your Company has with its banking institution in which compensating balances are required?

P

JOHN bf.

HAYNES "A.

The Company has obtained from various banks lines o

credit I

totaling ~p151,100,000 for which compensating balances are required.

Additional lines of credit totaling $49.5 million have been obtained by payment of fees.

Fee lines of credit cannot exceed the lines o" credit requiring compensating balances.

7 Q,Jhat are the usual terms required by banks with respect to compensating balances?

E A.

Compensating balances vary from bank to bank, however, the 10 most prevalent method is 10I of the line of credit plus 10~~

of the amount borro red.

Have you obtained documentation from an officer of each bank in which 13 Niagara h!ohawk maintains a compensating balance'describing arrangements as applied to Niagara mohawk?

15 A. I directed my assistant to request letters from the banks, 16 and copies of these are contained in Exhibit 13.

The dollars 17 18 associated with these, balances have been computed and pro-vided to fir. Sanguine.

19 20 21 22 23

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