BEFORE THE STATE OF NEW YORK PUBLIC SERVICE COMMISSION In the Matter of UNITED ...

315 Pages·2014·11.53 MB·English

BEFORE THE
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
In the Matter of
UNITED WATER NEW ROCHELLE & UNITED WATER WESTCHESTER
Cases 13-W-0539, 13-W-0564 AND 14-W-0006
APRIL 2014
Prepared Exhibits of:
Staff Finance Panel
KWAKU DUAH
Associate Utility Financial
Analyst
KENNETH BULLOCK
Senior Utility Financial Analyst
Office of Accounting, Audits and
Finance
State of New York
Department of Public Service
Three Empire State Plaza
Albany, New York 12223-1350
Summary of Exhibits Cases 13-W-0539, 13-W-0564 & 14-W-0006 Exhibit_(SFP-1)
Exhibit_(SFP-#) PDF Page # Description
Exhibit_(SFP-2) 3-13 Referenced Interrogatory Responses
Exhibit_(SFP-3) 14-15 Summary of Staff’s Cost of Capital
Exhibit_(SFP-4) 16 SuezE’s Corporate Structure
Exhibit_(SFP-5) 17-18 SuezE’s Common Equity Ratio
Exhibit_(SFP-6) 19 SuezE’s Equity Investments in Subsidiaries
Exhibit_(SFP-7) 20-21 Example of the Impact of Double Leverage on Return on Equity (ROE)
Exhibit_(SFP-8) 22-43 Moody’s Comment on ITC Holding Corp.’s Double Leverage
Exhibit_(SFP-9) 44-45 Subsidiary Adjustment Applied to Staff’s Proxy Group
Exhibit_(SFP-10) 46-123 Standard and Poor’s November 19, 2013 Credit Methodology
Exhibit_(SFP-11) 124-185 Moody’s December 23, 2013 Credit Methodology
Exhibit_(SFP-12) 186-188 United Water New Rochelle(UWNR) and United Water Westchester’s (UWWC) Rate Year
Credit Metrics
Exhibit_(SFP-13) 189 Rate Year Cost of Long –Term Debt
Exhibit_(SFP-14) 190 Summary of Staff’s Cost of Equity
Exhibit_(SFP-15) 191-192 Universe of Electric Holding Companies
Exhibit_(SFP-16) 193 Staff Proxy Group
Exhibit_(SFP-17) 194 Three Month Prices for Staff Proxy Group
Exhibit_(SFP-18) 195-196 Discounted Cash Flow Calculation For Staff Proxy Group
Exhibit_(SFP-19) 197-202 Merrill Lynch Quantitative Profiles (Relevant Pages)
Exhibit_(SFP-20) 203 Capital Asset Pricing Model Results
Exhibit_(SFP-21) 204-206 Ambika Prasad Dash’s Article: “Security Analysis And Portfolio Management”
Exhibit_(SFP-22) 207-211 Cost of Equity Estimate Based on Water Proxy Group only
Exhibit_(SFP-23) 212-216 Dr. Morin’s Excerpt on Sample Size;
Exhibit_(SFP-24) 217-226 William Bernstein’s & Robert Arnott’s Article on Analysts Earnings Growth and GDP
Exhibit_(SFP-25 ) 227-231 McKinsey & Company’s Recent Report on Inaccuracy of Analysts’ Earnings Growth Rate
Forecast
Exhibit_(SFP-26) 232-235 Fortune Magazine article entitled “9% Forever?”
Exhibit_(SFP-27) 236-244 Annie Wong’s Article on Size Premium
Exhibit_(SFP-28) 245-261 Richard Roll’s Article on Size Premium
Exhibit_(SFP-29) 262-307 Ching-Chih Lu’s Article on Size Premium
Exhibit_(SFP-30) 308-315 Standard & Poor’s Report on the Effect of Size on Regulated Water Companies
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
E
STAFF OF THE DEPARTMENT OF PUBLCIACS SERVICE
INTERROGATORY/DOCUMENT REQUEEST
United Water New Rochelle/United Water Westchester
Request No.: STAFF-6 KXD-1
Requested By: Kwaku Duah
Date of Request: December 26, 2013
Response Due: January 6, 2014
Witness: Ms. Pauline M. Ahern
Subject: Size Premium
a. Provide any empirical evidence/research work
demonstrating that firm size premium is applicable to
utility companies
b. Provide data showing how many regulatory bodies
provide size premium for regulated water companies
c. For the past decade, provide a listing of the
Commission’s rate case decisions that have accepted the
use of a size premium/size adjustment in determining the
allowed cost of equity for utilities regulated by the
Commission
Response:
a. Please see Attachment KXD-1 (a), In addition, the nine
companies in Ms. Ahern’s proxy group of nine water
companies trade on either the NYSE or the NDQ as shown
below:
American States Water Co. (NYSE)
American Water Works Co., Inc. (NYSE)
Aqua America, Inc. (NYSE)
Artesian Resources (NASDAQ)
California Water Service Group (NYSE)
Connecticut Water Service, Inc.(NASDAQ)
Middlesex Water Company (NASDAQ)
SJW Corporation (NYSE)
York Water Company (NASDAQ)
Page 1 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
Ibbotson Associates size premium studyE is based upon the
“decile portfolios of New York StockC ASExchange (NYSE),
American Stock Exchange (AMEX)andE NASDAQ listed
companies”, as stated in Ms. Ahern’s Prepared Direct
Testimony at page 55, li. 3 – 6. Therefore, all of the
water companies in her proxy group are included in the
Ibbotson Associates study. Hence, a firm size premium is
applicable to utility companies.
b. Please see Attachment KXD-1 (b) and Attachment KXD-1 (c).
Ms. Ahern is also aware that size premiums have been
explicitly or implicitly allowed in Nevada, Delaware,
Pennsylvania, Florida, Minnesota, and Kentucky.
The Connecticut Public Utilities Regulatory Authority, on
pages 5 and6 of Attachment KXD-1 (C) stated the
following:
The fixed formula adder of 50 basis points
was developed through negotiation by the OCC
and the Small Water Companies. This fixed
formula adder is in recognition of the lack
of financial flexibility for the Small Water
Companies due to their size and as such lack
of access to the financial markets. This 50
basis point adder was believed to be
reasonable when compared with the various
deciles of micro-cap size adjustments
recommended by Ibbotson Associates which is
a research firm that compiles stock and
other financial data. The 9th and 10th decile
companies, of which the Small Water
Companies are comparable, all rated at least
a 2.22% percentage point adder in a range of
2.22%-3.81%. In addition, when the 9th and
10th deciles are further broken down by size,
relative to the Small Water Companies, the
Ibbotson adders increase even more.
Response to Interrogatory FI-10. The
Authority finds the Settlement Agreement’s
fixed formula adder to be reasonable given
the data from Ibbotson Associates.
A variable performance adder of 50 basis
points was included as a provision to the
Settlement Agreement as an incentive for
management efficiency, customer service
and
Page 2 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
cost containment initiatives. E The variable
performance adder of 50 basiCsA Spoints was
found reasonable by the PartiEes, reasoning
that a variable performance adder equal to
the fixed formula adder would encourage
excellence in performance. The Authority
notes that the fixed and variable
performance adder when combined is still
significantly less than the 9th and 10th
decile companies in the 2.22%-3.81% range.
Response to Interrogatory FI-11. The Small
Water Companies believe that data to support
the areas of management efficiency, customer
service, and cost containment can be easily
generated since they track these
measurements. Tr. 8/30/13, pp. 112 and 113.
The Authority is of the opinion that this
variable performance adder should provide
for better service for water customers.
c. Ms. Ahern is not aware of any decision of the Commission
which accepted the use of a size premium / adjustment in
determining the allowed cost of equity for utilities
regulated by the Commission.
Page 3 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
STAFF OF THE DEPARTMENT OF PUBLEI C SERVICE
INTERROGATORY/DOCUMENT REQUCEASST
E
United Water New Rochelle/United Water Westchester
Request No.: STAFF-52 KXD-21
Requested By: Kwaku Duah
Date of Request: January 8, 2014
Response Due: January 18, 2014
Witness: Ms. Pauline M. Ahern
Subject: Double Leverage Ratios of Suez Environnement and
United Waterworks Inc
a. Please provide the double leverage ratio (in %) of United
Waterworks Inc. as of June 30, 2013. The leverage ratio
should be calculated by dividing United Waterworks’ equity
investments in all its subsidiaries and associated
companies by the intermediate parent’s (United Waterwork
[sic]) total equity holdings as of June 30, 2013. The
ratio should exclude goodwill.
b. Similarly, provide the double leverage ratio (in %) of the
ultimate parent (Suez Environnement) as of June 30, 2013.
The leverage ratio should be calculated by dividing
SuezE’s equity investments in all its subsidiaries and
associated companies by SuezE’s total equity holdings as
of June 30, 2013. The ratio should exclude goodwill.
Provide all documents relied upon as sources of information in
making the calculation.
Response:
a. The ratio of the total equity for the operating
subsidiaries of United Waterworks, Inc. as of June 30, 2013
as a percent of the total equity of United Waterworks’ was
65.10% as shown in the Attachment KXD-21. Since United
Waterworks is in the business, on a consolidated basis of
buying and selling regulated water operations, its only
subsidiaries it has are regulated operating utilities,
there are no associated companies. Note too, that the
common equity of United Waterworks consists of the common
equity in General Waterworks when acquired by United Water
Resources (UWR), additional paid in capital from UWR, if
any, retained earnings of United Waterworks subsidiaries
Page 4 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
(subsidiary retained earnings at thEe time of the
acquisition plus income received sinceC ASthe acquisition,
less any dividends which may have been paEid) as well as any
gains or losses from buying and selling water operations.
The subsidiaries common equity includes the common equity
on their books at the time of the UWR’s acquisition of
General Waterworks, income received since then, less
dividends paid, if any as well as any equity infusions from
United Waterworks, if any.
b. The information to respond is not available.
Page 5 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
STAFF OF THE DEPARTMENT OF PUBLEI C SERVICE
INTERROGATORY/DOCUMENT REQUCEASST
E
United Water New Rochelle/United Water Westchester
Request No.: STAFF-53 KXD-22
Requested By: Kwaku Duah
Date of Request: January 8, 2014
Response Due: January 18, 2014
Witness: Mr. Kevin Doherty
Subject: Impact of 100 bps Change in Common Equity Ratio
Please provide the impact (both after-tax and pre-tax basis) of
a 100 basis points change in the proposed 53.64% common equity
ratio on:
a. United Water New Rochelle revenue requirement
b. United Water Westchester revenue requirement
c. Combined revenue requirement for both companies
Response:
The after-tax impact of a 100 basis point change in the
proposed 53.64% common equity ratio is a decrease to the
United Water New Rochelle revenue requirement of $198,343;
a decrease of $44,883 to United Water Westchester and a
combined decrease of $243,226.
The Company’s revenue requirement model does not make
the requested calculation for pre-tax basis and such is
not provided with this response.
Page 6 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
13-W-0006
STAFF OF THE DEPARTMENT OF PUBLEI C SERVICE
INTERROGATORY/DOCUMENT REQUCEASST
E
United Water New Rochelle/United Water Westchester
Request No.: STAFF-110 KXD-44
Requested By: Kwaku Duah
Date of Request: January 24, 2013
Response Due: February 4, 2014
Witness: Pauline Ahern and Michael Algranati
Subject: Ring Fencing Mechanisms
Does Suez Environnement Company (SuezE) have in place strong
corporate mechanisms, such as ring fencing or golden share
provisions, which would fully insulate the capital structure
and financial standing of United Water New Rochelle, United
Water Westchester, and United Waterworks? If so:
a. Please fully describe the mechanisms.
b. Identify all entities within SuezE’s corporate
structure from which the specified mechanisms
insulate United Water New Rochelle, United Water
Westchester, and United Waterworks
c. Provide all supporting documents.
Response:
Suez Environnement does not have any such mechanisms.
Page 7 of 11
Exhibit (SFP-2)
PUBLIC SERVICE COMMISSION CAS 13-W-0539
E
13-W-0564
14-W-0006
STAFF OF THE DEPARTMENT OF PUBLEI C SERVICE
INTERROGATORY/DOCUMENT REQUCEASST
E
United Water New Rochelle/United Water Westchester
Request No.: STAFF-139 KXD-51
Requested By: Kwaku Duah
Date of Request: February 3, 2014
Response Due: February 13, 2014
Witness: Ms. Pauline M. Ahern & Michael Algranati
Subject: Follow-up to STAFF-48 KXD-17(SuezE Capital
Structure
Reference your response to STAFF-48 KXD-17. Your response did
not include minority interest and short-term debt. It also did
not provide the US GAAP version. Therefore, please provide the
capital structure in the Excel spreadsheet in the following
format. Show all steps in the calculation and provide the
financial statements and any other documents that were the
sources relied to perform the calculation. Show the
development of any adjustment and reconciliations and provide
the source documents relied upon in calculating each
adjustment and reconciliations.
Suez Environnement Suez Environnement
Consolidated Capital Structure Consolidated Capital Structure
(IFRS) (US GAAP)
30-Jun-13 30-Jun-13
€(Mil) % €(Mil) %
Short-Term debt Short-Term debt
Long-term Debt Long-term Debt
Minority Interest Minority Interest
Common Equity Common Equity
Total Capital Total Capital
Response: Please refer to Staff-139 KXD-51 Attachment for
the Suez Environnement Capital Structure that includes Short
Term Borrowings.
There is no US GAAP version of the Suez Environnement financial
statements. The Company is unable to provide the requested
analysis.
Page 8 of 11