INT Gill Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
INTERMOUNTAIN GAS COMPANY )
)
CASE NO. U-L034-88
PREPARED DIRECT TESTIMONY
OF
EDWARD K. GILL
Q. Please state your name and business address.
A. My name is Edward K. Gill. My business address is 101 South
Capitol Boulevard, Boise, Idaho.
Q. Wha t is your educational background?
A. I received my doctorate in Finance from the University of
Oregon in 1968. Prior to that I received a Master of
Business Ailninstration d~gree in 1966 and a Bachelor of
Science degree in 1961, both from the University of Oregon.
Q. What is your work background?
A. From 1961 to 1964 I worked in the Trust Investments area
for Bank of America in California. In 1964 I began my
graduate work at the Universi ty of Oregon. In 1967 I
joined the faculty of Idaho State University in Pocatello.
In 1968 I moved to Missoula, Montana, where I was a faculty
member at the University of Montana until 1971. I moved
to Boise in 1971 and taught at Boise State University
until 1974. At all three schools I taught Finance courses
primarily, including investments, financial analysis and
related courses.
In 1974 I joined my present employer, The Idaho First
National Bank, where I am Vice President in charge of the
Trust Investment Department. Also I am co-author of a
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textbook enti tledCommeroialBanking, published by Prentice
Hall, in which I authored the chapters on investment
management of bank portfolios and financial statement
analysis. The book is now in its second edition.
Q. What does your position at Idaho First National entail ?
A. My staff and I provide investment management service for
approximately 2000 trusts, estates, employee benefit
accounts and agencies of various types.
Q. Do you make investment decisions regarding corporate
stocks and bonds?
A. Yes. Corporate securities held in the Department total
approximately $250 million in market value. Of this amount
we have management responsibility over approximately
$150 million.
Q. How much of that. $150 million consists of public utility
securities?
A. Approximately $25 million.
Q. What is the purpose of your testimony?
A. I have been asked by Intermountain Gas Company to give
my views regarding the Company's role, present and future,
in Idaho. They have also asked me to testify as to how
I believe investors view the common stock of the Company,
and what would be required to make the stock more appealing
to investors.
Q. How do you view the present status of the Company?
A. Intermountain is a major supplier of energy in Idaho.
Natural gas is the only relatively abundant energy source
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at this time that does not carry major environmental
concerns. It is of great value to the people of Idaho
that Intermountain' s distribution system is in place and
serving the number of customers that it does at present.
Also of importance at this time is Intermountain' s ability
to increase the number of people served and expand the
number of applications to which gas is put by many existing
customers. This process of increasing the number of people
served is going on continuously. Intermountain has
indicated that during its 1980 fiscal year it plans to
add service lines, mains and metering equipment to the
extent of approximately $4 million.
In addition to the importance of the physical distri-
bution facilities, the organization, the skills of
Intermountain' s people and the value of the human systems
which are in place and serving the energy needs of southern
Idaho' s people are very important. To develop such an
organization would be a long and expensive process, and
the fact that it is here and operating at a time when our
future energy sources are so uncertain is of vi tal importance
to our region.
Q. How otherwise do you view the company as it is presently
established?
A. Intermountain is an important company in our part of Idaho.
It provides jobs for nearly 400 people. It pays taxes in
the communities it serves as well as to the State of Idaho.
Intermountain purchases a large volume of capital goods
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within the state as well as other materials and supplies.
New plant additions create employment and add to the tax
base. Also, a portion of the in teres t and dividends
paid by the Company each year remains in Idaho.
Q. How do you view the future role of Intermountain in Idaho?
A. The vi tal need to conserve energy and to properly allocate
available energy sources is well recognized. All energy
sources will be important in the future, but I believe
there should be greater reliance on gas than at present.
I believe Intermountain will play an important part in the
conserva tion and al1ocation processes as these pertain to
Idaho. This means helping assure that the most abundant
energy sources are those most utilized, and that energy
consumption per capi ta is at the most conservative level
possible. Of course, Intermountain must accomplish this
wi th as much consistency as possible with the needs and
expectations of customers and investors in the Company' s
securi ties.
Q. What does that entail?
A. The conservation effort cannot be viewed as damaging to
Intermountain' s long-term abili ty to serve customers'
energy needs. For example, if potential customers view
encouragement to conserve as evidence of near-term exhaustion
of gas supplies, they will be reluctant to call for gas
hookups.Investors, of course, want to be sure that the
Company has product to sell far into the future, and must
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understand the conservation effort. Very few industries
operate with an objective of discouraging per capita
consumption of their products, and if investors view the
conservation effort as hurting the Company financially,
then attracting capital will be very difficult. . Investors
must understand that gas supplies are sufficient and also
must see that Intermountain has the potential to achieve
increased utilization of gas relative to other energy
sources even though the trend is towards lower total
energy consumption per capita.
I believe Idaho willbenefi t if we increase our
emphasis on gas for our energy needs. The supply and
environmental problems of the other major energy sources
seem to be greater than those of natural gas. Synthetic
fuels and other sources of energy are as yet much too
expensive and scarce to replace the tradi tionalenergy
sources. Intermountain has a very important role to carry
out in bringing about more reliance on gas while promoting
overall energy conservation.
But in order to bring gas service to a steadily
increasing number of people ,wi th a larger number of uses
per customer, the Company must be financially strong and
be confident that it can raise capital as needed to increase
its service. In order to adequately serve the needs of
more customers, Intermountain's capital must increase.
Capi tal is increased in two ways: by obtaining funds from
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the capi tal markets and through retention of a portion of
net earnings. It is important that a portion of capi tal
come from retained earnings. Only a small portion of the
total capi tal needs of a growing company can be provided
by retained earnings, but a record of an increasing equity
base through retained earnings as well as periodic increases
in the dividend payment will make both the debt and equity
securi ties more attractive when funds must be raised in
the capital markets. It will be vital to its capital-
raising effort that the Company show a good earnings
record on its common stock.
How do investors perceive Intermountain 's common stock?
I believe the following .sets forth the most important
concerns presently facing prospective investors as they
consider purchase of Intermountain' s common stock.
l. The ability of the Company to earn its authorized
return on equity. Return on common equity was very
low in recent years. If potential investors are
not confident tha.t return on equity will increase,
then they will be concerned about the Company's
ability to increase dividends in the future and to
maintain a dividend payout ratio which is sufficiently
low to enable Intermountain to continue to build its
equity base through retained earnings.
2. Declining per capita consumption. The concern is
that conservation efforts by gas customers will result
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in weak earnings performance. Conservation efforts do
not imply a reduced need for capi tal investment,
however, as Intermountain must continue to inárease
the number of customers served.
3. Variations in weather. Earnings are expeCted to be
violatile due to variations in the severity of winters.
However, investors would expect that colder than
average weather would result in strong earnIngs
performance. This did not result from the severe
78-79 winter.
4. Lack of automatic adjustment for increases in the
cost of gas. This suggests to investors thepossi-
bility that Intermountain could be required to absorb
a price increase for a period of time, thus reducing
earnings. This concern should be partially alleviated
by the success Intermountain has had in the past in
obtaining rate adjustments to cover increases in gas
cost. Nonetheless, I believe the potential investor
would prefer automatic adjustment.
5. Uncertainty as to gas supply. In the early 1970's
the view spread that gas supplies were limited and
very uncertain. I believe this view is still held
by many, and is somewhat exacerbated in the case of
Intermountain because Canada is its main source.
While Intermountain's supplies are secure, in my
view there continues to be reluctance on the part of
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many potential investors to be convinced that long-
run supplies are certain .
6. Heavy reliance on two large industrial customers.
The Standard & Poor's stock report on Intermountain
(dated 2-11-80) points out that 27% of utility
opera ting revenues come from the J. R. Simplot Company
and Beker Industries. This may appear to be a heavy
exposure to many potential investors .
Q. What will be required to make the stock more appealing to
investors?
A. A signif icant improvement in return on equity, an improve-
ment to a level which investors consider to be reasonable
given prevailing weather conditions. If the Company can
earn its authorized return on equity, the potential investor
can reasonably expect periodic dividend increases, and can
also expect the Company to build its equity base gradually
through retained earnings. The ability to provide a portion
of its capi tal requirements through retained earnings
would moderately reduce the Company's dependence on the
capi tal markets and would help give it flexibil i ty as to
when it enters the capital markets.
A good earnings performance by the common stock with
periodic dividend increases will, I believe, increase the
market price of the stock as a percentage of book value
per share. It will be very important to have a good
earnings record when the time comes to raise additional
capital through the issuance of addi tionalcommon shares
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and for the market price of the stock to be sufficiently
high both to avoid dilution of book value per share and
to encourage potential investors in the new issue that
future amounts added to eaui ty capital via retained earnings
will not be severely discounted as the. market determines
the price of the shares.
Q. Will this improve the Company's abi.li ty to borrow?
A. A good earnings record on Intermountain's common stock will
improve its ability to borrow through issuance of debt
securi ties. The quality of its debt issues will be enhanced
by a good earnings performance, and this will allow the
issuance of debt at lower rates than would be possible if
its earnings record does. not improve over that of recent
history. It will also have more flexibility as to when
it enters the credit market and from what sources it
acquires debt funds if it has a good earnings record.
Q. Do you believe the rate of return recommended by Intermountain,
if it could be earned, is sufficient to increase the invest-
ment appeal of the Company's common stock?
A. I consider it to be the minimum required to begin the process
òf improving the appeal of Intermountain's common stock.
Q. Does this conclude your direct testimony?
A. Yes it does.