U-1034-99 Smith Testimony.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
INTERMOUNTAIN GAS COMPANY
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Case No. U-1034-99
PREPARED TESTIMONY OF WALTER H. SMITH
Q. State your name, address and position with Intermountain
Gas Company.
A. My name is Walter H. Smith. My business address is 555
Soutt Cole Road, Boise, Idaho and I am President and
Chief Executive Officer of Intermountain Gas Company,
and serve on its Board of Directors.
Q. What are your responsibilities?
A. I have the overall responsibility of directing the operations
of the Company and carrying out the policies a.s established
by the Board of Directors.
Q. Will you briefly state your educational background and .your
work experience.
A. I have a Bachelor of Science degree in Civil Engineering
from Oregon State University. I have been involved in
utility management, construction and operations for the
past thirty-four years. I have been employed by Inter-
mountain Gas Company for thirteen years, and have been
President for approximately two years.
Q. Will you briefly describe the Company's operation and
business?
A. The Company is engaged in distribution of natural gas to
approximately 93,000 customers in 65 communities in the
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southern part of Idaho in an area generally known as
the Snake River Basin. In terms of our total annual
gas. sales, 18% is for residential use, 21% for commercial
use and 61% for industrial use.
Q. When was the last general rate case determination for
Intermountain Gas Company made by the Idaho Public
Utilities Commission?
A. On December 11, 1982, the idaho Public Utilities
Commission, in Case No. U-10 34-95, authorized an increase
of $4,840,450 in revenue based on a 10.980% overall
rate of return and a 15.75% return on common equity.
Q. Will Intermountain Gas Company be able to achieve the
overall rate of return and the return on common equity
allowed by the Commission in that Order?
A. Although a very short period of time has elapsed since
the granting of the final Order, it is apparent that
the Company will be unable to attain the allowed return
on equity.
Q. Why do you reach that conclusion?
A. Since the filing of the last rate proceeding on September 3,
1981 and the granting of the Order in that proceeding,
there has been a substantial drop in gas sales. The
last case was predicated on sales of approximately
322,000,000 therms per year. Primarily because of
shifts in industrial load, annual therm sales are pro-
jected to be approximately 25% lower than the level set
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forth in the previous case. Testimony given by other
wi tnesses in this case will show our gas sales pro-
jection to be 243,000,000 therms per year, which will
result in substantial revenue deficiencies.
Q. What effect does the decrease in earnings have on the
financial integrity of the Company?
A. Intermountain has failed to earn its allowed rate of
return on equity by a wide marg in in three of the past
four years. This has put a significant strain on the
financial strength of the Company. Witness Blickenstaff
will demonstrate that the company's financial performance,
when compared with forty-five other companies in the
natural gas distribution industry, has been poor. By
practically any standard of comparison, Intermountain
rates among the bottom 10% of these companies. This
si tuation must be corrected if we are going to be able
to attract capital at a fair and reasonable cost.
Q. Will the Company have to obtain any outside financing in
the near future?
A. The Company has not had any recent substantial customer
growth. This has been caused primarily by current
economic conditions in the residential ma.rket and low-
cost electrical power. As a result, the Company has not
had to raise outside capital since October, 1979. However,
the Company's marketing position has been strengthened and
the Company anticipates growth in the residential markets.
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This will require fresh capital, and the Company will once
again need to obtain outside financing. The Company's
earnings must be increased now in anticipation of that
financing, since recent earnings are critical to the
cost of either equity or debt. Any short term benefit to
the ratepayers arising from artificially low rates will
be more than offset by increased costs of future funds
to the Company.
Q. Has the common shareholder received a common stock
dividend on a regular basis?
A. The common shareholder has received a cash dividend of
$1.40 per share for the past four years. However, in only
one of those last four years have there been sufficient
earnings available to pay the dividend. The shortfall
has been paid out. of unrestricted retained earnings.
Q. What are unrestricted retained earnings?
A. Unrestricted retained earnings are defined in the corporate
trust indenture as that portion of the retained earnings
that may be used to pay common stock dividends. Unrestricted
retained earnings have unfortunately been so badly depleted
in the past three years that unless the Company can earn
sufficient funds to cover the common stock dividend and
required preferred stock redemptions, the total of which
currently amounts to approximately $2.8 million a year,
the common stock dividend will be in jeopardy. It is
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obvious that once the unrestricted retained earnings
have been depleted, dividends can only be declared
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sistent with the earnings available. As a result, if
earnings are not sufficient, the dividend may have to
be reduced or eliminated.
Q. What effect would that have on the financial integrity
of the Company?
A. Our common stock has been selling for many months at
between 50% and 60% of book value. The only positive
element has been the annual common stock dividend. Our
financial advisors inform us that deletion or reduction
of the common stock dividend would greatly reduce the
market price of our common stock. Witness Blickenstaff
will show the history of financial difficulties incurred
by utilities that have reduced or eliminated their common
stock dividend. The net result in reducing or eliminating
a di videndis to increase the cost of capital. Thus,
Intermountain has no choice but to significantly improve
its earning posture. Failure to do so will cause disastrous
consequences to not only the shareholders but also the
ratepayers who will have to pay the increased capital costs.
Q. Who are the shareholders of Intermountain Gas company?
A. There are about 5,000 shareholders. They are mostly small
investors. Those owning 500 shares or less constitute
90 % of the shareholders. Those owning 200 shares or
less constitute over two-thirds of the shareholders.
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service would only decrease by about 5%.
Q. Can the shortfall in revenues be made up by increasing
the residential and small commercial customer base?
A. The intermediate and long-term marketing prospects for
the CompctI1Y are good. The Company is presently getting
a substantially better share of the market than in the
past. The Company continues to make every effort to
increase its market share; however, this will not have
an imediate impact on corporate earnings and the pros-
pect for substantial growth over the next couple of
years is not encouraging.
We see no immediate upturn in the housing market and
the temporary oil surplus has caused some industrial load
loss. Additionally, introduction of more efficient natural
gas space heating equipment will further increase conser-
vation and reduce therm sales per customer.
Q. The largest expense for Intermountain Gas Company is the
cost of gas. Has- the Company taken any steps to reduce
that cost?
A. The Company has taken steps to reduce the cost of gas.
Two recent developments have prompted the Company to
attempt to reduce our annual demand charges. In the first
instance, the projected sales volume for the Company has
been reduced. Secondly, a -new general rate case filing
with FERC by Northwest Pipeline Company on March 31, 1982
requests substantially higher demand charges for the gas
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distribution companies such as Intermountain have under
contract. For that reason, the Company is seeking a
reduction in our contract volumes with Northwest Pipeline.
Witness Penning will speak more directly to that matter.
Q. You previously mentioned that the reason the Company made
application at the present time for increased revenues
was due to lower therm sales than had been proj ected in
the previous rate case. Have you any assurance that your
present estimate of 243,000,000 therms would be valid if
approved by this Commission?
A. Estimation of therm sales is particularly difficult for
Intermountain, which has a much higher than average per-
centage of industrial sales than other similarly situated
distribution companies, which have a larger percentage of
their sales in residential and small commercial classifica-
tions. lvith almost two-thirds of Intermountain's sales to
the large industrials, the opening or closing of an
industrial plant,- the adding or reduction of work shifts, or
the introduction of new industrial processes can radically
change this Company's therm sales over a very short period.
Intermountain's therm sales are therefore much more volatile
than the industry norm. If economic conditions were to
improve dramatically, our therm sales estimate would be
conservative, and would result in overcollections from
our customers. The reverse, however, may be more likely
to occur and we would, again, suffer a shortfall.
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Q. Does Intermountain have any suggestions to rectify those
problems?
A. Once the revenue requirement is determined, the rates
are established on the estimated volume levels. The
Commission, the Company and the intervenors have generally
come to a consensus over the past few years to the
caiculation of the revenue requirement. An incorrect
prediction of therm sales, however, guarantees that
rates set by the Commission will not recover the agreed
upon revenue requirement. We will in this case suggest
a mechanism to protect the Company from a shortfall
in therm sales, and also protect the ratepayer should
therm sales be better than estimated in the rate proceeding.
Similar mechanisms have been authorized by other Commissions
wi th satisfactory results. We urge careful consideration
of such a mechanism by this Commission.
Q. Does this conclude your direct testimony?
A. Yes, it does.
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