BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION PREPARED REBUTTAL TESTIMONY PAULINE M. AHERN, VICE PRESIDENT AUS CONSULTANTS - UTILITY SERVICES

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1 BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION ) OF ARKANSAS WESTERN GAS COMPANY ) FOR APPROVAL OF CHANGES IN RATES ) Docket No U APPLICABLE TO RETAIL GAS SERVICE ) PREPARED REBUTTAL TESTIMONY OF PAULINE M. AHERN, VICE PRESIDENT AUS CONSULTANTS UTILITY SERVICES ON BEHALF OF ARKANSAS WESTERN GAS COMPANY JUNE 12,1996

2 TABLE OF CONTENTS Pa No. 1. INTRODUCTION 1 II. CAPITAL STRUCTURE RATIOS 2 i

3 PSC Docket No U Prepared Rebuttal Testiony of Pauline M. Ahern Q. A. Q. A. Q. A. 1. INTRODUCTION Please state your nae, occupation and business address. My nae is Pauline M. Ahern and I a a Mce President of AUS Consultants Utility Services. My business address is 155 Gaither Drive, P.O. Box 1050, Moorestown, New Jersey Are you the sae Pauline M. Ahern who previously subitted prepared direct testiony in this proceeding? Yes, I a. What is the purpose of this testiony? The purpose of this testiony is to provide evidence on behalf of Arkansas Western Gas Copany (Arkansas Western or the Copany) as to the reasonableness of its proposed updated capital structure ratios in the instant docket and to testify to sae. The Copany based its originally requested overall rate of return of 8.26% upon a capital structure for the test year ended August 31, 1995 (Adjusted) developed using the Modified Balance Sheet Approach. Since the adjustents to the test year capital structure reach out to August 31, 1996, it is appropriate to utilize the ost recent per books capital structure (Adjusted) available. Since March 31, 1996 data are the ost recently available, it is appropriate to utilize these ratios in establishing an updated overall rate of return for the Copany, at this tie. The resultant updated overall rate of return of 8.53% is based upon the updated proposed capital structure for the year ended March 31, 1996 (Adjusted) which consists of 35.81% longter debt (including the longter debt portion of accuulated deferred investent tax credits), 2.73% custoer deposits, 46.71% coon equity (including the coon equity portion of 1

4 \ PSC Docket No U Prepared Rebuttal Testiony of Pauline M. Ahern Q. A. Q. A. accuulated deferred investent tax credits), 9.56% accuulated deferred incoe taxes, 5.1 3% current, accrued and other liabilities and 0.06% other interest bearing liabilities, copanyprovided ebedded cost rates and Mr. Hanley's recoended coon equlty cost rate, as shown in EXHIBIT FJH24. Moreover, I urge this Coission to utilize the ost recently available actual capital structure ratios (adjusted) at the close of record in this docket in establishing the overall rate of return for the Copany. Have you prepared exhibits which support the conclusion of your study? Yes, I have. They have been arked for identification as EXHIBITS PMA4 through PMA6. II. CAPITAL STRUCTURE RATIOS Why do you believe that the Copany's updated capital structure ratios for the year ended March 31, 1996, including costfree capital and custoer deposits are reasonable? They are appropriate because, like the Copany's capital structure ratios based upon the year ended August 31, 1995 (Adjusted), they result fro a conventional capital structure and related ratios based upon investorprovided capital (longter debt and coon equity). As stated in y prepared direct testiony, the investent counity, Le., analysts, investors and rating agencies, view all copanies on a coparative basis and Arkansas Western is no exception. Such ratios are indicative of how the Copany will be financed in the nearter future, the period of tie when new rates set in this proceeding would be in effect. As shown on EXHIBIT PMA4, the investorprovided capital structure for the year ended March 31, 1996 (Adjusted), upon which Mr. Hanley's updated recoended 2

5 PSC Docket No U Prepared Rebuttal Testiony of Pauline M. Ahern overall rate of return is based, consists of 43.40% longter debt and 56.60% coon equity. Arkansas Western's investorprovided capital structure for the year ended March 31, 1996 is within the range of reasonableness, consistent with the capital structures aintained by siilar risk enterprises. Q. How does Arkansas Weste's 56.60% coon equity ratio based upon investorprovided capital for the year ended March 31,1996 copare with the coon equity ratios aintained by the copanies in Mr. Hanley's proxy groups. A. Arkansas Western's coon equity ratio of 56.60% based upon investorprovided capital is consistent with the coon equity ratios aintained by the copanies in Mr. Hanley's proxy groups of twenty Value Line gas distribution copanies (LDCs) and of seven LDCs upon which he bases his updated 11.70% coon equity cost rate. Since the average Standard & Poor's (S&P) bond rating of both of his LDC proxy groups is A (see page 5 of EXHIBIT FJH17 accopanying Mr. Hanley's prepared rebuttal testiony), it is clear that the coon equity ratios aintained by these LDCs have found acceptance in the arketplace. As shown on pages 3 and 4 of EXHIBIT PMA5, the twenty Value Line LDCs and seven LDCs in his proxy groups have aintained, on average, coon equity ratios of 47.76% and 49.45%, respectively, for the year 1995, representing a slight increase in coon equdy ratio over those aintained, on average, for the year 1994,46.41% and 48.84% for each proxy group, respectively. The coon equdy ratios of the individual LDCs in the hnro proxy groups range fro 33.12% to 60.59% for the twenty Value Line LDCs and fro 38.85% to 60.59% for the seven LDCs. Consequently, Arkansas Western's coon equity ratio for the year ended March 31,1996 of 56.60% is reasonable, if not conservative, given Arkansas Western's sall size as discussed by Mr. Hanley in his prepared direct testiony, visavis the average coon 3

6 PSC Docket No U Prepared Rebuttal Testiony of Pauline M. Ahern equity ratios aintained by both his proxy groups of LDCs upon which his recoended coon equity cost rate is based. Q. How do Arkansas Western's capital structure ratios for the year ended March 31,1996 based upon investorprovided capital copare with the capital structure ratios aintained by the Copany in the recent past and estiated at June 30,1996? a A. Arkansas Weste's coon equity ratio based upon investorprovided capital of 56.60% for the year ended March 31, 1996 (Adjusted) is consistent with the coon equity ratios based upon investor provided capital (per books) aintained by the Copany in the recent past. As shown on page 1 of EXHIBIT PMA6 the Copany has aintained an average coon equity based upon investor provided capital of 55.53% since June 30, 1994, ranging fro 49.50% to 60.66%. In addition, as shown on page 2 of EXHIBIT PM4, the Copany estiates a coon equity ratio of 55.88% at June 30,1996, only slightly lower than the updated coon equity ratio of 56.60% for the year ended March 31,1996 (Adjusted). Q. How do Arkansas Western's capital structure ratios for the year ended March 31,1996 based upon investorprovided capital copare with SBP's financial benchark criteria? A. They are consistent with S&P's financial benchark ratios of total debt to total capital for LDCs with longter debt rated in the A category and of siilar business position as Mr. Hanley's two proxy groups, Le., high averagejawrage and average (see page 3 of EXHIBIT FJH14 accopanying Mr. Hanley's prepared direct testiony). As shown on page 14 of EXHIBIT FJH2, S&P's total debt to total capital criteria for an LDC, in an average business position, in order to obtain and aintain an A bond rating is 46% which iplies a total equity ratio of 54%. Arkansas Western's total debt ratio 4

7 PSC Docket No U Prepared Rebuttal Testiony of Pauline M. Ahern Q. A. Yes. based upon investorprovided capital for the year ending March 31, 1996 (Adjusted) is 43.40% as shown on EXHIBIT PMA2. A total debt ratio of 43.40% is only slightly lower than S&P's 46% total debt criteria for an A bond rating for an LDC in an average business position and is clearly consistent with an A bond rating by that benchark alone. In view of the foregoing, it is y opinion that a capital structure based upon investorprovided capital coprised of 43.40% longter debt and 56.60% coon equity is reasonable. It is consistent with S&Ps financial benchark criteria for an LDC to obtain and aintain an A bond rating and with the capital structures aintained, on average, by the LDCs in Mr. Hanley's proxy groups of twenty Value Line LDCs and seven LDCs, respectively. Consequently, as stated previously, the capital structure developed using the Modified Balance Sheet Approach upon which the Copany's updated overall rate of return of 8.53% is based is therefore reasonable, because it is the end result of a reasonable and appropriate investorprovided capital structure. Does this conclude your prepared rebuttal testiony? 5

8 BEFORE THE ARKANSAS PUBUC SERVICE COMMISSION IN THE MATIER OF M E APPLICATION ) OF ARKANSAS WESTERN GAS COMPANY ) FOR APPROVAL OF CHANGES IN RATES ) Docket No U APPLICABLE TO RETAIL GAS SERVICE ) FINANCIAL EXHIBIT (CONSISTING OF 3 EXHIBITS) TO ACCOMPANY THE PREPARED REBUTTAL TESIMONY OF PAULINE M. AHERN, VICE PRESIDENT AUS CONSULTANTS UTIUTY SERVICES ON BEHALF OF ARKANSAS WESTERN GAS COMPANY June 12,1996

9 ARKANSAS WESTERN GAS COMPANY Table of Contents to the Financial Supporting Exhibr of Pauline M. Ahern Exhibit No. Capital Structure and Related Ratios Capital Structure Ratios Based Upon for The Proxy Group of Twenty Value Line LDCs and Proxy Group of Seven LDCs Capital Structure Ratios for Arkansas Western Gas Copany at June 30,1994, Deceber 31,1994, August 31, 1995, Deceber 31, 1995, March 31, 1996 and Estiated June 30,

10 E'XHIBIT PMA4 M Capital Structure and Related Ratios ( A M Type of Capital (Intercopany Notes) Custoer Deposits Arkansas Missouri Total Custoer Deposits Total InvestorProvided Capital and Custoer Deposits Ratios Based Ratios on Total Based Investoron Total Provided Ratios Investor Capital Based on Aount Provided Incl. Cust. Total Outstanding (1) Capital Deposits Capital $57,168, % % % 74,563, $131,731, % $3,569, , $4,413, $1 36,145, % Accuulated Deferred Incoe Taxes Current, Accrued & Other Liabilities Accuulated Deferred Investent Tax Credits Debt Portion Portion Total Accuulated Deferred Investent Tax Credits Other Interest Bearing Liabilities Total CostFree and Other Capital $15,467,439 8,312, , ,830,565 90,053 $25,700,809 $161,846, % Notes: (1) Copanyprovided

11 Coon Equlty Total Capltal Total Capltal BlaMGwa Coon Equlty Total Capltal Preferred Stodc Coon Equlty Total Capltal Preferred Stodc Total Capltal See page 4 for notes. s Western Gas Wnry Capital Shcture Ratios Based upon Total Capltal for the Proxy Group of Twenty Value Une Gas Distrlbution Copanles P 1994 E!& (PI % AZ % as % L % % !s % 8.78!ILK % &Is % I.a % 5.84 a25 lqem% % !s! lqqlqq% % 0.51 SLZQ lpem% % e9p lpeop% % A2 lqqbqq% rn % s lqq&q% % L % u % 0.55 lqilq!l% % &.24 lqq&q% % % IL.a lqqlqq% % lqqlqq% EXHIBIT PMA5 Page 1 of % w % La % & % tsl % % e % u % s % 6.13 a % % % 3.39 GAQ % sl % Ll % a52

12 Preferred S W Preferred Stodc Coon Equlty LoTer Debt ShohTer Debt Total Capltal!llxJ Coon Equlty P Capital Structure Ratios Based upon for the Proxy Group of Twenty Value Une Gas Dlstrlbution Copanies fortheyeanl fp (PI % 9.51 a22 loo.qq% % 1.30!a % u % o.oo% % rn roo.qp% % w % &a 1M9Q%! % 1.99 si!ll u1psp% % 7.39 XW UQQ% % !B % Q UuQ% % t 1M90% % Lu lpeop% 4410 % u 1M90% % rn ioo.qp% % 2.26 ZLIQ uulm% % azz % u.l 1M9p% % aj!n 1pQSp% % % !z loo.qq% EXHIBIT PMA5 Page 2 of % % % w % cW % % LB % e221 ioo.qq% % & % S2a % 0.56 ala % BX ibb.oo% % &! % l rao.oo% % XI See page 4 for notes.

13 EXHIBIT PMA5 Page 3 of 4 clw2kh ShortTer Oebt Coon Equlty Coon Equlty Pledont Natural Gas Co, Coon Equlty Coon Equlty Total Capltal!4Ye&L See page 4 for notes. Arkansas Western Gas Capital Structure Ratios Eased upon for the Proxy Grwp of Twenty Value Une Gas Dlstrlbutfon Copanies lor the Years 1991 thah 1995 P1 w3 (PI % i % 0.07 z!a ioo.oo% % 1.83 a2q % ai % za! % i=&s % i!a % fL % 0.07 XMl % % xu2 ioo.oo% % %9! % Llz % aa % &Ala 1M9Q% % loepp% % !Li2 1pQsp% % Li4 IppSp% % A.2 lqepp% % #us 1Msp% % !L!M lpepq% % J % u % !lQB % % Z!sQ % % LEZ % o0.60% % lum% % g % ;r ioa.ao% % !L2a 1o6.00% % 6.72 iwa % toa.Qn% Source of Inforation: Standard 8 Poor's Copustat Senrlces, Inc., Utility Copustat II

14 EXHIBIT PMA5 Page 4 of 4 P Capital Sbucture Ratios Based upon for the Proxy Group of Seven Gas Dishhution Copanies I995 (PI 1994 z 1991 BaGswh % zs 1M9p% % u % w 1Msp% % L84 ipepp% % ShOrtTer Debt Preferred stock % wI 1M9p% % UQ lpem% % &2!l % rn lpepp% % s LOngT Debt ShortT~ Debt Preferredstock % 8.78 lpeop% % Msp% % !2a % a32 IMSp% % !&w QQ% Natud Gas CQIP, L~ngTrn Debt ShottTer Debt preferredstock Total tal % M9p% % 5.e % uQ 1pQsp% % !Mi % lpem% ElHaWan ShOrtT~ Debt % 9.51 fila % 1.99 SAI ldepp% % SLU lpem% % lpepp% % SMTWVI Debt Preferred stock ShortT~t~~ Debt Preferred stock % 1.30 sess 1M9p% % si3p 1M9p% % KB % U.a lpepp% % 2.26 SZSQ ipeppx % !&Gz 1M9p% % lpepp"/ % % % ProxvGrouDAvereae Preferred stock % &!& IMsp% % ipepp% % lqqiqq% % lpepb% % ipepq% P Notes: (1) Preliinary data are final for Atos Energy Cow.. Bay State Gas Co. and Ladede Gas Co. and preliinary for the reaining copanies in the proxy groups. Forerly Atlanta Gas Light Copany. Source of Inforation: Standard 8 Pool's Copustat Services, Inc.. Utility Copustat II

15 10 June 30,1994 Deceber 31,1994 August Deceber 31,1995 March Average Aount Rauos Aount Rauos Awnt Re(i0S Aount Ratios Aoun( Ratios Ratios ($1 (%I 0 (%) cz) 0) (96) ($1 (%) (96) Intercopany Notes $61,988, % $60,397, % $50,926, % $70, % $58,316, % % ,971, , , Total _ % 2136,369, % $ ~ % $ j % 10 % Source of Inforation: Copanypvided

16 EXHIBIT PMA6 Page 2 of 6 Arkansas Western Gas Co Danv. Capital Structure Ratios Estiated at Ju ne intercopany Notes Total June 30, 1996 (Estiated) Aount Ratios ($1 (%) $58,236, % $1 31,982, % Source of inforation: Copanyprovided

17 CERTIFICATE OF SERVICE I, Jeffrey L. Dangeau, hereby certify that a copy of the foregoing has been served on all parties of record by forwarding the sae by fiist class ail, postage prepaid, this 12th day of June, L. DangeauU