SCEG OATT Formula Transmission Rate Filing.pdf - SCANA ...

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20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael 1. Vilbert Docket ER I0- -000 Page 27 of35 Table 4 EXHIBIT NO. SCE-13 Company S&P Business Profile Revenue (2008) ($MM) Regulated Market Cap Electric (2008) Assets ($MM) 3rd Quarter, Sustainable BEst Long- 2009Bond Growth Tenn Growth Rating <strong>Rate</strong>s Estimate Sources and Notes: [1]: Issuer Ranking: U.S. Regulated Electric Utilities, Standard & Poor's, RatingsDirect, August 2009. When the parent company was not available, its major subsidiary was used instead. [2], [4], [5]: Historical Bloomberg data accessed September 11,2009 [3]: EEl 2008 Financial Review as of December 31, 2008, pp. 25 - 26. R = Regulated (greater than 80 percent of total assets are regulated). MR = Mostly Regulated (50 to 80 percent of total assets are regulated) o = Diversified (less than 50 percent of total assets are regulated). [6]: See Workpaper#l to Table No_ MJV·4. [7]: See Workpaper #10 to Table No. MJV-4. B. THE DISCOUNTEDCASH FLOW APPROACH 1. The Theoretical DCF Model Q44. Please describe the discounted cash flow approach. 2 A44. The DCF model attempts to estimate the cost of capital in one step. The method assumes 3 that the market price of a stock is equal to the present value of the dividends that its 4 owners expect to receive. The method also assumes that this present value can be 5 calculated by the standard formula for the present value of a cash flow stream: D, D2 D3 Dr p = -- + + + ...+----'--,,- (l+k) (l+k)2 (l+k)3 (l+k), (1) 6 7 where "P" is the market price of the stock; "D," is the dividend cash flow expected at the end of period t (i.e., subscript period I, 2, 3 or T in the equation); "/r' is the cost of
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ER 10-_-000 Page 28 of35 EXHIBIT NO. SCE-13 2 3 4 5 6 7 8 9 capital; and "T' is the last period in which a dividend cash flow is to be received. The formula just says that the stock price is equal to the sum of the expected future dividends, each discounted for the time and risk between now and the time the dividend is expected to be received. Very often, when the DCF is applied in regulatory proceedings, very strong (i.e., unrealistic) assumptions are used that yield a simplification of the standard formula, which then can be rearranged to estimate the cost of capital. Specifically, it is assumed that investors expect a dividend stream that will grow forever at a steady rate, and if so, the market price of the stock will be given by a very simple formula, p= D, (k- g) (2) 10 II 12 13 where "D/' is the dividend expected at the end of the first period, "gOO is the perpetual growth rate, and "P" and "k" are the market price and the cost of capital, as before. Equation (2) is a simplified version of Equation (1) that can be solved to yield the well known "DCF formula" for the cost of capital: D k = -' +g P Dox(l+g) = +g P (3) 14 15 16 17 18 19 where "Do" is the current dividend, which investors expect to increase at rate g by the end of the next period, and the other symbols are defined as before. Equation (3) says that if Equation (2) is satisfied, the cost of equity equals the expected dividend yield plus the (perpetual) expected future (forever constant) growth rate of dividends. I refer to this as the simple DCF model because this simplification of the model relies on the use of very strong assumptions that are unlikely to reflect actual circumstances. 2. The Commission's Preferred DCF Model 20 Q45. Please describe the Commission's preferred DCF model.
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"0 0 '" .... .... I 0 0 Exhibit No.
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64 FERC ER07-169 Ameren Energy Mark
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88 Illinois Commerce Commission ER0
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