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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Michael J. Vilbert
Docket ER IO· -000
Page 29 of35
EXHIBIT
NO. SCE-13
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A45.
The Commission's
uses a constant growth of dividends.
61,262-63:
preferred DCF model is a version of the standard DCF model that
The model is articulated in Opinion No. 445, at
In the past, we have consistently applied a one-step, constant growth DCF
model for calculating ROEs for electric utilities. The DCF methodology
determines the ROE by summing the dividend yield (with an adjustment
for the quarterly payment of dividends) and expected growth rate. The
resulting formula is DIP (I +.5g) + g = k, where "DIP" is the dividend
yield, "g" is the sustainable growth rate of dividends per share, and "k" is
the resulting ROE. The sustainable growth rate is calculated by the
following formula: g = br + sv, where "b" is the expected retention ratio,
"r" is the expected earned rate of return on common equity, "s" is the
percent of common equity expected to be issued annually as new common
stock, and "v" is the equity accretion rate.
15 Q46. Opinion No. 445 references snstainable growth. Please explain how the sustainable
16 growth rate is determined.
17 A46. Although companies can experience very high rates of growth from time to time (i.e.,
18 greater than the growth of the economy as a whole), these high rates cannot generally be
19 expected to last indefinitely. Conversely, very low rates of growth can generally be
20 expected to improve over time. As implied by the name, the sustainable growth rate of a
21 company is that which can be expected to be maintained by the company through
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reinvestment of its earnings or additional equity issuances at prices above book value.
The growth achieved by reinvestment of new earnings depends on both the amount of
24 earnings retained, b = (I-DividendslNet Income), and on the expected return on equity (r)
25 those earnings will achieve. On the other hand, growth from new share issues depends
26 on the percentage of new shares being issued, s, and the equity accretion
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ratIO,v= . [ 1- 1 ] .
Market - to - Book Ratio
given as shown in Equation (4):
Together, the implied sustainable growth rate is
g = br + sv (4)
29 Q47. Is the sustainable growtb rate the only growth rate you use in your implementation
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of the Commission's preferred DCF model?