October 31, 2019s22.q4cdn.com/464697698/files/doc_downloads/regulatory_info/201… · My name is...
120
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECT TESTIMONY OF ANN E. BULKLEY On Behalf of Arizona Public Service Company Docket No. E-01345A-19-0236 October 31, 2019
Transcript of October 31, 2019s22.q4cdn.com/464697698/files/doc_downloads/regulatory_info/201… · My name is...
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
DIRECT TESTIMONY OF ANN E. BULKLEY
On Behalf of Arizona Public Service Company
Docket No. E-01345A-19-0236
October 31, 2019
-i-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Table of Contents
I. INTRODUCTION ............................................................................................................... 1
II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY .............................................. 2
III. SUMMARY OF ANALYSIS AND CONCLUSIONS ....................................................... 4
IV. REGULATORY GUIDELINES ......................................................................................... 9
V. CAPITAL MARKET CONDITIONS ............................................................................... 11
A. Effect of Market Conditions on Valuations and Dividend Yields ........................... 12
B. The Current and Expected Interest Rate Environment ............................................. 18
C. Effect of Tax Reform on the ROE ........................................................................... 24
VI. PROXY GROUP SELECTION ........................................................................................ 30
VII. COST OF EQUITY ESTIMATION ................................................................................. 32
A. DCF Model ............................................................................................................... 39
B. CAPM Analysis ........................................................................................................ 43
C. Bond Yield Plus Risk Premium Analysis ................................................................ 49
D. Expected Earnings Analysis ..................................................................................... 52
VIII. REGULATORY AND BUSINESS RISKS ...................................................................... 54
A. Regulatory Risk Assessment .................................................................................... 55
B. APS’s Capital Expenditure Plan .............................................................................. 57
C. Generation Risk ........................................................................................................ 59
IX. CAPITAL STRUCTURE .................................................................................................. 60
X. CONCLUSIONS AND RECOMMENDATION .............................................................. 61
XI. FAIR VALUE RATE BASE ............................................................................................. 62
XII. FAIR VALUE RATE OF RETURN ................................................................................. 68
ATTACHMENT LIST
Ms. Bulkley’s Resume and Testimony Listing .............................. Attachment AEB-1DR
Constant Growth DCF for Proxy Group ......................................... Attachment AEB-2DR
-ii-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Projected DCF for Proxy Group ..................................................... Attachment AEB-3DR
Beta Estimates for Proxy Group ..................................................... Attachment AEB-4DR
Long-Term Growth Estimates for S&P 500 Index ........................ Attachment AEB-5DR
Capital Asset Pricing Model Analysis ............................................ Attachment AEB-6DR
Risk Premium Analysis .................................................................. Attachment AEB-7DR
Expected Earnings Analysis for Proxy Group ................................ Attachment AEB-8DR
Regulatory Risk Assessment for Proxy Group ............................... Attachment AEB-9DR
Comparison of Nuclear Generation for Proxy Group .................. Attachment AEB-10DR
Capital Structure Analysis ............................................................ Attachment AEB-11DR
Fair Value Rate of Return ............................................................. Attachment AEB-12DR
Comparable Transactions Analysis .............................................. Attachment AEB-13DR
Estimates of Inflation .................................................................... Attachment AEB-14DR
Yardeni Research Publication ...................................................... Attachment AEB-15DR
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
DIRECT TESTIMONY OF ANN E. BULKLEY ON BEHALF OF ARIZONA PUBLIC SERVICE COMPANY
(Docket No. E-01345A-19-0236)
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Ann E. Bulkley. My business address is 293 Boston Post Road West,
Suite 500, Marlborough, Massachusetts 01752.
Q. WHAT IS YOUR POSITION WITH CONCENTRIC ENERGY ADVISORS,
INC. (CONCENTRIC)?
A. I am employed by Concentric as a Senior Vice President.
Q. ON WHOSE BEHALF ARE YOU SUBMITTING THIS DIRECT
TESTIMONY?
A. I am submitting this Direct Testimony on behalf of Arizona Public Service
Company (APS or the Company). APS is a wholly-owned subsidiary of Pinnacle
West Capital Corporation (Pinnacle West).
Q. PLEASE DESCRIBE YOUR EDUCATION AND EXPERIENCE.
A. I hold a Bachelor’s degree in Economics and Finance from Simmons College and
a Master’s degree in Economics from Boston University, with over 20 years of
experience consulting to the energy industry. I have advised numerous energy and
utility clients on a wide range of financial and economic issues with primary
concentrations in valuation and utility rate matters. Many of these assignments
have included the determination of the cost of capital for valuation and ratemaking
purposes. My resume and a summary of testimony that I have filed in other
proceedings are provided as Attachment AEB-1DR.
Q. PLEASE DESCRIBE CONCENTRIC’S ACTIVITIES IN ENERGY AND
UTILITY ENGAGEMENTS.
A. Concentric provides financial and economic advisory services to many and various
energy and utility clients across North America. Our regulatory, economic, and
-2-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
market analysis services include utility ratemaking and regulatory advisory
services; energy market assessments; market entry and exit analysis; corporate and
business unit strategy development; demand forecasting; resource planning; and
energy contract negotiations. Our financial advisory activities include buy and
sell-side merger, acquisition and divestiture assignments; due diligence and
valuation assignments; project and corporate finance services; and transaction
support services. In addition, we provide litigation support services on a wide
range of financial and economic issues on behalf of clients throughout North
America.
II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY?
A. The purpose of my Direct Testimony is to present evidence and provide a
recommendation regarding the Company’s Return on Equity (ROE)1 and to
provide an assessment of the capital structure to be used for ratemaking purposes
as proposed in the Direct Testimony of APS witness Elizabeth A. Blankenship.
My Direct Testimony also provides evidence and a recommendation as to the
appropriate Fair Value Rate of Return (FVROR) and to the reasonableness of the
Company’s proposed Fair Value Rate Base (FVRB). My analyses and
recommendations are supported by the data presented in Attachment AEB-2DR
through Attachment AEB-15DR, which were prepared by me or under my
direction.
Q. PLEASE PROVIDE A BRIEF OVERVIEW OF THE ANALYSES THAT
LED TO YOUR ROE RECOMMENDATION.
A. As discussed in more detail in Section VI, in developing my ROE recommendation,
I applied the Discounted Cash Flow (DCF) model, the Capital Asset Pricing Model
1 Throughout my Direct Testimony, I interchangeably use the terms “ROE” and “Cost of Equity.”
-3-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
(CAPM), a Risk Premium approach, and an Expected Earnings analysis. I also
considered several additional risk factors that affect the Company’s required ROE,
including: (1) the Company’s capital expenditure requirements relative to the
proxy group; (2) the Company’s regulatory risk relative to the proxy group,
including current and proposed adjustor mechanisms; and (3) the Company’s
dependence on nuclear generation. Finally, I considered the Company’s proposed
capital structure as compared to the capital structures of the proxy companies.
While I did not make any specific adjustments to my ROE estimates for any of
these factors, I did take them into consideration in aggregate when determining
where the Company’s Cost of Equity falls within the range of analytical results.
Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE APPROPRIATE
COST OF EQUITY AND FVROR FOR APS?
A. My analyses indicate that APS’s Cost of Equity should be within a range from
10.00 percent to 10.50 percent. Considering the results of the analyses summarized
in Figure 1 and discussed in greater detail in the remainder of my testimony, I
believe that the Company’s requested ROE of 10.15 percent is reasonable and may
be a conservative estimate of the cost of equity. I also believe that the Company’s
proposed return on the Fair Value Increment of 1.00 percent is significantly lower
than reasonable estimates of the minimum rate of return that should be applied to
the fair value increment and results in an FVROR is 5.62 percent.
Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE COMPANY’S
FVRB?
A. In order to determine the reasonableness of the Company’s FVRB, I conducted an
analysis of the range of value established in recent transactions for electric utilities.
Specifically, I estimated the market value of APS’s assets by comparing the
Company’s proposed FVRB to the market value of comparable companies in
recent arms-length transactions. Based on the results of my Comparable
-4-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Transactions analysis, I conclude that the Company’s estimate of the FVRB is
conservative.
Q. HOW IS THE REMAINDER OF YOUR DIRECT TESTIMONY
ORGANIZED?
A. The remainder of my Direct Testimony is organized as follows: Section III
provides a summary of my analyses and conclusions; Section IV reviews the
regulatory guidelines pertinent to the development of the cost of capital; Section V
discusses current and projected capital market conditions and the effect of those
conditions on the Company’s Cost of Equity; Section VI explains my selection of
a proxy group of electric utilities; Section VII describes my analyses and the
analytical basis for the recommendation of the appropriate ROE for APS; Section
VIII provides a discussion of specific regulatory, business, and financial risks that
have a direct bearing on the ROE to be authorized for the Company in this case;
Section IX discusses the capital structure of the Company as compared with the
proxy group; Section X presents my conclusions and recommendation for the
market-based Cost of Equity; Section XI discusses my analysis of the Company’s
proposed FVRB; and Section XII discusses the estimation of the FVROR.
III. SUMMARY OF ANALYSIS AND CONCLUSIONS
Q. PLEASE SUMMARIZE THE KEY FACTORS CONSIDERED IN YOUR
ANALYSES AND UPON WHICH YOU BASE YOUR RECOMMENDED
ROE.
A. My analyses and recommendations considered the following:
• The Hope and Bluefield decisions2 that established the standards for
determining a fair and reasonable authorized ROE, including consistency of
the authorized return with other businesses having similar risk, adequacy of
2 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944); Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679 (1923).
-5-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
the return to provide access to capital and support credit quality, and the
principle that the end result must lead to just and reasonable rates.
• The effect of current and prospective capital market conditions on the ROE
estimation models and on investors’ return requirements.
• The Company’s regulatory, business, and financial risks relative to the
proxy group of comparable companies and the implications of those risks in
arriving at the appropriate ROE.
Q. PLEASE SUMMARIZE THE ROE ESTIMATION MODELS THAT YOU
CONSIDERED TO ESTABLISH THE RANGE OF ROES FOR APS.
A. I considered the results of the Constant Growth DCF model, two risk premium
approaches: the CAPM and a Bond Yield Plus Risk Premium methodology, and an
Expected Earnings analysis. Figure 1 summarizes the range of results established
using each of these estimation methodologies.
Figure 1.
Summary of Cost of Equity Analytical Results
Constant Growth DCF Mean Low Mean Mean High 30-Day Average Price 8.09% 9.07% 10.21% 90-Day Average Price 8.17% 9.14% 10.28% 180-Day Average Price 8.17% 9.26% 10.40%
Risk Premium Models
Current Risk-Free
Rate (2.57%)
2019-2020 Projected Risk-Free
Rate (2.66%)
2021-2025 Projected Risk-Free
Rate (3.60%) CAPM - Bloomberg Beta 10.07% 10.11% 10.42% CAPM - Value Line Beta 9.54% 9.58% 9.94% Bond Yield Plus Risk Premium 9.75% 9.79% 10.20%
Expected Earnings Analysis Value Line 2022-2024 11.15%
-6-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
As shown in Figure 1, the range of DCF model results is very wide, particularly in
relation to the results of the other methodologies. As discussed in more detail in
Section VII, the DCF model is influenced by market conditions that are not
projected to be sustained in the long term. Those conditions have a tendency to
result in lower estimates of the Cost of Equity using the DCF model, including
significant outliers. As shown in Attachment AEB-1, the DCF model produces an
individual company result as low as 5.94 percent, or only 184 basis points higher
than the Company’s embedded cost of long-term debt of 4.10 percent.3
Recently, anomalous market conditions have affected the inputs and assumptions
used in the ROE estimation models, particularly the DCF model. Therefore,
consistent with prior opinions of the Arizona Corporation Commission
(Commission), I believe that it is reasonable to rely on a combination of the results
of the DCF and other ROE estimation models.4 As discussed in more detail in the
remainder of my Direct Testimony, this conclusion is also supported by the Federal
Energy Regulatory Commission (FERC) and various state utility regulatory
commissions. Other regulatory commissions have determined that it is appropriate
to consider the results of multiple methodologies, including the DCF, CAPM, Risk
Premium and Expected Earnings models in estimating the ROE.
While I would have concerns about relying on only the results produced by the
DCF model, my ROE recommendation is based on the results of both the DCF
model and a forward-looking CAPM analysis, taking into consideration the
business and company-specific risk factors of APS relative to the proxy group. The
Bond Yield Plus Risk Premium analysis and the Expected Earnings analysis, while
3 SFR Schedule D-1. 4 See Decision No. 69663 (June 28, 2007) at 49.
-7-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
not relied on specifically for my ROE recommendation, corroborate the range
established for my recommendation.
Q. WHAT IS YOUR RECOMMENDED ROE FOR APS?
A. The analytical results presented in Figure 1 provide the range of results for the
proxy group companies. I also considered the level of regulatory, business, and
financial risk faced by the Company relative to the proxy group in order to establish
where APS’s ROE falls within the range. Based on the results in Figure 1, a
reasonable range of ROE estimates for APS is from 10.00 percent to 10.50 percent,
and within that range, the Company is proposing an ROE of 10.15 percent, which
is a reasonable and may be a conservative estimate of the cost of equity.
The required ROE should be a forward-looking estimate; therefore, the analyses
supporting my recommendation rely on forward-looking inputs and assumptions
(e.g., projected growth rates in the DCF model, forecasted risk-free rate and Market
Risk Premium in the CAPM analysis, etc.) and take into consideration the current
high valuations of utility stocks and the effect of current stock prices on the ROE
estimation models. The use of historical inputs and assumptions would tend to
understate the required ROE for APS, especially under current and prospective
conditions in capital markets.
Q. PLEASE SUMMARIZE THE ANALYSIS THAT YOU CONDUCTED TO
VALIDATE THE FVRB FOR APS.
A. Consistent with Commission precedent, the Company has estimated the FVRB by
equally weighting its Original Cost Rate Base (OCRB) and an estimate of the
Replacement Cost New, Depreciated (RCND) of those assets. I performed a
Comparable Transactions analysis to test the FVRB that is being relied on in the
FVROR analysis. Specifically, I estimated the market value of APS’s assets by
comparing the Company’s proposed FVRB to the market value of comparable
-8-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
companies in recent arms-length transactions. To create a consistent basis of
comparison among the transactions (which took place amid differing market
conditions), I normalized the transaction values using the corporate values of the
acquired companies, which incorporates the book value of debt and equity,
resulting in premiums to corporate value stemming from the transactions. I
estimated the market value of APS’s assets by applying the median premium of
43.64 percent to the Company’s OCRB. That analysis resulted in an estimated
market value for APS’s assets of $12,745 million.
Q. WHAT DO YOU CONCLUDE FROM THAT ANALYSIS?
A. Based on the results of the Comparable Transactions analysis, I conclude that the
Company’s proposed FVRB of $12,310.3 million is generally consistent with
estimate of market value discussed above.
Q. HOW DID YOU ESTIMATE THE FVROR?
A. I estimated the FVROR using the approach relied on by the Commission in several
recent rate cases. In applying that method, I also conclude that the minimum rate
of return that should be applied to the fair value “increment” of rate base is the real
risk-free rate of return. As discussed in more detail in Section VII, I estimate the
real risk-free rate of return to be approximately 2.72 percent. However, the
Company has proposed a return of 1.00 percent, which is significantly lower than
reasonable estimates of the minimum rate of return that should be applied to the
fair value increment. As shown in Figure 2 and Figure 3, the result of that analysis
is a FVROR of 5.62 percent.
Figure 2.
Estimation of the FVRB
Capital $ Millions Percent Weighted FVRB
OCRB $8,873.0 50.00% $4,436.5 RCND $15,747.5 50.00% $7,873.8 FVRB $12,310.3
-9-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Figure 3.
Estimation of the FVROR
Capital $ Millions Percent Cost Rate Weighted Cost Rate
Long-Term Debt $4,022.1 32.67% 4.10% 1.34% Common Equity $4,850.9 39.41% 10.15% 4.00%
Fair Value Increment $3,437.3 27.92% 1.00% 0.28% Total $12,310.3 5.62%
IV. REGULATORY GUIDELINES
Q. PLEASE DESCRIBE THE GUIDING PRINCIPLES TO BE USED IN
ESTABLISHING THE COST OF CAPITAL FOR A REGULATED
UTILITY.
A. The United States Supreme Court’s precedent-setting Hope and Bluefield cases
established the standards for determining the fairness or reasonableness of a
utility’s allowed ROE. Among the standards established by the Court in those
cases are: (1) consistency with other businesses having similar or comparable
risks; (2) adequacy of the return to support credit quality and access to capital; and
(3) that the end result, as opposed to the methodology employed, is the controlling
factor in arriving at just and reasonable rates.5
Based on those recognized standards, the return authorized in this case should
provide the Company with the opportunity to earn an ROE that is:
• Adequate to attract capital on reasonable terms, thereby enabling the
Company to provide safe, reliable service;
5 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944); Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679 (1923).
-10-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• Sufficient to ensure the financial soundness of the Company’s operations;
and
• Commensurate with returns on investments in comparable risk enterprises.
The allowed ROE should enable the Company to finance capital expenditures on
reasonable terms and optimize its financial flexibility over the period during which
rates are expected to remain in effect.
Q. HAS THE COMMISSION PROVIDED SIMILAR GUIDANCE IN
ESTABLISHING THE APPROPRIATE RETURN ON COMMON
EQUITY?
A. Yes. The Commission has noted that under the Arizona Constitution, a public
utility is entitled to a fair return on the fair value of its property devoted to public
uses. The Commission is required to find the fair value of the utility’s property
and to use that value to establish just and reasonable rates.6
Q. WHY IS IT IMPORTANT FOR A UTILITY TO BE ALLOWED THE
OPPORTUNITY TO EARN AN ROE THAT IS ADEQUATE TO ATTRACT
CAPITAL AT REASONABLE TERMS?
A. An ROE that is adequate to attract capital at reasonable terms enables the Company
to continue to provide safe, reliable electric utility service while maintaining its
financial integrity. To the extent the Company has the opportunity to earn its
market-based cost of capital, neither customers nor shareholders are disadvantaged.
6 See, e.g., Arizona Corp. Comm’n v. Ariz. Water Co., 85 Ariz. 198, 203, 335 P.2d 412, 415 (1959).
-11-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. WHAT ARE YOUR CONCLUSIONS REGARDING REGULATORY
GUIDELINES AND CAPITAL MARKET EXPECTATIONS?
A. It is important for the ROE authorized in this proceeding to take into consideration
current and prospective capital market conditions, as well as investors’
expectations and requirements for both risks and returns. Further, in light of the
Company’s capital investment requirements, it is important that APS be afforded
the opportunity to maintain a financial profile that will enable it to access the capital
markets at reasonable rates.
V. CAPITAL MARKET CONDITIONS
Q. WHY IS IT IMPORTANT TO ANALYZE CAPITAL MARKET
CONDITIONS?
A. The ROE estimation models rely on market data that are either specific to the proxy
group, in the case of the DCF model, or the expectations of market risk, in the case
of the CAPM. The results of the ROE estimation models can be affected by
prevailing market conditions at the time the analysis is performed. While the ROE
established in a rate proceeding is intended to be forward-looking, the analyst uses
current and projected market data, specifically stock prices, dividends, growth rates
and interest rates in the ROE estimation models to estimate the required return for
the subject company.
As discussed in the remainder of this section, analysts and many regulatory
commissions have concluded that recent market conditions have been anomalous
and that these conditions have affected the results of the ROE estimation models.
As a result, it is important to consider the effect of these conditions on the ROE
estimation models when determining the appropriate range and recommended
ROE for a future period. If investors do not expect current market conditions to be
sustained in the future, it is possible that the ROE estimation models will not
-12-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
provide an accurate estimate of investors’ required return during that rate period.
Therefore, it is very important to consider projected market data to estimate the
return for that forward-looking period.
Q. WHAT FACTORS ARE AFFECTING THE COST OF EQUITY FOR
REGULATED UTILITIES IN THE CURRENT AND PROSPECTIVE
CAPITAL MARKETS?
A. The cost of equity for regulated utility companies is being affected by several
factors in the current and prospective capital markets, including: (1) the current
market uncertainty has resulted in valuations of utility stocks that are at historically
high levels, which has an inverse relationship to dividend yields; (2) recent market
uncertainty, its current effect on interest rates and long-term expectations for
interest rates; and (3) recent Federal tax reform. In this section, I discuss each of
these factors and how it affects the models used to estimate the cost of equity for
regulated utilities.
A. Effect of Market Conditions on Valuations and Dividend Yields
Q. HOW HAS THE FEDERAL RESERVE’S MONETARY POLICY
AFFECTED CAPITAL MARKETS IN RECENT YEARS?
A. Extraordinary and persistent federal intervention in capital markets artificially
lowered government bond yields after the Great Recession of 2008-09, as the
Federal Open Market Committee (FOMC) used monetary policy (both reductions
in short-term interest rates and purchases of Treasury bonds and mortgage-backed
securities) to stimulate the U.S. economy. As a result of very low returns on short-
term government bonds, yield-seeking investors were forced into longer-term
instruments, bidding up prices and reducing yields on those investments. As
investors moved along the risk spectrum in search of yields that met their return
requirements, there was increased demand for dividend-paying equities, such as
utility stocks.
-13-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HOW HAS THE PERIOD OF ABNORMALLY LOW INTEREST RATES
AFFECTED THE VALUATIONS AND DIVIDEND YIELDS OF UTILITY
SHARES?
A. The Federal Reserve’s monetary policy in recent years has caused investors to seek
alternatives to the interest rates available on Treasury bonds, which are low relative
to historical levels. As a result of this search for higher yield, the share prices for
many common stocks, especially dividend-paying stocks such as utilities, have
been driven higher while the dividend yields (which are computed by dividing the
dividend payment by the stock price) have decreased to levels well below the
historical average. As shown in Figure 4, over the period from 2009 through 2017,
as the Federal Reserve intervened to stabilize financial markets and support the
economic recovery after the Great Recession of 2008-09, Treasury bond yields and
utility dividend yields declined. Specifically, Treasury bond yields declined by
approximately 118 basis points, and electric utility dividend yields decreased by
about 234 basis points over this period.
Figure 4.
Dividend Yields for Utility Stocks7
7 Source: Bloomberg Professional.
-14-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HAVE EQUITY ANALYSTS COMMENTED ON THE VALUATIONS OF
UTILITY STOCKS?
A. Yes. Several equity analysts have recognized that utility stock valuations are very
high. In the electric utilities industry report, Value Line noted the high valuations:
Why are most issues in this industry faring so well? The expectation of continued low interest rates has prompted many investors to ‘‘reach for yield’’ by purchasing utility stocks for their generous dividends. However, this has driven the valuation of utility stocks to unusually high levels. For many years, utility equities’ price-earnings ratios were at a premium to the market only if earnings were depressed. Now, most utility stocks have a relative price-earnings ratio above 1.0—significantly above that figure, in some cases. The average dividend yield of stocks in the Electric Utility Industry is just 3.25%, which is low, by historical standards. Moreover, the recent quotations of most utility stocks are well within their 2022-2024 Target Price Range.8
This is further supported by a recent Edward Jones report on the utility sector:
Utility valuations have climbed back to record levels as 10-year Treasury bond rates have fallen back below 2%. On a price-to-earnings basis, remain significantly above their historical average, and have been trading near all-time highs. We have seen utility valuations moving in line with interest rate movements, although there have been exceptions to this. Overall, however, we believe the low-interest rate environment has been the biggest factor in pushing utilities higher since many investors buy them for their dividend yield.
Utilities recently hit new all-time highs, and are still trading significantly above their average price-to earnings ratio over the past decade. The premium valuation continues to reflect not only the low interest rate environment, but also the stable and predominantly regulated earnings growth we foresee.9
As noted by Value Line and Edward Jones, over the last few years, utility stocks
have experienced high valuations and low dividend yields; driven by investors
moving into dividend paying stocks from bonds due to the low interest rates in the
bond market. Value Line and Edward Jones recognize that as interest rates
8 Value Line Investment Survey, Electric Utility (East) Industry, August 16, 2019, at 135. 9 Andy Pusateri and Andy Smith. Edward Jones, Utilities Sector Outlook (August 19, 2019), at 2-3.
-15-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
increase, bonds become a substitute for utility stocks. As utility stock prices
decline, the dividend yields will increase. This change in market conditions, which
is expected over the long-term, implies that the ROE calculated using historical
market data in the DCF model may understate the forward-looking cost of equity.
Furthermore, recently, Bank of America Merrill Lynch commented on the risks of
underperformance for certain utilities based on concerns on the valuation of the
sector, in particular that the current premium on share prices may be largely
unwarranted.10
Q. WHAT IS THE EFFECT OF HIGH VALUATIONS ON UTILITY STOCKS
ON THE DCF MODEL?
A. High valuations have the effect of depressing the dividend yields, which results in
overall lower estimates of the cost of equity resulting from the DCF model.
Q. HOW DO THE VALUATIONS OF PUBLIC UTILITIES COMPARE TO
THE HISTORICAL AVERAGE?
A. To assess how the current low interest rate environment has affected the valuations
of the companies in my proxy group, I reviewed the price/earnings to growth (PEG)
ratio for the S&P Utilities Index. The PEG ratio is commonly used by investors to
determine if a company is considered over- or under-valued. The ratio compares
the P/E ratio of a company to the expected growth rate of future earnings. This
allow investors to compare companies with similar P/E ratios but different earnings
growth projections. If two companies have a P/E ratio of 20, but Company A is
growing at a rate of 6 percent and Company B is growing at a rate of 15 percent,
then on a relative valuation basis Company B is the better investment.
10 BofAML, American Water Works AWKward valuation: Downgrading premium utility to under-perform, July 15, 2019. BofAML, Eversource Energy, Reiterating our Underperform: Shares pricey relative to few updates, July 15, 2019.
-16-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
As shown on page 7 of Attachment AEB-15DR, which is a report published by
Yardeni Research, Inc., the PEG ratio for the S&P Utilities Index has been
significantly higher than it has historically as a result of the accommodative
monetary policy pursued by the Federal Reserve following the Great Recession of
2008/09.11 While the PEG ratio has declined in recent years due to the Federal’s
Reserve’s shift to normalize monetary policy, the PEG ratio for the S&P Utilities
Index is still above the historical average. In general, stocks with lower long-term
PEG ratios are considered better values. As the PEG ratio increases above the
long-term historical average, as has been the case with the S&P Utilities Index,
then the stocks are considered relatively over-valued unless the growth rate
increases to support the higher valuation. The PEG ratio for the S&P Utilities
Index as of August 2019 is close to 4.2, which indicates that many of the stocks
contained in the index are currently trading at levels well above the historical
average. Based on this valuation metric, investors should expect the stock prices
of utilities to decline in the future. This analysis supports the P/E Ratio projections
produced by Value Line, which as noted above, are projecting the P/E ratios of
utilities to decline over the near-term.
Q. HOW DO EQUITY INVESTORS VIEW THE UTILITIES SECTOR BASED
ON THESE RECENT MARKET CONDITIONS?
A. Investment advisors have suggested that utility stocks may underperform as a result
of market conditions. Bloomberg recently noted that the valuations of defensive
sector stocks such as utilities have reached record levels which could result in
sector rotation as investors question the sustainability of the high valuations.
Specifically, Bloomberg explained that:
The prospect of easier monetary policy is adding fuel to a mammoth rally in bond proxy shares like real estate companies and utilities. Investors betting on a growth slowdown are ramping up premiums
11 Yardeni Research, Inc. “S&P 500 Industry Briefing: Utilities.” September 3, 2019, https://www.yardeni.com/pub/if-sut.pdf, p. 5.
-18-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HAVE REGULATORS RECENTLY RESPONDED TO THE
HISTORICALLY LOW DIVIDEND YIELDS FOR UTILITY COMPANIES
AND THE CORRESPONDING EFFECT ON THE DCF MODEL?
A. Yes. As I discuss in more detail later in my testimony, the FERC recently proposed
a methodology that reflects their current view that investors rely on multiple ROE
estimation models. The FERC’s proposed methodology includes an equal
weighting of the DCF, CAPM, Expected Earnings and Risk Premium models to
better reflect investor behavior and capital market conditions.13
In addition, the Illinois Commerce Commission (ICC), the Pennsylvania Public
Utility Commission (PPUC) and the Missouri Public Service Commission
(Missouri PSC) have all considered this phenomenon in recent decisions. I discuss
the response of these regulators to historically low dividend yields and the impact
on the DCF model in detail later in my testimony.
B. The Current and Expected Interest Rate Environment
Q. PLEASE PROVIDE A BRIEF SUMMARY OF THE RECENT MONETARY
POLICY ACTIONS OF THE FEDERAL RESERVE.
A. At its September 2019 meeting, the Federal Reserve acknowledged the
implications of global developments on the U.S. economic outlook and therefore
lowered the federal funds rate by 25 basis points, which resulted in a range of 1.75
percent to 2.00 percent.14 Thus, the Federal Reserve has reduced the federal funds
rate twice in 2019. However, it is important to view the recent Fed policy decisions
in the context of the reactions to the trade dispute between the U.S. and China and
longer-term fundamentals. Prior to the Federal Reserve recently lowering the
federal funds rate in July and September of 2019, the Fed raised the short-term
13 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order Directing Briefs, issued October 16, 2018, at para. 32. 14 FOMC, Federal Reserve press release, September 18, 2019.
-19-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
borrowing rate in 25-basis-point increments on four occasions in 2018 based on
stronger conditions in employment markets, a relatively stable inflation rate, steady
economic growth, and increased household spending. Since December 2015, the
Federal Reserve increased interest rates nine times, bringing the federal funds rate
to the range of 2.25 percent to 2.50 percent, before the recent two reductions.
The ongoing trade dispute has affected the global economy and caused a rise in
volatility in the financial markets. As a result, the Federal Reserve is continuing
to examine and evaluate the effect the trade dispute is having on economic growth
and will pursue a monetary policy agenda that sustains the economic expansion
and satisfies the Federal’s Reserve’s goals of price stability and full employment.
As Chairman Powell noted recently in his annual remarks in Jackson Hole,
Wyoming:
Our challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend to more of those still left behind, and so that inflation is centered firmly around 2 percent.
***
While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade,” he said in prepared remarks. “We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives.15
15 Cox, Jeff. “Powell Says There’s No ‘Rulebook’ for Trade War, Pledges to ‘Act as Appropriate’ to Sustain Economy.” CNBC, CNBC, 23 Aug. 2019, www.cnbc.com/2019/08/23/powell-jackson-hole-speech.html.
-21-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
treasuries due to increased fears of a possible recession. This has been increasingly
evident over the past few months as investors responded to news of increases in
tariffs by both China and the U.S.
To illustrate the recent reactions of investors, I have conducted an event study of
the yield on the 10-year U.S. Treasury bond since July 1, 2019. As shown in Figure
7, the yield on the 10-year U.S. Treasury Bond was relatively stable for the month
of July; however, the yield decreased by approximately 50 basis points from the
end of July to the middle of August. The recent decline was due to investors
responding to events associated with the trade dispute. For example, the market
reacted negatively to Chairman Powell’s comments following the FOMC meeting
at the end of July and President Trump’s announcement that the U.S. was going to
impose tariffs on the remaining set of goods imported from China. The two-events
accounted for an approximately 25 basis point decrease in the yield on the 10-year
Treasury between July 30, 2019 and August 5, 2019. This led Bloomberg to note
in a recent article titled “Powell Speaks, Trump Tweets, China Reacts, Markets
Freak. Repeat”, that the volatility in the market on any given day is being
determined more and more by the words and actions of Chairman Powell, President
Trump and the President of China, Xi Jinping.17
17 Regan, Michael P. “Powell Speaks, Trump Tweets, China Reacts, Markets Freak. Repeat.” Bloomberg.com, Bloomberg, 8 Aug. 2019, bloomberg.com/news/articles/2019-08-08/powell-speaks-trump-tweets-china-reacts-markets-freak-repeat.
-24-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
the U.S. and China is not expected to continue over the long-term. In fact, given
the increase in price sensitive investors purchasing U.S. Treasuries bonds, were a
trade deal to be reached it is likely the yields on long-term government bonds would
increase substantially. As interest rates increase, the cost of equity for the proxy
companies using the DCF model is likely to be an overly-conservative estimate of
investors’ required returns because the proxy group average dividend yield reflects
the increase in stock prices that resulted from substantially lower interest rates. As
such, rising interest rates support the selection of a return toward the upper end of
a reasonable range of ROE estimates resulting from the DCF analysis.
Alternatively, my CAPM and Bond Yield Plus Risk Premium analyses include
estimated returns based on near-term projected interest rates, reflecting investors’
expectations of market conditions over the period that the rates established in this
proceeding will be in effect.
C. Effect of Tax Reform on the ROE
Q. ARE THERE OTHER FACTORS THAT SHOULD BE CONSIDERED IN
DETERMINING THE COST OF EQUITY FOR APS?
A. Yes. The effect of the TCJA should also be considered in the determination of the
cost of equity. The credit rating agencies have commented on the effect of the
TCJA on regulated utilities. In summary, the TCJA is expected to reduce utility
revenues due to the lower federal income taxes and the requirement to return excess
Accumulated Deferred Income Taxes. This change in revenue is expected to
reduce Funds From Operations (FFO) across the sector, and absent regulatory
mitigation strategies, is expected to lead to weaker credit metrics and negative
ratings actions for some utilities.20
20 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector”, January 24, 2018.
-25-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HAVE CREDIT OR EQUITY ANALYSTS COMMENTED ON THE
EFFECT OF THE TCJA ON UTILITIES?
A. Yes. Each of the credit rating agencies have indicated that the TCJA would have
an overall negative credit impact on regulated operating companies of utilities and
their holding companies due to the reduction in cash flow that results from the
change in the federal tax rate and the loss of bonus depreciation.
Moody’s Investor Services (Moody’s) noted that the rates that regulators allow
utilities to charge customers are based on a cost-plus model, with income tax
expense being one of the pass-through items. Utilities will collect less income tax
at the lower rate, reducing revenue and FFO. In the near term, for the many utilities
that are not currently cash tax payers, FFO and FFO-based credit metrics will be
negatively impacted. In addition, with the loss of bonus depreciation, the timing
of future cash tax payments will be accelerated, all else being equal, which will
have a negative effect on utility cash flows and will ultimately negatively impact
the utilities’ ability to fund ongoing operations and capital improvement programs.
In Standard & Poor’s (S&P’s) 2019 trends report, the rating agency notes that the
utility industry’s financial measures weakened in 2018 and attributed that to tax
reform, capital spending and negative load growth. In addition, S&P expects that
weaker credit metrics will continue into 2019 for those utilities operating with
minimal financial cushion. S&P further expects that these utilities will look to
offset the revenue reductions from tax reform with equity issuances. The rating
agency reported that in 2018 regulated utilities issued nearly $35 billion in equity,
which is more than twice the equity issuances in 2016 and 2017.21
21 Standard & Poor’s Ratings, “Industry Top Trends 2019, North America Regulated Utilities”, November 8, 2019.
-26-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
FitchRatings (Fitch) also indicated that any ratings actions will be guided by the
response of regulators and the management of the utilities. Fitch notes that the
solution will depend on the ability of utility management to manage the cash flow
implications of the TCJA. Fitch offered several solutions to provide rate stability
and to moderate changes to cash flow in the near term, including increasing the
authorized ROE and/or equity ratio.22
Q. HOW HAVE RATING AGENCIES RESPONDED TO THE INCREASED
RISK FOR UTILITIES RESULTING FROM THE TCJA?
A. In January 2018, Moody’s issued a report changing the rating outlook for several
regulated utilities from Stable to Negative. Moody’s noted that the rating change
affected companies with limited cushion in their ratings for deterioration in
financial performance. In June 2018, Moody’s issued a report in which the rating
agency downgraded the outlook for the entire regulated utility industry from Stable
to Negative for the first time ever, citing ongoing concerns about the negative effect
of the TCJA on cash flows of regulated utilities. While noting that “[r]egulatory
commissions and utility management teams are taking important first steps” 23 and
that “we have seen some credit positive developments in some states in response
to tax reform,”24 Moody’s concludes that “we believe that it will take longer than
12-18 months for the majority of the sector to show any material financial
improvement from such efforts.”25 Beginning in mid-2018, Moody’s began
downgrading several utilities. Furthermore, as shown in Figure 9, Moody’s is
continuing to evaluate the effect of the TCJA on the cash flows of individual
utilities. As part of the credit evaluation, rating agencies are specifically
22 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector”, January 24, 2018. 23 Moody’s Investors Service, “Regulated utilities – US: 2019 outlook shifts to negative due to weaker cash flows, continued high leverage”, June 18, 2018, at 3. 24 Ibid. 25 Idid.
-27-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
considering the recent rate case decisions of utilities to determine if the results of
these cases help to mitigate the effect of the TCJA on cash flows. Therefore, the
credit rating agencies appear to be continuing to monitor the effects of the TCJA
on utilities.
Figure 9.
Credit Rating Downgrades Resulting from TCJA
Utility Rating Agency
Credit Rating before TCJA
Credit Rating after TCJA
Downgrade Date
DTE Gas Company Moody’s A2 A3 7/22/2019 South Jersey Gas Company Moody’s A2 A3 7/17/2019 Central Hudson Gas & Electric Moody’s A2 A3 7/12/2019 Oklahoma Gas & Electric Company Moody’s A2 A3 5/31/2019 American Water Works Moody’s A3 Baa1 4/1/2019 Niagara Mohawk Power Corporation Moody’s A2 A3 3/29/2019 KeySpan Gas East Corporation (KEDLI) Moody’s A2 A3 3/29/2019 Xcel Energy Moody’s A3 Baa1 3/28/2019 ALLETE, Inc. Moody’s A3 Baa1 3/26/2019 Brooklyn Union Gas Company (KEDNY) Moody’s A2 A3 2/22/2019 Avista Corp. Moody’s Baa1 Baa2 12/30/2018 Consolidated Edison Company of New York Moody’s A2 A3 10/30/2018 Consolidated Edison, Inc. Moody’s A3 Baa1 10/30/2018 Orange and Rockland Utilities Moody’s A3 Baa1 10/30/2018 Southwestern Public Service Company Moody’s Baa1 Baa2 10/19/2018 Dominion Energy Gas Holdings Moody’s A2 A3 9/20/2018 Piedmont Natural Gas Company, Inc. Moody’s A2 A3 8/1/2018 WEC Energy Group, Inc. Moody’s A3 Baa1 7/12/2018 Integrys Holdings Inc. Moody’s A3 Baa1 7/12/2018 OGE Energy Corp. Moody’s A3 Baa1 7/5/2018 Oklahoma Gas & Electric Company Moody’s A1 A2 7/5/2018
Q. HAVE THE RATING AGENCIES REVIEWED APS’S METRICS
FOLLOWING THE TCJA?
A. Yes, in May 2018 S&P changed its rating outlook on APS and the parent company
from positive to stable based on modestly weaker forward-looking for financial
metrics related the TCJA, capital spending and increased distributed generation
-28-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
that were not expected to be offset by a change in the Company’s capital structure.
Based on these factors, S&P expected that both PWCC and APS would have
financial measures that more consistently reflected the higher end of the range for
the significant financial risk profile category; with APS having an FFO to debt ratio
in the range of 21%-24%. This is a change from S&P’s prior views, which placed
APS’s coverage ratios at the lower end of the financial risk profile category.26
Moody’s recently noted that the rating agency expects APS’s financial metrics will
deteriorate in 2019 “due primarily to the continuing impact of US tax reform.”27
Q. HAVE STATE REGULATORY COMMISSIONS CONSIDERED MARKET
EVENTS AND THE UTILITY’S ABILITY TO ATTRACT CAPITAL IN
DETERMINING THE EQUITY RETURN?
A. Yes. In a recent rate case for Consumers Energy Company in Michigan, Case No.
U-18322, Staff recommended a 9.80 percent ROE based on the results of the DCF,
CAPM and Risk Premium approaches, which was supported by the Administrative
Law Judge (ALJ).28 However, in its Order issued on March 29, 2018, the Michigan
Public Service Commission (Michigan PSC) partly disagreed with the ALJ and
Staff regarding expected market conditions and authorized a 10.00 percent ROE
for Consumers Energy Company. The Michigan PSC noted that:
[i]n setting the ROE at 10.00%, the Commission believes there is an opportunity for the company to earn a fair return during this period of atypical market conditions. This decision also reinforces the Commission’s belief that customers do not benefit from a lower ROE if it means the utility has difficulty accessing capital at attractive terms and in a timely manner. The fact that other utilities
26 Standard & Poor’s Ratings Direct, Research Update Pinnacle West Capital Corp. and Subsidiary Arizona Public Service Co. Outlooks Revised to Stable; A- Rating Affirmed, May 3, 2018, p. 2. 27 Moody’s Investor Services, Credit Opinion, Arizona Public Service Company, June 18, 2019, at 1, 5. 28 Michigan Public Service Commission Order, Cause No. U-18322, Consumers Energy Company, March 29, 2018, at 37.
-29-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
have been able to access capital despite lower ROEs, as argued by many intervenors, is also a relevant consideration. It is also important to consider how extreme market reactions to singular events, as have occurred in the recent past, may impact how easily capital will be able to be accessed during the future test period should an unforeseen market shock occur. The Commission will continue to monitor a variety of market factors in future rate cases to gauge whether volatility and uncertainty continue to be prevalent issues that merit more consideration in setting the ROE.29
The Michigan PSC references “singular events” and the overall effect the events
could have on the ability of a utility to access capital. Consistent with the Michigan
PSC’s views, it is important to consider that the TCJA has had a negative effect on
the cash flows of utilities. In addition, it is important to consider this reduced cash
flow in the context of overall market conditions, when determining the appropriate
ROE and equity ratio to enable APS the ability to attract capital. As a result, it is
important that the Commission authorize an ROE for APS that will attract capital
at reasonable terms during the period that rates will be in effect.
Q. WHAT CONCLUSIONS DO YOU DRAW FROM YOUR ANALYSIS OF
CAPITAL MARKET CONDITIONS?
A. The important conclusions resulting from capital market conditions are:
• The assumptions used in the ROE estimation models have been affected by
recent historical market conditions.
• Recent market conditions are not expected to persist as the Federal Reserve
continues to normalize monetary policy. As a result, the recent historical
market conditions are not reflective of the market conditions that will be
present when the rates for APS will be in effect.
29 Id. at 43.
-30-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• It is important to consider the results of a variety of ROE estimation models,
using forward-looking assumptions to estimate the cost of equity.
• Without adequate regulatory support, the TCJA will have a negative effect
on utility cash flows, which increases investor risk expectations for utilities.
VI. PROXY GROUP SELECTION
Q. WHY HAVE YOU USED A GROUP OF PROXY COMPANIES TO
ESTIMATE THE COST OF EQUITY FOR APS?
A. In this proceeding, we are focused on estimating the cost of equity for an electric
utility company that is not itself publicly traded. Since the Cost of Equity is a
market-based concept, and given that APS does not make up the entirety of a
publicly-traded entity, it is necessary to establish a group of companies that is both
publicly-traded and comparable to APS in certain fundamental business and
financial respects to serve as its “proxy” in the ROE estimation process.
Even if the Company’s electric utility operations in Arizona did constitute the
entirety of a publicly-traded entity, it is possible that transitory events could bias
its market value over a given period of time. A significant benefit of using a proxy
group is that it moderates the effects of unusual events that may be associated with
any one company. The proxy companies used in my analyses all possess a set of
operating and risk characteristics that are substantially comparable to APS, and
thus provide a reasonable basis to derive and estimate the appropriate ROE for the
Company.
Q. PLEASE PROVIDE A BRIEF PROFILE OF APS.
A. APS provides electric utility service (generation, transmission, and distribution) to
approximately 2.7 million customers in 11 of Arizona’s 15 counties. APS currently
-31-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
has an investment grade long-term rating of A2 from Moody’s and A- (Outlook:
Stable) from S&P.30
Q. HOW DID YOU SELECT THE COMPANIES INCLUDED IN YOUR
PROXY GROUP?
A. I began with the group of 39 domestic companies that Value Line classifies as
electric utilities and I simultaneously applied the following screening criteria to
exclude companies that:
• Do not pay consistent quarterly cash dividends because such companies
cannot be analyzed using the Constant Growth DCF model.
• Do not have positive long-term earnings growth forecasts from at least two
equity analysts.
• Do not have investment grade long-term issuer ratings from both S&P and
Moody’s.
• Derive less than 70.00 percent of their total operating income from regulated
operations.
• Derive less than 80.00 percent of their total regulated operating income from
regulated electric operations.
• Do not own regulated generation assets that are included in rate base.
30 S&P Global Market Intelligence, site accessed August 31, 2019.
-32-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
• Do not have at least 35 percent of owned regulated generation capacity come
from regulated coal-fired or nuclear power plants.
• Were party to a merger or other transformative transaction during the
analytical period considered.
Q. WHAT IS THE COMPOSITION OF YOUR PROXY GROUP?
A. My proxy group consists of the companies shown in Figure 10.
Figure 10.
Proxy Group
Company Ticker ALLETE, Inc. ALE Ameren Corporation AEE American Electric Power Company, Inc.
AEP
DTE Energy Company DTE Duke Energy Corporation DUK Exelon Corporation EXC FirstEnergy Corporation FE Evergy, Inc. EVRG OGE Energy Corporation OGE Otter Tail Corporation OTTR PNM Resources, Inc. PNM PPL Corporation PPL Southern Company SO Xcel Energy Inc. XEL
VII. COST OF EQUITY ESTIMATION
Q. PLEASE BRIEFLY DISCUSS THE ROE IN THE CONTEXT OF THE
REGULATED RATE OF RETURN.
A. The overall rate of return for a regulated utility is based on its weighted average
cost of capital, in which the cost rates of the individual sources of capital are
weighted by their respective book values. While the costs of debt and preferred
-33-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
stock can be directly observed, the Cost of Equity is market-based and, therefore,
must be estimated based on observable market data.
Q. HOW IS THE REQUIRED ROE DETERMINED?
A. The required ROE is estimated using one or more analytical techniques that rely
on market-based data to quantify investor expectations regarding required equity
returns, adjusted for certain incremental costs and risks. Informed judgment is then
applied to determine where the Company’s Cost of Equity falls within the range of
results. The key consideration in determining the Cost of Equity is to ensure that
the methodologies employed reasonably reflect investors’ views of the financial
markets in general, as well as the subject company (in the context of the proxy
group) in particular.
Q. WHAT METHODS DID YOU USE TO DETERMINE THE COMPANY’S
ROE?
A. I considered the results of the Constant Growth DCF model, the CAPM analysis, a
Bond Yield Plus Risk Premium methodology, and an Expected Earnings analysis.
As discussed in more detail below, a reasonable ROE estimate considers alternative
methodologies and the reasonableness of their individual and collective results.
Q. WHY IS IT IMPORTANT TO USE MORE THAN ONE ANALYTICAL
APPROACH?
A. It is important to use more than one approach because the Cost of Equity is not
directly observable, and therefore must be estimated based on both quantitative and
qualitative information. When faced with the task of estimating the Cost of Equity,
analysts and investors are inclined to gather and evaluate as much relevant data as
reasonably can be analyzed. A number of models have been developed to estimate
the Cost of Equity. Analysts and academics understand that ROE models are tools
to be used in the ROE estimation process and that strict adherence to any single
approach, or the specific results of any single approach, can lead to flawed
-34-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
conclusions. Consistent with the Hope finding, it is the analytical result, not the
methodology employed, that is controlling in arriving at ROE determinations. As
a practical matter, however, all of the models available for estimating the cost of
equity are subject to limiting assumptions or other methodological constraints.
Consequently, many well-regarded finance texts recommend using multiple
approaches when estimating the cost of equity. For example, Copeland, Koller,
and Murrin31 suggest using the CAPM and Arbitrage Pricing Theory model, while
Brigham and Gapenski32 recommend the CAPM, DCF, and Bond Yield Plus Risk
Premium approaches.
Q. IS IT IMPORTANT, GIVEN THE CURRENT MARKET CONDITIONS,
TO USE MORE THAN ONE ANALYTICAL APPROACH?
A. Yes. Low interest rates, and the effects of the investor “flight to quality” can be
seen in high utility share valuations, relative to historical levels and relative to the
broader market. Higher utility stock valuations produce lower dividend yields and
result in lower cost of equity estimates from a DCF analysis. Low interest rates
also affect the CAPM in two ways: (1) the risk-free rate is lower, and (2) because
the market risk premium is a function of interest rates, (i.e., it is the return on the
broad stock market less the risk-free interest rate), the risk premium should move
higher when interest rates are lower. Therefore, it is important to use multiple
analytical approaches to moderate the impact that the current low interest rate
environment is having on the ROE estimates for the proxy group and, where
possible, consider using projected market data in the models to estimate the return
for the forward-looking period.
31 Tom Copeland, Tim Koller and Jack Murrin, Valuation: Measuring and Managing the Value of Companies, 3rd Ed. (New York: McKinsey & Company, Inc., 2000), at 214. 32 Eugene Brigham, Louis Gapenski, Financial Management: Theory and Practice, 7th Ed. (Orlando: Dryden Press, 1994), at 341.
-35-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. ARE YOU AWARE OF ANY REGULATORY COMMISSIONS WHO
HAVE RECOGNIZED THAT RECENT CONDITIONS IN CAPITAL
MARKETS ARE CAUSING ROE RECOMMENDATIONS BASED ON
DCF MODELS TO BE UNREASONABLE?
A. Yes, several regulatory commissions have addressed the effect of capital market
conditions on the DCF model, including FERC, the ICC, the PPUC and the
Missouri PSC.
Q. PLEASE SUMMARIZE HOW THE FERC HAS RESPONDED TO THE
EFFECT OF MARKET CONDITIONS ON THE DCF.
A. Understanding the important role that dividend yields play in the DCF model, the
FERC determined that capital market conditions have caused the DCF model to
understate equity costs for regulated utilities. In Opinion No. 531, the FERC noted:
There is ‘model risk’ associated with the excessive reliance or mechanical application of a model when the surrounding conditions are outside of the normal range. ‘Model risk’ is the risk that a theoretical model that is used to value real world transactions fails to predict or represent the real phenomenon that is being modeled.33
In Opinion No. 531, the FERC also noted that the low interest rates and bond yields
that persisted throughout the analytical period that was relied on (study period) had
affected the results of the DCF model and recognized the need to move away from
the midpoint of the DCF analysis. In that case, the FERC relied on the CAPM and
other risk premium methodologies to inform its judgment to set the return above
the midpoint of the DCF results. These positions were affirmed by the FERC in
Opinion No. 551 in September 2016.34
33 FERC Docket No. EL11-66-001, Opinion No. 531 (June 19, 2014), fn 286. 34 FERC Docket No. EL14-12-002, Opinion No. 551, at para. 121.
-36-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Finally, in October 2018, the FERC issued an Order in response to the remand from
the U.S. Court of Appeals for the District of Columbia indicating plans to establish
ROEs based on an equal weighting of the results of four financial models: the DCF,
CAPM, Expected Earnings and Risk Premium. FERC explains its reasons for
moving away from sole reliance on the DCF model as follows:
Our decision to rely on multiple methodologies in these four complaint proceedings is based on our conclusion that the DCF methodology may no longer singularly reflect how investors make their decisions. We believe that, since we adopted the DCF methodology as our sole method for determining utility ROEs in the 1980s, investors have increasingly used a diverse set of data sources and models to inform their investment decisions. Investors appear to base their decisions on numerous data points and models, including the DCF, CAPM, Risk Premium, and Expected Earnings methodologies. As demonstrated in Figure 2 below, which shows the ROE results from the four models over the four test periods at issue in this proceeding, these models do not correlate such that the DCF methodology captures the other methodologies. In fact, in some instances, their cost of equity estimates may move in opposite directions over time. Although we recognize the greater administrative burden on parties and the Commission to evaluate multiple models, we believe that the DCF methodology alone no longer captures how investors view utility returns because investors do not rely on the DCF alone and the other methods used by investors do not necessarily produce the same results as the DCF. Consequently, it is appropriate for our analysis to consider a combination of the DCF, CAPM, Risk Premium, and Expected Earnings approaches.35
Q. HOW HAVE THE PPUC, THE ICC AND THE MISSOURI PSC
ADDRESSED THE EFFECT OF MARKET CONDITIONS ON THE DCF?
A. In a 2012 decision for PPL Electric Utilities, while noting that the PPUC has
traditionally relied primarily on the DCF method to estimate the cost of equity for
regulated utilities, the PPUC recognized that market conditions were causing the
DCF model to produce results that were much lower than other models such as the
CAPM and Bond Yield Plus Risk Premium. The PPUC’s Order supported the
35 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order Directing Briefs, issued October 16, 2018, at para. 40. [Figure 2 was omitted]
-37-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
consideration of multiple ROE estimation methodologies.36 The PPUC ultimately
concluded:
As such, where evidence based on the CAPM and RP methods suggest that the DCF-only results may understate the utility’s current cost of equity capital, we will give consideration to those other methods, to some degree, in determining the appropriate range of reasonableness for our equity return determination.37
In a recent ICC case, Docket No. 16-0093, Staff relied on a DCF analysis that
resulted in average returns for their proxy groups of 7.24 percent to 7.51 percent.
The company demonstrated that these results were uncharacteristically too low, by
comparing the results of Staff’s models to recently authorized ROEs for regulated
utilities and the return on the S&P 500.38 In Order No. 16-0093, the ICC agreed
with the Company that Staff’s proposed ROE of 8.04 percent was anomalous and
recognized that a return that is not competitive will deter investment in Illinois.39
In setting the return in this proceeding the ICC recognized that it was necessary to
consider other factors beyond the outputs of the financial models, particularly
whether or not the return is sufficient to attract capital, maintain financial integrity,
and is commensurate with returns for companies of comparable risk, while
balancing the interests of customers and shareholders.40
36 Pennsylvania Public Utility Commission, PPL Electric Utilities, R-2012-2290597, meeting held December 5, 2012, at 80. 37 Id., at 81. 38State of Illinois Commerce Commission, Docket No. 16-0093, Illinois-American Water Company Initial Brief, August 31, 2016, at 10. 39 Illinois Staff’s analysis and recommendation in that proceeding were based on its application of the multi-stage DCF model and the CAPM to a proxy group of water utilities. 40 State of Illinois Commerce Commission Decision, Docket No. 16-0093, Illinois-American Water Company, 2016 WL 7325212 (2016), at 55.
-38-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Finally, in February 2018, the Missouri PSC issued a decision in Spire’s 2017 gas
rate case, in which the allowed ROE was set at 9.80 percent. In explaining the
rationale for its decision, the Missouri PSC cited the importance of considering
multiple methodologies to estimate the cost of equity and the need for the
authorized ROE to be consistent with returns in other jurisdictions and to reflect
the growing economy and investor expectations for higher interest rates.
Based on the competent and substantial evidence in the record, on its analysis of the expert testimony offered by the parties, and on its balancing of the interests of the company’s ratepayers and shareholders, as fully explained in its findings of fact and conclusions of law, the Commission finds that 9.8 percent is a fair and reasonable return on equity for Spire Missouri. That rate is nearly the midpoint of all the experts’ recommendations and is consistent with the national average, the growing economy, and the anticipated increasing interest rates. The Commission finds that this rate of return will allow Spire Missouri to compete in the capital market for the funds needed to maintain its financial health.41
Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE
DCF AND CAPM MODELS?
A. Recent market data that is used as the basis for the assumptions for both models
have been affected by market conditions. As a result, relying exclusively on
historical assumptions in these models, without considering whether these
assumptions are consistent with investors’ future expectations, will underestimate
the cost of equity that investors would require over the period that the rates in this
case are to be in effect. In this instance, relying on the historical average of
abnormally high stock prices results in low dividend yields that are not expected to
continue over the period that the new rates will be in effect. This, in turn,
underestimates the ROE for the rate period.
41 File No. GR-2017-0215 and File No. GR-2017-0216, Missouri Public Service Commission, Report and Order, Issue Date February 21, 2018, at 34.
-39-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The use of recent historical Treasury bond yields in the CAPM also tends to
underestimate the projected cost of equity. The expectation that bond yields will
not remain at currently low levels means that the expected cost of equity would be
higher than is suggested by the CAPM using historical average yields. The use of
projected yields on Treasury bonds results in CAPM estimates that are more
reflective of the market conditions that investors expect during the period in which
the Company’s rates will be in effect.
A. DCF Model
Q. PLEASE DESCRIBE THE DCF APPROACH.
A. The DCF approach is based on the theory that a stock’s current price represents the
present value of all expected future cash flows. In its most general form, the DCF
model is expressed as follows:
Where P0 represents the current stock price, D1…D∞ are all expected future
dividends, and k is the discount rate, or required ROE. Equation [1] is a standard
present value calculation that can be simplified and rearranged into the following
form:
Equation [2] is often referred to as the Constant Growth DCF model in which the
first term is the expected dividend yield and the second term is the expected long-
term growth rate.
( ) ( ) ( )∞∞
+++
++
+=
kD
kD
kDP
1...
11 221
0 [1]
( ) gP
gDk ++
=0
0 1 [2]
-40-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. WHAT ASSUMPTIONS ARE REQUIRED FOR THE CONSTANT
GROWTH DCF MODEL?
A. The Constant Growth DCF model requires the following assumptions: (1) a
constant growth rate for earnings and dividends; (2) a stable dividend payout ratio;
(3) a constant price-to-earnings ratio; and (4) a discount rate greater than the
expected growth rate. To the extent that any of these assumptions is violated,
considered judgment and/or specific adjustments should be applied to the results.
Q. WHAT MARKET DATA DID YOU USE TO CALCULATE THE
DIVIDEND YIELD IN YOUR CONSTANT GROWTH DCF MODEL?
A. The dividend yield in my Constant Growth DCF model is based on the proxy
companies’ current annualized dividend and average closing stock prices over the
30-, 90-, and 180-trading days ended July 31, 2019.
Q. WHY DID YOU USE 30-, 90-, AND 180-DAY AVERAGING PERIODS?
A. It is important to use an average of recent trading days to calculate the term P0 in
the DCF model to ensure that the ROE is not skewed by unusual events that may
affect stock prices on any given trading day. The averaging period should also be
reasonably representative of expected capital market conditions over the long-term.
In my view, the use of 30-, 90-, and 180-day averaging periods reasonably balances
those considerations.
Q. DID YOU MAKE ANY ADJUSTMENTS TO THE DIVIDEND YIELD TO
ACCOUNT FOR PERIODIC GROWTH IN DIVIDENDS?
A. Yes. Since utility companies tend to increase their quarterly dividends at different
times throughout the year, it is reasonable to assume that dividend increases will
be evenly distributed over calendar quarters. Given that assumption, it is
reasonable to apply one-half of the expected annual dividend growth rate for
purposes of calculating the expected dividend yield component of the DCF model.
This adjustment ensures that the expected first year dividend yield is, on average,
-41-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
representative of the coming twelve-month period, and does not overstate the
aggregated dividends to be paid during that time.
Q. WHY IS IT IMPORTANT TO SELECT APPROPRIATE MEASURES OF
LONG-TERM GROWTH IN APPLYING THE DCF MODEL?
A. In its Constant Growth form, the DCF model (i.e., Equation [2]) assumes a single
growth estimate in perpetuity. In order to reduce the long-term growth rate to a
single measure, one must assume a constant payout ratio, and that earnings per
share, dividends per share and book value per share all grow at the same constant
rate. Over the long run, however, dividend growth can only be sustained by
earnings growth. It, therefore, is important to incorporate a variety of sources of
long-term earnings growth rates into the Constant Growth DCF model.
Q. WHICH SOURCES OF LONG-TERM EARNINGS GROWTH RATES DID
YOU USE?
A. My Constant Growth DCF model incorporates three sources of long-term earnings
growth rates: (1) consensus estimates from Zacks Investment Research; (2)
consensus estimates from Thomson First Call (provided by Yahoo! Finance); and
(3) Value Line Investment Survey.
Q. PLEASE SUMMARIZE THE RESULTS OF YOUR DCF ANALYSIS.
A. As shown in Figure 11 (see also Attachment AEB-2DR), the Constant Growth
DCF model produces a range of mean results from 9.07 percent to 9.26 percent and
mean high results from 10.21 percent to 10.40 percent.
Figure 11.
Discounted Cash Flow Results
Constant Growth DCF Mean Low Mean Mean High 30-Day Average Price 8.09% 9.07% 10.21% 90-Day Average Price 8.17% 9.14% 10.28% 180-Day Average Price 8.17% 9.26% 10.40%
-42-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HOW DID YOU CALCULATE THE RANGE OF RESULTS FOR THE DCF
MODEL?
A. I calculated the low results for the DCF model using the minimum growth rate (i.e.,
the lowest of the First Call, Zacks, and Value Line earnings growth rates) for each
of the proxy group companies. Thus, the low results reflect the minimum DCF
result for the proxy group. I used a similar approach to calculate the high results,
using the highest growth rate for each proxy group company. The mean results
were calculated using the average growth rates from all three sources.
Q. DID YOU EXCLUDE THE DCF RESULTS OF ANY OF THE INDIVIDUAL
COMPANIES IN THE PROXY GROUP?
A. Yes, I have. It is appropriate to exclude DCF results below a specified threshold
at which equity investors would consider such returns to provide an insufficient
return increment above long-term debt costs. The average credit rating for the
companies in my proxy group is BBB+/Baa1. The average yield on Moody’s Baa-
rated utility bonds for the 30 trading days ending July 31, 2019, was 4.17 percent.42
As shown in Attachment AEB-2DR, I have eliminated Constant Growth results
lower than 7.00 percent because such returns would provide equity investors a risk
premium only 283 basis points above Baa-rated utility bonds.
Q. DID YOU CONSIDER THE RESULTS OF ANY OTHER DCF ANALYSIS?
A. Yes. Because analysts have indicated that utility stocks may currently be at
unsustainably high prices due to market conditions, I also considered the results of
a projected Constant Growth DCF model. Under this DCF analysis, the dividend
yield is calculated using Value Line’s projected average share prices and dividends
for the period from 2022-2024, while the long-term growth rate is based on the
same five-year projected EPS growth rates used in the Constant Growth DCF
model. As shown in Attachment AEB-2, the projected DCF analysis produces a
42 Source: Bloomberg Professional.
-43-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
mean DCF result of 9.66 percent and a mean high result of 10.75 percent. Relying
on Value Line’s projected dividend yields and share prices in 2022-2024, the mean
results of the Constant Growth DCF model increase by 78 basis points (i.e., 9.66
percent vs. 8.88 percent shown in Attachment AEB-2DR).43
Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE
DCF MODEL?
A. Recent market data that is used as the basis for the inputs and assumptions for the
DCF model have been affected by capital market conditions. As a result, relying
exclusively on historical inputs and assumptions in this model, without considering
whether those inputs and assumptions are consistent with investors’ future
expectations, will underestimate the cost of equity that investors would require
over the period that the rates in this case are to be in effect. In this instance, relying
on the historical average of abnormally high stock prices results in low dividend
yields that are not expected to prevail over the period that the new rates will be in
effect. This, in turn, underestimates the ROE for the rate period.
B. CAPM Analysis
Q. PLEASE BRIEFLY DESCRIBE THE CAPITAL ASSET PRICING
MODEL.
A. The CAPM is a risk premium approach that estimates the Cost of Equity for a given
security as a function of a risk-free return plus a risk premium to compensate
investors for the non-diversifiable or “systematic” risk of that security. This second
component is the product of the market risk premium and the Beta coefficient,
which measures the relative riskiness of the security being evaluated.
43 This comparison includes the all of the proxy group companies.
-44-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The CAPM is defined by four components, each of which must theoretically be a
forward-looking estimate:
( )fmfe rrrK −+= β [3]
Where:
Ke = the required market ROE;
β = Beta coefficient of an individual security;
rf = the risk-free rate of return; and
rm = the required return on the market as a whole.
In this specification, the term (rm – rf) represents the market risk premium.
According to the theory underlying the CAPM, since unsystematic risk can be
diversified away, investors should only be concerned with systematic or non-
diversifiable risk. Non-diversifiable risk is measured by Beta, which is defined as:
β =
Covariance(re, rm) [4]
Variance(rm)
The variance of the market return (i.e., Variance (rm)) is a measure of the
uncertainty of the general market, and the covariance between the return on a
specific security and the general market (i.e., Covariance (re, rm)) reflects the extent
to which the return on that security will respond to a given change in the general
market return. Thus, Beta represents the risk of the security relative to the general
market.
-45-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. WHAT RISK-FREE RATE DID YOU USE IN YOUR CAPM ANALYSIS?
A. I relied on three sources for my estimate of the risk-free rate: (1) the current 30-
day average yield on 30-year U.S. Treasury bonds of 2.57 percent;44 (2) the average
projected 30-year U.S. Treasury bond yield for Q4 2019 through Q4 2020 of 2.66
percent;45 and (3) the average projected 30-year U.S. Treasury bond yield for 2021
through 2025 of 3.60 percent.46
Q. DID YOU PLACE MORE WEIGHT ON ONE OF THESE SCENARIOS?
A. Yes. Based on current market conditions, I placed more weight on the results of
the projected yields on the 30-year Treasury bonds. As discussed previously, the
estimation of the Cost of Equity should be forward-looking since it is the return
that investors would receive over the future rate period. Therefore, the inputs and
assumptions used in the CAPM analysis should reflect the expectations of the
market at that time. As discussed in Section V of my Direct Testimony, leading
economists surveyed by Blue Chip expect an increase in long-term interest rates
over the next five years. This is an important consideration for equity investors as
they assess their return requirements. While I have included the results of a CAPM
analysis that relies on the current average risk-free rate, that analysis fails to take
into consideration the effect of the market’s expectations for interest rate increases
on the cost of equity.
Q. WHAT BETA COEFFICIENTS DID YOU USE IN YOUR CAPM
ANALYSIS?
A. As shown on Attachment AEB-4DR, I used the Beta coefficients for the proxy
group companies as reported by Bloomberg and Value Line. The Beta coefficients
reported by Bloomberg were calculated using ten years of weekly returns relative
44 Bloomberg Professional, as of July 31, 2019. 45 Blue Chip Financial Forecasts, Vol. 38, No. 8, August 1, 2019, at 2. 46 Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14.
-46-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
to the S&P 500 Index. Value Line’s calculation is based on five years of weekly
returns relative to the New York Stock Exchange Composite Index.
Q. WHY DID YOU SELECT A TEN-YEAR PERIOD TO CALCULATE THE
BETA COEFFICIENTS FROM BLOOMBERG?
A. As I discussed in Section V, the TCJA has had a significant effect on utility
companies. While other industries are able to retain the benefits of a reduced
corporate income tax rate, this benefit has largely been passed through to customers
by utility companies. This fundamental difference affected investors’ view of the
utility industry relative to other industries. As shown in Figure 12, after the Senate
passed the TCJA on December 2, 2017, utilities significantly deviated from the
broader market.
Figure 12.
Performance of the Utility Industry Relative to the S&P 50047
As shown in Figure 12, following the TCJA the performance of the utility industry
deviated significantly from the broader market, understating the Beta for utility
47 Bloomberg Professional. Data through July 31, 2019.
-47-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
companies as compared with historical averages. To reflect the long-term
relationship, which has been that utility stocks are less volatile than the broader
market (i.e., the relative volatility for utility companies has been lower than the
S&P 500 over the ten-year measure),48 I selected a ten-year period to calculate the
Beta coefficients from Bloomberg.
Q. HOW DID YOU ESTIMATE THE MARKET RISK PREMIUM IN THE
CAPM?
A. I estimated the market risk premium based on the expected total return on the S&P
500 Index less the 30-year Treasury bond yield. The expected total return on the
S&P 500 Index is calculated using the Constant Growth DCF model discussed
earlier in my Direct Testimony for the companies in the S&P 500 Index for which
dividend yields and long-term earnings projections are available. As shown in
Attachment AEB-5DR, based on an estimated market capitalization-weighted
dividend yield of 1.94 percent and a weighted long-term growth rate of 11.84
percent, the estimated required market return for the S&P 500 Index is 13.90
percent. As shown in Attachment AEB-5DR, the implied market risk premium
over the current 30-day average of the 30-year U.S. Treasury bond yield, and
projected yields on the 30-year U.S. Treasury bond, range from 10.30 percent to
11.24 percent.
Q. WHY IS A FORWARD-LOOKING MARKET RISK PREMIUM MORE
APPROPRIATE THAN A HISTORICAL MARKET RISK PREMIUM?
A. The historical market risk premium fails to consider the inverse relationship
between interest rates and the market risk premium. As shown in my Bond Yield
plus Risk Premium analysis, as interest rates decrease, the market risk premium
increases. The historical market risk premium reported by Morningstar is based
on an income-only return on long-term government bonds of 5.00 percent (which
48 Ibid.
-48-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
is significantly higher than the current yield on long-term government bonds)
subtracted from the long-term return on large company stocks of 12.10 percent.49
Therefore, the historical market risk premium is understated relative to current or
near-term projected interest rates, which are well below the long-term average
government bond yield of 5.00 percent. As such, it is more appropriate to use a
forward-looking market risk premium that reflects projected total returns for the
S&P 500 less the current and projected yield on Treasury securities.
Q. WHAT ARE THE RESULTS OF YOUR CAPM ANALYSES?
A. As shown in Figure 13 (see also Attachment AEB-6DR), my CAPM analysis
produces a range of returns from 9.54 percent to 10.42 percent. The mean return
using the Bloomberg Beta coefficients and three measures of the risk-free rate is
10.20 percent. Using the Value Line Beta coefficients and three measures of the
risk-free rate, the mean result is 9.69 percent.
Figure 13.
Forward-Looking CAPM Results
Current Risk-Free
Rate (2.57%)
2019-2020 Projected
Risk-Free Rate (2.66%)
2021-2025 Projected
Risk-Free Rate (3.60%)
Mean Result
Bloomberg Beta 10.07% 10.11% 10.42% 10.20% Value Line Beta 9.54% 9.58% 9.94% 9.69%
Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE
CAPM?
A. The use of recent historical Treasury bond yields in the CAPM tends to
underestimate the forward-looking cost of equity. The expectation that bond yields
49 Duff & Phelps, 2018 Cost of Capital: Annual U.S. Guidance and Examples, Chapter 2, Exhibit 2.3, at 4.
-49-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
will not remain at currently low levels means that the expected Cost of Equity
would be higher than is suggested by the CAPM using historical average yields.
The use of projected yields on Treasury bonds results in CAPM estimates that are
more reflective of the market conditions that investors expect during the period that
the Company’s rates will be in effect.
C. Bond Yield Plus Risk Premium Analysis
Q. PLEASE DESCRIBE THE BOND YIELD PLUS RISK PREMIUM
APPROACH YOU EMPLOYED.
A. In general terms, this approach is based on the fundamental principle that equity
investors bear the residual risk associated with equity ownership and therefore
require a premium over the return they would have earned as a bondholder. Since
returns to equity holders have greater risk than returns to bondholders, equity
investors must be compensated to bear that risk. Risk premium approaches
estimate the cost of equity as the sum of the equity risk premium and the yield on
a particular class of bonds. In my analysis, I used actual authorized returns for
electric utilities as the historical measure of the Cost of Equity to determine the risk
premium.
Q. ARE THERE OTHER CONSIDERATIONS THAT SHOULD BE
ADDRESSED IN CONDUCTING THIS ANALYSIS?
A. Yes. Both academic literature and market evidence indicate that the equity risk
premium (as used in this approach) is inversely related to the level of interest rates.
That is, as interest rates increase (decrease), the equity risk premium decreases
(increases). Consequently, it is important to develop an analysis that: (1) reflects
the inverse relationship between interest rates and the equity risk premium; and (2)
relies on recent and expected market conditions. Such an analysis can be developed
based on a regression of the risk premium as a function of U.S. Treasury bond
yields. If we let authorized ROEs for electric utilities serve as the measure of
-50-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
required equity returns and define the yield on the long-term U.S. Treasury bond
as the relevant measure of interest rates, the risk premium is simply the difference
between those two points.50
Q. IS THE BOND YIELD PLUS RISK PREMIUM ANALYSIS RELEVANT
TO INVESTORS?
A. Yes. Investors are aware of ROE awards in other jurisdictions, and they consider
those awards as a benchmark for a reasonable level of equity returns for utilities of
comparable risk operating in other jurisdictions. Since my Bond Yield Plus Risk
Premium analysis is based on authorized ROEs for electric utilities relative to
corresponding Treasury yields, it provides relevant information to assess the return
expectations of investors. However, I have relied on this analysis only to
corroborate the reasonableness of my DCF and CAPM results and to inform my
ultimate ROE recommendation, not as the primary basis for my recommendation.
Q. WHAT DID YOUR BOND YIELD PLUS RISK PREMIUM ANALYSIS
REVEAL?
A. As shown in Figure 14, from 1992 through July 2019, there was a strong negative
relationship between risk premia and interest rates. To estimate that relationship,
I conducted a regression analysis using the following equation:
( )TbaRP += [5]
50 See e.g., S. Keith Berry, Interest Rate Risk and Utility Risk Premia during 1982-93, Managerial and Decision Economics, Vol. 19, No. 2 (March, 1998), in which the author used a methodology similar to the regression approach described below, including using allowed ROEs as the relevant data source, and came to similar conclusions regarding the inverse relationship between risk premia and interest rates. See also Robert S. Harris, Using Analysts’ Growth Forecasts to Estimate Shareholders Required Rates of Return, Financial Management, Spring 1986, at 66.
-51-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Where:
RP = Risk Premium (difference between allowed ROEs and the yield on 30-
year U.S. Treasury bonds)
a = intercept term
b = slope term
T = 30-year U.S. Treasury bond yield
Data regarding allowed ROEs were derived from 615 integrated electric utility rate
cases from 1992 through July 2019 as reported by Regulatory Research Associates
(RRA).51 This equation’s coefficients were statistically significant at the 99.00
percent level.
Figure 14.
Risk Premium Results
51 This analysis began with a total of 1,129 cases and was screened to eliminate limited issue rider cases, transmission-only cases, distribution cases and cases that were silent with respect to the authorized ROE. After applying those screening criteria, the analysis was based on data for 615 cases.
-52-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
As shown in Attachment AEB-7DR, based on the current 30-day average of the
30-year U.S. Treasury bond yield (i.e., 2.57 percent), the risk premium would be
7.19 percent, resulting in an estimated ROE of 9.75 percent. Based on the near-
term (Q4 2019 – Q4 2020) projections of the 30-year U.S. Treasury bond yield
(i.e., 2.66 percent), the risk premium would be 7.13 percent, resulting in an
estimated ROE of 9.79 percent. Based on longer-term (2021-2025) projections of
the 30-year U.S. Treasury bond yield (i.e., 3.60 percent), the risk premium would
be 6.60 percent, resulting in an estimated ROE of 10.20 percent.
D. Expected Earnings Analysis
Q. HAVE YOU CONSIDERED ANY ADDITIONAL ANALYSIS TO
ESTIMATE THE COST OF EQUITY FOR APS?
A. Yes. I have considered an Expected Earnings analysis based on the projected
ROEs for each of the proxy group companies.
Q. WHAT IS AN EXPECTED EARNINGS ANALYSIS?
A. The Expected Earnings methodology is a comparable earnings analysis that
calculates the earnings that an investor expects to receive on the book value of a
stock. The Expected Earnings analysis is a forward-looking estimate of investors’
expected returns. The use of an Expected Earnings approach based on the proxy
companies provides a range of the expected returns on a group of risk comparable
companies. This range is useful in helping to determine the opportunity cost of
investing in the subject company, which is relevant in determining a company’s
ROE.
Q. HAVE REGULATORS ENDORSED THE USE OF AN EXPECTED
EARNINGS ANALYSIS?
A. Yes. As discussed above, the FERC issued an Order in October 2018 indicating
plans to establish ROEs based on an equal weighting of the results of four financial
-53-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
models: the DCF, CAPM, Expected Earnings and Risk Premium. In regard to the
expected earnings analysis, FERC noted the following:
A comparable earnings analysis is a method of calculating the earnings an investor expects to receive on the book value of a particular stock. The analysis can be either backward looking using the company’s historical earnings on book value, as reflected on the company’s accounting statements, or forward-looking using estimates of earnings on book value, as reflected in analysts’ earnings forecasts for the company. The latter approach is often referred to as an “Expected Earnings analysis.” The returns on book equity that investors expect to receive from a group of companies with risks comparable to those of a particular utility are relevant to determining that utility’s cost of equity, because those returns on book equity help investors determine the opportunity cost of investing in that particular utility instead of other companies of comparable risk. Because investors rely on Expected Earnings analyses to help estimate the opportunity cost of investing in a particular utility, we find this type of analysis useful in determining a utility’s ROE.52
Q. HAVE ANY OTHER REGULATORS CONSIDERED THE USE OF AN
EXPECTED EARNINGS ANALYSIS?
A. Yes. The Washington Utilities & Transportation Commission (Washington UTC),
in its order in Dockets UE-170485 and UG-170486, considered the results of the
Comparable Earnings analysis53 in establishing the authorized ROE for Avista
Corporation. The Washington UTC noted that it tends to place more weight on the
results of the DCF, CAPM and Risk Premium analyses; however, given the wide
range of CAPM results presented by the ROE witnesses in the case, the
Washington UTC decided to apply weight to the results of the Comparable
Earnings analysis.54 Specifically, the Washington UTC stated the following:
52 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order Directing Briefs, issued October 16, 2018, at 42. 53 The Expected Earnings analysis is a form of the Comparable Earnings analysis that relies exclusively on forward-looking projections. 54 Wash. Utils. & Transp. Comm’n v. Avista Corp., Docket Nos. UE-170485 and UG-170486, Order 07, ¶ 65 (April 26, 2018).
-54-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Finally, as additional data points for our consideration of establishing Avista’s ROE, we note that two witness, Mr. McKenzie for Avista and Mr. Parcell for Staff, employ the CE approach to two proxy groups of companies. The respective mid-points of each witnesses’ CE analysis are 10.5 and 9.5 percent, respectively, with an average of 10.0 percent. Although we generally do not apply material weight to the CE method, having stronger reliance on the DCF, CAPM and RP methods, we are inclined to include the CE method here given the anomalous CAPM results described previously.55
Q. HOW DID YOU DEVELOP THE EXPECTED EARNINGS APPROACH?
A. I relied primarily on the projected ROE capital for the proxy companies as reported
by Value Line for the period from 2022-2024. The projected ROEs are adjusted to
account for the fact that the ROEs reported by Value Line are calculated on the
basis of common shares outstanding at the end of the period, as opposed to average
shares outstanding over the period. This adjustment is consistent with FERC’s
methodology for the Expected Earnings analysis that was included in its October
2018 order. As shown in Attachment AEB-8DR, the Expected Earnings analysis
produces mean results of 11.15 percent and a median of 10.81 percent.
VIII. REGULATORY AND BUSINESS RISKS
Q. DO THE MEAN DCF, CAPM, RISK PREMIUM AND EXPECTED
EARNINGS RESULTS FOR THE PROXY GROUP PROVIDE AN
APPROPRIATE ESTIMATE OF THE COST OF EQUITY FOR APS?
A. No. These results provide only a range of the appropriate estimate of the
Company’s Cost of Equity. There are additional factors that must be taken into
consideration when determining where the Company’s Cost of Equity falls within
the range of analytical results. I considered the regulatory risk faced by APS in
determining the overall risk profile of the Company as compared with the proxy
group, APS’s projected level of capital expenditures, and the Company’s reliance
on nuclear generation.
55 Ibid.
-55-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
A. Regulatory Risk Assessment
Q. HAVE YOU PERFORMED A REGULATORY RISK ASSESSMENT OF
APS AS COMPARED TO THAT OF THE PROXY GROUP COMPANIES?
A. Yes. Specifically, I examined the following factors that affect the business risk of
APS and the proxy group companies: (1) test year convention; (2) rate base
convention; (3) revenue decoupling mechanism; and (4) inclusion of Construction
Work in Progress (CWIP) in rate base and the ability to earn a cash return on CWIP.
As shown in Attachment AEB-9DR, approximately 64.00 percent of the operating
companies in the proxy group provide service in jurisdictions that allow the use of
a fully or partially forecasted test year. APS’s rates are based on a historical test
year, adjusted for known and measurable changes. Further, approximately 46.00
percent of the operating utilities in the proxy group are allowed to use year-end rate
base, while about 54.00 percent use average rate base. APS’s rates are currently
based on year-end rate base.
APS has a partial revenue decoupling mechanism (the Lost Fixed Cost Recovery
Mechanism) that allows the Company to recover a portion of the revenues lost due
to reduced sales resulting from customer participation in energy efficiency and
distributed energy rooftop solar programs. By comparison, like APS,
approximately 38.00 percent of the operating utilities held by the proxy group have
partial revenue decoupling mechanisms, and slightly less than 6.00 percent have
full revenue decoupling mechanisms (which account for changes in volumetric risk
regardless of the cause) which offer greater protection against volumetric risk.
As shown in Attachment AEB-9DR, approximately 84.00 percent of the operating
utilities in the proxy group have the ability to include all or part of the CWIP in
-56-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
rate base and earn a cash return on CWIP, which helps to offset the pressure on
cash flows of major capital projects. APS does not have this ability.
Q. ARE YOU AWARE THAT APS’S 2017 RATE SETTLEMENT INCLUDED
MANY CREDIT SUPPORTIVE FEATURES?
A. Yes, I am aware that the settlement provided for a 55.8 percent equity ratio and an
allowed ROE of 10.00 percent with the continuation of certain cost recovery riders.
However, as a result of the settlement, the Commission Staff opened a docket to
review the Company’s earnings and required that APS file a full rate case earlier
than was anticipated as part of the settlement. In that determination, the Staff
identified several areas to be revisited in the rate proceeding including the
authorized equity ratio and ROE and all adjustment mechanisms that had been
included in the settlement.56 While the 2017 rate settlement included credit
supportive features, FitchRatings downgraded the outlook on APS to negative in
June 2019, noting concern related to the delay in approval of the step rate increase
related to the recovery of investment in the Four Corners environmental
remediation, the re-examination of retail rates and the review of potential over
earnings at APS.57 In addition, Moody’s acknowledged the terms of the 2017
settlement agreement and the Staff’s determination to require a rate case that
reconsiders many of the terms of that settlement. However, in June 2019 Moody’s
credit opinion assumed that the Arizona regulatory environment would remain
supportive, referencing timely recovery mechanisms that help support cash flow
from operations.58 As such, continued support from the Commission could
56 Moody’s Investor Services Credit Opinion, Arizona Public Service Company: Update to credit analysis, June 18, 2019 at 5. 57 FitchRatings, Corporate Report, Arizona Public Service Co., July 3, 2019, at 1. 58 Moody’s Investor Services Credit Opinion, Arizona Public Service Co., June 18, 2019 at 1.
-57-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
mitigate concerns from the credit rating agencies that may affect APS’s credit
quality.
Q. BASED ON THESE ANALYSES, WHAT IS YOUR CONCLUSION
REGARDING THE LEVEL OF REGULATORY RISK FOR APS
RELATIVE TO THAT OF THE PROXY GROUP COMPANIES?
A. As discussed above, APS has greater regulatory risk than the proxy group
companies due to the use of a historical test year, higher volumetric risk than
several of the proxy group companies as a result of the structure of the partial
decoupling mechanism, capital recovery between rate cases, and recent regulatory
developments that may result in a review of the terms of the 2017 settlement. My
conclusion is that, even though APS has some cost recovery adjustors, they are
generally more limited than many of the proxy group companies. Therefore, APS
has greater regulatory risk than the proxy group, which supports an authorized ROE
toward the upper end of the range of results.
B. APS’s Capital Expenditure Plan
Q. PLEASE SUMMARIZE THE COMPANY’S PROJECTED CAPITAL
EXPENDITURE REQUIREMENTS.
A. APS projects capital investments of approximately $4.0 billion over the period
from 2019 through 2021.59 The capital program is largely driven by the Company’s
clean energy investment initiatives, which seek to substantially expand its clean
energy portfolio with the addition of 351 MW of battery storage and 100 MW of
solar by 2021, and an additional 500 MW of solar and battery by 2025.60
59 Source: Company response to data request. 60 Moody’s Investor Services Credit Opinion, June 18, 2019 at 5.
-58-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. DO CREDIT RATING AGENCIES RECOGNIZE THE RISKS
ASSOCIATED WITH ELEVATED LEVELS OF CAPITAL
EXPENDITURES?
A. Yes. From a credit perspective, the additional pressure on cash flows associated
with high levels of capital expenditures exerts corresponding pressure on credit
metrics and, therefore, credit ratings. This additional pressure on FFO coverage
ratios was noted by S&P when the rating agency downgraded the outlook on APS
from positive to stable.
To the extent that APS’s rates do not permit it to recover its full cost of doing
business, the Company will face increased recovery risk and thus increased
pressure on its credit metrics. This is particularly important given the pressure on
the Company’s credit metrics due to the negative effect of the TCJA on APS’s cash
flows.
Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE EFFECT OF
APS’S CAPITAL SPENDING PROGRAM ON ITS RISK PROFILE AND
COST OF CAPITAL?
A. As noted by S&P, the elevated level of APS’s projected capital expenditures is
expected to drive higher the Company’s negative free cash flow. Timely cost
recovery is needed to maintain the Company’s credit metrics at a level consistent
with the current credit ratings. S&P noted that the Company’s current rating is
based in part on its ability to manage regulatory risk in what S&P has determined
is a challenging regulatory environment in Arizona.61 Based on the S&P
assessment, it will be important to ensure that the Company’s credit metrics are
61 Standard & Poors Ratings Direct, Research Update Pinnacle West Capital Corp. and Subsidiary Arizona Public Service Co. Outlooks Revised To Stable; A- Rating Affirmed, May 3, 2018, p. 2.
-59-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
supported through the capital structure and an authorized ROE for the Company
toward the upper end of the range for the proxy group.
C. Generation Risk
Q. PLEASE PROVIDE AN OVERVIEW OF THE COMPANY’S
GENERATION PORTFOLIO.
A. APS’s portfolio includes a substantial amount of coal and nuclear generation.
While the Company has a stated plan to reduce its coal generation over time,
ceasing coal generation by 2038,62 the APS portfolio remains depended on nuclear
generation. In fact, the Company operates the largest nuclear generating facility in
the country - Palo Verde.
Q. PLEASE DESCRIBE THE RISKS ASSOCIATED WITH APS’S
GENERATION PORTFOLIO.
A. In general, nuclear generation assets are subject to certain risks including the
recovery of investors’ capital in the event of a change in market structure or a plant
failure, and recovery of replacement power and repair costs in the event of extended
or unplanned outage. In addition, federal safety regulations present a substantial
risk of requiring investors to commit new capital to comply with new regulations
or operation restrictions or possibly closure. The Company and its investors are
faced with the risk that new and impending federal regulations will require it to
expend additional capital or face closure and investors consider these risks in
establishing their return requirements. As shown in Attachment AEB-10DR, it is
clear that the Company’s exposure to the risks associated with nuclear generation
is above the proxy group average. In fact, approximately 35.00 percent of the
Company’s net generation was derived from nuclear generation assets, compared
62 Moody’s Investor Services Credit Opinion, Arizona Public Service Company: Update to credit analysis, June 18, 2019 at 4.
-60-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
to the proxy group average of approximately 22.00 percent. As such, this supports
an authorized ROE toward the upper end of the range of results.
IX. CAPITAL STRUCTURE
Q. WHAT IS APS’S PROPOSED CAPITAL STRUCTURE?
A. As described in the Direct Testimony of Ms. Blankenship, the Company’s
proposed capital structure consists of 54.67 percent common equity and 45.33
percent long-term debt, based on the test year actual capital structure.
Q. HAVE YOU CONDUCTED ANY ANALYSIS TO DETERMINE IF THE
COMPANY’S CAPITAL STRUCTURE IS REASONABLE?
A. Yes, I have reviewed the capital structures of the proxy group companies. In
addition, I have considered recent trends in the industry following the TCJA.
Q. PLEASE DISCUSS YOUR ANALYSIS OF THE CAPITAL STRUCTURES
OF THE PROXY GROUP COMPANIES.
A. My analysis of the proxy group companies’ actual capital structures is provided in
Attachment AEB-11DR. As shown in that exhibit, I calculated the mean
proportions of common equity and long-term debt over the most recent eight
quarters63 for each of the proxy group companies at the operating company level.
The Company’s proposed equity ratio of 54.67 percent is slightly above the mean
of the proxy group of 53.69 percent and near the middle of the range of common
equity ratios for the proxy group companies of - 45.93 percent to 60.59 percent.
Q. ARE THERE OTHER FACTORS TO BE CONSIDERED IN SETTING THE
COMPANY’S CAPITAL STRUCTURE?
A. Yes. The credit rating agencies’ response to the TCJA must also be considered
when determining the equity ratio. As discussed previously in my testimony, all
three rating agencies have noted that the TCJA has negative implications for utility
63 Source: SNL Financial and FERC Form 1 quarterly reports. Includes quarterly data from Q3 2017 through Q2 2019.
-61-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
cash flows. S&P and FitchRatings have specifically identified increasing the
equity ratio as one approach to ensure that utilities have sufficient cash flows
following the tax cuts and the loss of bonus depreciation. Furthermore, Moody’s
unprecedented downgrade of the rating outlook for the entire utilities sector in June
2018 stresses the importance of maintaining adequate cash flow metrics for the
industry as a whole and APS in the context of this proceeding.
Q. WHAT IS YOUR CONCLUSION REGARDING AN APPROPRIATE
CAPITAL STRUCTURE FOR APS?
A. Considering the actual capital structures of the proxy group’s operating companies,
and recent trends in the industry, I believe that APS’s proposed common equity
ratio of 54.67 percent is reasonable.
X. CONCLUSIONS AND RECOMMENDATION
Q. WHAT IS YOUR CONCLUSION REGARDING A JUST AND
REASONABLE ROE FOR APS?
A. Based on the various quantitative and qualitative analyses presented in my Direct
Testimony, and in light of the business and financial risks of APS compared to the
proxy group, it is my view that the Company’s requested ROE of 10.15 percent is
just and reasonable and would balance the interests of the Company’s customers
and shareholders. Specifically, my ROE recommendation would enable the
Company to maintain its financial integrity and therefore its ability to attract capital
at reasonable rates under a variety of economic and financial market conditions,
while continuing to provide safe, reliable and affordable electric utility service to
customers in Arizona.
-62-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Figure 15.
Summary of Analytical Results
Constant Growth DCF Mean Low Mean Mean High 30-Day Average Price 8.09% 9.07% 10.21% 90-Day Average Price 8.17% 9.14% 10.28% 180-Day Average Price 8.17% 9.26% 10.40%
Risk Premium Models
Current Risk-Free Rate (2.57%)
2019-2020 Projected Risk-Free
Rate (2.66%)
2021-2025 Projected Risk-Free
Rate (3.60%) CAPM - Bloomberg Beta 10.07% 10.11% 10.42% CAPM - Value Line Beta 9.54% 9.58% 9.94% Bond Yield Plus Risk Premium 9.75% 9.79% 10.20%
Expected Earnings Analysis Value Line 2022-2024 11.15%
Q. WHAT IS YOUR CONCLUSION WITH RESPECT TO APS’S PROPOSED
CAPITAL STRUCTURE?
A. My conclusion is that the Company’s proposed capital structure consisting of 54.67
percent common equity and 45.33 percent long-term debt is reasonable compared
to the mean capital structures for the proxy group companies.
XI. FAIR VALUE RATE BASE
Q. WHAT IS THE FAIR VALUE STANDARD IN ARIZONA?
A. As the Commission noted in its decision regarding Chaparral City Water
Company,64 the Arizona Constitution requires the use of a fair value rate base in
establishing rates. Article XV, Section 14 of the Arizona Constitution states:
64 Decision No. 70441 (July 28, 2008), at 20-21.
-63-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The corporation commission shall, to aid it in the proper discharge of its duties, ascertain the fair value of the property within the state of every public service corporation doing business therein; and every public service corporation doing business within the state shall furnish to the commission all evidence in its possession, and all assistance in its power, requested by the commission in aid of the determination of the value of the property within the state of such public service corporation.65
As interpreted by the Arizona Court of Appeals, this paragraph requires the
Commission to find the fair value of a public service corporation’s property and to
use that value to set just and reasonable rates.66
Q. HOW HAS THE COMMISSION APPLIED THE FAIR VALUE
STANDARD IN PRIOR CASES?
A. The fair value standard, as applied by the Commission in recent rate cases, includes
the estimation of two components: (1) the FVRB; and (2) the FVROR on the
FVRB.67
Q. HOW HAS THE COMMISSION ESTIMATED THE FVRB?
A. In several recent cases, the Commission has determined that it was appropriate to
estimate the FVRB by equally weighting the OCRB and the RCND. The RCND
estimates the current replacement cost value of the utility system by escalating the
utility’s original investments in rate base assets by inflation, since the installation
year of the asset. In order to recognize physical and functional depreciation of the
assets, the replacement cost is then adjusted for the accounting depreciation of the
assets based on the expected useful life of the asset, as determined through the
company’s depreciation study.
65 Arizona Constitution, Article XV, Section 14. 66 Decision No. 75697 (August 18, 2016), Decision No. 71914, (September 30, 2010) at 48-49. See also, Decision No. 70441 (July 28, 2008), at 20-21. 67 Decision No. 75697 (August 18, 2016), Decision No. 71914 (September 30, 2010), at 51.
-64-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Q. HOW DO YOU DEFINE “FAIR VALUE”?
A. Used in the regulatory context of determining a just and reasonable rate of return,
“fair value” is the price at which a property would change hands between a willing
buyer and a willing seller, when neither party is under any compulsion to enter into
a transaction, and when both parties have reasonable knowledge of relevant facts.68
That definition is consistent with the Internal Revenue Code and Revenue Ruling
59-60 (Ruling 59-60), which notes that court decisions regarding fair value further
assume that the buyer and seller are “able, as well as willing, to trade and to be well
informed about the property and concerning the market for such property.”69
Q. HAVE YOU CONDUCTED ANY ADDITIONAL ANALYSIS TO
DETERMINE WHETHER THE METHODOLOGY THAT THE
COMMISSION HAS USED TO ESTIMATE THE FVRB IS
REASONABLE?
A. Yes. Applying a 50.00 percent weight to the OCRB to estimate the FVRB is
inconsistent with the valuation theory that is relied upon by investors. Valuation
theory identifies three traditional approaches that are used to estimate the value of
an asset: (1) the Income Approach; (2) the Cost Approach; and (3) the Comparable
Transactions Approach. The Income Approach establishes the value of the asset
based on the present discounted value of the expected income from the asset. Using
the Cost Approach, an investor estimates the value of the asset based on the current
cost of a reasonably comparable replacement asset, adjusted to reflect all forms of
depreciation that are present in the subject asset. Finally, using the Comparable
Transactions or Market Multiples Approach, the investor relies on the use of
market data on the sale of comparable assets to estimate the value of the assets.
68 See Shannon P. Pratt, Valuing a Business, 5th ed. McGraw Hill, 2008, at 41-42. 69 IRS Revenue Ruling 59-60, 1959-1 CB 237-IRC Sec. 2031.
-65-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
While different circumstances of the asset or the investor can affect whether or not
all three approaches are considered, or how much emphasis should be placed on
any given approach, the objective of each approach is to use available market data
to derive the market-based value of an asset. An approach which places a 50.00
percent weight on the depreciated original cost of the assets at the time those assets
were installed suggests that the accounting value of an investment has a
relationship to the current market value of the asset. This is not the case, as is
recognized both in the marketplace and in academia.70
Q. HAVE YOU CONDUCTED ANY ANALYSIS TO ASSESS THE
REASONABLENESS OF USING THE RCND AS THE FVRB FOR APS?
A. Yes. As noted above, there are three main approaches to valuation typically relied
upon by investors and analysts: (1) the Income Approach; (2) the Cost Approach;
and (3) the Comparable Transactions Approach. The Income Approach is not
appropriate in circumstances such as this where the value of the assets is used to
determine the income of the assets. The RCND is the Company’s estimate of the
current value of the assets using the second approach, the Cost Approach. As
shown in Attachment AEB-12DR, the FVRB of $12,310 million is calculated by
weighting equally the Company’s OCRB of $8,873 million and the Company’s
estimated RCND of $15,748 million.
70 See Pratt, Reilly, Schweihs, Valuing a Business, 4th ed. Irwin, 2000, at 308, which states: Under any standard of value, the true economic value of a business enterprise equals the company’s accounting book value only by coincidence. More likely than not, the true economic value of a company will be either higher or lower than its accounting book value. There is no theoretical support, conceptual reasoning, or empirical data to suggest that the value of a business enterprise (under any standard of value) will necessarily equal the company’s accounting book value. From a valuation perspective, the terms book value or net book value are merely accounting jargon. This is because book value is not related to economic value, or to the valuation process, at all…In any event, accounting book value is not a recommended business valuation method.
-66-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
In order to determine the reasonableness of the Company’s proposed FVRB, which
includes a 50.00 percent weight on original cost rate base, I relied on the third
method, the Comparable Transactions Approach, to estimate the market value of
the Company’s OCRB.
Q. PLEASE EXPLAIN HOW YOU APPLIED THE COMPARABLE
TRANSACTIONS APPROACH TO DETERMINE THE
REASONABLENESS OF THE COMPANY’S FVRB.
A. I compared the Company’s FVRB estimate to the market value of comparable
companies in recent arms-length transactions. I normalized the transaction values
using the percentage premium over the corporate value of the acquired company.
This metric incorporates the book value of debt and equity to estimate a premium
to corporate value resulting from the transactions to create a consistent basis of
comparison among the transactions (which took place amid differing market
conditions). I then estimated the market value of APS’s assets by applying the
median premium of 43.64 percent to the Company’s OCRB. That analysis resulted
in an estimated market value for APS’s assets of $12,745 million.
Q. HOW DID YOU ESTABLISH THE UNIVERSE OF TRANSACTIONS
THAT WAS ANALYZED FOR COMPARABILITY TO THE APS
SYSTEM?
A. I began by developing a database of announced and executed transactions
involving the sale of electric and diversified utility companies and assets. Those
data were compiled using the S&P Global Market Intelligence utility merger-
screening tool. I also reviewed publicly-available information such as press
releases, investor presentations, SEC filings, and regulatory commission filings.
Once that preliminary list of transactions was developed, I then applied the
following screening criteria to establish a final group of transactions for which I
calculated the transaction premium.
-67-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
1. I included transactions that involved the sale of state-regulated
investor-owned electric and diversified utilities;
2. I included transactions that resulted in the sale of the entire company,
excluding partial system or asset sales; and
3. I included transactions with a value of between $100 million and $10
billion.
There were 45 transactions that met my screening criteria.
Q. WHAT PERIOD OF TIME DID YOU CONSIDER IN DEVELOPING
YOUR LIST OF COMPARABLE TRANSACTIONS?
A. My Comparable Transactions analysis was performed on utility transmission and
distribution asset transactions that were announced between January 1, 1997 and
July 31, 2019. In my view, that period is sufficiently long to avoid the bias that
could result from limiting the analysis to a shorter period, yet produces a sufficient
number of observations.
Q. PLEASE SUMMARIZE THE RESULT OF THAT ANALYSIS.
A. Figure 16 summarizes the range of acquisition premiums for the comparable
transactions. As shown in Figure 16 and in Attachment AEB-13, the median
acquisition premium was 43.64 percent. Applying that premium to APS’s OCRB
of $8,873 million indicates an implied market value for APS’s assets of
approximately $12,745 million.
-68-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Figure 16.
Comparable Transaction Multiples
Transaction Premium
Implied Valuation
($M) Minimum -1.75% $8,718 Maximum 127.06% $20,147
Mean 49.42% $13,258 Median 43.64% $12,745
Standard Deviation 30.85% $2,737 Q. WHAT DO YOU CONCLUDE FROM THE COMPARABLE
TRANSACTIONS APPROACH?
A. The results of the Comparable Transactions Approach demonstrate that the
Company’s proposed FVRB is conservative relative to the estimated fair market
value of the Company’s assets.
XII. FAIR VALUE RATE OF RETURN
Q. DOES THE FAIR VALUE STANDARD ALSO REQUIRE
CONSIDERATION OF THE FAIR RETURN ON THE FAIR VALUE OF
THE COMPANY’S ASSETS?
A. Yes. As noted above, the Arizona Constitution requires that the Commission
establish just and reasonable rates using the fair value of the Company’s property.
In establishing the revenue requirement, the Commission would also need to
establish the appropriate ROE to apply to the equity component of the FVRB.
Q. HOW HAS THE COMMISSION ESTIMATED THE FVROR ON THE
FVRB?
A. In several recent cases, the Commission has determined the FVROR by applying
the market ROE and the cost of debt to the Company’s OCRB based on the percent
of equity and debt in the Company’s proposed capital structure. The Commission
then applies a different rate, traditionally one half of the risk-free rate, to what has
-69-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
been commonly referred to as the “fair value increment.”71 The fair value
increment is the difference between the OCRB and the Company’s proposed
FVRB. The FVROR is then the sum of the returns on each of the three
components: (1) equity capital; (2) debt capital; and (3) the fair value increment,
weighted by the percentage of each in the FVRB.
Q. WHAT DOES THE FAIR VALUE INCREMENT REPRESENT?
A. As described in the Commission’s Decision No. 75697, the fair value increment
represents the appreciation in the value of the assets to their current value due to
inflation. The sum of the OCRB and the fair value increment is the total fair value
of the utility’s property.72
Q. WHAT RATE OF RETURN SHOULD BE APPLIED TO THE FAIR
VALUE INCREMENT?
A. Based on the risk differential between equity and debt investments, equity holders
will require a greater return than the risk-free rate. As such, the range of returns
on the fair value increment should be between the risk-free rate and the Cost of
Equity established by the results of the proxy group analysis.
Q. DO YOU AGREE WITH THE METHODOLOGY OF DETERMINING
THE RATE OF RETURN TO BE APPLIED TO THE FAIR VALUE
INCREMENT TRADITIONALLY USED BY THE COMMISSION, I.E.,
HALF THE RISK-FREE INTEREST RATE?
A. No. There is no basis whatsoever for reducing this return component to one-half
of the risk-free rate. Since equity investors are the residual claimants after
bondholders and preferred stockholders, it is inconceivable to me that an investor
would accept a rate of return that is less than the cost of debt for an equity position
in any investment. At the very least, the market expectation is that investments
71 Decision No. 70665 (December 24, 2008), at 32 and Decision No. 75697 (August 18, 2016), at 14. 72 Ibid.
-70-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
that are not risk-free should earn a rate of return that exceeds the risk-free rate.
Furthermore, the application of 50.00 percent of the risk-free rate as a measure of
the Cost of Equity on the fair value increment is subjective and has no basis in
financial theory. The risk-free rate sets the low-end of the range of returns that I
believe would be appropriate to apply to the fair value increment.
Q. HOW HAVE YOU ESTIMATED THE FVROR IN THIS CASE?
A. I have estimated the FVROR using three approaches, all based generally on the
methodology that has been relied on by the Commission in prior cases.
Q. PLEASE EXPLAIN THE METHODOLOGIES YOU USED TO ESTIMATE
THE RISK-FREE RATE OF RETURN.
A. As shown in Attachment AEB-14DR, in all three cases, the risk-free rate is
estimated based on a nominal projection of the risk-free rate and an interest rate
assumption to establish the real risk-free rate. In the first two scenarios, I relied on
a projected nominal risk-free rate of return as the average of the 2021-2025
projected yield on 30-year U.S. Treasury bonds of 3.60 percent and the 2026-2030
projected yield on 30-year U.S. Treasury bonds of 3.80 percent as reported in the
Blue Chip Financial Forecasts.73 I then adjusted the nominal risk-free rate of 3.70
percent by a measure of inflation.
In scenario 1, the nominal risk-free rate was adjusted based on a projected estimate
of inflation that was based on the growth in the Consumer Price Index and the GDP
Chain-type Price Index over the period from 2020-2030 (see Attachment AEB-
14DR). The rate of inflation of 2.25 percent is based on three measures: (1) the
average 2021-2025 and 2026-2030 projected growth rate in the CPI of 2.10
percent, as reported by Blue Chip Financial Forecasts;74 (2) the compound annual
73 Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14. 74 Ibid.
-71-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
growth rate of the CPI for all urban consumers for 2020-2030 of 2.31 percent as
projected by the EIA in the Annual Energy Outlook 2019; and (3) the compound
annual growth rate of the GDP Chain-Type Price Index for 2020-2030 of 2.35
percent, also reported by the EIA in the Annual Energy Outlook 2019.75 Using
these indexes, the estimate of inflation was 2.25 percent. Removing inflation from
the nominal risk-free rate resulted in a real risk-free rate of 1.41 percent.
In scenario 2, the estimate of inflation was based on the 180-day average yield on
the 30-year U.S. Treasury Inflation Protected Security (TIPS). This resulted in an
estimate of inflation of 0.98 percent, which is similar to the estimate that has been
relied on in recent cases before the Commission.76 The resulting real risk-free rate
after adjusting for inflation is 2.72 percent.
Q. DID YOU CONSIDER OTHER ESTIMATES OF THE RISK-FREE RATE?
A. Yes, I also considered a normalized estimate of the risk-free rate. As discussed
previously in my Direct Testimony, though recent data has demonstrated
historically low interest rates, investors are expecting to see increases in interest
rates over time. In order to address the uncertainty on the correct level of interest
rates, in scenario 3, I have relied on a normalized risk-free rate, as published by
Duff and Phelps in the 2019 Valuation Handbook of 3.50 percent. This normalized
interest rate is then converted to a real rate using the yield on the TIPS of 0.98
percent. The resulting real risk-free rate is 2.52 percent.
Q. WHAT IS YOUR CONCLUSION ON THE APPROPRIATE REAL RISK-
FREE RATE IN THIS CASE?
75 U.S. Energy Information Administration, Annual Energy Outlook 2019, Table 20, Macroeconomic Indicators. 76 Docket No. WS-01303A-17-0257 Joint Notice of Filing Issues Matrix July 13, 2018, p. 1.
-72-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
A. The range established by the three methodologies that I developed is from 1.41
percent to 2.72 percent. In reviewing the inflation estimates, I believe that the
inflation estimate developed in Scenario 1, which relies on projected growth in
GDP and CPI may overstate the level of inflation that is expected in the risk-free
rate, given the very low level of the risk-free rate at this time. Based on current
market conditions and the expectation that interest rates will continue to increase,
I have relied on the real risk-free rate resulting from Scenario 3, which uses the
normalized risk-free rate. The normalized risk-free rate is lower than the
projections reported in consensus estimates. Therefore, I conclude that beginning
with the normalized risk-free rate results in a conservative estimate of the real risk-
free rate to be used as the FVROR.
Q. PLEASE EXPLAIN HOW YOU APPLIED THE COMMISSION’S
METHODOLOGY TO ESTIMATE THE FVROR.
A. As shown in Attachment AEB-12DR and in Figures 17and 18 below, I calculated
the difference between the Company’s OCRB and the Company’s proposed FVRB,
which includes a 50.00 percent weight on original cost. That difference represents
the appreciation in the value of the assets based on the “market value” of the
OCRB, and has been commonly referred to as the “fair value increment.”77 The
weighted average cost of debt and the market Cost of Equity were applied to the
OCRB.
Q. PLEASE EXPLAIN HOW YOU ESTIMATED THE RATE OF RETURN
THAT YOU APPLIED TO THE FAIR VALUE INCREMENT.
A. As discussed above, I believe that the appropriate return that could be applied to
the fair value increment ranges from the low-end as measured by the risk-free rate
to the high-end as measured by the cost of equity for the proxy group as discussed
77 Decision No. 70665 (December 24, 2008), at 32 and Decision No. 75697 (August 18, 2016), at 14.
-73-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
in Section VI of my Direct Testimony. Nevertheless, the Company has requested
that I estimate the FVROR by applying 1.00 percent to the fair value increment.
Figure 17. Estimation of the FVRB
Capital $ Millions Percent Weighted FVRB
OCRB $8,873.0 50.00% $4,436.5
RCND $15,747.5 50.00% $7,873.8
FVRB $12,310.3
Figure 18. Estimation of the FVROR
Capital $ Millions Percent Cost Rate
Weighted Cost Rate
Long-Term Debt $4,022.1 32.67% 4.10% 1.34%
Common Equity $4,850.9 39.41% 10.15% 4.00%
Fair Value Increment $3,437.3 27.92% 1.00% 0.28%
Total $12,310.3 5.62%
Q. WHAT IS THE RESULTING FVROR?
A. As shown in Figure 17 and 18 (see also, Attachment AEB-12DR) based on the
calculation discussed previously, the FVROR that would be applied to the FVRB
is 5.62 percent.
Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
A. Yes, it does.
ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY
CONCENTRIC ENERGY ADVISORS | PG. 1
ANN E. BULKLEY Senior Vice President
REPRESENTATIVE PROJECT EXPERIENCE Regulatory Analysis and Ratemaking
Ms. Bulkley has provided a range of advisory services relating to regulatory policy analysis and many aspects of utility ratemaking. Specific services have included: cost of capital and return on equity testimony, cost of service and rate design analysis and testimony, development of ratemaking strategies; development of merchant function exit strategies; analysis and program development to address residual energy supply and/or provider of last resort obligations; stranded costs assessment and recovery; performance-based ratemaking analysis and design; and many aspects of traditional utility ratemaking (e.g., rate design, rate base valuation).
Cost of Capital
Ms. Bulkley has provided expert testimony on the cost of capital in more than 30 regulatory proceedings before regulatory commissions in Arizona, Arkansas, Colorado, Connecticut, Kansas, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, Texas, South Dakota, West Virginia, and the Federal Energy Regulatory Commission. In addition, Ms. Bulkley has prepared and provided supporting analysis for at least forty Federal and State regulatory proceedings in which she did not testify.
Ms. Bulkley has more than two decades of management and economic consulting experience in the energy industry. Ms. Bulkley has extensive state and federal regulatory experience on both electric and natural gas issues including rate of return, cost of equity and capital structure issues. Ms. Bulkley has provided expert testimony on the cost of capital in more than 30 regulatory proceedings before regulatory commissions in Arizona, Arkansas, Colorado, Connecticut, Kansas, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, Texas, South Dakota, West Virginia, and the Federal Energy Regulatory Commission. In addition, Ms. Bulkley has prepared and provided supporting analysis for at least forty Federal and State regulatory proceedings. In addition, Ms. Bulkley has worked on acquisition teams with investors seeking to acquire utility assets, providing valuation services including an understanding of regulation, market expected returns, and the assessment of utility risk factors. Ms. Bulkley has assisted clients with valuations of public utility and industrial properties for ratemaking, purchase and sale considerations, ad valorem tax assessments, and accounting and financial purposes. In addition, Ms. Bulkley has experience in the areas of contract and business unit valuation, strategic alliances, market restructuring and regulatory and litigation support. Prior to joining Concentric, Ms. Bulkley held senior expertise-based consulting positions at several firms, including Reed Consulting Group and Navigant Consulting, Inc. where she specialized in valuation. Ms. Bulkley holds an M.A. in economics from Boston University and a B.A. in economics and finance from Simmons College. Ms. Bulkley is a Certified General Appraiser licensed in the Commonwealth of Massachusetts and the State of New Hampshire.
ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY
CONCENTRIC ENERGY ADVISORS | PG. 2
Valuation
Ms. Bulkley has provided valuation services to utility clients, unregulated generators and private equity clients for a variety of purposes including ratemaking, fair value, ad valorem tax, litigation and damages, and acquisition. Ms. Bulkley’s appraisal practices are consistent with the national standards established by the Uniform Standards of Professional Appraisal Practice. In addition, Ms. Bulkley has relied on other simulation based valuation methodologies.
Representative projects/clients have included:
• Northern Indiana Fuel and Light: Provided expert testimony regarding the fair value of the company’s natural gas distribution system assets. Valuation relied on cost approach.
• Kokomo Gas: Provided expert testimony regarding the fair value of the company’s natural gas distribution system assets. Valuation relied on cost approach.
• Prepared fair value rate base analyses for Northern Indiana Public Service Company for several electric rate proceedings. Valuation approaches used in this project included income, cost and comparable sales approaches.
• Confidential Utility Client: Prepared valuation of fossil and nuclear generation assets for financing purposes for regulated utility client.
• Prepared a valuation of a portfolio of generation assets for a large energy utility to be used for strategic planning purposes. Valuation approach included an income approach, a real options analysis and a risk analysis.
• Assisted clients in the restructuring of NUG contracts through the valuation of the underlying assets. Performed analysis to determine the option value of a plant in a competitively priced electricity market following the settlement of the NUG contract.
• Prepared market valuations of several purchase power contracts for large electric utilities in the sale of purchase power contracts. Assignment included an assessment of the regional power market, analysis of the underlying purchase power contracts, a traditional discounted cash flow valuation approach, as well as a risk analysis. Analyzed bids from potential acquirers using income and risk analysis approached. Prepared an assessment of the credit issues and value at risk for the selling utility.
• Prepared appraisal of a portfolio of generating facilities for a large electric utility to be used for financing purposes.
• Prepared an appraisal of a fleet of fossil generating assets for a large electric utility to establish the value of assets transferred from utility property.
• Conducted due diligence on an electric transmission and distribution system as part of a buy-side due diligence team.
• Provided analytical support for and prepared appraisal reports of generation assets to be used in ad valorem tax disputes.
• Provided analytical support and prepared testimony regarding the valuation of electric distribution system assets in five communities in a condemnation proceeding.
• Valued purchase power agreements in the transfer of assets to a deregulated electric market.
ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY
CONCENTRIC ENERGY ADVISORS | PG. 3
Ratemaking
Ms. Bulkley has assisted several clients with analysis to support investor-owned and municipal utility clients in the preparation of rate cases. Sample engagements include:
• Assisted several investor-owned and municipal clients on cost allocation and rate design issues including the development of expert testimony supporting recommended rate alternatives.
Worked with Canadian regulatory staff to establish filing requirements for a rate review of a newly regulated electric utility. Analyzed and evaluated rate application. Attended hearings and conducted investigation of rate application for regulatory staff. Prepared, supported and defended recommendations for revenue requirements and rates for the company. Developed rates for gas utility for transportation program and ancillary services.
Strategic and Financial Advisory Services
Ms. Bulkley has assisted several clients across North America with analytically based strategic planning, due diligence and financial advisory services.
Representative projects include:
• Preparation of feasibility studies for bond issuances for municipal and district steam clients.
• Assisted in the development of a generation strategy for an electric utility. Analyzed various NERC regions to identify potential market entry points. Evaluated potential competitors and alliance partners. Assisted in the development of gas and electric price forecasts. Developed a framework for the implementation of a risk management program.
• Assisted clients in identifying potential joint venture opportunities and alliance partners. Contacted interviewed, and evaluated potential alliance candidates based on company-established criteria for several LDCs and marketing companies. Worked with several LDCs and unregulated marketing companies to establish alliances to enter into the retail energy market. Prepared testimony in support of several merger cases and participated in the regulatory process to obtain approval for these mergers.
• Assisted clients in several buy-side due diligence efforts, providing regulatory insight and developing valuation recommendations for acquisitions of both electric and gas properties.
PROFESSIONAL HISTORY
Concentric Energy Advisors, Inc. (2002 – Present) Senior Vice President Vice President Assistant Vice President Project Manager
Navigant Consulting, Inc. (1995 – 2002) Project Manager
Cahners Publishing Company (1995) Economist
ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY
CONCENTRIC ENERGY ADVISORS | PG. 4
EDUCATION
Boston University M.A., Economics, 1995
Simmons College B.A., Economics and Finance, 1991
CERTIFICATIONS
Certified General Appraiser licensed in the Commonwealth of Massachusetts and the States of Michigan and New Hampshire
Attachment AEB-2DRPage 1 of 3
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14]
Company TickerAnnualized Dividend
StockPrice
Dividend Yield
Expected Dividend
Yield
Value Line Earnings Growth
Yahoo! Finance Earnings Growth
Zacks Earnings Growth
Average Growth
Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE
ALLETE, Inc. ALE $2.35 $85.61 2.74% 2.83% 5.00% 6.00% 7.20% 6.07% 7.81% 8.89% 10.04% 7.81% 8.89% 10.04%Ameren Corporation AEE $1.90 $76.31 2.49% 2.56% 6.50% 4.95% 6.50% 5.98% 7.50% 8.55% 9.07% 7.50% 8.55% 9.07%American Electric Power Company, Inc. AEP $2.68 $89.89 2.98% 3.06% 4.00% 6.10% 5.70% 5.27% 7.04% 8.33% 9.17% 7.04% 8.33% 9.17%DTE Energy Company DTE $3.78 $129.64 2.92% 2.99% 5.50% 4.45% 6.00% 5.32% 7.43% 8.31% 9.00% 7.43% 8.31% 9.00%Duke Energy Corporation DUK $3.71 $88.63 4.19% 4.31% 6.00% 7.23% 4.90% 6.04% 9.19% 10.36% 11.57% 9.19% 10.36% 11.57%Exelon Corporation EXC $1.45 $48.15 3.01% 3.12% 10.50% Negative 3.60% 7.05% 6.67% 10.17% 13.67% 10.17% 13.67%FirstEnergy Corporation FE $1.52 $43.57 3.49% 3.61% 8.00% Negative 6.00% 7.00% 9.59% 10.61% 11.63% 9.59% 10.61% 11.63%Evergy, Inc. EVRG $1.90 $60.93 3.12% 3.22% NMF 6.15% 6.60% 6.38% 9.36% 9.59% 9.82% 9.36% 9.59% 9.82%OGE Energy Corporation OGE $1.46 $42.99 3.40% 3.48% 6.50% 3.80% 4.60% 4.97% 7.26% 8.45% 10.01% 7.26% 8.45% 10.01%Otter Tail Corporation OTTR $1.40 $52.51 2.67% 2.76% 5.00% 9.00% 7.00% 7.00% 7.73% 9.76% 11.79% 7.73% 9.76% 11.79%PNM Resources, Inc. PNM $1.16 $50.55 2.29% 2.37% 7.00% 6.25% 5.50% 6.25% 7.86% 8.62% 9.38% 7.86% 8.62% 9.38%PPL Corporation PPL $1.65 $30.66 5.38% 5.41% 1.50% 0.59% NA 1.05% 5.99% 6.45% 6.92%Southern Company SO $2.48 $55.84 4.44% 4.52% 3.50% 2.18% 4.50% 3.39% 6.67% 7.91% 9.04% 7.91% 9.04%Xcel Energy Inc. XEL $1.62 $60.65 2.67% 2.75% 5.50% 5.80% 5.60% 5.63% 8.24% 8.38% 8.55% 8.24% 8.38% 8.55%
Mean 3.27% 3.36% 5.73% 5.21% 5.67% 5.53% 7.74% 8.88% 9.98% 8.09% 9.07% 10.21%
Notes:[1] Source: Bloomberg Professional[2] Source: Bloomberg Professional, equals 30-day average as of July 31, 2019.[3] Equals [1] / [2][4] Equals [3] x (1 + 0.50 x [8])[5] Source: Value Line[6] Source: Yahoo! Finance[7] Source: Zacks[8] Equals Average ([5], [6], [7])[9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7])[10] Equals [4] + [8][11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7])[12] - [14] Excludes companies with ROEs less than the a 7.00% return.
30-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUPAll Proxy Group With Exclusions
Attachment AEB-2DR Page 2 of 3
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14]
Company TickerAnnualized Dividend
StockPrice
Dividend Yield
Expected Dividend
Yield
Value Line Earnings Growth
Yahoo! Finance Earnings Growth
Zacks Earnings Growth
Average Growth
Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE
ALLETE, Inc. ALE $2.35 $83.27 2.82% 2.91% 5.00% 6.00% 7.20% 6.07% 7.89% 8.97% 10.12% 7.89% 8.97% 10.12%Ameren Corporation AEE $1.90 $74.40 2.55% 2.63% 6.50% 4.95% 6.50% 5.98% 7.57% 8.61% 9.14% 7.57% 8.61% 9.14%American Electric Power Company, Inc. AEP $2.68 $87.02 3.08% 3.16% 4.00% 6.10% 5.70% 5.27% 7.14% 8.43% 9.27% 7.14% 8.43% 9.27%DTE Energy Company DTE $3.78 $126.92 2.98% 3.06% 5.50% 4.45% 6.00% 5.32% 7.49% 8.37% 9.07% 7.49% 8.37% 9.07%Duke Energy Corporation DUK $3.71 $88.54 4.19% 4.32% 6.00% 7.23% 4.90% 6.04% 9.19% 10.36% 11.57% 9.19% 10.36% 11.57%Exelon Corporation EXC $1.45 $49.11 2.95% 3.06% 10.50% Negative 3.60% 7.05% 6.61% 10.11% 13.61% 10.11% 13.61%FirstEnergy Corporation FE $1.52 $42.41 3.58% 3.71% 8.00% Negative 6.00% 7.00% 9.69% 10.71% 11.73% 9.69% 10.71% 11.73%Evergy, Inc. EVRG $1.90 $59.09 3.22% 3.32% NMF 6.15% 6.60% 6.38% 9.46% 9.69% 9.92% 9.46% 9.69% 9.92%OGE Energy Corporation OGE $1.46 $42.56 3.43% 3.52% 6.50% 3.80% 4.60% 4.97% 7.30% 8.48% 10.04% 7.30% 8.48% 10.04%Otter Tail Corporation OTTR $1.40 $51.27 2.73% 2.83% 5.00% 9.00% 7.00% 7.00% 7.80% 9.83% 11.85% 7.80% 9.83% 11.85%PNM Resources, Inc. PNM $1.16 $48.30 2.40% 2.48% 7.00% 6.25% 5.50% 6.25% 7.97% 8.73% 9.49% 7.97% 8.73% 9.49%PPL Corporation PPL $1.65 $30.91 5.34% 5.37% 1.50% 0.59% NA 1.05% 5.94% 6.41% 6.88%Southern Company SO $2.48 $54.03 4.59% 4.67% 3.50% 2.18% 4.50% 3.39% 6.82% 8.06% 9.19% 8.06% 9.19%Xcel Energy Inc. XEL $1.62 $58.24 2.78% 2.86% 5.50% 5.80% 5.60% 5.63% 8.36% 8.49% 8.66% 8.36% 8.49% 8.66%
Mean 3.33% 3.42% 5.73% 5.21% 5.67% 5.53% 7.80% 8.95% 10.04% 8.17% 9.14% 10.28%
Notes:[1] Source: Bloomberg Professional[2] Source: Bloomberg Professional, equals 90-day average as of July 31, 2019.[3] Equals [1] / [2][4] Equals [3] x (1 + 0.50 x [8])[5] Source: Value Line[6] Source: Yahoo! Finance[7] Source: Zacks[8] Equals Average ([5], [6], [7])[9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7])[10] Equals [4] + [8][11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7])[12] - [14] Excludes companies with ROEs less than the a 7.00% return.
90-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUPAll Proxy Group With Exclusions
Attachment AEB-2DR Page 3 of 3
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14]
Company TickerAnnualized Dividend
StockPrice
Dividend Yield
Expected Dividend
Yield
Value Line Earnings Growth
Yahoo! Finance Earnings Growth
Zacks Earnings Growth
Average Growth
Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE
ALLETE, Inc. ALE $2.35 $80.91 2.90% 2.99% 5.00% 6.00% 7.20% 6.07% 7.98% 9.06% 10.21% 7.98% 9.06% 10.21%Ameren Corporation AEE $1.90 $71.63 2.65% 2.73% 6.50% 4.95% 6.50% 5.98% 7.67% 8.72% 9.24% 7.67% 8.72% 9.24%American Electric Power Company, Inc. AEP $2.68 $82.66 3.24% 3.33% 4.00% 6.10% 5.70% 5.27% 7.31% 8.59% 9.44% 7.31% 8.59% 9.44%DTE Energy Company DTE $3.78 $122.25 3.09% 3.17% 5.50% 4.45% 6.00% 5.32% 7.61% 8.49% 9.18% 7.61% 8.49% 9.18%Duke Energy Corporation DUK $3.71 $88.21 4.21% 4.33% 6.00% 7.23% 4.90% 6.04% 9.21% 10.38% 11.59% 9.21% 10.38% 11.59%Exelon Corporation EXC $1.45 $47.99 3.02% 3.13% 10.50% Negative 3.60% 7.05% 6.68% 10.18% 13.68% 10.18% 13.68%FirstEnergy Corporation FE $1.52 $40.70 3.73% 3.87% 8.00% Negative 6.00% 7.00% 9.85% 10.87% 11.88% 9.85% 10.87% 11.88%Evergy, Inc. EVRG $1.90 $58.37 3.26% 3.36% NMF 6.15% 6.60% 6.38% 9.51% 9.73% 9.96% 9.51% 9.73% 9.96%OGE Energy Corporation OGE $1.46 $41.60 3.51% 3.60% 6.50% 3.80% 4.60% 4.97% 7.38% 8.56% 10.12% 7.38% 8.56% 10.12%Otter Tail Corporation OTTR $1.40 $50.11 2.79% 2.89% 5.00% 9.00% 7.00% 7.00% 7.86% 9.89% 11.92% 7.86% 9.89% 11.92%PNM Resources, Inc. PNM $1.16 $45.67 2.54% 2.62% 7.00% 6.25% 5.50% 6.25% 8.11% 8.87% 9.63% 8.11% 8.87% 9.63%PPL Corporation PPL $1.65 $30.81 5.36% 5.38% 1.50% 0.59% NA 1.05% 5.96% 6.43% 6.90%Southern Company SO $2.48 $50.90 4.87% 4.96% 3.50% 2.18% 4.50% 3.39% 7.11% 8.35% 9.48% 7.11% 8.35% 9.48%Xcel Energy Inc. XEL $1.62 $55.30 2.93% 3.01% 5.50% 5.80% 5.60% 5.63% 8.51% 8.65% 8.81% 8.51% 8.65% 8.81%
Mean 3.44% 3.53% 5.73% 5.21% 5.67% 5.53% 7.91% 9.05% 10.15% 8.17% 9.26% 10.40%
Notes:[1] Source: Bloomberg Professional[2] Source: Bloomberg Professional, equals 180-day average as of July 31, 2019.[3] Equals [1] / [2][4] Equals [3] x (1 + 0.50 x [8])[5] Source: Value Line[6] Source: Yahoo! Finance[7] Source: Zacks[8] Equals Average ([5], [6], [7])[9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7])[10] Equals [4] + [8][11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7])[12] - [14] Excludes companies with ROEs less than the a 7.00% return.
180-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUPAll Proxy Group With Exclusions
Attachment AEB-3DRPage 1 of 1
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13]
High LowStockPrice
ALLETE, Inc. ALE $2.85 $80.00 $60.00 $70.00 4.07% 4.19% 5.00% 6.00% 7.20% 6.07% 9.17% 10.26% 11.42%Ameren Corporation AEE $2.55 $75.00 $55.00 $65.00 3.92% 4.04% 6.50% 4.95% 6.50% 5.98% 8.97% 10.02% 10.55%American Electric Power Company, Inc. AEP $3.40 $95.00 $75.00 $85.00 4.00% 4.11% 4.00% 6.10% 5.70% 5.27% 8.08% 9.37% 10.22%DTE Energy Company DTE $4.80 $140.00 $100.00 $120.00 4.00% 4.11% 5.50% 4.45% 6.00% 5.32% 8.54% 9.42% 10.12%Duke Energy Corporation DUK $4.15 $105.00 $80.00 $92.50 4.49% 4.62% 6.00% 7.23% 4.90% 6.04% 9.50% 10.67% 11.88%Exelon Corporation EXC $1.80 $55.00 $40.00 $47.50 3.79% 3.92% 10.50% Negative 3.60% 7.05% 7.46% 10.97% 14.49%FirstEnergy Corporation FE $1.90 $55.00 $40.00 $47.50 4.00% 4.14% 8.00% Negative 6.00% 7.00% 10.12% 11.14% 12.16%Evergy, Inc. EVRG $2.50 $70.00 $55.00 $62.50 4.00% 4.13% NMF 6.15% 6.60% 6.38% 10.27% 10.50% 10.73%OGE Energy Corporation OGE $1.95 $50.00 $40.00 $45.00 4.33% 4.44% 6.50% 3.80% 4.60% 4.97% 8.22% 9.41% 10.97%Otter Tail Corporation OTTR $1.65 $55.00 $40.00 $47.50 3.47% 3.60% 5.00% 9.00% 7.00% 7.00% 8.56% 10.60% 12.63%PNM Resources, Inc. PNM $1.50 $55.00 $35.00 $45.00 3.33% 3.44% 7.00% 6.25% 5.50% 6.25% 8.93% 9.69% 10.45%PPL Corporation PPL $1.80 $45.00 $35.00 $40.00 4.50% 4.52% 1.50% 0.59% NA 1.05% 5.10% 5.57% 6.03%Southern Company SO $2.78 $65.00 $50.00 $57.50 4.83% 4.92% 3.50% 2.18% 4.50% 3.39% 7.07% 8.31% 9.44%Xcel Energy Inc. XEL $2.05 $65.00 $50.00 $57.50 3.57% 3.67% 5.50% 5.80% 5.60% 5.63% 9.16% 9.30% 9.47%
Mean 8.51% 9.66% 10.75%
Notes:[1] Source: Value Line[2] Source: Value Line[3] Source: Value Line[4] Source: Value Line[5] Equals [1] / [4][6] Equals [5] x (1 + 0.50 x [10])[7] Source: Value Line[8] Source: Yahoo! Finance[9] Source: Zacks[10] Equals Average ([7], [8], [9])[11] Equals [5] x (1 + 0.50 x Minimum ([7], [8], [9]) + Minimum ([7], [8], [9])[12] Equals [6] + [10][13] Equals [5] x (1 + 0.50 x Maximum ([7], [8], [9]) + Maximum ([7], [8], [9])
PROJECTED CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUP
High ROECompany TickerAnnualized Dividend
Stock Price (2022-2024)Dividend
Yield
Expected Dividend
Yield
Value Line Earnings Growth
Yahoo! Finance Earnings
Zacks Earnings Growth
Average Growth
Rate Low ROE Mean ROE
Attachment AEB-4DRPage 1 of 1
BETAAs of July 31, 2019
[1] [2]
Bloomberg Value Line
ALLETE, Inc. ALE 0.70 0.65Ameren Corporation AEE 0.66 0.60American Electric Power Company, Inc. AEP 0.64 0.55DTE Energy Company DTE 0.67 0.55Duke Energy Corporation DUK 0.54 0.50Exelon Corporation EXC 0.65 0.70FirstEnergy Corporation FE 0.69 0.65Evergy, Inc. EVRG 0.65 NAOGE Energy Corporation OGE 0.75 0.80Otter Tail Corporation OTTR 0.81 0.70PNM Resources, Inc. PNM 0.77 0.60PPL Corporation PPL 0.63 0.70Southern Company SO 0.53 0.50Xcel Energy Inc. XEL 0.58 0.50
Mean 0.662 0.615
Notes:[1] Source: Bloomberg Professional[2] Source: Value Line
Attachment AEB-5DRPage 1 of 6
MARKET RISK PREMIUM DERIVED FROM ANALYSTS LONG-TERM GROWTH ESTIMATES
[8] Estimated Weighted Average Dividend Yield 1.94%
[9] Estimated Weighted Average Long-Term Growth Rate 11.84%
[10] S&P 500 Estimated Required Market Return 13.90%
[11] Risk-Free Rate 2.57% 2.66% 3.60%
[12] Implied Market Risk Premium 11.34% 11.24% 10.30%
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
LyondellBasell Industries NV LYB 0.11% 5.02% 0.01% 6.20% 0.01%American Express Co AXP 0.40% 1.25% 0.01% 9.16% 0.04%Verizon Communications Inc VZ 0.89% 4.36% 0.04% 2.55% 0.02%Broadcom Inc AVGO 0.45% 3.66% 0.02% 13.51% 0.06%Boeing Co/The BA 0.75% 2.41% 0.02% 7.88% 0.06%Caterpillar Inc CAT 0.29% 3.13% 0.01% 13.15% 0.04%JPMorgan Chase & Co JPM 1.46% 2.76% 0.04% 4.65% 0.07%Chevron Corp CVX 0.91% 3.87% 0.04% 1.89% 0.02%Coca-Cola Co/The KO 0.87% 3.04% 0.03% 6.73% 0.06%AbbVie Inc ABBV 0.38% 6.42% 0.02% 5.10% 0.02%Walt Disney Co/The DIS 1.00% 1.23% 0.01% 2.08% 0.02%FleetCor Technologies Inc FLT 0.10% n/a n/a 18.14% 0.02%Extra Space Storage Inc EXR 0.06% 3.20% 0.00% 4.56% 0.00%Exxon Mobil Corp XOM 1.22% 4.68% 0.06% 8.69% 0.11%Phillips 66 PSX 0.18% 3.51% 0.01% 2.20% 0.00%General Electric Co GE 0.35% 0.38% 0.00% 8.87% 0.03%HP Inc HPQ 0.12% 3.05% 0.00% 3.11% 0.00%Home Depot Inc/The HD 0.91% 2.55% 0.02% 9.37% 0.09%International Business Machines Corp IBM 0.51% 4.37% 0.02% 2.12% 0.01%Concho Resources Inc CXO 0.08% 0.51% 0.00% 11.20% 0.01%Johnson & Johnson JNJ 1.33% 2.92% 0.04% 6.09% 0.08%McDonald's Corp MCD 0.62% 2.20% 0.01% 8.67% 0.05%Merck & Co Inc MRK 0.83% 2.65% 0.02% 11.52% 0.10%3M Co MMM 0.39% 3.30% 0.01% 6.95% 0.03%American Water Works Co Inc AWK 0.08% 1.74% 0.00% 8.72% 0.01%Bank of America Corp BAC 1.11% 2.35% 0.03% 9.90% 0.11%Baker Hughes a GE Co BHGE 0.05% 2.84% 0.00% 41.26% 0.02%Pfizer Inc PFE 0.84% 3.71% 0.03% 3.58% 0.03%Procter & Gamble Co/The PG 1.15% 2.53% 0.03% 7.40% 0.09%AT&T Inc T 0.97% 5.99% 0.06% 5.49% 0.05%Travelers Cos Inc/The TRV 0.15% 2.24% 0.00% 12.58% 0.02%United Technologies Corp UTX 0.45% 2.20% 0.01% 9.75% 0.04%Analog Devices Inc ADI 0.17% 1.84% 0.00% 12.10% 0.02%Walmart Inc WMT 1.22% 1.92% 0.02% 3.56% 0.04%Cisco Systems Inc CSCO 0.92% 2.53% 0.02% 6.96% 0.06%Intel Corp INTC 0.87% 2.49% 0.02% 6.74% 0.06%General Motors Co GM 0.22% 3.77% 0.01% 11.70% 0.03%Microsoft Corp MSFT 4.04% 1.35% 0.05% 9.92% 0.40%Dollar General Corp DG 0.13% 0.96% 0.00% 10.14% 0.01%Cigna Corp CI 0.25% 0.02% 0.00% 11.09% 0.03%Kinder Morgan Inc/DE KMI 0.18% 4.85% 0.01% 13.90% 0.03%Citigroup Inc C 0.62% 2.87% 0.02% 12.43% 0.08%American International Group Inc AIG 0.19% 2.29% 0.00% 11.00% 0.02%Honeywell International Inc HON 0.48% 1.90% 0.01% 7.70% 0.04%Altria Group Inc MO 0.34% 6.80% 0.02% 6.68% 0.02%HCA Healthcare Inc HCA 0.18% 1.20% 0.00% 10.78% 0.02%Under Armour Inc UAA 0.02% n/a n/a 30.97% 0.01%International Paper Co IP 0.07% 4.55% 0.00% 4.70% 0.00%Hewlett Packard Enterprise Co HPE 0.07% 3.13% 0.00% 5.79% 0.00%Abbott Laboratories ABT 0.60% 1.47% 0.01% 9.58% 0.06%Aflac Inc AFL 0.15% 2.05% 0.00% 4.15% 0.01%Air Products & Chemicals Inc APD 0.20% 2.03% 0.00% 12.71% 0.02%Royal Caribbean Cruises Ltd RCL 0.09% 2.41% 0.00% 11.11% 0.01%American Electric Power Co Inc AEP 0.17% 3.05% 0.01% 5.82% 0.01%Hess Corp HES 0.08% 1.54% 0.00% -5.43% 0.00%Anadarko Petroleum Corp APC 0.14% 1.63% 0.00% 16.17% 0.02%Aon PLC AON 0.17% 0.93% 0.00% 10.90% 0.02%Apache Corp APA 0.04% 4.10% 0.00% -8.42% 0.00%Archer-Daniels-Midland Co ADM 0.09% 3.41% 0.00% 0.60% 0.00%Automatic Data Processing Inc ADP 0.28% 1.90% 0.01% 13.50% 0.04%Verisk Analytics Inc VRSK 0.10% 0.66% 0.00% 9.47% 0.01%AutoZone Inc AZO 0.11% n/a n/a 12.58% 0.01%Avery Dennison Corp AVY 0.04% 2.02% 0.00% 4.95% 0.00%MSCI Inc MSCI 0.07% 1.02% 0.00% 10.00% 0.01%Ball Corp BLL 0.09% 0.84% 0.00% 6.77% 0.01%Bank of New York Mellon Corp/The BK 0.17% 2.64% 0.00% 6.47% 0.01%Baxter International Inc BAX 0.17% 1.05% 0.00% 11.96% 0.02%Becton Dickinson and Co BDX 0.26% 1.22% 0.00% 12.14% 0.03%Berkshire Hathaway Inc BRK/B 1.09% n/a n/a 60.60% 0.66%Best Buy Co Inc BBY 0.08% 2.61% 0.00% 6.89% 0.01%H&R Block Inc HRB 0.02% 3.76% 0.00% 10.00% 0.00%Boston Scientific Corp BSX 0.23% n/a n/a 8.88% 0.02%Bristol-Myers Squibb Co BMY 0.28% 3.69% 0.01% 8.06% 0.02%Fortune Brands Home & Security Inc FBHS 0.03% 1.60% 0.00% 10.17% 0.00%Brown-Forman Corp BF/B 0.07% 1.21% 0.00% 8.41% 0.01%Cabot Oil & Gas Corp COG 0.03% 1.88% 0.00% 34.52% 0.01%Campbell Soup Co CPB 0.05% 3.39% 0.00% 2.74% 0.00%
Attachment AEB-5DRPage 2 of 6
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Kansas City Southern KSU 0.05% 1.16% 0.00% 12.73% 0.01%Hilton Worldwide Holdings Inc HLT 0.11% 0.62% 0.00% 13.14% 0.01%Carnival Corp CCL 0.10% 4.23% 0.00% 8.47% 0.01%Qorvo Inc QRVO 0.03% n/a n/a 9.62% 0.00%CenturyLink Inc CTL 0.05% 8.27% 0.00% 1.78% 0.00%UDR Inc UDR 0.05% 2.97% 0.00% 5.59% 0.00%Clorox Co/The CLX 0.08% 2.61% 0.00% 4.33% 0.00%CMS Energy Corp CMS 0.06% 2.63% 0.00% 7.20% 0.00%Newell Brands Inc NWL 0.02% 6.48% 0.00% -5.04% 0.00%Colgate-Palmolive Co CL 0.24% 2.40% 0.01% 4.52% 0.01%Comerica Inc CMA 0.04% 3.66% 0.00% 12.93% 0.01%IPG Photonics Corp IPGP 0.03% n/a n/a 9.68% 0.00%Conagra Brands Inc CAG 0.05% 2.94% 0.00% 6.25% 0.00%Consolidated Edison Inc ED 0.11% 3.48% 0.00% 4.15% 0.00%SL Green Realty Corp SLG 0.03% 4.19% 0.00% -6.79% 0.00%Corning Inc GLW 0.09% 2.60% 0.00% 11.20% 0.01%Cummins Inc CMI 0.10% 3.20% 0.00% 6.67% 0.01%Danaher Corp DHR 0.39% 0.48% 0.00% 13.47% 0.05%Target Corp TGT 0.17% 3.06% 0.01% 6.75% 0.01%Deere & Co DE 0.20% 1.84% 0.00% 9.54% 0.02%Dominion Energy Inc D 0.23% 4.94% 0.01% 4.92% 0.01%Dover Corp DOV 0.05% 1.98% 0.00% 10.97% 0.01%Alliant Energy Corp LNT 0.05% 2.87% 0.00% 5.59% 0.00%Duke Energy Corp DUK 0.25% 4.36% 0.01% 5.04% 0.01%Regency Centers Corp REG 0.04% 3.51% 0.00% 4.57% 0.00%Eaton Corp PLC ETN 0.13% 3.46% 0.00% 8.60% 0.01%Ecolab Inc ECL 0.23% 0.91% 0.00% 13.13% 0.03%PerkinElmer Inc PKI 0.04% 0.33% 0.00% 16.84% 0.01%Emerson Electric Co EMR 0.15% 3.02% 0.00% 8.73% 0.01%EOG Resources Inc EOG 0.19% 1.34% 0.00% 7.91% 0.02%Entergy Corp ETR 0.08% 3.45% 0.00% 2.84% 0.00%Equifax Inc EFX 0.07% 1.12% 0.00% 11.76% 0.01%IQVIA Holdings Inc IQV 0.12% n/a n/a 16.68% 0.02%Gartner Inc IT 0.05% n/a n/a 13.08% 0.01%FedEx Corp FDX 0.17% 1.52% 0.00% 20.72% 0.04%Macy's Inc M 0.03% 6.64% 0.00% 1.83% 0.00%FMC Corp FMC 0.04% 1.85% 0.00% 9.33% 0.00%Ford Motor Co F 0.14% 6.30% 0.01% 13.00% 0.02%NextEra Energy Inc NEE 0.39% 2.41% 0.01% 5.33% 0.02%Franklin Resources Inc BEN 0.06% 3.19% 0.00% 10.00% 0.01%Freeport-McMoRan Inc FCX 0.06% 1.81% 0.00% -7.37% 0.00%Gap Inc/The GPS 0.03% 4.97% 0.00% 6.63% 0.00%General Dynamics Corp GD 0.21% 2.19% 0.00% 8.39% 0.02%General Mills Inc GIS 0.12% 3.69% 0.00% 6.17% 0.01%Genuine Parts Co GPC 0.06% 3.14% 0.00% 5.35% 0.00%Atmos Energy Corp ATO 0.05% 1.93% 0.00% 7.00% 0.00%WW Grainger Inc GWW 0.06% 1.98% 0.00% 12.33% 0.01%Halliburton Co HAL 0.08% 3.13% 0.00% 8.74% 0.01%Harley-Davidson Inc HOG 0.02% 4.19% 0.00% 5.90% 0.00%L3Harris Technologies Inc LHX 0.18% 1.45% 0.00% n/a n/aHCP Inc HCP 0.06% 4.64% 0.00% 2.68% 0.00%Helmerich & Payne Inc HP 0.02% 5.72% 0.00% 22.74% 0.00%Fortive Corp FTV 0.10% 0.37% 0.00% 10.10% 0.01%Hershey Co/The HSY 0.09% 2.04% 0.00% 7.07% 0.01%Synchrony Financial SYF 0.09% 2.45% 0.00% 6.70% 0.01%Hormel Foods Corp HRL 0.08% 2.05% 0.00% 5.70% 0.00%Arthur J Gallagher & Co AJG 0.07% 1.90% 0.00% 9.83% 0.01%Mondelez International Inc MDLZ 0.30% 2.13% 0.01% 7.86% 0.02%CenterPoint Energy Inc CNP 0.06% 3.96% 0.00% 5.67% 0.00%Humana Inc HUM 0.16% 0.74% 0.00% 12.79% 0.02%Willis Towers Watson PLC WLTW 0.10% 1.33% 0.00% 13.97% 0.01%Illinois Tool Works Inc ITW 0.20% 2.59% 0.01% 6.66% 0.01%Ingersoll-Rand PLC IR 0.12% 1.71% 0.00% 7.85% 0.01%Foot Locker Inc FL 0.02% 3.70% 0.00% 8.88% 0.00%Interpublic Group of Cos Inc/The IPG 0.03% 4.10% 0.00% 12.35% 0.00%International Flavors & Fragrances Inc IFF 0.06% 2.03% 0.00% 7.80% 0.00%Jacobs Engineering Group Inc JEC 0.04% 0.82% 0.00% 13.10% 0.01%Hanesbrands Inc HBI 0.02% 3.73% 0.00% 3.25% 0.00%Kellogg Co K 0.08% 3.92% 0.00% 2.29% 0.00%Broadridge Financial Solutions Inc BR 0.06% 1.70% 0.00% n/a n/aPerrigo Co PLC PRGO 0.03% 1.56% 0.00% -0.50% 0.00%Kimberly-Clark Corp KMB 0.18% 3.04% 0.01% 4.63% 0.01%Kimco Realty Corp KIM 0.03% 5.83% 0.00% 3.86% 0.00%Kohl's Corp KSS 0.03% 4.98% 0.00% 5.55% 0.00%Oracle Corp ORCL 0.73% 1.71% 0.01% 7.63% 0.06%Kroger Co/The KR 0.07% 3.02% 0.00% 5.88% 0.00%Leggett & Platt Inc LEG 0.02% 4.00% 0.00% 10.00% 0.00%Lennar Corp LEN 0.05% 0.34% 0.00% 9.42% 0.00%Jefferies Financial Group Inc JEF 0.02% 2.34% 0.00% n/a n/aEli Lilly & Co LLY 0.41% 2.37% 0.01% 9.25% 0.04%L Brands Inc LB 0.03% 4.62% 0.00% 9.38% 0.00%Charter Communications Inc CHTR 0.33% n/a n/a 43.54% 0.14%Lincoln National Corp LNC 0.05% 2.27% 0.00% 9.00% 0.00%Loews Corp L 0.06% 0.47% 0.00% n/a n/aLowe's Cos Inc LOW 0.31% 2.17% 0.01% 14.66% 0.05%Host Hotels & Resorts Inc HST 0.05% 4.60% 0.00% 15.05% 0.01%Marsh & McLennan Cos Inc MMC 0.20% 1.84% 0.00% 12.22% 0.02%Masco Corp MAS 0.05% 1.18% 0.00% 10.51% 0.00%S&P Global Inc SPGI 0.23% 0.93% 0.00% 9.20% 0.02%Medtronic PLC MDT 0.53% 2.12% 0.01% 7.34% 0.04%CVS Health Corp CVS 0.28% 3.58% 0.01% 6.04% 0.02%
Attachment AEB-5DRPage 3 of 6
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
DuPont de Nemours Inc DD 0.21% 1.66% 0.00% 16.67% 0.03%Micron Technology Inc MU 0.19% n/a n/a -0.69% 0.00%Motorola Solutions Inc MSI 0.11% 1.37% 0.00% 5.50% 0.01%Cboe Global Markets Inc CBOE 0.05% 1.32% 0.00% 5.35% 0.00%Mylan NV MYL 0.04% n/a n/a -5.72% 0.00%Laboratory Corp of America Holdings LH 0.06% n/a n/a 8.18% 0.01%Newmont Goldcorp Corp NEM 0.12% 1.53% 0.00% 5.75% 0.01%NIKE Inc NKE 0.42% 1.02% 0.00% 13.76% 0.06%NiSource Inc NI 0.04% 2.69% 0.00% 5.38% 0.00%Noble Energy Inc NBL 0.04% 2.17% 0.00% 18.05% 0.01%Norfolk Southern Corp NSC 0.20% 1.97% 0.00% 13.82% 0.03%Principal Financial Group Inc PFG 0.06% 3.79% 0.00% 6.87% 0.00%Eversource Energy ES 0.10% 2.82% 0.00% 5.96% 0.01%Northrop Grumman Corp NOC 0.23% 1.53% 0.00% 6.04% 0.01%Wells Fargo & Co WFC 0.83% 4.21% 0.03% 9.86% 0.08%Nucor Corp NUE 0.06% 2.94% 0.00% 0.35% 0.00%PVH Corp PVH 0.03% 0.17% 0.00% 8.12% 0.00%Occidental Petroleum Corp OXY 0.15% 6.15% 0.01% 15.80% 0.02%Omnicom Group Inc OMC 0.07% 3.24% 0.00% 3.87% 0.00%ONEOK Inc OKE 0.11% 5.08% 0.01% 13.18% 0.01%Raymond James Financial Inc RJF 0.04% 1.69% 0.00% 11.10% 0.00%Parker-Hannifin Corp PH 0.09% 2.01% 0.00% 9.02% 0.01%Rollins Inc ROL 0.04% 1.25% 0.00% 10.00% 0.00%PPL Corp PPL 0.08% 5.57% 0.00% 5.00% 0.00%Exelon Corp EXC 0.17% 3.22% 0.01% 3.53% 0.01%ConocoPhillips COP 0.26% 2.07% 0.01% 3.45% 0.01%PulteGroup Inc PHM 0.03% 1.40% 0.00% 8.25% 0.00%Pinnacle West Capital Corp PNW 0.04% 3.23% 0.00% 5.41% 0.00%PNC Financial Services Group Inc/The PNC 0.25% 3.22% 0.01% 7.64% 0.02%PPG Industries Inc PPG 0.11% 1.74% 0.00% 6.82% 0.01%Progressive Corp/The PGR 0.18% 0.49% 0.00% 6.23% 0.01%Public Service Enterprise Group Inc PEG 0.11% 3.29% 0.00% 5.32% 0.01%Raytheon Co RTN 0.20% 2.07% 0.00% 8.38% 0.02%Robert Half International Inc RHI 0.03% 2.05% 0.00% -1.99% 0.00%Edison International EIX 0.10% 3.29% 0.00% 5.30% 0.01%Schlumberger Ltd SLB 0.21% 5.00% 0.01% 29.25% 0.06%Charles Schwab Corp/The SCHW 0.22% 1.57% 0.00% 4.21% 0.01%Sherwin-Williams Co/The SHW 0.18% 0.88% 0.00% 11.83% 0.02%JM Smucker Co/The SJM 0.05% 3.17% 0.00% 3.12% 0.00%Snap-on Inc SNA 0.03% 2.49% 0.00% 7.34% 0.00%AMETEK Inc AME 0.08% 0.62% 0.00% 9.29% 0.01%Southern Co/The SO 0.23% 4.41% 0.01% 3.75% 0.01%BB&T Corp BBT 0.15% 3.49% 0.01% 8.16% 0.01%Southwest Airlines Co LUV 0.11% 1.40% 0.00% 5.12% 0.01%Stanley Black & Decker Inc SWK 0.09% 1.87% 0.00% 9.23% 0.01%Public Storage PSA 0.16% 3.30% 0.01% 3.99% 0.01%Arista Networks Inc ANET 0.08% n/a n/a 21.79% 0.02%SunTrust Banks Inc STI 0.11% 3.00% 0.00% 2.37% 0.00%Sysco Corp SYY 0.14% 2.28% 0.00% 12.13% 0.02%Corteva Inc CTVA 0.09% 1.76% 0.00% n/a n/aTexas Instruments Inc TXN 0.45% 2.46% 0.01% 9.70% 0.04%Textron Inc TXT 0.04% 0.16% 0.00% 11.86% 0.01%Thermo Fisher Scientific Inc TMO 0.43% 0.27% 0.00% 11.43% 0.05%Tiffany & Co TIF 0.04% 2.47% 0.00% 9.25% 0.00%TJX Cos Inc/The TJX 0.26% 1.69% 0.00% 10.04% 0.03%Torchmark Corp TMK 0.04% 0.76% 0.00% 7.60% 0.00%Total System Services Inc TSS 0.09% 0.38% 0.00% 12.14% 0.01%Johnson Controls International plc JCI 0.13% 2.45% 0.00% 7.57% 0.01%Ulta Beauty Inc ULTA 0.08% n/a n/a 21.00% 0.02%Union Pacific Corp UNP 0.49% 2.16% 0.01% 12.90% 0.06%Keysight Technologies Inc KEYS 0.07% n/a n/a n/a n/aUnitedHealth Group Inc UNH 0.92% 1.73% 0.02% 12.28% 0.11%Unum Group UNM 0.03% 3.57% 0.00% 9.00% 0.00%Marathon Oil Corp MRO 0.04% 1.42% 0.00% -2.65% 0.00%Varian Medical Systems Inc VAR 0.04% n/a n/a 8.55% 0.00%Ventas Inc VTR 0.10% 4.71% 0.00% 4.24% 0.00%VF Corp VFC 0.13% 1.97% 0.00% -11.41% -0.02%Vornado Realty Trust VNO 0.05% 4.10% 0.00% -0.60% 0.00%Vulcan Materials Co VMC 0.07% 0.90% 0.00% 16.63% 0.01%Weyerhaeuser Co WY 0.07% 5.35% 0.00% 4.50% 0.00%Whirlpool Corp WHR 0.04% 3.30% 0.00% 4.61% 0.00%Williams Cos Inc/The WMB 0.12% 6.17% 0.01% 10.00% 0.01%WEC Energy Group Inc WEC 0.10% 2.76% 0.00% 6.05% 0.01%Xerox Holdings Corp XRX 0.03% 3.12% 0.00% n/a n/aAdobe Inc ADBE 0.56% n/a n/a 17.16% 0.10%AES Corp/VA AES 0.04% 3.25% 0.00% 8.33% 0.00%Amgen Inc AMGN 0.43% 3.11% 0.01% 5.88% 0.03%Apple Inc AAPL 3.75% 1.45% 0.05% 9.25% 0.35%Autodesk Inc ADSK 0.13% n/a n/a 64.51% 0.09%Cintas Corp CTAS 0.10% 0.79% 0.00% 11.27% 0.01%Comcast Corp CMCSA 0.76% 1.95% 0.01% 11.53% 0.09%Molson Coors Brewing Co TAP 0.04% 4.22% 0.00% -0.57% 0.00%KLA Corp KLAC 0.09% 2.20% 0.00% 10.68% 0.01%Marriott International Inc/MD MAR 0.18% 1.38% 0.00% 8.20% 0.01%McCormick & Co Inc/MD MKC 0.08% 1.44% 0.00% 6.20% 0.00%Nordstrom Inc JWN 0.02% 4.47% 0.00% 5.97% 0.00%PACCAR Inc PCAR 0.09% 1.82% 0.00% 4.90% 0.00%Costco Wholesale Corp COST 0.47% 0.94% 0.00% 10.51% 0.05%First Republic Bank/CA FRC 0.06% 0.76% 0.00% 10.00% 0.01%Stryker Corp SYK 0.30% 0.99% 0.00% 9.55% 0.03%Tyson Foods Inc TSN 0.09% 1.89% 0.00% 3.10% 0.00%
Attachment AEB-5DRPage 4 of 6
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Lamb Weston Holdings Inc LW 0.04% 1.19% 0.00% 7.50% 0.00%Applied Materials Inc AMAT 0.18% 1.70% 0.00% 9.37% 0.02%American Airlines Group Inc AAL 0.05% 1.31% 0.00% 17.45% 0.01%Cardinal Health Inc CAH 0.05% 4.21% 0.00% 1.37% 0.00%Celgene Corp CELG 0.25% n/a n/a 16.10% 0.04%Cerner Corp CERN 0.09% 1.00% 0.00% 13.55% 0.01%Cincinnati Financial Corp CINF 0.07% 2.09% 0.00% n/a n/aDR Horton Inc DHI 0.07% 1.31% 0.00% 12.60% 0.01%Flowserve Corp FLS 0.03% 1.52% 0.00% 18.92% 0.00%Electronic Arts Inc EA 0.11% n/a n/a 9.49% 0.01%Expeditors International of Washington Inc EXPD 0.05% 1.31% 0.00% 9.80% 0.00%Fastenal Co FAST 0.07% 2.86% 0.00% 7.15% 0.00%M&T Bank Corp MTB 0.09% 2.44% 0.00% 5.33% 0.00%Xcel Energy Inc XEL 0.12% 2.72% 0.00% 5.81% 0.01%Fiserv Inc FISV 0.23% n/a n/a 15.60% 0.04%Fifth Third Bancorp FITB 0.08% 3.23% 0.00% 4.65% 0.00%Gilead Sciences Inc GILD 0.32% 3.85% 0.01% 8.52% 0.03%Hasbro Inc HAS 0.06% 2.25% 0.00% 9.53% 0.01%Huntington Bancshares Inc/OH HBAN 0.06% 4.21% 0.00% 4.99% 0.00%Welltower Inc WELL 0.13% 4.19% 0.01% 6.11% 0.01%Biogen Inc BIIB 0.17% n/a n/a 5.50% 0.01%Northern Trust Corp NTRS 0.08% 2.86% 0.00% 7.25% 0.01%Packaging Corp of America PKG 0.04% 3.13% 0.00% 10.00% 0.00%Paychex Inc PAYX 0.12% 2.99% 0.00% 7.15% 0.01%People's United Financial Inc PBCT 0.03% 4.32% 0.00% 2.00% 0.00%QUALCOMM Inc QCOM 0.35% 3.39% 0.01% 16.75% 0.06%Roper Technologies Inc ROP 0.15% 0.51% 0.00% 13.03% 0.02%Ross Stores Inc ROST 0.15% 0.96% 0.00% 9.40% 0.01%IDEXX Laboratories Inc IDXX 0.09% n/a n/a 18.43% 0.02%Starbucks Corp SBUX 0.44% 1.52% 0.01% 13.27% 0.06%KeyCorp KEY 0.07% 4.03% 0.00% 4.83% 0.00%Fox Corp FOXA 0.05% 1.23% 0.00% 1.60% 0.00%Fox Corp FOX 0.04% 1.24% 0.00% -7.06% 0.00%State Street Corp STT 0.08% 3.24% 0.00% 3.98% 0.00%Norwegian Cruise Line Holdings Ltd NCLH 0.04% n/a n/a 10.18% 0.00%US Bancorp USB 0.35% 2.59% 0.01% 6.33% 0.02%AO Smith Corp AOS 0.02% 1.94% 0.00% 8.00% 0.00%Symantec Corp SYMC 0.05% 1.39% 0.00% 7.26% 0.00%T Rowe Price Group Inc TROW 0.10% 2.68% 0.00% 8.20% 0.01%Waste Management Inc WM 0.19% 1.75% 0.00% 7.74% 0.01%CBS Corp CBS 0.07% 1.40% 0.00% 14.10% 0.01%Allergan PLC AGN 0.20% 1.84% 0.00% 5.37% 0.01%Constellation Brands Inc STZ 0.13% 1.52% 0.00% 7.74% 0.01%Xilinx Inc XLNX 0.11% 1.30% 0.00% 9.45% 0.01%DENTSPLY SIRONA Inc XRAY 0.05% 0.64% 0.00% 12.57% 0.01%Zions Bancorp NA ZION 0.03% 3.02% 0.00% 5.23% 0.00%Alaska Air Group Inc ALK 0.03% 2.21% 0.00% 15.35% 0.00%Invesco Ltd IVZ 0.03% 6.46% 0.00% 6.74% 0.00%Linde PLC LIN 0.40% 1.83% 0.01% 15.05% 0.06%Intuit Inc INTU 0.28% 0.68% 0.00% 16.16% 0.05%Morgan Stanley MS 0.29% 3.14% 0.01% 8.26% 0.02%Microchip Technology Inc MCHP 0.09% 1.55% 0.00% 10.87% 0.01%Chubb Ltd CB 0.27% 1.96% 0.01% 10.60% 0.03%Hologic Inc HOLX 0.05% n/a n/a 8.58% 0.00%Citizens Financial Group Inc CFG 0.07% 3.86% 0.00% 5.42% 0.00%O'Reilly Automotive Inc ORLY 0.11% n/a n/a 13.64% 0.02%Allstate Corp/The ALL 0.14% 1.86% 0.00% 9.00% 0.01%FLIR Systems Inc FLIR 0.03% 1.37% 0.00% n/a n/aEquity Residential EQR 0.11% 2.88% 0.00% 8.41% 0.01%BorgWarner Inc BWA 0.03% 1.80% 0.00% 1.85% 0.00%Incyte Corp INCY 0.07% n/a n/a 43.15% 0.03%Simon Property Group Inc SPG 0.19% 5.18% 0.01% 5.16% 0.01%Eastman Chemical Co EMN 0.04% 3.29% 0.00% 7.95% 0.00%Twitter Inc TWTR 0.13% n/a n/a 31.80% 0.04%AvalonBay Communities Inc AVB 0.11% 2.91% 0.00% 6.39% 0.01%Prudential Financial Inc PRU 0.16% 3.95% 0.01% 9.00% 0.01%United Parcel Service Inc UPS 0.32% 3.21% 0.01% 9.01% 0.03%Apartment Investment & Management Co AIV 0.03% 3.15% 0.00% 8.80% 0.00%Walgreens Boots Alliance Inc WBA 0.19% 3.36% 0.01% 5.47% 0.01%McKesson Corp MCK 0.10% 1.18% 0.00% 1.14% 0.00%Lockheed Martin Corp LMT 0.40% 2.43% 0.01% 8.24% 0.03%AmerisourceBergen Corp ABC 0.07% 1.84% 0.00% 12.37% 0.01%Capital One Financial Corp COF 0.17% 1.73% 0.00% 5.13% 0.01%Waters Corp WAT 0.05% n/a n/a 11.26% 0.01%Dollar Tree Inc DLTR 0.09% n/a n/a 8.39% 0.01%Darden Restaurants Inc DRI 0.06% 2.90% 0.00% 10.76% 0.01%NetApp Inc NTAP 0.05% 3.28% 0.00% 9.73% 0.01%Citrix Systems Inc CTXS 0.05% 1.49% 0.00% 7.80% 0.00%DXC Technology Co DXC 0.06% 1.51% 0.00% 5.28% 0.00%DaVita Inc DVA 0.04% n/a n/a 18.83% 0.01%Hartford Financial Services Group Inc/The HIG 0.08% 2.08% 0.00% 9.50% 0.01%Iron Mountain Inc IRM 0.03% 8.31% 0.00% 5.72% 0.00%Estee Lauder Cos Inc/The EL 0.16% 0.93% 0.00% 12.08% 0.02%Cadence Design Systems Inc CDNS 0.08% n/a n/a 10.07% 0.01%Universal Health Services Inc UHS 0.05% 0.53% 0.00% 8.08% 0.00%E*TRADE Financial Corp ETFC 0.05% 1.15% 0.00% 12.73% 0.01%Skyworks Solutions Inc SWKS 0.06% 1.78% 0.00% 10.57% 0.01%National Oilwell Varco Inc NOV 0.04% 0.84% 0.00% 59.18% 0.02%Quest Diagnostics Inc DGX 0.05% 2.08% 0.00% 7.57% 0.00%Activision Blizzard Inc ATVI 0.14% 0.76% 0.00% 10.49% 0.02%Rockwell Automation Inc ROK 0.07% 2.41% 0.00% 11.90% 0.01%
Attachment AEB-5DRPage 5 of 6
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Kraft Heinz Co/The KHC 0.15% 5.00% 0.01% -0.47% 0.00%American Tower Corp AMT 0.36% 1.74% 0.01% 20.11% 0.07%HollyFrontier Corp HFC 0.03% 2.65% 0.00% 0.99% 0.00%Regeneron Pharmaceuticals Inc REGN 0.13% n/a n/a 11.70% 0.01%Amazon.com Inc AMZN 3.58% n/a n/a 44.33% 1.59%Jack Henry & Associates Inc JKHY 0.04% 1.15% 0.00% 9.40% 0.00%Ralph Lauren Corp RL 0.02% 2.64% 0.00% 7.96% 0.00%Boston Properties Inc BXP 0.08% 2.86% 0.00% 4.07% 0.00%Amphenol Corp APH 0.11% 1.07% 0.00% 8.67% 0.01%Arconic Inc ARNC 0.04% 0.32% 0.00% 9.90% 0.00%Pioneer Natural Resources Co PXD 0.09% 0.46% 0.00% 26.43% 0.02%Valero Energy Corp VLO 0.14% 4.22% 0.01% 9.69% 0.01%Synopsys Inc SNPS 0.08% n/a n/a 13.60% 0.01%Western Union Co/The WU 0.04% 3.81% 0.00% 3.36% 0.00%CH Robinson Worldwide Inc CHRW 0.04% 2.39% 0.00% 8.63% 0.00%Accenture PLC ACN 0.50% 1.52% 0.01% 10.43% 0.05%TransDigm Group Inc TDG 0.10% n/a n/a 13.64% 0.01%Yum! Brands Inc YUM 0.13% 1.49% 0.00% 12.37% 0.02%Prologis Inc PLD 0.20% 2.63% 0.01% 7.34% 0.01%FirstEnergy Corp FE 0.09% 3.46% 0.00% 1.29% 0.00%VeriSign Inc VRSN 0.10% n/a n/a 9.70% 0.01%Quanta Services Inc PWR 0.02% 0.43% 0.00% 22.00% 0.00%Henry Schein Inc HSIC 0.04% n/a n/a 4.87% 0.00%Ameren Corp AEE 0.07% 2.51% 0.00% 5.78% 0.00%ANSYS Inc ANSS 0.07% n/a n/a 11.95% 0.01%NVIDIA Corp NVDA 0.40% 0.38% 0.00% 9.76% 0.04%Sealed Air Corp SEE 0.03% 1.53% 0.00% 6.60% 0.00%Cognizant Technology Solutions Corp CTSH 0.14% 1.23% 0.00% 11.05% 0.02%SVB Financial Group SIVB 0.05% n/a n/a 11.00% 0.01%Intuitive Surgical Inc ISRG 0.23% n/a n/a 13.63% 0.03%Affiliated Managers Group Inc AMG 0.02% 1.49% 0.00% 5.86% 0.00%Take-Two Interactive Software Inc TTWO 0.05% n/a n/a 8.80% 0.00%Republic Services Inc RSG 0.11% 1.83% 0.00% 12.96% 0.01%eBay Inc EBAY 0.13% 1.36% 0.00% 12.07% 0.02%Goldman Sachs Group Inc/The GS 0.31% 2.27% 0.01% 0.64% 0.00%Sempra Energy SRE 0.14% 2.86% 0.00% 9.39% 0.01%SBA Communications Corp SBAC 0.11% 0.15% 0.00% 46.90% 0.05%Moody's Corp MCO 0.16% 0.93% 0.00% 7.05% 0.01%Booking Holdings Inc BKNG 0.32% n/a n/a 16.99% 0.05%F5 Networks Inc FFIV 0.03% n/a n/a 10.29% 0.00%Akamai Technologies Inc AKAM 0.06% n/a n/a 13.70% 0.01%MarketAxess Holdings Inc MKTX 0.05% 0.61% 0.00% n/a n/aDevon Energy Corp DVN 0.04% 1.33% 0.00% 5.60% 0.00%Alphabet Inc GOOGL 1.42% n/a n/a 12.87% 0.18%Teleflex Inc TFX 0.06% 0.40% 0.00% 12.97% 0.01%Allegion PLC ALLE 0.04% 1.04% 0.00% 10.61% 0.00%Netflix Inc NFLX 0.55% n/a n/a 43.20% 0.24%Agilent Technologies Inc A 0.09% 0.95% 0.00% 13.53% 0.01%Anthem Inc ANTM 0.29% 1.09% 0.00% 14.13% 0.04%CME Group Inc CME 0.27% 1.54% 0.00% 7.90% 0.02%Juniper Networks Inc JNPR 0.04% 2.81% 0.00% 7.74% 0.00%BlackRock Inc BLK 0.28% 2.82% 0.01% 8.82% 0.02%DTE Energy Co DTE 0.09% 2.97% 0.00% 5.53% 0.00%Celanese Corp CE 0.05% 2.21% 0.00% 7.15% 0.00%Nasdaq Inc NDAQ 0.06% 1.95% 0.00% 13.00% 0.01%Philip Morris International Inc PM 0.50% 5.45% 0.03% 7.23% 0.04%salesforce.com Inc CRM 0.47% n/a n/a 22.30% 0.10%Huntington Ingalls Industries Inc HII 0.04% 1.51% 0.00% 40.00% 0.01%MetLife Inc MET 0.18% 3.56% 0.01% 8.39% 0.02%Under Armour Inc UA 0.02% n/a n/a 27.23% 0.00%Tapestry Inc TPR 0.03% 4.36% 0.00% 9.43% 0.00%CSX Corp CSX 0.22% 1.36% 0.00% 12.17% 0.03%Edwards Lifesciences Corp EW 0.17% n/a n/a 14.75% 0.03%Ameriprise Financial Inc AMP 0.08% 2.67% 0.00% 3.20% 0.00%TechnipFMC PLC FTI 0.05% 1.89% 0.00% 17.11% 0.01%Zimmer Biomet Holdings Inc ZBH 0.11% 0.71% 0.00% 6.22% 0.01%CBRE Group Inc CBRE 0.07% n/a n/a 7.30% 0.01%Mastercard Inc MA 1.06% 0.48% 0.01% 17.46% 0.19%CarMax Inc KMX 0.06% n/a n/a 10.61% 0.01%Intercontinental Exchange Inc ICE 0.19% 1.25% 0.00% 9.40% 0.02%Fidelity National Information Services Inc FIS 0.32% 1.05% 0.00% 11.31% 0.04%Chipotle Mexican Grill Inc CMG 0.09% n/a n/a 21.64% 0.02%Wynn Resorts Ltd WYNN 0.05% 3.08% 0.00% 11.50% 0.01%Assurant Inc AIZ 0.03% 2.12% 0.00% n/a n/aNRG Energy Inc NRG 0.04% 0.35% 0.00% 31.92% 0.01%Monster Beverage Corp MNST 0.14% n/a n/a 14.50% 0.02%Regions Financial Corp RF 0.06% 3.89% 0.00% 8.21% 0.01%Mosaic Co/The MOS 0.04% 0.79% 0.00% 14.00% 0.01%Expedia Group Inc EXPE 0.08% 1.02% 0.00% 21.16% 0.02%Evergy Inc EVRG 0.06% 3.14% 0.00% 7.64% 0.00%Discovery Inc DISCA 0.02% n/a n/a 13.35% 0.00%CF Industries Holdings Inc CF 0.04% 2.42% 0.00% 20.27% 0.01%Viacom Inc VIAB 0.04% 2.64% 0.00% 3.43% 0.00%Alphabet Inc GOOG 1.64% n/a n/a 12.87% 0.21%TE Connectivity Ltd TEL 0.12% 1.99% 0.00% 9.43% 0.01%Cooper Cos Inc/The COO 0.06% 0.02% 0.00% 5.23% 0.00%Discover Financial Services DFS 0.11% 1.96% 0.00% 7.28% 0.01%TripAdvisor Inc TRIP 0.02% n/a n/a 9.34% 0.00%Visa Inc V 1.19% 0.56% 0.01% 15.71% 0.19%Mid-America Apartment Communities Inc MAA 0.05% 3.26% 0.00% 7.00% 0.00%Xylem Inc/NY XYL 0.06% 1.20% 0.00% 14.45% 0.01%
Attachment AEB-5DRPage 6 of 6
STANDARD AND POOR'S 500 INDEX
[13] [14] [15] [16] [17]Cap-Weighted
Weight in Estimated Cap-Weighted Long-Term Long-TermName Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Marathon Petroleum Corp MPC 0.15% 3.76% 0.01% 9.11% 0.01%Advanced Micro Devices Inc AMD 0.13% n/a n/a 18.20% 0.02%Tractor Supply Co TSCO 0.05% 1.29% 0.00% 10.88% 0.01%ResMed Inc RMD 0.07% 1.21% 0.00% 11.37% 0.01%Mettler-Toledo International Inc MTD 0.07% n/a n/a 13.50% 0.01%Copart Inc CPRT 0.07% n/a n/a 20.00% 0.01%Fortinet Inc FTNT 0.05% n/a n/a 24.04% 0.01%Albemarle Corp ALB 0.03% 2.01% 0.00% 13.41% 0.00%Essex Property Trust Inc ESS 0.08% 2.58% 0.00% 7.91% 0.01%Realty Income Corp O 0.09% 3.93% 0.00% 4.04% 0.00%Seagate Technology PLC STX 0.05% 5.44% 0.00% 4.60% 0.00%Westrock Co WRK 0.04% 5.05% 0.00% 2.25% 0.00%IHS Markit Ltd INFO 0.10% n/a n/a 11.08% 0.01%Wabtec Corp WAB 0.06% 0.62% 0.00% 15.00% 0.01%Western Digital Corp WDC 0.06% 3.71% 0.00% -5.24% 0.00%PepsiCo Inc PEP 0.69% 2.99% 0.02% 5.45% 0.04%Diamondback Energy Inc FANG 0.07% 0.73% 0.00% 27.41% 0.02%Nektar Therapeutics NKTR 0.02% n/a n/a -2.40% 0.00%Maxim Integrated Products Inc MXIM 0.06% 3.24% 0.00% 8.53% 0.01%Church & Dwight Co Inc CHD 0.07% 1.21% 0.00% 8.13% 0.01%Duke Realty Corp DRE 0.05% 2.58% 0.00% 4.62% 0.00%Federal Realty Investment Trust FRT 0.04% 3.09% 0.00% 5.61% 0.00%MGM Resorts International MGM 0.06% 1.73% 0.00% 11.87% 0.01%JB Hunt Transport Services Inc JBHT 0.04% 1.02% 0.00% 12.13% 0.01%Lam Research Corp LRCX 0.12% 2.11% 0.00% 13.40% 0.02%Mohawk Industries Inc MHK 0.04% n/a n/a 5.28% 0.00%Pentair PLC PNR 0.03% 1.86% 0.00% 7.15% 0.00%Vertex Pharmaceuticals Inc VRTX 0.17% n/a n/a 51.00% 0.08%Amcor PLC AMCR 0.07% n/a n/a n/a n/aFacebook Inc FB 1.81% n/a n/a 19.37% 0.35%T-Mobile US Inc TMUS 0.26% n/a n/a 6.53% 0.02%United Rentals Inc URI 0.04% n/a n/a 12.00% 0.00%Alexandria Real Estate Equities Inc ARE 0.06% 2.73% 0.00% 4.33% 0.00%ABIOMED Inc ABMD 0.05% n/a n/a 29.00% 0.01%Delta Air Lines Inc DAL 0.15% 2.64% 0.00% 14.63% 0.02%United Airlines Holdings Inc UAL 0.09% n/a n/a 12.93% 0.01%News Corp NWS 0.01% 1.49% 0.00% -12.73% 0.00%Centene Corp CNC 0.08% n/a n/a 14.93% 0.01%Macerich Co/The MAC 0.02% 9.08% 0.00% -0.96% 0.00%Martin Marietta Materials Inc MLM 0.06% 0.78% 0.00% 15.09% 0.01%PayPal Holdings Inc PYPL 0.50% n/a n/a 19.11% 0.10%Coty Inc COTY 0.03% 4.58% 0.00% 6.71% 0.00%DISH Network Corp DISH 0.03% n/a n/a -8.73% 0.00%Alexion Pharmaceuticals Inc ALXN 0.10% n/a n/a 15.93% 0.02%Dow Inc DOW 0.14% 5.78% 0.01% 1.79% 0.00%Everest Re Group Ltd RE 0.04% 2.27% 0.00% 10.00% 0.00%WellCare Health Plans Inc WCG 0.06% n/a n/a 15.83% 0.01%News Corp NWSA 0.02% 1.52% 0.00% -12.73% 0.00%Global Payments Inc GPN 0.10% 0.02% 0.00% 17.13% 0.02%Crown Castle International Corp CCI 0.22% 3.38% 0.01% 17.07% 0.04%Aptiv PLC APTV 0.09% 1.00% 0.00% 8.93% 0.01%Advance Auto Parts Inc AAP 0.04% 0.16% 0.00% 15.68% 0.01%Capri Holdings Ltd CPRI 0.02% n/a n/a 6.28% 0.00%Align Technology Inc ALGN 0.06% n/a n/a 20.73% 0.01%Illumina Inc ILMN 0.17% n/a n/a 23.74% 0.04%Alliance Data Systems Corp ADS 0.03% 1.61% 0.00% 9.13% 0.00%LKQ Corp LKQ 0.03% n/a n/a 13.05% 0.00%Nielsen Holdings PLC NLSN 0.03% 6.04% 0.00% 12.00% 0.00%Garmin Ltd GRMN 0.06% 2.90% 0.00% 7.03% 0.00%Cimarex Energy Co XEC 0.02% 1.58% 0.00% 30.03% 0.01%Zoetis Inc ZTS 0.21% 0.57% 0.00% 9.83% 0.02%Digital Realty Trust Inc DLR 0.09% 3.78% 0.00% 17.36% 0.02%Equinix Inc EQIX 0.16% 1.96% 0.00% 18.37% 0.03%Discovery Inc DISCK 0.04% n/a n/a 13.35% 0.01%
Notes:[8] Equals sum of Col. [15][9] Equals sum of Col. [17][10] Equals ([8] x (1 + (0.5 x [9]))) + [9][11] Source: Exhibit AEB-5, at 1[12] Equals [10] − [11][13] Equals weight in S&P 500 based on market capitalization [14] Source: Bloomberg Professional[15] Equals [13] x [14][16] Source: Bloomberg Professional[17] Equals [13] x [16]
Attachment AEB-6DRPage 1 of 1
CAPITAL ASSET PRICING MODEL
[4] [5] [6] [7]
Risk-Free Rate
Average Beta
Market Risk
Premium ROE
Proxy Group Average Bloomberg Beta[1] Current 30-day average of 30-year U.S. Treasury bond yield 2.57% 0.662 11.34% 10.07%[2] Blue Chip Consensus Forecast (Q4 2019 - Q4 2020) 2.66% 0.662 11.24% 10.11%[3] Projected 30-year U.S. Treasury bond yield (2021 - 2025) 3.60% 0.662 10.30% 10.42%
Mean: 10.20%
Proxy Group Average Value Line Beta[1] Current 30-day average of 30-year U.S. Treasury bond yield 2.57% 0.615 11.34% 9.54%[2] Blue Chip Consensus Forecast (Q2 2019 - Q2 2020) 2.66% 0.615 11.24% 9.58%[3] Projected 30-year U.S. Treasury bond yield (2020 - 2024) 3.60% 0.615 10.30% 9.94%
Mean: 9.69%
[1] Source: Bloomberg Professional[2] Source: Blue Chip Financial Forecasts, Vol. 38, No. 8, August 1, 2019, at 2[3] Source: Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14[4] See Notes [1], [2], and [3][5] Source: Bloomberg Professional and Value Line[6] Exhibit AEB-4[7] Equals [4] + [5] x [6]
Attachment AEB-7DRPage 1 of 3
[1] [2] [3]Average
Authorized Electric ROE
U.S. Govt. 30-year
TreasuryRisk
Premium1992.1 12.38% 7.80% 4.58%1992.2 11.83% 7.89% 3.93%1992.3 12.03% 7.45% 4.59%1992.4 12.14% 7.52% 4.62%1993.1 11.84% 7.07% 4.77%1993.2 11.64% 6.86% 4.79%1993.3 11.15% 6.31% 4.84%1993.4 11.04% 6.14% 4.90%1994.1 11.07% 6.57% 4.49%1994.2 11.13% 7.35% 3.78%1994.3 12.75% 7.58% 5.17%1994.4 11.24% 7.96% 3.28%1995.1 11.96% 7.63% 4.34%1995.2 11.32% 6.94% 4.37%1995.3 11.37% 6.71% 4.66%1995.4 11.58% 6.23% 5.35%1996.1 11.46% 6.29% 5.17%1996.2 11.46% 6.92% 4.54%1996.3 10.70% 6.96% 3.74%1996.4 11.56% 6.62% 4.94%1997.1 11.08% 6.81% 4.27%1997.2 11.62% 6.93% 4.68%1997.3 12.00% 6.53% 5.47%1997.4 11.06% 6.14% 4.92%1998.1 11.31% 5.88% 5.43%1998.2 12.20% 5.85% 6.35%1998.3 11.65% 5.47% 6.18%1998.4 12.30% 5.10% 7.20%1999.1 10.40% 5.37% 5.03%1999.2 10.94% 5.79% 5.15%1993.3 11.15% 6.31% 4.84%1999.4 11.10% 6.25% 4.85%2000.1 11.21% 6.29% 4.92%2000.2 11.00% 5.97% 5.03%2000.3 11.68% 5.79% 5.89%2000.4 12.50% 5.69% 6.81%2001.1 11.38% 5.44% 5.93%2001.2 11.00% 5.70% 5.30%2001.3 10.76% 5.52% 5.23%2001.4 11.99% 5.30% 6.70%2002.1 10.05% 5.51% 4.54%2002.2 11.41% 5.61% 5.79%2002.3 11.65% 5.08% 6.57%2002.4 11.57% 4.93% 6.64%2003.1 11.72% 4.85% 6.87%2003.2 11.16% 4.60% 6.56%2003.3 10.50% 5.11% 5.39%2003.4 11.34% 5.11% 6.23%2004.1 11.00% 4.88% 6.12%2004.2 10.64% 5.32% 5.32%2004.3 10.75% 5.06% 5.69%2004.4 11.24% 4.86% 6.38%2005.1 10.63% 4.69% 5.93%2005.2 10.31% 4.47% 5.85%2005.3 11.08% 4.44% 6.65%2005.4 10.63% 4.68% 5.95%2006.1 10.70% 4.63% 6.06%2006.2 10.79% 5.14% 5.65%2006.3 10.35% 4.99% 5.35%2006.4 10.65% 4.74% 5.91%2007.1 10.59% 4.80% 5.80%2007.2 10.33% 4.99% 5.34%2007.3 10.40% 4.95% 5.45%2007.4 10.65% 4.61% 6.04%2008.1 10.62% 4.41% 6.21%2008.2 10.54% 4.57% 5.97%2008.3 10.43% 4.44% 5.98%2008.4 10.39% 3.65% 6.74%2009.1 10.75% 3.44% 7.31%2009.2 10.75% 4.17% 6.58%2009.3 10.50% 4.32% 6.18%2009.4 10.59% 4.34% 6.26%2010.1 10.59% 4.62% 5.97%2010.2 10.18% 4.36% 5.82%2010.3 10.40% 3.86% 6.55%2010.4 10.38% 4.17% 6.21%2011.1 10.09% 4.56% 5.53%2011.2 10.26% 4.34% 5.92%2011.3 10.57% 3.69% 6.88%
BOND YIELD PLUS RISK PREMIUM
Attachment AEB-7DRPage 2 of 3
[1] [2] [3]Average
Authorized Electric ROE
U.S. Govt. 30-year
TreasuryRisk
Premium
BOND YIELD PLUS RISK PREMIUM
2011.4 10.39% 3.04% 7.35%2012.1 10.30% 3.14% 7.17%2012.2 9.95% 2.93% 7.02%2012.3 9.90% 2.74% 7.16%2012.4 10.16% 2.86% 7.30%2013.1 9.85% 3.13% 6.72%2013.2 9.86% 3.14% 6.72%2013.3 10.12% 3.71% 6.41%2013.4 9.97% 3.79% 6.18%2014.1 9.86% 3.69% 6.17%2014.2 10.10% 3.44% 6.66%2014.3 9.90% 3.26% 6.64%2014.4 9.94% 2.96% 6.98%2015.1 9.64% 2.55% 7.08%2015.2 9.83% 2.88% 6.94%2015.3 9.40% 2.96% 6.44%2015.4 9.86% 2.96% 6.90%2016.1 9.70% 2.72% 6.98%2016.2 9.48% 2.57% 6.91%2016.3 9.74% 2.28% 7.46%2016.4 9.83% 2.83% 7.00%2017.1 9.72% 3.04% 6.67%2017.2 9.64% 2.90% 6.75%2017.3 10.00% 2.82% 7.18%2017.4 9.91% 2.82% 7.09%2018.1 9.69% 3.02% 6.66%2018.2 9.75% 3.09% 6.66%2018.3 9.69% 3.06% 6.63%2018.4 9.60% 3.27% 6.33%2019.1 9.72% 3.01% 6.71%2019.2 9.58% 2.78% 6.79%
AVERAGE 10.75% 4.85% 5.90%MEDIAN 10.64% 4.82% 6.01%
Attachment AEB-8DRPage 1 of 1
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]
Company Ticker
Value Line ROE
2022-2024
Value LineTotal Capital
2018
Value LineCommon Equity
Ratio 2018
Total Equity 2018
Value LineTotal Capital2022-2024
Value LineCommon Equity
Ratio2022-2024
Total Equity 2022-2024
Compound Annual Growth
RateAdjustment
Factor
Adjusted Return on Common
Equity
ALLETE, Inc. ALE 9.00% 3,584.30 60.10% 2,154 4,250 59.00% 2,508 3.08% 1.015 9.14%Ameren Corporation AEE 10.50% 15,632.00 48.80% 7,628 20,700 50.00% 10,350 6.29% 1.031 10.82%American Electric Power Company, Inc AEP 10.50% 40,667.00 46.80% 19,032 53,100 46.30% 24,585 5.25% 1.026 10.77%DTE Energy Company DTE 10.50% 22,371.00 45.80% 10,246 31,600 46.50% 14,694 7.48% 1.036 10.88%Duke Energy Corporation DUK 8.50% 94,940.00 46.20% 43,862 119,300 43.50% 51,896 3.42% 1.017 8.64%Exelon Corporation EXC 10.00% 65,229.00 47.20% 30,788 80,600 51.00% 41,106 5.95% 1.029 10.29%FirstEnergy Corporation FE 16.00% 24,565.00 27.40% 6,731 34,300 32.00% 10,976 10.27% 1.049 16.78%Evergy, Inc. EVRG 8.50% 16,716.00 60.00% 10,030 18,600 47.50% 8,835 -2.50% 0.987 8.39%OGE Energy Corporation OGE 11.50% 6,902.00 58.00% 4,003 8,625 54.00% 4,658 3.07% 1.015 11.67%Otter Tail Corporation OTTR 10.50% 1,318.90 55.30% 729 1,950 49.50% 965 5.76% 1.028 10.79%PNM Resources, Inc. PNM 10.00% 4,370.00 38.60% 1,687 5,575 40.50% 2,258 6.00% 1.029 10.29%PPL Corporation PPL 13.00% 31,726.00 36.70% 11,643 37,300 45.50% 16,972 7.83% 1.038 13.49%Southern Company SO 12.50% 65,750.00 37.60% 24,722 78,300 41.50% 32,495 5.62% 1.027 12.84%Xcel Energy Inc. XEL 11.00% 28,025.00 43.60% 12,219 36,900 42.00% 15,498 4.87% 1.024 11.26%Mean 11.15%Median 10.81%
Notes:[1] Source: Value Line[2] Source: Value Line[3] Source: Value Line[4] Equals [2] x [3][5] Source: Value Line[6] Source: Value Line[7] Equals [5] x [6][8] Equals ([7] / [4]) ^ (1/5) - 1[9] Equals 2 x (1 + [8]) / (2 + [8])[10] Equals [1] x [9]
EXPECTED EARNINGS ANALYSIS
Attachment AEB-9DR Page 1 of 2
[4]
Generation Generic CWIP inProxy Group Company Operation State Operation Test Year Rate Base Full Partial Capacity Infrastructure Rate Base
ALLETE, Inc. Minnesota Electric 1 Partially Forecast Average PartialWisconsin [4] Electric 1 Fully Forecast Average Rider
Ameren Corporation Illinois Electric 1 Fully Forecast Average PartialIllinois Gas 1 Fully Forecast Average x x PartialMissouri Electric 1 Partially Forecast Year End x x NoMissouri Gas 1 Partially Forecast Year End x No
American Electric Power Company, Inc. Arkansas Electric 1 Partially Forecast Year End x x NoIndiana Electric 1 Historical Year End x x RiderKentucky Electric 1 Fully Forecast Average x YesLouisiana Electric 1 Historical Average x Large projects onlyMichigan Electric 1 Fully Forecast Average Large projects onlyOhio Electric 1 Partially Forecast Year End x x PartialOklahoma Electric 1 Historical Year End x x YesTennessee Electric 1 Fully Forecast Average YesTexas Electric 1 Historical Year End x SurchargeVirginia Electric 1 Historical Year End x RiderWest Virginia Electric 1 Historical Average x Large projects only
DTE Energy Company Michigan Electric 1 Fully Forecast Average Large projects onlyMichigan Gas 1 Fully Forecast Average x x Large projects only
Duke Energy Corporation Florida Electric 1 Fully Forecast Average x YesIndiana Electric 1 Historical Year End x x x YesKentucky Electric 1 Fully Forecast Average x YesKentucky Gas 1 Fully Forecast Average x x YesNorth Carolina Electric 1 Historical Year End Large projects onlyNorth Carolina Gas 1 Historical Year End x x Large projects onlyOhio Electric 1 Partially Forecast Year End x x PartialOhio Gas 1 Partially Forecast Year End x PartialSouth Carolina Electric 1 Historical N/A YesSouth Carolina Gas 1 Historical N/A x YesTennessee Gas 1 Fully Forecast Average x x Yes
Exelon Delaware Gas 1 Historical Average PartialDistrict of Columbia Electric 1 Partially Forecast Average x x PartialIllinois Electric 1 Fully Forecast Average x PartialPennsylvania Electric/Gas 1 Fully Forecast Year End x NoMaryland Electric/Gas 1 Historical Average x x Yes
FirstEnergy Corp. Maryland Electric 1 Historical Average YesNew Jersey Electric 1 Partially Forecast Year End Financial distressOhio Electric 1 Partially Forecast Year End x x PartialPennsylvania Electric 1 Fully Forecast Year End x NoWest Virginia Electric 1 Historical Average x Large projects only
Evergy, Inc. Kansas Electric 1 Historical Year End x YesMissouri Electric 1 Partially Forecast Year End x x No
OGE Energy Corporation Arkansas Electric 1 Partially Forecast Year End x x x NoOklahoma Electric 1 Historical Year End x x Yes
Otter Tail Corporation Minnesota Electric 1 Partially Forecast Average PartialNorth Dakota Electric 1 Fully Forecast Average x Rider
PNM Resources, Inc. New Mexico Electric 1 Historical Year End x Yes
COMPARISON OF PROXY GROUP COMPANIES REGULATORY FRAMEWORK - ADJUSTMENT CLAUSES
Decoupling New Capital[3][2][1]
Attachment AEB-9DRPage 2 of 2
[4]
Generation Generic CWIP inProxy Group Company Operation State Operation Test Year Rate Base Full Partial Capacity Infrastructure Rate Base
ALLETE, Inc. Minnesota Electric 1 Partially Forecast Average Partial
COMPARISON OF PROXY GROUP COMPANIES REGULATORY FRAMEWORK - ADJUSTMENT CLAUSES
Decoupling New Capital[3][2][1]
Texas Electric 1 Historical Year End x Surcharge
PPL Corporation Kentucky Electric 1 Fully Forecast Year End x YesKentucky Gas 1 Fully Forecast Year End x x YesPennsylvania Electric 1 Fully Forecast Year End x NoVirginia Electric 1 Fully Forecast Year End Rider
Southern Company Alabama Electric 1 Historical Year End x NoGeorgia Electric/Gas 1 Partially Forecast Average x x Large projects onlyIllinois Gas 1 Fully Forecast Average x PartialMississippi Electric 1 Partially Forecast Average x Large projects onlyTennessee Gas 1 Fully Forecast Average x YesVirginia Gas 1 Historical Year End x x Rider
Xcel Energy Inc. Colorado Electric 1 Historical Average x x PartialColorado Gas 1 Historical Average x x PartialMinnesota Electric 1 Fully Forecast Average x PartialMinnesota Gas 1 Fully Forecast Average x PartialNew Mexico Electric 1 Fully Forecast Year End YesNorth Dakota Electric 1 Fully Forecast Average x RiderNorth Dakota Gas 1 Fully Forecast Average NoSouth Dakota Electric 1 Historical Average x x x NoTexas Electric 1 Historical Year End x SurchargeWisconsin Electric 1 Fully Forecast Average RiderWisconsin Gas 1 Fully Forecast Average Rider
Historical: 25 Average: 36Proxy Company Totals Forecast: 44 Year End: 31 4 26 9 40 58Total Jurisdictions 69Percent of Jurisdictions Forecast: 64% Year End: 46% 5.8% 37.7% 13.0% 58.0% 84.1%
Notes:[1] Source: S&P Global Market Intelligence, Regulatory Focus: Adjustment Clauses, dated September 28, 2018. Operating subsidiaries not covered in this report were excluded from this exhibit.[2] Source: "Alternative Regulation for Evolving Utility Challenges," Prepared by Pacific Economics Group Research for Edison Electric Institute, Table 6, November 2015; S&P RRA Research; Company Investor Presen[3] Source: S&P Global Market Intelligence, Regulatory Focus: Adjustment Clauses, dated September 28, 2018.[4] Source: S&P Global Market Intelligence, Regulatory Research Associates, Commission Profiles[5] This exhibit includes the adjustment mechanisms for the electric and gas distribution companies.
Attachment AEB-10DRPage 1 of 1
Proxy Group Company Ticker% Net Generation
(2018)ALLETE, Inc. ALE 0.00%Ameren Corporation AEE 24.65%American Electric Power Company, Inc. AEP 17.49%DTE Energy Company DTE 17.81%Duke Energy Corporation DUK 32.44%Evergy, Inc. EVRG 20.64%Exelon Corporation EXC 86.07%FirstEnergy Corp. FE 47.10%OGE Energy Corp. OGE 0.00%Otter Tail Corporation OTTR 0.00%PNM Resources, Inc. PNM 33.65%PPL Corporation PPL 0.00%Southern Company SO 15.93%Xcel Energy Inc. XEL 19.11%MEAN 22.49%
Arizona Public Service Company 35.16%
NUCLEAR GENERATION COMPARISON
Attachment AEB-11DRPage 1 of 2
Proxy Group Company Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 AverageALLETE (Minnesota Power) ALE 60.87% 60.80% 61.27% 60.33% 60.26% 60.50% 60.15% 59.79% 60.50%Ameren Corporation AEE 52.97% 52.76% 52.68% 53.23% 51.93% 52.91% 52.56% 53.35% 52.80%American Electric Power Company, Inc. AEP 48.04% 48.72% 48.55% 47.52% 47.93% 48.54% 48.88% 48.36% 48.32%DTE Energy Company DTE 48.76% 48.69% 50.96% 49.97% 49.23% 51.12% 51.02% 50.50% 50.03%Duke Energy Corporation DUK 53.12% 52.16% 52.71% 52.85% 53.04% 52.88% 53.01% 53.02% 52.85%Exelon Corporation EXC 53.78% 53.72% 53.31% 53.02% 53.78% 53.56% 53.38% 53.04% 53.45%FirstEnergy Corporation FE 57.81% 58.37% 58.90% 59.48% 59.00% 57.54% 56.97% 56.43% 58.06%Evergy, Inc. EVRG 60.32% 57.95% 59.53% 59.71% 64.75% 64.71% 58.67% 59.11% 60.59%OGE Energy Corporation OGE 53.47% 55.38% 53.20% 53.05% 54.25% 53.59% 53.36% 53.05% 53.67%Otter Tail Corporation OTTR 53.75% 53.90% 53.58% 53.49% 53.11% 52.67% 57.34% 57.24% 54.39%PNM Resources, Inc. PNM 43.86% 43.45% 45.63% 48.01% 46.68% 46.20% 46.06% 47.58% 45.93%PPL Corporation PPL 53.84% 55.18% 54.92% 54.85% 54.51% 54.60% 54.60% 54.75% 54.66%Southern Company SO 54.50% 54.40% 54.29% 53.08% 51.35% 51.29% 48.14% 49.84% 52.11%Xcel Energy Inc. XEL 55.25% 54.92% 54.48% 54.29% 53.51% 54.40% 54.23% 53.76% 54.36%MEAN 53.60% 53.60% 53.86% 53.78% 53.81% 53.90% 53.46% 53.56% 53.69%LOW 43.86% 43.45% 45.63% 47.52% 46.68% 46.20% 46.06% 47.58% 45.93%HIGH 60.87% 60.80% 61.27% 60.33% 64.75% 64.71% 60.15% 59.79% 60.59%
Company Name Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 AverageALLETE (Minnesota Power) ALE 60.94% 60.87% 61.39% 60.43% 60.33% 60.38% 60.04% 59.73% 60.51%Superior Water, Light and Power Company ALE 58.38% 58.19% 56.86% 56.58% 57.34% 65.80% 64.99% 62.33% 60.06%Ameren Illinois Company AEE 54.05% 53.65% 52.86% 53.18% 52.74% 54.24% 53.38% 54.98% 53.64%Union Electric Company AEE 52.00% 51.96% 52.52% 53.26% 51.28% 51.84% 51.92% 52.14% 52.12%AEP Texas, Inc. AEP 46.32% 47.54% 45.38% 43.80% 43.20% 46.75% 45.14% 42.81% 45.12%Appalachian Power Company AEP 48.19% 47.77% 49.51% 49.30% 48.93% 49.35% 48.72% 48.30% 48.76%Indiana Michigan Power Company AEP 45.83% 45.43% 44.62% 44.53% 44.15% 46.64% 46.33% 46.65% 45.52%Kentucky Power Company AEP 46.50% 46.42% 45.72% 45.28% 44.89% 44.40% 43.52% 43.22% 44.99%Kingsport Power Company AEP 50.18% 51.54% 50.79% 50.71% 47.69% 47.28% 46.53% 45.88% 48.82%Ohio Power Company AEP 52.92% 58.86% 57.80% 56.85% 57.11% 52.91% 58.63% 57.64% 56.59%Public Service Company of Oklahoma AEP 48.02% 47.19% 49.16% 49.55% 48.59% 48.10% 48.50% 48.85% 48.49%Southwestern Electric Power Company AEP 47.45% 47.59% 46.97% 43.43% 47.91% 47.72% 48.52% 48.66% 47.28%Wheeling Power Company AEP 53.83% 54.27% 54.62% 54.70% 54.19% 54.27% 54.26% 54.13% 54.28%DTE Electric Company DTE 48.76% 48.69% 50.96% 49.97% 49.23% 51.12% 51.02% 50.50% 50.03%Duke Energy Carolinas, LLC DUK 52.94% 52.32% 51.78% 52.64% 52.10% 51.70% 52.98% 53.98% 52.55%Duke Energy Florida, LLC DUK 51.55% 50.56% 50.04% 49.65% 48.79% 49.92% 49.25% 49.46% 49.90%Duke Energy Indiana, LLC DUK 54.83% 54.29% 53.26% 52.79% 52.64% 52.54% 51.94% 51.71% 53.00%Duke Energy Kentucky, Inc. DUK 53.04% 52.81% 51.95% 56.58% 55.79% 53.72% 53.11% 50.69% 53.46%Duke Energy Ohio, Inc. DUK 64.45% 59.29% 68.09% 67.73% 67.10% 66.06% 66.24% 65.79% 65.59%Duke Energy Progress, LLC DUK 50.09% 49.60% 51.00% 50.76% 53.22% 52.82% 52.27% 51.06% 51.35%Baltimore Gas and Electric Company EXC 54.36% 54.43% 53.67% 52.85% 55.34% 55.36% 54.77% 53.70% 44.05%Commonwealth Edison Company EXC 55.29% 55.00% 55.06% 54.72% 55.36% 54.96% 54.85% 54.60% 44.01%Delmarva Power & Light Company EXC 50.20% 50.18% 49.98% 50.11% 49.86% 50.35% 50.38% 50.18% 49.18%PECO Energy Company EXC 55.20% 55.13% 53.72% 52.82% 54.28% 53.77% 53.54% 53.30% 49.18%Potomac Electric Power Company EXC 50.24% 50.41% 50.01% 50.24% 50.08% 49.94% 49.89% 49.71% 49.18%Cleveland Electric Illuminating Company FE 55.49% 55.54% 55.44% 56.50% 56.31% 55.48% 55.27% 54.06% 49.18%Jersey Central Power & Light Company FE 68.23% 68.08% 69.46% 69.34% 68.81% 65.52% 65.30% 65.26% 49.18%Metropolitan Edison Company FE 48.46% 47.78% 53.21% 54.25% 53.10% 52.18% 52.33% 52.30% 51.70%Monongahela Power Company FE 49.07% 49.05% 48.87% 50.71% 51.53% 50.57% 49.15% 48.18% 49.64%Ohio Edison Company FE 71.42% 70.82% 69.93% 69.14% 67.33% 66.89% 64.91% 62.27% 67.84%Pennsylvania Electric Company FE 50.93% 53.85% 53.89% 54.01% 53.90% 53.09% 52.06% 53.29% 53.13%Pennsylvania Power Company FE 51.71% 50.69% 49.03% 58.27% 56.89% 55.70% 53.82% 55.74% 53.98%Potomac Edison Company FE 52.99% 53.29% 52.35% 52.92% 52.65% 52.64% 51.59% 51.27% 52.46%Toledo Edison Company FE 60.57% 60.78% 60.43% 62.25% 62.25% 60.60% 60.04% 57.81% 60.59%West Penn Power Company FE 50.63% 54.68% 53.50% 53.14% 52.09% 51.09% 52.82% 52.10% 52.51%Great Plains Energy Incorporated EVRG 50.27% 47.99% 51.05% 51.39% 51.25% 50.39%Westar Energy, Inc. EVRG 67.31% 65.16% 65.23% 65.34% 64.75% 64.71% 64.65% 64.73% 65.24%Oklahoma Gas and Electric Company OGE 53.47% 55.38% 53.20% 53.05% 54.25% 53.59% 53.36% 53.05% 53.67%Otter Tail Power Company OTTR 53.75% 53.90% 53.58% 53.49% 53.11% 52.67% 57.34% 57.24% 54.39%Public Service Company of New Mexico PNM 43.86% 43.45% 45.63% 48.01% 46.68% 46.20% 46.06% 47.58% 45.93%Kentucky Utilities Company PPL 52.81% 55.44% 54.85% 54.76% 54.51% 54.08% 54.00% 53.93% 54.30%Louisville Gas and Electric Company PPL 53.88% 56.16% 55.80% 55.35% 54.97% 54.46% 55.42% 56.29% 55.29%PPL Electric Utilities Corporation PPL 54.51% 54.52% 54.52% 54.65% 54.28% 55.04% 54.57% 54.54% 54.58%Alabama Power Company SO 52.54% 52.23% 47.77% 48.13% 47.51% 48.86% 47.07% 48.78% 49.11%Georgia Power Company SO 56.39% 56.43% 59.02% 57.27% 54.97% 53.81% 50.06% 50.90% 54.86%Mississippi Power Company SO 49.87% 49.73% 50.35% 45.84% 43.87% 43.00% 39.34% 47.32% 46.16%Northern States Power Company - MN XEL 53.66% 53.64% 52.81% 52.64% 52.61% 52.59% 52.38% 52.22% 52.82%Northern States Power Company - WI XEL 53.49% 53.59% 53.60% 48.45% 53.85% 53.79% 53.36% 55.57% 53.21%Public Service Company of Colorado XEL 57.53% 56.68% 56.31% 56.08% 54.17% 56.67% 56.50% 55.64% 56.20%Southwestern Public Service Company XEL 54.14% 54.13% 54.17% 56.29% 53.88% 53.54% 53.55% 52.29% 54.00%
Notes:[1] Ratios are weighted by actual common capital and long-term debt of Operating Subsidiaries.[2] Natural Gas and Electric Operating Subsidiaries with data listed as N/A from SNL Financial have been excluded from the analysis.
COMMON EQUITY RATIO - UTILITY OPERATING COMPANIES [2]
CAPITAL STRUCTURE ANALYSIS
COMMON EQUITY RATIO [1]
Attachment AEB-11DRPage 2 of 2
Proxy Group Company Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 AverageALLETE (Minnesota Power) ALE 39.13% 39.20% 38.73% 39.67% 39.74% 39.50% 39.85% 40.21% 39.50%Ameren Corporation AEE 47.03% 47.24% 47.32% 46.77% 48.07% 47.09% 47.44% 46.65% 47.20%American Electric Power Company, Inc. AEP 51.96% 51.28% 51.45% 52.48% 52.07% 51.46% 51.12% 51.64% 51.68%DTE Energy Company DTE 51.24% 51.31% 49.04% 50.03% 50.77% 48.88% 48.98% 49.50% 49.97%Duke Energy Corporation DUK 46.88% 47.84% 47.29% 47.15% 46.96% 47.12% 46.99% 46.98% 47.15%Exelon Corporation EXC 46.22% 46.28% 46.69% 46.98% 46.22% 46.44% 46.62% 46.96% 46.55%FirstEnergy Corporation FE 42.19% 41.63% 41.10% 40.52% 41.00% 42.46% 43.03% 43.57% 41.94%Evergy, Inc. EVRG 39.68% 42.05% 40.47% 40.29% 35.25% 35.29% 41.33% 40.89% 39.41%OGE Energy Corporation OGE 46.53% 44.62% 46.80% 46.95% 45.75% 46.41% 46.64% 46.95% 46.33%Otter Tail Corporation OTTR 46.25% 46.10% 46.42% 46.51% 46.89% 47.33% 42.66% 42.76% 45.61%PNM Resources, Inc. PNM 56.14% 56.55% 54.37% 51.99% 53.32% 53.80% 53.94% 52.42% 54.07%PPL Corporation PPL 46.16% 44.82% 45.08% 45.15% 45.49% 45.40% 45.40% 45.25% 45.34%Southern Company SO 45.50% 45.60% 45.71% 46.92% 48.65% 48.71% 51.86% 50.16% 47.89%Xcel Energy Inc. XEL 44.75% 45.08% 45.52% 45.71% 46.49% 45.60% 45.77% 46.24% 45.64%MEAN 46.40% 46.40% 46.14% 46.22% 46.19% 46.10% 46.54% 46.44% 46.31%LOW 39.13% 39.20% 38.73% 39.67% 35.25% 35.29% 39.85% 40.21% 39.41%HIGH 56.14% 56.55% 54.37% 52.48% 53.32% 53.80% 53.94% 52.42% 54.07%
Company Name Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 AverageALLETE (Minnesota Power) ALE 39.06% 39.13% 38.61% 39.57% 39.67% 39.62% 39.96% 40.27% 39.49%Superior Water, Light and Power Company ALE 41.62% 41.81% 43.14% 43.42% 42.66% 34.20% 35.01% 37.67% 39.94%Ameren Illinois Company AEE 45.95% 46.35% 47.14% 46.82% 47.26% 45.76% 46.62% 45.02% 46.36%Union Electric Company AEE 48.00% 48.04% 47.48% 46.74% 48.72% 48.16% 48.08% 47.86% 47.88%AEP Texas, Inc. AEP 53.68% 52.46% 54.62% 56.20% 56.80% 53.25% 54.86% 57.19% 54.88%Appalachian Power Company AEP 51.81% 52.23% 50.49% 50.70% 51.07% 50.65% 51.28% 51.70% 51.24%Indiana Michigan Power Company AEP 54.17% 54.57% 55.38% 55.47% 55.85% 53.36% 53.67% 53.35% 54.48%Kentucky Power Company AEP 53.50% 53.58% 54.28% 54.72% 55.11% 55.60% 56.48% 56.78% 55.01%Kingsport Power Company AEP 49.82% 48.46% 49.21% 49.29% 52.31% 52.72% 53.47% 54.12% 51.18%Ohio Power Company AEP 47.08% 41.14% 42.20% 43.15% 42.89% 47.09% 41.37% 42.36% 43.41%Public Service Company of Oklahoma AEP 51.98% 52.81% 50.84% 50.45% 51.41% 51.90% 51.50% 51.15% 51.51%Southwestern Electric Power Company AEP 52.55% 52.41% 53.03% 56.57% 52.09% 52.28% 51.48% 51.34% 52.72%Wheeling Power Company AEP 46.17% 45.73% 45.38% 45.30% 45.81% 45.73% 45.74% 45.87% 45.72%DTE Electric Company DTE 51.24% 51.31% 49.04% 50.03% 50.77% 48.88% 48.98% 49.50% 49.97%Duke Energy Carolinas, LLC DUK 47.06% 47.68% 48.22% 47.36% 47.90% 48.30% 47.02% 46.02% 47.45%Duke Energy Florida, LLC DUK 48.45% 49.44% 49.96% 50.35% 51.21% 50.08% 50.75% 50.54% 50.10%Duke Energy Indiana, LLC DUK 45.17% 45.71% 46.74% 47.21% 47.36% 47.46% 48.06% 48.29% 47.00%Duke Energy Kentucky, Inc. DUK 46.96% 47.19% 48.05% 43.42% 44.21% 46.28% 46.89% 49.31% 46.54%Duke Energy Ohio, Inc. DUK 35.55% 40.71% 31.91% 32.27% 32.90% 33.94% 33.76% 34.21% 34.41%Duke Energy Progress, LLC DUK 49.91% 50.40% 49.00% 49.24% 46.78% 47.18% 47.73% 48.94% 48.65%Baltimore Gas and Electric Company EXC 45.64% 45.57% 46.33% 47.15% 44.66% 44.64% 45.23% 46.30% 45.69%Commonwealth Edison Company EXC 44.71% 45.00% 44.94% 45.28% 44.64% 45.04% 45.15% 45.40% 45.02%Delmarva Power & Light Company EXC 49.80% 49.82% 50.02% 49.89% 50.14% 49.65% 49.62% 49.82% 49.84%PECO Energy Company EXC 44.80% 44.87% 46.28% 47.18% 45.72% 46.23% 46.46% 46.70% 46.03%Potomac Electric Power Company EXC 49.76% 49.59% 49.99% 49.76% 49.92% 50.06% 50.11% 50.29% 49.94%Cleveland Electric Illuminating Company FE 44.51% 44.46% 44.56% 43.50% 43.69% 44.52% 44.73% 45.94% 44.49%Jersey Central Power & Light Company FE 31.77% 31.92% 30.54% 30.66% 31.19% 34.48% 34.70% 34.74% 32.50%Metropolitan Edison Company FE 51.54% 52.22% 46.79% 45.75% 46.90% 47.82% 47.67% 47.70% 48.30%Monongahela Power Company FE 50.93% 50.95% 51.13% 49.29% 48.47% 49.43% 50.85% 51.82% 50.36%Ohio Edison Company FE 28.58% 29.18% 30.07% 30.86% 32.67% 33.11% 35.09% 37.73% 32.16%Pennsylvania Electric Company FE 49.07% 46.15% 46.11% 45.99% 46.10% 46.91% 47.94% 46.71% 46.87%Pennsylvania Power Company FE 48.29% 49.31% 50.97% 41.73% 43.11% 44.30% 46.18% 44.26% 46.02%Potomac Edison Company FE 47.01% 46.71% 47.65% 47.08% 47.35% 47.36% 48.41% 48.73% 47.54%Toledo Edison Company FE 39.43% 39.22% 39.57% 37.75% 37.75% 39.40% 39.96% 42.19% 39.41%West Penn Power Company FE 49.37% 45.32% 46.50% 46.86% 47.91% 48.91% 47.18% 47.90% 47.49%Great Plains Energy Incorporated EVRG 49.73% 52.01% 48.95% 48.61% 48.75% 49.61%Westar Energy, Inc. EVRG 32.69% 34.84% 34.77% 34.66% 35.25% 35.29% 35.35% 35.27% 34.76%Oklahoma Gas and Electric Company OGE 46.53% 44.62% 46.80% 46.95% 45.75% 46.41% 46.64% 46.95% 46.33%Otter Tail Power Company OTTR 46.25% 46.10% 46.42% 46.51% 46.89% 47.33% 42.66% 42.76% 45.61%Public Service Company of New Mexico PNM 56.14% 56.55% 54.37% 51.99% 53.32% 53.80% 53.94% 52.42% 54.07%Kentucky Utilities Company PPL 47.19% 44.56% 45.15% 45.24% 45.49% 45.92% 46.00% 46.07% 45.70%Louisville Gas and Electric Company PPL 46.12% 43.84% 44.20% 44.65% 45.03% 45.54% 44.58% 43.71% 44.71%PPL Electric Utilities Corporation PPL 45.49% 45.48% 45.48% 45.35% 45.72% 44.96% 45.43% 45.46% 45.42%Alabama Power Company SO 47.46% 47.77% 52.23% 51.87% 52.49% 51.14% 52.93% 51.22% 50.89%Georgia Power Company SO 43.61% 43.57% 40.98% 42.73% 45.03% 46.19% 49.94% 49.10% 45.14%Mississippi Power Company SO 50.13% 50.27% 49.65% 54.16% 56.13% 57.00% 60.66% 52.68% 53.84%Northern States Power Company - MN XEL 46.34% 46.36% 47.19% 47.36% 47.39% 47.41% 47.62% 47.78% 47.18%Northern States Power Company - WI XEL 46.51% 46.41% 46.40% 51.55% 46.15% 46.21% 46.64% 44.43% 46.79%Public Service Company of Colorado XEL 42.47% 43.32% 43.69% 43.92% 45.83% 43.33% 43.50% 44.36% 43.80%Southwestern Public Service Company XEL 45.86% 45.87% 45.83% 43.71% 46.12% 46.46% 46.45% 47.71% 46.00%
Notes:[1] Ratios are weighted by actual common capital and long-term debt of Operating Subsidiaries.[2] Natural Gas and Electric Operating Subsidiaries with data listed as N/A from SNL Financial have been excluded from the analysis.
LONG-TERM DEBT RATIO - UTILITY OPERATING COMPANIES [2]
CAPITAL STRUCTURE ANALYSIS
LONG-TERM DEBT RATIO [1]
Attachment AEB-12DRPage 1 of 1
ARIZONA PUBLIC SERVICE COMPANYFAIR VALUE RATE OF RETURN
ARIZONA STAFF METHODOLOGY
WeightedAmount Amount
($M) Weighting ($M)
Original Cost Rate Base (OCRB) 8,873.0$ 50.00% 4,436.5$ [1]
Replacement Cost New, Depreciated Rate Base (RCND) 15,747.5$ 50.00% 7,873.8 [2]
Fair Value Rate Base (FVRB) 12,310.3 [3]
Appreciation Above OCRB 3,437.3$ [4]
FVRB / OCRB Multiple 1.39
WeightedAmount Cost Cost
Capital ($M) Percent Rate Rate
Long-Term Debt 45.33% 4,022.1$ 32.67% 4.10% [5] 1.34%
Common Equity 54.67% 4,850.9 39.41% 10.15% [6] 4.00%
Capital Financing OCRB 8,873.0$ 72.08% 5.34%
Appreciation Above OCRB Not Recognized on Utility's Books 3,437.3 27.92% 1.00% 0.28%
Total 12,310.3$ 100.00% 5.62% [7]
[1] Direct Testimony of [2] Direct Testimony of [3] Equals [1] + [2][4] Equals [3] − OCRB[5] Company Data[6] Equals Recommended ROE on OCRB[7] Capital Financing OCRB + Return on Fair Value Increment
Attachment AEB-13DRPage 1 of 1Comparable Transactions Analysis
Calculation of Transaction Premium over Corporate Value
[1] [2] [3] [4] [5] [6] [7]
Named Range Target Buyer
Date Announced
Target Book Value Per
Share
Target Deal Value Per
SharePremium to
EquityTarget Equity
Ratio
Transaction Premium to Corporate
Value
Implied APS Valuation
($M)VVC Vectren Corporation CenterPoint Energy, Inc. 4/23/2018 $22.58 $72.00 218.80% 58.07% 127.06% $20,147SCG SCANA Corporation Dominion Energy, Inc. 1/3/2018 $36.66 $53.71 46.48% 51.69% 24.03% $11,005EDE Empire District Electric Company Algonquin Power & Utilities Corp. 2/9/2016 $18.32 $34.00 85.60% 50.45% 43.18% $12,705TECO TECO Energy, Inc. Emera Incorporated 9/4/2015 $10.86 $27.55 153.67% 45.79% 70.37% $15,117UIL UIL Holdings Corporation Iberdrola, S.A. 2/25/2015 $24.07 $52.75 119.20% 46.10% 54.95% $13,749CNL Cleco Corporation Investor group 10/20/2014 $27.14 $55.37 103.99% 55.66% 57.88% $14,009TEG Integrys Energy Group, Inc. Wisconsin Energy Corporation 6/23/2014 $42.17 $71.47 69.48% 56.42% 39.20% $12,351POM Pepco Holdings, Inc. Exelon Corporation 4/30/2014 $17.28 $27.25 57.73% 52.88% 30.53% $11,582UNS UNS Energy Corporation Fortis Inc. 12/11/2013 $22.75 $60.25 164.83% 61.58% 101.50% $17,879NVE NV Energy, Inc. Berkshire Hathaway Inc. 5/29/2013 $15.05 $23.75 57.84% 46.99% 27.18% $11,285CHG CH Energy Group, Inc. Fortis Inc. 2/21/2012 $33.72 $65.00 92.77% 55.96% 51.92% $13,479CV Central Vermont Public Service Corporation Gaz Métro LP 6/23/2011 $20.59 $35.25 71.20% 61.29% 43.64% $12,745CEG Constellation Energy Group Inc. Exelon Corporation 4/28/2011 $39.65 $38.59 -2.68% 65.30% -1.75% $8,718DPL DPL Inc. AES Corporation 4/19/2011 $10.52 $30.00 185.18% 63.13% 116.90% $19,245NST NSTAR Northeast Utilities 10/18/2010 $18.60 $40.28 116.51% 51.31% 59.79% $14,178AYE Allegheny Energy, Inc. FirstEnergy Corporation 2/11/2010 $18.36 $27.65 50.62% 42.53% 21.53% $10,783PSD Puget Energy, Inc. Investor Consortium 10/25/2007 $18.45 $30.00 62.63% 50.35% 31.54% $11,671EAS Energy East Corporation Iberdrola, S.A. 6/25/2007 $20.21 $28.50 41.01% 48.37% 19.83% $10,633ILA Aquila, Inc. Great Plains Energy, Inc. 2/6/2007 $3.49 $4.54 30.18% 48.89% 14.76% $10,182DQE Duquesne Light Holdings, Inc Macquarie Consortium 7/5/2006 $8.41 $20.00 137.82% 46.83% 64.55% $14,600GMP Green Mountain Power Corporation Gaz Métro LP 6/21/2006 $22.79 $35.00 53.60% 61.71% 33.08% $11,808KSE KeySpan Corp. National Grid Group PLC 2/25/2006 $25.60 $42.00 64.05% 56.78% 36.37% $12,100CIN Cinergy Corp. Duke Energy Corporation 5/8/2005 $22.71 $45.80 101.69% 55.23% 56.16% $13,856RGS RGS Energy Group, Inc. Energy East Corporation 2/16/2001 $22.19 $39.50 78.04% 55.15% 43.04% $12,692CIV Conectiv Potomac Electric Power Company 2/12/2001 $13.10 $25.00 90.91% 54.41% 49.46% $13,262MonPow Montana Power Company NorthWestern Corporation 9/28/2000 $9.86 $10.50 6.53% 77.59% 5.06% $9,322NMK Niagara Mohawk Holdings, Inc. National Grid Group PLC 9/4/2000 $16.90 $19.00 12.39% 43.41% 5.38% $9,350GPUI GPU, Inc. FirstEnergy Corporation 8/8/2000 $27.01 $36.50 35.12% 54.35% 19.09% $10,567IPL IPALCO Enterprises, Inc. AES Corporation 7/15/2000 $7.76 $25.00 222.03% 49.21% 109.27% $18,568BGR Bangor Hydro-Electric Company NS Power Holdings Inc. 6/29/2000 $18.34 $26.50 44.46% 46.73% 20.77% $10,716LGE LG&E Energy Corp. Powergen PLC 2/27/2000 $8.80 $24.85 182.35% 63.37% 115.56% $19,126MEC MidAmerican Energy Holdings Company Investor group 10/24/1999 $15.59 $35.05 124.81% 20.58% 25.69% $11,152UCM Unicom Corporation PECO Energy Company 9/22/1999 $23.51 $34.40 46.36% 49.01% 22.72% $10,889FPC Florida Progress Corporation Carolina Power & Light Company 8/22/1999 $19.70 $54.00 174.08% 51.35% 89.39% $16,805CMP CMP Group, Inc. Energy East Corporation 6/14/1999 $16.79 $29.50 75.72% 78.19% 59.20% $14,126TNP TNP Enterprises, Inc. Investor Group 5/24/1999 $23.21 $44.00 89.59% 40.00% 35.84% $12,053EUA Eastern Utilities Associates National Grid Group PLC 2/1/1999 $18.29 $31.46 72.05% 61.42% 44.25% $12,799NES New England Electric System National Grid Group PLC 12/11/1998 $29.30 $53.75 83.48% 62.49% 52.16% $13,501PPW PacifiCorp Scottish Power PLC 12/6/1998 $13.47 $25.13 86.56% 54.51% 47.19% $13,060CES Commonwealth Energy System BEC Energy 12/5/1998 $20.75 $44.10 112.58% 54.79% 61.68% $14,346CER CILCORP Inc AES Corporation 11/23/1998 $26.24 $65.00 147.71% 62.91% 92.92% $17,118MEC MidAmerican Energy Holdings Company CalEnergy Company, Inc. 8/11/1998 $12.99 $27.15 109.07% 25.20% 27.49% $11,312ORU Orange and Rockland Utilities, Inc. Consolidated Edison, Inc. 5/10/1998 $27.92 $58.50 109.52% 60.21% 65.94% $14,724NVP Nevada Power Company Sierra Pacific Resources 4/29/1998 $16.33 $26.00 59.20% 52.88% 31.30% $11,651KU KU Energy Corporation LG&E Energy Corporation 5/20/1997 $17.29 $40.71 135.48% 56.38% 76.39% $15,651
Min: -1.75% $8,718Max: 127.06% $20,147
Mean: 49.42% $13,258Median: 43.64% $12,745
Std. Dev.: 30.85% $2,737Count: 45 45
Notes: APS OCRB 8,873.0$ [1] Source: Bloomberg Professional Premium 43.64%[2] Source: Bloomberg Professional Implied FV 12,745$ [3] Source: SEC Filings[4] Equals ([3] − [2]) / [2][5] Source: Bloomberg Professional[6] Equals [4] x [5][7] Equals APS's OCRB x (1 + [6])
Attachment AEB-14DRPage 1 of 3
Scenario 1: Real Risk Free Rate- Projected EstimateStep 1
Consumer Price Index (YoY % Change) [1]2021-2025 2.10%
2026-2030 2.10%Average 2.10%
Consumer Price Index (All-Urban) [2]2020 2.632030 3.31
Compound Annual Growth Rate 2.31%
GDP Chain-type Price Index (2009=1.000) [2]2020 1.222030 1.54
Compound Annual Growth Rate 2.35%
Average Inflation Forecast 2.25%
Step 2Nominal U.S. Treasury Bond Yield, 30-year [1]
2021-2025 3.60%2026-2030 3.80%
3.70%
Real Risk-Free Rate [3] 1.41%
Notes:[1] Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14.[2] Energy Information Administration, Annual Energy Outlook 2019, Table 20[3] Equals (3.70% + 1) / (1 + 2.25%) − 1
Estimates of Fair Value Return Increment
Attachment AEB-14DRPage 2 of 3
Scenario 2: Real Risk Free Rate- Projected Estimate
Nominal U.S. Treasury Bond Yield, 30-year [1]Projection period: 2021-2025 3.60%
Projection period: 2025-2029 3.80%3.70%
0.98%
Real Risk-Free Rate [3] 2.72%
Notes:[1] Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14
[3] Equals [1]-[2]
180-day average yield on 30- Year U.S. Treasury Inflation Protected Securities [2]
[2] https://www.treasury.gov/resource-center/data-chart-center/interest-
Estimates of Fair Value Return Increment
Attachment AEB-14DRPage 3 of 3
Scenario 3: Real Risk Free Rate-Normalized Risk-Free Rate
Nominal Risk Free Rate [1] 3.50%
0.98%Real Risk-Free Rate [3] 2.52%
Notes:[1] Duff and Phelps 2019 Valuation Handbook
[3] Equals [1]-[2]
180-day average yield on 30- Year U.S. Treasury Inflation Protected Securities [2]
[2] https://www.treasury.gov/resource-center/data-chart-
Estimates of Fair Value Return Increment
Copyright (c) Yardeni Research, Inc. 2019. All rights reserved. The informationcontained herein has been obtained from sources believed to be reliable, but is notnecessarily complete and its accuracy cannot be guaranteed. No representation orwarranty, express or implied, is made as to the fairness, accuracy, completeness, orcorrectness of the information and opinions contained herein. The views and the otherinformation provided are subject to change without notice. All reports and podcasts posted onwww.yardeni.com, blog.yardeni.com, and YRI’s Apps are issuedwithout regard to the specific investment objectives, financial situation, or particular needsof any specific recipient and are not to be construed as a solicitation or an offer to buy or sellany securities or related financial instruments. Past performance is not necessarily a guideto future results. Company fundamentals and earnings may be mentioned occasionally, butshould not be construed as a recommendation to buy, sell, or hold the company’s stock.Predictions, forecasts, and estimates for any and all markets should not be construed asrecommendations to buy, sell, or hold any security--including mutual funds, futurescontracts, and exchange traded funds, or any similar instruments.
The text, images, and other materials contained or displayed on any Yardeni Research, Inc.product, service, report, email or website are proprietary to Yardeni Research, Inc. andconstitute valuable intellectual property. No material from any part of www.yardeni.com, blog.yardeni.com, and YRI’s Apps may be downloaded, transmitted,broadcast, transferred, assigned, reproduced or in any other way used or otherwisedisseminated in any form to any person or entity, without the explicit written consent ofYardeni Research, Inc. All unauthorized reproduction or other use of material from YardeniResearch, Inc. shall be deemed willful infringement(s) of this copyright and other proprietaryand intellectual property rights, including but not limited to, rights of privacy. YardeniResearch, Inc. expressly reserves all rights in connection with its intellectual property,including without limitation the right to block the transfer of its products and services and/orto track usage thereof, through electronic tracking technology, and all other lawful means,now known or hereafter devised. Yardeni Research, Inc. reserves the right, without furthernotice, to pursue to the fullest extent allowed by the law any and all criminal and civilremedies for the violation of its rights.
The recipient should check any email and any attachments for the presence of viruses.Yardeni Research, Inc. accepts no liability for any damage caused by any virus transmittedby this company’s emails, website, blog and Apps. Additional information available onrequest.
Attachment AEB-15DR
