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\. !?.. Exhibit No 8'1 Data:J-~--."1 Reporte~ File No \::..C..-~\'-\ -O,;L.;';;I-J Rebuttal Testimony of Robert B

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\. !?.. Exhibit No 8'1 Data:J-~--. Exhibit No.: Issues: Retum on Equity Witness: Robert B. 1-IeYert Sponsoring Party: Union Electric Company Type of Exhibit: Rebuttal Testimony FileNo.: EC-2014-0223 Date Testimony Prepared: June 6, 2014 Filed August 5, 2014 Data Center Missouri Public Service Commission MISSOURI PUBLIC SERVICE COMMISSION FILE NO. EC-2014-0223 REBUTTAL TESTIMONY OF ROBERT B. HEVERT ON BEHALF OF UNION ELECTRIC COMPANY d/b/a Ameren Missouri Framingham, 1\Jassachusetts June 6, 2014 j \. !?.. Exhibit No 8'1 Data:J-~--."1 Reporte~ File No \::..c..-~\'-\ -O,;l.;';;I-J Rebuttal Testimony of Robert B. Hever1 TABLE OF CONTENTS I. INTRODUCTION ............................................................................................................... I II. PURPOSE AND OVERVIEW OF TESTIMONY .............................................................. 2 Ill. SUMMARY OF ISSUES SURROUNDING COST OF EQUITY ESTIMATION IN REGULATORY PROCEEDINGS ...................................................................................... 3 IV. RESPONSE TO THE DIRECT TESTIMONY OF MR. GORMAN .................................. 8 A. Composition of1\1r. Gorman's Proxy Group ........................................................... 8 B. Application of the Constant Growth DCF Model .................................................. 10 C. Application ofthe Multi-Stage DCF Model ........................................................... J5 D. Application of Capital Asset Pricing Model .......................................................... 20 E. Application ofthe Risk Premium Model ................................................................ 26 V. COST OF EQUITY ESTIMATION ................................................................................. .33 A. Proxy Group Selection ........................................................................................... 34 B. Constant Growth Discounted Cash Flow Model ................................................... 38 C. Multi-Stage DCF Model ........................................................................................ 43 D. CAP M Analysis ...................................................................................................... 48 E. Bond Yield Plus Risk Premium Approach ............................................................. 52 VI. OTHER CONSIDERATIONS ........................................................................................... 54 A. RegulatOIJ' Environment ............. ,.......................................................................... 55 B. Generation Portfolio .............................................................................................. 59 VII. CONCLUSIONS AND RECOMMENDATION .............................................................. 6I Rcbultal Testimony of Robert B. Hcvcrt Glossary of Frequently Used Terms TERM DESCRIPTION Beta Coefficient A component of the CAPM that measures the risk of a given stock relative to the risk of the overall market. Capital Asset Pricing Model A risk premium-based model used to estimate the ("CAPM") Cost of Equity, assuming the stock is added to a well- diversified portfolio. The CAPM assumes that investors are compensated for the time value of money (represented by the Risk Free Rate), and risk (represented by the combination of the Beta Coefficient and the Market Risk Premium). Constant Growth DCF Model A form of the DCF model that assumes cash flows will grow at a constant rate, in perpetuity. The model simplifies to a form that expresses the ROE as the sum of the expected dividend yield and the expected growth rate. Cost of Equity The return required by investors to invest in equity securities. The terms "Return on Equity" and "Cost of Equity" are used interchangeably. Discounted Cash Flow ("DCF") Model A model used to estimate the Cost of Equity based on expected cash flows. The Cost of Equity equals the discount rate that sets the current market price equal to the present value of expected cash flows. Dividend Yield For a given stock, the current dividend divided by the current market price. Gross Domestic Product ("GDP") The value of all finished goods and services produced within a country during a given period of time (usually measured annually). GDP includes public and private consumption, government expenditures, investments, and exports less imports. Market Return The expected return on the equity market, taken as a portfolio. Market Risk Premium The additional compensation required by investing in the equity market as a portfolio over the Risk-Free rate. The Market Risk Premium is a component of theCAPM. Multi-Stage DCF Model A form of the DCF model in which the rate of growth may change over different stages. Proxy Group A group of publicly traded companies used as the "proxy" for the subject company (in this case, Ameren Missouri). Proxy companies are sometimes referred to as "Comparable Companies". II Rebuttal Testimony of Robert B. Hevet1 TERM DESCRIPTION Return on Equity ("ROE") The return required by investors to invest in equity securities. The terms "Return on Equity" and "Cost of Equity" are used interchangeably. Risk Free Rate The rate of return on an asset with no default risk. Risk Premium The additional compensation required by investors for taking on additional increments of risk. Risk Premium-based approaches are used in addition to the DCF and CAPM to estimate the Cost of Equity. Sustainable Growth An estimate of growth based on the percentage of earnings retained, and the expected return on retained earnings. Terminal Growth The expected rate of growth in the final, or terminal, stage of the Multi-Stage DCF model. Treasury Inflation Protected Securities Treasury securities that are indexed to inflation. The ("TIPS") principal value of TIPS increase with inflation and decrease with deflation, as measured by the Consumer Price Index. Treasury Yield The return on Treasury securities; the yield on long- term Treasury bonds is considered to be a measure of the Risk Free Rate. Vertically Integrated Utilities Electric utilities that own and operate distribution, transmission and generation assets. iii Rebuttal Testimony of Robert B. Hever1 REBUTTAL TESTIMONY 2 OF 3 ROBERT B. HE VERT 4 FILE NO. EC-2014-0223 I. INTRODUCTION 5 Q. Please state your name, affiliation and business address. 6 A. My name is Robert B. Hevert. I am Managing Partner of Sussex Economic 7 Advisors, LLC. My business address is 161 Worcester Road, Suite 503, Framingham, 8 Massachusetts 0 1701. 9 Q. On whose behalf are you submitting this testimony? 10 A. I am submitting this rebuttal testimony ("Rebuttal Testimony") before the 11 Missouri Public Service Commission ("Commission") on behalf of Union Electric Company 12 d/b/a Ameren Missouri ("Ameren Missouri" or the "Company"). 13 Q. Please describe your educational background. 14 A. 1 hold a Bachelor's degree in Business and Economics fi·om the University of 15 Delaware, and an MBA with a concentration in Finance from the University of Massachusetts. I 16 also hold the Chartered Financial Analyst designation. 17 Q. Please describe your experience in the energy and utility industries. 18 A. I have worked in regulated industries for over twenty-five years, having served as 19 an executive and manager with consulting firms, a financial officer of a publicly-traded natural 20 gas utility (at the time, Bay State Gas Company), and an analyst at a telecommunications utility. 21 In my role as a consultant, 1 have advised numerous energy and utility clients on a wide range of 22 financial and economic issues, including corporate and asset-based transactions, asset and Rebuttal Testimony of Robert B. Hevert enterprise valuation, transaction due diligence, and strategic matters. As an expert witness, I 2 have provided testimony in approximately I 00 proceedings regarding various financial and 3 regulatory matters before numerous state utility regulatory agencies and the Federal Energy 4 Regulatory Commission. A summary of my professional and educational background, including 5 a list of my testimony in prior proceedings, is included in Attachment A to my Rebuttal 6 Testimony. 7 II. PURPOSE AND OVERVIEW OF TESTIMONY 8 Q. What is the purpose of your Rebuttal Testimony? 9 A. On behalf of Ameren Missouri, my Rebuttal Testimony responds to Mr. Michael I 0 P. Gorman on behalf of the Noranda Aluminum, Inc. ("Noranda") as his direct testimony relates II to the Company's return on equity ("ROE"). In addition, my Rebuttal Testimony presents 1 12 evidence and provides a recommendation regarding the Company's ROE • My analyses and 13 conclusions are supported by the data presented in Schedules RBH-1 through RBH-14, which 14 have been prepared by me or under my direction. 15 Q. How is the remainder of your Rebuttal Testimony organized? 16 A. The remainder of my Rebuttal Testimony is organized as follows: 17 Section lii- Provides a summary of issues regarding Cost of Equity estimation in 18 regulatory proceedings; 19 Section IV- Provides my response to the Direct Testimony of Mr. Gorman; 20 Section V - Explains my analyses and the analytical bases for my ROE 21 recommendation; 22 Section VI - Provides a discussion of specific business risks that have a direct 23 bearing on the Company's Cost of Equity; and Throughout my Rebuttal Testimony, I interchangeably use the terms "ROE" and "Cost ofEquity." 2 Rebuttal Testimony of Robert 13. Hevert Section VII- Summarizes my conclusions and recommendations. III. SUMMARY OF ISSUES SURROUNDING COST OF EOUITY ESTIMATION IN REGULATORY PROCEEDINGS
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