INDIANA-AMERICAN WATER COMPANY, INC.
IURC CAUSE NO. 45142
DIRECT TESTIMONY
OF
ANN E. BULKLEY
SPONSORING ATTACHMENTS AEB-1 THROUGH AEB-13
DIRECT TESTIMONY OF ANN E. BULKLEY
CAUSE NO. 45142
1 I. BACKGROUND
2 Q. Please state your name, affiliation, and business address.
3 A. My name is Ann E. Bulkley. I am employed by Concentric Energy Advisors, Inc.
4 (“Concentric”) as a Senior Vice President. My business address is 293 Boston Post Road
5 West, Suite 500, Marlborough, Massachusetts 01752.
6 Q. On whose behalf are you submitting this testimony?
7 A. I am submitting this testimony on behalf of Indiana-American Water Company (“IAWC”
8 or the “Company”), a wholly-owned subsidiary of American Water Works Company Inc.
9 (“AWK”).
10 Q. Please describe your background and professional experience in the energy and
11 utility industries.
12 A. I hold a Bachelor’s degree in Economics and Finance from Simmons College and a
13 Master’s degree in Economics from Boston University, with more than 20 years of
14 experience consulting to the energy industry. I have advised numerous energy and utility
15 clients on a wide range of financial and economic issues with primary concentrations in
16 valuation and utility rate matters. Many of these assignments have included the
17 determination of the cost of capital for valuation and ratemaking purposes. My
18 qualifications and testimony listing are presented in more detail in Appendix A.
Bulkley - 1
1 Q. Please describe Concentric’s activities in energy and utility engagements.
2 A. Concentric provides financial and economic advisory services to many and various
3 energy and utility clients across North America. Our regulatory, economic, and market
4 analysis services include utility ratemaking and regulatory advisory services; energy
5 market assessments; market entry and exit analysis; corporate and business unit strategy
6 development; demand forecasting; resource planning; and energy contract negotiations.
7 Our financial advisory activities include buy- and sell-side merger, acquisition, and
8 divestiture assignments; due diligence and valuation assignments; project and corporate
9 finance services; and transaction support services. In addition, we provide litigation
10 support services on a wide range of financial and economic issues on behalf of clients
11 throughout North America.
12
13 II. PURPOSE AND OVERVIEW OF TESTIMONY
14 Q. What is the purpose of your Direct Testimony?
15 A. The purpose of my Direct Testimony is to present evidence and provide a
16 recommendation regarding IAWC’s authorized return on equity (“ROE” or “cost of
17 equity”) and to assess the reasonableness of its proposed capital structure for ratemaking
18 purposes. I will also support IAWC’s fair value rate base.
19 Q. Please identify the attachments you will be sponsoring and for which you will be
20 providing testimony.
21 A. I am sponsoring the following attachments:
Bulkley - 2
1 - Attachment AEB-1 (Constant Growth DCF Analysis)
2 - Attachment AEB-2 (Projected DCF Analysis)
3 - Attachment AEB-3 (Value Line ROE Projections)
4 - Attachment AEB-4 (Betas)
5 - Attachment AEB-5 (S&P 500 DCF)
6 - Attachment AEB-6 (CAPM Analysis including AWK)
7 - Attachment AEB-7 (CAPM Analysis excluding AWK)
8 - Attachment AEB-8 (CAPM Analysis excluding CTWS and SJW)
9 - Attachment AEB-9 (Capital Expenditure Analysis)
10 - Attachment AEB-10 (Regulatory Risk Analysis)
11 - Attachment AEB-11 (Capital Structure Analysis)
12 - Attachment AEB-12 (Fair Value Rate Base)
13 - Attachment AEB-13 (Rate of Return Summary)
14
15 Q. Were each of Attachments AEB-1 through AEB-13 prepared by you or under your
16 direction and supervision?
17 A. Yes.
18 Q. Please provide a brief overview of the analyses that led to your ROE
19 recommendation.
20 A. In developing my ROE recommendation, I applied the Constant Growth Discounted Cash
21 Flow (“DCF”) model and the Capital Asset Pricing Model (“CAPM”). In addition to
Bulkley - 3
1 these analyses, I also considered the Value Line projected ROEs for the proxy group
2 companies, and a Constant Growth DCF analysis based on projected dividend yields and
3 share prices. My ROE recommendation also considers the following factors: (1) the risk
4 associated with IAWC’s capital expenditure program relative to the proxy group
5 companies; (2) the risk associated with variations in volume/demand and the resulting
6 effect on IAWC’s revenues and cash flows; and (3) the test year convention used to set
7 rates for IAWC. Although I did not make any specific adjustments to my ROE estimates
8 for the foregoing factors, I considered each of them when determining where the
9 Company’s ROE should fall within the range of analytical results. Finally, I compared
10 IAWC’s proposed capital structure to the actual capital structures of the proxy group
11 companies.
12 Q. Please summarize your analytical results.
13 A. My analytical results are summarized in Table 1.
Bulkley - 4
1 Table 1: Summary of Cost of Equity Results
Forward-Looking CAPM Results 2018-2019 2020-2024 Current Risk- Projected Risk- Projected Risk- Mean Free Rate Free Rate Free Rate Result (3.14%) (3.54%) (4.20%) Including AWK1
Bloomberg Beta 12.55% 12.65% 12.81% 12.67%
Value Line Beta 12.20% 12.31% 12.50% 12.34%
Excluding AWK2 Bloomberg Beta 12.61% 12.71% 12.87% 12.73%
Value Line Beta 12.34% 12.44% 12.62% 12.47%
Excluding CTWS and SJW3,4 Bloomberg Beta 13.43% 13.50% 13.62% 13.51%
Value Line Beta 12.41% 12.52% 12.69% 12.54%
2
1 See Attachment AEB-6. 2 See Attachment AEB-7. 3 See Attachment AEB-8. 4 As discussed later in my testimony, SJW Group (SJW) and Connecticut Water Service, Inc. (CTWS) announced their merger in March 2018. I have conducted my analysis with and without them as a part of the proxy group.
Bulkley - 5
1 Table 1: Summary of Cost of Equity Results (cont’d)
Mean Low Mean Mean High Constant Growth DCF – 30 Day Average5 Including AWK 8.54% 9.38% 11.54% Excluding AWK 8.26% 9.15% 11.00% Excluding SJW and CTWS 8.97% 9.24% 11.39% Constant Growth DCF – Projected DCF Model 2021-20236
Mean Low Mean Mean High Including AWK 8.32% 9.95% 12.11% Excluding AWK 8.00% 9.72% 11.57% Excluding SJW and CTWS 8.37% 9.83% 12.00% Value Line Projected Equity Returns 2021-20237 Low Mean High Including AWK 10.50% 12.50% 14.00% Excluding AWK 11.00% 12.79% 14.00% Excluding SJW and CTWS 10.50% 12.50% 14.00% 2
3 As shown in Attachment AEB-1, the DCF model is producing individual company results
4 as low as 4.87 percent, or 30 basis points lower than IAWC’s embedded cost of long-
5 term debt of 5.17 percent for the test year ending April 30, 2020.8 This result is
6 inconsistent with the relative risk of owning common equity or debt instruments.
7 Because shareholders are the residual claimants on the firm’s earnings and assets, the
8 return to equity holders must be higher than the return to bond holders. As discussed in
9 more detail in Section IV of my Direct Testimony, I applied a minimum threshold to the
10 DCF results of 7.00 percent, which results in an equity risk premium of 183 basis points
5 See Attachment AEB-1. 6 See Attachment AEB-2. 7 Source: Value Line Investment Survey, Water Utilities, April 13, 2018. 8 Source: Company provided data.
Bulkley - 6
1 above IAWC’s current cost of long-term debt.9 The results summarized in Table 1 reflect
2 this lower bound.
3 As discussed in more detail in Section IV of my Direct Testimony, there are concerns
4 among investors and regulators that the DCF model is not producing reasonable results at
5 this time due to anomalous conditions in capital markets. My ROE recommendation also
6 considers the results of a forward-looking CAPM analysis and the projected ROEs for the
7 water utilities in the proxy group, as published by Value Line. In addition, I consider
8 company-specific risk factors and current and prospective capital market conditions.
9 Q. What is your conclusion regarding the appropriate authorized ROE for IAWC in
10 this proceeding?
11 A. A reasonable range of ROE estimates for IAWC is from 10.00 percent to 10.80 percent.
12 Considering the business and financial risk factors facing IAWC, I believe that an ROE
13 of 10.80 percent is reasonable and appropriate. The required ROE should be a forward-
14 looking estimate; therefore, the analyses supporting my recommendation rely on forward-
15 looking inputs and assumptions (e.g., projected analyst growth rates in the DCF model,
16 forecasted risk-free rate and Market Risk Premium in the CAPM analysis, etc.). I also
17 take into consideration capital market conditions, including the effect of the current low
18 interest rate environment on utility stock valuations and dividend yields, and the market’s
19 expectation for higher interest rates.
9 The lower bound is based on a recent position established by the Minnesota Department of Commerce in Docket No. E017/GR-15-1033, In the Matter of the Application of Otter Tail Power Company for Authority to Increase Rates for Electric Service in the State of Minnesota (August 16, 2016), at 11.
Bulkley - 7
1 Q. How is the remainder of your Direct Testimony organized?
2 A. The remainder of my Direct Testimony is organized in seven sections. Section III
3 reviews the regulatory guidelines pertinent to the development of the cost of capital.
4 Section IV discusses the current and prospective capital market conditions and the effect
5 of those conditions on IAWC’s cost of equity. Section V explains my selection of a
6 proxy group of water utilities. Section VI describes my analyses and the analytical basis
7 for the recommendation of the appropriate ROE for IAWC. Section VII provides a
8 discussion of specific business risks that have a direct bearing on the Company’s
9 authorized ROE in this case. Section VIII provides an assessment of the reasonableness
10 of IAWC’s proposed capital structure relative to the proxy group. Section IX presents
11 my conclusions and recommendations on the cost of equity and capital structure. Section
12 X provides an assessment of the fair value rate base and fair value return increment.
13 III. REGULATORY GUIDELINES
14 Q. Please describe the principles that guide the establishment of the cost of capital for a
15 regulated utility.
16 A. The United States Supreme Court’s Hope and Bluefield decisions established the
17 standards for determining the fairness or reasonableness of a utility’s authorized ROE.
18 Among the standards established by the Court in those cases are: (1) consistency with
19 other businesses having similar or comparable risks; (2) adequacy of the return to support
20 credit quality and access to capital; and (3) the principle that the specific means of
Bulkley - 8
1 arriving at a fair return are not important, only that the end result leads to just and
2 reasonable rates.10
3 Q. Has the Indiana Utility Regulatory Commission (“Commission”) provided similar
4 guidance in establishing the appropriate return on common equity?
5 A. Yes. The Commission follows the precedents of Hope and Bluefield and acknowledges
6 that utility investors are entitled to a fair and reasonable return. For example, in a recent
7 Indianapolis Power & Light decision, the Commission stated: “The rate of return for a
8 utility must be comparable to the return on investments in other enterprises having
9 corresponding risks, sufficient to assure confidence in the financial integrity of the utility,
10 maintain support of the utility's credit, and attract capital.”11
11 Q. Why is it important for a utility to be allowed the opportunity to earn a return that
12 is adequate to attract capital at reasonable terms?
13 A. A return that is adequate to attract capital at reasonable terms enables IAWC to
14 continuing providing safe, reliable water distribution service while maintaining its
15 financial integrity. That return should be commensurate with returns expected elsewhere
16 in the market for investments of equivalent risk. If it is not, debt and equity investors will
17 seek alternative investment opportunities for which the expected return reflects the
18 perceived risks, thereby inhibiting IAWC’s ability to attract capital at reasonable cost.
19 Q. What are your conclusions regarding regulatory guidelines?
20 A. The ratemaking process is premised on the principle that, in order for investors and
21 companies to commit the capital needed to provide safe and reliable utility services, a
10 Bluefield Water Works v. Public Service Comm’n, 262 U.S. 679, 692-93 (1923); Federal Power Comm’n v. Hope Natural Gas, 320 U.S. 591, 603 (1944). 11 Indianapolis Power & Light, Cause No. 44576, Order of the Commission issued March 16, 2016, at 41.
Bulkley - 9
1 utility must have the opportunity to recover the return of, and the market-required return
2 on, its invested capital. Because utility operations are capital-intensive, regulatory
3 decisions should enable the utility to attract capital at reasonable terms; doing so balances
4 the long-term interests of the utility and its customers.
5 The financial community carefully monitors the current and expected financial condition
6 of utility companies, and the regulatory framework within which they operate. In that
7 respect, the regulatory framework is one of the most important factors in both debt and
8 equity investors’ assessments of risk. The Commission’s order in this case, therefore,
9 should establish rates that provide IAWC with the opportunity to earn a ROE that is: (1)
10 adequate to attract capital at reasonable terms; (2) sufficient to ensure its financial
11 integrity; and (3) commensurate with returns on investments in enterprises with similar
12 risk. To the extent the Company is authorized the opportunity to earn its market-based
13 cost of capital, the proper balance is achieved between customers’ and shareholders’
14 interests.
15
16 IV. CAPITAL MARKET CONDITIONS
17 Q. Why is it important to analyze capital market conditions?
18 A. The ROE estimation models rely on market data that are either specific to the proxy
19 group, in the case of the DCF model, or the expectations of market risk, in the case of the
20 CAPM. The results of the ROE estimation models can be affected by prevailing market
21 conditions at the time the analysis is performed. Because the ROE established in a rate
22 proceeding is intended to be forward-looking, the analyst uses current and projected
23 market data, specifically stock prices, dividends, growth rates and interest rates in the
Bulkley - 10
1 ROE estimation models to estimate the required return for the subject company. As
2 discussed in the remainder of this section, analysts and regulatory commissions have
3 concluded that current market conditions are anomalous. These conditions have affected
4 the results of the ROE estimation models. As a result, it is important to consider the
5 effect of these conditions on the ROE estimation models when determining the
6 appropriate range and recommended ROE for a future period. If investors do not expect
7 current market conditions to be sustained in the future, it is possible that the ROE
8 estimation models will not provide an accurate estimate of investors’ required return
9 during that rate period. Therefore, it is very important to consider projected market data
10 to estimate the return for that forward-looking period.
11 Q. What factors are affecting the cost of equity for regulated utilities in the current and
12 prospective capital markets?
13 A. The cost of equity for regulated utility companies is being affected by several factors in
14 the current and prospective capital markets, including: (1) the current low interest rate
15 environment and the corresponding effect on valuations and dividend yields of utility
16 stocks relative to historical levels; (2) the market’s expectation for higher interest rates;
17 and (3) recent Federal tax reform. In this section, I discuss each of these factors and how
18 it affects the models used to estimate the cost of equity for regulated utilities.
19
Bulkley - 11
1 A. The Effect of Market Conditions on Valuations
2 Q. How has the Federal Reserve’s monetary policy affected capital markets in recent
3 years?
4 A. Extraordinary and persistent federal intervention in capital markets artificially lowered
5 government bond yields after the Great Recession of 2008-09, as the Federal Open
6 Market Committee (“FOMC”) used monetary policy (both reductions in short-term
7 interest rates and purchases of Treasury bonds and mortgage-backed securities) to
8 stimulate the U.S. economy. As a result of very low returns on short-term government
9 bonds, yield-seeking investors have been forced into longer-term instruments, bidding up
10 prices and reducing yields on those investments. As investors moved along the risk
11 spectrum in search of yields that meet their return requirements, there has been increased
12 demand for dividend-paying equities, such as water utility stocks.
13 Q. How has the period of abnormally low interest rates affected the valuations and
14 dividend yields of water utility shares?
15 A. The Federal Reserve’s monetary policy has caused investors to seek alternatives to the
16 historically low interest rates available on Treasury bonds. As a result of this search for
17 higher yield, the share prices for many common stocks, especially dividend-paying stocks
18 such as utilities, have been driven higher while the dividend yields (which are computed
19 by dividing the dividend payment by the stock price) have decreased to levels well below
20 the historical average. As shown in Chart 1, yields on 30-year Treasury bonds have
21 declined by 101 basis points since 2009 when the Federal Reserve began to actively
22 manage interest rates as a result of the Great Recession, while dividend yields on water
23 utilities have declined by 215 basis points over this period. However, in 2018, both
Bulkley - 12
1 Treasury bond yields and dividend yields have increased modestly. The yields on 30-
2 year Treasury bonds are currently at 3.06 percent and dividend yields for water utilities
3 have increased to 2.08 percent. It is important to note that in spite of slight increases in
4 2018, the dividend yields are still well below their historical average.
5 Chart 1: Dividend Yields for Water Utility Stocks12
6
7 Q. How are higher stock valuations and lower dividend yields for utility companies
8 affecting the results of the DCF model?
9 A. During periods when stock valuations and dividend yields are not being distorted by the
10 level of interest rates, the DCF model adequately reflects market conditions and investor
11 expectations. However, in the current market environment, the DCF model results are
12 distorted by the historically low level of interest rates and the higher valuation of utility
13 stocks. Value Line recently commented on the high valuations of water utilities:
14 We caution investors that these stocks may not be as safe as they have 15 been in the past. That’s because the larger utilities have seen their stocks
12 Source: SNL Financial. Figure 1 includes 2018 data through May 31, 2018.
Bulkley - 13
1 rise to near all time highs. For example, the current yield on this group’s 2 stocks is only about equal to the Value Line median. Also, though inflation 3 remains tame, the Federal Reserve has indicated that there will probably 4 be several more interest rate hikes next year. This could make bonds more 5 attractive to income-oriented investors. In any case, subscribers should be 6 aware that these stocks may carry more risk than their Beta co-efficients 7 and Safety ranks indicate.13
8 The most recent Value Line report notes that higher interest rates on Treasury bonds are 9 creating competition for utility stock investments.
10 For those seeking income-generating securities, there is typically a choice 11 to be made between a high-yielding equity or a bond. Due to massive 12 intervention by monetary authorities, rates on short term government debt 13 had declined to historic lows. The Federal Reserve has allowed interest 14 rates to increase by over 100 basis points for short term treasuries. This 15 makes the notes much more competitive with the 2.0% yield on the typical 16 stock. For example, the one- and two-year treasury notes are now yielding 17 2.05% and 2.30%, respectively. Thus, investors can get the same current 18 income for a lot less risk. 14
19
20 As noted by Value Line, over the last few years, utility stocks have experienced high
21 valuations and low dividend yields; however, those dynamics are changing. Value Line
22 recognizes that as interest rates increase, bonds become a substitute for utility stock. This
23 implies that the ROE calculated using historical market data in the DCF model is
24 understated.
25
26 Q. How has the Standard & Poor’s Utilities Index responded to recent changes in
27 market conditions?
28 A. Chart 2 compares the Standard & Poor’s (“S&P”) Utilities index (which includes AWK,
29 the parent company of IAWC) to the yield on the 30-year Treasury bond from 2007 to
13 Value Line Investment Survey, Water Utility Industry, January 12, 2018, at 1783. 14 Value Line Investment Survey, Water Utility Industry, April 13, 2018 at 1783.
Bulkley - 14
1 2018. As shown in Chart 2, the S&P Utilities index increased steadily from the
2 beginning of 2009 through early November 2017, as yields on 30-year Treasury bonds
3 declined in response to accommodative federal monetary policy.
4 Chart 2: S&P Utilities Index and U.S. Treasury Bond Yields - 2007 – 2018
5
6 Recent market conditions, however, have been considerably different. In response to
7 rising interest rates and Federal tax reform since the House of Representatives approved
8 the initial version of the tax reform legislation on November 16, 2017, the S&P Utilities
9 Index has declined by approximately 11 percent, as yields on 30-year Treasury bonds
10 have increased from 2.81 percent to 3.09 percent.15 This change in utility stock
15 Comparison as of June 13, 2018.
Bulkley - 15
1 valuations affects the dividend yield in the DCF model. Furthermore, dividend yields
2 that are based on the historical higher stock prices are likely understating the forward-
3 looking cost of equity for utility companies. The effect of tax reform in determining the
4 cost of equity for IAWC is discussed in more detail later in my testimony.
5 Chart 3: S&P Utilities Index and U.S. Treasury Bond Yields – 06/2017 – 05/201816
6
7 Q. How have regulators responded to the historically low dividend yields for utility
8 companies and the corresponding effect on the DCF model?
9 A. Understanding the important role that dividend yields play in the DCF model, the Federal
10 Energy Regulatory Commission (“FERC”) has determined that anomalous capital market
11 conditions have caused the DCF model to understate equity costs for regulated utilities at
12 this time. In Opinion No. 531, the FERC noted:
16 Source: SNL Financial, as of May 31, 2018.
Bulkley - 16
1 There is ‘model risk’ associated with the excessive reliance or mechanical 2 application of a model when the surrounding conditions are outside of the 3 normal range. ‘Model risk’ is the risk that a theoretical model that is used 4 to value real world transactions fails to predict or represent the real 5 phenomenon that is being modeled.17
6 In Opinion No. 531, the FERC noted that the low interest rates and bond yields that
7 persisted throughout the analytical period that was relied on (study period) resulted in
8 anomalous market conditions and recognized the need to move away from the midpoint
9 of the DCF analysis. In that case, the FERC relied on the CAPM and other risk premium
10 methodologies to inform its judgment to set the return above the midpoint of the DCF
11 results.
12 In Opinion No. 551, issued in September 2016, the FERC recognized that those
13 anomalous market conditions continued into the study period and again concluded that it
14 was necessary to rely on ROE estimation methodologies other than the DCF model to set
15 the appropriate ROE:
16 Though the Commission noted certain economic conditions in Opinion 17 No. 531, the principle argument was based on low interest rates and bond 18 yields, conditions that persisted throughout the study period. 19 Consequently, we find that capital market conditions are still anomalous 20 as described above…18
21 **** 22 Because the evidence in this proceeding indicates that capital markets 23 continue to reflect the type of unusual conditions that the Commission 24 identified in Opinion No. 531, we remain concerned that a mechanical 25 application of the DCF methodology would result in a return inconsistent 26 with Hope and Bluefield.19
27 **** 28 As the Commission found in Opinion No. 531, under these circumstances, 29 we have less confidence that the midpoint of the zone of reasonableness in
17 FERC Docket No. EL11-66-001, Opinion No. 531, footnote 286. While Opinion No. 531 has been vacated and remanded to the FERC by the D.C. Circuit Court, the Court’s decision did not question the finding by the FERC that capital market conditions were anomalous. 18 FERC Docket No. EL14-12-002, Opinion No. 551, at para 121. 19 Id., at para 122.
Bulkley - 17
1 this proceeding accurately reflects the equity returns necessary to meet the 2 Hope and Bluefield capital attraction standards. We therefore find it 3 necessary and reasonable to consider additional record evidence, including 4 evidence of alternative methodologies…20
5 For the time-frame used in my DCF analysis that relies on historical dividend yields,
6 yields on 10-year Treasury bonds were almost always below 3.00 percent, which is the
7 level that FERC determined represents “anomalous” capital market conditions.
8
9 Q. Have state regulatory commissions also responded to the effect of recent market
10 conditions on the results of the ROE estimation models?
11 A. Yes, the Pennsylvania Public Utility Commission (“PPUC”), the Illinois Commerce
12 Commission (“ICC”), and the Massachusetts Department of Public Utilities (“MDPU”)
13 have all considered this in recent decisions. For example, in a 2012 decision for PPL
14 Electric Utilities, while noting that the PPUC has traditionally relied primarily on the
15 DCF method to estimate the cost of equity for regulated utilities, the PPUC recognized
16 that market conditions were causing the DCF model to produce results that were much
17 lower than other models such as the CAPM and Bond Yield Plus Risk Premium. The
18 PPUC’s Order explained:
19 Sole reliance on one methodology without checking the validity of the 20 results of that methodology with other cost of equity analyses does not 21 always lend itself to responsible ratemaking. We conclude that 22 methodologies other than the DCF can be used as a check upon the 23 reasonableness of the DCF derived equity return calculation.21
24 The PPUC ultimately concluded:
20 Id. 21 Pennsylvania Public Utility Commission, PPL Electric Utilities, R-2012-2290597, meeting held December 5, 2012, at 80.
Bulkley - 18
1 As such, where evidence based on the CAPM and RP methods suggest 2 that the DCF-only results may understate the utility’s current cost of 3 equity capital, we will give consideration to those other methods, to some 4 degree, in determining the appropriate range of reasonableness for our 5 equity return determination.22
6 In a recent ICC case, Staff relied on a DCF analysis that resulted in average returns for
7 their proxy groups of 7.24 percent to 7.51 percent. The Company (Illinois-American
8 Water Company) demonstrated that those results were uncharacteristically too low, by
9 comparing the results of Staff’s models to recently authorized ROEs for regulated utilities
10 and the return on the S&P 500.23 The ICC agreed with the Company that Staff's
11 proposed ROE of 8.04 percent was anomalous and recognized that a return that is not
12 competitive will deter investment in Illinois.24 In setting the return in that proceeding, the
13 ICC found that it was necessary to consider other factors beyond the outputs of the
14 financial models, particularly whether the return is sufficient to attract capital, maintain
15 financial integrity, and is commensurate with returns for companies of comparable risk,
16 while balancing the interests of customers and shareholders.25 Finally, in DPU 17-05, the
17 MDPU noted that current Federal monetary policy has pushed Treasury yields to near
18 historic lows. Therefore, the MDPU found that it is appropriate to use prospective
19 interest rate expectations in the CAPM.26
20 Current federal monetary policy that is intended to stimulate the economy 21 has pushed treasury yields to near historic lows. Consequently, the 22 Department has found that a CAPM analysis based on current treasury 23 yields may tend to underestimate the risk-free rate over the long term and, 24 thereby, understate the required ROE. The CAPM is based on investor
22 Id., at 81. 23 State of Illinois Commerce Commission, Docket No. 16-0093, Illinois-American Water Company Initial Brief, August 31, 2016, at 10. 24 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. 25 State of Illinois Commerce Commission Decision, Docket No. 16-0093, Illinois-American Water Company, 2016 WL 7325212 (2016), at 55. 26 D.P.U. 17-05, at 693.
Bulkley - 19
1 expectations and, therefore, it is appropriate to use a prospective measure 2 for the risk-free rate component. The Department has found that Blue Chip 3 Financial Forecasts is widely relied on by investors and provides a useful 4 proxy for investor expectations for the risk-free rate.27
5
6 B. The Current and Expected Interest Rate Environment
7 Q. What evidence is there that the interest rate environment is shifting?
8 A. Based on stronger conditions in employment markets, a relatively stable inflation rate,
9 steady economic growth, and increased household spending, the Federal Reserve raised
10 the short-term borrowing rate by 25 basis points at both the March and June 2018
11 meetings. Since December 2015, the Federal Reserve has increased interest rates seven
12 times, bringing the federal funds rate to the range of 1.75 percent to 2.00 percent. As the
13 economy continues to expand, the Federal Reserve is expected to continue increasing
14 short-term interest rates to sustain the desired balance between unemployment and
15 consumer price inflation.28 The Federal Reserve has indicated that it intends to raise
16 short-term rates twice more in 2018.29
17 Furthermore, in October 2017, the FOMC started reducing the size of the Fed’s $4.5
18 trillion bond portfolio by no longer reinvesting the proceeds of the bonds it holds. In
19 response to the Great Recession, the Federal Reserve pursued a policy known as
20 “Quantitative Easing,” in which it systematically purchased mortgage-backed securities
21 and long-term Treasury bonds to provide liquidity in financial markets and drive down
27 D.P.U. 17-05 Petition of NSTAR Electric Company and Western Massachusetts Electric Company, each doing business as Eversource Energy, Pursuant to G.L. c. 164, § 94 and 220 CMR 5.00 et seq., for Approval of General Increases in Base Distribution Rates for Electric Service and a Performance Based Ratemaking Mechanism, November 30, 2017, at 693. 28 FOMC, Federal Reserve press release, June 13, 2018. 29 Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, June 2018.
Bulkley - 20
1 yields on long-term government bonds. Although the Federal Reserve discontinued the
2 Quantitative Easing program in October 2014, it continued to reinvest the proceeds from
3 the bonds it holds. Under the new policy, the FOMC intends to gradually reduce the
4 Federal Reserve’s securities holdings by $10 billion per month initially, ramping up to
5 $50 billion per month by the end of the first twelve months.30
6 The Federal Reserve’s announced unwinding plan provides additional support for
7 investors’ view that long-term interest rates will increase, as the Federal Reserve
8 gradually reverses the Quantitative Easing program that reduced those long-term rates.
9 Furthermore, several analysts have recently suggested that the Federal Reserve’s plan
10 could cause sector rotation, as investors shift from utilities and telecom stocks to shares
11 of banks and other sectors that benefit from rising interest rates.31
12
13 Q. What is the financial market’s perspective on the future path of interest rates?
14 A. According to the May 2018 issue of Blue Chip Financial Forecasts, in response to the
15 question regarding the total increase in interest rates by the Federal Reserve in 2018, 60
16 percent of those surveyed expect an increase of 100 basis points, 38 percent expect an
17 increase of 75 basis points, and 2 percent expect an increase of 50 basis points.32
18 Furthermore, data compiled by CME Group indicates that investors expect a high
19 likelihood that the federal funds rate will increase. Table 1 summarizes the federal funds
20 probabilities developed by CME group. The probability of a rate hike is calculated by
21 adding the probabilities of all target rate levels above the current target rate. The current
30 Federal Reserve press release, Addendum to the Policy Normalization Principles and Plans, June 14, 2017, implemented at FOMC meeting September 20, 2017. 31 Reuters Business News, “Fed meeting could trigger stock sector rotation,” September 15, 2017. 32 Blue Chip Financial Forecasts, Vol. 37, Issue No. 5, May 1, 2018, at 14.
Bulkley - 21
1 target federal funds rate of 175 to 200 bps was set at the June 2018 FOMC meeting. The
2 target rate before that was 150 to 175 bps, set at the March 2018 meeting. The market
3 expects further rate increases in 2018, shown by high expectations for target federal funds
4 rates above the 175-200 bps range beginning in September 2018.
5
Bulkley - 22
1 Table 2: Investor Expectations of Future Federal Funds Rate Increases33
Meeting Probabilities Meeting 0-25 25-50 50-75 75-100 100-125 125-150 150-175 175-200 200-225 225-250 250-275 275-300 Date/(bps) 8/1/2018 0% 0% 0% 0% 0% 98.0% 2.0% 0.0% 9/26/2018 0% 0% 0% 0% 0% 0% 0% 13.3% 84.9% 1.7% 0.0% 0.0% 11/8/2018 0% 0% 0% 0% 0% 0% 0% 12.8% 82.1% 5.0% 0.1% 0.0% 12/19/2018 0% 0% 0% 0% 0% 0% 0% 4.6% 38.0% 54.2% 3.2% 0.0% 1/30/2019 0% 0% 0% 0% 0% 0% 0% 4.1% 34.4% 52.4% 8.6% 0.4% 2 3 Q. What effect do rising interest rates have on the cost of equity?
4 A. As interest rates increase, the cost of equity for the proxy companies using the Constant
5 Growth DCF model is likely to be a conservative estimate of investors’ required return
6 because the dividend yield is calculated based on stock prices when interest rates were
7 substantially lower. As such, rising interest rates support the selection of a return toward
8 the upper end of a reasonable range of ROE estimates that are based on current market
9 data. My CAPM analysis includes estimated returns based on near-term projected
10 interest rates, reflecting investors’ expectations of market conditions over the period that
11 the rates that are determined in this case will be set.
12 C. Effect of Tax Reform on IAWC
13 Q. Are there other market conditions that should be considered in determining the cost
14 of equity for IAWC?
15 A. Yes. The effect of the recently passed Tax Cuts and Jobs Act (“TCJA”) should also be
16 considered in the determination of the cost of equity. The credit rating agencies have
17 commented on the effect of the TCJA on regulated utilities. In summary, the TCJA is
18 expected to reduce utility revenues due to the lower federal income taxes and the
19 requirement to return excess accumulated deferred income taxes (“ADIT”). This change
33 CME Group; FedWatch tool as of June 15, 2018.
Bulkley - 23
1 in revenue is expected to reduce funds from operations (“FFO”) metrics across the sector,
2 and absent regulatory mitigation strategies, is expected to lead to weaker credit metrics
3 and negative ratings actions for some utilities.34
4 Q. Have credit or equity analysts commented on the effect of the TCJA on utilities?
5 A. Yes. Moody’s Investors Services (“Moody’s”) provided a summary of the implications
6 of the TCJA for investor-owned utilities. In that summary, Moody’s indicated that while
7 the TCJA was credit positive for many sectors, it has an overall negative credit impact on
8 regulated operating companies of utilities and their holding companies due to the
9 reduction in cash flow metrics that results from the change in the federal tax rate and the
10 loss of bonus depreciation.
11 Moody’s acknowledged that the rates that regulators allow utilities to charge customers is
12 based on a cost-plus model, with tax expense being one of the pass-through items.
13 Utilities will collect less taxes at the lower rate, reducing revenue. While the taxes are
14 ultimately paid out as an expense, under the new law utilities lose the timing benefit,
15 reducing cash that may have been carried over a number of years. The lower tax rate
16 combined with the loss of bonus depreciation will have a negative effect on utility cash
17 flows and will ultimately negatively impact the utilities’ ability to fund ongoing
18 operations and capital improvement programs.
19 Q. How has Moody’s responded to the increased risk for utilities resulting from the
20 TCJA?
21 A. Moody’s recently issued a report changing the rating outlook for several regulated
22 utilities from Stable to Negative. Moody’s noted that the rating change affected
34 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector”, January 24, 2018.
Bulkley - 24
1 companies with limited cushion in their ratings for deterioration in financial performance.
2 The rating for AWK, the parent company of IAWC, was reduced from Stable to Negative
3 in this Moody’s report.35
4
5 Q. What does it mean for Moody’s to downgrade a credit outlook?
6 A. A Moody’s rating outlook is an opinion regarding the likely rating direction over what it
7 refers to as “the medium term.” A Stable outlook indicates a low likelihood of a rating
8 change in the medium term. A Negative outlook indicates a higher likelihood of a rating
9 change over the medium term. While Moody’s indicates that the time period for
10 changing a rating subsequent to a change in the outlook form Stable will vary, on average
11 Moody’s indicates that a rating change will follow within a year of a change in outlook.36
12 Q. Have other rating agencies commented on the effect of the TCJA on credit ratings?
13 A. FitchRatings (“Fitch”) has indicated that any ratings actions will be guided by the
14 response of regulators and the management of the utilities. Fitch notes that the solution
15 will depend on the ability to manage the cash flow implications of the TCJA. Fitch offers
16 several solutions to provide rate stability and moderate changes to cash flow in the near
17 term, including increasing the authorized ROE and/or equity ratio as measures that can be
18 implemented.37
35 Moody’s Investors Services, Global Credit Research, Rating Action: Moody’s changes outlooks on 25 US regulated utilities primarily impacted by tax reform, January 19, 2018. 36 Moody’s Investors Service Rating Symbols and Definitions, July 2017, at 27. 37 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector”, January 24, 2018.
Bulkley - 25
1 Q. What conclusions do you draw from your analysis of capital market conditions?
2 A. My first conclusion is that the ROE estimation models have been affected by the
3 anomalous market conditions that have resulted from the Federal Reserve’s extraordinary
4 accommodative monetary policy since the end of the recession. My second conclusion,
5 which is equally important, is that the current anomalous market conditions are not
6 expected to persist as the Federal Reserve continues to normalize monetary policy. As a
7 result, the current market conditions are not reflective of the market conditions that will
8 be present when the rates for IAWC will be in effect. As discussed in more detail above,
9 other state and federal regulators have all considered this issue in recent decisions. In
10 each case, the regulatory commission tried to account for changing capital market
11 conditions by placing additional weight on models that include forward-looking inputs.
12 Therefore, I have considered alternative models with forward-looking inputs such as the
13 projected DCF model and the CAPM using forward-looking Treasury yields and a
14 forward-looking market risk premium when developing my estimate of the cost of equity
15 for IAWC. Consequently, my recommended ROE for IAWC takes into consideration the
16 likelihood that capital costs will continue to increase in the near to intermediate term or
17 the period during which IAWC’s rates will be in effect.
18 Finally, without adequate regulatory support, the TCJA will have a negative effect on
19 utility cash flows, which increases investor risk expectations for utilities. The recent
20 decline in utility stock prices since the initial legislation passed demonstrates investors’
21 perception of the increased risk in utility stocks. I have considered each of these factors
22 in establishing my recommended ROE.
23
Bulkley - 26
1 V. PROXY GROUP SELECTION
2 Q. Why have you used a group of proxy companies to estimate the cost of equity for
3 IAWC?
4 A. In this proceeding, I am estimating the cost of equity for IAWC, which is a rate-regulated
5 subsidiary of AWK. Since the ROE is a market-based concept, and given the fact that
6 IAWC’s operations do not make up the entirety of a publicly-traded entity, it is necessary
7 to establish a group of companies that is both publicly-traded and comparable to the
8 Company in certain fundamental business and financial respects to serve as its “proxy”
9 for purposes of the ROE estimation process. The proxy companies used in my analyses
10 all possess a set of operating and financial risk characteristics that are substantially
11 comparable to IAWC, and, therefore, provide a reasonable basis for deriving the
12 appropriate ROE.
13 Q. Please provide a brief profile of IAWC.
14 A. IAWC, a wholly-owned subsidiary of AWK, provides water distribution service to
15 approximately 302,000 customers and wastewater services to approximately 500
16 customers in Indiana.38 The Company generally accesses debt markets through American
17 Water Capital Corp. (“AWCC”). The current credit ratings on senior unsecured debt for
18 AWK and AWCC are as follows: (1) S&P - A (Outlook: Stable); and (2) Moody’s - A3
19 (Outlook: Negative).39
38 Company provided data. 39 S&P Global Ratings, “Summary: American Water Works Company, Inc.,” August 10, 2016, and Moody’s Investors Service, Credit Opinion “American Water Works, Company, Inc.,” August 10, 2016,.
Bulkley - 27
1 Q. How did you select the companies in your proxy group?
2 A. I began with the group of nine U.S. utilities that Value Line classifies as Water Utilities,
3 and I simultaneously applied the following screening criteria to select companies that:
4 pay consistent quarterly cash dividends because companies that do not cannot be
5 analyzed using the Constant Growth DCF model;
6 have positive long-term earnings growth forecasts from at least two sources;
7 have investment grade long-term issuer ratings from either S&P or Moody’s; and
8 derive more than 80 percent of their total operating income from regulated water
9 operations.
10 Q. Did you include AWK in your analysis?
11 A. While my general practice is to exclude the subject company, or its parent holding
12 company, from the proxy group, given the relatively small number of companies
13 classified by Value Line as Water Utilities and given the fact that Indiana is one of
14 sixteen states served by AWK, I have presented my ROE results both including and
15 excluding AWK.
16 Q. What is the composition of your proxy group?
17 A. The screening criteria discussed above resulted in a proxy group consisting of the
18 companies in Table 2.
Bulkley - 28
1 Table 2: Proxy Group
Company Ticker American States Water Company AWR American Water Works Company, Inc. AWK Aqua American, Inc. WTR California Water Service Group CWT Connecticut Water Service Inc. CTWS Middlesex Water Company MSEX SJW Corporation SJW York Water Company YORW 2
3 Q. Did you consider a different proxy group than the one mentioned above?
4 A. Yes. I also conducted a separate analysis by excluding SJW Group (“SJW”) and
5 Connecticut Water Service Inc (“CWTS”) from the proxy group. SJW and CTWS
6 announced their merger on March 15, 2018. While my general practice is to exclude any
7 companies subject to merger and acquisition activity from the proxy group, given the
8 relatively small number of companies classified by Value Line as Water Utilities, I have
9 presented my ROE results both including and excluding SJW and CTWS.
10
11 VI. COST OF EQUITY ESTIMATION
12 Q. Please briefly discuss the ROE in the context of the regulated rate of return
13 (“ROR”).
14 A. The overall ROR for a regulated utility is based on its weighted average cost of capital, in
15 which the costs of the individual sources of capital are weighted by their respective book
16 values. While the costs of debt and preferred stock can be directly observed, the cost of
Bulkley - 29
1 equity is market-based and, therefore, must be estimated based on observable market
2 data.
3 Q. How is the required ROE determined?
4 A. The required ROE is estimated by using multiple analytical techniques that rely on
5 market-based data to quantify investor expectations regarding required equity returns,
6 adjusted for certain incremental costs and risks. Quantitative models produce a range of
7 reasonable results from which the market-required ROE is selected. That selection must
8 be based on a comprehensive review of relevant data and information, and does not
9 necessarily lend itself to a strict mathematical solution. The key consideration in
10 determining the cost of equity is to ensure that the methodologies employed reasonably
11 reflect investors’ views of the financial markets in general and of the subject company (in
12 the context of the proxy group) in particular.
13 Q. What methods did you use to estimate IAWC’s cost of equity?
14 A. I considered the results of the Constant Growth DCF model and the CAPM. I also
15 considered the Value Line projected ROEs for the proxy group companies, and the results
16 of a forward-looking DCF analysis using projected dividend yields and projected share
17 prices published by Value Line. I believe that a reasonable ROE estimate considers
18 alternative methodologies, observable market data, and the reasonableness of their
19 individual and collective results.
20 Q. Why is it important to use more than one analytical approach?
21 A. It is important to use more than one analytical approach because the cost of equity is not
22 directly observable; therefore, it must be estimated based on both quantitative and
Bulkley - 30
1 qualitative information. In estimating the cost of equity, analysts and investors are
2 inclined to gather and evaluate as much relevant data as can be reasonably analyzed. A
3 number of models have been developed to estimate the cost of equity. Analysts and
4 academics understand that ROE models are tools to be used in the ROE estimation
5 process and that strict adherence to any single approach, or the results of any single
6 approach, can lead to flawed or irrelevant conclusions. Consistent with the Hope finding,
7 it is the analytical result, not the methodology, which is controlling in arriving at ROE
8 determinations.
9 Q. Has the Commission also recognized the benefits of using more than one model to
10 estimate the cost of equity?
11 A. Yes. In a recent Indianapolis Power & Light decision, the Commission explained:
12 The Commission recognizes that the cost of equity cannot be precisely 13 calculated and estimating it requires the use of judgment. Due to this lack 14 of precision, the use of multiple methods is desirable because no single 15 method will produce the most reasonable result under all conditions and 16 circumstances.40
17 A. Constant Growth DCF Model
18 Q. Are DCF models widely used to estimate the ROE for regulated utilities?
19 A. Yes. DCF models are widely used in regulatory proceedings and have sound theoretical
20 bases, although neither the DCF model nor any other model can be applied without
21 considerable judgment in the selection of data and the interpretation of results. As
22 discussed in Section IV of my Direct Testimony, analysts are projecting that the currently
23 high stock market valuations and low dividend yields for water utility companies are not
40 Indianapolis Power & Light, Cause No. 44576, Order of the Commission issued March 16, 2016, at 41.
Bulkley - 31
1 sustainable. This is raising concerns among analysts and regulators that the DCF model
2 is understating the cost of equity at this time.
3 Q. Please describe the DCF approach.
4 A. The DCF approach is based on the theory that a stock’s current price represents the
5 present value of all expected future cash flows. In its most general form, the DCF model
6 is expressed as follows:
D1 D2 D P0 2 ... 7 1 k 1 k 1 k [1]
8 Where P0 represents the current stock price, D1…D∞ are all expected future dividends,
9 and k is the discount rate, or required ROE. Equation [1] is a standard present value
10 calculation that can be simplified and rearranged into the following form:
D 1 g k 0 g P 11 0 [2]
12 Equation [2] is often referred to as the Constant Growth DCF model in which the first
13 term is the expected dividend yield and the second term is the expected long-term growth
14 rate.
15 Q. What assumptions are required for the Constant Growth DCF model?
16 A. The Constant Growth DCF model requires the following assumptions: (1) a constant
17 growth rate for earnings and dividends; (2) a stable dividend payout ratio; (3) a constant
18 price-to-earnings (“P/E”) ratio; and (4) a discount rate greater than the expected growth
19 rate. To the extent any of these assumptions is violated, considered judgment and/or
20 specific adjustments should be applied to the results.
Bulkley - 32
1 Q. What market data did you use to calculate the dividend yield in your Constant
2 Growth DCF model?
3 A. The dividend yield in my Constant Growth DCF model is based on the proxy companies’
4 current annual dividend and average closing stock prices over the 30-, 90-, and 180-
5 trading days as of May 31, 2018.
6 Q. Why did you use three averaging periods for stock prices?
7 A. It is important to use an average of trading days to calculate the price term in the DCF
8 model to ensure that the calculated ROE is not skewed by anomalous events that may
9 affect stock prices on any given trading day. The averaging period should be reasonably
10 representative of expected capital market conditions over the long term. In my view, the
11 use of the 30-, 90-, and 180-day averaging periods reasonably balances those
12 considerations.
13 Q. Did you make any adjustments to the dividend yield to account for periodic growth
14 in dividends?
15 A. Yes. Since utility companies tend to increase their quarterly dividends at different times
16 throughout the year, it is reasonable to assume that dividend increases will be evenly
17 distributed over calendar quarters. Given that assumption, it is reasonable to apply one-
18 half of the expected annual dividend growth rate for purposes of calculating the expected
19 dividend yield component of the DCF model. This adjustment ensures that the expected
20 first year dividend yield is, on average, representative of the coming twelve-month
21 period, and does not overstate the aggregated dividends to be paid during that time.
Bulkley - 33
1 Q. Why is it important to select appropriate measures of long-term growth in applying
2 the DCF model?
3 A. In its Constant Growth form, the DCF model (i.e., Equation [2]) assumes a single long-
4 term growth rate in perpetuity. In order to reduce the long-term growth rate to a single
5 measure, one must assume that the dividend payout ratio remains constant and that
6 earnings per share, dividends per share, and book value per share all grow at the same
7 constant rate. Over the long run, however, dividend growth can only be sustained by
8 earnings growth. For example, earnings growth rates tend to be least influenced by
9 capital allocation decisions that companies may make in response to near-term changes in
10 the business environment. Since such decisions may directly affect near-term dividend
11 payout ratios, estimates of earnings growth are more indicative of long-term investor
12 expectations than are dividend or book value growth estimates.
13 Q. What sources of long-term growth rates did you rely on in your Constant Growth
14 DCF model?
15 A. My Constant Growth DCF model incorporates the following sources of long-term
16 earnings growth rates: 1) consensus estimates from Zacks Investment Research; 2)
17 consensus estimates from Thomson First Call (provided by Yahoo! Finance); 3)
18 consensus estimates from Thomson Reuters; and 4) long-term earnings growth estimates
19 from Value Line.
20 Q. How did you calculate the expected dividend yield?
21 A. I adjusted the dividend yield to reflect the growth rate that was being used in that
22 particular scenario. This ensures that the growth rate used in the dividend yield
Bulkley - 34
1 calculation and the growth rate used as the “g” term of the DCF model are internally
2 consistent.
3 Q. Did you make any adjustments to the results of the Constant Growth DCF analysis?
4 A. Yes. I eliminated any ROE estimate that is below the current cost of long-term debt for
5 IAWC plus a minimum equity risk premium. Specifically, I established the lower bound
6 at 7.00 percent, which is only 183 basis points above IAWC’s embedded cost of long-
7 term debt for the test year ending April 30, 2020. This equity risk premium is very low
8 when considering the difference between the risk of equity ownership and debt
9 obligations.
10 Q. Please summarize the results of your Constant Growth DCF analyses.
11 A. The results of the Constant Growth DCF analysis are shown in Table 3.
Bulkley - 35
1 Table 3: Summary of Constant Growth DCF Results41
Mean Low Mean Mean High Including AWK 30-Day Average 8.54% 9.38% 11.54% 90-Day Average 8.63% 9.48% 11.63% 180-Day Average 8.87% 9.41% 11.57% Excluding AWK 30-Day Average 8.26% 9.15% 11.00% 90-Day Average 8.35% 9.25% 11.10% 180-Day Average 8.61% 9.18% 11.03% Excluding SJW and CTWS 30-Day Average 8.97% 9.24% 11.39% 90-Day Average 9.02% 9.30% 11.46% 180-Day Average 9.59%42 9.23% 11.39% 2
3 Q. How did you calculate the range of results for the Constant Growth DCF model?
4 A. I calculated the low DCF result using the minimum growth rate (i.e., the lowest of the
5 Thomson First Call, Thomson Reuters, Zacks, and Value Line earnings growth rates) for
6 each of the proxy group companies. Thus, the low result reflects the minimum DCF
7 result for the proxy group. I used a similar approach to calculate the high results, using
8 the highest growth rate for each proxy group company. The mean results were calculated
9 using the average growth rates from all sources.
10 Q. What are your conclusions about the results of the Constant Growth DCF model?
11 A. As discussed previously, one primary assumption of the DCF model is a constant P/E
12 ratio. That assumption is heavily influenced by the market price of utility stocks. To the
41 The results shown in Table 4 reflect a 7.00 percent lower bound. 42 The 180-day average mean results are lower than the mean low results for this proxy group, which excludes SJW and CTWS.
Bulkley - 36
1 extent utility valuations are high and may not be sustainable, it is important to consider
2 the results of the DCF model with caution. As shown in Chart 1 above, the average
3 dividend yield for the proxy group has declined from 4.23 percent in 2009 to 2.08 percent
4 in 2018 due primarily to the low interest rate environment for government bonds. The
5 dividend yield on the 30-day average DCF analysis is 2.12 percent, which is very close to
6 the minimum average dividend yields for water utilities since 2009. While I have given
7 weight to the results of the Constant Growth DCF model, my recommendation also gives
8 weight to the results of other ROE estimation models.
9 Q. Have you considered the results of any other DCF analyses?
10 A. Yes, I have considered two additional DCF analyses: 1) a projected Constant Growth
11 DCF model; and 2) the expected returns on equity for the proxy group companies.
12 Because analysts have indicated that utility stocks may currently be at unsustainably high
13 prices due to market conditions, I considered the results of a projected Constant Growth
14 DCF model. Under this DCF analysis, the dividend yield is calculated using Value
15 Line’s projected average share prices and dividends for the period from 2021-2023, while
16 the long-term growth rate is based on the same five-year projected EPS growth rates used
17 in the Constant Growth DCF model. As shown in Attachment AEB-2, the projected DCF
18 analysis produces a mean DCF result of 9.95 percent and a mean high result of 12.11
19 percent (including AWK) and 9.72 percent and 11.57 percent (excluding AWK). Relying
20 on Value Line’s projected dividend yields and share prices in 2021-2023, the mean
Bulkley - 37
1 results of the Constant Growth DCF model increase by 57 basis points (i.e., 9.95 percent
2 vs. 9.38 percent shown in Attachments AEB-1 and AEB-2).43
3 I have also considered the expected returns on equity as reported by Value Line for each
4 of the proxy group companies in 2018 and for the period from 2021-2023, as shown in
5 Table 4 (also see Attachment AEB-3).
6 Table 4: Value Line Projected Returns on Equity44
Company Ticker 2018 2021-2023 American States Water Co. AWR 12.00% 14.00% American Water Works Co. Inc. AWK 10.00% 10.50% Aqua America, Inc. WTR 12.50% 12.50% California Water Service, Inc. CWT 10.50% 11.50% Connecticut Water Service, Inc. CTWS 9.50% 11.00% Middlesex Water Company MSEX 10.50% 12.50% SJW Corporation SJW 12.00% 14.00% York Water Company YORW 10.50% 14.00%
Mean 10.94% 12.50% Mean excluding AWK 11.07% 12.79% Mean excluding CTWS and SJW 11.00% 12.50% 7
8 This demonstrates that investors are expecting substantially higher returns on equity for
9 the water utilities than what is suggested by the DCF model.
43 This comparison includes the all of the proxy group companies. 44 Source: Value Line Investment Survey, Water Utilities, April 13, 2018.
Bulkley - 38
1 B. CAPM Analysis
2 Q. Please briefly describe the Capital Asset Pricing Model (“CAPM”).
3 A. The CAPM is a risk premium approach that estimates the cost of equity for a given
4 security as a function of a risk-free return plus a risk premium to compensate investors
5 for the non-diversifiable or “systematic” risk of that security. Systematic risk is the risk
6 inherent in the entire market or market segment. This form of risk cannot be diversified
7 away using a portfolio of assets. Non-systematic risk is the risk of a specific company
8 that can be mitigated through portfolio diversification.
9 The CAPM is defined by four components, each of which must theoretically be a
10 forward-looking estimate:
K r r r 11 e f m f [3]
12 Where:
13 Ke = the required market ROE;
14 β = Beta coefficient of an individual security;
15 rf = the risk-free ROR; and
16 rm = the required return on the market as a whole.
17
18 In this specification, the term (rm – rf) represents the Market Risk Premium. According to
19 the theory underlying the CAPM, since unsystematic risk can be diversified away,
20 investors should only be concerned with systematic risk. Systematic risk is measured by
Bulkley - 39
1 Beta. Beta is a measure of the volatility of a security as compared to the market as a
2 whole. Beta is defined as:
Covariance(r , r ) β = e m [4] Variance(rm) 3
4 The variance of the market return (i.e., Variance (rm)) is a measure of the uncertainty of
5 the general market. The covariance between the return on a specific security and the
6 general market (i.e., Covariance (re, rm)) reflects the extent to which the return on that
7 security will respond to a given change in the general market return. Thus, Beta
8 represents the risk of the security relative to the general market.
9
10 Q. What risk-free rate did you use in your CAPM analyses?
11 A. I relied on three sources for my estimate of the risk-free rate: (1) the current 30-day
12 average yield on 30-year U.S. Treasury bonds (i.e., 3.14%);45 (2) the projected 30-year
13 U.S. Treasury bond yield for 2018 through 2019 (i.e., 3.54%);46 and (3) the projected 30-
14 year U.S. Treasury bond yield for 2020 through 2024 (i.e., 4.20%).47
15 Q. What Beta coefficients did you use in your CAPM analyses?
16 A. As shown in Attachment AEB-4, I used the average Beta coefficients for the proxy group
17 companies as reported by Value Line and Bloomberg. Value Line’s calculation is based
18 on five years of weekly returns relative to the New York Stock Exchange Composite
19 Index. The Bloomberg Betas are calculated based on two years of weekly returns relative
20 to the New York Stock Exchange Composite Index.
45 Bloomberg Professional, as of May 31, 2018. 46 Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 2. 47 Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 14.
Bulkley - 40
1 Q. How did you estimate the Market Risk Premium in the CAPM?
2 A. I estimated the Market Risk Premium based on the expected total return on the S&P 500
3 Index less the 30-year Treasury bond yield. The expected total return on the S&P 500
4 Index is calculated using the Constant Growth DCF model for the companies in the S&P
5 500 Index. As shown in Attachment AEB-5, based on an estimated dividend yield of
6 1.95 percent and a long-term earnings growth rate of 13.56 percent, the estimated total
7 market return for the S&P 500 Index is 15.64 percent. The implied Market Risk Premia
8 over the current and projected yields on the 30-year U.S. Treasury bond range from 11.44
9 percent to 12.50 percent.
10 Q. What are the results of your CAPM analyses?
11 A. As shown in Table 5 (see also Attachments AEB-6, AEB-7 and AEB-8), my CAPM
12 analyses produce a range of returns from 12.20 percent to 12.81 percent (including
13 AWK), from 12.34 percent to 12.87 percent (excluding AWK), and from 12.41 percent to
14 13.62 percent (excluding CTWS and SJW).
Bulkley - 41
1 Table 5: Forward-Looking CAPM Results 2018-2019 2020-2024 Current Risk- Projected Risk- Projected Risk- Mean Free Rate Free Rate Free Rate Result (3.14%) (3.54%) (4.20%) Including AWK
Bloomberg Beta 12.55% 12.65% 12.81% 12.67%
Value Line Beta 12.20% 12.31% 12.50% 12.34%
Excluding AWK Bloomberg Beta 12.61% 12.71% 12.87% 12.73%
Value Line Beta 12.34% 12.44% 12.62% 12.47%
Excluding CTWS and SJW Bloomberg Beta 13.43% 13.50% 13.62% 13.51%
Value Line Beta 12.41% 12.52% 12.69% 12.54%
2
3 VII. BUSINESS RISKS
4 Q. Do the mean DCF and CAPM results for the proxy group, taken alone, provide an
5 appropriate estimate of the cost of equity for IAWC?
6 A. No. These mean results provide only a range of the appropriate estimate of IAWC’s cost
7 of equity. Several additional factors must be considered when determining where the
8 Company’s cost of equity falls within the range of results. These factors, discussed
9 below, should be considered with respect to their overall effect on IAWC’s risk profile
10 relative to the proxy group.
Bulkley - 42
1 A. Risks Associated with Capital Expenditure Program
2 Q. Please summarize IAWC’s capital expenditure program.
3 A. IAWC projects that the Company will spend approximately $607.3 million on capital
4 investments for the period from 2018-2022, including significant investment to replace
5 aging infrastructure necessary to meet the needs of its customers and to comply with
6 various regulations.
7 Q. How is IAWC’s risk profile affected by its substantial capital expenditure program?
8 A. As with any utility faced with substantial capital expenditures, IAWC’s risk profile is
9 adversely affected in two significant and related ways: (1) the heightened level of
10 investment increases the risk of under-recovery, or delayed recovery, of the invested
11 capital; and (2) an inadequate return would put downward pressure on key credit metrics.
12 Q. Do credit rating agencies recognize the risks associated with elevated capital
13 expenditures?
14 A. Yes. From a credit perspective, the additional pressure on cash flows associated with
15 high levels of capital expenditures exerts corresponding pressure on credit metrics and,
16 therefore, credit ratings. A July 2014 report from S&P explains:
17 [T]here is little doubt that the U.S. electric industry needs to make record 18 capital expenditures to comply with the proposed carbon pollution rules 19 over the next several years, while maintaining safety standards and grid 20 stability. We believe the higher capital spending and subsequent rise in 21 debt levels could strain these companies’ financial measures, resulting in 22 an almost consistent negative discretionary cash flow throughout this 23 higher construction period. To meet the higher capital spending 24 requirements, companies will require ongoing and steady access to the 25 capital markets, necessitating that the industry maintains its high credit 26 quality. We expect that utilities will continue to effectively manage their
Bulkley - 43
1 regulatory risk by using various creative means to recover their costs and 2 to finance their necessary higher spending.48
3 While this S&P report refers to electric utilities, the same applies to water utilities. To
4 the extent that IAWC’s rates do not permit it to recover its full cost of doing business, the
5 Company will face increased recovery risk and thus increased pressure on its credit
6 metrics. In an August 2016 report, S&P explained the importance of regulatory support
7 for large capital projects:
8 When applicable, a jurisdiction’s willingness to support large capital 9 projects with cash during construction is an important aspect of our 10 analysis. This is especially true when the project represents a major 11 addition to rate base and entails long lead times and technological risks 12 that make it susceptible to construction delays. Broad support for all 13 capital spending is the most credit-sustaining. Support for only specific 14 types of capital spending, such as specific environmental projects or 15 system integrity plans, is less so, but still favorable for creditors. 16 Allowance of a cash return on construction work-in-progress or similar 17 ratemaking methods historically were extraordinary measures for use in 18 unusual circumstances, but when construction costs are rising, cash flow 19 support could be crucial to maintain credit quality through the spending 20 program. Even more favorable are those jurisdictions that present an 21 opportunity for a higher return on capital projects as an incentive to 22 investors.49
23
24 Q. Have credit rating agencies commented specifically on AWK’s capital spending
25 program?
26 A. Yes, both S&P and Moody’s have observed that AWK has significant capital spending
27 requirements. S&P states:
28 The Company’s geographic diversity, reliability, and efficiency further 29 support its business risk profile. AWK’s elevated capital spending 30 requirements for infrastructure replacement, increased compliance costs to
48 S&P, Ratings Direct, “U.S. Regulated Electric Utilities’ Annual Capital Spending is Poised to Eclipse $100 Billion,” July 2014. 49 S&P Global Ratings, “Assessing U.S. Investor-Owned Utility Regulatory Environments,” August 10, 2016, at 7.
Bulkley - 44
1 meet water quality standards, and reliance on acquisitions to provide 2 growth partially offset these strengths.50
3 Similarly, Moody’s comments that one credit challenge for AWK is that it operates in a
4 “highly capital intensive industry with an old asset base.”51
5
6 Q. Have you conducted any analysis of the Company’s projected capital expenditures
7 for water distribution services relative to the proxy companies?
8 A. Yes. I compared the ratio of projected capital expenditures from 2018 through 2022 to
9 net utility plant as of December 31, 2017, for IAWC with each of the proxy group
10 companies. Error! Reference source not found. demonstrates that IAWC’s ratio of
11 projected capital expenditures to net plant is higher than each of the seven proxy group
12 companies (excluding AWK). Furthermore, as shown in Attachment AEB-9, IAWC’s
13 ratio of capital spending to net plant of 51.9 percent is well above the proxy group
14 median of 39.9 percent, suggesting that the Company faces greater risk as compared to
15 the proxy group.
50 S&P Global Ratings, “Summary: American Water Works Company, Inc.,” August 10, 2016, at 3. 51 Moody’s Investors Service, Credit Opinion “American Water Works, Company, Inc.,” August 10, 2016, at 2.
Bulkley - 45
1 Chart 4: Projected Capital Expenditures (2018-2022)/2017 Net Plant
2
3 Q. Does IAWC have a mechanism for timely recovery of infrastructure replacements?
4 A. Yes. IAWC has a Distribution System Improvement Charge (“DSIC”) that allows the
5 Company to recover costs associated with replacing aging infrastructure. In addition, in
6 April 2017 the Governor of Indiana signed House Enrolled Act 1519, which allows
7 companies to recover a return on and return of costs to replace customer-owned lead
8 service lines via this and future rate cases, as well as through the DSIC. The only
9 requirement is that a Plan be drafted and approved by the Commission. The Commission
10 approved the Company’s lead service line replacement plan in Cause No. 45043 by its
11 order dated July 25, 2018. While some portion of the IAWC capital program is expected
12 to be recovered through the infrastructure surcharge, there is additional capital investment
13 planned beyond that which can be recovered through the surcharge that would not be
14 included in rates until the rate proceeding following the in-service date of the investment.
Bulkley - 46
1 Q. Do the proxy group companies also have the ability to recover capital investments
2 through a distribution system infrastructure surcharge?
3 A. Yes. As shown in Attachment AEB-10, the proxy companies, excluding AWK, have a
4 recovery mechanism comparable to the DSIC in approximately 57 percent of their
5 operating jurisdictions.
6 Q. What are your conclusions regarding the effect of IAWC’s capital spending
7 program on its risk profile?
8 A. IAWC’s projected capital expenditures are significant relative to the Company’s current
9 level of rate base investment and relative to the proxy group companies. Timely cost
10 recovery is needed in order to maintain credit metrics at a level consistent with the
11 current credit ratings. The financial community recognizes the additional risks associated
12 with substantial capital expenditures. In my view, those factors support an ROE above
13 the proxy group mean.
14 B. Other Business and Operating Risks
15 Q. Has IAWC experienced declining average use per customer?
16 A. Yes. As discussed in the testimony of Company witness Gregory Roach, average use per
17 residential customer for IAWC is declining at a rate of approximately 2.12 percent per
18 year over the ten-year period from 2008-2017.
19
20 Q. Does IAWC have protection against volumetric risk?
Bulkley - 47
1 A. No. IAWC does not have a revenue decoupling or revenue stabilization mechanism that
2 breaks the link between revenues and volume/demand.52 Therefore, as average use per
3 residential customer declines each year, IAWC has less opportunity to fully recover its
4 Commission-approved revenue requirement because actual usage is lower than the billing
5 determinants that were used to set rates. This is especially true for IAWC because the
6 Company has not filed a rate case since 2014, and agreed in the settlement agreement that
7 resolved the last rate case that it would not file another base rate case until January 2018,
8 absent a financial emergency.
9 Q. How does IAWC’s volumetric risk compare to the proxy group?
10 A. As shown in Attachment AEB-10, 22 percent of the operating companies have protection
11 against volumetric risk through either revenue stabilization mechanisms or revenue
12 decoupling, while IAWC does not. Those operating companies which have implemented
13 a mechanism to protect revenues against fluctuations in volume/demand have more stable
14 revenues and cash flows and a better opportunity to achieve their authorized return than
15 IAWC does. The returns for those proxy companies already reflect any risk-reducing
16 benefits of these revenue decoupling mechanisms. Therefore, IAWC has higher
17 volumetric risk than companies with revenue decoupling or revenue stabilization
18 mechanisms.
19 Q. Please summarize IAWC’s proposal with respect to test year convention.
20 A. IAWC is proposing to rely on a future test year ending April 30, 2020. The use of a
21 future test year helps to mitigate the effect of regulatory lag so that IAWC has a better
22 opportunity to earn its authorized return on equity. As shown in Attachment AEB-10,
52 I recognize that the DSIC provides recovery of infrastructure investments as a fixed charge.
Bulkley - 48
1 approximately 49 percent of the operating companies held by the proxy group use
2 forward test periods, which serve to mitigate risk related to regulatory lag. In this regard,
3 IAWC has similar risk as the proxy group companies because the Company has proposed
4 to use a future test year.
5 Q. What is your conclusion regarding the business risk of IAWC relative to the proxy
6 group as it relates to test year convention and volumetric risk?
7 A. My conclusion is that IAWC has comparable risk in terms of test year convention, and
8 higher risk than those proxy group companies that have implemented mechanisms to
9 mitigate the effect on revenue and cash flows of variations in volume/demand. This
10 higher relative volumetric risk supports an authorized ROE above the proxy group mean.
11 XIII. CAPITAL STRUCTURE
12 Q. What is the Company’s proposed capital structure?
13 A. IAWC is proposing a rate-making capital structure composed of 56.36 percent common
14 equity and 43.64 percent long-term debt, excluding adjustments for zero cost capital
15 items.
16 Q. Have you conducted any analysis to determine a reasonable equity ratio for IAWC?
17 A. Yes, I reviewed the capital structures of the proxy companies.
18 Q. Why is it appropriate to consider the equity ratio for the proxy companies?
19 A. The determination of the ROE is based on the expected return for a proxy group of
20 companies that are comparable in risk to IAWC. The equity ratio is a measure of the
21 financial risk of the company, and the authorized ROE is the return to compensate
22 investors for that risk. If the Commission is going to rely on the ROE estimates for the
Bulkley - 49
1 proxy companies to establish the authorized ROE for IAWC, it is important that the
2 financial risk of IAWC be similar to the financial risk of the proxy group. This is
3 accomplished when the equity ratio of the subject company (in this case IAWC) is within
4 the range established by the proxy group.
5 Q. How did you conduct your analysis of the proxy group capital structures?
6 A. I calculated the mean and median proportions of common equity and long-term debt in
7 2017 for each of the proxy group companies.53 As shown in Attachment AEB-11, the
8 common equity ratios for the proxy group (excluding AWK) at December 31, 2017 were
9 55.62 percent (mean) and 56.60 percent (median), within a range from 47.99 percent to
10 62.25 percent. Including AWK, the mean equity ratio for the proxy group is 54.18
11 percent. IAWC’s proposed common equity ratio of 56.36 percent is consistent with the
12 mean and median common equity ratios for the proxy group (excluding AWK).
13 Q. Please explain why it is appropriate to use the actual capital structure of IAWC
14 rather than the consolidated capital structure of AWK for ratemaking purposes.
15 A. The determination of the ROE and capital structure in this proceeding is for ratemaking
16 purposes for IAWC and therefore should be based on the stand-alone capital structure of
17 IAWC. According to the stand-alone principle, the various equity and debt cost rates and
18 capital structure components should be set as if the operating utility company were going
19 to the financial market to raise capital on its own merits. Furthermore, as discussed
20 previously, because my ROE recommendation for IAWC is based on a proxy group of
21 risk comparable companies, it is appropriate to also consider IAWC’s equity ratio in
53 Long-term debt includes the current portion of long-term debt, assuming that the current portion would be refinanced with debt at maturity.
Bulkley - 50
1 comparison to the average equity ratio for that same proxy group of companies. In
2 addition, the use of a hypothetical capital structure – which the use of AWK’s capital
3 structure for IAWC would be -- is not allowed in Indiana.
4 Q. What is your conclusion with regard to IAWC’s proposed capital structure?
5 A. Based on my review of the equity ratios of the proxy companies, and taking into
6 consideration the views of the credit rating agencies regarding the effects of the TCJA on
7 cash flow metrics for American Water, IAWC’s proposed common equity ratio of 56.36
8 percent is reasonable, if not conservative.
9 IX. COST OF EQUITY AND CAPITAL STRUCTURE
10 CONCLUSIONS AND RECOMMENDATION
11 Q. What is your conclusion regarding a fair ROE for IAWC?
12 A. Based on the various quantitative analyses summarized in Table 6 and the qualitative
13 analyses presented in my Direct Testimony, a reasonable range of ROE results for IAWC
14 is from 10.00 percent to 10.80 percent. Within that range, I believe that an ROE of 10.80
15 percent is reasonable and appropriate. I recommend a return at the high end of the range
16 of results because it takes into account IAWC’s company-specific risks relative to the
17 proxy group, as discussed in my Direct Testimony. In addition, the recommended ROE
18 of 10.80 percent takes into consideration the anomalous conditions in capital markets that
19 are causing the DCF model to understate the cost of equity, including the effect of the
20 current low interest rate environment on utility stock valuations and dividend yields, and
21 the market’s expectation for higher interest rates during the period in which the rates
22 established in this proceeding would be in effect.
Bulkley - 51
1
2 Table 6: Summary of Analytical Results
Forward-Looking CAPM Results 2018-2019 2020-2024 Current Risk- Projected Risk- Projected Risk- Mean Free Rate Free Rate Free Rate Result (3.14%) (3.54%) (4.20%) Including AWK54
Bloomberg Beta 12.55% 12.65% 12.81% 12.67%
Value Line Beta 12.20% 12.31% 12.50% 12.34%
Excluding AWK55 Bloomberg Beta 12.61% 12.71% 12.87% 12.73%
Value Line Beta 12.34% 12.44% 12.62% 12.47%
Excluding CTWS and SJW56,57 Bloomberg Beta 13.43% 13.50% 13.62% 13.51%
Value Line Beta 12.41% 12.52% 12.69% 12.54%
3
4 5
54 See Attachment AEB-6. 55 See Attachment AEB-7. 56 See Attachment AEB-8. 57 As discussed in my testimony, SJW Group (SJW) and Connecticut Water Service, Inc. (CTWS) announced their merger in March 2018. I have conducted my analysis with and without them as a part of the proxy group.
Bulkley - 52
1 Table 7: Summary of Analytical Results (cont’d)
Mean Low Mean Mean High Constant Growth DCF – 30 Day Average58 Including AWK 8.54% 9.38% 11.54% Excluding AWK 8.26% 9.15% 11.00% Excluding SJW and CTWS 8.97% 9.24% 11.39% Constant Growth DCF – Projected DCF Model 2021-202359
Mean Low Mean Mean High Including AWK 8.32% 9.95% 12.11% Excluding AWK 8.00% 9.72% 11.57% Excluding SJW and CTWS 8.37% 9.83% 12.00% Value Line Projected Equity Returns 2021-202360 Low Mean High Including AWK 10.50% 12.50% 14.00% Excluding AWK 11.00% 12.79% 14.00% Excluding SJW and CTWS 10.50% 12.50% 14.00% 2
3 Q. What is your conclusion regarding IAWC’s proposed capital structure?
4 A. My conclusion is that IAWC’s proposed rate-making capital structure consisting of 56.36
5 percent common equity and 43.64 percent long-term debt is reasonable as compared to
6 the proxy group companies and should be adopted.
7 X. FAIR VALUE RATE BASE
8 Q. What is the purpose of this section of your testimony?
9 A. In this section of my testimony, I summarize the analysis I developed to estimate the fair
10 value of IAWC’s rate base.
58 See Attachment AEB-1. 59 See Attachment AEB-2. 60 Source: Value Line Investment Survey, Water Utilities, April 13, 2018.
Bulkley - 53
1 Q. Why is the fair value relevant in this proceeding?
2 A. The Indiana Code § 8-1-2-6, discusses the valuation of public utility property.
3 The commission shall value all property of every public utility actually 4 used and useful for the convenience of the public at its fair value, 5 giving such consideration as it deems appropriate in each case to all 6 bases of valuation which may be presented or which the commission is 7 authorized to consider by the following provisions of this section. As 8 one of the elements in such valuation the commission shall give 9 weight to the reasonable cost of bringing the property to its then state 10 of efficiency. . . .
11 Q. Please summarize the methodology that you relied on to develop the fair value of
12 IAWC’s assets.
13 A. The methodology that I relied on is generally consistent with the methodology that has
14 been used by the Commission to establish the fair value of IAWC’s assets in prior rate
15 proceedings (the “IURC Methodology”). The IURC Methodology begins with the Fair
16 Value Rate Base (“FVRB”) that was established in the last rate proceeding. The
17 historical FVRB is trended to current dollars using an inflation index, CPI-U, to establish
18 the current value of the fair value rate base from the prior case.
19 Q. How was the historical fair value determined?
20 A. Cause No. 44450, which was IAWC’s prior rate proceeding, resulted in a settlement that
21 did not specify a fair value rate base. Therefore, I relied on the fair value rate base that
22 was determined by IAWC witness Roach from that proceeding as the basis for this
23 analysis. As shown in Attachment AEB-12, the Fair Value that was developed by Mr.
24 Roach in Cause No. 44450 was $1,222,819,707. Mr. Roach had updated the Fair Value
25 from the prior case using the IURC Methodology.
Bulkley - 54
1 Q. How did you escalate the historical FVRB to the end of the test period?
2 A. The fair value rate base that was established by the Company in Cause No. 44450 was
3 based on a test year ending November 30, 2015. In the current rate proceeding, IAWC is
4 relying on a forward-looking test period ending April 30, 2020. I escalated the fair value
5 rate base from November 30, 2015 to the end of the projected test year using the average
6 inflation factor for the five years prior to the end of the test year. This methodology is
7 consistent with the methodology that was relied on by the IURC in Cause No. 44022, the
8 most recent fair value determination made by the IURC for the Company. For the test
9 period ending April 30, 2020, the average inflation was determined for the period from
10 2016-2020. This average includes historical inflation for the period from 2016-2017 and
11 projected inflation for 2018-2020. The source of historical inflation was the Bureau of
12 Labor Statistics. For the 2016-2017 period, the historical inflation rate was 2.10 percent.
13 Projected inflation rates are based on data from Blue Chip Economic Indicators averaging
14 2.30 percent over the forecast period.61 The resulting average annual inflation factor that
15 was applied to the FVRB from Cause No. 44450 was 2.22 percent.
16 Q. What value was used for net investor supplied capital?
17 A. Net investor supplied capital additions were calculated by the Company as included in
18 my workpapers. As shown in that workpaper, and in Attachment AEB-12, page 1, Net
19 Investor Supplied Additions are $407,657,743.
61 Blue Chip Economic Indicators, Vol. 43, No. 3, March 10, 2018, at 2.
Bulkley - 55
1 Q. What is the resulting FVRB?
2 A. As shown in Attachment AEB-12, page 1, the updated FVRB as of April 30, 2020 is
3 $1,755,102,609. I compared this to a reproduction cost new less depreciation
4 (“RCNLD”) study that was prepared by the Company using the Handy-Whitman Index
5 and which is in my workpapers. Based in part upon the RCNLD, the IURC Methodology
6 continues to be a reasonable method for determining fair value.
7 Q. Did you also calculate the return on the FV increment?
8 A. Yes, I did. As shown in Attachment AEB-12, I calculated the return on FVRB using three
9 approaches that were applied in IAWC’s 2012 rate case.62 Recognizing that the FVRB
10 includes inflation, each of these approaches makes an adjustment to the Weighted
11 Average Cost of Capital (“WACC”) to remove inflation from the FVRB where inflation
12 has been applied.
13 Methodology #1: Removes inflation from the debt component of the capital
14 structure. The inflation rate that is used in this calculation is based on the
15 historical inflation over a 15 year period. That 15 year period reflects the average
16 age of the assets in the IAWC rate base. As shown in the workpaper supporting
17 Attachment AEB-12, page 1, the inflation factor that is removed from the WACC
18 as of the end of the test year ending April 30, 2020 is 2.09 percent. Deducting this
19 inflation rate of 2.09 percent from the debt rate establishes a return of 6.07
20 percent. I also performed this calculation as of the beginning of the test period,
62 Indiana-American Water Company, Inc., Cause No. 44022, Order issued by the Commission dated June 6, 2012, at 43-44.
Bulkley - 56
1 April 30, 2019, resulting in an inflation adjusted WACC of 6.00 percent, as
2 shown in Attachment AEB-12, page 2.
3 Methodology #2: Removes inflation from the WACC. The inflation used in this
4 calculation is consistent with the inflation factor used in Methodology #1.
5 Deducting an inflation rate of 2.09 percent from the WACC produces a fair rate of
6 return of 4.73 percent as of the end of the test year ending April 30, 2020. I also
7 performed this calculation as of the the beginning of the test period. The resulting
8 inflation adjusted WACC as of April 30, 2019 is 4.64 percent. This return
9 represents the low end of the range established by the Commission.
10 Methodology #3: I relied on the rate of return of 4.90 percent that was established
11 by the Commission in Cause No. 44022.
12 Q. How is inflation included in the FVRB?
13 A. As discussed previously, inflation is applied to the previously determined FVRB to trend
14 the costs from the last determination to the end of the test period in the current rate
15 proceeding. The current FVRB is the sum of the trended historical FVRB, which includes
16 inflation and net investor supplied capital that has been added since the last rate case.
17 While the trended historical FVRB includes inflation, the second component, net investor
18 supplied capital, is not a trended cost and therefore does not include inflation.
19 Q. How are net investor supplied additions calculated?
20 A. Net investor supplied additions used in the fair value analysis are the difference between
21 net investor supplied additions in Cause No. 44450 and the pro forma net investor
22 supplied additions through the test year ending April 30, 2020. Net investor supplied
Bulkley - 57
1 capital additions are calculated as Net Utility Plant in Service less Contributions in Aid of
2 Construction (“CIAC”) and less Customer Advances for Construction (“CAFC”).
3 Q. Should the fair value rate of return be applied to the entire FVRB?
4 A. No. The three methodologies for estimating the fair value return above are all adjustment
5 methodologies that have been relied on by the IURC to recognize inflation that exists in
6 the FVRB. However, as mentioned previously, there are two components to the FVRB.
7 The first component of the fair value rate base is the fair value rate base from IAWC’s
8 last rate proceeding. That component is escalated by inflation. The second component is
9 net investor supplied capital since the last rate proceeding. This portion of the FVRB is
10 the actual investments made since the last rate proceeding and therefore does not include
11 inflation.
12 Therefore, in order to establish the Fair Value Operating Income, it is appropriate to
13 apply the fair value rate of return, which removes inflation, to escalated FVRB from the
14 last rate proceeding. It is not appropriate to apply an inflation adjusted WACC to the net
15 investor supplied capital additions because this portion of the FVRB is not inflation
16 adjusted. I relied on the three methodologies for estimating the fair value return,
17 discussed previously, and applied those estimates of the Fair Value Return to the trended
18 fair value rate base.
Bulkley - 58
1 Q. Please explain how you applied each of the estimates of the fair value return that
2 you discussed previously in order to estimate the fair value operating income for test
3 year ending April 30, 2020.
4 A. As shown in Attachment AEB-12, page 1, I calculated the fair value operating income
5 using each of the estimates of fair value return discussed previously. In developing the
6 fair value return using Methodologies #1 and #2, I applied the fair value return to the fair
7 value from the prior case, adjusted to the test year price level.63 In addition, the Fair
8 Value operating income includes a return on net investor supplied capital. Because the
9 net investor supplied capital has not been inflated, I calculated the return on this
10 increment using the original cost rate base return of 6.82 percent. The resulting fair value
11 operating income is $109,592,161 and $91,495,977 for these two methodologies
12 respectively.
13
14 Q. What is the fair value increment that results from applying these two
15 methodologies?
16 A. Attachment AEB-12 compares the operating income from the fair value rate base to the
17 operating income derived by applying the original cost return to the original cost rate
18 base. As shown in that attachment, as of the end of the test year ending April 30, 2020,
19 the resulting fair value increment for Methodology #1 is $24,509,358. The fair value
20 increment resulting from Methodology #2 is $6,413,174. As of April 30, 2019
21 (beginning of test year), the resulting fair value increment for Methodology #1 is
22 $22,621,765. The fair value increment resulting from Methodology #2 is $4,666,974.
63 See Attachment AEB-12, line 16.
Bulkley - 59
1 Q. Please summarize the methodology that the IURC relied on to develop the fair value
2 operating income in Cause No. 44022.
3 A. In Cause No. 44022, the IURC established a return on the fair value increment of 4.90
4 percent that was applied to the FVRB. For purposes of my analysis, I applied that return
5 to the beginning and end of test year FVRB as well as to the net investor supplied plant
6 additions as of those dates.
7 Q. What are the fair value operating income and the fair value increment that result
8 from applying the return established by the IURC in Cause No. 44022 to the FVRB
9 in the current case?
10 A. As shown in Attachment AEB-12, page 1, the fair value operating income that results
11 from applying a return of 4.90 percent to the Updated FVRB as of April 30, 2020 is
12 $86,000,028. The fair value increment above the return on the original cost rate base is
13 $917,225. As shown in Attachment AEB-12, page 2, applying a return of 4.90 percent to
14 the Updated FVRB as of April 30, 2019 results in a fair value increment of $3,549,112.
15 Q. Is IAWC proposing the fair value increment as calculated using any of these
16 methodologies be included in its revenue requirement?
17 A. No. While each of these methodologies is a reasonable approach to estimating the fair
18 value operating income for IAWC, the Company is not proposing to rely on the fair value
19 increment that results from the methodologies described above. Rather, IAWC is
20 proposing to include only the return on the Indiana Cities acquisition premium that has
21 been authorized by the IURC in other proceedings through informed fair value
22 ratemaking. As shown in Attachment AEB-12, the return on the Indiana Cities
Bulkley - 60
1 acquisition premium is $425,054 as of the end of the test year ending April 30, 2020 and
2 $450,903 as of April 30, 2019.
3 Q. Does this conclude your Direct Testimony?
4 A. Yes.
Bulkley - 61
VERIFICATION
I, Ann E. Bulkley, Senior Vice President of Concentric Energy Advisors, Inc., affirm under penalties of perjury that the foregoing representations are true and correct to the best of my knowledge, information and belief.
Date: °Jfi/;R Attachment AEB-1 Page 1 of 3
30-DAY CONSTANT GROWTH DCF
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] Excluding Low-End Outliers Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Reuters Reuters Reuters Growth Mean Company Dividend Price Yield Yield Growth Growth Growth High Low Mean Rate Low ROE Mean ROE High ROE 7% Low ROE ROE High ROE
American States Water Co AWR $1.02 $55.62 1.83% 1.88% 6.50% 4.00% 5.00% n/a n/a n/a 5.17% 5.87% 7.05% 8.39% 7.05% 8.39% American Water AWK $1.82 $83.54 2.18% 2.27% 8.50% 8.20% 7.70% 13.00% 8.20% 10.60% 8.75% 9.96% 11.02% 15.32% 9.96% 11.02% 15.32% Aqua America, Inc. WTR $0.82 $34.53 2.37% 2.45% 7.00% 5.00% 5.50% 9.00% 9.00% 9.00% 6.63% 7.43% 9.07% 11.48% 7.43% 9.07% 11.48% California Water Service Group CWT $0.75 $39.62 1.89% 1.98% 9.50% 9.80% n/a n/a n/a n/a 9.65% 11.48% 11.63% 11.79% 11.48% 11.63% 11.79% Connecticut Water Service, Inc. CTWS $1.25 $66.20 1.89% 1.94% 5.50% 6.00% n/a n/a n/a n/a 5.75% 7.44% 7.69% 7.94% 7.44% 7.69% 7.94% Middlesex Water Company MSEX $0.90 $41.75 2.14% 2.20% 8.00% 2.70% n/a n/a n/a n/a 5.35% 4.87% 7.55% 10.23% 7.55% 10.23% SJW Corporation SJW $1.12 $60.39 1.85% 1.95% 6.00% 14.00% n/a n/a n/a n/a 10.00% 7.91% 11.95% 15.98% 7.91% 11.95% 15.98% York Water Company YORW $0.67 $32.27 2.07% 2.14% 9.00% 4.90% n/a n/a n/a n/a 6.95% 7.02% 9.09% 11.16% 7.02% 9.09% 11.16% Mean 2.03% 2.10% 7.50% 6.83% 6.07% 11.00% 8.60% 9.80% 7.28% 7.75% 9.38% 11.54% 8.54% 9.38% 11.54% Mean excluding AWK 2.01% 2.08% 7.36% 6.63% 5.25% 9.00% 9.00% 9.00% 7.07% 7.43% 9.15% 11.00% 8.26% 9.15% 11.00% Mean Excluding CTWS and SJW 2.08% 2.15% 8.08% 5.77% 6.07% 11.00% 8.60% 9.80% 7.08% 7.77% 9.24% 11.39% 8.97% 9.24% 11.39%
Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 30-day average as of May 31, 2018 [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [11]) [5] Source: Value Line ` [6] Source: Yahoo! Finance [7] Source: Zacks [8] Source: Reuters [9] Source: Reuters [10] Source: Reuters [11] Equals Average ([5], [6], [7], [10]) [12] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7], [8], [9]) + Minimum ([5], [6], [7],[8], [9]) [13] Equals [4] + [11] [14] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7], [8], [9]) + Maximum ([5], [6], [7], [8], [9]) [15] Equals [12] if greater than 7.00% [16] Equals [13] if greater than 7.00% [17] Equals [14] if greater than 7.00% Attachment AEB-1 Page 2 of 3
90-DAY CONSTANT GROWTH DCF
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] Excluding Low-End Outliers Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Reuters Reuters Reuters Growth Mean Company Dividend Price Yield Yield Growth Growth Growth High Low Mean Rate Low ROE Mean ROE High ROE Low ROE ROE High ROE
American States Water Co AWR $1.02 $54.21 1.88% 1.93% 6.50% 4.00% 5.00% n/a n/a n/a 5.17% 5.92% 7.10% 8.44% 7.10% 8.44% American Water AWK $1.82 $81.78 2.23% 2.32% 8.50% 8.20% 7.70% 13.00% 8.20% 10.60% 8.75% 10.01% 11.07% 15.37% 10.01% 11.07% 15.37% Aqua America, Inc. WTR $0.82 $34.28 2.39% 2.47% 7.00% 5.00% 5.50% 9.00% 9.00% 9.00% 6.63% 7.45% 9.09% 11.50% 7.45% 9.09% 11.50% California Water Service Group CWT $0.75 $38.88 1.93% 2.02% 9.50% 9.80% n/a n/a n/a n/a 9.65% 11.52% 11.67% 11.82% 11.52% 11.67% 11.82% Connecticut Water Service, Inc. CTWS $1.25 $59.48 2.10% 2.16% 5.50% 6.00% n/a n/a n/a n/a 5.75% 7.66% 7.91% 8.16% 7.66% 7.91% 8.16% Middlesex Water Company MSEX $0.90 $38.64 2.32% 2.38% 8.00% 2.70% n/a n/a n/a n/a 5.35% 5.05% 7.73% 10.41% 7.73% 10.41% SJW Corporation SJW $1.12 $56.57 1.98% 2.08% 6.00% 14.00% n/a n/a n/a n/a 10.00% 8.04% 12.08% 16.12% 8.04% 12.08% 16.12% York Water Company YORW $0.67 $31.20 2.14% 2.21% 9.00% 4.90% n/a n/a n/a n/a 6.95% 7.09% 9.16% 11.23% 7.09% 9.16% 11.23% Mean 2.12% 2.20% 7.50% 6.83% 6.07% 11.00% 8.60% 9.80% 7.28% 7.84% 9.48% 11.63% 8.63% 9.48% 11.63% Mean excluding AWK 2.10% 2.18% 7.36% 6.63% 5.25% 9.00% 9.00% 9.00% 7.07% 7.53% 9.25% 11.10% 8.35% 9.25% 11.10% Mean Excluding CTWS and SJW 2.15% 2.22% 8.08% 5.77% 6.07% 11.00% 8.60% 9.80% 7.08% 7.84% 9.30% 11.46% 9.02% 9.30% 11.46%
Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 90-day average as of May 31, 2018 [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [11]) [5] Source: Value Line [6] Source: Yahoo! Finance [7] Source: Zacks [8] Source: Reuters [9] Source: Reuters [10] Source: Reuters [11] Equals Average ([5], [6], [7], [10]) [12] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7], [8], [9]) + Minimum ([5], [6], [7],[8], [9]) [13] Equals [4] + [11] [14] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7], [8], [9]) + Maximum ([5], [6], [7], [8], [9]) [15] Equals [12] if greater than 7.00% [16] Equals [13] if greater than 7.00% [17] Equals [14] if greater than 7.00% Attachment AEB-1 Page 3 of 3
180-DAY CONSTANT GROWTH DCF
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] Excluding Low-End Outliers Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Reuters Reuters Reuters Growth Mean Company Dividend Price Yield Yield Growth Growth Growth High Low Mean Rate Low ROE Mean ROE High ROE Low ROE ROE High ROE
American States Water Co AWR $1.02 $54.25 1.88% 1.93% 6.50% 4.00% 5.00% n/a n/a n/a 5.17% 5.92% 7.10% 8.44% 7.10% 8.44% American Water AWK $1.82 $84.35 2.16% 2.25% 8.50% 8.20% 7.70% 13.00% 8.20% 10.60% 8.75% 9.94% 11.00% 15.30% 9.94% 11.00% 15.30% Aqua America, Inc. WTR $0.82 $35.19 2.33% 2.40% 7.00% 5.00% 5.50% 9.00% 9.00% 9.00% 6.63% 7.39% 9.03% 11.43% 7.39% 9.03% 11.43% California Water Service Group CWT $0.75 $40.65 1.85% 1.93% 9.50% 9.80% n/a n/a n/a n/a 9.65% 11.43% 11.58% 11.74% 11.43% 11.58% 11.74% Connecticut Water Service, Inc. CTWS $1.25 $59.46 2.10% 2.16% 5.50% 6.00% n/a n/a n/a n/a 5.75% 7.66% 7.91% 8.17% 7.66% 7.91% 8.17% Middlesex Water Company MSEX $0.90 $40.22 2.23% 2.28% 8.00% 2.70% n/a n/a n/a n/a 5.35% 4.96% 7.63% 10.31% 7.63% 10.31% SJW Corporation SJW $1.12 $59.20 1.89% 1.99% 6.00% 14.00% n/a n/a n/a n/a 10.00% 7.95% 11.99% 16.02% 7.95% 11.99% 16.02% York Water Company YORW $0.67 $32.88 2.03% 2.10% 9.00% 4.90% n/a n/a n/a n/a 6.95% 6.98% 9.05% 11.12% 9.05% 11.12% Mean 2.06% 2.13% 7.50% 6.83% 6.07% 11.00% 8.60% 9.80% 7.28% 7.78% 9.41% 11.57% 8.87% 9.41% 11.57% Mean Excluding AWK 2.04% 2.11% 7.36% 6.63% 5.25% 9.00% 9.00% 9.00% 7.07% 7.47% 9.18% 11.03% 8.61% 9.18% 11.03% Mean Excluding CTWS and SJW 2.08% 2.15% 8.08% 5.77% 6.07% 11.00% 8.60% 9.80% 7.08% 7.77% 9.23% 11.39% 9.59% 9.23% 11.39%
Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 180-day average as of May 31, 2018 [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [11]) [5] Source: Value Line [6] Source: Yahoo! Finance [7] Source: Zacks [8] Source: Reuters [9] Source: Reuters [10] Source: Reuters [11] Equals Average ([5], [6], [7], [10]) [12] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7], [8], [9]) + Minimum ([5], [6], [7],[8], [9]) [13] Equals [4] + [11] [14] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7], [8], [9]) + Maximum ([5], [6], [7], [8], [9]) [15] Equals [12] if greater than 7.00% [16] Equals [13] if greater than 7.00% [17] Equals [14] if greater than 7.00% Attachment AEB-2 Page 1 of 1
PROJECTED CONSTANT GROWTH DCF -- ALL WATER COMPANIES
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] Excluding Low-End Outliers Annualized Stock Price (2021 - 2023) Yahoo! Dividend Expected Value Line Finance Zacks Reuters 7% (2021 - Dividend Dividend Earnings Earnings Earnings Average Mean Company 2023) High Low Mean Yield Yield Growth Growth Growth High Low Mean Growth Rate Low ROE Mean ROE High ROE Low ROE ROE High ROE
American States Water Co AWR $1.45 $60.00 $45.00 $52.50 2.76% 2.83% 6.50% 4.00% 5.00% n/a n/a n/a 5.17% 6.82% 8.00% 9.35% 8.00% 9.35% American Water AWK $2.60 $115.00 $75.00 $95.00 2.74% 2.86% 8.50% 8.20% 7.70% 13.00% 8.20% 10.60% 8.75% 10.54% 11.61% 15.91% 10.54% 11.61% 15.91% Aqua America, Inc. WTR $1.25 $50.00 $40.00 $45.00 2.78% 2.87% 7.00% 5.00% 5.50% 9.00% 9.00% 9.00% 6.63% 7.85% 9.49% 11.90% 7.85% 9.49% 11.90% California Water Service Group CWT $1.02 $50.00 $35.00 $42.50 2.40% 2.52% 9.50% 9.80% n/a n/a n/a n/a 9.65% 12.01% 12.17% 12.32% 12.01% 12.17% 12.32% Connecticut Water Service, Inc. CTWS $1.52 $65.00 $45.00 $55.00 2.76% 2.84% 5.50% 6.00% n/a n/a n/a n/a 5.75% 8.34% 8.59% 8.85% 8.34% 8.59% 8.85% Middlesex Water Company MSEX $1.11 $50.00 $35.00 $42.50 2.61% 2.68% 8.00% 2.70% n/a n/a n/a n/a 5.35% 5.35% 8.03% 10.72% 8.03% 10.72% SJW Corporation SJW $1.45 $90.00 $60.00 $75.00 1.93% 2.03% 6.00% 14.00% n/a n/a n/a n/a 10.00% 7.99% 12.03% 16.07% 7.99% 12.03% 16.07% York Water Company YORW $1.00 $45.00 $30.00 $37.50 2.67% 2.76% 9.00% 4.90% n/a n/a n/a n/a 6.95% 7.63% 9.71% 11.79% 7.63% 9.71% 11.79% Mean 2.58% 2.67% 7.50% 6.83% 6.07% 11.00% 8.60% 9.80% 7.28% 8.32% 9.95% 12.11% 9.06% 9.95% 12.11% Mean excl AWK 2.56% 2.65% 7.36% 6.63% 5.25% 9.00% 9.00% 9.00% 7.07% 8.00% 9.72% 11.57% 8.76% 9.72% 11.57% Mean Excluding CTWS and SJW 2.66% 2.75% 8.08% 5.77% 6.07% 11.00% 8.60% 9.80% 7.08% 8.37% 9.83% 12.00% 9.51% 9.83% 12.00%
Notes: [1] Source: Value Line dated April 13, 2018 [2] Source: Value Line dated April 13, 2018 [3] Source: Value Line dated April 13, 2018 [4] Source: Value Line dated April 13, 2018 [5] Equals [1] / [4] [6] Equals [5] x (1 + 0.50 x [13]) [7] Source: Value Line [8] Source: Yahoo! Finance [9] Source: Zacks [10] Source: Reuters [11] Source: Reuters [12] Source: Reuters [13] Equals Average ([7], [8], [9], [12]) [14] Equals [5] x (1 + 0.50 x Minimum ([7], [8], [9], [10], [11]) + Minimum ([7], [8], [9], [10], [11]) [15] Equals [6] + [13] [16] Equals [5] x (1 + 0.50 x Maximum ([7], [8], [9], [10], [11]) + Maximum ([7], [8], [9], [10], [11]) [17] Equals [14] if greater than 7.00% [18] Equals [15] if greater than 7.00% [19] Equals [16] if greater than 7.00% Attachment AEB-3 Page 1 of 1
VALUE LINE ROE PROJECTIONS
Company Ticker 2018 2021-2023
American States Water Co AWR 12.00% 14.00% American Water Works Co, Inc. AWK 10.00% 10.50% Aqua America, Inc. WTR 12.50% 12.50% California Water Service Group CWT 10.50% 11.50% Connecticut Water Service, Inc. CTWS 9.50% 11.00% Middlesex Water Company MSEX 10.50% 12.50% SJW Corporation SJW 12.00% 14.00% York Water Company YORW 10.50% 14.00%
Mean 10.94% 12.50% Mean excl AWK 11.07% 12.79% Mean Excluding CTWS and SJW 11.00% 12.50%
Source: Value Line dated April 13, 2018 Attachment AEB-4 Page 1 of 1
PROXY COMPANY BETAS
[1] [2]
Bloomberg Value Line
American States Water Co AWR 0.77 0.75 American Water AWK 0.72 0.65 Aqua America, Inc. WTR 0.79 0.70 California Water Service Group CWT 0.87 0.75 Connecticut Water Service, Inc. CTWS 0.33 0.65 Middlesex Water Company MSEX 0.87 0.80 SJW Corporation SJW 0.75 0.70 York Water Company YORW 0.92 0.80
Mean 0.752 0.725 Mean excl AWK 0.758 0.736 Mean Excluding CTWS and SJW 0.823 0.742
Notes: [1] Source: Bloomberg Professional, May 31, 2018 [2] Source: Value Line; dated April 13, 2018 Attachment AEB-5 Page 1 of 7
MARKET RISK PREMIUM DERIVED FROM ANALYSTS' LONG-TERM GROWTH ESTIMATES
[1] Estimated Weighted Average Dividend Yield 1.95%
[2] Estimated Weighted Average Long-Term Growth Rate 13.56%
[3] S&P 500 Estimated Required Market Return 15.64%
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
LyondellBasell Industries NV LYB 0.18% 3.57% 0.01% 7.73% 0.0143% American Express Co AXP 0.35% 1.42% 0.01% 17.30% 0.0614% Verizon Communications Inc VZ 0.83% 4.95% 0.04% 2.31% 0.0191% Broadcom Inc AVGO 0.43% 2.78% 0.01% 12.78% 0.0555% Boeing Co/The BA 0.86% 1.94% 0.02% 15.33% 0.1320% Caterpillar Inc CAT 0.38% 2.05% 0.01% 21.75% 0.0829% JPMorgan Chase & Co JPM 1.53% 2.09% 0.03% 9.80% 0.1498% Chevron Corp CVX 1.00% 3.60% 0.04% 54.01% 0.5383% Coca-Cola Co/The KO 0.77% 3.63% 0.03% 8.49% 0.0652% AbbVie Inc ABBV 0.66% 3.88% 0.03% 13.63% 0.0898% Walt Disney Co/The DIS 0.62% 1.69% 0.01% 10.20% 0.0633% Extra Space Storage Inc EXR 0.05% 3.57% 0.00% 6.08% 0.0031% Exxon Mobil Corp XOM 1.44% 4.04% 0.06% 15.96% 0.2304% Phillips 66 PSX 0.23% 2.75% 0.01% 10.00% 0.0228% General Electric Co GE 0.51% 3.41% 0.02% 4.03% 0.0207% HP Inc HPQ 0.15% 2.53% 0.00% 7.75% 0.0117% Home Depot Inc/The HD 0.90% 2.21% 0.02% 13.25% 0.1196% International Business Machines Corp IBM 0.54% 4.44% 0.02% 1.97% 0.0107% Concho Resources Inc CXO 0.09% n/a n/a 32.85% 0.0282% Johnson & Johnson JNJ 1.35% 3.01% 0.04% 7.46% 0.1004% McDonald's Corp MCD 0.53% 2.52% 0.01% 8.77% 0.0462% Merck & Co Inc MRK 0.67% 3.23% 0.02% 6.58% 0.0442% 3M Co MMM 0.49% 2.76% 0.01% 8.70% 0.0427% American Water Works Co Inc AWK 0.06% 2.19% 0.00% 7.88% 0.0049% Bank of America Corp BAC 1.24% 1.65% 0.02% 13.40% 0.1656% Brighthouse Financial Inc BHF 0.02% n/a n/a 8.00% 0.0019% Baker Hughes a GE Co BHGE 0.06% 2.08% 0.00% 66.45% 0.0402% Pfizer Inc PFE 0.88% 3.79% 0.03% 7.37% 0.0649% Procter & Gamble Co/The PG 0.77% 3.92% 0.03% 7.45% 0.0575% AT&T Inc T 0.83% 6.19% 0.05% 5.00% 0.0416% Travelers Cos Inc/The TRV 0.15% 2.40% 0.00% 16.58% 0.0242% United Technologies Corp UTX 0.42% 2.24% 0.01% 10.59% 0.0444% Analog Devices Inc ADI 0.15% 1.98% 0.00% 9.60% 0.0145% Walmart Inc WMT 1.02% 2.52% 0.03% 6.21% 0.0635% Cisco Systems Inc CSCO 0.84% 3.09% 0.03% 6.24% 0.0526% Intel Corp INTC 1.08% 2.17% 0.02% 8.98% 0.0969% General Motors Co GM 0.25% 3.56% 0.01% 11.05% 0.0279% Microsoft Corp MSFT 3.19% 1.70% 0.05% 11.41% 0.3637% Dollar General Corp DG 0.10% 1.33% 0.00% 15.95% 0.0157% Kinder Morgan Inc/DE KMI 0.15% 4.80% 0.01% 88.15% 0.1361% Citigroup Inc C 0.71% 1.92% 0.01% 13.86% 0.0989% American International Group Inc AIG 0.20% 2.42% 0.00% 11.00% 0.0219% Honeywell International Inc HON 0.46% 2.01% 0.01% 10.29% 0.0477% Altria Group Inc MO 0.44% 5.02% 0.02% 4.87% 0.0215% HCA Healthcare Inc HCA 0.15% 1.36% 0.00% 12.58% 0.0190% Under Armour Inc UAA 0.02% n/a n/a 25.39% 0.0041% International Paper Co IP 0.09% 3.55% 0.00% 8.67% 0.0081% Hewlett Packard Enterprise Co HPE 0.10% 2.95% 0.00% -4.05% -0.0040% Abbott Laboratories ABT 0.45% 1.82% 0.01% 12.67% 0.0573% Aflac Inc AFL 0.15% 2.31% 0.00% 6.52% 0.0095% Air Products & Chemicals Inc APD 0.15% 2.73% 0.00% 11.42% 0.0169% Royal Caribbean Cruises Ltd RCL 0.09% 2.29% 0.00% 15.45% 0.0144% American Electric Power Co Inc AEP 0.14% 3.65% 0.01% 5.64% 0.0079% Hess Corp HES 0.08% 1.66% 0.00% -7.90% -0.0060% Anadarko Petroleum Corp APC 0.15% 1.43% 0.00% 19.23% 0.0290% Aon PLC AON 0.14% 1.14% 0.00% 11.42% 0.0164% Apache Corp APA 0.06% 2.50% 0.00% -17.09% -0.0110% Archer-Daniels-Midland Co ADM 0.10% 3.07% 0.00% 7.50% 0.0077% Automatic Data Processing Inc ADP 0.24% 2.12% 0.01% 13.50% 0.0324% Verisk Analytics Inc VRSK 0.07% n/a n/a 12.84% 0.0095% AutoZone Inc AZO 0.07% n/a n/a 13.58% 0.0099% Avery Dennison Corp AVY 0.04% 1.98% 0.00% 9.83% 0.0038% MSCI Inc MSCI 0.06% 0.94% 0.00% 12.90% 0.0079% Ball Corp BLL 0.05% 1.08% 0.00% 5.50% 0.0030% Bank of New York Mellon Corp/The BK 0.23% 1.75% 0.00% 8.10% 0.0188% Baxter International Inc BAX 0.16% 1.07% 0.00% 13.06% 0.0209% Becton Dickinson and Co BDX 0.25% 1.35% 0.00% 13.91% 0.0346% Berkshire Hathaway Inc BRK/B 1.08% n/a n/a 6.70% 0.0725% Best Buy Co Inc BBY 0.08% 2.64% 0.00% 11.22% 0.0091% H&R Block Inc HRB 0.02% 3.50% 0.00% 11.00% 0.0027% Boston Scientific Corp BSX 0.18% n/a n/a 21.44% 0.0377% Bristol-Myers Squibb Co BMY 0.36% 3.04% 0.01% 9.00% 0.0325% Fortune Brands Home & Security Inc FBHS 0.03% 1.42% 0.00% 12.68% 0.0044% Brown-Forman Corp BF/B 0.07% 1.12% 0.00% 13.83% 0.0102% Attachment AEB-5 Page 2 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Cabot Oil & Gas Corp COG 0.04% 1.05% 0.00% 39.25% 0.0170% Campbell Soup Co CPB 0.04% 4.16% 0.00% 3.70% 0.0016% Kansas City Southern KSU 0.05% 1.34% 0.00% 8.70% 0.0040% Advanced Micro Devices Inc AMD 0.06% n/a n/a 23.60% 0.0132% Hilton Worldwide Holdings Inc HLT 0.10% 0.74% 0.00% 11.23% 0.0114% Carnival Corp CCL 0.14% 3.21% 0.00% 13.54% 0.0189% Qorvo Inc QRVO 0.04% n/a n/a 13.30% 0.0057% CenturyLink Inc CTL 0.08% 11.86% 0.01% -15.40% -0.0127% Cigna Corp CI 0.17% 0.02% 0.00% 11.33% 0.0196% UDR Inc UDR 0.04% 3.54% 0.00% 5.30% 0.0022% Clorox Co/The CLX 0.07% 3.18% 0.00% 8.53% 0.0056% CMS Energy Corp CMS 0.05% 3.10% 0.00% 6.29% 0.0034% Colgate-Palmolive Co CL 0.23% 2.66% 0.01% 8.47% 0.0195% Comerica Inc CMA 0.07% 1.44% 0.00% 26.85% 0.0183% IPG Photonics Corp IPGP 0.05% n/a n/a 12.00% 0.0065% CA Inc CA 0.06% 2.85% 0.00% 3.08% 0.0019% Conagra Brands Inc CAG 0.06% 2.29% 0.00% 10.35% 0.0063% Consolidated Edison Inc ED 0.10% 3.73% 0.00% 3.00% 0.0030% SL Green Realty Corp SLG 0.04% 3.33% 0.00% 3.62% 0.0013% Corning Inc GLW 0.09% 2.65% 0.00% 4.96% 0.0047% Cummins Inc CMI 0.10% 3.03% 0.00% 9.06% 0.0089% Danaher Corp DHR 0.29% 0.64% 0.00% 8.15% 0.0237% Target Corp TGT 0.16% 3.40% 0.01% 5.17% 0.0084% Deere & Co DE 0.20% 1.85% 0.00% 7.67% 0.0156% Dominion Energy Inc D 0.18% 5.20% 0.01% 5.55% 0.0097% Dover Corp DOV 0.05% 2.43% 0.00% 12.63% 0.0063% Cboe Global Markets Inc CBOE 0.05% 1.11% 0.00% 18.64% 0.0086% Duke Energy Corp DUK 0.23% 4.61% 0.01% 4.45% 0.0101% Eaton Corp PLC ETN 0.14% 3.45% 0.00% 9.04% 0.0127% Ecolab Inc ECL 0.17% 1.15% 0.00% 13.30% 0.0230% PerkinElmer Inc PKI 0.03% 0.38% 0.00% 15.34% 0.0053% Emerson Electric Co EMR 0.19% 2.74% 0.01% 11.79% 0.0221% EOG Resources Inc EOG 0.29% 0.63% 0.00% 8.00% 0.0229% Entergy Corp ETR 0.06% 4.40% 0.00% 0.91% 0.0006% Equifax Inc EFX 0.06% 1.37% 0.00% 8.00% 0.0046% EQT Corp EQT 0.06% 0.23% 0.00% 17.50% 0.0100% IQVIA Holdings Inc IQV 0.09% n/a n/a 15.73% 0.0135% XL Group Ltd XL 0.06% 1.58% 0.00% n/a n/a Gartner Inc IT 0.05% n/a n/a 15.00% 0.0076% FedEx Corp FDX 0.28% 0.80% 0.00% 14.60% 0.0408% Macy's Inc M 0.04% 4.33% 0.00% -0.07% 0.0000% FMC Corp FMC 0.05% 0.76% 0.00% 14.17% 0.0070% Ford Motor Co F 0.19% 5.19% 0.01% -7.42% -0.0141% NextEra Energy Inc NEE 0.33% 2.68% 0.01% 8.57% 0.0281% Franklin Resources Inc BEN 0.08% 2.74% 0.00% 10.00% 0.0076% Freeport-McMoRan Inc FCX 0.10% 1.18% 0.00% -1.41% -0.0015% Gap Inc/The GPS 0.05% 3.47% 0.00% 9.20% 0.0042% General Dynamics Corp GD 0.25% 1.84% 0.00% 11.45% 0.0288% General Mills Inc GIS 0.11% 4.63% 0.00% 7.33% 0.0077% Genuine Parts Co GPC 0.06% 3.17% 0.00% -2.49% -0.0014% WW Grainger Inc GWW 0.07% 1.76% 0.00% 14.70% 0.0107% Halliburton Co HAL 0.18% 1.45% 0.00% 70.36% 0.1286% Harley-Davidson Inc HOG 0.03% 3.60% 0.00% 8.95% 0.0026% Harris Corp HRS 0.07% 1.52% 0.00% n/a n/a HCP Inc HCP 0.05% 6.17% 0.00% -0.37% -0.0002% Helmerich & Payne Inc HP 0.03% 4.22% 0.00% 122.99% 0.0373% Fortive Corp FTV 0.11% 0.39% 0.00% 13.04% 0.0139% Hershey Co/The HSY 0.06% 2.91% 0.00% 8.10% 0.0045% Synchrony Financial SYF 0.11% 1.73% 0.00% 10.60% 0.0116% Hormel Foods Corp HRL 0.08% 2.09% 0.00% 8.05% 0.0064% Arthur J Gallagher & Co AJG 0.05% 2.47% 0.00% 10.32% 0.0052% Mondelez International Inc MDLZ 0.24% 2.24% 0.01% 10.73% 0.0261% CenterPoint Energy Inc CNP 0.05% 4.25% 0.00% 5.87% 0.0028% Humana Inc HUM 0.17% 0.69% 0.00% 13.13% 0.0221% Willis Towers Watson PLC WLTW 0.08% 1.59% 0.00% 10.00% 0.0084% Illinois Tool Works Inc ITW 0.20% 2.17% 0.00% 10.16% 0.0207% Ingersoll-Rand PLC IR 0.09% 2.06% 0.00% 10.92% 0.0099% Foot Locker Inc FL 0.03% 2.56% 0.00% 5.58% 0.0015% Interpublic Group of Cos Inc/The IPG 0.04% 3.72% 0.00% 4.96% 0.0018% International Flavors & Fragrances Inc IFF 0.04% 2.26% 0.00% 8.10% 0.0033% Jacobs Engineering Group Inc JEC 0.04% 0.93% 0.00% 19.29% 0.0074% Hanesbrands Inc HBI 0.03% 3.29% 0.00% 5.87% 0.0016% Kellogg Co K 0.09% 3.35% 0.00% 8.07% 0.0076% Perrigo Co PLC PRGO 0.04% 1.04% 0.00% 6.52% 0.0028% Kimberly-Clark Corp KMB 0.15% 3.97% 0.01% 14.24% 0.0211% Kimco Realty Corp KIM 0.03% 7.24% 0.00% 3.17% 0.0009% Kohl's Corp KSS 0.05% 3.66% 0.00% 6.73% 0.0032% Oracle Corp ORCL 0.80% 1.63% 0.01% 8.71% 0.0697% Kroger Co/The KR 0.08% 2.06% 0.00% 5.57% 0.0046% Leggett & Platt Inc LEG 0.02% 3.68% 0.00% 10.00% 0.0023% Lennar Corp LEN 0.06% 0.31% 0.00% 20.99% 0.0131% Jefferies Financial Group Inc JEF 0.03% 1.83% 0.00% 18.00% 0.0057% Eli Lilly & Co LLY 0.39% 2.65% 0.01% 10.57% 0.0411% L Brands Inc LB 0.04% 7.08% 0.00% 10.28% 0.0041% Attachment AEB-5 Page 3 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Charter Communications Inc CHTR 0.26% n/a n/a 29.32% 0.0763% Lincoln National Corp LNC 0.06% 1.99% 0.00% 8.00% 0.0049% Loews Corp L 0.07% 0.51% 0.00% n/a n/a Lowe's Cos Inc LOW 0.33% 1.73% 0.01% 15.34% 0.0505% Host Hotels & Resorts Inc HST 0.07% 3.70% 0.00% 3.95% 0.0027% Marsh & McLennan Cos Inc MMC 0.17% 2.07% 0.00% 12.77% 0.0219% Masco Corp MAS 0.05% 1.13% 0.00% 15.84% 0.0077% Mattel Inc MAT 0.02% n/a n/a 9.73% 0.0022% S&P Global Inc SPGI 0.21% 1.01% 0.00% 11.70% 0.0244% Medtronic PLC MDT 0.49% 2.13% 0.01% 6.90% 0.0338% CVS Health Corp CVS 0.27% 3.16% 0.01% 11.23% 0.0304% DowDuPont Inc DWDP 0.62% 2.37% 0.01% 8.23% 0.0514% Micron Technology Inc MU 0.28% n/a n/a 2.20% 0.0062% Motorola Solutions Inc MSI 0.07% 1.94% 0.00% 4.07% 0.0030% Mylan NV MYL 0.08% n/a n/a 6.31% 0.0052% Laboratory Corp of America Holdings LH 0.08% n/a n/a 9.15% 0.0071% Newell Brands Inc NWL 0.05% 3.90% 0.00% 5.42% 0.0026% Newmont Mining Corp NEM 0.09% 1.44% 0.00% -3.00% -0.0026% Twenty-First Century Fox Inc FOXA 0.17% 0.93% 0.00% 10.60% 0.0181% NIKE Inc NKE 0.39% 1.11% 0.00% 11.18% 0.0432% NiSource Inc NI 0.04% 3.08% 0.00% 5.86% 0.0023% Noble Energy Inc NBL 0.07% 1.23% 0.00% 12.50% 0.0091% Norfolk Southern Corp NSC 0.18% 1.90% 0.00% 14.38% 0.0258% Principal Financial Group Inc PFG 0.07% 3.73% 0.00% 9.39% 0.0063% Eversource Energy ES 0.08% 3.54% 0.00% 6.20% 0.0047% Northrop Grumman Corp NOC 0.24% 1.47% 0.00% 14.80% 0.0354% Wells Fargo & Co WFC 1.10% 2.89% 0.03% 10.66% 0.1176% Nucor Corp NUE 0.09% 2.37% 0.00% 5.90% 0.0051% PVH Corp PVH 0.05% 0.09% 0.00% 10.56% 0.0055% Occidental Petroleum Corp OXY 0.27% 3.66% 0.01% 11.55% 0.0312% Omnicom Group Inc OMC 0.07% 3.33% 0.00% 5.67% 0.0039% ONEOK Inc OKE 0.12% 4.67% 0.01% 25.16% 0.0296% Raymond James Financial Inc RJF 0.06% 1.24% 0.00% 17.00% 0.0100% PG&E Corp PCG 0.09% n/a n/a 5.25% 0.0049% Parker-Hannifin Corp PH 0.10% 1.78% 0.00% 9.59% 0.0091% PPL Corp PPL 0.08% 6.00% 0.00% 5.40% 0.0043% Exelon Corp EXC 0.17% 3.33% 0.01% 5.31% 0.0089% ConocoPhillips COP 0.33% 1.69% 0.01% 6.00% 0.0199% PulteGroup Inc PHM 0.04% 1.19% 0.00% 21.25% 0.0077% Pinnacle West Capital Corp PNW 0.04% 3.49% 0.00% 4.49% 0.0017% PNC Financial Services Group Inc/The PNC 0.28% 2.09% 0.01% 11.11% 0.0314% PPG Industries Inc PPG 0.11% 1.78% 0.00% 8.73% 0.0092% Praxair Inc PX 0.19% 2.11% 0.00% 13.97% 0.0263% Progressive Corp/The PGR 0.15% 1.81% 0.00% 8.00% 0.0121% Public Service Enterprise Group Inc PEG 0.11% 3.40% 0.00% 6.04% 0.0068% Raytheon Co RTN 0.25% 1.66% 0.00% 14.97% 0.0378% Robert Half International Inc RHI 0.03% 1.76% 0.00% 16.20% 0.0053% SCANA Corp SCG 0.02% 6.75% 0.00% -2.10% -0.0005% Edison International EIX 0.08% 3.89% 0.00% 5.26% 0.0045% Schlumberger Ltd SLB 0.40% 2.91% 0.01% 39.63% 0.1581% Charles Schwab Corp/The SCHW 0.31% 0.72% 0.00% 21.02% 0.0662% Sherwin-Williams Co/The SHW 0.15% 0.91% 0.00% 12.25% 0.0182% JM Smucker Co/The SJM 0.05% 2.90% 0.00% 6.70% 0.0034% Snap-on Inc SNA 0.04% 2.22% 0.00% 9.70% 0.0034% AMETEK Inc AME 0.07% 0.77% 0.00% 10.58% 0.0075% Southern Co/The SO 0.19% 5.35% 0.01% 4.38% 0.0084% BB&T Corp BBT 0.17% 2.86% 0.00% 14.32% 0.0246% Southwest Airlines Co LUV 0.12% 1.25% 0.00% 12.03% 0.0150% Stanley Black & Decker Inc SWK 0.09% 1.81% 0.00% 11.50% 0.0104% Public Storage PSA 0.15% 3.78% 0.01% 5.44% 0.0084% SunTrust Banks Inc STI 0.13% 2.37% 0.00% 13.31% 0.0175% Sysco Corp SYY 0.14% 2.21% 0.00% 11.85% 0.0168% Andeavor ANDV 0.09% 1.63% 0.00% 7.95% 0.0073% Texas Instruments Inc TXN 0.46% 2.22% 0.01% 10.46% 0.0481% Textron Inc TXT 0.07% 0.12% 0.00% 13.51% 0.0097% Thermo Fisher Scientific Inc TMO 0.35% 0.33% 0.00% 10.93% 0.0384% Tiffany & Co TIF 0.07% 1.68% 0.00% 10.28% 0.0070% TJX Cos Inc/The TJX 0.24% 1.73% 0.00% 12.53% 0.0298% Torchmark Corp TMK 0.04% 0.75% 0.00% 10.45% 0.0042% Total System Services Inc TSS 0.07% 0.61% 0.00% 14.57% 0.0095% Johnson Controls International plc JCI 0.13% 3.10% 0.00% 10.47% 0.0137% Ulta Beauty Inc ULTA 0.06% n/a n/a 18.50% 0.0116% Union Pacific Corp UNP 0.46% 2.05% 0.01% 14.20% 0.0655% UnitedHealth Group Inc UNH 0.97% 1.24% 0.01% 13.05% 0.1271% Unum Group UNM 0.04% 2.68% 0.00% 7.00% 0.0025% Marathon Oil Corp MRO 0.08% 0.93% 0.00% 5.00% 0.0038% Varian Medical Systems Inc VAR 0.05% n/a n/a 16.00% 0.0072% Ventas Inc VTR 0.08% 5.78% 0.00% 1.83% 0.0015% VF Corp VFC 0.14% 2.27% 0.00% 8.06% 0.0109% Vornado Realty Trust VNO 0.06% 3.62% 0.00% 7.38% 0.0041% Vulcan Materials Co VMC 0.07% 0.88% 0.00% 21.12% 0.0150% Weyerhaeuser Co WY 0.12% 3.43% 0.00% 9.25% 0.0110% Whirlpool Corp WHR 0.04% 3.18% 0.00% 9.98% 0.0043% Williams Cos Inc/The WMB 0.09% 5.06% 0.00% -12.20% -0.0114% Attachment AEB-5 Page 4 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
WEC Energy Group Inc WEC 0.08% 3.50% 0.00% 3.00% 0.0025% Xerox Corp XRX 0.03% 3.68% 0.00% n/a n/a Adobe Systems Inc ADBE 0.52% n/a n/a 18.66% 0.0961% AES Corp/VA AES 0.04% 4.08% 0.00% 8.23% 0.0029% Amgen Inc AMGN 0.50% 2.94% 0.01% 5.11% 0.0255% Apple Inc AAPL 3.85% 1.56% 0.06% 12.47% 0.4804% Autodesk Inc ADSK 0.12% n/a n/a 36.67% 0.0435% Cintas Corp CTAS 0.08% 0.89% 0.00% 11.60% 0.0095% Comcast Corp CMCSA 0.60% 2.44% 0.01% 15.40% 0.0925% Molson Coors Brewing Co TAP 0.05% 2.66% 0.00% 5.61% 0.0028% KLA-Tencor Corp KLAC 0.07% 2.65% 0.00% 11.16% 0.0083% Marriott International Inc/MD MAR 0.20% 1.21% 0.00% 17.83% 0.0358% McCormick & Co Inc/MD MKC 0.05% 2.06% 0.00% 8.30% 0.0043% Nordstrom Inc JWN 0.03% 3.02% 0.00% 8.80% 0.0030% PACCAR Inc PCAR 0.09% 1.80% 0.00% 6.80% 0.0062% Costco Wholesale Corp COST 0.37% 1.15% 0.00% 11.47% 0.0419% Stryker Corp SYK 0.27% 1.08% 0.00% 8.89% 0.0242% Tyson Foods Inc TSN 0.08% 1.78% 0.00% 8.50% 0.0072% Applied Materials Inc AMAT 0.21% 1.58% 0.00% 14.46% 0.0310% Time Warner Inc TWX 0.31% 1.71% 0.01% 5.00% 0.0155% American Airlines Group Inc AAL 0.09% 0.92% 0.00% 17.10% 0.0146% Cardinal Health Inc CAH 0.07% 3.66% 0.00% 10.75% 0.0073% Celgene Corp CELG 0.24% n/a n/a 19.05% 0.0456% Cerner Corp CERN 0.08% n/a n/a 11.94% 0.0099% Cincinnati Financial Corp CINF 0.05% 3.06% 0.00% n/a n/a DR Horton Inc DHI 0.07% 1.18% 0.00% 20.52% 0.0137% Flowserve Corp FLS 0.02% 1.84% 0.00% 19.47% 0.0044% Electronic Arts Inc EA 0.17% n/a n/a 13.50% 0.0228% Express Scripts Holding Co ESRX 0.18% n/a n/a 6.73% 0.0120% Expeditors International of Washington Inc EXPD 0.05% 1.21% 0.00% 10.83% 0.0059% Fastenal Co FAST 0.06% 2.78% 0.00% 17.50% 0.0112% M&T Bank Corp MTB 0.10% 1.86% 0.00% 13.84% 0.0145% Xcel Energy Inc XEL 0.10% 3.34% 0.00% 5.88% 0.0057% Fiserv Inc FISV 0.12% n/a n/a 3.30% 0.0041% Fifth Third Bancorp FITB 0.09% 2.09% 0.00% 6.00% 0.0053% Gilead Sciences Inc GILD 0.37% 3.38% 0.01% -6.54% -0.0240% Hasbro Inc HAS 0.05% 2.90% 0.00% 8.17% 0.0037% Huntington Bancshares Inc/OH HBAN 0.07% 2.96% 0.00% 13.77% 0.0095% Welltower Inc WELL 0.09% 6.04% 0.01% 5.84% 0.0053% Biogen Inc BIIB 0.26% n/a n/a 5.45% 0.0142% Range Resources Corp RRC 0.02% 0.51% 0.00% 22.54% 0.0037% Northern Trust Corp NTRS 0.10% 1.64% 0.00% 13.84% 0.0134% Packaging Corp of America PKG 0.05% 2.69% 0.00% 8.00% 0.0037% Paychex Inc PAYX 0.10% 3.42% 0.00% 8.50% 0.0084% People's United Financial Inc PBCT 0.03% 3.80% 0.00% 2.00% 0.0005% QUALCOMM Inc QCOM 0.36% 4.27% 0.02% 5.67% 0.0205% Roper Technologies Inc ROP 0.12% 0.60% 0.00% 13.27% 0.0158% Ross Stores Inc ROST 0.13% 1.14% 0.00% 13.12% 0.0164% IDEXX Laboratories Inc IDXX 0.08% n/a n/a 16.91% 0.0128% Starbucks Corp SBUX 0.33% 2.12% 0.01% 14.43% 0.0473% KeyCorp KEY 0.09% 2.47% 0.00% 16.47% 0.0143% State Street Corp STT 0.15% 1.75% 0.00% 17.73% 0.0261% Norwegian Cruise Line Holdings Ltd NCLH 0.05% n/a n/a 19.90% 0.0098% US Bancorp USB 0.34% 2.40% 0.01% 8.03% 0.0277% AO Smith Corp AOS 0.04% 1.14% 0.00% 11.50% 0.0044% Symantec Corp SYMC 0.05% 1.44% 0.00% 8.52% 0.0046% T Rowe Price Group Inc TROW 0.12% 2.31% 0.00% 12.57% 0.0155% Waste Management Inc WM 0.15% 2.25% 0.00% 11.71% 0.0176% CBS Corp CBS 0.07% 1.43% 0.00% 15.32% 0.0111% Allergan PLC AGN 0.21% 1.91% 0.00% 9.21% 0.0198% Constellation Brands Inc STZ 0.16% 1.33% 0.00% 14.41% 0.0227% Xilinx Inc XLNX 0.07% 2.11% 0.00% 10.20% 0.0074% DENTSPLY SIRONA Inc XRAY 0.04% 0.80% 0.00% 8.95% 0.0037% Zions Bancorporation ZION 0.05% 1.75% 0.00% 10.23% 0.0046% Alaska Air Group Inc ALK 0.03% 2.10% 0.00% 15.52% 0.0049% Invesco Ltd IVZ 0.05% 4.39% 0.00% 8.97% 0.0042% Intuit Inc INTU 0.22% 0.77% 0.00% 16.29% 0.0353% Morgan Stanley MS 0.37% 1.99% 0.01% 14.35% 0.0534% Microchip Technology Inc MCHP 0.10% 1.49% 0.00% 12.04% 0.0116% Chubb Ltd CB 0.26% 2.23% 0.01% 10.00% 0.0255% Hologic Inc HOLX 0.04% n/a n/a 9.51% 0.0041% Citizens Financial Group Inc CFG 0.08% 2.15% 0.00% 20.98% 0.0174% O'Reilly Automotive Inc ORLY 0.09% n/a n/a 14.72% 0.0136% Allstate Corp/The ALL 0.14% 1.97% 0.00% 9.00% 0.0124% FLIR Systems Inc FLIR 0.03% 1.19% 0.00% n/a n/a Equity Residential EQR 0.10% 3.38% 0.00% 5.14% 0.0051% BorgWarner Inc BWA 0.04% 1.39% 0.00% 4.83% 0.0021% Newfield Exploration Co NFX 0.02% n/a n/a 13.72% 0.0034% Incyte Corp INCY 0.06% n/a n/a 57.63% 0.0350% Simon Property Group Inc SPG 0.21% 4.87% 0.01% 6.16% 0.0128% Eastman Chemical Co EMN 0.06% 2.15% 0.00% 7.65% 0.0048% AvalonBay Communities Inc AVB 0.10% 3.55% 0.00% 6.37% 0.0061% Prudential Financial Inc PRU 0.17% 3.72% 0.01% 8.50% 0.0145% United Parcel Service Inc UPS 0.34% 3.13% 0.01% 8.50% 0.0286% Attachment AEB-5 Page 5 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Apartment Investment & Management Co AIV 0.03% 3.72% 0.00% 5.94% 0.0016% Walgreens Boots Alliance Inc WBA 0.26% 2.56% 0.01% 10.73% 0.0279% McKesson Corp MCK 0.12% 0.96% 0.00% 5.83% 0.0070% Lockheed Martin Corp LMT 0.38% 2.54% 0.01% 22.09% 0.0833% AmerisourceBergen Corp ABC 0.08% 1.85% 0.00% 10.33% 0.0078% Capital One Financial Corp COF 0.19% 1.70% 0.00% 16.36% 0.0314% Waters Corp WAT 0.06% n/a n/a 10.11% 0.0064% Dollar Tree Inc DLTR 0.08% n/a n/a 13.37% 0.0110% Darden Restaurants Inc DRI 0.05% 2.88% 0.00% 10.67% 0.0048% NetApp Inc NTAP 0.08% 2.34% 0.00% 10.17% 0.0078% Citrix Systems Inc CTXS 0.06% 1.33% 0.00% 11.00% 0.0066% Goodyear Tire & Rubber Co/The GT 0.02% 2.29% 0.00% n/a n/a DXC Technology Co DXC 0.10% 0.95% 0.00% 6.15% 0.0059% DaVita Inc DVA 0.05% n/a n/a 20.25% 0.0099% Hartford Financial Services Group Inc/The HIG 0.08% 1.91% 0.00% 9.50% 0.0075% Iron Mountain Inc IRM 0.04% 7.06% 0.00% 9.00% 0.0036% Estee Lauder Cos Inc/The EL 0.14% 1.02% 0.00% 21.15% 0.0297% Cadence Design Systems Inc CDNS 0.05% n/a n/a 12.00% 0.0060% Stericycle Inc SRCL 0.02% n/a n/a 8.87% 0.0020% Universal Health Services Inc UHS 0.04% 0.35% 0.00% 9.44% 0.0040% E*TRADE Financial Corp ETFC 0.07% n/a n/a 29.86% 0.0209% Skyworks Solutions Inc SWKS 0.08% 1.30% 0.00% 10.99% 0.0083% National Oilwell Varco Inc NOV 0.07% 0.48% 0.00% 48.10% 0.0319% Quest Diagnostics Inc DGX 0.06% 1.88% 0.00% 9.95% 0.0060% Activision Blizzard Inc ATVI 0.23% 0.48% 0.00% 15.55% 0.0352% Rockwell Automation Inc ROK 0.09% 2.10% 0.00% 11.49% 0.0106% Kraft Heinz Co/The KHC 0.29% 4.35% 0.01% 6.90% 0.0203% American Tower Corp AMT 0.26% 2.23% 0.01% 15.02% 0.0385% Regeneron Pharmaceuticals Inc REGN 0.13% n/a n/a 15.76% 0.0210% Amazon.com Inc AMZN 3.32% n/a n/a 39.85% 1.3221% Ralph Lauren Corp RL 0.03% 1.49% 0.00% 5.11% 0.0016% Boston Properties Inc BXP 0.08% 2.63% 0.00% 6.16% 0.0049% Amphenol Corp APH 0.11% 1.06% 0.00% 11.31% 0.0124% Arconic Inc ARNC 0.04% 1.36% 0.00% 15.95% 0.0057% Pioneer Natural Resources Co PXD 0.14% 0.17% 0.00% 30.50% 0.0421% Valero Energy Corp VLO 0.22% 2.64% 0.01% 26.80% 0.0587% Synopsys Inc SNPS 0.06% n/a n/a n/a n/a L3 Technologies Inc LLL 0.07% 1.61% 0.00% 11.07% 0.0072% Western Union Co/The WU 0.04% 3.82% 0.00% 4.26% 0.0016% CH Robinson Worldwide Inc CHRW 0.05% 2.11% 0.00% 9.58% 0.0049% Accenture PLC ACN 0.42% 1.71% 0.01% 11.10% 0.0466% TransDigm Group Inc TDG 0.07% n/a n/a 11.80% 0.0087% Yum! Brands Inc YUM 0.11% 1.77% 0.00% 12.40% 0.0137% Prologis Inc PLD 0.14% 2.98% 0.00% 6.47% 0.0093% FirstEnergy Corp FE 0.07% 4.18% 0.00% -0.12% -0.0001% VeriSign Inc VRSN 0.07% n/a n/a 10.40% 0.0070% Quanta Services Inc PWR 0.02% n/a n/a n/a n/a Henry Schein Inc HSIC 0.04% n/a n/a 8.34% 0.0037% Ameren Corp AEE 0.06% 3.09% 0.00% 8.97% 0.0054% ANSYS Inc ANSS 0.06% n/a n/a 12.17% 0.0070% NVIDIA Corp NVDA 0.64% 0.24% 0.00% 10.40% 0.0668% Sealed Air Corp SEE 0.03% 1.47% 0.00% 11.61% 0.0034% Cognizant Technology Solutions Corp CTSH 0.19% 1.06% 0.00% 15.03% 0.0278% SVB Financial Group SIVB 0.07% n/a n/a 10.75% 0.0075% Intuitive Surgical Inc ISRG 0.22% n/a n/a 11.75% 0.0257% Aetna Inc AET 0.24% 1.14% 0.00% 11.08% 0.0268% Affiliated Managers Group Inc AMG 0.04% 0.75% 0.00% 12.85% 0.0047% Take-Two Interactive Software Inc TTWO 0.05% n/a n/a 10.00% 0.0054% Republic Services Inc RSG 0.09% 2.05% 0.00% 9.69% 0.0090% eBay Inc EBAY 0.16% n/a n/a 10.04% 0.0158% Goldman Sachs Group Inc/The GS 0.36% 1.42% 0.01% 16.05% 0.0574% SBA Communications Corp SBAC 0.08% n/a n/a 27.15% 0.0207% Sempra Energy SRE 0.12% 3.36% 0.00% 16.96% 0.0200% Moody's Corp MCO 0.14% 1.03% 0.00% 8.00% 0.0110% Booking Holdings Inc BKNG 0.43% n/a n/a 14.12% 0.0602% F5 Networks Inc FFIV 0.04% n/a n/a 10.25% 0.0046% Akamai Technologies Inc AKAM 0.05% n/a n/a 11.71% 0.0063% Devon Energy Corp DVN 0.09% 0.77% 0.00% 10.58% 0.0097% Alphabet Inc GOOGL 1.38% n/a n/a 18.96% 0.2613% Red Hat Inc RHT 0.12% n/a n/a 17.36% 0.0210% Allegion PLC ALLE 0.03% 1.10% 0.00% 11.96% 0.0036% Netflix Inc NFLX 0.64% n/a n/a 47.27% 0.3031% Agilent Technologies Inc A 0.08% 0.96% 0.00% -9.90% -0.0082% Anthem Inc ANTM 0.24% 1.35% 0.00% 10.09% 0.0239% CME Group Inc CME 0.23% 1.72% 0.00% 3.65% 0.0085% Juniper Networks Inc JNPR 0.04% 2.70% 0.00% 8.68% 0.0034% BlackRock Inc BLK 0.36% 2.16% 0.01% 11.38% 0.0409% DTE Energy Co DTE 0.08% 3.45% 0.00% 5.30% 0.0041% Nasdaq Inc NDAQ 0.06% 1.92% 0.00% 10.79% 0.0069% Philip Morris International Inc PM 0.52% 5.38% 0.03% 10.87% 0.0564% salesforce.com Inc CRM 0.40% n/a n/a 26.30% 0.1060% Huntington Ingalls Industries Inc HII 0.04% 1.30% 0.00% 27.50% 0.0114% MetLife Inc MET 0.20% 3.65% 0.01% 12.68% 0.0249% Under Armour Inc UA 0.02% n/a n/a 36.17% 0.0064% Attachment AEB-5 Page 6 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Monsanto Co MON 0.24% 1.69% 0.00% 7.95% 0.0188% Tapestry Inc TPR 0.05% 3.09% 0.00% 11.31% 0.0060% Fluor Corp FLR 0.03% 1.72% 0.00% 27.68% 0.0080% CSX Corp CSX 0.24% 1.36% 0.00% 15.16% 0.0360% Edwards Lifesciences Corp EW 0.12% n/a n/a 15.33% 0.0186% Ameriprise Financial Inc AMP 0.08% 2.60% 0.00% n/a n/a Rockwell Collins Inc COL 0.09% 0.96% 0.00% 11.60% 0.0110% TechnipFMC PLC FTI 0.06% 1.67% 0.00% 8.47% 0.0051% Zimmer Biomet Holdings Inc ZBH 0.10% 0.86% 0.00% 5.54% 0.0053% CBRE Group Inc CBRE 0.07% n/a n/a 10.75% 0.0071% Mastercard Inc MA 0.82% 0.53% 0.00% 21.41% 0.1759% CarMax Inc KMX 0.05% n/a n/a 12.90% 0.0066% Intercontinental Exchange Inc ICE 0.17% 1.35% 0.00% 10.43% 0.0180% Fidelity National Information Services Inc FIS 0.14% 1.25% 0.00% 4.40% 0.0062% Chipotle Mexican Grill Inc CMG 0.05% n/a n/a 18.94% 0.0095% Wynn Resorts Ltd WYNN 0.09% 1.53% 0.00% 18.70% 0.0167% Assurant Inc AIZ 0.02% 2.40% 0.00% n/a n/a NRG Energy Inc NRG 0.05% 0.35% 0.00% 19.82% 0.0090% Monster Beverage Corp MNST 0.12% n/a n/a 16.30% 0.0197% Regions Financial Corp RF 0.09% 1.97% 0.00% 16.09% 0.0138% Mosaic Co/The MOS 0.04% 0.36% 0.00% 7.00% 0.0031% Expedia Group Inc EXPE 0.07% 0.99% 0.00% 16.76% 0.0117% Discovery Inc DISCA 0.01% n/a n/a 6.00% 0.0008% CF Industries Holdings Inc CF 0.04% 2.92% 0.00% 11.75% 0.0047% Viacom Inc VIAB 0.04% 2.95% 0.00% 4.17% 0.0017% Alphabet Inc GOOG 1.59% n/a n/a 18.96% 0.3011% TE Connectivity Ltd TEL 0.14% 1.89% 0.00% 10.33% 0.0141% Cooper Cos Inc/The COO 0.05% 0.03% 0.00% 10.73% 0.0050% Discover Financial Services DFS 0.11% 1.90% 0.00% 8.89% 0.0096% TripAdvisor Inc TRIP 0.03% n/a n/a 14.41% 0.0039% Dr Pepper Snapple Group Inc DPS 0.09% 1.94% 0.00% 11.00% 0.0099% Visa Inc V 0.98% 0.64% 0.01% 17.35% 0.1699% Mid-America Apartment Communities Inc MAA 0.04% 3.94% 0.00% 7.00% 0.0031% Xylem Inc/NY XYL 0.05% 1.19% 0.00% 18.00% 0.0096% Marathon Petroleum Corp MPC 0.15% 2.33% 0.00% 6.87% 0.0105% Tractor Supply Co TSCO 0.04% 1.67% 0.00% 13.29% 0.0051% ResMed Inc RMD 0.06% 1.36% 0.00% 16.10% 0.0099% Mettler-Toledo International Inc MTD 0.06% n/a n/a 11.95% 0.0070% Albemarle Corp ALB 0.04% 1.43% 0.00% 12.90% 0.0056% Essex Property Trust Inc ESS 0.07% 3.11% 0.00% 6.42% 0.0043% GGP Inc GGP 0.08% 4.34% 0.00% 2.15% 0.0018% Realty Income Corp O 0.06% 4.94% 0.00% 4.39% 0.0028% Seagate Technology PLC STX 0.07% 4.47% 0.00% 3.15% 0.0021% WestRock Co WRK 0.06% 2.92% 0.00% 8.00% 0.0051% IHS Markit Ltd INFO 0.08% n/a n/a 12.33% 0.0102% Western Digital Corp WDC 0.10% 2.39% 0.00% 14.08% 0.0148% PepsiCo Inc PEP 0.60% 3.70% 0.02% 6.92% 0.0413% Nektar Therapeutics NKTR 0.06% n/a n/a n/a n/a Church & Dwight Co Inc CHD 0.05% 1.85% 0.00% 10.31% 0.0050% Duke Realty Corp DRE 0.04% 2.85% 0.00% -3.93% -0.0017% Federal Realty Investment Trust FRT 0.04% 3.36% 0.00% 4.20% 0.0015% MGM Resorts International MGM 0.07% 1.53% 0.00% 8.64% 0.0063% Twenty-First Century Fox Inc FOX 0.13% 0.94% 0.00% 10.60% 0.0136% Alliant Energy Corp LNT 0.04% 3.24% 0.00% 5.94% 0.0024% JB Hunt Transport Services Inc JBHT 0.06% 0.75% 0.00% 12.72% 0.0075% Lam Research Corp LRCX 0.14% 2.22% 0.00% 6.50% 0.0089% Mohawk Industries Inc MHK 0.06% n/a n/a 8.58% 0.0055% Pentair PLC PNR 0.03% 1.60% 0.00% 10.55% 0.0034% Vertex Pharmaceuticals Inc VRTX 0.16% n/a n/a 62.50% 0.1029% Facebook Inc FB 1.93% n/a n/a 21.49% 0.4148% United Rentals Inc URI 0.06% n/a n/a 17.76% 0.0099% Alexandria Real Estate Equities Inc ARE 0.05% 2.88% 0.00% 6.78% 0.0037% ABIOMED Inc ABMD 0.07% n/a n/a 37.00% 0.0263% United Continental Holdings Inc UAL 0.08% n/a n/a 20.48% 0.0166% Navient Corp NAVI 0.02% 4.63% 0.00% -6.00% -0.0009% Delta Air Lines Inc DAL 0.16% 2.26% 0.00% 16.77% 0.0267% News Corp NWS 0.01% 1.29% 0.00% 12.95% 0.0017% Centene Corp CNC 0.10% n/a n/a 16.65% 0.0168% Regency Centers Corp REG 0.04% 3.82% 0.00% 8.45% 0.0035% Macerich Co/The MAC 0.03% 5.32% 0.00% 4.82% 0.0016% Martin Marietta Materials Inc MLM 0.06% 0.79% 0.00% 13.36% 0.0078% Envision Healthcare Corp EVHC 0.02% n/a n/a 14.96% 0.0033% PayPal Holdings Inc PYPL 0.41% n/a n/a 18.63% 0.0762% Coty Inc COTY 0.04% 3.77% 0.00% 16.00% 0.0067% DISH Network Corp DISH 0.03% n/a n/a -11.61% -0.0033% Alexion Pharmaceuticals Inc ALXN 0.11% n/a n/a 18.87% 0.0205% Everest Re Group Ltd RE 0.04% 2.31% 0.00% 10.00% 0.0039% News Corp NWSA 0.02% 1.33% 0.00% 12.95% 0.0031% Global Payments Inc GPN 0.07% 0.04% 0.00% 22.03% 0.0164% Crown Castle International Corp CCI 0.18% 4.03% 0.01% 12.77% 0.0231% Aptiv PLC APTV 0.11% 0.90% 0.00% 9.55% 0.0103% Advance Auto Parts Inc AAP 0.04% 0.19% 0.00% 16.64% 0.0066% Michael Kors Holdings Ltd KORS 0.04% n/a n/a 7.83% 0.0028% Align Technology Inc ALGN 0.11% n/a n/a 31.45% 0.0351% Attachment AEB-5 Page 7 of 7
STANDARD AND POOR'S 500 INDEX
[4] [5] [6] [7] [8] Cap-Weighted Weight in Current Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.
Illumina Inc ILMN 0.17% n/a n/a 16.22% 0.0272% Acuity Brands Inc AYI 0.02% 0.44% 0.00% 10.00% 0.0020% Alliance Data Systems Corp ADS 0.05% 1.08% 0.00% 12.40% 0.0061% LKQ Corp LKQ 0.04% n/a n/a 13.65% 0.0056% Nielsen Holdings PLC NLSN 0.05% 4.64% 0.00% 12.00% 0.0054% Garmin Ltd GRMN 0.05% 3.53% 0.00% 5.90% 0.0028% Cimarex Energy Co XEC 0.04% 0.69% 0.00% 74.20% 0.0276% Zoetis Inc ZTS 0.17% 0.60% 0.00% 14.89% 0.0253% Digital Realty Trust Inc DLR 0.09% 3.76% 0.00% 7.28% 0.0068% Equinix Inc EQIX 0.13% 2.30% 0.00% 18.75% 0.0248% Discovery Inc DISCK 0.03% n/a n/a 6.00% 0.0018%
Notes: [1] Equals Sum ([6]) [2] Equals Sum ([8]) [3] Equals ([1] x (1 + (0.5 x [2]))) + [2] [4] Equals weight in S&P 500 based on market capitalization [5] Source: Bloomberg Professional [6] Equals [4] x [5] [7] Source: Bloomberg Professional [8] Equals [4] x [7] Attachment AEB-6 Page 1 of 1
CAPITAL ASSET PRICING MODEL INCLUDING AWK
K = R f + β (R m − R f )
[4] [5] [6] [7] [8] Market Risk-Free Market Risk Rate Beta Return Premium ROE
(R f ) (β) (R m )(Rm − R f ) (K)
Proxy Group Average Bloomberg Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.752 15.64% 12.50% 12.55% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.752 15.64% 12.10% 12.65% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.752 15.64% 11.44% 12.81% Average 12.67%
Proxy Group Average Value Line Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.725 15.64% 12.50% 12.20% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.725 15.64% 12.10% 12.31% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.725 15.64% 11.44% 12.50% Average 12.34%
Overall Average 12.50%
Notes: [1] Source: Bloomberg Professional [2] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 2 [3] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 14 [4] See Notes [1], [2], and [3] [5] Source: Exhibit AEB-4 [6] Source: Exhibit AEB-5 [7] Equals [6] − [4] [8] Equals [4] + [5] x [7] Attachment AEB-7 Page 1 of 1
CAPITAL ASSET PRICING MODEL EXCLUDING AWK
K = R f + β (R m − R f )
[4] [5] [6] [7] [8] Market Risk-Free Market Risk Rate Beta Return Premium ROE
(R f ) (β) (R m )(Rm − R f ) (K)
Proxy Group Average Bloomberg Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.758 15.64% 12.50% 12.61% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.758 15.64% 12.10% 12.71% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.758 15.64% 11.44% 12.87% Average 12.73%
Proxy Group Average Value Line Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.736 15.64% 12.50% 12.34% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.736 15.64% 12.10% 12.44% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.736 15.64% 11.44% 12.62% Average 12.47%
Overall Average 12.60%
Notes: [1] Source: Bloomberg Professional [2] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 2 [3] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 14 [4] See Notes [1], [2], and [3] [5] Source: Exhibit AEB-4 [6] Source: Exhibit AEB-5 [7] Equals [6] − [4] [8] Equals [4] + [5] x [7] Attachment AEB-8 Page 1 of 1
CAPITAL ASSET PRICING MODEL EXCLUDING CTWS AND SJW
K = R f + β (R m − R f )
[4] [5] [6] [7] [8] Market Risk-Free Market Risk Rate Beta Return Premium ROE
(R f ) (β) (R m )(Rm − R f ) (K)
Proxy Group Average Bloomberg Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.823 15.64% 12.50% 13.43% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.823 15.64% 12.10% 13.50% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.823 15.64% 11.44% 13.62% Average 13.51%
Proxy Group Average Value Line Beta Current 30-day average of 30-year U.S. Treasury bond yield [1] 3.14% 0.742 15.64% 12.50% 12.41% Near-term projected 30-year U.S. Treasury bond yield (Q3 2018 - Q3 2019) [2] 3.54% 0.742 15.64% 12.10% 12.52% Projected 30-year U.S. Treasury bond yield (2020 - 2024) [3] 4.20% 0.742 15.64% 11.44% 12.69% Average 12.54%
Overall Average 13.03%
Notes: [1] Source: Bloomberg Professional [2] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 2 [3] Source: Blue Chip Financial Forecasts, Vol. 37, No. 6, June 1, 2018, at 14 [4] See Notes [1], [2], and [3] [5] Source: Exhibit AEB-4 [6] Source: Exhibit AEB-5 [7] Equals [6] − [4] [8] Equals [4] + [5] x [7] Attachment AEB-9 Page 1 of 2
2018-2022 CAPITAL EXPENDITURES AS A PERCENT OF 2017 NET PLANT ($ Millions)
[1] [2] [3] [4] [5] [6] [7] 2018-22 Cap. Ex. / 2017 2017 2018 2019 2020 2021 2022 Net Plant
American States Water Co AWR Capital Spending per Share $3.40 $3.40 $3.33 $3.25 $3.25 Common Shares Outstanding 36.80 37.00 37.25 37.50 37.50 Capital Expenditures $125.1 $125.8 $123.9 $121.9 $121.9 51.33% Net Plant $1,205.0
American Water AWK Capital Spending per Share $9.60 $9.55 $9.38 $9.20 $9.20 Common Shares Outstanding 179.00 180.00 183.75 187.50 187.50 Capital Expenditures $1,718.4 $1,719.0 $1,722.7 $1,725.0 $1,725.0 53.00% Net Plant $16,246.0
Aqua America WTR Capital Spending per Share $2.65 $2.65 $2.38 $2.10 $2.10 Common Shares Outstanding 178.25 178.75 179.38 180.00 180.00 Capital Expenditures $472.4 $473.7 $426.0 $378.0 $378.0 39.41% Net Plant $5,399.9
California Water Services Group CWT Capital Spending per Share $4.35 $3.95 $3.80 $3.65 $3.65 Common Shares Outstanding 48.50 49.00 49.50 50.00 50.00 Capital Expenditures $211.0 $193.6 $188.1 $182.5 $182.5 46.76% Net Plant $2,048.0
Connecticut Water Service, Inc. CTWS Capital Spending per Share $4.45 $4.00 $3.68 $3.35 $3.35 Common Shares Outstanding 12.15 12.25 12.38 12.50 12.50 Capital Expenditures $54.1 $49.0 $45.5 $41.9 $41.9 33.29% Net Plant $697.7
Middlesex Water Company MSEX Capital Spending per Share $2.85 $2.75 $2.63 $2.50 $2.50 Common Shares Outstanding 16.50 16.75 16.88 17.00 17.00 Capital Expenditures $47.0 $46.1 $44.3 $42.5 $42.5 39.91% Net Plant $557.2
SJW Corporation SJW Capital Spending per Share $5.50 $5.25 $5.13 $5.00 $5.00 Common Shares Outstanding 21.00 22.00 22.50 23.00 23.00 Capital Expenditures $115.5 $115.5 $115.3 $115.0 $115.0 46.50% Net Plant $1,239.3
York Water Company YORW Capital Spending per Share $1.50 $1.25 $1.15 $1.05 $1.05 Common Shares Outstanding 12.75 12.65 12.58 12.50 12.50 Capital Expenditures $19.1 $15.8 $14.5 $13.1 $13.1 26.19% Net Plant $288.8
Indiana-American Water Company AWK-IN
Capital Expenditures $108.08 $157.88 $110.00 $109.82 $121.49 51.89% Net Plant $1,170.2
Notes: [1] - [6] Source: Value Line, dated April 13, 2018 [7] Equals (Column [2] + [3] + [4] + [5] + [6]) / Column [1] [8] Company provided data. [9] Company provided data- ratebase Attachment AEB-9 Page 2 of 2
2018-2022 CAPITAL EXPENDITURES AS A PERCENT OF 2017 NET PLANT
Projected CapEx / 2017 Net Plant
60.00% Proxy Group Median = 39.9%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00% YORW CTWS WTR MSEX SJW CWT AWR
Projected CapEx / 2017 Net Plant
Company Ticker Percentage Median York Water Company YORW 26.19% 39.9% Connecticut Water Service, Inc. CTWS 33.29% 39.9% Aqua America WTR 39.41% 39.9% Middlesex Water Company MSEX 39.91% 39.9% SJW Corporation SJW 46.50% 39.9% California Water Services Group CWT 46.76% 39.9% American States Water Co AWR 51.33% 39.9% Indiana-American Water Company AWK-IN 51.89% 39.9%
Proxy Group Median 39.91% AWK-IN / Proxy Group 1.30 Attachment AEB-10 Page 1 of 1
Infrastructure Revenue Replacement Future Stabilization or Company Ticker State Surchage Test Year Decoupling Citations
American States Water Co AWR 2017 10-K California Yes Yes American Water AWK 2017 10-K New Jersey Yes Pennsylvania Yes Yes Illinois Yes Yes Yes Missouri Yes Indiana Yes Yes California Yes Yes West Virginia Yes Georgia Hawaii Yes Iowa Yes Kentucky Yes Maryland Michigan New York Yes Yes Yes Tennessee Yes Yes Virginia Yes Yes Aqua America, Inc. WTR 2017 10-K Pennsylvania Yes Yes Aqua America Q1 2018 Investor Presentation Ohio Yes Yes Texas Illinois Yes Yes North Carolina Yes New Jersey Yes Indiana Yes Yes Virginia Final Order, Case No. PUR-2017-00017 California Water Service Group CWT California Yes Yes 2017 10-K New Mexico Opinion Resolving General Rate Cases, Decision 07-12-055 Washington Hawaii Yes Decision and Order, Docket No. 03-0275 Connecticut Water Service, Inc. CTWS 2017 10-K Connecticut Yes Yes Maine Yes Middlesex Water Company MSEX 2017 10-K New Jersey Yes Delaware Yes Yes Pennsylvania Yes Order December 17, 2015, Docket R-2015-2506337 and C-2015-2514368 SJW Corporation SJW 2017 10-K California Yes Yes Texas York Water Company YORW Pennsylvania Yes Yes Annual Report
Total Number of Jurisdictions (Y) 22 18 8 Total Number of Jurisdictions 37 37 37 Percent of Jurisdictions 59.46% 48.65% 21.62% Total Number of Jurisdictions (excl AWK) (Y) 12 9 5 Total Number of Jurisdictions (excl AWK) 21 21 21 Percent of Jurisdictions (excl. AWK) 57.14% 42.86% 23.81% Attachment AEB-11 Page 1 of 1
CAPITAL STRUCTURE OF PROXY GROUP COMPANIES
Company Name Ticker 2017 (%)
American States Water Co. AWR Common Equity 62.25% Preferred Stock 0.00% Long-Term Debt 37.75% Total Capital 100.00%
Aqua America Inc. WTR Common Equity 47.99% Preferred Stock 0.00% Long-Term Debt 52.01% Total Capital 100.00%
California Water Service Group CWT Common Equity 56.60% Preferred Stock 0.00% Long-Term Debt 43.40% Total Capital 100.00%
Connecticut Water Service Inc. CTWS Common Equity 53.01% Preferred Stock 0.14% Long-Term Debt 46.85% Total Capital 100.00%
Middlesex Water Co. MSEX Common Equity 60.71% Preferred Stock 0.64% Long-Term Debt 38.65% Total Capital 100.00%
SJW Corp. SJW Common Equity 51.80% Preferred Stock 0.00% Long-Term Debt 48.20% Total Capital 100.00%
York Water Co. YORW Common Equity 56.98% Preferred Stock 0.00% Long-Term Debt 43.02% Total Capital 100.00%
Proxy Group Mean excluding AWK Common Equity 55.62% Preferred Stock 0.11% Long-Term Debt 44.27%
Proxy Group Median excluding AWK Common Equity 56.60% Preferred Stock 0.00% Long-Term Debt 43.40%
American Water AWK Common Equity 44.12% Preferred Stock 0.07% Long-Term Debt 55.81% Total Capital 100.00%
Proxy Group Mean including AWK Common Equity 54.18% Preferred Stock 0.11% Long-Term Debt 45.71%
Source: Company 10-K's Attachment AEB-12 Page 1 of 2
Indiana‐American Water Company, Inc. Cause No. 45142 Support for Fair Value Increment as of April 30, 2020
1 2 Methodology 1 Methodology 2 Methodology 3 3 Fair Value 4/30/2020 Fair Value 4/30/2020 Fair Value 4/30/2020 4 WACC estimated as debt‐inflation WACC ‐ inflation Using IURC method (4.9%) 5 For Prior FVRB return For Prior FVRB return Cause No. 44022 6 7 Updated FV calculation from Cause No. 44450 [1]$ 1,222,819,707 $ 1,222,819,707 $ 1,222,819,707 8 Inflation Increment Compounded for 2015 through Apr. 2020 [2] 124,625,159 124,625,159 124,625,159 9 Fair Value Adjusted to 4/30/20 Price Level [3]$ 1,347,444,866 $ 1,347,444,866 $ 1,347,444,866 10 11 Net Investor Supplied Plant Additions since Cause No. 44450 [4]$ 407,657,743 $ 407,657,743 $ 407,657,743 12 Updated Fair Value from Cause No. 44450 [5]$ 1,755,102,609 $ 1,755,102,609 $ 1,755,102,609 13 WACC [6] 6.82% 6.82% 6.82% 14 WACC excluding inflation [7] 6.07% 4.73% 4.90% 15 16 Calculated Fair Value Operating Income on Fair Value Adjusted to 4/30/20 [8]$ 81,789,903 $ 63,693,719 $ 66,024,798 17 Fair Value on Net Investor Supplied Plant Additions [9] 27,802,258 27,802,258 19,975,229 18 Total Fair Value Operating Income [10]$ 109,592,161 $ 91,495,977 $ 86,000,028 19 20 Net Original Cost Rate Base [11]$ 1,241,315,970 $ 1,241,315,970 $ 1,241,315,970 21 Return on Net Original Cost Rate Base [12] 84,657,749 84,657,749 84,657,749 22 Indiana Cities NBV [13] 6,232,464 6,232,464 6,232,464 23 Indiana Cities Return on Acquisition Premium [14] 425,054 425,054 425,054 24 Original Cost Rate Base Operating Income Including Indiana Cities [15]$ 85,082,803 $ 85,082,803 $ 85,082,803 25 26 Fair Value Increment April 30, 2020 [16] $ 24,509,358 $ 6,413,174 $ 917,225
Notes: [1] Updated FV calculation as of 11/30/2015 is from Testimony of Gregg Roach in Cause No. 44450 [2] Inflation calculated as annual average for 2016‐2020 based on Bureau of Labor Statistics historical inflation and the Blue Chip Economic Indicators for projected inflation [3] Sum of [1] and [2] [4] Source: SWX‐1 [5] Sum of [3] + [4] [6] Source: Petitioner's Exhibit AEB‐13 [7] Calculated as noted in line 2 [8] Equals: [3] * [7] [9] Equals: [4] * [6] [10] Equals: [8] + [9] [11] Source: Petitioner's Exhibit JMW‐4 [12] Equals: [6] *[11] [13] Source: Revenue Requirement Exhibit [14] Equals: [13] *[6] [15] Sum [11], [12], [13], [14] [16] Equals: [10]‐[15] Attachment AEB-12 Page 2 of 2
Indiana‐American Water Company, Inc. Cause No. 45142 Support for Fair Value Increment as of April 30, 2019
1 2 Methodology 1 Methodology 2 Methodology 3 3 Fair Value 4/30/2019 Fair Value 4/30/2019 Fair Value 4/30/2019 4 WACC estimated as debt‐inflation WACC ‐ inflation Using IURC method (4.9%) 5 For Prior FVRB return For Prior FVRB return Cause No. 44022 6 7 Updated FV calculation from Cause No. 44450 [1]$ 1,222,819,707 $ 1,222,819,707 $ 1,222,819,707 8 Inflation Increment Compounded for 2014 through Apr. 2019 [2] 94,479,689 94,479,689 94,479,689 9 Fair Value Adjusted to 4/30/19 Price Level [3]$ 1,317,299,396 $ 1,317,299,396 $ 1,317,299,396 10 11 Net Investor Supplied Plant Additions since Cause No. 44450 [4]$ 250,402,150 $ 250,402,150 $ 250,402,150 12 Updated Fair Value from Cause No. 44450 [5]$ 1,567,701,546 $ 1,567,701,546 $ 1,567,701,546 13 WACC [6] 6.73% 6.73% 6.73% 14 WACC excluding inflation [7] 6.00% 4.64% 4.90% 15 16 Calculated Fair Value Operating Income on Fair Value Adjusted to 4/30/19 [8]$ 79,037,964 $ 61,083,173 $ 64,547,670 17 Fair Value on Net Investor Supplied Plant Additions [9] 16,852,065 16,852,065 12,269,705 18 Total Fair Value Operating Income [10]$ 95,890,028 $ 77,935,238 $ 76,817,376 19 20 Net Original Cost Rate Base [11]$ 1,081,981,581 $ 1,081,981,581 $ 1,081,981,581 21 Return on Net Original Cost Rate Base [12] 72,817,360 72,817,360 72,817,360 22 Indiana Cities NBV [13] 6,699,901 6,699,901 6,699,901 23 Indiana Cities Return on Acquisition Premium [14] 450,903 450,903 450,903 24 Original Cost Rate Base Operating Income Including Indiana Cities [15]$ 73,268,264 $ 73,268,264 $ 73,268,264 25 26 Fair Value Increment April 30, 2019 [16] $ 22,621,765 $ 4,666,974 $ 3,549,112
Notes: [1] Updated FV calculation as of 11/30/2015 is from Testimony of Greg Roach in Cause No. 44450 [2] Inflation calculated as annual average for 2016‐2020 based on Bureau of Labor Statistics historical inflation and the Blue Chip Economic Indicators for projected inflatio [3] Sum of [1] and [2] [4] Source: Exhibit SWR‐1 [5] sum of [3] + [4] [6] Source: Petitioner's Exhibit AEB‐13 [7] Calculated as noted in line 2 [8] Equals: [3] * [7] [9] Equals: [4] * [6] [10] Equals: [8] + [9] [11] Source: Petitioner's Exhibit JMW‐4 [12] Equals: [6] *[11] [13] Source: Revenue Requirement Exhibit [14] Equals: [13] *[6] [15] Sum [11], [12], [13], [14] [16] Equals: [10]‐[15] Attachment AEB-13 Page 1 of 3
Indiana‐American Water Company Cause No. 45142 Pro Forma Rate of Return Summary
Type of Filing: __X__ Original _____ Updated _____ Revised
Step 2 Line As of % of (%) Weighted Number Class of Capital 04/30/2020 Total Cost Cost (%)
1 Long‐Term Debt $434,467,491 35.60% 5.19% 1.85% 2 3 Accumulated Deferred Income Taxes 225,159,739 18.45% 0.00% 0.00% 4 5 Accumulated Depreciation on Contributed Utility Plant for Muncie Sewer 88,164 0.01% 0.00% 0.00% 6 7 Post Retirement Benefits, Net 2,345,695 0.19% 0.00% 0.00% 8 9 Accumulated Deferred Investment Tax Credits ‐ Pre 1971 0 0.00% 0.00% 0.00% 10 11 Job Development Investment Tax Credits (JDITC) ‐ Post 1970 344,492 0.03% 8.35% 0.00% 12 13 Prepaid Pension (3,140,901) ‐0.26% 0.00% 0.00% 14 15 Common Equity 561,112,881 45.98% 10.80% 4.97% 16 17 Total Capitalization $1,220,377,560 100.00% 6.82% Attachment AEB-13 Page 2 of 3
Indiana‐American Water Company Cause No. 45142 Pro Forma Rate of Return Summary
Type of Filing: __X__ Original _____ Updated _____ Revised
Step 1 Line As of % of (%) Weighted Number Class of Capital 04/30/2019 Total Cost Cost (%)
1 Long‐Term Debt $386,377,967 34.98% 5.26% 1.84% 2 3 Accumulated Deferred Income Taxes 217,863,201 19.73% 0.00% 0.00% 4 5 Accumulated Depreciation on Contributed Utility Plant for Muncie Sewer 85,859 0.01% 0.00% 0.00% 6 7 Post Retirement Benefits, Net 2,345,695 0.21% 0.00% 0.00% 8 9 Accumulated Deferred Investment Tax Credits ‐ Pre 1971 0 0.00% 0.00% 0.00% 10 11 Job Development Investment Tax Credits (JDITC) ‐ Post 1970 381,500 0.03% 8.39% 0.00% 12 13 Prepaid Pension (3,145,390) ‐0.28% 0.00% 0.00% 14 15 Common Equity 500,587,982 45.32% 10.80% 4.89% 16 17 Total Capitalization $1,104,496,814 100.00% 6.73% Attachment AEB-13 Page 3 of 3
Indiana‐American Water Company Cause No. 45142 Rate of Return Summary
Type of Filing: __X__ Original _____ Updated _____ Revised
Line Actual As Of % of (%) Weighted Number Class of Capital 12/31/17 Total Cost Cost (%)
1 Long‐Term Debt $346,132,503 34.82% 5.53% 1.93% 2 3 Accumulated Deferred Income Taxes 203,154,485 20.44% 0.00% 0.00% 4 5 Accumulated Depreciation on Contributed Utility Plant for Muncie Sewer 82,785 0.01% 0.00% 0.00% 6 7 Post Retirement Benefits, Net 2,345,695 0.24% 0.00% 0.00% 8 9 Accumulated Deferred Investment Tax Credits ‐ Pre 1971 0 0.00% 0.00% 0.00% 10 11 Job Development Investment Tax Credits (JDITC) ‐ Post 1970 430,844 0.04% 8.50% 0.00% 12 13 Prepaid Pension (3,885,775) ‐0.39% 0.00% 0.00% 14 15 Common Equity 445,707,419 44.84% 10.80% 4.84% 16 17 Total Capitalization $993,967,956 100.00% 6.77%