1 2 3 4 5 6 7 8

9 DIRECT TESTIMONY OF ANN E. BULKLEY 10 On Behalf of Arizona Public Service Company 11 Docket No. E-01345A-19-0236 12 13 14 15 16 17 18 19

20 21 22 23 24 25 26 27 October 31, 2019 28

1 Table of Contents 2 I. INTRODUCTION ...... 1 3 II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY ...... 2 4 III. SUMMARY OF ANALYSIS AND CONCLUSIONS ...... 4 5 IV. REGULATORY GUIDELINES ...... 9 6 V. CAPITAL MARKET CONDITIONS ...... 11 7 A. Effect of Market Conditions on Valuations and Dividend Yields ...... 12 8 B. The Current and Expected Interest Rate Environment ...... 18 9 C. Effect of Tax Reform on the ROE ...... 24 10 VI. PROXY GROUP SELECTION ...... 30 11 VII. COST OF EQUITY ESTIMATION ...... 32 12 A. DCF Model ...... 39 13 B. CAPM Analysis ...... 43 14 C. Bond Yield Plus Risk Premium Analysis ...... 49 15 D. Expected Earnings Analysis ...... 52 16 VIII. REGULATORY AND BUSINESS RISKS ...... 54 17 A. Regulatory Risk Assessment ...... 55 18 B. APS’s Capital Expenditure Plan ...... 57 19 C. Generation Risk ...... 59 20 IX. CAPITAL STRUCTURE ...... 60 21 X. CONCLUSIONS AND RECOMMENDATION ...... 61 22 XI. FAIR VALUE RATE BASE ...... 62 23 XII. FAIR VALUE RATE OF RETURN ...... 68

24 25 ATTACHMENT LIST

26 Ms. Bulkley’s Resume and Testimony Listing ...... Attachment AEB-1DR

27 Constant Growth DCF for Proxy Group ...... Attachment AEB-2DR 28 -i-

1 Projected DCF for Proxy Group ...... Attachment AEB-3DR

2 Beta Estimates for Proxy Group ...... Attachment AEB-4DR

3 Long-Term Growth Estimates for S&P 500 Index ...... Attachment AEB-5DR 4 Capital Asset Pricing Model Analysis ...... Attachment AEB-6DR 5 Risk Premium Analysis ...... Attachment AEB-7DR 6 Expected Earnings Analysis for Proxy Group ...... Attachment AEB-8DR 7 8 Regulatory Risk Assessment for Proxy Group ...... Attachment AEB-9DR 9 Comparison of Nuclear Generation for Proxy Group ...... Attachment AEB-10DR 10 Capital Structure Analysis ...... Attachment AEB-11DR

11 Fair Value Rate of Return ...... Attachment AEB-12DR

12 Comparable Transactions Analysis ...... Attachment AEB-13DR 13 Estimates of Inflation ...... Attachment AEB-14DR 14 Yardeni Research Publication ...... Attachment AEB-15DR 15

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1 DIRECT TESTIMONY OF ANN E. BULKLEY ON BEHALF OF ARIZONA PUBLIC SERVICE COMPANY 2 (Docket No. E-01345A-19-0236) 3 I. INTRODUCTION 4 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 5 A. My name is Ann E. Bulkley. My business address is 293 Boston Post Road West, 6 Suite 500, Marlborough, Massachusetts 01752. 7 Q. WHAT IS YOUR POSITION WITH CONCENTRIC ENERGY ADVISORS, 8 INC. (CONCENTRIC)? 9 A. I am employed by Concentric as a Senior Vice President. 10 Q. ON WHOSE BEHALF ARE YOU SUBMITTING THIS DIRECT 11 TESTIMONY? 12 A. I am submitting this Direct Testimony on behalf of Arizona Public Service 13 Company (APS or the Company). APS is a wholly-owned subsidiary of Pinnacle 14 West Capital Corporation (Pinnacle West). 15 Q. PLEASE DESCRIBE YOUR EDUCATION AND EXPERIENCE. 16 A. I hold a Bachelor’s degree in Economics and Finance from Simmons College and 17 a Master’s degree in Economics from Boston University, with over 20 years of 18 experience consulting to the energy industry. I have advised numerous energy and 19 utility clients on a wide range of financial and economic issues with primary 20 concentrations in valuation and utility rate matters. Many of these assignments 21 have included the determination of the cost of capital for valuation and ratemaking 22 purposes. My resume and a summary of testimony that I have filed in other 23 proceedings are provided as Attachment AEB-1DR. 24 Q. PLEASE DESCRIBE CONCENTRIC’S ACTIVITIES IN ENERGY AND 25 UTILITY ENGAGEMENTS. 26 A. Concentric provides financial and economic advisory services to many and various 27 energy and utility clients across North America. Our regulatory, economic, and 28

1 market analysis services include utility ratemaking and regulatory advisory 2 services; energy market assessments; market entry and exit analysis; corporate and 3 business unit strategy development; demand forecasting; resource planning; and 4 energy contract negotiations. Our financial advisory activities include buy and 5 sell-side merger, acquisition and divestiture assignments; due diligence and 6 valuation assignments; project and corporate finance services; and transaction 7 support services. In addition, we provide litigation support services on a wide 8 range of financial and economic issues on behalf of clients throughout North 9 America. 10 II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY 11 Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY? 12 A. The purpose of my Direct Testimony is to present evidence and provide a 13 recommendation regarding the Company’s Return on Equity (ROE)1 and to 14 provide an assessment of the capital structure to be used for ratemaking purposes 15 as proposed in the Direct Testimony of APS witness Elizabeth A. Blankenship. 16 My Direct Testimony also provides evidence and a recommendation as to the 17 appropriate Fair Value Rate of Return (FVROR) and to the reasonableness of the 18 Company’s proposed Fair Value Rate Base (FVRB). My analyses and 19 recommendations are supported by the data presented in Attachment AEB-2DR 20 through Attachment AEB-15DR, which were prepared by me or under my 21 direction. 22 Q. PLEASE PROVIDE A BRIEF OVERVIEW OF THE ANALYSES THAT 23 LED TO YOUR ROE RECOMMENDATION. 24 A. As discussed in more detail in Section VI, in developing my ROE recommendation, 25 I applied the Discounted Cash Flow (DCF) model, the Capital Asset Pricing Model 26 27 1 Throughout my Direct Testimony, I interchangeably use the terms “ROE” and “Cost of 28 Equity.”

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1 (CAPM), a Risk Premium approach, and an Expected Earnings analysis. I also 2 considered several additional risk factors that affect the Company’s required ROE, 3 including: (1) the Company’s capital expenditure requirements relative to the 4 proxy group; (2) the Company’s regulatory risk relative to the proxy group, 5 including current and proposed adjustor mechanisms; and (3) the Company’s 6 dependence on nuclear generation. Finally, I considered the Company’s proposed 7 capital structure as compared to the capital structures of the proxy companies. 8 While I did not make any specific adjustments to my ROE estimates for any of 9 these factors, I did take them into consideration in aggregate when determining 10 where the Company’s Cost of Equity falls within the range of analytical results. 11 Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE APPROPRIATE 12 COST OF EQUITY AND FVROR FOR APS? 13 A. My analyses indicate that APS’s Cost of Equity should be within a range from 14 10.00 percent to 10.50 percent. Considering the results of the analyses summarized 15 in Figure 1 and discussed in greater detail in the remainder of my testimony, I 16 believe that the Company’s requested ROE of 10.15 percent is reasonable and may 17 be a conservative estimate of the cost of equity. I also believe that the Company’s 18 proposed return on the Fair Value Increment of 1.00 percent is significantly lower 19 than reasonable estimates of the minimum rate of return that should be applied to 20 the fair value increment and results in an FVROR is 5.62 percent. 21 Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE COMPANY’S 22 FVRB? 23 A. In order to determine the reasonableness of the Company’s FVRB, I conducted an 24 analysis of the range of value established in recent transactions for electric utilities. 25 Specifically, I estimated the market value of APS’s assets by comparing the 26 Company’s proposed FVRB to the market value of comparable companies in 27 recent arms-length transactions. Based on the results of my Comparable 28

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1 Transactions analysis, I conclude that the Company’s estimate of the FVRB is 2 conservative. 3 Q. HOW IS THE REMAINDER OF YOUR DIRECT TESTIMONY 4 ORGANIZED? 5 A. The remainder of my Direct Testimony is organized as follows: Section III 6 provides a summary of my analyses and conclusions; Section IV reviews the 7 regulatory guidelines pertinent to the development of the cost of capital; Section V 8 discusses current and projected capital market conditions and the effect of those 9 conditions on the Company’s Cost of Equity; Section VI explains my selection of 10 a proxy group of electric utilities; Section VII describes my analyses and the 11 analytical basis for the recommendation of the appropriate ROE for APS; Section 12 VIII provides a discussion of specific regulatory, business, and financial risks that 13 have a direct bearing on the ROE to be authorized for the Company in this case; 14 Section IX discusses the capital structure of the Company as compared with the 15 proxy group; Section X presents my conclusions and recommendation for the 16 market-based Cost of Equity; Section XI discusses my analysis of the Company’s 17 proposed FVRB; and Section XII discusses the estimation of the FVROR. 18 III. SUMMARY OF ANALYSIS AND CONCLUSIONS 19 Q. PLEASE SUMMARIZE THE KEY FACTORS CONSIDERED IN YOUR 20 ANALYSES AND UPON WHICH YOU BASE YOUR RECOMMENDED 21 ROE. 22 A. My analyses and recommendations considered the following: 23 • The Hope and Bluefield decisions2 that established the standards for 24 determining a fair and reasonable authorized ROE, including consistency of 25 the authorized return with other businesses having similar risk, adequacy of

26 2 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944); Bluefield 27 Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 28 679 (1923).

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1 the return to provide access to capital and support credit quality, and the 2 principle that the end result must lead to just and reasonable rates. 3 4 • The effect of current and prospective capital market conditions on the ROE 5 estimation models and on investors’ return requirements. 6 7 • The Company’s regulatory, business, and financial risks relative to the 8 proxy group of comparable companies and the implications of those risks in 9 arriving at the appropriate ROE. 10 Q. PLEASE SUMMARIZE THE ROE ESTIMATION MODELS THAT YOU 11 CONSIDERED TO ESTABLISH THE RANGE OF ROES FOR APS. 12 A. I considered the results of the Constant Growth DCF model, two risk premium 13 approaches: the CAPM and a Bond Yield Plus Risk Premium methodology, and an 14 Expected Earnings analysis. Figure 1 summarizes the range of results established 15 using each of these estimation methodologies. 16 Figure 1. 17 Summary of Cost of Equity Analytical Results

18 Constant Growth DCF 19 Mean Low Mean Mean High 30-Day Average Price 8.09% 9.07% 10.21% 20 90-Day Average Price 8.17% 9.14% 10.28% 21 180-Day Average Price 8.17% 9.26% 10.40% Risk Premium Models 22 Current 2019-2020 2021-2025 23 Risk-Free Projected Projected Rate Risk-Free Risk-Free 24 (2.57%) Rate (2.66%) Rate (3.60%) 10.07% 10.11% 10.42% 25 CAPM - Bloomberg Beta CAPM - Value Line Beta 9.54% 9.58% 9.94% 26 Bond Yield Plus Risk Premium 9.75% 9.79% 10.20% 27 Expected Earnings Analysis Value Line 2022-2024 11.15% 28

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1 As shown in Figure 1, the range of DCF model results is very wide, particularly in 2 relation to the results of the other methodologies. As discussed in more detail in 3 Section VII, the DCF model is influenced by market conditions that are not 4 projected to be sustained in the long term. Those conditions have a tendency to 5 result in lower estimates of the Cost of Equity using the DCF model, including 6 significant outliers. As shown in Attachment AEB-1, the DCF model produces an 7 individual company result as low as 5.94 percent, or only 184 basis points higher 8 than the Company’s embedded cost of long-term debt of 4.10 percent.3 9 10 Recently, anomalous market conditions have affected the inputs and assumptions 11 used in the ROE estimation models, particularly the DCF model. Therefore, 12 consistent with prior opinions of the Arizona Corporation Commission 13 (Commission), I believe that it is reasonable to rely on a combination of the results 14 of the DCF and other ROE estimation models.4 As discussed in more detail in the 15 remainder of my Direct Testimony, this conclusion is also supported by the Federal 16 Energy Regulatory Commission (FERC) and various state utility regulatory 17 commissions. Other regulatory commissions have determined that it is appropriate 18 to consider the results of multiple methodologies, including the DCF, CAPM, Risk 19 Premium and Expected Earnings models in estimating the ROE. 20 21 While I would have concerns about relying on only the results produced by the 22 DCF model, my ROE recommendation is based on the results of both the DCF 23 model and a forward-looking CAPM analysis, taking into consideration the 24 business and company-specific risk factors of APS relative to the proxy group. The 25 Bond Yield Plus Risk Premium analysis and the Expected Earnings analysis, while 26 27 3 SFR Schedule D-1. 28 4 See Decision No. 69663 (June 28, 2007) at 49.

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1 not relied on specifically for my ROE recommendation, corroborate the range 2 established for my recommendation. 3 Q. WHAT IS YOUR RECOMMENDED ROE FOR APS? 4 A. The analytical results presented in Figure 1 provide the range of results for the 5 proxy group companies. I also considered the level of regulatory, business, and 6 financial risk faced by the Company relative to the proxy group in order to establish 7 where APS’s ROE falls within the range. Based on the results in Figure 1, a 8 reasonable range of ROE estimates for APS is from 10.00 percent to 10.50 percent, 9 and within that range, the Company is proposing an ROE of 10.15 percent, which 10 is a reasonable and may be a conservative estimate of the cost of equity. 11 12 The required ROE should be a forward-looking estimate; therefore, the analyses 13 supporting my recommendation rely on forward-looking inputs and assumptions 14 (e.g., projected growth rates in the DCF model, forecasted risk-free rate and Market 15 Risk Premium in the CAPM analysis, etc.) and take into consideration the current 16 high valuations of utility stocks and the effect of current stock prices on the ROE 17 estimation models. The use of historical inputs and assumptions would tend to 18 understate the required ROE for APS, especially under current and prospective 19 conditions in capital markets. 20 Q. PLEASE SUMMARIZE THE ANALYSIS THAT YOU CONDUCTED TO 21 VALIDATE THE FVRB FOR APS. 22 A. Consistent with Commission precedent, the Company has estimated the FVRB by 23 equally weighting its Original Cost Rate Base (OCRB) and an estimate of the 24 Replacement Cost New, Depreciated (RCND) of those assets. I performed a 25 Comparable Transactions analysis to test the FVRB that is being relied on in the 26 FVROR analysis. Specifically, I estimated the market value of APS’s assets by 27 comparing the Company’s proposed FVRB to the market value of comparable 28

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1 companies in recent arms-length transactions. To create a consistent basis of 2 comparison among the transactions (which took place amid differing market 3 conditions), I normalized the transaction values using the corporate values of the 4 acquired companies, which incorporates the book value of debt and equity, 5 resulting in premiums to corporate value stemming from the transactions. I 6 estimated the market value of APS’s assets by applying the median premium of 7 43.64 percent to the Company’s OCRB. That analysis resulted in an estimated 8 market value for APS’s assets of $12,745 million. 9 Q. WHAT DO YOU CONCLUDE FROM THAT ANALYSIS? 10 A. Based on the results of the Comparable Transactions analysis, I conclude that the 11 Company’s proposed FVRB of $12,310.3 million is generally consistent with 12 estimate of market value discussed above. 13 Q. HOW DID YOU ESTIMATE THE FVROR? 14 A. I estimated the FVROR using the approach relied on by the Commission in several 15 recent rate cases. In applying that method, I also conclude that the minimum rate 16 of return that should be applied to the fair value “increment” of rate base is the real 17 risk-free rate of return. As discussed in more detail in Section VII, I estimate the 18 real risk-free rate of return to be approximately 2.72 percent. However, the 19 Company has proposed a return of 1.00 percent, which is significantly lower than 20 reasonable estimates of the minimum rate of return that should be applied to the 21 fair value increment. As shown in Figure 2 and Figure 3, the result of that analysis 22 is a FVROR of 5.62 percent. 23 Figure 2. 24 Estimation of the FVRB

25 Weighted Capital $ Millions Percent FVRB 26 OCRB $8,873.0 50.00% $4,436.5 27 RCND $15,747.5 50.00% $7,873.8 FVRB $12,310.3 28

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1 Figure 3. 2 Estimation of the FVROR

3 Weighted Capital $ Millions Percent Cost Rate Cost Rate 4 Long-Term Debt $4,022.1 32.67% 4.10% 1.34% 5 Common Equity $4,850.9 39.41% 10.15% 4.00% Fair Value Increment $3,437.3 27.92% 1.00% 0.28% 6 Total $12,310.3 5.62% 7 8 IV. REGULATORY GUIDELINES 9 Q. PLEASE DESCRIBE THE GUIDING PRINCIPLES TO BE USED IN 10 ESTABLISHING THE COST OF CAPITAL FOR A REGULATED 11 UTILITY. 12 A. The United States Supreme Court’s precedent-setting Hope and Bluefield cases 13 established the standards for determining the fairness or reasonableness of a 14 utility’s allowed ROE. Among the standards established by the Court in those 15 cases are: (1) consistency with other businesses having similar or comparable 16 risks; (2) adequacy of the return to support credit quality and access to capital; and 17 (3) that the end result, as opposed to the methodology employed, is the controlling 18 factor in arriving at just and reasonable rates.5 19 20 Based on those recognized standards, the return authorized in this case should 21 provide the Company with the opportunity to earn an ROE that is: 22 23 • Adequate to attract capital on reasonable terms, thereby enabling the 24 Company to provide safe, reliable service; 25

26 5 Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944); Bluefield 27 Waterworks & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 28 679 (1923).

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1 • Sufficient to ensure the financial soundness of the Company’s operations; 2 and 3 4 • Commensurate with returns on investments in comparable risk enterprises. 5 6 The allowed ROE should enable the Company to finance capital expenditures on 7 reasonable terms and optimize its financial flexibility over the period during which 8 rates are expected to remain in effect. 9 Q. HAS THE COMMISSION PROVIDED SIMILAR GUIDANCE IN 10 ESTABLISHING THE APPROPRIATE RETURN ON COMMON 11 EQUITY? 12 A. Yes. The Commission has noted that under the Arizona Constitution, a public 13 utility is entitled to a fair return on the fair value of its property devoted to public 14 uses. The Commission is required to find the fair value of the utility’s property 15 and to use that value to establish just and reasonable rates.6 16 Q. WHY IS IT IMPORTANT FOR A UTILITY TO BE ALLOWED THE 17 OPPORTUNITY TO EARN AN ROE THAT IS ADEQUATE TO ATTRACT 18 CAPITAL AT REASONABLE TERMS? 19 A. An ROE that is adequate to attract capital at reasonable terms enables the Company 20 to continue to provide safe, reliable electric utility service while maintaining its 21 financial integrity. To the extent the Company has the opportunity to earn its 22 market-based cost of capital, neither customers nor shareholders are disadvantaged. 23 24 25 26 27 6 See, e.g., Arizona Corp. Comm’n v. Ariz. Water Co., 85 Ariz. 198, 203, 335 P.2d 412, 28 415 (1959).

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1 Q. WHAT ARE YOUR CONCLUSIONS REGARDING REGULATORY 2 GUIDELINES AND CAPITAL MARKET EXPECTATIONS? 3 A. It is important for the ROE authorized in this proceeding to take into consideration 4 current and prospective capital market conditions, as well as investors’ 5 expectations and requirements for both risks and returns. Further, in light of the 6 Company’s capital investment requirements, it is important that APS be afforded 7 the opportunity to maintain a financial profile that will enable it to access the capital 8 markets at reasonable rates. 9 V. CAPITAL MARKET CONDITIONS 10 Q. WHY IS IT IMPORTANT TO ANALYZE CAPITAL MARKET 11 CONDITIONS? 12 A. The ROE estimation models rely on market data that are either specific to the proxy 13 group, in the case of the DCF model, or the expectations of market risk, in the case 14 of the CAPM. The results of the ROE estimation models can be affected by 15 prevailing market conditions at the time the analysis is performed. While the ROE 16 established in a rate proceeding is intended to be forward-looking, the analyst uses 17 current and projected market data, specifically stock prices, dividends, growth rates 18 and interest rates in the ROE estimation models to estimate the required return for 19 the subject company. 20 21 As discussed in the remainder of this section, analysts and many regulatory 22 commissions have concluded that recent market conditions have been anomalous 23 and that these conditions have affected the results of the ROE estimation models. 24 As a result, it is important to consider the effect of these conditions on the ROE 25 estimation models when determining the appropriate range and recommended 26 ROE for a future period. If investors do not expect current market conditions to be 27 sustained in the future, it is possible that the ROE estimation models will not 28

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1 provide an accurate estimate of investors’ required return during that rate period. 2 Therefore, it is very important to consider projected market data to estimate the 3 return for that forward-looking period. 4 Q. WHAT FACTORS ARE AFFECTING THE COST OF EQUITY FOR 5 REGULATED UTILITIES IN THE CURRENT AND PROSPECTIVE 6 CAPITAL MARKETS? 7 A. The cost of equity for regulated utility companies is being affected by several 8 factors in the current and prospective capital markets, including: (1) the current 9 market uncertainty has resulted in valuations of utility stocks that are at historically 10 high levels, which has an inverse relationship to dividend yields; (2) recent market 11 uncertainty, its current effect on interest rates and long-term expectations for 12 interest rates; and (3) recent Federal tax reform. In this section, I discuss each of 13 these factors and how it affects the models used to estimate the cost of equity for 14 regulated utilities. 15 A. Effect of Market Conditions on Valuations and Dividend Yields 16 Q. HOW HAS THE FEDERAL RESERVE’S MONETARY POLICY 17 AFFECTED CAPITAL MARKETS IN RECENT YEARS? 18 A. Extraordinary and persistent federal intervention in capital markets artificially 19 lowered government bond yields after the Great Recession of 2008-09, as the 20 Federal Open Market Committee (FOMC) used monetary policy (both reductions 21 in short-term interest rates and purchases of Treasury bonds and mortgage-backed 22 securities) to stimulate the U.S. economy. As a result of very low returns on short- 23 term government bonds, yield-seeking investors were forced into longer-term 24 instruments, bidding up prices and reducing yields on those investments. As 25 investors moved along the risk spectrum in search of yields that met their return 26 requirements, there was increased demand for dividend-paying equities, such as 27 utility stocks. 28

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1 Q. HOW HAS THE PERIOD OF ABNORMALLY LOW INTEREST RATES 2 AFFECTED THE VALUATIONS AND DIVIDEND YIELDS OF UTILITY 3 SHARES? 4 A. The Federal Reserve’s monetary policy in recent years has caused investors to seek 5 alternatives to the interest rates available on Treasury bonds, which are low relative 6 to historical levels. As a result of this search for higher yield, the share prices for 7 many common stocks, especially dividend-paying stocks such as utilities, have 8 been driven higher while the dividend yields (which are computed by dividing the 9 dividend payment by the stock price) have decreased to levels well below the 10 historical average. As shown in Figure 4, over the period from 2009 through 2017, 11 as the Federal Reserve intervened to stabilize financial markets and support the 12 economic recovery after the Great Recession of 2008-09, Treasury bond yields and 13 utility dividend yields declined. Specifically, Treasury bond yields declined by 14 approximately 118 basis points, and electric utility dividend yields decreased by 15 about 234 basis points over this period. 16 Figure 4.

17 Dividend Yields for Utility Stocks7

18 19 20 21 22 23 24 25 26 27

28 7 Source: Bloomberg Professional.

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1 Q. HAVE EQUITY ANALYSTS COMMENTED ON THE VALUATIONS OF 2 UTILITY STOCKS? 3 A. Yes. Several equity analysts have recognized that utility stock valuations are very 4 high. In the electric utilities industry report, Value Line noted the high valuations: 5 Why are most issues in this industry faring so well? The expectation of continued low interest rates has prompted many investors to 6 ‘‘reach for yield’’ by purchasing utility stocks for their generous dividends. However, this has driven the valuation of utility stocks 7 to unusually high levels. For many years, utility equities’ price- earnings ratios were at a premium to the market only if earnings 8 were depressed. Now, most utility stocks have a relative price- earnings ratio above 1.0—significantly above that figure, in some 9 cases. The average dividend yield of stocks in the Electric Utility Industry is just 3.25%, which is low, by historical standards. 10 Moreover, the recent quotations of most utility stocks are well within their 2022-2024 Target Price Range.8 11 12 This is further supported by a recent Edward Jones report on the utility sector: 13 Utility valuations have climbed back to record levels as 10-year Treasury bond rates have fallen back below 2%. On a price-to- 14 earnings basis, remain significantly above their historical average, and have been trading near all-time highs. We have seen utility 15 valuations moving in line with interest rate movements, although there have been exceptions to this. Overall, however, we believe the 16 low-interest rate environment has been the biggest factor in pushing utilities higher since many investors buy them for their dividend 17 yield. 18 Utilities recently hit new all-time highs, and are still trading significantly above their average price-to earnings ratio over the 19 past decade. The premium valuation continues to reflect not only the low interest rate environment, but also the stable and 20 predominantly regulated earnings growth we foresee.9 21 22 As noted by Value Line and Edward Jones, over the last few years, utility stocks 23 have experienced high valuations and low dividend yields; driven by investors 24 moving into dividend paying stocks from bonds due to the low interest rates in the 25 bond market. Value Line and Edward Jones recognize that as interest rates

26 8 Value Line Investment Survey, Electric Utility (East) Industry, August 16, 2019, at 135. 27 9 Andy Pusateri and Andy Smith. Edward Jones, Utilities Sector Outlook (August 19, 28 2019), at 2-3.

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1 increase, bonds become a substitute for utility stocks. As utility stock prices 2 decline, the dividend yields will increase. This change in market conditions, which 3 is expected over the long-term, implies that the ROE calculated using historical 4 market data in the DCF model may understate the forward-looking cost of equity. 5 6 Furthermore, recently, Bank of America Merrill Lynch commented on the risks of 7 underperformance for certain utilities based on concerns on the valuation of the 8 sector, in particular that the current premium on share prices may be largely 9 unwarranted.10 10 Q. WHAT IS THE EFFECT OF HIGH VALUATIONS ON UTILITY STOCKS 11 ON THE DCF MODEL? 12 A. High valuations have the effect of depressing the dividend yields, which results in 13 overall lower estimates of the cost of equity resulting from the DCF model. 14 Q. HOW DO THE VALUATIONS OF PUBLIC UTILITIES COMPARE TO 15 THE HISTORICAL AVERAGE? 16 A. To assess how the current low interest rate environment has affected the valuations 17 of the companies in my proxy group, I reviewed the price/earnings to growth (PEG) 18 ratio for the S&P Utilities Index. The PEG ratio is commonly used by investors to 19 determine if a company is considered over- or under-valued. The ratio compares 20 the P/E ratio of a company to the expected growth rate of future earnings. This 21 allow investors to compare companies with similar P/E ratios but different earnings 22 growth projections. If two companies have a P/E ratio of 20, but Company A is 23 growing at a rate of 6 percent and Company B is growing at a rate of 15 percent, 24 then on a relative valuation basis Company B is the better investment. 25

26 10 BofAML, American Water Works AWKward valuation: Downgrading premium utility 27 to under-perform, July 15, 2019. BofAML, Eversource Energy, Reiterating our 28 Underperform: Shares pricey relative to few updates, July 15, 2019.

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1 As shown on page 7 of Attachment AEB-15DR, which is a report published by 2 Yardeni Research, Inc., the PEG ratio for the S&P Utilities Index has been 3 significantly higher than it has historically as a result of the accommodative 4 monetary policy pursued by the Federal Reserve following the Great Recession of 5 2008/09.11 While the PEG ratio has declined in recent years due to the Federal’s 6 Reserve’s shift to normalize monetary policy, the PEG ratio for the S&P Utilities 7 Index is still above the historical average. In general, stocks with lower long-term 8 PEG ratios are considered better values. As the PEG ratio increases above the 9 long-term historical average, as has been the case with the S&P Utilities Index, 10 then the stocks are considered relatively over-valued unless the growth rate 11 increases to support the higher valuation. The PEG ratio for the S&P Utilities 12 Index as of August 2019 is close to 4.2, which indicates that many of the stocks 13 contained in the index are currently trading at levels well above the historical 14 average. Based on this valuation metric, investors should expect the stock prices 15 of utilities to decline in the future. This analysis supports the P/E Ratio projections 16 produced by Value Line, which as noted above, are projecting the P/E ratios of 17 utilities to decline over the near-term. 18 Q. HOW DO EQUITY INVESTORS VIEW THE UTILITIES SECTOR BASED 19 ON THESE RECENT MARKET CONDITIONS? 20 A. Investment advisors have suggested that utility stocks may underperform as a result 21 of market conditions. Bloomberg recently noted that the valuations of defensive 22 sector stocks such as utilities have reached record levels which could result in 23 sector rotation as investors question the sustainability of the high valuations. 24 Specifically, Bloomberg explained that: 25 The prospect of easier monetary policy is adding fuel to a mammoth rally in bond proxy shares like real estate companies and utilities. 26 Investors betting on a growth slowdown are ramping up premiums 27 11 Yardeni Research, Inc. “S&P 500 Industry Briefing: Utilities.” September 3, 2019, 28 https://www.yardeni.com/pub/if-sut.pdf, p. 5.

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1 Q. HAVE REGULATORS RECENTLY RESPONDED TO THE 2 HISTORICALLY LOW DIVIDEND YIELDS FOR UTILITY COMPANIES 3 AND THE CORRESPONDING EFFECT ON THE DCF MODEL? 4 A. Yes. As I discuss in more detail later in my testimony, the FERC recently proposed 5 a methodology that reflects their current view that investors rely on multiple ROE 6 estimation models. The FERC’s proposed methodology includes an equal 7 weighting of the DCF, CAPM, Expected Earnings and Risk Premium models to 8 better reflect investor behavior and capital market conditions.13 9 10 In addition, the Illinois Commerce Commission (ICC), the Pennsylvania Public 11 Utility Commission (PPUC) and the Missouri Public Service Commission 12 (Missouri PSC) have all considered this phenomenon in recent decisions. I discuss 13 the response of these regulators to historically low dividend yields and the impact 14 on the DCF model in detail later in my testimony. 15 B. The Current and Expected Interest Rate Environment 16 Q. PLEASE PROVIDE A BRIEF SUMMARY OF THE RECENT MONETARY 17 POLICY ACTIONS OF THE FEDERAL RESERVE. 18 A. At its September 2019 meeting, the Federal Reserve acknowledged the 19 implications of global developments on the U.S. economic outlook and therefore 20 lowered the federal funds rate by 25 basis points, which resulted in a range of 1.75 21 percent to 2.00 percent.14 Thus, the Federal Reserve has reduced the federal funds 22 rate twice in 2019. However, it is important to view the recent Fed policy decisions 23 in the context of the reactions to the trade dispute between the U.S. and China and 24 longer-term fundamentals. Prior to the Federal Reserve recently lowering the 25 federal funds rate in July and September of 2019, the Fed raised the short-term

26 13 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order 27 Directing Briefs, issued October 16, 2018, at para. 32. 28 14 FOMC, Federal Reserve press release, September 18, 2019.

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1 borrowing rate in 25-basis-point increments on four occasions in 2018 based on 2 stronger conditions in employment markets, a relatively stable inflation rate, steady 3 economic growth, and increased household spending. Since December 2015, the 4 Federal Reserve increased interest rates nine times, bringing the federal funds rate 5 to the range of 2.25 percent to 2.50 percent, before the recent two reductions. 6 7 The ongoing trade dispute has affected the global economy and caused a rise in 8 volatility in the financial markets. As a result, the Federal Reserve is continuing 9 to examine and evaluate the effect the trade dispute is having on economic growth 10 and will pursue a monetary policy agenda that sustains the economic expansion 11 and satisfies the Federal’s Reserve’s goals of price stability and full employment. 12 As Chairman Powell noted recently in his annual remarks in Jackson Hole, 13 Wyoming: 14 Our challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend 15 to more of those still left behind, and so that inflation is centered firmly around 2 percent. 16 *** 17 While monetary policy is a powerful tool that works to support 18 consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade,” he said in 19 prepared remarks. “We can, however, try to look through what may be passing events, focus on how trade developments are affecting 20 the outlook, and adjust policy to promote our objectives.15 21 22 23 24 25

26 15 Cox, Jeff. “Powell Says There’s No ‘Rulebook’ for Trade War, Pledges to ‘Act as 27 Appropriate’ to Sustain Economy.” CNBC, CNBC, 23 Aug. 2019, 28 www.cnbc.com/2019/08/23/powell-jackson-hole-speech.html.

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1 treasuries due to increased fears of a possible recession. This has been increasingly 2 evident over the past few months as investors responded to news of increases in 3 tariffs by both China and the U.S. 4 5 To illustrate the recent reactions of investors, I have conducted an event study of 6 the yield on the 10-year U.S. Treasury bond since July 1, 2019. As shown in Figure 7 7, the yield on the 10-year U.S. Treasury Bond was relatively stable for the month 8 of July; however, the yield decreased by approximately 50 basis points from the 9 end of July to the middle of August. The recent decline was due to investors 10 responding to events associated with the trade dispute. For example, the market 11 reacted negatively to Chairman Powell’s comments following the FOMC meeting 12 at the end of July and President Trump’s announcement that the U.S. was going to 13 impose tariffs on the remaining set of goods imported from China. The two-events 14 accounted for an approximately 25 basis point decrease in the yield on the 10-year 15 Treasury between July 30, 2019 and August 5, 2019. This led Bloomberg to note 16 in a recent article titled “Powell Speaks, Trump Tweets, China Reacts, Markets 17 Freak. Repeat”, that the volatility in the market on any given day is being 18 determined more and more by the words and actions of Chairman Powell, President 19 Trump and the President of China, Xi Jinping.17 20 21 22 23 24 25

26 17 Regan, Michael P. “Powell Speaks, Trump Tweets, China Reacts, Markets Freak. 27 Repeat.” Bloomberg.com, Bloomberg, 8 Aug. 2019, bloomberg.com/news/articles/2019- 28 08-08/powell-speaks-trump-tweets-china-reacts-markets-freak-repeat.

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1 the U.S. and China is not expected to continue over the long-term. In fact, given 2 the increase in price sensitive investors purchasing U.S. Treasuries bonds, were a 3 trade deal to be reached it is likely the yields on long-term government bonds would 4 increase substantially. As interest rates increase, the cost of equity for the proxy 5 companies using the DCF model is likely to be an overly-conservative estimate of 6 investors’ required returns because the proxy group average dividend yield reflects 7 the increase in stock prices that resulted from substantially lower interest rates. As 8 such, rising interest rates support the selection of a return toward the upper end of 9 a reasonable range of ROE estimates resulting from the DCF analysis. 10 Alternatively, my CAPM and Bond Yield Plus Risk Premium analyses include 11 estimated returns based on near-term projected interest rates, reflecting investors’ 12 expectations of market conditions over the period that the rates established in this 13 proceeding will be in effect. 14 C. Effect of Tax Reform on the ROE 15 Q. ARE THERE OTHER FACTORS THAT SHOULD BE CONSIDERED IN 16 DETERMINING THE COST OF EQUITY FOR APS? 17 A. Yes. The effect of the TCJA should also be considered in the determination of the 18 cost of equity. The credit rating agencies have commented on the effect of the 19 TCJA on regulated utilities. In summary, the TCJA is expected to reduce utility 20 revenues due to the lower federal income taxes and the requirement to return excess 21 Accumulated Deferred Income Taxes. This change in revenue is expected to 22 reduce Funds From Operations (FFO) across the sector, and absent regulatory 23 mitigation strategies, is expected to lead to weaker credit metrics and negative 24 ratings actions for some utilities.20 25 26 27 20 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on 28 the U.S. Utilities, Power & Gas Sector”, January 24, 2018.

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1 Q. HAVE CREDIT OR EQUITY ANALYSTS COMMENTED ON THE 2 EFFECT OF THE TCJA ON UTILITIES? 3 A. Yes. Each of the credit rating agencies have indicated that the TCJA would have 4 an overall negative credit impact on regulated operating companies of utilities and 5 their holding companies due to the reduction in cash flow that results from the 6 change in the federal tax rate and the loss of bonus depreciation. 7 8 Moody’s Investor Services (Moody’s) noted that the rates that regulators allow 9 utilities to charge customers are based on a cost-plus model, with income tax 10 expense being one of the pass-through items. Utilities will collect less income tax 11 at the lower rate, reducing revenue and FFO. In the near term, for the many utilities 12 that are not currently cash tax payers, FFO and FFO-based credit metrics will be 13 negatively impacted. In addition, with the loss of bonus depreciation, the timing 14 of future cash tax payments will be accelerated, all else being equal, which will 15 have a negative effect on utility cash flows and will ultimately negatively impact 16 the utilities’ ability to fund ongoing operations and capital improvement programs. 17 18 In Standard & Poor’s (S&P’s) 2019 trends report, the rating agency notes that the 19 utility industry’s financial measures weakened in 2018 and attributed that to tax 20 reform, capital spending and negative load growth. In addition, S&P expects that 21 weaker credit metrics will continue into 2019 for those utilities operating with 22 minimal financial cushion. S&P further expects that these utilities will look to 23 offset the revenue reductions from tax reform with equity issuances. The rating 24 agency reported that in 2018 regulated utilities issued nearly $35 billion in equity, 25 which is more than twice the equity issuances in 2016 and 2017.21 26 27 21 Standard & Poor’s Ratings, “Industry Top Trends 2019, North America Regulated 28 Utilities”, November 8, 2019.

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1 FitchRatings (Fitch) also indicated that any ratings actions will be guided by the 2 response of regulators and the management of the utilities. Fitch notes that the 3 solution will depend on the ability of utility management to manage the cash flow 4 implications of the TCJA. Fitch offered several solutions to provide rate stability 5 and to moderate changes to cash flow in the near term, including increasing the 6 authorized ROE and/or equity ratio.22 7 Q. HOW HAVE RATING AGENCIES RESPONDED TO THE INCREASED 8 RISK FOR UTILITIES RESULTING FROM THE TCJA? 9 A. In January 2018, Moody’s issued a report changing the rating outlook for several 10 regulated utilities from Stable to Negative. Moody’s noted that the rating change 11 affected companies with limited cushion in their ratings for deterioration in 12 financial performance. In June 2018, Moody’s issued a report in which the rating 13 agency downgraded the outlook for the entire regulated utility industry from Stable 14 to Negative for the first time ever, citing ongoing concerns about the negative effect 15 of the TCJA on cash flows of regulated utilities. While noting that “[r]egulatory 16 commissions and utility management teams are taking important first steps” 23 and 17 that “we have seen some credit positive developments in some states in response 18 to tax reform,”24 Moody’s concludes that “we believe that it will take longer than 19 12-18 months for the majority of the sector to show any material financial 20 improvement from such efforts.”25 Beginning in mid-2018, Moody’s began 21 downgrading several utilities. Furthermore, as shown in Figure 9, Moody’s is 22 continuing to evaluate the effect of the TCJA on the cash flows of individual 23 utilities. As part of the credit evaluation, rating agencies are specifically 24

22 25 FitchRatings, Special Report, What Investors Want to Know, “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector”, January 24, 2018. 26 23 Moody’s Investors Service, “Regulated utilities – US: 2019 outlook shifts to negative due to weaker cash flows, continued high leverage”, June 18, 2018, at 3. 27 24 Ibid. 28 25 Idid.

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1 considering the recent rate case decisions of utilities to determine if the results of 2 these cases help to mitigate the effect of the TCJA on cash flows. Therefore, the 3 credit rating agencies appear to be continuing to monitor the effects of the TCJA 4 on utilities. 5 Figure 9.

6 Credit Rating Downgrades Resulting from TCJA 7 Credit Credit 8 Rating Rating Rating Downgrade Utility Agency before after Date 9 TCJA TCJA 10 DTE Gas Company Moody’s A2 A3 7/22/2019 South Jersey Gas Company Moody’s A2 A3 7/17/2019 11 Central Hudson Gas & Electric Moody’s A2 A3 7/12/2019 Oklahoma Gas & Electric Company Moody’s A2 A3 5/31/2019 12 American Water Works Moody’s A3 Baa1 4/1/2019 13 Niagara Mohawk Power Corporation Moody’s A2 A3 3/29/2019 KeySpan Gas East Corporation (KEDLI) Moody’s A2 A3 3/29/2019 14 Xcel Energy Moody’s A3 Baa1 3/28/2019 15 ALLETE, Inc. Moody’s A3 Baa1 3/26/2019 Brooklyn Union Gas Company (KEDNY) Moody’s A2 A3 2/22/2019 16 Avista Corp. Moody’s Baa1 Baa2 12/30/2018 Consolidated Edison Company of New York Moody’s A2 A3 10/30/2018 17 Consolidated Edison, Inc. Moody’s A3 Baa1 10/30/2018 18 Orange and Rockland Utilities Moody’s A3 Baa1 10/30/2018 Southwestern Public Service Company Moody’s Baa1 Baa2 10/19/2018 19 Dominion Energy Gas Holdings Moody’s A2 A3 9/20/2018 20 Piedmont Natural Gas Company, Inc. Moody’s A2 A3 8/1/2018 WEC Energy Group, Inc. Moody’s A3 Baa1 7/12/2018 21 Integrys Holdings Inc. Moody’s A3 Baa1 7/12/2018 OGE Energy Corp. Moody’s A3 Baa1 7/5/2018 22 Oklahoma Gas & Electric Company Moody’s A1 A2 7/5/2018 23 Q. HAVE THE RATING AGENCIES REVIEWED APS’S METRICS 24 FOLLOWING THE TCJA? 25 A. Yes, in May 2018 S&P changed its rating outlook on APS and the parent company 26 from positive to stable based on modestly weaker forward-looking for financial 27 metrics related the TCJA, capital spending and increased distributed generation 28

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1 that were not expected to be offset by a change in the Company’s capital structure. 2 Based on these factors, S&P expected that both PWCC and APS would have 3 financial measures that more consistently reflected the higher end of the range for 4 the significant financial risk profile category; with APS having an FFO to debt ratio 5 in the range of 21%-24%. This is a change from S&P’s prior views, which placed 6 APS’s coverage ratios at the lower end of the financial risk profile category.26 7 8 Moody’s recently noted that the rating agency expects APS’s financial metrics will 9 deteriorate in 2019 “due primarily to the continuing impact of US tax reform.”27 10 Q. HAVE STATE REGULATORY COMMISSIONS CONSIDERED MARKET 11 EVENTS AND THE UTILITY’S ABILITY TO ATTRACT CAPITAL IN 12 DETERMINING THE EQUITY RETURN? 13 A. Yes. In a recent rate case for Consumers Energy Company in Michigan, Case No. 14 U-18322, Staff recommended a 9.80 percent ROE based on the results of the DCF, 15 CAPM and Risk Premium approaches, which was supported by the Administrative 16 Law Judge (ALJ).28 However, in its Order issued on March 29, 2018, the Michigan 17 Public Service Commission (Michigan PSC) partly disagreed with the ALJ and 18 Staff regarding expected market conditions and authorized a 10.00 percent ROE 19 for Consumers Energy Company. The Michigan PSC noted that: 20 [i]n setting the ROE at 10.00%, the Commission believes there is an opportunity for the company to earn a fair return during this 21 period of atypical market conditions. This decision also reinforces the Commission’s belief that customers do not benefit from a lower 22 ROE if it means the utility has difficulty accessing capital at attractive terms and in a timely manner. The fact that other utilities 23 26 Standard & Poor’s Ratings Direct, Research Update Pinnacle West Capital Corp. and 24 Subsidiary Arizona Public Service Co. Outlooks Revised to Stable; A- Rating Affirmed, 25 May 3, 2018, p. 2. 27 Moody’s Investor Services, Credit Opinion, Arizona Public Service Company, June 18, 26 2019, at 1, 5. 28 27 Michigan Public Service Commission Order, Cause No. U-18322, Consumers Energy Company, March 29, 2018, at 37. 28

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1 have been able to access capital despite lower ROEs, as argued by many intervenors, is also a relevant consideration. It is also 2 important to consider how extreme market reactions to singular events, as have occurred in the recent past, may impact how easily 3 capital will be able to be accessed during the future test period should an unforeseen market shock occur. The Commission will 4 continue to monitor a variety of market factors in future rate cases to gauge whether volatility and uncertainty continue to be prevalent 5 issues that merit more consideration in setting the ROE.29 6 7 The Michigan PSC references “singular events” and the overall effect the events 8 could have on the ability of a utility to access capital. Consistent with the Michigan 9 PSC’s views, it is important to consider that the TCJA has had a negative effect on 10 the cash flows of utilities. In addition, it is important to consider this reduced cash 11 flow in the context of overall market conditions, when determining the appropriate 12 ROE and equity ratio to enable APS the ability to attract capital. As a result, it is 13 important that the Commission authorize an ROE for APS that will attract capital 14 at reasonable terms during the period that rates will be in effect. 15 Q. WHAT CONCLUSIONS DO YOU DRAW FROM YOUR ANALYSIS OF 16 CAPITAL MARKET CONDITIONS? 17 A. The important conclusions resulting from capital market conditions are: 18 19 • The assumptions used in the ROE estimation models have been affected by 20 recent historical market conditions. 21 22 • Recent market conditions are not expected to persist as the Federal Reserve 23 continues to normalize monetary policy. As a result, the recent historical 24 market conditions are not reflective of the market conditions that will be 25 present when the rates for APS will be in effect. 26 27

28 29 Id. at 43.

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1 • It is important to consider the results of a variety of ROE estimation models, 2 using forward-looking assumptions to estimate the cost of equity. 3 4 • Without adequate regulatory support, the TCJA will have a negative effect 5 on utility cash flows, which increases investor risk expectations for utilities. 6 VI. PROXY GROUP SELECTION 7 Q. WHY HAVE YOU USED A GROUP OF PROXY COMPANIES TO 8 ESTIMATE THE COST OF EQUITY FOR APS? 9 A. In this proceeding, we are focused on estimating the cost of equity for an electric 10 utility company that is not itself publicly traded. Since the Cost of Equity is a 11 market-based concept, and given that APS does not make up the entirety of a 12 publicly-traded entity, it is necessary to establish a group of companies that is both 13 publicly-traded and comparable to APS in certain fundamental business and 14 financial respects to serve as its “proxy” in the ROE estimation process. 15 16 Even if the Company’s electric utility operations in Arizona did constitute the 17 entirety of a publicly-traded entity, it is possible that transitory events could bias 18 its market value over a given period of time. A significant benefit of using a proxy 19 group is that it moderates the effects of unusual events that may be associated with 20 any one company. The proxy companies used in my analyses all possess a set of 21 operating and risk characteristics that are substantially comparable to APS, and 22 thus provide a reasonable basis to derive and estimate the appropriate ROE for the 23 Company. 24 Q. PLEASE PROVIDE A BRIEF PROFILE OF APS. 25 A. APS provides electric utility service (generation, transmission, and distribution) to 26 approximately 2.7 million customers in 11 of Arizona’s 15 counties. APS currently 27 28

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1 has an investment grade long-term rating of A2 from Moody’s and A- (Outlook: 2 Stable) from S&P.30 3 Q. HOW DID YOU SELECT THE COMPANIES INCLUDED IN YOUR 4 PROXY GROUP? 5 A. I began with the group of 39 domestic companies that Value Line classifies as 6 electric utilities and I simultaneously applied the following screening criteria to 7 exclude companies that: 8 9 • Do not pay consistent quarterly cash dividends because such companies 10 cannot be analyzed using the Constant Growth DCF model. 11 12 • Do not have positive long-term earnings growth forecasts from at least two 13 equity analysts. 14 15 • Do not have investment grade long-term issuer ratings from both S&P and 16 Moody’s. 17 18 • Derive less than 70.00 percent of their total operating income from regulated 19 operations. 20 21 • Derive less than 80.00 percent of their total regulated operating income from 22 regulated electric operations. 23 24 • Do not own regulated generation assets that are included in rate base. 25 26 27

28 30 S&P Global Market Intelligence, site accessed August 31, 2019.

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1 • Do not have at least 35 percent of owned regulated generation capacity come 2 from regulated coal-fired or nuclear power plants. 3 4 • Were party to a merger or other transformative transaction during the 5 analytical period considered. 6 Q. WHAT IS THE COMPOSITION OF YOUR PROXY GROUP? 7 A. My proxy group consists of the companies shown in Figure 10. 8 Figure 10.

9 Proxy Group

10 Company Ticker 11 ALLETE, Inc. ALE Ameren Corporation AEE 12 American Electric Power Company, 13 Inc. AEP DTE Energy Company DTE 14 Duke Energy Corporation DUK Exelon Corporation EXC 15 FirstEnergy Corporation FE 16 Evergy, Inc. EVRG OGE Energy Corporation OGE 17 Otter Tail Corporation OTTR PNM Resources, Inc. PNM 18 PPL Corporation PPL 19 Southern Company SO Xcel Energy Inc. XEL 20 21 VII. COST OF EQUITY ESTIMATION 22 Q. PLEASE BRIEFLY DISCUSS THE ROE IN THE CONTEXT OF THE 23 REGULATED RATE OF RETURN. 24 A. The overall rate of return for a regulated utility is based on its weighted average 25 cost of capital, in which the cost rates of the individual sources of capital are 26 weighted by their respective book values. While the costs of debt and preferred 27 28

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1 stock can be directly observed, the Cost of Equity is market-based and, therefore, 2 must be estimated based on observable market data. 3 Q. HOW IS THE REQUIRED ROE DETERMINED? 4 A. The required ROE is estimated using one or more analytical techniques that rely 5 on market-based data to quantify investor expectations regarding required equity 6 returns, adjusted for certain incremental costs and risks. Informed judgment is then 7 applied to determine where the Company’s Cost of Equity falls within the range of 8 results. The key consideration in determining the Cost of Equity is to ensure that 9 the methodologies employed reasonably reflect investors’ views of the financial 10 markets in general, as well as the subject company (in the context of the proxy 11 group) in particular. 12 Q. WHAT METHODS DID YOU USE TO DETERMINE THE COMPANY’S 13 ROE? 14 A. I considered the results of the Constant Growth DCF model, the CAPM analysis, a 15 Bond Yield Plus Risk Premium methodology, and an Expected Earnings analysis. 16 As discussed in more detail below, a reasonable ROE estimate considers alternative 17 methodologies and the reasonableness of their individual and collective results. 18 Q. WHY IS IT IMPORTANT TO USE MORE THAN ONE ANALYTICAL 19 APPROACH? 20 A. It is important to use more than one approach because the Cost of Equity is not 21 directly observable, and therefore must be estimated based on both quantitative and 22 qualitative information. When faced with the task of estimating the Cost of Equity, 23 analysts and investors are inclined to gather and evaluate as much relevant data as 24 reasonably can be analyzed. A number of models have been developed to estimate 25 the Cost of Equity. Analysts and academics understand that ROE models are tools 26 to be used in the ROE estimation process and that strict adherence to any single 27 approach, or the specific results of any single approach, can lead to flawed 28

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1 conclusions. Consistent with the Hope finding, it is the analytical result, not the 2 methodology employed, that is controlling in arriving at ROE determinations. As 3 a practical matter, however, all of the models available for estimating the cost of 4 equity are subject to limiting assumptions or other methodological constraints. 5 Consequently, many well-regarded finance texts recommend using multiple 6 approaches when estimating the cost of equity. For example, Copeland, Koller, 7 and Murrin31 suggest using the CAPM and Arbitrage Pricing Theory model, while 8 Brigham and Gapenski32 recommend the CAPM, DCF, and Bond Yield Plus Risk 9 Premium approaches. 10 Q. IS IT IMPORTANT, GIVEN THE CURRENT MARKET CONDITIONS, 11 TO USE MORE THAN ONE ANALYTICAL APPROACH? 12 A. Yes. Low interest rates, and the effects of the investor “flight to quality” can be 13 seen in high utility share valuations, relative to historical levels and relative to the 14 broader market. Higher utility stock valuations produce lower dividend yields and 15 result in lower cost of equity estimates from a DCF analysis. Low interest rates 16 also affect the CAPM in two ways: (1) the risk-free rate is lower, and (2) because 17 the market risk premium is a function of interest rates, (i.e., it is the return on the 18 broad stock market less the risk-free interest rate), the risk premium should move 19 higher when interest rates are lower. Therefore, it is important to use multiple 20 analytical approaches to moderate the impact that the current low interest rate 21 environment is having on the ROE estimates for the proxy group and, where 22 possible, consider using projected market data in the models to estimate the return 23 for the forward-looking period. 24 25

26 31 Tom Copeland, Tim Koller and Jack Murrin, Valuation: Measuring and Managing the Value of Companies, 3rd Ed. (New York: McKinsey & Company, Inc., 2000), at 214. 27 32 Eugene Brigham, Louis Gapenski, Financial Management: Theory and Practice, 7th Ed. 28 (Orlando: Dryden Press, 1994), at 341.

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1 Q. ARE YOU AWARE OF ANY REGULATORY COMMISSIONS WHO 2 HAVE RECOGNIZED THAT RECENT CONDITIONS IN CAPITAL 3 MARKETS ARE CAUSING ROE RECOMMENDATIONS BASED ON 4 DCF MODELS TO BE UNREASONABLE? 5 A. Yes, several regulatory commissions have addressed the effect of capital market 6 conditions on the DCF model, including FERC, the ICC, the PPUC and the 7 Missouri PSC. 8 Q. PLEASE SUMMARIZE HOW THE FERC HAS RESPONDED TO THE 9 EFFECT OF MARKET CONDITIONS ON THE DCF. 10 A. Understanding the important role that dividend yields play in the DCF model, the 11 FERC determined that capital market conditions have caused the DCF model to 12 understate equity costs for regulated utilities. In Opinion No. 531, the FERC noted: 13 There is ‘model risk’ associated with the excessive reliance or mechanical application of a model when the surrounding conditions 14 are outside of the normal range. ‘Model risk’ is the risk that a theoretical model that is used to value real world transactions fails 15 to predict or represent the real phenomenon that is being modeled.33 16 17 In Opinion No. 531, the FERC also noted that the low interest rates and bond yields 18 that persisted throughout the analytical period that was relied on (study period) had 19 affected the results of the DCF model and recognized the need to move away from 20 the midpoint of the DCF analysis. In that case, the FERC relied on the CAPM and 21 other risk premium methodologies to inform its judgment to set the return above 22 the midpoint of the DCF results. These positions were affirmed by the FERC in 23 Opinion No. 551 in September 2016.34 24 25 26 27 33 FERC Docket No. EL11-66-001, Opinion No. 531 (June 19, 2014), fn 286. 28 34 FERC Docket No. EL14-12-002, Opinion No. 551, at para. 121.

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1 Finally, in October 2018, the FERC issued an Order in response to the remand from 2 the U.S. Court of Appeals for the District of Columbia indicating plans to establish 3 ROEs based on an equal weighting of the results of four financial models: the DCF, 4 CAPM, Expected Earnings and Risk Premium. FERC explains its reasons for 5 moving away from sole reliance on the DCF model as follows: 6 Our decision to rely on multiple methodologies in these four complaint proceedings is based on our conclusion that the DCF 7 methodology may no longer singularly reflect how investors make their decisions. We believe that, since we adopted the DCF 8 methodology as our sole method for determining utility ROEs in the 1980s, investors have increasingly used a diverse set of data 9 sources and models to inform their investment decisions. Investors appear to base their decisions on numerous data points and models, 10 including the DCF, CAPM, Risk Premium, and Expected Earnings methodologies. As demonstrated in Figure 2 below, which shows 11 the ROE results from the four models over the four test periods at issue in this proceeding, these models do not correlate such that the 12 DCF methodology captures the other methodologies. In fact, in some instances, their cost of equity estimates may move in opposite 13 directions over time. Although we recognize the greater administrative burden on parties and the Commission to evaluate 14 multiple models, we believe that the DCF methodology alone no longer captures how investors view utility returns because investors 15 do not rely on the DCF alone and the other methods used by investors do not necessarily produce the same results as the DCF. 16 Consequently, it is appropriate for our analysis to consider a combination of the DCF, CAPM, Risk Premium, and Expected 17 Earnings approaches.35 18 Q. HOW HAVE THE PPUC, THE ICC AND THE MISSOURI PSC 19 ADDRESSED THE EFFECT OF MARKET CONDITIONS ON THE DCF? 20 A. In a 2012 decision for PPL Electric Utilities, while noting that the PPUC has 21 traditionally relied primarily on the DCF method to estimate the cost of equity for 22 regulated utilities, the PPUC recognized that market conditions were causing the 23 DCF model to produce results that were much lower than other models such as the 24 CAPM and Bond Yield Plus Risk Premium. The PPUC’s Order supported the 25

26 35 27 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order Directing Briefs, issued October 16, 2018, at para. 40. [Figure 2 was omitted] 28

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1 consideration of multiple ROE estimation methodologies.36 The PPUC ultimately 2 concluded: 3 As such, where evidence based on the CAPM and RP methods suggest that the DCF-only results may understate the utility’s 4 current cost of equity capital, we will give consideration to those other methods, to some degree, in determining the appropriate 5 range of reasonableness for our equity return determination.37 6 7 In a recent ICC case, Docket No. 16-0093, Staff relied on a DCF analysis that 8 resulted in average returns for their proxy groups of 7.24 percent to 7.51 percent. 9 The company demonstrated that these results were uncharacteristically too low, by 10 comparing the results of Staff’s models to recently authorized ROEs for regulated 11 utilities and the return on the S&P 500.38 In Order No. 16-0093, the ICC agreed 12 with the Company that Staff’s proposed ROE of 8.04 percent was anomalous and 13 recognized that a return that is not competitive will deter investment in Illinois.39 14 In setting the return in this proceeding the ICC recognized that it was necessary to 15 consider other factors beyond the outputs of the financial models, particularly 16 whether or not the return is sufficient to attract capital, maintain financial integrity, 17 and is commensurate with returns for companies of comparable risk, while 18 balancing the interests of customers and shareholders.40 19 20 21 22 36 Pennsylvania Public Utility Commission, PPL Electric Utilities, R-2012-2290597, 23 meeting held December 5, 2012, at 80. 37 Id., at 81. 24 38State of Illinois Commerce Commission, Docket No. 16-0093, Illinois-American Water 25 Company Initial Brief, August 31, 2016, at 10. 39 Illinois Staff’s analysis and recommendation in that proceeding were based on its 26 application of the multi-stage DCF model and the CAPM to a proxy group of water utilities. 27 40 State of Illinois Commerce Commission Decision, Docket No. 16-0093, Illinois- 28 American Water Company, 2016 WL 7325212 (2016), at 55.

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1 Finally, in February 2018, the Missouri PSC issued a decision in Spire’s 2017 gas 2 rate case, in which the allowed ROE was set at 9.80 percent. In explaining the 3 rationale for its decision, the Missouri PSC cited the importance of considering 4 multiple methodologies to estimate the cost of equity and the need for the 5 authorized ROE to be consistent with returns in other jurisdictions and to reflect 6 the growing economy and investor expectations for higher interest rates. 7 Based on the competent and substantial evidence in the record, on its analysis of the expert testimony offered by the parties, and on its 8 balancing of the interests of the company’s ratepayers and shareholders, as fully explained in its findings of fact and 9 conclusions of law, the Commission finds that 9.8 percent is a fair and reasonable return on equity for Spire Missouri. That rate is 10 nearly the midpoint of all the experts’ recommendations and is consistent with the national average, the growing economy, and the 11 anticipated increasing interest rates. The Commission finds that this rate of return will allow Spire Missouri to compete in the capital 12 market for the funds needed to maintain its financial health.41 13 Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE 14 DCF AND CAPM MODELS? 15 A. Recent market data that is used as the basis for the assumptions for both models 16 have been affected by market conditions. As a result, relying exclusively on 17 historical assumptions in these models, without considering whether these 18 assumptions are consistent with investors’ future expectations, will underestimate 19 the cost of equity that investors would require over the period that the rates in this 20 case are to be in effect. In this instance, relying on the historical average of 21 abnormally high stock prices results in low dividend yields that are not expected to 22 continue over the period that the new rates will be in effect. This, in turn, 23 underestimates the ROE for the rate period. 24 25 26 27 41 File No. GR-2017-0215 and File No. GR-2017-0216, Missouri Public Service 28 Commission, Report and Order, Issue Date February 21, 2018, at 34.

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1 The use of recent historical Treasury bond yields in the CAPM also tends to 2 underestimate the projected cost of equity. The expectation that bond yields will 3 not remain at currently low levels means that the expected cost of equity would be 4 higher than is suggested by the CAPM using historical average yields. The use of 5 projected yields on Treasury bonds results in CAPM estimates that are more 6 reflective of the market conditions that investors expect during the period in which 7 the Company’s rates will be in effect. 8 A. DCF Model 9 Q. PLEASE DESCRIBE THE DCF APPROACH. 10 A. The DCF approach is based on the theory that a stock’s current price represents the 11 present value of all expected future cash flows. In its most general form, the DCF 12 model is expressed as follows: 13 D1 D2 D∞ P0 = + ...++ [1] 14 ()1+ k ()1+ k 2 ()1+ k ∞ 15

16 Where P0 represents the current stock price, D1…D∞ are all expected future 17 dividends, and k is the discount rate, or required ROE. Equation [1] is a standard 18 present value calculation that can be simplified and rearranged into the following 19 form:

20 ()1+ gD k = 0 + g [2] 21 P0

22 23 Equation [2] is often referred to as the Constant Growth DCF model in which the 24 first term is the expected dividend yield and the second term is the expected long- 25 term growth rate. 26 27 28

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1 Q. WHAT ASSUMPTIONS ARE REQUIRED FOR THE CONSTANT 2 GROWTH DCF MODEL? 3 A. The Constant Growth DCF model requires the following assumptions: (1) a 4 constant growth rate for earnings and dividends; (2) a stable dividend payout ratio; 5 (3) a constant price-to-earnings ratio; and (4) a discount rate greater than the 6 expected growth rate. To the extent that any of these assumptions is violated, 7 considered judgment and/or specific adjustments should be applied to the results. 8 Q. WHAT MARKET DATA DID YOU USE TO CALCULATE THE 9 DIVIDEND YIELD IN YOUR CONSTANT GROWTH DCF MODEL? 10 A. The dividend yield in my Constant Growth DCF model is based on the proxy 11 companies’ current annualized dividend and average closing stock prices over the 12 30-, 90-, and 180-trading days ended July 31, 2019. 13 Q. WHY DID YOU USE 30-, 90-, AND 180-DAY AVERAGING PERIODS?

14 A. It is important to use an average of recent trading days to calculate the term P0 in 15 the DCF model to ensure that the ROE is not skewed by unusual events that may 16 affect stock prices on any given trading day. The averaging period should also be 17 reasonably representative of expected capital market conditions over the long-term. 18 In my view, the use of 30-, 90-, and 180-day averaging periods reasonably balances 19 those considerations. 20 Q. DID YOU MAKE ANY ADJUSTMENTS TO THE DIVIDEND YIELD TO 21 ACCOUNT FOR PERIODIC GROWTH IN DIVIDENDS? 22 A. Yes. Since utility companies tend to increase their quarterly dividends at different 23 times throughout the year, it is reasonable to assume that dividend increases will 24 be evenly distributed over calendar quarters. Given that assumption, it is 25 reasonable to apply one-half of the expected annual dividend growth rate for 26 purposes of calculating the expected dividend yield component of the DCF model. 27 This adjustment ensures that the expected first year dividend yield is, on average, 28

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1 representative of the coming twelve-month period, and does not overstate the 2 aggregated dividends to be paid during that time. 3 Q. WHY IS IT IMPORTANT TO SELECT APPROPRIATE MEASURES OF 4 LONG-TERM GROWTH IN APPLYING THE DCF MODEL? 5 A. In its Constant Growth form, the DCF model (i.e., Equation [2]) assumes a single 6 growth estimate in perpetuity. In order to reduce the long-term growth rate to a 7 single measure, one must assume a constant payout ratio, and that earnings per 8 share, dividends per share and book value per share all grow at the same constant 9 rate. Over the long run, however, dividend growth can only be sustained by 10 earnings growth. It, therefore, is important to incorporate a variety of sources of 11 long-term earnings growth rates into the Constant Growth DCF model. 12 Q. WHICH SOURCES OF LONG-TERM EARNINGS GROWTH RATES DID 13 YOU USE? 14 A. My Constant Growth DCF model incorporates three sources of long-term earnings 15 growth rates: (1) consensus estimates from Zacks Investment Research; (2) 16 consensus estimates from Thomson First Call (provided by Yahoo! Finance); and 17 (3) Value Line Investment Survey. 18 Q. PLEASE SUMMARIZE THE RESULTS OF YOUR DCF ANALYSIS. 19 A. As shown in Figure 11 (see also Attachment AEB-2DR), the Constant Growth 20 DCF model produces a range of mean results from 9.07 percent to 9.26 percent and 21 mean high results from 10.21 percent to 10.40 percent. 22 Figure 11.

23 Discounted Cash Flow Results 24 Constant Growth DCF 25 Mean Low Mean Mean High 26 30-Day Average Price 8.09% 9.07% 10.21% 90-Day Average Price 8.17% 9.14% 10.28% 27 180-Day Average Price 8.17% 9.26% 10.40% 28

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1 Q. HOW DID YOU CALCULATE THE RANGE OF RESULTS FOR THE DCF 2 MODEL? 3 A. I calculated the low results for the DCF model using the minimum growth rate (i.e., 4 the lowest of the First Call, Zacks, and Value Line earnings growth rates) for each 5 of the proxy group companies. Thus, the low results reflect the minimum DCF 6 result for the proxy group. I used a similar approach to calculate the high results, 7 using the highest growth rate for each proxy group company. The mean results 8 were calculated using the average growth rates from all three sources. 9 Q. DID YOU EXCLUDE THE DCF RESULTS OF ANY OF THE INDIVIDUAL 10 COMPANIES IN THE PROXY GROUP? 11 A. Yes, I have. It is appropriate to exclude DCF results below a specified threshold 12 at which equity investors would consider such returns to provide an insufficient 13 return increment above long-term debt costs. The average credit rating for the 14 companies in my proxy group is BBB+/Baa1. The average yield on Moody’s Baa- 15 rated utility bonds for the 30 trading days ending July 31, 2019, was 4.17 percent.42 16 As shown in Attachment AEB-2DR, I have eliminated Constant Growth results 17 lower than 7.00 percent because such returns would provide equity investors a risk 18 premium only 283 basis points above Baa-rated utility bonds. 19 Q. DID YOU CONSIDER THE RESULTS OF ANY OTHER DCF ANALYSIS? 20 A. Yes. Because analysts have indicated that utility stocks may currently be at 21 unsustainably high prices due to market conditions, I also considered the results of 22 a projected Constant Growth DCF model. Under this DCF analysis, the dividend 23 yield is calculated using Value Line’s projected average share prices and dividends 24 for the period from 2022-2024, while the long-term growth rate is based on the 25 same five-year projected EPS growth rates used in the Constant Growth DCF 26 model. As shown in Attachment AEB-2, the projected DCF analysis produces a 27

28 42 Source: Bloomberg Professional.

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1 mean DCF result of 9.66 percent and a mean high result of 10.75 percent. Relying 2 on Value Line’s projected dividend yields and share prices in 2022-2024, the mean 3 results of the Constant Growth DCF model increase by 78 basis points (i.e., 9.66 4 percent vs. 8.88 percent shown in Attachment AEB-2DR).43 5 Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE 6 DCF MODEL? 7 A. Recent market data that is used as the basis for the inputs and assumptions for the 8 DCF model have been affected by capital market conditions. As a result, relying 9 exclusively on historical inputs and assumptions in this model, without considering 10 whether those inputs and assumptions are consistent with investors’ future 11 expectations, will underestimate the cost of equity that investors would require 12 over the period that the rates in this case are to be in effect. In this instance, relying 13 on the historical average of abnormally high stock prices results in low dividend 14 yields that are not expected to prevail over the period that the new rates will be in 15 effect. This, in turn, underestimates the ROE for the rate period. 16 B. CAPM Analysis 17 Q. PLEASE BRIEFLY DESCRIBE THE CAPITAL ASSET PRICING 18 MODEL. 19 A. The CAPM is a risk premium approach that estimates the Cost of Equity for a given 20 security as a function of a risk-free return plus a risk premium to compensate 21 investors for the non-diversifiable or “systematic” risk of that security. This second 22 component is the product of the market risk premium and the Beta coefficient, 23 which measures the relative riskiness of the security being evaluated. 24 25 26 27

28 43 This comparison includes the all of the proxy group companies.

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1 The CAPM is defined by four components, each of which must theoretically be a 2 forward-looking estimate: 3

4 fe β ()−+= rrrK fm [3] 5 6 Where: 7 Ke = the required market ROE; 8 9 β = Beta coefficient of an individual security; 10 rf = the risk-free rate of return; and 11 rm = the required return on the market as a whole. 12 13

14 In this specification, the term (rm – rf) represents the market risk premium. 15 According to the theory underlying the CAPM, since unsystematic risk can be 16 diversified away, investors should only be concerned with systematic or non- 17 diversifiable risk. Non-diversifiable risk is measured by Beta, which is defined as:

18 β Covariance(re, = rm) [4] 19 Variance(rm) 20

21 The variance of the market return (i.e., Variance (rm)) is a measure of the 22 uncertainty of the general market, and the covariance between the return on a

23 specific security and the general market (i.e., Covariance (re, rm)) reflects the extent 24 to which the return on that security will respond to a given change in the general 25 market return. Thus, Beta represents the risk of the security relative to the general 26 market. 27 28

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1 Q. WHAT RISK-FREE RATE DID YOU USE IN YOUR CAPM ANALYSIS? 2 A. I relied on three sources for my estimate of the risk-free rate: (1) the current 30- 3 day average yield on 30-year U.S. Treasury bonds of 2.57 percent;44 (2) the average 4 projected 30-year U.S. Treasury bond yield for Q4 2019 through Q4 2020 of 2.66 5 percent;45 and (3) the average projected 30-year U.S. Treasury bond yield for 2021 6 through 2025 of 3.60 percent.46 7 Q. DID YOU PLACE MORE WEIGHT ON ONE OF THESE SCENARIOS? 8 A. Yes. Based on current market conditions, I placed more weight on the results of 9 the projected yields on the 30-year Treasury bonds. As discussed previously, the 10 estimation of the Cost of Equity should be forward-looking since it is the return 11 that investors would receive over the future rate period. Therefore, the inputs and 12 assumptions used in the CAPM analysis should reflect the expectations of the 13 market at that time. As discussed in Section V of my Direct Testimony, leading 14 economists surveyed by Blue Chip expect an increase in long-term interest rates 15 over the next five years. This is an important consideration for equity investors as 16 they assess their return requirements. While I have included the results of a CAPM 17 analysis that relies on the current average risk-free rate, that analysis fails to take 18 into consideration the effect of the market’s expectations for interest rate increases 19 on the cost of equity. 20 Q. WHAT BETA COEFFICIENTS DID YOU USE IN YOUR CAPM 21 ANALYSIS? 22 A. As shown on Attachment AEB-4DR, I used the Beta coefficients for the proxy 23 group companies as reported by Bloomberg and Value Line. The Beta coefficients 24 reported by Bloomberg were calculated using ten years of weekly returns relative 25

26 44 Bloomberg Professional, as of July 31, 2019. 27 45 Blue Chip Financial Forecasts, Vol. 38, No. 8, August 1, 2019, at 2. 28 46 Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14.

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1 to the S&P 500 Index. Value Line’s calculation is based on five years of weekly 2 returns relative to the New York Stock Exchange Composite Index. 3 Q. WHY DID YOU SELECT A TEN-YEAR PERIOD TO CALCULATE THE 4 BETA COEFFICIENTS FROM BLOOMBERG? 5 A. As I discussed in Section V, the TCJA has had a significant effect on utility 6 companies. While other industries are able to retain the benefits of a reduced 7 corporate income tax rate, this benefit has largely been passed through to customers 8 by utility companies. This fundamental difference affected investors’ view of the 9 utility industry relative to other industries. As shown in Figure 12, after the Senate 10 passed the TCJA on December 2, 2017, utilities significantly deviated from the 11 broader market. 12 Figure 12.

13 Performance of the Utility Industry Relative to the S&P 50047 14 15 16 17 18 19 20 21 22 23 24

25 As shown in Figure 12, following the TCJA the performance of the utility industry 26 deviated significantly from the broader market, understating the Beta for utility 27

28 47 Bloomberg Professional. Data through July 31, 2019.

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1 companies as compared with historical averages. To reflect the long-term 2 relationship, which has been that utility stocks are less volatile than the broader 3 market (i.e., the relative volatility for utility companies has been lower than the 4 S&P 500 over the ten-year measure),48 I selected a ten-year period to calculate the 5 Beta coefficients from Bloomberg. 6 Q. HOW DID YOU ESTIMATE THE MARKET RISK PREMIUM IN THE 7 CAPM? 8 A. I estimated the market risk premium based on the expected total return on the S&P 9 500 Index less the 30-year Treasury bond yield. The expected total return on the 10 S&P 500 Index is calculated using the Constant Growth DCF model discussed 11 earlier in my Direct Testimony for the companies in the S&P 500 Index for which 12 dividend yields and long-term earnings projections are available. As shown in 13 Attachment AEB-5DR, based on an estimated market capitalization-weighted 14 dividend yield of 1.94 percent and a weighted long-term growth rate of 11.84 15 percent, the estimated required market return for the S&P 500 Index is 13.90 16 percent. As shown in Attachment AEB-5DR, the implied market risk premium 17 over the current 30-day average of the 30-year U.S. Treasury bond yield, and 18 projected yields on the 30-year U.S. Treasury bond, range from 10.30 percent to 19 11.24 percent. 20 Q. WHY IS A FORWARD-LOOKING MARKET RISK PREMIUM MORE 21 APPROPRIATE THAN A HISTORICAL MARKET RISK PREMIUM? 22 A. The historical market risk premium fails to consider the inverse relationship 23 between interest rates and the market risk premium. As shown in my Bond Yield 24 plus Risk Premium analysis, as interest rates decrease, the market risk premium 25 increases. The historical market risk premium reported by Morningstar is based 26 on an income-only return on long-term government bonds of 5.00 percent (which 27

28 48 Ibid.

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1 is significantly higher than the current yield on long-term government bonds) 2 subtracted from the long-term return on large company stocks of 12.10 percent.49 3 Therefore, the historical market risk premium is understated relative to current or 4 near-term projected interest rates, which are well below the long-term average 5 government bond yield of 5.00 percent. As such, it is more appropriate to use a 6 forward-looking market risk premium that reflects projected total returns for the 7 S&P 500 less the current and projected yield on Treasury securities. 8 Q. WHAT ARE THE RESULTS OF YOUR CAPM ANALYSES? 9 A. As shown in Figure 13 (see also Attachment AEB-6DR), my CAPM analysis 10 produces a range of returns from 9.54 percent to 10.42 percent. The mean return 11 using the Bloomberg Beta coefficients and three measures of the risk-free rate is 12 10.20 percent. Using the Value Line Beta coefficients and three measures of the 13 risk-free rate, the mean result is 9.69 percent. 14 Figure 13.

15 Forward-Looking CAPM Results

16 Current 2019-2020 2021-2025 17 Risk-Free Projected Projected 18 Rate Risk-Free Rate Risk-Free Rate Mean (2.57%) (2.66%) (3.60%) Result 19 Bloomberg Beta 10.07% 10.11% 10.42% 10.20% 20 Value Line Beta 9.54% 9.58% 9.94% 9.69% 21 22 Q. WHAT ARE YOUR CONCLUSIONS ABOUT THE RESULTS OF THE 23 CAPM? 24 A. The use of recent historical Treasury bond yields in the CAPM tends to 25 underestimate the forward-looking cost of equity. The expectation that bond yields 26 27 49 Duff & Phelps, 2018 Cost of Capital: Annual U.S. Guidance and Examples, Chapter 2, 28 Exhibit 2.3, at 4.

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1 will not remain at currently low levels means that the expected Cost of Equity 2 would be higher than is suggested by the CAPM using historical average yields. 3 The use of projected yields on Treasury bonds results in CAPM estimates that are 4 more reflective of the market conditions that investors expect during the period that 5 the Company’s rates will be in effect. 6 C. Bond Yield Plus Risk Premium Analysis 7 Q. PLEASE DESCRIBE THE BOND YIELD PLUS RISK PREMIUM 8 APPROACH YOU EMPLOYED. 9 A. In general terms, this approach is based on the fundamental principle that equity 10 investors bear the residual risk associated with equity ownership and therefore 11 require a premium over the return they would have earned as a bondholder. Since 12 returns to equity holders have greater risk than returns to bondholders, equity 13 investors must be compensated to bear that risk. Risk premium approaches 14 estimate the cost of equity as the sum of the equity risk premium and the yield on 15 a particular class of bonds. In my analysis, I used actual authorized returns for 16 electric utilities as the historical measure of the Cost of Equity to determine the risk 17 premium. 18 Q. ARE THERE OTHER CONSIDERATIONS THAT SHOULD BE 19 ADDRESSED IN CONDUCTING THIS ANALYSIS? 20 A. Yes. Both academic literature and market evidence indicate that the equity risk 21 premium (as used in this approach) is inversely related to the level of interest rates. 22 That is, as interest rates increase (decrease), the equity risk premium decreases 23 (increases). Consequently, it is important to develop an analysis that: (1) reflects 24 the inverse relationship between interest rates and the equity risk premium; and (2) 25 relies on recent and expected market conditions. Such an analysis can be developed 26 based on a regression of the risk premium as a function of U.S. Treasury bond 27 yields. If we let authorized ROEs for electric utilities serve as the measure of 28

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1 required equity returns and define the yield on the long-term U.S. Treasury bond 2 as the relevant measure of interest rates, the risk premium is simply the difference 3 between those two points.50 4 Q. IS THE BOND YIELD PLUS RISK PREMIUM ANALYSIS RELEVANT 5 TO INVESTORS? 6 A. Yes. Investors are aware of ROE awards in other jurisdictions, and they consider 7 those awards as a benchmark for a reasonable level of equity returns for utilities of 8 comparable risk operating in other jurisdictions. Since my Bond Yield Plus Risk 9 Premium analysis is based on authorized ROEs for electric utilities relative to 10 corresponding Treasury yields, it provides relevant information to assess the return 11 expectations of investors. However, I have relied on this analysis only to 12 corroborate the reasonableness of my DCF and CAPM results and to inform my 13 ultimate ROE recommendation, not as the primary basis for my recommendation. 14 Q. WHAT DID YOUR BOND YIELD PLUS RISK PREMIUM ANALYSIS 15 REVEAL? 16 A. As shown in Figure 14, from 1992 through July 2019, there was a strong negative 17 relationship between risk premia and interest rates. To estimate that relationship, 18 I conducted a regression analysis using the following equation: 19 20 RP += ()Tba [5] 21 22 23

24 50 See e.g., S. Keith Berry, Interest Rate Risk and Utility Risk Premia during 1982-93, 25 Managerial and Decision Economics, Vol. 19, No. 2 (March, 1998), in which the author used a methodology similar to the regression approach described below, including using 26 allowed ROEs as the relevant data source, and came to similar conclusions regarding the inverse relationship between risk premia and interest rates. See also Robert S. Harris, 27 Using Analysts’ Growth Forecasts to Estimate Shareholders Required Rates of Return, 28 Financial Management, Spring 1986, at 66.

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1 Where:

2 RP = Risk Premium (difference between allowed ROEs and the yield on 30- 3 year U.S. Treasury bonds) 4 5 a = intercept term 6 b = slope term 7 8 T = 30-year U.S. Treasury bond yield 9 10 Data regarding allowed ROEs were derived from 615 integrated electric utility rate 11 cases from 1992 through July 2019 as reported by Regulatory Research Associates 12 (RRA).51 This equation’s coefficients were statistically significant at the 99.00 13 percent level. 14 Figure 14.

15 Risk Premium Results

16 17 18 19 20 21 22 23 24

25

26 51 This analysis began with a total of 1,129 cases and was screened to eliminate limited issue rider cases, transmission-only cases, distribution cases and cases that were silent 27 with respect to the authorized ROE. After applying those screening criteria, the analysis 28 was based on data for 615 cases.

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1 As shown in Attachment AEB-7DR, based on the current 30-day average of the 2 30-year U.S. Treasury bond yield (i.e., 2.57 percent), the risk premium would be 3 7.19 percent, resulting in an estimated ROE of 9.75 percent. Based on the near- 4 term (Q4 2019 – Q4 2020) projections of the 30-year U.S. Treasury bond yield 5 (i.e., 2.66 percent), the risk premium would be 7.13 percent, resulting in an 6 estimated ROE of 9.79 percent. Based on longer-term (2021-2025) projections of 7 the 30-year U.S. Treasury bond yield (i.e., 3.60 percent), the risk premium would 8 be 6.60 percent, resulting in an estimated ROE of 10.20 percent. 9 D. Expected Earnings Analysis 10 Q. HAVE YOU CONSIDERED ANY ADDITIONAL ANALYSIS TO 11 ESTIMATE THE COST OF EQUITY FOR APS? 12 A. Yes. I have considered an Expected Earnings analysis based on the projected 13 ROEs for each of the proxy group companies. 14 Q. WHAT IS AN EXPECTED EARNINGS ANALYSIS? 15 A. The Expected Earnings methodology is a comparable earnings analysis that 16 calculates the earnings that an investor expects to receive on the book value of a 17 stock. The Expected Earnings analysis is a forward-looking estimate of investors’ 18 expected returns. The use of an Expected Earnings approach based on the proxy 19 companies provides a range of the expected returns on a group of risk comparable 20 companies. This range is useful in helping to determine the opportunity cost of 21 investing in the subject company, which is relevant in determining a company’s 22 ROE. 23 Q. HAVE REGULATORS ENDORSED THE USE OF AN EXPECTED 24 EARNINGS ANALYSIS? 25 A. Yes. As discussed above, the FERC issued an Order in October 2018 indicating 26 plans to establish ROEs based on an equal weighting of the results of four financial 27 28

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1 models: the DCF, CAPM, Expected Earnings and Risk Premium. In regard to the 2 expected earnings analysis, FERC noted the following: 3 A comparable earnings analysis is a method of calculating the earnings an investor expects to receive on the book value of a 4 particular stock. The analysis can be either backward looking using the company’s historical earnings on book value, as reflected on the 5 company’s accounting statements, or forward-looking using estimates of earnings on book value, as reflected in analysts’ 6 earnings forecasts for the company. The latter approach is often referred to as an “Expected Earnings analysis.” The returns on book 7 equity that investors expect to receive from a group of companies with risks comparable to those of a particular utility are relevant to 8 determining that utility’s cost of equity, because those returns on book equity help investors determine the opportunity cost of 9 investing in that particular utility instead of other companies of comparable risk. Because investors rely on Expected Earnings 10 analyses to help estimate the opportunity cost of investing in a particular utility, we find this type of analysis useful in determining 11 a utility’s ROE.52 12 Q. HAVE ANY OTHER REGULATORS CONSIDERED THE USE OF AN 13 EXPECTED EARNINGS ANALYSIS? 14 A. Yes. The Washington Utilities & Transportation Commission (Washington UTC), 15 in its order in Dockets UE-170485 and UG-170486, considered the results of the 16 Comparable Earnings analysis53 in establishing the authorized ROE for Avista 17 Corporation. The Washington UTC noted that it tends to place more weight on the 18 results of the DCF, CAPM and Risk Premium analyses; however, given the wide 19 range of CAPM results presented by the ROE witnesses in the case, the 20 Washington UTC decided to apply weight to the results of the Comparable 21 Earnings analysis.54 Specifically, the Washington UTC stated the following: 22 23 24

52 25 Federal Energy Regulatory Commission, Docket No. EL 11-66-001, et al., Order Directing Briefs, issued October 16, 2018, at 42. 26 53 The Expected Earnings analysis is a form of the Comparable Earnings analysis that relies exclusively on forward-looking projections. 27 54 Wash. Utils. & Transp. Comm’n v. Avista Corp., Docket Nos. UE-170485 and UG- 28 170486, Order 07, ¶ 65 (April 26, 2018).

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1 Finally, as additional data points for our consideration of establishing Avista’s ROE, we note that two witness, Mr. 2 McKenzie for Avista and Mr. Parcell for Staff, employ the CE approach to two proxy groups of companies. The respective mid- 3 points of each witnesses’ CE analysis are 10.5 and 9.5 percent, respectively, with an average of 10.0 percent. Although we 4 generally do not apply material weight to the CE method, having stronger reliance on the DCF, CAPM and RP methods, we are 5 inclined to include the CE method here given the anomalous CAPM results described previously.55 6 7 Q. HOW DID YOU DEVELOP THE EXPECTED EARNINGS APPROACH? 8 A. I relied primarily on the projected ROE capital for the proxy companies as reported 9 by Value Line for the period from 2022-2024. The projected ROEs are adjusted to 10 account for the fact that the ROEs reported by Value Line are calculated on the 11 basis of common shares outstanding at the end of the period, as opposed to average 12 shares outstanding over the period. This adjustment is consistent with FERC’s 13 methodology for the Expected Earnings analysis that was included in its October 14 2018 order. As shown in Attachment AEB-8DR, the Expected Earnings analysis 15 produces mean results of 11.15 percent and a median of 10.81 percent. 16 VIII. REGULATORY AND BUSINESS RISKS 17 Q. DO THE MEAN DCF, CAPM, RISK PREMIUM AND EXPECTED 18 EARNINGS RESULTS FOR THE PROXY GROUP PROVIDE AN 19 APPROPRIATE ESTIMATE OF THE COST OF EQUITY FOR APS? 20 A. No. These results provide only a range of the appropriate estimate of the 21 Company’s Cost of Equity. There are additional factors that must be taken into 22 consideration when determining where the Company’s Cost of Equity falls within 23 the range of analytical results. I considered the regulatory risk faced by APS in 24 determining the overall risk profile of the Company as compared with the proxy 25 group, APS’s projected level of capital expenditures, and the Company’s reliance 26 on nuclear generation. 27

28 55 Ibid.

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1 A. Regulatory Risk Assessment 2 Q. HAVE YOU PERFORMED A REGULATORY RISK ASSESSMENT OF 3 APS AS COMPARED TO THAT OF THE PROXY GROUP COMPANIES? 4 A. Yes. Specifically, I examined the following factors that affect the business risk of 5 APS and the proxy group companies: (1) test year convention; (2) rate base 6 convention; (3) revenue decoupling mechanism; and (4) inclusion of Construction 7 Work in Progress (CWIP) in rate base and the ability to earn a cash return on CWIP. 8 9 As shown in Attachment AEB-9DR, approximately 64.00 percent of the operating 10 companies in the proxy group provide service in jurisdictions that allow the use of 11 a fully or partially forecasted test year. APS’s rates are based on a historical test 12 year, adjusted for known and measurable changes. Further, approximately 46.00 13 percent of the operating utilities in the proxy group are allowed to use year-end rate 14 base, while about 54.00 percent use average rate base. APS’s rates are currently 15 based on year-end rate base. 16 17 APS has a partial revenue decoupling mechanism (the Lost Fixed Cost Recovery 18 Mechanism) that allows the Company to recover a portion of the revenues lost due 19 to reduced sales resulting from customer participation in energy efficiency and 20 distributed energy rooftop solar programs. By comparison, like APS, 21 approximately 38.00 percent of the operating utilities held by the proxy group have 22 partial revenue decoupling mechanisms, and slightly less than 6.00 percent have 23 full revenue decoupling mechanisms (which account for changes in volumetric risk 24 regardless of the cause) which offer greater protection against volumetric risk. 25 26 As shown in Attachment AEB-9DR, approximately 84.00 percent of the operating 27 utilities in the proxy group have the ability to include all or part of the CWIP in 28

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1 rate base and earn a cash return on CWIP, which helps to offset the pressure on 2 cash flows of major capital projects. APS does not have this ability. 3 Q. ARE YOU AWARE THAT APS’S 2017 RATE SETTLEMENT INCLUDED 4 MANY CREDIT SUPPORTIVE FEATURES? 5 A. Yes, I am aware that the settlement provided for a 55.8 percent equity ratio and an 6 allowed ROE of 10.00 percent with the continuation of certain cost recovery riders. 7 However, as a result of the settlement, the Commission Staff opened a docket to 8 review the Company’s earnings and required that APS file a full rate case earlier 9 than was anticipated as part of the settlement. In that determination, the Staff 10 identified several areas to be revisited in the rate proceeding including the 11 authorized equity ratio and ROE and all adjustment mechanisms that had been 12 included in the settlement.56 While the 2017 rate settlement included credit 13 supportive features, FitchRatings downgraded the outlook on APS to negative in 14 June 2019, noting concern related to the delay in approval of the step rate increase 15 related to the recovery of investment in the Four Corners environmental 16 remediation, the re-examination of retail rates and the review of potential over 17 earnings at APS.57 In addition, Moody’s acknowledged the terms of the 2017 18 settlement agreement and the Staff’s determination to require a rate case that 19 reconsiders many of the terms of that settlement. However, in June 2019 Moody’s 20 credit opinion assumed that the Arizona regulatory environment would remain 21 supportive, referencing timely recovery mechanisms that help support cash flow 22 from operations.58 As such, continued support from the Commission could 23 24 25 56 Moody’s Investor Services Credit Opinion, Arizona Public Service Company: Update 26 to credit analysis, June 18, 2019 at 5. 57 FitchRatings, Corporate Report, Arizona Public Service Co., July 3, 2019, at 1. 27 58 Moody’s Investor Services Credit Opinion, Arizona Public Service Co., June 18, 2019 28 at 1.

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1 mitigate concerns from the credit rating agencies that may affect APS’s credit 2 quality. 3 Q. BASED ON THESE ANALYSES, WHAT IS YOUR CONCLUSION 4 REGARDING THE LEVEL OF REGULATORY RISK FOR APS 5 RELATIVE TO THAT OF THE PROXY GROUP COMPANIES? 6 A. As discussed above, APS has greater regulatory risk than the proxy group 7 companies due to the use of a historical test year, higher volumetric risk than 8 several of the proxy group companies as a result of the structure of the partial 9 decoupling mechanism, capital recovery between rate cases, and recent regulatory 10 developments that may result in a review of the terms of the 2017 settlement. My 11 conclusion is that, even though APS has some cost recovery adjustors, they are 12 generally more limited than many of the proxy group companies. Therefore, APS 13 has greater regulatory risk than the proxy group, which supports an authorized ROE 14 toward the upper end of the range of results. 15 B. APS’s Capital Expenditure Plan 16 Q. PLEASE SUMMARIZE THE COMPANY’S PROJECTED CAPITAL 17 EXPENDITURE REQUIREMENTS. 18 A. APS projects capital investments of approximately $4.0 billion over the period 19 from 2019 through 2021.59 The capital program is largely driven by the Company’s 20 clean energy investment initiatives, which seek to substantially expand its clean 21 energy portfolio with the addition of 351 MW of battery storage and 100 MW of 22 solar by 2021, and an additional 500 MW of solar and battery by 2025.60 23 24 25 26 27 59 Source: Company response to data request. 28 60 Moody’s Investor Services Credit Opinion, June 18, 2019 at 5.

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1 Q. DO CREDIT RATING AGENCIES RECOGNIZE THE RISKS 2 ASSOCIATED WITH ELEVATED LEVELS OF CAPITAL 3 EXPENDITURES? 4 A. Yes. From a credit perspective, the additional pressure on cash flows associated 5 with high levels of capital expenditures exerts corresponding pressure on credit 6 metrics and, therefore, credit ratings. This additional pressure on FFO coverage 7 ratios was noted by S&P when the rating agency downgraded the outlook on APS 8 from positive to stable. 9 10 To the extent that APS’s rates do not permit it to recover its full cost of doing 11 business, the Company will face increased recovery risk and thus increased 12 pressure on its credit metrics. This is particularly important given the pressure on 13 the Company’s credit metrics due to the negative effect of the TCJA on APS’s cash 14 flows. 15 Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE EFFECT OF 16 APS’S CAPITAL SPENDING PROGRAM ON ITS RISK PROFILE AND 17 COST OF CAPITAL? 18 A. As noted by S&P, the elevated level of APS’s projected capital expenditures is 19 expected to drive higher the Company’s negative free cash flow. Timely cost 20 recovery is needed to maintain the Company’s credit metrics at a level consistent 21 with the current credit ratings. S&P noted that the Company’s current rating is 22 based in part on its ability to manage regulatory risk in what S&P has determined 23 is a challenging regulatory environment in Arizona.61 Based on the S&P 24 assessment, it will be important to ensure that the Company’s credit metrics are 25

26 61 Standard & Poors Ratings Direct, Research Update Pinnacle West Capital Corp. and 27 Subsidiary Arizona Public Service Co. Outlooks Revised To Stable; A- Rating Affirmed, 28 May 3, 2018, p. 2.

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1 supported through the capital structure and an authorized ROE for the Company 2 toward the upper end of the range for the proxy group. 3 C. Generation Risk 4 Q. PLEASE PROVIDE AN OVERVIEW OF THE COMPANY’S 5 GENERATION PORTFOLIO. 6 A. APS’s portfolio includes a substantial amount of coal and nuclear generation. 7 While the Company has a stated plan to reduce its coal generation over time, 8 ceasing coal generation by 2038,62 the APS portfolio remains depended on nuclear 9 generation. In fact, the Company operates the largest nuclear generating facility in 10 the country - Palo Verde. 11 Q. PLEASE DESCRIBE THE RISKS ASSOCIATED WITH APS’S 12 GENERATION PORTFOLIO. 13 A. In general, nuclear generation assets are subject to certain risks including the 14 recovery of investors’ capital in the event of a change in market structure or a plant 15 failure, and recovery of replacement power and repair costs in the event of extended 16 or unplanned outage. In addition, federal safety regulations present a substantial 17 risk of requiring investors to commit new capital to comply with new regulations 18 or operation restrictions or possibly closure. The Company and its investors are 19 faced with the risk that new and impending federal regulations will require it to 20 expend additional capital or face closure and investors consider these risks in 21 establishing their return requirements. As shown in Attachment AEB-10DR, it is 22 clear that the Company’s exposure to the risks associated with nuclear generation 23 is above the proxy group average. In fact, approximately 35.00 percent of the 24 Company’s net generation was derived from nuclear generation assets, compared 25 26 27 62 Moody’s Investor Services Credit Opinion, Arizona Public Service Company: Update 28 to credit analysis, June 18, 2019 at 4.

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1 to the proxy group average of approximately 22.00 percent. As such, this supports 2 an authorized ROE toward the upper end of the range of results. 3 IX. CAPITAL STRUCTURE 4 Q. WHAT IS APS’S PROPOSED CAPITAL STRUCTURE? 5 A. As described in the Direct Testimony of Ms. Blankenship, the Company’s 6 proposed capital structure consists of 54.67 percent common equity and 45.33 7 percent long-term debt, based on the test year actual capital structure. 8 Q. HAVE YOU CONDUCTED ANY ANALYSIS TO DETERMINE IF THE 9 COMPANY’S CAPITAL STRUCTURE IS REASONABLE? 10 A. Yes, I have reviewed the capital structures of the proxy group companies. In 11 addition, I have considered recent trends in the industry following the TCJA. 12 Q. PLEASE DISCUSS YOUR ANALYSIS OF THE CAPITAL STRUCTURES 13 OF THE PROXY GROUP COMPANIES. 14 A. My analysis of the proxy group companies’ actual capital structures is provided in 15 Attachment AEB-11DR. As shown in that exhibit, I calculated the mean 16 proportions of common equity and long-term debt over the most recent eight 17 quarters63 for each of the proxy group companies at the operating company level. 18 The Company’s proposed equity ratio of 54.67 percent is slightly above the mean 19 of the proxy group of 53.69 percent and near the middle of the range of common 20 equity ratios for the proxy group companies of - 45.93 percent to 60.59 percent. 21 Q. ARE THERE OTHER FACTORS TO BE CONSIDERED IN SETTING THE 22 COMPANY’S CAPITAL STRUCTURE? 23 A. Yes. The credit rating agencies’ response to the TCJA must also be considered 24 when determining the equity ratio. As discussed previously in my testimony, all 25 three rating agencies have noted that the TCJA has negative implications for utility 26 27 63 Source: SNL Financial and FERC Form 1 quarterly reports. Includes quarterly data 28 from Q3 2017 through Q2 2019.

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1 cash flows. S&P and FitchRatings have specifically identified increasing the 2 equity ratio as one approach to ensure that utilities have sufficient cash flows 3 following the tax cuts and the loss of bonus depreciation. Furthermore, Moody’s 4 unprecedented downgrade of the rating outlook for the entire utilities sector in June 5 2018 stresses the importance of maintaining adequate cash flow metrics for the 6 industry as a whole and APS in the context of this proceeding. 7 Q. WHAT IS YOUR CONCLUSION REGARDING AN APPROPRIATE 8 CAPITAL STRUCTURE FOR APS? 9 A. Considering the actual capital structures of the proxy group’s operating companies, 10 and recent trends in the industry, I believe that APS’s proposed common equity 11 ratio of 54.67 percent is reasonable. 12 X. CONCLUSIONS AND RECOMMENDATION 13 Q. WHAT IS YOUR CONCLUSION REGARDING A JUST AND 14 REASONABLE ROE FOR APS? 15 A. Based on the various quantitative and qualitative analyses presented in my Direct 16 Testimony, and in light of the business and financial risks of APS compared to the 17 proxy group, it is my view that the Company’s requested ROE of 10.15 percent is 18 just and reasonable and would balance the interests of the Company’s customers 19 and shareholders. Specifically, my ROE recommendation would enable the 20 Company to maintain its financial integrity and therefore its ability to attract capital 21 at reasonable rates under a variety of economic and financial market conditions, 22 while continuing to provide safe, reliable and affordable electric utility service to 23 customers in Arizona. 24 25 26 27 28

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1 Figure 15.

2 Summary of Analytical Results 3 Constant Growth DCF 4 Mean Low Mean Mean High 5 30-Day Average Price 8.09% 9.07% 10.21% 6 90-Day Average Price 8.17% 9.14% 10.28% 180-Day Average Price 8.17% 9.26% 10.40% 7 Risk Premium Models 2019-2020 2021-2025 8 Current Risk- Projected Projected Free Rate 9 Risk-Free Risk-Free (2.57%) Rate (2.66%) Rate (3.60%) 10 CAPM - Bloomberg Beta 10.07% 10.11% 10.42% 11 CAPM - Value Line Beta 9.54% 9.58% 9.94% Bond Yield Plus Risk 12 9.75% 9.79% 10.20% Premium 13 Expected Earnings Analysis 14 Value Line 2022-2024 11.15% 15 16 Q. WHAT IS YOUR CONCLUSION WITH RESPECT TO APS’S PROPOSED 17 CAPITAL STRUCTURE? 18 A. My conclusion is that the Company’s proposed capital structure consisting of 54.67 19 percent common equity and 45.33 percent long-term debt is reasonable compared 20 to the mean capital structures for the proxy group companies. 21 XI. FAIR VALUE RATE BASE 22 Q. WHAT IS THE FAIR VALUE STANDARD IN ARIZONA? 23 A. As the Commission noted in its decision regarding Chaparral City Water 24 Company,64 the Arizona Constitution requires the use of a fair value rate base in 25 establishing rates. Article XV, Section 14 of the Arizona Constitution states: 26 27

28 64 Decision No. 70441 (July 28, 2008), at 20-21.

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1 The corporation commission shall, to aid it in the proper discharge of its duties, ascertain the fair value of the property within the state 2 of every public service corporation doing business therein; and every public service corporation doing business within the state 3 shall furnish to the commission all evidence in its possession, and all assistance in its power, requested by the commission in aid of 4 the determination of the value of the property within the state of such public service corporation.65 5 6 As interpreted by the Arizona Court of Appeals, this paragraph requires the 7 Commission to find the fair value of a public service corporation’s property and to 8 use that value to set just and reasonable rates.66 9 Q. HOW HAS THE COMMISSION APPLIED THE FAIR VALUE 10 STANDARD IN PRIOR CASES? 11 A. The fair value standard, as applied by the Commission in recent rate cases, includes 12 the estimation of two components: (1) the FVRB; and (2) the FVROR on the 13 FVRB.67 14 Q. HOW HAS THE COMMISSION ESTIMATED THE FVRB? 15 A. In several recent cases, the Commission has determined that it was appropriate to 16 estimate the FVRB by equally weighting the OCRB and the RCND. The RCND 17 estimates the current replacement cost value of the utility system by escalating the 18 utility’s original investments in rate base assets by inflation, since the installation 19 year of the asset. In order to recognize physical and functional depreciation of the 20 assets, the replacement cost is then adjusted for the accounting depreciation of the 21 assets based on the expected useful life of the asset, as determined through the 22 company’s depreciation study. 23 24 25 65 Arizona Constitution, Article XV, Section 14. 26 66 Decision No. 75697 (August 18, 2016), Decision No. 71914, (September 30, 2010) at 48-49. See also, Decision No. 70441 (July 28, 2008), at 20-21. 27 67 Decision No. 75697 (August 18, 2016), Decision No. 71914 (September 30, 2010), at 28 51.

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1 Q. HOW DO YOU DEFINE “FAIR VALUE”? 2 A. Used in the regulatory context of determining a just and reasonable rate of return, 3 “fair value” is the price at which a property would change hands between a willing 4 buyer and a willing seller, when neither party is under any compulsion to enter into 5 a transaction, and when both parties have reasonable knowledge of relevant facts.68 6 That definition is consistent with the Internal Revenue Code and Revenue Ruling 7 59-60 (Ruling 59-60), which notes that court decisions regarding fair value further 8 assume that the buyer and seller are “able, as well as willing, to trade and to be well 9 informed about the property and concerning the market for such property.”69 10 Q. HAVE YOU CONDUCTED ANY ADDITIONAL ANALYSIS TO 11 DETERMINE WHETHER THE METHODOLOGY THAT THE 12 COMMISSION HAS USED TO ESTIMATE THE FVRB IS 13 REASONABLE? 14 A. Yes. Applying a 50.00 percent weight to the OCRB to estimate the FVRB is 15 inconsistent with the valuation theory that is relied upon by investors. Valuation 16 theory identifies three traditional approaches that are used to estimate the value of 17 an asset: (1) the Income Approach; (2) the Cost Approach; and (3) the Comparable 18 Transactions Approach. The Income Approach establishes the value of the asset 19 based on the present discounted value of the expected income from the asset. Using 20 the Cost Approach, an investor estimates the value of the asset based on the current 21 cost of a reasonably comparable replacement asset, adjusted to reflect all forms of 22 depreciation that are present in the subject asset. Finally, using the Comparable 23 Transactions or Market Multiples Approach, the investor relies on the use of 24 market data on the sale of comparable assets to estimate the value of the assets. 25 26 27 68 See Shannon P. Pratt, Valuing a Business, 5th ed. McGraw Hill, 2008, at 41-42. 28 69 IRS Revenue Ruling 59-60, 1959-1 CB 237-IRC Sec. 2031.

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1 While different circumstances of the asset or the investor can affect whether or not 2 all three approaches are considered, or how much emphasis should be placed on 3 any given approach, the objective of each approach is to use available market data 4 to derive the market-based value of an asset. An approach which places a 50.00 5 percent weight on the depreciated original cost of the assets at the time those assets 6 were installed suggests that the accounting value of an investment has a 7 relationship to the current market value of the asset. This is not the case, as is 8 recognized both in the marketplace and in academia.70 9 Q. HAVE YOU CONDUCTED ANY ANALYSIS TO ASSESS THE 10 REASONABLENESS OF USING THE RCND AS THE FVRB FOR APS? 11 A. Yes. As noted above, there are three main approaches to valuation typically relied 12 upon by investors and analysts: (1) the Income Approach; (2) the Cost Approach; 13 and (3) the Comparable Transactions Approach. The Income Approach is not 14 appropriate in circumstances such as this where the value of the assets is used to 15 determine the income of the assets. The RCND is the Company’s estimate of the 16 current value of the assets using the second approach, the Cost Approach. As 17 shown in Attachment AEB-12DR, the FVRB of $12,310 million is calculated by 18 weighting equally the Company’s OCRB of $8,873 million and the Company’s 19 estimated RCND of $15,748 million. 20 21 22 70 See Pratt, Reilly, Schweihs, Valuing a Business, 4th ed. Irwin, 2000, at 308, which 23 states: Under any standard of value, the true economic value of a business enterprise equals the company’s accounting book value only by coincidence. More likely than not, 24 the true economic value of a company will be either higher or lower than its accounting 25 book value. There is no theoretical support, conceptual reasoning, or empirical data to suggest that the value of a business enterprise (under any standard of value) will 26 necessarily equal the company’s accounting book value. From a valuation perspective, the terms book value or net book value are merely accounting jargon. This is because 27 book value is not related to economic value, or to the valuation process, at all…In any 28 event, accounting book value is not a recommended business valuation method.

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1 In order to determine the reasonableness of the Company’s proposed FVRB, which 2 includes a 50.00 percent weight on original cost rate base, I relied on the third 3 method, the Comparable Transactions Approach, to estimate the market value of 4 the Company’s OCRB. 5 Q. PLEASE EXPLAIN HOW YOU APPLIED THE COMPARABLE 6 TRANSACTIONS APPROACH TO DETERMINE THE 7 REASONABLENESS OF THE COMPANY’S FVRB. 8 A. I compared the Company’s FVRB estimate to the market value of comparable 9 companies in recent arms-length transactions. I normalized the transaction values 10 using the percentage premium over the corporate value of the acquired company. 11 This metric incorporates the book value of debt and equity to estimate a premium 12 to corporate value resulting from the transactions to create a consistent basis of 13 comparison among the transactions (which took place amid differing market 14 conditions). I then estimated the market value of APS’s assets by applying the 15 median premium of 43.64 percent to the Company’s OCRB. That analysis resulted 16 in an estimated market value for APS’s assets of $12,745 million. 17 Q. HOW DID YOU ESTABLISH THE UNIVERSE OF TRANSACTIONS 18 THAT WAS ANALYZED FOR COMPARABILITY TO THE APS 19 SYSTEM? 20 A. I began by developing a database of announced and executed transactions 21 involving the sale of electric and diversified utility companies and assets. Those 22 data were compiled using the S&P Global Market Intelligence utility merger- 23 screening tool. I also reviewed publicly-available information such as press 24 releases, investor presentations, SEC filings, and regulatory commission filings. 25 Once that preliminary list of transactions was developed, I then applied the 26 following screening criteria to establish a final group of transactions for which I 27 calculated the transaction premium. 28

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1 1. I included transactions that involved the sale of state-regulated 2 investor-owned electric and diversified utilities; 3 2. I included transactions that resulted in the sale of the entire company, 4 excluding partial system or asset sales; and 5 3. I included transactions with a value of between $100 million and $10 6 billion. 7 8 There were 45 transactions that met my screening criteria. 9 Q. WHAT PERIOD OF TIME DID YOU CONSIDER IN DEVELOPING 10 YOUR LIST OF COMPARABLE TRANSACTIONS? 11 A. My Comparable Transactions analysis was performed on utility transmission and 12 distribution asset transactions that were announced between January 1, 1997 and 13 July 31, 2019. In my view, that period is sufficiently long to avoid the bias that 14 could result from limiting the analysis to a shorter period, yet produces a sufficient 15 number of observations. 16 Q. PLEASE SUMMARIZE THE RESULT OF THAT ANALYSIS. 17 A. Figure 16 summarizes the range of acquisition premiums for the comparable 18 transactions. As shown in Figure 16 and in Attachment AEB-13, the median 19 acquisition premium was 43.64 percent. Applying that premium to APS’s OCRB 20 of $8,873 million indicates an implied market value for APS’s assets of 21 approximately $12,745 million. 22 23 24 25 26 27 28

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1 Figure 16.

2 Comparable Transaction Multiples

3 Transaction Implied 4 Valuation Premium ($M) 5 Minimum -1.75% $8,718 Maximum 127.06% $20,147 6 Mean 49.42% $13,258 7 Median 43.64% $12,745 Standard Deviation 30.85% $2,737 8

9 Q. WHAT DO YOU CONCLUDE FROM THE COMPARABLE 10 TRANSACTIONS APPROACH? 11 A. The results of the Comparable Transactions Approach demonstrate that the 12 Company’s proposed FVRB is conservative relative to the estimated fair market 13 value of the Company’s assets. 14 XII. FAIR VALUE RATE OF RETURN 15 Q. DOES THE FAIR VALUE STANDARD ALSO REQUIRE 16 CONSIDERATION OF THE FAIR RETURN ON THE FAIR VALUE OF 17 THE COMPANY’S ASSETS? 18 A. Yes. As noted above, the Arizona Constitution requires that the Commission 19 establish just and reasonable rates using the fair value of the Company’s property. 20 In establishing the revenue requirement, the Commission would also need to 21 establish the appropriate ROE to apply to the equity component of the FVRB. 22 Q. HOW HAS THE COMMISSION ESTIMATED THE FVROR ON THE 23 FVRB? 24 A. In several recent cases, the Commission has determined the FVROR by applying 25 the market ROE and the cost of debt to the Company’s OCRB based on the percent 26 of equity and debt in the Company’s proposed capital structure. The Commission 27 then applies a different rate, traditionally one half of the risk-free rate, to what has 28

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1 been commonly referred to as the “fair value increment.”71 The fair value 2 increment is the difference between the OCRB and the Company’s proposed 3 FVRB. The FVROR is then the sum of the returns on each of the three 4 components: (1) equity capital; (2) debt capital; and (3) the fair value increment, 5 weighted by the percentage of each in the FVRB. 6 Q. WHAT DOES THE FAIR VALUE INCREMENT REPRESENT? 7 A. As described in the Commission’s Decision No. 75697, the fair value increment 8 represents the appreciation in the value of the assets to their current value due to 9 inflation. The sum of the OCRB and the fair value increment is the total fair value 10 of the utility’s property.72 11 Q. WHAT RATE OF RETURN SHOULD BE APPLIED TO THE FAIR 12 VALUE INCREMENT? 13 A. Based on the risk differential between equity and debt investments, equity holders 14 will require a greater return than the risk-free rate. As such, the range of returns 15 on the fair value increment should be between the risk-free rate and the Cost of 16 Equity established by the results of the proxy group analysis. 17 Q. DO YOU AGREE WITH THE METHODOLOGY OF DETERMINING 18 THE RATE OF RETURN TO BE APPLIED TO THE FAIR VALUE 19 INCREMENT TRADITIONALLY USED BY THE COMMISSION, I.E., 20 HALF THE RISK-FREE INTEREST RATE? 21 A. No. There is no basis whatsoever for reducing this return component to one-half 22 of the risk-free rate. Since equity investors are the residual claimants after 23 bondholders and preferred stockholders, it is inconceivable to me that an investor 24 would accept a rate of return that is less than the cost of debt for an equity position 25 in any investment. At the very least, the market expectation is that investments

26 71 Decision No. 70665 (December 24, 2008), at 32 and Decision No. 75697 (August 18, 27 2016), at 14. 28 72 Ibid.

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1 that are not risk-free should earn a rate of return that exceeds the risk-free rate. 2 Furthermore, the application of 50.00 percent of the risk-free rate as a measure of 3 the Cost of Equity on the fair value increment is subjective and has no basis in 4 financial theory. The risk-free rate sets the low-end of the range of returns that I 5 believe would be appropriate to apply to the fair value increment. 6 Q. HOW HAVE YOU ESTIMATED THE FVROR IN THIS CASE? 7 A. I have estimated the FVROR using three approaches, all based generally on the 8 methodology that has been relied on by the Commission in prior cases. 9 Q. PLEASE EXPLAIN THE METHODOLOGIES YOU USED TO ESTIMATE 10 THE RISK-FREE RATE OF RETURN. 11 A. As shown in Attachment AEB-14DR, in all three cases, the risk-free rate is 12 estimated based on a nominal projection of the risk-free rate and an interest rate 13 assumption to establish the real risk-free rate. In the first two scenarios, I relied on 14 a projected nominal risk-free rate of return as the average of the 2021-2025 15 projected yield on 30-year U.S. Treasury bonds of 3.60 percent and the 2026-2030 16 projected yield on 30-year U.S. Treasury bonds of 3.80 percent as reported in the 17 Blue Chip Financial Forecasts.73 I then adjusted the nominal risk-free rate of 3.70 18 percent by a measure of inflation. 19 20 In scenario 1, the nominal risk-free rate was adjusted based on a projected estimate 21 of inflation that was based on the growth in the Consumer Price Index and the GDP 22 Chain-type Price Index over the period from 2020-2030 (see Attachment AEB- 23 14DR). The rate of inflation of 2.25 percent is based on three measures: (1) the 24 average 2021-2025 and 2026-2030 projected growth rate in the CPI of 2.10 25 percent, as reported by Blue Chip Financial Forecasts;74 (2) the compound annual 26 27 73 Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14. 28 74 Ibid.

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1 growth rate of the CPI for all urban consumers for 2020-2030 of 2.31 percent as 2 projected by the EIA in the Annual Energy Outlook 2019; and (3) the compound 3 annual growth rate of the GDP Chain-Type Price Index for 2020-2030 of 2.35 4 percent, also reported by the EIA in the Annual Energy Outlook 2019.75 Using 5 these indexes, the estimate of inflation was 2.25 percent. Removing inflation from 6 the nominal risk-free rate resulted in a real risk-free rate of 1.41 percent. 7 8 In scenario 2, the estimate of inflation was based on the 180-day average yield on 9 the 30-year U.S. Treasury Inflation Protected Security (TIPS). This resulted in an 10 estimate of inflation of 0.98 percent, which is similar to the estimate that has been 11 relied on in recent cases before the Commission.76 The resulting real risk-free rate 12 after adjusting for inflation is 2.72 percent. 13 Q. DID YOU CONSIDER OTHER ESTIMATES OF THE RISK-FREE RATE? 14 A. Yes, I also considered a normalized estimate of the risk-free rate. As discussed 15 previously in my Direct Testimony, though recent data has demonstrated 16 historically low interest rates, investors are expecting to see increases in interest 17 rates over time. In order to address the uncertainty on the correct level of interest 18 rates, in scenario 3, I have relied on a normalized risk-free rate, as published by 19 Duff and Phelps in the 2019 Valuation Handbook of 3.50 percent. This normalized 20 interest rate is then converted to a real rate using the yield on the TIPS of 0.98 21 percent. The resulting real risk-free rate is 2.52 percent. 22 Q. WHAT IS YOUR CONCLUSION ON THE APPROPRIATE REAL RISK- 23 FREE RATE IN THIS CASE? 24 25

26 75 U.S. Energy Information Administration, Annual Energy Outlook 2019, Table 20, Macroeconomic Indicators. 27 76 Docket No. WS-01303A-17-0257 Joint Notice of Filing Issues Matrix July 13, 2018, p. 28 1.

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1 A. The range established by the three methodologies that I developed is from 1.41 2 percent to 2.72 percent. In reviewing the inflation estimates, I believe that the 3 inflation estimate developed in Scenario 1, which relies on projected growth in 4 GDP and CPI may overstate the level of inflation that is expected in the risk-free 5 rate, given the very low level of the risk-free rate at this time. Based on current 6 market conditions and the expectation that interest rates will continue to increase, 7 I have relied on the real risk-free rate resulting from Scenario 3, which uses the 8 normalized risk-free rate. The normalized risk-free rate is lower than the 9 projections reported in consensus estimates. Therefore, I conclude that beginning 10 with the normalized risk-free rate results in a conservative estimate of the real risk- 11 free rate to be used as the FVROR. 12 Q. PLEASE EXPLAIN HOW YOU APPLIED THE COMMISSION’S 13 METHODOLOGY TO ESTIMATE THE FVROR. 14 A. As shown in Attachment AEB-12DR and in Figures 17and 18 below, I calculated 15 the difference between the Company’s OCRB and the Company’s proposed FVRB, 16 which includes a 50.00 percent weight on original cost. That difference represents 17 the appreciation in the value of the assets based on the “market value” of the 18 OCRB, and has been commonly referred to as the “fair value increment.”77 The 19 weighted average cost of debt and the market Cost of Equity were applied to the 20 OCRB. 21 Q. PLEASE EXPLAIN HOW YOU ESTIMATED THE RATE OF RETURN 22 THAT YOU APPLIED TO THE FAIR VALUE INCREMENT. 23 A. As discussed above, I believe that the appropriate return that could be applied to 24 the fair value increment ranges from the low-end as measured by the risk-free rate 25 to the high-end as measured by the cost of equity for the proxy group as discussed 26 27 77 Decision No. 70665 (December 24, 2008), at 32 and Decision No. 75697 (August 18, 28 2016), at 14.

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1 in Section VI of my Direct Testimony. Nevertheless, the Company has requested 2 that I estimate the FVROR by applying 1.00 percent to the fair value increment.

3 Figure 17. 4 Estimation of the FVRB 5 6 Weighted Capital $ Millions Percent FVRB 7 OCRB $8,873.0 50.00% $4,436.5 8 RCND $15,747.5 50.00% $7,873.8 9 FVRB $12,310.3 10 11 Figure 18. 12 Estimation of the FVROR

13 Cost Weighted 14 Capital $ Millions Percent Rate Cost Rate

15 Long-Term Debt $4,022.1 32.67% 4.10% 1.34%

16 Common Equity $4,850.9 39.41% 10.15% 4.00% 17 Fair Value Increment $3,437.3 27.92% 1.00% 0.28%

18 Total $12,310.3 5.62% 19 20 Q. WHAT IS THE RESULTING FVROR? 21 A. As shown in Figure 17 and 18 (see also, Attachment AEB-12DR) based on the 22 calculation discussed previously, the FVROR that would be applied to the FVRB 23 is 5.62 percent. 24 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 25 A. Yes, it does. 26 27 28

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ANN E. BULKLEY Senior Vice President

Ms. Bulkley has more than two decades of management and economic consulting experience in the energy industry. Ms. Bulkley has extensive state and federal regulatory experience on both electric and natural gas issues including rate of return, cost of equity and capital structure issues. Ms. Bulkley has provided expert testimony on the cost of capital in more than 30 regulatory proceedings before regulatory commissions in Arizona, Arkansas, Colorado, Connecticut, Kansas, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, Texas, South Dakota, West Virginia, and the Federal Energy Regulatory Commission. In addition, Ms. Bulkley has prepared and provided supporting analysis for at least forty Federal and State regulatory proceedings. In addition, Ms. Bulkley has worked on acquisition teams with investors seeking to acquire utility assets, providing valuation services including an understanding of regulation, market expected returns, and the assessment of utility risk factors. Ms. Bulkley has assisted clients with valuations of public utility and industrial properties for ratemaking, purchase and sale considerations, ad valorem tax assessments, and accounting and financial purposes. In addition, Ms. Bulkley has experience in the areas of contract and business unit valuation, strategic alliances, market restructuring and regulatory and litigation support. Prior to joining Concentric, Ms. Bulkley held senior expertise-based consulting positions at several firms, including Reed Consulting Group and Navigant Consulting, Inc. where she specialized in valuation. Ms. Bulkley holds an M.A. in economics from Boston University and a B.A. in economics and finance from Simmons College. Ms. Bulkley is a Certified General Appraiser licensed in the Commonwealth of Massachusetts and the State of New Hampshire.

REPRESENTATIVE PROJECT EXPERIENCE Regulatory Analysis and Ratemaking Ms. Bulkley has provided a range of advisory services relating to regulatory policy analysis and many aspects of utility ratemaking. Specific services have included: cost of capital and return on equity testimony, cost of service and rate design analysis and testimony, development of ratemaking strategies; development of merchant function exit strategies; analysis and program development to address residual energy supply and/or provider of last resort obligations; stranded costs assessment and recovery; performance-based ratemaking analysis and design; and many aspects of traditional utility ratemaking (e.g., rate design, rate base valuation). Cost of Capital Ms. Bulkley has provided expert testimony on the cost of capital in more than 30 regulatory proceedings before regulatory commissions in Arizona, Arkansas, Colorado, Connecticut, Kansas, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, Texas, South Dakota, West Virginia, and the Federal Energy Regulatory Commission. In addition, Ms. Bulkley has prepared and provided supporting analysis for at least forty Federal and State regulatory proceedings in which she did not testify.

CONCENTRIC ENERGY ADVISORS | PG. 1 ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY

Valuation Ms. Bulkley has provided valuation services to utility clients, unregulated generators and private equity clients for a variety of purposes including ratemaking, fair value, ad valorem tax, litigation and damages, and acquisition. Ms. Bulkley’s appraisal practices are consistent with the national standards established by the Uniform Standards of Professional Appraisal Practice. In addition, Ms. Bulkley has relied on other simulation based valuation methodologies. Representative projects/clients have included: • Northern Indiana Fuel and Light: Provided expert testimony regarding the fair value of the company’s natural gas distribution system assets. Valuation relied on cost approach. • Kokomo Gas: Provided expert testimony regarding the fair value of the company’s natural gas distribution system assets. Valuation relied on cost approach. • Prepared fair value rate base analyses for Northern Indiana Public Service Company for several electric rate proceedings. Valuation approaches used in this project included income, cost and comparable sales approaches. • Confidential Utility Client: Prepared valuation of fossil and nuclear generation assets for financing purposes for regulated utility client. • Prepared a valuation of a portfolio of generation assets for a large energy utility to be used for strategic planning purposes. Valuation approach included an income approach, a real options analysis and a risk analysis. • Assisted clients in the restructuring of NUG contracts through the valuation of the underlying assets. Performed analysis to determine the option value of a plant in a competitively priced electricity market following the settlement of the NUG contract. • Prepared market valuations of several purchase power contracts for large electric utilities in the sale of purchase power contracts. Assignment included an assessment of the regional power market, analysis of the underlying purchase power contracts, a traditional discounted cash flow valuation approach, as well as a risk analysis. Analyzed bids from potential acquirers using income and risk analysis approached. Prepared an assessment of the credit issues and value at risk for the selling utility. • Prepared appraisal of a portfolio of generating facilities for a large electric utility to be used for financing purposes. • Prepared an appraisal of a fleet of fossil generating assets for a large electric utility to establish the value of assets transferred from utility property. • Conducted due diligence on an electric transmission and distribution system as part of a buy-side due diligence team. • Provided analytical support for and prepared appraisal reports of generation assets to be used in ad valorem tax disputes. • Provided analytical support and prepared testimony regarding the valuation of electric distribution system assets in five communities in a condemnation proceeding. • Valued purchase power agreements in the transfer of assets to a deregulated electric market.

CONCENTRIC ENERGY ADVISORS | PG. 2 ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY

Ratemaking Ms. Bulkley has assisted several clients with analysis to support investor-owned and municipal utility clients in the preparation of rate cases. Sample engagements include: • Assisted several investor-owned and municipal clients on cost allocation and rate design issues including the development of expert testimony supporting recommended rate alternatives. Worked with Canadian regulatory staff to establish filing requirements for a rate review of a newly regulated electric utility. Analyzed and evaluated rate application. Attended hearings and conducted investigation of rate application for regulatory staff. Prepared, supported and defended recommendations for revenue requirements and rates for the company. Developed rates for gas utility for transportation program and ancillary services.

Strategic and Financial Advisory Services Ms. Bulkley has assisted several clients across North America with analytically based strategic planning, due diligence and financial advisory services. Representative projects include: • Preparation of feasibility studies for bond issuances for municipal and district steam clients. • Assisted in the development of a generation strategy for an electric utility. Analyzed various NERC regions to identify potential market entry points. Evaluated potential competitors and alliance partners. Assisted in the development of gas and electric price forecasts. Developed a framework for the implementation of a risk management program. • Assisted clients in identifying potential joint venture opportunities and alliance partners. Contacted interviewed, and evaluated potential alliance candidates based on company- established criteria for several LDCs and marketing companies. Worked with several LDCs and unregulated marketing companies to establish alliances to enter into the retail energy market. Prepared testimony in support of several merger cases and participated in the regulatory process to obtain approval for these mergers. • Assisted clients in several buy-side due diligence efforts, providing regulatory insight and developing valuation recommendations for acquisitions of both electric and gas properties.

PROFESSIONAL HISTORY Concentric Energy Advisors, Inc. (2002 – Present) Senior Vice President Vice President Assistant Vice President Project Manager Navigant Consulting, Inc. (1995 – 2002) Project Manager Cahners Publishing Company (1995) Economist

CONCENTRIC ENERGY ADVISORS | PG. 3 ATTACHMENT AEB-1DR RESUME OF ANN E. BULKLEY

EDUCATION Boston University M.A., Economics, 1995 Simmons College B.A., Economics and Finance, 1991

CERTIFICATIONS Certified General Appraiser licensed in the Commonwealth of Massachusetts and the States of Michigan and New Hampshire

CONCENTRIC ENERGY ADVISORS | PG. 4

Attachment AEB-2DR Page 1 of 3

30-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUP All Proxy Group With Exclusions [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Growth Company Ticker Dividend Price Yield Yield Growth Growth Growth Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE

ALLETE, Inc. ALE $2.35 $85.61 2.74% 2.83% 5.00% 6.00% 7.20% 6.07% 7.81% 8.89% 10.04% 7.81% 8.89% 10.04% Ameren Corporation AEE $1.90 $76.31 2.49% 2.56% 6.50% 4.95% 6.50% 5.98% 7.50% 8.55% 9.07% 7.50% 8.55% 9.07% American Electric Power Company, Inc. AEP $2.68 $89.89 2.98% 3.06% 4.00% 6.10% 5.70% 5.27% 7.04% 8.33% 9.17% 7.04% 8.33% 9.17% DTE Energy Company DTE $3.78 $129.64 2.92% 2.99% 5.50% 4.45% 6.00% 5.32% 7.43% 8.31% 9.00% 7.43% 8.31% 9.00% Duke Energy Corporation DUK $3.71 $88.63 4.19% 4.31% 6.00% 7.23% 4.90% 6.04% 9.19% 10.36% 11.57% 9.19% 10.36% 11.57% Exelon Corporation EXC $1.45 $48.15 3.01% 3.12% 10.50% Negative 3.60% 7.05% 6.67% 10.17% 13.67% 10.17% 13.67% FirstEnergy Corporation FE $1.52 $43.57 3.49% 3.61% 8.00% Negative 6.00% 7.00% 9.59% 10.61% 11.63% 9.59% 10.61% 11.63% Evergy, Inc. EVRG $1.90 $60.93 3.12% 3.22% NMF 6.15% 6.60% 6.38% 9.36% 9.59% 9.82% 9.36% 9.59% 9.82% OGE Energy Corporation OGE $1.46 $42.99 3.40% 3.48% 6.50% 3.80% 4.60% 4.97% 7.26% 8.45% 10.01% 7.26% 8.45% 10.01% Otter Tail Corporation OTTR $1.40 $52.51 2.67% 2.76% 5.00% 9.00% 7.00% 7.00% 7.73% 9.76% 11.79% 7.73% 9.76% 11.79% PNM Resources, Inc. PNM $1.16 $50.55 2.29% 2.37% 7.00% 6.25% 5.50% 6.25% 7.86% 8.62% 9.38% 7.86% 8.62% 9.38% PPL Corporation PPL $1.65 $30.66 5.38% 5.41% 1.50% 0.59% NA 1.05% 5.99% 6.45% 6.92% Southern Company SO $2.48 $55.84 4.44% 4.52% 3.50% 2.18% 4.50% 3.39% 6.67% 7.91% 9.04% 7.91% 9.04% Xcel Energy Inc. XEL $1.62 $60.65 2.67% 2.75% 5.50% 5.80% 5.60% 5.63% 8.24% 8.38% 8.55% 8.24% 8.38% 8.55%

Mean 3.27% 3.36% 5.73% 5.21% 5.67% 5.53% 7.74% 8.88% 9.98% 8.09% 9.07% 10.21%

Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 30-day average as of July 31, 2019. [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [8]) [5] Source: Value Line [6] Source: Yahoo! Finance [7] Source: Zacks [8] Equals Average ([5], [6], [7]) [9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7]) [10] Equals [4] + [8] [11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7]) [12] - [14] Excludes companies with ROEs less than the a 7.00% return. Attachment AEB-2DR Page 2 of 3

90-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUP All Proxy Group With Exclusions [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Growth Company Ticker Dividend Price Yield Yield Growth Growth Growth Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE

ALLETE, Inc. ALE $2.35 $83.27 2.82% 2.91% 5.00% 6.00% 7.20% 6.07% 7.89% 8.97% 10.12% 7.89% 8.97% 10.12% Ameren Corporation AEE $1.90 $74.40 2.55% 2.63% 6.50% 4.95% 6.50% 5.98% 7.57% 8.61% 9.14% 7.57% 8.61% 9.14% American Electric Power Company, Inc. AEP $2.68 $87.02 3.08% 3.16% 4.00% 6.10% 5.70% 5.27% 7.14% 8.43% 9.27% 7.14% 8.43% 9.27% DTE Energy Company DTE $3.78 $126.92 2.98% 3.06% 5.50% 4.45% 6.00% 5.32% 7.49% 8.37% 9.07% 7.49% 8.37% 9.07% Duke Energy Corporation DUK $3.71 $88.54 4.19% 4.32% 6.00% 7.23% 4.90% 6.04% 9.19% 10.36% 11.57% 9.19% 10.36% 11.57% Exelon Corporation EXC $1.45 $49.11 2.95% 3.06% 10.50% Negative 3.60% 7.05% 6.61% 10.11% 13.61% 10.11% 13.61% FirstEnergy Corporation FE $1.52 $42.41 3.58% 3.71% 8.00% Negative 6.00% 7.00% 9.69% 10.71% 11.73% 9.69% 10.71% 11.73% Evergy, Inc. EVRG $1.90 $59.09 3.22% 3.32% NMF 6.15% 6.60% 6.38% 9.46% 9.69% 9.92% 9.46% 9.69% 9.92% OGE Energy Corporation OGE $1.46 $42.56 3.43% 3.52% 6.50% 3.80% 4.60% 4.97% 7.30% 8.48% 10.04% 7.30% 8.48% 10.04% Otter Tail Corporation OTTR $1.40 $51.27 2.73% 2.83% 5.00% 9.00% 7.00% 7.00% 7.80% 9.83% 11.85% 7.80% 9.83% 11.85% PNM Resources, Inc. PNM $1.16 $48.30 2.40% 2.48% 7.00% 6.25% 5.50% 6.25% 7.97% 8.73% 9.49% 7.97% 8.73% 9.49% PPL Corporation PPL $1.65 $30.91 5.34% 5.37% 1.50% 0.59% NA 1.05% 5.94% 6.41% 6.88% Southern Company SO $2.48 $54.03 4.59% 4.67% 3.50% 2.18% 4.50% 3.39% 6.82% 8.06% 9.19% 8.06% 9.19% Xcel Energy Inc. XEL $1.62 $58.24 2.78% 2.86% 5.50% 5.80% 5.60% 5.63% 8.36% 8.49% 8.66% 8.36% 8.49% 8.66%

Mean 3.33% 3.42% 5.73% 5.21% 5.67% 5.53% 7.80% 8.95% 10.04% 8.17% 9.14% 10.28%

Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 90-day average as of July 31, 2019. [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [8]) [5] Source: Value Line [6] Source: Yahoo! Finance [7] Source: Zacks [8] Equals Average ([5], [6], [7]) [9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7]) [10] Equals [4] + [8] [11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7]) [12] - [14] Excludes companies with ROEs less than the a 7.00% return. Attachment AEB-2DR Page 3 of 3

180-DAY CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUP All Proxy Group With Exclusions [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] Yahoo! Expected Value Line Finance Zacks Average Annualized Stock Dividend Dividend Earnings Earnings Earnings Growth Company Ticker Dividend Price Yield Yield Growth Growth Growth Rate Low ROE Mean ROE High ROE Low ROE Mean ROE High ROE

ALLETE, Inc. ALE $2.35 $80.91 2.90% 2.99% 5.00% 6.00% 7.20% 6.07% 7.98% 9.06% 10.21% 7.98% 9.06% 10.21% Ameren Corporation AEE $1.90 $71.63 2.65% 2.73% 6.50% 4.95% 6.50% 5.98% 7.67% 8.72% 9.24% 7.67% 8.72% 9.24% American Electric Power Company, Inc. AEP $2.68 $82.66 3.24% 3.33% 4.00% 6.10% 5.70% 5.27% 7.31% 8.59% 9.44% 7.31% 8.59% 9.44% DTE Energy Company DTE $3.78 $122.25 3.09% 3.17% 5.50% 4.45% 6.00% 5.32% 7.61% 8.49% 9.18% 7.61% 8.49% 9.18% Duke Energy Corporation DUK $3.71 $88.21 4.21% 4.33% 6.00% 7.23% 4.90% 6.04% 9.21% 10.38% 11.59% 9.21% 10.38% 11.59% Exelon Corporation EXC $1.45 $47.99 3.02% 3.13% 10.50% Negative 3.60% 7.05% 6.68% 10.18% 13.68% 10.18% 13.68% FirstEnergy Corporation FE $1.52 $40.70 3.73% 3.87% 8.00% Negative 6.00% 7.00% 9.85% 10.87% 11.88% 9.85% 10.87% 11.88% Evergy, Inc. EVRG $1.90 $58.37 3.26% 3.36% NMF 6.15% 6.60% 6.38% 9.51% 9.73% 9.96% 9.51% 9.73% 9.96% OGE Energy Corporation OGE $1.46 $41.60 3.51% 3.60% 6.50% 3.80% 4.60% 4.97% 7.38% 8.56% 10.12% 7.38% 8.56% 10.12% Otter Tail Corporation OTTR $1.40 $50.11 2.79% 2.89% 5.00% 9.00% 7.00% 7.00% 7.86% 9.89% 11.92% 7.86% 9.89% 11.92% PNM Resources, Inc. PNM $1.16 $45.67 2.54% 2.62% 7.00% 6.25% 5.50% 6.25% 8.11% 8.87% 9.63% 8.11% 8.87% 9.63% PPL Corporation PPL $1.65 $30.81 5.36% 5.38% 1.50% 0.59% NA 1.05% 5.96% 6.43% 6.90% Southern Company SO $2.48 $50.90 4.87% 4.96% 3.50% 2.18% 4.50% 3.39% 7.11% 8.35% 9.48% 7.11% 8.35% 9.48% Xcel Energy Inc. XEL $1.62 $55.30 2.93% 3.01% 5.50% 5.80% 5.60% 5.63% 8.51% 8.65% 8.81% 8.51% 8.65% 8.81%

Mean 3.44% 3.53% 5.73% 5.21% 5.67% 5.53% 7.91% 9.05% 10.15% 8.17% 9.26% 10.40%

Notes: [1] Source: Bloomberg Professional [2] Source: Bloomberg Professional, equals 180-day average as of July 31, 2019. [3] Equals [1] / [2] [4] Equals [3] x (1 + 0.50 x [8]) [5] Source: Value Line [6] Source: Yahoo! Finance [7] Source: Zacks [8] Equals Average ([5], [6], [7]) [9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7]) + Minimum ([5], [6], [7]) [10] Equals [4] + [8] [11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7]) + Maximum ([5], [6], [7]) [12] - [14] Excludes companies with ROEs less than the a 7.00% return. Attachment AEB-3DR Page 1 of 1

PROJECTED CONSTANT GROWTH DCF -- ARIZONA PUBLIC SERVICE COMPANY PROXY GROUP

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13]

Stock Price (2022-2024) Expected Value Line Yahoo! Zacks Average Annualized Stock Dividend Dividend Earnings Finance Earnings Growth Company Ticker Dividend High Low Price Yield Yield Growth Earnings Growth Rate Low ROE Mean ROE High ROE

ALLETE, Inc. ALE $2.85 $80.00 $60.00 $70.00 4.07% 4.19% 5.00% 6.00% 7.20% 6.07% 9.17% 10.26% 11.42% Ameren Corporation AEE $2.55 $75.00 $55.00 $65.00 3.92% 4.04% 6.50% 4.95% 6.50% 5.98% 8.97% 10.02% 10.55% American Electric Power Company, Inc. AEP $3.40 $95.00 $75.00 $85.00 4.00% 4.11% 4.00% 6.10% 5.70% 5.27% 8.08% 9.37% 10.22% DTE Energy Company DTE $4.80 $140.00 $100.00 $120.00 4.00% 4.11% 5.50% 4.45% 6.00% 5.32% 8.54% 9.42% 10.12% Duke Energy Corporation DUK $4.15 $105.00 $80.00 $92.50 4.49% 4.62% 6.00% 7.23% 4.90% 6.04% 9.50% 10.67% 11.88% Exelon Corporation EXC $1.80 $55.00 $40.00 $47.50 3.79% 3.92% 10.50% Negative 3.60% 7.05% 7.46% 10.97% 14.49% FirstEnergy Corporation FE $1.90 $55.00 $40.00 $47.50 4.00% 4.14% 8.00% Negative 6.00% 7.00% 10.12% 11.14% 12.16% Evergy, Inc. EVRG $2.50 $70.00 $55.00 $62.50 4.00% 4.13% NMF 6.15% 6.60% 6.38% 10.27% 10.50% 10.73% OGE Energy Corporation OGE $1.95 $50.00 $40.00 $45.00 4.33% 4.44% 6.50% 3.80% 4.60% 4.97% 8.22% 9.41% 10.97% Otter Tail Corporation OTTR $1.65 $55.00 $40.00 $47.50 3.47% 3.60% 5.00% 9.00% 7.00% 7.00% 8.56% 10.60% 12.63% PNM Resources, Inc. PNM $1.50 $55.00 $35.00 $45.00 3.33% 3.44% 7.00% 6.25% 5.50% 6.25% 8.93% 9.69% 10.45% PPL Corporation PPL $1.80 $45.00 $35.00 $40.00 4.50% 4.52% 1.50% 0.59% NA 1.05% 5.10% 5.57% 6.03% Southern Company SO $2.78 $65.00 $50.00 $57.50 4.83% 4.92% 3.50% 2.18% 4.50% 3.39% 7.07% 8.31% 9.44% Xcel Energy Inc. XEL $2.05 $65.00 $50.00 $57.50 3.57% 3.67% 5.50% 5.80% 5.60% 5.63% 9.16% 9.30% 9.47%

Mean 8.51% 9.66% 10.75%

Notes: [1] Source: Value Line [2] Source: Value Line [3] Source: Value Line [4] Source: Value Line [5] Equals [1] / [4] [6] Equals [5] x (1 + 0.50 x [10]) [7] Source: Value Line [8] Source: Yahoo! Finance [9] Source: Zacks [10] Equals Average ([7], [8], [9]) [11] Equals [5] x (1 + 0.50 x Minimum ([7], [8], [9]) + Minimum ([7], [8], [9]) [12] Equals [6] + [10] [13] Equals [5] x (1 + 0.50 x Maximum ([7], [8], [9]) + Maximum ([7], [8], [9]) Attachment AEB-4DR Page 1 of 1

BETA As of July 31, 2019

[1] [2]

Bloomberg Value Line

ALLETE, Inc. ALE 0.70 0.65 Ameren Corporation AEE 0.66 0.60 American Electric Power Company, Inc. AEP 0.64 0.55 DTE Energy Company DTE 0.67 0.55 Duke Energy Corporation DUK 0.54 0.50 Exelon Corporation EXC 0.65 0.70 FirstEnergy Corporation FE 0.69 0.65 Evergy, Inc. EVRG 0.65 NA OGE Energy Corporation OGE 0.75 0.80 Otter Tail Corporation OTTR 0.81 0.70 PNM Resources, Inc. PNM 0.77 0.60 PPL Corporation PPL 0.63 0.70 Southern Company SO 0.53 0.50 Xcel Energy Inc. XEL 0.58 0.50

Mean 0.662 0.615

Notes: [1] Source: Bloomberg Professional [2] Source: Value Line Attachment AEB-5DR Page 1 of 6

MARKET RISK PREMIUM DERIVED FROM ANALYSTS LONG-TERM GROWTH ESTIMATES

[8] Estimated Weighted Average Dividend Yield 1.94%

[9] Estimated Weighted Average Long-Term Growth Rate 11.84%

[10] S&P 500 Estimated Required Market Return 13.90%

[11] Risk-Free Rate 2.57% 2.66% 3.60%

[12] Implied Market Risk Premium 11.34% 11.24% 10.30%

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

LyondellBasell Industries NV LYB 0.11% 5.02% 0.01% 6.20% 0.01% American Express Co AXP 0.40% 1.25% 0.01% 9.16% 0.04% Verizon Communications Inc VZ 0.89% 4.36% 0.04% 2.55% 0.02% Broadcom Inc AVGO 0.45% 3.66% 0.02% 13.51% 0.06% Boeing Co/The BA 0.75% 2.41% 0.02% 7.88% 0.06% Caterpillar Inc CAT 0.29% 3.13% 0.01% 13.15% 0.04% JPMorgan Chase & Co JPM 1.46% 2.76% 0.04% 4.65% 0.07% Chevron Corp CVX 0.91% 3.87% 0.04% 1.89% 0.02% Coca-Cola Co/The KO 0.87% 3.04% 0.03% 6.73% 0.06% AbbVie Inc ABBV 0.38% 6.42% 0.02% 5.10% 0.02% Walt Disney Co/The DIS 1.00% 1.23% 0.01% 2.08% 0.02% FleetCor Technologies Inc FLT 0.10% n/a n/a 18.14% 0.02% Extra Space Storage Inc EXR 0.06% 3.20% 0.00% 4.56% 0.00% Exxon Mobil Corp XOM 1.22% 4.68% 0.06% 8.69% 0.11% Phillips 66 PSX 0.18% 3.51% 0.01% 2.20% 0.00% General Electric Co GE 0.35% 0.38% 0.00% 8.87% 0.03% HP Inc HPQ 0.12% 3.05% 0.00% 3.11% 0.00% Home Depot Inc/The HD 0.91% 2.55% 0.02% 9.37% 0.09% International Business Machines Corp IBM 0.51% 4.37% 0.02% 2.12% 0.01% Concho Resources Inc CXO 0.08% 0.51% 0.00% 11.20% 0.01% Johnson & Johnson JNJ 1.33% 2.92% 0.04% 6.09% 0.08% McDonald's Corp MCD 0.62% 2.20% 0.01% 8.67% 0.05% Merck & Co Inc MRK 0.83% 2.65% 0.02% 11.52% 0.10% 3M Co MMM 0.39% 3.30% 0.01% 6.95% 0.03% American Water Works Co Inc AWK 0.08% 1.74% 0.00% 8.72% 0.01% Bank of America Corp BAC 1.11% 2.35% 0.03% 9.90% 0.11% Baker Hughes a GE Co BHGE 0.05% 2.84% 0.00% 41.26% 0.02% Pfizer Inc PFE 0.84% 3.71% 0.03% 3.58% 0.03% Procter & Gamble Co/The PG 1.15% 2.53% 0.03% 7.40% 0.09% AT&T Inc T 0.97% 5.99% 0.06% 5.49% 0.05% Travelers Cos Inc/The TRV 0.15% 2.24% 0.00% 12.58% 0.02% United Technologies Corp UTX 0.45% 2.20% 0.01% 9.75% 0.04% Analog Devices Inc ADI 0.17% 1.84% 0.00% 12.10% 0.02% Walmart Inc WMT 1.22% 1.92% 0.02% 3.56% 0.04% Cisco Systems Inc CSCO 0.92% 2.53% 0.02% 6.96% 0.06% Intel Corp INTC 0.87% 2.49% 0.02% 6.74% 0.06% General Motors Co GM 0.22% 3.77% 0.01% 11.70% 0.03% Microsoft Corp MSFT 4.04% 1.35% 0.05% 9.92% 0.40% Dollar General Corp DG 0.13% 0.96% 0.00% 10.14% 0.01% Cigna Corp CI 0.25% 0.02% 0.00% 11.09% 0.03% Kinder Morgan Inc/DE KMI 0.18% 4.85% 0.01% 13.90% 0.03% Citigroup Inc C 0.62% 2.87% 0.02% 12.43% 0.08% American International Group Inc AIG 0.19% 2.29% 0.00% 11.00% 0.02% Honeywell International Inc HON 0.48% 1.90% 0.01% 7.70% 0.04% Altria Group Inc MO 0.34% 6.80% 0.02% 6.68% 0.02% HCA Healthcare Inc HCA 0.18% 1.20% 0.00% 10.78% 0.02% Under Armour Inc UAA 0.02% n/a n/a 30.97% 0.01% International Paper Co IP 0.07% 4.55% 0.00% 4.70% 0.00% Hewlett Packard Enterprise Co HPE 0.07% 3.13% 0.00% 5.79% 0.00% Abbott Laboratories ABT 0.60% 1.47% 0.01% 9.58% 0.06% Aflac Inc AFL 0.15% 2.05% 0.00% 4.15% 0.01% Air Products & Chemicals Inc APD 0.20% 2.03% 0.00% 12.71% 0.02% Royal Caribbean Cruises Ltd RCL 0.09% 2.41% 0.00% 11.11% 0.01% American Electric Power Co Inc AEP 0.17% 3.05% 0.01% 5.82% 0.01% Hess Corp HES 0.08% 1.54% 0.00% -5.43% 0.00% Anadarko Petroleum Corp APC 0.14% 1.63% 0.00% 16.17% 0.02% Aon PLC AON 0.17% 0.93% 0.00% 10.90% 0.02% Apache Corp APA 0.04% 4.10% 0.00% -8.42% 0.00% Archer-Daniels-Midland Co ADM 0.09% 3.41% 0.00% 0.60% 0.00% Automatic Data Processing Inc ADP 0.28% 1.90% 0.01% 13.50% 0.04% Verisk Analytics Inc VRSK 0.10% 0.66% 0.00% 9.47% 0.01% AutoZone Inc AZO 0.11% n/a n/a 12.58% 0.01% Avery Dennison Corp AVY 0.04% 2.02% 0.00% 4.95% 0.00% MSCI Inc MSCI 0.07% 1.02% 0.00% 10.00% 0.01% Ball Corp BLL 0.09% 0.84% 0.00% 6.77% 0.01% Bank of New York Mellon Corp/The BK 0.17% 2.64% 0.00% 6.47% 0.01% Baxter International Inc BAX 0.17% 1.05% 0.00% 11.96% 0.02% Becton Dickinson and Co BDX 0.26% 1.22% 0.00% 12.14% 0.03% Berkshire Hathaway Inc BRK/B 1.09% n/a n/a 60.60% 0.66% Best Buy Co Inc BBY 0.08% 2.61% 0.00% 6.89% 0.01% H&R Block Inc HRB 0.02% 3.76% 0.00% 10.00% 0.00% Boston Scientific Corp BSX 0.23% n/a n/a 8.88% 0.02% Bristol-Myers Squibb Co BMY 0.28% 3.69% 0.01% 8.06% 0.02% Fortune Brands Home & Security Inc FBHS 0.03% 1.60% 0.00% 10.17% 0.00% Brown-Forman Corp BF/B 0.07% 1.21% 0.00% 8.41% 0.01% Cabot Oil & Gas Corp COG 0.03% 1.88% 0.00% 34.52% 0.01% Campbell Soup Co CPB 0.05% 3.39% 0.00% 2.74% 0.00% Attachment AEB-5DR Page 2 of 6

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

Kansas City Southern KSU 0.05% 1.16% 0.00% 12.73% 0.01% Hilton Worldwide Holdings Inc HLT 0.11% 0.62% 0.00% 13.14% 0.01% Carnival Corp CCL 0.10% 4.23% 0.00% 8.47% 0.01% Qorvo Inc QRVO 0.03% n/a n/a 9.62% 0.00% CenturyLink Inc CTL 0.05% 8.27% 0.00% 1.78% 0.00% UDR Inc UDR 0.05% 2.97% 0.00% 5.59% 0.00% Clorox Co/The CLX 0.08% 2.61% 0.00% 4.33% 0.00% CMS Energy Corp CMS 0.06% 2.63% 0.00% 7.20% 0.00% Newell Brands Inc NWL 0.02% 6.48% 0.00% -5.04% 0.00% Colgate-Palmolive Co CL 0.24% 2.40% 0.01% 4.52% 0.01% Comerica Inc CMA 0.04% 3.66% 0.00% 12.93% 0.01% IPG Photonics Corp IPGP 0.03% n/a n/a 9.68% 0.00% Conagra Brands Inc CAG 0.05% 2.94% 0.00% 6.25% 0.00% Consolidated Edison Inc ED 0.11% 3.48% 0.00% 4.15% 0.00% SL Green Realty Corp SLG 0.03% 4.19% 0.00% -6.79% 0.00% Corning Inc GLW 0.09% 2.60% 0.00% 11.20% 0.01% Cummins Inc CMI 0.10% 3.20% 0.00% 6.67% 0.01% Danaher Corp DHR 0.39% 0.48% 0.00% 13.47% 0.05% Target Corp TGT 0.17% 3.06% 0.01% 6.75% 0.01% Deere & Co DE 0.20% 1.84% 0.00% 9.54% 0.02% Dominion Energy Inc D 0.23% 4.94% 0.01% 4.92% 0.01% Dover Corp DOV 0.05% 1.98% 0.00% 10.97% 0.01% Alliant Energy Corp LNT 0.05% 2.87% 0.00% 5.59% 0.00% Duke Energy Corp DUK 0.25% 4.36% 0.01% 5.04% 0.01% Regency Centers Corp REG 0.04% 3.51% 0.00% 4.57% 0.00% Eaton Corp PLC ETN 0.13% 3.46% 0.00% 8.60% 0.01% Ecolab Inc ECL 0.23% 0.91% 0.00% 13.13% 0.03% PerkinElmer Inc PKI 0.04% 0.33% 0.00% 16.84% 0.01% Emerson Electric Co EMR 0.15% 3.02% 0.00% 8.73% 0.01% EOG Resources Inc EOG 0.19% 1.34% 0.00% 7.91% 0.02% Entergy Corp ETR 0.08% 3.45% 0.00% 2.84% 0.00% Equifax Inc EFX 0.07% 1.12% 0.00% 11.76% 0.01% IQVIA Holdings Inc IQV 0.12% n/a n/a 16.68% 0.02% Gartner Inc IT 0.05% n/a n/a 13.08% 0.01% FedEx Corp FDX 0.17% 1.52% 0.00% 20.72% 0.04% Macy's Inc M 0.03% 6.64% 0.00% 1.83% 0.00% FMC Corp FMC 0.04% 1.85% 0.00% 9.33% 0.00% Ford Motor Co F 0.14% 6.30% 0.01% 13.00% 0.02% NextEra Energy Inc NEE 0.39% 2.41% 0.01% 5.33% 0.02% Franklin Resources Inc BEN 0.06% 3.19% 0.00% 10.00% 0.01% Freeport-McMoRan Inc FCX 0.06% 1.81% 0.00% -7.37% 0.00% Gap Inc/The GPS 0.03% 4.97% 0.00% 6.63% 0.00% General Dynamics Corp GD 0.21% 2.19% 0.00% 8.39% 0.02% General Mills Inc GIS 0.12% 3.69% 0.00% 6.17% 0.01% Genuine Parts Co GPC 0.06% 3.14% 0.00% 5.35% 0.00% Atmos Energy Corp ATO 0.05% 1.93% 0.00% 7.00% 0.00% WW Grainger Inc GWW 0.06% 1.98% 0.00% 12.33% 0.01% Halliburton Co HAL 0.08% 3.13% 0.00% 8.74% 0.01% Harley-Davidson Inc HOG 0.02% 4.19% 0.00% 5.90% 0.00% L3Harris Technologies Inc LHX 0.18% 1.45% 0.00% n/a n/a HCP Inc HCP 0.06% 4.64% 0.00% 2.68% 0.00% Helmerich & Payne Inc HP 0.02% 5.72% 0.00% 22.74% 0.00% Fortive Corp FTV 0.10% 0.37% 0.00% 10.10% 0.01% Hershey Co/The HSY 0.09% 2.04% 0.00% 7.07% 0.01% Synchrony Financial SYF 0.09% 2.45% 0.00% 6.70% 0.01% Hormel Foods Corp HRL 0.08% 2.05% 0.00% 5.70% 0.00% Arthur J Gallagher & Co AJG 0.07% 1.90% 0.00% 9.83% 0.01% Mondelez International Inc MDLZ 0.30% 2.13% 0.01% 7.86% 0.02% CenterPoint Energy Inc CNP 0.06% 3.96% 0.00% 5.67% 0.00% Humana Inc HUM 0.16% 0.74% 0.00% 12.79% 0.02% Willis Towers Watson PLC WLTW 0.10% 1.33% 0.00% 13.97% 0.01% Illinois Tool Works Inc ITW 0.20% 2.59% 0.01% 6.66% 0.01% Ingersoll-Rand PLC IR 0.12% 1.71% 0.00% 7.85% 0.01% Foot Locker Inc FL 0.02% 3.70% 0.00% 8.88% 0.00% Interpublic Group of Cos Inc/The IPG 0.03% 4.10% 0.00% 12.35% 0.00% International Flavors & Fragrances Inc IFF 0.06% 2.03% 0.00% 7.80% 0.00% Jacobs Engineering Group Inc JEC 0.04% 0.82% 0.00% 13.10% 0.01% Hanesbrands Inc HBI 0.02% 3.73% 0.00% 3.25% 0.00% Kellogg Co K 0.08% 3.92% 0.00% 2.29% 0.00% Broadridge Financial Solutions Inc BR 0.06% 1.70% 0.00% n/a n/a Perrigo Co PLC PRGO 0.03% 1.56% 0.00% -0.50% 0.00% Kimberly-Clark Corp KMB 0.18% 3.04% 0.01% 4.63% 0.01% Kimco Realty Corp KIM 0.03% 5.83% 0.00% 3.86% 0.00% Kohl's Corp KSS 0.03% 4.98% 0.00% 5.55% 0.00% Oracle Corp ORCL 0.73% 1.71% 0.01% 7.63% 0.06% Kroger Co/The KR 0.07% 3.02% 0.00% 5.88% 0.00% Leggett & Platt Inc LEG 0.02% 4.00% 0.00% 10.00% 0.00% Lennar Corp LEN 0.05% 0.34% 0.00% 9.42% 0.00% Jefferies Financial Group Inc JEF 0.02% 2.34% 0.00% n/a n/a Eli Lilly & Co LLY 0.41% 2.37% 0.01% 9.25% 0.04% L Brands Inc LB 0.03% 4.62% 0.00% 9.38% 0.00% Charter Communications Inc CHTR 0.33% n/a n/a 43.54% 0.14% Lincoln National Corp LNC 0.05% 2.27% 0.00% 9.00% 0.00% Loews Corp L 0.06% 0.47% 0.00% n/a n/a Lowe's Cos Inc LOW 0.31% 2.17% 0.01% 14.66% 0.05% Host Hotels & Resorts Inc HST 0.05% 4.60% 0.00% 15.05% 0.01% Marsh & McLennan Cos Inc MMC 0.20% 1.84% 0.00% 12.22% 0.02% Masco Corp MAS 0.05% 1.18% 0.00% 10.51% 0.00% S&P Global Inc SPGI 0.23% 0.93% 0.00% 9.20% 0.02% Medtronic PLC MDT 0.53% 2.12% 0.01% 7.34% 0.04% CVS Health Corp CVS 0.28% 3.58% 0.01% 6.04% 0.02% Attachment AEB-5DR Page 3 of 6

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

DuPont de Nemours Inc DD 0.21% 1.66% 0.00% 16.67% 0.03% Micron Technology Inc MU 0.19% n/a n/a -0.69% 0.00% Motorola Solutions Inc MSI 0.11% 1.37% 0.00% 5.50% 0.01% Cboe Global Markets Inc CBOE 0.05% 1.32% 0.00% 5.35% 0.00% Mylan NV MYL 0.04% n/a n/a -5.72% 0.00% Laboratory Corp of America Holdings LH 0.06% n/a n/a 8.18% 0.01% Newmont Goldcorp Corp NEM 0.12% 1.53% 0.00% 5.75% 0.01% NIKE Inc NKE 0.42% 1.02% 0.00% 13.76% 0.06% NiSource Inc NI 0.04% 2.69% 0.00% 5.38% 0.00% Noble Energy Inc NBL 0.04% 2.17% 0.00% 18.05% 0.01% Norfolk Southern Corp NSC 0.20% 1.97% 0.00% 13.82% 0.03% Principal Financial Group Inc PFG 0.06% 3.79% 0.00% 6.87% 0.00% Eversource Energy ES 0.10% 2.82% 0.00% 5.96% 0.01% Northrop Grumman Corp NOC 0.23% 1.53% 0.00% 6.04% 0.01% Wells Fargo & Co WFC 0.83% 4.21% 0.03% 9.86% 0.08% Nucor Corp NUE 0.06% 2.94% 0.00% 0.35% 0.00% PVH Corp PVH 0.03% 0.17% 0.00% 8.12% 0.00% Occidental Petroleum Corp OXY 0.15% 6.15% 0.01% 15.80% 0.02% Omnicom Group Inc OMC 0.07% 3.24% 0.00% 3.87% 0.00% ONEOK Inc OKE 0.11% 5.08% 0.01% 13.18% 0.01% Raymond James Financial Inc RJF 0.04% 1.69% 0.00% 11.10% 0.00% Parker-Hannifin Corp PH 0.09% 2.01% 0.00% 9.02% 0.01% Rollins Inc ROL 0.04% 1.25% 0.00% 10.00% 0.00% PPL Corp PPL 0.08% 5.57% 0.00% 5.00% 0.00% Exelon Corp EXC 0.17% 3.22% 0.01% 3.53% 0.01% ConocoPhillips COP 0.26% 2.07% 0.01% 3.45% 0.01% PulteGroup Inc PHM 0.03% 1.40% 0.00% 8.25% 0.00% Pinnacle West Capital Corp PNW 0.04% 3.23% 0.00% 5.41% 0.00% PNC Financial Services Group Inc/The PNC 0.25% 3.22% 0.01% 7.64% 0.02% PPG Industries Inc PPG 0.11% 1.74% 0.00% 6.82% 0.01% Progressive Corp/The PGR 0.18% 0.49% 0.00% 6.23% 0.01% Public Service Enterprise Group Inc PEG 0.11% 3.29% 0.00% 5.32% 0.01% Raytheon Co RTN 0.20% 2.07% 0.00% 8.38% 0.02% Robert Half International Inc RHI 0.03% 2.05% 0.00% -1.99% 0.00% Edison International EIX 0.10% 3.29% 0.00% 5.30% 0.01% Schlumberger Ltd SLB 0.21% 5.00% 0.01% 29.25% 0.06% Charles Schwab Corp/The SCHW 0.22% 1.57% 0.00% 4.21% 0.01% Sherwin-Williams Co/The SHW 0.18% 0.88% 0.00% 11.83% 0.02% JM Smucker Co/The SJM 0.05% 3.17% 0.00% 3.12% 0.00% Snap-on Inc SNA 0.03% 2.49% 0.00% 7.34% 0.00% AMETEK Inc AME 0.08% 0.62% 0.00% 9.29% 0.01% Southern Co/The SO 0.23% 4.41% 0.01% 3.75% 0.01% BB&T Corp BBT 0.15% 3.49% 0.01% 8.16% 0.01% Southwest Airlines Co LUV 0.11% 1.40% 0.00% 5.12% 0.01% Stanley Black & Decker Inc SWK 0.09% 1.87% 0.00% 9.23% 0.01% Public Storage PSA 0.16% 3.30% 0.01% 3.99% 0.01% Arista Networks Inc ANET 0.08% n/a n/a 21.79% 0.02% SunTrust Banks Inc STI 0.11% 3.00% 0.00% 2.37% 0.00% Sysco Corp SYY 0.14% 2.28% 0.00% 12.13% 0.02% Corteva Inc CTVA 0.09% 1.76% 0.00% n/a n/a Texas Instruments Inc TXN 0.45% 2.46% 0.01% 9.70% 0.04% Textron Inc TXT 0.04% 0.16% 0.00% 11.86% 0.01% Thermo Fisher Scientific Inc TMO 0.43% 0.27% 0.00% 11.43% 0.05% Tiffany & Co TIF 0.04% 2.47% 0.00% 9.25% 0.00% TJX Cos Inc/The TJX 0.26% 1.69% 0.00% 10.04% 0.03% Torchmark Corp TMK 0.04% 0.76% 0.00% 7.60% 0.00% Total System Services Inc TSS 0.09% 0.38% 0.00% 12.14% 0.01% Johnson Controls International plc JCI 0.13% 2.45% 0.00% 7.57% 0.01% Ulta Beauty Inc ULTA 0.08% n/a n/a 21.00% 0.02% Union Pacific Corp UNP 0.49% 2.16% 0.01% 12.90% 0.06% Keysight Technologies Inc KEYS 0.07% n/a n/a n/a n/a UnitedHealth Group Inc UNH 0.92% 1.73% 0.02% 12.28% 0.11% Unum Group UNM 0.03% 3.57% 0.00% 9.00% 0.00% Marathon Oil Corp MRO 0.04% 1.42% 0.00% -2.65% 0.00% Varian Medical Systems Inc VAR 0.04% n/a n/a 8.55% 0.00% Ventas Inc VTR 0.10% 4.71% 0.00% 4.24% 0.00% VF Corp VFC 0.13% 1.97% 0.00% -11.41% -0.02% Vornado Realty Trust VNO 0.05% 4.10% 0.00% -0.60% 0.00% Vulcan Materials Co VMC 0.07% 0.90% 0.00% 16.63% 0.01% Weyerhaeuser Co WY 0.07% 5.35% 0.00% 4.50% 0.00% Whirlpool Corp WHR 0.04% 3.30% 0.00% 4.61% 0.00% Williams Cos Inc/The WMB 0.12% 6.17% 0.01% 10.00% 0.01% WEC Energy Group Inc WEC 0.10% 2.76% 0.00% 6.05% 0.01% Xerox Holdings Corp XRX 0.03% 3.12% 0.00% n/a n/a Adobe Inc ADBE 0.56% n/a n/a 17.16% 0.10% AES Corp/VA AES 0.04% 3.25% 0.00% 8.33% 0.00% Amgen Inc AMGN 0.43% 3.11% 0.01% 5.88% 0.03% Apple Inc AAPL 3.75% 1.45% 0.05% 9.25% 0.35% Autodesk Inc ADSK 0.13% n/a n/a 64.51% 0.09% Cintas Corp CTAS 0.10% 0.79% 0.00% 11.27% 0.01% Comcast Corp CMCSA 0.76% 1.95% 0.01% 11.53% 0.09% Molson Coors Brewing Co TAP 0.04% 4.22% 0.00% -0.57% 0.00% KLA Corp KLAC 0.09% 2.20% 0.00% 10.68% 0.01% Marriott International Inc/MD MAR 0.18% 1.38% 0.00% 8.20% 0.01% McCormick & Co Inc/MD MKC 0.08% 1.44% 0.00% 6.20% 0.00% Nordstrom Inc JWN 0.02% 4.47% 0.00% 5.97% 0.00% PACCAR Inc PCAR 0.09% 1.82% 0.00% 4.90% 0.00% Costco Wholesale Corp COST 0.47% 0.94% 0.00% 10.51% 0.05% First Republic Bank/CA FRC 0.06% 0.76% 0.00% 10.00% 0.01% Stryker Corp SYK 0.30% 0.99% 0.00% 9.55% 0.03% Tyson Foods Inc TSN 0.09% 1.89% 0.00% 3.10% 0.00% Attachment AEB-5DR Page 4 of 6

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

Lamb Weston Holdings Inc LW 0.04% 1.19% 0.00% 7.50% 0.00% Applied Materials Inc AMAT 0.18% 1.70% 0.00% 9.37% 0.02% American Airlines Group Inc AAL 0.05% 1.31% 0.00% 17.45% 0.01% Cardinal Health Inc CAH 0.05% 4.21% 0.00% 1.37% 0.00% Celgene Corp CELG 0.25% n/a n/a 16.10% 0.04% Cerner Corp CERN 0.09% 1.00% 0.00% 13.55% 0.01% Cincinnati Financial Corp CINF 0.07% 2.09% 0.00% n/a n/a DR Horton Inc DHI 0.07% 1.31% 0.00% 12.60% 0.01% Flowserve Corp FLS 0.03% 1.52% 0.00% 18.92% 0.00% Electronic Arts Inc EA 0.11% n/a n/a 9.49% 0.01% Expeditors International of Washington Inc EXPD 0.05% 1.31% 0.00% 9.80% 0.00% Fastenal Co FAST 0.07% 2.86% 0.00% 7.15% 0.00% M&T Bank Corp MTB 0.09% 2.44% 0.00% 5.33% 0.00% Xcel Energy Inc XEL 0.12% 2.72% 0.00% 5.81% 0.01% Fiserv Inc FISV 0.23% n/a n/a 15.60% 0.04% Fifth Third Bancorp FITB 0.08% 3.23% 0.00% 4.65% 0.00% Gilead Sciences Inc GILD 0.32% 3.85% 0.01% 8.52% 0.03% Hasbro Inc HAS 0.06% 2.25% 0.00% 9.53% 0.01% Huntington Bancshares Inc/OH HBAN 0.06% 4.21% 0.00% 4.99% 0.00% Welltower Inc WELL 0.13% 4.19% 0.01% 6.11% 0.01% Biogen Inc BIIB 0.17% n/a n/a 5.50% 0.01% Northern Trust Corp NTRS 0.08% 2.86% 0.00% 7.25% 0.01% Packaging Corp of America PKG 0.04% 3.13% 0.00% 10.00% 0.00% Paychex Inc PAYX 0.12% 2.99% 0.00% 7.15% 0.01% People's United Financial Inc PBCT 0.03% 4.32% 0.00% 2.00% 0.00% QUALCOMM Inc QCOM 0.35% 3.39% 0.01% 16.75% 0.06% Roper Technologies Inc ROP 0.15% 0.51% 0.00% 13.03% 0.02% Ross Stores Inc ROST 0.15% 0.96% 0.00% 9.40% 0.01% IDEXX Laboratories Inc IDXX 0.09% n/a n/a 18.43% 0.02% Starbucks Corp SBUX 0.44% 1.52% 0.01% 13.27% 0.06% KeyCorp KEY 0.07% 4.03% 0.00% 4.83% 0.00% Fox Corp FOXA 0.05% 1.23% 0.00% 1.60% 0.00% Fox Corp FOX 0.04% 1.24% 0.00% -7.06% 0.00% State Street Corp STT 0.08% 3.24% 0.00% 3.98% 0.00% Norwegian Cruise Line Holdings Ltd NCLH 0.04% n/a n/a 10.18% 0.00% US Bancorp USB 0.35% 2.59% 0.01% 6.33% 0.02% AO Smith Corp AOS 0.02% 1.94% 0.00% 8.00% 0.00% Symantec Corp SYMC 0.05% 1.39% 0.00% 7.26% 0.00% T Rowe Price Group Inc TROW 0.10% 2.68% 0.00% 8.20% 0.01% Waste Management Inc WM 0.19% 1.75% 0.00% 7.74% 0.01% CBS Corp CBS 0.07% 1.40% 0.00% 14.10% 0.01% Allergan PLC AGN 0.20% 1.84% 0.00% 5.37% 0.01% Constellation Brands Inc STZ 0.13% 1.52% 0.00% 7.74% 0.01% Xilinx Inc XLNX 0.11% 1.30% 0.00% 9.45% 0.01% DENTSPLY SIRONA Inc XRAY 0.05% 0.64% 0.00% 12.57% 0.01% Zions Bancorp NA ZION 0.03% 3.02% 0.00% 5.23% 0.00% Alaska Air Group Inc ALK 0.03% 2.21% 0.00% 15.35% 0.00% Invesco Ltd IVZ 0.03% 6.46% 0.00% 6.74% 0.00% Linde PLC LIN 0.40% 1.83% 0.01% 15.05% 0.06% Intuit Inc INTU 0.28% 0.68% 0.00% 16.16% 0.05% Morgan Stanley MS 0.29% 3.14% 0.01% 8.26% 0.02% Microchip Technology Inc MCHP 0.09% 1.55% 0.00% 10.87% 0.01% Chubb Ltd CB 0.27% 1.96% 0.01% 10.60% 0.03% Hologic Inc HOLX 0.05% n/a n/a 8.58% 0.00% Citizens Financial Group Inc CFG 0.07% 3.86% 0.00% 5.42% 0.00% O'Reilly Automotive Inc ORLY 0.11% n/a n/a 13.64% 0.02% Allstate Corp/The ALL 0.14% 1.86% 0.00% 9.00% 0.01% FLIR Systems Inc FLIR 0.03% 1.37% 0.00% n/a n/a Equity Residential EQR 0.11% 2.88% 0.00% 8.41% 0.01% BorgWarner Inc BWA 0.03% 1.80% 0.00% 1.85% 0.00% Incyte Corp INCY 0.07% n/a n/a 43.15% 0.03% Simon Property Group Inc SPG 0.19% 5.18% 0.01% 5.16% 0.01% Eastman Chemical Co EMN 0.04% 3.29% 0.00% 7.95% 0.00% Twitter Inc TWTR 0.13% n/a n/a 31.80% 0.04% AvalonBay Communities Inc AVB 0.11% 2.91% 0.00% 6.39% 0.01% Prudential Financial Inc PRU 0.16% 3.95% 0.01% 9.00% 0.01% United Parcel Service Inc UPS 0.32% 3.21% 0.01% 9.01% 0.03% Apartment Investment & Management Co AIV 0.03% 3.15% 0.00% 8.80% 0.00% Walgreens Boots Alliance Inc WBA 0.19% 3.36% 0.01% 5.47% 0.01% McKesson Corp MCK 0.10% 1.18% 0.00% 1.14% 0.00% Lockheed Martin Corp LMT 0.40% 2.43% 0.01% 8.24% 0.03% AmerisourceBergen Corp ABC 0.07% 1.84% 0.00% 12.37% 0.01% Capital One Financial Corp COF 0.17% 1.73% 0.00% 5.13% 0.01% Waters Corp WAT 0.05% n/a n/a 11.26% 0.01% Dollar Tree Inc DLTR 0.09% n/a n/a 8.39% 0.01% Darden Restaurants Inc DRI 0.06% 2.90% 0.00% 10.76% 0.01% NetApp Inc NTAP 0.05% 3.28% 0.00% 9.73% 0.01% Citrix Systems Inc CTXS 0.05% 1.49% 0.00% 7.80% 0.00% DXC Technology Co DXC 0.06% 1.51% 0.00% 5.28% 0.00% DaVita Inc DVA 0.04% n/a n/a 18.83% 0.01% Hartford Financial Services Group Inc/The HIG 0.08% 2.08% 0.00% 9.50% 0.01% Iron Mountain Inc IRM 0.03% 8.31% 0.00% 5.72% 0.00% Estee Lauder Cos Inc/The EL 0.16% 0.93% 0.00% 12.08% 0.02% Cadence Design Systems Inc CDNS 0.08% n/a n/a 10.07% 0.01% Universal Health Services Inc UHS 0.05% 0.53% 0.00% 8.08% 0.00% E*TRADE Financial Corp ETFC 0.05% 1.15% 0.00% 12.73% 0.01% Skyworks Solutions Inc SWKS 0.06% 1.78% 0.00% 10.57% 0.01% National Oilwell Varco Inc NOV 0.04% 0.84% 0.00% 59.18% 0.02% Quest Diagnostics Inc DGX 0.05% 2.08% 0.00% 7.57% 0.00% Activision Blizzard Inc ATVI 0.14% 0.76% 0.00% 10.49% 0.02% Rockwell Automation Inc ROK 0.07% 2.41% 0.00% 11.90% 0.01% Attachment AEB-5DR Page 5 of 6

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

Kraft Heinz Co/The KHC 0.15% 5.00% 0.01% -0.47% 0.00% American Tower Corp AMT 0.36% 1.74% 0.01% 20.11% 0.07% HollyFrontier Corp HFC 0.03% 2.65% 0.00% 0.99% 0.00% Regeneron Pharmaceuticals Inc REGN 0.13% n/a n/a 11.70% 0.01% Amazon.com Inc AMZN 3.58% n/a n/a 44.33% 1.59% Jack Henry & Associates Inc JKHY 0.04% 1.15% 0.00% 9.40% 0.00% Ralph Lauren Corp RL 0.02% 2.64% 0.00% 7.96% 0.00% Boston Properties Inc BXP 0.08% 2.86% 0.00% 4.07% 0.00% Amphenol Corp APH 0.11% 1.07% 0.00% 8.67% 0.01% Arconic Inc ARNC 0.04% 0.32% 0.00% 9.90% 0.00% Pioneer Natural Resources Co PXD 0.09% 0.46% 0.00% 26.43% 0.02% Valero Energy Corp VLO 0.14% 4.22% 0.01% 9.69% 0.01% Synopsys Inc SNPS 0.08% n/a n/a 13.60% 0.01% Western Union Co/The WU 0.04% 3.81% 0.00% 3.36% 0.00% CH Robinson Worldwide Inc CHRW 0.04% 2.39% 0.00% 8.63% 0.00% Accenture PLC ACN 0.50% 1.52% 0.01% 10.43% 0.05% TransDigm Group Inc TDG 0.10% n/a n/a 13.64% 0.01% Yum! Brands Inc YUM 0.13% 1.49% 0.00% 12.37% 0.02% Prologis Inc PLD 0.20% 2.63% 0.01% 7.34% 0.01% FirstEnergy Corp FE 0.09% 3.46% 0.00% 1.29% 0.00% VeriSign Inc VRSN 0.10% n/a n/a 9.70% 0.01% Quanta Services Inc PWR 0.02% 0.43% 0.00% 22.00% 0.00% Henry Schein Inc HSIC 0.04% n/a n/a 4.87% 0.00% Ameren Corp AEE 0.07% 2.51% 0.00% 5.78% 0.00% ANSYS Inc ANSS 0.07% n/a n/a 11.95% 0.01% NVIDIA Corp NVDA 0.40% 0.38% 0.00% 9.76% 0.04% Sealed Air Corp SEE 0.03% 1.53% 0.00% 6.60% 0.00% Cognizant Technology Solutions Corp CTSH 0.14% 1.23% 0.00% 11.05% 0.02% SVB Financial Group SIVB 0.05% n/a n/a 11.00% 0.01% Intuitive Surgical Inc ISRG 0.23% n/a n/a 13.63% 0.03% Affiliated Managers Group Inc AMG 0.02% 1.49% 0.00% 5.86% 0.00% Take-Two Interactive Software Inc TTWO 0.05% n/a n/a 8.80% 0.00% Republic Services Inc RSG 0.11% 1.83% 0.00% 12.96% 0.01% eBay Inc EBAY 0.13% 1.36% 0.00% 12.07% 0.02% Goldman Sachs Group Inc/The GS 0.31% 2.27% 0.01% 0.64% 0.00% Sempra Energy SRE 0.14% 2.86% 0.00% 9.39% 0.01% SBA Communications Corp SBAC 0.11% 0.15% 0.00% 46.90% 0.05% Moody's Corp MCO 0.16% 0.93% 0.00% 7.05% 0.01% Booking Holdings Inc BKNG 0.32% n/a n/a 16.99% 0.05% F5 Networks Inc FFIV 0.03% n/a n/a 10.29% 0.00% Akamai Technologies Inc AKAM 0.06% n/a n/a 13.70% 0.01% MarketAxess Holdings Inc MKTX 0.05% 0.61% 0.00% n/a n/a Devon Energy Corp DVN 0.04% 1.33% 0.00% 5.60% 0.00% Alphabet Inc GOOGL 1.42% n/a n/a 12.87% 0.18% Teleflex Inc TFX 0.06% 0.40% 0.00% 12.97% 0.01% Allegion PLC ALLE 0.04% 1.04% 0.00% 10.61% 0.00% Netflix Inc NFLX 0.55% n/a n/a 43.20% 0.24% Agilent Technologies Inc A 0.09% 0.95% 0.00% 13.53% 0.01% Anthem Inc ANTM 0.29% 1.09% 0.00% 14.13% 0.04% CME Group Inc CME 0.27% 1.54% 0.00% 7.90% 0.02% Juniper Networks Inc JNPR 0.04% 2.81% 0.00% 7.74% 0.00% BlackRock Inc BLK 0.28% 2.82% 0.01% 8.82% 0.02% DTE Energy Co DTE 0.09% 2.97% 0.00% 5.53% 0.00% Celanese Corp CE 0.05% 2.21% 0.00% 7.15% 0.00% Nasdaq Inc NDAQ 0.06% 1.95% 0.00% 13.00% 0.01% Philip Morris International Inc PM 0.50% 5.45% 0.03% 7.23% 0.04% salesforce.com Inc CRM 0.47% n/a n/a 22.30% 0.10% Huntington Ingalls Industries Inc HII 0.04% 1.51% 0.00% 40.00% 0.01% MetLife Inc MET 0.18% 3.56% 0.01% 8.39% 0.02% Under Armour Inc UA 0.02% n/a n/a 27.23% 0.00% Tapestry Inc TPR 0.03% 4.36% 0.00% 9.43% 0.00% CSX Corp CSX 0.22% 1.36% 0.00% 12.17% 0.03% Edwards Lifesciences Corp EW 0.17% n/a n/a 14.75% 0.03% Ameriprise Financial Inc AMP 0.08% 2.67% 0.00% 3.20% 0.00% TechnipFMC PLC FTI 0.05% 1.89% 0.00% 17.11% 0.01% Zimmer Biomet Holdings Inc ZBH 0.11% 0.71% 0.00% 6.22% 0.01% CBRE Group Inc CBRE 0.07% n/a n/a 7.30% 0.01% Mastercard Inc MA 1.06% 0.48% 0.01% 17.46% 0.19% CarMax Inc KMX 0.06% n/a n/a 10.61% 0.01% Intercontinental Exchange Inc ICE 0.19% 1.25% 0.00% 9.40% 0.02% Fidelity National Information Services Inc FIS 0.32% 1.05% 0.00% 11.31% 0.04% Chipotle Mexican Grill Inc CMG 0.09% n/a n/a 21.64% 0.02% Wynn Resorts Ltd WYNN 0.05% 3.08% 0.00% 11.50% 0.01% Assurant Inc AIZ 0.03% 2.12% 0.00% n/a n/a NRG Energy Inc NRG 0.04% 0.35% 0.00% 31.92% 0.01% Monster Beverage Corp MNST 0.14% n/a n/a 14.50% 0.02% Regions Financial Corp RF 0.06% 3.89% 0.00% 8.21% 0.01% Mosaic Co/The MOS 0.04% 0.79% 0.00% 14.00% 0.01% Expedia Group Inc EXPE 0.08% 1.02% 0.00% 21.16% 0.02% Evergy Inc EVRG 0.06% 3.14% 0.00% 7.64% 0.00% Discovery Inc DISCA 0.02% n/a n/a 13.35% 0.00% CF Industries Holdings Inc CF 0.04% 2.42% 0.00% 20.27% 0.01% Viacom Inc VIAB 0.04% 2.64% 0.00% 3.43% 0.00% Alphabet Inc GOOG 1.64% n/a n/a 12.87% 0.21% TE Connectivity Ltd TEL 0.12% 1.99% 0.00% 9.43% 0.01% Cooper Cos Inc/The COO 0.06% 0.02% 0.00% 5.23% 0.00% Discover Financial Services DFS 0.11% 1.96% 0.00% 7.28% 0.01% TripAdvisor Inc TRIP 0.02% n/a n/a 9.34% 0.00% Visa Inc V 1.19% 0.56% 0.01% 15.71% 0.19% Mid-America Apartment Communities Inc MAA 0.05% 3.26% 0.00% 7.00% 0.00% Xylem Inc/NY XYL 0.06% 1.20% 0.00% 14.45% 0.01% Attachment AEB-5DR Page 6 of 6

STANDARD AND POOR'S 500 INDEX

[13] [14] [15] [16] [17] Cap-Weighted Weight in Estimated Cap-Weighted Long-Term Long-Term Name Ticker Index Dividend Yield Dividend Yield Growth Est. Growth Est.

Marathon Petroleum Corp MPC 0.15% 3.76% 0.01% 9.11% 0.01% Advanced Micro Devices Inc AMD 0.13% n/a n/a 18.20% 0.02% Tractor Supply Co TSCO 0.05% 1.29% 0.00% 10.88% 0.01% ResMed Inc RMD 0.07% 1.21% 0.00% 11.37% 0.01% Mettler-Toledo International Inc MTD 0.07% n/a n/a 13.50% 0.01% Copart Inc CPRT 0.07% n/a n/a 20.00% 0.01% Fortinet Inc FTNT 0.05% n/a n/a 24.04% 0.01% Albemarle Corp ALB 0.03% 2.01% 0.00% 13.41% 0.00% Essex Property Trust Inc ESS 0.08% 2.58% 0.00% 7.91% 0.01% Realty Income Corp O 0.09% 3.93% 0.00% 4.04% 0.00% Seagate Technology PLC STX 0.05% 5.44% 0.00% 4.60% 0.00% Westrock Co WRK 0.04% 5.05% 0.00% 2.25% 0.00% IHS Markit Ltd INFO 0.10% n/a n/a 11.08% 0.01% Wabtec Corp WAB 0.06% 0.62% 0.00% 15.00% 0.01% Western Digital Corp WDC 0.06% 3.71% 0.00% -5.24% 0.00% PepsiCo Inc PEP 0.69% 2.99% 0.02% 5.45% 0.04% Diamondback Energy Inc FANG 0.07% 0.73% 0.00% 27.41% 0.02% Nektar Therapeutics NKTR 0.02% n/a n/a -2.40% 0.00% Maxim Integrated Products Inc MXIM 0.06% 3.24% 0.00% 8.53% 0.01% Church & Dwight Co Inc CHD 0.07% 1.21% 0.00% 8.13% 0.01% Duke Realty Corp DRE 0.05% 2.58% 0.00% 4.62% 0.00% Federal Realty Investment Trust FRT 0.04% 3.09% 0.00% 5.61% 0.00% MGM Resorts International MGM 0.06% 1.73% 0.00% 11.87% 0.01% JB Hunt Transport Services Inc JBHT 0.04% 1.02% 0.00% 12.13% 0.01% Lam Research Corp LRCX 0.12% 2.11% 0.00% 13.40% 0.02% Mohawk Industries Inc MHK 0.04% n/a n/a 5.28% 0.00% Pentair PLC PNR 0.03% 1.86% 0.00% 7.15% 0.00% Vertex Pharmaceuticals Inc VRTX 0.17% n/a n/a 51.00% 0.08% Amcor PLC AMCR 0.07% n/a n/a n/a n/a Facebook Inc FB 1.81% n/a n/a 19.37% 0.35% T-Mobile US Inc TMUS 0.26% n/a n/a 6.53% 0.02% United Rentals Inc URI 0.04% n/a n/a 12.00% 0.00% Alexandria Real Estate Equities Inc ARE 0.06% 2.73% 0.00% 4.33% 0.00% ABIOMED Inc ABMD 0.05% n/a n/a 29.00% 0.01% Delta Air Lines Inc DAL 0.15% 2.64% 0.00% 14.63% 0.02% United Airlines Holdings Inc UAL 0.09% n/a n/a 12.93% 0.01% News Corp NWS 0.01% 1.49% 0.00% -12.73% 0.00% Centene Corp CNC 0.08% n/a n/a 14.93% 0.01% Macerich Co/The MAC 0.02% 9.08% 0.00% -0.96% 0.00% Martin Marietta Materials Inc MLM 0.06% 0.78% 0.00% 15.09% 0.01% PayPal Holdings Inc PYPL 0.50% n/a n/a 19.11% 0.10% Coty Inc COTY 0.03% 4.58% 0.00% 6.71% 0.00% DISH Network Corp DISH 0.03% n/a n/a -8.73% 0.00% Alexion Pharmaceuticals Inc ALXN 0.10% n/a n/a 15.93% 0.02% Dow Inc DOW 0.14% 5.78% 0.01% 1.79% 0.00% Everest Re Group Ltd RE 0.04% 2.27% 0.00% 10.00% 0.00% WellCare Health Plans Inc WCG 0.06% n/a n/a 15.83% 0.01% News Corp NWSA 0.02% 1.52% 0.00% -12.73% 0.00% Global Payments Inc GPN 0.10% 0.02% 0.00% 17.13% 0.02% Crown Castle International Corp CCI 0.22% 3.38% 0.01% 17.07% 0.04% Aptiv PLC APTV 0.09% 1.00% 0.00% 8.93% 0.01% Advance Auto Parts Inc AAP 0.04% 0.16% 0.00% 15.68% 0.01% Capri Holdings Ltd CPRI 0.02% n/a n/a 6.28% 0.00% Align Technology Inc ALGN 0.06% n/a n/a 20.73% 0.01% Illumina Inc ILMN 0.17% n/a n/a 23.74% 0.04% Alliance Data Systems Corp ADS 0.03% 1.61% 0.00% 9.13% 0.00% LKQ Corp LKQ 0.03% n/a n/a 13.05% 0.00% Nielsen Holdings PLC NLSN 0.03% 6.04% 0.00% 12.00% 0.00% Garmin Ltd GRMN 0.06% 2.90% 0.00% 7.03% 0.00% Cimarex Energy Co XEC 0.02% 1.58% 0.00% 30.03% 0.01% Zoetis Inc ZTS 0.21% 0.57% 0.00% 9.83% 0.02% Digital Realty Trust Inc DLR 0.09% 3.78% 0.00% 17.36% 0.02% Equinix Inc EQIX 0.16% 1.96% 0.00% 18.37% 0.03% Discovery Inc DISCK 0.04% n/a n/a 13.35% 0.01%

Notes: [8] Equals sum of Col. [15] [9] Equals sum of Col. [17] [10] Equals ([8] x (1 + (0.5 x [9]))) + [9] [11] Source: Exhibit AEB-5, at 1 [12] Equals [10] − [11] [13] Equals weight in S&P 500 based on market capitalization [14] Source: Bloomberg Professional [15] Equals [13] x [14] [16] Source: Bloomberg Professional [17] Equals [13] x [16] Attachment AEB-6DR Page 1 of 1

CAPITAL ASSET PRICING MODEL

[4] [5] [6] [7] Market Risk-Free Average Risk Rate Beta Premium ROE

Proxy Group Average Bloomberg Beta [1] Current 30-day average of 30-year U.S. Treasury bond yield 2.57% 0.662 11.34% 10.07% [2] Blue Chip Consensus Forecast (Q4 2019 - Q4 2020) 2.66% 0.662 11.24% 10.11% [3] Projected 30-year U.S. Treasury bond yield (2021 - 2025) 3.60% 0.662 10.30% 10.42% Mean: 10.20%

Proxy Group Average Value Line Beta [1] Current 30-day average of 30-year U.S. Treasury bond yield 2.57% 0.615 11.34% 9.54% [2] Blue Chip Consensus Forecast (Q2 2019 - Q2 2020) 2.66% 0.615 11.24% 9.58% [3] Projected 30-year U.S. Treasury bond yield (2020 - 2024) 3.60% 0.615 10.30% 9.94% Mean: 9.69%

[1] Source: Bloomberg Professional [2] Source: Blue Chip Financial Forecasts, Vol. 38, No. 8, August 1, 2019, at 2 [3] Source: Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14 [4] See Notes [1], [2], and [3] [5] Source: Bloomberg Professional and Value Line [6] Exhibit AEB-4 [7] Equals [4] + [5] x [6] Attachment AEB-7DR Page 1 of 3

BOND YIELD PLUS RISK PREMIUM

[1] [2] [3] Average Authorized U.S. Govt. Electric 30-year Risk ROE Treasury Premium 1992.1 12.38% 7.80% 4.58% 1992.2 11.83% 7.89% 3.93% 1992.3 12.03% 7.45% 4.59% 1992.4 12.14% 7.52% 4.62% 1993.1 11.84% 7.07% 4.77% 1993.2 11.64% 6.86% 4.79% 1993.3 11.15% 6.31% 4.84% 1993.4 11.04% 6.14% 4.90% 1994.1 11.07% 6.57% 4.49% 1994.2 11.13% 7.35% 3.78% 1994.3 12.75% 7.58% 5.17% 1994.4 11.24% 7.96% 3.28% 1995.1 11.96% 7.63% 4.34% 1995.2 11.32% 6.94% 4.37% 1995.3 11.37% 6.71% 4.66% 1995.4 11.58% 6.23% 5.35% 1996.1 11.46% 6.29% 5.17% 1996.2 11.46% 6.92% 4.54% 1996.3 10.70% 6.96% 3.74% 1996.4 11.56% 6.62% 4.94% 1997.1 11.08% 6.81% 4.27% 1997.2 11.62% 6.93% 4.68% 1997.3 12.00% 6.53% 5.47% 1997.4 11.06% 6.14% 4.92% 1998.1 11.31% 5.88% 5.43% 1998.2 12.20% 5.85% 6.35% 1998.3 11.65% 5.47% 6.18% 1998.4 12.30% 5.10% 7.20% 1999.1 10.40% 5.37% 5.03% 1999.2 10.94% 5.79% 5.15% 1993.3 11.15% 6.31% 4.84% 1999.4 11.10% 6.25% 4.85% 2000.1 11.21% 6.29% 4.92% 2000.2 11.00% 5.97% 5.03% 2000.3 11.68% 5.79% 5.89% 2000.4 12.50% 5.69% 6.81% 2001.1 11.38% 5.44% 5.93% 2001.2 11.00% 5.70% 5.30% 2001.3 10.76% 5.52% 5.23% 2001.4 11.99% 5.30% 6.70% 2002.1 10.05% 5.51% 4.54% 2002.2 11.41% 5.61% 5.79% 2002.3 11.65% 5.08% 6.57% 2002.4 11.57% 4.93% 6.64% 2003.1 11.72% 4.85% 6.87% 2003.2 11.16% 4.60% 6.56% 2003.3 10.50% 5.11% 5.39% 2003.4 11.34% 5.11% 6.23% 2004.1 11.00% 4.88% 6.12% 2004.2 10.64% 5.32% 5.32% 2004.3 10.75% 5.06% 5.69% 2004.4 11.24% 4.86% 6.38% 2005.1 10.63% 4.69% 5.93% 2005.2 10.31% 4.47% 5.85% 2005.3 11.08% 4.44% 6.65% 2005.4 10.63% 4.68% 5.95% 2006.1 10.70% 4.63% 6.06% 2006.2 10.79% 5.14% 5.65% 2006.3 10.35% 4.99% 5.35% 2006.4 10.65% 4.74% 5.91% 2007.1 10.59% 4.80% 5.80% 2007.2 10.33% 4.99% 5.34% 2007.3 10.40% 4.95% 5.45% 2007.4 10.65% 4.61% 6.04% 2008.1 10.62% 4.41% 6.21% 2008.2 10.54% 4.57% 5.97% 2008.3 10.43% 4.44% 5.98% 2008.4 10.39% 3.65% 6.74% 2009.1 10.75% 3.44% 7.31% 2009.2 10.75% 4.17% 6.58% 2009.3 10.50% 4.32% 6.18% 2009.4 10.59% 4.34% 6.26% 2010.1 10.59% 4.62% 5.97% 2010.2 10.18% 4.36% 5.82% 2010.3 10.40% 3.86% 6.55% 2010.4 10.38% 4.17% 6.21% 2011.1 10.09% 4.56% 5.53% 2011.2 10.26% 4.34% 5.92% 2011.3 10.57% 3.69% 6.88% Attachment AEB-7DR Page 2 of 3

BOND YIELD PLUS RISK PREMIUM

[1] [2] [3] Average Authorized U.S. Govt. Electric 30-year Risk ROE Treasury Premium 2011.4 10.39% 3.04% 7.35% 2012.1 10.30% 3.14% 7.17% 2012.2 9.95% 2.93% 7.02% 2012.3 9.90% 2.74% 7.16% 2012.4 10.16% 2.86% 7.30% 2013.1 9.85% 3.13% 6.72% 2013.2 9.86% 3.14% 6.72% 2013.3 10.12% 3.71% 6.41% 2013.4 9.97% 3.79% 6.18% 2014.1 9.86% 3.69% 6.17% 2014.2 10.10% 3.44% 6.66% 2014.3 9.90% 3.26% 6.64% 2014.4 9.94% 2.96% 6.98% 2015.1 9.64% 2.55% 7.08% 2015.2 9.83% 2.88% 6.94% 2015.3 9.40% 2.96% 6.44% 2015.4 9.86% 2.96% 6.90% 2016.1 9.70% 2.72% 6.98% 2016.2 9.48% 2.57% 6.91% 2016.3 9.74% 2.28% 7.46% 2016.4 9.83% 2.83% 7.00% 2017.1 9.72% 3.04% 6.67% 2017.2 9.64% 2.90% 6.75% 2017.3 10.00% 2.82% 7.18% 2017.4 9.91% 2.82% 7.09% 2018.1 9.69% 3.02% 6.66% 2018.2 9.75% 3.09% 6.66% 2018.3 9.69% 3.06% 6.63% 2018.4 9.60% 3.27% 6.33% 2019.1 9.72% 3.01% 6.71% 2019.2 9.58% 2.78% 6.79%

AVERAGE 10.75% 4.85% 5.90% MEDIAN 10.64% 4.82% 6.01%

Attachment AEB-8DR Page 1 of 1

EXPECTED EARNINGS ANALYSIS

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

Value Line Value Line Value Line Value Line Common Equity Value Line Common Equity Compound Adjusted Return ROE Total Capital Ratio Total Equity Total Capital Ratio Total Equity Annual Growth Adjustment on Common Company Ticker 2022-2024 2018 2018 2018 2022-2024 2022-2024 2022-2024 Rate Factor Equity

ALLETE, Inc. ALE 9.00% 3,584.30 60.10% 2,154 4,250 59.00% 2,508 3.08% 1.015 9.14% Ameren Corporation AEE 10.50% 15,632.00 48.80% 7,628 20,700 50.00% 10,350 6.29% 1.031 10.82% American Electric Power Company, Inc AEP 10.50% 40,667.00 46.80% 19,032 53,100 46.30% 24,585 5.25% 1.026 10.77% DTE Energy Company DTE 10.50% 22,371.00 45.80% 10,246 31,600 46.50% 14,694 7.48% 1.036 10.88% Duke Energy Corporation DUK 8.50% 94,940.00 46.20% 43,862 119,300 43.50% 51,896 3.42% 1.017 8.64% Exelon Corporation EXC 10.00% 65,229.00 47.20% 30,788 80,600 51.00% 41,106 5.95% 1.029 10.29% FirstEnergy Corporation FE 16.00% 24,565.00 27.40% 6,731 34,300 32.00% 10,976 10.27% 1.049 16.78% Evergy, Inc. EVRG 8.50% 16,716.00 60.00% 10,030 18,600 47.50% 8,835 -2.50% 0.987 8.39% OGE Energy Corporation OGE 11.50% 6,902.00 58.00% 4,003 8,625 54.00% 4,658 3.07% 1.015 11.67% Otter Tail Corporation OTTR 10.50% 1,318.90 55.30% 729 1,950 49.50% 965 5.76% 1.028 10.79% PNM Resources, Inc. PNM 10.00% 4,370.00 38.60% 1,687 5,575 40.50% 2,258 6.00% 1.029 10.29% PPL Corporation PPL 13.00% 31,726.00 36.70% 11,643 37,300 45.50% 16,972 7.83% 1.038 13.49% Southern Company SO 12.50% 65,750.00 37.60% 24,722 78,300 41.50% 32,495 5.62% 1.027 12.84% Xcel Energy Inc. XEL 11.00% 28,025.00 43.60% 12,219 36,900 42.00% 15,498 4.87% 1.024 11.26% Mean 11.15% Median 10.81%

Notes: [1] Source: Value Line [2] Source: Value Line [3] Source: Value Line [4] Equals [2] x [3] [5] Source: Value Line [6] Source: Value Line [7] Equals [5] x [6] [8] Equals ([7] / [4]) ^ (1/5) - 1 [9] Equals 2 x (1 + [8]) / (2 + [8]) [10] Equals [1] x [9] Attachment AEB-9DR Page 1 of 2 COMPARISON OF PROXY GROUP COMPANIES REGULATORY FRAMEWORK - ADJUSTMENT CLAUSES

[1] [2] [3] [4] Decoupling New Capital Generation Generic CWIP in Proxy Group Company Operation State Operation Test Year Rate Base Full Partial Capacity Infrastructure Rate Base ALLETE, Inc. Minnesota Electric 1 Partially Forecast Average Partial Wisconsin [4] Electric 1 Fully Forecast Average Rider

Ameren Corporation Illinois Electric 1 Fully Forecast Average Partial Illinois Gas 1 Fully Forecast Average x x Partial Missouri Electric 1 Partially Forecast Year End x x No Missouri Gas 1 Partially Forecast Year End x No

American Electric Power Company, Inc. Arkansas Electric 1 Partially Forecast Year End x x No Indiana Electric 1 Historical Year End x x Rider Kentucky Electric 1 Fully Forecast Average x Yes Louisiana Electric 1 Historical Average x Large projects only Michigan Electric 1 Fully Forecast Average Large projects only Ohio Electric 1 Partially Forecast Year End x x Partial Oklahoma Electric 1 Historical Year End x x Yes Tennessee Electric 1 Fully Forecast Average Yes Texas Electric 1 Historical Year End x Surcharge Virginia Electric 1 Historical Year End x Rider West Virginia Electric 1 Historical Average x Large projects only

DTE Energy Company Michigan Electric 1 Fully Forecast Average Large projects only Michigan Gas 1 Fully Forecast Average x x Large projects only

Duke Energy Corporation Florida Electric 1 Fully Forecast Average x Yes Indiana Electric 1 Historical Year End x x x Yes Kentucky Electric 1 Fully Forecast Average x Yes Kentucky Gas 1 Fully Forecast Average x x Yes North Carolina Electric 1 Historical Year End Large projects only North Carolina Gas 1 Historical Year End x x Large projects only Ohio Electric 1 Partially Forecast Year End x x Partial Ohio Gas 1 Partially Forecast Year End x Partial South Carolina Electric 1 Historical N/A Yes South Carolina Gas 1 Historical N/A x Yes Tennessee Gas 1 Fully Forecast Average x x Yes

Exelon Delaware Gas 1 Historical Average Partial District of Columbia Electric 1 Partially Forecast Average x x Partial Illinois Electric 1 Fully Forecast Average x Partial Pennsylvania Electric/Gas 1 Fully Forecast Year End x No Maryland Electric/Gas 1 Historical Average x x Yes

FirstEnergy Corp. Maryland Electric 1 Historical Average Yes New Jersey Electric 1 Partially Forecast Year End Financial distress Ohio Electric 1 Partially Forecast Year End x x Partial Pennsylvania Electric 1 Fully Forecast Year End x No West Virginia Electric 1 Historical Average x Large projects only

Evergy, Inc. Kansas Electric 1 Historical Year End x Yes Missouri Electric 1 Partially Forecast Year End x x No

OGE Energy Corporation Arkansas Electric 1 Partially Forecast Year End x x x No Oklahoma Electric 1 Historical Year End x x Yes

Otter Tail Corporation Minnesota Electric 1 Partially Forecast Average Partial North Dakota Electric 1 Fully Forecast Average x Rider

PNM Resources, Inc. New Mexico Electric 1 Historical Year End x Yes Attachment AEB-9DR Page 2 of 2 COMPARISON OF PROXY GROUP COMPANIES REGULATORY FRAMEWORK - ADJUSTMENT CLAUSES

[1] [2] [3] [4] Decoupling New Capital Generation Generic CWIP in Proxy Group Company Operation State Operation Test Year Rate Base Full Partial Capacity Infrastructure Rate Base ALLETE, Inc. Minnesota Electric 1 Partially Forecast Average Partial Texas Electric 1 Historical Year End x Surcharge

PPL Corporation Kentucky Electric 1 Fully Forecast Year End x Yes Kentucky Gas 1 Fully Forecast Year End x x Yes Pennsylvania Electric 1 Fully Forecast Year End x No Virginia Electric 1 Fully Forecast Year End Rider

Southern Company Alabama Electric 1 Historical Year End x No Georgia Electric/Gas 1 Partially Forecast Average x x Large projects only Illinois Gas 1 Fully Forecast Average x Partial Mississippi Electric 1 Partially Forecast Average x Large projects only Tennessee Gas 1 Fully Forecast Average x Yes Virginia Gas 1 Historical Year End x x Rider

Xcel Energy Inc. Colorado Electric 1 Historical Average x x Partial Colorado Gas 1 Historical Average x x Partial Minnesota Electric 1 Fully Forecast Average x Partial Minnesota Gas 1 Fully Forecast Average x Partial New Mexico Electric 1 Fully Forecast Year End Yes North Dakota Electric 1 Fully Forecast Average x Rider North Dakota Gas 1 Fully Forecast Average No South Dakota Electric 1 Historical Average x x x No Texas Electric 1 Historical Year End x Surcharge Wisconsin Electric 1 Fully Forecast Average Rider Wisconsin Gas 1 Fully Forecast Average Rider

Historical: 25 Average: 36 Proxy Company Totals Forecast: 44 Year End: 31 4 26 9 40 58 Total Jurisdictions 69 Percent of Jurisdictions Forecast: 64% Year End: 46% 5.8% 37.7% 13.0% 58.0% 84.1%

Notes: [1] Source: S&P Global Market Intelligence, Regulatory Focus: Adjustment Clauses, dated September 28, 2018. Operating subsidiaries not covered in this report were excluded from this exhibit. [2] Source: "Alternative Regulation for Evolving Utility Challenges," Prepared by Pacific Economics Group Research for Edison Electric Institute, Table 6, November 2015; S&P RRA Research; Company Investor Presen [3] Source: S&P Global Market Intelligence, Regulatory Focus: Adjustment Clauses, dated September 28, 2018. [4] Source: S&P Global Market Intelligence, Regulatory Research Associates, Commission Profiles [5] This exhibit includes the adjustment mechanisms for the electric and gas distribution companies. Attachment AEB-10DR Page 1 of 1

NUCLEAR GENERATION COMPARISON

% Net Generation Proxy Group Company Ticker (2018) ALLETE, Inc. ALE 0.00% Ameren Corporation AEE 24.65% American Electric Power Company, Inc. AEP 17.49% DTE Energy Company DTE 17.81% Duke Energy Corporation DUK 32.44% Evergy, Inc. EVRG 20.64% Exelon Corporation EXC 86.07% FirstEnergy Corp. FE 47.10% OGE Energy Corp. OGE 0.00% Otter Tail Corporation OTTR 0.00% PNM Resources, Inc. PNM 33.65% PPL Corporation PPL 0.00% Southern Company SO 15.93% Xcel Energy Inc. XEL 19.11% MEAN 22.49%

Arizona Public Service Company 35.16% Attachment AEB-11DR Page 1 of 2

CAPITAL STRUCTURE ANALYSIS

COMMON EQUITY RATIO [1] Proxy Group Company Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 Average ALLETE (Minnesota Power) ALE 60.87% 60.80% 61.27% 60.33% 60.26% 60.50% 60.15% 59.79% 60.50% Ameren Corporation AEE 52.97% 52.76% 52.68% 53.23% 51.93% 52.91% 52.56% 53.35% 52.80% American Electric Power Company, Inc. AEP 48.04% 48.72% 48.55% 47.52% 47.93% 48.54% 48.88% 48.36% 48.32% DTE Energy Company DTE 48.76% 48.69% 50.96% 49.97% 49.23% 51.12% 51.02% 50.50% 50.03% Duke Energy Corporation DUK 53.12% 52.16% 52.71% 52.85% 53.04% 52.88% 53.01% 53.02% 52.85% Exelon Corporation EXC 53.78% 53.72% 53.31% 53.02% 53.78% 53.56% 53.38% 53.04% 53.45% FirstEnergy Corporation FE 57.81% 58.37% 58.90% 59.48% 59.00% 57.54% 56.97% 56.43% 58.06% Evergy, Inc. EVRG 60.32% 57.95% 59.53% 59.71% 64.75% 64.71% 58.67% 59.11% 60.59% OGE Energy Corporation OGE 53.47% 55.38% 53.20% 53.05% 54.25% 53.59% 53.36% 53.05% 53.67% Otter Tail Corporation OTTR 53.75% 53.90% 53.58% 53.49% 53.11% 52.67% 57.34% 57.24% 54.39% PNM Resources, Inc. PNM 43.86% 43.45% 45.63% 48.01% 46.68% 46.20% 46.06% 47.58% 45.93% PPL Corporation PPL 53.84% 55.18% 54.92% 54.85% 54.51% 54.60% 54.60% 54.75% 54.66% Southern Company SO 54.50% 54.40% 54.29% 53.08% 51.35% 51.29% 48.14% 49.84% 52.11% Xcel Energy Inc. XEL 55.25% 54.92% 54.48% 54.29% 53.51% 54.40% 54.23% 53.76% 54.36% MEAN 53.60% 53.60% 53.86% 53.78% 53.81% 53.90% 53.46% 53.56% 53.69% LOW 43.86% 43.45% 45.63% 47.52% 46.68% 46.20% 46.06% 47.58% 45.93% HIGH 60.87% 60.80% 61.27% 60.33% 64.75% 64.71% 60.15% 59.79% 60.59%

COMMON EQUITY RATIO - UTILITY OPERATING COMPANIES [2] Company Name Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 Average ALLETE (Minnesota Power) ALE 60.94% 60.87% 61.39% 60.43% 60.33% 60.38% 60.04% 59.73% 60.51% Superior Water, Light and Power Company ALE 58.38% 58.19% 56.86% 56.58% 57.34% 65.80% 64.99% 62.33% 60.06% Ameren Illinois Company AEE 54.05% 53.65% 52.86% 53.18% 52.74% 54.24% 53.38% 54.98% 53.64% Union Electric Company AEE 52.00% 51.96% 52.52% 53.26% 51.28% 51.84% 51.92% 52.14% 52.12% AEP Texas, Inc. AEP 46.32% 47.54% 45.38% 43.80% 43.20% 46.75% 45.14% 42.81% 45.12% Appalachian Power Company AEP 48.19% 47.77% 49.51% 49.30% 48.93% 49.35% 48.72% 48.30% 48.76% Indiana Michigan Power Company AEP 45.83% 45.43% 44.62% 44.53% 44.15% 46.64% 46.33% 46.65% 45.52% Kentucky Power Company AEP 46.50% 46.42% 45.72% 45.28% 44.89% 44.40% 43.52% 43.22% 44.99% Kingsport Power Company AEP 50.18% 51.54% 50.79% 50.71% 47.69% 47.28% 46.53% 45.88% 48.82% Ohio Power Company AEP 52.92% 58.86% 57.80% 56.85% 57.11% 52.91% 58.63% 57.64% 56.59% Public Service Company of Oklahoma AEP 48.02% 47.19% 49.16% 49.55% 48.59% 48.10% 48.50% 48.85% 48.49% Southwestern Electric Power Company AEP 47.45% 47.59% 46.97% 43.43% 47.91% 47.72% 48.52% 48.66% 47.28% Wheeling Power Company AEP 53.83% 54.27% 54.62% 54.70% 54.19% 54.27% 54.26% 54.13% 54.28% DTE Electric Company DTE 48.76% 48.69% 50.96% 49.97% 49.23% 51.12% 51.02% 50.50% 50.03% Duke Energy Carolinas, LLC DUK 52.94% 52.32% 51.78% 52.64% 52.10% 51.70% 52.98% 53.98% 52.55% Duke Energy Florida, LLC DUK 51.55% 50.56% 50.04% 49.65% 48.79% 49.92% 49.25% 49.46% 49.90% Duke Energy Indiana, LLC DUK 54.83% 54.29% 53.26% 52.79% 52.64% 52.54% 51.94% 51.71% 53.00% Duke Energy Kentucky, Inc. DUK 53.04% 52.81% 51.95% 56.58% 55.79% 53.72% 53.11% 50.69% 53.46% Duke Energy Ohio, Inc. DUK 64.45% 59.29% 68.09% 67.73% 67.10% 66.06% 66.24% 65.79% 65.59% Duke Energy Progress, LLC DUK 50.09% 49.60% 51.00% 50.76% 53.22% 52.82% 52.27% 51.06% 51.35% Baltimore Gas and Electric Company EXC 54.36% 54.43% 53.67% 52.85% 55.34% 55.36% 54.77% 53.70% 44.05% Commonwealth Edison Company EXC 55.29% 55.00% 55.06% 54.72% 55.36% 54.96% 54.85% 54.60% 44.01% Delmarva Power & Light Company EXC 50.20% 50.18% 49.98% 50.11% 49.86% 50.35% 50.38% 50.18% 49.18% PECO Energy Company EXC 55.20% 55.13% 53.72% 52.82% 54.28% 53.77% 53.54% 53.30% 49.18% Potomac Electric Power Company EXC 50.24% 50.41% 50.01% 50.24% 50.08% 49.94% 49.89% 49.71% 49.18% Cleveland Electric Illuminating Company FE 55.49% 55.54% 55.44% 56.50% 56.31% 55.48% 55.27% 54.06% 49.18% Jersey Central Power & Light Company FE 68.23% 68.08% 69.46% 69.34% 68.81% 65.52% 65.30% 65.26% 49.18% Metropolitan Edison Company FE 48.46% 47.78% 53.21% 54.25% 53.10% 52.18% 52.33% 52.30% 51.70% Monongahela Power Company FE 49.07% 49.05% 48.87% 50.71% 51.53% 50.57% 49.15% 48.18% 49.64% Ohio Edison Company FE 71.42% 70.82% 69.93% 69.14% 67.33% 66.89% 64.91% 62.27% 67.84% Pennsylvania Electric Company FE 50.93% 53.85% 53.89% 54.01% 53.90% 53.09% 52.06% 53.29% 53.13% Pennsylvania Power Company FE 51.71% 50.69% 49.03% 58.27% 56.89% 55.70% 53.82% 55.74% 53.98% Potomac Edison Company FE 52.99% 53.29% 52.35% 52.92% 52.65% 52.64% 51.59% 51.27% 52.46% Toledo Edison Company FE 60.57% 60.78% 60.43% 62.25% 62.25% 60.60% 60.04% 57.81% 60.59% West Penn Power Company FE 50.63% 54.68% 53.50% 53.14% 52.09% 51.09% 52.82% 52.10% 52.51% Great Plains Energy Incorporated EVRG 50.27% 47.99% 51.05% 51.39% 51.25% 50.39% Westar Energy, Inc. EVRG 67.31% 65.16% 65.23% 65.34% 64.75% 64.71% 64.65% 64.73% 65.24% Oklahoma Gas and Electric Company OGE 53.47% 55.38% 53.20% 53.05% 54.25% 53.59% 53.36% 53.05% 53.67% Otter Tail Power Company OTTR 53.75% 53.90% 53.58% 53.49% 53.11% 52.67% 57.34% 57.24% 54.39% Public Service Company of New Mexico PNM 43.86% 43.45% 45.63% 48.01% 46.68% 46.20% 46.06% 47.58% 45.93% Kentucky Utilities Company PPL 52.81% 55.44% 54.85% 54.76% 54.51% 54.08% 54.00% 53.93% 54.30% Louisville Gas and Electric Company PPL 53.88% 56.16% 55.80% 55.35% 54.97% 54.46% 55.42% 56.29% 55.29% PPL Electric Utilities Corporation PPL 54.51% 54.52% 54.52% 54.65% 54.28% 55.04% 54.57% 54.54% 54.58% Alabama Power Company SO 52.54% 52.23% 47.77% 48.13% 47.51% 48.86% 47.07% 48.78% 49.11% Georgia Power Company SO 56.39% 56.43% 59.02% 57.27% 54.97% 53.81% 50.06% 50.90% 54.86% Mississippi Power Company SO 49.87% 49.73% 50.35% 45.84% 43.87% 43.00% 39.34% 47.32% 46.16% Northern States Power Company - MN XEL 53.66% 53.64% 52.81% 52.64% 52.61% 52.59% 52.38% 52.22% 52.82% Northern States Power Company - WI XEL 53.49% 53.59% 53.60% 48.45% 53.85% 53.79% 53.36% 55.57% 53.21% Public Service Company of Colorado XEL 57.53% 56.68% 56.31% 56.08% 54.17% 56.67% 56.50% 55.64% 56.20% Southwestern Public Service Company XEL 54.14% 54.13% 54.17% 56.29% 53.88% 53.54% 53.55% 52.29% 54.00%

Notes: [1] Ratios are weighted by actual common capital and long-term debt of Operating Subsidiaries. [2] Natural Gas and Electric Operating Subsidiaries with data listed as N/A from SNL Financial have been excluded from the analysis. Attachment AEB-11DR Page 2 of 2

CAPITAL STRUCTURE ANALYSIS

LONG-TERM DEBT RATIO [1] Proxy Group Company Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 Average ALLETE (Minnesota Power) ALE 39.13% 39.20% 38.73% 39.67% 39.74% 39.50% 39.85% 40.21% 39.50% Ameren Corporation AEE 47.03% 47.24% 47.32% 46.77% 48.07% 47.09% 47.44% 46.65% 47.20% American Electric Power Company, Inc. AEP 51.96% 51.28% 51.45% 52.48% 52.07% 51.46% 51.12% 51.64% 51.68% DTE Energy Company DTE 51.24% 51.31% 49.04% 50.03% 50.77% 48.88% 48.98% 49.50% 49.97% Duke Energy Corporation DUK 46.88% 47.84% 47.29% 47.15% 46.96% 47.12% 46.99% 46.98% 47.15% Exelon Corporation EXC 46.22% 46.28% 46.69% 46.98% 46.22% 46.44% 46.62% 46.96% 46.55% FirstEnergy Corporation FE 42.19% 41.63% 41.10% 40.52% 41.00% 42.46% 43.03% 43.57% 41.94% Evergy, Inc. EVRG 39.68% 42.05% 40.47% 40.29% 35.25% 35.29% 41.33% 40.89% 39.41% OGE Energy Corporation OGE 46.53% 44.62% 46.80% 46.95% 45.75% 46.41% 46.64% 46.95% 46.33% Otter Tail Corporation OTTR 46.25% 46.10% 46.42% 46.51% 46.89% 47.33% 42.66% 42.76% 45.61% PNM Resources, Inc. PNM 56.14% 56.55% 54.37% 51.99% 53.32% 53.80% 53.94% 52.42% 54.07% PPL Corporation PPL 46.16% 44.82% 45.08% 45.15% 45.49% 45.40% 45.40% 45.25% 45.34% Southern Company SO 45.50% 45.60% 45.71% 46.92% 48.65% 48.71% 51.86% 50.16% 47.89% Xcel Energy Inc. XEL 44.75% 45.08% 45.52% 45.71% 46.49% 45.60% 45.77% 46.24% 45.64% MEAN 46.40% 46.40% 46.14% 46.22% 46.19% 46.10% 46.54% 46.44% 46.31% LOW 39.13% 39.20% 38.73% 39.67% 35.25% 35.29% 39.85% 40.21% 39.41% HIGH 56.14% 56.55% 54.37% 52.48% 53.32% 53.80% 53.94% 52.42% 54.07%

LONG-TERM DEBT RATIO - UTILITY OPERATING COMPANIES [2] Company Name Ticker 2019Q2 2019Q1 2018Q4 2018Q3 2018Q2 2018Q1 2017Q4 2017Q3 Average ALLETE (Minnesota Power) ALE 39.06% 39.13% 38.61% 39.57% 39.67% 39.62% 39.96% 40.27% 39.49% Superior Water, Light and Power Company ALE 41.62% 41.81% 43.14% 43.42% 42.66% 34.20% 35.01% 37.67% 39.94% Ameren Illinois Company AEE 45.95% 46.35% 47.14% 46.82% 47.26% 45.76% 46.62% 45.02% 46.36% Union Electric Company AEE 48.00% 48.04% 47.48% 46.74% 48.72% 48.16% 48.08% 47.86% 47.88% AEP Texas, Inc. AEP 53.68% 52.46% 54.62% 56.20% 56.80% 53.25% 54.86% 57.19% 54.88% Appalachian Power Company AEP 51.81% 52.23% 50.49% 50.70% 51.07% 50.65% 51.28% 51.70% 51.24% Indiana Michigan Power Company AEP 54.17% 54.57% 55.38% 55.47% 55.85% 53.36% 53.67% 53.35% 54.48% Kentucky Power Company AEP 53.50% 53.58% 54.28% 54.72% 55.11% 55.60% 56.48% 56.78% 55.01% Kingsport Power Company AEP 49.82% 48.46% 49.21% 49.29% 52.31% 52.72% 53.47% 54.12% 51.18% Ohio Power Company AEP 47.08% 41.14% 42.20% 43.15% 42.89% 47.09% 41.37% 42.36% 43.41% Public Service Company of Oklahoma AEP 51.98% 52.81% 50.84% 50.45% 51.41% 51.90% 51.50% 51.15% 51.51% Southwestern Electric Power Company AEP 52.55% 52.41% 53.03% 56.57% 52.09% 52.28% 51.48% 51.34% 52.72% Wheeling Power Company AEP 46.17% 45.73% 45.38% 45.30% 45.81% 45.73% 45.74% 45.87% 45.72% DTE Electric Company DTE 51.24% 51.31% 49.04% 50.03% 50.77% 48.88% 48.98% 49.50% 49.97% Duke Energy Carolinas, LLC DUK 47.06% 47.68% 48.22% 47.36% 47.90% 48.30% 47.02% 46.02% 47.45% Duke Energy Florida, LLC DUK 48.45% 49.44% 49.96% 50.35% 51.21% 50.08% 50.75% 50.54% 50.10% Duke Energy Indiana, LLC DUK 45.17% 45.71% 46.74% 47.21% 47.36% 47.46% 48.06% 48.29% 47.00% Duke Energy Kentucky, Inc. DUK 46.96% 47.19% 48.05% 43.42% 44.21% 46.28% 46.89% 49.31% 46.54% Duke Energy Ohio, Inc. DUK 35.55% 40.71% 31.91% 32.27% 32.90% 33.94% 33.76% 34.21% 34.41% Duke Energy Progress, LLC DUK 49.91% 50.40% 49.00% 49.24% 46.78% 47.18% 47.73% 48.94% 48.65% Baltimore Gas and Electric Company EXC 45.64% 45.57% 46.33% 47.15% 44.66% 44.64% 45.23% 46.30% 45.69% Commonwealth Edison Company EXC 44.71% 45.00% 44.94% 45.28% 44.64% 45.04% 45.15% 45.40% 45.02% Delmarva Power & Light Company EXC 49.80% 49.82% 50.02% 49.89% 50.14% 49.65% 49.62% 49.82% 49.84% PECO Energy Company EXC 44.80% 44.87% 46.28% 47.18% 45.72% 46.23% 46.46% 46.70% 46.03% Potomac Electric Power Company EXC 49.76% 49.59% 49.99% 49.76% 49.92% 50.06% 50.11% 50.29% 49.94% Cleveland Electric Illuminating Company FE 44.51% 44.46% 44.56% 43.50% 43.69% 44.52% 44.73% 45.94% 44.49% Jersey Central Power & Light Company FE 31.77% 31.92% 30.54% 30.66% 31.19% 34.48% 34.70% 34.74% 32.50% Metropolitan Edison Company FE 51.54% 52.22% 46.79% 45.75% 46.90% 47.82% 47.67% 47.70% 48.30% Monongahela Power Company FE 50.93% 50.95% 51.13% 49.29% 48.47% 49.43% 50.85% 51.82% 50.36% Ohio Edison Company FE 28.58% 29.18% 30.07% 30.86% 32.67% 33.11% 35.09% 37.73% 32.16% Pennsylvania Electric Company FE 49.07% 46.15% 46.11% 45.99% 46.10% 46.91% 47.94% 46.71% 46.87% Pennsylvania Power Company FE 48.29% 49.31% 50.97% 41.73% 43.11% 44.30% 46.18% 44.26% 46.02% Potomac Edison Company FE 47.01% 46.71% 47.65% 47.08% 47.35% 47.36% 48.41% 48.73% 47.54% Toledo Edison Company FE 39.43% 39.22% 39.57% 37.75% 37.75% 39.40% 39.96% 42.19% 39.41% West Penn Power Company FE 49.37% 45.32% 46.50% 46.86% 47.91% 48.91% 47.18% 47.90% 47.49% Great Plains Energy Incorporated EVRG 49.73% 52.01% 48.95% 48.61% 48.75% 49.61% Westar Energy, Inc. EVRG 32.69% 34.84% 34.77% 34.66% 35.25% 35.29% 35.35% 35.27% 34.76% Oklahoma Gas and Electric Company OGE 46.53% 44.62% 46.80% 46.95% 45.75% 46.41% 46.64% 46.95% 46.33% Otter Tail Power Company OTTR 46.25% 46.10% 46.42% 46.51% 46.89% 47.33% 42.66% 42.76% 45.61% Public Service Company of New Mexico PNM 56.14% 56.55% 54.37% 51.99% 53.32% 53.80% 53.94% 52.42% 54.07% Kentucky Utilities Company PPL 47.19% 44.56% 45.15% 45.24% 45.49% 45.92% 46.00% 46.07% 45.70% Louisville Gas and Electric Company PPL 46.12% 43.84% 44.20% 44.65% 45.03% 45.54% 44.58% 43.71% 44.71% PPL Electric Utilities Corporation PPL 45.49% 45.48% 45.48% 45.35% 45.72% 44.96% 45.43% 45.46% 45.42% Alabama Power Company SO 47.46% 47.77% 52.23% 51.87% 52.49% 51.14% 52.93% 51.22% 50.89% Georgia Power Company SO 43.61% 43.57% 40.98% 42.73% 45.03% 46.19% 49.94% 49.10% 45.14% Mississippi Power Company SO 50.13% 50.27% 49.65% 54.16% 56.13% 57.00% 60.66% 52.68% 53.84% Northern States Power Company - MN XEL 46.34% 46.36% 47.19% 47.36% 47.39% 47.41% 47.62% 47.78% 47.18% Northern States Power Company - WI XEL 46.51% 46.41% 46.40% 51.55% 46.15% 46.21% 46.64% 44.43% 46.79% Public Service Company of Colorado XEL 42.47% 43.32% 43.69% 43.92% 45.83% 43.33% 43.50% 44.36% 43.80% Southwestern Public Service Company XEL 45.86% 45.87% 45.83% 43.71% 46.12% 46.46% 46.45% 47.71% 46.00%

Notes: [1] Ratios are weighted by actual common capital and long-term debt of Operating Subsidiaries. [2] Natural Gas and Electric Operating Subsidiaries with data listed as N/A from SNL Financial have been excluded from the analysis. Attachment AEB-12DR Page 1 of 1

ARIZONA PUBLIC SERVICE COMPANY FAIR VALUE RATE OF RETURN ARIZONA STAFF METHODOLOGY

Weighted Amount Amount ($M) Weighting ($M)

Original Cost Rate Base (OCRB) $ 8,873.0 50.00%$ 4,436.5 [1]

Replacement Cost New, Depreciated Rate Base (RCND) $ 15,747.5 50.00% 7,873.8 [2]

Fair Value Rate Base (FVRB) 12,310.3 [3]

Appreciation Above OCRB $ 3,437.3 [4]

FVRB / OCRB Multiple 1.39

Weighted Amount Cost Cost Capital ($M) Percent Rate Rate

Long-Term Debt 45.33%$ 4,022.1 32.67% 4.10% [5] 1.34%

Common Equity 54.67% 4,850.9 39.41% 10.15% [6] 4.00%

Capital Financing OCRB $ 8,873.0 72.08% 5.34%

Appreciation Above OCRB Not Recognized on Utility's Books 3,437.3 27.92% 1.00% 0.28%

Total $ 12,310.3 100.00% 5.62% [7]

[1] Direct Testimony of [2] Direct Testimony of [3] Equals [1] + [2] [4] Equals [3] − OCRB [5] Company Data [6] Equals Recommended ROE on OCRB [7] Capital Financing OCRB + Return on Fair Value Increment Attachment AEB-13DR Comparable Transactions Analysis Page 1 of 1 Calculation of Transaction Premium over Corporate Value

[1] [2] [3] [4] [5] [6] [7] Transaction Target Book Target Deal Premium to Implied APS Named Date Value Per Value Per Premium to Target Equity Corporate Valuation Range Target Buyer Announced Share Share Equity Ratio Value ($M) VVC Vectren Corporation CenterPoint Energy, Inc. 4/23/2018 $22.58 $72.00 218.80% 58.07% 127.06% $20,147 SCG SCANA Corporation Dominion Energy, Inc. 1/3/2018 $36.66 $53.71 46.48% 51.69% 24.03% $11,005 EDE Empire District Electric Company Algonquin Power & Utilities Corp. 2/9/2016 $18.32 $34.00 85.60% 50.45% 43.18% $12,705 TECO TECO Energy, Inc. Emera Incorporated 9/4/2015 $10.86 $27.55 153.67% 45.79% 70.37% $15,117 UIL UIL Holdings Corporation Iberdrola, S.A. 2/25/2015 $24.07 $52.75 119.20% 46.10% 54.95% $13,749 CNL Cleco Corporation Investor group 10/20/2014 $27.14 $55.37 103.99% 55.66% 57.88% $14,009 TEG Integrys Energy Group, Inc. Wisconsin Energy Corporation 6/23/2014 $42.17 $71.47 69.48% 56.42% 39.20% $12,351 POM Pepco Holdings, Inc. Exelon Corporation 4/30/2014 $17.28 $27.25 57.73% 52.88% 30.53% $11,582 UNS UNS Energy Corporation Fortis Inc. 12/11/2013 $22.75 $60.25 164.83% 61.58% 101.50% $17,879 NVE NV Energy, Inc. Berkshire Hathaway Inc. 5/29/2013 $15.05 $23.75 57.84% 46.99% 27.18% $11,285 CHG CH Energy Group, Inc. Fortis Inc. 2/21/2012 $33.72 $65.00 92.77% 55.96% 51.92% $13,479 CV Central Vermont Public Service Corporation Gaz Métro LP 6/23/2011 $20.59 $35.25 71.20% 61.29% 43.64% $12,745 CEG Constellation Energy Group Inc. Exelon Corporation 4/28/2011 $39.65 $38.59 -2.68% 65.30% -1.75% $8,718 DPL DPL Inc. AES Corporation 4/19/2011 $10.52 $30.00 185.18% 63.13% 116.90% $19,245 NST NSTAR Northeast Utilities 10/18/2010 $18.60 $40.28 116.51% 51.31% 59.79% $14,178 AYE Allegheny Energy, Inc. FirstEnergy Corporation 2/11/2010 $18.36 $27.65 50.62% 42.53% 21.53% $10,783 PSD Puget Energy, Inc. Investor Consortium 10/25/2007 $18.45 $30.00 62.63% 50.35% 31.54% $11,671 EAS Energy East Corporation Iberdrola, S.A. 6/25/2007 $20.21 $28.50 41.01% 48.37% 19.83% $10,633 ILA Aquila, Inc. Great Plains Energy, Inc. 2/6/2007 $3.49 $4.54 30.18% 48.89% 14.76% $10,182 DQE Duquesne Light Holdings, Inc Macquarie Consortium 7/5/2006 $8.41 $20.00 137.82% 46.83% 64.55% $14,600 GMP Green Mountain Power Corporation Gaz Métro LP 6/21/2006 $22.79 $35.00 53.60% 61.71% 33.08% $11,808 KSE KeySpan Corp. National Grid Group PLC 2/25/2006 $25.60 $42.00 64.05% 56.78% 36.37% $12,100 CIN Cinergy Corp. Duke Energy Corporation 5/8/2005 $22.71 $45.80 101.69% 55.23% 56.16% $13,856 RGS RGS Energy Group, Inc. Energy East Corporation 2/16/2001 $22.19 $39.50 78.04% 55.15% 43.04% $12,692 CIV Conectiv Potomac Electric Power Company 2/12/2001 $13.10 $25.00 90.91% 54.41% 49.46% $13,262 MonPow Montana Power Company NorthWestern Corporation 9/28/2000 $9.86 $10.50 6.53% 77.59% 5.06% $9,322 NMK Niagara Mohawk Holdings, Inc. National Grid Group PLC 9/4/2000 $16.90 $19.00 12.39% 43.41% 5.38% $9,350 GPUI GPU, Inc. FirstEnergy Corporation 8/8/2000 $27.01 $36.50 35.12% 54.35% 19.09% $10,567 IPL IPALCO Enterprises, Inc. AES Corporation 7/15/2000 $7.76 $25.00 222.03% 49.21% 109.27% $18,568 BGR Bangor Hydro-Electric Company NS Power Holdings Inc. 6/29/2000 $18.34 $26.50 44.46% 46.73% 20.77% $10,716 LGE LG&E Energy Corp. Powergen PLC 2/27/2000 $8.80 $24.85 182.35% 63.37% 115.56% $19,126 MEC MidAmerican Energy Holdings Company Investor group 10/24/1999 $15.59 $35.05 124.81% 20.58% 25.69% $11,152 UCM Unicom Corporation PECO Energy Company 9/22/1999 $23.51 $34.40 46.36% 49.01% 22.72% $10,889 FPC Florida Progress Corporation Carolina Power & Light Company 8/22/1999 $19.70 $54.00 174.08% 51.35% 89.39% $16,805 CMP CMP Group, Inc. Energy East Corporation 6/14/1999 $16.79 $29.50 75.72% 78.19% 59.20% $14,126 TNP TNP Enterprises, Inc. Investor Group 5/24/1999 $23.21 $44.00 89.59% 40.00% 35.84% $12,053 EUA Eastern Utilities Associates National Grid Group PLC 2/1/1999 $18.29 $31.46 72.05% 61.42% 44.25% $12,799 NES New England Electric System National Grid Group PLC 12/11/1998 $29.30 $53.75 83.48% 62.49% 52.16% $13,501 PPW PacifiCorp Scottish Power PLC 12/6/1998 $13.47 $25.13 86.56% 54.51% 47.19% $13,060 CES Commonwealth Energy System BEC Energy 12/5/1998 $20.75 $44.10 112.58% 54.79% 61.68% $14,346 CER CILCORP Inc AES Corporation 11/23/1998 $26.24 $65.00 147.71% 62.91% 92.92% $17,118 MEC MidAmerican Energy Holdings Company CalEnergy Company, Inc. 8/11/1998 $12.99 $27.15 109.07% 25.20% 27.49% $11,312 ORU Orange and Rockland Utilities, Inc. Consolidated Edison, Inc. 5/10/1998 $27.92 $58.50 109.52% 60.21% 65.94% $14,724 NVP Nevada Power Company Sierra Pacific Resources 4/29/1998 $16.33 $26.00 59.20% 52.88% 31.30% $11,651 KU KU Energy Corporation LG&E Energy Corporation 5/20/1997 $17.29 $40.71 135.48% 56.38% 76.39% $15,651

Min: -1.75% $8,718 Max: 127.06% $20,147 Mean: 49.42% $13,258 Median: 43.64% $12,745 Std. Dev.: 30.85% $2,737 Count: 45 45

Notes: APS OCRB $ 8,873.0 [1] Source: Bloomberg Professional Premium 43.64% [2] Source: Bloomberg Professional Implied FV $ 12,745 [3] Source: SEC Filings [4] Equals ([3] − [2]) / [2] [5] Source: Bloomberg Professional [6] Equals [4] x [5] [7] Equals APS's OCRB x (1 + [6]) Attachment AEB-14DR Page 1 of 3

Estimates of Fair Value Return Increment

Scenario 1: Real Risk Free Rate- Projected Estimate Step 1 Consumer Price Index (YoY % Change) [1] 2021-2025 2.10%

2026-2030 2.10% Average 2.10%

Consumer Price Index (All-Urban) [2] 2020 2.63 2030 3.31 Compound Annual Growth Rate 2.31%

GDP Chain-type Price Index (2009=1.000) [2] 2020 1.22 2030 1.54 Compound Annual Growth Rate 2.35%

Average Inflation Forecast 2.25%

Step 2 Nominal U.S. Treasury Bond Yield, 30-year [1] 2021-2025 3.60% 2026-2030 3.80% 3.70%

Real Risk-Free Rate [3] 1.41%

Notes: [1] Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14. [2] Energy Information Administration, Annual Energy Outlook 2019, Table 20 [3] Equals (3.70% + 1) / (1 + 2.25%) − 1 Attachment AEB-14DR Page 2 of 3

Estimates of Fair Value Return Increment

Scenario 2: Real Risk Free Rate- Projected Estimate

Nominal U.S. Treasury Bond Yield, 30-year [1] Projection period: 2021-2025 3.60%

Projection period: 2025-2029 3.80% 3.70%

180-day average yield on 30- Year U.S. Treasury Inflation Protected Securities [2] 0.98%

Real Risk-Free Rate [3] 2.72%

Notes: [1] Blue Chip Financial Forecasts, Vol. 38, No. 6, June 1, 2019, at 14 [2] https://www.treasury.gov/resource-center/data-chart-center/interest- [3] Equals [1]-[2] Attachment AEB-14DR Page 3 of 3

Estimates of Fair Value Return Increment

Scenario 3: Real Risk Free Rate-Normalized Risk-Free Rate

Nominal Risk Free Rate [1] 3.50%

180-day average yield on 30- Year U.S. Treasury Inflation Protected Securities [2] 0.98% Real Risk-Free Rate [3] 2.52%

Notes: [1] Duff and Phelps 2019 Valuation Handbook [2] https://www.treasury.gov/resource-center/data-chart- [3] Equals [1]-[2]

Attachment AEB-15DR

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