I&E Exhibit No. 1 Witness: Rachel Maurer PENNSYLVANIA PUBLIC UTILITY COMMISSION v. UNITED WATER PENNSYLVANIA INC. Docket No. R-2015-2462723 Exhibit to Accompany the Direct Testimony of Rachel Maurer Bureau of Investigation & Enforcement Concerning: Rate of Return Summary of Cost of Capital Type of Capital Ratio Cost Rate Weighted Cost Long term Debt 44.91% 5.28% 2.37% Common Equity 55.09% 8.77% 4.83% Total 100.00% 7.20% Ms. Ahern's Proxy Group of Non-Price-Regulated Companies Ticker Company Industry AMGN Amgen Biotechnology BAX Baxter Medical Supplies (Invasive) BMY Bristol-Myers Squibb Drug BRO Brown & Brown Financial Services (Diversified) DGX Quest Diagnostics Medical Services DVA DaVita Healthcare Medical Services HAE Haemonetics Corp Medical Supplies (Non-Invasive) KR The Kroger Co. Retail/Wholesale Food LANC Lancaster Colony Household Products MCY Mercury General Insurance (Property/Casualty) MKL Markel Corp Insurance (Property/Casualty) NLY Annaly Capital Real Estate Investment Trust NWBI Northwest Bancshares Thrift ROST Ross Stores Inc. Retail (Softlines) SHW Sherwin-Williams Retail Building Supply SJM Smucker (JM) Co. Food Processing SLGN Silgan Holdings Packaging & Container SRCL Stericycle Inc. Environmental TAP Molson Coors Beverage TECH Bio-Techne Corp. Biotechnology THG Hanover Insurance Group Insurance (Property/Casualty) WMK Weis Markets Retail/Wholesale Food NYSE Alleghany Corp Insurance (Property/Casualty) Source UWPA Exhibit No. PMA-1, Schedule 8. March 13, 2015 MEDICAL SERVICES INDUSTRY 799 With the calendar nearing the end of the first INDUSTRY TIMELINESS: 20 (of 97) quarter of 2015, the Medical Services Industry continues its clean bill of health. After several may even need to be eschewed in the name of profitabil- years of average to subpar returns, the Affordable ity, but these are all just signs of the new times. Care Act has woken up a number of sleeping UnitedHealth has played the game at an above- dragons, particularly hospital chains. With that, average level as well. Its position in the Dow got this the sector remains within our top-20 Industry stock trending in the right direction and then interna- Rankings. tional expansion (particularly to Brazil) made it even We have said for some time that those entities more of a market darling. Its leadership’s ability to that can get out ahead of the reform changes will weather the reform is unparalleled and is the primary distance themselves from the pack in terms of reason behind the fact that its stock has continually set gains and many of the stocks within our coverage new 52-week highs over the last several months. The are doing just that. Too, when jittery investors public exchanges are boosting enrollment figures for a have a flight to quality, there are now top-notch number of HMOs and these companies are churning names waiting for them in this space. United- profits out of these additional lives. Health Group is a member of the Dow 30 and has been on a steady incline since the winds of reform Some Distance In The Duopoly began to blow. Aetna is another industry bell- wether held in high regard. The duopoly of Laboratory Corporation of America and Still, healthcare in the United States remains in Quest Diagnostics have both used reform as a stepping an evolutionary stage, and more alterations to the stone to greater market share. Lesser entities have been way business is done are forthcoming. Those com- forced to put themselves up for sale and the large labs panies that have proven their acumen at adjusting have feasted on them. should continue to prosper, while those that have But, now that LabCorp has purchased Covance, it has struggled out of the gate are learning that the been outperforming its brethren in terms of stock price current landscape is not a sprint, but a marathon. momentum. The deal created a lab testing/drug devel- opment titan whose projections eclipse that of Quest. Hospitals Heat Up From an investment standpoint, the only real advantage that DGX has is that it pays a dividend, while LH has Revenues at a number of the hospitals under our chosen to go the acquisition route Volumes remain blase coverage are skyrocketing. Yes, a consolidation trend for both members of the duopoly, however, brighter days heading in to the onset of the Affordable Care Act played look to be ahead. a large role, but an uptick in the percentage of patients with medical coverage has also been a boon. The simple Conclusion fact that these operators are now laying out less money to care for uninsured patients was enough to spark a These are exciting times in the Medical Services rally in share prices when the early whispers of reform Industry. A prolonged period of blandness has given way began. True, some chains are having trouble getting the to significant investor enthusiasm. With that, a number top-line success to transfer into bottom-line gains, how- of selections on the following pages are timely for year ever, the investment community is being patient (the ahead performance, or a solid play for appreciation virtue) in that regard. Tenet Healthcare is a perfect aspirations three to five years hence. We do caution, example of such a scenario. however, that an equal amount of these stocks are For some time we have opined that hospitals will be viewed as fully valued at current prices. the largest benefactor from the ACA when all is said and We recommend, as always, that subscribers peruse done, and we stand by that belief. In fact, those that each of the following pages to get a better idea of which aggressively added to their bed counts in the investment options suit the needs they have in both the months/years heading up to the legislation will almost present day and for the stretch to 2018-2020. certainly reap the largest rewards when the dust of reform settles. Tenet and Universal Health Services are Erik M. Manning two entities that fit this bill. Enrollment figures for 2015 are off to a solid start and we see no reason why a Medical Services slowdown might occur. RELATIVE STRENGTH (Ratio of Industry to Value Line Comp.) 1200 HMOs Now Fans Of The ACA 960 At first blush, health maintenance organizations were 720 by no means enamored with the Obama Administra- tion’s ideas for altering healthcare in America. It was 600 perceived that they would foot a good portion of the new 480 taxes and fees that the industry was facing. Truth be told, many companies (see: Aetna) are operating at 360 significantly higher tax rates, but making big profits nonetheless. Management was able to see the changes 240 coming and invoke strategic price increases to help cushion the blow. Even more regulations are being put in place for 2015, so those with strong leadership will 120 continue to shine. Spending floors are going to be in 2009 2010 2011 2012 2013 2014 2015 place for individual accounts and some lines of business Index: June, 1967 = 100 © 2015 Value Line Publishing LLC. All rights reserved. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind. THE PUBLISHER IS NOT RESPONSIBLE FOR ANY ERRORS OR OMISSIONS HEREIN. This publication is strictly for subscriber’s own, non-commercial, internal use. No part To subscribe call 1-800-VALUELINE of it may be reproduced, resold, stored or transmitted in any printed, electronic or other form, or used for generating or marketing any printed or electronic publication, service or product. January 23, 2015 BEVERAGE INDUSTRY 1962 The Beverage Industry is comprised of both INDUSTRY TIMELINESS: 63 (of 97) non-alcoholic and alcoholic drink makers. Most of these equities trailed the broader market over the pressure on Keurig’s competitor SodaStream. Looking past three months, though a few issues were able ahead, deal activity will probably remain busy, as bev- to buck the trend. The companies in this sector erage companies try to grab market share in a very continue to face a tough operating environment competitive market. due to the uneven macroeconomic climate and some unfavorable business trends. Regardless, Long-term Consideration many of these companies remain profitable, New growth opportunities remain key to the top and thanks to ongoing strategic efforts and their abil- bottom lines given the mature nature of this industry. ity to find new growth opportunities. Like other businesses, beverages makers count on inno- vation for product differentiation, which has become Current Business Conditions increasingly important given the rise of small upstarts. This group will likely face its share of challenges in As discussed, ‘‘still’’ and premium offerings should re- the year ahead. Most notably, economic issues overseas main attractive markets for the foreseeable future. and currency headwinds will probably weigh on results Lastly, brewers will likely continue to search for ways to for some of the more established names in this sector. tap the popularity of craft beer in the years ahead. Specifically, companies with substantial business expo- sure to Europe and South America may experience lower Beverage companies are searching for high-growth revenues and earnings in the near term. Lean consumer markets in an effort to increase their volumes. Accord- spending in the United States is also worth noting. ingly, they remain focused on building their presence in Consequently, results in the U.S. may be uninspiring for emerging markets, which offers attractive prospects some of the companies in this group this year. Though over the long term. Indeed, developing regions are an near-term challenges will hinder top-line advances for important opportunity, given the growing populations some of the larger players, most of these companies will and rising income levels in these markets.