20200930Walker Direct.pdf

Michael C. Creamer (lSB No. 4030)
Preston N. Carter (lSB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise, lD 83702
Telephone: [phone]
Facsimile: (208) 388-1 300
m cc@qivenspu rslev.com
[e-mail]
Aftorneys for SUEZ Water ldaho lnc.
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF SUEZ WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE
IN THE STATE OF IDAHO
Case No. SUZ-W-20-02
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
D]RECT TESTIMONY OF HAROLD WALKER, III
SEPTEMBER 2O2O
SUEZ WATER IDAHO INC.
BOISE, IDAHO
RATE OF RETURN
DIRECT TESTIMONY
OF
HAROLD WALKER, II!
AUGUST 2O2O
Prepared by:
GANNETT FLEMING
VALUATION AND RATE CONSULTANTS, LLC
ffi
Valley Forge, Pennsylvania
TABLE OF CONTENTS
INTRODUCTION.....1
SUMMARY OF RECOMMENDATION .........1
PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN .3
!NVESTMENT RISK........
DESCRIPTION OF SWID
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THE INDUSTRY 7
COMPARABLE GROUP ........10
CAPITAL STRUCTURE
EMBEDDED COST RATE
FINANCIAL ANALYSIS 17
RISK ANALYS]S 21
CAPITAL COST RATES 30
COMMON EQUITY COST RATE ESTIMATE 36
DISCOUNTED CASH FLOW ...38
CAPITAL ASSET PRICING MODEL ..."...' 51
RISK PREMIUM.55
SUMMARY OF COMMON EQUITY COST RATE....................61
OVERALL RATE OF RETURN RECOMMENDATION 63
APPENDIX A
OVERALL RATE OF RETURN TERMS, ABBREVIATIONS AND ACRONYMS
Terms, Abbreviations and Acronyms Defined
CAPM Capital Asset Pricing Model
Commission Haho Public Utilities Commission
Company SUEZWater ldaho lnc.
Comparable Companies Water Group Followed by Analysts
Comparable Group Water Group Followed by Analysts
Cost of Capital lnlestor-req ui red cost rate
DCF Discounted Cash Flow
DPS Dividend per share
EPA U.S. Envi ronmental Protection AqencVs
EPS Eamings pershare
FinancialRisk Leverage
GICS Global lnd ustry Classifi cation Swtem
GO General Obligation Bonds
tou lnvestor Owned Uti lities
Leverage Fixed cost capital
Long-term U.S. TreasurySecurities Base Risk-Free Rate
M/B Maket-to-Book Ratios
Moody's Moody's lnrestors SeMce
NARUC National Association of Regulatory Uti lity
Commissioners
Non€ystematic Risk Company€pecific Risk
PUC ldaho Public Utilities Commission
ROE Retum on Equity
RP Risk Premium
S&P Standard & Poo/s
SIC Standard lndustrial Classifi cation
SWID SUEZWater Haho lnc.
SWR SUEZ Water Resources lnc.
Systematic Risk Non-Diversifiable Risk
Value Line Value Line lnrestment Survey
Water Group Water Group Followed byAnalrrsts
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INTRODUCTION
O. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Harold Walker, lll. My business mailing address is 1010 Adams
Avenue, Audubon, Pennsylvania 1 9403.
O. BY WHOM ARE YOU EMPLOYED AND !N WHAT CAPACITY?
A. I am employed by Gannett Fleming Valuation and Rate Consultants, LLC as
Manager, Financial Studies.
O. WHAT IS YOUR EDUCATIONAL BACKGROUND AND EMPLOYMENT
EXPERIENCE?
A. My educational background, business experience and qualifications are provided
in Appendix A.
SCOPE OF TESTIMONY
O. WHAT tS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to recommend an appropriate overal! rate of retum
that SUEZ Water ldaho lnc. ("SW|D" or the "Company") should be afforded an
opportunity to earn on its water service rate base. My testimony is supported by
Exhibit No.1, which is composed of 19 Schedules.
SUMMARY OF RECOMMENDATION
A. WHAT IS YOUR RECOMMENDED COST OF EQUITY?
A. My recommendation is that SWID be permitted an overall rate of return of 7.460/o,
including a 1O.2Oo/o cost of common equity, based upon the Company's capital
structure at August 31, 2020. My recommended cost of common equity reflects
SWID's unique risk characteristics.
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HOW DlD YOU DETERMINE YOUR RECOMMENDED COMMON EQUITY
COST RATE?
I used several models to help me in formulating my recommended common equity
cost rate including Discounted Cash Flow ("DCF"), Capital Asset Pricing Model
("CAPM") and Risk Premium ('RP").
IS IT IMPORTANT TO USE MORE THAN ONE MARKET MODEL?
Yes. lt is necessary to estimate @mmon equity cost rates using a number of
different models. At any given time, a particular model may understate or
overstate the cost of equity. While any single investor may rely solely upon one
model, different investors rely on different models and many investors use multiple
models. Therefore, because the price of common stock reflects a number of
valuation models, it is appropriate to estimate the market-required @mmon equity
cost rate by applying a broad range of analytical models.
PLEASE SUMMARIZE YOUR COMMON EQUTTY COST RATE
RECOMMENDATION.
There is no market data concerning SWID's shares of common stock because
SWID shares of common stock are not publicly traded. Accordingly, due to the
lack of market data concerning the SWID's equity, ! used a comparable group of
publicly traded companies to estimate the common equity cost rate. Based upon
the results of my entire analysis, I conclude SWID's current common equity cost
rate is at least 10.20o/o. The current range of common equity cost for SWID is
10.00% (DCF), 10.60% (CAPM), and 10.00% (RP). Value Line Investment
Survey ("Value Line") is relied upon by many investors and is the only investment
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advisory service of which I am aware that projects eamed return on equity. As a
check on the reasonableness of my common equity cost rate recommendation, I
reviewed Value Line's projected returns on common equity for comparable utilities.
Value Line's projected earned returns on common equity for my comparable
utilities range from 9.6% to 14.4o/o. The range of the projected returns suggests
that my recommendation that SWID be permitted an opportunity to earn 10.20% is
reasonable, if not conservative.
PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN
A. WHAT ARE THE PRINCIPLES GUIDING FAIR RATES OF RETURN IN THE
CONTEXT OF RATE REGULATION?
A. ln a capitalistic or free market system, competition determines the price for all
goods and services. Utilities are permitted to operate as monopolies or near
monopolies as a tradeoff for a ceiling on the price of service because: (1) the
services provided by utilities are considered necessities by society; and (2) capital-
intensive and long-lived facilities are necessary to provide utility service.
Generally, utilities are required to serve all customers in their service territory at
reasonable rates determined by regulators. As a result, regulators act as a
substitute for a competitive-free market system when they authorize prices for
utility service.
Although utilities operate in varying degrees as regulated monopolies, they
must compete with govemmental bodies, non-regulated industries, and other
utilities for labor, materials, and capital. Capital is provided by investors who seek
the highest return commensurate with the perceived level of risk; the greater the
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perceived risk, the higher the required return rate. ln order for utilities to attract
the capital required to provide service, a fair rate of return should equal an investor-
required, market-determined rate of return.
O. WHAT CONSTITUTES A FAIR RATE OF RETURN?
A. Two noted Supreme Court cases define the benchmarks of a fair rate of return.
ln Bluefieldl , a fair rate of return is defined as: (1) equal to the retum on
investments in other business undertakings with the same level of risks (the
comparable earnings standard); (2) sufficient to assure confidence in the financial
soundness of a utility (the financial integrity standard); (3) adequate to permit a
public utility to maintain and support its credit, enabling the utility to raise or attract
additional capital necessary to provide reliable service (the capital attraction
standard). The second case, Hope2, determined a fair rate of return to be based
upon guidelines found in Bluefield as well as stating that: (1) allowed revenues
must cover capital costs including service on debt and dividends on stock; and (2)
the Commission was not bound to use any single formula or combination of
formulae in determining rates. Utilities are not entitled to a guaranteed return.
However, the regulatory-determined price for service must allow the utility a fair
opportunity to recover all costs associated with providing the service, including a
fair rate of return.
lBluefield WaterWorks & lmorovement Comoanv v. P.S.C. of West Viroinia, 262 U.S. 679 (1923).
2Federal Power Commis , 320 U.S. 591 (1944).
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INVESTMENT RISK
PREVIOUSLY, YOU REFERRED TO RISK. PLEASE DEFINE THE TERM
RISK.
Risk is the uncertainty associated with a particular action; the greater the
uncertainty of a particular outcome, the greater the risk. lnvestors who invest in
risky assets expose themselves to investment risk particular to that investment.
Investment risk is the sum of business risk and financia! risk. Business risk is the
risk inherent in the operations of a business. Assuming that a Company is
financed with 100% @mmon equity, business risk includes all operating factors
that affect the probability of receiving expected future income such as: sales
volatility, management actions, availability of product substitutes, technological
obsolescence, regulation, raw materials, labor, size and growth of the market
served, diversity of the customer base, economic activity of the area seryed, and
other similar factors.
WHAT IS FINANCIAL R!SK?
Financial risk reflects the manner in which an enterprise is financed. Financial
risk arises from the use of fixed cost capital (leverage) such as debt and/or
preferred stock, because of the contractual obligations associated with the use of
such capital. Because the fixed contractual obligations must be serviced before
eamings are available for @mmon stockholders, the introduction of leverage
increases the potentia! volatility of the earnings available for common shareholders
and therefore increases common shareholder risks.
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Although financial risk and business risk are separate and distinct, they are
interrelated. ln order for a company to maintiain a given level of investment risk,
business risk and financial risk should complement one another to the extent
possible. For example, two firms may have similar investment risks while having
different levels of business risk, if the business risk differences are compensated
for by using more or less leverage (financial risk) thereby resulting in similar
investment risk.
DESCRIPTION OF SWID
PLEASE GIVE A BRIEF DESCRIPTION OF THE COMPANY.
SWID is a private or investor-owned company. SWID is a regulated public utility
that provides water service to about 97,000 (12131119) customers located in their
franchise territories in Boise, parts of Eagle, and unincorporated areas of Ada
County, ldaho. The price of service of SWID is regulated by the ldaho Public
Utilities Commission ("Commission" or "PUC").
SWID is a wholly-owned subsidiary of SUEZ Water Resources lnc.
('SWR"). SWR is the sole source of SWID's external capital. SWR owns and
provides services to water and wastewater utility companies which are located
throughout the United States (e.9., SWID ). SWR was founded in 1869 and is
based in Paramus, New Jersey. SWR is a subsidiary of SUEZ SA.
SUEZ SA is a France-based holding company engaged predominantly in
the area of environmental services, transforming waste into resources. lt provides
services in the areas of water and waste, including drinking water and wastewater
treatment services and engineering, waste collection and recovery. lt operates on
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three business lines: Water Europe;Waste Europe, and lnternational (The United
States of America, Australia, and Africa).
THE INDUSTRY
PLEASE GIVE A BRIEF OVERVIEW OF THE INDUSTRY IN WHICH THE
COMPANY OPERATES.
SWID operates in the water supply industry. The water supply industry has a
Standard lndustrial Classification ("SIC") code of 4941, has water utilities, and
includes establishments primarily engaged in distributing water for sale for
residential, commercial, and industrial uses. Government controlled
establishments such as municipalities, public service districts and other local
governmenta! entities dominate the industry. Private companies or investor
owned utilities ('lOU") are active in the construction and improvement of water
supply facilities and infrastructure. There are currently 11,014 U.S. Businesses
with a SIC code of 4941.
A comparative industry to the water supply industry is the wastewater
supply industry. The wastewater utility industry has a Standard lndustrial
Classification ("SlC") code of 4952 (Sewerage Systems), has sewer utilities, and
includes establishments primarily engaged in the collection and disposalof wastes
conducted through a sewer system, including such treatment processes as may
be provided. There are currently 2,154 U.S. Businesses with a SIC code of 4952.
The water supply industry is the most fragmented of the major utility
industries with more than 53,000 community water systems in the U.S. (83% of
which serve less than 3,300 customers). The nation's water systems range in
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size from large municipally owned systems, such as the New York City water
system that serves approximately 9 million people, to sma!! systems, where a few
customers share a common well.
According to the U.S. Environmental Protection Agency's ("EPA") most
recent survey of publicly-owned wastewater treatment facilities in 2008, there are
approximately 15,000 such facilities in the nation, serving approximately 74o/o of
the U,S. population. Eighty percent of domestic wastewater systems are
govemment owned rather than lOUs. Currently, there are no wastewater utility
companies that have actively traded stock.3
An estimated 14o/o of all water supplies are managed or owned by lOUs.
lOUs consist of companies with common stock that is either actively traded or
inactively traded, as well as companies that are closely held, or not publicly traded.
Currently, there are only about nine investor owned water utility companies with
publicly traded stock in the U.S.
The water utility industry's and wastewater utility industry's increased
compliance with state and federal water purity levels and large infrastructure
replacements are driving consolidation of the wastewater utility and water utility
industries. Because many wastewater utility and water utility operations do not
have the means to finance the significant capital expenditures needed to comply
with these requirements, many have been selling their operations to larger,
financial ly stronger operations.
sMany of the publicly traded water utility stocks also own some wastewater utilities but there are no
publicly traded utility stocks which are comprised solely of wastewater utilities.
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The larger lOUs have been following an aggressive acquisition program to
expand their operations by acquiring smaller wastewater and water systems.
Generally, they enter a new market by acquiring one or several wastewater or
water utilities. After their initial entry into a new market, the larger investor-owned
water utility companies continually seek to expand their market share and services
through the acquisition of wastewater and water utility businesses and operations
that can be integrated with their existing operations. Such acquisitions may allow
a company to expand market share and increase asset utilization by eliminating
duplicate management, administrative, and operationalfunctions. Acquisitions of
small, independent utilities can often add earning assets without necessarily
incurring the costs associated with the SDWA if such acquisitions are contiguous
to the potential purchaser.
ln summary, the result of increased capital spending, to meet the SDWA
and CWA requirementsa and replace the aging infrastructure of many systems,
has moved the wastewater and water industries toward consolidation. Moreover,
Federa! and State regulations and controls conceming water quality are still in the
process of being developed and it is not possible to predict the scope or the
enforceability of regulations or standards which may be established in the future,
aThe SDWA, or Safe Drinking Water Act, is the principal federal law in the United States intended to
ensure safe drinking water for the public. Pursuant to the act, the EPA is required to set standards for
drinking water qualiiy and oversee all states, localities, and water suppliers who implement these
standaids. The CWA, or Clean Water Act, is the primary federal law in the United States governing
water pollution. The CWA's objective is to restore and maintain the chemical, physical, and biological
integriiy of the nation's waters by preventing point and nonpoint pollution sources, providing assistance to
publicly owned treatment works for the improvement of wastewater treatment, and maintaining the
integrity of wetlands.
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or the cost and effect of existing and potential regulations and legislation upon
SWID. However, as a smaller water system, SWID faces the cost of compliance
with less financial resources when compared to larger IOU water utilities.
COMPARABLE GROUP
HOW DO YOU ESTIMATE THE GOST OF COMMON EQUITY FOR SWD?
SWID's common stock is not publicly traded. Accordingly, I employed a
comparable group of utility companies with actively traded stock, to determine a
market-required cost rate of common equity capital for SWID. Since no
companies are perfectly identical to SWID, it is reasonable to determine the
market-required cost rate for a comparable group of utility companies and adjust,
to the extent necessary, for investment risk differences between SWID and the
comparable group.
HOW DID YOU SELECT THE COMPARABLE GROUP USED TO DETERMINE
THE COST OF COMMON EQUITY FOR SWID?
I selected a comparable group of water utilities to determine the cost of common
equity for SWID considering security analysts' coverage. Unlike the other utility
industries, only a portion of the IOU water companies with publicly traded stock in
the U.S. are followed by security analysts. Coverage by security analysts is
important when determining a market required cost of common equity.
Accordingly, security analysts' coverage was considered when selecting my
comparable group. I selected my water utility comparable group, Water Group
Followed by Analysts ("Water Group"), based upon a general criteria that includes:
(1) all U.S. water utilities that are covered by several security analysts as measured
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by the existence of several sources of published projected five-year growth rates
in eamings per share ("EPS"); (2) with a Standard lndustrial Classification (SlC) of
4941 (i.e., Water Supply Facilities and lnfrastructure); (3) with a North American
lndustry Classification System (NAICS) of 221310 (i.e., Water Supply and lrrigation
Systems); (4) are not the announced subject of an acquisition; (5) currently pay a
common dividend and have not reduced their common dividend within the past
four years; (6) have market value of common stock, the product of multiplying the
closing stock price by the number of common shares outstanding, greater than
$200.0 million; and (7) have a total enterprise, the sum of market value, preferred
stock and total debt, greater than $450.0 million'
It should be noted that the Water Group is also referred to as the
Comparable Group and/or the Comparable Companies' 5 The names of the
utilities that comprise the Comparable Group and their bond or credit ratings are
listed in Table 1.
Bond and Credit Ratings for
The Water Group Followed bv Analvsts
S&P Credit Ratinq
Water Group Followed bv Analvsts
American States Water Co
American Water Works Co Inc
California Water Service GP *
Essential Utilities, lnc.
Middlesex Water Co
SJW Corp
York Water Co
5All of the Comparable Companies also provide some wastewater service.
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Bond and Credit Ratings for
The Water Group Followed bv Analvsts
Average A
*- The A+ bond rating is that for California Water Service, lnc.
Table 1
O. WHY DID YOU INCLUDE NOT BEING THE SUBJECT OF AN ACQUISITTON AS
A CRITERIA FOR THE WATER GROUP?
A. To begin with, there are only about nine investor owned water utility companies
with publicly traded stock in the U.S., and some of these companies are very small.
As stated previously, the IOU water industry receives only limited exposure on Wall
Street.
Additionally, the merger activity in the water industry can result in abnormal
or "tainted" stock prices in terms of a DCF analysis because premiums are typically
paid in corporate acquisitions. That is, when a tender offer is made for the
purchase of all the outstanding stock of a company, the amount of that offer usually
exceeds the price at which the stock was previously traded in the market. These
large premiums are often reflected in the prices of other water utilities that are not
currently the announced subject of an acquisition.6
oMultiple publications mention these impacts including Research Maoazine - April 2010, Barron's - March2001, Utilitv Business - June 2002, and value Line lnvestment Survev - April 2013.
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CAPITAL STRUCTURE
O. WHAT IS REQUIRED TO DEVELOP AN OVERALL RATE OF RETURN?
A. The first step in developing an overall rate of return is the selection of capital
structure ratios to be employed. Next, the cost rate for each capita! component is
determined. The overall rate of return is the product of weighting each capita!
component by its respective capital cost rate. This procedure results in SWID's
overall rate of return being weighted proportionately to the amount of capital and
cost of capital of each type of capital.
O. DOES SWID DIRECTLY RAISE OR ISSUE ITS OWN DEBT CAPITAL?
A. No, prospectively SWID will not raise its own capital; rather SWR will be the sole
source of SWID's external caPital.
O. WHAT CAPITAL STRUCTURE RATIOS ARE APPROPRIATE TO BE USED TO
DEVELOP SWID'S OVERALL RATE OF RETURN?
A. Consistent with settled rate setting principles, I believe it is necessary to evaluate
SWID's current cost of capital based on SWR's August 31,2020 capital structure,
which includes 45.93o/o debt and 54.07o/o common equity as reflected in Schedule
1. These ratios synchronize capitalization with rate base.
O. IS THERE A SET OF REGULATORY AND FINANCIAL PRINCIPLES USED IN
DECIDING THE APPROPRIATE CAPITAL STRUCTURE TO USE FOR COST
OF CAPITAL PURPOSES?
A. Yes. There is a general set of regulatory and financial principles used in deciding
the capital structure issue for cost of capital purposes that are consistent with both
regulatory and financial theories:
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1) lt is generally preferable to use a utility's actual capital structure in
developing its rate of return. However, in deciding whether a departure
from this general preference is wananted in a particular case, it is
appropriate to first look to the issue of whether the utility is a financially
independent entity. ln determining whether a utility is a financially
independent entity or self-financing, it is important to look to whether the
utility:
o has its own bond rating;
o provides its own debt financing; and
o debt financing is not guaranteed by a parent company.
2) When a utility issues its own debt that is not guaranteed by the pubtic or
private parent and has its own bond rating, regulatory and financial
principles indicate to use a utility's own capital structure, unless the utility's
capital structure is not representative of the utility's risk profile or where use
of the actual capital structure would create atypical results. Regulatory and
financial principles involve determining whether the actual capital structure
is atypical when compared with the capital structures approved by the
Commission for other utilities that operate in the same industry (r.e., water
utility, gas distribution utility, etc.), as well as those of the proxy utility
companies that operate in the same industry.
3) For utility subsidiarieswithout publicly traded stock, the manner in which the
utility obtains its debt financing determines whether it does its own
financing. Public Utility Commissions generally determine if a subsidiary
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has financial, operational, and managerial relationships with its parent
entity. However, having such ties typically has not led to use of a parent's
capital structure for regulatory purposes, unless the subsidiary utility issues
no long-term debt, issues long-term debt only to its parent, or issues long-
term debt to outside investors only with the guarantee of its parent.
4) lf a utility does not provide its own financing, Public Utility Commissions
often look to another entity. Generally, Public Utility Commissions use the
actual capital structure of the entity that does the financing for the regulated
utility as long as it results in just and reasonable rates. This generally means
using a parent company.
S) lf the parent's capital structure is used, because it finances the operation of
the utility, regulatory and financial principles require adjustments in the
utility's allowed rate of return on equity to adiust for risk differences, if any,
between the parent and the regulated subsidiary. lf, however, the
financing entity's capital structure is inconsistent relative to the capital
structures of the publiclv-traded proxv companies used in the cost of equity
analysis and capital structures approved for other utilities that operate in the
same industry (r.e., water utility, gas distribution utility, etc.), Public Utility
Commissions employ a hypothetical capital structure.
Once the cost of equity for the proxy companies is determined, thereby
establishing a range of reasonable returns, Public Utility Commissions should
determine where to set the utility's return in that range based upon how the utility's
risk compares with that of other utilities that operate in the same industry (r.e.,
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water utility, gas distribution utility, etc.). The risk analysis begins with the
assumption that the utility generally falls within a broad range of average risk,
absent highly unusual circumstances that indicate an inconsistently high or low risk
as compared to other utilities that operate in the same industry (r.e., water utility,
gas distribution utility, etc.). Generally, financial risk is a function of the amount
of debt in an entity's capital structure used for cost of capital purposes. When
there is more debt, there is more risk.
HOW DOES YOUR RECOMMENDED CAPITAL STRUCTURE COMPARE WITH
RATIOS EMPLOYED BY OTHER INVESTOR.OWNED COMPANIES?
The capital structure I recommend for SWID reflects a @mmon equity ratio of
54.1o/o which falls within the range of the ratios employed by other investor-owned
water companies as shown on pages 1 and 2 of Schedule 2. A comparison of my
recommendation for SWID's capital structure ratios to those recently employed
and forecasted to be employed by the Comparison Group is shown in Table 2.
Comoarison of Caoital Structure Ratios
SWDI Water Group
Debt
Preferred Stock
Common Equity
At
8t30t2020
45.9
0.0
il.1
100J)
At
3t31t2020
50.7
0.0
49.3
10oo
Projected
2024
43.7
0.0
56.3
1000
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SWID's rate making capitalstructure ratios are reasonable based upon the
above information.
EMBEDDED COST RATE
WHAT EMBEDDED COST RATES DO YOU RECOMMEND BE USED TO
CALCULATE SWID'S OVERALL RATE OF RETURN?
Consistent with my recommended capitals structure ratios I recommend using
SWR's embedded debt cost rate of 4.23o/o for SWID as reflected in Schedule 1.
This embedded debt cost rate ol 4.23o/o is detailed on the Company's Exhibit No.
2, Schedule 2. The determination of an embedded cost rate is a relatively simple
arithmetic exercise because a company has contracted for this capital for a specific
period of time and at a specific cost, including issuance expenses and coupon rate.
FINANCIAL ANALYSIS
HAVE YOU REVIEWED HISTORICAL FINANCIAL INFORMATION OF SWID AS
PART OF YOUR ANALYSIS?
Yes. On page 1 of Schedule 3, I developed a five-year analysis, ending in 2019,
detailing various financial ratios for SWID. On Schedule 4, I performed a similar
five-year analysis for the Water Group. Schedule 5 reveals the results of
operations for a large broad-based group of utilities known as the Standard &
Poor's ('S&P'), Utilities for the five years ending 2019. This information is useful
in determining relative risk differences between different types of utilities.
Comparing SWID, the Comparable Group and the S&P Utilities'coverage
of fixed charges and the various cash flow coverage proves that the Comparable
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Group has experienced a higher level of coverage than the S&P Utilities.
Reviewing SWID's various cash flow coverages shows SWID has had similar but
higher levels of coverage than the Comparable Group.
WHAT DO YOU CONCLUDE FROM THE COMPARISON OF ALL THE
INFORMATION SHOWN ON SCHEDULES 3 THROUGH 5?
Taken together, these comparisons show that SWID is exposed to risk that is
similar in nature but greater in degree compared with the Comparable Groups.
This is evident in particular when one considers the size and diversification of
SWID, or lack thereof, as compared to the Comparable Companies. Moreover,
the evidence from the various financial ratios show SWID's risks as being similar
to the Comparable Companies' but less than the Iarger S&P Utilities.
Prospectively, SWID's future construction expenditures will place downward
pressure on SWID's financial ratios as measured by interest coverage and cash
generation.
WHAT INFORMATION IS SHOWN ON SCHEDULE 6?
Schedule 6 lists the names, issuer credit ratings, common stock rankings, betas
and market values of the companies contiained in the Comparable Group and the
S&P Utilities. As is evident from the information shown on Table 3, the
Comparable Group and the S&P Utilities are similar to each other in risk.
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S&P
lssuer Credit
Ratinq
S&P
Quality
Rankinq
Value
Line
Beta
Recent
Market
Value
(Miil $)
Market
Quartile
Name
Water Group A Above Average (A-) 0.77 2,283.225 Low-Cap
S&P Utilities BBB+Average (B+)0.89 30,269.305 Large-Cap
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The Water Group's average issuer credit ratings and common stock
rankings are higher than the S&P Utilities. The average beta of the Comparable
Group, 0.77, is less than the average beta of the S&P Utilities, 0.89. Beta is a
measure of volatility or market risk; the higher the betia, the higher the market risk.
The market values provide an indication of the relative size of each group. As a
generalization, the Smaller the average Sizes of a group, the greater the risk.
Page 2 of Schedule 7 shows that SWID has generally experienced the
lowest return on equity ('ROE') when compared to the Comparable Companies.
Further, SWID's dividend payout ratio is lower than the Comparable Companies'
dividend payout ratio.
S&P, the predominant bond rating agency, considers profit to be a
fundamental determinant of credit protection. S&P states that a firm's profit level:
Whether generated by the regulated or deregulated side of the
business, profitability is critical for utilities because of the need to
fund investment-generating capacity, maintain access to external
debt and equity capital, and make acquisitions. Profit potential and
stability is a critical determinant of credit protection. A company that
generates higher operating margins and returns on capital also has
a greater ability to fund growth internally, attract capita! externally,
and withstand business adversity. Earnings power ultimately attests
to the value of the company's assets, as well. ln fact, a company's
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profit performance offers a litmus test of its fundamental health and
competitive position.
Accordingly, the conclusions about profitability should confirm the
assessment of business risk, including the degree of advantage
provided by the regulatory environment.T
O. WHAT INFORMATION IS SHOWN ON SCHEDULE 7?
A. Schedule 7 reveals the capital intensity and capital recovery for SWID, the
Comparable Companies and the S&P Utilities. Based upon the 2019 capital
intensity ratio of plant to revenues, SWID ($10.72) is more capital intensive as
compared to the Water Group ($6.2t ) and more than the S&P Utilities ($4.0S1.
From a purely financial point of view, based on current accounting practices, the
rate of capital recovery or depreciation rate is an indication of risk because it
represents cash flow and the return of an investment. SWID's average rate of
capital recovery is lower than the Comparable Group's, suggesting more risk.
The retum on equity and depreciation expense provides the margin for
coverage of construction expenditures. For a utility company, depreciation
expense is the single largest generator of cash flow. From a financia! analyst's
point of view, cash flow is the life blood of a utility company. Without it, a utility
cannot access capital markets, it cannot construct plant, and therefore, it cannot
provide service to its customers.
TStandard & Poor's Ratings Services, Criteria, lJtilities: Key Credit Factors: Buslness And Financial Rlsks tn The
lnvestor-Owned Utilities lndustry, Nov. 26, 2008, pgs.8-9.
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RISK ANALYSIS
PLEASE EXPLAIN THE INFORMATION SHOWN ON SCHEDULE 8.
Schedule 8 details the size difference between SWID and the Comparable Group.
Company size is an indicator of business risk and is summarized in Table 4.
Number of Times Larqer Than the SWID
Water Group
Capitalization
Revenues
Number of Customers
20.3x
19.5x
8.6x
Table 4
As shown in Table 4, SWID is much smaller than the Water Group. The size of
a company affects risk. A smaller company requires the employment of
proportionately less financial leverage (r.e., debt and preferred capital) than a
Iarger company to balance out investment risk. lf investment risk is not balanced
out, then a higher cost of capital is required.
WHY IS SIZE SIGNIFICANT TO YOUR ANALYSIS?
The size of a company can be likened to ships on the ocean, since a large ship
has a much better chance of weathering a storm than a small ship. The loss of a
large customer will impact a small company much more than a large company
because a large customer of a small company usually accounts for a larger
percentage of the small company's sales.
Moreover, a larger company is likely to have a more diverse geographic
operation than a smaller company, which enables it to sustain earnings fluctuations
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caused by abnorma! weather in one portion of its service territory. A larger
company operating in more than one regulatory jurisdiction enjoys "regulatory
diversification" which makes it less susceptible to adverse regulatory
developments or eminent domain claims in any single jurisdiction. Further, a
larger company with a more diverse customer base is less susceptible to
downturns associated with regional economic conditions than a small company.
For example, on average, the average company in the water Group provides
water/sewer service in multiple states for about 835,000 customers. The average
population of the communities served by the average company in the Water Group
is about 3.3 million people. These wide-ranging operations provide the Water
Group substantial geographic, economic, regulatory, weather and customer
diversification. SWID provides regulated water service to about 97,000
customers (2019). The concentration of SWID's business in southwestern ldaho
makes it very susceptible to any adverse development in local regulatory,
economic, demographic, competitive and weather conditions.
Further, S&P, a major credit rating agency, recognizes the importance that
diversification and size play in credit ratings. S&P believes some of the critical
factors include: regional and cross-border market diversification (mitigates
economic, demographic, and political risk concentration); customer diversification;
and regulatory regime diversification.s
sStandard & Poor's, Coroorate Ratinos Criteria, Utilities: Key Credit Factors: Business and Financial Risks
in The lnvestor-Owned Utilities lndustry, Nov.26, 2008.
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The size of a company can be a barrier to fluid access to capita! markets
(i.e., liquidity risk). lnvestors require compensation for the lack of marketability
and liquidity of their investments. lf no compensation is provided, then investors,
or at least sophisticated investors, shy away.
O. IS THE IMPACT OF SIZE COMMONLY RECOGNIZED?
A. Yes, the NationalAssociation of Regulatory Utility Commissioners ("NARUC"), as
well as most good financial texts, recognizes that size affects relative business
risk. Liquidity risk and the existence of the small firm effect relating to business
risk of small firms are well-documented in financial literature e Investors'
expectations reflect the highly-publicized existence of the small firm effect. For
example, many mutual funds classify their investment strategy as small
capitalization in an attempt to profit from the existence of the small firm effect.
As previously discussed, S&P recognizes that size plays a role in credit
ratings.
Standard & Poor's has no minimum size criterion for any given
rating level. However, size turns out to be significantly
correlated to ratings. The reason: size often provides a
measure of diversification, and/or affects competitive position.. Small companies are, almost by definition, more
concentrated in terms of product, number of customers, orgeography. ln effect, they lack some elements of
diversification that can benefit larger companies. To the
extent that markets and regional economies change, a
broader scope of business affords protection. This
consideration is balanced against the performance and
prospects of a given business. . . . ln addition, lack of financial
flexibility is usually an important negative factor in the case of
eBanz, Rolf, W. 'The Relationship Between Return and Market Value of Common Stocks," Journal of
Financial Economics, 9:3-18 1981. For subsequent studies see Fama and French, etc.
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very small companies. Adverse developments that would
simply be a setback for companies with greater resources
could spell the end for companies with limited access to
funds.lo
As shown on Schedule 9, size plays a role in the composition of investors, and
hence liquidity. ln 2019, about 115o/o of the Water Group's shares traded while
the Iarger companies comprising the S&P Utilities had a much higher trading
volume ol 1630/o. lnsidersll hold more than seven times more, as a percent to
total, of the Water Group's shares than the S&P Utilities. Currently, only about
68% of the Water Group shares are held by institutions 12 while the larger
companies comprising the S&P Utilities had much higher institutional holdings of
80o/o. Due to smal! size and less interest by financial institutions, fewer security
analysts follow the Comparable Group and none follow SWID.
The lack of trading activity may affect the cost of equity estimates for small
entities such as SWID and the Water Group. When stock prices do not change
because of inactive trading activity, estimates of dividend yield for use in a dividend
cash flow model and beta estimates for use in the capital asset pricing model are
affected. ln a stock market that is generally up, the beta estimates for the
Comparable Companies may be understated due to thin trading.
loStandard & Poor's, Corporate Ratinos Criteria 2006i p9.22.
11An insider is a director or an officer who has a policy-making role or a person who is directly or indirectly
the beneficial owner of more than 10% of a certain company's stock.
l2lnstitutional holders are those investment managers having a fair market value of equity assets under
management of $100 million or more. Certain banks, insurance companies, investment advisers,
investment companies, foundations and pension funds are included in this category.
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o.DO SWID AND THE COMPARABLE COMPANIES HAVE SIMILAR
OPERATING RISKS?
Yes. From an operations standpoint, SWID and the Comparable Companies
have similar risks and are indistinguishable. Both are required to meet Clean
Water Acts and Safe Drinking Water Act requirements and are also required to
provide safe and reliable services to their customers and comply with Commission
regulations.
IS THERE ANY SINGLE MEASURE THAT BEST SHOWS INVESTMENT RISK
FROM A COMMON STOCKHOLDER'S PERSPECTIVE?
No. However, from a creditor's viewpoint, the best measure of investment risk is
debt rating. The debt rating process generally provides a good measure of
investment risk for @mmon stockholders because the factors considered in the
debt rating process are usually relevant factors that a common stock investor
would consider in assessing the risk of an investment. Credit rating agencies,
such as S&P, assess the risk of an investment into two categories based on:
fundamental business analysis; and financial analysis.l3 The business risk
analysis includes assessing: Country risk; industry risk; competitive position; and
profitability/peer group comparisons. The financial risk analysis includes
assessing: accounting; financial governance and policies/risk tolerance; cash flow
adequacy; capital structure/asset protection; and Iiquidity/short-term factors.
A.
o.
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lsStandard & Poor's, Corporate Ratinos Criteria, General: Criteria Methodology: Business RisUFinancial
Risk Matrix Expanded, May 27, 2009 and Standard & Poor"s, Criteria Coroorates General: Coroorate
Methodoloov, November 19, 2013.
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O. WHAT IS THE BOND RATING OF SWID AND THE COMPARABLE GROUP?
A. Page 1 of Schedule 10 shows the average bond/credit rating Comparable Group.
The Comparable Group has an A credit profile and SWID does not have bonds
rated. SWR has an A credit profile. The major bond rating/credit rating agencies
append modifiers, such as +, - for S&P and 1,2, and 3 for Moody's lnvestors
Service ("Moody's") to each generic rating classification. For example, an "A"
credit profile is comprised of three subsets such as A*, A, A- for S&P or A1, A2 or
A3 for Moody's. The modifier of either "+" or "1" indicates that the obligation ranks
in the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier of "-" or "3" indicates a ranking in the lower
end of that generic rating category.
S&P and Moody's publish financial benchmark criteria necessary to obtain
a bond rating for different types of utilities. As a generalization, the higher the
perceived business risk, the more stringent the financial criteria so the sum of the
two, business risk and financial criteria, remains the same.
O. WHAT ARE SOME FINANCIAL BENCHMARKS APPLIED BY CREDIT RATING
AGENCIES FOR RATING PUBLIC UTILITY DEBT?
A. S&P describes their range of financial benchmarks as
Risk-adjusted ratio guidelines depict the role thatfinancial ratios play
in Standard & Poor's rating process, since financial ratios are viewed
in the context of a firm's business risk. A company with a stronger
competitive position, more favorable business prospects, and more
predictable cash flows can afford to undertake added financial risk
while maintaining the same credit rating. The guidelines displayed in
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the matrices make explicit the linkage between financial ratios and
levels of business risk.la
O. WHAT OTHER INFORMATION IS SHOWN ON SCHEDULE 10?
A. page 2 of Schedule 10 summarizes the application of S&P's and Moody's
measures of financial risk for SWID and the Comparable Group. S&P's and
Moody's measures of financia! risk are broader than the traditional measure of
financial risk (i.e., leverage). Besides reviewing amounts of leverage employed,
S&P and Moody's also focuses on earnings protection and cash flow adequacy.
As is evident from the information shown on page 2 of Schedule 10, for the
five years ending in2019 and for the year 2019, SWID's cash flow adequacy ratios
were generally higher than the Comparable Companies in most instances.
Comparing the SWID and the Water Group's measures of cash flow adequacy
shows that the Water Group has experienced a lower level of cash flow adequacy
than SWID, indicating that SWID is a Iower investment risk than the Water Group.
Prospectively, based upon the Company's construction program, the Company's
ratios are likely to be strained. Based solely upon SWID's historical ratios, it is my
opinion that SWID's credit profile is similar to the Comparable Companies.
Further, based solely upon SWID's size, it is my opinion that SWID's credit
profile is lower than the Comparable Groups'. Based on SWID's small size, it is
highly likely that SWID's credit profile is below BBB (i.e., BB). An analysis of
corporate credit ratings, shown on page 4 of Schedule 10, indicates that there is
an g0% (1}Oo/o-OYo-Oo/o-4o/o-6o/o=90%) chance that SWID's credit profile falls below
l4Standard & Poor's Coroorate Ratino Criteria, 2000.
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BBB based on their small size alone. As S&P has stated, size is significantly
correlated to credit ratings. An analysis of corporate credit ratings found The York
Water Company to be the smallest utility with a credit rating. Their credit rating is
only A- despite having a capitalization comprised of more than $220 million and a
common equity ratio in excess of 58%.
HAVE YOU REVIEWED THE COMPANY'S LARGE CONSTRUCTION
PROGRAM?
Yes, the Company estimates their construction program to total $125.3 million from
2021 through 2024. At year end 2019 the Company's total capital outstanding
was $193.6 million indicating the need fora 65% increase ($125.3 million + $193.6
million) in capitalthrough 2024.
HOW DOES THE MAGNITUDE OF THE COMPANY'S LARGE CONSTRUCTION
PROGRAM COMPARE TO THE COMPARABLE GROUP'S CONSTRUCTION
PROGRAM?
The Company is forecasted to require 65% of additional capital to finance their
construction program while the Comparable Group is projected by Value Line to
require 45o/o of additional capital to finance their construction programs.
Accordingly, SWID's capital requirements are about 43% greater than the
Comparable Group's through 2024 indicating more risk for SWID.
ln order to compete with the Comparable Group for capital, in the future, it
will be necessaryfor SWID to achieve higher retums on equity, and increased cash
flow just to maintain a similar credit quality.
S&P has stated:
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... low authorized retums may affect the industry's &!li!1l[4ttract
necessarv capital to develop new water supplies and upgrade the
quality of existing supplies . . . Traditiona! ratemaking policy has not
provided sufficient credit support during the construction cycle of the
electric industry over the past 15 years. To avoid a reoeat in the
water industry, regulators must be aware of the increased challenges
the industry faces.15
lnvestors will not provide the equity capita! necessary for increasing the amount of
common equity in a capital structure unless the regulatory authority allows an
adequate rate of retum on the equity.16
O. WHAT DO YOU CONCLUDE FROM THE VARIOUS MEASURES OF
INVESTMENT RISK INFORMATION YOU HAVE TESTIFIED TO?
A. A summary of my conclusions regarding the risk analyses discussed
previously is shown in Table 5. Overall, the information summarized in Table 5
indicates that SWID has similar investment risk as the Water Group.
l5Standard & Poor's CreditWeek, May 25, 1992 (emphasis added).
loNational Association of Regulatory Utility Commissioners, loc. cit.
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Summary of Risk Anallses
f upSWIDFollowed by
1. Business Risk:
2. Country Risk Similar Risk Lewl
3. hdrsW Risk Similar Risk Lewl
4. Competitire Position Similar Risk Level
5. Profitabilitv/PeerGroupComparisors Hioher Risk Level
6. Capitalization Ratios & Financial Risk (Lereraoe)*Hiqher Risk Le\El
7. Debt Cost Rate*Hioher Risk Lewl
8. Relatirc Size:
9. Reoulatory Diversification Hioher Risk Level
10. EconomicDiuersification Hioher Risk Level
11. DemographicDiuersification Hioher Risk Ler,el12. Dircrsification of Weather Conditions Hioher Risk Lewl
13. Ctstomer Concentration of Re\Enues Hioher Risk Level
14. Capital hensity Hioher Risk Lercl
15. Capital Recorcry Hiqher Risk Le\€l
16. Lower Liquidity:
17. kstitntionalHoldinqs Hioher Risk Level
18. ksider Holdirrqs Hioher Risk Level
19. Percentaqe of Shares Traded Hioher Risk Lewl
20. Required To Meet Clean WaterActs and Safe Drinking WaterAct Similar Risk Level
21. Credit Market Finarrial Risk Metrics Hiqher Risk Le\€l
22. Cash FlowAdequacy Hioher Risk Lewl
23. CreditRatim /CreditProfile Similar Risk Lercl
* - Based on recommended capital structure for rate making purposes.
Comment: The terms 'Similar Le\el " indicates same amount of risk and the terms 'Higher Ler,el " indicates greater risk.
Table 5
CAPITAL GOST RATES
O. WHAT INFORMATION IS SHOWN ON SCHEDULE 11?
A. Schedule 11 reviews long-term and short-term interest rate trends. Long-term
and short-term interest rate trends are reviewed to ascertain the "sub-flooring" or
"basement" upon which the Comparable Companies' common equaty market
capitalization rate is built. Based upon the settled yields implied in the Treasury
Bond future contracts and the long-term and recent trends in spreads between
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Iong-term govemment bonds and A-rated public utility bonds available to me at the
time Schedule 11 was prepared, I conclude that the market believes that if the
Comparable Companies issued new long-term bonds near term, they would be
priced to yield about 3.0o/o based upon a credit profile of "A." Further, it is
reasonable to conclude the market anticipates that long-term govemment bonds
will be priced to yield about 1.4o/o, near term.
However, prospectively, over the next couple of years, forecasters believe
capital costs rates may increase substantially from their current levels. Former
Federal Reserve Chairman Alan Greenspan warned that the bond market is on the
edge of a collapse that would bring much higher interest rates and may also impact
stock prices.
ln a QNBC interview, the longtime central bank chief said the
prolonged period of low interest rates is about to end and, with it, a
bull market in fixed income that has lasted more than three decades.
"The current levelof interest rates is abnormally low and there's only
one direction in which they can go, and when they start they will be
rather rapid," Greenspan said on "Squawk Box."
That low interest rate environment has been the product of current
monetary policy at the institution he helmed from 1987-2006. The
Fed took its benchmark rate to near zero during the financial crisis
and kept it there for seven years after.
Since December 2015, the Fed has approved four rate hikes, but
govemment bond yields remained mired near record lows'
Greenspan did not criticize the policies of the current Fed. But he
warned that the low rate environment can't last forever and will have
severe consequences once it ends.
"l have no time frame on the forecast," he said. "l have a chart which
goes back to the 1800s and I can tell you that this particular period
sticks out. But you have no way of knowing in advance when it will
actually trigger."
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One point he did make about timing is it likely will be quick and take
the market by surprise.
"lt looks stronger just before it isn't stronger," he said. Anyone who
thinks they can forecast when the bubble will break is "in for a
d isastrous" experience."
ln addition to his genera! work at the Fed, which also featured an
extended period of low rates though nowhere near their current
position, Greenspan is widely known for the "irrational exuberance"
speech he gave at the American Enterprise lnstitute in 1996. The
speech warned about asset prices and said it is difficult to tel! when
a bubble is about to burst.
Those remarks foreshadowed the popping of the dot-com bubble,
and the phrase has found a permanent place in the Wall Street
lexicon.
"You can never be quite sure when irrationalexuberance arises," he
told CNBC. "l was doing it as part of a much broader speech and
talking about the analysis of the markets and the !ike, and I wasn't
trying to focus short term. But the press loved that term."17
Since October 2008, the Federal Reserve has been monetizing US
Treasury debt to artificially suppress interest rates through expansionary money
policies. The Federal Reserve, with effectively unlimited money at its disposal,
intervenes at any time it wishes, in whatever volume it wishes, to make sure that
Treasury bond and bill prices and yields are exactly what the Federa! Reserve
wants them to be. The US Treasury bond market, and mortgage market, has
become an artificial market with no connection to objective risk and interest rates.
!n August 2011, the Federal Reserve began "Operation Twist." Under
"Operation Twist," the Federal Reserve began buying $400 billion of long-dated or
17CNBC, Greenspan: Bond Bubble About to Break Because of 'Abnormallv Low' lnterest Rates ,814t17,
httos://wunru.cnbc.com/2017l08/04/qreenspan-bond-bubble-about-to-break-because-of-abnormallv-low-
interest-rates.html, (8141 17).
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Iong-term US Treasury debt, financed by selling short-term US Treasury debt with
three years to go or less. The goal of "Operation Twist" was to try to drive Iong-
term rates lower, which the Federal Reserve thought would help the mortgage
market. This process has created an artificial demand for the US Treasury debt
themselves, and easily drives interest rates artificially lower and deceives investors
into believing US Treasury debt are safe with wide demand. This has resulted in
the entire capitalsystem being impacted by the Federa! Reserve's distortion of the
price of risk.
ln the real world of economics, the bonower pays an interest rate to
a lender, who makes money (interest) by taking on the risk of lending
and deferring gratification. The lender is willing to not spend his
money now. ln a free market economy, interest rates are essentially
a price put on money, and they reflect the time preference of people.
Higher interest rates reflect a high demand for bonowing and lower
savings. But the higher rates automatically correct this situation by
encouraging savings and discouraging borrowing. Lower interest
rates will work the opposite way. When the governmenUcentral
bank tampers with interest rates, savings and lending are distorted,
and resources are misallocated. This is evident in looking back on
the housing bubble. The artificially Iow interest rates signaled that
there was a high amount of savings. But it was a false signal. There
was also a signal for people to borrow more. Again, it was a false
signal. As these false signals were revealed, the housing boom
tumed into a bust.18
HAVE YOU CONSIDERED THE IMPACT OF COVID-lg ON THE CAPITAL
MARKETS IN YOUR ANALYSIS?
Yes. On March 11,2O2O the World Health Organization ("WHO") declared a
quickly spreading coronavirus infection a pandemic ("COVID-19'). Labeling a
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lsPike, Geoffrey "The Threat of Negative lnterest Rates," Wealth Daily, May 30! 2011, .
http://www.weaitndaity.com/articles/the-threat-of-negative-interest-rates/S185, (610312014)
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disease as a pandemic indicates its spread over a wide geographic area and
affecting a high proportion of the population.
The United States Environmental Protection Agency ('EPA") is providing
information on drinking water and wastewater to provide clarity to the public
regarding covlD-19. According to EPA, the CoVID-19 virus has not been
detected in drinking-water supplies. Based on current evidence, the risk to water
supplies is low.1e EPA has also stated that wastewater treatment plants treat the
COVID-19: "wastewater treatment plants treat viruses and other pathogens.
Coronavirus, which causes COVID-19, is a type of virus that is particularly
susceptible to disinfection. Standard treatment and disinfectant processes at
wastewater treatment plants are expected to be effective."2o EPA sent a "letter to
Govemors in all 50 states, tenitories, tribes and Washington, DC, requesting that
water and wastewater workers, as well as the manufacturers and suppliers who
provide vital services and materials to the water sector, are considered essential
workers and businesses by state authorities when enacting restrictions to curb the
spread of COVID-19."21
!n response to COVID-19 the Federal Reserve has provided monetary and
fiscal stimulus to increase liquidity in the form of new fiscal stimulus programs and
rate cuts. "For context, new fiscal stimulus and total fiscal deficits in the US are
roughly double the levels seen in 2008-2009, and the US fiscal deficit we project
1 t https://www.epa. oov/coronavirus, 5127 120.
20 httos://www.eoa.oov/coronavirus/do-wastewatertreatment-plants-treat-covid-19 ,7tg1l2O.21 httDs://www.epa.oov/coronavirus/coronavirus-and-drinkinq-water-and-wastewiier , St27t2O
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for 2020 of 15o/o-18% is only matched by deficits seen at the height of WWll in
1942-1943."22 The combined result of these actions by the Federa! Reserve and
investors' flight to quality have resulted in artificial and historically low risk-free
rates as measured by the 3O-year treasury bond yield. Public utility bond yields
have not fluctuated (decreased) nearly to the degree which yields of 30-year
treasury bonds have as is evident by the widening of the yield spread or default
spread shown on page 5 of Schedule 17 from pre-COVID-19 levels.
When there is a crisis in the markets, such as a financial meltdown, market
participants usually sell off and move their money to a safer place; fleeing from
illiquid, low quality investments to liquid, high quality investments. This flight to
quality reflects a collapse of confidence in the financial system and is most evident
in short-term interest rates. Prospectively the capita! markets will be affected by
the upcoming unprecedented large Treasuryfinancings. lnvestors provide capital
based upon risk and return opportunities and investors will not provide common
equity capitalwhen higher risk-adjusted returns are available.
O. ARE THERE OTHER INDICATIONS THAT FORECASTERS BELIEVE CAPITAL
COSTS RATES MAY INCREASE SUBSTANTIALLY FROM THEIR CURRENT
LEVELS?
A. Yes, consensus forecasts show that interest rates are expected to increase
substantially in the next few years. Table 6 shows the forecasted increase in
interest rates published in the June 1, 2020 Blue Chip Consensus Forecasts for
22 httos ://www. iom orqan. com/i pm pdf/1 320748588999. pdf , 5129 120
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the period 2021 lo 2023. As shown in Table 6, consensus forecasts show interest
rates are expected to increase over 75 basis points from current levels. lf interest
rates were to increase as predicted, investors will not provide @mmon equity
capital when higher risk-adjusted retums are available.
Blue Chip Financial Forecasts Long-Range Surr,ev (8/1/20)
Latest Qtr
(u1t20)
2Q2020
Consensus Forecasts
(611120 Forecasts)
2021 2022 2023
lnterest Rates
Prime Rate
&mo. Treasury Bills
10 Year Notes
30 Year Notes
Aaa Corporate Bond Yield
Baa Corporate Bond Yield
3.25
0.14
0.69
1.38
2.81
3.67
3.36
0.24
1.17
1.80
2.80
4.14
3.60
0.53
1.54
2.22
3.19
4.46
4.14
1.06
2.08
2.73
3.&r
4.90
Table 6
COMMON EQUITY COST RATE ESTIMATE
O. WHAT IS THE BEST METHOD OF ESTIMATING COMMON EQUIW COST
RATES?
A. There is no single method (mode!) suitable for estimating the cost rate for common
equity. While a single investor may rely solely upon one model in evaluating
investment opportunities, other investors rely on different models. Most
sophisticated investors who use an equity valuation model rely on many models in
evaluating their common equity investment altematives. Therefore, the average
price of an equity security reflects the results of the application of many equity
models used by investors in determining their investment decisions.
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The application of any single model to estimate common equity cost rates
is not appropriate because the security price for which the equity cost rate is being
estimated reflects the application of many models used in the valuation of the
investment. That is, the price of any security reflects the collective application of
many models. Accordingly, if only one model is used to estimate common equity
cost rates, that cost rate will most Iikely be different from the collective market's
cost rates because the collective valuation in the market reflects more than one
method.
Noted financial texts, investor organizations and professiona! societies all
endorse the use of more than one valuation method. "We endorse the dividend
discount model, particularly when used for establishing companies with consistent
earnings power and when used along with other valuation models. lt is our view
that, in any case, aIL! ."23
The American Association of lndividual lnvestors state, "No one area of
investment is suitable for al! investors and no single method of evaluating
investment opportunities has been proven successful all of the time."2a
ln their study guide, the National Society of Rate of Return Analysts state,
"No cost of equity model or other concept is recommended or emphasized, nor is
any procedure for employing any model recommended . . . it remains important to
recognize that alternative methods exist and have merit in cost of capital
23sidney Cottle, Roger F. Murray and Frank E. Block, Graham and Dodd's Securities Analysis Sth Edition,
McGraw-Hill, lnc., 1988, p. 568 (emphasis added).
zaEditorial Policy, AAllJournal, American Association of lndividual lnvestors, Volume 18, No. 1, January
1996, p. 1.
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estimation. To this end, analysts should be knowledgeable of a broad spectrum
of cost of capital techniques and issues."2s
Several different models should be employed to measure accurately the
market-required cost of equity reflected in the price of stock. Therefore, I used
three recognized methods: the DCF shown on Schedule 12, the CAPM shown on
Schedule 17, and the RP shown on Schedule 18.
DISCOUNTED CASH FLOW
PLEASE EXPLAIN THE DISCOUNTED CASH FLOW MODEL.
The DCF is based upon the assumption that the price of a share of stock is equal
to a future stream of cash flows to which the holder is entitled. The stream of cash
flows is discounted at the investor-required cost rate (cost of capital).
Although the traditional DCF assumes a stream of cash flow into perpetuity,
a termination, or sale price can be calculated at any point in time. Therefore, the
return rate to the stockholder consists of cash flow (earnings or dividends) received
and the change in the price of a share of stock. The cost of equity is defined as:
...the minimum rate of return that must be earned on equity
finance and investments to keep the value of existing
common equitv unchanqed. This return rate is the rate of
return that investors expect to receive on the Company's
common stock . . . the dividend vield plus the capita! qains
vield...26
2sDavid C. Parcell, The Cost of Capital - A Practitioners Guide, National Society of Rate of Return Analysts,
1995 Edition.
26J. Fred Weston and Eugene F. Briqham. Essentials of Manaoerial Finance, 3rd ed. (The Dryden Press),
1974, p.504 (emphasis added).
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PLEASE EXPLAIN HOW YOU CALCULATED YOUR DIVIDEND YIELD IN THE
DCF SHOWN ON SCHEDULE 12.
As shown on page 1 of Schedule 12, ! used the average dividend yield of 1.7o/olor
the Water Group. The individual dividend yields are shown on page 2 of Schedule
12 and are based upon the most recent months' yield, July 2020, and the twelve-
month average yield, ending July 2020. The second input to a market DCF
calculation is the determination of an appropriate share price growth rate.
WHAT SOURCES OF GROWTH RATES DID YOU REVIEW?
I reviewed both historical and projected groMh rates. Schedule 13 shows the
array of projected growth rates for the Comparable Companies that are published.
Specific historical groMh rates are shown for informational purposes because I
believe the meaningful historical groMh rates are already considered when
analysts arrive at their projected growth rates. Nonetheless, some investors may
still rely on historical grovuth rates.
PLEASE EXPLAIN THE SOURCES OF THE PROJECTED GROWTH RATES
SHOWN ON SCHEDULE 13.
I relied upon four sources for projected growth rates, First Call, S&P, Zacks
Investment Research and Value Line.27
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2lruith the exception of Value Line, the earnings grov(h rate projections are consensus estimates five-year
EPS estimates. These consensus estimates are compiled from more than 1,700 financialanalysts and
brokerage firms nationwide. lt should be noted that none of the consensus forecasts provides projected
DPS estimates. Value Line publishes projected Cash flow, EPS and DPS five-year growth projections as
well.
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DID YOU REVIEW ANY OTHER GROWTH RATES BESIDES THOSE SHOWN
ON SCHEDULE 13?
Yes. ! reviewed EPS growth rates reflecting changes in return rates on book
common equity (ROE) over time. I summarized recent ROEs on page 1 of
Schedule 14, and compared those to the Water Group's higher levels projected to
be achieved by Value Line, as shown on page 2 of Schedule 14. ROEs increase
when EPS grows at much higher/faster rates than book value.
I also reviewed industry specific average projected groMh rates that are
published by Zacks for the industries in which the Comparable Companies
operate. According to Zacks, the Water Group's industry is projected to have EPS
groMh rates that average 9.9% over the next five years.
WHAT DO YOU CONCLUDE FROM THE GROWTH RATES YOU HAVE
REVIEWED?
Table 7 summarizes some of the various groMh rates reviewed.
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Summarv of Growth Rates
Projected 5 Year Growth in EPS
Actual 5 Year Growth in EPS
Projected 5 Year Growth in DPS
Projected 5 Year Growth in EPS for the industry
Water
Grouo
7.2
6.2
6.9
9.9
Table 7
Academic studies suggest that growth rate conclusions should be tested for
reasonableness against long-term interest rate levels. Further, the minimum
growth rate must at least exceed expected inflation Ievels. Otherwise, investors
would experience decreases in the purchasing power of their investment. Finally,
the combined result of adding the growth rate to the market value dividend yield
must provide a sufficient margin over yields of public utility debt.
O. WHAT METHOD DID YOU USE TO ARRIVE AT YOUR GROWTH RATE
CONCLUSION?
A. No single method is necessarily the correct method of estimating share value
growth. lt is reasonable to assume that investors anticipate that the Water
Group's current ROE will expand to higher levels. The published historical
earnings growth rates for the Water Group averages 6.20/o. Because there is not
necessarily any single means of estimating share value groMh, I considered all of
this information in determining a growth rate conclusion for the Comparable
Companies.
Moreover, while some rate of return practitioners would advocate that
mathematical precision should be followed when selecting a growth rate, the fact
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is that investors do not behave in the same manner when establishing the market
price for a stock. Rather, investors consider both company-specific variables and
overall market sentiment such as inflation rates, interest rates and economic
conditions when formulating their capital gains expectations. This is especially
true when one considers the relatively meaningless negative growth rates. That
is, use of a negative growth rate in a DCF implies that investors invest with the
expectation of losing money.
The range of groMh rates previously summarized supports the
reasonableness of an expected 7.2o/o growth rate for the Water Group based
primarily on the projected five-year growth rates and considering the Water
Group's industry projected EPS growth rates of 9.9%. Like the projected grourth
rates, this investor-expected growth rate of 7 .2o/o is based on a survey of projected
and historical grovuth rates published by established entities, including First Call,
S&P, Zacks lnvestment Research and Value Line. Use of information from these
unbiased professiona! organizations provides an objective estimation of investor's
expectations of grovuth. Based on the aforesaid, all growth rates for the
Comparison Companies have been considered and have been given weight in
determining a7.2o/o growth rate for the Water Group.
WHAT IS YOUR MARKET VALUE DCF ESTTMATE FOR THE COMPARABLE
COMPANIES?
The market value DCF cost rate estimate for the Water Group is g.0%, as detailed
on page 1 of Schedule 12.
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ARE THERE OTHER CONSIDERATIONS THAT SHOULD BE TAKEN INTO
ACCOUNT IN REVIEWTNG A MARKET VALUE CAPITALIZATION DCF COST
RATE ESTIMATE?
Yes. !t should be noted that although I recommend specific dividend yields for the
Comparable Group, I recommend that less weight be given to the resultant market
value DCF cost rate due to the market's current market capitalization ratios and
the impact that the market-to-book ratio has on the DCF results. The Comparable
Companies' current market-to-book ratios of 346% and low dividend yields are
being affected by the aforementioned policy of the Federal Reserve that has
resulted in the mispricing of capita! due to artificial interest rates, not DCF
fundamentals.
Although the DCF cost for common equity appears to be based upon
mathematical precision, the derived result does not reflect the reality of the
marketplace since the model proceeds from unconnected assumptions. The
traditional DCF derived cost rate for common equity will continuously understate
or overstate investors' return requirements as long as stock prices continually sell
above or below book value. A traditional DCF model implicitly assumes that stock
price will be driven to book value over time. However, such a proposition is not
rational when viewed in the context of an investor purchasing stock above book
value. lt is not rational to assume that an investor would expect share price to
decrease 71o/o (100o/o+3460/o=290/o-1000/o=71o/o)in value to equal book value'
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A
Utility stocks do not trade in a vacuum. Utility stock prices, whether they
are above or below book value, reflect worldwide market sentiment and are not
reflective of only one element.
WHAT DO YOU MEAN BY YOUR STATEMENT THAT UTILITY STOCKS ARE
NOT TRADED IN A VACUUM?
Utility stocks cannot be viewed solely by themselves. They must be viewed in
the context of the market environment. Table 8 summarizes recent market-to-
book ratios ("M/B") for well-known measures of market value reported in the
August 3,2020 issue of Barron's and the water Group's average M/B as shown
on page 1 of Schedule 14.
Dow Jones lndustrials
Dow Jones Transportation
Dow Jones Utilities
s&P 500
S&P lndustrials
Vs.
Water Group
M/B Ratios(%)
406
309
224
358
490
346
Table 8
Utility stock investors view their investment decisions compared with other
investment altematives, including those of the various market measures shown in
Table 8.
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HOW DOES A TRADITIONAL DCF IMPLICITLY ASSUME THAT MARKET
PRICE WLL EQUAL BOOK VALUE?
Under traditional DCF theory, price will equal book value (M/B=1.00) only when a
company is earning its cost of capital. Traditional DCF theory maintains that a
company is under-eaming its cost of capital when the market price is below book
value (M/B<1.00), while a company over-earning its cost of capital will have a
market price above its book value (M/B>1.00). lf this were true, it would imply that
the capitalistic free-market is not efficient because the overwhelming majority of
stocks would cunently be eaming more than their cost of capital. Table 8 shows
that most stocks sell at an M/B that is greater than 1.0.
PLEASE EXPLAIN WHY SUCH A PHENOMENON WOULD SHOW THAT THE
CAPITALISTIC FREE-MARKET IS NOT EFFICIENT.
Historically, the S&P lndustrials, which represented approximately400 companies,
have sold at an M/B as low as 1.0 only one time out of the S3-year period 1947-
1999. Based upon the traditional DCF assumption, which suggests that
companies with M/Bs greater than 1.0 earn more than their cost of capital, this
data would suggest that the S&P lndustrial companies have earned more than
their cost of capital while competing in a competitive environment over the 53-year
period. ln a competitive market, new companies would continually enter the
market up to the point that the earnings rate was at least equa! to their cost of
capital.
During this period the S&P lndustrials sold at an average M/B of 223.7o/o
while experiencing a ROE of 15.7o/o over a period in which interest rates averaged
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7.2%. lt is important to note that the average ROE of 15.7o/o is relative to a
common equity ratio of more than 60% for the S&P lndustrials over many years.
A. WHAT IS THE SIGNIFICANCE OF INDUSTRIAL COMPANIES' M/B AND THE
COST OF CAPITAL FOR A WATER UTILITY?
A. As stated previously, utility stocks do not trade in a vacuum. They must compete
for capital with other firms including industrial stocks. Over time, there has been
a relationship between M/Bs of industrial stocks and utility stocks. Although
industrial stocks have sold at a higher multiple of book value than utility stocks,
both have tracked in similar directions. Because utility and industrial stock prices
relative to book values move in similar directions, it is inationa! to conclude that
stock prices that are different from book value, either higher or lower, suggests
that a firm is over-or under-eaming its cost of capital when competitive free-
markets exist.
A. DOES THE MARKET VALUE DCF PROVIDE A REASONABLE ESTIMATE OF
THE WATER GROUP'S COMMON EQUITY COST RATE?
A. No, the DCF only provides a reasonable estimate of the Comparable Group's
common equity cost rate when their market price and book value are similar
(M/B=100o/o).28 A DCF will overstate a common equity cost rate when M/Bs are
below 100o/o and understate when they are above 100o/o. Since the Comparable
Group's current M/Bs average 3460/o, the DCF understates their common equity
cost rate. Schedule 15 provides a numerical illustration of the impact of M/Bs on
2sRoger A Morin, Reoulatorv Finance - Utilities' Cost of Capital, Public Utility Reports, lnc., 1994, pp. 236-
237.
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investors'market returns and DCF returns. The reason that DCF understates or
overstates investors' return requirements depending upon M/B levels is because
a DCF-derived equity cost rate is applied to a book value rate base while investors'
returns are measured relative to stock price levels. Based upon this, I
recommend that less weight be given to the market value DCF cost rate unless the
increased financia! risk, resulting from applying a market value cost rate to a book
value, is accounted for.
HOW DO YOU RESOLVE THE FINANCIAL RISK DIFFERENCE BETWEEN
MARKET VALUE COST RATES AND BOOK VALUE COST RATES?
10 A.The basic proposition of financial theory regarding the economic value of a
company is based on market value. That is, a company's value is based on its
market value weighted average cost of capital.2e The American Society of
Appraisers, ASA Business Valuation Standards, 2009, and the National
Association of Certified Valuation Analysts, Professional Standards, 2007, use the
same definition:
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Weighted Average Cost of Capital (WACC). The cost of capital
(discount rate) determined by the weighted average, at market
values, of the cost of all financing sources in the business
enterprise's ca pital structu re. ( Em phasis added )
2eFor other examples, see http://www.investinoanswers.com/financial-dictionarv/financial-statement-
analvsis/weiqhted-averaoe-cost-caoital-wacc-2905. Also see htto://www.wallstreetmoio.com/weiohted-
averaoe-cost-capital-wacc/ , or http://accountinqexolained.com/misc/corporate-finance/wacc .
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Accordingly, the market value derived cost rate reflects the financial risk or
leverage associated with capitalization ratios based on market value, not book
value.
As shown on page 1 of Schedule 16, for the Water Group there is a large
difference in leverage as a result of the average $4,689 million difference in market
value common equity and book value @mmon equity. This difference in market
values and book values results in debUequity ratios based on market value of
24.70/o175.3% (debUequity) verses 5O.7o/o149.3% (debUequity) based on book
value as shown on page 1 of Schedule 16. The larger the difference between
market values and book values the less reliable the models' results are because
the models provide an estimate of the cost of capital of market value, not
book value.
Financial theory concludes capital structure and firm value are related.
Since capital structure and firm value are related, an adjustment is required when
a cost of common equity model is based on market value and if its results are then
applied to book value. As explained previously, the market value derived cost
rate reflects the financial risk or leverage associated with capitalization ratios
based on market value, not book value. The authors Brealey, Myers and Allen
provide a similar definition of the cost of capital being based on market
capitalization, not book value,
The values of debt and equity add up to overall firm value (D + f =
V) and firm value V equals asset value. These figures are all
market values, not book (accounting) values. The market value
of equity is often much larger than the book value, so the market debt
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ratio DA/ is often much lower than a debt ratio computed from the
book balance sheet.3o
The work of Modigliani and Miller concludes that the market value of any
firm is independent of its capital structure and this is precisely the reason why an
adjustment is appropriate. The only way for the market value of a firm to remain
independent of its capital structure is if the capital cost rates change to offset
changes in the capital structure. lf the capital cost rates do not change to offset
changes in the capital structure, then the value of the firm will change. Clearly an
adjustment is required when a cost of common equity model is based on market
value and if its results are then applied to book value because the capital structure
is changed from market value capitalization to book value capitalization.
Differences in the amount of leverage employed can be quantified based
upon the Comparable Group's leveraged beta being "unleveraged" through the
application of the "Hamada Formula". The details of the model are shown on
page 2 of Schedule 16. For example, the inputs to the formula for the Water
Group market value capitalization consist of their leveraged beta of 0.77, debt ratio
of 24.7o/o, preferred stock ratio of 0.0o/o, @mmon equity ratio of 75.3o/o and
combined tax rate of 28.00o/o. The group's unleveraged beta is determined to be
0.62 through the use of the following Hamada formula:
3oBrealey, Myers and Allen, Princioles of Coroorate Finance, 1Oth edition, page 216 (emphasis added).
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Bt =Bu(1 +(1 -t)D/E+P/E)
where:
Bl = observed, leveraged beta
Bu = calculated, unleveraged beta
t = income tax rate
D = debt ratio
P - preferred stock ratio
E = common equity ratio
Applying the unleveraged beta of 0.62 along with the Water Group's book value
capitalization ratios of 50.7o/o long-term debt, 0.0% preferred stock and 49.3%
common equity and combined tax rate of 28.00o/o results in a leveraged beta of .84
applicable to the group's book value capitalization. Based upon the Water
Group's risk premium of 6.0% and the difference between Water Group's market
value leveraged beta, their book value leveraged beta of 0.31 (1.08 ' 0.77)
indicates that the Water Group's common equity cost rate must be increased by
1.86 (0.31 x 6.0 = 1.86) in recognition of their book value's exposure to more
financial risk.
IS THERE ANOTHER WAY TO REFLECT THE FINANCIAL RISK DIFFERENCE
THAT EXISTS AS A RESULT OF MARKET CAPITALIZATION RATIOS BEING
SIGNIFICANTLY DIFFERENT FROM BOOK VALUE CAPITALIZATION
RATIOS?
Yes, generally speaking. Although it is possible to know the direction of a financia!
risk adjustment on common equity cost rate, a specific quantification of financial
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risk differences is very difficult. Although the end result of a financial risk
adjustment is very subjective and specific quantification very difficult, the direction
of the adjustment is clearly known. However, hypothetically if the Comparable
Group's debt were rated based on market value debt ratios they would command
an Aaa rating. The Comparison Group currently has bonds rated A based upon
their book value debt ratios. The yield spread on a bond rated Aaa versus A rated
bonds averages 34 basis points or O.34o/o as shown on page 3 of Schedule 16.
The end result of the application of the Hamada Model and the bond yield
spread indicates that the Water Group market value common equity cost rate
equity cost rate should be adjusted upward by at least 1.Oo/o (1.8% hamada est. +
0.3o/o yield spread = 2.1o/o + 2 = 1.0%) since it is going to be applied to a book
value.
Accounting for the increased amount of leverage between market value
derived DCF cost rates and book value cost rates indicates a book value DCF cost
rate of 10.00% for the Water Group (9.0% + 1 .Oo/o = 10.00%).
CAPITAL ASSET PRICING MODEL
A. PLEASE BRIEFLY DESCRIBE THE THEORY OF THE CAPTTAL ASSET
PRICING MODEL.
A. The CAPM is based upon the assumption that investors hold diversified portfolios
and that the market only recognizes or rewards non-diversifiable (or systematic)
risk when determining the price of a security because company-specific risk (or
non-systematic) is removed through diversification. Further, investors are
assumed to require additional or higher retums for assuming additional or higher
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risk. This assumption is captured by using a beta that provides an incremental
cost of additional risk above the base risk-free rate available to investors' The
beta of a security reflects the market risk or systematic risk of the security relative
to the market. The beta for the market is always equal to 1.00; therefore, a
company whose stock has a beta greater than 1.00 is considered riskier than the
market, and a company with a beta less than 1.00 is considered less risky than the
market. The base risk-free rate is assumed to be a U.S. Government treasury
security because they are assumed to be free of default risk.
O. WHAT RISK.FREE RATE AND BETA HAVE YOU USED IN YOUR CAPM
CALCULATION?
A. The risk-free rate used in CAPM should have approximately the same maturity as
the life of the asset for which the cost rate is being determined. Because utility
assets are long-lived, a long-term Treasury Bond yield serves as an appropriate
proxy. Previously, I estimated an appropriate risk-free rate of 1.4o/o based upon
the recent and forward long-term Treasury yields. I used the average beta o10.77
for the Water Group as shown on page 1 of Schedule 17. However, as stated
previously, the Comparable Group's betas are understated due to their small size
which affects their stock price changes.
O. AFTER DEVELOPING AN APPROPRIATE BETA AND RISK.FREE RATE,
WHAT ELSE IS NECESSARY TO CALCULATE A CAPM DERIVED COST
RATE?
A. A market premium is necessary to determine a traditional CAPM derived cost rate.
The market return rate is the return expected for the entire market. The market
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premium is then multiplied by the company specific beta to capture the incremental
cost of additional risk (market premium) above the base risk-free rate (long-term
treasury securities) to develop a risk adjusted market premium. For example, if
you conclude that the expected retum on the market as a whole is 15% and further
assume that the risk-free rate is 8%, then the market premium is shown to be 7o/o
(15o/o-8o/o=7o/o).
Further, assume there are two companies, one of which is considered less
risky than the market, and therefore has a beta of less than 1.00 or 0.80. The
second company has a beta that is greater than 1.00 or 1.20, and is therefore
considered riskier than the market. By multiplying the hypothetical T.Oo/o market
premium by the respective betas of 0.80 and 1.20, risk adjusted market premiums
of 5.60/o (7.0Yo x 0.80) and 8.4o/o (7.0Yo x 1.20) are shown for the company
considered less risky than the market and for the company considered riskier than
the market, respectively.
Adding the assumed risk-free rate of 8o/o to the risk adjusted market
premiums results in the CAPM derived cost rates of 13.60/o (5.6% + 8.0%) for the
less risky company and 16.40/o (8.4o/o + 8.0%) for the company considered of
greater risk than the market. ln fact, the result of this hypothetical CApM
calculation shows that: (1) the least risky company, with the beta of 0.g0, has a
cost rate of 13.60/o; (2) the market, with the beta of 1.00, has a cost rate of 1'.Oo/oi
and (3) that the higher risk company, with a beta of 1.2O, has a cost rate of 16.40/o.
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O. HOW DID YOU DEVELOP A MARKET PREMIUM FOR YOUR CAPM?
A. The average projected market premium of 15.1% is developed on page 2 of
Schedule 17. lt is based upon Value Line's average projected total market return
for the next three to five years oI 16.50/o less the risk free rate of 1.4o/o. I also
reviewed market premiums derived from lbbotson Associates' most recent
publication concerning asset returns that show a market premium of 6.9%' The
lbbotson Associates' market premium may be on the low side reflective of the
higher interest rate environment found during their study (r.e., 5.0%). The Value
Line market premium reflects the Federal Reserve's current artifiCial interest rate
levels while the lbbotson Associates' market premiums reflect a higher interest rate
environment.
O. HOW DID YOU ADJUST FOR THE IMPACT THAT SIZE HAS ON THE
COMPARABLE GROUP'S BETA?
A. The adjustment is reflected in the CAPM size premium. The CAPM size premium
is developed on page 4 of Schedule 17. The size premium reflects the risks
associated with the Comparable Group's small size and its impact on the
determination of their beta. This adjustment is necessary because beta
(systematic risk) does not capture or reflect the Comparable Group's small size'
I reduced the size premium by the ratio of the Comparison Group's beta to their
respective market quartile's beta.
O. WHAT IS THE COVID.lg DEFAULT ADJUSTMENT?
A. As explained previously, the combined result of these actions by the Federal
Reserve and investors'flight to quality have resulted in artificial and historically low
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risk-free rates as measured bythe 3O-yeartreasury bond yield. Public utility bond
yields have not fluctuated (decreased) nearly to the degree which yields of 3O-year
treasury bonds have as is evident by the widening of the yield spread or defautt
spread shown on page 5 of Schedule 17 from pre-COVID-19 levels. The COVID-
19 default adjustment normalizes the default spread between treasury bond yields
and public utility bond yields to account for current artificial interest rates.
O. WHAT IS THE COMPARISON GROUP'S MARKET COST OF EQUITY BASED
UPON YOUR CAPM CALCULATION?
A. The CAPM based on lbbotson Associates' historical market returns shows a
market cost rate of 8.0% for the Water Group. The CAPM based on Value Line's
projected market returns shows an 14.3o/o for the Water Group, as shown on page
1 of Schedule 17 . The Comparable Group's average market value CAPM of g.60/o
is based 75o/o on the results of the historica! market returns and 2|o/o on the
projected market retums. Adjusting the market value CAPM based upon the end
result of the application of the Hamada Modeland the bond yield spread to account
for the difference in leverage between market value capitalization ratios and book
value ratios discussed previously indicates a cost rate of 10.60/o for the Water
Group applicable to book value (9.6% + 1.Oo/o = 10.6%).
RISK PREMIUM
O. WHAT IS A RISK PREMIUM?
A. A risk premium is the common equity investors' required premium over the long-
term debt cost rate forthe same company, in recognition of the added risk to which
the common stockholder is exposed versus long-term debtholders. Long-term
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debtholders have a stated contract concerning the receipt of dividend and principal
repayment whereas common stock investors do not. Further, long-term
debtholders have the first claim on assets in case of bankruptcy. A risk premium
recognizes the higher risk to which a common stock investor is exposed. The risk
premium-derived cost rate for common equity is the simplest form of deriving the
cost rate for common equity because it is nothing more than a premium above the
prospective level of long-term corporate debt.
O. WHAT IS THE APPROPRIATE ESTIMATED FUTURE LONG'TERM
BORROWING RATE FOR THE COMPARABLE COMPANIES?
A. The estimated near term long-term borrowing rate for the Comparable Companies
is 3.0% based upon their credit profile that supports an A bond rating'
A. WHAT IS THE APPROPRIATE RISK PREMIUM TO BE ADDED TO THE
FUTURE LONG.TERM BORROWING RATE?
A. To determine a common equity cost rate, it is necessary to estimate a risk premium
to be added to the Comparable Group's prospective long-term debt rate.
lnvestors may rely upon published projected premiums; they also rely upon their
experiences of investing in ultimately determining a probabilistic forecasted risk
premium.
Projections of total market returns are shown on page 2 of Schedule 18. A
projected risk premium for the market can be derived by subtracting the debt cost
rate from the projected market retum as shown on page 2 of Schedule 18.
However, the derived risk premium for the market is not directly applicable to the
Comparable Companies because they are less risky than the market. The use of
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o
A.
85o/o ol the market's risk is a conservative estimation of their level of risk as
compared to the market.
The midpoint of the risk premium range is 11.7o/o and the average for the
most recent quarter is 11.4o/o as shown on page 2 of Schedule 18. Based on this,
a reasonable estimate of a longer term projected risk premium is 1'1.4o/o.
HOW DO INVESTORS' EXPERIENCES AFFECT THEIR DETERMINATTON OF
A RISK PREMIUM?
Returns on various assets are studied to determine a probabilistic risk premium.
The most noted asset return studies and resultant risk premium studies are those
performed by lbbotson Associates. However, lbbotson Associates has not
performed asset retum studies concerning public utility common stocks. Based
upon lbbotson Associates' methodology of computing asset returns, ! calculated
annual retums for the S&P utilities and bonds for the period 1928-2019. The
resultant annual retums were then compared to determine a recent risk premium
from a recent 20-year period, 2000-2019 and subsequent periods that were each
increased by ten years unti! the entire study period was reviewed (pages 3 and 4
of Schedule 18).
A long-term analysis of rates of return is necessary because it assumes that
investors' expectations are, on average, equal to realized long-run rates of retum
and resultant risk premium. Observing a single year's risk premium, either high or
low, may not be consistent with investors' requirements. Further, studies show a
mean reversion in risk premiums. ln other words, over time, risk premiums revert
to a longer-term average premium. Moreover, since the expected rate of retum
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is defined as "the rate of retum expected to be realized from an investment; the
mean value of the probability distribution of possible results," 31 a long-term
analysis of annual retums is appropriate.
A. WHAT DO YOU CONCLUDE FROM THE INFORMATION SHOWN ON PAGES 3
AND 4 OF SCHEDULE 18?
A. The average of the absolute range of the S&P Utilities' appropriate average risk
premium (i.e., bonds rated AAA to A) was 3.7% during the seven periods studied,
as calculated from page 3 of Schedule 18. The credit adjusted longer term risk
premiums (i.e., bonds rated A), 1928-2019, and averages 4.3%. The appropriate
average (i.e., bonds rated AAA to A) longer term risk premiums, 1928-2019, have
an absolute range of 4.3o/o to 5.3%, and averages 4.7o/o.
The aforementioned premiums are based on total returns for bonds; and
reflect their price risk. A bond's price risk is not related to its credit quality and is
eliminated when a bond is held to maturity from time of purchase. Using the
income returns, page 4 of Schedule 18, for bonds eliminates price risk and better
measures an investor's required return based on credit quality. The appropriate
average risk premium (i.e., bonds rated AAA to A) based on income returns was
5.2o/o during the seven periods studied. The credit adjusted longer term risk
premiums (i.e., bonds rated A), 1928-2019, and averages 4.9%. The appropriate
average (i.e., bonds rated AAA to A) longer term risk premiums, 1928-2019, have
an absolute range of 4.9o/oto 5.2o/o, and averages 5.1%.
3lEugene F. Brigham, Fundamentals of Financial Manaqement, Fifth Edition, The Dryden Press, 1989, p.
106.
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A. WHAT INFORMATION IS SHOWN ON PAGE 5 OF SCHEDULE 13?
A. Page 5 of Schedule 18 proves and measures the negative retationship between
interest rate levels and the resulting risk premium. That is, risk premiums are
generally higherwhen interest rates are low and risk premiums are generalty lower
when interest rates are high. This was proven by sorting the g2-year period, 1g28
to 2019, annual returns based on interest rate level from lowest interest rate to
highest interest rate and distributing the results into two equal groups, a 46-year
low interest rate environment group and a 46-year high interest rate environment
group.
During the period 1928-2019, the 46 years with the lowest interest rates had
an average interest rate of 2.9o/o and reflected a range of interest rates from 2.0%
to 4.1o/o. This period resembles the current interest rate environment of 1.4o/o
discussed previously regarding the CAPM's risk free rate. The risk premium
based on total returns during this low interest rate environment produced the
appropriate average (i.e., bonds rated A/fuA to A) longer term risk premium of 6.6%
and a credit adjusted longer term risk premium (i.e., bonds rated A) of 5.8%. The
annual income return based risk premium during this low interest rate environment
produced the appropriate average (i.e., bonds rated A/fuq to A) longer term risk
premium of 7.5o/o and a credit adjusted longer term risk premium (i.e., bonds rated
A) of 7.2o/o.
However, during the period 1928-2019, the 46 years with the highest
interest rates had an average interest rate of 7.2o/o and reflected a range of interest
rates from 4.1o/o to 13.5o/o. This period is far different from the current interest rate
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environme nt of 1.4%. The risk premium based on total returns during the highest
interest rate environment produced an average longer term risk premium ol2.8o/o
over bonds rated A/fuA to A and a credit adjusted longer term risk premium (i'e.,
bonds rated A) of only 2.8o/o. The annual income return based risk premium
during the highest interest rate environment produced an average longer term risk
premium of 2.8o/o over bonds rated AAA to A and a credit adjusted longer term risk
premium (i.e., bonds rated A) of only 2.60/o-
Over time, risk premiums are mean reverting. They constantly move
toward a long-term average reflecting a long-term level of interest rates' That is,
an above-average risk premium will decrease toward a long-term average while a
below-average risk premium will increase toward a long-term average' ln any
single year, of course, investor-required rates of retum may not be realized and in
certain instances, a single year's risk premiums may be negative. Negative risk
premiums are not indicative of investors' expectations and violate the basic
premise of finance concerning risk and return. Negative risk premiums usually
occur only in the stock market's down years (r.e., the years in which the stock
markets' return was negative).
When interest rate Ievels are not considered the credit adjusted longer term
risk premium (i.e., bonds rated A), 1928-2019, averages 4.9o/o, discussed
previously regarding page 4 of Schedule 18. However, the annual income retum
based risk premium during the low interest rate environment produced a credit
adjusted longerterm risk premium (i.e., bonds rated A) of 7.2o/o. Since this period
resembles the current interest rate environment of 1.4o/o, a reasonable estimate of
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investors risk premium based on historical returns is based on a S0% weighting on
the results of the entire 1928-2019 historical market retums and a 50% weighting
on the results of the low interest rate environment to produce a 6.0% historical risk
premium.
Adding the risk premium of 6.0% for the Comparable Group to the
prospective cost of newly-issued long-term debt of 3.0% results in a market value
risk premium derived cost rate for common equity of g.0% as reflected on page 1
of Schedule 18. Adjusting the market value risk premium based upon the end
result of the application of the Hamada Modeland the bond yield spread to account
for the difference in leverage between market value capitalization and book value
ratios discussed previously indicates a cost rate of 10.4o/o applicable to book value
(9.0% +1.0%=10.0o/o).
SUMMARY OF COMMON EQUITY COST RATE
O. WHAT IS YOUR COMPARABLE GROUP'S COMMON EQUITY COST RATE?
A' Based upon the results of the models employed, the Water Group's common
equity cost rate is in the range of 10.0% to 10.6% as reflected on Schedule 1g.
Based upon this data, the common equity cost rate for the Water Group is at least
1o.20o/o. My recommendation is based upon the Water Group's 1O.2Oo/o common
equity cost rate.
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DO YOU RECOMMEND A COST OF COMMON EQUITY OF 10.10% FOR
SWID?
yes. Based upon the financial analysis and risk analysis, I conclude that SWID is
exposed to overall similar investment risk as the Comparable Group. This is
evidenced by the factors summarized in Table 5 discussed previously.
The results of the three models employed for the Water Group shows a
current range of common equity cost applicable to book value of SWID of 10.00o/o
(DCF), 10.60% (CAPM), and 10.00% (RP) as shown in Table 9'
Summaryof the SWID's EquitY
Cost Rates
DCF
CAPM
RP
10.00
10.60
10.00
Table 9
WHAT IS YOUR COMMON EQUITY COST RATE RECOMMENDATION FOR
SWID?
As discussed above and as shown in schedule 19, I recommend a 10.200/o
common equity cost rate for SWID.
HAVE YOU CHECKED THE REASONABLENESS OF YOUR RECOMMENDED
COMMON EQUITY RATE FOR SWID?
yes. page 2 of Schedule 14 reflects the average projected earned return on
average book common equity for the companies in the Comparable Group for the
period 2023-2025, which is shown to range from 9.6% to 14.4o/o. Given the large
degree to which regulatory lag and attrition impacts water utilities earning, the
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1 range of the comparable utilities' projected earned returns suggests that my
2 recommendation that SWID be permitted an opportunity to earn 1O.2Oo/o is
3 reasonable, if not conservative.
4 OVERALL RATE OF RETURN RECOMMENDATION
5 O. WHAT IS YOUR OVERALL FAIR RATE OF RETURN RECOMMENDATION FOR
6 THE SWID?
7 A. Based upon the recommended capital structure and my estimate of the SWID's
8 common equity cost rate, I recommend an overall fair rate of retum of 7.460/o. The
9 details of my recommendation are shown on Schedule 1.
10 A. HAVE YOU TESTED THE REASONABLENESS OF YOUR OVERALL FAIR
11 RATE OF RETURN RECOMMENDATION?
12 A. Yes. lf my recommended overall rate of retum is actually earned, it will give SWID
13 ratios that will allow SWID to present a financial profile that will enable it to attract
14 capital necessary to provide safe and reliable water service, at reasonable terms.
15 A. DOES THAT CONCLUDE YOUR DIRECT TESTIMONY?
16 A. Yes, it does.
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APPENDIX A
Professional Qualifi cations
of
Harold Walker, lll
Manager, Financial Studies
Gannett Fleminq Valuation and Rate Consultants. LLC.
EDUCATION
Mr. Walker graduated from Pennsylvania State University in 1984 with a Bachelor of
Science oegiee in Finance. His studies concentrated on securities analysis and portfolio
managemeit *itfr an emphasis on economics and quantitative business analysis' He
has alio completed the regulation and the rate-making process @urses presented by the
College of Business Adm-inistration and Economics Center for Public Utilities at New
Mexico State University. Additionally, he has attended programs presented by The
lnstitute of Chartered Financial Analysts (CFA).
Mr. Walker was awarded the professional designation "Certified Rate of Return Analyst"
(CRRA) by the Society of Utility and Regulatory Financial Analysts. This designation is
based upon eOucation, experience and the successfu! completion of a comprehensive
examinaiion. He is also a member of the Society of Utility and Regulatory Financial
Anagsts (SURFA) and has attended numerous financial forums sponsored by the
Society. 'Tne SURFA forums are recognized by the Association for lnvestment
Management and Research (AIMR) and the National Association of State Boards of
Accou nta ncy for continu in g ed u cation cred its'
Mr. Walker is also a licensed MunicipalAdvisor Representative (Series 50) by Municipal
Securities Rulemaking Board (MSRB) and Financial lndustry Regulatory Authority
(FTNRA).
BUSINESS EXPERIENCE
Prior to joining Gannett Fleming Valuation and Rate Consultants, LLC., Mr' Walker was
employeO Uy-nUS ConsultantJ- Utility Services. He held various positions during his
eleven yeari with AUS, concluding hisemployment there as a Vice President. His duties
included providing and supervising financial and economic studies on behalf of investor
owned and municipally owned wa1er, wastewater, electric, natural gas distribution and
transmission, oil pipeline and telephone utilities as well as resource recovery companies.
ln 1996, Mr. Walker joined Ganneft Fleming Valuation and Rate Consultants, LLC. lnhis capacity as Manager, Financial Studies and for the past twenty years, he has
continuously studied rates of return requirements for regulated firms. th itris regard, hesupervised the preparation of rate of return studies in connection with his testimony andin the past, for other individuals. He also assisted and/or developed dividend fiolicystudies, nuclear prudence studies, calculated fixed charge rates for avoided 'costs
involving cogeneration projects, financial decision studies foi capital budgeting purposes
and developed financial models for determining future capital requiremenis and the'effectof those requirements on investors and ratepayers, valued utility property and common
stock for acquisition and divestiture, and assisted in the private placement of fixed capitalsecurities for public utilities.
Head, Gannett Fleming GASB 34 Task Force responsible for developing GovernmentalAccounting Standards Poard (GASB) 34 services, and educating Ginnett Flemingpersonnel and Gannett Fleming clients on GASB 34 and how it may affect them. Th;GASB 34 related services include inventory of assets, valuation of assets, salvage
estimation, annual depreciation rate determination, estimation of depreciation res"rl,asset service life determination, asset condition assessment, condition assessmentdocumentation, maintenance estimate for asset preservation, establishment of conditionlevel index, geographic information system (GlS) and data management services,management discussion and analysis (MD&A) reporting, required supplementalinformation (RSl) reporting, auditor int,erface, anO ORSB 34 compliance review.
Mr. Walker was also the Publisher of C.A. Tumer Utility Reports from 1988 to 1996. C.A.Turner Utility Reports is a financial publication which provides financial data and relatedratios and forecasts covering the utility industry. From 1993 to 1gg4, he became acontributing author for the Fortniohtlv, a utility trade journal. His column was theFinancial News column and focused mainly on the natural gas industry.
ln 2004, Mr. Walker was elected to serve on the Board of Directors of SURFA.Previously, he served as an ex-officio directors as an advisor to SURFA's exis1ngPresident. ln 2000, Mr. Walker was elected President of SURFA for the 2OO1-2OO2teri.Prior to that, he was elected to serve on the Board of Directors of SURFA during theperiod 1997-1998 and 1999-2000. Currently, he also serves on the Pennsyliania
Mu nicipal Authorities Association, Electric Deregu lation comm ittee.
EXPERT TESTIMONY
Mr' Walker has submitted testimony or been deposed on various topics before regulatorycommissions and courts in 25 states including: Arizona, California, Colorado,Connecticut, Delaware, Hawaii, lllinois, lndiana, Kentucky, Maryland, Massachusetts,
Michigan, Missouri, New Hampshire, Nevada, New Jersey, New york, North Carolina,Oklahoma, Pennsylvania, Rhode lsland, South Carolina, Vermont, Virginia, and WestVirginia. His testimonies covered various subjects including: fair market value, the takingof natural resources, benchmarking, appropriate capital structure and fixed capital cos-t
A-2
rates, depreciation, fair rate of return, purchased water adjustments, synchronization of
interest charges for income tax purposes, valuation, cash working capital, lead-lag
studies, financial analyses of investment alternatives, and fair value. The following
tabulation provides a iisting of the electric power, natural gas distribution, telephone,
wastewatei, and water service utility cases in which he has been involved as a witness.
Additionally, ne f,as been involved in a number of rate proceedings involving small public
utilities which were resolved by Option Orders and therefore, are not listed below.
Client Docket No
Alpena Power CompanY
Armstrong Telephone ComPanY -
Northern Division
Armstrong Telephone ComPanY -
Northern Division
Artesian Water ComPanY, lnc.
Artesian Water ComPanY, lnc.
Aqua lllinois Consolidated Water Divisions
and Consolidated Sewer Divisions
Aqua Illinois Hawthorn Woods
Wastewater Division
Hawthorn Woods Water Division
Kankakee Water Division
Kankakee Water Division
u-10020
92-0884:f -427
95-0571-T-427
90 10
06 158
1 1-0436
07 0620107 0621/08
0067
07 0620/07 0621108
0067
10-0194
14-0419
07 0620107 0621108
0067
07 0620/07 0621108
0067
07 0620/07 0621108
0067
A-2016-2580061
A-2017-2605434
A-2018-3001582
A-2019-3008491
A-2019-3009052
A-2019-3015173
Pue-2009-00059
Aqua lllinois
Aqua lllinois
Aqua lllinois
Aqua lllinois Vermilion Division
Aqua lllinois
Aqua lllinois
Willowbrook Wastewater Division
Willowbrook
Water Division
Aqua Pennsylvania Wastewater lnc
Aqua Pennsylvania Wastewater lnc
Aqua Pennsylvania Wastewater lnc
Aqua Pennsylvania Wastewater lnc
Aqua Pennsylvania Wastewater lnc
Aqua Pennsylvania Wastewater lnc
Aqua Virginia - Alpha Water Corporation
A-3
Aqua Virginia - Blue Ridge Utility Company, lnc
Aqua Virginia - Caroline Utilities, lnc.
(Wastewater)
Aqua Virginia - Caroline Utilities, lnc. (Water)
Aqua Virginia - Earlysville Forest Water
Company
Aqua Virginia - Heritage Homes of Virginia
Aqua Virginia - lndian River Water Company
Aqua Virginia - James River Service Corp.
Aqua Virginia - Lake Holiday Utilities, lnc.
(Wastewater)
Aqua Virginia - Lake Holiday Utilities, lnc.
(Water)
Aqua Virginia - Lake Monticello Services Co.
(Wastewater)
Aqua Virginia - Lake Monticello Services Co.
(Water)
Aqua Virginia - Lake Shawnee
Aqua Virginia - Land'or Utility Company
(Wastewater)
Aqua Virginia - Land'or Utility Company (Water)
Aqua Virginia - Mountainview Water Company,
lnc.
Aqua Virginia - Powhatan Water Works, lnc.
Aqua Virginia - Rainbow Forest Water
Corporation
Aqua Virginia - Shawnee Land
Aqua Virginia - Sydnor Water Corporation
Aqua Virginia - Water Distributors, lnc.
Berkshire Gas Company
Borough of Hanover
Borough of Hanover
Borough of Hanover
Borough of Royersford
Chaparral City Water Company
California-American Water Company
Con necticut-American Water Company
Con necticut Water Company
Citizens Utilities Company
Colorado Gas Division
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
Pue-2009-00059
18-40
R-2009-2106908
R-2012-2311725
R-2014-242830
A-2020-3019634
W 02113a 04 0616
ctvcv156413
99-08-32
06 07 08
A-4
Citizens Utilities ComPanY
Vermont Electric Division
Citizens Utilities Home Water Company
Citizens Utilities Water ComPanY
of Pennsylvania
City of Bethlehem - Bureau of Water
City of Bethlehem - Bureau of Water
City of Bethlehem - Bureau of Water
City of Dubois - Bureau of Water
City of Dubois - Bureau of Water
City of Lancaster Sewer Fund
City of Lancaster Sewer Fund
City of Lancaster Sewer Fund
City of Lancaster Sewer Fund
City of Lancaster Sewer Fund
City of Lancaster Water Fund
City of Lancaster Water Fund
City of Lancaster Water Fund
City of Lancaster Water Fund
City of Lancaster Water Fund
Coastland Corporation
Consumers Pennsylvania Water Company
Roaring Creek Division
Consumers Pennsylvania Water Company
Shenango ValleY Division
Country Knolls Water Works, lnc.
East Resources, lnc. - West Virginia Utility
Elizabethtown Water Com PanY
Forest Park, lnc.
Hampton Water Works ComPanY
Hidden Valley Utility Services, LP
Hidden Valley UtilitY Services, LP
lllinois American Water ComPanY
lndian Rock Water ComPanY
lndiana Natural Gas CorPoration
Jamaica Water SuPPIY ComPanY
Kane Borough AuthoritY
5426
R 901664
R 901663
R-00984375
R 00072492
R-2013-2390244
R-2013-2350509
R-2016-2554150
R-00005109
R-00049862
R-2012-2310366
R-2019-3010955
R-2019-3010955
R-00984567
R-00016114
R 00051 167
R-2010-2179103
R-2014-2418872
15-cvs-216
R-00973869
R-00973972
90 w 0458
06 0445 G 427
wR06030257
19-W-0168 & 19-W-
0269
DW 99-057
R-2018-3001306
R-2018-3001307
16-0093
R-911971
38891
A-5
A-2019-3014248
Kentucky American Water Company, lnc.
Middlesex Water Company
Millcreek Township Water Authority
Missouri-American Water Company
Missouri-American Water Company
Mount Holly Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey American Water Company
New Jersey Natural Gas Company
NeMown Artesian Water Company
Newtown Artesian Water Company
Newtown Artesian Water Company
Nevytown Artesian Water Company
Newtown Artesian Water Company
Nevytown Artesian Water Company
North Maine Utilities
Northern lndiana Fuel& Light Company
Oklahoma Natural Gas Company
Palmetto Wastewater Reclamation, LLC
Pennichuck Water Works, lnc.
Pennichuck Water Works, Inc.
Pennichuck Water Works, lnc.
Pennsylvania Gas & Water Company (Gas)
Pennsylvania Gas & Water Co. (Water)
Pennsylvania Gas & Water Co. (Water)
Pennsylvania Gas & Water Co. (Water)
Pennsylvania Gas & Water Co. (Water)
Pennsylvania Gas & Water Co. (Water)
Philadelphia Gas Works
2007 00134
wR 89030266J
55 198 Y 00021 11
wR 2000-281
sR 2000-282
wR06030257
wR 89080702J
wR 90090950J
wR 03070511
wR-06030257
wR08010020
wR10040260
wR11070460
wR15010035
wR17090985
wR19121516
GR19030420
R-911977
R-00943157
R-2009-2117550
R-2011-2230259
R-2017-2624240
R-2019-3006904
14-0396
38770
PUD-940000477
2018-82-S
DW 04 048
DW 06 073
DW 08 073
R-891261
R 901726
R-911966
R-22404
R-OO922482
R-00932667
R-2020-3017206
A-6
Public Service Company of North Carolina, lnc.
Public Service Electric and Gas Company
Public Service Electric and Gas Company
Presque lsle Harbor Water ComPanY
Sierra Pacific Power Company d/b/a NV Energy
St. Louis County Water ComPanY
SUEZ Water Delaware, lnc.
SUEZ Water New JerseY, lnc.
SUEZ Water Owego-Nichols, lnc.
SUEZ Water Pennsylvania, lnc.
SUEZ Water Pennsylvania, lnc.
SUEZ Water PennsYlvania, lnc.
SUEZ Water Rhode lsland, lnc.
SUEZ Water Owego-Nichols, lnc.
SUEZ Water New York, lnc.
SUEZ Westchester, lnc.
Town of North East Water Fund
Township of Exeter
United Water New Rochelle
United Water Toms River
Valley Township (water)
Valley Township (wastewater)
Valley Water Systems, lnc.
Virginia American Water ComPanY
West Virginia-American Water Company
West Virginia-American Water Company
Wilmington Suburban Water Corporation
York Water Company
York Water CompanY
York Water Company
York Water CompanY
York Water Company
York Water Company
Young Brothers, LLC
G-5, Sub 565
ER181010029
GR18010030
u-9702
19-06002
wR-2000-844
19-0615
wR18050593
17-W-0528
R-2018-3000834
A-2018-3003519
A-2018-3003517
Docket No. 4800
19-W-0168 & 19-W-
0269
19-W-0168 & 19-W-
0269
19-W-0168 & 19-W-
0269
9190
A-2018-3004933
w-95-W-1168
wR-95050219
A-2020-3019859
A-2020-3020178
06 10 07
PUR-2018-00175
15-0676-W-427
15-0675-S-427
94-149
R-901813
R-922168
R-943053
R-963619
R-994605
R-00016236
2019-0117
A-7
Michael C. Creamer (lSB No.4030)
Preston N. Carter (lSB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise, lD 83702
Telephone: [phone]
Facsimile: (208) 388-1 300
[e-mail]
prestonca rter@q ivenspu rslev. co m
Attorneys for SUEZ Water ldaho lnc.
IN THE MATTER OF THE APPLICATION
OF SUEZ WATER IDAHO INC. FOR
AUTHORIry TO INCREASE lTS RATES
AND CHARGES FOR WATER SERVICE
IN THE STATE OF IDAHO
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
Case No. SUZ-W-2O-O2
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT 1 TO ACCOMPANY THE
DIRECT TESTIMONY OF HAROLD WALKER, III
SUEZ V/ATER IDAHO INL.
BOISE,IDAHO
RATE OF RETURN
E)GIIBIT
TO ACCOMPANY THE
DIRECT TESTIMONY
SEPTEMBER 2O2O
Prepared by:
GANNETT FLEMING
VALUATION AND RATE CONSULTANTS, LLC
m
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page I of49
Valley Forge, Pennsylvania
Schedule I
Tvpe of Capital Ratios*
Debt 45.93o/o
Preferred Stock 0.00
Common Equity s4.07
Overall Cost of Capital 100-00%
Before Income Tax Interest Coverage (x)
(Based on effective income tax rate of 26.47%.)
* Ratios and embedded cost rates are from Exhibit
those of SUEZ Water Resources, Inc.
SUEZ Water Idaho Inc.
Cost of Capital and Fair Rate of Return
At August 30. 2020
Cost
Rate*
va
4.23
0.00
10.20
4.9x
r.94%
0.00
746%
The capital structure ratios are
Weighted
Cost Rate
(o/r)
5.52
Case No SUZ-W-20-A2
ExhibitNo. I
H. Walker
Page 2 of 49
Capital Structure Ratios for
The Water Group Followed by Analysts
At 3 I 3 I I 2020 and Estimated for 2024
Schedule 2
Page I of2
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 3 of49
Est.(l)
2024313u2020
Water Group Followed by Anal),sts
Long-term Debt 50.7 %
Preferred Stock 0.0
Common Equrty 49.3
43.7 %
0.0
56.3
Total 100.0 %100.0 %
Notes: (l) Project by Value Line for the period 2023 to 2025.
Source of Information: Value Line Investment Survey, 7110120, and S&P Capital IQ
Schedule 2
Page2 of?
Capital Stmcture Ratios for
The Water Group Followed by Analysts
At 3/31/2020 utdEstimated for 2024
Actual at 3l3l/20
Debt Stock Equity
Water Group Followed by Anal),sts
American States Water Co
American Water Works Co Inc
California Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
46.5
58.4
51.7
51.5
43.0
60.3
43.3
0.0
0.0
0.0
0.0
0.4
0.0
0.0
0.q
53.5
41.6
48.3
48.5
56.6
39.7
56.7
Average 59.2 t%)
Estimated at2024
Debt Stock Equity
Water Groun Followed bv Analvsts
American States Water Co
American Water Works Co Inc
California Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
49.5
59.0
43.5
40.5
39.0
39.0
36.0
-1.0
0.0
0.0
0.0
0.5
0.0
0.0
5l .5
4l.0
56.5
59.5
60.s
6l.0
64.0
Average tlt 00 [S.L
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 4 of49
Source of Information: Value Line Investment Survey, 7110120, and S&P Capital IQ
Schedule 3
Page I ofL
SUEZ Water Idaho Inc.
Five Year Analysis
2015 - 2019 (l)
Lr,#2019 2018 2017 2016 2015
(Millions of $)
Investor Provided Capital($)
I Permanent Capital
2 Short-Term Debt
3 Total Capital
193.554
0.000
J93.5r4
180.33 I
0.000
lE0.33l
168.639
0.000
L6E 6.19
163.820
0.000
L6;L!20
166.177
0.000
l55.L7l
Average
Arm. Chq(%)
3.9
3.9
(0.2)
t2.t
4 Total Revenue($)46.062 48.406 48.899 49.822 46.512
5 Construction($)23-877 19.303 25.430 19.196 16.485
6 Effective lncome Tax Rate(%)30.9 28.7 4t.6 25.1 39.7
0.0
0.0
100.0
Jr)00
0.0
0.0
100.0
u00
NA
NA
0.0
4.2
4.2
2.9
Five Year
Averase
33.2
Average
Cental
Values(9)
33. I
Capitalization Ratios(%)
7 Long-Term Debt
8 Preferred Stock
9 Common Equity
Total
0.0
0.0
100.0
1000
0.0
0.0
100.0
lolJ
0.0
0.0
100.0
t0!.0
0.0
0.0
100.0
u0.a
0.0
0.0
100.0
0.0
0.0
100.0
l0ll
t2
Total Debt
Preferred Stock
Common Equity
Total
0.0
0.0
100.0
100.0
0.0
0.0
100.0
r09.q
0.0
0.0
100.0
u0.q
0.0
0.0
100.0
109.0
0.0
0.0
100.0
0.0
0.0
100.0
l3
t4
l5
Rates on Average Capital(2)(%)
Total Debt
Long-Term Debt
Preferred Stock
NA
NA
0.0
NA
NA
0.0
NA
NA
0.0
NA
NA
0.0
NA
NA
0.0
NA
NA
0.0
l6
t7
l8
Coverage - Including AFC(3Xx)
PreTax Interest
PreTax lnterest * Pref. Div
PostTax lnterest + Pref Div
5.3
5.3
4.0
5.2
5.2
4.0
4.6
4.6
3.1
4.5
4.5
3.7
4.8
4.8
3.5
4.8
4.8
3.6
Coverage - Excluding AFC(3)(x)
19 PreTax lnterest
20 PreTax Interest + Pref. Div
2l PostTax Interest + Pref. Div
5.0
5.0
3.t
6.7
0.0
12.8
93.0
9.7
NA
I 1.5
5.0
5.0
3.8
4.5
4.5
3.0
4.5
4.5
3.6
5.3
1.2
I1.6
15.9
2.0
NA
11.9
4.1
4.1
2.9
4.7
2.2
l0.l
53.7
2.5
NA
9.7
4.6
4.6
3.4
4.7
4.'7
3.4
22 GCF / Interest Coverage(4)(x)
23 Coverage of Common Dividends(5Xx)
24 Construction / Avg. Tot. Capital(%)
25 NCF / Construction(6X%)
26 AFC / lncome for Common Stock
27 GCF /Avg Tot. Deb(7)(%)
28 GCF / Permanent Capital(8)(%)
See page 3 ofthis Schedule for notes.
6.2
17.3
ll.l
101.4
5.2
NA
r 1.5
5.1
13.0
15.3
65. I
2.3
NA
10.6
5.6
6.7
12.2
65.8
4.3
NA
I 1.0
5.5
5.5
I1.8
70.6
J.J
NA
tt.2
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 5 of49
Schedule 3
Page2 of2
SUEZ Water Idaho Inc.
Five Year Analysis
2015-20t9
Notes
(l)Based upon the achieved results for each individual company based upon the
financials as originally reported.
(2) Computed by relating total debt interest, long-term debt interest and preferred
dividend expense to average of beginning and ending balance of the
respective capital outstanding.
(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.
(4) GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.
(5) GCF (see note 4) less all preferred dividends which cover common
dividends.
(6) The percent of GCF (see note 4) less all cash dividends which cover gross
construction expenditures.
(7)GCF (see note 4) as a percentage of Permanent capital (long-term debt,
current mafurities and preferred, preference and common equity).
(8) GCF (see note 4) as a percentage of average total debt.
(9) Average of the second, third and fourth quintile values.
Source of Information: Annual Reports filed with the ID PUC
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 6 of 49
Schedule 4
Page 1 of2
Water Grouo Followed bv Analv$s
Five Year Analysis
2015 - 2019 (1)
bt 2019 2018 2017 2016 2015
(Mllions of $)
Average
Arrr Che(7o)
I 1.9
1 1.8
3.5
10.9
Investor Provided Capital($)
t PernanentCapital
2 Short-TermDebt
3 Total Capital
3,934.479
162.140
4,096.619
3.230.128
171.857
3,401.985
2,836.135
188.340
3,024.47s
2,677.151
154.493
2,831.644
2,530.244
t06.277
2,636.521
4 Total Revenue($)899.2s4 8s6.759 835.976
357.285
812.504 785.4E7
5 Construction($)414.853 386.422 320.360 274.975
6 Effective Inconr TaxRate(%)13.4 14.4 32.2 32.0 3l.5
Five Year
Average
24.7
Average
Central
Value(9)
31.5
Book Capitalizarion Ratios(%)
7 Long-TermDebt
8 Preferred Stock
9 ComrnnEquity
Total
49.4
0.1
50.6
100.0
46.2
0.1
53.7
100.0
45.6
0.1
54.3
100.0
46.2
0.1
53.7
100.0
46.3
0.1
53.6
100.0
46.7
0.1
53.2
46.2
0.1
53.7
10
l1
t2
Total Debt
Preferred Stock
Cornrnon Equity
Total
50.9
0.1
49.0
100.0
48.5
0.1
51.4
100.0
49.0
0.1
s0.9
100.0
48.5
0.1
51.4
I00.0
47.5
0.1
52.4
100.0
48.9
0.1
s1.0
48.5
0.1
51.4
13
14
ls
Rares on Average Capital(2[%)
Total Debt
Long-TermDebt
Preferred Stock
4.4
3.9
5.8
5.1
4.5
5.9
4.9
5.1
5.9
5.1
5.1
5.9
5.2
5.3
5.9
5.0
4.8
5.9
4.2
4.2
3.4
5.1
5.1
5.9
l6
t7
18
Coverage - Incltdine AFC(3)(x)
PreTax Interest
PreTa:r Interesl + Pref Div
PostTax It$erest + Pref. Div
3.6
3.6
3.3
3.7
3.6
3.3
3.6
3.6
3.2
5.0
3.2
13.6
49.2
3.6
19.3
9.1
4.8
4.8
3.6
4.7
4.6
3.5
4.4
4.4
3.3
4.4
4.3
3.2
6.2
4.0
10.8
90.4
2.2
2s.8
12.1
4.4
4.4
33
Coverage - ExcludirU AFC(3)(x)
19 PreTaxlrtreresl
20 PreTaxlnterest+ Pref Div
2l PostTax Irtere$ + Pref Div
22 GCF / Interest Coverage(4)(x)
23 CoverageofConnmnDividend{5)(x)
24 Construction i Avg Tol Capital(%)
25 NCF / Construction(6x%)
26 AFC / Inconr for Conrmn Stock
27 GCFi Avg. Tot Deb(7X%)
28 GCF / Pernranent Capital(8[%)
See page 2 ofthis Schedule for notes.
3.5
3.5
3.2
5.1
3.0
12.8
46.7
6.5
17.7
8.3
4.7
4.7
3.5
6.1
4.0
14.4
62.0
3.7
23.9
I 1.9
4.6
4.6
3.4
4.2
4.1
3.3
5.6
3.6
13.0
62.9
3.8
22.1
10.6
4.4
4.3
3.2
5.8
3.9
13.4
66.2
2.8
23.9
I 1.4
5.8
3.9
13.4
62.0
3.6
23.9
I 1.4
Case No SUZ-W-20-02
ExhibitNo.I
H. Walker
PageT of49
Notes:
Water Group Followed by Anal],sts
Five Year Analysis
2015-2019
(l ) Average of the achieved results for each individual company based upon the
financials as originally reported.
(2) Computed by relating total debt interest, long-term debt interest and preferred
dividend expense to average of beginning and ending balance of the
respective capital outstanding.
(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.
(4) GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.
(5)GCF (see note 4) less all preferred dividends which cover common
dividends.
(6) The percent of GCF (see note 4) less all cash dividends which cover gross
construction expendifures.
(7) GCF (see note 4) as a percentage of Permanent Capital (long-term debt,
current maturities and preferred, preference and common equity).
(8) GCF (see note 4) as a percentage of average total debt.
(9) Average of the second, third and fourth quintile values.
Source of Information: Standard & Poor's and Annual Reports
Schedule 4
Page2 ofT
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 8 of49
2019
sl,186.799
1.626.323
52,813.123
2017
(Mllions of $)
42,898.s67
1-461.341
,l4,359.908
14.075.30s
5,017.795
2016
40,656.671
1.349.417
42,006.088
2015
3s,858.8 14
1.276.707
37,135.521
Average
Ann Chs(%)
Schedule 5
Page I of2
Average
Ceilral
Value(9)
27.2
56.1
0.6
43.4
S&P Utilities
Five Year Analysis
2015 -2019 0\
2018Ln#
Investor Provided Capital($)
I Perrnanent Capital
2 Short-TermDebt
3 Total Capital
4 Total Revenue($)
5 Con$ruction($)
6 Effective Irrcorr Tax Rate(%)
Book Capital ization Ratio{%)
7 Long-TermDebt
8 Preferred Stock
9 Comrnn Equity
Total
14,806.863 14,s13.493
6,2s9.136 5,465.970
13,371.010 13,421.140
4.948.510 4.358.889
4s,049.028
2.223.236
47,272.264
9.4
9.3
2.5
9.6
Five Year
2s.3
Averase
4.2
NA
5.3
3.2
3.2
2.9
15.8
56, l
0.9
43.1
100.0
57.5
0.8
41.6
100.0
4.4
NA
6.4
3.1
3.1
2.8
29.8 20.0
55.8
0.5
43.6
100.0
s8.0
0.5
41.5
100.0
3.2
3.2
2.8
5.3
3.9
12.6
61.4
3.4
l7.6
l0.l
s7.2
0.0
42.8
100.0
58.8
0.0
41.2
100.0
3.2
3.2
2.7
5.2
3.2
12.4
53.3
4.5
17.1
9.8
s6.6
0.0
41.4
100.0
27.2
3.1
3.1
2.4
5.2
J.J
13.2
50.4
(2.e)
16.9
9.1
56. I
0.3
43.6
33.6
54.7
0.0
45.3
100.0
56.2
0.0
43.8
100.0
4.2
NA
NA
3.2
3.2
2.8
3.3
,.,
2.8
3.7
3.7
2.8
10
1l
12
l3
14
15
Total Debt
Prefened Stock
Conrnon Equity
Total
Rates on Average Capital(2)(%)
Total Debt
long-TermDebt
Preferred Stock
Coverage - Including AFC(3Xx)
PreTax Interesl
PreTax Interest + Pref Div
PostTax Interest + Pref Div
58.2
0.0
41.8
100.0
4.2
NA
NA
3.2
3.2
2.5
s7.7
0.3
42.0
58.0
0.4
41.6
4.2
0.0
0.0
4.2
NA
5.8
t6
t7
l8
4.1
NA
NA
3.3
J_)
2.8
Coverage - Excluding AFC(3 Xx)19 PreTaxlntere$
20 PreTax Intere$ + Pref Div
21 PostTax Imerest + Pref Div
22 GCF/InterestCoverage(4)(x)
23 Coverage ofConnnonDividend{SXx)
24 Construction / Avg. Tot. Capital(%)
25 NCF / Constructio(6X%)
26 AFC / Inconp for Conmon Stock
27 GCF / Avg Tot. Deb(7X%)
28 GCF / Pernanent Capital(8)(%)
See page 2 ofthis Schedule for rotes.
3.0
3.0
2.8
5.0
4.1
12.6
67.?
4.6
17.0
95
3.6
3.6
2.7
5.8
3.9
12.8
60.1
3.4
19.7
10.6
3.2
3.2
2.7
5.3
3.7
12.7
s8.6
2.6
17.7
9.8
3.2
3.2
2.7
5.2
3.9
12.6
60. I
3.4
17.3
9.8
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 9 of49
Schedule 5
Page2 of2
Notes:
S&P Public Utilities
Five Year Analysis
2015-2019
(l) Market value weighted achieved results for each individual company based
upon the financials as originally reported.
Computed by relating total debt interest, long-term debt interest and prefened
dividend expense to average of beginning and ending balance of the
respective capital outstanding.
(2)
(4)
(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.
GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.
(5)GCF (see note 4) less all preferred dividends which cover common
dividends.
(6)The percent of GCF (see note 4) less all cash dividends which cover gross
construction expenditures.
(7) GCF (see note 4) as a percentage of Permanent Capital (long-term debt,
current maturities and preferred, preference and common equity).
(8) GCF (see note 4) as a percentage ofaverage total debt.
(9) Average of the second, third and fourth quintile values
Source of Information: Standard & Poor's, Moody's and Annual Reports
CaseNo SUZ-W-20-02
ExhibitNo.I
H. Walker
Page l0 of49
Risk Measures for the Common Stock of
The Water Croup Followed bv Analvsts and the S&P Utilities
Market
Ouartile
Schedule 6
Page I of3
Market
Quartile
Name
Low{ap
Large{ap
Low{ap
Mid{ap
Low{ap
Low{ap
Mico{ao
Iau{en
Recent
s&P
Issuer Credit
Ratine
Stock
Exchanee
NYSE
NYSE
NYSE
NYSE
NasdaqGS
NYSE
NasdaqGS
Recent
S&P
Qualrty
Rankine
Hieh (A)
Above Average (A-)
Above Average (A-)
Hieh (A)
Hrch (A)
Average (B+)
Hieh (A)
Aboxr3ysaecl&)
Lower (B-)
Htch (A)
Above Average (A)
Average (B+)
Above Average (A-)
Above Average (A)
Average (B+)
Above Average (A-)
Average (B+)
Below Average (B)
Above Average (A-)
Above Average (A-)
Below Average (B)
Below Average (B)
Above Average (A)
Hish (A)
Below Average (B)
In Reorganization (D)
Hrch (A)
Below Average (B)
Below Average (B)
Hish (A)
Average (B+)
Average (B+)
Average (B+)
Average (B+)
Hieh (A)
Hish (A)
Value
Line
Beta
Rec€nt
Market
Value
(Mill $)
Water Group Followed bv Analvsts
American States Water Co
American Water Works Co Inc
California Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
Average
S&P Public Urilities
AES Corporation (The)
Alliant Energy Corporation
Ameren Corporation
American Electric Power Company, Inc
American Water Works Company, Inc.
Atmos Energy Corporation
CenterPoint Energy, Inc.
CMS Enerry Corporation
Consolidated Edison, Inc.
Dominion Energy, Inc.
DTE Energy Company
Duke Energy Corporation
Edison Intemational
Entergy Corporation
Evergy. Inc.
Eversource Energy
Exelon Corporation
FirstEnergy Corp.
NextEra Energy, Inc.
NiSource Inc.
NRG Energy, Inc.
Pinnacle West Capital Corporation
PPL Corporation
Public Service Enterprise Group Incorp
Sempra Energy
Southem Co (The)
WEC Energy Group, Inc.
Xcel Enerry Inc.
0.65
0.85
0.65
0.90
0.75
0.80
0.80
wl
A+
A
A+
A
A
A-
A-
A
2,835.624
26,659.246
2.283.225
1t,t12.622
r,rl7.l92
1,780.573
603.203
2,,2,$.2n
3
I
J
a
3
3
!
BB+
A-
BBB+
A-
A
A
BBB+
BBB+
A-
BBB+
BBB+
A.
BBB
BBB+
A-
A-
BBB+
BBB
A-
BBB+
BB+
A-
A-
BBB+
BBB+
A.
A.
A-
NYSE
NasdaqGS
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NasdaqGS
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NasdaqGS
10,126.541
13,435.777
19,8 I 0.536
43,056.263
26,659.246
12,963.797
I 0,354.603
18,368.903
25.669.060
68,004.509
22,276.205
62,27 t.404
21,055.562
2t,048.1r7
14,699.585
30,853.001
37,621.887
15,710.857
137,444.127
9,359.447
8,2s2.s84
9,345.956
20,464.484
28,284.681
36,410.188
57,675.300
30.048.293
36-269.633
Mid{ap
Mid{ap
Large{ap
Large{ap
Large{ap
Mid{ap
Mid{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Larye{ap
Large4ap
Large{ap
Mid{ap
Mid{ap
Mid{ap
Large{ap
Large{ap
Large{ap
Large{ap
Large{ap
Larqe{ap
1.05
0.80
0.80
0.7 5
0.85
0.80
Ll5
0.80
0.75
0.80
0.90
0.85
0.90
0.95
1.05
0.90
0.90
0.85
0.85
0.85
1.25
0.85
1.05
0.90
0.95
0.90
0.80
0.75
2
2
I
I
I
2
2
I
I
I
1
I
I
I
I
I
I
I
I
2
)
2
I
I
I
I
I
-L
I IargE{ru
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page ll of49
Average EEE AyeiEgsJE) 0.!9 1!,2,59.i95
Schedule 6
Page2 of3
Comparative Ratios
For SUEZ Water Idaho Inc.,
the Water Group Followed by Analysts,
S&P Utilities, and S&P 500
For the Years 2015-2019(l)
2019 2018 2017 2016 2015
Five
Year
Averaee
49.s
60.4
66.1
44.5
Rehrrn on Common Eouitv(2)
SUEZ Water Idaho Inc.
Water Grorry Followed by Analysts
S&P Urilities
s&P 500
Market/Book Multiple(3)
Water Group Followed by Analysts
S&P Utilities
s&P 500
Eamines/Price Ratio(4)
Water Group Followed by Analysts
S&P Utilities
s&P 500
Dividend Pavout Ratio(S )
SUEZ Water Idaho Inc.
Water Group Followed by Analysts
S&P Utilities
s&P 500
Dividend Yield(6)
Water Grorp Followed by Analysts
S&P Utilities
s&P 500
See nex page for Notes.
6.3
9.5
9.8
15.8
6.7
r0.l
10.2
15.9
7.4
10.9
9.1
12.6
5.2
10.4
9.3
t2.t
6.2
10.5
9.7
t4.t
3.1
1.8
3.2
3.1
2.2
3.1
2.8
2.0
2.7
2.5
1.9
2.7
2.9
2.1
2.8
2.7
5.3
4.9
J.J
5.2
5.1
3.7
4.7
4.7
5.5
tt.4
10.3
14.0
3.7
4.8
4.5
3.4
2.6
3.2
0.0
73.2
77.1
41.9
10.2
60.5
58.7
40.4
135.3
56.2
55.4
47.6
87.0
s7.5
s5.0
48.7
14.9
54.7
84.1
43.8
4.6
4.0
4.4
4.0
4.4
4.6
2.1
3.6
2.2
1.8
3.4
2.1
2.0
3.7
2.0
1.9
3.5
2.0
2.6
3.7
2.2
2.t
3.6
2.1
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 12 of 49
Comparative Ratios For
SUEZ Water Idaho Inc.,
The Water Group Followed by Analysts,
The S&P Utilities, and the S&P 500
For the Years 2015-2019 (1)
Notes
(l)The average of achieved results for the companies in each group. The
information for the S&P Public Utilities is market weighted. The information
for the S&P 500 is based upon per share information adjusted to price index
level.
(2) Rate of Return on Average Book Common Equity - income available for
common equity divided by average beginning and ending year's balance of
book common equity.
(3) Market/Book Ratio - average of yearly high-low market price divided by the
average of beginning and ending year's book value per share.
(4) Earnings/Price Ratio - reported eamings per share yearly divided by the
average of yearly high-low market price.
(5) Dividend Payout Ratio is computed by dividing the yearly reported dividends
paid by the yearly income available for common equity.
(6) Dividend Yield - yearly dividend per share divided by the average yearly
high-low market price.
Source of Information: Standard & Poor's and Annual Reports
Schedule 6
Page 3 of3
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 13 of49
Schedule 7
SUEZ Water Idaho Inc.
Water Group Followed by Analysts
S&P Utilities
Caoital Intensitv and Caoital Recovery
SIIEZ Water Idaho Inc.
The Water Group Followcd by Analysts, and S&p Utilities
For the Year 2019
Capital
Intensity
$10.72
$6.7r
Rate of
Capital
Recovery
1.94%
2.07%
3.21%
Capital
Recovery
Years
49.0
51.6
32.8
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 14 of49
$4.65
Schedule 8
Relative Size of
SUEZ Water Idaho Inc.
Versus the Water Group Followed by Analysts
For the Year 2019
Total Capital ization (000's)
Total Operating Revenues (000's)
Number of Customers
SUEZ Water
Idaho Inc.
$193,554
$46,062
97,029
Water Group
Followed by
Analvsts
Water Group
Followed by
Analysts
Vs.
SUEZ Water
Idaho Inc.
203 x
19.5 x
8.6 x
$3,934,000
$899,000
834,921
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page l5 of49
Schedule 9
Institutional Holdings, Insider Holdings and Percentage ofShares Traded Annually for
The Water Grouo Followed bv Analvsts. and the S&p Utilities
Water Group
Followed by
Analvsts
Percentage ofcommon shares held by insiders (l)
Percentage of common shares held by institutions (2)
Percentage ofCommon Shares Traded in 2018
Percentage ofCommon Shares Traded in 2019
2.3o/o
68Y.
135%
tts%
s&P
Public Utilities
03%
80o/o
193%
l630/o
7.4Average Number of Months For All Common Shares to Tumover (3)12.9
Notes: (l) An insider is a dhector or an offtoer who has a policy-making role or a person who is directly or indirecfly the
beneficial owner of more than l0%o of a certain company's stock. An insider may be either an individual or a
corporation. Insiders are required to disclose their purchase/sale hansactions to the SEC in which a change in
beneficial ov"nership has occurred. The filings must be submitted before the end ofthe second business day
following the day on which the transaction had been executed.
(2) Institutional holders are those investment managers having a fair market value ofequity assets under
management of $100 million or more. Certain banks, insurance companies, investment advisers, investment
companies, foundations and pension funds are included in this category.
(3) Based on average tumover (shares traded) over the past five years.
CaseNo SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 16 of49
Bond and Credit Ratings for
SUEZ Water Idaho Inc., SUEZ Water Resources Inc.and
The Water Group Followed by Analysts
Schedule 10
Page I of4
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
PagelT of49
s&P
Credit
Ratine
SUEZ Water Idaho
SUEZ Water Resources Inc.
Water Group Followed bY Analysts
American States Water Co
American Water Works Co Inc
California Water Service GP *
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
Average
rt
NA
A
A+
A
A+
A
A
A.
A-
A
- The A+ bond rating is that for Califomia Water Service, Inc
Schedule l0
Page2 of4
Comparison of Credit Measures of Financial fusk
SUEZ Water Idaho Inc. and
For the Water Grouo Followed by Analysts( 1 )
Spot in Credit Measures of
Financial Risk Gor the Year 2019)
Trend in Credit Measues of
Year
Credit Subject
Imolication Comoanv
Water Group
Followed by
Analvsts
Credit
Imolication
Higher
NA
Lower
NA
Higher
Higher
Subject
Comoanv
Water Group
Followed by
Analvsts
4.2x
489%
5.6x
22 1%
62.9%
12.4o/o
Base Credit Metrics
2. PreTax Interest Coverags(2xx)
3. Total Debt/Total Capital(o/o)
4. GCF/ Interestcoverage(3xx)
5. GCF / Average Total Deb(4X%)
6. NCF / Constuction(5)(o/")
7. Construction / Average Total Capita(6)(%)
Higher
NA
Higher
NA
Higher
Lower
Higher
Higher
5.0x
NA
6.7x
NA
93.0%
12.8%
3.5x
50.9%
5. lx
17.7o/o
46.7o/o
12.3%
18.0o/o
4.8x
5. lx
5.2x
17.7o/o
-7.20/o
-13.4%
5. lx
17.7%
ll.6yo
44.6%
8.8%
9.5x
8.7o/o
-3.60/o
-6.60/o
8.7o/o
5.7o/o
4.6x
NA
5.6x
NA
65.8o/o
12.2o/o
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Standad & Pm/s Credit Metrics
Funds from Operation / Average Total Dell/'OX%)
Average Total Debt / EBITDA(EXx)
FFO / Interest Coverage(gxx)
EBITDA / Interest( I 0[x)
CFO / Average Total Deb(l 1[%)
FOCF / Average TotalDebt(12)(o/o)
DCF / Average Total Deb(l3X%)
Moodv's Credit Metrics
Cash Flow Interest Coverage(3) (x)
Cash Flow / Average Toal Deb(4X%)
Retained Cash Flow / Average Total Deb(l4x%)
Average Total Debt / Average Adjusted Total Capital(15j(%)
22. Standard & Poo/s Credit Metrics - Adiusted to Total Capital
23. Funds from Operation/ Average Total Capial(16X%)
24. Average Total Capital / EBITDA(I7Xx)
25. CFO / Average Total Capita( I 8X%)
26. FOCF /Average Total Capital(l9X7o)
27. DCF / Average TotalCapital(20)(%)
28. Moodv's Credit Metrics - Adjusted to Total Caoital
29. Cash Flow / AverageTotalCapital(21)(o/o)
30. Retained Cash Flow / Average Total Capital(22){o/o)
See the next page for notes.
NA
NA
Higher
Higher
NA
NA
NA
Higher
NA
NA
NA
Higher
Higher
Higher
Higher
Higher
NA
NA
6.7x
7.8x
NA
NA
NA
NA
NA
Higher
Higher
NA
NA
NA
Lower
NA
NA
NA
Higher
Higher
Higher
Higher
Higher
21.90
1.7x
5.6x
5.9x
22.|Yo
-3.7%
-10.3%
NA
NA
5.6x
6.9x
NA
NA
NA
5.6x
NA
NA
NA
6.7x
NA
NA
NA
11.9%
6. lx
11.9o/o
-0.9%
-0.*/o
lt.9%
ll.9%
Higher
Higher
tt3%
5.8x
ll.3%
-0.9o/o
4.1%
11.3%
8.lo/o
5.6x
22.1%
15.6%
41.2%
10.4%
7.6x
l0.sYo
-1.gYo
-5.0o/o
10j%
7.4o/o
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page l8 of49
Credit Metrics
Notes:
(1)
(2)
Comparison of Credit Market Financial Risk Metrics
For SUEZ Water Idaho Inc. and
The Water Group Followed by Analysts
2015 - 2019
Average of the achieved results for each individual company based upon the
financials as originally reported.
Represents the number of times available pretax earnings ("EBIT"), excluding AFC,
cover all interest charges.
GCF or gross cash flow (sum of net income, depreciation,amortization, netdeferred
income taxes and investment tax credits, less AFC), plus interest charges, divided by
interest charges.
GCF (see note 3) as a percentage of average total debt.
The percent of GCF (see note 3) less all cash dividends which cover gross
construction expenditures.
Construction expenditures as a percentage of average total capital.
Funds from operations ("FFO"), revenue minus operating expenses, plus
depreciation and amortization expenses ("EBITDA") less net interest expense less
current tax expense, as a percentage ofaverage total debt.
Average total debt divided by EBITDA (see note 7).
FFO (see note 7) plus interest charges, divided by interest charges.
EBITDA (see note 7) divided by interest charges.
Cash flow from operations ("CFO"), GCF (see note 3) plus changes in operating
assets and liabilities (working capital), as a percentage of average total debt.
Free operating cash flow ("FOCF"), CFO (see note I l) minus capital expenditures,
as a percentage ofaverage total debt.
Discretionary cash flow ("DCF"), FOCF (see note 12) minus cash dividends as a
percentage ofaverage total debt.
The percent of GCF (see note 3) less all cash dividends as a percentage of average
total debt.
Average total debt divided by average of total capital plus deferred taxes (balance
sheet).
Funds from operations ("FFO"), revenue minus operating expenses, plus
depreciation and amortization expenses ("EBITDA") less net interest expense less
current tax expense, as a percentage ofaverage total capital.
Average total capital divided by EBITDA (see note 7).
Cash flow from operations ("CFO"), GCF (see note 3) plus changes in operating
assets and liabilities (working capital), as a percentage of average total capital.
Free operating cash flow ("FOCF"), CFO (see note 11) minus capital expenditures,
as a percentage ofaverage total capital.
Discretionary cash flow ("DCF"), FOCF (see note 12) minus cash dividends as a
percentage of average total capital.
GCF (see note 3) as a percentage of average total capital.
The percent of GCF (see note 3) less all cash dividends as a percentage of average
total capital.
Source of Information: Standard & Poor's, Moody's and Annual Reports
Schedule l0
Page 3 of4
Case No SUZ-W-20-02
Exhibit No. I
H. Walker
Page 19 of49
(3)
(4)
(s)
(6)
(7)
(r2)
(13)
(14)
(1 s)
(16)
(8)
(e)
(10)
(l l)
(17)
(l 8)
(te)
(20)
(21)
(22\
Schedule 10
Page 4 of 4
Number of
Compoies
In Each
Grouoinq
Distribution of Bond ad Credit Ratings for
All Comomics Contained in S&Fs Cozprcral Darabe 0)
S&P Bond and Credit
Rage of Reported Pemflent
laqestAvsee Medio Maimum Minimm Smallest Media
100
100
100
100
100
100
100
100
100
100
100
100
100
100
t00
100
8
BBA
BB. BB. AA.
BB. BB. A+
BB BB A.
BB+ BB+ A
BB+ BB+ A+
BB+ BB+ A+
BBB. BBB- A+
BBB. BBB. AA
BBB. BBB A+
BBB BBB AA-
BBB BBB A+
BBB BBB A+
BBB+ BBB+ AA+
BBB+ A. AA+
A. A. AAA
A. A. AA
t6%
5o/o
60/o
2yo
3%
2o/o
t%
@/.
2Yo
u/o
@/o
lo/o
l%o
U/o
OYo
0/o
@/o
57Yo
36yo
3y/o
23Yo
2V/o
t2%
l5Yo
sYo
l3o/o
8Yo
7o/o
3yo
60
3Yo
@/o
lY6
@/o
t6%
43o/o
40o/o
48%
37yo
4lo/o
33%
37o/o
33%
29/o
l9/o
t3%
t4%
l5o/o
lU/o
3o/o
Oo/o
4%
4Yo
4Yo
5o/o
s%o
l3o/o
ll%o
ttyo
l6Yo
rSYo
230/o
24o/o
28%
35Yo
44o/o
3|yo
63yo
@/o
lYo
U/o
V/o
V/o
8/o
U/o
V/o
2Yo
U/o
2o/o
oyo
@/o
2Yo
9o/o
2ryo
l3Yo
@/o
V/o
@/o
0o/o
@/o
U/o
V/o
@/o
u/o
OYo
@/o
OYo
@/o
@/o
0o/o
2%
V/o
Default
ccc
ccc
cc
ccc
CCC+
cc
B.
ccc+
B
Defult
Default
ccc
B
BB.
B
BBB
-2,81 3.000
666.479
t,069.648
1,505.676
1,908.991
2,517.100
3,300.651
4,000.800
5,019.600
6,325.000
7,885.887
I 0,608.073
t4,025.354
18,977.000
2',1,545.OO0
61,394.000
350,339.000
48t.268
845.776
t,262.592
t,7M.365
2,194.582
2,861.849
3,596.152
4,450.659
5,663.956
6,984.000
8,957.652
t2,t66.560
16,263 500
22,870.'1't0
37,567.385
94,340.963
429,595.500
659.429
1,064.303
1,500.252
1,904.804
2,5 16.000
3,295.586
3,996.000
5,004.700
6,323.582
?,867.057
10,529.894
13,998 000
18,976.100
2'7,540.000
61,000.000
32?,',180.000
538,546.000
Nmber of
Companies
In Each
Grouoinc
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
8
-2,81 3.000
666.479
1,069.648
1,505.676
1,908.99t
2,5t7.t00
3,300.651
4,000.800
5,019.600
6,325.000
7,885.887
10,608.073
14,025.354
I 8,977.000
27,545.000
61,394.000
350,339.000
48t.268
845.776
1,262.592
1,704.365
2,t94.582
2,86't.849
3,596.752
4,450.659
s,663.956
6,984.000
8.95?.652
t2,166.560
16,263.500
22,810.770
37,56'.1.t85
94,340.963
429,595.500
659.429
t,064.303
t,500.252
1,904.804
2,516.000
3,295.586
3,996.000
5,004.700
6,323.582
7,867.057
10,529.894
13,998.000
l 8,976.100
27,540.000
61,000.000
327,7E0.000
538,546.000
rotal __U99__
Rilge of Reported Pemment
Capital By GrouDins (Million $)ofS&P Bond
BBB BB B ccc cc DefaultSmallestMedianLarcest
6Yo
rryo
llo/o
2t%
3sYo
32o/o
3y/o
4',tyo
34Yo
48o/o
s@/o
57o/o
5t%
4syo
37Yo
35o/o
25%
Oo/o
V/o
t/o
lo/o
V/o
OYo
lYo
V/o
u/o
OYo
A/o
V/o
oYo
V/o
e/o
OYo
oYr
lo/o
@/a
0/o
@/o
V/o
u/o
@/o
V/o
v/o
OYo
l%
zYo
u/o
On/o
e/o
u/o
Oo/o
1,608
Note; (l) Includes all compaies contained in S&P! Conpustat North America Databde that hav€ a S&P bond or credit ratings ddreportedpemilentcapitalfortheyear2018(asof8/8/19). Compuieswemrtedbedonmountofreponedpemaent
capital ud then seprated into groups of 100 compaies from smallcst to ldgcst.
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 20 of 49
Schedule 11
Page I of7
Interest Rate Trends for
Investor-Owned Public Utility Bonds
Yearlv for 2014-2018. Monthly for the Years 2019 and 2020
Years Aaa Rated Aa Rated A Rated Baa Rated
2014
2015
2016
2017
2018
NA
NA
NA
NA
NA
4.18
4.00
3.73
3.82
4.09
4.28
4.12
3.93
4.00
4.25
4.80
5.03
4.68
4.38
4.67
Average NA 3.96 4.tt 4.71
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
NA 4.18
4.05
3.98
3.91
3.84
3.65
3.53
3.17
3.24
3.24
3.25
3.22
3.61
4.35
4.25
4.16
4.08
3.98
3.82
3.69
3.29
3.37
3.39
3.43
3.40
3.77
4.91
4.76
4.65
4.55
4.47
4.31
4.13
3.63
3.71
3.72
3.76
3.73
4.19
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Jan
Feb
Mar
Apr
May
Jun
Jul
2020
2020
2020
2020
2020
2020
2020
NA
NA
NA
NA
NA
NA
NA
3.12
2.96
3.30
2.93
2.89
2.80
2.46
3.29
3.11
3.50
3.19
3.14
3.07
2.74
3.60
3.42
3.96
3.82
3.63
3.44
3.09
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page2l of 49
Source of Information: MERGENT BOND RECORD
Schedule I I
Page2 of7
Credit Risk Spreads of
Investor-Owned Public Utility Bonds
Yearly for 2014-2018. Monthlv for the Years 2019 and 2020
Aa
Over
Aaa
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
A Baa
Over
A
Baa
Over
Aaa
Over
Years Aa
2014
2015
2016
2017
2018
0.r0
0.12
0.20
0.18
0.16
0.52
0.91
0.74
0.38
0.42
NA
NA
NA
NA
NA
Average 0.ls 0.60 NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
Jan
Feb
Mar
Apr
May
Jun
Jul
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
0.17
0.20
0.18
0.17
0.14
0.r7
0.16
0.12
0.13
0.15
0.18
0.18
0.16
0.56
0.s1
0.49
0.47
0.49
0.49
0.u
0.34
0.34
0.33
0.33
0.33
0.42
2020
2020
2020
2020
2020
2020
2020
NA
NA
NA
NA
NA
NA
NA
0.17
0.15
0.20
0.26
0.25
0.27
0.28
0.31
0.3r
0.46
0.63
0.49
0.37
0.35
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
PageZ? of 49
Source of Information: MERGENT BOND RECORD
Schedule 11
Page 3 of7
Interest Rate Trends
Of Long-Term Treasury Constant
Yearly for 2014-2018. Monthlv for the Years 2019 and 2020
Years
l0-Year
T-Bond
20-Year
T-Bond
30-Year
T-Bond
Long-term
T-Bond Yield
2014
2015
20r6
2017
2018
2.54
2.14
1.84
2.33
2.91
3.07
2.55
2.23
2.65
3.02
3.34
2.84
2.60
2.90
3.11
2.98
2.51,, ,,1
2.63
3.02
Average 2.35 2.70 2.96 2.67
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2.71
2.68
2.57
2.53
2.40
2.07
2.06
1.63
1.70
t.7t
l.8l
r.86
2.14
2.89
2.87
2.80
2.76
2.63
2.36
2.36
l.9l
1.97
2.00
2.t3
2.16
2.40
3.04
3.02
2.98
2.94
2.82
2.57
2.57
2.12
2.16
2.19
2.28
2.30
2.s8
2.97
2.95
2.89
2.85
2.73
2.47
2.47
2.02
2.07
2.10
2.21
2.23
2.49
Jan
Feb
Mar
Apr
May
Jun
Jul
2020
2020
2020
2020
2020
2020
2020
1.76
1.50
0.87
0.66
0.67
0.73
0.62
2.07
1.81
1.26
1.06
t.t2
1.27
1.09
2.22
1.97
1.46
1.27
r.38
1.49
l.3l
2.r5
1.89
1.36
t.l7
1.25
1.38
1.20
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page23 of 49
Source of Information: Federal Reserve Bulletin
Schedule I I
Page 4 of7
Spread in Average Long-Term Bond Yields
Versus Public Utility Bond Yields
Yearly for 2014-2018. Monthly for the Years 2019 and 2020
Spread in Averaee Lone-Term T-Bond Yields Versus Public UtiliB Bonds:Years Aaa Rated Aa Rated A Rated Baa Rated
2014
2015
2016
2017
2018
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
l.t9
1.49
l.5l
l.l9
1.07
1.29
1.61
t.7t
1.37
1.23
1.82
2.52
2.45
1.75
1.65
Average 1.29 1.44 2.04
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
Jan
Feb
Mar
Apr
May
Jun
Jul
2019
2019
2019
2019
2019
2019
2019
2019
2019
20t9
2019
2019
2019
1.22
l.ll
r.09
1.06
t.t2
l.l9
r.07
l.l6
1.18
l.l5
1.05
0.99
t.t2
1.39
l.3l
1.27
1.23
r.26
1.36
1.23
1.28
l.3l
1.30
1.23
l.t7
1.28
1.95
1.82
t.76
1.70
1.75
1.85
1.67
1.62
1.65
1.63
1.56
1.50
t.7l
2020
2020
2020
2020
2020
2020
2020
NA
NA
NA
NA
NA
NA
NA
0.98
1.07
1.94
1.77
1.64
1.42
t.26
l.t5
1.22
2.14
2.03
r.89
1.69
1.54
1.46
1.53
2.60
2.66
2.38
2.06
1.89
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page24 of 49
Comment: Derived from the information on pages I and 3 of this Schedule.
Schedule I I
Page 5 of7
Interest Rate Trends for
Federal Funds Rate and Prime Rate
Yearlv for 2014-2018. Monthly for the Years 2019 and 2020
Years
Fed
Funds
Rate
Prime
Rate
2014
2015
2016
2017
2018
0.09
0.13
0.40
1.00
1.83
3.25
3.26
3.51
4.r0
4.90
Average 0.69 3.80
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
Jan
Feb
Mar
Apr
May
Jun
Jul
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2.40
2.40
2.41
2.42
2.39
2.38
2.40
2.13
2.04
1.83
l.55
1.55
2.16
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.25
5.15
4.99
4.75
4.75
5.28
2020
2020
2020
2020
2020
2020
2020
1.55
1.58
0.65
0.05
0.05
0.08
0.09
4.75
4.75
3.78
3.25
3.25
3.25
3.25
Case No SUZ-W-20-02
ExhibitNo.1
H. Walker
Page 25 of 49
Source of Information: Federal Reserve Bulletin
Schedule 11
Page 6 of7
Blue Chin Financial Forecasts - Auzust l. 2020
Third
Quarter
2020
Fourth
Quarter
2020
First
Quarter
2020
Second
Quarter
2020
Third
Quarter
2021
Five
Quarter
Average
Prime Rate
Top Ten Average
Group Average
Bottom Ten Average
Three-Month Treasury Bills
Top Ten Average
Group Average
Bottom Ten Average
Ten Year Treasury Notes
Top Ten Average
Group Average
Bottom Ten Average
Thirty Year Treasury Bonds
Top Ten Average
Group Average
Bottom Ten Average
Aaa-Rated Comorate Bonds
Top Ten Average
Group Average
Bottom Ten Average
Baa-Rated Corporate Bonds
Top Ten Average
Group Average
Bottom Ten Average
J.J
J.J
3.2
J.J
J.J
3.2
3.3
5.5
3.2
J.J
J.J
3.2
3.3 o/o
3.3
3.3
o/o Yo Yo %3.3%
3.3
5-Z
2.9
2.6
2.2
0.2
0.1
0.1
0.2
0.2
0.1
0.3
0.2
0.1
0.3
0.2
0.1
0.3
0.2
0.1
0.3
0.2
0.1
0.8
0.7
0.6
1.0
0.8
0.7
1.2
0.9
0.7
1.4
1.0
0.7
1.6
l.l
0.7
1.2
0.9
0.7
1.6
1.4
1.3
1.8
1.5
1.3
2.0
1.6
1.3
a1
1.7
1.3
2.3
1.8
1.4
2.0
1.6
1.3
2.7
2.4
2.1
2.8
2.s
2.1
3.0
2.6
2.2
3.1
2.7
2.3
3.2
2.7
2.3
5.1
3.6
4.6
5.1
3.7
4.6
5.t
3.8
4.6
5.1
3.9
4.6
5.1
3.8
4.6
5.1
3.8
4.6
Derived Public Utility Bond Yield Forecasts Based on Aaa and Baa Corporate Yields
Aa-Rated Public Utiliw Bonds
Top Ten Average 3.6
Group Average 2.7
Bottom Ten Average 3.1
A-Rated Public Utilitv Bonds
Top Ten Average
Group Average
Bottom Ten Average
Baa-Rated Public Utility Bonds
Top Ten Average
Group Average
Bottom Ten Average
3.7
2.8
3.1
3.8
2.9
3.2
3.8
3.0
3.2
3.8
2.9
3.2
3.8
2.9
J.J
3.9
3.0
3.3
4.0
3.1
J.J
4.0
3.2
3.4
4.1
3.2
3.4
4.0
3.1
J.J
3.9
3.0
3.2
4.3
case fr6suz-w-20-02
ExhibitNo. I
H. Walker
Page26 of 49
4.2
5.3
3.7
4.3
3.4
3.7
4.3
3.5
3.7
4.4
3.6
3.8
4.5
3.6
3.8
Settled Yields on Treasury Bond
Future Contracts
Traded on the Chicago Board ofTrade
at the Close of Auzust 06. 2020
Treasury
Bonds
(cBoT)
Schedule 11
PageT of7
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page27 of49
Delivery Date
Sep20
Dec-20
Mar2l
2.227
2.277
2.277
%
Average 2.260 Yo
Source of Information: Chicago Board of Trade
Schedule l2
Page I of 2
Market Value Discounted Cash Flow for
The Water Group Followed b), Analysts
Water Group
Followed by
Analvsts
Dividend Yield(l)
Growth in Dividends(2)
1.7 o/o
0.1
Adjusted Dividend Yield
Stock Appreciation(3)
1.8
7.2
Market Value DCF Cost Rate 9.0 o/o
Notes: (1) Developed on page 2 ofthis Schedule.
(2) Equal to one-half the assumed growth in value.
(3) As explained in the direct testimony, the growth in value
is supported by the information shown on Schedules 13 and 14.
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page2& of 49
Schedule 12
Page2 of 2
Market Value Dividend Yield for
the Water Group Followed by Analysts
For the Twelve Months Ended July 2020
Recent
Dividend
Yields(l)
Longer Term
Dividend
Yields(2)
Average
Yields
Water Group Followed by Analvsts
American States Water Co
American Water Works Co Inc
California Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
1.6 %
1.6
1.8
2.1
1.6
2.0
1.5
1.5 %
1.7
1.6
2.1
1.6
1.9
1.7
Average 1.7 %1.7 %1.7 o/o
Notes: (1) Average of the high and the low dividend yield for the month of
July 2020.
(2) Average of the high and the low dividend yield for each of the
twelve months ended July 2020.
Source of Information: S&P Capital IQ
Case No SUZ-W-20-02
Exhibit No. I
H. Walker
Page 29 of 49
Schedule 13
Development of Long Term Projected Growth in Value
Based Upon Gro*dr Over The Next Five Years
For the Water Group Followed b!, Analvsts
ABCD E E GH
Analvsts'Proiected Growth in EPS Other Proiected Growth
First
Call
EPS
Growth
s&P
EPS
Growth
ZACK's
EPS
Growth
Value
Line
EPS
Growth
Value
Line
DPS
Growth
Value
Line
Cash Flow
Growth
Average
EPS
Crrowfh
Average
All
Growth
Water Grouo Followed bv Analvsts
American States Water Co
American Water Works Co Inc
Califomia Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
6.0%
8.3
9.8
6.4
2.7
14.0
4.9
5.7 %
8.3
9.0
7.0
NA
6.0
NA
4.9 0A
8.1
NA
6.0
NA
14.0
NA
6.5 o/o
8.5
6.5
7.0
6.0
10.5
7.0
9.5 %
8.5
5.5
7.5
5.5
6.0
6.0
7.0 %
6.5
2.0
5.5
4.5
4.5
7.0
5.8 %
8.3
8.4
6.6
4.4
ll.l
6.0
6.6 %
8.0
6.6
6.6
4.7
9.2
6.2
Average 7.4 % 7.2 % 8.3 % 7.4 o/o 6.9 % 5.3 o/o 7.2 % 6.8 %
Historical s-Year Crowth in EPS
First
Call
EPS
Growth
ZACKs
EPS
Growth
ValueLine AverageEPS EPS
Growth Growth
Water Grouo Followed bv Anal],sts
American States Water Co
American Water Works Co Inc
Califomia Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
5.5 o/o 5.9
8.3
4.8
4.0
t2.2
-0.6
5.0
%5.0
6.5
4.5
1.5
12.0
4.5
6.0
%5.5 %
7.8
10. l
3.1
t2.6
-0.6
5.1
8.7
2t.t
3.9
13.5
-5.E
4.2
Average 7.3 % 5.7 % 5.7 o/o 6.2%
Source of Information: Value Line Investnent Survey, 7/1020; S&P Capital IQTBLD0',
FirstCall 7l3l/20;and
Zacks Invesfnent Research 7/3 1/20
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 30 of49
Schedule 14
Page 1 of2
Recent Payout Ratios,
ROEs, P-E Multiples, Market/Book Multiples, and Market Value
For the Water Grouo Followed bv Analvsts
Current
Dividend
Payout
Current
Return
on
Eouiw
PE
Market to
Book
Mult
Current
Market
Value
(Mill $)
Mult
Water Grouo Followed by Analysts
American States Water Co
American Water Works Co Inc
California Water Service Gp
Essential Utilities, Inc.
Middlesex Water Co
SJW Corp
York Water Co
5l
57
77
82
48
174
59
14.6
10.4
6.9
7.5
t2.0
2.3
I r.8
33.2
42.2
44.9
40.2
3 l.t
89. t
38.6
4.69
4.27
3.02
2.41
3.41
2.01
4.43
2,83s.624
26,6s9.246
2,283.22s
11,112.622
1,117.192
1,780.573
603.203
Average 78 9.4 45.6 3.46 6,627.384
Source of Information: S&P Capital IQ
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 3l of49
Schedule 14
Page2 of 2
Value Line Projected ROE Based qr Year-End and Average,
Dividend Paput Ratiq and Common EquityRatio for
The Water Group Followcd by Anabsts for 2023 - 2025
Value Line
Projected
ROE
Projected
Average
ROE
fl)
Value Line
Projected
Dividend
Pavout
Value Line
Projected
Common
Equity
Ratio
Water Grouo Follow.ed by Analysts
Arnerican States Water Co
American Water Works Co Inc
California Water Servie Gp
Essential Utilities, Inc.
Middlesex Water Co
SfW Corp
York Water Co
14.0
I1.5
12.5
9.0
14.5
9.5
13.0
%14.4 o/o
I1.8
t2.6
9.6
14.4
9.8
13.2
63.8
s9.2
52-5
74.3
50.0
43.3
59.4
o/o 5l-5 o/"
41.0
56.5
59.5
60.5
61.0
64.0
Average )2,4 %)24 o/o 5Ll %5fi "/o
Notes: (l) Value Line ROE, which is a par-end ROE, is converted to average ROE by the faclor
derived from the following fonnulal. 2((l+gy(2+g)), where "g" is the rate of grouth in
oommon equity.
Source oflnformation: Value Line hvestment Swvey, 7ll0l20
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 32 of 49
Schedule 15
Illustration ofthe
Effect of Market'To-BookRatio onMarket Return
Ln#Situation I Situation2 Situation3
I M/B Ratio
2 Market Purchase Price
3 Book Value
50%
$2s.00
$s0.00
100%
$s0.00
$50.00
200%
$100.00
$s0.00
4 DCF Return 10.0%10.0%10.0%
5 DCF Dollar Retum $s.00 $s.00 $s.00
6 Dividend Yield
7 DPS
5.0%
$1.2s
5.0%
$2.s0
5.0%
$s.00
8 Dollar Growth in Value
9 Market Sale Price
$3.7s $2.s0 s0.00
00.0075
10
"The simple numerical illustration....demonstrates the impact of market-tobook
ratios on the DCF market return....The DCF cost rate of l0Yo, made up of a 5o/o
dividend yield and a 5%o growthrate, is applied to the book value rate base of $50
to produce $5.00 of earnings. Of the $5.00 of earnings, the frrll $5.00 are required
for dividends to produce a dividend yield of 5.0% on a stock price of $100.00, and
no dollars are available for growth. The investor's return is therefore oily 5oh
versrs his required return of l0%. ADCF cost rate of l0oZ, which implies $10.00
of earnings, translates to only $5.00 of eamings on book value, or a 5%o
return.....Therefore, the DCF cost rate understates the investor's required retum
when stock prices are well above boolg as is the case presently."
The above illustration is taken from Roger A MorirU Regulatory Finance -
Utilities' Cost of Capital, Public Utility Reports, Inc., 1994, pp. 236-237 .
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 33 of49
Total Market Return 10.0o/o 5.OYo20.00/"
Schedule 16
Page I of3
Differences in Book Value and Market Values for the
Water Groun Followed b), Anal],sts
Recent
Book Value
Capitalization
Ratios
(313y20\
Recent
Market Value
Capitalization
Ratios
Average
Book Value
ofCommon
Equity
(Millions)
Average
Market Value
ofCommon
Equity
Difference in
Market Value
and
Book Value
Common Equity
(Millions)
Water Grouo Followed by Analysts:
Long Term Debt
Prefened Stock
Common Equity
Total
50.7 %
0.0
49.3
24.7
0.0
7s.3
%
s1,937.588 $6,627.384 s4,689.796
100.0 o/o 100.0 o/o
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page34 of 49
Schedule 16
Page 2 of3
Financial Risk Adiustrnent Usine the "Hamada Model"
Water Group Followed bv Analysts
Market Value @ (3/31/20)
Line
No.
1
)
3
4
5
6
7
8
DEBT PREF(D) (P)
CE
(E)
TAX BETA(t) (BD
24.7o/o 0.0% '75.3% 28.000o/o 0.77
Bl = Bu (l+(1-t)D/E+P/E)
l-t =
DIE:
P/E =
Bl=
Bu=
0.7200
0.3280
0.0000
Bu*
0.62
1.2362
Water Group Followed by Analysts
Book Value @ (3/31/20)
9
l0
1l
t2
DEBT PREF
(P)
CE
(E)
TAX
(D)(t)
s0.70% 0.00% 49.30% 28.000%
Bl = Bu (l+(1-t)D/E+P/E)
13
t4
l5
l6
17
l-t =
DIE=
PIE=
Bl=
Bl=
0.7200
r.0284
0.0000
Bu*
1.08
1.7404
Cost Adiustment Based on Risk Premium
l8
19
20
21
Barometer Group's Beta
Beta difference
Risk premium
Risk adjustment
0.77
0.31
6.0
1.86
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 35 of49
Default Spread for
Aaa Rated corporate Bonds and A Rated Investor-owned public utility Bonds
Yearlyfor 2014-2018. Monthly for the Years 2019 and 2020
Schedule 16
Page 3 of3
Case No SUZ-W-20-02
Exhibit No. I
H. Walker
Page 36 of49
Corporate
Aaa Rated
4.16
3.89
3.67
3.74
3.93
3.88
Public Utility
A Rated
A
Aaa
Over
0.1I
0.23
0.27
0.25
0.32
0.24
Years
2014
20ts
2016
2017
2018
4.28
4.12
3.93
4.00
4.25
4.ttAverage
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Avg
Jan
Feb
Mar
Apr
May
Jun
Jul
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
20t9
2019
2019
2020
2020
2020
2020
2020
2020
2020
3.93
3.79
3.77
3.69
3.67
3.42
3.29
2.98
3.03
3.01
3.06
3.01
3.39
2.94
2.78
3.02
2.43
2.50
2.44
2.14
4.35
4.25
4.16
4.08
3.98
3.82
3.69
3.29
3.37
3.39
3.43
3.40
3.77
3.29
3.1I
3.50
3.19
3.14
3.07
2.74
0.42
0.46
0.39
0.39
0.31
0.40
0.40
0.31
0.34
0.38
0.37
0.39
0.38
0.3s
0.33
0.48
0.76
0.64
0.63
0.60
Source of Information: MERGENT BOND RECORD
Market Value CAPM for
The Water Grouo Followed by Analvsts
Water Group
Followed by
Analvsts
Estimation Based Upon Historical Information
MarketPremium(l) 6.9 %
x Beta(2) 0.77
Risk Adjusted Market Premium 5.3
Size Adjustment Premium(2) 0.9
Plus Risk Free Rate(l) 1.4
COVID-I9 Default Adjustment(3) 0.42
Market Value CAPM Cost Rate 8.0 %
Estimation Based Upon Proiected lnformation
Schedule 17
Page I of5
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page37 of49
Market Premium(l)
x Beta(2)
Risk Adjusted Market Premium
Size Adjustment Premium(2)
Plus Risk Free Rate(1)
COVID- I 9 Default Adjustment(3)
Market Value CAPM Cost Rate
l5.r %
0.77
I 1.6
0.9
1.4
0.42
14.3 %
Market ValueCAPM is: 9.6%
Notes: (1) Developed on page 2 of this Schedule.
(2) Developed on page 4 ofthis Schedule.
(3) Developed on page 5 ofthis Schedule.
Development of Market Premiums for Use in a CAPM Model
E E GDC
Schedule 17
Page 2 of5
H
CAPM
Prqjected
Market
Retum(6)
16.5 o/o
1.4
l5.l o/o
6.9 o/o
CaseNo SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 38 of49
A B
Value Line
Summary & Index
Month End
Edition
Forecasted
Market
Dividend
Yield
May-20
June20
July-20
See next page ofthis Schedule for Notes.
Stock Price
Appreciation
Next 3-5 Years
Annual
Price
Aooreciation(l)
Annual
Total
Retum(l)
Midpoint
Market
Retum(2)
Average
Market
Retum(3)
2.6
2.4
2.4
80%
65
60
o/o 15.8 o/o
13.3
12.5
18.4 o/o
15.7
14.9
!9. % Jfi o/o
Less Risk Free Rate(4)
Estimated Market Premium Based Upon Projected Information (l)
Estimated Market Premium Based Upon Historical Information (5)
CAPM
The Water Group Followed b], Anal)rsts
Notes: (l) A projected market premium is based upon the projected market return rate derived from the
Value Line Summary and Index for the various dates shown. For example, Value Line
projects (Jul-20) that the market will appreciate in price 60Yo over the next three to five years. Using
a four-year midpoint estimate, Value Line's appreciation potential equates to 125%o
annually ([.60]^.25). Additionally, Value Line estimates the market will have a dividend yield of 2.4Yo.
Combining the market dividend yield of 2.4%o*iththe market appreciation results in
a projected market return rate of 14.9%o (12.5o/o + 2.404.
(2) Mid point ofthe month-end total market returns in Column E.
(3) Average total market retum in Column E.
(4) As discussed in the direct testimony, the risk-free rute is l.4o/o.
(5) The historical market premium is based upon studies conducted by Ibbotson Associates concerning
asset returns. Ibbotson Associates' asset refurn studies are the most noted asset retum rate
studies available today. The results are widely disseminated throughout the investnent
public. Ibbotson Associates' long-term coilrmon stock total market return is I1.88% which, when
reduced by the long-term historic risk-free rate of 4.97o/o results in a market premium of
6.9% (l1.88% - 4.97o/o).
Schedule 17
Page 3 of5
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 39 of49
Schedule 17
Page 4 of5
Reced Market Valrrs and
Beta Adjusted Itbotson Associates Size Premiums For
The Water Grorm Followed bv Analvsts
I 2 J !1A Z g
Recefr
Market
Value
(Milr$)
Market
Quartile
Name
Quartile
Size
Premirm
Vahe
Beta Adjusted
Quartile
Sizc
Premium
Market
Ouartile
Quartile
Beta
Line Beta
RatioBeta
Water Grou Followed bvAnalvsts
American States Water Co
A,merioan Water Works Co Inc
Califomia Water Service Gp
Essemial [Jnlities, Inc.
Middlesex Wetcr Co
SJW Co,rp
YortWater Co
$2,$5.A4
26,659.246
2283.22s
11,112.622
t,tt7.t92
t,780.573
603.203
Low{ap
Large{ap
Low{ap
Mid4ap
Low{ap
Low-Cap
Mico{an
3
I
3
2
3
J
4
2
1.60
0.00
1.60
0.89
1.60
1.60
3.40
1.22
1.00
t.22
t.t2
1.22
t.22
r.35
0.65
0.85
0.65
0.90
0.7s
0.80
0.e
s3%
85o/o
53%
8V/o
610/o
66%
59/o
0.8
0.0
0.8
0.7
1.0
l.l
z9
Average IdsECrD lJq l2 AA $Yt 09
Source of Informatioa 2019 SBBI Yeaftook, Stocks, Bon&, Bi[s, and Inflatiotr, and Value Line
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 40 of49
COVID- 1 9 Default Adjustment
Pre and Post COVID-19
A Rated Investor-Owned Public Utility Bonds and 30-Year Treasury Bonds
Schedule 17
Page 5 of5
CaseNo SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 41 of49
Pre COVID-l9 Yields
Jan 2019
Feb 2019
Mar 2019
Apr 2019
May 2019
Jun 2019
Jul 2019
Aug 2019
Sep 2019
Oct 2019
Nov 2019
Dec 2019
Jan 2020
Feb 2020
4.35
4.25
4.16
4.08
3.98
3.82
3.69
3.29
3.37
3.39
3.43
3.40
3.29
3.11
Average Credit Spread (Pre COVID-19)
Recent Post COVID-l9 Yields
Years A Rated
3.14
3.07
2.74
30-Year
T-Bond
3.04
3.02
2.98
2.94
2.82
2.57
2.57
2.12
2.16
2.19
2.28
2.30
2.22
1.97
1.38
1.49
1.31
Credit
Spread
t.t7
t.76
1.58
r.43
1.59
31
l8
l4
t6
.25
.23
1
1
1
I
I
I
I
1
1
I
I
I
I
1
.1
.1
.2
a
7
I
l5
l0
.07
.t4
.20
May
Jun
Jul
2020
2020
2020
Average Credit Spread (Post COVID-19)
Average Credit Spread (Post COVID-I9)
Average Credit Spread (Pre COVID-I9)
1.59
t.t7
COVID- I 9 Default Adjustment 0.42
Schedule l8
Page I of7
Market Value Risk Premium
For the Water Group Followed by Analysts
Water Group
Followed by
Analysts
Prospective Public Utility Bond Yields(l)
Estimated Risk Premium(2)
Market Value Risk Premium Indicated Cost Rate
3.0 %
6.0
9.0 %
Notes: (l) Based upon the current and prospective long-term debt cost rates, it is
reasonable to expect that if the comparable group (i.e., Water Group)
issued new long-term bonds, it would both be priced to leld about
3% based upon credit profiles of A for the Water Group.
(2) A 60/o risk premirun is concluded for the Group after reviewing the
tabulation ofrisk spreads shown on pages2,3,4 and 5 ofthis Schedute.
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 42 of 49
Schedule l8
Page2 of7
Develooment of the Proiected Risk Premium
A B c D E E G H I
Value Line
Summary & Index
Month End
Edition
Forecasted
Market
Dividend
Yield
Stock Price
Appreciation
Next 3-5 Years
Annual
Price
Aooreciation
Less:
Forecasted Yield of
Annual Moody's
Total A Rated
Retum Industrial Bonds
Forecasted
Equity
Premium
Estimated
Risk
Adiustrnent
Forecasted
Risk
Premium
May-20
June-20
July-20
2.6 %
2.4
2.4
80%
65
60
15.8 %
13.3
12.5
18.4 o/o
15.7
14.9
3.09 %
2.97
2.63
15.3 %
12.7
12.3
85%
85
85
13,0 %
10.8
10.4
Midpoint of data
Quarte/s Average
t6.7
16.3
13.8
13.4
11.7 %
tt.4 %
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 43 of49
Schedule l8
Page 3 of7
Annual Total Returns and fusk Premiums of
S&P Public Utility Stocks and Bonds
for the Years 2000-2019. 1990-2019. 1980-2019. 1970-2019.1960-2019. 1950-2019 and 1928-2019
Annual Total Returns
Public Utilitv Bonds
Periods
Public Utility
Stock
L-Term AAAT-Bonds AAA & AA AA A BBB
Averase Annual Rates of Retum
2000
t990
1980
1970
1960
1950
t92E
to
to
to
to
to
to
to
20t9
2019
2019
2019
2019
2019
2019
0.t224
0.1 156
0. 1419
0.1305
0.1207
0.1241
0. I 120
0.0805
0.0857
0.1007
0.0894
0.0765
0.0644
0.0580
0.0905
0.097r
0.1200
0.1004
0.0790
0.0638
0.0594
0.0912
0.0930
0.1068
0.0971
0.0825
0.0708
0.0661
0.0916
0.0935
0.1079
0.0982
0.0832
0.0714
0.0671
0.0924
0.0921
0.1078
0.0990
0.0840
0.0723
0.0693
0.0976
0.0977
0.1 r45
0.1052
0.0896
0.0779
0.0761
Averaee Risk Premiums
2000
1990
1980
1970
1960
1950
1928
to
to
to
to
to
to
to
2019
2019
2019
2019
2019
2019
2019
0.0419
0.0299
0.0412
0.0443
0.0443
0.0597
0.0540
0.0319
0.0185
0.0219
0.0418
0.04r8
0.0604
0.0526
0.0313
0.0227
0.0351
0.0382
0.0382
0.0534
0.0459
0.0309
0.0221
0.0340
0.0375
0.0375
0.0527
0.0449
0.0300
0.0236
0.0342
0.0367
0.0367
0.0519
0.0428
0.0249
0.0179
0.0274
0.031 r
0.031 I
0.0463
0.0359
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 44 of 49
Schedule l8
Page 4 of7
Annual Total Retums, Annual Income Returns and Risk Premiums of
S&P Public Utility Stocks and Bonds
forthe years 2000-2019. 1990-2019. 1980-2019. 1970-2019.1960-2019. 1950-2019 and 1928'2019
Annual Income Refums
Annual
Total Returns
Public Utility
Stock
Public Utility Bonds
Periods
LTerm
T-Bonds
AAA
Aud{ & AA
Average Rates of Refum
AA A BBB
2000
1990
r980
1970
1960
1950
1928
to
to
to
to
to
to
to
2019
2019
2019
2019
20t9
2019
2019
0.t224
0.1 156
0.1419
0.1305
0.1207
0.1241
0.1120
0.0398
0.0501
0.0641
0.0664
0.0630
0.0s83
0.0508
0.0769
0.0782
0.0953
0.0916
0.0818
0.072s
0.0609
0.0533
0.0622
0.0759
0.0776
0.0732
0.0675
0.0597
0.0534
0.0623
0.0763
0.0782
0.0737
0.0680
0.0604
0.05s 1
0.0640
0.0786
0.0806
0.0759
0.0701
0.0629
0.0600
0.0682
0.0831
0.0850
0.0799
0.0740
0.0677
Average Risk Premiums
2000
1990
1980
1970
1960
1950
1928
to
to
to
to
to
to
to
20t9
2019
2019
2019
2019
2019
2019
0.0826
0.0655
0.0778
0.0578
0.0578
0.0659
0.0613
0.0456
0.0374
0.0467
0.0390
0.0390
0.0517
0.051I
0.0691
0.0535
0.0661
0.0476
0.0476
0.0566
0.0s24
0.0691
0.0533
0.0656
0.0470
0.0470
0.0561
0.0s 17
0.0674
0.05r6
0.0634
0.0449
0.0449
0.0540
0.0491
0.0625
0.0474
0.0589
0.0408
0.0408
0.0502
0.0443
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 45 of49
Schedule l8
Page 5 of7
Annual Total Retums, Annual Income Returns and Risk premiums of
S&P Public Utility Stocks and Bonds
For the 46 Years of the Lowest Interest Rate Environment and the 46 Years of the Highest Interest Rate Environment
For The Years 1928-2019
Current Interest Rate Environment: l.4olo
Public Utilitv Bonds
Periods
Public Utility
Stock
L-Term
T-Bonds
AAAAAA &AA
Annual Totel Returns
AA A BBB
Low Interest Rate Environment:
46 Years of the Lowest Interest Rates, Ranging from2.0%oto 4.1% with an Average Rate of 2.9%
Averaee Rates ofRetum
0.1126 0.0313 0.0349 0.0484 0.0496 0.0547 0.0662
Averase Risk Premiums
0.0814 0.0777 0.0642 0.0630 0.0579 0.0464
High Interest Rate Environment:
46 Years of the Highest Interest Rates, Ranging from 4.loZ to 13.5% with an Average p1ate of 7.2o/o
Averaee Risk Premiums
0.lll4 0.0847 0.0814 0.0838 0.0847 0.0838 0.0860
Average Risk Premiums
0.0267 0.0300 0.0276 0.0268 0.0276 0.0254
Annual Income Returns
Low Interest Rate Environment:
46 Years of the Lowest Interest Rates, Ranging fiom 2.0% to 4.lo/owth an Average Rate of 2.97o
Averaee Rates of Retum
0.1126 0.0293 0.0343 0.0371 0.0378 0.0407 0.0465
Averase Risk Premiums
0.0833 0.0783 0.0755 0.0749 o.O72o 0.0661
High Interest Rate Environment:
46 Years of the Highest Interest Rates, Ranging from 4.17o to 13.5% with an Average Rate of 7.2o/o
Averaee Risk Premiums
0.1114 0.0723 0.0847 0.0E22 0.0830 0.0852 0.0889
0.0225
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 46 of49
Averase Risk Premiums
0.0392 0.0267 0.0292 0.0285 0.0262
Ye6
Public Utililv
stocks
LTem
T-Bonds
Arnud Total Retms of
S&P Public Utilitv Srocks ed Bonds
forrhe Yes l92t-2019
AAA &AA AA A BBB
Schedule 18
Page 6 of7
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 47 of 49
1928
1929
1930
l93t
1932
1933
1934
1935
1936
t937
1938
1939
1940
l94l
t942
1943
1944
l94s
t946
1947
l94t
1949
t950
l95l
1952
1953
1954
1955
1956
1957
l95t
1959
1960
l96l
1962
t963
1964
1965
1966
1967
1968
I 969
1970
l97l
1972
1973
1974
1975
1916
1977
t97t
1979
1980
l9tl
t9t2
l9t3
l9t4
l9t5
l9t6
198?
1988
l9t9
1990
l99l
1992
1993
1994
1995
1996
1997
l99t
1999
2000
2001
2002
2003
2004
2005
2006
2001
200t
2009
2010
201 I
2012
2013
2014
2015
2016
2017
20lE
2019
0.5431
0.1376
4.2149
4.3193
4.O724
4.2110
4.t143
0.6914
0.2357
4.3337
0.1020
0.1538
-0.1643
-0.3050
0.1079
0.4750
0. lt79
0.5665
-0.0t30
4.1216
0.0451
0.3074
0.0152
0.2075
0.1947
o.09lE
0.2269
0.!357
0.0415
0.0541
0.3827
0.095r
o. l6t0
0.3646
-0.0519
0.1261
0.1685
0.04E9
-0.0504
-0.0216
0. l4l9
-0.1?69
0.1494
0.0050
0.1464.
-0.2106
-0.2135
0.4364
0.3245
0.1076
-0.0174
0.1221
0.t275
0.1464
0.2292
0.2372
0.22t9
0.3212
0.3575
4.0544
0.1849
0.435t
0.0069
0.0931
0. I lt3
0. l66l
4.0825
0.3772
0.0550
0. t959
0.1896
-0.099E
0.5475
4.2t17
4.2934
0.2509
0.2163
o.2t5l
0.2323
0.t434
-0.3160
o.lE0l
0.0795
0.2051
0.1272
0.1363
0.3017
-0.0629
0.1834
0.1966
o.o(44
0.2690
-0.0030
0.0410
0.0509
4.0782
0.1736
0.0090
0.0962
0.0610
0.0691
-0.0091
0.0662
o.0692
0.0910
o.0234
4.0735
0.022t
0.0268
0.1075
-0.0006
4.0165
0.0202
0.0?60
-0.0034
4.0541
0.0101
0.0062
0.0676
4.0264
4.0484
o.0472
-0.0439
-0.0320
0.1106
0.013s
0.0650
4.0022
{J.0439
-0.0064
0.00E5
4.0650
0.0149
-o.0640
0.1537
0.0999
0.0661
-0.0893
0.0092
0.0465
0.195s
0.0074
-0.0189
4.0289
-0.0804
o.0472
0.4323
-0.0049
0. l6t I
0.3143
0.3692
4.1013
0.1026
o.2116
0.0482
(t.t472
0.1093
0.2162
-0.10?5
o.326t
0.0020
0.1454
0.17t6
-0.1062
0.t922
0.0596
o.t362
0.0488
0.0t61
0.0520
0.0421
0.0t14
0.2953
-0.1460
0.0755
0.3271
0.0622
-0.1592
0.2419
0.01 t5
4.0224
0.0714
-0.0579
0.2127
0.0370
0.0209
0.0917
0.0058
0.1073
o.ot42
0.1712
0.1053
0.0783
0.0290
0.o120
0.M35
0.0480
0.0255
0.0261
0.0312
0.0343
0.0298
o.(t233
4.0139
0.0281
0.071t
0.0126
4.0393
0.0373
0.007t
0.066E
4.0107
4.0703
0.0246
4.0081
4.0231
0.01(A
0.0432
0.0t31
0.0171
0.0394
{.0010
4.0501
4.t)525
0.026E
4.0792
0.0970
0.1168
0.0912
0.ol5t
4.0315
0.0915
0.1976
0.0459
{.0083
4.0424
4.0782
0.0616
0.3294
0.0721
0.1770
0.3473
0.2994
4.tr32
0.2027
0.1710
0.06t5
o.ltl3
0.1264
o.t926
{.0802
0.2E60
0.0279
0.1 ltl
0.1431
4.0792
0.1076
0.o134
0.0388
0.0193
0.0t92
-0.0059
0.1037
..(r.0145
0.2000
0.12A3
0.0916
0.0323
0.0711
0.0473
0.0506
0.029r
o.02t1
0.0346
0.0353
0.0349
0.0238
-0.01t7
0.0317
o.0746
0.0131
-0.0393
0.0390
0.m63
0.0701
4.0127
-0.0?03
0.0229
{.0032
-0.0234
0.0735
0.0,14t
0.0t29
0.0202
0.0391
-0.0014
-o.0509
-0.0539
0.0224
-0.0t39
0.097t
t.t24t
0.09t0
o.0l3t
-0.0360
0.0863
0.2017
0.0545
-0.0055
-0.0509
4.077t
0.0674
0.3750
0.0691
0.1796
0.3276
o.2720
-0.0637
0.1615
0.t743
0.0689
0.1u7
0. l3l2
o.2t26
-0.0656
0.3074
0.021 I
0.1 157
0.0365
4.0275
0. I t50
0.0788
0. l85l
0. l67t
0.1 r62
0.0t69
0.04t6
0.0043
0.0733
0.1159
0.0t09
0.2701
0.0t01
-0.0E50
0.1571
-0.0031
0.0443
0.1224
-0.0566
0.2209
0.0406
0.017t
0.0t69
{.0t71
0.1003
4.O4ol
0.2272
0.1427
0.t046
0.0357
0.0t25
0.0510
0.0532
0.0327
0.0313
0.0380
0.0362
0.0383
0.0242
4.0214
0.0347
0.0773
0.0135
4.0393
0.0407
0.0M8
0.0733
4.0t47
-0.0703
0.0213
0.0017
4.0231
0.0705
0.04u
0.0t28
0.0232
0.03t7
4.001E
-0.051E
-0.0553
0.0181
4.0885
0.09t7
0. l3l3
0.1047
0.0118
-0.M05
0.0t13
0.2058
0.0629
4.OO27
4.0590
4.0173
0.0730
0.3942
0.0763
0. t768
0.3259
0.269t
4.0566
0.1594
0. l7l5
0.0722
0.1624
0.t324
0.2190
4.0657
0.30t9
o.o2l4
0. I 169
0.0289
4.0217
0.1146
0.08?3
0. l85l
0 l67t
0. I 162
0.0t69
0.0486
0.0043
0.0733
0. I 159
0.0E09
0.2101
0.0t01
-0.0E50
0.1577
-0.0031
0.0443
0.1224
4.0566
0.2209
0.o372
0.0163
0.0820
-0.060t
0.06t5
-0.06t6
0.326/
0.t760
0.1079
0.o272
0.0884
0.0851
0.0949
0.0428
0.0314
0.040s
0.0303
0.06t3
0.0267
-0.0213
0.0225
0.0892
0.0107
.0.046t
0.0442
0.0107
0.0745
-0.0100
4.0714
0.0054
0.0121
.0.0120
0.0791
0.0502
0.0852
o.0294
0.0409
4.0044
4.0602
4.0s92
0.o2a6
-0.0960
0.0952
0.1510
0. I 103
0.0156
-0.06t3
0.0t72
0.u75
0.06t3
-0.0026
-0.0655
4.0702
0.0416
0.3708
0.1406
0.1?83
0.3141
0.2t35
-0.0435
0.1643
0.1692
0.073t
o.t7t5
0.1355
o.1429
0.0M5
0.2164
o.o219
0.123t
o.lo74
-0.0921
0.1 lol
0.07t0
0.2461
0.1 529
0.0782
0.0732
0.0596
0.0143
0.0132
0.1662
0.08?l
0.2505
0.0955
4.075t
o.1812
-0.0227
0.0512
0.121 I
-0.o477
0.2098
0.0392
{.0076
0.037t
-0.1089
0.0570
{.0601
0.4593
0.2tt5
0.t078
4.0626
0.1505
0.0923
0.r359
0.06E1
0.0590
0.0564
0.04s9
0.0t05
o.0377
4.0105
0.0073
0.o757
0.0233
-0.026t
0.0399
0.0037
0.0909
0.0146
-0.0t16
4.0131
0.0339
-0.0102
0.0994
o.0442
0.0t91
0.0329
o.0!96
0.0050
-0.0990
4.0271
0.0243
-0.0892
0.0761
0.1681
0.1387
0.0150
-0.1033
0.0940
0.2806
0.0903
0.0000
4.0823
-0.0649
0.0674
0.3t08
0.1341
0.2075
0.3098
0.2933
4.0505
0.t919
0. lTtl
0.012a
0.tt7t
0. l3l 5
0.1590
4.0351
o.2442
0.041s
0.1496
0.09il
4.06t4
o. I 196
0.0534
0.1746
0.2329
0.0919
0.0541
0.0759
u.oo42
-o.l 109
o.3219
0.0t93
0.2019
o.t2a7
4.0494
0.1333
4.06E2
0.1625
0.1505
-0.0680
o.247t
Annual Total Retms of S&P Public Ulility Stock
And Annual Income Retms of Bonds
forlheYem 1928-2019
Schedule l8
PageT of7
Case No SUZ-W-20-02
ExhibitNo. I
H. Walker
Page 48 of49
Ym Public Utility
Stocks AAA &AA AA
LTem
T-Bonds
0.0329
0.0361
0.0332
0.033t
0.0350
0.0315
0.0306
0.0278
0.0273
0.0275
0 0263
0.0239
o.0224
0.0197
0.0239
0.0246
0.024a
0.0229
0.020E
0.0215
0.0240
0.0223
0.0216
o.0244
0.0265
0.0300
0.0266
o.o2t7
0.0310
0.0355
0.0344
0.0409
0.0409
0.0391
0.0401
0.0403
0.0419
0.0424
0.0475
0 0494
0.0543
0.0624
0 0692
0.06t4
0.0601
0.o7ol
0.0t00
0.0&7
o.o794
0.0765
0.0t40
0.0921
o.lll5
0.1349
o.1309
0.ll15
0.t247
0.1 t04
0.0802
0.0t43
0.0t97
0.0t54
0.085E
0.0ElE
0.0769
0.0671
0.0730
0.0?08
o.0612
0.0670
0.t)572
0.0592
0.0607
0.0557
0.0542
0.0496
0.0505
0.0465
0.0499
o.0493
0.0.14t
0.0401
0.0405
0.0375
0.0256
0.0302
0.0316
0.o254
o.o22t
0.0261
o.o3o1
0.0248
A BBB
1928
1929
1930
l93t
1932
I 933
1934
1935
1936
1937
1938
1939
I 940
l94l
1942
t943
1944
1945
t946
t947
1948
I 949
1950
l95l
t952
1953
1954
1955
1956
t957
1958
1959
1960
I 96t
t962
I 963
t9(A
t965
1966
t967
t968
1969
1970
t97t
1972
1973
1974
197 5
t976
1977
1978
1979
1980
l98l
1982
t9t3
1984
19t5
l9t6
1987
l98E
l9E9
1990
l99l
1992
I 993
1994
I 995
I 996
t997
l99t
1999
2000
2001
2002
2003
2004
2005
2006
20o7
200E
2t)ot)
201 0
20t I
2012
20t3
2011
2015
2016
20t7
2018
2019
0.5431
0 t376
4.2149
-0.3193
4.0724
-o.2t70
-0.1 743
0.69t4
0.2357
4.3337
0.1020
0. l53E
-0. t643
-0.3050
0.t07.)
0 4750
0.1879
O J66J
-0.0130
-0.1236
0.0451
(t 3074
0.0152
0.2075
0 1947
0.0918
0.2269
0.1357
0.04t6
0.0541
0.3827
0.0958
0 l6t0
0 3646
-0.0519
0.1261
0.1685
0 0489
-0.0504
-0.0216
0. l4l 9
4.1769
0.t494
o 0050
0.1464
4.2106
4.2135
0.4364
0 3245
0 1076
-0.0174
0 t22l
0.1275
0.1464
o.2292
0.2372
0.22t9
0 3232
0.3575
-0.05.l,l
0.1t49
0.4351
0.0069
0.0931
0. I lE3
0. t66l
-0.0825
0.3772
o 0550
0 1959
0. lE96
4.0998
0.5475
4.2a77
-0.2934
0.2509
0.2763
0 2t5l
0.2323
0.1414
-0.3160
0. t80t
0 0795
0.2051
0.1272
0.1363
o 3017
-0 0629
0.t834
0.1966
0.o@
0 2690
0.0451
0.0468
0.045t
0.0434
0.0474
0.rM36
0.0402
0.0351
o.0324
0.0320
0.0303
0.0286
0.02??
0 0269
o.tJ272
0.0264
0.0265
0.0256
0.0250
o.0257
0.0242
0.o270
o.0262
o.u2t5
0.0300
o.0325
0.0296
0.0307
0.0335
0.0397
0.03t4
0 0445
0.0450
0.0442
0.0434
o.0427
o.(t441
0.044E
0.05 t3
0.0553
0.062t
0.0706
0.0822
0.0766
0.0744
0.0162
0.0849
0.0894
0.0t64
0.0t14
o.o877
0 0962
0.t lE2
0.1427
0.t439
0.1247
0.t297
0. I tt7
0.0908
0.0934
0.1013
o.093E
0.0943
0.0891
0.0t22
0.0737
0 0?94
0.0781
0.0745
0.0746
0.06t2
0.07 l0
o.tJ190
o 0747
0.0460
0.0479
0.0470
0.0449
0 0504
0.0468
0.0436
0.0376
0.0343
0.0334
0.0316
0.0296
0.0285
0.0276
0.0279
0.0269
0.0268
0.0261
tJ.0254
0.0261
0.02t7
0 0274
0.026/.
0.0268
0.0303
0.0328
0.029t
0.0309
0.0337
0.0400
0.0386
0.0448
0.0453
0.0,145
o.0437
0.0429
0.0442
0.0450
0.0515
0.0556
o.0627
0.0716
0.0t33
0.0777
0 0751
0.0761
0.0861
0.0912
0.0t80
0 0E29
0.0t88
0.09?8
o. l2t I
0.145t
0.1448
0.1229
0.1339
0.1 179
0.0930
0.0946
0.1009
tJ.0949
0.0959
0.0915
0.0860
0.0776
0.0799
0.o774
0.o742
0.0743
0.0614
0.0740
0.0817
0.0771
0.0730
0.0646
0.0608
0.0546
0.0583
0.0591
0.0619
o.{579
0.0525
0.0489
0.0385
0.0417
0.0424
0.0397
o.0373
0.03t6
o.o4o4
0.0369
0.0470
0 0490
0.0482
0.0463
0 0535
0.0499
0.0471
0.0402
0.0362
0.0347
0.0329
0.0305
0 0293
0.02t3
o.o2t7
0.0273
0.0212
0.0266
0.0257
0.0264
0.0292
0 0277
0.0267
0.0291
0 0305
0.0331
0.0301
0.0311
0.0340
0.0403
0.0389
0.0451
0 0455
0.0449
0.0439
0.0431
0.0443
O,M5I
0.0518
0.0559
0.0633
0 0725
0 08zl4
0.0789
0 0758
0.0773
0 0E73
0.0929
0 0895
0.0845
0.0900
0.0995
o.t24t
0.1489
o.t4@
0.t237
0. l34l
0 llt9
0.0940
0.0953
0.1014
0.0955
0 0964
0.0921
0 0869
0.0780
0 0t02
0.0176
0.0745
0.0746
0.0677
0.074E
0 0E2l
0 0780
0.0730
0.0646
0.060E
0.0546
0.0583
0.0591
0 0619
0.0579
0.0525
0.0489
0.03t5
0.04t7
u.0424
0.0397
0.0373
0 0386
0.0404
0 0369
0.0499
0.0522
0.0514
0.051 l
0.0640
0.0604
0.0559
0.0466
0.0415
0.0395
0.0392
0.0360
0.0331
0.0304
0.0305
0.0296
o.{t294
0.02t5
0.o26E
0.021)
0.0301
0.0291
0.0276
0.0307
0.0324
0.0347
0 0317
0.0324
0.0357
0.0428
0 0414
0.0470
0.o473
0.0462
0.0450
0.0437
0.0450
0.0458
0.0531
0.0576
0.0651
0.0743
0.08?0
0.0825
0.077a
0.0789
0.0899
0.0978
0.0928
0.0t59
0.0917
0. t0l7
o.L27t
0. I529
0.t532
0.1298
0.1374
0.122t
0.0973
0 0985
0.1040
0.09t0
0.0985
0.0943
0.0t87
0.0t05
0.0826
0.0813
0.0762
o.0747
0.06t7
0.0743
0.0830
0.07t7
0.0154
0.0623
0.061 7
0.0566
0.0607
0.0605
0.0650
0.06t0
0.054E
0.0514
0.04 I 6
0.0441
0.M35
0.0408
0.0394
0.0404
0.tJ42o
0.0385
0.0541
0.0578
0.0591
0.0635
0.0t15
0.0t33
0.0713
o.0544
0.0465
0.0486
0.0510
0.0.148
0.0410
0.0366
0.035E
0.0338
0.0333
0.03tE
0.0293
0.0297
0.0327
0.0324
0 03t2
0.0334
0.0351
tJ.o37 t
0.0348
0.0341
0.0374
0.0452
0.0447
0.0494
0.04t9
0.0476
(t.0466
0.0456
tJ.0466
0.0475
0.0552
0.0605
0.0684
0.077t
0.0913
O,OE6E
0.0815
0.0812
0.0929
0.1057
0.0987
0.0E96
0.0947
0.1064
0.1352
0. l6t 6
0. l6l0
0.1350
0.1434
0.1270
0.1015
0.1027
0.1083
0.1 00 1
0.1009
0.0961
0 0E97
0.0816
0.0t6t
0.0857
0.0805
0 0782
0.0710
0.0766
0.0E39
0.0810
0.0818
0.0673
0.0641
0 0592
0 0632
0.o62t)
0.071 I
0.072t
0.0598
0.0565
0.0490
0.0492
0.0485
0.0496
0.0474
0 0443
0.0460
0.0429
Schedule 19
SUEZ Water Idaho Inc.
Common Equity Cost Rate Summary
Water Group Followed by Analysts
pcF(r) CAPM(2)RP(3)
Common Equity Cost Rate Range 10.00 % 10.60 % 10.00 %
Investment Risk
Adjustments (4)0.00 0.00 0.00
SUEZ Water ldaho Inc.
Adjusted Common Equity Cost
Rate Range:10.00 10.60 10.00
SUEZ Water Idaho Inc.
Recommended Common Equity Cost Rate (5)10.20 %
Check of Reasonableness of
Common Equity Cost Rate (6)9.6 0h to 14.4 %
Notes: (1) From Schedule 12 and explained in the Direct Testimony.
(2) From Schedule 17 and explained in the Direct Testimony.
(3) From Schedule 18 and explained in the Direct Testimony.
(a) As explained in the Direct Testimony.
(5) As explained in the Direct Testimony, the recommendation is only applicable to a
rate making contmon equity rutio of 54o/o. (*54.07%)
(6) See page2 of Schedule 14.
Case No SUZ-W-20-02
ExhibitNo.l
H. Walker
Page 49 of 49