20041201Ahern Exhibits.pdf

Idaho Public Utilities Commission
Office of the SecretaryRECEIVED
Nav 3 0 2004
Boise. Idaho
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MA TIER OF THE APPLICATION
OF LJNITEDWATER IDAHO,INC.
FOR APPROVAL OF INCREASED RATES
FOR WATER SERVICE
CASE NO" UWI.04-
EXHIBIT 12
TO ACCOMPANY THE
DIRECT TESTIMONY OF
PAULINE M. AHERN , CRRA, VICE PRESIDENT
AUS CONSULTANTS - UTILITY SERVICES
ON BEHALF OF UNITED WATER IDAHO INC.
NOVEMBER 2004
United Water Idaho. Inc.
T able of Contents
to the Financial Supporting Schedules
of Pauline M. Ahern
Summary of Cost of Capital and Fair Rate of Return
Standard & Poor's Public Utility Rating Methodology Profile
and Revised Public Utility Financial Benchmark Ratio -Targets
Financial Profile of the Proxy Group of Six C. A.. Turner
Water Companies
Financial Profile of the Proxy Group of Three Value Line
Water Companies
Indicated Common Equity Cost Rate Using the
Discounted Cash Flow Model
Derivation of Dividend Yield for Use in the Discounted Cash
Flow Model
Institutional Holdings
Historical and Projected Growth for Use in the
Discounted Cash Flow Model
Indicated Common Equity Cost Rate Using the Risk Premium Model
Indicated Common Equity Cost Rate Using the Capital Asset
Pricing Model
Indicated Common Equity Cost Rate Using
Comparable Earnings Analysis
Schedule No.
(PMA-
(PMA-
(PMA-
(PMA-
(PMA-
(PMA-
(PMA- 7)
(PMA-
(PMA-
(PMA-10)
(PMA-11 )
Exhibit No.. 12
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Exhibit Index
United Water Idaho. Inc.
Summary of Cost of Capital and Fair Rate of Return
Based upon the Consolidated Capital Structure of United Waterworks tne.
at June 30. 2004
e of Ca ital Ratios Cost Rate Wei hted Cost Rate
Long~Term Debt 55.10 %710 % (1)391 %
Minority Interest (Preferred Stock)013 500 (1)001
Common Equity 44.1120(2)
Total 100.00 %93 %
Notes:
(1) Company-provided.
(2) Based upon informed judgment from the entire study r the principal results of which are summarized on page 2 of
this Schedule.
Exhibit No.. 12
Case No.. UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-
Page 1 of 18
United Water Idaho. Inc.
Brief Sumrnarv of Common EQultv Cost Rate
No.Principal Methods
Proxy Group of Six C. A. Turner
Water Companies
Proxy Group of Three Value Una
(Standard Edition) Water
Companies
Discounted Cash Flow Model (DCF) (1)10.8 %11.2 %
Risk Premium Model (RPM) (2)11.112
Capital Asset Pricing Model (CAPM) (3)10.108
Comparable Earnings Model (CEM) (4)142 141
Range of Indicated Common Equity (;()st
Rate Before Business RisK Adjustment
Business Risk Adjustment
10.8 %112 %
10.95 %11.45 %
Range of Common EquUy Cost Rate Mer
Business Risk Adjustment
Midpoint of Common Equity Cost Rate After
Business Risk Adjustment 1120%
Recommonded Common Equity Cost Rate
"""""""""""""""""'-'---"
1 11.20%
Notes: (1) From Schedule (PMA-
(2) From page 1 of Schedule (PMA-9).
(3) From page 1 of Schedule (PMA-10)..
(4) From page 1 of Schedule (PMA-11)
Exhibit No. 12
Case No. UWI-O4-
Pauline M"Ahern, AUS Consultants
Schedule (PMA-
Page 2 of 18
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United Water Idaho. Inc..
Derivation of Investment Risk Adjustment Based upon
Ibbotson Associates' Size Premia for the Decile Portfolios of the NYSE
Notes:
('1 )
(2)
From page 5 of this Exhibit
Line No.1 - Line No 2 and Line No.1 - Line No.3 of Columns 3 and 4
respectively. For example, the 271% in Column 5, Line No 2 is derived as
follows: 2.7'1% = 4,.62% - 1.91%
(3)
(4)
At June 3D, 2004 Company-provided.
With an estimated market capitalization of $122.144 million (based upon the
proxy group of six C A Turner water companies) or $'120.154 mil1ion (based
upon the proxy group of three Value Line (Standard Edition) water companies),
United Water Idaho, Inc" falls between the 9th and 10th deciles of the
NYSEIAMEXNASDAQ which have an average market capitalization of$'177.208
million as can be gleaned from the information shown in the table on the bottom
half of page 3 of this Exhibit.
(5)Average size premium applicable to the 9th and 10lh deciles of the
NYSEIAMEXNASDAQ derived from the information shown on page '15 of this
Exhibit.
(6)
(7)
From page 1 of Schedule (PMA-3) of this Exhibit
With an estimated market capitalization of $559 824 million, the proxy group of
six C. A. Turner water companies falls between the 7'h and 8th deciles of the
NYSEIAMEXNASDAQ which have an average market capitalization of $573.587
million as can be gleaned from the information shown in the table on the bottom
half of page 3 of this Exhibit.
(8)Average size premium applicable to the 7'h and 8 th deciles of the
NYSE/AMEXNASDAQ derived from the information shown on page 15 of this
Exhibit.
(9)
( 10)
From page 1 of Schedule (PMA-4) of this Exhibit
With an estimated market capitalization of $980.864 million, the proxy group of
three Value Line (Standard Edition) water companies falls in the 6th decile of the
NYSEIAMEXNASDAQ which has an average market capitalization of$1 048.566
million as shown in the table on the bottom half of page 3 of this Exhibit.
( 11)Size premium applicable to the 6th decile of the NYSEIAMEXNASDAQ derived
from the information shown on page '15 of this Exhibit
Source of Information: Ibbotson Associates stocks nds.Bills and Inflation - Valuation
Edition - 2004Yearbook, Chicago, IL, 2004
Exhibit No. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-
Page 4 of 18
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Chapter 7
Firm Size and Return
The Firm Size Phenomenon
One of the moSt remarkable discoveries of modem finance is that of a relationship
betWeen fum size
aDd rerum. The relationship cuts across the entire size specrrum bUt is moSt evident among sma.l1er
compamcs, which have higher rmJrDS on average thnn larger ones. Many StUdies have looked at the
effect of firm size on retUfil,1 In this chaplet, the retU111S across the entire range of firm sUe
are tnminecL
Construction of the Decile Portfolios
The portfolios used in this chapter are those created by the Center for Research in
Secnr:ity Prius
(CRSP) at the University of Chicagos GradtUte School of Business. CR.SP has refined the methodol-
ogy of creating si.ze~ba.sed portfolios and has applied this methodology to the entire universe of
NYSEJAMEXINASDAQ-liste4 securities going back to 1.926"
The New York Stock b,.J,Rnge universe excludes closed,-e.ad mutUal funds, preferred Stocks,
real estate investment trUStS, foreign Stocks. AmeritaJl Depository Receipts, unit investment trUStS.
and Ame.ricus TrustS. All companies on the NYSE are ranked by the combined market capitalization
of their eligible equity securities. The compi1l1ies arc then split intO 10 equally populated groups, or
dc:dles. Eligible companies traded on the American Stock E,:xr-nange (AMEX) aDd the Nasdaq
National Markt:t (NASDAQ) arc then assigned to the appropriate dcciles aC.tDrding to their eapiwb
beon in relation to the NYSE breakpoints. !be portfolios are rebalanced, using clasmg prices for
the last tradicg day of March. June, September, and December.. Securities added dwing the quarter
are assigned to the a.pproprlatC portfolio when tWO consecutive month...w.d prices are available. If the
final NYSE price of a security that becomes delisted is a month-end price, then
that month's rmun
is included in the quarterly rCtUI11 of the security's portfolio, When a month-end NYSE price is miss-
ing. the month-end value of the security is derived from merger tmJ1S, quotations on regional
exchanges, and ethe.r sources. If a month--end value still is not dctcmili:1cd, the last available cW.1y
price is used.
Base seCllIity returnS are monthly bolding period returnS. All distributions are added to the
month-eI1d prices, and appropriate price adjustmentS ale made to account for stock splitS a.nd divi-
dends. The return on a portfolio for one month is calcu1at~d as the weighted average of the retutDS
for its inwvidual stocks. .Ann~ pomella rctUII1S arc calcn1.aced by comppunding the monthly port-
folio ~tUI'DS"
Size of the Deciles
Table 7-1 reveals that the top three dcciles of the NYSElAMEXlNASDAQ account for most of the
total market value of its stocks. Approximately tWo-thirds of the market value is represented by the
first decile, which currently consists of 168 Stocks, while the sma1l~ decile accounts for just ove.r
one percent of the market value. The data in the second column of Table 7.
1 are averages across all
1 1!..olfW1Ianz wu the 6m to document tIili pbcnoml:Don. Se: Ban:, RoUW. --Die h!JItionship JU:auns aDd
MArket VaJ.:u: oE Common Steeb,- JotmUll of E.conr;nrJkJ. VoL. !I, 1.981, pp., 3-18.
IbbotsonAssociates 121
Exhibit No.. 12
Case No.. UWI-04-
Pauline M,. Ahem, AUS Consultants
Schedule (PMA~1), Page 7 of 18
Ct\SpteI' 7
78 yr:a.rs. Of course, the proportion of market nlue represented by the various deciles varies from
year to yeu.
Columns three and four give rw:nt figur~ on the number of companies a.nd their market cap-
italli.a.tioD, presentiDg asn.apshot of the StIUanre of the dcciles nC21' the end of 2003.
Table 7-1
SIze-DeeDe portfonO$ of thl NYSEJAMEX/NASDAQ SIza and Composition
1925.2003
Rocent
Hllrtcrlcal Averaga R~ent Decfle Maricot Recent
Pert:Ul1taga cd Number of Capltall:allon Peruntlge crt
CecJle Total Cepllnltmtlon companies (In Ihou=ndc) Total Capltnll::Dtlon
1.Largest 63.33'" '68 $1,419.838.030 64.91"
13.99% 186 1.471.629.952
-"
12.8!.'!!
7.57% 19B 746.718,927.. 4,74% 200 . 451.145.013
-_..
. 3.24% 221 337.041,577 2-95'1'0
2.37% 277 290,452.647 2.54%
!..-
1.72% 343 238,327.258
---
2.oa%
1.279:' 379 171.431.31S 1.50%
---'
9 0.9T,*, 613 168.689.552 1.48%
1D-Smaflest 0.80% 1.724 136,D2B.242 1.,19%
Mid-CaP 3-5 15.55% 619 1.534.903,517 13.43%
!.Dw-CaP &-S 5.36~~ 999 700,217,223 6.13%
0-10 1..77% 2.337 304.917.894 2.,67%
Source: C 200403 CASP" Conter far Resesrdl In Securfty Prt:es. G~ua18 School of BusIness. The UnIvendtY al ChI:ago., U:ed
with
p~
jIJI rlghlS relietWd. www.mp"uchlcago..edu.
tistari:aI averIIgt! pert:l!nl3ge of tDta! c;apJtali1atlon al\oW$ Ute average, over the 1iIst 78 )'8IU'S. of the dec:lle maIksI values as a
p~ge af IhII trJtaI NYSEIAMEX'NASDAO l;:alcu!ated ed1 mcnth. Nl6I1bor of CQmpanlcs k1 declle.s, T8cent m1l/1C8t
capIta.&::a1Ion of dacl!es, oncImcmt percantlge Df 1CtaI capII,,1'mrt1onare IS 01 sep\llmbar 30, 2DO3.
Table 7.2 gives the cumnt breakpointS th.:I.I: define the composition of the NYSEf.A.MEXJNASDAQ
size deciles, The largest company and itS ma.d:et c:apita.liza.tion are presented for each decile. Table
3 shows the historical breakpointS for each of the three size groupings pcescn~d throughout this
c:hapw:. Mid..cap Stocks are defined her: as the aggregate of
ded1es 3-5. Based aD the most recent
dati. (Table 7-2), companies "Within this mid-cap cange have mukct c;:apitalizations II.t or below
7~-4,O27,OOO but greatcr~an $1,166,79.9,000- Low-cap nocks include deciles 6-8 and c:urrencly
include all companies in the NYSEJAMEXINASDAQ 'With" marlca capitalizations ,at or below
166,799,OOO but greater than 5330 608,000. Miao-cap stocks include deci1es ~-10 and include
c:ompanies with market apitali.z;u:ions at or be1ow 5330,608,000" The market capiulliatioD of the
smallest compa.ny includeL\ in the micro-apitalization group is cw:rcotIy $332 thousand.
122 S8B1 Valuation Edition 2004 Yearbook
Exhibit No., '
Case No. UWI-04-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-1), Page 8 of 18
Film Size and Return
Table 7-2
SIze.-DecUe pof1;tonos or the NYSElAMEXlNA.SDAC, LargBSt Company
and Its Market CapttallzatJon by Decne
September 30. 2003
Mariult CapltallzaUon
of !.artiest CompanyDectle On thousands) Company Name
1-t.argest $286.638.305 GaoernI eDCtric Co.
-'-- .-... _....,._.~.,..... . --_._--~-- ..---. -~ - ..- -,.- - ..---"
11.365.767
--
Manco Corp.
.--.
3 ",794,027 EOG Resources \nc.
." . ....-
- ft.
-.-------,.--
4 2,585,9804 Toys R Us he..
- .. "- ..,-_....-._- -.---.--....... -_.
5 1.720.959 Intemmlonal RectIfier Corp.6 1.166.799 -Ther \ndustrt~ me.
-.-------.--,.-.- -----.-~._._. ---.. .._--,_
-1~!!.-~Gran1teConstrudlOn1nc.
507,820 Steelcase Inc.
- .-..-...--------.---------------.'
e 330,&08 Ster1lng Bar\COI'P
--- --,- .'.'. -... --.-..---.-- -..-.-------...-'..
1o.Smallest 166.414 ElhyI Corp"
Soun:e: Cenler for Research In securitY Prices. UnIverSIty al ChIcago,
Presentation of the Decile Data
Swnmary St3tistics of annual retUmS of the 10 dcci1es over 1926-2003 are presented in Table 7-4.
Note from this exhibit that both the average return and the tOtal risk, or St3Ddard deViation of anIltID
retUmS, tend to increase as one moves from the largest decile to the smallest. Furthermore, the
serial correbtions of returnS are near zero for all but the smallest tWO deci1es, serial correlations and
their significaDce will be discussed in detaillatet in this chapter.
Graph 7-1 dcpfctS the growth of one dollar invested in each of three NYSEI.A.MEXJNASDAQ
groups broken down intO mid-cap, low--ca.p, wd tnicro-cap stocks. The index 'Value of the entire
NYSEI.AMEXJNASDAQ is also included.. All retu.tn5 presented axe
rune-weighted based OD the t!W'-
ket apitallzatioDS of the deci1es c.ontained in each subgroup. The sheer magnitUde of the size effect
in some years is noteworthy. While the largest srocks actUally declined in 1977, the smallest Stocks
rose more than 20 percent. A more extreme case occurred in the depression-recovery year of 1~33,
when the difference betWeen the first and tenth decile retl1r1lS was far more subst:mtial This diver-
gence in the perlonna.na: of small and larg
~ '
~mpwy stockS is a common cici:Ui:rence.
IbbotsonAssociates 123
Exhibit No.. 12
Case No" UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-1) I Page 9 of 18
Chapter 7
Table 7-
Size-Decile portfonos of the NYSElAMEXINASDAQ
Largest and Smallest Company by Siza GroUP
from 1926 to1965
Cllplla.D:::ltion of Largc:.;t Company Capftall::2ilon /If Smafler;t CompanyOn thou:land:;) pn tho~lUIdGIem Mld.cap L.ow.(:ap MI~ MldoCap L.ow-Csp MI~
(Sept 3D) 3-6 &-8 9-10 3-5 6-8 8.10
$61.490 ~O~--_Y..:?~-_._-$'104lOO-
""'
~H_._
1.9!!..- S65.281
_..
114,
-- _
!4~
~- -...
~.J~ _..!4!
.~. _. .:._
1928 $81.998 $18,975 $5.074 S19.OS0 $5.119 $1:15
--""--'-~.' -.-- .~_. -~ --,-'---'-- -..-.-
1929 $107.085 $24.328 $5,875 $24.480 $5.915 5126
--.- . ---..--.---.-
--_ow -.-
1930 . $61,80B $1:3.050 $3.219 $'\3.058 $3,2&4 $30
1931 S4z,SO7 SS,142 $1.905 SD.222 $1.927 $15
------.- ..-- .. .._- ------...-
1932 S'1z,431 C2.170 $.473 tt.196 1477 $19
--.-- - ._.._.-...._._-.__.._---_.-~.......
1933 S40,298 57.210 $1.830 ST.28D SUI75 $100
-,- --"-- --. - -- -.--- -- ---
1934 S38.129 5:6,659 S1.659 S6.T34 $1,673 sse
_. .----- ---- .._._~ .--.-
1935 $31,53' $6,519 $1.3S0 S6.54" S1,383 $38
1936 $.46.920 $11,505 S2,5fiO . $11,526 S2,6S8 $98
----- ---------. --.---..- .--
1937 $51.750 S13.6O1 $3,500 $'13.635 $3,539 $68
,,--- .-----.,..---
1939 5:36.'02 $8,325.$2.125 59.372 S2. 145 $SO
-- .---.---.----.---
1939 S35.18J.
-_.~--_
!1'
~--
~ S7.389
.!!:~___.__
.!1...!
1;40 S3'\,D50 $7 .geD $1,261 SEI,GOr $1.872 $51
1941 $31.744. $8.316 S2.0ae $8,336 $2.087 S72--.. ___n'__-
,Si\2 S2S.135 sa,liTo $1,779
_.-
$6.875 !l..:
~--
SB2
1943 $43.218 $11,475 &3.841 $11.480 $3,903 $395
-- ----.- .----- ---
1944 $.46.621 ~~6!.. -~t_- $'I3..- !4~~ -_.1945 $55,268 $17,32S $6.413 $17,575 $5.42S S22S
1946 $79.156 $24 192 $'10,013 $24.199 $10,051 $829
..--,------- ..--"----
1947 $57.830 $17.735 $5.373 $17.S72 56,380 5747
---- .-.- -.---- - ------ ----,~
$67,238 $19,575 ST ,313 $19,651 $7.329 S78o1
------.-- ... .-..--.-".--
1949 $55.506 $14,549 $6.0'37 $14 577 $5,10S $379
------.------..-.------.-------..--.
1950 Sas.S8' $18,675 $6.176 $18,750 15,201 S3D3
1951 $82,517 $22,750 S7,$1 w.8aO 57,59B 5668
- ------.-...-..-"-
1952 $97,936 $25.452 S!,428 $25,532 $8,480 $.480
--- ---..---- -
- ___.0 _0-
-...--' --. ...._--..
'953 $98.595 $25.374 $8,156 $25.395 $8.'58 $.sS9
-,_._-
-_ft. -----.
.-- .'.--"'- -. -..,.--
1954 S125~ $29.645 $8,464 m.7D7 S5,488 $463
----- ..----..--..-.---" -----'" - ----
1955 $170,829 $41,445 $'12.353 $41,681 $12.366 $SS3
1956 $183.434 $45.805 $13,481 $4S,BB6 $13,524 $1,122
.------.-.---....-....----.... ..-.-.,--..-.-.,..-. .."-- -~.
1957 '$192.861 $47.es8 $13.844 $49,509 $13,848 SS25
--.---- ------. .-.. ....-.-
....---.- '0 ..---.
...... -. ..,--.
1958 $195.083 $48.774 S13,7BS $46.871 $13.816 C55O
..--.-..-----..--.-.-----.---.'..-.....----- ....."-'
1959 S253.644 55-4.221 $19.500 S64,372 5:19,548 $'1.804
-.-.-......--.----.
_.-r--"--' - -...
"-".'~- '.-."-
0_. - -....'960 $246,202 ssi,lIes . $'19.34-C "$61.529'" $'\9.385 $831
1W~.-,
~~~~
$ry~t.
. ~~~~.. .._._
!?9..!.1~ ..613 . ~4S5
'9152 $250.433 SS8,8S6 $1e.952 159,143 $1B.96S S'1.01S
--....-.-..-...-.-..-..-....-.... -",'--'" .....'--"
l.~~..
-- _
i3_B . .' ~~~~- SF.:.B.
~~ . .
" .. ~1~7~ Sf3:8~
~~ .... -~~~
~9~
~.~~ .
S7~,~q~ ~,~~5
1965 $363.159 $84,479 t2.B.365 $84 600 S2B.:rT5 $250
Source: Center lor ReoSM:h In Se=fty Ptbs, I.Jr\M!:nIIy of Chlcaeo.,
124 S8el Valuation EdItIon 2004 Yearbook
Exhibit No. 12
Case No.. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-1), Page 10 of 18
F"mI Size and Reu.rn
Table 7 ~3 (continued)
Slze-Decne Portfolios of the NYSEI AMEX/NASDAQ
Largest and Smallest Company by Size Group
from 1966 to 2003
CBpltn11:.atlon of Largest Company Capltaft:aUon of Smallelrt Company(In thou:;ands) pn thDu:;ands)
Date oCap LowocaP MIcro-Cap Mld~ap Low-CaP MIc:m-CaP
(Sept 30) 3-5 6-8 9-10 3-5 6-8 9-1 D
1966 $399,455 $99,578 $34.884 $99.935 $34,966 $381
1967 S4s9,170 $117 ,9as ~'$42,267-"'" 'S; 18:329 $42,3;'3 ", $381
6B $528:326 $;49,261 $60:351.
- -
50:128 "'~So.9i .. -i592
;969 "$517:452 "$'144:770""'" $54:273
- .' ' "
45.684' - $5.i.iSo" "" $2.1;9'
1970"" $:;S0:246 " 'i94~D25" "$29:910 -"- "'$94:047 '-$29.916 '.,.' "$822
1971 $542,517 $145,340 $45,571 $145.673 $45,589 5865
912" "$545:2;1'- i;39~7 -.. $ie~728-" - $139,710- "'$"46:757-' -. $i:O3:t
;973 --" $424:584- S94:809' . $29,50,"'- -... S95~378-'" '$29;600
---
.. isi1-
974
' '
$344:0,3 - -$75,272 .,-" $22:475' ..oo --Sis:S53- "'$2'2,48;
,- "-
$444
i~r;5'- "'$.165:163 ""$96,9Sr"-- i'iB,140'" --"i9i.i6'S28.i-4Too.- ' -S540
1975 $551,071 $116.164 $31,987 $116,212 $32.002 $564
i9n - -$573.054
" -
$i3s:aci4"""'" $39,;92" . -- $;37:32i"'~ i39,254
---
$513
197s-" '-'$572:96"7'$15917a-- - $46",62'-- . $1s0;s24'-$'4s.m---SSiO
1979 ..' $66;:336$;14:4"80'- S49,Osi- - _.'00 sv4;5ir""'-S49J7'2-- $s4B
1960' $154.552"" "
$;'
94.012- .. i48.57;' -- Si9i.241-~$4i,9S3"-- ~ 'S549
1981 $954.665 $259,028 $71,276 $261,059 $71.289 $1,446
i9B2 ~- '$-,'62:028- -S205.590---i5"4:m----i2oo;53a-S;,8B3""-'-i1.060
; 983 '- Si:200;Bsc. -'$352.698 --ii~"- -$352.944""$100.530--'. -$2".025
1964 ,..- $;:068.972 -" "$314."650
- --
$90.41 9'
,-, -
$3'15:214
". -
590-;659- "$2.'093
1985'- $'1:432.342 -"$367.4';3 --, "$8'37810 ~
.- -
s36ii4S" $94,000' "
"--
$760
'966 $1.857.621 ~,827 $'09,956 $445,548 $109,975 $706
1SSr--S2:Qs'9:1:i3 $467;4"30--' $112,035
" -- ---
$46~8T1i2:12S-"i1:2T7.
;988 ' -i;,ii5T:i2S--S42o.2S.r'." -$94.26s-"- --$0i21:340-oo
~-'
- S69s"
19Bs-si,147:5Oe-$iso,5 -$100;2es
-'-
s4S3:6i3-Sioo;3S4-' '.~,' $96
i'9'9O -s2:164:iBS --'$472.003 .-. - $s3.,-~ $474,065 ss3:7sD
-- --
$,3"2
1991 $2,129,663 $457.958 $87.586 $458,853 587,733 $278
;992 '-$z.42B:57'1""S500.34S" '"$i03.352-'-
"'-
5O1,050 $100:500-- $510
1993' '-$2.711.068'.'$008:52'0 '
- .
$i37:9~----$sOi82s $137:987-"---.5602
1994 --$2:4'97:0;3 $60(552"- -$i49.43s---S602:5S2$149.~ -$SiB.
;995-- $2.7'93:761 's553:i'7"8' '.. -5;-58,011
- -
-- $e54,O;9-ij5i:-'-" -. SSe-
1996 $3,150.665 $763,377 $195.1S8 $763.812 $19S,326 $1.043
1997- . $3.5;;:;32 -fB1B.2S9 ., ii:iO:;i2-
,-- -
S'8i1.028'$230.554'- .'.-$480
,....' ,,-..'-.".'.".-"-- - .'"-'---- ..-- -,-_.. ,-.--- ",'-" ..---
199B $4,216,707 S934,264 $253,329 " $936;727""'$253,336 $1.671",__0" -,---."-"-'--'.."" ,
-.-.-- ...... ..-.----,--------"
1999 $4.251,741 $875.309 5218.336 $875,582 $218,368 $1.502
2000'" $4,1.13~902' $840.000 "-'-$;92.598 .". $'64O:7io $;92,721-" ." $1:46"2"
2001 S5,252.063 51.114,792 $269.275 $1.115.200 $270,391 $443
2002 $5.012:7'05' "i1.;43,S45' '" s314.042 $1~144.452 """$314,174 ,-- "$S'O;"
2003 -- $4.794,027 -S1.166;799
'.'" '
me.606 S1~'167,040" mo.T97 i:ci2
Source: Cen1m' for Research In SecurlIy Pricas. UnIverSIty of Chicago,
IbbotsonAssoclates 125
Exhibit No, 12
Case No- UWI-O4-04
Pauline MoO Ahern, AUS Consultants
Schedule (PMA-1), Page 11 of 18
Qlaptar 7
Table 7-4
Sl%e-DecRII PomaDes of the NYSEJAMEX/NASDAQ, Summary StatistIcS ef AnnuQ! Returns
'92&-2003
Geomebic ArIthmetic Stuldan1 Serial
Docile Mean Mean DevIatIon ColnIllJtlon
11.,4';'19.40%
10.13.2 ~!2
11.2 1311 21"~-0.
"",
14.2~3!-002
11.5 1".27.-0.
15.3 28.
.... .
11..5 15.30.
18.33.
12. 1 7:6.37..0,,
, 0- SrnoJIe:rt 13.21..95
Mi~~. ~5 11..3 14.-O.,gJ!
1'.15.
- .
~,,~e~~I 9-1~12.7 39.0..
NYSEIAM!:m1ASOAO
TDIaI VaJue--Welghted Index 10.12.,20,
SCUl'Ca: Center fa Fle:leuchln Se:tDftY Prlce:. lJn/versfty of Chl:ago,
Aspects of the Finn Size Effect
The firm siu phI:nOrI1eJ30I1 is remarkable in several W2fi' Ftrst, the greater risk of small stOcks. does
not, in the conteXt of the capital asset pricing model (CAPM), fully ~unt for their higher retamS
o'Ve:r the leDg tt.t:m. In the CAPM, only syswnadc or beta risk is rewarded; small company stocks
have had retnrnS in excess or those implied by their beetS.
SC1:ond, the c:ale.nd:tr annual retarn differences betWeen small and la.rgc companies are serially
correlated. This StJggCStS that past annual returns m;:y be of some value in predicting future a.t1I1ual
retUInS. Sa.ch serial correlation, or auroc:oaelation, is practicilly unknown in the mad:et for luge
~cks and in most other equity matkm bat is evident in the size premia.
third, the firm me effect is seasonal for exampl~ small c;ompany Stocks cutpetformed large
compa.ny Stocks in the mot2th of January in a large majority of the ye:us. Such predic:u.bility is sur-
pnsmg-:ffid 'suspicious' in light'ofmodenn:apital market theory. These three aspectS of the .firm she
eHea-long-rerm retumS in excess of syst.clImtic: risk, saial corre.1acion, and se:LSonmry-wilI be
ana.J~ thoroughly in the following sections.
125 S881 Valuation EdHIon 2004 Yearbook
Exhibit No. 12
Case No. UWI.O4-
Pauline M" Ahern, AUS Consultants
Schedule (PMA-1), Page 12 of 18
Firm Size and Retum
Graph 7~
SIze-OeeDe Pqrtfonos of the NYSEIAMEX/NASDAO: Wealth Indices of Invesiments In Mid-, low-, MIcro- end
Total CaJ:lltanzation Stocks
'925-2003
Year-end 1925 D $1.
$20,000
$'0,000
~ ' ;. ,, ,:)":" ', ,, " "
$11,443,
; ~, "~::
::f ;;'
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1925 1935 1945 1955 1965 1975 1985 1995 2003
Year-end Source: Center for Researd1 in SectJI1ty Prices. university of Cticago.
IbbotsonAssociates 127
Exhibit No. 12
Case No" UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-1), Page 13 of 18
Cha;:rtar 7
Lons,Tenn Returns In Excess of Systematic Risk
The capital asset pricing model (CA.PM) does not Cully account fer the higher retm:nS of small com-
pany stOcks, Table 7-5 &hoWs the retarDS in of syswna.tic risk over the past 78 years for =ch
decile of the NYS"E/AMEXINAS)AQ. RealI that the CA.PM is expressed as foDows:
. =rf +~a xERP)
Table 7-5 uses the CAPM tD estimate the rctUrD in excess of the rlsldcss ra.~ aDd compares this esti-
mate to bistoricaJ performance.. Aa:ording to the CAPM, the expected retUrn on a security should
consist of the riskless rau plus aD addition.a.l. remm to compensate for the sySteIn1\nc risk of the secu-
rity. The retUrn in c:cess of the riskless rate-is est:iID2D:d in the conteXt of the CAlM by multiplying
the equity risk premium by ~ (hem). The .equity risk premium is the mum that compensateS investOrs
for W:ing on risk equal to the rlsJc of me market as a whole (systematic: .risk),~ Beta measures the
extent to which a secnrity or portfolio js exposed to systematic: risk.' The be:ta of =ch decile indi.
cates the degree to which the deciles rerum moves with th:1t of the overall market.
A beta grc.aux than one indic:a.~ th.a.r the security or portfolio graarer symmatk risk tb.a.n
the market; according to the CAPM equation, investors ue compensated for taking OD this additional
risk. Yet, ToWle 7-5 illamates that the smalJer d~es have had retUrnS that arc not falJy expb.iImble
by their higher betaS. This retUtIl in a:c.ess of that preclicted by CAPM mcrl::l.Se.5 as one moves from
the largest companies in decile 1 to the sm.a.I1est in declJe 10. The excess remrn is especially pro-
nounwi for micrD-Cap StOCks (dec:iles 9-10). This mc-rw.red phenomenon has prompted a revision
to the CAPM, which incllldt:s a size premium. Chapter 4 presents this modified CAPM theory and
its application in marc detail.
This phenomenon em also be 'Viewed grapmcally, as depicted in the Graph 7-2. The security
muket line is based on th~ pure CAPM without adjustmcDt for thc me pr~wn. Based on the risk
(or bw.) of a se.curlty, the expected rerum lles on the securiry mark~ line. However, the acmal his.
toric: retntnS for the smaller dec:iles of the NYSEIAMEX/NASDAQ lie above the line, indicating that
these deci.les have had retUI:DS in acess oE that wbicl1 is appropriate for their systematic: risk.
2 The equity dsl: premium is etima=d by the 78-J=t ~ctiI: ItIc:a.%I mum 011 complU!T SUlci::, U-41 p:n=nt, I=:s
~ 78-~ a:cithmcUc m= !Dcom~1'mIm I:OmpoDt:22r of 20-fCIl' pvmIlDCIU bonds IS the historicaJ m1:1= n.~ in this
5.2.3 p=t. (lr is appl'Oprl:l~ hO'WeVl:!i to IDW the ~I or darzrloD., of the riskI= ILCct whh the iDftSt1De:m:
hari::m.1 Se= Chnpn:r lor Inort dean all eq.m, DsIc premium c:nim:u:iOI1.
3 Himn:ial b= ...-ere =lciliu:d um.r; II simple rctt=ioD of !he 1D01ldJ.)y pordoUo (dedit) tm:IJ =mm ill c::c:ss of the
3lkhr u..s. Th::r.:1II7 billm=.J tttarnl1'tm1S the Slid' SOD toC21 retI:ImS m c:.:== of the 30-day u.s.. 'T:re.=u1 biD.
JlI.Da:I.lT m&-Dccembe:r 2003, Se= Cluapu:r , Cor mort dl:Qil all bca t:timarioa.
128 S8el Valuation EdItIon 2004 Yearbook
Exhibit No.. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-1), Page 14 of 18
Mrm Siza and Return
Table 7.
Long-Term Returns In Excess or CAPM Estimation for Decne PortfoRcs of the NVSElAMEXlNASDAQ
1926-2003
Reallzed E:rtImated Sin Premium
ArIthmetic Return In Return In (Rewm InMean Excess of E:I:ess of E:tce:lS orDocile Beta" Aetum Rlskless Rate.. RI:.1dC$ti RB1et CAPM)
!~~~_....
..o~~L '::~~. ~_. .l'~::!-
_. __
6~~ ~
-- _:?;~~
2 1.04 1316'0 7.94% 7.44% 0.50%
"'..""'" "-",--,,~,,,,_.,. -..---......,-..... --...
3 1.10 13,78% 855% 7.B8% 0,67'"
'" ..- . .,. .. .~... --
.--_.._'.8'" .
.,----..-....-
4 ...-
'. '
:'!..3
. - ..
!~:.~!i'- ..~~2.~_._. .- -,
~:~~?'_- ,..__
1J:!S 1.16 14.91,*, ,use'" 8.32% 1.36%6 1.18 15.32% 10.09% 8..50% 1,59%
.-.--' .-..... ...- -.- ".'-. .. -- -..----". .-,...----- --.
1..23 15.65% 10.42% 8.85% 1.57%
.._~ _.- .. ---..--,-.....-"
'w"" ---, .-
--,--"'-. ..' -- ..-,..-
1.2B 16,64% 11.42% 9.16% 2.25%
----- .----..---'.-. --.---"--'---'" --.-- .-.-..
9 1.34 17.76% 12.53% 9.63% 2.90%
-..,-...-..-- ...
--.., ---. -0
._----
-.. -_u_.
---.-- ---
1Q.SmaBest '1.41 21.73% 16.50% 1015% 6.34%
Mid.(;ap,3-5 1.12 14.16% B.93% 8.02% 0.91%
u;-.c;p-:- ~e - .,...
.,
ii
-' "
15:57% -- ,-- ';0.44%--
- - .
8:74%-"'---. 1:70%___h--- - -....-. _n_--"'-."-'-'.
---- - -"--'.-'.- -....-,-
Mi~. 9-10 1..35 18,9B% 13.75% 9.74% 4.01%
"BetBS ere estimated from mtll1thl)' pcrtfono 1ctaJ returnS In excl!S$ 01 the 3D-dav U.S- Treasury bm 10\31 mum verwe Ihe S&P
500 total ret1rns In excess or the 31J-dsy U,S. Treasury bll January 1Q25-0ecember 2003.
""Historical ri5Jdw rate Is measured by the 78-year artIhmetic mean Income mum ~onent of 2G-year gcmmmen1 bonds
(5.23 pen;enl),
tCelCUlirted In !hI context 01 the CAPM by multiplying the equity risk premium by beta. The eQuity ri!ik premium
is estimated by
the artIhmeUc mean total /'BlUm or II1e St.P 500 ('12.41 pen:enl) mJ.nUs the arithmetic mean Income I'8tum component of 2Q.year
government bonds (5.23 pen;ent) hun 1926-2003.
Graph 7-
Security Markot Une versus Size-Decile portfonos of the NYSEIAMEX/NASCAO192&-2003
0.0
Beta
'ii
Iii
:!:
.!iZ'ii
IbbotsonAssociates 129
Exhibit No, 12
Case No. UWI-O4-04
Pauline M. Ahem, AUS Consultants
Schedule (PMA-1), Page 15 of 18
Oiapter 7
Further Analysis of the 10th Decile
The size premia presented thus far do a great deal to e:x:plaiD the retU111 due solely to size in publicly
traded companies. However, by splitti:Dg the 10th dec:ile into two size groupings we can get a closer
look at the sma.llest companies. This magnification of the smallest companies will demoDSmlte
whether the company size to size premia remtionship continlle5 to bold trUe.
k. previously discnssed, the method for derl!rm;ning the size gronpin~ for me premia analysis
was to take the stOcks traded 011 the NYSE and break them up intO 10 ded1es, niter which stOd:s
traded on the AMEX a.nd NASDAQ were alloated intO the same size groupings. This same method-
ology was used to split the 10th decili: inttl tWO pam: lOa md lOb. with lOb being the mWler of
the twO. This is equivalent to breaking the Stocks down into 20 she grol1pmgs, with portfolios 19
and 20 representiDg lOa and lOb.
Table 7-7 shows that the patt:n1 continues; as companies get their size prc.mium inacas-
es" There is a noticeable inaca.se in size premium from lOa w lOb. which can also be demonsttated
visaally in Graph 7-3. This c:an be useful in nluing companies that arc ex.tttmdy small Table 7-
presents the &iz:, CDmposition, and breakpoints of deci1es lOa and lOb" Fsrst, the ream number
CDmpanies and total decile Dl2.tket czpiWi:ucon are presented. Then the largest company and itS
ma.r.ket capitalization are prese.m:ed.
Breaking the smallest decile down lowers the siS"'ifi/:::mce of the results compared to r~tS for
tbt 10th decile taken as a whole, however. The same holds trUe for comparing the 10th decile with
the Micro-Cap I1.ggregation of the 9th and 10th decile.s. The more stOW included in a sample the
more signific:a.nce can be placed on the results. W'b.i1e tbis is Dot as mnciJ of a faCtOr with the recent
ye.an of da~ these she premia are constrnCtCd with data. back to 1926. By breaking the 10th decile
down into smaller components we have C11t the namber of stOcks included in each grouping. The
change over time of the number of Stod:s included in the 10th decile for the NYSFJAMEXlNASDAQ
is presented in Table 7-8. With f~er StOcks included in the analysis eulyon., there is a strong pos-
sibility that just a few Stocks can dominate the rem.rns for those early years.
While the number of companies included in the 10th decile for: the early yea.n of our analysis
is low, it is not tOO low to still draw mcaniDgfuJ rcsub:s even when broken dO"W11 intO subdivisions
1011. and lOb. All things considered, size premia developed for dec.:iles lOa and lOb are significant and
am be used in cost of capital analysis. These size premia should greatly enb2na: the development of
cost of capital analysis for very small companies.
Tabla 7-
S~DeCnePDrt1DDos 10B and 10b of the NYSEJAMEXINASDAQ,
Lar;est Company and Its Ma1ket Capltall::atiDn
September 30. 2DD3
Reeont OdD Marlmt CapltaJt:atJon
Recent Number MarlcDt Cap/t:lll:atfcn of Largest Company
Dllcn. of Companies pn thoucDndr;) (In thou:ancb)
~9~
.. -" ,'. _.. -., ,,
~~J.~~:4..- -.
- . '" ..
S!.
~~~'
10b 1.1511 ~.B51,824 $95.928
Note: 1he:;o numbel1i ITIIIY not 8ggrogatll1a &qual decile 10 &gurcs..
Sourc:a: Center ler Flesean:h n Security Price:I. Unfolmlty of Cli:;ago.
Company.
Name
~~IJ?'
..._..
M~ AcyaIIy Trust
130 S881 Valuation edition 2004 Yearbook:
Exhibit No. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-1), Page 16 of 18
Arm SIZa end Return
Table 7-
Long-Tem Returns In Excess of CAPtJI estimation for DecRe Portfolios of the
NYSEIAMEXJNASDAO. with 10th OecDa Split
1926-2003 Aoallzed EstImated Size Premium
Arithmetic Return In Return In (Return InMoan E::cemo 01 E:ccess of Excess ofBeta. Rel1Jm RiskIest! Rata- Rlskless Ratet CAPM)
1-l.arBest 0.91 11,.(3% 6.21% 6.54% -o.
.- -'-'."- - .-.- .......--., - '.~"'- -- ",-",'-'-" .--------.--
2 1.04 13,,16% 7..94% 1.44% 0.50%
-. .. ~ - - -..- --- -.....-.--... ..---..---.--------..---
:3 1.10 13.78% 8.55% 7.B8% 0.67%
... ._
_"0
., -'" ..-.--. .. .--.,--- --.---.- ..-.--.-..---'
4 1.13 14.43% 9.20% 8.00% 1,11"
-.-.-' - ..-.-- .....--. ....... -. ...-...-.-,---........---.--.-.---
S 1.16 14..91% 6S,," 32% 1.138%
..-...... .---- -...---'-- ----.--.-..---.---------
1.18 15.32% 10.09% 8.50% 1.59%
- -,- ... -- -------- --- ------.--- -.-----
7 1.23 15.65% 10.42% U5% 1.57%
--....-.-'-" .--..---.-----------
1.28 16.64% 11.42% 9.16% 2.25%
---" .. -.-- .------..-"'--'--"-- ....-----
1.34 17.76% 12.53% 9.63% 2.90%
--.-------..-.- ... -.-.- -..-------'---' -----'-'--
108 142 19.93% 14,70,," 10.20% 4.
---..- ". ---- --- -.---.-- ---- .--.. -..--.
10b-Gmal1eS1 1.40 2S.0S% 19.a5% 10.03% e.82%
MId.Qlp, ~5 1,12 14,16% 8.93% 8.02% 0.91%
---- -.' -_._-,-----,,_._----
t.ow..cap,6-S 1.22 15.67% 10.44% 8.74% 1,70%
-,~--,,- --_..
MIct'D-CaP,10 1..36 1 B.96% 13,75% 9,74% 4.01%
"BelaS are esUmBt.ed frcm monthly portfo&u Ictal returN In ~S3 of the 3().day U.S. Treasury bID tctal mum versus 1t18 S&P
500 Ictal returnS In excess at the 3O-day U.s. Treasury bro, January 1 92&-Oecembar 2003 .
~CaI rlskless rail! Is measured by the 78-yt1ar arilhmeUc mean Income retum component of 2o-year
government bonds
(5.23 percent),
tCa/culated In the c=rte7;1 01 the CAPM by mul\lp!)llng the equity IIsk premIuT1, by beta. The equity riSk prunium Is esUma1ed by
the arithmetic mean total return of the S&P 500 (12..41 pen:ent) minus \he arithmetic mean IncOme retum CQlTlponent at 2O-year
government bends (523 pe~ Ircm 1926-2003.
Graph 7-
Security Market line versus Slze-DGcfie Portlollos or the NYSEIAMEXINASDAO. with 10th Decile SpOt
1926-2003
20'
.S!
eeta
8 O"B 1,,1.2 1.4 1.
swn:e: Cen!2r Icr Resear;!'lln Seo.r!ly Pri.."'e!I. 0nI\II:ISty rJ. OiIcago Idl!c!I~ daIII).
Ib botsonAssociateS 131
Exhibit No, 12
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-1). Page 17 of 18
Chapter 7
Table 7-
H!stcrlcal Number of Companies for N'fSEiAMEX/NASDAO DeeDlI 10
Sept. Numblll' 01 CompanlC$1926
- -- -----
1930
..--- -------
1940
---. .---~--- -- _-!..~
'960 109
~- ~~-
BSS1990 1.BH2000 1.927
----
2003 1.124
'The fewest number 01 companlelt was 49 n March.. 1926
Sc\II'Ce: Center for AI!~OII1Ch In Sec:urtty PrIces.l.IrMrsItY of Cl'l\::3Q:)
Altemptjve Methods of Calculating the Size Premia
Th~ me premia estimation method presmted above makes sevetaJ assumptions with respect to the
muket bet1c:bmark and the measurement of beta.. The impact ~f these ~ptieDS an. best be exam-
ined by looking at some alternadves. In this section we will examine the impact on the she
premia.
of using a different mad::et bcnrhmllrk for estimating tbe eqwty risk premia and beta.. 'We will also
examine the effect on the size premia stUdy of using sum beta or an
wnw beta..
Changing the Market Benchmark
In the original she premia stUdy, the S&.P 500 is used as the uwkct b~,.hm!lr1t:in the calcnlation of
the realized historical equity z:isk premium III1d of each size group s beta.. The NYSE total value-
weighted index is a common altemative market bcnc.bm.a.rk used te calculate beta. Table 1-9 uses this
ma.rket benchmark in the caJc:uhttion of beta. In order to isolate the size effect, we require an equity
risk premi.'DJD based on a large company Stode be.n""m,,,.tr The NYSE ded1es 1-2 large company
i.cda offm II. mul:lW)y exclusive set of portfolios for tha analysis of the smaller ~ompany groups:;
mid-ap deciles 3-S.low-cap deci1es G-S. and micro-cap deci1es 9-10, The size premia analyses using
thde bw..J,mllrks arc in Table 7.9 and depiacd graphically in Gnph 7-4.
For the entire peciod .ana.1yud, 1926-2003, the betaS obtained using the NYSE tOtal value--
weighted index"uc higher than those-obWned using me.S&.P.500. Since sm;41~-~C!x:t1P~~.
higher betaS using the NYSE be.nchma.tk, one would apect the size premia to shrink. HoweveJ; as
WO1S illustrated in Chapter 5, the equity risk premi'DJD calc:u1ated using the NYSE deciles 1-2 bench-
mz.rk results in ;. value of 6.40, as opposed to 7,.19 when using the S&P 500. The effect of the
higher betaS and lower equity risk premium ca.nc:d each other om. and the resultf.ug size premia in
Table 7-9 are slightly higher than those resulting from the original stUdy,
It Sam beta is the method of b= atimatioll desaibcd in OIJlpter (; thAt was dl:9C!apcd to bca:r ac:anmt for the I.;q;&ed
:t::IaiOIl of mWI Stotb tD II!21kct mon:mems. 'Ihc ;nm bea methodnlo&7 mJ deTelopcd for tbe AIDe n::ISOIi tb.u the
pn:mio1 wen developed; cDmp;nJ be::s wer: tOO sm.dI to ae=UI!I: for ;JI or Ch:ir co:e:s fmICIS.
132 S881 Valuation EdItion 2004 Yearbook
Exhibit No.. 12
Case No.. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-1), Page 18 of 18
Standard & .Poor
CORPORATE
RATINGS CRITERIA
Exhibit No" 12
Case No. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-2), Page 1 of 15
1~11~1tlilljiiI1!lmlll&l~illlt1iJillfil~~~I~fl'1111~1~~
CORPORATE RATINGS CRtrERIA
Dear Reader,
This volume updates the 1994 edition of
C.orporate Finana Criteria. There are several
new chapters, covering our recently introduced
Bank Loan Ratings, criteria for "notching- jtmior
obligarions, and the role of cyclicality in ratings.
Naturally, the ratio medians have been brought
up to date.
Standard &: Poor s criteria publications represent
our endeavor to convey the thought processes and
methodologies employed in determining Stmdard
&: Poor s ratings. They describe both
the quanritative and qualitative aspectS of the
analysis. We believe that our rating product has
the most va.Iue if users appreciate all that has
gone into producing the letter symbols.
Bear in mind, though, that a rating is, in the end,
an opinion. The ratillg experience is as much an
art as it is a science.
Solomon B. Samson
Chairman, Corporate Ratings Criteria Committee
Ablllll p,:,1XII"ta; IC' f.1:dng ~~CJ1:ItI ~F C1lat&..JhFt'd~ Ir ~IIV /IIII:p Cillril1ItIIJI1II1II COIIUI
C8 pahJisblr II ~Wbbd. for t=azmIoa all 'IA rma. .. I'" I1.x ,t=o c:za (Zt2j 2GIo114.
st.an4ard Poor'i A~~~
Ptes1ded Leo Co O'NeiJl
ExwdiVI Vaea Predde1lb
H=driIt J. 'Ktanenborg Jtob=t It Maimer
EDcutiR MmmgiQ Din:ctDrII
:Edw;ad z.. Emm~,
~ ~
R4~
Cifford M. Griep, ludtulior.s BAines
Vl:adimir Stadnyk, p,J,& Pinanu Rminf$~~~~Ub Rmmgs
Vickie A.. Stnlaunul Fmanc.e R4tinrs
Joumc w. Rose. Senior M4n.aging Dinctor
GourJ CoumJ
Glenn 50 Go1dbcrg. Mmuzcinr Din:aot'.
lt4tmKS DcJopmm;t cT Commu~
SemDlYice P=deat JeHrcy R.. Pa=soft
ViDI flUld,at
Pro d act M alia gat
MIIIbtiDa SplCla&t
IlIIIIIDI.Da EdItor
E4ItDdaI MaDllll1a
bbctt Prump
Olp B. Sc5Dl1iDo
S I1%:I%1Da J:arufiDo
UDcb Sa uJ
h=c CoI==
JW::hd 1.. GordoaSIm D. Homan
Pr:a:r DinoUoCan Edilllr
PRODUCTION
D1nIc:taud De:I~Pl'4dDdiDIl&Mllnlfaetuliag hard
DEsrror PoiwsHIN~
MaJlDQllf. PlDdaatlDII OJllrdDIII ~di Bead!::
PlOda:tiOD MIDIgN' Baa, !lit:
Pllldndlaa CallnlilLDtal'l HuTD! AtoI:lSOD
AIic:iI .t=cElise ticbll:rmllD
SlIIiDrPllldllc:tiDII~ Law JoachimU= M'oCUlD, CoP'! EAtDf'
Sa=pb= "WiIIiam$
D!S1GN
IIIlllaoar.AJt&Dasip Sua
s.DlorDadlllll/i Ca1dia &wfoD=~ s.wyer
Dclpr GufiD FiJD
JmDl D~pll' H=u 'WeioberJ
Ta::HNCLOCY It DEvELol!MENT
Sla1orPlOdac1&lllMaIIllI,r Edward HDIIII~
. piViiilC1iiiiiMiR"Iig"
~~
SworProdacfiollA::l:tald Jason Roc:!:
SAlES
Vie. ~:id'al Sar:a.h Fersm=
DiI'IdDr. GlDbal :.1.. Georp Scbepp
&aJc MlIIIgII'I S~ 1=bw:, ~t:
Micbad Na)'iot, AsilJ.l =(1&
Cc."1omarSlrvlce Mllllllir Ihlbm '&umohl
PlCnsllJII lit SIu:!ud & I'oGI'I. 'O1rb!ol1l1lll U:GI'IJtoHID CcllPIJIIn. !xmIIIR II&a: 1m /In_1I1I1II A/mII:D.I..YIIl U. lalla om=: 25 ll112#WJ7. A..,D1t"II't 100D.l1S5II 1tliJoG77l. ===noll'.m=
fZ1%) 2D 1-1 1 4At Co GIu-IIlII CIm All,. Imf\'III. D III:II'S " 1!18 M:G/I8'1IIII c"m Josq" L D\o..... 0I0ItmuI ani! QI'd EmIIItn 0III=t. II:IIDId ". McGn'. I L PI CIIId 0pIn\IDIJ
till a:r; lID bat I\. bil:lS.l5taI=t Vb l1li 5aIzr1: at. W:It. &tdor Vb III! Gum! CcIzns2t 11m PI n;!ase. kdor Vb PusbZIIL '1DSlrJ lip D1IbA bf InIIII!IID = me II tIIIIII:d ., CaIJ=ZD
Ib:npcnrn l1li=
-=
M!lmLlII:1 R /llbb1a.1/IrftfIt Iit:Ua dill oIlamn otll8d:labllllll'~ III' -=a. ~RIII/I;J I:lCri Ilea IIGI l1li c=q.
~.
.. complrlzllm 0' IIIJ hlailDUba l1li
II Nt br1IIj'lIIn II' 0InI;sbI$ Cll"1Dr1I8 r=: er=hll1Iam Ik a:o III au:h
S:a$n! .. I'DcJ'IItC:tIns comptm:dlzJa IIIJlJDlqlldrtft!Ozll=. $v::!! COIIIIptD$d!llals liD 1181l:1li lid t.IIIIn ID ft:l:llllb lilt'" uS" IIfI/1IDIIJ """ I!IIIEt btl!l8l=m III ar:lllz:d1:2 II' lIT lilt tIId8mI\UII ,1/t:I;IIIIrG
.,1110 1bmI!l1l81as Dt=nIW 'RIJ' InIa =.!DQ IIIISUVD. W1I!t SII.IdU1II. '=1'1-- III dgjd III dI=mImtt lilt alii;. llIa!m 101 pqIIICII!tu cbIII; SrI. a:zJ! b"~atD b
Exhibit No, '
Case No.. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-2), Page 2 of 15
Utilities
The utilJt1es rating methodology encompasses two basic
components: business risk analysis and financial analysis.
Evaluation oflndustry c:harac:terlstIcs. the utWty's position
w1tb1n that industry. Its regulatlon. and Jts management
provides the context for assessing a ftrm'~dal condJ-
tlon.
H1stor1ca1 ana1ys1s Is a tool for Identifying srrengWs and
weaknesses. and provides a starting pc1nt for evaJuat1JJg
financial cmu:iJtIon. BusInesS position assessment Is the
qua1Itatfve measure or a utflJty s fundamenlal c:redltwor~
thlness.lt roQJSeS on the torus ilia! wm shape the utlUties
future.
The aed.It analysis or utillties Js qulc:k1y evolving, as
utilities are treated less as regulated monopoUes and more
as entitles faced with a host of d1a11engers in a competitive
environment Marketplace dynamIcs are ~pp1anting t1w
power of regulation. making It aitically Important to re-
duce costs and/or market new services in order tD thwart
competitors' inroads.
Markets and service area economy
Assessing service territory begins with the economic and
demographic evaluation ohile arealn whJch the utfJ.Uy has
Jts franchise.. Strength oflong-t.enn demand for the product
is examined from B macroeconomic perspective. ThIs tn-
abies Standard &: Poors to evaluate the affordabillty of
~,-~~.~~-~g,
p.E!'.~~_de~
Stmdard &: Poor s tries tD dlscem-8ri,Y-Cii1iirconsump. ,
tion trends and. more Importantly. ihe reasons fot' them..
SpedJ1c Items examined include the size and growth rate
of the market. strength of the franchise. historical and
projected sales growth.1ncome levels and trends in popu-
latlan. employment. and per capita Incoma.. A utWt;y with
a bea1thy economy and QJStDmer base-as illust:ra!ed by
diverse employment opportunWes. avernge or abave-av~
erase wea1th and Income statlsdcs. and low unemploy~
ment-wnJ have a greater capacity to support tis opera-
tions.
For electrlc and gas utflWes. dlstdbutlon by customer
cl.ass Is ~t1nJzed to assess the ae pth and dJversUy or the
utility's customer mix. For example. heavy industrial can~
c:entratlon is viewed cautious1y. sinas a utility may have
slgnIficanJ: exposure 10 cycUca1 voladllty. AlternadveJy. a
large residential component yields a stable end more pre-
dJct:JbJe revenue stream. The largest utIU1y c:ustDmers are
IdentUled to determine Ihe!r Importance to the bottcmline
and assess the risk. of their Jess and potential adverse effect
on the utWtts flnanc:!al posltlon. Credit concerns arise
when individual customers represent more than 5% of
revenut$. The company or industJy may play asignlflcant
role in the overaD economic base of the service area. More-
over,1arge aJStomers maytum to cogeneration or aluma-
live power supplles to meet their energy needs. potendaDy
leading to reduced cash Dow for theutOJty (even in cases
where a large customer pays dlscounted rates and Is not a
profitable account for the utiUty). Customer concentration
is less significant for water and teW:ommunicaUon utflI-tI~
Competitive positio!"
A:s competitive pressures have 1nt.enslOed in the utilJties
Industly. Sumdard &: Poors ana1ysIs bas deepened to In-
clude a more thorough review of competitive position.
E~ric mD~ compmn~n
For electric udUties. competitive factors examined in-
clude: pen::e~ge of firm wholesale revenues that are most
w1nerable to CtJmpetltlon: industria11oad concenlration:
exposure of key custDmen to alterl1EldVe supplJen; com--
mertla1 concentrations; rates for various customer classes:
rate design and Dexibility: production costs. both marginal
and fixed: the regional capacity situation: and transmission
constraints. A regional focus is evident. but high rosa and
rates re1adve to national averages are also of signUicant
concern because of the potential for eJedrldty substlbJtes
over time.
Mounting competition In the eJectric utO.Uy Industry
derives from exteSS generating capacity, lower barrlers to
iint:eiihg" ttiinlectrlc-generating business;' and marginal"
costS that are bclow embedded costs. Standard & Poor
has alrudy witnessed dec1lnJng prices In who1esaJe mar-
kets, as m (adD retail competition Js already being seen In
several parts of the counby. Standard & Poors beUm'es
that aver the coming years more and more customers wID
want and demand lower prices. Inll:1aJ concerns focus on
the largest industrial loads. but ether customer classes wf11
be inaeasing)y vulnerable. Competition wm not necessar-
Exhibit No.. 12
Case No" UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-2), Page 3 of 15
. I ~i: ~"CI"
J1y be drlven by legislation., Other pressures will arise from
global competition and Improving technologies, whether
:It be the decUn1ng cost of Incremental generation or ad.
vances in tranSmission capad()' Dr substitute energy
sources lIke the fue) ceIl. It Is impossible to say precisely
when wlde-open reW! competition will occur; this wID be
evolutionwy.. However. significantly greater competition
in retaU markets is inevitable.
Gas utility competition
Slmfiarly, gas utWties are analyzed with regard to theJr
competitive standing in the three major areas of demand:
residential. commercial and industriaL AJthough regu-
lated as holders of monopoly power. natural gas utilities
have for some time been actJve1y competing Cor energy
market share with fuel aD. e1ectrldty, coal solar, wood, etc. '
The long-term staying power of market demand for natu-
ral gas cannot be taken for granted. In fact. as the eJec:ttic
utWty industry restructures and reduces costs. electric
power will become more cost competitive and threaten
certain gas markets.. In adcUtJon. independent gas market.
ers have made greater inroads behind the dty gate and are
competing for large gas users. Moreover, the recent trend
by state regulators to unbundle utlUly services is aeatlng
oppOrbmlties for outsiders to market niche products. Dis-
tributors still have the upper hand. but those who do not
reduce and contra) costs. and thus rates. could find com-
petition even more dimculL
Natural gas pipelines are judged to carry a somewhat
hIgher business risk than distribution companies because
they face competition In every one of their markets. To the
extent a pipeline serves utilities versus ind ust:ria) end users.
Us stablIJly Is greater, Over the next five years. pipeline
competition will heat up since many service contracts with
customers are expiring. Most distributor or end-use cus.-
tomers are looking to reduce pIpeline costs and are work.
ing to Improve their load factor to do so. Thus. pipelInes
wDll1keJy find it dIfilcult to reCDntract all capadty in
coming years. Being the pipelIne of choice Is a function of
attractJve transportation rates, diversity and quality of
servi~ provided, and capadty available in each particular
markeL In all cases though. periodic dJscounting of rates
to retain customers will occur and put pressure on profit.
abWty.
Water utility competition
" As the last true utility monopoly, water utilities face very
UtIle competition and there Is CUlTently no challenge to the
continuation of franchise areas. The oruy exceptions have
been cases where inVestor-owned water companies have
been subjed to condemnation and municfpa1l.zat1on be-
cause of poor service or poUticaJ motivadons. In that re-
gard, Standard & Poor s pays close attention to costs and
rates In relation to neighboring utilities and naUena! aver-
ages., (In contrast. the privatization of pubUcwater fadUties
has begun. albeit at a slower pace than antIdpated" ThIs is
oca.nTing mostly in the fonn of operating contracts and
pubUclprivate partnerships, and not In asset transfers..
ThIs trend should continue as dtles look for ways to bal-
ance their tight budget:s..) Also. water utWtles are not fully
Immune to the fCl'C$ of competition: in a few Instances
whoJesa1e customers can access more than one suppUer.
Telephone competition
The 1 eleconununlcatJons Ad. of 1996 accelerates the con.
tinuIng challenge to the local exchange companies' (LECs)
century-old monopoly in the local loop. Compet!t1ve ac-
cess provJders (CAPs). both fadUties-based and resellers.
are aggressively pursuing customers. generally targeting
metropoUtan areas. and promising lower rates and betterservice.
Most long-dlstana! caDs are still originated and terml.
nated on the local telephone company netWork.. To com-
plete sUch a caU. the long-distance provider (including
AT&T. MCL Sprint and a host of smaller Interexd1ange
carriers or -IXCsj must pay the locaJ telephone company
a steep -access- fee to compensate the local phone com-
pany fOf the use of its local network. CAPs. in contraSt.
build or lease facilJUes that directly connect customers to
their )ong~ce carrier. bypassing the local telephone
company and avoiding access fees. and thereby can offer
lower long-distance rates. But the LECs are not standIng
still: they are combating the loss of business to CAPs by
lowering access fees. thereby reducing the economic incen-
tive for a hIgh usage long-distance customer to use a CAP.
LECs are attempting to make up for the loss of revenues
from lower access fees by inaeaslng basic local service
rates (or at least not lowering them). since basic service is
far less subject to competJtIon.. LEGs are improving oper-
ating efDdency and marketing hJgh margin. value-added
new services. Additionally ,In the wake of the T elecOIIU11U-
IDeations A1;t, LEC'.:s wID capture at least some of the inter-
LATA long-distance market.. As a nsult of these initiatives,
LECs continue to rebuIld themselves-from the traditional
utillty monopoly to leaner. more marketing oriented or-ganfzatlons..
...
WhDe LECs. and Indeed all segments afthe telecommu-
nications sector, face inaeasing competition. there are fa-
vorable IndustI)' factors that tend to offset heightened
business risk and auger for overall ratings stability for most
LECs. Importantly. telecommunications Is a decl1ning-cost
business. With Increased deployment of fiber optics. the
cost of transport has fallen dramatically and digital switch-
Ing hardware and software have yielded more capable.
trouble-free and cosHffident networks. As a result. the
. cost of network maintenance has dropped sharply. as mus.
trated by the ratIo of employees per 10,000 access Unes, an
oft cited measurement of effidency. Ratios as Jow as 25
employees per 10,000 lInes are being seen, down from the
typica140 or more employees per 10,000 ratio of only a few
years ago..
In addition. networks are far more capable. They are
JnaeaslngJy dlgitaJIy switched and able to accommodate
high-speed communIcations. The Infrastructure needed to
accommodate switched broadband services will be bunt
Into telephone netWorks over the next few years., These
advanced networks will enable telephone romparrles to
look to a greater variety of higb-margin, value-added serv-
Exhibit No.. 12
Case No" UWI~04-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-2), Page 4 of
Ices. In addition to those CUlTent services such as caJl
waiting or caller ID, the dellvelj' of hundreds of broadcast
and interactive video channels will be possible. WhIle these
services ofi'er the potential of new revenue streams. they
wm simUltaneously present a formidable chaI1enge.. LEes
wiD be entering the neW (to them) arena of multimedia
entertainment and will have to develop expertise In mar-
keting and entertainment programming ammen: such
skJlls stand in sharp contrast to LEes' traditional sttengths
In engineering and customer service.
Operations
Standard & Poor s focuses on the nature of operations
from the perspective of cost. re11abIDty, and quality of
service. Here. emphasIs is placed on those areas that re-
quire management attenttonin termS oftlrne Of money and
which. ffunresolved, may lead to poUticaL regulatmy, or
competitive problems..
Operations of electric utUitiea
For e1edrlcs. the staWs of utfl1ty plant investment is
reviewed with regard to generating plant avallabWty and
utilization. and a1so for compliance with existing and con-
templated environmenta1 and other regulatory standards.
The record of plant outages. equivalent avaJIabilJty.load
factors. heat rates. and capacity Caeton; are exa.mlned Also
important is effidency. as defined by total megawatt hour
per employee and CUStOme.rs per employee.. Transmission
1nterCOMections are evaluated In terms of the number of
utWt1es to whJch the utillty In question has ateeSS. the cost
strUctures and avaDable generating capadty of these other
utUlt1es. and the price paid for wholesale power.
Because of mounting competition and the substantial
escalation in decommissJonlng estimates, significant
weight Is given to the operation of nuclear fadlIties. Nu.
clear plants are becaming more vulnerable to hIgh produc-
tion costs that make their rates uneconomic. SIgn1f1cant
asset concentration may expose the utilJtyto poor perform-
ance. unscheduled outages Dr premature shutdowns. and
large deferrals or regulatory assets that may need to bewritten off for the utillty to remain competitive. Nso.
nuclear facUitles tend to represent signIflcant portions of
their operators' generating capabWty and assets. The loss
of a productive nuclear unit from both power supply and
rate base-canlOterropi"the revinueStream and .~su1).;
stantlal adcUticnal costs for repairs and improvements and
replacement power. The ability to keep these statIons run-
ning smooth)y and economically cUredly 1nf1uences the
ahUity to meet electric demand. the stabWly of revenues
and costs. and, by extension. the abIlUy to maintain ade-
quate aed1tworthiness. Thus, economic operation, safe
operation. and long-term operation are examIned in depth.
Specifically, emphasis Is placed on operation and mainte-
nance costs. busbar costs, fuel costs. refueling ournges,
forced outages. plant statistIcs. NRC evaluations, the p0-
tential need for repairs. operating licenses. deco~on-
tog estimates and amounts heJd in external trusts. spent
fuel storage capadty. and management s nuclear expert-
ence.ln essence, favorable nuclear operations offer signifi-
cant opportunities but if a nuclear unit Nns poorly or not
at aD. the attendant risks can be great.
Operations of gss utilities
For gas pJpelJne and d1stributlon companies, the degree
of plant utilization. the physical condition of the malns and
Unes. adequacy of storage to meet seasonal needs. -lost and
unaccounted for- gas levels, and per-unlt nangas operat-
ing and constrUction costs are important factOrs. EfiIdency
statistics such as load factor. operating costs per customer.
and operating income per employee are also evaluated In
comparison to other utilities and the industry as a whol~
Operations of water utilities
As a group. water utUittes are mntinuaDy upgrading
their physical plant to satisfy regulations and to deve1op
additional supply. Over the next decade. water systems
w1lllncreasing1y face the task of maintaining compliance,
as drinking water regulations change and inf'rastruaure
ages. Given that the Safe DrlnIdng Water Act was author"
!zed in 1914. the first generatlon of treatment plants bunt
to corUonn with these roles are a1most 20 years old. Addi-
tionally. because the focus during this period was on sat-
Isfying envJronmental standards, deferred maintenance of
distribution systems has been common. espedally in older
urban areas. The increasing cost of supplying Ireated water
argues aga.inst the high level of unaccounted for water
witnessed in the industry. Consequently, Standard &
Poor s antldpates capItal plans for rebulld1I1g distribution
Unes and major renewa1 and replacement efforts aimed
treatment plants.
Operations of telephone companies
For telephone companies, cost-of-servlce ana1ysfs fo-
cuses on plant capabWty and measures of efficiency and
qualIty of service. P1ant capabWty Is ascertaIned by looking
at such parameters as percentage of dIgitally swItched
Unes; fiber optic deployment in particular In those por-
tions of the plant key to network survival: and the degree
of broadband capacity fiber and coaxial deployment and
broadband switching capacity. EIDdency measures in-
clude operating margins, the ratto of employees per 10.000
access lines. and the extent of network and operations
consolidation. Quality of servIce encompasses examtna-
. tioii"of quantitative measures. such as trouble reports and
repeat service calls. as well as an assessment of qualitative
factors. that may Include service quaUty goals mandated
by regu1ato~
Regulation
Regulatory rate-setting actions are reviewed on a case-
by-case basis with regard to the potential effect on credit.
worthiness. Regulators' authorizing high rates of return Is
ofUttle value unless the returns are earnable. Furthermore,
allowing high reb.uns based on noncash Items does not
benefit bondholders. Also. to be viewed positively. regula-
tory treatment should allow consistent performance from
Exhibit No.. 12
Case No. UWI-04-
Pauline M. Ahern. AUS Consultants
Schedule (PMA-2), Page 5 of 15
period to period. given the importance offlnancial stabW1y
as a rating consideration.
The utillty group meets frequently with c.cmmlsslon and
staff members. both at Standard & Poor s offices and at
commf.sslon headquarters. demonstratIng the Importance
Standard & Poor s p1ac:es on the regulatory arena for aedJt
quality evaluation. Input from these meetings and from
review of rate orders and their impact weigh heavDy in
Standard & Poor s ana1ys1s.
Standard & Poor s does not "rate- regulatory commIs-
sions.. State commissions typ1caDy regulate a number of
diverse Industries, and regulatOry approaches to d1fi'erent
types of companies often dJ.ffer within a single regulatory
jurlsdlct1on. This makes It aD but impossible to develop
inclusive .ratings- for regu1ators..
Standard & Poor s evaluation of regulation also encom-
passes the adm1nistratlve. judIcial. and legislative proc-
esses involved in state and federal regulation, These can
affect ra.re.settlng activities and other aspects of the busi-
ness. such as competitive entry. environmental and safety
rules. fadllty sitIng. and securities sales.
As the utillty industry faces an increasingly deregulated
environment. alternatives to tradltlonal rate-making are
becoming more crltlca1 to the abillty of utlUtJes to effec-
tl've1y compete, malntaJn earnings power. and sustain
aedltor protection. Thus. Standard & Poor s focuses on
whether regulators. both state and federal, will help or
hinder utlllties as they are exposed to greater competition.
There Is much that reguJators can do. from allocating costs
to more captive customers to allowing pricing fiexlbfl.
ity-and sometimes just stepping out of the way.
Under traditional rate-maldng. rates and earnings are
tied to the amount of invested capital and the c.cst of
capltal ThIs can sometImes reward companies more for
justifying costs than for containIng them. Moreover. most
current regulatory poUdes do not permit utillties to be
flexible when responding to competitive pressures of a
deregulated market. ~k of flexIble tariffs for electric utill-
ties may lw-e large customers to wheel cheaper power from
other sources.
In general. a regulatory jurlsdlction is viewed favorably
if It permits earnIng a rebJrn based on the ability to susb1in
rates at competitive levels. In add.Jtion to performance-
based rewards or penalties. flexible plans could include
market~based rates. price caps. index-based prices, and
rates premised on the value of customer service. Such rates
more closely mln"or the competitive environment that utili.
des are confronting.
Electric Industry regulation
The ability to enter into long..term arrangements at ne.
gotIated rates without having to seek regulateI)' approval
for each contract is also important in the electric Industry,.
(WhIle contract:fng at reduced rates constrains financial
performance. it lessens the potenUal adverse impact In the
event of retaD wheeUn~ Since revenue losses assodated
with this strategy are not UkeJy to be recovered from rate-
payers. utilities must control costs well enough to remain
competitive If they are to sustain CUlTent levels of bond-
holder protect1on,,
Natural gas industry regulation
In the gas industry. tOo, several state commIssIon poUdes
weigh heavily in the evaluation of regulatory support
Examples include smbIllzatJon mechan1sms to adjust reve-
nues for changes in weather or the economy. rate and
service unbundlIng decisions. revenue and cost allocatIon
betWeen sales and rransportatlon customers. flexible in-
dustrial rates, and the general supportl.veness of construc-
tion costS and gas purchases.
Water Industry regulation
In all water uilllty activities. federal and state environ-
mental regulations continue to play a aitlca1 role. The
legislative timetable to effect the 1986 amendments to me
Safe Drinking Water Act of 1974 was quite aggressive.. But
environmental standards-setting has ad.ually slowed over
the past couple of years due large1y to increasing sentiment
that the strir1gent. costJy standards have not beenjustiBed
on ~e basis of public health. A moratOrium on the prom-
ulgation of signiflCBnt new environmental rules is anttd-
pated.
Telecommunications Industry regulation
Despite the advances in telecommunications deregula-
tion. analys!s of' regulation of telephone operators wf1l
continue to be a key rating deterrnlnan1 for the foreseeable
future. The method of regulation may be either classic
rate-based rate of return or some form of price cap mecha-
nIsm. The most Important fai:tor Js to assess whether the
regulatory framework-no matter which type-provides
suffident financial incentive to encourage the rated com-
pany to maintain Its quality of service and to upgrade Its
plant to accommodate new seIVices while fadng fnaeasfng
competition from w1reless operators and cable television
companies.
Where regulators do still set tariffs based on an author-
ized return, Standard & Poor s strives to explore with
regulators their view of the rate-of-return components that
can materially Impact reported versus regulatDry earnings.
SpecIfically these include the allowable base upon which
the authorized return can be earned, aIlowable expenses.
and the authorized return.. Since regulatory oversight runs
th~gamut from strict. adversarial reIatlonships with the
regulated operating companies to highly supportive pos-
tures, Standard & Poor s probes beyond the apparentregu-
latelY environment to ascertain the actual impact of
reguJatJon on the rated company.
Management
Evaluating the management of a utility Is of paramount
importance to the analytical process since management
abilities and decisions affect all areas of a company s op-
erations.. While regulation, the economy, and other outside
factors can Influence results. it Is ultimately the quallty of
management that determines the success of a company,
Exhibit No. 12
Case No" UWI-O4-
Pauline M" Ahem, AUS Consultants
Schedule (PMA-2), Page 6 of 15
With emerging compet1t:fon. utlllty management will be
more closely sautlnlzed by Standard & Poor s and wID
beccme an inaeaslngly aitlcaJ component of the aedlt
evaluation. Management sttategles can be the key determi-
nant in differentiating utJllties and in estabUshing where
companies lie on the businesS pcs1tion spednlm. It Is
imperative that managements be adaptable. aggressive,
and 'Proactive if thelr utillties are to be viBble In the future:
this Is especlally important for utilities that are cummtly
uncompetWve.
The assessment of management Is accompllshed through
meetings, conversations. and reviews of company p~.
is based on such factOrs as tenure, industry experience.
grasp of industIy Issues, knowledge ofcustomersand their
needs. knowledge of competitors, a.ccountlng and ~anc-
ing practices. and commitment to credJt quality. Manage--
ment s ability and willingness to develop workable
strategies to address thEir systems' needs, to dea1 with the
competitive pressures offree market. to execute reasonable
and effective long-term plans. and to be proactive in lead.
ing their utillties into the future are assessed. Management
quality Is also indicated by thoughtful balancing of pubHc
and private priorities. a record of credJbllJty, and effective
conununlcat1on with the public. regulatory bodIes. and the
financial community. Boards of directors will receive ever
more attention with respect to their role In setting appro-
priate management incentives.
With competition the watchword, Standard & Poor
also focuses on management s efIorts to enhance financial
condition. Management can bolster bondholder proted:J.oD
by taking any number DC dtsaetlonary actions. such as
selling common equity, lowering the common dividend
payout. and paying down debt. Also Important for the
electric Industry will be creativity in entering into strategic
alliances and working partnerships that improve effi~
clency. such as central dispatching for a number of utllJ.tjes
or locking up aHisk QJStOmers through lcl1g..term con-
tracts or expanded flexible pricing agreements.. Proactive
management teams will also seek alternatives to tradi-
tional rate-base, rate-of-return rate-making. moVe to adopt
higher depredation rates for generating facilities, segment
customers by individual market preferences. and attempt
to create superior service organIzatlons.
In general. management's ability to respond to mounting
competition and changes In the utility industry In a swift
and appropriate manner will be necessary to maintain
credit health.
Fuel, power, and water supply
Assessment of present and prospective fuel and power
supply Is aitical to ~ery electric utillty ana1ysis. whUe
gauging the long..term natural gas supply position for gas
plpeUne and distribution companies and the water re-
sources of a water utility Is equally important There Is no
simllar ana1ytica1 category for telephone utIDties..
Electric utilities
For electric utllJties emphasis Is placed on generating
reserve margins, fuel mix. fuel contract terms. demand-
side management technIques, and purchased power ar-
rangements. The adequacy of generating margins is
exarnJned nationally, regionally. and for each 1nd1vidual
company. However. the reserve margin picture is mud-
dIed by ilie impredse nature of peak-load growth forecast-
ing. and also supply uncertainty relatlng to such things as
Canadian capacity avafiabf1Jt;y and potential plant shut-
downs due to age. new NRC rules. add rain remedies. fuel
shortages, problems associated with nontndltlona1 tech-
nologies. and so forth.. Even apparently ample reserves
may not be what they seem. Moreover. the quality of
capacity is just as important as the size of reserves.. Com-
panieS' reserve requirements differ, depending upon indi-
vidual operating characteristics.
Fuel diversity provides flexibility in a changing environ-
ment. Supply dIsruptions and price bikes can raise rates
and ignite po11tical and regulatory pressures that ulti-
mately lead to erosion in finandal perfomumce. Thus. the
abWty to a1W' generatlng sources and take advantage of
lower cost fuels Is viewed favorab1y:
Dependence on any single fuel means exposure to that
fuel's problems: e)ectrlc utlllties that rely on on or gas face
the potent1al for shortages and rapid price Increases: utill.
Ues that own nuclear generating fadllties face escalating
costs for decomm!s.sfoning: and .coal-fired capadty enta1ls
enVironmental problems stemming from concerns over
add rain and the -greenhouse en:ect.,
Buying power from neighboring utilltJes. qua1JfyJng fa-
dlJty projects, or independent power producers may be the
best choIce for a utWty that faces increasing electriclty
demand. There has been a growing reHance on purchased
pcwer arrangements as an alternative to new plant con-
structJo~ This can be an important advantage. since the
pW"Chasing utility avoids potential constrUction cost over-
runs as well as risking substantial capital. Also, ut1lities can
avoid th e flnan dal rls ks ty pi ca1 0 fa m u1 ti Y ear co nstrU ctI 0 n
program that are caused by regulatory lag and prudence
reviews. Further mere, purchased power may enhance
supply flexibility, fuel resource diversity, and maximize
load factors. Utilities that plan to meet demand projections
with a portfolio of supply-side options also may be better
able to adapt to fuDJre growth uncertainties. Notwith-
standing the benefits of purchasing. such a strategy has
risks associated with it. By entering into a Dnn long-term
purchased power contract that contains a fixed-cost com-
panent. utilities can Incur substantial market. operating.
regulatory. and financial risks. Moreover. regulatory treat~
ment of purchased power removes any upside potential
that might help offset the risks. UtlUtles are not compen-
sated through incenUve rate-making: rather. purchased
power Is recovered doDar-for.cloDar as an operating ex-
pense.
To analyze the finandal1rnpact of purchased power,
Standard & Poor s first calculates the net present value of
furore annual capacity payments (dJsccunted at 10%), ThIs
represents a potential debt equivalent-the off-balance-
sheet oblIgation that a utIDty incurs when It enters Into a
1ong.tenn purchased power contract. However, Standard
Exhibit No.. 12
Case No" UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-2), Page 7 of 15
& Poor s adds to the utilltis balance sheet only a portion
of this amount. recogntzing that such a contractual ar~
rangement Is not ent.1rely the equivalent of debt. What
percentage is added is a function of Standard & Poor
quaUtative analysis of the spedflc contract and the extent
to whJch market., operating. and reguJatory risks are bome
by the utillty (the risk factor).. For uncondJtional. take-or.
pay contracts. the risk factor range is from 40%.80%, with
the average hovering around 60%. A lower risk factDr Is
typlcaDy assigned for system purchases from coal-Bred
utiUties and a higher risk factor is usually designated for
untt.spedfic nuclear purchases. The range for take-and-
pay performance obligations is betWeen 10%.50%,.
Gas utilities
For gas distribution utOltles.long-term supply adequacy
obviously Js aitlcaL but the supply role has become even
more Important In aedit analysis since the Federal Energy
Regulatory CommIssion s Order 636 ellmlJ1a1,ed the inte.r-
state plpeUne merchant business. This thrust gas supply
responsibilities squarely on local gas distrlbutD~ Stand.
ard & Poor s has always believed dlstIibutor management
has the expertise and whereWithal to perform the Job well.
but the risks are slgnIflcant since gas costS are such a large
percentage of total utillt)r costs. In that regard, it is lmpor.
tm1t for ulilltles to get pre approvals of supply plans by state
regulato~ or at least keep the staff and cormnisstoners weD
Wormed. To m1n1rnIze risks. a well-run program would
diversify gas sources among dIfferent producers or mar-
keters. different gas basins in the U.s. and Canada. and
different pipeline routes.. Also, purchase conrracts should
be firm. with minimal take-or~pay provisions. and have
prices tied to an indllStry index. A modest percentage of
fixed-price gas Is not unreasonable.. Contracts, whether of
gas purchases or pipeline capacity. should be intermediate
term. Staggering contract expirations (preferably annu-
ally) provides an opportunftyto be an active market player.
A modest degree of nUance on spot purchases provides
DexibWty, as does the use of market-based storage.. Gas
storage and on-property gas resources such as Uquef1ed
nawral gas or propane air are effective peak-dayand peak-
season supply management tools.
Since pipeline companies no longer buy and sell natural
gas and are just common cartiers. connect1ons With varied
reserve basins and many wells within those basins are of
greaiimpoit3rite:. Diver'Sity of sources helps offset the risks .
arising from the natural production declines eventually
exper:lenced by all reserve basins and IndividuaJ wells.
Moreover, such d1versJty can enhance a pipelIne s attraC-
tiveness as a transporter of natural gas to distributors and
end users seeking to buy the most economical gas avaOabJe
for their needs.
Water utilities
Nearly all water systems throughout the u.S. have ample
long-term water supplies. Yel to gain comfort. Standard &
Poor s assesses the production capability of treatment
plants and the ability to pump water from underground
aquifers In relation to the usage demands from consumers.
Having adequate treated water storage fad11tfes has be-
come ImpOrtant in recent ye~ and has helped many
systems meet demands during peak summer periods.
interest is whether the resources are owned by the utfllty
or purchased from other utll1ties or local authorities. OWn-
ing properties wit11 water rights provides more supply
se c:urlty. This is es p eda1l Y so in stateS U k e C a1lf 0 mta where
water allocations are being reduced, partlcuJarly since re-
cent. droughts and environmental IsSUes have auted
alann. SInce the prlmary cost for water companies is treat~
rnent.ltmakes little difference whether raw water is owned
Of bought-In fact. compliance with federal and stat:2 water
regulations Is very high. and the overall cost to deliver
treated water to consumers remainS relatively affordable.
Asset concentration in the electric
utility industry
In the electrlc industry, Standard & Poor s follows the
operations of major generating fadlities to assess If they are
well managed or troubled.S1gniflcant dependence on one
generating facl1lty Of a large financial Investment In
single asset suggestS high risk. The siZe or magnitUde of aparticular asset relative to total generation. net plant In
service.. and common equJty is evaluated. Where substan-
tial asset concentration exists, the finandal prome of
company may experience wide swings dependIng on the
asset's performance. Heavy asset concentration is most
prevalent among utilltles with CX)st1y nUdear units.
Earnings protection.
In this category, pretaX cash Income coverage of al1inter-
est charges is the primary ratio. For this ca1cu1atlon, allow-
ance for funds used during construction (AFUDC) is
removed from Inceme and interest expense. AFUDC and
other such noncash Items do not provide any protect1on fOf
bondholders. To Identify total interest expense, the analyst
rec1a.ss:Uies certain operating expenses. The interest com-
ponent of various off-ba1anc~sheet obllgatlons, such as
Jeases and some purchased-power contracts, is lnduded In
Interest expense.. This provides the most direct ind1cat1on
of a utilIty s ability to service its debt burden.
WhIle considerable emphasis in assessing aedlt protec-
tion is placed on coverage ratios, this measure does not
provide the entire earnings protection pld:ure. Also Impor~
tant are a company's earned renuns on both equity and
capital. measures that highlight a finn's earnings perform-
ance. ConsideratIon is given to the interaction or embed~
dad costs. finandalleverage. and pretaX return on capital.
Capital structure
Analyzing debt leverage goes beyond the balance sheet
and covers quasi-debt Items and elements of hidden flnan.
dalleverage.. Noncapltalized leases (includ1ng sale/1ease-
baa obllgatJons), debt guarantees, receivables financing.
and purchased-power contracts are an considered debt
equivalents and are reflected as debt In calculating capita!
Exhibit No. 12
Case No. UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-2), Page 8 of 15
structure ratlos. By making debt level adjustments. the
analyst can compare the degree of leverage used by each
utflity company.
Furthermore, assets are examined to identify underval-
ued or overvalued items. Assets of questionable value are
d1scounted to more aa:urately evaluate asset protection.
Some flrms use short-term debt as a pennanent piece of
their capital structure. Short-term debt also is considered
part of pennanent capital when it is used as a bridge to
pennanent financing. Seasonal. self-liquidating debt Is ex-
cluded from the permanent debt amount. but this situation
is rare--with the exception or certain gas utWties. Given
the long me of almost all utillty assets, short -term debt may
expose these companies to interest-rate volatillty, remar-
keting risk. bank line backup risk. and regulatory exposure
that cannot be readDy offset. The lower cost or shorte.r..term
obligations (assuming a positively sJoped yield cwve) Is a
positive factor that partially mItIgates the rlsk of interest-
rate variabWty. As a role of thumb. a level of short-term
debt that exceeds 10% of total capltaJ is cause for concern.
SlmIlarly. if floating-rate debt and preferred stock con-
stitute over one-third ohow debt plus preferred stock. thIs
level is viewed as unusually high and may be cause for
concern. It might also indicate that management is aggres-
sive in its flnandaI polJdes.
A layer of preferred stock in the capital structure is
usuaDyviewed as equJty-since dtvidends are discretion-
ary and the subordinated claim on assets provides a cush-
ion for providers of debt capital.. A preferTed component
of up to 10% Is typically viewed as a permanent wedge In
the capital structure of utllitl~ However. as rate-of -return
regulatJon is phased out, preferred stock may be viewed
by utllltles-as many industrial f1rms would-as a tempo-
rary option for companies that are not current taxpayersthat do not benefit from the tax deductibility of interest.
Even nOW. floating-rate preferred and money market per-
petual preferred are problema.t1c; a rise In the rate due to
deteriorating crecUt quality tends to Induce a company to
take out such prefmed stock with debt. SUUC1l.1reS that
convey tax dedualbllity to preferred stock have become
very popular and do generally afford such financings with
equity treatment.
Cash flow adequacy
Cash flow adequacy relates to a company s abIDty to
generate funds Internally relative to Jts needs. It is a basic
component of credit analysis because It takes cash to pay
expenses. fund apital spending. pay dividends. and make
tnterest and pdndpal payments. Since both common and
preferred dividend payments are important to maintain
capital market access. Standard &. P cor' 5 looks at cash flow
measures both before and after dividends are paJd"
To detennlne cash flow adequacy. several quantitative
relationships are examined.. Emphasis 15 placed on cash
flow relative to debt. debtserv1ce requirements. and capital
spending, Cash now adequacy is evaluated with respect to
a fInn's abWtyto meet an fixed charges. including capacity
payments under purchasedapower contrad3. DespJte the
condttlonal nature of some contrar:ts. the purchaser is Db-
ligated to pay a m1n1mum capacity charge. The ratio used
Is funds from operations plus interest and capadty pay-
men~ dlv1ded by interest plus capacity payments.
Financial flexibility/capital attraction
FInancing flexibility incorporates a utility s financing
needs. plans. and alternatives. as well as Its nexIbl11ty to
accompllsh its financing program under stress without
damaging aedicworthJness. E.xternal funding capabWty
complements internal cash flow.. EspedaDy since utilities
are so capital intensive. a finn's abillty to tap capital mar~
kets on an ongoing basis must be considered, Debt capacity
re.f1ects all the earlier elements: earnings protectJon. debt
leverage. and cash flow adequacy. Market aIUSS at reason-
able rates is restricted if a reasonable capital stnlcture Is not
maIntaIned and the company s DnandaI prospects dim.
The analyst also reviews indenture restrictions and the
impact of addJtJonal debt on covenant tests.
Standard & Poor s assesses a company s capacity and
wWIngness to Issue col1ll11on equity" ThIs is affected by
various factors. including the market-to-book ratio. dlvi.
dend pollcy, and any regulatory restrictions regarding the
composition of the capital structure.
Exhibit No" 12
Case No.. UWI-O4~
Pauline M.. Ahem. AUS Consultants
Schedule (PMA-2), Page 9 of 15
June 7, ZUU4
Vol. 13. No, Z1
Last Week's Rating
Reviews and Activity. . .. .. . 14
Did You Know?
Average Motor Gasonne
Retail Prices in U.S.. Cities "", , 4
last Week'
financing Activity
Tesoro Petroleums $625
Mil. Credit Facilities Are
Rated 'B8'
" " . ".. .. .
. u ".' . 15
Utility Credit Ranldogs
8ectJicfGasfWater.
.. ..' .",,'"
Intemational,..,.".....
..."....
Key Contacts" u .. .. . .. ,. .. , . .. 21
STANDARD
&POOJrS
Feature Article
New Business Profile Scores Assigned for
S. Utility and Power Companies:
FInancial Guidelines Revised
,.....".".,."..""....,," ",...""......""....
Utility Spotlight
Dynegy Holdings $1.3 Bafion Cred~ Facility Is Rated '88-
' .. . .
Special Report
Is the Refinancing Challenge Over for the U.
Energy MerchantSector?.."
",........."".....,... ",.., ,......",.."....
News Comments
Houston Exp'oration s Rating Is Affirmed, Outlook Revised to Negative,
.. .. . . .. . .. .. .. .. .. . .. .
Ratings on TransMontaigne Are Cut to 'B8.'; Off Watch, Outlook Negative.. . . .
. ' . ., " .
Forest Oil's Rating Is lowered to 'BB-'; Off Watch, Outlook Stable
" .. . ., . .. .. . , . .. , .' ... . .
1 1
Southern Powers 'BBSt' Ratings Are Affirmed After Plant Sale.. . .
.. .. . .. .. .. ,. ... .. .. .. , . ... .
Suez Gr-oup s Ratings Are Affirmed; Outlook Revised to Stable
, -. . . . . .. . , . . .. , .. ' .. . " .
J 2
Exhibit No.. 12
Case No.. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-2), Page 10 of 15
Featnre Artic'e
~ Back tD
Table of ConmntS
Next Page ..
New Business Profile Scores Assigned for U.S. Utility and Power
Companies: Financial Guidelines Revised
tandard Fa Poor's Ratings Services has assigned new
business profile scores to Us.. utility and power compa-
nies to better reflect the relative business risk among Ctlrn-
panies in Ih2 sectDr. Standarrl & Poors also has revised its
published risk-adjusted financial guidelines, The new busi.
ness scores and financial guidelines do not represent: a
change to Standard & Poor's ratings criteria Of methodology.
and no ratings changes are antkipated trom the new busi.
ness profile scores or revised financial guidelines
New Business Profile Scores a"d Revised
Rnanelsl Guidelines
SmndBrd & Poors has always monitored changes in the
industry and altered its business risk assessments Beam!-
ingly. This is the first time sines the 1 o-point business pro-
file scale for U.s. investDr-owned utilities was implemented
that a comprehensive assessment of the benefits and the
application of the methodology has been made. The princi-
pal purpose was to determine if the rnethDdoiogy contiouss
to provide meaningful differentiation of business risk The
review indicated that while business profile stOring contin-
ues In provide analytical benefits,. the complete rnnge of the
1 G-point scale was not being utilized tD the fullest extent.
Stiandanf & Poors ha5 also revisE! the ksy financial guid&-
IiI1!!S that it uses as an integral part of evaluating the aedit
quality of U 5.. utility and power companies.. These guidermes
were last updated in June 1999 1hefmaneial guidelIneS fOf
three principal ratios (funds from operations (ffO) intereSt cov-
erage. fFO to tntal debt. and total debt to total capital) have
been broadened so as to be more flexible. Pretax interest COY-
Chait'
Distnlnroon of Business Prome Scares
% of tOmpenle.s
111
New Buslnw Prolll& Sent'!
ChaIt Z
Transmission and Distribution-Water. Gas. and Electric
.,.. of r.ompanies
Page 2 June 7.. 2004
iii
10
Buslnw I'n:!IDe Score
Smndartl & Poors Utilities &: Perspe!:tive$
Exhibit No. -
Case No., UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-2)t Page 11 of 15
Feature Article
erage as a key aedit ratio WO$ eliminated
finally, Standard & Poor's has segmented the utility and
pawe! indm:try 1nto sub-sector:. based on the dominant cor.
pOriltB strategy that a company is pursuing Standard &
Poors has published a new US, utinty and pOVoJer company
ranking list that reflects lt1ese sub.sectas
There are numerous benefits 10 the reassessment Fuller
utilization of the entire t().point scale provides a superior rela-
tivs rnnking of qualitative b!!Siness risk. A revision of the
financial guidermes supports the goal of not causing rating
changes from the recalibration of the business profiles.
CIG$Sification of aJmpanies by sub-~rs will ensure greater
wmparabiUty and consistent'f in rntings,. The use of industJy
segmentation will also allDW mDl'e in-depth statistical analysis
of ratings distJibutions and rating thang~,
The reassessment does not represent a change to
Standard & Poo(s criteria Of methodology tor determining
ratings for utility and power companies Each business pro-
file Store should be considered as the assignment of a new
score; these SCOie$ do not represent improvement or delEn.
oration in our assessment of an individual companys busi-
ness risk relative to the previously assigned score. The
financial guidelines tnntinue to be risk.adjusted based en
hismrical utility and industrial medians. Segmentation join
indust1y sub-sectDB does not imply that specific company
characteristics will not weigh heavily into the assignment of
a company's business profile score
Results
PreviDUsly, 83% 01 U.s utility and power business profile
scores felt between '3" and '0. which clearly does not
reflect the ris~ differentiation that e:ists in the utility and
power industJy today" Since the to-point scale was intro-
duced. lt1e industly has transformed into a much less
hamogerrous imlustly, where the divergence at business
risk-particularly regarding management, strategy. and
degreeot 'competitive marbt exposure-bas creal2d a
much wider spectrum of risk profiles. Yet over the same
period. business profile scores actually converged more
tightly around a median score of "4', The ne-oN business pro-
0\aJt :I
TransmissiDD Only-EIectric. Gas, and Other
" afcompllniLlS
o\S
Businw Prome Score
Chen 4
Integrated Electric. Gas. and Combination Ublities
Iji 01 CIImpsnJes
Z!I
~ Back to
Table of Contents
Next Page ~Page 3 June 7. 2DD4
8u,inm Profile SCZJ!1!
Standard & Poors Ulil1tie$ B: Perspecims
Exhibit No. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-2), Page 12 of 15
Fea11lre Article
file scores. as of June 2. are shown in Dian 1. The overall
median business profile score is now
Teble 1 contains the revised financial guidelines It is
important to emphasize that these matric~ are Dnly guide-
lines associated with expectations for various rating lev-
els Although credit ratio analysis is an impDltant part of
the ratings prows, these three statistics are by no means
the only critical financial measures that Standard & poor
uses in its anatytical process We. also analyze a wide
array of financial ratios that do not have published guide-
lines for each rating category..
Again, ratings analysis is not driVen solely by these
financial ratios, nor has It ever been. In fact-the new finarr
cia! guidelines !hat Standard & Poors is incmporating for
the specified rating categories reinforce the analytical
framework whereby other factDrs can outweigh the achieve-
ment of otherwise acceptable financial ratios. These factors
include:
. Effecti\leness of liability and liquidity management:
. Analysis of internal flJnding sources;
. Retllm on invested capital;
. The execution record of stated business strategies;
. Accuracy 01 projected perfClnnance versus acwal results.
as well as the trend;
. Assessment of management's financial policies and atti-
wde towam credit and
. Corporate governance practices
Charts 2 through 6 show business proms scores broken
out by industry sulrsectnr. The five industry sub-sectors are:
. Transmission and distrihution-Water, gas, and electric;
. Transmission only-EJectric. gas, and other;
. Integrated electric, gas. and combination utilities;
. Diversified energy and diversified nonenergy; and
. Energy merchant/power developer/trading and maJt:eting
companies.
The average business profile scores for transmission and
distribution companies and transmission-only companies are
low-,;, on tire scale thOI'! the pievious iMrages, while the aver.
age business profile scores for integlGted utilities. dlvooified
el1e1QY, and energy merchants and developers are higher.
01att 5
Diversified EneruY and Diversified Non-&ergy
% or comp:anIes
Business Prolie St!II1!
02116
Energy Merchant/DeveloperslTrading ami Marketing
'io of CDmpanl~
~ Back to
Table 01 Contents
Next Page"Page 4 June 7.2004
Business Prcfile St.ores
Standard & Poors Utilities & Perspe::tiYes
Exhibit No.. 12
Case No. UWI-W,.O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-2), Page 13 of 15
Featnre Article
See pages 16 to '9 for the company ranking list of busi.file scores are assigned to all rat!d utility and power romps--
ness profile scores segmented by industry sub-seClDr and nies. whether they are holding companies, subsidiaries, or
ranked in order of aedit rating, outlook. business profile stand-alone corporations.. For operating subsidiaries and
score, and relative SlJength"stand-alone companies. the score is 8 bottnm-up assess.
menl Scores for families of companies are a composite of
Business Profile Score Methodology the operating subsidiaries' SCtJfes. The actual credit rating of
Standard lit Poor s methodology of determining corporate a company is analyzed, In part, by comparing the business
utility business risk is anchored in the assessment of certain profile score with the risk-adjusted financial guidelines
specific characteristics that define the sectDr We assign For most companies, businsss profile scores ere
business profile scores to each of the rated companies in the assessed using fIVe categories: specifically, regulation, mar-
utility and power sector on a , o-point scale, where '" repre-kets, operations. competitiveness, and management The
sents the lowest risk and " 0' the highest risk, Business pro-emphasis placed on each cate9DfY may be influenced by the
Table 1
Revised Financial Guidelines
Funds from opcrationslinterest coverage (x)
Business prome BSB
2.5
1.5
4.2 3..2.5 1..5
2.8 2..
4.2 4.2
4..2.2
3..2.5
2.B
Funds from operation/tD131 debt 1-/.1
BuslDI!$S Profile BBB
55 .45
Total debfJtotal capital W~.
BlISiness frame BBB
51)
~ Back to
Table of Contents
Next Page ~Pago 5 June 7,2004 S!3ndard & Poors Utilities & Porspecthres
Exhibit No.. 12
Case No. UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-2), Page 14 of 15
featUre Article
dominant strategy of the company or other fattoD. For
example. for if regulated transmtssion and distribution com-
pany, regulation may account for 301Jlo UI .w1Jlo of the busi.
ness profile SCOle because regulation can be the single-
most important credit driver for this type of company.,
Conversely, competition. which may not e:dst for a transmis-
sion and distribution company. would provide a much Icwer
proportion le.~ 5% to 15%1 of the business profile store,
For certain types of companies. such as power genere-
tIlTS, power developers. on and gas exploration and produc-
tion companies, or nonenergy.related holdings, where these
f1V5 components may nm. be appropriate, Sl2i1dartf & Pilafs
will use other, more appropriate methodologies, Some of
these companies are assigned business profile scores that
are Uteful only for relative ranldng purposes.
As nDted abtM!, the business profile score for a parent
or holding company is a composite of the business profile
stOres of its individual subsidiary companies. Again.
Standard & Poors does not apply rigid guidefines for deter.
~ Back to
Table of Contents
Next Page.Page 6 .June 7. 2004
mining the pTopDrtion Dr weighting that each subsidiary rep-
resents in the overall busineSS" p'ofiIe SCDTe Instead, it is
determined based Dn a number of factors Standard & Poor
will analyze each subsidiarys contribution to FfO. fcrec.ast
capital expendiblJes. liquidity requirements, and other pare-
memrs, including the exU;nt to which one subsidiary has
higher growth, The weighting is determined case-by.case. 8
Ronald M. Barone
New York 11) Z12-438-766Z
Richard W" Cortright. Jr,
New York It) 212-438-7665
SuzaMB G. SmldJ
New York (11212-438-2106
John W, WbitJock
New York It) 212--438-7678
Andruw Watt
New York (1) 212.0138-7868
Artbur F. Simonson
New Yor\( (1) 212-438.2094
Standard & Poors Utilities & Perspe::tives
Exhibit No. '
Case No. UWI.O+04
Pauline M" Ahem, AUS Consultants
Schedule (PMA-2), Page 15 of 15
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Proxy Group of Six C. A, Turner Water Companies
Capitalization and Financial Statistics
1999-2003. Inclusive
Notes:
(1)All capitalization and financial statistics for the group are the arithmetic average of
the achieved results for each individual company in the group, and are based upon
financial statements as originally reported in each year..
(2)Computed by relating actual long-term debt interest or preferred stock dividends
booked to average of beginning and ending long-term debt or preferred stock
reported to be outstanding,.
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income tax and investment tax credits, less total AFUDC) as a percentage of total debt
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charges,.
(4)
Selection Criteria:
The basis of selection was to include those water companies: '1) which are included in the
Water Company Group of C. A. Turner Public Utility Reports (October 2004); 2) which have Value Une
(Standard Edition) five-year EPS growth rate projections or Thomson FN First Call consensus five-
year EPS growth rate projections; and 3) which have more than 70% oftheir 2003 operating revenues
derived from water operations"
The following six water companies met the above criteria:
American States Water Co..
Aqua America, Inc,.
Artesian Resources, Inc"
California Water Service Group
Middlesex Water Company
York Water Co.
Source of Information: Standard & Poor s Compustat Services, Inc., PC Plus
Research Insight Database
Company Annual Forms 10K
Exhibit No. 12
Case No" UWI-O4-
Pauline M" Ahern, AUS Consultants
Schedule (PMA-3), Page 2 of 3
United Wa!er Idaho. Inc.
Capital Structure Based upon Total Capital for
the Proxy Group ofSixC. A. TumerWaler Companies
ror the Years 1999throu h 2003
5 YEAR
2003 2002 2001 2000 AVERAGE
American Slates Water Co.
ong-erm 53.41 %55.89 %58.74 %4250 %47.98 %5110 %
Short-Term Debt 972 1080
Preferred Stock 000 046 056
Common Equity 36.;&m!37.46.
Total Capital 1QQ.2Q %.1QQJ!Q %100.100.100.100.
Aqua America, Inc.
ong-erm 49.35 %50.36 %41.67 %48.18 %4744 %48.60 %
Short-Term Debt 1148
Preferred Stock 006 017
Common Equity 44.~19 42.40.
Tolal Capital 100.100.100.100..1QQ.J!Q %100.
Artesian Resources Corp.
ong-Term Debt 5483 %5382 %4944 %5871 %4649 %5266 %
Short-Term Debt 939 16.365 1069 873
Preferred Slack 000 076 100 050
Common Equity 35.42.36.41.82
Total Capital 100.1lli1.QQ %100.'00,100,100.
California Water SeNices Group
ong-erm 51 T7 51 25 %48.36 %4669 %4505 %48.62 %
Short-Term Debt 122 742 359 385
Prarerred Siock 011 098 080
Common Equity 46..!!Z 50.46.
Total Capilal 100.100.100.1QQ.QQ %100 1QQJ!Q %
Middlesex Water Company
ong- Term De 50.57 %4729 %49.70 %5048 %51.88 %49,98 %
Short-Term Debt 743 126
Preferred Stock 2.09 2.18 2.28 249 2.32
Common Equity 40.41.40.43.44.
Total Capilal 1!!Q..QQ %100,1lli!..QQ %100.100.100,
York Water Company
ong-Term De 41 40 %45.00 %46.35 %46.29 %5041 %46.29 %
Short-Term Debt 220 435
Preferred Stock 000 000 000
Common Equity 51.47.49,
Tolal Capital 100.100.tOO.100.100,.1!1QJ!Q %
Proxy Group of SIx C A Turner
Water Companies
ong-erm 50.22 %50.60 %5004 %49.14 %48.21 %49.64 %
Short-Term Debt 705 760
Preferred Siock D47 070 093
Common Equity 42.41.43,
Tolal Capital tOO.100.1Q!1QQ %100,100.1QQ..QQ %
Source of Information: Standard & Poor s Compustal Services, Ino . PC Plus Research Insight Data Base
Exhibit No. 12
Case No. UWI-O4-
Pauline M- Ahern, AUS Consultants
Schedule (PMA-3), Page 3 of 3
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proxy Group otI.hree Va~ne (S~on) Water Compan~
Capitalization and Financial Statistics
1999-2003. Inclusive
Notes:
(2)
All capitalization and financial statistics for the group are the arithmetic average of
the achieved results for each individual company in the group, and are based upon
financial statements as originally reported in each year.,
Computed by relating actual long-term debt interest or preferred stock dividends
booked to average of beginning and ending long-term debt or preferred stock
reported to be outstanding.
(1)
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income tax and investment tax credits, less total AFUDC) as a percentage of total debt
Funds from operations (as defined in Note 3) plus interest charges divided by interest
charges,
(4)
Selection Criteria:
The basis of selection was to include those water companies: 1) which are included in the
Value Line (Standard Edition).
The following three water companies met the above criteria:
American States Water Co..
Aqua America, Inc.
California Water Service Group
Source of Information: Standard & Poors Compustat Services, Inc", PC Plus
Research Insight Database
Company Annual Forms '1 OK
Exhibit No. '
Case No. UWt-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-4), Page 2 of 3
United Waler Idaho. Inc.
Capital Structure Based upon Total Capital for
Ihe Proxy Group of Three Value Line (Standard Edition) Waler Companies
for Ihe Years 1999 throu h 2003
5 YEAR
1Qm 2002 2001 a!QQ 1999 AVERAGE
American States Waler Co.
ong- erm 53.41 %55.89 %58.74 %42.50 %4798 %51 70 %
Short-Term Debt 10.729
Preferred Slack 046
Common Equity 36.ill!!~2.4 45.
Total Capital 100.tOO.
~'"
100.100.1QQJ)Q %100.
Aqua America. Inc.
ong-Term De 4935 %50.36 %4767 %48.18 %4744 %4860 %
Short-Term Debl 647 1148 920
Preferred Stock 006 017 046 025
Common Equity 44.40.42.A2.52 !MQ 41.
Total Capital 10D.QQ %100 .1!&QQ %.1QQJ;!Q %100.100.
~'"
California Water Services Group
ong-Term Debt 51 77 %51 25 %4836 %46.69 %4505 %48.62 %
Short-Term Debt 122 742 385 A24
Preferred Stock 071 081
Common Equity 46.45.48.50.
Total Capital 100.,QQ %100.100.100.lQR.QQ %1QQJ1Q %
Proxy Group of Three Value Line
(Standard Edition) Water
Companies
ong-erm Debt 51 51 %52.50 %51 59 %45.79 %46.82 %49.64 %
Short-Term Debt 768 711
Preferred Stock 044 059 068
Common Equity 39.41.45.45.43.
Total Capital 100..1QQ.QQ %100..1QQJ!Q %100.1QQ.QQ %
Source of Information: Standard 8. Poor s Compustat Services, Inc. PC Plus Research Insight Dala Base
Exhibit No" 12
Case No. lJWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-4), Page 3 of 3
a Water Servl (ll1l
Indicated Common equly Cast Rala Through Ike 01 Ihe
Slrlplo Slilgo Di;col8'IIlMl CItcli flow Model for
Iho PrullY Group 01 SbI C. A. Tumer Water Companies III1d the
IJD of Three Value l o (
~.!~
on~ WalK ComDanies
BasodvoDD H!$lor1~l.!Dd ~ed ~.fMJJI!IJIB.!:.!i\l
DMdend Inlfaled
AvelillJl!GnIwII!A4nled CCIITII1on
OMdend Ccmponen!DMdeM GII!'M" Rata EqIiIy Call
YIeld (1)(2\YIeld 13)C4~Rala r5~
PrII1y Group 01 Sir C. A. Turner
Waler ComPanin
American Stales Waler Co 0 %1 %7 %7 ""4 %
Aqua Amerla, Inc.2.3 123
Artesian RnDIRa' Colp.
c.difotria Wiler SeMcI!ll GlDup
Middlesex Waler Company
York Water Company
--!!..
---!!J..----!1..
Average ---2.i.. ----t!. %....JL 7 %~%(II)
ProAy Gnlup of'l'hree V.we
(Slandanl Edition) Water
Companies
Amerk&n Slales Waler CD 38 %I %7 %7 ""4 '110
Aqua America. Inc.12:1
eanlomla Wiler Services Group
-..!!.
Avel'lllJl!--..ll. %--!!o!. %7 %-1J.!!.. % (8)
Da~!!IJI~~~
DMdend l/ldlCaled
Avel1lDo GnrMh Adjusted ColM1on
OMdend Componont DNidend GrcN.UI Rato Equal' Cost
YIeld YIeld (3)Rata
:1.& %1 %10.0 %
112
\1.B
4 I 12.0
--!!..
-----!t.
.!..
---2L 10.
--!!,;!.
--1lo!L % (6)
Proxy Group of Six C A. Turner
ler CO/nIIanies
Amerlcan Slales Waler Co.
Aqtn AmerlQ, Inc.
Artesian Resources Corp
Caliloma Waler Semcas Group
Middlesex W;der Company
York Wiler company
Averago
Proxy GfOIlp olThreeVaJuI ~e
IStandin! Edition) Wiler
Companies
Mlerlt:ln SlallS Wale, Co
Aqua America, Inc.
Ca~rDmla Water Services Group
Avtr1llJ1'
0 %
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\ %
1 %
37 %
----&..
3 'J(,
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Conclusion
Pruxy Group of Sit C. A. Tumer
Waler Como~n!e.---l2!.,
...
Proxy Group of Three V41ut1 U1a
(Slandal'd Edi1lon) Water
COmoanies --!!.L %
Noles: (1) From Schedule (PMA-5) ollh!~ E:d1IbI.
(2) TI~s fIIneet. a growIh .-;11 ffiIIponent eql/al to one-tlallihe conclusion of gnM1h (;III (frompaoe 1 01 Sdlecfule (PMA-7) of lids E.hibh ) ~ Column 110 ~ntd lIIe periodic payment
diYldond~ (GonfOll Model) 8t opposed 10 thl cDl'llnuous payment.. Thus. for Arnt!r1C1n SlaIn
WalerCo.. 3.0%x( 112 x" 7%) ..0.1'"
(J) Colurm I + Cohlnn 2-
(4) From palle 101 Schedule (PMA-7) o'thIs Clibh
(5) CollMW1 3 + COltll1l14
(6) Includes o~ Chon Indicated common .quay co\1 rales ~ch am greater lIAR 0.8'II.a., 200
buit polnl. above the pfO1pectlvc yield on A rated 1110011(1 pubKc utiity bonds of 0 B% (Irom
plOO 1 of Sdledajo (PMA-D) at tlW ElllIibt.
Exhibit No" 12
Case No.. LJWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-5), Page 1 of 1
Proxy Group of Six C A.. Turner Water
Companies
American States Water Co
Aqua America, Inc.
Artesian Resources Corp
California Water Services Group
Middlesex Water Company
York Water Company
Average
Proxy Group of Three Value Line
(Standard Edition) Water Companies
American States Water Co.
Aqua America, Inc.
California Water Services Group
Average
Notes:
Carolina Water Service of South Carolina
Derivation of Dividend Yield for Use in the
Discounted Cash Flow Model
Spot
Dividend Yield
Average
Last 3
Months
Average
Dividend
Yield (3)
35%
3.7
3.4
36 %
3.7
4 %
6 %
3.7
3.4
3.4 %3 %
2.2
2 %
3..
3 %
36%
3 %
(1 ) The spot dividend yield is the current annualized dividend per
share divided by the spot market price on 10107/04.
(2) The average 3-month dividend yield was computed by
relating the indicated annualized dividend rate and market
price on the last trading day of each of the three months
ended September 3D, 2004,
(3) Equal weight has been given to the 3-month average and
spot dividend yield This provides recognition of current
conditions, but does not place undue emphasis thereon
Source of Information: Standard & Poor's Compustat Services, lnG , PC Plus
Research Insight Database
finance.yahoo.com
Exhibit No" 12
Case No,. UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-6), Page 1 of 1
Notes:
United Water Idaho. Inc.
Current Institutional Holdings (1) and Individual Holdings (2) for
the Proxy Group of Six C. A. Turner Water Companies and
the Proxy Group of Three Value Line (Standard Edition) Water Companies
October 2004
Percentage of
Institutional
Holdings
Proxy Group of Six C. A Turner Water
Companies
American States Water Co.
Aqua America, Inc.
Artesian Resources Corp..
California Water Service Group
Middlesex Water Company
York Water Company
393 %
28.
10 1
224
17.
21.0 %Average
Proxy Group of Three Value line
(Standard Edition) Water Companies
American States Water Co
Aqua America, Inc
California Water Service Group
Average
39.3 %
28.
22.
30.2 %
(1) (1 ~ column 1).
Source of Information: vahoo.investor,reulers,com
October 2004
Percentage of
Individual
Holdings (1)
60.7 %
71.
89.
17.
82.
92.
79.0 %
60..7 %
71.1
77.
69.8 %
Exhibit No.. 12
Case No., UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA- 7) I Page 1 of 1
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Exhibit No. '
Case No. UWI-O4-
Pauline M. Ahern , AUS Consultants
Schedule (PMA-8), Page l of 12
Carolina Waler Service of South Carolina
Calculation of His cal BR + sv
BR+
BR Factor Faclor (3)SV SV
Proxy Group of Six C. A" Turner Waler
Companies
American States Waler Co.3 %6 %43.4 %1 %4 %
Aqua America,lnc.15.65.10.15.
Artesian Resources Corp.40.
California Waler Services Group 46.
Middlesex Waler Company 56..4
York Water Company --.kQ.---b!~55.
Average 51.5 %0 %
Proxy Group of Three Value Line
(Slandard Edition) Waler Companies
American Stales Waler Co.3 %26 %43..4 %11 %4 %
Aqua America, tnc.159 65.103 15.
California Waler Services Group -1&.-.B.48.-1:.!
Average 3 %52.4 8 %6.3 %
Notes: (1)
(2)
(3)
(4)
(5)
From column 6, page 3 oflhis Schedule.
From column 12, page 4 of thIs Schedule.
From column 7. page 5 of this Schedule.
Column 2 . column 3.
Column 1 + column 4
Exhibit No" 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-8), Page 2 of 12
Carolina Waler Service or South Carolina
Historlc:alintemal Growth Rote (1), 1.0 , BR, for
\he Proxy Group of Six C, A. Turner Water Companies and the
Proxy Group of Three Value line (Standard Edlllon) Water Companies
for tho Years 1999 .2003
Five-Year
Avemge
1999-2003
Inlemal Growth
~OD2 2001 ZQQ!!1999 Rate. I.
Proxy Group of Six C A. Turner
Water Companies
Amellam Stales Water Co.
Common Equity Return Rate 59 %83 %10,37 %10.24 %10.23 %
Retention RallO (12,98)3504 3565 32..06 2840
Inlernal Growth Rate (1)(0.73)370 328 2.91 3 % (2)
Aauo America, Inc.
Common Equity Return Rale 12.30 %13.92 %13.34 %13.32 %1217 %
Relenllon RaUo 43-45,4295 42,.2715
Internal Growth Halo (1)536 629 573 330
Artesian Resources Corp.
Common Equity Relum ROlle 741 %967 %80 'I(,39 %74 %
Retention Ratio 1924 3496 3135 2774
Internal Growth Rate (1)143 307 270
California Water Services Group
Common EqUity Return Rale 6B %56 %749 %10,54 %1143 %
Retention Rallo 10,(1422)1803 3037
Internal Growth Rale (1)016 097 (107)1.90 8 (2)
Middlesex Waler Company
Common Equity Relum Rate 17 %1010 %937 %716 %11.05 %
Retention Rallo (6.51)13.(2176)22. 73
Internal Growth Rale (1)(0.53)135 (1 56)2.51 15 (2)
York Water Company
Common Equity Return Rate 1166 %10,37 %1173 %11 88 %1031 %
Retontlon Ratio 21.04 1232 2197 2150 10.
Inlemal Growth Rate (1)128 255 108
AYef;)ge 2.7 %
Proxy Group of Three Value Lln!.!
(Stlndard edition) WOller
American StItes Water Co.
Common Equity Return Rate 559 %83 %10.37 %10.24 %10.23 %
RetenUon Rallo (1298)3504 3565 32.28.40
Inlemal Growth Rate (1)(0.13)3.44 370 3 % (2)
AQua Amellea. Inc.
Common Equity Return Rate 1230 %1392 %13.34 %13.32 %12.17 %
Retention Ratio 43.45.42.42.110 2715
Intemn! Growth Rate (1)536 629 573 330
California Water Services Group
Common Equity Return Rale B68 %956 %749 %10.54 %1143 %
Retention RaUo 879 1013 (1422)1803 3037
Inlemal Growth Rate (1)(107)190 347 8 (2)
Average 5 %
Notes:(1)The Internal growth rate Is calculated by mulUplylng the common equity return rate by
the rotonUon mUo (100% minus the dividend payout ratIo). All data aro on a
consolidated basIS
(2) excludes negalMls
Source of IntormaUon:Standard & POOfS Compustat Services, tne . PC Plus Research Insight Database
Exhibit No" 12
Case No. UWI-04-
Pauline M" Ahern , AUS Consultants
Schedule (PMA-8), Page 3 of 12
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198B 1989 1990 1991 1992 1993 1994 1995 1996 1997 2005 Co VALU: LIE PUIi, me..D7~
a.58 9.5B 10.9Z1 10.43 110m 1137 11M 1 1.02 12.91 1z.11 13.13.711 13.98 14.~15.DOReYtnuet pi/' ,h f 5.55
t.13 1.44 1.49 t78 1.67 1..68 1.15 1..75 1.85 2.D4 2.26 2.211 2.53 2.54 2.D8 2.60 2.JO "Cash FloW- pl/'sh
.E5 ..92 119 1.15 t11 !IS 1.03 113 1.D4 1.oa 1.19 1JA 135 1..34 1.15 E.ImIng~ pll sh 100
.67 .6!J ..eo .!2 JI3 .B4 .as .as .61 .ae .II 01v'1I Deei'd per all"..9:5
2.39 2..46 2.5J loTI 2.31 1.90 2.43 2.19 2.40 2.5B 3.11 430 3.113 J..1B z.6B .3J6
!;;p'
1 S penlling pm'
7.31 7.54 BJ9 8.85 9.95 1D.07 10.29 11.01 11.24 11.48 11.82 12.74 13.22 14.13.S7 15.00 1&.15Book ValUB penh 17.
~.J:I ~,;I:j 9.91 9.!i1i 11.1'.11.n 13.33 1J.13M 13~1~.1~.15.1~21 1&.00 common:i1lS QuIiI'!i~JjU/D
142 9.1 102 8.B 10.13.1Z.II 11.6 12.6 14,Ji 1:';''~.!I 16.7 18.3 31.5
-::
it-...Avg AM'I PIE RaDo 13.0
.13 .76 .ss .64 .B4 .78 .84 .B1 .97 1.03 .86 1.00 1.25 u...Ralallve PIE lbIIa
7.5"10 7..0%6.3%5.3%6.6"1.6.7%5.8%5.5%5.01 4.2J.,(.3 3.9'1'.J.5%nIIII AvgAM'1 Dlv'dYiDId
CAPITAL S1RlJCTURE ar. of 3I311G4 121.7 129.8 151.5 153.8 148.1 184.157.209.2 212.1 230 255 R/lvenut8!1m1Dj z..D5
Total Dab! S277 mil. DuD In n" S60.o mil.11.3 12.2 13.5 1t1 14.6 16.18.0 211.4 211.3 11.9 21.Nut ProllllSmllli .!to
LTDDbt $22U mm.LT lntelC!rt$16.S mal 43.41.9"1.U3'1o 04110;,40.9%46M AS. 7.%4lDY.38..9%43.5"&40.0s 411.0"IocDIIII Tax Ra1a IIJ.D'"
(TcilDTlrilDlII!iI COVDtaga: 2.DX)NIl AFUDC f.1o Net Profit
1.:==. Unc::lpltaflZlld: N:)11O 43,5'\;,46.6':.~1.!1%.:3.DT.43R 51,1)""41.5"/0 5.:~5z.D""62.~51r"51,(1:;Long-Tonn IJ;!bllti1lo 52.0"1.
PIlMlon Asutl-1m $46.7 mE!..55.5'1i 52..5%57.3"56.:1%55.7'fo ~a.4%51.9%44.~B.D%018.5U1%41(/"-'CDI1IITIOD Eauliv Rld)o 49.
Ob6g. S58.9 mil.213.5 230.6 2S6. 2liU 217,32B..2 311.447.444.44U 490 Total CaplbJ (SmJD)700
PhI Siock NeIll.Pld Dlv'd Hon~314.9 335.0 357J 383.414.11 449.509.1 539.8 563.3 6O2J ,&0 715 Net Plant rsmiln B5D
Common Stll\:k 15.244928 Gh!i..9%7.0%6. 6'!.6.01%E.1%EM.4.E%lD"Ret1.m on Total Cap'!.11';
auf 5I1O/D.&900ft 9.2%9.4"1o.K 9.2%10.1%9.5%I.D~a.sr.RI!tIIn on Str, EqullJ 10.or.
MARKEr CAP: $350 minion (Small Copt 10.9.2%4"l.10.9.3%10.1%9.5%I.~&.5%Rclum on Com E~iiv 111.
(/"';
CURRENT posmoN 2002 2003 ~1/0.4 1.6%z.1'z.4~1JI%Z. 2.9%3m.3J%N~IF :'0%W"'RDIalll!dlo Com Eq (.5'"
~~b 18.12.8 84%79"~73%80%78'68%Ii5%65%113%57"/.SUO"An IliY'ds 10 Net Prof 5f"-'
Rocolvablus 10.11.8 BUSINESS: Aml!lican Stl1Ds Wa1llr Co. opol1ll~ us G IJDkIiIg of BIg Bur IJIkII Inti In GRUIS 01 San DommdInD Coimt)'. AcquiredI~ (Avg Cst)1,4 c:ompan)'. Through as priD~ GUbsidlal)', Sovlhom tal.amla C!lapanaI cay Walor of Ariwna (10J0D~ 11..00 CllStomollL Has
0Ih0r 21.7 32.4 2a.5
Cumin! Assols 5'1:5 --g(4 39.Water Company. 1\ auppibs water to 75 communliDt m 10 about 520 IImp!ayoos. Olf. & cI'~. OWII loss lIton ", III common
Ac:!:s Payable 11.6 18.13.alllnUcs. SolVa Imn!I lnckaIe (he gJUw meIropolilan IIIGaII of tIo!i (.m4 Pnxxy~ Chairman: Uoyd RIm. Presido:nt & CEO: Fbyd
Deb1 D~o 48.3 56.8 ~7.B lAB AngDlos IIIId Orange CountieL Tho tOmpatJy Dba proWles Wm Incorporillsll: Co\. Add.; 630 Elm FoDIIIl1 Boulavanl, San
Olhar 1.9.8 20.3 21.uJudriculllity.aurvieu ID IIPPIllXlmaIoIy 22,000 .cw;IomO!J;.illbu c!y OimaG,.c.U1773. T~L: .BD9.:J94.:16OD. Web: \'AI"N.BS\WIor.com.
Cunum LIDh. 79:S 95.90 --m .American States Wu:t:er Compa:ny COD- commission that 'Will provide for increased
Fix. Chg. CGY. 285% 255% 200""
ANNUAl RATES P=t P:m ~'d 'II1.
tinues to disappoint. The ~mpan.y revenues in the Region n customer service
III dIIIIge (PUsh) In,,- SYn. '\D 'I1~D9 reported first-quarter earnings oc $0.08 11 area of SCW, anticipated to begin in Sep-
Rovvnul!S 3 SO. 4..0% sh.B.re, nearly 70% lower than we tember. The rate case should ~erate an
"Cosh flaW 3..0% 5.0% 7.anticipated 8.I1d 60% lower than 2003'additional three year increase m revenuesEarnings .. 1.5% II.lackluster total. Revenues were flat in the of $15 million. We believe that the currentDividilncls 1..5% 1.0% 1.5"Book VD1u9 .c,5% 4.0% 0S'.quarter due to n delay in the Tate increase administrations focus on delivering more
CaJ. Oll.ART8!LY RMtIIIES (Slllin.l Fun in the Region ill customer service area of timeJy decisjons augurs well for AWR's top
endar Mat31 Jun. 3D SeD.30 Dee. 3t Yllar the comPll1ly's Southern California Woter line going forward.
ZOn1 40.3 49.59.4 47..9 19~:Company (Sew) unit. The increase, which tighter regulatory environment,
21102 44.52.8 61.6 50.209.WB.CI expected to be in rlace for the fjm though. wiD probably dilute F;ome of
2JIO3 46.7 51,8 63.7 50.21z.quarter, waD Dot effective until late in these gains in 2005. With teJUlBtory and
2404 46.S9.0 &9.SS.3 Z3O Much. Ma1dDg matters worse was an in~ infrastructure costs on the nse, AWE is
zoos ~.66.D 76.&0.2S5 crease in supply costs due to more
!.sur--
lookiDj to a shore offering to fund the
Cilo EARMIIGSPERSHAI'.E" Full eMBed water In Sew's resource mix.. 11 needs upkeep. About $30 million in stock
emler Mat31 Jun.3D S1!p.30 Dec.3! Year result, we hove Jowered our 2004 earninb'1i will likely be offered within the next year.
2001 .21 .63 18 1.35 estimate by $0.20, to S1...25 a share. As such. we are leaving our 2005 bottom.
2DO2 ..25 .36 SO 23 1 34 The California Public Utilities Com. line estimate untouched at $1.55 a share.,
2003 .20 13 .51 d.12 mission (CPUC) ought to provide We do not recommend Americn:D
21104 .Da ,J.J ..59 ..24 1.25 more favorable rulings going forward. slwres.. They are ranked to underperfonn
2005 J1 .38 .63 .Z1 1.55 Aside from toe aforementioned rate bIke, the broad market in tOe year ahead B.Dd
CaJ. aUARlERLY DMDsms PAID'" FuU which should be included Us the com~B.D1's they offer little in the way of aSJireciatioD.
IImlar I M:II..31 Jun.3D Sen.30 DGc.31 Yaar second-quarter results (not yet re eased potential out to 2007-2009.. In a tion. the
2000 .213 .213 .213 .211
when we went to prellR), American recently co
"djany will he haTd'-
pre!'lfled to increa.qe
zoot 217 217 .217 .217 announced that another decision by the its 'vidend payment substantinlly as cash
21102 217 .217 .217 221 CPUC on JnJy 8th should result in a $5.2 now wiu likely ~Dtinue to be limited by
ZOO3 221 121 .221 .221 m..\llion pre tax ga,in. In addition, the com. the rising maintenance costs..
2004 .221 121 pany has reached an agreement with the .AruJ.re J. Co::to.nza July 30, 2004
fA) vam. ExdUllas 11=rmg'(8) DMdandll 'hbtllril:aD, paid'lI\ D:1Irly-March.IC) In rirI:!mI, 'ildj1m1Dd'!vI wliill,
I co
o'W.~ Fina~I~\nmglh
g:~
'91. ~ 'U2.. 13j!. Naxi 81111'1lngs ropor1 June. Svptamber, Ds~Qr.' DlY'd roinvcst.51 S CI! Stability
polina Cd.mon! plan IMllable.Prlca Gruwih PIll5b:ti!nc:o
Eamlnp Pn:dittDblllly
1;lJ'l ):s:jr:tlr~11 le::a-cal!: III 1'=8 D D:ro ~ ;0 D
Exhibit No.. 12
Case No. UWIM O4-
Pauline M. Ahem, AlJS Consultants
Schedule (PMA-8), Page 8 of 12
AQUA AMERICA NYSEwwrR 19.37 TMno 22.
(=~)
RElA1M 1.291~M!50/"PIE RAnD YUI
l1UEUtSS 4 IDII;:UI HIgh:5.3 5.0 s.s 11.A 1$.A 15,.4 16..18..7 20.0 22.4 22.TI'lItI~t Price Ranoe
Lcw:011..c.5..9 11.7 10.1 II..12..5 12.8 15.B 19J1 2007 21108 2009
SAFETY tDwesof"IO\LJ:GENDS
TECHNICAL 4 II1tnnd
- =
r.::.r ~. . .. RISIdn 11::1 Sn.gtI
' .
BETA .15 11.DD- M8IbII ,-b,z "* 7/11&2007 4-b.; =- 1/98
" .,
Ann'1 Tatal 5-b-l 121a1
,;. ~
01-4 ow....-_00
5./gr4 - 1mPrl~ Gailt RDIllm s.a... 121n3
High 30 ((~r 14~~d lIP ;.:'::;/:$ Ia:8SI.bn
,. .,
"'I,t!.
..... .
I#r ZO +5%
..."
1111 III"
Insider DGIIIGIDns 11I1"i
3;lor.UII"I'II~
",
iOND.lFU.....
,..,
-liar 0, 0 O. 0, a 0 1 o. 0
0,.1II1II102000001 i..--
, ". ';",..
_$II 101000002
"...
.~ I
.-\..:'
" TOT, REf\lRII we
InsUtutJDRDI Decision.'I,.."'"..... I
' :,
'IIG '\.111m
4Q!t:.I PetcIInI 4..5 SlllCI.==:1
=::-;-"
5.:t
fit TIC 3)'1",31.4 :1O.D
1I'I1II1141.51Cd'~ 235n9 2GGT3 2GG3T 5)'.54.8 65.7
'I9BB 198.9 1aBJ),1.991.199~1.9.9:1.1.994 1.!l9 5 1996.1.!l91 1.99 B 'I!l9.9 won 2OQ1 2002 2 DD3.2004 20 IJ1 co VA1.UE.lJUE!UB...IHt..01.00-
~.45 (,53 2.70 2.85 ~43 2..27 2.42 2.45 z..cs 1.69 2.79 3.21 3.29 359 3.78 3.B1 Rsvenuas per sh &.00
Ji6 .ss .sa .59 .52 .63 J!1 ..96 1.01 115 116 128 1.60 Cash FlDW" parlh z.tO
.30 .33 ..33 .31 .:!5 .:is .53 .55 JiB .J5 .!5 E:rnil\g$ per sh ".2/1
.24 .24 .26 .2B .29 .32 .34 .36 .3B .43 .52 Dlv'd D~d'd aersh"
.8B tIS 1.01 .80 .63 .61 .Ii!!.64 1.20 1.60 t76 1.&0 1~ISplndt~ptII'5h
z.B8 l!I2 2.M 2.7&2.79 3.05 3.21 3.28 3!i1 418 451 5.53 SJ1 1.95 BoakVllueplI'I:hD 160
2JW 30.411 31.i)6 3HO 'It; JIJ 41m (~.J'tiO 5(15 BO.eJ.81 e5.46 BUD 92.59 !5.00 JtOO COIIII'IanShsOUlsl'fc;lOIl.~
12.J 12.9 10l 10.12.5 14A 13.5 'I2.D 15.6 11.8 Zl.b 21.2 18.2 23.23.6 24.5 DoJd r- lie ~O AM I PIE RatIo 21,
1.D2 .98 .76 .69 .85 .89 .DO .S8 1.17 1.21 1.11 121 1.29 1A2 vu;,UIII RJlIIIYe PIE Rallo
SM.19%7'1.7.2%6.8'5.!!~6.0~6.2'10 4.9%3.9'k 2.9%0'l.3.3'1.2.5'1.2.5%AVII Ann'! ortIS YlDld l6~
CIJIrTALS1RUCTl!RE as oJ3I311D4 10&.6 117.D \Z2.S 13&.2 151.0 l.57.275.5 3O7.::J 322.0 3Ii7.2 lID Revenues fSmiIII GIlD
Tcrtal Debt Sll46.2 mil Due In 5 VIS $'230.0 111m. 15.19.19.1 ZI.2 2B.8 45.SfJ.58.5 627 67.3 10J1 95.0 NIltPrufd,smml 125
loT De III $B116.3 mm.I.Tlnillrul$45.0mill.42.S'1.40.4%41A".co.6%40.5%38.J1'h '31.!1%.39.3\38.5%'3!1~%411.0'"4Q.O)i Jncumt Tax Rate 4a.O~
(i'olaJ Inlomst c:ovorage: 3.5x).8'f.1.6%1.J%0'10 4.3%4A%5.3%2.1%2.2%3.2%.15%AFUDC %10 Nil ProfJ!(0';
Pension Anetr.-12ln3 :0100.7 mil 50.2'10 51.9'k 54.54.4".52.519%52J)G'.,52...."\54.2f,51.4~5lS".'5(.5%Loni-Tam DclIt Ib!!o 54.
ObD;.S150 1 mDl 47 .4to '16.4%44.0%-44.11%46.6%46.7%47.D%47.7'tt 45.8%4a.6%4&.m;ColIIIIIDn EauJIy Ratio 46.0"
Pfd Sled. Nono 303.3311.0 ,(017 421.2 ,(96.6 782.7 901.1 990.1076.2 13551 1550 Total Capllal (SmW)ZfDO
Common Block 02,845.523;hams 385.435.9 .502.9 634.5 6O9.1135,'251.4 1368.1490.8 1B24.3 1925 ll1ZS Hat Plant ISmlm DOO
:II; of WIOl 7.Il'1o 7'10 6.8'10 7.4%7.6%7...'7.B'1o 6'10 6.5'"TAl'J!atwn on Tobl C;p'7..5'"
1D.4%111%10.11..9%f~%122%11.7%f2.3%12~10.2"fJ.O""fUI;RmI.m 0 n SIIr, Equity 1.1.0"
MARKET CAP: $1.8 blnJonlUid cap)10,3%11J%11.2%12.0%12.4%12.3%11.12.4'12.7%10.2'10 11.1$11.0"';RehlmonComEIIIII~t:I.
CURRENT POSmoN 2002 2003 3131104 2.1%3..5%2J%3.6%4.5%".3'10 4.7%1"lo 4.2%5.0.RllaJnadioCD8I Eq
&.~
Cas~b.49.39.2 37..81,.71"75%70%64t.65%60~591 S9r.!Ii"5J~AU Dlv'1Is ioNIlPruf
RcccivDbles 'S'I.62.3 585 8USINESS: Aqua A/nori::a, lilt:. \$ Ibl hDldi1g cmnpany lor waler 7103; IInd CJIhGr!. Wam wpply monllus 'IIi: m~1II!IiiII. 59%;
InvonlDl)' (A\1JCct)01.6.2 and waS1owa1ar IllIIitiIIS that SllMi appmximaloJy 2.S m1l'IIIQ ~ mmmoicla1. 17%; industrial. & albor, 24%. OIflQll'II IIIId dil8Clol1l
OltJor 2.7
Current A:;:$eb ""i'iU 112.:4 "'11)'I'Adentll II Pon~ia., Ohio, Now JIIfTiIIJ'. Ilinoi!J. Maino, North own 1A% 01 \!ID common Glad; (4104 Praxy~ ChDinnan & Chill Ex-
Acds PoyabIo 31.1 32.3 1'..Canll!na. TOt1l$. Florida. Ken11lcty, and fiw other 5la1os. Oivor;tod OcutivD OIIicor. N'lC!\o\ils DoBBnodJ.::Ii!L Inc:llrpamilld.: PennsyMlR1a.
Debt Dwi 149.135..159.9 IhI'1lD cl four nol\oWll!Dr Milllnl~ in '01; t&1;lIlIa4G\ing 91D11P Addnw:: 762 War;! Lont:l!ilGr Avonuo, Bsyn MIIwr. PonnsyMulia
Other 46.63,66.8 '93; and DllreJ1. At:q\1Rd CoIl$lll!lO1S Woder, .oL99; AqunSOUltll,1S01o. TlIIDphanll: 610-S2S-141X1.1ntDmGt: WlVW.Bquaamori::a.com.
Current Uab.2a'3 232Jj '2JG kIna America continues to grow ulnted 'subsidimies in various states.FIX. Cha. CoY,347'-'344%309%
ANNUAL MT"'..5Past !'3$t ~'d '01.through acquisitions.. The company ;1erations in I1liDois were recent1y grant.-
01 d\IwI9ItJtf th) tOY/$.5Yrs.to '01.'11 :recently announced the completion of its a 21% increase in rates, totaliDg ap-
Revonuos 0"-'purchase of Heater Utilities, adding more ~:rlmate1y $2.1 million. Applications
'"Cash Fkm"8..5%10,,B..~than 50,000 new customers in North Cnro-ve been med in Pennsylvania, New Jer-
Earnings 1ina to its total, A deal was also fine.1ized sey. and Texas for annual revenue in-DlvldondsBook Veluu t.o purchase water :md w3Stewater sys-creases or $25 million. $2,6 millicm, :md
CaJ.QlIART8lLf REVEHI1ES ($ mD4 Full tams that will add 40,000 custDmers in $12 million, =vely. Management has
.ondat Mar.:!1 Jun.30 SepJO .Doc.3!YDIIt Floridll, thereby more than doubling its also revealed & to file for increases in
21101 70.2 n.3 84..7 75.307.customer base in the state,. Combined with Ohio, North arolina, and Florida. Tradi-
2JlD2 71.7 7li.1:i 91.818 various smaller purchases, the company tionally, rate negotiations take a Dumber
2JlD3 8Q.5 83.4 102. 1 111\2 367.more t.han half 'Way to maDagement"s goal of months, and the rate increase that. is
21104 9~.105 1ZU 115 44(1 of SO acquisitions for the year. We expect awarded is subject to change based on an
21105 105 115 130 125 .f15 axmual revenue growth of approximately expected return on equity and capita) im-
cat-EARJImGS PER SIlt.RE Full 7% for the Den 3 to 5 yt!1U'S as acquisitions provements. Therefore. we do not expect
emiliii'Mar.:!f Jun.3D SIIP,30 DIIC.31 Year from 2003 forward are integrated, How-new rates to take effecl; IUItiJ the second
20111 .22 ever.half of the year, but they should help reva-
'2IID2 .25 Margins.n.r.e being pressured by nue growth Cor the next few years.
21103 tegration expen&cs and higher inter-Aqua America shares offer little ap-
2004 .2Z cst rates.. Ap. new management iF; put in prccin.tion potcntinl through 2007w
21105 .2J .zr .2Ii .is place, redundant DEeratiOIlB are being
2009. Growth through acquisItion should
Ca~QUAR1BILY DMDEJIDS PAID II.Full trimmed, bat not be ore a period of aver-continue to ~e results, but the regu-
andal'Mar.31 Jun.30 Sell,30 Dec.31 y 0Ja1 lapping operations. Pension expenses and 1n.ted nature the industry may well limit
20011 092 092 .092 099 severance costs associated with downsized the speed at which new businesses become
2001 099 099 .099 106 labor forces also pressure xaargins. 'Tho, as accretive to earnings. But this unfavorably
ZOOi 1D6 106 106 '12 interest rates rise, the cost of debt for ac-ranked stock does offer predictable returns
ZO03 112 112 . '12 quisitions may burt results..aDd a growinJ dividend,
ZOD4 Rate negotiations are ongomg for reg'-Matthl!w B. AlbreclU July 30, 2004
IA) Prim:ny shDJu oUlritlnding IhIough "96;0= opDratiom:: 116, U. N;xI oomin9~ ",port In milfiollS. e6jwod lor tIDck qlr~ IfJ In:!.
CoIQ
~1,1i FInancial
Slnnglh Bot
dnulnd thoTonftOl. ExcI. noome. gniRS ~DS5CS~dulllJarIy Au~l Dividllnds hislcri::aty dololl1ld thorgos. In '03: S34 3 mil.. . 31/sb., Slo , rlr:e StabtrJty
'BO.~);'B', fJ4~t '112. (3~'99. (11j!~ '00,paid lIaurly una, s
~ &
Ooc. ' Div'cI.Price Growth Pllnllstem:1I 1152~ 1. 2~ 'C2.~; '03, 4~ gain fmm l8inve~nt plan IMlDable discount~ (C)Earnings PredictabDIIy '00
"0 -.:subs cti b~""Ca 11;:13 UD:'S3o::O0 z+ u;-D ~I..~j"ht Pvb~ Ire. ~ fIIJu I1!Ilmd. FaQl8) IIIUII!af Is dlU/md '"" ~Md ~ bt rtoIlsNt end Is PfMItd nIIh:nft ",,""0111 cllI/IT kW1
me. PUau:.n:.tl IS NOi IlESPONS ISlE lOR JJIY tAAORS OA OMISSIOIIS H5\EJN. m: iI ndr b own, noo-=mt8f'CII. ImrnsI
_.
HD pIIfIrof a l1li)' be
~.
m=Id. end !II III ttrt P'A18d. III bill. !If lAd tr ;erw;fng cr IIW\ma IIIJ prJdas !If a.:wi: ~:cn. nrY'.:. III pIdu::I
Exhibit No" 12
Case No. UWI-O4-
Pauline M.. Ahern. AUS Consultants
Schedule (PMA-8), Page 9 of 12
CALIFORNIA WATER NYSE.CWT
11!.I5IJtJESS 4 1I=aI'~
~~ ~~:~
SAFEJY 2 t.ar.md&1l1l3S LEGENDS133 J 0M:I1I\d' P Q\
iECHNlCAl 3 tmmu:tmt)! ~Id RJIa
am :JO (I~..IIWI) 2;":' =-r1D1 Stangl!
200NJ9PR ~~n=wn::a:::m
Ann'1 Tat;!Prko GaIn RAtum -Hish 40 1+50%\ 13% .LIiir 3D 1.10%;' 7% ~I, .
Insldo' DoclslonlllIi D " P J f III A II ...
- -
'-Oar 0 I) 0 1 0 0 0 0 ,Dp&a 000000000bW 0 0 0 0 0 0 0 0 0
InslltutJolUIl Decisionsmom IQmC ""'--IDBur "D 40 oC,2
~'
10'" :!3 1! 10 '-
""
~dm 2!l68 3465 3785 w. """
1988 1989 1990 1991 1992 1993
10,03 10.33 10'~ 1118 1W 1134tEl U9 1.97 1.98 1.92 2..25
1.23 UD 1.2:) 1.21 1.D9 135.80 .B4 1i1 .9D .93 .9Ii
2.12 2.40 2.36 .3.03 3.09 z.:jJ
9.3D 9.66 10.D4 10.35 10.51 1o.sn
1\.34 11.3& 11,31; 1~ 11.311 11.36
11.fi 10.& 10.11.2 14,13.6.95 JO .11 J2 .86 .80
5.7% lli'/. 6.7"10 E.1i% 6.1'1. 5.2'1.
CAFITAl.S1iUIcruRE lIS of 3131104
Tota! D~ $2B2..6 mil Due In 5 y" 510.7 mil.
LT Debt szn.0 mil. l.T Intom! $16.0 mil.
(IT &11111851 aamod: 2..Bx: tela! ill!. ttIV~ 2.7~)
PensIon ,bsals,1W $B8.~ mill Obng. $63.2
miD.
PFd SId $3.5 mil. prd Dlv'd S.15 rriU.
139,000 sharu~, .l\A% cumulativo ($25 par~
COmlllDII Sloclt 16,932.046 .Got~
r.tARKET 1:AP: '$450 IIIIUlon fSlllDIi Cap)
CURR.8IT POSmON 2002 2003 3/31/0.4cJ~~t:J 1.1 2.9 OthCll 41.9 40.5 41.
CUrro nt I\s$als 43Jj '4!f3
A1;t;b:. Payable 237 23 15.3Debt DUD 24.e 7 .3 10.Other 43.0 3Z.5 36.&
Culll'lniUBb. 91.5 63,65.6
flx..Chc. Cov. 250% 21~~ 20m.
ANNUAl. RATES Pasl Past bt'd '01-'03a!~(pII=h) 11'1'", 51",- m'Gi.Rovcnues 3,0% 2.0% ".Cnsh F!Dw" 2.0% .1..5% 8.S%EIImintl5 ..5%
.(;.
5"10 11.Dividends 2.0% 1.0% f.1m
Book Value 2..5% 1.0% 14,
tal- Q\lAJt1'EJW' REVENUES ($ mm.) Filiianclat Mar,31 Jun.30 Seo.30 Dec.31 Year
2001 47.G1.75.3 55.5 246.2DO2 517 69.81., 60.253.2
2.003 51.3 611.88.2 69.6 711.
201W 60.77. 8 fDD alD 320
2005 70.115.D 105 85,345tal- EARNIIIGS PER SHARE A I! filII
endDt MarJ1 Jun.30 SIID.30 Det..31 Year
2DD1 .01 .34 .39 .2D .94
2002 .12 .43 SO .2D 1.252003 cL05 3D 53 .41 121
2004 .08 .41 ,73 .38 UiO2O0S .If ,43 .75 .40 1.
Cal- QUAl!'iERLYDMISIDSPA/Db. Filii
endar Mor.3! Jun.30 SenJO Dct..31 YeCll
20Da .215 .275 .275 Z15 1 10
20D1 .279 ..279 .m .279 1122002 26 .28 .28 .28 112
2.003 ;281 .281 .281 2B1 1 12
2004 283 ..2B3
(A) Ba1lic EPs. En.I. mmlmUting gm
~=~
DD, (7\!); '01, 4~; 02 02.at- Noxt aammQo
RIper! duo lata Oct
)rrorr 27 .00 l~i1O 16.(:~:~j) fA~ O.951~ 4.
17.6 2U 29.6 :cJJI 32..0 3t.28.6 26.9 31.30.2
14.B 16.18.8 20.22.& 21.22.9 20.5 23.25A Torg~ Price Range2007 aD& 2009
Ii4
. u.- n__-
211
111
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3 pr, 22.3 3lllI l-S ~, =.s 551
1994 1995 1996 1997 199a 1999 2000 2001 2002 2003 2004 2005 ClVALUELDiEPUB.,IIIC, 117oG9
121S 13.17 14.48 1SAI 14.76 15.96 16.16 1616 1733 16.371 11.60 1U5 Rovemsespltsh 2145
2JI2 2.D7 2.SO 2.92 2.60 21S 2.S2 2..20 US 2.51 US :us "Cash FlDYI' par ," 17'
1.22 1.17 1.51 1.83 1.45 1.53 1.31 J4 1.25 1.21 1.6" f.70 Eamlngsparsl\" z.os
.D!I 1.112 1.B4 1.06 1m 1.119 1.10 1.12 1.12 1.12 W 1.13 Dlid Oecl'dpcl'lh 8. f.18
2.2Ii 2.17 2.61 2.74 3.44 2.45 4.09 5.82 -4.39 us .us CiIp'lSplWliIl9f1Bfsn
1156 11.72 12.22 13.110 1~.:!8 13.43 12.90 12.95 13.12 14.M 15.40 16.511 Book Value PII '" C lU5
",451 1z..-.; lZ-5Z 1Ztif? 1L.1iZ 1;:.:101 16.15 15.18 15.1B 16.!13 rll.lP 18. n~I\SOIl'.srg~ zz.OO
14,13.7 11.9 12.6 17.11.1\ 19.1T.1 19.1 22.1 hIofls""" /lllgAM"l'ltI\lllD 16.0
.!12. .!12 15 13 .9J 1.01 1.27 1.39 1.08 1.2!1 v,*" Unto ReIafiv8 PJE RaIlD 1.05
5.8% 6A~ 5.8% U% 41'1. 4.D'J. OJ. 4.4% .(.5% .41'" .d.~ AvgAM'IDJv'd~ld (D~
151.3 1&5.16'...5 195.3 18C! 2Di4 2M.! 246.& m.2 m , .no 345 IbIvlnuDll$m1!1) 450
:lU '14.7 19.1 23.3 .18.4 19.9 2011 14.4 19.19A .29.D .31.D. N.aU!lIIfi:IlSmllri 45.11
40.D'" 40.1" -36..9% 37.4'1. 36.4% 37.9% 42.:W. 39.4% 39.7% 39.9'fo 4411" 4Il1m Intoma Tax Rail 4II.O~.0
.. .. .. .. .. .. .. .. ..
161 Nil AFUDC%tDNeIPram NIl
Mi~ 49.2':. ~7 Z. 45.4~ ~r.. 4U% 48..9'1, 5G.3r. 55.3":, 52.3'1. 54.V',. 5O.D'~ Long-Turm Deb'. na~ 4S.D~
52.2% 49.n. 51.4% 53.S% 54.7% 52.0'11 50.2% 4m 44.0% "7,"" 40' 4i~ CommonEauJlyRallo 5D.0"
276.9 296.0 299.306.7 3IIIL6 3J3.1! 36B.! 4021 453.1 5211.3 50 6tD TDlatCapltalISnilQ ,~
4111.9 422.2 443.6 460.478.3 515.5B2.0 624.3 597,759.5 815 SJ5 HeiPIant/tmim Des
11% 6.8% &.3" 9.4% 7.6% 7.8% 6.8% U% 5.9'I't 5.~
""
0" RllumonTotaICap'1 7Jm
1% 11.8% 12.1" 13.9% to.7% 111% 10.0% 7.2% 9.4% U'1. !.51 141m Rcl:umonShr.Eqully 11..0"
9.11% 9.9~ 1U% 14.1% to.!% 11.4% 10.1% 7.2% 9.5% 79'1t 141m IlebJrnonCamEaulhl 11.41"
1.9% 1.2'1'. 3.5% 2.8" 3.5% B'1. NI.IF 1.D'J'. .U" J.~ RIIblnedtoComEq
81% 88" 69" 58% 74% 70% 82'1. 119% 90% 91y, 7'" srn AlIDiv'dsIDNltPror
1!USINESS: California Wallll Sorvia! Group pnwldllS l'epulaled Shd (111C0). RownU8 bnlakdlM'll, '03: nmldllnflal.70%; !MinI=. 111%:
nonrogulidOO walllr 50Mte III IWOI 2 million peilplD (461,200 CIJ~ publil: aulhori!iD$, 5"A; Industrial. 4%; oilier. 3%. '03 IIpOlled
tomors) .. 9& mmmuntill' In Caliomlll, Washington. and NIIW cloprac 1;10: 2.2%. ohDut 815 emplayoa. Chaimll/t RobDII
UoxIaL "'.ain are3$'. San Fmnciseo Bay Il1O8. Sac:amonlo W.
~.
PresQ-lit & CEO: Pelor C Hotson. In~ Dolawam. M-
Vaal)'. SI\DntJ.5 VlltB)', san Joaquin VBII8Y l. par1S 1IIl.aa A/lgDlD5 ~1I1SS: 1720 tlOl1l1 FiBI SlIIII1. San Jose. CalitDlTlla 9511Z-459a.
AcquWd National U1iIBy Company (5104); RiD Grando Tclcphono: 40S,,367-82OO. Inlllmet www.caIwaIIIt.mm.
'CDlli'orniB Water -Service Grtntp's Te- announced "pbms 10 sell 1.25 -million
suIts are improving. The company shn.res of common stock at $27.25 8 share
reported earnings of $0.08 a share in the in the second quarter.. The nearly $34 mil-
Sist quarter. compared to 0 loss of $0.05 lion in. proceeds. are slated to. be used to
last year and our estimate of $0.03, The pay for the pj'orementioned purchase, ea-
outperfonnance was revenue driven, 88 calating infrastructure costs, and addi-
the finD's top line iDcreased 17% on 8 tional acquisitions,
year-over-year basis, due prlmarlJy to fa- Favorable general rate case rulings
vornble rate increase rulings by the Call- augur well for California. The company
Cornia Public Utility Commission (CPUC), received a $4.4 million step-rate increase
Indaed, approximately $7 million of the in Janunry, which likely went into effect.
top-line odvance 'Wos a result of rate in- during the second qu.a.rter. Plus, a decision
creases, with the majority stemming from on the 2002 general rate case was 8Warded
the 2001 general rate case, On 8 down by the CPUC in April, allowing for an m-
note, the higher water usage rate hurt crease or $3,5 million on an annualized
CWT'u operatiDg mf1X1:,.w, as it forced the basis. AB such. we have added a dime onto
company to purehase water to meet OU!' 2004 share-net ca1L Still,demand.. These untimely shares offer little ap-
The fragmented industry is producing peal at this time.. AJry gains we foresee
opportunities, In fact, CWT subsidiary from further CPUC mlings and the robust
New Mexico Water Service Company population growth of tbe state of ColiIor-
recently bought National Utility Company. niB will likely be diluted by additional
National serves 700 customerD next to equity and debt offerings necessary to
New Mex:ico Water s Middle Rio Grande fund g:ro~g capital expenditures, How-
water system and 950 customers south of ever. cwr m1JY be attract;ive to income-
Albuquerque. The deal increases New oriented investors because of its solid di'\1i.
Mexico Waters customer base by 40%.. dend yield.
A stock offering is W,e1y. The company An.dn? J. CoEda.n:.a July aD, 2004
181 D;mond~ hi:loriC311y paid iI midf,b~ IC) Ind. dalonvd maillot In '03: S3B.O III!... ~pany ll FInancial StrorrgIh 11++
Mor. Au;.. NIIY. . Div'clreinYl!slmonf plan $2:2Slah. Stock'i Price SblbllllJ avaitilblo. m mBIianli. adjusted lor sp1iL PrlCIt Growth Pan;lstenc.o
IE Mil)' net tolal due 10 c:hange in thorn... Earnings Pradlc:tll1llllly
, ,
c ZtIOC. \';UI UII PI.~ ~ ~ m:tII'I!:I. F~=! rn:J1!!rI::! I/:!II 201m:! b=lm~ 10 t'I! ntb!ft en! b ~td II!!tan anr IO'd.
'THE PUBIJSIS\ IS 1m IlESPClISI!!l..E ruRNIY EIUIORS DR DlAISSIClIS HSIIEJlt TIm to n~ "" 1M!\. nan-c:nmraat 1IIUrNI....II~ pm
DlIIOD'f' !II radIo or .. l1li
~.
ddIri: Of IIi!\W t:nn, It ~iI br '" 1!III1.b!ng I"f FItII! It NM:8 Of p:C;cl
~9~~Ui16~
Exhibit No, 12
Case No. UWI-O4-
Pauline M Ahern, AUS Consultants
Schedule (PMA-8), Page 10 of 12
WJlf; 17 .66 I=~o 29.91~r~ 1.551~ 3.9~~; ,
1288 19.76 16.97 18.73 2004 21.23 21.81, ! ;;"'963 10,50 12.50 14.,59 13,,73 15,,77 17,
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c VALWW PUB~t;, ~c. !J9&6 "997 . ' 199& ~ 1999 2000 '~OO' 2002
.. '
~DO~ ~OO4 ~O~~~O~.
.. ~
SALESPERSH ' 4,52- Jt72 '-4,39 '6.35 539 5,87; 5,99 6,,12 - ",\~,
;,~"
CASHFLOW"PERSH
' '.
02 11& .99 US 120 1.15 - ..1'1'.
EARNINGS-PER SH
- ,
60 .S7
: .
71 ,76 "li1
' .
66 .73 ,61 .871.1J :isciNA,.
DIV'DSDECL'DPERSH .55 .57 .s9 .60 .51 .62 "63 ,65 - :.:! ~::I'.1,.:I::
CAP'LSPENDINGPERSH 73 -1.20 "'2..1iB . 2.33 1.32 125 159 1.87 -
,"'
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BODKVALUEPERSH '85 6.00 6,&0 '6,95 6.98 7.11 7.39, 7,60 - .
:, .
\!1I\':-'1i1:
COMfdDNSHSOIlTST'GIMILL' 8.41 8.54 B.B2 ~ 10,00 ,10.11 10,17 10.38 ~o.48 '1;': n:'.-!';;':i!\'!..::;,
AVGANH't:PJERAT1q ,h 14.,,4 :'3,4 ,5.2 17,6 28.7 24.23.5 '30..20.3 "\::-;\"22;4JNA:t:.
RELA11VEPJERAT10 ,77 ,79 1,00 1..B7 1.26 128 1..72 - I
;':" '
,".7,','='"
AVGANN'LDIV'OYIELD "4% 6.:1% li,4% '1.4'~ 4.2% 3,8% 3.7% 3.5% I""",..":'::.t.
SALES (lMlLL) 3B.O 40,,3 43.1 53.5 S4.: 59.sa '64.,lIQld figUre.
OPERA11NGMARGIN 36.0"" 37.2%'37.0%:39.9% . 32.2% 47.2% 47.1% 44.0% - !.rilio'iitiaiiiizi
DEPRECIAi10N (SldlLl) ,,2:9 " ~8 ,4;3 ..c.g 5.3 5.5-6 - - :,1 ~.5'ii~riiiJji'j;-
NET PRom lSMlU,1 ,,5.2 5.6.5 7.9 '5.3 7.0 ",;r.6.G - ,N: i~tdF
INCOME TAX ,RATE 32,B% -34.9% .31.5% ,; 28..8% .. 33,,1% 3U% 33..3% . 32B~ - j;nd:~j.tli.
Ne:T PRom MARGIN 13.6~ 14.5% 15,. " 14.7"" 9.' 11'.7",~ "12.5% '1. 0.3% - ./ i . ~:I ,!r:ii!!:f€i.#ll
WORKlHGCAP'l(srlllU.) d2.9 14,6 ,,.8 . 112.7 ,d.9 d9.3 d-133 - I"';PlEiitliE."
LONG-TERM DEBT ($L\ILLI 53 0 52.9 711,0' , 82.3 81.1" 80:,875 97 4 ,-
~~ '
,.II:! -:-:.;.t-.";,
SHR.EOUTrYfSrdll.U 51.9 ,56.2 ,".7 74,6 74.7 75,4 .eo"G,.. 83.
.. .',:j:
r,;:r.:;~:,;
RE11JRlIONTOTALCAP'l .6.4% 6..8%" 5,
"'~
' 6.4% ," 4,9%
,.
5..6"10 0% 5,0% -! :jI,'j1!tl;::~';1'r::;;
RETuRN ON EiHR.:EOUITY 10.0% "10.04.~ .'9.1% 10.6% 7.1.~
. .
1"~ ...,6'~ ,7.9"" .,.f"
::'::;;:~!..;~::.......
RETAJNED TO COM EO ,,8% 1,,7% ,1S% '2.5'r. NMF' 5",4 1.30';' ;NMF -
:: :'
.I.1~'i.:"1:,
::~:
ALL DJV'DSTO. NET PROF 92~' 85% 81Ok. 7a-J;~.121~ 94% 87",(;,1DSO~ -
'~"".;!'~
t~~~;,;,:~
No. ~ WI\. I!!t. illasr '1 Gap: 0 up, 0 d:nnt,
')"'.'
DII1Iing5 gfUWfh 6J7"~ JW~v. BBiJs~ ~ 2 i!stitJIIItu. CBaud LI;)I1IIIN'
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, ANNuAi.:'RATES'r ':"f~?,"
'"
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"". '\~F;INDUSTB ijtUl
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ASSETS (SmIlL) 21102-.:;2003 i3fJ1JD4 :ti
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;.;;;;.,;~
"",~11..~:.
Dfawng~(per.sha18' ". 5Yra. lYr. ciiS)iAsSBIS
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2.9 3.3.3 ,;.0... .
, ."""; ,",""'~' .'
:::, Flow" ;
!; ~: ~'
ReCeIvabIeS; '
" ,
~ll:' 9.2. 5.T 11.1 B'QSINFSS:,,, MiddlesCx, Water CPD?PIIDYo Ibrough jtS ,~D-
eA_I_- .
.".,: "": ~&~
(Avgcosq 1.2' 1.4 1.6 sidinries, engages in !he OWDCtiJiib nnd opcration Qr;iC.on."""""11" "'..
...'"
VI"'" 7.0 4.3 .9 ._
..!
. . I , J' .
.. ~",;q.':"
Dividends
" .
2.5%" 25% 'cittm~: ~ - m ' 144 ,"""'i4i 1n~ w~ uJij.ity system5 in ccnlril1 aDd soulhcm"New
QC!ok.VaIuB ''~:l"
~~ ,, ,,
- ~.o% .
- '
' ,~e
' '
~crs.cY, anoiD Dc1I1":'are.. as well IISII ~gulntcd waStewater!
FiScal QUARTERLY SALfS,(SmUL)" Full Property, Planl, ' utility in ~oulh~ ~V( Jersey,. I~'~;\f.1~,t;i.~Y-~~tU ~~I:f;
Year 10 ' " 20: 3U ': ~Q Year ...&-E!juJp. at COS1 259.3 278.4 - system (die Middlescx: Sys~in) pI?-videsWII\t:r IicrV:iCC$..'IO
12/31m2 143 ' 15.5 " 17,,0 '" 151 61.9 ..
=~:~B!ciallcn 2
~;~' . ~~~ '
. m; CUS!~ms~ ~ cen~ Nc,! IJ~ey: The. ~d~~s~
12fJ11D3 15.0 1iiJ:i 1~7,15.5 641 Other ..B! ,!.J1! '..JL! System nlSo proYJdcs wntcr .setV1~ under cDn~ Ip.-tQ1!7-
12/31104 15'.9 ,
. .
TolaJ As$elS' 24-4,263.2 ' 265.nicipnlitics in cep,tta1 New Jersey. The eompll!JY opera~ tIll:
12/31105 .
"/ ,:.
I ' Wilier supply system ao4 wastewi1tcr system for Ihe 'city-bf
FIs~ EAANJNGS PER SHARE FuU ~=l~mln.) 2.1 4.8 4.2 ~CIth ~b~~ ~ '~~w J~cy m p'~Cl3htp~Wi~ its Su~~,
Yell/' 10, , 20 ~Q. 4D Year Debt Du 18.3 t3.6 145 1111')', Unlity SerY1te AfPliatcs (perth Ambor), Ine: 1~ other,
12/31101 Jia '18' '23 :,7 66 OOlow" ;': &.2
" ~
10.5 New Jcrsey subsi~arlCs provide water.. ai1d'-~~~W~~f',
12/31/02 12 ,18 .24 ,19 ,73 CUrrt!rt Uab ,. 29.'07 292' services to residents i.I\ Southampton 10w;DSbip,- Th~ com-
12/3flD3 ,11 ,17 .22
,~ ,
61 I ,; , pany s Dclawacc ~b5ii:liades co~prisingTidcwn~ Ulili~:
12/311114 .D9 ,2J ,21 7lJ
LON TER DEBT EOUtTY
lies. ~~. ~d Southcm Sbofes WaIC~ COmpBDY,' LL9..o~'~MIS
...
III water sctv1ce$ to I'cuill. customers in New Cnstk..Kent;' end
.;or- QUARTERt.Y DMDENDS PAID Fun .'" IS ol3fJ11D4
' "
Sussex Cotintie~, Has 209, emploYtcs.
' &:
~sidcnt:
pndlll' 1Q, j, 20 3Q , 40 yoar Tolal Debl SI12.8 mm 'Duo In 6 YiI, NA J. Richard Tompkins, Jile.,: NJ. Address: 1500 Ro~on Roli4.
2001 155 ,155 ,155 .159 62 LT.Debl S9B.311!11l.
' ,
Iselin, NJ' '08830 Tel.: [phone]:' Internet:
2002 159 :158 ,,158 ,161 '64 'IncludJng Cap, Leasea NA ttp ilwWw.D:iiddiesc"wate",com.x.z(54% of Cap1) 'II
.'
2003 .161 ,,161 161 165 65 Leasel, Uncupllalltnd Annuill rentals NA,
_. "
20G4 ,HiS .165 .July 30. 2004 ,t"
:.1:
1'1
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MIDDLESEXt,:WATER 'NDQ-M~Ex 4707
. ... ~
High
LOw~ 1:t~~tJftJ1 AN K S -if1- '11I~~11..
" 7.
LEGENDS
--
12 MoD Mov Avp. , . . RDI PII.-. S\lallglll, 3.Ior.2 GpII 1102
o\.'or-3 c~ 11103
SIII:I1d ilia t=", Q:tW-I 8 ,
, "
PERFORMANCE 3 A~'
Tochnlclll 3 A"'II~t
SAFETY 2
~g,
BETA .60 1'.00 " MarlalQ
, ,.. -" .,..,";, ,. , '
:0-
'..
B++Flnonc!aI Stnlnglh
Plica Slabtllty
- -. "
;" i.. '2- 1 .
INS11TUnONAL DECISIONS ~emilon ,liability ~ 1 mil In 'Q3 n. SS.:l m!l.1n '02 TOTAl
SHARI;HOLDER RETuRN
: :'
30'03 40'03 10'04 Pld Stock $4 ,1 lid Pfd Dlv'd Paid $.3 mn Divirhlllll: IIppt'It~UOll.UI 613.~'!Iauy 18 24 1'1 ."f (2%ofCap'lj 3 Mot:. SMolI. 'Yr. 3Yrs. Sy~10 Sol 12 1.c 15 Common SIDtII10,5!B,947 &hares
H!d'~(00II) .. 1631 - - 1705 1749
' '
/4-4% 01 CBII'I1. -S.~% -2.79%. 6
~% '" _~~,
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~~
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::tHE.PUIIlJ5HEfI1S NOr.REsPONSIet1 FQR AIN UlIIORS OR HEREIN. 1Its IJUti::;abll; 1Iri:G'( tor
~&
INrfi. r;on.cmmlltill. I-1Iemal u:e. No pili .; I I: , I . .
itl ~tii~ tri~S1:Jiodat'trinsirtllr!i""rrrrprWId. ~II DtJlllarm I1I13I!I arr::nbl; ItIyptdldcr 1I~pt:(i::l1en. SaM:a G'pcd:c:.
Exhibit No. 12
Case No. UWI-04-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-8), Page 1'1 of 12
! ..,..:._-,
." -P - - .
YORK::WATER ,CO NDQ~i~\~L:
: ,; ,
J~~~: 1.7.40 IWnfo 21.0 l~rJWo 1~O8.1~ 3.' 4ZJ:
15,33 "20-17 2023 21,04 Hfgh50 12.30 14.00 1740 : '
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LoW~~~t.tl'i:.~!lAANKSti':*-W;3f~? '
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PERFORMANC:~ 1. ~huf
Technl::al 3 AYe
".p
SAFETY 3
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BETA .ss (1.00'; L1A1tt8I)
LEGENDS
12 MDI Mini Avg
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Exhibit No.. 12
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA~8), Page 12 of 12
United Water Idaho. Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
UsinQ an Adjusted Total Market Approach
Proxy Group of Three Value
Une Proxy Group of Six C LIne (Standard Edition)
NQ:.Tumer Water Com anies Water Com anies
Prospective Yield on Aaa Rated
Corporate Bonds (1)63 %3 oAt
Adjustment to Reflect Yield Spread
Between Aaa Rated Corporate
Bonds and A Rated Public
Utility Bonds 5 (2)5 (2)
Adjusted Prospective Yield on A Rated
Public Utility Bonds 68 %68 %
Adjustment to Reflect Bond
Rating Difference of Proxy Group (3)(3)
Adjusted Prospective Bond Yield 6,.
Equity Risk Premium (4)4.4
Risk Premium Derived Common
Equity Cost Rate 11.0 %11.2 %
Notes:(1) Derived in Note (3) on page 6 of this Schedule
(2) Tho average yield spread of A rated public utility bonds over Aaa rated corporate bonds of 0 46%
rounded to 0.5% from page 4 of this Schedule
(3) No adjustment necessary as the average Moody's bond rating of the proxy group is A2.
(4) From page 5 of this Schedule.
Exhibit No.. 12
Case No" UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-9), Page 1 of 9
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United Water Idaho. Inc.
Numerical Assignment for
Moodv s and Standard & Poor s Bond Ratin(Js
Moody Numerical Standard & Poo(s
Bond Ratin Bond Wei htin Bond Ratino
Aaa AAA
Aa1 AA+
Aa2
Aa3 AA-
Baa1 BBB+
Baa2 BBB
Baa3 BBB-
Ba1 BB+
Ba2
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Exhibit No" 12
Case No" UWI-04-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-9), Page 30f9
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United Water Idaho. Inc.
Judgment of Equity Risk Premium for
the Proxy Group of Six C. A Turner Water Companies and the
Pro)(.)' Group of Three Value Line (Standard Edition) Water Companies
Une
No.
Proxy Group of Six C..
A Turner Water
Comj)anies
Proxy Group of Three
Value Une (Standard
Edition) Water
Companies
Calculated equity risk
premium based on the
total market using
the beta approach (1 2 %
Mean equity risk premium
based on a study
using the holding period
returns of public utilities
with A rated bonds (2)
Average equity risk premium 2 %4.4 %
Notes: ("1) From page 6 of this Schedule.
(2) From page 8 of this Schedule.
Exhibit No.. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-9), Page 5 of 9
United Water Idaho. Inc.
Derivation of Equity Risk Premium Based on the Total Market Approach
Using the Beta for the Proxy Group of Six C . A" Turner Water Companies and the
Proxy Group of Three Value Line (Standard Edition) Water Companies
Line
No.
Proxy Group of Three Value
Line (Standard Edition) Water
Companies
Proxy Group of Six C. A
Turner Water Companies
Arithmetic mean total return rate on
the Standard & Poor's 500 Composite
Index - 1926-2003 (1)12.4 %12..4 %
Arithmetic mean total return rate on
kaa and Aa Corporate Bonds
1926-2003 (2)(6.(6.
Historical Equity Risk Premium 3 %3 %
Forecasted 3.5 year Total Annual
Market Return (3)12.7 %12.7 %
6.4 %4 o~
Prospective Yield an Asa Rated
Corporate Bonds (4)
Forecasted Equity Risk Premium
Average of Historical and Forecasted
Equity Risk Premium (5)4 %6.4 %
2 %5 oAJ
Adjusted Value Line Beta (6)
Beta Adjusted Equity Risk Premium
Notes:(1) From Stocks, Bonds. Bills and Inflation - 2004 Yearbook Valuation Edition, Ibbotson Associates. Inc.
Chicago. IL, 2004.
(2) From Moody's Industrial Manual and Mergent Bond Record Monthly Update
(3) From Note 1. page 3 of Schedule (PMA-10) of this Exhibit.
(4) Average forecast based upon six quarterly estimates of Aaa rated corporate bonds peT the consensus of
nearly 50 economists reported in Blue Chip Financial Forecasts dated October 1. 2004 (see page 7 of
this Schedule). The estimates are detailed below
Fourth Quarter 2004
First Quarter 2005
Second Quarter 200S
Third Quarter 2005
Fourth Quarter 2005
First Quarter 2006
8 %
3 %Average
(5) Average of the Historical Equity Risk Premium of 63% from LIne No.3 and the Forecasted Equity Risk
Premium of 6.4% from LIne No.6 ((6..3% -+ 6.4%) /2:;:: 635%. rounded to 6.4%).
(5) From page 9 of this Schedule
Exhibit No.. 12
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-9) I Page 6 of 9
12 II BLUE CHIP FINANCIAL FORECASTS 81 OCTOBER 1 2004
Consensus Forecasts Of U.S. Interest Rates And Key AssumptionsHistory .Co~~Dsiis 'oreWts-'Qu~erb' Avg,
Average For Week Ending- -Avenge For MODth- lAte$t Q, Q;, :~' 1Q. ~. 2Q ,; 3Q.-" ..Q,. ' .1Q
~ ~ ~
.s.md AY&
~ -
302004 2004 2005 200S :ioos 1005 2006
1.64 1.49 LSD 1.53 143 1,26 1.03 /.41 i'.9~ 13:: 1.7 : U.. 3..4' :3.
, '
' I '
. . ,;. ~ ' ~ ~ .
57 4..50 50 50 442 4..25 4.00 4.40 4..9 :~ 5.3,' 5.1 ; 6.6..4 6.
1.92 189 1.86 1.81 1.73 1.63 1.49 J. 74 'f.~ \is ": i.~ :b 3.6: 3~
1..72 1,67 1.61 153 1.48 129 1.13 147 ..i.:z.2:7 3,
..,
\3~ti
' .' .
1.72 1.67 165 161 ISO 136 1.29 151 0 .oj. .. 1.1 3.1 3.4. 3.
194 1.88 1.89 182 1.76 170 1.64 178 tz 2.5' "1.9 :U , 3.5 3';
, ,... .: ,: ,: '
2.14 2.09 2.10 2.03 2.02 210 2..12 07 1..5.. 1.8 '3.2 3.5 3.3..9.
53 2,,49 2,,52 247 2.51 264 2.76 2,3$ 1.9 ,, 3j '3~.. j~9' ~~l 4.2
.. . .. ' .
29 335 3.42 3.39 34 7 3,69 3.93 3,
. ~:
7 '4.1 : 4.3, i; 6 4..7
, \
'f.
04 4.14 4.11 419 428 4.50 4.73 431 4.4: 4.7 ;' 4..9 ,5.3 5.3
80 4.92 4,99 4,98 5..07 5.24 545 JOB s..L: 5,,: 5.5 5;6 5.';. 5.8
37 5.48 5.54 555 5..65 582 6.01 565 '. 5./ 6.0 :6.2 6:4 '~:s. 6.6
6.17 6.29 6,36 63'7 6.46 6.62 6.78 6.46 6li- ;is'i '' 6,9 : '~1 7i:
:. ,. , .. , " ..:., \ ., .
1 ..
446 4.54 461 4.63 4.70 487 5.05 4.71 . 4,,
' '
4.9' ; 5..1 . 5.5.3 5.
70 S75 83 77 587 6.06 6.29 90
~. ';;"'
6,2: . .':4 'd &,~:iI
, .' ,,, .' " ", " ' '
Histo ConSensus "l:'cirecilStS unrter1 Avry '
. ... .. y g..
4Q IQ 2Q 3Q 4Q IQ 2Q JQ .4Q:'' lQ
:: '
~Q) 3Q
. '
4Q
..,
Kev Assumntions 2002 2003 ~OO3 2003 2004 2004 lQM.'" 2004 2005 ~OOS io05 2ods
..
2006
MajorCurrencylndc); 1000 95.1 908 90.7 87.8S.880 86,S 86..4,.86.' ~6.o.; i15~9 .8~O .86.
RcalGDP :7 4.1 7.4 4.2 4,5 2.36 3,
: .
3..
: ..~~, .
3:5' 3.4, '
~j.
GDP Price Index 2..2. 7 l.l 1..4 1. 6 2 8 3 .2 :1.0, 2..i '' 1.1 2.1 . 1.J :
Consumer Price Index 2..3.8 07 2..4 07 3.5 4,. 2'.3; :1.4, ,: 2.4 ,:U ,ii.s . 1..5
jodJviduaJ pllDcl mcnbcrs. fo=uts arc 00 p;q,:a 4 through 9. Historic:al data for intertSl nlteS eu:pt LIBOI!. is fnlm rtd=! IWcrw Rdasc (FRSR) H.15 . LIBOI!. quOItS mva.iJ..
able fnloo me IYtJ/l SlI'trJ Journa1.. DermiuDDS rcpo~ bcre arc SUIIC a.c those in FRSR H.tS, Trcamr)' yields an: reponed 0111 CQIISt1IIt _JUriI)' bllS\s. Hiltoric:al dati for \he US.
FcdClOl1 ~ Board's MajorCurn:acy Jnd::x is Iiom FRSR K.I 0 aod 0..5. His'toria! cbu for Real GDP III'Jd GDP CbaiDcd Price Jnda. an: Innn the Burem orEcollomi~ Mol)'"Jis
(BEA). Cousumcr Price tnda (CPI) hist.ory is from the Depwncnt or~bDr s Bu= of~bor Statistics (BLS).. "1nJn'at ntrt dlltttf"r JQ 1004 ~aJi~d "n hisIorlct:l dtUA th/"fJut:h
thtl meA ended SqzltlJtlbcr ;U.,.DGJD fur JQ 20f# MaJur Cam1J~ InaQ; aUD if "/:Jet! Dn 'alii tNolllh wed: QlJd ,~q.IDllbrr 21. Fi:IU~ ~llfllV/1fD" 3Q loot RtllIl GDP, GDP
QIIZbttd Price 1m/a and ClmslUfIU Prictllm/ex /In: CD/f$DUJIS lorrcasts buu IIn II spcdal ,atStiDlI surooq thif month "I till! land mf!Sllb~
Interest Rates
Federal Funds Rate
Prime R.ate
LIBOR., 3-mo..
Commercial Paper, 1.mo.
Treasury bill, 3--mo.
Treasury biD, 6-mo
Treasury bill. 1 yr.
Treasury DOte. 2 yr.
Trc:r.swy DOte. yr.
Trensury note, 10 yr.
Trensury Dote, 20 yr
Corpol'3te Aaa bond
Corporate Baa band
Stale & Loca.l bonds
Homc mortgage rate
s. Treasury Yield Curve
Week ended September 24.2004 ond YaIr ""go v:,
40 201).C and 10 2006 Conllensvs 10111=11111
650600
51)
450~ 4.
115 350Q,. 3,
250
1..
100
3mo
650600
500..50400
200
2Oyr
V.ar "I/O
-X-We." .nde" 9J23IOA
_Conaen- '0 2008
-+--Cona.nsuo ~O 2DIU
6mo 1)'1'2yr
MII\Ulttlea
5yr 10yr
Corporate Bond Spreads
AI; of week ended September 24, 2004
400375350325300275
250
~ Z25
~ 200
-5 175. 150
'" 1ZS
100
1997 19118
ADO Corporale Bond Y1old
mlnuII1o.'fear'T.eend 'field
,II9g 2000 2001 2002 2003 2004
S. 3-Mo. TMBlIIs & 10rYr. T.Note YIeld
(OUllttariy AY8ftIgol HlII\OI')'FOOWC:t8t
650
6..550500450~ 4 00
.. 3..C\. 3.
1007
700
41,
300
100
0,,10
20115 200610 10 10 10 10 10
10118 '1100 2000 2001 200z 2003 200-'1
S. Treasury Yield Curve
A$ of weell encted September 24, 2004
",DO375350325300275250Z25200175150- 125100ISI 75
"1001997 199B
1o-YearT..scnd 'field
mlnul 3-MDnlh T-Blh 'field
1999 2000 2001 2002 2003 2004
Exhibit No.. 12
Case No.. UWI-04M
Pauline M. Ahem, AUS Consultants
Schedule (PMA-9), Page 7 of 9
Line
No.
Time Period
Notes: ( 1 )
United Water Idaho. Inc.
Derivation of Mean Equity Risk Premium Based on a Study
Usim:J Holdina Period Returns of Public Utilities
Over A Rated
Public Utility Bonds
AUS Consultants -
Utility Services
Study W
1928-2003
Arithmetic Mean Holding Period
Returns (2):
standard & Poor's Public
Utility Index 108 %
Arithmetic Mean Yield on:
A Rated Public Utility Bonds (6.
Equity Risk Premium 2 %
(2)
S&P Public Utility Index and Moodts Pubilc Utility Bond Average
Annual Yields 1928-2003, (US Consultants - Utility Services, 2004),
Holding period returns are calculated based upon income received
(dividends and interest) plus the relative change in the market value
of a security over a one-year holding period,
Exhibit No. 12
Case No" UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-9), Page 8 of 9
United Water Idaho. Inc.
Value Line Adjusted Betas for
the Proxy Group of Six C A Turner Water Companies and the
Proxy Group of Three Value Line (Standard Edition) Water Companies
Value Line
Adjusted
Beta
Proxy Group of Six C. A
Turner Water Companies
American States Water Co.
Aqua America, Inc
Artesian Resources Corp.
California Water Service Group
Middlesex Water Company
York Water Company
Average
065
070
Proxy Group of Three Value
~(Standard Edition) Water
American States Water Co.
Aqua America, Inc.
California Water Service Group
Average
0..
0..
NA = Not Available
Source of Information: Value Line Investment Survey.
July 3D, 2004
Exhibit No" 12
Case No" UWI-04-
Pauline M. Ahern, ALJS Consultants
Schedule (PMA-9), Page 9 of 9
United Water Idaho.lnc.
of the Capital Asset Pricing Model for
the Proxy Group of Six C.. A. Tumer Water Companies and the
Proxy Group of Three Value Line (Standard Edition) Water Companies
Line
N.2.
Proxy Group of Six C. A-
Tumer Water Companies
Rlsk.Free Rate (1)5 %
Traditional Capital Asset Pricina Model
Average Company-SpecifJc
Market Premium (2)
Capital Asset Pricing Model
Derived Company Equity
Cost Rate 10.2 0,(,
Rlsk.Free Rate (1)55 %
Empirical Capital Asset PricinQ Model
Average Company-Specific
Market Premium (2)
Capital Asset Pricing Model
Derived Company Equity
Cost Rate 10.8 %
Conclusion 10.5 %
Notes:(1) Developed in note 2 of page 3 ofthfs Schedule.
(2) Developed on page 2 of this Schedule
Proxy Group of Three Value Line
(Standard Edition) Water
Companies
550,(,
10.5 %
5 %
11.1 %
10.8 %
Exhibit No" 12
Case No.. UWI-04-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-10), Page 1 of 3
United Water Idaho. Inc.
Indicated Common Equity Cost Rate Through Use
ofilia Capital Asset Pricing Model
Proxy Group of Six C . A. Turner
Water Companies
American States Water Co.
Aqua America. Inc.
Artesian Resources Corp.
California Water Service Group
Middlesex Water Company
York Water Company
Average
Proxy Group of Three Value LIne
(Standard Edition) Water Companies
American States Water Co.
Aqua America. Inc.
California Water Service Group
Average
Proxy Group of Six C. A Turner
Water Companies
American States Water Co.
Aqua America, Inc.
Artesian Resources Corp.
California Water Service Group
Middlesex Water Company
York Water Company
Average
Proxy Group of Three Value Une
(Standard Edition) Water Companies
American States Water Co..
Aqua America, Ine
California Water Service Group
See page 3 for notes.
Value Line
Adjusted
Beta
0,,
0..
0..
0..
0..
Company-Specific
Risk Premium
Based on Market
Premium of 7.2% (1)
CAPM Result
Including
Rlsk..f'ree
Rate of 5.5% (2)
Traditional Capital Asset PriclnQ Model (3)
4.7 %
5..4
70,(,
102 %
10.
105
102 % (3)
4,,7 %
5..4
0 %
10.2 %
10.
10,
10,5 % (3)
Empirical Capital Asset Pricing Model (5)
53 0,(,
5..
5..
3 %
10.8 %
11.
11.
10,
10.
10.8 % (3)
53 %
6 %
10.8 %
11.4
11.
11.1 % (3)
Exhibit No.. 12
Case No.. UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-10), Page 2 of 3
Notes:
United Water Idaho. Inc.
Development of the Market-Required Rate of Return on Common Equity Using
the Capital Asset Pricing Model for
the Proxy Group of She C. A. Turner Water Companies and the
Proxy Group of Three Value Line (Standard Edition) Water Companies
Adjusted to Renect a Forecasted Risk-Free Rate and Market Return
(1 )From the three previous month-end (Jul. '04 - Aug. '04), as well as a recently available (Oct. 1
2004), Value LIne Summary & Index, a forecasted 3-5 year total annual maf1(et return of 12.7% can
be derived by averaging the 3-month and spot forecasted total 3--5 year total appreciation, converting
it Into an annual market appreciation and adding the Value Lineaverage forecasted annual dividend
yield
The 3-5 year average total market appreciation of 52% produces a four-year average annual
return of 11.04% ((1.5225) - 1). When the average annual forecasted dividend yield of 1.70% is
added, a total average market return of 1274%, rounded to 12,,7%, (1..10% + 11.04%) is derived
The 3--month and spot forecasted total market return of 12..7% minus the risk-free rate of
5% (developed in Note 2) is 7.2% (12.7% - 5.5%) The Ibbotson Associates calculated market
premium of 1.2% for the period 1926-2003 results from a total market return of 12.4% less the
average Income return on long-term US. Government Securities of 5.2% (12.4% - 5.2% =1.2%).
This Is then averaged with the 1.2% Value Line market premium resulting in a 7.2% market
premium. The 7.2% market premium is then multiplied by the beta in column 1 of page 2 of thisSchedule,
(2)Average forecast based upon six quarterly estimates of 20-year Treasury Bond yields per the
consensus of nearly 50 economists reported in the Blue Chip Financial Forecastsdated October 1
2004 (see page 7 of Schedule (PMA-9)) , The estimates are detailed below:
Fourth Quarter 2004
First Quarter 2005
Second Quarter 2005
Third Quarter 2005
Fourth Quarter 2005
First Quarter 2006
Average
20-Year
Treasurv Bond YIeld
~5%
(3)The traditional Capital Asset Pricing Model (CAPM) Is applied using the following formula:
Rs = RF + ~ (R,.. - RF)
(4)
Where Rs = Return rate of common stock
RF = Risk Free Rate
13 = Value Une Adjusted Beta
RM = Return on the market as a whole
Includes only those indicated common equity cost rates which are above 88%, i., 200 basis poInts
above the prospective yield of 68% on A rated Moody s public utility bonds (from page 1 of
Schedule (PMA-9))
(5)The empirical CAPM is applied using the following formula:
Rs = RF + .25 (RN - RF ) +75 ~ (RM - RF )
Where Rs = Return rate of common stock
RF = Risk-Free Rate
13 = Value Line Adjusted BetaR... = Return on the market as a whole
Source of Information:Value LIne Summarv & Index
Blue Chip Financial Forecasts, October 1 , 2004
Value line Investment Survey, July 30, 2004, Standard Edition and Small and Mid-Cap
Edition
Stocks. Bonds. Bills and Inflation - Valuation Edition 2004 Yearbook.
Ibbotson Associates, Inc., Chicago, IL
Exhibit No.. 12
Case No" UWI-O4-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-10), Page 3 of 3
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Notes: (1)
United Water Idaho. Inc.
Comparab ~rnings Anah/sis
The criteria for selection of the proxy group of eighty-one non-utility companies was
that the non-utility companies be domestic and have a meaningful rate of return on
net worth, common equity or partners' capital for each of the five years ended 2003 or
projected 2007 - 2009 as reported in Value Line Investment Survey (Standard
Edition). The proxy group of eighty-one non-utility companies was selected based
upon the proxy group of six C., A.. Turner water companies' unadjusted beta range
0.,15 - 0.75 and standard err~)f of the regression range of 3,,2822 - 4.2788.. These
ranges are based upon plus or minus three standard deviations of the unadjusted
beta and standard error of the regression as detailed in Ms. Ahern s accompanying
direct testimony. Plus or minus three standard deviations captures 99..73% of the
distribution of unadjusted betas and standard errors of the regression.
(2)
(3)
(4)
Ending 2003..
2007-2009.
The Student's T -statistic associated with these returns exceeds 1.96 at the 95% level
of confidence" Therefore, they have been excluded, as outliers to arrive at proper
mean historical and projected returns as fully explained in Ms.. Ahern s accompanying
testimony.
The standard deviation of the proxy group of six C.. A" Turner water companies
standard error of the regression is 0.1661" The standard deviation of the standard
error of the regression is calculated as follows:
(5)
Standard Deviation ofthe Std" Err.. of the Regr. = Standard Error ofthe Regression
/2N
where: N = number of observations" Since Value Line betas are derived from
weekly price change observations over a period of five years, N = 259
Thus. 0..1661 = 7805 7805/518 22.7596
(6)Mid-point of the arithmetic mean of the historical five year average and five year
projected rate of return on net worth..
(7)Arithmetic mean of historical five year rates of return and five year projected rates
return on net worth, common equity or partners' capital excluding those 20% and
above as well as those below 8..8%, Le., 200 basis points above the prospective yield
of 6..8% on A rated Moody s public utility bonds (from page of Schedule (PMA-9),,
(8)Mid-pojnt of the arithmetic mean of historical five year rates of return and five year
projected rates of return on net worth , common equity or partners' capital excluding
those 20% and above as well as those below 8.8%, Le.., 200 basis points above the
prospective yield of 8% on A rated Moody s public utility bonds (from page
Schedule (PMA-9),,
(9)The criteria for selection ofthe proxy group of ninety-nine non-utility companies was
that the non-utility companies be domestic and have a meaningful rate of return on
net worth, common equity or partners' capital for each of the five years ended 2003 or
Exhibit No" 12
Case No" UWI-04-
Pauline M,. Ahern, AUS Consultant~
Schedule (PMA-11), Page 5 ot6
United Water Idaho. Inc.
Comparable Earnings Analysis
projected 2007 - 2009 as reported in Value Line Investment Survey (Standard
Edition)" The proxy group of ninety-nine non-utility companies was selected based
upon the proxy group of three Value Line (Standard Edition) water companies
unadjusted beta range of 0,,26 - 0.82 and standard error of the regression range of
1532- 4.1108" These ranges are based upon plus or minus three standard
deviations of the unadjusted beta and standard error of the regression as detailed in
Ms. Ahern s accompanying direct testimony.. Plus or minus three standard deviations
captures 99,,73% of the distribution of unadjusted betas and standard errors of the
regression.
(10)The standard deviation of the proxy group of three Value Line (Standard Edition)
water companies' standard error ofthe regression is 0..1596 (3..6320/22.7596)..
Source of Information: Value Line, Inc.., September 16 2004
Value Line Investment Survey (Standard Edition)
Exhibit No., 12
Case No. UWI-04-
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-11), Page 60f 6