20050512Ahern rebuttal.pdf

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Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
O. Box 2564-83701
Boise, ID 83702
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joecmmcrlevitt-miUer com
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UTILI j iL:j CUi, iSS!ON
Attorneys for Applicant
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO
Case No. UWI-04-
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
REBUTTAL TESTIMONY OF PAULINE M. AHERN, CRRA, VICE PRESIDENT
AUS CONSULTANTS-UTILITY SERVICES
ON BEHALF OF UNITED WATER IDAHO INC.
I .
II.
III.
IV.
TABLE OF CONTENTS
INTRODUCT I ON
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PURPOSE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPUC STAFF WITNESS HALL
. . . . . . . . . . . . . . . . . . .
. . . . . 2
A . Deb t Co s t Ra t e .
. . . . . . . . . . . . . . . . . . .
. . . . . 2
B. Common Equi ty Cos t Rate
. . . . . . . . . . . . . . . . . . . . . . . . .
. . 5
C. Relative Risk of United Water Idaho Inc. .... 7
IPUC STAFF WITNESS CARLOCK . 9
Comparable Earnings Method
. . . . . . . .
. . . . . . . . . . 9
Discounted Cash Flow Model (DCF) .. 11
V. CONCLUSIONS
...
. 15
I. INTRODUCTION
Please state your name, occupation and business address.
My name is Pauline M. Ahem and I am a Vice President of AUS Consultants -
Utility Services. My business address is 155 Gaither Drive, P.O. Box 1050
Moorestown, New Jersey 08057.
Are you the same Pauline M. Ahem who previously submitted prepared direct
testimony in this proceeding?
Yes, I am.
Have you prepared an exhibit which supports your rebuttal testimony?
Yes, I have. It has been marked for identification as Exhibit No. 18 and
consists of Schedules (PMA-12) through (PMA-17).
II. PURPOSE
What is the purpose of this testimony?
The purpose of this testimony is to rebut certain aspects of the prepared
testimonies of Idaho Public Utilities Commission (IPUC) Staff Witnesses
Carolee Hall and Terri Carlock concerning common equity cost rate and
overall rate of return. Specifically, I will address: Ms. Hall's recommended
debt cost rate; the inadequacy of her recommended common equity cost rate;
and her assessment of the relative risk of United Water Idaho Inc. (United).
will also address Ms. Carlock's misuse of the data contained in Exhibit No. 12
accompanying my direct testimony; her applications of both the Comparable
~arnings and Discounted Cash Flow models; and the inadequacy of her
Ahern, Re
United Water Idaho Inc.
recommended common equity cost rate of 10.00%. Finally, I will provide an
update of my recommended common equity cost rate.
III. IPUC STAFF WITNESS HALL
Debt Cost Rate
Do you agree with Staff's adjustment to the Company s cost of debt?
No. The Company has calculated its proposed debt cost rate of 6.90% by
dividing the annual cost of debt, comprised of the aggregate annual interest
expense plus the aggregate annual amortization of the net discount, premium
and expenses, by the aggregate bond issuances minus the aggregate
unamortized balances of net discount, premium and expense at December 31
2004. Ms. Hall states on page 6, line 24 through page 7, line 1 of her direct
testimony that "Staff believes that the Company has not reflected the
discounting properly, thereby inflating the embedded cost rate and the overall
long-term debt cost." In contrast, Staff has used the aggregate face value of the
bonds in the denominator of the calculation. In Ms. Hall's opinion, doing so
accurately reflects the discounting of issuance costs to properly allow the
Company to recover in rates the annual interest cost and the annual
amortization of issuance costs." (see page 7 , at lines 13 - 16). However, Ms.
Hall did not provide any empirical evidence in support of her assertion.
Can you provide empirical evidence that shows that the methodology the
Company used to calculate its proposed debt cost rate does not inflate the
embedded long-term debt cost rate?
Ahern , Re 2
United Water Idaho Inc.
Yes. That evidence is shown on pages 1 and 2 of Schedule (PMA-12).
Schedule (PMA-12) shows that the Company s recovers its full net discount
premium and expenses through its debt cost rate calculation methodology in
contrast to an inability to fully recover these costs using the Staff's
methodology. Page 1 provides an example using a bond sold at discount, while
page 2 provides an example using a bond sold at premium. In both cases, the
Company fully recovers its costs using its debt cost rate methodology. In the
first instance, with a bond sold at discount, the Company does not fully recover
its costs using Staff's methodology. In the second , with a bond sold at
premium, the Company would recover more than its costs using Staff's
methodology.
Please explain.
In the case of a 2-year, $100par bond with an 8.00% coupon rate, sold at a
10% discount, or $90 , the annual interest expense is $8.00 ($8.00 = $100 *
00%). The amortization of the discount would be $5.00/ year ($5.00 =
$10.00/2 years). Using the Company s debt cost rate methodology, the total
annual revenue requirement, i., interest and amortization expense, is $13.
($13.00 = $8.00 interest + $5.00 amortization of discount). In Year 1 , the
Company receives net proceeds of $90, the $100 face value of the bond less the
$10 discount, and invests it in rate base. Since the Company needs to recover
$13 per year, the debt cost rate in Year 1 is 14.44% ($13.00/ $90.00).
Applying this 14.440/0 debt cost rate to the $90 debt portion of rate base
Ahern , Re 3
United Water Idaho Inc.
provides the Company with the proper revenue requirement of $13.00. Debt
holders receive $8.00 in interest and the unamortized balance of net discount is
reduced by $5.00. In Year 2, then, the unamortized balance of net discount is
$5.00 ($5.00 = $10.00 - $5.00) and the denominator of the Company s debt
cost rate calculation is $95 ($95 = $100 face value - $5.00 unamortized balance
of net discount at the beginning of Year 2). The debt cost rate in Year 2 is thus
13.68% (13.68% = $13.00/ $95.00). The $5.00 annual amortization expense is
invested in rate base, raising the rate base debt investment to $95. Applying
this 13.68% debt cost rate to the $95 debt portion of rate base again provides
the Company with the proper revenue requirement of $13.00. Debt holders
receive $8.00 in interest and the unamortized balance of net discount is reduced
by $5.00. Once again, the $5.00 annual amortization expense is invested in
rate base, raising the rate base debt investment to $100, the original face value
of the debt. Thus, the Company is made whole, having recovered its full $10
discount on the debt.
In contrast, using Staff's methodology, the bottom half of page 1 of
Schedule (PMA-12) demonstrates how applying a constant 13% debt cost rate
, $8.00 annual interest expense plus $5.00 annual amortization / $100 face
value of the bond, does not provide the Company with the opportunity to fully
recover the $10 discount on the debt. During Year 1 , the Company will have
received only $11.70, i.e., 13.00% * $90 (the portion of the debt in rate base in
Year 1). With $8.00 interest paid to debt holders, only $3.70 remains to offset
Ahern, Re 4
United Water Idaho Inc.
the unamortized balance of the discount. Thus, during Year 2, the amount
debt in the rate base is $93.70 ($93.70 = $90.00 + $3.70) and only $12.18 is
received by the Company ($12.18 = 13.00% * $95.00). After paying $8.00 of
interest to debt holders, the Company will have $4.18 to offset the unamortized
balance of the discount. At the end of two years, the Company, using Staff's
methodology, will have recovered only $7.88 in aggregate amortization
expenses. This leaves $2.12 not yet recovered ($2.12 = $10.00 - $7.88). Since
the debt will no long be outstanding, there will be no opportunity for further
recovery of this $2.12 and the Company does not fully recover the costs
associated with the debt.
Likewise, in a similar manner, page 2 demonstrates that using the
Company s debt cost rate methodology, the Company accurately recovers its
costs for a bond sold at premium, but recovers more than its costs for the same
bond using Staff's methodology.
B. Common Equity Cost Rate
On page 12, lines 19 - 22 of her direct testimony, Ms. Hall states that she
calculated a water utilities industry cost of equity of 10% and recommend ( s)
that this rate be authorized for United Water Idaho , and on page 13 , lines 3 -
, Ms. Hall asserts that a common equity cost rate of 10% is "in line with the
composite Value Line returns for the industry." Please comment.
Ms. Hall supports her recommended common equity cost rate of 10% with
Value Line Investment Survey s (Value Line) composite statistics for the water
Ahern, Re 5
United Water Idaho Inc.
utilities industry as published on October 29, 2004 and January 28, 2005. She
states at page 13 , lines 5-7 that the "return on shareholder s equity and
common equity for 2004 and 2005 was 9.5%" and "(fJor the years of 2007-
2009 it is projected to be at 10%." Although those are Value Line s composite
estimates for the water utility industry, the aven:lge expected retllm~ on
compri~e the Va1neJ jne water inoll~try containeoin Va1neJ jne Tnve~tment
(American States
Water Company, Aqua America, Inc. and California Water Service Group)
average 10.4% for 2004 and 2005 and 11.5% for 2007-2009 from both the
October 29,2004 Value Line and January 28 2005 as shown on Schedule
(PMA-13). Clearly Value Line is expecting the average proxy water company
to earn a prospective ROE of 11.5% which is significantly greater than Ms.
Hall's recommended common equity cost rate of 10.000/0.
Moreover, the most currently available Value Line Investment
Survey (April 29, 2005) is projecting these same three water companies to earn
an average projected 5-year ROE of 12.00/0. In addition, the expected ROEs
for the Value Line composite water industry are 11.3 % for 2005 and 2006 and
12.0% for 2008-2010. It is clear, then, that Ms. Hall's recommended common
equity cost rate of 10% is also not in line with the most current Value Line
ROE expectations for water companies , either on an average or composite
basis. In fact, the most recent (April 29, 2005) Value Line expected ROEs for
Ahern, Re 6
United Water Idaho Inc.
Value Line s composite water industry, 11.3% for 2005 and 2006 and 12.
for the 2008-2010 clearly demonstrate that both my originally recommended
common equity cost rate of 11.20%, as well as my updated recommended
common equity cost rate of 11.10% (which will be discussed subsequently) are
conservatively reasonable.
C. Relative Risk of United Water Idaho Inc.
Ms. Hall disagrees with the Company s position regarding the risks of United
Water Idaho Inc. Please comment.
Ms. Hall's disagreement with the Company s risk analysis centers on the betas
of the three Value Line water companies. Ms. Hall correctly states that two of
the companies ((American States Water Company and Aqua America, Inc.
have Value Line adjusted betas of 0., while one company (California Water
Service Group) has an adjusted beta of 0.75.1 Ms. Hall is also correct that
these betas "reflect(s) a lower than market risk for these water utilities." (see
page 15 , lines 3 and 4 of Ms. Hall's direct testimony) However, market risk is
but a very small portion of the total investment risk faced by any given
company. Total risk is the sum of market, i., diversifiable, risk and non-
market, i., non-diversifiable or company specific risk. Hence, Ms. Hall'
comparison of the betas of the three Value Line water companies with the
market is an incomplete comparison. In addition, the R -squared of the
Presumably from the January 28 2005 Value Line Investment Survey. Note that these betas are
identical to those published by Value Line for these three water companies on April 29, 2005.
Ahern , Re 7
United Water Idaho Inc.
regression which gives rise to betas describes the percentage of variation in the
dependent variable, i., a company s market price, which is explained by the
independent variable, i., the market price of the market as a whole. As
Ibbotson Associates state on page 103 of
Ya)llation Edition 2005 Yearbook, which is provided in Schedule (PMA-14)
( a)n R -squared of 0 indicates that the independent variable does not explain
any of the variation of the dependent variable." It is also stated on page 110
(page 3 of Schedule (PMA-14)) that "a high R-squared means that the
movements of the returns of the security are explained largely by the
movements of the returns of the market. The R-squared for security betas are
usually quite low." Graph 6.4 on page 110, shows the distribution of the R-
squareds for 5000 companies for whom Ibbotson Associates calculates betas.
It is clear that the majority of these R-squareds are less than 0.10, indicated that
less than 10% of the variation in the returns of individual securities are
explained by the movements of the returns of the market. As Ibbotson
Associates state on page 100: "What can we infer from this data? There may
be other company- or industry-specific factors that drive security prices." It
clear then that a comparison of betas does not provide a comprehensive
comparison of all the factors which drive security prices and hence the risk of a
company.
In addition, Ms. Hall's comparison is limited to the three Value
Line water companies and the market as a whole. She has not conducted any
Ahern, Re 8
United Water Idaho Inc.
relative risk comparison between United itself and the three Value Line water
companies. Since United faces many extraordinary risk factors and is
significantly smaller than the three Value Line water companies as measured
by either total capitalization or estimated market capitalization of equity as
discussed in my direct testimony on page 11 , line 1 through page 16, line 17,
United clearly is significantly more business risky than the three Value Line
water companies. Consequently, no valid conclusion as to United's relative
risk can be drawn from Ms. Hall's comparison of the relative market risk of the
Value Line water companies. Therefore, Ms. Hall's recommended common
equity cost rate of 10.0% is unsupported and grossly understated.
IV. IPUC STAFF WITNESS CARLOCK
A. Comparable Earnings Method
Please comment upon Ms. Carlock's application of the Comparable Earnings
Method (CEM).
Based upon a lengthy narrative, Ms. Carlock concludes that she "believe(s) a
reasonable return on equity attributed to United Water Idaho is 9.5% - 10.
under the Comparable Earnings method." Ms. Carlock provided no empirical
data or analysis in support of this range of common equity cost rate.
responding to Company Data Request No. 20, a copy of which is attached as
Schedule (PMA-15), which requested the identity of the companies used in her
CEM as well as the source documents and calculations relied upon by Ms.
Carlock, she replied that the water companies were those in my two proxy
Ahern, Re 9
United Water Idaho Inc.
groups and that she did a "risk-adjusted comparison with the Value Line
electric utilities." Regarding the requested source documents and calculations
Ms. Carlock stated that the documents were available online and that Exhibit
No. 12, my exhibit and workpapers were utilized. I would point out that I was
never requested to, nor did provide any workpapers other than Exhibit No.
12. Hence, the precise source of and derivation of Ms. Carlock's range of CEM
conclusion of 9.5% - 10.0% cannot be determined. However, given that it is
identical to the Value Line composite water industry ROEs referenced by Ms.
Hall as supporting her recommended common equity cost rate of 10., one
can only assume that Ms. Carlock relied upon the same Value Line expected
ROEs for the three water companies in its Standard Edition as Ms. Hall. As
previously discussed, relative to Schedule (PMA-13), the average expected
ROEs for the three individual Value Line water companies for 2004 and 2005
which average 10.4%, as well as for the years 2007-2009, which average
11.5%2 do not support a range of common equity cost rate of 9.5% - 10.0%.
Furthermore, more current Value Line information, from April 29, 2005
indicates that the average expected ROEs for these three water companies for
2005 and 2006 and for the years 2008-2010 are 10.6% and 12., respectively,
which are also not supportive of a range of common equity cost rate of 9.5% -
10.0%.
In addition, in relying upon water companies in her CEM analysis
From both the October 29,2004 and January 28, 2005 Value Line Investment Survey.
Ahern, Re
United Water Idaho Inc.
Ms. Carlock has introduced circularity into it as the ROEs of water companies
are a direct result of the regulatory process, i., authorized ROEs. The
circularity results because the earned returns, even on a projected basis, are not
determined by competitive factors but rather by the regulatory process. As
Roger A. Morin states
It would be hopelessly circular to set a fair return based on the past actions
of other regulators, much like observing a series of duplicate images in
multiple mirrors.
In other words , Ms. Carlock is using data resulting from authorized
ROES as the basis of recommending an authorized ROE.
As for Ms. Carlock's "risk-adjusted comparison with Value Line
electric utilities , because I still do not know upon which specific electric
utilities she relied or her risk-adjustment methodology, I can neither accept it
nor comment upon it. And, neither should the IPUC.
In view of the foregoing, Ms. Carlock's range of CEM results of
5% - 10.00/0 is supported neither by the documentation she provided (or
failed to provide) or by the average expected ROEs of the three Value Line
(Standard Edition) water companies upon which the only DCF analysis
documented by Staff in Ms. Hall's direct testimony is based.
B. Discounted Cash Flow Model (DCF)
Please comment upon Ms. Carlock's DCF analysis.
Morin, Roger A.Reglllatory Finance - U1ilitie~' Co~t of..C.apj1a1. Public Utility Reports
Inc., Arlington, VA, 1994, p. 395.
Ahern, Re
United Water Idaho Inc.
Once again, in response to the Company s data requests, specifically Request
Nos. 21 and 22 (provided as Schedule (PMA-16), rather than provide the
requested source documents and calculations supporting her DCF analysis, Ms.
Carlock responded that she relied upon Value Line, Exhibit No. 12 and my
nonexistent workpapers. Therefore, it is not possible to know exactly how
either her dividend yield range of 3.4% - 50/0 or her growth rate range of 5.
- 6.0% were derived. Nor is it possible to figure out how a dividend yield
range of 3.4% - 3.5% and a growth rate range of 5.0% - 6.0%, yields a range of
DCF results of 8.0% - 10.5%.
In view of the foregoing, as with Ms. Carlock's "risk-adjusted
comparison with the Value Line electric utilities" in her CEM, I can neither
accept it nor comment upon it. And, neither should the IPUC.
Nevertheless, in her response to Part b. of Request No. 21 , there is
a hint that she has relied upon Value Line data for the years 2004 , 2005 and
2007 - 2009, indicating that she relied upon forecasted growth in arriving at
her growth rate range. Exactly how she utilized this information is unknown.
However, there is ample empirical academic support for the use of analysts
forecasts of earnings growth in a DCF analysis. Over the long run, there can be
no growth in DPS without growth in EPS. Earnings expectations have a more
significant, but not exclusive, influence on market prices than dividend
expectations. Thus, the use of earnings growth rates in a DCF analysis
provides a better matching between investors ' market appreciation
Ahern, Re
United Water Idaho Inc.
expectations and the growth rate component of a DCF. This is obvious, even
to the laypersons who hear financial news reports on radio / TV and read them
in newspapers / magazines.
In addition, Myron Gordon, the "father" of the standard regulatory
version of the DCF model utilized by Ms. Carlock, Ms. Hall and myself in this
proceeding, has recognized the significance of analysts ' forecasts of growth in
EPS in a speech given in March 1990 before the Institute for Quantitative
Research and Finance. He said:
.L 6
We have seen that earnings and growth estimates by
security analysts were found by Malkiel and Cragg to be
superior to data obtained from financial statements for the
explanation of variation in price among common stocks.
estimates by security analysts available from sources such as
IDES are far superior to the data available to Malkiel and
Cragg. Eq (7) is not as elegant as Eq (4), but is has a good
deal more intuitive appeal. It says that investors buy earnings
but what they will pay for a dollar of earnings increases with
the extent to which the earnings are reflected in the dividend
or in appreciation through growth.
Therefore, in view of the foregoing, since Ms. Carlock is apparently relying
exclusively upon Value Line forecasted information in her DCF analysis, it
would be appropriate for her to rely upon Value Line s projected growth in
EPS , which averaged 9.5% (October 29, 2004), 9.5% (January 28 2004) and
8% (April 29, 2005) for the three water companies as shown on Schedule
(PMA-13). Using a projected EPS growth rate range of 8.8% - 9.5% and Ms.
Carlock's range of 3.4% - 3.5% and conservatively not growing the dividend
yield by the growth rate, results in a DCF common equity cost rate range of
Ahern, Re
United Water Idaho Inc.
12.2% - 13.0%, Thus, Ms. Carlock's DCF range of 8.0% - 10.5% is grossly
understated.
If Ms. Carlock, who states that she has relied upon the data in
Exhibit No. 12 accompanying my direct testimony, had utilized the growth rate
range indicated by the average growth rates shown in Column 4 on page 1 of
Schedule (PMA-5), 5.7% - 7.9%, a DCF cost rate range of 9.1 % - 11.4%, with
a midpoint of 10.25% results. However, because this 10.25% DCF cost rate is
applicable to the three Value Line water companies which are significantly
larger than United in terms of both total capitalization and estimated market
capitalization (see page 3 of Schedule (PMA-17), i., page 3 of Schedule
(PMA-l)(Updated)), this understates the common equity cost rate applicable to
United. Adding a modest size adjustment of 30 basis points (0.30%) (see page
2 of Schedule (PMA-17), i.e., page 2 of Schedule (PMA-l)(Updated)), to this
10.25% DCF cost rate using Value Line projected growth in EPS , results in a
DCF cost rate of 10.55% more applicable to United than Ms. Carlock'
recommended range of DCF cost rate of8.0% - 10.50/0. Note, that a DCF cost
rate of 10.55% more closely approximates the updated DCF cost rates for my
two proxy groups of water companies, i., 10.4% and 10., respectively as
shown on page 2 of Schedule (PMA-17), i.e., page 2 of Schedule (PMA-
l)(Updated). However, based upon the Efficient Market Hypothesis, (EMH)
as discussed in my direct testimony at pages 23 - 25 , the results of multiple
cost of common equity models should be relied upon and not the results of a
Ahern, Re
United Water Idaho Inc.
single model, such as the DCF.
V. CONCLUSIONS
What conclusions do you have after reviewing the direct testimonies of Ms.
Hall and Ms. Carlock?
I conclude that the Company s debt cost rate should be accepted by the IPUC
because it affords the Company s the opportunity to full recovery of all costs
associated with the debt issues outstanding and that the Staff's debt cost rate
should be rejected because it does not.
I also conclude that Staff's recommended return on common equity
of 10.00% is unsupported by the analyses of Ms. Hall and Ms. Carlock and
grossly understates the cost of common equity applicable to United, even if a
size adjustment of 30 basis points (0.30%) on an updated basis (see page 2 of
Schedule (PMA-17), i., page 2 of Schedule (PMA-l)(Updated)) is added.
IV. UPDATED COMMON EQUITY COST RATE
Have you prepared an update of your common equity cost rate to reflect current
capital market conditions?
Yes. The updated is shown on Schedule (PMA-17), which consists of forty-
two (42) pages. Current capital market conditions indicate that an appropriate
common equity cost rate applicable to United is 11.10% applicable to United'
updated capital structure.
Does that conclude your rebuttal testimony?
Yes.
Ahern , Re
United Water Idaho Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF UNITED WATER IDAHO , INC..
FOR APPROVAL OF INCREASED RATES
FOR WATER SERVICE
CASE NO. UWI-O4~
EXHIBIT 18
TO ACCOMPANY THE
REBUTTAL TESTIMONY OF
PAULINE M. AHERN, CRRA, VICE PRESIDENT
AUS CONSULTANTS - UTILITY SERVICES
ON BEHALF OF UNITED WATER IDAHO, INC..
MAY 2005
United Water Idaho. Inc.
Demonstration of the Inadequacy of IPue Staff Witness Hall'
Recommended Debt Cost Rate
Debt Cost RecovelY to the Company of a Bond sold at Discount
Example 1: 2 year, $100 bond, 8.00% coupon rate, sold at $90 (Discount)
Method 1 (Used by company): Varying cost rate; revenue requirements are constant
Cash
Flows Debt in Total Amortization
From lTo Rate Base at Revenue Interest of Bond
Year No.Investors BeQinnin!:! of Year ReQuirements Pavments Discount
(S90 00)
$800 59000 $1300 sa 00 $500
$10800 $9500 $13.$8.$5,
S100 00
Totals $26.$16.510.
Cost Rate Year 1 131 $90 = 1444%
Year2 $131$95= 1368%
(Revenue Requirement/Net Proceeds)
(Revenue Requirement/Net Proceeds)
Year 3 Rate Base =$100 00 (Face Value of Bond)
Bond Discount fully amortized In Year 2
Result: Company recovers lis costs
Example 1: 2 year, $100 bond, 8,,00% coupon rate, sold at $90 (Discount)
Method 2 (Used by Staff): Applying Incorrect cost rate
Revenue
Requirements
Cost Rate
Cash of 13 0%
Flows Debt in Applied to Amortization
From ITo Rate Base al Beg. - Year Interest of Bond
Year No.Investors Bej:llnnina of Year Rate Base Pavments Discount
($90,00)
$800 $90 00 $11 70 $600 $370
$10aOO $93.$12.$8.$4,
$9786
Totals $23.$16.$7.
Cost Rate Year' ($8+$5) or $131 $100 = 1300% (Revenue RequlremenVFace Value of Bond)
Year 3 Rate Base =$97,88 (Does not Equal Face Value of Bond)
Bond Discounlls not fully amortized In Year 2
Result: company does not recover Its costs
Exhibit No. 18
Case No.. UWI~O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA.12), Page 1 of 2
United Water Idaho. Inc.
Demonstration of the Inadequacy of IPUC Staff Witness Hall'
Recommended Debt Cost Rate
Debt Cost Recovery to the Company of a Bond sold at Premium
Example 2: 2 yeltr, $100 bond, 8.,00% coupon rale, sold at $110 (Premium)
Method 1 (Used by Company): Varying cost rate; revenue requirements .ne constant
Cash
Flows Debt in Total Amortization
From /To Rate Base at Revenue Interest of Bond
Year No.Investors Beginnlno of Year ReQuirements Payments Premium
($11000)
$8.511000 $300 S800 ($5.00)
$10800 $10500 $3.$8.($5.00~
$10000
Totals $6.$16.1$1O.
Cost Rate Year 1 $31 $110 = 2 73%
Year 2 S31 $105 = 2 86%
(Revenue RequlrementlNet Proceeds)
(Revenue RequlremenUNet Proceeds)
Year 3 Rate Base =$100 00 (Face Value of Bond)
Bond Discount fully amortized In Year 2
Result: Company recovers Its cos1s
Example 2: 2 year, $100 bond, 8.00% coupon rate, sold at $110 (Premium)
Method 2 (Used by Staff): Applying Incorrect cost rate
Revenue
Requirements
Cost Rate
Cash of 3 0%
Flows Debt In Applied to Amortization
From Rate Base at Beg. - Year Interest of Bond
Year No.Investors Beatnnlna of Year Rate Base Pavments Premium
(511000)
$800 $11000 $330 $800 ($4,70)
$10B 00 $105.$3:16 $8./$4.64)
$100.46
Totals $6.$16.(S9.54)
Cost Rate Year'l ($8-$5) or $31 $100 = 3 00%(Revenue RequlremenUFace Value of Bond)
Year 3 Rate Base =$100 46 (Does nol Equal Face Value of Bond)
Bond Premium IS nol fully amortized in Year 2
Result: Company recovers more than Its costs
Exhibit No" 18
Case No. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-12), Page 2 of 2
Company
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California Water Service Group
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American States Water Company
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Water Utility Industry
United Water Idaho. Inc.
Value line Proelcled Return on Common EQuitv and 5.Year Projected Growth in EPS
Return on Common Equity (October 29. 2004)
2007.2009
2004-2005 PlOjected
Average ROE Average ROE
2004 2005 Percent Percent
10,
110 12,11.5 13.
10,10.10.11.
10.10.10.4 11.
2001.03 to 2007-
09 Projected
Growth Rate in
EPS
5 %
10.
5 %
2001.0310 2007.
09 Projected
GrowUt Rate in
EPS
95 %
10.
5 %
2002.'04 10 2008-
10 Projected
Growth Rate in
EPS
0 %
8 %
Source of InformaUon: Value Line Investment Survey. Octobedr 29. 2004. January 28. 2005 and April 29. 2005
Average
5 %5 %5 %10.0 %
Return on Common Equity (January 28, 2005),
2007-2009
2004-2005 Projected
Average ROE Average ROE
2004 2005 Percent Percent
105
1 to 120 115 13,
10.10.10.11.
10,10.10.11.Average
9.5 %5 %5 %10.0 %
Return on Common Equity (April 29, 2005)
2008-2010
2005-2006 Projected
Average ROE Average ROE
2005 2006 Percent Percent
12.0
12.0 12.12,130
10.10.10.11.
Average 10.10,10.12.
11.0 11.11.12.
Exhibit No"
Case No" UWI~O4-
Pauline M., Ahem, AUS Consultants
Schedule (PMA-13) I Page 1 of 1
Exhibit No,
Case No. UWI-O4-
Pauline M, Ahern, AUS Consultants
Schedule (PMA-14), Page 1 of 3
Beta Estimation Methodologies
thus, tbe beta of Company B is not statistically different than zero ,at that confidence Level. if the regres-
sion provides a beta of 0.90 but is not statistically different maRrero, then other measures of beta may
need to be consulted (such as the company s peer betas or industry average betas).
To better illustrate the typical range of a beta s t-statistic, Graph 6-3 depicts the distribution of
all t-statistics calculated with respect to the betas of over 5,000 companies included in Ibbotson Beta
Book, Since these beta calculations use 60 months of data, the critical value for the t.st;:!tisric is again
1.67 at the 90 perc;ent confidence level. Recall that the absolute value is what is compared to the crit-
ical value; (-statistics above 1..67 or below -1. 67 would therefore be considered statistically significant.
Graph 6-
Statistlc Distribution
October 1999 through September 2004
350
300
250
II!
a. 200
~ 150III
::JZ 100
. : ~:: ., .; ,, ,. '. : .. ,:: "" .:: .
Range of hStatislic Values
Squared
Another valuable regression statistic is the coefficient of determination, or R-squared, The R-squared
is a statistic that measures the Ugoodness of fit" of the regression line and describes the percentage
of variation in the dependent variable that is explained by the independent variable. The
R~squared
measure may vary from zero to one. An R.squared of 1,00 means that the independent variable
explains 100 percent of the variation of the dependent variable, An R-squared of 0
indiCates that the
independent variable does not explain any of the variation of the dependent variable.
IbbotsonAssociates 109
Exhibit No, 18
Case No., UWI-O4-
Pauline M. Ahem, ALJS Consultants
Schedule (PMA-14), Page 2 of 3
Chapter 6
In terms of measuring beta via regression, a high R-squared means that the movements of the
retUrns of the security are explained largely by the movements of the returns of the market. The
R-squared for security betas are usually quite low" Graphs 6-4 and 6-5 show a distribution of
R-squared statistics from Ibbotson Associates Beta Book. The first graph shows the distribution of
R-squared for all 5,000 plus companies included in the publication, The second graph shows the dis-
tribution of R-squared for the largestl 00 companies, in terms of equity capitalization, that are
included in the book.
Graph 6-
Squared DIstribution for Entire Population
October 1999 through September 2004
1400
1200
1000
II)
fij
800
(.)
.... 600
;:,
400
; ,, ,
200 . : .:. i. . '
. .
1 I I I I'
005 010 015 020 025 030 035 045 050 060
Aange of A-Squared Values
Note that most betas have an R-squared less than 0.3.. What can we infer from this data? There may
be other company- or industry-specific factors that drive security prices" While the CAPM includes
only one factor in determining expected retUrns, it does not disallow the existence of otbers.
110 S88\ Valuation Edition 2005 Yearbook
Exhibit No. 18
Case No" UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-14), Page 3 of 3
UNITED WATER IDAHO INC.
CASE NO. UWI..W..O4-4
FIRST PRODUCTION REQUEST OF UNITED WATER
TO COMMISSION STAFF
Request No. 20: Please refer to page 8, line 13 through 16 of Ms. Carlock's direct
testimony. Please provide the following:
The identity of the companies utilized by Ms. Carlock in ber Comparable
Earnings method.
A copy of the source documents, electronic spreadsheets and calculations
relied upon by Ms. Carlock in developing the "reasonable return on equity
attributed to United Water Idaho (of) 9.50/0 -10.5% under the Comparable
Earnings method.
Response to Request No. 20:
The companies utilized for the comparable earnings method include an analysis of
water companies including those listed by Value Line and C. A. Turner as
included in Company witness Ahem s Exhibit No, 12 A risk-adjusted
comparison with Value Line electric utilities was also evaluated
The source documents for Value Line are available online and is also utilized by
Company witness Ahem so she has access to this data This data can be made
available for review at the Commission office by setting up an appointment with
Terri Carlock. Ms, Ahern s Exhibit No 12 and workpapers were also utilized
Preparer/Sponsoring Witness: T eni Carlock
Telephone Number: [phone]
Title: Audit Section Supervisor
STAFF'S RESPONSE TO UNITED
WATER'S PRODUCTION REQUEST
APRIL 29, 2005
Exhibit No., 18
Case No. UWIM O4-
Pauline Mn Ahern, AUS Consultants
Schedule (PMA-15), Page 1 of 1
UNITED WATER IDAHO INC.
CASE NO. UWI-O4n
FffiST PRODUCTION REQUEST OF 'UNITED WATER
TO COMMISSION STAFF
Request No. 21: Please refer to page 10, line 25 through page 11, line 5 of Ms.
Carlock's direct testimony.
Please provide all source documents, electronic spreadsheets and calculations
supporting Ms. Carlock's conclusion oftbe cost of equity for United Water
Idaho, Inc. using the Discounted Cash Flow method of between 80/0 and
10.50/0.
Please identify the "various time intervals" referenced on line 2 of page 11 of
Ms. Carlock's direct testimony.
Please identify the companies relied upon for the dividend yield of
40/0
50/0 and growth rate of 50/0 to /0 referenced in lines 4 and 5 of page 8.
Response to Request No. 21:
Value Line (October 2004, January 2005, March 2005), Company witness
Ahern s Exhibit No, 12 and workpapers were utilized, Ms, Carlock's judgment
differs but the data is the same,
The various time intervals include 2004. 2005 and 2007 - 2009 estimates
The companies utilized include the water companies listed by Value Line and C
Turner as included in Company witness Ahern s Exhibit No.. 12
PreparerlSponsorlng Witness: TeITi Carlock
Telephone Number: [phone]
Title: Audit Section Supervisor
STAFF'S RESPONSE TO lOOTED
WATER'S PRODUCTION REQUEST
APRIL 29 2005
Exhibit No. 18
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-16), Page 1 of 2
UNITED WATER IDAHO INC.
CASE NO. UWI-W..O4-4
FIRST PRODUCTION REQUEST OF UNITED WATER
TO COMMISSION STAFF
Request No. 22: Please refer to page 10, lines 13 through 19 of Ms. Carlock's direct
testimony
Please provide all source documents, electronic spreadsheets and calculations
supporting Ms. Carlock's conclusion of expected growth rate of 50/0 to 60/0
referenced on line 14 of page
Response to Request No. 22: Value Line (October 2004, January 2005, March 2005),
Company witness Ahern s Exhibit No, 12 and workpapers were utilized. Ms Carlock'
judgment differs but the data is the same,
PreparerlSponsoring Witness: T em Carlock
Telephone Number: [phone]
Title: Audit Section Supervisor
STAFF'S RESPONSE TO UNITED
WATER'S PRODUCTION REQUEST
APRIL 29, 2005
Exhibit No" 18
Case No, UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-16), Page 2 of 2
United Water Idaho. Inc.
Summary of Cost of Capital and Fair Rate of Return
Based upon the Consolidated Capital Structure of United Waterworks Ino"
at December 31 , 2004
e of Ca ital Ratios Cost Rate Wei hted Cost Rate
Long-Term Debt 53,41 %690 %(1)69 %
Minority Interest (Preferred Stock)0,,5,,00 (1)001
Common Equity 46.46 11..10 (2)5;16
Total 100.00 %86 %
Notes:
(1) Company-provided"
(2) Based upon informed judgment from the entire study, the principal results of which are summarized on page 2 of
this Schedule e.. page 2 of Schedule (PMA-1) (Updated),
Exhibit No.. 12
Case No. UWI-O4-
Pauline M. Ahem AUS Consultants
Schedule (PMA-1), Page 1 of 18
(Updated)
Exhibit No, 18
Case No.. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-17), Page 1 of 43
United Water Idaho, Inc.
Brief Surnmarv of Common EQuitY Cost Rate
No.Principal Methods
Proxy Group of Six C. A. Turner
Water Companies
Proxy Group of Three Value Line
(Standard Edition) Water
Companies
Discounted Cash Flow Model (DCF) (1)10.4 %10.6 %
Risk Premium Model (RPM) (2)
Capital Asset Pricing Model (CAPM) (3)
10,10,
10,109
Comparable Earnings Model (CEM) (4)14.139
Range of Indicated Common Equity Cost
Rate Before Business Risk Adjustment 106 %110%
10.60 %11,30 %
Business Risk Adjustment
Range of Common Equity Cost Rate After
Business Risk Adjustment
Midpoint of Common Equity Cost Rate After
Business Risk Adjustment 11,10%
Recommended Common Equity Cost Rate
~;'~:~""""
; I
Notes: (1) From page 19 of this Schedule, i.e . Schedule (PMA-5) (Updated),
(2) From page 29 of this Schedule. i.9 . page 1 of Schedule (PMA-9) (Updated) ,
(3) From page 37 of this Schedule, I.e. page 1 of Schedule (PMA-10) (Updated),
(4) From pages 41 and 43 of this Schedule. I,e . pages 2 and 4 of Schedule (PMA-11) (Updated),
Exhibit No. 12
Case No, LJWI-O4~
Pauline M, Ahem, AUS Consultants
Schedule (PMA-1), Page 2 of 18
(Updated)
Exhibit No" 18
Case No" UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-17), Page 2 of 43
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( 1)
(2)
(3)
(4)
United Water Idaho. Inc..
Derivation of Investment Risk Adjustment Based upon
Ibbotson Associates' Size Premia for the Decile Portfolios of the NYSE
From page 5 of this Schedule, ie , page 5 of Schedule (PMA-1) (Updated)
Une No, 1 - Une No.2 and Line No., '1 - Line No, 3 of Columns 3 and 4
respectively For example, the 3,80% in Column 5, Line No.2 is derived as
follows: 3,80% = 6.41% - 2,61%,
At June 3D, 2004. Company-provided.
With an estimated market capitalization of $127,708 million (based upon the
proxy group of six C, A Turner water companies) Of $129,932 million (based
upon the proxy group of three Value Line (Standard Edition) water companies),
United Water Idaho, Inc, falls in the '10th decile of the NYSEIAMEXNASDAQ
which has an average market capitalization of $104.276 million as can be
gleaned from the information shown in the table on the bottom half of page 3 of
this Schedule, i e t page 3 of Schedule (PMA-1) (Updated)
(5)Size premium applicable to the 'th decile of the NYSEIAMEXNASDAQ derived
from the information shown on page 15 of this Schedule, ie., page '15 of
Schedule (PMA-10) (Updated),
From page 1 of Schedule (PMA-(6)
(7)With an estimated market capitalization of $670.824 million, the proxy group of
six C" A, Turner water companies falls between the 7th and 8th deciles of the
NYSE/AMEXNASDAQ which have an average market capitalization of $735,888
million as can be gleaned from the information shown in the table on the bottom
half of page 3 of this Schedule, Le" page 3 of Schedule (PMA-1) (Updated),
Average size premium applicable to the ih and 81h decites of the
NYSEIAMEXNASDAQ derived from the information shown on page 15 of this
Schedule. i.e , page 15 of Schedule (PMA-1) (Updated)"
(8)
(9)
(10)
From page 1 of Schedule (PMA-4)
( 1'
With an estimated market capitalization of $1, 194083 million, the ~roxygroupof
three Value Line (Standard Edition) water companies falls in the 6 decile of the
NYSEJAMEXNASDAQ which has an average market capitalization of$1 267,171
million as shown in the table on the bottom half of page 3 of this Schedule, i
page 3 of Schedule (PMA-1) (Updated).
Size premium applicable to the 6th decile of the NYSEIAMEXNASDAQ derived
from the information shown on page 15 of this Schedule, i e., page 15 of
Schedule (PMA-1) (Updated),
Source of Information: Ibbotson Associates Stocks, Bonds, Bills and Inflation - Valuation
Edition - 2005 Yearbook, Chicago, IL, 2005
Exhibit No" '
Case No. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-1), Page 4 of 18
(Updated)
Exhibit No, 18
Case No, UWI~O4-
Pauline M, Ahem, AUS Consultants
Schedule (PMA-17), Page 4 of 43
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Chapter 7
Firm Size and Return
The Firm Size Phenomenon
One of the most remarkable discoveries of modern finance is that of a relationship between firm size
and return, The relationship cuts across the entire size spectrum but is most evident among smaller
companies, which have higher returns on average than larger ones.. Many studies have looked at the
effect of firm size on return.' In this chapter, the returns across the entire. range of firm size
are examined.
Construction of the Decile Portfolios
The portfolios used in this chapter are those created by the Center for Research in Security Prices
(CRSP) at the University of Chicago s Graduate School of Business, CRSP has refined the methodol-
ogy of creating size-based portfolios and has applied this methodology to tbe entire universe of
NYSElAMEXINASDAQ-listed securities going back to 1926.
The New York Stock Exchange universe excludes closed-end mutual funds, preferred stocks
real estate investment trusts, foreign stocks, American Depository Receipts, unit investment trusts,
and Arnericus Trusts" All companies on the NYSE are ranked by the combined market capitalization
of their eligible equity securities.. The companies are then split into 10 equalJy populated groups. or
deciles.. Eligible companies traded on the American Stock Exchange (AMEX) and the Nasdaq
National Market (NASDAQ) are then assigned to the appropriate deciles according t~ their capital-
ization in reJation to the NYSE breakpoints, The portfolios are rebalanced, usin~ closing prices for
the last trading day of March, June, September, and December. Securities added during the quaner
are assigned to the appropriate portfolio when two consecutive month-end prices are available. If the
final NYSE price of a security that becomes delisted is a month-end price, then that month's retUrn
is included in the quarterly return 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 terms, quotations on regional
exchanges, and other sources" If a month-end value still is not determined. the last available daily
price is used,
Base security returns are monthly holding period returns. All distributions are added to the
month-end prices, and appropriate price adjustments are made to account for stock splits and divi-
dends., The rerum on a portfolio for one month is calculated as the weighted average of the retUrns
for itS individual stocks. Annual portfolio returns are calculated by compounding the monthly port~
folio returns,.
Size of the DecHas
Table 7-1 reveals that the top three deciles of the NYSEJAMEXINASDAQ account for most of the
total market value of its stocks" Approximately tWo-thirds of tbe market value is represented by the
first decile, which currently consists of 172 stockst while the smallest decile accounts for just over
one percent of the market value, The data in the second column of Table 7-1 are averages across all
, Rolf W BanI was the first to document this phenomenon. See Banz, Rolf W.. MThe Relationship BetWeen Rerurns and
Market Value of Common Stocks Journal of Financial Econotflics Vol. 9 1981 . pp. 3-18,
IbbotsonAssoclates 127
Exhibit No, 18
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-17)t Page 7 of 43
Chapter 7
79 years" Of course, the proportion of market value represented by the various deciles varies from
year to year.
Columns three and four give recent figures on the number of companies and their market cap~
italization, presenting a snapshot of the structure of the deciles near the end of 2004,
Table 7-
Size-Decile Portfolios of the NYSEIAMEXINASDAQ Size and Composition
1926.2004
Recent
HIstorical Ayerage Recent Decile Market Recent
Percentage of Number of Capitalization Percentage of
Decile Tolal Capitalization Companies ~n thousands)Total Capitalization
Largest 6331%172 $8.214.688.366 6316%
13.97%177 U22.153,325 13.24%
58%199 894.917.914 688%
474%209 548,389.454 422%
324%219 400.381.543 30B%
237%257 32!'.662.936 50%
173%300 264.131.617 03%
128%372 219.976.996 169%
098%589 230.476.080 177%
1 a-Smallest 080%782 185.820.31 a 143%
Mid-Cap 3-1556%527 843.688.910 1418%
Low-Cap 6-8 538%929 809.771.549 623%
Micro-Cap 9-10 179%371 416.296.398 320%
Source: C 200503 CRSP" Center lor Research in Security Prices Graduate School of Business. The Unlverslly of Chicago Used
with permission All rights reserved www crspuchicago edu
Hislorical average percentage 01 total capitalizaUon shows Ihe average, over Ihe lasl 79 years, of the decile market values as a
percentage of the tolal NYSEIAMEXINASDAO calculated each month, Number of companIes in declles. recent market
capitalization of declles. and recent percentage of tolal capitalization are as of September 30. 2004
Table 7-2 gives the current breakpoints that define the composition of the NYSEJAMEXINASDAQ
size deciles" The largest company and its market capitalization are presented for each decile. Table
3 shows the historical breakpoints for each of the three size groupings presented throughout this
chapter. Mid-cap stocks are defined here as the aggregate of deciles 3-5. Based on the most recent
data (Table 7-2), companies within this mid-cap range have market capitalizations at or below
241 953 000 but greater than $1 607 854 000. Low-cap stocks include deciles 6-8 and currently
include all companies in the NYSEJAMEX/NASDAQ with market capitalizations at or below
607 854 000 but greater than $505,437,000, M.icro-cap stocks include deciles 9-10 and include
companies with market capitalizations at or below $505,437 000" The market capitalization of the
smallest company included in the micro-capitalization group is currently $1,393 000.,
128 SBBI Valuation Edition 2005 Yearbook
--"
Exhibit No" 18
Case No" UWI-O4-
Pauline M. Ahern. AUS Consultants
Schedule (PMA-17) I Page 8 of 43
Arm SiZe and Retum
Table 7M2
Size-Decile Portfolios of the NYSElAMEXlNASDAO, Largest Company
and Its Market Capitalization by Decile
September 30. 2004
Market Capltanzatlon
of largest Company
Decile (In thousands)Company Name
1 -Largest $342.087.219 General Electric Co.
14,096.886 A~lIenl Technologies In~
241.953 Tenet Healthcare Corp
464.104 Wellchoice Ine
231.707 OGE Energy Corp
607.854 Entercom Communications Corp
097.603 VIntage Pelrol8u~ loc
746.219 Wabash N~tional Corp
505,437 World Fuel Services Corp
1 a-Smallest 262.725 Maslec Inc
Source: Center lor Research in Securlly Prices. University 01 Chicago
Presentation of the Decile Data
Summary statistics of annual returns of the 10 deciles over 1926-2004 are presented in Table 7-
Note from this exhibit that both the average rerurn and the total risk, or standard deviation of annual
retUrns, tend to increase as one moves from the largest decile to rhe smallest. Furthermore, the
serial correlations of returns are near zero for all bur the smallesr twO deciles. Serial correlations and
their significance will be discussed in detail later in this chapter.
Graph 7.1 depicts the growth of one dollar invested in each of three NYSEIAMEXINASDAQ
groups broken down into midMcap, low.cap, and micro-cap stocks, The index value of the entire
NYSEJAMEXfNASDAQ is also included, AU retUrns presented are value.weighted based on the marM
ket capitalizations of the deciles contained in each subgroup. The sheer magnitUde of the size effect
in some years is noteworthy.. While the largest stocks actUally declined in 1977, the smallest stocks
rose more than 20 percent. A more extreme case occurred in the depression-recovery year of 1933
when the difference betWeen the first and tenth decile returns was far more substantial. This diver-
gence in the performance of small and large company stocks is a common occurrence.
IbbotsonAssociates 129
Exhibit No. 18
Case No.. UWI-O4-
Pauline M" Ahem, AUS Consultants
Schedule (PMA-17), Page 9 of 43
Chapler 7
Table 7-
Size*Decile Portfolios of the NYSElAMEXlNASDAQ
Largest and Smallest Company by Size Group
from 1926 t01965
Capitalization of Largest Company Capitalization of Smallest Company
(In thousands)(In thousands)
Date Mid-Cap Low-Cap Micro-Cap MId-Cap Low-Cap Micro-Cap
(Sept 30)6-8 9-10 3.5
1926 $61.490 $14,040 $4.305 $14,100 $4,325 $43
1927 $65.261 $14.746 $4.450 $15.311 $4.496 $72
1928 S81 998 $18,975 S5.074 $19.050 $5.119 $135
1929 $107.0B5 $24.328 $5.875 $24.480 $5.915 $126
1930 $67,606 $13,050 $3.219 $13,068 $3.264 $30
1931 $42.607 SBJ42 S1,905 $8.222 $1 .927 $15
1932 $12.431 $2.170 $473 $2.196 $477 $19
1933 $40.298 $7.210 $1.830 $7.260 $1.875 $100
1934 $36.129 $6.669 Sl,669 $6.734 51.673 S68
1935 $37,631 $6.519 $1,350 $6.549 $1.363 $38
1936 $46,920 $11.505 52.660 $11.526 $2.668 $96
1937 $51.750 S13,601 $3.500 $13.635 S3.539 $68
1938 536.102 $8,325 52,125 $8.372 $2.145 $60
1939 $35,784 $7.367 $1.697 $7,389 $1.800 $75
1940 $31.050 $7.990 $1.B61 $6.007 51.B72 $51
1941 $31.744 $8.316 $2.0B6 58.336 52,087 $72
1942 $26,135 56.870 $1.779 $6.875 $1.788 S82
1943 $43.218 $11.475 $3.847 $1 1.4BO $3.903 5395
1944 $46.621 $13,066 $4 .800 $13.068 54.812 $309
1945 $55.268 $17 .325 $6.413 $17.575 $6.428 $225
1945 $79.156 $24.192 $10.013 $24.199 $10.051 $829
1947 $57-830 $17.735 $6,373 $17.872 $6.380 $747
1948 $67,238 519.575 $7.313 $19.651 $7.329 $784
1949 $55.506 $14.549 $5.037 $14.577 $5.108 $379
1950 $65.881 $18.675 $6,176 $18.750 56,201 $303
1951 $82,517 $22,750 $7.567 522.860 $7,598 $668
1952 $97.936 $25.452 $8.428 $25,532 $8.480 $480
1953 $98.595 $25.374 $8.156 $25.395 $8.168 $459
1954 $125.834 $29.645 $8.484 529.707 $8.488 $463
1955 $170.829 $41.445 $12.353 $41.681 $12.366 $553
1956 $183,434 $46.805 $13.481 $46,886 $13.524 $1.122
1957 $192,861 $47.658 $13.644 $48.509 $13.848 $925
1956 $195.083 $46.774 $13,789 $46,871 $13.816 $550
1959 $253.644 $64.221 $19.500 $64,372 $19.548 $1.804
1960 $246.202 $61.485 $19.344 $61.529 $19.365 $831
1951 $296.261 $79.058 $23.562 $79.422 $23.613 $2.455
1962 $250.433 $58.866 $18.952 $59,143 $18.968 $1.018
1963 $306.438 $71 846 $23.819 $71.971 $23.822 $295
1964 $344.033 $79.343 $25,594 $79.506 $25.595 $223
1965 $363.759 $84.479 $28,365 $84.600 $26.375 $250
Source: Center for Research in Security Prices, University of Chicago
130 SBBI Valuation Edition 2005 Yearbook
Exhibit No. 18
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA~17), Page 10 of 43
FIrm Size and Relurn
Table 7 -(continued)
Size-Decile Portfolios of the NYSEIAMEXINASDAQ
Largest and Smallest Company by Size Group
from 1966 to 2004
Capitalization of Largest Company Capitalization of Smallest Company
(In thousands)(In thousands)
Date Mid-Cap Low-Cap Micro-Cap Mid-Cap Low-Cap Micro-Cap
(Sept 30)6.8 9-10 -9-10
1966 $399.455 $99,578 $34.884 $99.935 $34.966 $381
1967 $459.170 $117.985 $42.267 $118,329 $42.313 $381
1968 $528.326 $149.261 $60.351 $150.126 $60.397 $592
1969 $517.452 $144.770 $54.273 $145,684 $54 280 $2,119
1970 $380.246 $94.025 $29.910 $94.047 $29.916 $822
1971 $542.517 $145.340 $45,571 $145.673 $45.589 $865
1972 $545.211 $139.647 $46.728 $139,710 $46.757 $1.031
1973 $424.584 $94 809 $29.601 $95.378 $29.606 $561
1974 $344.013 $75.272 $22.475 $75.853 $22,481 $444
1975 $465.763 $96.954 $28.140 $97,266 $28,144 $540
1976 $551.071 $116.184 $31.987 $116,212 $32.002 $564
1977 $573.084 $135,804 $39.192 $137.323 $39,254 $513
1978 $572,967 $159.778 $46.621 $160.524 $46.629 $830
1979 $661.336 $174.460 $49.088 $174.517 $49.172 $948
1980 $754.562 $194 012 $48.671 $194.241 $48.953 $549
1981 $954.665 $259.028 $71,276 $261.05Q $71 ,289 $1,446
1982 $162.028 $205.590 $54.675 $206.536 $54 883 $1,060
1983 $1.200,680 $352,698 $103.443 $352.944 $103.530 $2.025
1984 $1.068.972 $314.650 $90.419 $315.214 $90.659 $2.093
1985 $1.432.342 $367 413 $93,810 $368.249 $94 000 $760
1986 $1.857.621 $444.827 $109.956 $445.648 $109,975 $706
1987 $2.059,143 $461.430 $112.035 $468,948 $112.125 $1.277
1988 $1.957,926 $420.257 $94.268 $421,340 $94.302 $696
1989 $2.147.608 $480,975 $100,285 $483.623 $100.384 $96
1990 $2,164.185 $472.003 $93,627 $414.065 $93.750 $132
1991 $2.129,863 $457.958 $87.586 $458.853 $81.733 $278
1992 $2,428.671 $500.346 $103.352 $501.050 $103.500 $510
1993 $2.711.066 $608.520 $137 945 $608.825 $137.987 $602
1994 $2.497.073 $601.552 $149.435 $602,552 $149,532 $598
1995 $2.793.761 $653.178 $158.Q11 $654.019 $158.063 $89
1996 $3.150.685 $763,377 $195.188 $763.812 $195.326 $1.043
1997 $3,511.132 $818.299 $230,472 $821.028 $230,554 $480
1998 $4.216.707 $934.264 $253,329 $936.727 $253.336 $1.671
1999 $4.251.741 $875.309 $218.336 $875.582 $218.366 $1.502
2000 $4.143,902 $840.000 $192.598 $840.730 $192.721 $1.462
2001 $5.252.063 $1.114.792 $269.275 $1.115.200 $270.391 $443
2002 $5.012.705 $1.143 845 $314.042 $1,144.452 $314.174 $501
2003 $4.794.027 $1.166,799 $330.608 $1,167.040 $330,797 $332
2004 $6.241.953 $1.607.864 $505.437 $1.607 .931 $506.410 $1,393
Source: Center for Research in Security Plices. University of Chicago
Ibbotson.A.ssociates 131
Exhibit No. 18
Case No.. UWI-O4-
Pauline M. Ahem. AUS Consultants
Schedule (PMA-17). Page 11 of 43
Chapter 7
Table 7 -
Size-Decile Portfolios of the NYSEIAMEX/NASDAO, Summary Statistics of Annual Returns
1926-2004
Geometric Arithmetic Standard Serial
Decile Mean Mean Deviation Correlation
Largest 96%114%19.27%009
109 13,2200 003
11 3 138 23 B1 ~O2
11 3 144 2610 -002
11 7 150 2694 ~O2
11 a 155 2797 004
11 6 157 3017 001
'19 167 3365 004
122 17 7 3677 005
10..Smallest 140 21 B 4567 015
Mid.Cap. 3-5 11 1\142 2490 -002
Low-Cap. o-B 11 B \S 8 2968 003
Micro.Cap.12 B 190 3938 008
NYSEJ AMEXINASDAO
Total Value-Weighted Index 101 121 2032 003
Source: Center for Research In Security Prices. University 01 Chicago.
Aspects of the Firm Size Effect
The firm size phenomenon is remarkable in several ways, First, the greater risk of small stocks does
not, in the context of the capital asset pricing model (CAPM), fully account for their higher retUrns
over the long term. In the CAPM, only systematic or beta risk is rewarded; small company stocks
have had returns in excess of those implied by their betas.
Second, the calendar annual return differences betWeen small and large companies are serially
correlated, This suggests that past annual returns may be of some value in predicting future annual
retUrns, Such serial correlation, or autocorrelation, is practically ~nknown in the market for large
stocks and in most other equity markets but is evident in the size premia.
Third, the firm. size effect is seasonal. For example, small company stocks outperformed large
company stocks in the month of January in a large majority of the years. Such predictability is sur-
prising and suspicious in light of modern capital market theory, These three aspects of the firm
size
effect-lang-term retUIDs in excess of systematic risk, serial correlation, and seasonality-will be
analyzed thoroughly in the following sections-
132 S881 Valuation Edition 2005 Yearbook
Exhibit No, 18
Case No.. UWI-O4-
Pauline Moo Ahern, AUS Consultants
Schedule (PMA-17), Page 12 of 43
Arm Size and Return
Graph 7-
Size-Decile Portfolios of the NYSElAMEXlNASDAO: Wealth Indices of Investments In Mid-, Low-. Micro- snd
Total Capitalization Stocks
1925-2004
Year. end , 925 ;: $1 00
$20,000
$10,000
, $13,661,13
Micro-Cap Stock
, ",~ """
Low-Cap Stock
$6,71385
997.
, $2,01920
$1.000
$100
1i31:)
'"
Total Value
Welgh~ed NYSEI
AMEXlNAsOAO
$10
1925 1935 1945 1955 1965 1975 1985 1995 2004
Year-end Source: Center for Research in Security Prices, University of Chicago
IbbotsonAssociates 133
Exhibit No" 18
Case No. UWI-O4-
Pauline M" Ahem, AUS Consultants
Schedule (PMA-17), Page 13 of 43
Chapter 7
Long-Term Returns in Excess of Systematic Risk
The capital asset pricing model (CAPM) does not fully account for the higher returns of small com-
pany stocks.. Table 7-5 shows the returns in excess of systematic risk over the past 79 years for each
decile of the NYSEJAMEX/NASDAQ, Recall that the CAPM is expressed as follows:
s =rf +03s xERP)
Table 7-5 uses the CAPM to estimate the rerum in excess of the riskless rate and compares this esti-
mate to historical performance.. According to the CAPM. the expected return on a security should
consist of the riskless rate plus an additional return to compensate for the systematic risk of the secu-
rity. The return in excess of the riskless rate is estimated in the context of the CAPM by multiplying
the equity risk premium by ~ (beta).. The equity risk premium is the retUrn that compensates investors
for taking on risk equal to the risk of the market as a whole (systematic dsk),,2 Beta measures the
extent to which a security or portfolio is exposed to systematic risk"J The beta of each decile indi-
cates the degree to which the decile s return moves with that of the overall market.
A beta greater than one indicates that the security or portfolio has greater systematic risk than
the market; according to the CAPM equation. investors are compensated for taking on this additional
risk. Yet, Table 7-5 illustrates that the smaller deciJes have had returns that are not fully explainable
by their higher betas, This return in excess of that predicted by CAPM increases as one moves from
the largest companies in decile 1 to the smallest in decile 10. The excess return is especially pro-
nounced for micro-cap stocks (deciles 9-10). This size-related phenomenon has prompted a revision
to the CAPM, which includes a size premium. Chapter 4 presents trus modified CAPM theory and
its application in more detaiL.
This phenomenon can also be viewed graphically, as depicted in the Graph 7~2. The security
market line is based on the pure CAPM without adjustment for the size premium.. Based on the risk
(or beta) of a security, the expected return lies on the security market line. However, the actual his-
toric retUrns for the smaller deciles of the NYSEJAMEX/NASDAQ lie above the line, indicating that
these deciles have had returns in excess of that which is appropriate for their systernaticrisk
2 1ne equity risk premium is estimated by we 79.year arithmetic mean return on large company stocks, 1239 percent, less
the 79-year arithmetic mean income-retUrn component of la-year government bonds as the historical riskJ~s rate, in this
case 512 percenL (It is appropriate, however, to match the matUrity, or duration, of the riskJcss asset with the investment
horjzon ,) See Chaptcr for more detail 011 equity risk premium estimation
3 Historical betas were cakulated using II simple regression of the monthly portfolio (decile) total returns in excess of the
30-day U ,So Treasury bill tota.! returns versus the S&P 500 total returns in excess of tbe 30.day U,S, Treasury bill.
January 1926-Deccmbet 2004 See Chaptcr 6 for mOte detail .on beta estimation.
134 SBBI Valuation Edition 2005 Yearbook
Exhibit No.. 18
Case No. UW1..O4.
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-17), Page 14 of 43
Firm Size and Return
Table 7.
Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSElAMEXlNASDAO
1926-2004
Realized EstImated Size Premium
Arithmetic Return In Return In (Return In
Mean Excess of Excess of Excess of
Decile Beta Return Riskless Rate Rlsk/ess Ratet CAPM) .
1..Largest 091 11 39%616%6 53%-037%
1324%8 02%742%060'1..
1 10 1384'1&862%786%075%
1 13 1438%915%808%107%
14.96%74%30%44%
1 18 1546%10 23%8 48%75%
123 1567%10.45%8830/0 161%
128 1674%1151%915%236%
134 17 71%1248%962%286%
10-Smallest 1 41 21 77%16 54%1014%6W~n
Mid-Cap. 3-1 12 14 19'~896%801%095%
Low-Cap, 6-122 1576%1054"0 a 73%1 81CJ&
Micro-Cap. 9.10 136 1897'10 1374%972%402%
6alas are estimated from monthly portlollo total returns In excess of the 30-day U.S. Treasury b111 lotal return versus the sap
500 total returns in excess of the 3D-day US. Treasury bill. January 1 926-December 2004
Historical rlskless rate is measured by the 7g.year arithmetic mean income return component 01 20.year government bonds
(5.22 percent)
tCalculated In the context of the CAPM by mulliplying the equity risk premium by bela. The equity risk premium is estimated bythe arilhmeUc meanlotal return 01 the S&P 500 11239 percent) minus the arithmetic mean income return component of 20-year
government bonds (5 22 percent) from 1926-2004.
Graph 7-2
Security Market line versus Size-Decile Portfolios of the NYSE.JAMEXINASDAO
1926-2004
,g 10
Riskless Rate
Beta Source: Center for Research in Security Prices, University of ChIcago (decile data)
I bbotsonAssociates 135
Exhibit No" 18
Case No" UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17), Page 15 of 43
Chapter 7
Further Analysis of the 10th Decile
The size premia presented rhus far do a great deal to explain the return due solely to size in publicly
traded companies. However, by splitting the 10th decile into tWo size groupings we can get a closer
look at the smallest companies. This magniHcation of the smallest companies will demonstrate
whether the company size to size premia relationship continues to hold true.
As previously discussed, the method for determining the size groupings for siz.e premia analysis
was to take the stocks traded on the NYSE and break them up into 10 deciles, after which stocks
traded on the AMEX and NASDAQ were allocated into the same size groupings. This same method-
ology was used to split the 10th decile into tWO parts: lOa and lOb, with lOb being the smaller of
the tWO, This is equivalent to breaking the stocks down into 20 size groupings, with portfolios 19
and 20 representing lOa and lOb.
Table 7-7 shows that the pattern continues; as companies get smaller their size premium increas-
es. There is a noticeable increase in size premium from lOa to lOb, which can also be demonstrated
visually in Graph 7-3, This can be useful in valuing companies that are extremely small.. Table 7-
presents the size, composition, and breakpoints of deciles 103 and 1 Db.. Firstl the recent number of
companies and total decile market capitalization are presented" Then the largest company and its
market capitalization arc presented,
Breaking the smallest decile down lowers the significance of the results compared to resultS for
the 10th decile taken as a whole, however. The same holds true for comparing the 10th decile with
the Micro-Cap aggregation of the 9th and 10th deciles, The more stocks included in a sample the
more significance can be placed on the results, While this is not as much of a factor with the recent
years of data, these size premia are constructed with data back to 1926. By breaking the 10th decile
down into smaller components we have cut the number of stocks included in each grouping.. The
change over time of the number of stocks included in the 10th decile for the NYSElAMEXlNASDAQ
is presented in Table 7-8. With fewer stocks included in the analysis early on~ there is a strong pos-
sibility th~t just a few stocks can dominate the returns for those early years.
While the number of companies included in the 10th decile for the early years of our analysis
is low, it is not too low to still draw meaningful results even when broken down into subdivisions
lOa and lOb, Allrhings considered. size premia developed for deciles lOa and lOb are significant and
can be used in cost of capital analysis.. Tbese size premia should greatly enhance the development of
cost of capital analysis for very small companies..
Table 7-
Size-Decile Portfolios 10a and 10b of the NYSElAMEXlNASDAQ,
Largest Company and Its Market Capitalization
September 30. 2004
Recent Decile Market Capitalization
Recent Number Market Capitalization of Largest Company Company
Decile of Companies ~n thousands)(In thousands)Name
108 532 $98.581.341 S262.725 Mas\ec fne
10b 261 $83.633.980 $143.916 Rex Stores Corp.
Note: These numbers may nol aggregate to equa! decile 10 figures.
Source: Center fat Research In Security Prices. University of Chicago
136 SBBI Valuation Edition 2005 Yearbook
Exhibit No. 18
Case No., UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-17), Page 16 of 43
Firm Size and Return
Table 7-
Long-Term Returns In Excess of CAPM Estimation for Decile Portfolios of the
NYSElAMEXlNASDAO, with 10th Decile Split
1926-2004
Realized Estimated
Arithmetic:Return In Return In
Mean Excess of Excess of
Beta Return Riskiess Rate Rlskless Ratet
1 -Largest 091 1139%616%653%
104 1324%802%742%
1 10 1384%862%786%
1 13 1438%9 15%806%
116 1496%974%830%
1 16 1546%1023%848'&
123 15.67%1045%883%
128 1674%11 51 %915%
134 1771%1248%962%
10a 142 1995%1473%1019%
1 Db-Smallest 139 25.13%1 9 90%1000%
Size Premium
(Return In
Excess of
CAPM)
-037%
060%
075%
107%
144%
175%
161%
236%
286%
454%
990%
Mld-Cap,1 12 14 19% B 96% 801% 095%
Low-Cap, 6-8 122 1576% 10.54% B 13% 1 B1%
Micro-Cap. 9.10 1 36 1897% 1374% 972% 402%
Betas are estimaled from monthly porifoRo total relums in excess of the 30-day S. Treasury bllliotal relurn versus the S&P
500 total relums In excess of the 30-day U S Treasury bill. January 1926-December 2004 .
Historical riskless rate is measured by the 79-year arithmellc mean Income return component of 20.year government bonds
(5 22 percent)
tCalculated in the conlext of the CAPM by multiplying the equity risk premium by beta. The equity risk premium Is estimated by
the arilhmellc mean lolal return of the S&P 500 (12 39 percent) minus lhe arithmetic mean Income return component of 20.year
government bonds (5 22 percent) from 1926-2004
Graph 7.
Security Market Une versus Size-Decile Portfolios of the NYSElAMEXlNASDAO, with 10th Decile Split
1926-2004
1Ob
:::I
c::
::?:
s=.
AlskJess Aata
Bela
1 6
Source: Center for Research in Security Prices, University 01 Chicago (decile data)
IbbotsonAssociates 137
Exhibit No, 18
Case No" UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17), Page 17 of 43
Chapter 7
Table 7.
Historical Number of Companies for NYSElAMEXlNASDAO Decile 10
Number of CompaniesSept.
1926
1930
1940
1950
1960
1970
1980
1990
2000
2004
52.
100
109
865
685
814
927
782
The lewesl number of companies was 491n March. 1926
Source: Center for Research in Security Prices. University of Chicago
Alternative Methods of Calculating the Size Premia
The size premia estimation method presented above makes several assumptions with respect to the
market benchmark and the measurement of beta, The impact of these assumptions can best be exam-
ined by looking at some alternatives, In this s~tion we wiU examine the impact on the size premia
of using a different market benchmark for estimating the equity risk premia and beta. We will also
examine the effect on the size premia stUdy of using sum beta or an annual beta..
Changing the Market Benchmark
In the original size premia study, the S&P 500 is used as the market benchmark in the calculation of
the realized historical equity risk premium and of each size group s beta.. The NYSE total value-
weighted index is a common alternative market benchmark used to calculate beta. Table 7-9 uses this
market benchmark in the calculation of beta.. In order to isolate the size effect, we require an equity
risk premiwn based on a large company srock benchmark,. The NYSE deciles 1-2 large company
index offers a mutually exclusive set of portfolios for the analysis of the smaller company groups:
mid-cap deciles 3-5, low-cap deciles 6-8, and micro-cap dec:iles 9-10. The size premia analyses using
these benchmarks ar~ summarized in Table 7-9 and depicted graphically in Graph 7-4"
For the entire period analyzed, 1926-2004, the betas obtained using the NYSE total value-
weighted index are higher than those obtained using the S&P 500.. Since smaller companies had
higher betas using the NYSE benchmark, one would expect the size premia to shrink. However, as
was illustrated in Chapter 5, the equity risk premium calclliated using the NYSE deciles 1-2 bench.
mark results in a value of 6 AD, as opposed to 7..17 when using the S&P 500. The effect of the
higher betas and lower equity risk premium cancel each other out, and the resulting size premia in
Table 7-9 are slightly higher than those resulting from the original study.
4 Sum beta is the method of bet:!. estimation described in Chapter 6 that was developed to better account for the lagged
reaction of small stocks to market movements. The sum beta methodology was developed for the same reason that the
siz.e premia were developed; small company betas were too 5mall to account for all of their excess returns.
138 SBBI Valuation Edition 2005 Yearbool(
Exhibit No. 18
Case No" UW1M O4~
Pauline M. Ahem, AlJS Consultants
Schedule (PMA-17), Page 18 of 43
~W...JM.
Indicaleel CoJTll\M equity Co~ Rat, T1Yough U" of thl!
SIngle Stage Di,cOl#1led ClSh F111W Model fer
lIIe ProICY Grvup al Six C. A. Tamer Wlrter Comparoles and the~~iIUI.~~IIJJWiU
JlJ!~1!.YJ!9!1.I!~VJ!I:3r d PrDIrc:t ..f:&. ~d UR
DMdend IAlficaled
AYling!!GrowIh A$Ated Common
Dividtnd Component Dividend GwMh Rale Equily Casl
YIeld 111 /2)Yield /3)(4)Rile IS)
Platy Group alS\l C A. Tamer
wafer Companle.
Amellc:ln SIal" Waler 5 %1 %30 %42 %8 %
Aqua America. Jne,2.1 10. I 12.
MI!SiIll R'saUll:al Cotp.
Califomla Waler Seme" Gnlup
Middlesex W;!ler Company
York Waler Company
AYel'ilgc 3.2 %I ')(,3 %6 %0 % (0)
Plllty GrllUp of T1na ValUe 1.&10
(Standard EdllJon) Waler
Companies
Amelian Stales Willer Co,35 %1 %11 %2 %0 %
Aqua ~rica. Inc.2. I 10.12.2
Ca&lonn Waler S~e's Gro\Ip -.!!L
Average 0 ')(,1 %1 'to 5 %10.6 '!L(O)
It mIJ..!II! 9.Il.fr2I~ ~.mI111.1nm
Dividend Indicated
Avenge Gnr.r.1h Adpsted Common
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YIeld f2)YIeld (3)Rale
5 %11.1 %11,1 %
2..B IIA 115
11.119
11,
10.
111.
2 %
~,,
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fOlDX)' Group ef Six C A. Tumer
Waler ColTllllnies
Amcfk::ln SlOtol Wiler Co
Aqua Amelita. Inc.Mlslan RIIOIJn:C$
Collrornlll Water Semcle Group
Middlesex Water complll1Y
York Waler Camp;l11y
Averago
Proxy Group e(11...0 Valul U1c(Standard ElSllon) Vh.tlr
Companle~
Ameritan Stales WaItt Co
Aqua Amlrlcal, Inc,Caifomla Waler StrkOi: Grou;t
Ayeroge
5 '!(,
0 %
1 '"
--2:l. %
6 %
!.-,
55 %
0 %
9.1 %liS-1li..
10.7 %(6)
Con.ulan
Proxy 01 SIX C A. Tumer
Wiler CCII1DIIniel 111.4 %
PrIll)' Glall)) of lIveo Value 1.&10
(SI;mdan! I;l2Ion) WalerComo,nI"10.13 %
NoW;; (I) From ~ue 20 of 1111, Stileel"o.o.. S.hcdule (PIAA-D) (Updated).
(2) This rvn"b Ii grooMh ralo componlml oquarto cne-half 1110 conc1r;lon ol!;"M1h ralo (from
lI'go 21 of tIn Schedule,e., page 1 of Sc:hedulo (PIAA-7) (Upclal'dl ) )l Coklmn 110 reled
the periodic p;aymenl or dividends (GenIon Model) as opposed to Ihe conllnuo~ payment
Thu,. IQf American SIot~ Woler Co.. 3,5% . ( 112 . 5.5% ) .. 0,
m ColIDm 1 + Cobnn2,
(4) From paue 21 of tin Sdle~t.. pagel 01 Schedl4o (PMA-7) (Updated),
(5) Colulm:.l + Column 4,
(6) Indtldes only lhoselndicalod common equity cost rales v.11IdI;mo grNh!rlhan O.5%,lo., 200
bul, pl!nll Ibove!lle prvspedive ~.Id on 1\ I'iIled MoodYe pamia lAiay bonds of 11,5% (flam
page 2!1 ofll1ls SdledIIe.. PIIIO I efSdleduIG (PMA-9) ~d.le~)l
ExniDit NO. 12
Case No. UWI-O4-
Pauline M.. Ahemt AUS Consultants
Schedule (PMA-5), Page '1 of'
(Updated)
Exhibit No, 18
Case No. UWi-O4-
Pauline M, Ahem, AUS Consultants
Schedule (PMA-17), Page 19 of 43
United Water Idaho. Inc.
Derivation of Dividend Yield for Use in the
Discounted Cash Flow Model
Dividend Yield
Average
Average
Spot Last 3 Dividend
04/29/04
) ('
Months Yield
Proxy Group of Six C, A Turner Water
Companies
American States Water Co,5 %35 %5 %
Aqua America, Inc.1,,
Artesian Resources Corp.
California Water Services Group 3,,4 3.4
Middlesex Water Company
York Water Company 3:1
Average 3.2 %2 %
Proxy Group of Three Value Line
(Standard Edition) Water Companies
American States Water Co,5 %35 %
Aqua America, Inc 2,.
California Water Services Group 3.4 3.4 3.4
Average 9 %0 %0 %
Notes:(1) The spot dividend yield is the current annualized dividend per
share divided by the spot market price on 04/29/04.,
(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 April 29, 2005
(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 & Poors Compustat Services, Ine , PC Plus
Research Insight Database
flnance,.yahoo,com
Exhibit No.. 12
Case No. UWln O4-
Pauline M. Ahern. AUS Consultants
Schedule (PMA-6), Page 1 of 1
(Updated)
Exhibit No. 18
Case No" UWI-O4-
Pauline M" Ahem,AUS Consultants
Schedule (PMA-17). Page 20 of 43
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Exhibit No. 12
Case No" UWI-O4-04
Pauline M" Ahern, AUS Consultants
Schedule (PMA-8), Page 1 of 12
(Updated)
Exhibit No.. 18
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-17), Page 21 of 43
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IDSIII 35 25 29 ill- III 3)'1' 187 32.5
Itcfltilll 5584 5938 5063 Imd U1J 5)'1'. 51.62.8 1-
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 ClVALUEUNEPUB.,INc. B-1a
9.12 9,58 9,15 10.10 9,27 10.43 11,03 1137 11.44 11,02 12.91 1217 '3.1)6 13.78 1398 13.60 1(,20 14.70 RavanUillpersll 1&.011
1.44 1.49 178 1.61 1,67 1.68 I 75 175 185 2.114 2.26 220 2.53 2.54 2.08 2.22 U5 2.95 "Cash Flaw" per III 92 94 1.19 115 111 95 1.03 113 1,04 1.08 119 1.2B 135 134 78 105 US 155 Earnings persb A 110
69 ,72 .73 .77 .79 .80 .81 .82 ,83 .84 ,85 .86 .87 ,87 .88 .89 .90 ,!If DtI'd Decfdpefsh B. ,
2.46 2.53 ,77 2.31 190 2.43 219 2.40 258 311 4.30 3.03 118 2.68 3.16 5.02 5.15 5.25 Cap ISpendingpersh 5.50
31 7.54 8.39 8.85 9.95 10.07 10,29 11.01 11.24 11.48 11.82 12.74 1322 14.05 13.97 14.98 15.20 15.35 BookVidueponh 17.
39 9.43 9.9\ 9.95 11.71 11.77 11.17 13.33 13.'14 13.44 13.44 15.12 '~.'2 15.15,21 16.11 11.25 1UG COmmon:inSOUIsrgC 20.00
g:7 10.8.8 to.6 13.12.8 11.6 12.6 \4.5 15.5 17.1 15.16.7 18.3 31.\1 2J.BolrJr,g leu", AvgMn,m.._~' 13.
.73 .76 .50 .64 .79 .64 .78 .79 .64 .81 $1 1.03 .86 1.00 1.82' 1.23 Va1
:~
UIrr1 Rolatlve PIE Rallo ,
7.7'10 7.5". 7.0". 6.3% 5.3'10 6.6", 6.7% 5.8% 5.5% 5.0% 4.2% 4.2'1. 9". 3.60/, 3.5')', 3.7% nfj In Avg AM" Dlv'd YIeld !.5~'
CAPITAl. STRUCTURE asor 12131J04 129.15\5 153.8 148,1 173,4 184.0 197,5 209.2\2.7 228.245 Z65 Rovenulsl$mlDJ 3211
Tolal Debt $214.8 mil OUt In 5Y1'8 565,0 !'IiII, 12.13.5 14.1 14.6 16.1 18.0 211,4 20.11.9 16.210 28.0 Het Prollt ISmlm 42.0
LT Dabt$22B.Q mill. LT Irdol1!slS18,O mill. 41 gill 43 3% 4\1% 4O.!I'f. 460% 457% 43IlOl 389% 435% 377" 4D.O" .w.0" Income 1a Rail 440%
(f01aIJnlerostalvlffil!Je:2.6x)
~,. , .
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Nil Nil AFUDC'latoNatPmflt Nil
Lcam, Unc:apllillb:cd: Nnlll! 46.6% 419% 43.~. 43.
~.
51.0lf. 475% s.1,9't. 52.0% 52.0% 477% 5f.0% 51..0% Long.TermDebtRatlo 52.0%
PensIon Assel5.12104 $51 3 mil. 52.5% 57.3% 56.3', 55."". 48.4% 51.9,., 4-1.7')'. 48.0% 48.0% 52.3", 49.0'" 49.0% Common ~IN RatIo 48.
ObUg. $70.3 mil 230.6 256.268.4 277 323 2 371 1 447.6 444.44l3 4110.535 6OD Totti Cilplbl ($mllij 735
PhI Stock None. Pfd Dlv'd None, 335.0 357.8 383,6 414.8 449.6 509.1 539.8 563.602.3 6642 7111 170 Net Plant/Snion 915
Common Stock 16,768,396shs 72'1. 6.9,.. 6,9% 7.11f. 6.6% 6.4% 6.H'. 6.5% 4,6% 49% 75% 400h ReturnonTotalcap 1.5""
asof3/11/0S 90/, 0% 9.2% 9.4% 10.D% 9.2% 10,1% 9,5% 6'Y. 6.5% 0" 9.~ RumonSllr. Equily fl.
MARKET CAP: $425 million (Small Cap) 10.0'1. 0'1, 9.2'1. 4% 10.1% 9.3% 10.1", 9.5% 5.8'10 &.5% 9.1I~ U'A, RelumonCom ErNItv ,2.//%
CURRENT POSmON 2002 2003 12/31104 2.1% 2.4,.. 1.6% 2.1% 2.9% 3.Do/, 3,6% 3.3% NMf NMf 2.5'-' 4.0% Rttalned ill Com Eq 6.5~
cas ~1s 18.4 12.8 4.79% 73% 80% 71W. 72% 68% 65". &5% 113% 91% 68%, 59'" AUDlv'dstoHBtProf 4&'"
rt!1:e
~bles to.B '8 113 BUSINESS: American Stales WOller Co, operalos as a holding 01 Big Bear Lake and in amos 01 San Bernardino County, Acquired
8~~ ry vg ! 21 3i: company. Through ~s princjpal subsidial)'. Southern Cafirornia Cltaparml City Waler of Arizona (10100); 11,400 cusloma~ Has
Current Assol5 5':8 53:0 Wa\Q~ Company. ft SU~pliDS water 10 75 commullaios In 10 roughly 525 employees.. Off. & dir, own 2.~'1'0 ollXlmmon sloclt
Acc13 Pa able 1 t 6 10 B 182 munlIDJI. SeMCO areas Includo the groator metropolitan areas 01 (4/05 Proxy). Chairman: Lloyd Ros!l. PlUSident & CEO: Floyd
Debt Ou 48:.3 56:8 4!i9 Loa Angelos ond Orange Counties. Tho company also pmvldD5 Wicks, Incorporated: CA. Add: 630 Easl Foolhll Boulevard, SanOther 20.3 22.aledric utility services 10 approximately 22,000 customers In \ho city Dimas, CA 91773. Tel.: [phone]. Web: 'MIIW.aswater.com.
Curront Uab. 79.5 95.90 86,gulat lik
File, ClIO. CO'i, 285% 255% 200" l~pr?V1Dg rc .. ory CDVlronD1CD an,
'""
WI ey orce .
ANNUA1.RATES P P It E t'd '02 '04 IS pDlntmg tl poSltivc backdrop for srock Wid debt to fund these expendItures.
oIch3ng1lfpanh) IO;~ 5~rs 5Io'Oa.'I"o American States Water. Indeed, more Such a development would undoubtedly
Revenues 3,5% 4.0% 20" favorable and timely rate request decisions dilute earnings, despite br'ighter top-line
Ca~h Flow" 3.()9,1, 5.0% 5.0" by the California Public Utility Commis- prospects" We, therefore, look foC' Amer-
5f:;~~Js ~i 1 ij.~ ~'
g~
sion (CPUC) 'helped the company post icans earnings growth rate to slow ro 15%
Book Value 4.5% 4:0% 3.5" $0 16 sham net in the fourth quarter, in 2006 However, there might be a cats-
C I QUARTERI.YREVENUES($milll Full VC('
SUS a loss of'$0.12188t year, despite un- lyst on the horizon. The utility filed a
d;r Mar,31 Jun.30 Sep,3D Dec.31 Year seasonably rainy weather. We look for the general rate casc. for r~o~ m during the
2002 44.52.6 616 503 209 current rc~ntorr landscape to get even ~st quarlf:r. Reglon ilr lS lts larges~, serv-
2003 46.7 51.6 637 SOS 21ii better at the urgmg of Governor Schwar- Ice area wlth roughly 40%, of AWRs. cuB'
2004 46.7 593 69.0 53.22~( zenegger, He. re~enUy repla~ed two regu- tamer base, Ti?-e company 18 ~eque8tmg a
2005 60.li3.11 73.590 245 latory commissIOners, considered to be 24% revenue IOcrease. effectIve January
2006 55.0 liB-D 78.0 64:0 265 antagonist:- of rate .relief for utilities, with 2006. If a favorable ruling is handed dawn.
Cal EARNINGS PER SHARE A Fil more busmess frIendly members. The our share-net figure would probably prove
.bt Mar.31 Jlln.30 5eo,3O Dec.31 V:ar CPUC ~as already approved rate increa~es too co~servative. .
2002 .25 36 50 23 134 for Region I and II customer areas, Whlch Most mvestors will want to look else-
2003 20 19 '51 d12 18 should boost AWR's top line by more than where.. AWR stock offers minimal appre-
2004 ,00 30 52 '16 1.05 $5 million. This relief nlong with more dation potential to 2008-2010 and is
ZO05 .211 35 .25 1.35 normal weather ought to fuel better-t'han ranked 4 (Below Average) for Timeliness"
2006 .25 .4D 60 3D 1.55 25% earnings gI'owth this year. Although consolidating industry t-rends
Cal QUARTERLY DIVIDENDS PAID S. F II Earnings growth should tail off a bit could provide some opportunities for the
end;r Mar.31 Jlln.30 SeD.30 Ded1 V:ar in 2006. We are conce~ed t'!1at the corn- coml?l1ny, a dearth of funds limits t'!1e
ZO01 .217 ,217 211 217 87 p~y's strapped financlals will become a !lltelihood. of su~h mcBsure~, That SD.1d
2002 ,217 217 217 221 :67 hmdrana: to ~owth, Infrastructure costs tnCOl;ne-onent~d Investors might want to
2003 221 221 221 221 88 are groWIng higher everyday and do not consider the Issue because AWR offers an
2004 221 221 221 225 '89 look as though they will be receding any- above average dividend yield,
2005 .225 .time soon, With onJy minimal cash on Andre J, Costanza AprU 29, 2005
(A) Primary earnings. Excludes nonmcurring (8) Dividends hlslorically paid in cady-March, tcI In milrlOns. adjusted for splits Companys Financial Sirungth
~Dlns: '91. 73~; '92. 13t: , t4~. Nexl earn- Juna. September, Decombor . Div d l1!invest" Smck'" Prlco Stability
tngs mpor1 duG lala July, OUrieriy aarnings may men' plan nvai1:lble Price Growth Perslalenc:o not sum duo to changa in shalt! COUll! Eamlngs Predlctabntty
I) 2.00S. Voluu Un. p.,bEshing. Inc. AI ~l11ts mIGMld. fo~ malam! b ob;J~1Id !rum SWlCOS I1diowd III ba nilBblo nro b PIlT,ldtd wI1io\Jl WIIll1IIIdu~ II! any I.iId
THE PUBUSliE!lIS HOT RESPOIISIBLEl'OR MN ERRORS OR OMISSIOIIS HEREet llds pub!ica:i'MI Ie, !Ub:.aibG"$ tIMI, non-eonmon:iol, in:Dntd 1110. No p3li To subscribe call 1.800-833.0046,
of IIIMt \jQ
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1I5Ofd. R:tUd at ~d h iIIIY jR1!ed. ql~ '" n~'Ior rcrm. Ct U!td let ilWm:II1g I)( rMrbdn~ aJrf frln'otd cr puI:~n. SuMtll cr pID(kt
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...
Targot Price Rango
2008 12009 12010
.----..-.-.~I
Exhibit No, 18
Case No.. UWI-WooO4-
Pauline M" Ahern, AUS Consultants
Schedule (PMA-17), Page 24 of 43
AQUA AMERICA NYSE.WTR
l1MEUNESS 4 1.m.1Jtd 6'W4 r~:
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SAFETY 3 lowlnd &11/03 LEGENDS1!.OIDMeondsllll1
TECHNICAl lDwed3ll1GS dlMDd W kuorusl Rilla
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BETA .75 (I.DO="'1I1Io1) 3,'or.2s~ 1/96
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1989 1990 1991 1992 1993 1994
4.53 270 2.85 2.43 ~27 2.42
24 ,'26 .26 .27 .27 .28115 1.01 7Z ,SO .63 .
2.92 2.BO 2.76 2.79 3.05 3.
2.9.45 30.48 -31:06 36,40 44.55 H44.
12.9 10,2 10.11.5 14.4 13.98 .76 .69 .76 .85 ,
9% 7.7". 7.2% 6.6% 5.9% 6.0'1.
CAPITAl. STRUCTURE as of t2l31/04
Total Debt $884.2 miD, DUD In 5 Yrs $221.6 mD
LT Dobt$1489 mill. L.Tlntofest $40.0 mitt
(Total inlalGsl coverage: 3,7x)
PensIon Assels.12104$115,3 mIl.
Oblig S111 1 mill.
Pfd Stock Nono
I~~f 25.90 1~110 27.8 (~~~~~~j)
~~
1.55 ~ 2.
6 11.4 15..4 15.4 16.19.7 20.0 22..4 24.6 27.2 5.97 10 I 8,12.5 128 15..189 233
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.---
II'
Targot Price Range
2008 2009 2010
.---- -.--. 32
It.
:..--
Common Slock 95,475.161 shams
as of 2118105
MARKET CAP: 52.5 billion (MId CoIp)
CURRENT POSmON 2002 2003 12131104
Jf:i~~1s 49.7 39,2 13.Roceiwbles 577 62.3 &\,InV(!nrol)' (AvgCst) 4.6 5,8 6,,Othor 2.7 5.1 5,
Current Assets 1TU 112.4 90.
Acc\3 Payable 31,1 32.3 23.Debt Due 149..4 135,8 135.Other 46,0 63.9 58.
Current Liab. 226.232.0 ""2'if:4
Fix. tho. COY, 347% 344% 364%
ANNUAL. RATES Pilst Past Esl'd 'IIZ-'04
or dIanga (pltSh) 10 YIS. 5 YIS. to '08-'10Revcnues 55% 7,5%
Cash Flow' 9.5% 9,5% 7 00.6
Bi;;~3s
~:g~ ~:g~ ~g~
Book Value 8.5% 10.5% 0r.
Cal. QUARltRLy REVENUES ($ mal)
endar Mar,31 Jun.30 Sep,30 Dec.2002 717 76.919 81.
2003 80.5 83.102.1 1012
2004 99.8 106.5 120,3 115.
2005 110 120 130 130
2006 120 130 140 135CaI- EARNINGS PER SHARE
IInd.1f Mar.31 Jun.30 Sop,30 Dec.31
20112 14 16 25 2003 15 18 24 20114 17 19 ,26 ,2005 ,19 23 .27 ,2006 .21 .25 .30 .29
Cat. QUARTERlY DfVIDENDSPA!D B .
vndar Mar 31 Jun.30 Seo30 Dec.
2001 099 .099 099 1062002 106 106 106 1122003 112 112 112 2004 .12 12 12 2005 .
(A) Primal)' shams oullllanding l/1rough 116;
~iluled 1hereaner. E1:~ nonrec. Qains t\ogS~S~90. .13~); '91. (34~). 92, (3a~t 99. (11~); 00,
U:b1. 2\!; '02, 5~: '03, 4t !:Xci. gain fJQm
0 2005, Vakro Uno PubllsHl'II!. Ire. AI n!;hls !I)_d. f1I~Jj m;j111b1 is clnnlnlld !raIII !ClJI1:oS bdlDVUd 10 be rWialio ol'd is proodDd wt1Iout WIIrIanDDo a! OIlY kiId.
'!ME PUDU91ER IS NOT RESPONSIBLJ: fOR AIrY Ei\!\ORS 011 OMISSlOtlS HEREti. This jlUbbliCln is $UIdy fw Qjb!;Oibals own, n!W1oCa1V11O1'Ci:11. IntDm:ll U!.II, 110
af a I!IJf be nlpo:t..aId. I1:dd. IlalJd C!I' 11 3111 pi\:od, elllQCnk CII' OM Icnn. CI usod fa' omUfll'jng III r:m.a~a iII1'f pt11/Jd or oI~ pIt&:I:!otI. CII' ftt"M1
%TOT.::UR
..
SlOCK REI
. . . '
Iyr, 15.
r:rllllrlrlltil
. .
3 yr 39.32.5 -
1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 ~~At.UE~~PUB.~~ 8.
2.45 2.4B 2.69 179 3,21 3,29 3.59 3,79 3,97 4.63 5.00 5.30 Ro-IenuBsptrsh &.50
63 ,fiT 74 ,81 96 1.01 115 1.26 12B 1.46 1.55 165 .Cash Flow" push 1.911
39 ,40 .53 5& ,62 ,68 .72 76 ,85 .95 1.(15 earnings perth A 125
29 .30 .32 .34 ,36 .38 .40 .43 ,46 .49 .52 .56 Olv'd Docfdpurs!l B. .
69 ,&1 77 1.09 1.~ 155 1.45 1.60 176 'Z.05 1.85 f,B0 Cap Jspandlngpersh 1.35
23 3.59 3.79 4.23 4.57 5.13 5.53 5.81 7.12 7.85 8.05 145 Book Value penh 9,
47.81 49.31 50.60 54.15 60.10 1.13.61 85.48 64.!IU \12.59 95.36 98.011 9B.1I1I commonShsOUlsrg" fOO,
12.0 1f1.1i 11.22.5 2.12 16.2 23.S 2J.ti 2,4.5 2:i.1 Bo/do, n,"" AvgAnn'IP/fRaUO 21:0
SO .91.1 1.00 1.17 1.21 1. 18 1.21 1.29 1.40 1.34 ~Iu. LIne Relative PIE Ratio f.55
2'1. !!Y. 3.90/. 2.9% 3.0% 3.3'10 2.5% 2.~. 2.5% 2.3% ..1In am Avg AM" DIv'd YIeld
1170 122.5 136.151.0 2573 275.307 J 322.0 367,442.0 m 525 Revenues ($mlIQ &50
19.0 19.8 23.2 28.8 45,0 50.7 !i8.62.7 67.3 BO.95.0 105.0 Net Prol'd limllQ ti5
40.4% 41.4% 40.6% 40,5% 3M" 38.9% 3.9.3% 38.5% 39,3% 39.4% 40.D:' 40.0% Income Tax Raitt .((1.0"
1.6% ..
.. .. .. .'
.- n 2.20/. 3.2% 3.5" 3,5'" AFUDC % to Net PlOfrt
519,.. 541% 54.4". 527r. 529% 52.0% 52.2% 54.2% 51.4% 50.0% 46.D~ 46.0" Long.TermOebtRatio 4O,
46.4% 44.0% 44.6% 46,6". 46,7% 47.8% 47.7% 45.8% 46.1i'!. 50.0'1. 52.11'" 54,0" Common Eaullv RaUo 6IJ.D"J
338.D 4017 4272 496.782.7 9011 990.1076.2 1355,14973 f525 1550 ToIaICap1taI(lmlB) f615
436.9 502.9 534.5 609.8 1135,1251.4 1366.1 1490.182.U 2.069.8 2125 2f75 Net Plilnt(SmllQ 2.125
17% 6.8% 7,4% 7.6% 7.6% 7.4% 1.8% 7.6% 6.4% 6.7%' 15% 8.0% RoiurnonTolalC;p'1 8.5%
117% 10.7% 1f 9% 12.3% 12.2% 117% 12.3% 12.7% 10.2% 10.7% 12.0% 1Zm RlllumonShr, Equity ,3.D",'
11.7% 11.2'10 12.0'1. 12.4% 12.3"1. 11.7~. 12.4". 12.7% 10.2% 10.7% 12.0~ 12."' RalurponComEDII\1II 1111'-'
5% 2.8r. 3.6'10 4.5". 4.3% 4.7'1. 1". 5.2,.. 4.2% 4,6% 5.5'" &'0'" Rolillned to Com Eq 6.0'-'
71% 75% 70% &4,.. 65". 60% 59% 590/, 59% 51'10 55% S3~ All Dlv'ds to Net Prof 55'"
BUSINESS: Aqua AmericiJ, Ine is IhI! holdin9 Qlmpany for water 7103; and olhers Water &upply ravenues '04: residential, 60%;
and Wi15tewatllr utiiUO5 Ihat SOIVO approximatel~ 2.5 milion IGsi. almmorcial, 15%: industrial & other, 25% Offian1l and directors
denb in Penns~vanla, Ohio, New Jorsey, IHinoi!!, Maine, Noli/1 own 1.5% 01 tho almmon slDclt (4105 Proxy). Chainnan & CIIie! Ex-
Call1lino, Te~$, F1orila. Kentucky, and five other sial!!$. Divested ecutivo orrlCor. Nicholas DeBenedictis, Incorporated: PennsyivilI1ia.
Ouea 01 four non-waler buslnesB8S In '91; telemarketin9 group in AddlGss: 762 WlISt Lancaster AVI!IIUI!, Bryn Mawr, Pennsylvania
1)3; and olhers. Aajuired Consumers WalOl', 4199; AquaSoun:o, 19010. Telophone: 610.525-1400. Intemet: www.aquaamerica.com.
We look for Aqua America to realize New Jersey, areas in which the company
an earnings gain of about 129'0 in the already has a strong presence.. It is likely
current year, following similar increases to me for additional rate hikes, reflecting
in 2004 Continued growth will likely stem tlm cost of hose acquisitions, Also, three of
from further acquisitions and some rate these purchases represent Aqua fir'st
increases. The company could also benefit venture into the specialized area of
from a long hot summer, as reservoirs in wastewater treatment, It will enable the
the Northeast are at or near capacity company to provide internal sludge haul-
~:~~ thanks to a. wet winter~ which will enable ing and collection system maintenance for
3220 the utility to meet customer damand from its own treatment facilities in south-
36i2 its own facilities eastern Pennsylvania. If this allows
44io Management bas been fairly success- tighter cost control, it may be applied to
490 fu1 in securing rate increases. A pend- other geographic regions as opportunity al-
525 ing North Carolina case will yield a $3,,lows, perhaps providing 0. new source of
million increase if granted in fulL We be- earnings,
~:~~ Heve a realistic decision will be I'cached, This stock's Pricc/Earnings ratio is
72 based on previous outcomes in that state- somewhat above its 15-year median.
76 Utility commissions are more apt to award Consequently, despite decent earnings
85 increases due to rising capital costs rather growth prospects, this equity's appreci-
95 than operating expenses. Its ability to ation potential to 2008-2010 is Wlattrac-
1.05 lower the ratio of expenses to revenues im- tive But acquisitions of additional small
F II presses the commission. water utilities will likely continue. The
V:ar The company is further' expanding company has typically been able to in-
through acquisitions" WTR completed crease returns on those operations, due to
~~ eight purchases in the first qullI'ter of its llU'ger size and lower capital costs,
46 2005, We expect a similar rate of explln- cordingly, our projections might well prove
49 sian throughout the yellI', Most of these op- conservative,
crations are located in Pennsylvania and Marc Denton Ap1il 29, 2005
dbc oporalions: ', 2~. Nexl eamings roport ln minions, adjusted lor slock spills, Company, financial Strenglh
duo eallyMav. 181 Oividonds historically paid (D May not sum due to rounding Stock's PrieD Stability
In eoif)' March, Juno, Sept & Doc. . Div'd. PrlCD Growth Parslstonco
reinvestment plan ava~ablo (5% disccunl). Eamlngs Predictability 100
To subscribe call1-BOO.833-0046.
Exhibit No. 18
Case No" UWlw O4-
Pauline M Ahem, ALJS Consultants
Schedule (PMA-17), Page 25 of 43
CALIFORNIA WATER NYSE.cwr IFCEHT 33 30
(PIE
21 s(IraiBDI-218 t'~ 1.20 DIV'D
PRICE RAllO . Median: 17,VlD
lIfJEUNESS 4 I.mr!red 2J4IDS High;20,17.21,29.33,32,,31.4 28.26,314 37,37.Targot Price Rango
Low:14.14.16,18.20,22,,215 229 20,23.261 31.2 2008 2009 2010
SAFar 2 ImIo'ad MitiS LEGENDS
TECHNICAL 2 RamJ.v2S'05
- l.3:hOM~on~fshdMdod ~ knoros l\u:a
. " -"
RolalNa lial s.,.n~
BETA .75 (1.00. Nllbl!;I.Iat-\ SIIIt 1198 r'u'
~*"'~: No --,I
,...-
20011-10 hildld I1I1/B irrfulss I!ICII$SG1 11111 ~J""II.
...
~"I Itl'
"."
lilli,
...---.-..
Ann l Total o!Iu"Prlea Gain Ralum 1'111
.,.
High 40 (+2O"'tl 8%jUj'j;fI I IIi. '"".,,1'" Low 30 (.10'~ 2%r'"
Insldor DecisionsJJASONDJF
, .
to lily 000000001
' '
c;tIo..000000500 .'M 1-6
IIIkl 000001500 % TUT. RETURN 3105
Institutional 00cl51oa5 0""
... "'" "
. 0.'"
, ,
1115 YL AIfnL
ZQ2.DOI3QZ1III ~IU~
-.....' .
sroal .au
Poraml 1)T 22.5
\a8 4IJ share:;illS \mdcd I. .oo 3t'475 32.5
HI';;lUtO 4047 3994 4419 5)'.84.62.6
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 ZO05 2006 ;:I VALUE UNE PUB. INC.8-10
1033 10.1118 12.29 13,12,1317 14.48 15.1476 15.16,16.1733 1&37 1718 '8.15 18.95 Ravonuos perth 21.15
191 198 192 2.25 2.02 2.07 2.50 292 2.60 2.75 2.52 210 2.65 2-51 2.84 3.10 1411 Cash Row" per sb 4..10
120 125 121 1.09 1:1S 1.22 117 151 153 125 1.21 1.46 f.TS EarnIngs porsh"215
87 .!III 1.02 1.04 1.0&1.07 1.00 1.10 1.12 1.12 1.12 1.13 1.15 Dlvd Decfd per ISh 1.24
2.40 2.3'6 2.26 2.17 2.83 2.61 2.74 2.45 195 eap'ISpendlngpe1$h
10.10.10.10.90 11.56 11.12 12.22 13,13.13,43 12.90 12.95 13.14.15.16.'UO Book Value per ISh 19,
11.38 11.38 11.38 11.38 11.38 12.49 12.~12.tiZ 12.6Z 12.62 12.94 1:1.1:1.111 15.16.16.18.15 19.25 Convnoll :ins WUfg"13.011
10.11M 11:2 14.13,14.13.11.9 12.6 11,17.1!1.ZI.19.8 22.1 20.Sold nu lit""IAvgAnnIPIJ:RallO 16.0
.86 1.01 1.21 1.39 1.08 1.Z6 1.06 Vola.UI!e RelidlYe PIE RatIo
6.1'10 8r.8,..4.4".nil'.rOf AvgAM1 DlY'dYtDld 3.5%
CAPITAL STRUCTURE as of 12131104 165.182.195.186,206.4 244.246.263.2 2771 315.365 RnVl~'S l$ml1~500
Tol:ll Dobt$214.8 mill Duo In 5 VIS S11.0mlD 14.19.23.3 18.19.20.14.4 19.19.26.30.35.D Net ProfIt ISmlll)50.
LTDeb1$274 II miD. LT Intorest $18.5 m~l 40,38.90/.37.35.'\%379'1'.42.3%39.4'1.397%39.39.4M%40,Income Tax Rate 4110"
(LTinlorest lIamod: 3.8x; total inl cov: 3.4x)
.. .. .. .. .. .. .. ..
Nil AFUDC % to Net Profit NIl
49.47,45.44.469%48,9".SO.3'1.55.30/.50.48.49.51'49."'Long.Tann Debt Ratio 49.
Pension Assets-12104 $75,1 mIl,49.51.4".53.54.52.0%50.48.44.49.1'1.50.50,50.0%Convnon EauHv Rallo 5O.
Obllg.S87.6 miD.296,299.306.7 308.333.386.4021 453.1 498.565.fiIIO 650 Tob! Capital (Smlll)gOO
Pfd Stock $3.5 mill.Pfd Dlv d $.15 mil,422.2 443.460..1 478.3 515.532.0 624.697.759,800.B50 900 Nit Plant ($miID 1D5O
139.000sMres, 4,4% cumulalive($25 par~8".UY.9'1.&.5"0'-'Relum on Tobl Cep'1
Common Siock 18.3n.49S shs 12.1".13,10,11,1O_0~.7.2%8".10.10.5%RolumonShr,EquIly 11..0'
as ofJ/4JOS 12.3".14.10.8'1.11.4%10.7Z1.5'1.10.0%10.5'-'Return Oil Com Eiroliv ,to%
MARKET CAP: $600 million (SmaU Capi 1.2%2.80/.1.8%NMf 1.0%7,..1.8,..10%4.11%Reblnedto Com Eq
CURRENT POSmON 2002 2003 12/31/04 88,..69,.,58%74%70%82%119%90%91%80%63:~All DlY'ds to Hat Prof 57'-'
J:'~~ts 2.,18.BUSINESS: California Walef Serveo Group proviles regulaled and (11/001. Revenue breakdown, '04: rosidontilll. 70%: buDino~9. 18%;
Other 41.40.51.6 nonregulaled wallir sorvico to over 2 malicn poople (451 000 CIS-public aulhnrllles, 5%; industrial 4%; olhllr. 3%. '04 reported
Currenl kI!letn 43:0 433 7OA Iomers) In 75 communbies in California, Washington. and Now deprcc. rate: 2.3% Has abOlJI 837 employeB!I. Chairman: Robert
Acx:ts Payablo 23.7 238 19.MOJIico, Main fieniat smas: San Francisco Ba~ area, Saclamenlo W, FO'1. Presldont & CEO: Peter C Nelson Int.: Delaware. fIil-
Debt Duo 248 Valley, Salinas Valla~. San Joaquin VaDey & parts of Los Angelos,dress: 1120 NolIl! Flrsl Street. San Jose. California 951124598,
Othor 43.32,36.4
Current Uob,63.57,Acquired Naoonal Ulir~~ Compan~ (5104); Rio Grande Colli.Telaphono: 400-367..a:ZOO,lntornot WWW.caJwalor,com.
Filt. CII!). Co~.250%218%200"Changes within the California Public that an unspecified port,ion of the $19.
ANNUAl RATES Past Past Est'd '02-'04 Utility Commission (CPUC) paint million in gains from these sales be ailo-
of (fa1r sII)10 YI1.5Yrs.08.brighter' picture for California Water entad for the benefit oC the ratepayer's, The
R8\/enues 30%Service Group ~oing forward. The com~company denies the charges, The CPUC
Cash Flow 15%
Earnings -U.5%-65%pany has been orced to deal with regu-does not have to tolte the OMs advice,
DiYidnnds 2.,15"latory delays from the board for years, as but this is the first case of this nature
Book Value 1.0%general rate case requests often remained making timeline and outcome of a resolu-
Car.QUARTER!. Y REVEMJES ($ mOI.l Full in limbo for up to two years, However, two tion difficult to pin down We expect the
endar Mar,31 Jun.30 SepJO DecJ1 Vaal"of the main adversaries to rate increase claim to slow earnings gr'owth until the
2002 517 69.81.4 60.263.requests stepped down earlier this year matter is concluded, though. As 11 result
2003 513 68.88.69.2771 IlI1d were replaced with more business-we have lowered our 2006 earrungs es-
2004 60.889 97,69.315.friendly candidates. The landscape has nl~timalc by a dime, to $1.600 share,
2005 65.90.105 811,11 340 ready improved, as CWT received approval Growth-minded investors will want to
200&75.95.D 110 85.365 to increase rates on an aIUluul basis by look elsewhere. These untimely shares
tal.EARNINGS PER SHARE Full $4.1 million effective January, 2005. The an~ likely to underperCorm the broad mar-
andar Mar.31 Jun.30 ScpJO Dec.Year company is currently awaiting n decision kat out to late decade. Besides the un-
2002 125 on its 2004 general rate case for eight dis-certainty surrounding the motion by the
2003 121 tricts, totalin& $26,5 million.ORA, profits will likely be thwarted by
2004 1.46 However, t ere are some concerns ongoing share and debt issuances, a prod.
ZO05 ..10 .25 1.60 looming. Earlier this year, the Office of uct of rising infrastructure costs,
2006 Ratepayer Advocates (ORA) took issue However. Cal may interest those look.
Cat.QUARtERl.Y DIVIDENDS PAID Full with CWT's land sale program., The CPUC ing for some income. The company of-
endar M.ilf.31 Jun.30 ScnJO Dec.roar branch, responsible for looking out for fers an above-average dividend yield. And
2001 279 279 279 279 112 ratepayers, charged that CWT violated tbe the recent dividend hike marks the 88th
2002 112 California Water Utility Infrastructure consecutive year that it has increased its
2003 281 281 281 281 112 Improvement Act of 1996, challenging its payout, Risk-averse investors should like
2004 283 283 263 283 113 lllI1d sales since 1996. It recommended the stock's 2 (Above Average) Safety rank.
2005 265 that the company pay a small fine and Andre J. Costan2a April ,291 .2005
1tJ Basic EPS. Excl. nonrewrring gain (Ioss~
~) Dlvldonds hl1ilorically paid in mid.feb.,~C) Ind defent!d dullgcs In '001: $54 3 miU.,Company s FInancial Sirongth
, ,
(1~~ '01. 4~; 02 '02. B~ Next aamings ay, Aug,. Nov. Oiv'd rein~l!5lmcnl plan 2.961sh.Stock's Prien Slabliity
roport due late July,&vwble.
I'n milliJns. adjustad for split.
Price Growth Pera(stencB
E May nol \DIal ilus 10 change in sham!!.Earnings Predictability
To subscribe call1.aOQ.833.0046.C 20)5, Vaw Una l'ulJt:tiO!J. In:. A!I d~:' IV!.t!lVOd, Fuc:ual malllialis cbblmd !rom 5~r;IIS butDvvd to ba ,liIaUa ard Is jIIO'Iidod wJ:luM warr;JI~os 01 any kind.
TIlE PUBUSHER IS NOT AESPONSIBLEfOR AllY EnRORSOA OMISSiOnS HEREfI. This p..bra;lanls ~Iridy b Slb:.alber~Gwn, 1101\~ I1l11mnlus.u, No p;ut
of . mar be n!~ rusol:l, s'.crad iii iI Utf ptn\IIt e~ cr OM form. cr usad rcr ganl!f3!!n:J Cl rn:rie:i'l!) arry ar ek!CrcRc smb cr pmdt.d.
Exhibit No.. '
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-17), Page 26 of 43
~::7
...('~~~~
.i~
-' - . ,\:;::::' ' . ". "
~'!j;~J;im;;?(j
PrieD SI~b~lIty 95 Price Growlh Persistence 75 !~~!*(i~J~~1
.. , ,,,"'",. "'.""""y ,""..
i;rh ~~"," 101
:::,
;, "'hh'h. ,~~fi.ffii" I ;i~Wiliffiffi
_. ,
:i
"VALlIE LINE I'UDlISIIING,INc. 1996 1997 1990 1999 2000 2001 2002 2003 2004 20051;2~06
SALES PER SH 452 472 439 535 539 587 598 612 625
CASHFlOW" PER SH. 94 1,02 102 119 99 118 120 115 126
EARNINGS PER SH .60 .67 71 78 51 66 13 61
DIV'OS OECl'O PER 8M .55 .57 .58 ,60 .61 .62 .63 .65 .
CAP'L SPENDING PER SH 73 1.20 268 233 1.32 125 ! 59 1 87 263
BOOK VALUE PER SH 5.85 6.00 6.80 6.95 6,98 . 7.11 7,39 7,60 . B.
COMMON SHS OUTSrG/MILLI 8.41 6.54 9.82 10.00 10.11 10.17 10.36 10.48 11.
AVGANN'LPIERATIO 144 134 152 17,287 246 235 30.264
RELATIVE PIE RATIO 90 77 79 1 00 1 87 1 26 1 28 1 71 1 39
AVGANN'l DIV'O YIELD 6.4% 6.3% 5.4% 4.4% 4.2% 3,8% 3.7% 3.5% 3.
S!\~ES ($MILL) 38 0 40 3 43 1 53 5 54 5 59 6 6' 9 64 1 71 0
OPERATING MARGIN 36.0% 37.2% 37.0% 33.9% 32.2% 47,2% 47,1% 44.0~~ 44.
OEPRECIATlON(5MllL) 29 31 ;J.43 49 5.3 5.56 6.
NET PROm (SMILl) 5.2 5.9 6.5 ' 7.9 5.3 7.0 7.B 6.6 8.
INCOME TAX RATE 328% 349% 315% 288'\'0 331% 34.8% 33 3% ~..8% 311%
NETPROFrrMARGIN 13.6% 14.5% 15,1% 14,7% 9.7% 11.7% 12.5% ;0.3% 11.90/0:,
WORKINGCAP'LISMILL) 20 d29 146 68 d2.d9 d93 d133 d118
LONG"TERM DEBT ($Mlll) 53 a 529 760 823 ' 81 1 ae 1 875 974 1153
SHR.eaUITYISMILLI ' 51.9 56.2 11,1 14.6 74.76.4 80.6 83.7 99.
RETURN ON TOTAL CAP'6 4% 68% 5 7% 6,4% 4 9% 5 6% 6 0% 50% 5.1 %
RETURNONSHR,EQUrrY 10.0% 10.4% 9,1% 10.1% 9.1% 9.6% 7.9% 8.
RETAINED TO COM eo .8% 1 7% 1 8% 25% NMF 5% 1 3% NMF .9%,
ALL DIV'DS TO NET PROF 92~\' 85% 81% '78% 121% 94% 81% 106% 90%
. ANo. of analysts r:hanfJ!ng 110(11. ~r, ill wr rG days: 0 up, Odolm. comtnsllS S'YOiJ' eiJlTllngs IIrDl~'1I6,O~ par yea~ uSJ$ad upon 0110 III1D1yS"s /lS.flmarl1,
;;;2
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':;.t::~::!'~X;;iIN E Y~mXGW ~J~ tc Hti,f.! ~
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BUSINESS: Middlesex Water Company. through its sub-
sidiaries. engages in the ownership and operation of regu~
lated water utility systems in central and southern 'Nc\,!
Jersey, nnd in Delaware. as well as n regulated wastewater
utility in southern New Jersey, Its New Jersey water utility
system (the Middlesex System) provides water services to
retail customers in central New Jersey The Middlesex
System also provides water servIce under contnici' to mu-
nicipalities in central New Jersey The company operates the
waler supply system and wastewater system for the city of
Perth Amboy in New Jersey in partnership ~ith its !lub~id:
iary. Utility Service Affiliates (PerthAmboy), Ine Its other
New Jersey subsidiaries provide water ' and wastewater
services to residents in Southampton Township. The com-
pany's Delaware subsidiaries, comprising TIdewater Utiti~
lies, lnc, and Southern Shores Water Company. LLC, offer
water services to retail customers in New Castle. Kent. and
Sussex Counties. Has 22'0 employees Chairman: 1. RichiU:a
Tompkins Ioc.: NJ Address: 1500 Ronson Road. Iselic. NJ08830 Tel.: [phone]. .Internet:
http://www.middiesexwater,com.
MIDDLESEX WATER
:;1i!):i:Y:'Wj
:~~"
RAN~$.:::5i:'/i:3S/:
PERFORMANCE 3 ~V6"17~
Metuga
,u,ow
AvClDl7Q
1 RECEm' ITRAlUtlG RELAnvE ~1D1v'01
1 PRICE . I I PJE RATIO PIE RATIO I YlO 1288 1975 1697 1873 2004 ., .' 2123 2181963 1050 1250 1469 1373 1577 1665
NCQ-MSEX
n 25819963775
LEGENDS
12 Mos Mov AvO
. .'
Rnl PrieD Sirongih
:1--10,-2 aplllllDalor..3 spill 11/03 I .,
...
.uJlS/rJde6illCJi'r;ti;.I!C!S/ecw.O1 ~,
J;:
...
1,,;,101"i~;t~Uei
, ..
' I""''-H' I "o,
' ,;,; ,.".,..,~ '.. .
.1'
I . I JITechnical
SAFETY
BETA 65 (1.00 = M~lIko')
";;",',"
"i'
,::,'
F1mmel~1 Sirengih ~,:i!;-;'h'i:';i~B++
ANNUAL RATES
of change (per shan!) 5 YrsSafes 50%
Cash Flow 25%Earnings .,05%DMdend5 2 5%Bock Value 35':'.
ASSETS ISmU!)
Cash Assets
Recsivablos
Invento.ry (Avg cosl)
Other
Cumm! Assels
2002
.-b.Q
20.
20D:!12/31104
16.
1 Yr.
20%
120%
195%
20%
10.
fiscal
Year
12131/02
12/31103
12131104
12131105
QUARTERLY SALES (Smill.10 2Q 30
143 155 17 0 151
15.1&.0 17.6 15.159 178 19B 175
Full Properly,. Plan!
. ,
Yenr to EquIp. at C()sl
Accum Oeprcclalicn
61 9 Ne! Property
6~ 1 OIlIer
71.Tolal Assets
259,
479
2114
12.
2446
278.4
475
2:10.
17.
263.
30!! .
52.
256.4
--'lE.J.
2991
LIABILITIES (Snil1l )FU Accts Payableear Debt Due
66 Olher
73 Curren! Uab
73 ;
Fiscal
Year
'~IIOI
12/31102
12/31/03
12131/04
12131105
EARNINGS PER SHARE10 2Q 30 08 18 23 12 18 24 11 17 22 09 16 29 12 .24 .28 LONG.TER~' DEBT AND EQUITY
QUARTERLY DiViDENDS PAID Full as 0112131/04
10 . 20 30 40 Year Tol~r Debt 5127.4 m!ll Due In 5 Yrs $19.4 mill
158 ISO 158 161 64 lT Dobt $115.3 mill.
161 161 161 165 ,65 Including Cap. Leases None
165 165 165 168 (54% 01 C2p1)168 .66 Leases, Uncapllallz!!d AnnUallen!ols ~one April 29. 200S
183
9.2
296
13.
277
12.
278
Cal-
endar
2002
2003
2004
2005
4705
19 '~I High
17531 Low
' .,...
5 --
. .
7~~'PiNA.
. ,. ., ..
22.4/NA
' ,;';
. i::',.
. ,... ..
~oltl ~/guf(m
I!te ccn.scrnl1U5
cDln!ngtl
. flstlntn
~,,~ .
'!'!d. u.s~!1 rh~ :
roe!:nr P~~IIS,
PIE ,?r'(J~.
..,,. "."...... .- ,
, PerislonLlabllitySSSmm,().IVS,S5,miliin'D3 INSTITUTIONAL DECiSioNS TOTAL SHAREHOLDER RETURN
20'04 30'04 40'04 PIli Siock 54 1 mill Pld Dlvd Paid $.3 mH!. Dividends pIUs approciurloD lIS O( :y:j,120CJS
10. Buy 19 12 16 12~.!l1 Capl)
' '. .
to Sell 13 17 12 3 Mos. I;) Mos. 1 Yr. :I Vrs. 5 Vrs~
Common SIeck 1'35B,i72 shares
. .
: H!tfs(QOO) ,
,.,,
)9)1.. : 1662, . .1861 . 144%cICaDI\ ..31%~ 3.09~\' .-9.13% 15.07% . .48.21%
~5 Yaluii lJto.o Fu!JI!5h1n~. Ioc.' A:1 rights rO501Yecs. Fat1,w m~l~nal is cbtnined IItI1I SOI;ltCS believed 10 be rc~:!!:lo IItYJ =1" pr::'.ided withOOI WO'I".n\ic5 III any kind.
FUEU5HER IS /JOT f,fSFOtlSl!!LE FOR AIIV ERRORS OR OMISSIOnS HEREIN. This publ1oOcn l5 stric'.Jy lor subscnbors OWII. non-ccmrnereaJ. in'ami!! u~e. ria pi!l1 II.: tUIII:.IIII . : IIBiICIU.'IIIIy,r;8
~ ! rMV tNll\!OmdlJQ!lj. ,C"..dd, stcn:d a' 1Ians:l1i~ed 'II JfIY prini~d. el~ic or oilier I(:III!. or ~wj reI 99N'r:llir.q or ~!nJ ~ prinled 01 elC'"~ r..tiC'm 5QriQ) or
Exhibit No. 18
Case No. UWI"O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17), Page 27 of 43
PriC1! Growth Persistence NMF fM~~~;iJi~~1
EnrnlngsPredlctabUity NMF ~'
:d;;;
;::,::'/~
,,111111 11161 ti~fl r
;; . !
~~I
0 VALUE .J.,INE PUBLISHING, INC. 1996 1997 . 1998 1999 2000 2001 . 2002 2003 2004 2005/2006
REVENUES PER SH
". ..
-, 6,07 3 08 3.07 325 327
CASH FLOW" PER SH
"" ..
-. 1.79 8e 8S 97
EARNINGS PER SH
." .,. .- -.
1 24 65 60 70
DIV'O DEed, PER Sit
,. .. .
98 .51 .53 .55 .
CAP'LSPENDING PER SH
.. -. ..
211 112 99 161 376
BOOK VALUE PER SH
.. ..
- 10.66 5.69 5.85 6.08 6.98 .
COMMON SItS OUTST'G (MIll)
..
' 3.04 6.31 6,36 6,42 6,
AVG ANN'l PIE RATIO
..
17 9 26 9 24 5 25 7
RELATive' PIE RATIO
.~ -. '-
92 1 47 1 40 1 35
AVG ANN'l DIV'O YIELD
..
- 4,3% 3.3% 3.2% 3.
REVENUES (SMIL.I..) ..
," --
185 194 196 209 225
NET PROFIT (SMILL)
.-
.. 3.8 4,D 3.8 4.4 4.
INCOME TAX' RATE -- 35.70/0 358% 349% 348% 367%
AFUOC % TO NET PROFIT
..
.. 2.2% 3.
LONG,TERM DEBT RATIO
.. .- .. . ..
502%. 477% 467% 434% 425%
COMMON EQUITY RATIO
-- ..
'- 49.8% 52.3% 53.3% 56.6% 57.
TOTAL CAPITAL (SMILL)
.. ..
652 686 699 69.836
NET PLAtfr'ISMILL) -
.-
- 97,0 102.3 106,7 116.5 140.
RETURN ON TOTAl.. CAP'
..
79% 7 9% 7 4% B 5% 7.
RETURNONSHR.EQUITY - 116% 112% 102'% 114% 100%
RETURN ON COM EQUITY
.. - ".
6~\' 11.2% 10.2% 11.4% 10.
RETAINEDTOCOMeQ -
.. -.
25o/d 25% 13% 26% 2.
ALl. DIV'DS TO NET PROF
.. ..
78% 78% eso;;. 77% 79%
ANo. ollJtJaly~l~ cIrlUJ!1ing eam.ast. ;n last 16 da~s: a'up, OCG'WI. consensus yoaream!fJfj9 fjltlWl/1 7:n~ per rea.-. 8EJa~ed upon analysIs' Gsrimates. EJiUed upon t1I1e ilna/yS/'S esdmaJo-
A/~;'A.:.U:?;;
::::
:(;;;31 ~I 94 ~T ~ Y~W~! ~tH'~!W;! r;;~::.!;:~;M'
;~);\::'
j St ;1
BUSINESS: York Willer Company engilges in the im-
pounding, purification, and distribution of Willer in York
County. Pennsylvania The camp.any hqs t\Vo res-:rvou.'
1 ake Wi1liams and 1 tikI: Redman. which together bold up to
275 billion gallons 01 water. It supplies water for domestic
commercial. industrial. and fire protection purposes. The
company.serves approxim,!lcly 149,000 people in 31 mu-
nicipalilies in York County. ~ennsylYllnja It supplies
through the company's own distribution syslem to the city
of York; the boroughs of New York Stale In lv1nrch, York
Water Company entered into an ngreement to acquire the
water system of Spring Groye Borough thot serves custom-
ers in York County In the same month, the company also
agreed 10 acquire the WIlIer system of Mountain View Water
Company that serves customers and a 220.unil mobile home
park in Conewago Township, York County HilS 95 employ-
ees. Chainnan: William Moms. Inc: PA Address: 130 East
Market Street. York, PA 17405 T~1.: [phone].
Internet hup:llwww yorkwater.com.
. .,.-...--... ",",-"----,-~,-,,.- .
YORK.WATER CO NDQ-YORW
':::L,~~iW:X;WfY; RA. ~ !(ljg~j':::i~ ;il~;;
PERFORMANCE 2
AVllIiIglI
I RECENT 1TRAllilIG 1RELATIVE IDIV'01
.I PRICE . I I PIE RATIO I I I PIE RATIO I YlD 1 ,(0
::..
1533 2017 2023 21 04850 1230 14 00 1650
Technical
AbllvuAvllr;!!iO
AIIovaAvor;!QII ;;,;;:r:?~;:::;,.:
LEGENDS
12 Mo~ Mol/Avo, . , , Rei Prieo SlJenglhlor-l spfilSl02 ~d 3IfJ ~t5
;r;3T'
:~;;:::'~:j . ~ .
II~'
It''lll.
1:I '~g:;;~~;1SAFETY
. ..
BETA .1WU'iXI:!..(1.00 = Morhel)
;"\,~i';",:'H
;::q;(;i);:~L:
FInancial Strength
Price Slablllty :~W~?;f;~,:;
ANNUAL RATE
al.chjlnge (per share) 5 V~s.Revenues
...
Cash Flow
...
Earnings Dividends -Beok Value
ASSETS (Smlll.
Cash Assets
Rt-ci:-iviibles
Inventory
Other
Current Assets
~Q3 12131/0-1
: .
--A
2002
2:11
--A
1 Yr.
5'!'.
45%
75%
14 5%
.... '
FIscal
yilar
12131/02
121~1io3
12/31/04
12/31105
QUAf\TERL" SAI.fS (Smlll )
10 . 20 30 '47 (9 S3 8 5.58 53 .5.6
Full Prcptlrty. PlantYear & Equip, at ~sl
Accum Depreclillloq
19.6 Net Property
209 Other
225 Tola! Assets
139.
, 226
1165
1275
1643
243
140.
-1!:.1
156.
1277
. 210
1067
2:Q
flO.
F II LIABILITIES" (SmllJ )
Acc\s Payableear Debt Duo
65 Other
60 Currant !Jab
FIscal
, Year
12/31/01
12/31102
12/31/03
12131/04
12/31/05
. Gal,
endar
EAANItIGS PER SHARE10 20 . 30 ;3 14 .23 14 15 18 12 16 .24 18 16 1B .
19 .20 .21
OUARTERLY OIVIDENDS PAID Full10 20 3a 40 Year Total Debl $51.9 mill Due In 5 Yrs $19.2 mill13 13 .13 13 52 LT Debt S35.6 miD.
135 135 135 135 54 Including Cap Lease!! 57 mill
(43% 01 Cap145 145 145 145 58 leases, Uncapltallzl!d Annual rentals None
.156
2.6
-1&-1:.1
14.
1.8
16.
212
LONG.TERM DEBT AND EQUITY
as of 12/31104
2002
2003
2004
2005 Ap/'il 29. 2005
Pension Liability 530 mill in '0.1 'IS. Uono in '
Pld Dlvd Paid None
4708
22.841 High
175DI Low
. 8
", .
.s'OA.BI.87C
. .
27,5125.
Bold f/gLlITIQ
Dro canst/oslJ:!
oilfllln!J5
ItSUm~(u5
Dnd, uslno rhlt
mct/nf prlCf/$.
piE nrlio9.
, .
3 Mas 6 Mos.1 Yr.
TOTAL SHAREHOLDER RETURN
Divide plw. app(e(la~ as of 3/31120CS
3 Vrs.5 Vrs
125.57%
INSTITUTIONAL DECISlotlS
20'04 30'01t 40'04 Pfd Slack Nenn.~ e~ Cammon Stock 6,887.047 shares10 SeD (S7% 01 Cap1)
HI(J's(OOO) 541 430 443 .1.03% 11,61%
C2005 YolJuo Uno Putjrl1ir.~. 1rJ:. AB ri~:tls lomwO. Facl1J3! m~leri.;j is ct:liilned lrem ~~urte5 bc~lIVed 10 t:e re5olbl.) and ;s pIO'fidcd y,i!hcut wa~es cI 3IIy kit.
THE PUEUSH:n IS flOT AESPONSISU:: FOR MI'f ERRORS OR CIM5510tlS HERE!IJ, This putlit:UJon is ~'ridl\' ler suI:;.::iI;o,~ own, /1G11-CCIT,msreal. 1/11cmallJ.!iO, 110 pall
01 il m~y 00 r~d. tuc~. Siornd arlrw:rr.:t'.ed in iI111 pi~ 1!!ECftr'.'c CI eiller or u!od f.1r ~!1'.cr;rt;r.q or 11'.3J~e:'.n!J In'/ prinlcd el~ ~IQtion, !OI'l'Cll 01 ptOd\I(1
. .
3.46%
. .
Exhibit No, 18
Case No" UWI-O4.
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17), Page 28 of 43
35.88%
:ll1I1!!;lCki!!lur!ltI
United Water Idaho. Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
U~lna an Adiusted Total Market Approach
Proxy Group of Three Value
LIne Proxy Group of Six C. A.Line (Standard Edition)
No.Tumer Water Com anies Water Com anies
Prospective Yield on Aaa Rated
Corporate Bonds (1)1 oRi 1 %
Adjustment to Reflect Yield Spread
Between Aaa Rated Corporate
Bonds and A Rated Public
Utility Bonds 0.4 (2)4 (2)
Adjusted Prospective Yield on A Rated
Public Utility Bonds 65 %65 %
Adjustment to Reflect Bond
Rating Difference of Proxy Group (3)(3)
Adjusted Prospective Bond Yield
Equity Risk Premium (4)4.4
Risk Premium Derived Common
Equity Cost Rate 10.8 %10.9 %
Notes:(1) Derived in Note (3) on page 33 of this Schedule, I..a., page 6 of Schedule (PMA-9) (Updated).
(2) The average yield spread of A rated public utility bonds over Aaa rated corporate bonds of 0.43%,
rounded to 0.4% from page 31 of this Schedule. Le., page 4 of Schedule (PMA-9) (Updated).
(3) No adjustment necessary as the average Moody's bond rating of the proxy group Is Kl..
(4) From page 32 ofthis Schedule, i e., page 5 of Schedule (PMA-9) (Updated)
Exhibit No., 12
Case No. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-9), Page 1 of 9
(Updated)
Exhibit No. '
Case No.. UWI-O4~
Pauline M.. Ahern, AUS Consultants
Schedule (PMA-17), Page 29 of 43
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United Water Idaho. Ine,
Judgment of Equity Risk Premium 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 Six C
A. Turner Water
Com))anies
Proxy Group of Three
Value Line (Standard
Edition) Water
Comf:Janies
Calculated equity risk
premium based on the
total market using
the beta approach (1)43%
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 3 %4.4 %
Notes: (1) From page 33 of this Schedule, Le., page 6 of Schedule (PMA-9) (Updated)..
(2) From page 35of this Schedule, i e" page 8 of Schedule (PMA-9) (Updated)
Exhibit No.. 12
Case No. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-9), Page 5 of 9
(Updated)
Exhibit No.. 18
Case No.. UWI~O4-
Pauline Moo Ahem, AUS Consultants
Schedule (PMAv17), Page 32 of 43
UQlted Water Idaho. Inc.
Derivation of Equity Risk Premium Based on the TolBl Market Approach
Using the Beta for the Proxy Group of Six C. A. Turner Water Companies and the
Proxy Group of Three Value Una (Standard Edition) Water Companies
Line
No.
Proxy Group of Six C. A,
Turner Water Companies
Proxy Group ofThree Value
Line (Standard Edition) Water
Companies
Arithmetic mean tolBl return rate on
the Standard & Poor's 500 Composite
Index -1926-2004 (1)12.4 %12.4 %
Arithmetic mean total return rate on
Aaa and Aa Corporate Bonds
1926-2004 (2)(6.(6,
Historical Equity Risk Premium 3 %3 %
Forecasted 3-5 year Total Annual
Market Return (3)12.3 %123 %
2 %6.2 %
Prospective Yield an fo;Ja Rated
Corporate Bonds (4)
Forecasted Equity Risk Premium
Average of Historical and Forecasted
Equity Risk Premium (5)
Adjusted Value LIne Beta (6)
63 ok 30,(,
3 %6 %Beta Adjusted Equity Risk Premium
Notes:(1) From Stocks, Bonds, Bills and Inflation - 2005 Yearbook Valuation Edition, Ibbotson Associates, Inc ,
Chicago, IL. 2005
(2) From Moody's Industrial Manual and Mergent Bond Record Monthly Update.
(3) From Note 1. page 39 of this Schedule. I.e.. 3 of Schedule (PMA-10) (Updated),
(4) Average forecast based upon six quarterly estimates of Naa rated corporate bonds per the consensus of
nearly 50 economists reported in Blue Chip Financial Forecasts dated May 1. 2005 (see page 34 of this
Schedule. La... page 7 of Schedule (PMA-9) (Updated)). The estimates are detailed below..
Second Quarter 2005
Third Quarter 2005
Fourth Quarter 2005
First Quarter 2006
Second Quarter 2006
Third Quarter 2006
55 %
6.4
1 %Average
(5) Average of the Historical Equity Risk Premium of 6 .3% from Une No.3 and the Forecasted Equity Risk
Premium of 6 .2% from Line No 6 ((6.30k + 6.2%) /2 = 6.250,(,. rounded to 6..3%),
(5) From page 36 of this Schedls. Le., page 9 of Schedule (PMA-9) (Updated)
Exhibit No. 12
Case No. UWI-O4-
Pauline M.. Ahem, AUS Consultants
Schedule (PMA-9), Page 6 of 9
(Updated)
Exhibit No. 18
Case No.. UWI-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17) I Page 33 of 43
12 . BLUE CHIP FINANCIAL FORECASTS. MAY 1 . 200S I
Consensus Forecasts or U.S. Interest Rates And Key Assumptions
~-----------------
Hi story
-------------------
Consensus Forecosts~Quarter)y A vg.
---
A Ycrage For Week Ending- -A vcrnge For Month-- btest 2Q 3Q 4Q 1 Q ZQ
Apr.n Apr.IS Anr.Am:.! Mar. Feb. Jan. 102005 201)5 2005 2005 2006 2006 2006
78 2.76 2.81 2.77 2.63 2.50 2.28 2.47 3,0 3.4 3.8 4.
5..75 5.75 7S 5.,75 5..58 5.49 525 44 6.0 6,4 6..8 7., 7.2 7..
16 3.14 312 3.10 3..02 2.82 267 284 3..2 3.7 4.4.2 4.4.5
89 2.81 2.74 2.74 2.67 2.49 2.33 250 3.0 3.5 3.8 4.1 4,
2.,90 2.7'7 2 78 2..82 2..80 2.58 237 2.58 3.3..4 3.8 4.0 4.4.3
3.13 3.15 3.13 3.15 3..09 285 2.68 287 3.3 3.7 4.0 4,2 4.3 4.
28 3.32 3.33 3.38 3.30 3..03 2.86 3,06 3..5 3..4.2 4.4 4.5 4.
57 3..65 3,74 384 373 3.38 322 3.44 3,8 4.2 4.4 4.6 4.7 4.
90 4.02 4.13 424 4.17 3.77 3..71 388 4.2 4,.5 4.7 4.9 5.0 5.
26 437 4.48 4.55 4.50 417 422 430 4.5 4..8 5.0 5.1 5.3 5.
468 4,,79 4.87 493 4.89 4,61 4.77 476 4,.9 5,2 5..4 5.5 5.6 5.
27 5.36 5.43 5.44 5.40 5.20 5.36 532 5.5 5.8 6.1 6.2 6.4 6.01 608 613 6..17 6.06 582 6..02 5.97 6.2 6..5 6.8 7.0 7.7:1.
4..42 4,49 456 4.61 4.57 435 4AI 4.44 4.6 4.8 5.0 5.1 5.5.3
80 5.91 5.93 6.04 5,93 5.63 5.71 5.76 6.0 6.3 6.5 6.6 6.7 6.
--.-
History- .--- Consensus Forccasts-QuorteI'ly Avg.2Q 3Q 4Q lQ 2Q 3Q 4Q lQ. 2Q 3Q 4Q 1Q 2Q
Key Assumptions 2003 2003 2003 2004 2004 2004 2004 2005 :Z005 :ZOOS 2006 ~O06 2006
MlljorCurrcncy Ind~)t 908 90.7 87.85.3 88.865 81.9 81.3 80.7 80.2 79.7 79.6 79.7 79.ReatGDP 41 7,42 4.5 3.3 4..38 3.1 3.4 3.5 3.5 3,3.4 3.4
GDPPricclndcx 1.1 1.4 1.6 28 3.1.4 23 3.3 2.2:1 2.1 2.3 2.2 2.
Consumer Price Index 0.22 0.9 4.4.4 L.7 3.4 2.,3 2.5 2,5 2.5 2.6 2,
lndividual panel tntmbers' forecasts ore: CD pages 4 through 9. Historical data for inlere!it rates except L.IBOR is from Ft4cnll Reservc Re1CDSC (FRSR) H,IS. LIBOR quotes
available nom The Wall SlrectJoumal. Definition:: reponed beft arc same BS those in FRSR B.IS TrCllSUl')' yields ore ftportt4 on II eonstanl mlliurity basis. Historiclll data for
the US. Ft4r:ral Reserve B 011 rd'lI Major Currency Index is from FRSRH.lO IInd G 5. HislOriclll dnln for Renl GDP and GDP Chained Price Index IIrcfrom the Burenu ofEco-
nomic: Annlysis (BRA), COnSW11tf Pritt: Ind~ (CPI) history is from the Dcpllrtmtllt ofl-nbor s BUttOU orL-nbar Slnlistic:s (8(.S).
Interest Rates
Federal Funds Rote
Prime Rote
LmOR, 3-mo..
Commercial Paper, I-mo..
Treasury biU, 3-mo.
Treasury bill, 6-mo,
T rellSW'Y bill, 1 yr.
Treasury note, 2 )lr..
r rensury note, 5 yr,
Treasury note, IO'yr.
Treasury note, 20 yr.
Corporate AM bond
Corporate BIlB bond
State & i.ocol bonds
Home mortgage rote
s. Treasury Yield Curve
Week ended Aprll22. 2005 and Year Ago va.
202005 and 3Q 2000 Conson5U$ forecasts
700650
550
i 4.
If
250
200
150
3mo
.50
450
3..
2..
050
20yr
-YoorAgo
-X- Week undo!! 4/'22105
-+-Consensus 302006
--+- Comcnsus 2Q 2005
5yr 1OyrSma1yr2yr
Maturities
Corporate Bond Spreads
As cfwoofc ended April 22. 2005 ..00
375350
325
300275
250
225
200
175
150
125
100
2005
400375350
325
300
275
250
~ 225
~ 200
-!I 175
aI 150125
100
1997
ADa Corporate Band YIeld
minus; 10-Yollr T-Bond Vlold
1998 1999 2000 2001 2002 2003 2004
s. 3--Mo. T-Bills & 10-Yr. T-Note Yield
750
7..
550
5..
350
2.00
10
1997 199O
(Quarterly Average) HlslDry ForcCl!5t
7..650
' 4.
,- 4..
/~y.
350
11,/ . 3.
2.50
150
05010 1Q 10 1Q 10 10 10
'999 2000 2001 2002 2003 2004 2005 2DO6
s. Treasury Yield Curve
As of week ended April 22. 2005 400375
10.YearT..aond Yield ~F\
~:'
1\ 1
. ~~g
mlnu5 3-Monlh T-Bin Yield
\ ~ ~~g
V '
\~
200
IJ
f'
I.' 175
\ \/\
tOY\I
~ ~~
\J\.,
~ j:\ \
I t ,'vd
. ~g" ~
100
1998 1999 2000 2001 2002 2003 2004 2005
400375350325300275250225200175150
-N 125
&I 100
-50
100
1997
Exhibit No. 18
Case No. UWI-O4-
Pauline M. Ahem,AUS Consultants
Schedule (PMA-17), Page 34 of 43
LIne
No.
Time Period
Notes: ( 1 )
United Water Idaho. Inc,
Derivation of Mean Equity Risk Premium Based on a Study
Using Holding Period Returns of Public Utilities
Arithmetic Mean Holding Period
Returns (2):
Standard & Poor's Public
Utility Index
Arithmetic Mean Yield on:
A Rated Public Utility Bonds
Equity Risk Premium
Over A Rated
Public Utility Bonds
AUS Consultants -
Utility Services
Study W
1928-2003
10.8 %
2 %
S&P Public Utility Index and Moodys 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
(2)
Exhibit No. '
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-9), Page 8 of 9
(Updated)
Exhibit No.. 18
Case No" UW1-O4-
Pauline M. Ahem, AUS Consultants
Schedule (PMA-17), Page 35 of 43
United Water Idaho. Inc.
Value Line Adjusted Betas for
the Proxy Group of Six C A. Turner Water Companies and the
Pro Grou of Three Value Line Standard Edition Water Com anies
Value Line
Adjusted
Beta
Proxy Group of Six C. A
Turner Water Companies
American States Water Co..
Aqua America, Ine
Artesian Resources Corp
California Water Service Group
Middlesex Water Company
York Water Company
Average
Proxy Group of Three Value
.b!.!!~JStandard Edition) Water
American states Water Co
Aqua America, Ine"
California Water Service,Group
Average
070
NA = Not Available
Source of Information: Value Line Investment Survey.
April 29, 2005
Exhibit No" 12
Case No. UWI-O4-
Pauline M" Ahem, AUS Consultants
Schedule (PMA-9). Page 9 of 9
(Updated)
Exhibit No.. 18
Case No., UWI.O4-
Pauline M. Ahem AUS Consultants
Schedule (PMA-17). Page 36 of 43
United Water Idaho. Inc.
of the Capital Asset Pricing Model 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 Six C. A-
Turner Water Companies
Proxy Group of Three Value LIne
(Standard Edition) Water
Companies
Risk-Free Rate (1)
Traditional Capital Asset Prietn" Model
54 %4 %
2..Average Company..specific
Market Premium (2)
Capital Asset Pricing Model
Derived Company Equity
Cost Rate
EmDlrical Capital Asset PricinQ Model
5..4 %504
10.2 %
Risk-Free Rate (1)
Average Company-Specific
Market Premium (2)
Capital Asset Pricing Model
Derived Company Equity
Cost Rate 10.8 %
Conclusion 10.5 %
10.6 %
5.4
11,1 %
10.9 %
Notes:(1) Developed in note 2 of page 39 of this Schedule. ie.., page 3 of Schedule (PMA-10) (Updated)
(2) Developed on page 38 of this Schedule. ie-. apge 2 of Schedule (PMA-10) (Updated)..
Exhibit No.. 12
Case No. lJWI~O4~
Pauline M. Ahem, AUS Consultants
Schedule (PMA-10), Page 1 of 3
(Updated)
Exhibit No. 18
Case No. UWI~O4~
Pauline M. Ahem, AUS Consultants
Schedule (PMA~17), Page 37 of 43
Proxy Group of Six C. A Turner
Water Companies
Amorican States Water Co..
Aqua America, Inc
Artesian Resources Corp.
California Water Service Group
Middlesex Water Company
York Water Company
Average
Proxy Group ofThrea 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, Ine
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,lnc.
California Water Service Group
See page 39 for notes.
United Water Idaho. Inc.
Indicated Common Equity Cost Rate Through Use
of the Capital Asset Priclna Model
Value Line
Adjusted
Beta
0.70
0..
0,,
0.75
070
0..
Company-Specific
Risk Premium
Based on Market
Premium of 7.1% (1)
CAPM Result
Including
Risk.Free
Rate of 5.4D~ (2)
Traditional Capital Asset Pricina Model (3)
50 %
5..
4..
8 %
10.4 %
10.
10.7
10.
10.2 % (3)
0 %
2 %
10.4 %
107
10.
10.6 % (3)
EmDirical Capital Asset Pricing Model (5)
5 %
5..
5..
4 %
10.9 %
11.
11..
10..
10.
10.8 % (3)
55 %
7 %
109 %
112
11,
11.1 % (3)
Exhibit No. 12
Case No" UWI-O4-
Pauline M" Ahern, ALJS Consultants
Schedule (PMA-10), Page 2 of 3
(Updated)
Exhibit No.. 18
Case No. UWI-O4-
Pauline M" Ahern, AUS Consultants
Schedule (PMA-17), Page 38 of 43
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 Six C.. A. Turner Water Companies and the
Proxy Group of Three Value Line (Standard Edition) Water Companies
Adjusted to Reflect a Forecasted Rlsk~Free Rate and Market Return
Notes:
(1)From the three previous month-end (Feb, 'OS - Apr. '05), as well as a recently available (Apr, 29
2005), Value Une Summarv & Index, a forecasted 3-5 year total annual marketretum of 12,.3% 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 LIne average forecasted annual dividend
yield.
The 3-5 year average total market appreciation of 50% produces a four.year average annual
return of 10.67% ((1..) . 1).. When the average annual forecasted dividend yield of 1.67% Is
added, a total average market return of 12.34%, rounded to 12., (1.67% + 10.67%) is derived.
The 3~month and spot forecasted total market return of 123% minus the risk-free rate of
5..4% (developed In Note 2) is 6 9% (12,3% ~ 5..4%). The Ibbotson Associates calculated market
premium of 7.2% for the period 192&-2004 results from a total marRet return of 12.4%, less the
average income return on long-term U.S. Government Securities of 5.2% (12.4% - 5.2% = 7.2%),
This Is then averaged with the 6.9% Value Line market premium resulting in a 705%, rounded to
1 % market premium, The 7.12% market premium is then multiplied by the beta in column 1 of
page 38 of this Schedule I i ,, Schedule (PMA-10), page 3 (Updated)
(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 Forecasts dated October 1,
2004 (see page 34 of this Schedule. i.e, page 7 of Schedule (PMA-9) (Updated)) The estimates are
detailed below:
Second Quarter 20OS
Third Quarter 2005
Fourth Quarter 2005
First Quarter 2006
Second Quarter 2006
Third First Quarter 2006
Average
20-Year
Treasury Bond Yield
5.4
5.4O
(3)The traditional Capital Asset Pricing Model (CAPM) is applied using the fonowing formula:
Rs = RF + 13 (RM ~ RF)
Where Rs = Return rate of common stock
RF = Risk Free Rate
13 = Value Une Adjusted Beta
RM = Return on the market as a whole
(4)Includes only those indicated common equity cost rates which are above 8., i e.. 200 basis points
above the prospective yield of 6 5% on A rated Moody's public utility bonds (from page 29 of this
Schedule, ie , page 1 of Schedule (PMA-9) (Updated)).
The empirical CAPM is applied using the following formula:
Rs = RF + .25 (RM - RF ) + .7513 (R,.. - RF )
(5)
Where Rs = Return rate of common stock
RF = Rlsk.Free Rate
~ = Value Line Adjusted Beta
RM = Return on the market as a whole
Source of Information:Value Une Summary & Index
Blue Chip Financial Forecasts May 1 . 2005
Value LIne Investment Survey, April 29, 2005. Standard Edition and Small and Mld.Cap
Edition
Stocks. Bonds. Bills and Inflation - Valuation Edition 2005 Yearbook
Ibbotson Associates. Inc., Chicago, Il
Exhibit No.. '
Case No. UWI-O4-.
Pauline M.. Ahern, ALJS Consultants
Schedule (PMA-10), Page 3 of 3
(Updated)
Exhibit No. '
Case No. UWI-O4-
Pauline M. Ahern, AUS Consultants
Schedule (PMA-17), Page 39 of 43
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