20110803Ahern Di, Exhibits.pdf

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Dean J. Miler (ISB 1968)
McDEVIT & MILLER LLP
420 West Bannock Street
P.O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
joeßVmcdevitt -miler . com
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Attorneys for Applicant
BEFORE TH IDAHO PUBLIC UTILIS COMMISSION
IN THE MATTER OF TH APPLICATION
OF UNID WATER IDAHO INC. FOR
AUTHORIT TO INCREASE ITS RATES
AN CHAGES FOR WATER SERVICE IN
TH STATE OF IDAHO
Case No. UW-W-ll-D2
BEFORE TH IDAHO PUBLIC UTILIS COMMISSION
DIRCT TESTIONY OF PAULIE M. AHRN, CRR
PRINCIPAL
AUS CONSULTANS
TABLE OF CONTENTS
Page No.
Introduction ......... ....... .... ..... ... .... ........ ........... ......... .......... .... ...... .......... ... ..... .... .................... ........ ... .... ................. ... .... ..1
Sumary........................................................................................................................................................................2
General Principles ... ...... ........... ....... ........................ ..... ....... ......... .......................... ......... ............... .... .... ........... ............ 6
Business Risk........................................................ ....................................... ........... ... ..................... .... .......... ... ............... 7
Financial Risk..............................................................................................................................................................21
United Water Idaho, Inc. .............................................................................................................................................24
Proxy Group .................................... .......... ..................................... ............. .............. ......... ..... ............................. .......24
Common Equity Cost Rate Models .............................................................................................................................25
The Effcient Market Hypothesis (EMH) ................................................................................................................25
Discounted Cash Flow Model (DCF) ......................................................................................................................27
The Risk Premium Model (RPM)............................................................................................................................33
The Capital Asset Pricing Model (CAPM)..............................................................................................................43
Cost of Common Equity Models Applied to Comparable, Domestic, Non-Price Reguated Companes ....................49
Expected Retu On Book Equity For The Proxy Group Of Domestic, Non-Price Reguated Companies.................51
Cost Rates For The Proxy Group Of Domestic, Non-Price Reguated Companies
Based Upon the DCF, RPM and CAPM ...................................................................................................................52
Financial Risk Adjustment...........................................................................................................................................55
Business Risk Adjustment ...........................................................................................................................................57
Appendix A - Professional Qualifications of Pauline M. Ahern
1 Introduction
2 Q. Please state your name, occupation and business address.
3 A. My name is Pauline M. Ahem. I am a Principal of AUS Consultants. My business
4 address is 155 Gaither Drive, Suite A, Mt. Laurel, New Jersey 08054.
5 Q. Please summarize your professional experience and educational backgound.
6 A I have offered expert testimony on behalf of investor-owned utilties before twenty-six
7 state regulatory commissions on rate of return issues, including but not limited to
8 common equity cost rate, fair rate of retu, capital structure issues, credit quality issues
9 and the like. I am a graduate of Clark University, Worcester, MA, where I received a
10 Bachelor of Arts degree with honors in Economics in 1973. In 1991, I received a Master
11 of Business Administration with high honors and a concentration in finance from Rutgers
12 University. The details of these appearances, my educational background, presentations I
13 have given and articles I have co-authored are shown in Appendix A supplementing this
14 testimony.
15 On a monthly basis, I also calculate and maintain the American Gas Association
16 (A.G.A.) Gas Index under contract with the AG.A., which serves as the benchmark
17 against which the performance of the American Gas Index Fund (AGIF is measured.
18 The A.G.A. Gas Index and AGIF are a market capitalization weighted index and fund,
19 respectively, comprised of the common stocks of the publicly traded corporate members
20 oftheA.G.A.
21 I am also the Publisher of AUS Utility Reports, responsible for supervising the
22 production, publication, distrbution and marketing of its various reports.
23 I am a member of the Society of Utilty and Regulatory Financial Analysts
Ahern, Di 1
United Water Idaho Inc.
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(SURF A) where I serve on its Board of Directors, having served two terms as President,
from 2006 - 2008 and 2008 - 2010. Previously, I held the position of Secretaryrrreasurer
from 2004 - 2006. In 1992, I was awarded the professional designation "Certified Rate
of Return Analyst" (CRR) by SURFA, which is based upon education, experience and
the succssful completion of a comprehensive written examination.
I am also an associate member of the National Association of Water Companies,
serving on its Finance/ Accounting/axation Committee; a member of the Energy
Association of Pennsylvana, formerly the Pennsylvania Gas Association; and a member
of the American Finance and Financial Management Associations.
What is the purpose of your testimony in this proceeding?
The purpose of my Direct Testimony is to provide testimony on behalf of United Water
Idaho, Inc. (U) relative to the overall rate of retur including common equity cost
rate which it should be aforded the opportunity to ear on its jurisdictional rate base.
Have you prepared an exhibit which supports your recommended common equity
cost rate?
Yes. It has been marked for identification as Exhibit No. 1 and consists of Schedules 1
17 though 14.
18 Summary
19 Q. What is your recommended common equity cost rate?
20 A. I recommend that the Idaho Public Utilties Commission (IPUC) or the Commission)
21 authorize the Company the opportunty to ear a common equity cost rate of 11.05%.
22 However, the Company is. requesting that the Commission authorize UWD the
23 opportunity to ear a conservatively reasonable common equity cost rate of 10.50%. A
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common equity cost rate of 10.50% results in an overall rate of return of 8.43% based
upon the consolidated capital structure at April 30, 2011 of United Waterworks, Inc.
(UW or the Parent) which consisted of 47.49% long-term debt at a cost rate of 6.15%
an 52.15% common equity. The overall rate of return is sumared in Table 1 below:
Table 1
Type of Capital Weighted Cost RateRatiosCost Rate
Long-Term Debt
Common Equity
47.49%
52.51
6.15%
10.50
2.92%
5.51
Total 100.00%8.43%
Please summarize your recommended common equity cost rate.
My recommended common equity cost rate of 11.05% is summarized on Schedule 1,
page 2. As a wholly-owned subsidiary of UWW, UWID's common stock is not publicly
traded. Thus, a market-based common equity cost rate canot be determined directly for
the Company. Consequently, in arriving at my recommended common equity cost rate of
11.05%, I have assessed the market-based common equity cost rates of companies of
relatively similar, but not necessarily identica risk, Le., proxy group(s) for insight into a
recommended common equity cost rate applicable to UW and suitable for cost of
capital purposes. Using companies of relatively comparable similar risk as proxies is
consistent with the principles of fair rate of return established in the HopeI and Bluefield2
cases, adding reliabilty to the informed expert judgment necessary to arrive at a
recommended common equity cost rate. However, no proxy group(s) can be selected to
Federal Power Commssion v. Hope Natual Gas Co., 320 U.S. 591 (1944).
2 Bluefield Water Works Improvement Co. v. Public Servo Comm'n, 262 U.S. 679 (1922).
Ahern, Di 3
United Water Idaho Inc.
1 be identical in risk to UW. Therefore, the proxy group(s)' results must be adjusted, if
2 necessar, to reflect the unique relative financial and/or business risk of the Company, as
3 wil be discussed in detail subsequently.
4 Consistent with the Efficient Market Hypothesis (EMH), which wil be discussed
5 in more detail below, my recommendation results from the application of market-based
6 cost of common equity models, the Discounted Cash Flow (DCF) approach, the Risk
7 Premium Model (RM) and the Capital Asset Pricing Model (CAPM) for the proxy
8 group of nie water companies whose selection wil be discussed subsequently. In
9 addition, I also selected a group of domestic, non-price regulated companies comparable
10 in total risk to the nie water companies, applying the DCF, RPM and CAPM to them as
11 well as assessing projected retus on book common equity or parner's capital In
12 accordance with the opportnity cost standards encapsulated in Hope and Bluefield.
13 The results derived from each are as follows:
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Table 2
Proxy Group
of Nine
Water
Companies
Discounted Cash Flow Model
Risk Premium Model
Capital Asset Pricing Model
Cost of Equity Models Applied to
Comparable Risk, Non-Price
Regulated Companies
9.54%
10.33
10.42
13.45
Indicated Common Equity Cost
Rate Before Adjustment for
Financial Risk, Flotation Costs
and Business Risks 10.90
Financial Risk Adjustment (0.23)
Business Risk Adjustment 0.40
Indicated Common Equity Cost Rate 11.07%
Recommended Common Equity
Cost Rate 11.05%
Mter reviewing the cost rates based upon these models, I conclude that a common
29 equity cost rate of 10.90% is indicated before any adjustment for financial and business
30 risks related to UWI's lower financial risk and its smaller size relative to the proxy
31 group of nine water companes. The indicated common equity cost rate based upon the
32 nine water companies was adjusted downward by 23 basis points (a negative 0.23%) to
33 reflect UW's slightly lower financial risk relative to the nine water companies, and
34 upward by 40 basis points (0.40%) to reflect UW's increased business risk as noted
35 above. These adjustments wil be discussed subsequently. Afer adjustment, the financial
36 and business risk-adjusted common equity cost rate is 11.07% which, rounded to 11.05%,
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United Water Idaho Inc.
1 is my recommended common equity cost rate.
2 General Prnciples
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What general principles have you considered in arrving at your recommended
common equity cost rate of 11.05 %.
In unregulated industries, the competition of the marketplace is the principal determinant
of the price of products or services. For regulated public utilties, regulation must act as a
substitute for marketplace competition. Assurng that the utilty can fulfill its obligations
to the public while providing safe and adequate service at all times requires a level of
earnings suffcient to maintain the integrty of presently invested capital as well as
permitting the attraction of needed new capital at a reasonable cost in competition with
other firs of comparable risk, consistent with the fai rate of return standards established
by the U.S. Supreme Cour in the previously cited Hope and Bluefield cases.
Consequently, marketplace data must be relied upon in assessing a common equity cost
rate appropriate for ratemakg puroses. Therefore, my recommended common equity
cost rate is based upon marketplace data for a proxy group of utilties as similar in risk as
possible to UW, based upon selection criteria which wil be discussed subsequently.
Just as the use of the market data for the proxy group(s) adds reliability to the informed
expert judgment used in arriving at a recommended common equity cost rate, the abilty
to use multiple common equity cost rate models also adds reliabilty when arriving at a
company-specific common equity cost rate.
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United Water Idaho Inc.
1 Business Risk
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Please define business risk and explain why it is important to the determination of a
fair rate of return.
Business risk is the riskiess of a company's common stock without the use of debt
and/or preferred capital. Examples of such general business risk to all utilties, Le., water,
electric and natural gas distribution, include the quality of management, the regulatory
environment, customer mix and concentration of customers, service territory growth,
capital intensity, size, and the like, which have a direct bearing on earnings.
Business risk is important to the determination of a fair rate of return because the
greater the level of risk, the greater the rate of return investors demand, consistent with
the basic financial precept of risk and return.
Please discuss the business risks facing the water industry in general.
Water is essential to life and unike electricity or natural gas, water is the only utilty
product which is ingested. Consequently, water quality is of paramount importance to the
health and well-being of customers and subject to additional health and safety regulations.
In addition, unike many electrc and natural gas utilties, water companies serve a
production function in addition to the delivery functions served by electric and gas
utilties.
Water utilties obtain supply from wells, aquifers, surface water reservoirs,
streams and rivers, or though water rights. Thoughout the years, well supplies and
aquifers have been environmentally threatened, with historicaly minor purifcation
treatment having given way to major well rehabiltation, treatment or replacement.
Simultaneously, environmental water quality standards have tightened considerably,
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United Water Idaho Inc.
1 requirg multiple treatments. In addition, drought, water source overuse, runoff,
2 theatened specieslhabitat protection and other factors are limting supply availabilty. As
3 for water rights, their lives are tyicaly finite with renewabilty uncertain. In the course
4 of procuring water supplies and treating water so that it meets Safe Drinking Water Act
5 standards, water utilties have an ever-increasing responsibilty to be stewards of the
6 environment from which supplies are drawn, in order to preserve and protect the natural
7 resources of the United States.
8 Moreover, electric and natual gas companies, where transmission and distribution
9 is separate from generation, generally do not produce the electricity or natural gas which
10 they transmit and distribute. In contrast, water utilties are typically vertically engaged in
11 the entire process of acquirg supply, production (treatment) and distribution of water.
12 Hence, water utilties require signifcant capital investment in sources of supply and
13 production (wells and treatment facilities), in addition to transmission and distribution
14 systems, both to serve additional customers and to replace aging systems, creating a major
15 risk facing the water and wastewater utility industry.
16 Value Lie Investment Surey3 (Value Lie) observes the following about the
17 water utilty industry:
18 Water utilty stocks have been met with some resistace since our January
19 review. Indeed, all but a single issue covered in our Survey gave back
20 some ground. And the exception advanced less than 10% in price. As a
21 result, the group, as a whole, has slipped into the bottom half of the pack
22 for Timeliness afer residing in the top quarile last time around.
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24 Wall Street's apprehension is not surrising, given that most of the
3 Value Line Investment Surey, April 22, 2011.
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companies reported disappointing earings in the fourth-quarer. (Firt-
quarter results were not released as of the day of this report). Indeed,
revenue growt, although healthy thans to continued progress on the
reguatory front, seemed to fall short of expectations. Earnngs,
meanwhile, were fuher frstrated by the increasing costs of doing
business.
The group's growt prospects going forward are not overly impressive
either. With the exception of American Water Works, not a single stock in
this industry stands out for Timeliness or 3- to 5-year price appreciation
potential. The companies here face stiff headwinds on the cost front, as
many of the countr's water systems are aging and increasing in the need
for repairs and maintenance. Financial constraints are of further concern,
with the financial moves that are likely to be made in order to maintain
infrastructues dilutive to share-net growth.
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Despite a more favorable regulatory climate, providers stil have troubles
facing them. Inastructues are decaying rapidly and, in many cases, need
complete overhauls. The costs to make the repairs are exorbitant many
operating in this space do not have the funds on hand to foot the bil.
Indeed, most are strapped for cash and wil have to look to outside
fianciers to keep up. Although consolidation trends present unique
opportnities for those with the financial capabilties to thow their hat in
the rig, such as Aqua America, others are just trying to stay afoat.
Unfortately, the financing costs to stay in business, whether it be
additional share or debt offerigs, wil probably drown most and dilute
shareholder gains moving ahead.
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The bulk of the stocks in this group have lost any luster they had from a
growth perspective. Although the share-price weakness makes for more
attractive entr points, only American States Water stands out for
appreciation potential. That said, the dividends of many help make for
worthwhile total return appeal in some cases. Again American States
Water, along with the American Water Works, and newcomer SJ Corp.,
top the list on ths account. .... That said, we do th that there are better
options out there for investors lookig to add an income producing stock
to the portfolios.
In addition, because the water and wastewater industr is much more capital-intensive
than the electric, natual gas or telephone industres, the investment required to produce a
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dollar of revenue is greater. For example, as shown on page 1 of Schedule 2, it took
$3.82 of net utilty plant on average to produce $1.00 in operating revenues in 2010 for
the water utilty industr as a whole. For UW specifcally, it took $6.50 of net utilty
plant to produce $1.00 in operating revenues in 2010. In contrast, for the electric,
combination electric and gas and natural gas utilty industries, on average it took only
$2.16, $1.70 and $1.27, respectively, to produce $1.00 in operating revenues in 2010.
The greater capital intensity of water utilties is not a new phenomenon as water utilties
have 'exhibited a consistently and significatly greater capital intensity relative to electric,
combination electric and gas and natural gas utilities during the ten years ended 2010, as
shown on page 2 of Schedule 2. As financing needs have increased over the last decade,
the competition for capital from traditional sources has increased, making the need to
maintain financial integrty and the abilty to attract needed new capital increasingly
important. Because investor-owned water utilties typically do not receive federal funds
for inastrctue replacement, the challenge to investor-owned water utilties is
exacerbated and their accss to financing is restricted, thus increasing risk.
The National Association of Regulatory Commissioners (NARUC) has also
highighted the chalenges facing the water and wastewater industr stemming from its
capital intensity. NARUC's Board of Directors adopted the following resolution in July
2006:4
WHEREAS, To meet the challenges of the water and wastewater industry which
may face a combined capital investment requirement nearing one trilion dollars over a
20-year period, the following policies and mechansms were identified to help ensure
sustainable practices in promoting needed capital investment and cost-effective rates: a)
"Resolution Supporting Consideration of Reguatory Policies Deemed as 'Best Practices''', Sponsored by
the Commttee on Water. Adopted by the NARUC Board of Directors, July 27, 2006.
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United Water Idaho Inc.
1 the use of prospectively relevant test years; b) the distrbution system improvement
2 charge; c) construction work in progress; d) pass-through adjustments; e) staff-assisted
3 rate cases; f) 'consolidation to achieve economies of scale; g) acquisition adjustment
4 policies to promote consolidation and elimination of non-viable systems; h) a streamlined
5 rate case process; i) mediation and settlement procedures; j) defined time frames for rate
6 cases; k) integrated water resource management; i) a fair return on capital investment;
7 and m),improved communications with ratepayers and stakeholders; and
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9 WHREAS, Due to the massive capital investment required to meet current and
10 future water quality and infrastrcture requirements, adequately adjusting alowed equity
11 returns to recogne industry risk in order to provide a fair return on invested capital was
12 recognzed as crucial...
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14 RESOLVED, That the National Association of Regulatory Utilty Commissions
15 (NARUC), convened in its July 2006 Sumer Meetings in Austin, Texas, conceptually
16 supports review and consideration of the inovative reguatory policies and practices
17 identified herein as "best practices;" and be it further
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19 RESOLVED, That NARUC recommends that economic regulators consider and
20 adopt as many as appropriate of the reguatory mechansms identified herein as best21 practices...
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23 UWID itself is facing expected significant capital investment as it projects net
24 capital expenditures of $66,501,000 for the remainder of 2011 through 2016, representing
25 an increase of approximately 27% over 2010 net utilty plant of $246,007,714.
26 The water utilty industry also experiences lower relative depreciation rates.
27 Lower depreciation rates, as one of the principal sources of internal cash flows for all
28 utilties, mean that water utilty depreciation as a source of internally-generated cash is far
29 less than for electrc, natual gas or telephone utilties. Water utilities' assets have longer
30 lives and, hence, longer capita recovery periods. As such, water utilties face greater risk
31 due to infation which results in a higher replacement cost per dollar of net plant than for
32 other types of utilties. As shown on page 3 of Schedule 2, water utilties experienced an
33 average depreciation rate of 3.0% for 2010 with UW experiencing an identical
34 depreciation rate of 3.0%. In contrast, in 2010, the electric, combination electric and gas,
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and natural gas, experienced average depreciation rates of 3.7%, 3.7% and 3.4%,
respectively.
As with capital intensity, the lower relative depreciation rates of water and
wastewater utilties is not a new phenomenon. As shown on page 4 of Schedule 2, water
utilty depreciation rates have been consistently and much lower than those of the electric,
combination electric and gas and natural gas utilties. Such low depreciation rates signify
that the pressure on cash flows remains significantly greater for water utilties than for
other types of utilties.
In addition, not only is the water utilty industry historically capital intensive, it is
expected to incur signcant capital expenditue needs over the next 20 years. Prior to
the recent economic and capital market tuoil, Stadard & Poor's (S&P) noted5:
Standard & Poor's expects the aleady capita-intensive water utilty
industry to become even more so over the next several years. Due to the
agig pipeline inrastructure and more stringent quality standards, the U.S.
Environmental Protection Agency's (EPA) foresees a need for $277 bilion
to upgrade and maintain U.S. water utilties through 2022, with about
$185 bilion going toward infrastructure improvements. In addition, about
$200 bilion wil be needed for wastewater applications, which suggests
increased capita spending to be a long-term trend in this industry.
In line with these trends, many companies have anounced aggessive
capital spending programs. Forecast capital spending priarily focuses on
infrastructure replacements and growth initiatives. Over the past five
years, capital spending has been equivalent to about three times its
depreciation expense. However, companies are now forecasting spending
to be at or above four times depreciation expense over the intermediate
term. For companies in reguatory jurisdictions that provide timely cost
recovery for capital expenditures, the increased spending is likely to have a
minial effect on financial metrics and ratings. However, companies in
areas without these mechanisms, earings, and cash flow could be
Stadard & Poor's, Credit Outlook For U.S. Investor-Owned Water Utilities Should Remain Stable in
2008 (Januar 31, 2008) 2, 4.
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negatively affected by the increased spending levels, which over the longer
term could har a company's overall credit profie.
Due to the high level of capital spending, U.S. investor-owned water
utilties do not generate positive free cash flow. This, coupled with the
forecast increase in capital spending over the intermediate term, wil
require additional accss to capital markets. We expect rated water
companes to have enough financial flexibilty to gain that accss. Ratings
actions shouldn't result from ths increased market activity because we
expect companies to use a balanced fiancing approach, which should
maintain debt near existing levels.
Specifcally, the EPA states the following6:
The surey found that the total nationwide infastructure need is $334.8
billon for the 20-year period from Januar 2007 through December 2026.
With $200.8 bilion in needs over the next 20 years, transmission and
distribution projects represent the largest category of need. This result is
consistent with the fact that transmission and distribution mains account
for most of the nation's water infastrctue. The other categories, in
descending order of need are: treatment, storage, source and a
miscellaneous category of needs called "other". The large magntude of the
national need reflects the challenges confronting water systems as they
deal with an inastrctue network that has aged considerably since these
systems were constructed, in many cases, 50 to 100 years ago.
In its 2009 infastructue Fact Sheei7 published by the American Society of Civil
Engineers (ASCE) they state:
America's drng water systems face an anual shortfall of at least $11
bilion to replace aging facilties that are near the end of their useful lives
and to comply with existing and futue federal water regulations. This does
not accunt for growth in the demand for drig water over the next 20
years. Leakg pipes lose an estimated 7 bilion gallons of clean drinking
water a day.
Exacerbating the impact on the risk of water utilties relative to energy utilties
"Fact Sheet: "EPA's 2007 Drig Water Infrastrctue Needs Surey and Assessment", United States
Environmental Protection Agency, Offce of Water, Februry 2009, 1.
7 2009 American Society of Civil Engineers, Report Card for America's Infrctue 2009.
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1 related to their increased capital intensity and projected large capital expenditure needs is
2 the declinng consumption of water by their ratepayers. Declining water usage results in
3 declining revenues at the same time that various fixed costs such as capital needs
4 continue to increase as previously discussed, but also operating costs are increasing. As
5 Company Witness Gregory P. Wyatt notes in his direct testimony, UW has been unable
. 6 to achieve its authorized retu on common equity (ROE) for the six years ending 2010,
7 earning an average ROE of 7.21 % relative to authorized ROEs in the range of 10.30% -
8 10.40%. Mr. Wyatt attributes ths inabilty of UW to ear its authorized ROE to a
9 continuing decline in water consumption per customer of approximately 23% from 2003
10 though 2010. Additionally, Company Witness Paul Herbert shows that, on average,
11 UW experienced an anual decline in consumption of4.7% from 2001 through 2011.
12 Mr. Wyatt also notes that the continuing decline in water consumption results in a
13 significant shortfall in anual revenues, because approximately 71 % of UWID' s anual
14 revenue requirement is derived from the variable volumetric portion of customer bils,
15 thus increasing the risk that UW wil continue to not achieve its authoried ROE.
16 Water utility capital expenditures as large as projected by the EPA and ASCE wil
17 require signcant financing. The three sources typically used for financing are debt,
18 equity (common and preferred) and cash flow. All three are intricately linked to the
19 opportuty to earn a suffcient rate of return as well as the abilty to achieve that return.
20 Consistent with the Bluefield and Hope decisions discussed previously, the return must be
21 sufficient enough to maintain credit quality as well as enable the attraction of necessary
22 new capital, be it debt or equity capitaL. If unable to raise debt or equity capital, the utilty
23 must tum to either retained earngs or free cash flow, both of which are directly linked to
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1 earng a suffcient rate of retu. If either is inadequate, it wil be nearly impossible for
2 the utility to invest in needed infastructure. Since all utilties typically experience
3 negative free cash flows, it is clear that an insuffcient rate of return can be fiancially
4 devastating for utilities and for its customers, the ratepayers. Page 5 of Schedule 2
5 demonstrates that the free cash flows (funds from operations minus capital expenditures)
6 of water utilties as a percent of total operating revenues has been consistently more
7 negative than that of the electric, combination electric and gas and natural gas utilities for
8 the ten years ended 2010. Magnfyng the impact of water utilities' negative free cash
9 flow position is a continued inabilty to achieve what may already be an insufficient
10 authorized rate of return on common equity, as will be discussed subsequently.
11 Consequently, as with the previously discussed capital intensity and depreciation
12 rates, significant capital expenditures relative to net plant as well as the consistently and
13 more signifcantly negative free cash flow relative to operating revenues of water utilties
14 indicates greater investment risk for water utilties relative to electric, combination
15 electric and gas and natural gas utilties.
16 In view of the foregoing, it is clear that the water utility industr's high degree of
17 capital intensity, low depreciation rates and signcat negative free cash flow, coupled
18 with the need for substantial inastructure capital spending, requires reguatory support in
19 the form of adequate and timely rate relief, as recogned by NARUC, so water utilties
20 wil be able to succssfuly meet the challenges they face.
21 In addition, the Water Research Foundation reports:
22 Pricing that recovers the costs of building, operating and maintaining the
23 systems is absolutely essential to achieving sustainability. Driking water
24 and wastewater utilties must be able to price water to reflect the full costs
Ahern, Di 15
United Water Idaho Inc.
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of treatment and delivery. 8
Are there other indications that the water utilty industr exhibits more investment
risk than the electric, combination electric and gas and natural gas utilty
industries?
Yes. Schedule 3 presents several such indications: total debt / eargs before interest,
taxes, depreciation and amortization (EBITA); fuds from operations (FO) / total debt;
funds from operations / interest coverage; before-income tax / interest coverage; earned
ROEs and eared v. authorized ROEs for each utilty industry for the ten years ended
2010. The increasing proportion of total debt to EBITA for the water utilties indicates
signicantly increasing and greater fiancial risk for water utilties, which began the most
recent ten years below that of electric, combination electric and gas and natural gas
utilities.
As noted previously, S&P evaluates total debt as a percentage of EBITA and
FFO as a percentage of debt in the bond / credit rating process. Page 1 of Schedule 3
shows that total debt / EBITA has risen steadily for water utilties for the ten years
ended 2010, dropping only slightly for 2010. Notwithstanding the decline in 2010, total
debt / EBITA is now higher than that for electric, combination electric and gas and
natural gas utilties. Page 2 shows that FFO / total debt has steadily declined for water
utilities over the decade ending 2010, while rising for the other utilty groups. The
consistently low level of FFO / total debt for the water utilties, is a fuher indication of
the pressures upon water utilty cash flows and the increased relative investment risk
which the water utilty industry faces.
8 Coomes et al. North American Water Usage Trends Since 1992, Water Research Foundation, 2010.Ahern, Di 16
United Water Idaho Inc.
1 Pages 3 and 4 of Schedule 3 confrm the pressures upon both cash flows and
2 income faced by water utilties. Page 3 shows that FFO / interest coverage for water,
3 electric, combination electric and gas and natural gas utilties followed a similar pattern to
4 FFO interest coverage for the ten years ended 2010. FFO interest coverage remained
5 relative consistent for water utilties, rising and falling between 2.0 and 3.0 times during
6 the period. A similar pattern was exhibited by electric utilties. However, FFO / tota debt
7 for combination electric and gas as well as natural gas utilties rose during the ten years,
8 exceeding that of water utilties significantly in 2009 and dropping back somewhat in
9 2010. Page 4 shows that before-income tax coverage interest coverage for water utilties
10 also remained relatively stable, fallng below that of gas utilties in 2002 and below that
11 of electric and combination electric and gas utilities between 2005 and 2006, where it
12 remained for the remaider of the ten years. In 2010, in all likelihood due to the "Great
13 Recession" and the economy's curently nascent, fragile recovery from it, before-income
14 tax interest coverage for water, electric and combination electric and gas utilties has
15 converged at slightly lower than 3.0 times, while natual gas utilties continue to enjoy a
16 signficantly greater before-income tax interest coverage of approximately 4.25 times in
17 2010. Once again, the consistency and relatively low level of interest coverage ratios for
18 water utilties are further indications of the pressures upon cash flow which water utilties
19 face, confrming greater investment risk for water utilties relative to electric,
20 combination electric and gas and natural gas utilties.
21 A final indication of the relative investment risk of water utilties compared with
22 electric, combination electric and gas and natural gas utilities, are trends in eared and
23 authorized ROEs. As shown on page 5 of Schedule 3, eared ROEs, on average, for water
Ahern, Di 17
United Water Idaho Inc.
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utilties have generally been below those of electric, combination electric and gas and
natural gas utilties during the ten years ended 2010. They have consistently been lower
for the last five years. However, such a comparson would not be complete without a
comparison of eared ROEs with authoried ROEs, as shown on pages 6 and 7 of
Schedule 3. The authorized ROEs are those reported in AUS Utility Reports for the last
month of each year representing the authorized ROEs in effect during the previous year,
rather than the outcomes of rate cases decided during the year. Hence, these authorized
ROEs represent the revenue requirements of each year which give rise to the earned
ROEs in each year. Water utilties generally, consistently and dramatically earned far
below their authoried ROEs, whie electric and combination electric and gas utilties
earned above their authoried ROEs in some years and below in others. In contrast,
natural gas utilties generally, consistently and dramatically earned above their authorized
ROEs. Notwithstanding the closing of the gap between the average authoried ROEs for
the various utilty groups over the ten year period, for the majority of the period, water
utilties have failed to ear their average authoried ROE with earned ROEs significantly
lower than authorized, a likely contributing factor to the greater risk indicated by the
previously discussed coverage metrics.
In view of all of the foregoing, it is clear that the investment risk of water utilities
has increased over the most recent ten years and that water utilties curently face greater
investment risk relative to electric, combination electric and gas and natual gas utilties.
Does UWID face additional extraordinary business risk?
Yes. In addition to the risk due to continuing declinng per customer consumption and
thus increased pressure on UWID's abilty to ear its authorized ROE, UW faces
Ahern, Di 18
United Water Idaho Inc.
1 additional extraordinary business risk due to its smaller size relative to the proxy group.
2 As discussed above, the greater the level of risk, the greater the rate of return demanded /
3 required by investors, consistent with the basic financial precept of risk and return.
4 Therefore an upward adjustment to the indicated common equity cost rate is necessary to
5 reflect the smaller size of UW.
6 Q. Please explain how UWID's smaller size increases its business risk relative to the
7 proxy groups.
8 A.As wil be discussed subsequently, UW's smaller size, $142.597 milion in estimated
9 market capitalization relative to the average market capitalization of $1.195 bilion for the
10 nine water companies, shown on page 1 of Schedule 14, indicates greater relative
11 business risk because all else equal, size has a bearing on risk. It is clear, too, that on a
12 relative basis, water utilties on average are smaller in terms of market capitalization than
13 electric, combination electric and gas and natural gas utilties, as demonstrated on page 5
14 of Schedule 3, which shows the market capitalization of each utility for the ten years
15 ended 2010.
16 Q.Please explain why size has a bearing on business risk.
17 A.It is conventional wisdom, supported by actual returns over time, that smaller companies
18 tend to be more risky causing investors to expect greater returns as compensation for that
19 risk. Smaller companies are simply less able to cope with significant events which afect
20 sales, revenues and earings. For example, in general, the loss of revenues from a few
21 larger customers would have a greater effect on a small company than on a much larger
22 company with a larger, more diverse, customer base. Moreover, smaller companies are
23 generaly less diverse in their operations as well as experiencing less financial flexibilty.
Ahern, Di 19
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In addition, the effect of extreme weather conditions, i.e., prolonged droughts or
extremely wet weather, wil have a greater affect upon a small operating water utility than
upon the much larger, more geographically diverse holding companies.
Further evidence of the risk effects of size include the fact that investors demand
greater returns to compensate for the lack of marketabilty and liquidity of the securities
of smaller firms. That it is the use of funds invested and not the source of those funds
which gives rise to the risk of any investment is a basic financial principle9. Therefore,
because UWID is the reguated utilty to whose jurisdictional rate base the overall cost of
capital allowed by the Commission wil be applied, the relevant risk reflected in the cost
of capital must be that of UW, including the impact of its small size on common equity
cost rate. As noted previously, UW is smaller than the average proxy group company
based upon the results of a study of the market capitalization of the nine water companies
as shown on Schedule 14.
In addition, BrighamIO states:
A number of researchers have observed that portfolios of small-firms have
eared consistently higher average retus than those of large-fis stocks;
ths is called "small-firm effect." On the surace, it would seem to be
advantageous to the small firms to provide average returns in a stock
market that are higher than those of larger firms. In reality, it is bad news
for the small fi; what the small-firm effect means is that the capital
market demands higher returns on stocks of small firms than on otherwise
similar stocks of the large firms. (italics added)
9 Brealey, Richard A. and Myers, Stewar C., Priciples of Corporate Finance (McGraw-Hil Book Company,
1988) 173 198.
10 Brigham Eugene F., Fundamentals of Financial Management, Fifh Edition (Te Dryden Press, 1989) 623.
Ahern, Di 20
United Water Idaho Inc.
1 Financial Risk
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Please define financial risk and explain why it is importnt to the determnation of a
fair rate of return.
Financial risk is the additional risk created by the introduction of senior capital, Le., debt
and preferred stock, into the capital structure. The higher the proportion of senior capital
in the capital structure, the higher the financial risk which must be factored into the
common equity cost rate, consistent with the previously mentioned basic financial
principle of risk and return, i.e., investors demand a higher common equity return as
compensation for bearing higher investment risk.
In May 2009, S&P expanded its Business Risk / Financial Risk Matrix in an effort
to augment its independence, strengthen the rating process and increase S&P's
transparency to better serve its markets (see page 4 of Schedule 4). S&P initially
published its electrc, gas, and water utilty ratings rankings in a framework consistent
with the manner in which it presents its rating conclusions across' all other corporate
sectors in November 2007. S&P then statedll:
Incorporating utilty ratings into a shared framework to communcate the
fudamental credit analysis of a company fuers the goals of
transparency and comparabilty in the ratigs process.
* * *
The utilties rating methodology remains unchanged, and the use of the
corporate risk matri has not resulted in any changes to ratings or
outlooks. The same five factors that we analyzed to produce a business
risk score in the familar 10-point scale are used in determining whether a
utility possesses an "Excellent," "Strong," "Satisfactory," "Weak," or
"Vulnerable" business risk profile.
Standad & Poor's - Ratigs Direct - "U.S. Utilties Ratings Analysis Now Portyed In The S&P Corporate
Ratigs Matr" (November, 30, 2007) 2.Ahern, Di 21
United Water Idaho Inc.
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In May 2009, S&P revised its Business Risk / Financial Risk Matrx with the new
business risk/fiancial risk matri shown in Table 1 on page 2 of Schedule 4 and financial
risk indicative ratios for utilties shown in Table 2 on page 4. Notwithstanding the
metrics published in Table 2, S&P stated:
The rating matrix indicative outcomes are what we typically observe - but
are not meant to be precise indications or guarantees of future rating
opinions. Positive and negative nuances in our analysis may lead to a
notch higher or lower than the outcomes indicated in the various cells of
the matrix.
As shown on Schedule 8, page 2, the average S&P bond rating (issuer credit
rating), business risk profie and financial risk profile of the nine water companies are
spli A+ (A), Excellent and Intermediate.
Please describe UWlD's degree of f'mancial risk relative to the proxy group of nine
water companies.
Although UW's ratemakg capita strctue ratios and hence, financial risk are similar
to the nine water companes on average, UWID's ratemaking long-term debt ratio at April
30, 2011 of 47.49% is lower than the average long-term debt ratio of the nine water
companies, 50.97%, at December 31, 2010. Therefore, UW's financial risk, although
similar, is somewhat lower than that of the nine water companies. Consistent with the
previously mentioned financial principle of risk and return, the lower financial risk of
UW must be reflected in the recommended common equity cost rate. Consequently, a
downward adjustment of 23 basis points (a negative 0.23%) was made to the indicated
common equity cost rate of 10.90% based upon the nie water companies before
adjustmènt for financial risk and business risk. The derivation of this adjustment wil be
discussed subsequently.
Ahern, Di 22
United Water Idaho Inc.
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Nevertheless, can the combined business risks, i.e., investment risk of an enterprise,
be proxied by bond and credit ratings?
Yes, similar bond ratings/issuer credit (bond/credit) ratings reflect and are representative
of similar combined business and fiancial risks, Le., total risk faced by bond investors.
Although specifc business or fiancial risks may difer between companies, the same
bond/credit rating indicates that the combined risks are similar, albeit not necessarily
equal, as the purose of the bond/credit rating process is to assess credit quality or credit
risk and not common equity risk. Risk distinctions within S&P's bond rating categories
are recogned by a plus or minus, i.e., within the A category, an S&P rating can be at
A+, A, or A-. Similarly, risk distinctions for Moody's ratings are distinguished by
numerical rating gradations, i.e., within the A category, a Moody's rating can be AI, A2
and A3. For S&P, additional risk distinctions are reflected in the assignent of one of
the six business risk profiles and six financial risk profies, shown in Tables 1 and 2 on
pages 2 and 4 of Schedule 4.
In sumar, it is clear that S&P's bond/credit rating process encompasses a
qualitative analysis of business and financial risks (see page 3 of Schedule 4). While not
a means by which one can specifically quantify the diferential in common equity risk
between companies, bond/credit ratings provide a useful means with which to
compare/diferentiate investment risk between companies because they are the result of a
thorough and comprehensive analysis of all diversifable business risks, i.e., investment
risk.
Ahern, Di 23
United Water Idaho Inc.
1 United Water Idaho. Inc.
2 Q. Have you reviewed the rate filing of UWID?
3 A. Yes. UW provides service to approximately 85,000 customers in Ada County, which
4 includes Boise and Eagle, ID. UWID is a wholly-owned subsidiary of UW, which in
5 turn is a wholly-owned subsidiary of United Water Resources, Inc. (UWR).
6 Consequently, the Company's common stock is not publicly traded.
7 Proxy Group
8 Q.
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Please explain how you chose the proxy group of nine water companies.
The basis of selection for the proxy group was to select those companies which meet the
following criteria: 1) they are included in the Water Company Group of AUS Utilty
Reports (July 2011); 2) they have Value Lie, Reuters, Zacks or Yahoo! Finance,
consensus five-year earnings per share (EPS) growth rate projections; 3) they have a
positive Value line five-year dividends per share (DPS) growth rate projection: 4) they
have a Value Line adjusted beta; 5) they have not cut or omitted their common dividends
during the five years ending 2010 or through the time of the preparation of this testimony;
6) they have 60% or greater of 2010 total operating income derived from and 60% or
greater of 2010 total assets devoted to reguated water operations; and 7) at the time of
the preparation of this testimony, they had not publicly anounced that they were
involved in any major merger or acquisition activity.
The following companies met these criteria: American States Water Co.,
America Water Works Co., Inc., Aqua America, Inc., Artesian Resources Corp.,
California Water Service Corp., Connecticut Water Service, Inc., Middlesex Water
Company, SJW Corporation and York Water Company.
Ahern, Di 24 .
United Water Idaho Inc.
1 Q.Please describe Schedule 5.
2 A.Schedule 5 contains comparative capitalization and financial statistics for the nine water
3 companies for the years 2006-2010.
4 Durg the five-year period ending 2010, the historically achieved average
5 earnings rate on book common equity for the group averaged 7.51%. The average
6 common equity ratio based upon total permanent capital (excluding short-term debt) was
7 49.71 %, and the average dividend payout ratio was 63.57%.
8 Total debt as a percent of EBITDA for the years 2006-2010 ranged between 4.56
9 and 9.07 times, averaging 5.90 times, while funds from operations relative to total debt
10 ranged from 15.04% to 17.10%, averagig 16.25%.
11 Common Equity Cost Rate Models
12 The Efficient Market Hypothesis (EMH)
13 Q.Please describe the conceptual basis of the EMH.
14 A.The EMH, which is the foundation of modern investment theory, was pioneered by
15 Eugene F. Famal2 in 1970. An efficient market is one in which secuty prices reflect all
16 relevant inormation al the time, with the implication that prices adjust instantaneously to
17 new information, thus reflecting the intrinsic fundamental economic value of a security.13
18 The generally-accepted "semi strong" form of the EMH asserts that all publicly
19 available information is fuly reflected in securities prices, i.e., that fudamental analysis
20 canot enable an investor to "out-perform the market" in the long-ru as noted by Brealey
12 Fama, Eugene F., "Effcient Capita Markets: A Review of Theory and Empircal Work" (Joural of Finance,
May 1970) 383-417.
13 Mori, Roger A, New Reguatory Finance (Pblic Utilty Reports, Inc., 2006) 279-281.
Ahern, Di 25
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and MyersI4. The "semistrong" form of the EMH is generally held to be tre because the
use of insider information often enables investors to earn excessive returns by
"outperformg the market" in the short-ru. Ths means that all perceived risks and
publicly-available inormation are taken into accunt by investors in the prices they pay
for securities, such as bond/credit ratings, discussions about companies by bond/credit
rating agencies and investment analysts as well as the discussions of the various common
equity cost rate methodologies (models) in the financial literature. In an attempt to
emulate investor behavior, no single common equity cost rate model should be relied
upon exclusively in determining a cost rate of common equity and the results of multiple
costs of common equity models should be taken into account. In addition, the academic
literature provides substantial support for the need to rely upon more than one cost of
common equity model in arriving at a recommended common equity cost rate.
IS
Are the cost of common equity models you use market-based models, and hence
based upon the EMH?
Yes. The DCF model is market-based in that market prices are utilized in developing the
dividend yield component of the modeL. The RPM is market-based in that the bond
ratings and expected bond yields used in the application of the RPM reflect the market's
assessment of bond/credit risk. In addition, the use of betas to determine the equity risk
premium also reflects the market's assessment of market/systematic risk as betas are
14 Brealey, Richard A. and Myers, Stewart C., Principles of Corprate Finance First Edition, (McGraw-Hil,
1996) 329.
15 Morin 428-431.
Brigham, Eugene F. and Gapenski, Louis C., Financial Management - Theory and Practice Fourh Edition,
(The Dryden Press, 1985) 256.
Brigham, Eugene F. and Daves, Philip R., Intermediate Financial Management, (Thomson-Southwestern,
2007) 332-333.Ahern, Di 26
United Water Idaho Inc.
1 derived from regression analyses of market prices. The CAPM is market-based for many
2 of the same reasons that the RPM is market-based i.e., the use of expected bond (Treasury
3 bond) yields and betas. The process of selecting the comparable risk non-utilty
4 companies is market-based in that it is based upon statistics which result from regression
5 analyses of market prices and reflect the market's assessment of total risk. Therefore, all
6 the cost of common equity models I utilize are market-based models, and hence based
7 upon the EMH.
8 Discounted Cash Flow Model (DC F)
9 Q.
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What is the theoretical basis of the DCF model?
The theory underlying the DCF model is that the present value of an expected future
stream of net cash flows during the investment holding period can be determined by
discounting those cash flows at the cost of capita, or the investors' capitalization rate.
DCF theory indicates that an investor buys a stock for an expected total return rate which
is derived from cash flows received in the form of dividends plus appreciation in market
price (the expected growth rate). Mathematicaly, the dividend yield on market price plus
a growt rate equals the capitalization rate, i.e., the total common equity return rate
expected by investors.
Which version of the DCF model do you use?
I utilize the single-stage constant growth DCF model because, in my experience, it is the
most widely utilized version of the DCF used in public utilty rate regulation. In my
opinion, it is widely utilized because utilties are generally in the mature stage of their
lifecyclesand not transitionig from one growth stage to another. This is especially true
for water utilities.
Ahern, Di 27
United Water Idaho Inc.
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All companies, including utilties, go through typical life cycles in their
development, initially progressing through a growth stage, moving onto a transition stage
and finally assuming a steady-state or constant growth state. However, the U.S. public
utilty industry is a long-standing industry, dating back to approximately 1882. The
standards of rate of retu reguation of public utilties date back to the previously
discussed principles of fair rate of return established in the Hope and Bluefield decisions
of 1944 and 1923, respectively. Hence, the public utility industr in the U.S. is a stable
and matue industry characterized by the steady-state or constant-growth stage of a multi-
stage DCF modeL. The regulated economics of the utilty industry further reflect the
features of ths relative stabilty and demand matuty. Their returns on capital
investment, Le., rate base, are set though a ratemakg process and not determined in the
competitive markets. Ths characteristic, taken together with the longevity of the public
utilty industry at large, all contribute to the stabilty and maturity of the industry,
including the water utility industry.
Since there is no basis for applyig multi-stage growth versions of the DCF model
to determine the common equity cost rates of mature public utilty companes, the
constant growth model is most appropriate.
Please describe the dividend yield you used in your application of the DCF model.
The unadjusted dividend yields are based upon a recent (July 6, 2011) indicated dividend
divided by the average of closing market prices for the 60 days ending July 6, 2011 as
shown in Column 1 on page 1 of Schedule 6.
Please explain the adjusted dividend yield shown on page 1 of Schedule 6, Column 7.
Because dividends are paid quarerly, or periodically, as opposed to continuously (daily),
Ahern, Di 28
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an adjustment must be made to the dividend yield. This is often referred to as the
discrete, or the Gordon Periodic, version of the DCF modeL.
DCF theory calls for the use of the ful growth rate, or Db in calculating the
dividend yield component of the modeL. However, since the varous companies in the
proxy group increase their quarterly dividend at various times during the year, a
reasonable assumption is to reflect one-half the annual dividend growth rate in the
dividend yield component, or Dil2. This is a conservative approach which does not
overstate the dividend yield which should be representative of the next twelve-month
period. Therefore, the actual average dividend yields in Column 1 on page 1 of Schedule
6 have been adjusted upward to reflect one-half the average projected growth rate shown
in Column 6.
Please explain the basis of the growth rates of the proxy group which you use in
your application of the DCF model.
Schedule 7 shows that approximately 54% of the common shares of the nine water
companies are held by individuals' as opposed to institutional investors. Institutional
investors tend to have more extensive informational resources than most individual
investors. Individual investors, with more limited resources, are therefore likely to place
great signifcance on the opinions expressed by fiancial information services, such as
Value Line, Reuters, Zacks and Yahoo! Finance, which are easily accssible and/or
available on the Internet and through public libraries. Investors realize that analysts have
significant insight into the dynamics of the industries and individual companies they
analyze, as well as company's abilties to effectively manage the effects of changig laws
and regulations and ever changig economic and market conditions.
Ahern, Di 29
United Water Idaho Inc.
1 Over the long run, there can be no growth in DPS without growth in EPS.
2 Securty analysts' eargs expectations have a more signficant, but not sole, inuence
3 on market prices than dividend expectations. Thus, the use of eargs growth rates in a
4 DCF analysis provides a better matching between investors' market price appreciation
5 expectations and the growth rate component of the DCF. Earings expectations have a
6 signficant infuence on market prices and their appreciation or "growt" experienced by
7 investors.I6 This should be evident even to relatively unsophisticated investors just by
8 listening to financial new reports on radio, TV or reading the newspapers.
9 In addition, Myron Gordon, the "father" of the standard regulatory version of the
10 DCF model widely utilized throughout the United States in rate base/rate of return
11 regulation has recognzed the signficance of analysts' forecasts of growth in EPS in a
12 speech he gave in March 1990 before the Institute for Quantitative Research and Finance.
13 He said:
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We have seen that earings and growth estimates by secuity 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 secuty analysts available from sources such as IBES are
far superior to the data available to Malkiel and Cragg. Eq (7) is not as
elegant as Eq (4), but it has a good deal more intuitive appeaL. It says that
investors buy earngs, but what they wil pay for a dollar of earings
increases with the extent to which the earngs are reflected in the
dividend or in appreciation through growth.
Professor Gordon recognized that total return is largely afected by the terminal price
25 which is mostly afected by earings (hence price / earngs multiples). However, while
26 EPS is the most signficant factor infuencing market prices, it is by no means the only
16 Morin 298 - 303.
Ahern, Di 30
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factor that afects market prices, as recogned by BonbrightI7:
In the first place, commissions canot forecast, except within wide limits,
the effect their rate orders wil have on the market prices of the stocks of
the companes they regulate. In the second place, whatever the initial
market prices may be, they are sure to change not only with the changing
prospects for earnings, but with the changing outlook of an inherently
volatile stock market In short, market prices are beyond the control,
though not beyond the inuence of rate regulation. Moreover, even if a
commission did possess the power of control, any attempt to exercise it ...
would result in harmfu, uneconomic shifts in public utilty rate levels.
(italics added)
Studies performed by Cragg and Malkie¡18 demonstrate that analysts' forecasts are
superior to historical growt rate extrapolations. Some question the accuracy of analysts'
forecast of EPS growt, however, it does not really matter what the level of accracy of
those analysts' forecasts is well afer the fact. What is importt is that they reflect
widely held expectations inuencing investors at the time they make their pricing
decisions and hence the market prices they pay. Moreover, there is no empirical evidence
that investors, consistent with the EMH, would disregard analysts' estimates of growth in
earnngs per share.I9 As stated previously, the "semistrong" form of the EMH, which is
generally held to . be true, indicates investors are aware of all publicly-available
information, including the many securty analysts' eargs growth rate forecasts
available. Investors are also aware of the accracy of past forecasts, whether for EPS or
DPS growth or for interest rates levels. Investors have no prior knowledge of the
17 Bonbright, James C., Danelsen, Albert L., Kaerschen, David R., Priciples of Public Utilty Rates (Public
Utiities Reports, Inc., 1988) 334.
18 Cragg, John G. and Malkiel, Buron G., E:mectations and the Structue of Share Prices (University of
Chicago Press, 1982) Chapter 4.
19 Agrawal, Anup and Chen, Mark A., "Do Analysts' Conflcts Matter? Evidence from Stock
Recommendations", (Joural of Law and Ecnomics, Augut 2008), VoL. 51.
Ahern, Di 31
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accuracy of any forecasts available at the time they make their investment decisions, as
that accracy only becomes known afer some future period of time has elapsed.
Therefore, given the overwhelming academic/empirical support regarding the superiority
of securty anysts' EPS growt rate forecasts, such EPS growt rate projections should
be relied upon in a cost of common equity analysis.
In response to recent concern about the use of securty analysts' EPS growth rate
forecasts, Malkie¡2° afed his belief in the superiority of analysts' earings forecasts
when he testified before the Public Service Commission of South Carolina, in November
2002:
With all the publicity given to tated analysts' forecasts and
investigations instituted by the New York Attorney General, the National
Association of Secuties Dealers, and the Secuties & Exchange
Commission, I believe the upward bias that existed in the late 1990s has
indeed diminished. In sumar, I believe that curent analysts' forecasts
are more reliable than they were during the late 1990s. Therefore,
analysts' forecasts remain the proper tool to use in performing a Gordon
Model DCF analysis.
Consequently, I have reviewed security analysts' projected growth rates in EPS, as
well as Value Line's projected five-year compound growth rates in EPS for each
company in the proxy group as shown in Colums 2 though 5, on page 1 of Schedule 6.
Please summarize the DCF model results.
As shown on page 1 of Schedule 6, the median result of the application of the single-stage
DCF model is 9.54% for the nine water companies. In arriving at a conclusion of a DCF-
indicated common equity cost rate for the proxy group, I have relied upon the median of
Buron A. Malel, the Chemical Ban Chairan's Professor of Economics at Prceton University and
author of the widely-read national bestselling book on investing entitled, "A Random Walk Down Wall
Street: The Time-Tested Strtegy for Successful Investig (Completely Revised and Updated)" (W.W.
Norton & Co. 2011).Ahern, Di 32
United Water Idaho Inc.
1 the results of the DCF, due to the wide- range of DCF results as well as the continuing
2 volatile capital market conditions and to not give undue weight to outliers on either the
3 high or the low side. In my opinion, the median is a more accurate and reliable measure
4 of central tendency, and provides recognition of all the DCF results.
5 The Risk Premium Model (RPM)
6 Q.
7 A.
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Please describe the theoretical basis of the RPM.
The RPM is based upon the basic financial principle of risk and retu, namely, that
investors require greater returns for bearg greater risk. The RPM recognizes that
common equity capital has greater investment risk than debt capital, as common equity
shareholders are last in line in any claim on a company's assets and earngs, with debt
holders being first in line. Therefore, investors require higher returns from common
stocks than from investment in bonds, to compensate them for bearing the additional risk.
Whle the investors' required common equity retu canot be directly determined
or observed, it is possible to directly observe bond returns and yields. Accrding to RPM
theory, one can assess a common equity risk premium over bonds, either historically or
prospectively, and then use that premium to derive a cost rate of common equity.
In sumar, accrding to RPM theory, the cost of common equity equals the
expected cost rate for long-term debt capital plus a risk premium over that cost rate to
compensate common shareholders for the added risk of being unsecured and last-in-line
for any claim on the corporation's assets and eargs.
Some analysts state that the RPM is another form of the CAPM. Do you agree?
While there are some similarties, there is a very signcant distinction between the two
models. The RPM and CAPM both add a "risk premium" to an interest rate. However,
Ahern, Di 33
United Water Idaho Inc.
~'
1 the beta approach to the determination of an equity risk premium in the RPM should not
2 be confsed with the CAPM. Beta is a measure of systematic, or market, risk, a relatively
3 small percentage of total risk (the sum of both non-diversifiable systematic and
4 diversifable unsystematic risk). Unsystematic risk is fully captured in the RPM through
5 the use of the long-term public utilty bond yield as ca be shown by reference to page 3
6 of Schedule 4 which confrms that the bond/credit rating process involves a
7 comprehensive assessment of both business and financial risks. In contrast, the use of a
8 risk-free rate of retun in the CAPM does not, and by definition cannot, reflect a
9 company's specific, i.e., unsystematic, risk. Consequently, a much larger portion of the
10 total' common equity cost rate is reflected in the company- or proxy group-specific bond
11 yield (a product of the bond rating) than is reflected in the risk-free rate in the CAPM, or
12 even by the dividend yield employed in the DCF modeL. Moreover, the financial
13 literature recognes the RPM and CAPM as two separate and distinct cost of common
14 equity models.
15 Q.Please explain the basis of the expected bond yield of 5.83 % applicable to the proxy
16 group of nine water companies shown on page 1 of Schedule 8.
17 A.The first step in the RPM analysis is to determine the expected bond yield. Because both
18 ratemakng and the cost of capital, including common equity cost rate, are prospective in
19 natue, a prospective yield on simarly-rated long-term debt is essential. Since both
20 ratemakg and the cost of capital are prospective in natue, I rely upon a consensus
21 forecast of about 50 economists of the expected yield on Aaa rated corporate bonds for
22 the six calendar quarers ending with the fourth calendar quarter of 2012 as derived from
23 the July 1, 2011 Blue Chip Financial Forecasts (shown on page 7 of Schedule 8). As
Ahern, Di 34
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shown on Line NO.1 of page 1 of Schedule 8, the average expected yield on Moody's
Aaa rated corporate bonds is 5.35%. An adjustment of 34 basis points (0.34%) is
necessar to adjust that average Aaa corporate bond yield to be equivalent to a Moody's
A2 rated public utilty bond as shown on Line NO.2 and explaied in Note 2 resulting in
an expected bond yield applicable to a Moody's A rated public utilty bond of 5.69% as
shown on Line NO.3.
Since the nine water companies average Moody's bond rating is A3, an
adjustment of 14 basis points (0.14%) is necessar to make the prospective bond yield
applicable to an A3 public utilty bond, as detailed in Note 3 on page 1 of Schedule 8.
Therefore, the expected specific bond yield is 5.83% for the nine water companies as
shown on Line NO.5.
Please explain the method utilzed to estimate the equity risk premium.
I evaluated the results of two different historical equity risk premium studies, as well as
Value Line IS forecasted total annual market return in excess of the prospective yÌeld on
Moody's Aaa corporate bonds, as detailed on pages 5, 6 and 8 of Schedule 8. As shown
on Line No.3, page 5, the mean equity risk premium is 4.50% applicable to the nine
water companies. This estimate is the result of an average of a beta-derived equity risk
premium as well as the mean historical equity risk premium applicable to public utilties
with bonds rated A based upon holding period returns. The basis of the beta-derived
equity risk premium applicable to the proxy group is shown on page 6 of Schedule 8. The
beta-determined equity risk premium should receive substantial weight because betas are
derived from the market prices of common stocks over a recent five-year period. Beta is
a meaningf measure of prospective relative risk to the market as a whole and a logica
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means by which to allocate a company's/proxy group's share of the market's total equity
risk premium relative to corporate bond yields.
The total market equity risk premium utilized is 6.95% and is based upon an
average of the long-term historica market risk premium and forecasted market risk
premium. To derive the historica market equity risk premium, I used the most recent
Morningstar2I data on holding period returns for the S&P 500 Composite Index from the
Ibbotson~ SBB~ - 2011 Valuation Yearbook - Market Results for Stocks, Bonds, Bils
and Infation - 1926-2010 (SBBI - 2011) and the average historical yield on Moody's
Aaa and Aa rated corporate bonds for the period 1926-2010. The use of holding period
retus over a very long period of time is usefu because it is consistent with the long-
term investment horizon presumed by the DCF modeL. As the SBBI - 2011 states22:
The estimate of the equity risk premium depends on the length of the data
series studied. A proper estimate of the equity risk premium requires a
data series long enough to give a reliable average without being unduly
inuenced by very good and very poor short-term returns. When
calculated using a long data series, the historical equity risk premium is
relatively stable.s Furthermore, because an average of the realized equity
risk premium is quite volatile when calcuated using a short history, using
a long series makes it less likely that the analyst can justif any number he
or she wants. The magnitude of how shorter periods can affect the result
wil be explored later in this chapter.
Some analysts estimate the expected equity risk premium using a shorter,
more recent time period on the basis that recent events are more likely to
be repeated in the near futue; furthermore, they believe that the 1920s,
1930s and 1940s contain too many unusual events. This view is suspect
because all periods conta "unusual" events. Some of the most unusual
events of the last hundred years took place quite recently, including the
ination of the late 1970s and early 1980s, the October 1987 stock market
21 Morningstar, Inc. acquired Ibbotson Associates in 2006.
22 Ibbotson QI SBBIQI - 2011 Valuation Yearbook - Market Results for Stocks, Bonds, Bils and lnflation ~ 1926 -
2010 (SBBI 2011) (Morningstar, Inc., 2010) 59.
Ahern, Di 36
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1 crash, the collapse of the high-yield bond market, the major contraction
2 and consolidation of the thr industry, the collapse of the Soviet Union,
3 the development of the European Economic Community, and the attacks
4 of September 11, 2001 and the more recent liquidity crisis of 2008 and5 2009.
6
7 It is even difcult for economists to predict the economic environment of
8 the future. For example, if one were analyzing the stock market in 1987
9 before the crash, it would be statistically improbable to predict the
10 impending short-term volatility without considering the stock market crash
11 and market volatilty of the 1929-1931 period.
12
13 Without an appreciation of the 1920s and 1930s, no one would believe that
14 such events could happen. The 85-year period staring with 1926 is
15 representative of what ca happen: it includes high and low returns,
16 volatile and quiet markets, war and peace, ination and deflation, and
17 prosperity and depression. Restricting attention to a shorter historical
18 period underestimates the amount of change that could occr in a long
19 future period. Finally, because historical event-types (not specific events)
20 tend to repeat themselves, long-ru capital market retu studies can reveal
21 a great deal about the future. Investors probably expect "unusual" events
22 to occur from time to time, and their return expectations reflect this.23 (footnote omitted)
24
25 Consequently, the long-term arithmetic mean total retun rates on the market as a whole
26 of 11.90% and the long-term arithmetic mean yield on corporate bonds of 6.10% were
27 used, as shown at Line Nos. 1 and 2 of page 6 of Schedule 8. As shown on Line No.3,
28 the resultant long-term historical equity risk premium on the market as a whole is 5.80%.
29 I used arithmetic mean return rates and yields (income returns) because they are
30 appropriate for cost of capital puroses as noted in the SBBI - 2011. Arithmetic mean
31 return rates and yields are appropriate because ex-post (historica) total returs and equity
32 risk premiums difer in size and direction over time, providing insight into the variance
33 and standard deviation of retus. Because the arithmetic mean captues the prospect for
34 variance in returns and equity risk premiums, it provides the valuable insight needed by
35 investors in estimating future risk when makng a current investment. Absent such
Ahern, Di 37
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valuable insight into the potential variance of returns, investors cannot meaningflly
evaluate prospective risk. If investors alternatively relied upon the geometric mean of ex-
post equity risk premiums, they would have no insight into the potential variance of
futue retus because the geometric mean relates the change over many periods to a
constant rate of change, thereby obviating the year-to-year fluctuations, or variance,
critical to risk analysis.
The fiancial literature is quite clear on this point, that risk is measured by the
variabilty of expected returns, Le., the probability distribution of returns.z3 In addition,
Weston and Brigham24 provide the standard financial textbook definition of the riskiess
of an asset when they state:
The riskiess of an asset is defied in terms of the likely variability of
future returns from the asset. (emphasis added)
And Morin states25:
The geometrc mean answers the question of what constant return you
would have to achieve in each year to have your investment growth match
the return achieved by the stock market. The arthmetic mean answers the
question of what growth rate is the best estimate of the future amount of
money that wil be produced by continually reinvesting in the stock
market. It is the rate of retu which, compounded over multiple periods,
gives the mean of the probability distribution of ending wealth. (emphasis
added)
In addition, Brealey and Myers26 note:
The proper uses of arithmetic and compound rates of return from past
investments are often misunderstood. . . Thus the arithmetic average of
Brigham (1989) 639.
Weston, J. Fred and Brigham Eugene F., Essentials of Managerial Finance Third Edition (The Dryden
Press, 1974) 272.
25
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Morin 133.
Brealey and Myers 146-147.
Ahern, Di 38
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the returns correctly measures the opportity cost of capital for
investments. . . Moral: If the cost of capital is estimated from historical
returns or risk premiums, use arithmetic averages, not compound annual
rates of return. (italics in origial)
Also, Giaacchino and Lesser27 state:
The appropriateness of using either a geometric or arithmetic mean
depends on the context.I2(footnote omitted) If you are evaluating the past
performance of a stock, the geometric mean is appropriate: it represents
the compound average retu over time.
* * *
If, instead, you wish to estimate future growt, you need to use an
arithmetic mean . . . compounding the stock at the arithmetic mean . . .
gives us the expected (average) stock price . . . compounding at the
geometric mean leads to the median stock price.
As previously discussed, investors gain insight into relative riskiness by analyzing
expected future variabilty. This is accomplished by the use of the arithmetic mean of a
distribution of returns / premiums. Only the arithmetic mean takes into account all of the
returns / premiums, hence, providing meaningfl insight into the variance and standard
deviation of those returns / premiums.
Can it be demonstrated that the arithmetic mean takes into account all of the
returns and therefore, that the arithmetic mean is appropriate to use when
estimating the opportunity cost of capital in contrast to the geometric mean?
Yes. Pages 1 through 3 of Schedule 9 graphically demonstrate this premise. It is clear
from observing the year-to-year variation (the retus on large company stocks for each
and every year, 1926 through 2010 on page 1), that stock market returns, and hence,
equity risk premiums, vary.
27 Giaacchino, Lenardo R. and Lesser, Jonathan A., Priciples of Utility Corporate Finance (Public Utilities
Reports, Inc., 2011) 38-41 and 233-234.Ahern, Di 39
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There is a clear bell-shaped pattern to the probabilty distribution of these returns
shown on page 2, an indication that they are randomly generated and not serially
correlated. The arthetic mean of ths distrbution of retus considers each and every
return in the distrbution, takg into accunt the standard deviation or likely variance
which may be experienced in the future when estimating the rate of return based upon
such historical returns. In contrast, page 3 demonstrates that when the geometric mean is
calculated, only two of the returns are considered, namely the initial and terminal years,
i.e., 1926 and 2010. Based upon only those two years, a constant rate of return is
calculated by the geometric average. That constant retu is graphically represented by a
flat line, showing no year-to-year varation, over the entire 1926 to 2010 time period,
which is obviously far different from reality, based upon the probabilty distribution of
returns shown on page 2 and demonstrated on page 1.
Consequently, only the arthmetic mean takes into accunt the standard deviation
of returns which is critical to risk analysis. The geometric mean is appropriate only when
measuring historical performance and should not be used to estimate the investors
required rate of return.
How did you incorporate Value Line's forecasted total annual market return in
excess of the prospective yield on high rated corporate bonds in your development
of an equity risk premium for your RPM analysis?
Once agai, because both ratemakg and the cost of capital, including the cost rate of
common equity are prospective, a prospective market equity risk premium is essentiaL.
The basis of the forecasted or prospective market equity risk premium ca be found on
Line Nos. 4 through 6 on page 6 of Schedule 8. Consistent with the development of the
Ahern, Di 40
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19 A.
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dividend yield component of my DCF analysis, it is derived from an average of the most
recent thirteen weeks ending July 8, 2011 3-5 year median market price appreciation
potentials by Value Line plus an average of the median estimated dividend yield for the
common stocks of the 1,700 firms covered in Value Line's Stadad Edition as explained
in detail in Note 1 on page 2 of Schedule 10.
The average median expected price appreciation is 55% which translates to an
11.51 % annual appreciation and, when added to the average (similarly calculated) median
dividend yield of 1.93% equates to a forecasted annual total return rate on the market as a
whole of 13.44%. The forecasted total market equity risk premium of 8.09% is derived by
deducting the July 1, 2011 Blue Chip Financial Forecasts consensus estimate of about 50
economists of the expected yield on Moody's Aaa rated corporate bonds for the six
calendar quarters ending with the fourth calendar quarter 2012 of 5.35% shown on
Schedule 8, page 6, Line NO.6 (8.09% = 13.44% - 5.35%).
In arving at my conclusion of equity risk premium of 6.95% on Line NO.7 on
page 6, I have given equal weight to the historical equity risk premium of 5.80% and the
forecasted equity risk premium of 8.09% shown on Line Nos. 3 and 6, respectively
(6.95% = (5.80% + 8.09%)/2).
What is your conclusion of an equity risk premium for use in your RPM analysis?
On page 1 of Schedule 10, the most current Value Line betas for the companies in the
proxy group are shown. Applying the median beta of the proxy group of 0.70 (consistent
with my reliance upon the median DCF results as previously discussed), to the market
equity risk premium of 6.95% results in a beta adjusted equity risk premium of 4.87% for
the proxy group of nine water companes.
Ahern, Di 41
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A mean equity risk premium of 4.12% applicable to utilties with A rated public
utilty bonds such as the proxy group of nine water companies was calculated based upon
holding period returns from a study using public utilities, as shown on Line No.2, page 5
of Schedule 8 and is detaied on page 8.
The equity risk premium applicable to the proxy group of nine water companies is
the average of the beta-derived premium, 4.87%, and that based upon the holding period
retus of public utilties with A rated bonds, 4.12%, as sumarized on Schedule 8, page
5, i.e., 4.50% (4.50% = (4.87% + 4.12%)/2).
What is the indicated RPM common equity cost rate?
It is 10.33% for the nine water companies as shown on Schedule 8, page 1.
Some critics of the RPM model claim that its weakness is that it presumes a constant
equity risk premium. Is such a claim valid?
No. The equity risk premium varies inversely with interest rate changes, although not in
tandem with those changes. However, the presumption of a constant equity risk premium
is no diferent than the presumption of a constant "g", or growth component, in the DCF
modeL. If one calculates a DCF cost rate today, the absolute result "k", as well as the
growth component "g", would invariably differ from a calcuation made just one or
several months earlier or later. Ths implies that "g" does change, although in the
application of the standard DCF model, "g" is presumed to be constant. Hence, there is
no difference between the RPM and DCF models in that both models assume a constant
component, but in reality, these components, "g" and the equity risk premium both
change.
Ahern, Di 42
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1 As Morin28 states with respect to the DCF model:
2 It is not necessar that g be constant year afer year to make the model
3 valid. The growth rate may vary randomly around some average expected
4 value. Random variations around trend are perfectly acceptable, as long
5 as the mean expected growth is constant. The growth rate must be
6 'expectationally constant' to use formal statistical jargon. (italics added)
7
8 The foregoing confirms that the RPM is similar to the DCF modeL. Both assume
9 an "expectationally constant" risk premium and growth rate, respectively, but in reality
10 both vary (change) randomly around an arithmetic mean. Consequently, the use of the
11 arthmetic mean, and not the geometric mean is coiIired as appropriate in the
12 determination of an equity risk premium as discussed previously.
13 The Capital Asset Pricing Model (CAPM)
14 Q.Please explain the theoretical basis of the CAPM.
15 A.CAPM theory defines risk as the covariabilty of a security's returns with the market's
16 retus as measured by beta ("ß"). A beta less than 1.0 indicates lower varability while a
17 beta greater than 1.0 indicates greater variabilty than the market.
18 The CAPM assumes that all other risk, i.e., all non-market or unsystematic risk,
19 can be eliminated through diversification. The risk that caot be eliminated through
20 diversification is called market, or systematic, risk. In addition, the CAPM presumes that
21 investors require compensation only for these systematic risks which are the result of
22 macroeconomic and other events that afect the retus on all assets. The model is applied
23 by adding a risk-free rate of retu to a market risk premium, which is adjusted
24 proportionately to reflect the systematic risk of the individual securty relative to the total
28 Morin 256.
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market as measured by beta. The traditional CAPM model is expressed as:
Rs = Rf+ ß(R - Rr)
Where:Rs Return rate on the common stock=
Rf Risk-free rate of retu=
Rm Return rate on the market as a whole=
ß Adjusted beta (volatilty of the security
relative to the market as a whole)
=
Numerous tests of the CAPM have measured the extent to which security returns
and betas are related as predicted by the CAPM confirming its validity. The empirical
CAPM (ECAPM) reflects the reality that while the results of these tests support the
notion that beta is related to security returns, the empirical Security Market Line (SML)
described by the CAPM formula is not as steeply sloped as the predicted SML. Morin29
states:
With few exceptions, the empirical studies agree that . . . low-beta
secuities ear retus somewhat higher than the CAPM would predict,
and high-beta secuities ear less than predicted,
* * *
Therefore, the empircal evidence suggests that the expected return on a
secuity is related to its risk by the followig approximation:
K = RF + x ß(RM - RF) + (l-x) ß(RM - RF)
where x is a fraction to be determined empirically. The value of x that
best explains the observed relationship Retu = 0.0829 + 0.0520 ß is
between 0.25 and 0.30. If x = 0.25, the equation becomes:
K = RF + O.25(RM - RF) + 0.75 ß(RM - RFio
29 Morin 175.
30 Mori 190.
Ahern, Di 44
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In view of theory and practica research, I have applied both the traditional CAPM and
the ECAPM to the companies in the proxy group and averaged the results.
Please describe your selection of a risk-free rate of return.
As shown in column 3 on page 1 of Schedule 10, the risk-free rate adopted for both
applications of the CAPM is 4.73%. Again, because both ratemakng and the cost of
capital, including common equity, are prospective, the risk-free rate for my CAPM
analysis is based upon the average consensus forecast of the reporting economists in the
July 1, 2011 Blue Chip Financial Forecasts as shown in Note 2, page 2, of the expected
yields on 30-year U.S. Treasur bonds for the six quarers ending with the fourth calendar
quarter 2012.
Why is the prospective yield on long-term U.S. Treasury Bonds appropriate for use
as the risk-free rate?
The yield on long-term U.S. Treasury T-Bonds is almost risk-free and its term is
consistent with the long-term cost of capital to public utilties measured by the yields on
A rated public utilty bonds, the long-term investment horizon inerent in utilties'
common stocks, the long-term investment horizon presumed in the standard DCF model
employed in regulatory ratemakg, and the long-term life of the jurisdictional rate base
to which the allowed fair rate of retun, Le., cost of capital wil be applied. In contrast,
short-term U.S. Treasury yields are more volatile and largely a function of Federal
Reserve monetar policy.
In addition, noted in the SBBI - 201131:
31 SBBI 201155.
Ahern, Di 45
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27 Q.
Although the equity risk premia of several horions are available, the long-
horizon equity risk premium is preferable for use in most business-
valuation settings, even if an investor has a shorter time horion.
Companes are entities that generaly have no defied life span; when
determg a company's value, it is importt to use a long-term discount
rate because the life of the company is assumed to be infnite. For this
reason, it is appropriate in most cases to use the long-horizon equity risk
premium for business valuation.
Please explain the estimation of the expected equity risk premium for the market.
The basis of the market equity risk premium is explaied in detail in Note 1 on page 2 of
Schedule 10. It is derived from an average of the most recent thirteen weeks ending July
8, 2011 3-5 year median total market price appreciation projects from Value Line,
resulting in a total anual retun of 13.44% as discussed previously, and the long-term
historica arthmetic mean total returns for the years 1926 - 2010 on large company
stocks from the SBBI - 2011 of 11.90%. From these returns, the appropriate projected
and historical risk-free rates are subtracted to arrive at a projected and historical equity
risk premium for the market.
For example, the forecasted total market equity risk premium is derived by
deducting the July 1, 2011' Blue Chip Financial Forecasts consensus estimate of about 50
economists of the expected yield on U.S. Treasur Notes of 4.73% from the Value Line
projected total anual market retu of 13.44%, resulting in a forecasted total market
equity risk premium of 8.71%. From SBBI - 2011 historical total market retu of
11.90%, the long-term income retu on U.S. Governent Securities of 5.20% was
deducted resulting in an historical equity risk premium of 6.70% which results in an
average total market equity risk premium of 7.71 % (7.71 % = (8.71 % + 6.70%)/2).
What are the results of your application of the traditional and empirical CAPM to
Ahern, Di 46
United Water Idaho Inc.
1
2 A
3
4
5
6
7
8
9 Q.
10
11 A
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
32
the proxy group?
As shown on Schedule 10, page 1, the median traditional CAPM cost rate is 10.13% for
the nie water companies and the median ECAPM cost rate is 10.71%. Consistent with
my reliance upon the median DCF results discussed previously, I rely upon the median
results of the traditional CAPM and ECAPM for the proxy group. Thus, as shown on
column 6 on page 1, the CAPM cost rate applicable to the proxy group of nine water
companies is 10.42% based upon an average of the traditional CAPM and ECAPM
results for the proxy group.
Some critics of the ECAPM model claim that using adjusted betas in a traditional
CAPM amounts to using an ECAPM. Is such a claim valid?
No. Using adjusted betas in a CAPM analysis is not equivalent to the ECAPM. Betas are
adjusted because of the general regression tendency of betas to converge toward 1.0 over
time, i.e., over succssive calcuations of beta. As noted above, numerous studies have
determined that the SML described by the CAPM formula at any given moment in time is
not as steeply sloped as the predicted SML. Mori32 states:
Some have argued that the use of the ECAPM is inconsistent with the use
of adjusted betas, such as those supplied by Value Line and Bloomberg.
This is because the reason for using the ECAPM is to allow for the
tendency of betas to regress toward the mean value of 1.00 over time, and,
since Value Line betas are already adjusted for such trend (sic), an
ECAPM analysis results in double-counting. This arguent is erroneous.
Fundamentally, the ECAPM is not an adjustment, increase or decrease, in
beta. This is obvious from the fact that the expected retu on high beta
securities is actually lower than that produced by the CAPM estimate. The
ECAPM is a formal recogntion that the observed risk-return tradeoff is
flatter than predicted by the CAPM based on myriad empirica evidence.
The ECAPM and the use of adjusted betas comprised two separate
featues of asset pricing. Even if a company's beta is estimated accurately,
Mori 191.
Ahern, Di 47
United Water Idaho Inc.
1 the CAPM stil understates the retu for low-beta stocks. Even if the
2 ECAPM is used, the return for low-beta securities is understated if the
3 betas are understated. Referrng back to Figure 6-1, the ECAPM is a
4 retu (vertica axis) adjustment and not a beta (horizontal axis)
5 adjustment. Both adjustments are necessar.
6
7 Moreover, the slope of the SML should not be confsed with beta. As Brigham
8 states33 :
9 The slope of the SML reflects the degree of risk aversion in the economy -
10 the greater the average investor's aversion to risk, then (I) the steeper is
11 the slope of the line, (2) the greater is the risk premium for any risky asset,
12 and (3) the higher is the required rate of return on risky assets.I2
13
14 12Students sometimes confse beta with the slope of the SML. This is a
15 mistake. As we saw earlier in connection with Figure 6-8, and as is
16 developed further in Appendix 6A, beta does represent the slope of a line,
17 but not the Security Market Line. This confsion arises partly because the
18 SML equation is generally written, in this book and throughout the finance
19 literature, as k¡ = Rp + b¡(kM - Rp), and in this form b¡ looks like the slope
20 coeffcient and (kM - Rp) the varable. It would perhaps be less confusing
21 if the second term were written (kM - Rp)b¡, but this is not generally done.
22
23 Regulatory support for the ECAPM ca be found in the New York Public Service
24 Commission's Generic Financing Docket, Case 91-M-0509. Also, the Regulatory
25 Commission of Alaska has stated34:
26
27
28
29
30
31
32
33
34
Although we primarily rely upon Tesoro's recommendation, we are
concerned, however, about Tesoro's CAPM analysis. Tesoro averaged the
results it obtained from CAPM and ECAPM while at the same time
providing empirical testimony604 that the ECAPM results are more
accurate then (sic) traditional CAPM results. The reasonable investor
would be aware of these empircal results. Therefore, we adjust Tesoro's
recommendation to reflect only the ECAPM result. (footnote omitted)
Thus, using adjusted betas in an ECAPM analysis is not incorrect nor inconsistent
33 Brigham and Gapenski 203.
34 In the Matter of the Correct Calculation and Use of Acceptable Input Data to Calculate the 1997, 1998,
1999, 2000, 2001 and 2002 Tarff Rates for the Intrastate Transportation of Petroleum over the
TrasAlaska Pipelie System, Docket No P-97-4, Order No. l5l, p. l46 (Reg. Comm'n AK l1/27/02).
Ahern,Di 48
United Water Idaho Inc.
1 with either their financial literature or reguatory precedent. Notwithstanding empirica
2 and reguatory support for the use of only the ECAPM, my CAPM analysis, which
3 includes both the traditional CAPM and the ECAPM, is a conservative approach resulting
4 in a reasonable estimate of the cost of common equity.
5 Cost of Common Equity Models Applied to Comparable, Domestic. Non-Price Regulated
6 Companies
7 Q.
8
9 A.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Please describe the basis of applying cost of common equity models to comparable
risk, non-price regulated companies?
Applying cost of equity models to non-price regulated companes, comparable in total
risk, is derived from the "corresponding risk" standard of the landmark cases of the U.S.
Supreme Court, Le., Hope and Bluefield, previously discussed. Therefore, it is consistent
with the Hope doctrine that the return to the equity investor should be commensurate with
returns on investments in other firms having corresponding risks based upon the
fundamental economic concept of opportunity cost which maintains that the true cost of
an investment is equal to the cost of the best available alternative use of the funds to be
invested. The opportnity cost principle is also consistent with one of the fundamental '
priciples upon which regulation rests: that reguation is intended to act as a surrogate for
competition and to provide a fair rate of return to investors.
The first step in determining such an opportnity cost of common equity based
upon the non-price reguated companies comparable in total risk to the nine water
companies is to choose an appropriate proxy group( s) of non-price regulated firms
comparable in total risk to the proxy group(s) of price-regulated utilities. The proxy
group(s) should be broad-based in order to obviate any company-specific aberrations and
Ahern, Di 49
United Water Idaho Inc.
1 should exclude utilties to avoid circularty since the achieved returns on book common
2 equity of utilities, being a function of the regulatory process, are substantially infuenced
3 by regulatory awards.
4 As stated previously, my selection criteria for the non-price regulated firs of
5 comparable risk are based upon statistics derived from the market prices paid by
6 investors. Value Line betas were used as a measure of systematic risk. The standard
7 error of the regression was used as a measure of each firm's unsystematic or specific risk
8 with the standard error of the regression reflecting the extent to which events specific to a
9 company's operations affect its stock price. In essence, companies which have similar
10 betas and standard errors of the regressions, have similar total investment risk, i.e., the
11 sum of systematic (market) risk as reflected by beta and unsystematic (business and
12 financial) risk, as reflected by the standard error of the regression. These statistics are
13 derived from regression analyses using market prices which, under the EMH, reflect all
14 relevant risks. An additional criterion used in the selection of these proxy companies
15 were that they be domestic non-utilty companies. The application of these criteria results
16 in a proxy group of non-price regulated firms comparable in total risk to the average
17 utilty in the proxy group of water companies. The proxy group of thirty-nine non-utility
18 companies comparable in total investment risk to the nine water companies is listed on
19 page 3 of Schedule 11.
20 Using a Value Line, Inc. proprietary database dated June 15, 2011, a proxy group
21 of thity-nine non-price regulated companies was chosen based upon ranges of unadjusted
22 beta and standard error of the regression shown on page 2 of Schedule 11. The ranges
23 were based upon the standard deviations of the unadjusted beta and the average standard
Ahern, Di 50
United Water Idaho Inc.
1 error of the regression for the proxy group of nine water companies as explained on page
2 4 of Schedule 11.
3 This selection criteria are meaningfl and effectively respond to the criticisms
4 normally associated with the selection of non-regulated firms presumed to be comparable
5 in total risk. The criteria do so because the selection of non-price reguated companies
6 comparable in total risk is based upon regression analyses of market prices which reflect
7 investors' assessment of all risks, diversifiable and non-diversifable, and is thus market-
8 based.
9 The fust method of measuring such an opportunity cost is shown in Schedule 12.
10 It measures the returns expected to be earned on the book common equity, net worth, or
11 parer's capital of non-price regulated enterprises of comparable total risk as the nine
12 water companes. The second method is to apply the DCF, RPM and CAPM to the same
13 non-price regulated companies comparable in total risk to the nine water companies as
14 shown on Schedule 13.
15 Expected Return On Book Equity For The Proxy Group Of Domestic. Non-Price Regulated
16 Companies
17 Q.Did you evaluate the expected return on book common equity, net worth, or
18 partner's capital for the proxy group of domestic, non-price regulated companies
19 that are comparable in total risk to the utilty proxy group?
20 A.Yes. Measuring the expected retu on book common equity, net worth, or parer's
21 capital provides a direct measure of return, since it translates into practice the competitive
22 principle upon which regulation rests. In my opinon, it is inappropriate to use the
23 achieved retus of reguated utilties of similar risk because to do so would be circuar, as
Ahern, Di 51
United Water Idaho Inc.
1 achieved returns are a function of authorized ROEs, i.e., the regulatory process itself, and
2 inconsistent with the principle of equality of risk with non-price regulated firms. As
3 shown on Schedule 12, the expected rate of retu on book equity, net worth, or parer's
4 capital was gathered from Value Line's Standard Edition (various issues). Mter applying a
5 test of significance (Student's t-statistic) to determe whether any of the projected returns
6 are significantly different from the mean at the 95% confdence level, the projected return
7 of one company has been excluded. Afer excluding this outlier, my conclusion of the
8 expected return on book common equity net worth or parer's capita is 15.50%.
9 Cost Rates For The Proxy Group Of Domestic, Non-Price Regulated Companies Based
10 Upon the DCF, RPM and CAPM
11 Q.Did you calculate common equity cost rates using the DCF, RPM and CAPM for the
12 proxy group of domestic, non-price regulated companies that are comparable in total
13 risk to the utilty proxy group?
14 A.Yes. Because the DCF, RPM and CAPM have been applied in an identical maner as
15 described previously relative to the market data of the nine water companies, I wil not
16 repeat the details of the rationale and application of each model shown in Schedule 13.
17 The only exception is that, in the application of the RPM, I did not use public utilty-
18 specifc equity risk premiums.
19 Page 1 of Schedule 13 contains the derivation of the DCF cost rates. As shown, the
20 median DCF cost rate for the proxy group of thirty-nine non-price regulated companies
21 comparable in total risk to the proxy group of nine water companies, is 12.05%.
22 Pages 2 through 4 contain information relating to the 11.38% RPM cost rate for the
23 proxy group of thirty-nine non-price regulated companes sumared on page 2. As
Ahern, Di 52
United Water Idaho Inc.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 Q.
16
17
18 A.
19
20
21 Q.
22
23
shown on Line 1 of page 2 of Schedule 13, the consensus prospective yield on Moody's
Baa rated corporate bonds for the six quarters ending with the fourth quarter of 2012 from
the July 1, 2011 Blue Chip Financial Forecasts is 6.17%, which is appropriate since the
average Moody's bond rating of the proxy group of thrty-nine non-price regulated
companies is Baa2 as shown on page 3 of Schedule 13. When the risk premium of 5.21 %
derived on page 4 is added to the prospective Baa rated corporate bond yield of 6.17%, the
indicated RPM cost rate is 11.38%. The average estimated equity risk premium is based
upon the average of the historical and projected market risk premiums of 6.95%, adjusted
by the group's median beta of 0.75, resulting in an equity risk premium of 5.21 % as shown
on Line 9, page 4 of Schedule 13.
Page 5 contains the details of the application of the traditional CAPM and ECAPM
to the thirty-nine non-price regulated companies comparable in total risk to the nine water
companies. As shown, the median cost rates are 10.51% and 10.99%, respectively which,
when averaged, results in an indicated CAPM cost rate of 10.75%.
What are the cost rates, based upon the DCF, RPM and CAPM, related to the
domestic, non-price regulated proxy group comparable in total risk to the utilty
proxy group?
The cost rates based upon application of the DCF, RPM and CAPM/ECAPM models to
the non-utilty group are 12.05%, 11.38% and 10.75%, respectively, averagig 11.39% as
sumaried on page 1 of Schedule 11.
What is your conclusion of the cost rate of common equity based upon the proxy
group of thirty-nine non-price regulated companies comparable in total risk to the
nine water companies?
Ahern, Di 53
United Water Idaho Inc.
1 A As shown on page 1 of Schedule 11, my conclusion of the projected return on book
2 equity, parer's capital or net wort of the comparable group is 15.50% and my
3 conclusion is 11.39% for the results of the DCF, RPM and CAPM applied to the
4 comparable group. Based upon these results, I conclude a cost of common equity of
5 13.45% for the non-price reguated companies.
Conclusion of Common Equity Cost Rate6
7
8 Q. What is your recommended common equity cost rate?
9 A.It is 11.05 % based upon the common equity cost rates resulting from the application of
10 cost of common equity models to the nine water companies as well as a proxy group of
11 non-utilty companies comparable in total risk to the nine water companies, as adjusted
12 for financial and business risks due to UWI's lower financial risk and smaller relative
13 size.
14 As discussed previously, reliance upon multiple models is consistent with the
15 EMH, upon which all of my models are premised. I employ all of my cost of common
16 equity models as primar tools in arriving at my recommended common equity cost rate
17 because; 1) no single model is so inherently precise that it can be relied upon solely to the
18 exclusion of other theoretically sound models; 2) all of my models have application
19 problems associated with them; 3) all of my models are based upon the Effcient Market
20 Hypothesis (EMH); and 4) as demonstrated previously, the prudence of using multiple
21 cost of common equity models is supported in both the financial literature and reguatory
22 precedent. Therefore, none should be relied upon exclusively to estimate investors'
23 required rate of retu on common equity.
24 The results of my cost of common equity models applied to the nine water
Ahern, Di 54
United Water Idaho Inc.
1 companies are shown on Schedule 1, page 2 and summarized below:
2 Table 3
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Proxy Group
of Nine
Water
Companies
Discounted Cash Flow Model
Risk Premium Model
Capital Asset Pricing Model
Cost of Equity Models Applied to
Comparable Risk, Non-Price
Regulated Companies
9.54%
10.33
10.42
13.45
Indicated Common Equity Cost
Rate Before Adjustment for
Financial Risk, Flotation Costs
and Business Risks 10.90
Financial Risk Adjustment (0.23)
Business Risk Adjustment 0.40
Indicated Common Equity Cost Rate 11.07%
Recommended Common Equity
Cost Rate 11.05%
Based upon these common equity cost rate results, I conclude that a common equity cost
30 rate of 10.90% is indicated for the nine water companies before the financial and business
31 risk adjustments previously discussed, shown on Lie Nos. 6 and 7 on page 2 of Schedule
32 1.
33 Financial Risk Adjustment
34 Q.Is there a way to quantify a financial risk adjustment due to UWID's previously
35 discussed lower financial risk relative to the proxy group?
36 A.Yes. As shown on page 1 of Schedule 1, the Company's ratemakg common equity ratio
Ahern, Di 55
United Water Idaho Inc.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
at April 30, 2011 (there is no preferred stock) is 52.51% which is somewhat higher than
the average 2010 total equity ratio maitaied, on average, by the nine water companies,
49.03%. Conversely, UW's ratemakg long-term debt ratio at April 30, 2011,
47.49%, is somewhat lower than the average 2010 long-term debt ratio of the proxy
group, 50.97%. Thus, UW has somewhat lower financial risk thàn the companies in
the proxy group. Because investors require a higher return in exchange for bearing higher
risk, a downward adjustment to the common equity cost rate derived from the market data
of the proxy group companies which have a somewhat higher degree of fiancial risk than
UWID is necessar.
An indication of the magnitude of the necessar financial risk adjustment is given
by the Hamada equation35, which un-levers and then re-levers betas based upon changes
in capital structure.
The Hamada equation un-levers the median beta of the proxy group of nine water
companies of 0.70 with an average December 31, 2010 common equity ratio of 49.03% to.
0.42 when applied to a 100% common equity ratio and then levers the beta to 0.67 using
UW's ratemakg common equity ratio of 52.51% at April 30, 2011. The re-levered
beta, applied to a 7.71% market risk premium and a 4.73% risk-free rate translates to a
9.90%36 common equity cost rate. The diference between the 9.90% relevered beta
common equity cost rate and the result of the traditional CAPM for the proxy group with
a median beta of 0.70, 10.13%37 is a negative 23 basis points (-0.23%). A downward
35 Brigham and Daves 533.
36
37
9.90% = (0.67 x 7.71%) + 4.73%.
10.13% = (0.70 x 7.71 %) + 4.73%.Ahern, Di 56
United Water Idaho Inc.
1 financial adjustment of 23 basis points (0.23%), reflects the somewhat lower financial
2 risk of UW attributable to its higher ratemaking common equity ratio of 52.51%
3 compared with the proxy group's average total equity ratio of 49.03% at December 31,
4 2010. The Hamada Equation and cacuations are as follows:
56 bi = bu (1 + (1- T)(D / S))
7 Where bi = Levered beta
8 bu = Un-levered beta
9 T= Tax Rate
10 (D / S) = Debt to Common Equity Ratio
11
12 To un-lever the beta from a 49.03% average proxy group total equity ratio, the following
13 equation is used:
14 0.70 = bu (1 + (1- 0.35) (50.97%/49.03%))
15
16 When solved for bu' bu = 0.42, indicating that the beta for the proxy group of nine water
17 companes would be 0.42 if their average capital structure contained 100% total equity.
18 To re-lever the beta relative to UW's 52.51% for Apri 30, 2011 ratemakg
19 common equity ratio, the following equation is used:
20 bi = 0.42 (1 + (1 - 0.35) (47.49%/52.51 %))
21
22 When solved for bi, bi = 0.67, indicating that the beta for the proxy group of nine water
23 companies would be 0.67, if their average capital structure contained 52.51 % total equity.
24 Business Risk Adjustment
25 Q.Is there a way to quantify a business risk adjustment due to UWID's small size
26 relative to the proxy group?
27 A.Yes. As discussed previously, the Company has greater business risk than the average
Ahern, Di 57
United Water Idaho Inc.
1 company in the proxy group because of its smaller size relative to the group, measured by
2 either book capitalization or the market capitalization of common equity (estimated
3 market capitalization for UWI, whose common stock is not traded).
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Table 4
Market
Capitalization(l)
($ Milions)
Times
Greater than
the Company
UWD $142.597
Proxy Group of Nine
Water Companies 1,194.619 8.4x
(1)From page 1 of Schedule 14.
Because the Company's common stock is not publicly traded, I have assumed that
19 if it were, the common shares would be sellng at the same market-to-book ratio as the
20 average market-to-book ratio for the proxy group, 175.8%, on July 6, 2011 as shown on
21 page 2 of Schedule 14. Since my recommended common equity cost rate is based upon
22 the market data of the proxy group, it is reasonable to use the market-to-book ratios of the
23 proxy group to estimate UW's market capitazation. Hence, the Company's market
24 capitalization is estimated at $142.597 milion based upon the average market-to-book
25 ratio of the proxy group. In contrast, the market capitalization of the average water
26 company was $1.195 bilion on July 6, 2011, or 8.4 times the size of UWID's estimated
27 market capitalization.
28 Therefore, it is necessar to upwardly adjust the common equity cost rate of
29 10.90% based upon the nine water companes to reflect UW's greater risk due to its
30 smaller relative size. The determination is based upon the size premiums for decile
Ahern, Di 58
United Water Idaho Inc.
1 portolios of New York Stock Exchange (NSE), American Stock Exchange (AMEX)
2 and NASDAQ listed companes for the 1926-2010 period and related data from SBBI-
3 2011. The average size premium for the decile in which the proxy group falls has been
4 compared with the average size premium for the decile in which the market capitalization
5 of UWI would fall if its stock were traded and sold at the July 6, 2011 average
6 market/book ratio of 175.84% experienced by the proxy group. As shown on page 1,
7 because uWln falls in the 10th decile and the nine water companies fall between the 6th
8 and ih deciles, the size premium spread between the Company and the nine water
9 companies is 451 basis points (4.51 % ).
10 In view of the foregoing, an upward adjustment of 40 basis points (0.40%) to
11 reflect UW's greater relative business risk due to its smaller size. A business risk
12 adjustment of 40 basis points (0.40%), coupled with the previously discussed financial
13 risk adjustment of a negative 23 basis points (a negative 0.23%), when added to the
14 10.90% indicated common equity cost rate based upon the nine water companies before
15 adjustment, results in a financial and business risk-adjusted common equity cost rate of
16 11.07%38 which, when rounded to 11.05%, is my recommendation.
17 However, as discussed previously, the Company is requesting a conservatively
18 reasonable common equity cost rate of 10.50%. A common equity cost rate of 10.50%,
19 when applied to the consolidated common equity ratio of 52.51% at April 30, 2011,
20 results in an overal rate of return of 8.43%. In my opinion, this overall rate of retu is
21 both reasonable and conservative, given UWID's small size and increased risk due to
38 11.07% = 10.90% - 0.23% + 0.40%.Ahern, Di 59
United Water Idaho Inc.
1 increased pressure on UWI's abilty to ear its authorized ROE due to declining per
2 customer usage, providing UW with suffcient eargs to enable it to attract necessar
3 new capital.
4 Q.Does that conclude your direct testimony?
5 A.Yes.
Ahern, Di 60
United Water Idaho Inc.
APPENDIX A
PROFESSIONAL QUALIFICATIONS
OF
PAULINE M. AHERN, CRRA
PRINCIPAL
AUS CONSULTANS
PROFESSIONAL QUALCATIONS
OF
PAULIN M. AHERN, CRR
PRICIPAL
AUS CONSULTANS
PROFESSIONAL EXERIENCE
1994-Present
In 1996, I became a Principal of AUS Consultats, continuing to offer testiony as an expert witness on the
subjects of fair rate of retu, cost of capital and related issues before state public utility commssions. I provide
assistance and support to clients throughout the entire ratemaking litigation process. In addition, I supervise the
fiancial analyst and administrative staff in the preparation of fair rate of retu and cost of capital exhibits which are
fied along with expert testimony before varous state and federal public utilty reguatory bodies. The team also
assists in the preparation of interrogatory responses, as well as rebutt exhbits.
As the Publisher of AUS Utility Report (formerly C. A Turer Utility Reports), I am responsible for the
production, publishing, and distrbution of the report. AUS Utility Report provides financial data and related ratios
for about 120 public utilties, i.e., elecc, combination gas and elecric, natural gas distribution, natural gas
transmission, telephone, and water utities, on a monthly, quarterly and annual basis. Among the subscribers of
AUS Utility Reports are utilities, many state reguatory commions, federal agencies, individuals, brokerage firms,
attorneys, as well as public and academic libraries. The publication has continuously provided financial statistics on
the utility industry since 1930.
As the Publisher of AUS Utility Reports, I also supervse the production, publishing, and distribution of the
AGA Rate Service publications under license from the American Gas Association. I am also responsible for
maintang and calcuating the performce of the AGA Index, a maket capitaliation weighted index of the
common stocks of the approxitely 70 corprate members of the AGA, which serves as the benchmark for the
AGA Gas Index Fund.
As an Assistant Vice President from 1994 - 1996, I prepared fair rate of return and cost of capital exhibits
which were fied along with expert testiony before various state and federal public utilty regulatory bodies. These
supporting exhibits include the determnation of an appropriate ratemaking capital structure and the development of
embedded cost rates of senior capitaL. The exhibits also support the determination of a recommended return on
common equity through the use of various market models, such as, but not limted to, Discounted Cash Flow
analysis, Capital Asset Pricing Model and Risk Premium Methodology, as well as an assessment of the risk
characteristics of the client utilty. I also assisted in the preparation of responses to any interrogatories recived
regarding such testionies filed on behalf of client utilties. Following the filing of fair rate of retu testimonies, I
assisted in the evaluation of opposition testiony in order to prepare interrogatory questions, areas of cross-
examation, and rebuttal testiony. I also evaluated and assisted in the preparation of briefs and exceptions
followig the hearing process. I also submitted testiony before state public utilty commssions regarding
appropriate capital strctue ratios and fied capita cost rates.
1990-1994
As a Senior Financial Analyst, I supervsed two analysts and assisted in the preparation of fair rate of retu
and cost of capital exhbits which are fied along with expert testiony before various state and federal public utility
reguatory bodies. The team also assisted in the preparation of interrogatory responses.
I evaluated the fial orders and decsions of various commssions to determne whether further actions were
waanted and to gain insight which assisted in the preparation of futue rate of retu studies.
I assisted in the preparation of an arcle authored by Frank J. Hanley and A Gerald Harris entitled "Does
Diversification Increase the Cost of Equity Capital?" published in the July 15, 1991 issue of Public Utilties
Fortghtly.
In 1992, I was awarded the professional designation "Certified Rate of Return Analyst" (CRRA) by the
National Society of Rate of Retu Analysts (now the Society of Utilty and Regulatory Financial Analysts
(SURFA)). This designation is based upon education, experience and the successfu completion of a comprehensive
examnation.
As Admiistrator of Financial Analysis for AUS Utility Report, which then reported fiancial data for over
200 utilty companies with approxiately 1,000 subscribers, I oversaw the preparation of this monthly publication,
as well as the accmpanying anual publication, Financial Statistics - Public Utities.
1988-1990
As a Financial Analyst, I assisted in the preparation of fair rate of retu studies including capital strcture
determiation, development of senior capital cost rates, as well as the determnation of an appropriate rate of retu
on equity. I also assisted in the preparation of interrogatory responses, interrogatory questions of the opposition,
areas of cross-examination and rebuttal testimony. I also assisted in the preparation of the annual publication C. A.
Turer Utility Reports - Financial Statistics -Public Utilties.
1973-1975
As a Research Assistant in the Research Department of the Regional Ecnomics Division of the Federal
Reserve Ban of Boston, I was involved in the development and maintenance of econometric models to simulate
regional economic conditions in New England in order to study the effects of, among other things, the energy crisis
of the early 1970's and property tax revaluations on the economy of New England. I was also involved in the
statistical analysis and preparation of arcles for the New England Ecnomic Review. Also, I was Assistant Editor
of New England Business Indicators.
1972
As a Research Assistant in the Offce of the Assistant Secretary for International Afairs, U.S. Treasury
Deparent, Washington, D.C., I developed and maintained econometric models which simulated the economy of
the United States in order to study the results of various alternate foreign trade policies so that national trade policy
could be formulated and recommended.
Clients Served
I have offered expert testiony before the followig commssions:
Arkansas
Californa
Connecticut
Delaware
Florida
Hawaü
Idaho
Illois
Indiana
Iowa
Kentucky
Louisiana
Maine
Maryland
Michigan
Missouri
Nevada
New Jersey
New York
Nort Carolina
Ohio
Pennsylvania
South Caolina
Virginia
Washigton
I have sponsored testiony on generic/uniform methodologies for determning the retu on common equity
for:
Aquarion Water Company
The Connecticut Water Company
United Water Connecticut, Inc.
Utilities, Inc.
I have sponsored testimony on the rate of retu and capita strctue effects of merger and acquisition
issues for:
Caliornia-American Water Company New Jersey-America Water Company
I have sponsored testiony on fai rate of retu and related issues for:
Alpena Power Company
Apple Canyon Utility Company
Applied Wastewater Management, Inc.
Aqua Ilinois, Inc.
Aqua New Jersey, Inc.
Aqua North Caolia, Inc.
Aqua Virgia, Inc.
Aquarion Water Company
Aresian Water Company
The Atlantic City Sewerage Company
Audubon Water Company
The Borough of Hanover, PA
Carolina Pines Utilities, Inc.
Carolina Water Servce, Inc. of NC
Carolina Water Service, Inc. of SC
The Columbia Water Company
The Connecticut Water Company
Consumers Ilinois Water Company
Consumers Maine Water Company
Consumers New Jersey Water Company
City of DuBois, Pennsylvania
Eliabethtown Water Company
Emporium Water Company
GTE Hawaiian Telephone Inc.
Greenrdge Utilties, Inc.
Ilois American Water Company
Iowa American Water Company
Water Servces Corp. of Kentucky
Lae Wildwood Utilities Corp.
Lad'Or Utility Company
Long Island America Water Company
Long Neck Water Company
Louisiana Water Servce, Inc.
Massanutten Public Servce Company
Middlesex Water Company
Missour-American Water Company
Mt. Holly Water Company
Nero Utilty Servces, Inc.
New Jersey-American Water Company
Ohio-American Water Company
The Newtown Aresian Water Company
NRG Energy Center Pittburgh LLC
NRG Energy Center Harsburg LLC
United Water Idaho, Inc.
Penn Estates Utilties
Pinelands Water Company
Pinelands Waste Water Company
Pittsburgh Therm
San Jose Water Company
Southland Utiities, Inc.
Spring Creek Utilties, Inc.
Sussex Shores Water Company
Tega Cay Water Service, Inc.
Total Environmenta Servces, Inc. -
Treasure Lae Water & Sewer Divisions
Thames Water Americas
Tidewater Utiities, Inc.
Transylvania Utilties, Inc.
Trigen - Philadelphia Energy Corporation
Twi Laes Utilties, lnc.
United Utility Companes
United Water Arkasas, Inc.
United Water Arlington Hills Sewerage, Inc.
United Water Connecticut, Inc.
United Water Delaware, Inc.
United Water Great Gorge Inc. / United Water
Vernon Transmission, Inc.
United Water Idaho, Inc.
United Water Indiana, Inc.
United Water New Jersey, Inc.
United Water New Rochelle, Inc.
United Water New York, Inc.
United Water Owego / Nichols, Inc.
United Water Pennsylvania, Inc.
United Water Rhode Island, Inc.
United Water South County, Inc.
United Water Toms River, Inc.
United Water Vernon Sewage Inc.
United Water Virgiia, Inc.
United Water Westchester, Inc.
United Water West Lafayette, Inc.
United Water West Milford, Inc.
Utilties, Inc.
Utilties Inc. of Central Nevada
Utilties, Inc. of Florida
Utilties, Inc. of Louisiana
(Testiony on Rate of Retu Clients Contiued)
Utilities, Inc. of Nevada
Utilities, Inc. of Pennsylvania
Utilties, Inc. - Westgate
Utilties Servces of South Carolina
Utilty Center, Inc.
Valey Energy, Inc.
Wellsboro Electric Company
Western Utilties, Inc.
I have sponsored testimony on capital structue and senior capital cost rates for the followig clients:
Alpena Power Company
Arkansas-Western Gas Company
Associated Natual Gas Company
PG Energy Inc.
United Water Delaware, Inc.
Washington Natual Gas Company
I have assisted in the preparation of rate of retu studies on behalf of the following clients:
Algonqui Gas Transmission Company
Anadarko Petroleum Corporation
Arkasas-Louisiana Gas Company
Arkasas Western Gas Company
Aresian Water Company
Associated Natu Gas Company
Atlantic City Electrc Company
Bridgeport-Hydraulic Company
Cambridge Electric Light Company
Caolina Power & Light Company
Citizens Gas and Coke Utilty
City of Vernon, CA
Columbia Gas/Gulf Transmission Cos.
Commonwealth Electric Company
Commonwealth Telephone Company
Conestoga Telephone & Telegraph Co.
Connecticut Natual Gas Corporation
Consolidated Gas Transmission Company
Consumers Power Company
CWS Systems, Inc.
Delma Power & Light Company
East Honolulu Communty Servces, Inc.
Equitable Gas Company
Equitrans, Inc.
Florida Power & Light Company
Gar Hobar Water Company
Gasco, Inc.
GTE Arkasas, Inc.
GTE Californa, Inc.
GTE Florida, Inc.
GTE Hawaüan Telephone
GTE Nort, Inc.
GTE Nortwest, Inc.
GTE Southwest, Inc.
Great Lakes Gas Transmission L.P.
Hawaüan Electric Company
Hawaiian Electrc Light Company
IES Utilties Inc.
Illinois Power Company
Interstate Power Company
Interstate Power & Light Co.
Iowa Electrc Light and Power Company
Iowa Southern Utilities Company
Kentucky-West Virginia Gas Company
Lockhart Power Company
Middlesex Water Company
Milwaukee Metropolitan Sewer District
Mountaieer Gas Company
National Fuel Gas Distribution Corp.
National Fuel Gas Supply Corp.
Newco Waste Systems of NJ, Inc.
New Jersey Natual Gas Company
New Jersey-American Water Company
New York-American Water Company
North Caolina Natual Gas Corp.
Northumbrian Water Company
United Water Idaho, Inc.
Oklahoma Natual Gas Company
Orange and Rockland Utilities
Paiute Pipelie Company
PECO Energy Company
Penn Estates Utities, Inc.
Penn-York Energy Corporation
Pennsylvania-America Water Co.
PG Energy Inc.
Philadelphia Electrc Company
Providence Gas Company
South Carolia Pipeline Company
Southwest Gas Corporation
Stamord Water Company
Tesoro Alaska Petroleum Company
Tesoro Refig & Marketig Co.
United Telephone of New Jersey
United Utility Companes
United Water Arkansas, Inc.
United Water Delaware, Inc.
(Rate of Retu Study Clients Continued)
United Water Idaho, Inc.
United Water Indiana, Inc.
United Water New Jersey, Inc.
United Water New York, Inc.
United Water Pennsylvania, Inc.
United Water Virginia, Inc.
United Water West Laayette, Inc.
Utiities, Inc. of Pennsylvana
Utilties, Inc. - Westgate
Vista-United Telecommuncations Corp.
Washington Gas light Company
Washington Natual Gas Company
Washigton Water Power Corporation
Waste Management of New Jersey -
Transfer Station A
Wellsboro Electrc Company
Western Reserve Telephone Company
Western Utilties, Inc.
Wisconsin Power and light Company
EDUCATION:
1973 - Clark University - RA - Honors in Economics (Concentration: Ecnometrics and
Regional/International Ecnomics)
1991- Rutgers University - M.RA - High Honors (Concentration: Corporate Finance)
PROFESSIONAL AFLITIONS:
American Finance Association
Financial Management Association
Society of Utility and Reguatory Financial Analysts
Member, Board of Directors - 2010-2012
President - 2006-2008 and 2008-2010
Secretaryflreasurer - 2004-2006
Energy Association of Pennsylvania
National Association of Water Companies - Member of the Finance/Accountinglaxation Commttee
SPEAKNG ENGAGEMENTS:
"Public Utilty Betas and the Cost of Capital", (co-presenter with Richard A Michelfelder, Ph.D.) - Advanced
Workshop in Reguation and Competition, 30th Anual Eastern Conference of the Center for Research in Reguated
Industries (CRRI), May 20,2011, Rutgers University, Skyop, PA
Moderator: Society of Utiity and Reguatory Financial Analysts: 43rd Financial Foru - "Impact of Cost Recovery
Mechanisms on the Perception of Public Utilty Risk", April l4-15, 2011, Washington, DC.
"A New Approach for Estimating the Equity Risk Premium for Public Utilities", (co-presenter with Richard A
Michelfelder, Ph.D.) - Hot Topic Hotline Webinar, December 3,2010, Financial Research Institute of the University
of Missouri.
"A New Approach for Estimating the Equity Risk Premium for Public Utilties", (co-presenter with Richard A
Michelfelder, Ph.D.) before the Indiana Utilty Reguatory Commssion Cost of Capital Task Force, September 28,
2010, Indianapolis, IN
Tomorrow's Cost of Capital: Cost of Capita Issues 20l0, Deloitte Center for Energy Solutions, 2010 Deloitte
Energy Conference, "Changing the Great Game: Climate, Customers and Capital", June 7-8, 2010, Washigton,
DC.
"Cost of Capital Issues - 20 1 0" - Deloitte Center for Energy Solutions 2010 Energy Conference: Changing the
Great Game: Cliate, Consumers and Capital, June 7-8,2010, Washington, DC
"A New Approach for Estiating the Equity Risk Premium for Public Utilities", (co-presenter with Richard A
1
Michelfelder, Ph.D.) - Advanced Workshop in Reguation and Competition, 29th Annual Eastern Conference of the
Center for Research in Reguated Industries (CRR), May 20,2010, Rutgers University, Skyop, PA
Moderator: Society of Utilty and Reguatory Financial Analysts: 420d Financial Foru - "The Changing Economic
and Capital Market Environment and the Utilty Industr", April 29-30, 2010, Washigton, DC
"A New Model for Estimating the Equity Risk Premium for Public Utilties" (co-presenter with Richard A
Michelfelder, Ph.D.) - Spring 2010 Meetig of the Staff Subcommttee on Accunting and Finance of the National
Association of Reguatory Utilty Commssioners, March 17, 2010, Charleston, SC
"New Approach to Estiating the Cost of Common Equity Capital for Public Utilties" (co-presenter with Richard
A Michelfelder, Ph.D.) - Advanced Workshop in Reguation and Competition, 28th Anual Eastern Conference of
the Center for Research in Reguated Industres (CRR), May 14, 2009, Rutgers University, Skyop, PA
Moderator: Society of Utilty and Reguatory Financial Analysts: 41 sl Financial Foru - "Estimating the
Cost of Capital in Today's Economic and Capital Market Environment', April l6-17, 2009, Washington, DC
"Water Utilty Financing: Where Does All That Cash Come From?", AWWA Pre-Conference Workshop: Water
Utilty Ratemakig, March 25, 2008, Atlantic City, NJ
PAPERS:
"Public Utility Beta Adjustment and the Cost of Capital", co-authored with Richard A Michelfelder, Ph.D. and
Panayiotis Theodossiou, Ph.D.
"A New Approach for Estimatig the Equity Risk Premium for Public Utilties", co-authored with Frank J. Hanley
and Richard A Michelfelder, Ph.D. (forthcomig in The Joural of Reguatory Ecnomics).
"Comparable Earnings: New Life for an Old Precept' co-authored with Frank J. Hanley, Financial Quarterly
Review, (American Gas Association), Sumer 1994.
Dean J. Miler (ISB 1968)
McDEVITT & MILLER LLP
420 West Bannock Street
P.O. Box 2564-83701
Boise, in 83702
Tel: [phone]
Fax: [phone]
j oe(ßmcdevitt -miller .com
C(\ ctD~,:.,,,',,~ 1_ 'i ..~
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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-W-LL-02
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT TO ACCOMPANY THE DIRECT TESTIMONY OF PAULINE M. AHERN, CRR
PRINCIPAL
AUS CONSULTANTS
Table of Contents
to the Financial Supporting Exhibit
of Pauline M. Ahern, CRRA
Schedule
Summary of Cost of Capital and Fair Rate of Return 1
Capital Intensity and Depreciation Rates for United Water
Idaho, Inc. and the AUS Utility Reports Companies 2
Relative Risk Indicators for the AUS Utility Reports Companies 3
Standard & Poor's Public Utility Rating Methodology Profile
and Revised Public Utility Financial Indicative Ratios 4
Financial Profile of the Proxy Group of Nine
Water Companies 5
Application of the Discounted Cash Flow Model (DC F)
to the Proxy Group of Nine Water Companies 6
Current Institutional Holdings 7
Application of the Risk Premium Model (RPM)
to the Proxy Group of Nine Water Companies 8
Total Returns on Large Company Common Stocks -1926-2010 9
Application of the Capital Asset Pricing Model (CAPM)
to the Proxy Group of Nine Water Companies 10
Summary of Cost of Common Equity Models Applied to
Comparable Risk Non-Price Regulated Companies to the
Proxy Group of Nine Water Companies and Basis of Selection 11
Projected Returns on Book Common Equity for the
Comparable Risk Non-Price Regulated Companies to the
Proxy Group of Nine Water Companies 12
Applications of the DCF, RPM, and CAPM for the
Comparable Risk Non-Price Regulated Companies to the
Proxy Group of Nine Water Companies 13
Estimated Market Capitalization for United Water Idaho, Inc.
and the Proxy Group of Nine Water Companies 14
United Water Idaho. Inc.
Summary of Cost of Capital and Fair Rate of Return
Based upon the Pro Forma Consolidated Capital Structure
of United Waterworks. Inc. at April 30. 2011
Weighted
Type of Capital Ratios (1)Cost Rate Cost Rate
Long-Term Debt 47.49%6.15% (1)2.92%
Common Equity 52.51%10.50% (2)5.51%
Total 100.00%8.43%
Notes:
(1) Company-provided.
(2) Although Ms. Ahern's recommended common equity cost
rate is 11.05%, the company is requesting a 10.50% return
rate on common equity.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 1
Page 1 of2
P. Ahern
United Water Idaho. Inc.
Brief Summary of Common Equity Cost Rate
Proxy Group of
Nine Water
No.Principal Methods Companies
1.Discounted Cash Flow Model (DCF) (1)9.54 %
2.Risk Premium Model (RPM) (2)10.33
3.Capital Asset Pricing Model (CAPM) (3)10.42
Market Models Applied to Comparable Risk, Non-Price
4.Regulated Companies (4)13.45
5.Indicated Common Equity Cost Rate before Adjustment
for Business Risks 10.90 %
6.Financial Risk Adjustment (5)(0.23)
7 Business Risk Adjustment (6)0.40
8.Indicated Common Equity Cost Rate 11.07 %
9.Recommended Common Equity Cost Rate 11.05 %
Notes: (1) From Schedule 6.
(2) From page 1 of Schedule 8.
(3) From page 1 of Schedule 10.
(4) From page 2 of Schedule 11.
(5) Financial risk adjustment to reflect the financial risk of the capital structure
employed by United Water Idaho for ratemaking purposes relative to the proxy
group as detailed in Ms. Ahern's accompanying direct testimony.
(6) Business risk adjustment to reflect's greater business risk due to its small size
relative to the proxy group as detailed in Ms. Ahern's accompanying direct
testimony.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 1
Page 2 of2
P. Ahern
United Water Idaho. Inc.
2010 Capital Intensity of United Water Idaho, Inc. and
AUS Utilty Reports Utility Companies Industry Averages
Average
Average Operating Capital Capital Intensity
Net Plant Revenue Intensity ofUWID
($ mil)($ mil) ($)v. Other Industries
(times)
United Water Idaho, Inc.$243.15 $37.39 $6.50
Water Industry Average $1,841.97 $482.13 $3.82 170.16%
Electric Industry Average $11,841.00 $5,481.47 $2.16 300.93%
Combination Elec. & Gas Industry Average $10,561.90 $6,210.80 $1.70 382.35%
Gas Distribution Average $2,909.36 $2,295.93 $1.27 511.81%
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2010
Capital Intensity
$3.82
$2.16
UWIO Water Industry
Avg.
Electric Industry Combination E&G LOC IndustryAvg.Avg. Avg.
Notes:
Capital Intensity is equal to Net Plant divided by Total Operating Revenue.
Source of Information:
EDGAR Online's I-Metrix Database
Company Annual Forms 10-K
AUS Utilty Reports - May 2011
Published By AUS Consultants
Company Provided Information
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 2
Page 1 of5
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United Water Idaho. Inc.
2010 Depreciation Rate of United Water Idaho, Inc. and
AUS Utility Report Utility Companies Industry Averages
Depreciation Average Total
Depletion Gross Plant Depreciation Depreciation Rate
& Amort. Expense Less CWIP Rate ofUWID
($ mil) ($ mil) (%)v. Other Industries
(times)
United Water Idaho, Inc.$7.32 $245.43 3.0%
Water Industry Average $61.69 $2,024.85 3.0%100.00%
Electric Industry Average $581.88 $15,770.71 3.7%81.08%
Combination Elec. & Gas Industry Average $541.78 $14,632.55 3.7%81.08%
LDC Gas Distribution Industr Average $132.79 $3,952.97 3.4%88.24%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010 Effective Depreciation Rate
UWID Water Industry Avg. Electric Industry Avg. Combination E&G LDC Industry Avg.
Avg.
Notes:
Effective Depreciation Rate is equal to Depreciation, Depletion and Amortzation Expense divided by
average beginning and ending year's Gross Plant minus Construction Work in Progress.
Source of Information:
EDGAR Online's I-Metrix Dataase
Company Annual Forms 10-K
AUS Utilty Report - May 2011
Published by AUS Consultants
Company Provided Information
Case No. UWI-W-11-D2
Exhibit No. 1
Schedule 2
Page 3 of5
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Case No. UWI-W-11-02
Exhibit No.1
Schedule 3
Page 10 of 10
Criteria I Corporates I General:
Criteria Methodology: Business
Risk/Financial Risk Matrix
Expanded
Primary Credit Analysts:
Solomon 8 Samson, New York (11212-438-7653: sol_samsonl/standardandpoors.com
Emmanuel Dubois-Pelerin, Paris (33) 1-4420-6673; emmanueLdubois-pelerinl/standardandpoors,com
Table Of Contents
Business Risk!inancial Risk Framework
Updated Matrix
Financial Benchmarks
How To Use The Matrix--And Its Limitations
Related Articles
www.standardandpoors.comJratingsdirect 1
Standard & Po's. All righls reseived. No reprint or dissemination without S&P's permission, S.. Terms of
IIc:pJnic:N~imP. on tim IAl:1 nMA
7i4 i 52 . 3J:i3!3~,52
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 4
Page 1 of6
Criteria I Corporates I General:
Criteria Methodology: Business Risk/Financial
Risk Matrix Expanded
(Editor's Note: In the previous version of this article published on May 26, certain of the rating outcomes in the
table 1 matrix were missated. A corrected version follows.)
Standard & Poor's Ratings Services is refining its methodology for corporate ratings related to its business
risk/financial risk matrix, which we published as part of 2008 Corporate Ratings Criteria on April 15,2008, on
RatingsDirect at ww.ratingsdirect.com and Standard & Poor's Web site at ww,standardandpoors.com.
This article amends and supersedes the criteria as published in Corporate Ratigs Criteria, page 21, and the articles
listed in the "Related Articles" section at the end of this report.
This article is part of a broad series of measures announced last year to enhance our governance, analytics,
dissemination of information, and investor education initiatives. These intiatives are aimed, at augmenting our
independence, strengthening the rating process, and increasing our transparency to better serve the global markets.
We introduced the business risk/financial risk matrix four years ago. The relationships depicted in the matrix
represent an essential element of our corporate analytical methodology.
We are now expanding the matrix, by adding one category to both business and financial risks (see table 1). As a
result, the matrix allows for greater differentiation regarding companies rated lower than investment grade (i.e., 'BB'
and below).
Table 1
Business And Financial Risk Profile Matrix
Business Risk Profile Financial Risk-Profie
Minimal Modest Intermediate Significant Aggressive Highly Leveraged
Exellent AM AA A A-BBB
Strong AA A A-BBB BB BB-
Satisfactor A-BBB+BBB BBt BB-B+
Fair BBB-BB+BB BB-B
Weak BB BB-B+B.
Vulnerable Bt B CCC+
These rating outcomes are shown for guidance purpses only. Actual rating should be within one notch of indicated rating outcoms.
The ratig outcomes refer to issuer credit ratings. The ratings indicated in each cell of the matrix are the midpoints
of a range of likely ratig possibilties. This range would ordiarily span one notch above and below the indicated
rating.
Standard & Poor's RatingsDirect I May 27, 2009 2
Standard & Poor's. All rights reserv. No reprint or dissemination without S&P's permissin. See Tenns of Use/Disclaimr on th la page.7Z151 ' 300023551
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 4
Page 2 of6
Criteria I Corp orates I General: Criteria Methodology: Business Risk/Financial Risk Matrix Expanded
Business Risk/Financial Risk Framework
Our corporate analytical methodology organizes the analytcal process according to a common framework, and it
divides the task into several categories so that all salient issues are considered. The first categories involve
fundamental business analysis; the financial analysis categories follow.
Our ratings analysis starts with the assessment of the business and competitive profile of the company. Two
companies with identical financial metrics can be rated very diferently, to the extent that their business challenges
and prospects differ. The categories underlying our business and financial risk assessments are:
Business risk
. Country risk
. Industry risk
. Competitive position
. ProfitabilitylPeer group comparisons
Financial risk
. Accounting
. Financial governance and policies/risk tolerance
. Cash flow adequacy
. Capital structure/asset protection
. Liquidity/short-term factors
We do not have any predetermined weights for these categories. The significance of specific factors varies from
situation to situation.
Updated Matrix
We developed the matrix to make explicit the rating outcomes that are typical for various business risk/financial risk
combinations. It ilustrates the relationship of business and financial risk profiles to the issuer credit rating.
We tend to weight business risk slightly more than financial risk when differentiating among investment-grade
ratings. Conversely, we place slightly more weight on financial risk for speculative-grade issuers (see table 1, again).
There also is a subtle compounding effect when both business risk and financial risk are aligned at extremes (i.e.,
excellent/minimal and vulnerablelhighly leveraged.)
The new, more granular version of the matrix represents a refinement--not any change in rating criteria or
standards--and, consequently, holds no implications for any changes to existing ratings. However, the expanded
matrix should enhance the transparency of the analytical process.
Financial Benchmarks
ww.standardandpoors.comJratingsdirect 3
Standard & Poor's. All rights reseivd. No reprint or dissmination without S&p's permission. See Term of UsalisclamOl on the last pag.724151 ¡ 300013552
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 4
Page 3 of6
Criteria I Corp orates I General: Criteria Methodology: Business Risk/Financial Risk Matrix Expanded
Tablø2
Financial Risk Indicatiiie Ratios (Corporates)
FFO/Debt (%)Debt/BITDA (xl Debt/Capital (%)
Minimal greater than 60 less than 1.5 less than 25
Modest 45-60 1.5-2 25-35
Intermediate 30-45 2-3 35-45
Significant 20-30 3-4 45-50
Aggressive 12-20 4-5 50-60
Highly Leveraged less than 12 greater than 5 greater than 60
How To Use The Matrix--And Its Limitations
The rating matrix indicative outcomes are what we typicaIly observe-but are not meant to be precise indications or
guarantees of future rating opinions. Positive and negative nuances in our analysis may lead to a notch higher or
lower than the outcomes indicated in the various cells of the matrix.
In certain situations there may be specific, overarching risks that are outside the standard framework, e.g., a
liquidity crisis, major litigation, or large acquisition. This often is the case regarding credits at the lowest end of the
credit spectrum--Le., the 'CCC' category and lower. These ratigs, by definition, reflect some impending crisis or
acute vulnerabilty, and the balanced approach that underlies the matrix framework just does not lend itself to such
situations.
Similarly, some matrix ceIls are blank because the underlying combinations are highly unusual--and presumably
would involve complicated factors and analysis.
The foIlowing hypothetical example ilustrates how the tables can be used to better understand our rating process
(see tables 1 and 2).
We believe that Company ABC has a satisfactory business risk profile, typical of a low investment-grade industrial
issuer. If we believed its financial risk were intermediate, the expected rating outcome should be within one notch of
'BBB'. ABC's ratios of cash flow to debt (35%) and debt leverage (total debt to EBITDA of 2.5x) are indeed
characteristic of intermediate financial risk.
It might be possible for Company ABC to be upgraded to the 'A' category by, for example, reducing its debt burden
to the point that financial risk is viewed as minimaL. Funds from operations (FFO) to debt of more than 60% and
debt to EBITDA of only 1.5x would, in most cases, indicate miniaL.
Conversely, ABC may choose to become more fiancially aggressive--perhaps it decides to reward shareholders by
borrowing to repurchase its stock. It is possible that the company may fall into the 'BB' category if we view its
financial risk as significant. FFO to debt of 20% and debt to EBITA 4x would, in our view, typif the significant
financial risk category.
Stil, it is essential to realize that the financial benchmarks are guidelines, neither gospel nor guarantees. They can
vary in nonstandard cases: For example, if a company's financial measures exhbit very little volatility, benchmarks
may be somewhat more relaxed.
Standard & Poor's RatingsDirect I May 27, 2009 4
Standard & Poor's. All rights reseid. No reprint or dissemination without S&P's pennission. See Term of UsalOislaimer on thalast pago.72151 . 300023552
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 4
Page 4 of6
Criteria I Corporates I General: Criteria Methodology: Business Risk/Financial Risk Matrix Expanded
Moreover, our assessment of fiancial risk is not as simplistic as looking at a few ratios. It encompasses:
. a view of accounting and disclosure practices;
· a view of corporate governance, financial policies, and risk tolerance;
. the degree of capital intensity, flexibility regarding capital expenditures and other cash needs, including
acquisitions and shareholder distributions; and
· various aspects of Iiquidity--including the risk of refinancing near-term maturities.
The matrix addresses a company's standalone credit profile, and does not take account of external influences, which
would pertain in the case of government-related entities or subsidiaries that in our view may benefit or suffer from
affilation with a stronger or weaker group. The matrix refers only to local-eurrency ratings, rather than
foreign-currency ratings, which incorporate additional transfer and convertibilty risks. Finally, the matrix does not
apply to project finance or corporate securitizations.
Related Articles
Industrials' Business Risk!inancial Risk Matrix-A Fundamental Perspective On Corporate Ratings, published April
7,2005, on RatingsDirect.
ww.standardandpoors.com/ratingsdirect 5
Standrd & Poor's. All rights rerv. No reprint or disemnation witht S&P's permission See Terms of Useliscleimer on the last page.72412' 300023552
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 4
Page 5 of6
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Standard & Poor's RatingsDirect I May 27. 2009 6
11152; 300023552
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 4
Page 6 of6
CAPITALIZATION STATISTICS
AMOUNT OF CAPITAL EMPLOYED
TOTAL PERMANENT CAPITAL
SHORT-TERM DEBT
TOTAL CAPITAL EMPLOYED
INDICATED AVERAGE CAPITAL COST RATES (2)
TOTAL DEBT
PREFERRED STOCK
CAPITAL STRUCTURE RATIOS
BASED ON TOTAL PERMANENT CAPITAL:
LONG-TERM DEBT
PREFERRED STOCK
COMMON EQUITY
TOTAL
BASED ON TOTAL CAPITAL:
TOTAL DEBT, INCLUDING SHORT-TERM
PREFERRED STOCK
COMMON EQUITY
TOTAL
FINANCIAL STATISTICS
FINANCIAL RATIOS - MARKET BASED
EARNINGS I PRICE RATIO
MARKET I AVERAGE BOOK RATIO
DIVIDEND YIELD
DIVIDEND PAYOUT RATIO
RATE OF RETURN ON AVERAGE BOOK COMMON EQUITY
TOTAL DEBT I EBITDA (3)
FUNDS FROM OPERATIONS /TOTAL DEBT (4)
TOTAL DEBT /TOTAL CAPITAL
Proxy Group of Nine Water Companies
CAPITALIZATION AND FINANCIAL STATISTICS (1)
2006 - 2010 Inclusive
2010 2009 2008 2007
(MILLIONS OF DOLLARS)
2006
$1,712.951 $1,641.561 $1,537.371 $1,561.064 $1,274.261
$53.463 $31.243 ~$37.360 $100.228
$1766414 $1672804 $1621475 $1 598424 $1374 489
5.37 %5.31 %5.58 %6.08 %7.61 %
1.85 1.85 2.88 2.18 2.04 ~
AVERAGE
50.97 %50.80 %50.35 %49.46 %48.48 %50.01 %
0.19 0.21 0.22 0.31 0.46 0.28
48.84 48.99 49.43 50.23 51.06 49.71
ll %l! %ll %ll %l! %ii %
53.49 %53.33 %53.43 %50.59 %50.32 %52.23 %
0.18 0.19 0.21 0.31 0.45 0.27
46.33 46.48 46,36 49.10 49.23 ߧ
1l %ii %l! %ii%1Q %ii %
5.92 %4.33 %2.90 %4.95 %5.29 %4.68 %
161.43 147.98 156.27 198.82 206.08 174.12
3.62 4.03 3.84 3.31 3.31 3.62
66.67 60.06 64.23 63.89 63.02 63.57
8.98 %6.99 %6.39 %7.09 %8.09 %7.51 %
4.75 X 5.53 X 9.07 X 5.59 X 4.56 X 5.90 X
17.10 %16.41 %16.14 %15.04 %16.58 %16.25 %
53.49 %53.33 %53.43 %50.59 %50.32 %52.23 %
Notes:
(1) All capitaliztion and financial sttistics for the group are the arithmetic average of the achieved result for
each indiviual copany in the group, and are based upon financial statements as originally reported ineach year. .
(2) Computed by relating actual total debt interest or preferred stock dividends booked to average of beinning
and ending total debt or preferred stock reported to be outading.
(3) Total debt as a percentage of EBITDA (Earnings before Interes, Income Taxes, Depreciation and
Amortzation).
(4) Funds from operations (sum of net income, depreciation, amortization, net deferred incme tax andinvestment tax credit, less total AFUDC) plus interest charges as a percentage of total debt.
Source of Information: I-Metrix Dataase
Company SEC Form 10-K
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 5
Page 1 of2
Cai1 Stctre Based upon Tota Permanent Capjt for thE
Prox Group of Nine Water Companies
2006 - 2010 Inclusive §.~~2008 2l 2Q AVERAGE
American States Water Co.
Long-Term Debt 44.30 %46.95 %46.25 %46.99 %48.61 %46.62 %
Preferred Stock 0.00 0.00 0.00 0.00 0.00 0.00
Common Equity 55.70 53.05 53.75 53.01 51.39 53.38
Total Capital 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
American Water Works Co.~
Long-Term Debt 56.73 %56.98 %53.75 %51.05 %46.93 %53.08 %
Preferred Stock 0.29 0.30 0.32 0.31 0.06 0.26
Common Equit 42.98 42.72 45.93 48.64 53.01 46.66
Tota Capil 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
Aqua Amenca Inc
Long.Term Debt 57.05 %56.59 %54.21 %55.88 %51.55 %55.06 %
Preferred Stock 0.02 0.02 0.09 0.09 0.10 0.06
Common Equit 42.93 43.39 45.70 44.03 48.35 44.88
Total Capital 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
Artesian Resource Coæ.
Long-Term Debt 52.84 %54.12%59.57 %52.20 %61.87 %56.12%
Prefered Stock 0.00 0.00 0.00 0.00 0.00 0.00
Common Equity 47.16 45.88 40.43 47.80 38.13 43.88
Total Capitl 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
California Water Serice
Group
Long-Term Debt 52.51 %47.93 %41.88 %42.86 %43.47 %45.73 %
Preferred Stock 0.00 0.00 0.00 0.51 0.51 0.20
Common Equity 47.49 52.07 58.12 56.63 56.02 54.07
Total Capitl 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
Connecticut Water Serice~
Long-Term Debt 49.32 %50.59 %46.94%47.76 %44.42 %47.81 %
Preferred Stoc 0.34 0.35 0.39 0.44 0.49 0.40
Common Equit 50.34 49.06 52.67 51.80 55.09 51.79
Tota Capital 100.00 %100.00%100.00 %100.00 %100.00 %100.00 %
Middlesex Water Compay
Long-Term Debt 43.91 %47.35 %49.10%49.48 %48.78 %47.72 %
Preferred Stock 1.07 1.24 1.22 1.46 2.95 1.59
Common Equity 55.02 51.41 49.68 49.06 48.27 50.69
Total Capitl 100.00 %100.00 %100.ÖÖ %100.00 %100.00 %100.00 %
SJW Corporation
Long-Term Debt 53.79 %49.52 %46.08 %47.79 %41.83 %47.80 %
Preferred Stock 0.00 0.00 0.00 0.01 0.Q 0.00
Common Equit 46.21 50.48 53.92 52.20 58.16 52.20
Total Capitl 100.00 %100.00 %100.00 %100.00 %100.00 %100.00%
York Water Company
Long-Term Debt 48.28 %47.16%55.31 %51.17 %48.82 %50.15%
Preferred Stock 0.00 0.00 0.00 0.00 0.00 0.00
Common Equit 51.72 52.84 44.69 48.83 51.8 49.85
Total Capitl 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
Proxy Group of Nine Water
Compaies
Long-Term Debt 50.97 %50.80 %50.35 %49.46 %48.48 %50.01 %
Preferred Stock 0.19 0.21 0.22 0.31 0.46 0.28
Common Equity 48.84 48.99 49.43 50.23 51.06 49.71
Tot Capital 100.00 %100.00 %100.00 %100.00 %100.00 %100.00 %
Source of Informaon
EDGAR Online's I-Metrix Databae
Annual Forms 1 O-K
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 5
Page 2 of2
Proxy Group of Nine Water Companies
American States Water Co.
American Water Works Co., Inc.
Aqua America, Inc.
Aresian Resources Corp.
Califrnia Water Service Group
Connecicut Water Service, Inc.
Middlesex Water Company
SJW Corporation
York Water Company
Average
Median
Source of Information:
United Water Idaho. Inc.
Indicated Comon Equit Cot Rate Using Ule Discounted Cah Flow Model for
Ule Proxy Group of Nine Water Companies
1 g a â §z fti
Yahoo!
Value Une Reuters Mean zack's Rve Rnance Average
Projected Consensus Year Projected Projeted Indicated
Average Five Year Projected Rve Projected Five Year Five Year Adjusted Common
Dividend Growt in Year Growth Growt Growt in Growt in Dividend Equity Cot
Yield (1)EPS(2)Rate in EPS Rate in EPS EPS EPS(3)Yield (4) Rate (5)
3.29 %8.00 %5.50 %%5.50 %6.33 %3.39 %9.72 %
3.02 8.50 11.00 8.70 8.70 9.23 3.16 12.39
2.81 10.00 7.20 6.50 6.00 7.43 2.91 10.34
3.99 3.60 4.50 3.60 4.53 4.06 4.07 8.13
3.34 3.00 6.30 9.00 6.10 3.4 9.54
3.72 4.00 5.50 4.00 3.00 4.13 3.80 7.93
3.99 3.00 (1.00)3.00 3.00 2.00 4.03 6.03
3.02 9.00 14.00 14.00 12.33 3.21 15.54
3.10 6.00 6.00 6.00 6.00 6.00 3.19 ~~%~%
NA= Not Available
NMF = Not Meaningful Figure
Notes:
(1) Indicate dividend at 7/6/2011 divided by Ule average closing price of Ule last 60 trading days ending 7/6/2011 for
each company.
(2) From pages 2 Ulrough 10 of this Scheule.
(3) Average of columns 2 Ulrough 5 excluding negative growth rates.
(4) This reflects a growt rate component equal to one-half the conclusion of growth rate (from column 6) x column 1
to reflect the periodic payment of dividends (Gordon Model) as opposed to the continuous payment. Thus, for
American States Water Co. , 3.29% x (1 +( 1/2 x 6.33%) ) = 3.39%.
(5) Column 6 + column 7.
Value Une Investment Survey: April 22, 2011
ww.reulers.com Downloaded on 07/06/2011
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Case No. UWI-W-11-02
Exhibit NO.1
Schedule 6
Page 1 of 10
% TOT. RETURN 3/11nu VLAR."
1: 1 yr. ~K ~~
I' 3 yr. 8.7 49.0.4 i l1 syr. 10.0 45.9
20 2 ~ 206 20 20 2010 2011 2012 "VAWE UNE PUB.LLC 14-16
12.17 13.06 13.78 13.98 13.61 14.06 15.76 17.49 18.42 19.48 21.41 21.05 2205 Revenuespersh 25.00
2.20 2.53 2.54 2.08 223 2.64 2.89 3.31 3.37 3.40 4.34 4.15 4.35 "C Fl pe sh 4.85
1.28 1.3 1.3 .78 1.05 1.32 1.33 1.62 1.55 1.62 2.25 2.10 2.20 Eaingpesh A 2.60
.86 .87 .87 .88 .89 .00 .91 .96 1.00 1.01 1.04 1.0B 1.12 D1v'd Dil'd per sh .. 1.25
3.03 3.18 2.68 3.76 5.03 4.24 3.91 2.89 4.5 4.18 4.24 4.15 4.35 cap'1 Speing per sh 5.00
12.74 13.22 14.05 13.97 15.01 15.72 16.64 17.53 17.95 19.39 20.26 20.80 20.50 Bok Value pe sh 20.75
15.12 15.12 15.18 15.21 16.75 16.80 17.05 17.23 17.30 18.53 18.63 19.5 19.50 Corn ShsOutg c 20.00
15.9 16.7 18.3 31.9 23.2 21.9 27.7 24.0 22.6 21.2 15.5 Bold OS ,.,.,. Avg Ann'l PIE Ratio 19.0
1.03 .86 1.00 1.82 1.23 1.7 1.50 1.27 1.35 1.41 1.00 :: Un. Relat PIE Ratc 1..254.2% 3.9% 3.6% 3.5% 3.6% 3.1% 2.5% 2.5% 2.9% 2.9% 3.0% .. Avg AM'I Di'd Yield 2.5%
197.5 209.2 212.7 228.0 23.2 268.6 301.4 318.7 351.0 398.9 .w5 430 Revenu ($ill) 5020.4 20.3 11.9 16.5 22.5 23.1 28.0 28.8 29.5 42. .w.0 43.0 Nel prom ($miiii 52.0
43.0% 38.9% 43.5% 37.4% 47.0% 40.5% 42.6% 37.8% 38.9% 42.6% 42.0% .w.0% Inc Tax Ra1 .w.0%
. . . . . . . . . . 12.2% 8.5% 6.9% 3.2% 5.0% 5.0% 5.0% AFUDC % to Nel Prl 5.0%
54.9% 52.0% 52.0% 47.1" 50.4% 49.6% 46.9% 46.2% 45.9% 44.3% 43.0% 450% LongTerm Debt Rao 49.5%
44.1" 48.% 49.0% 52.3% 49.6% 51.4% 53.1% 53.8% 54.1% 55.7% 57.0% 55.0% CommnEauitRato 50.5%447.6 444.4 442.3 480.4 532.5 551.6 569.4 5770 66.0 6774 700 72 Tot Cøtsl ($ißl) 825
539.8 56.3 602.3 66.2 713.2 750.6 776.4 825.3 86.4 005.2 950 100 Nel Plant ISIlI 1150
8.1% 6.5% 4.6% 52% 5.4% 6.0% 6.1" 6.4% 5.9% 7.5% 7.5% 7.5% Retum on Tot cap'1 8.0%
10.1% 9.5% 5.6% 6.6% 8.5% 8.1% 9.9% 8.6% 8.2% 11.9% 11.0% 11.0% RetumonShr.Equi 12.5%
Common Siock 18,854,106 shs. 10.1% 9.5% 5.6% 6.6% 8.5% 8.1% 9.9% 8.6% 8.2% 11.9% 11.0% 11.0% RemonCom&iui 12.5%
as 0131/11 3.6% 3.3% NMF 1.0% 2.8% 2.1" 3.9% 3.1% 3.2% 6.2% 5.0% 5.5% RefBneloComEq 6.5%MARKET CAP: $650 millon (Small Cap) 65% 65% 113% 84% 61 81" 58% 64% 61% 45% 52 51% All Dlv'ds to Net Pro .48%
CU;ft' POSITON 20 20 12/1/10 BUSINESS: American Sttes Water Co. operates as a holding ers in the ci of Big Bear lae and in areas of San Bernardino
Cash Asets 7.3 1.7 4.2 company. Throuh it principal subsidiary, Golden Ste Water County. Acired Chaparr City Water of Arizona (10100). Has
Other 83.3 94.3 20.8 Company, it suppRes waer to more than 250,000 customers in 75 703 employees. Ofcers & directors own 2.6% of common stock
Current Asets -- -- "2 communitie in 10 conties. Service areas include the greater (4/10 Proxy). Chairman: Lloyd Ross. President & CEO: Robert J.
è:ts~aiable 36.6 ~:~ ~:~ metropolitn areas of los Angeles and Orange Counties. The com- Sprowls. inc: CA. Addr: 630 East Foothill Bolevrd, san Dimas,
Other ~:~ 47:7 81.2 pany also provides elecric utiit servics to nearly 23,250 custom- CA 91773. Tel: 909460. Internet: WW.aswater.com.Current Lib. 137.4 -- 178.8 Favorable regulatory back enabled empty, however, and the company willFoe ChQ. Cov. 29% 352 441% America States Water to have a have to contiue to seek outside finaciers
ANNUAL RATES Past Pas Est'd '08'10 blowout four quarer. Indeed. the to stay afoat. Debt and equity issuances
~:"ii~.!r sh) 10 ¡~% 5 i~ih to ~"5~ water utity posted eanigs of $0.71 a have become commonplace, and wi likely"Cash Flow" 5.0% 8.0% 5.5% share, nearly four times the year-before remain a drag on earnings growth going
5t'r~W:i i:~ ~:~~ g:g~ taly. Revenues jumped 20%, to $103.7 foiward. As a result, we look for shareBook Value 4.5% 5.0% 3.0% mion, than to the recognition of earngs to take a step back tl year andretroactive revenues from earlier in the to show modest improvement in 2012.
Ca~ QUARTELY REVENUES ($ mRi.) Full yea asociated with rate increases handed That said, the company is slated to fte a
endBr Mar.31 Jun. 30 Sep.30 Dec. 31 Year down by the Califonûa Public Utities general rate cae for all th regions in20 6B.9 80.3 B5.3 84.2 31B. Commsion (CPUC) in regar to general July of tl year. A rulig is expeced to
20 79.6 93.6 101.5 86.3 361. rate cass for Regions II and III. tae 18 month. A favorable verdict could
2010 88.4 95.5 111.3 103.7 39B. Growt wi be tough to come by tls prove our 2012 estiate consrvative.
~g :i~ l~~ m 9~~ ~~ r~~ Al~h:u:h ~e~~~~~ ~~::p~~:: ~~~;!t:::~:'=nli~::; %~~~nn~
Ca~ M.r.3~~~~~i:~~~:E~ec.31 Full ized in the final quarer of the year, the end in sight to the inrastrctue invest-enw Year CPUC's rug added $0,30 a share to the ment that is necessar. This industry is
208 .30 .53 .26 .43 1.55 bottm lie for the full-yea 2010. AWR is capital intensive, but unortunately AWR20 .2B .64 .52 .1B 1.62 subject to regulatory rulgs so the gai is is cash-strapped. As a result, the stock2010 .45 .47 .62 .71 2.25 considered tyical and not looked at as a does not stad out for price appreciation2011 .45 .55 .65 .45 2.10 nonrcurrng. But we do not expe a potential for the coming six to 12 months2012 .47 .58 .69 .46 2.20 simar occurrnce tl year. or the 3 to 5 years ahead. The financial
CB~ QUARTELY DMDENDS PAID" Full ... as well as the continued escala- constraints lead to concern about the
endBr Mar.31 Jun.30 Sen.30 Dec.31 Year tion of infrastructue costs. AWR's op- company's dividend, which despite being
207 .235 .235 .235 .250 .96 erating costs remain on the rise and are above the average offering in our Survy,208 .250 .250 .250 .250 1.00 not likely to slow anyte soon, given that loses some luster when compared to other20 .250 .250 .250 .26 1.01 its water system are growig older and utities.
¡:~ ~ .26 .26 .260 1.04 require attention. Its pockets are all but Andre J. Costan April 22, 2011
(A) Primary earnings. Excludes nonrecrrint¡roUndin9. : I (C) In milions, adjust for split. Company's Financal Strengt BHgains/ll..ses): '04, 14t; '05, 25t; '06, 6t; '08, (8) Divens historiCBI~ paid in eariy March, Stk' PriceSlabilit 65(27t); '10, (55t). Nex earnings report due ear. June, September, and December. . Div'd rain. Price Growt Persistence 70~ May. Quarter~ egs. may not add due to vestent plan evilab~. _eamings Pradiclabtilly 85
~~itB~~E~n~~~~~~P~~~'¿SR~::;rtRR~~rrdR~=~I~~~I:~i~~~~:,~::i~fore:=:'sis~~~:::;I~'2o;i , . I'. : Ii: It..oIil ma be reuced. resld, stored or irmi in an prle ele or oIhe bm. (J ii foge or maetng any pred or ~k; pu ser (J pr
TIMELINESS 3 Rai 11n9l0
SAFETY 3 New V410
TECHNICAL 2 Ra 4I1
BETA .15 (1.00", Market)
2014-16 PROJEC1~~,l Totl
Price Gain RetmHig 60 1+75%1 17%lo 40 +15% 7%
Insider DecisionsMJJASON
taBuy 0 0 0 2 0 0 0Opnsl000012toW 1 0 0 0 1 1 2
Institutional Decisions
202010 30200 4Q2010 Percentto Buy 46 53 59 shares
:IdS~~J 108: 111:~ 110~ traded
1995 1996 1997 1998 199
11.03 11.37 11.44 11.02 12.91
1.75 1.75 1.85 2.04 2.26
1.03 1.3 1.04 1.08 1.9
.81 .82 .83 .84 .85
2.19 2.40 2.58 3.11 4.30
10.29 11.01 11.24 11.48 11.82
11.77 13.33 t3.44 13.44 13.44
11.6 12.6 14.5 15.5 17.1
.78 .79 .84 .81 .97
8.7% 5.B% 5.5% 5.0% 4.2%
CAPITAL STRUCTURE as 0112/1/1
Total Deb $361.2 mil. Due In 5 Yrs $296.9 mil.
LT Debt $299.8 mil. LTinterest $21.6 mil.
(LT interest earned: 4.9x: total interestcoverage: 4.4x) (44% 01 Cap'l)
Hi9h: 25.3 26.4 29.0Low: 16.7 19.0 20.3
LEGENDS-1.25xDivendsrSh
.... ~=e~~:e;e3...2s¡ 612
°l~:/~eBS inte recs
29.021.6 26.820.8 34.624.3 43.830.3
46.1
33.6
42.0
27.0
38.829.8 39.631.2 36.432.7
3.0o/~
Target Price Range
2014 2015 2016
128
9680
64
4840
32
24
AMER. STATES WATER NYSE-AWR I~~fcr 34.331~11 14.5 (~:~~;~O ~tRl~t 0.87 ~
1i111.i
¡¡-iI'
.1'1'
,1111111 '111 111.11.liiil ;1.----
o J
o 0i 0
o 0
.Ill',
1'"
........ ......16
12-"... ......... .......-......._... ~....-...' .....
Leses, Uncapitalized: Annual rentals $3.3 mil.
Pension Assets-12/0 $90.2 milL.
ObUg. $118.8 mil.
P1d Stock None.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 6
Page 2 of 10
23.716.5
28.9
25.2
3.2%-=
Target Price Range
2014 2015 2016
AMERICAN WATER NYSE.AWK I~~fcer 27 .90 I~no 16.8 (~:~~J~¡) ~l~ 1.01 to
TIMELINESS 1 New 1010
SAFE 3 New 7n51
TECHNICAL 4 Loed 3I1m
BETA .65 (1.00 '" Market)
2014-16 PROJECT1~~'f Totl
Price Gain RetrnHigh 50 1+80%1 18%Lo 35 1+25"'" 9%
Insider DecisionsMJJASONOJ
IoBII 0 0 0 0 0 0 0 0 0Oplions 000000000
to Sen 0 0 0 0 0 0 0 0 0
Institutional Decisions
2010 3Q200 4QIO
:::l ~~; ':~ ~~~HJiii 154379 149349 145401995 199 1997 199
LEGENDS I.... Relative Pr Slrgt.O~:d V;~S inte re
Percntshre.toaed
21,.7
199 20 2001 200 200 20 20 206
13.08
.65
d.97
4.31 4.74
23.86 28.39
.. 160.00 160.00
CAPITAL STRUCTURE as 01 12/31110
Toll Debt $5478.3 mül. Due in 5 Yrs $201.9 mül.
LT Oebt $54.5 mill. LT Inlerest $31 5.0 mül.
(Total interest coverage: 2.4x) (57% of Cap'l)
Leases, Uncapitlized: Annual rentals $25.7 mill.
Pension As..is12/10 $861.0 mül
Oblig. $1285.5 mül.Pfd Slock $23.9 mül. Pf Dlv'd NMF
- - 2093.1 2214.2
- - d155.8 d342.3
Common stock 175,211,59 shs.
as 012/2/11
.. 56.1%
_. 43.9%
_. 86.8
.. 872.6
NMf
NMf
NMf
NMFMARKET CAP: $4.9 billon (Mid Cap)
CURRENT POSITON 20 2009 12/31110
~$MLL)Cash Ass 9.5 22.3 13.1Other 40.2 476.8 521.2Cu Asts 417.7 49 534.3
Acc. Payable 149.8 138.6 199.2Debt Due 654.8 173.6 44.8Other 30.2 295.2 53.5Currnt Llab. 1104.8 6õ n4.5Fix. Cho. Cov. 197% 210% 237%
ANNUAL RATES Pasl Past Estd '08-'10
of clnge (persh) 10 Yrs 5Y1s. 10 '14-'16Revenues - - - - 3.5%"Cash Flow" - - - - 5.0%Eamings - - - - 8.5%Divideris -- -- 8.0%Boo Value - - - - -.5%
High:Low:
207
13.84
d.47
d2.14
14.61
2.87
1.0
.40
6.31
25.64
160.00
18.9
1.4
1.9
2336.
187.2
.. 37.4%
50.9%
49.1%
9245.7
9318.0
NMF
NMF
NMF
NMF
23.016.2
25.S
19.4
II, i''
20
13.98
2.89
1.25
.82
4.50
22.91
174.63
15.6
1.04
4.2%
2440.7
209.9
37.9%
.. 12.5%
56.9%
43.1%
9289.0
10524
3.8%
5.2%
5.2%
1.8%
65%
% TOT. RETURN 311
TlI VlARJTll:STOCK INDEX
1 yr. 33.7 23.4
3 yr. - 49,05 yr. - 45.9
2011 2012 "VALUEUNEPUB.llC
16.0 16.35 Revnues pe sh
3.50 3.80 'Cash Flow per sh
1.70 1.80 Eaings pe sh A
.90 .94 Div'd DeeI'd per sh B
4.30 4.25 Cap'1 Speding persh
2360 23.40 Bo Value pe sh D
180.00 185.00 Commo Shs Oug c
Bol fi ... ar Avg AM'I PIE Ratio
V./~ Lin. Rele PIE Rato
uti. lo Avg Ann'l Divd Yiel
2875 3025 Revenues ($mil)
30 330 tel Profit f$mHli
39.0% 38.5% Inc Ta. Rat
10.0% 10.% AFUDC % to Net Prfit
56.5% 56.5% long-Term Debt Rat
43.5% 415% Comm Eoult Rato
985 1010i Toll Capital ($Hl)
1145 11875 Net Plant ($mill)
4.5% 5.0% Ritum on Tot Cao'l
7.0% 7.5% Relom on Shr. Equity
7.0% 7.5% Retum on Com ~uiÍv
15% 3.5% Retind to Com Eq
54% 53 All Div'ds to Net Prol
80
6050
40
3025
20
15
10
1.5
4-16
17.95
4.10
2.10
1.10
4.20
23.60
195.0i
20.0
1.35
2.6%
350i
410
38.0%
15.0% '
56.5%
43.5%
1060
13150
5.5%
9.0%
9.0%
4.5%
52%
",1. ....- .'
53.1%
46.9%
875.2
991.8
3.7%
4.6%
4.6%
3.0%
34%
2010
15.49
3.56
1.53
.86
4.38
23.59
17.00
14.6
.94
3.8%
2710.7
287.8
40.4%
10.0%
56.8%
43.2%
9561.3
11859
4.4%
6.5%
6.5%
2.8%
56%
BUINESS: American Water Works Company, Inc. is the largest market accnting for ovr 19% of revenues. Has roughly 7,000
investor-owed water and watewer utilit in the U.S., providing employees. Depreciation rate, 2.5% in '10. BlackRock, Inc., owns
servces to over 15 millon people in over 30 states and Caad. its 6.9% of the common stock outtanding. Of. & dir. own les thn
non regulate business assists munidpalites and militry bases 1%. President & CEO; Jeffey Sterba. Chairman; George Macken-
wit the maintennce and upkeep as welL. Regulated operations lie. Address: 1025 Larel Oak Road, Voorhees, NJ 08043. Tele.
made up over 89 of 2010 revenues. New' Jersey is it biggest phone: [phone]. Internet: ww.amwater.com.
America Water Works closed out a with milta bases, and these non-
healthy 2010 capaign in solid. albeit regulated ventures should remain profita-not as strong as we predicted, fashion. ble, but the company remains for all in-
The countr's biggest water utilty posted tents and purposes, a heavily regulated
share earngs of $0.23, 10% better than business. Although regulatory commis-
the year before, but half of what we were sions have been far more-business friendly
anticipating. Revenues advanced a slower- of late, there is no way of gettng around
Ca~ QUARTERLY REVENUES ($ mül.) Fun than-expected 11%, to roughly $665 mil- the need to maintain the nation's water-
ondar Msr.31 Jun. 30 Sop.30 Dec. 31 Year lion. benefiting from new rate awards and ways and pipelines. These infrastructure
208 506.8 589.4 672.2 56.5 2336. grater mitar demand. costs, and the associated financing ex-
200 550.2 612.7 68.0 597.8 2440. We look for growth to continue slow- penses, ought to keep share-earrngs
2010 56.1 6712 786.9 66.5 2710.7 ing this year. The hlgh end of manage- growt in single-digit territory next year2011 620 715 820 725 2875 ments eargs guidance ($1.65 to $1.75 a and thereafer out to mid-decade.2012 650 750 865 760 3025 share) appear a litte too bullish in our These shares ar ranked 1 (Hghest)
Cal- EARNINGS PER SHARE A Full opinon, given the tough comparsons and for TImeliness. th to recent
ondar Mar.31 Jun. 30 SiP. 30 0".31 Year the contiuously rising costs of doing busi- shar-price momentum. They have been
208 .04 .28 .55 .23 1.10 ness in th space. Indeed, infastncture on a steady climb upward since last SUf-
200 .19 .32 .52 .21 1.25 exnses are liely to remain on an up- mer, and ar up nearly 30% in alL.
2010 .18 .42 .71 .23 1.53 swing, as many systems are decaying and This issue looks to be undervalued ac-
2011 .22 .46 .75 .21 1.70 in need of signcant, if not complete, cording to our projections Despite the2012 .24 .49 .79 .28 1.80 overhauls. America is not exactly flush financial constraints we envision, price ap-
Ca~ QUARTERLY DIDENDS PAID B. Full with cash though and wili need to look to preciation potential out to mid-decade is
enda Mar.31 Jun.30 SeD.30 Dac.31 Yeer outside financiers to foot the bil. The in- on par with the Value Line average. Trac-
207 - - - - - - - . - . creased debt load and/or hlgher shar tion in nonregulated areas ought to help
208 . . - - .20.20 .40 count will diute shar-net gai. pick up some of the slack. Meanwhile, the2009 .20 .20 .21 .21 .82 We have introduced our 2012 es- dividend adds to the issue's 3- to 5-year2010 .21 .21 .22.22 .Bt timates with similar trends in mind. tota-retum appeal.2011 .22 True. American continues to make inoads Andre J. Costan Aprii 22. 2011
(A) Dilutd earnings. ExckJdes nonreCUrring; ¡¡eaningS may not sum due to rounding. i ¡(C) In millions. Copany's Financal Streng B
~~ln~~J~~~~O:~s(~~~~¡l.9, ($263). Dis- :sl:e~~~;~~:l:ii~.~:~~:.i~~y~¥i: !~,I$SI~~i:h~~:.ngibIB'. In 2010: $1.251 bil- ~=~~~~~':~~nce N~~Next eanings report due early May. Quarterly able. Iimln s Predictabilit 10
~Hl~B~~~E~5 :~~~~p'~Š1~~E"i~~~rv~R~~~Rmtl~~I~N~:~I~~hiSOb~:i:~~~e::='sis~C:~-c:iemt~~= ::io~ . . . '. : l l: l I j .olitma be repruced resd. sled or trsmi in any pr ele or OIlifo or us fo gealng or inng any pr oreøimt ublat serorpriil
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 6
Page 3 of 10
---
2.8%-=
Target Price Range
2014 2015 2016
64
4840
..... ..... 32
.__.- ..... 24
20
16
12
AQUA AMERICA NYSE-WTR
¡RECEN 21 94i1PIE 23 8/Tiiilin9:24.4) RELTIVE 1 43 DIVD
PRICE . II RATIO . \Medlan: 25.0 PIE RATIO. YLD
TIMELINESS 3 low ,nini r~~: i '~:g '~:: '~~ 1~:: 1::~ ~~ ~:~ ~::: ~~:g ~~:¡ ~~:g ~~::
SAFETY 3 lo8l/0 LEGENDS
TECHNICAL 3 _4/11 - ~~~":liiie.... Relti Pre StrgthBETA .65 (1.00;; Mañ) 4.for.3 spI 1198
2014-16 PROJECT!ON.~ ~¡:i::~:: sji~ '~2IAnn'l Totl 5-fo.4Pnce Gain Retn 4-1or-3
~ ~~ i:~g~i li~ "...an_1te..sIs .,Insider DecisionsM J J A SON D J Il,hllil I 'II. I T' 8~~:s ~ g g g ~ ~ g ~ ~ ir .-.... . .~. 6
fohO 0 0 3 0 2 1 1 1 0 ....... . ."~ % TOT. RETUR 311Institutional Decisions .: ..... i ._..... .. TH VlAR:20010 30200 4Q0 Percent 15 STK IID£
to Buy 92 90 101 shares 10 ~~: ~:; :::~
:k1~:m 6O~J¡ 59~~~ 554:: traded 5 5 yr. .6.1 45.9
1995 1996 1997 1998 199 200 201 200 2003 200 205 2010 2011 2012 "VALUEUNEPUB.LLC 14-161.84 1.86 2.02 2.09 2.41 2.46 2.70 2.85 2.97 3.48 3ß5 4.03 4.52 4.63 4.91 5.26 5.60 5.90 Reveooespesh 6.0
.47 .50 .56 .61 .72 .76 .66 .94 .96 1.09 1.21 1.26 1.37 1.42 1.61 1.78 1.5 1.95 -cash Flow pe sh i35
.29 .30 .34 .40 .42 .47 .51 .54 .57 .64 .71 .70 .71 .73 .77 .90 .95 1.05 Eangs pe sh A 1.35
.22 .23 .24 .26 .27 .28 .30 .32 .35 .37 .40 .44 .48 .51 .55 .59 .63 .67 Dio'd Oecld per sh So .79
.52 .48 .58 .82 .90 1.6 1.09 1.20 1.32 1.54 1.84 2.05 1.79 1.98 2.08 2.37 i45 1.55 cap'l Spendln9 per sh UO
2.46 2.69 2.84 3.21 3.42 3ß5 4.15 4.36 5.3 5.89 6.30 6.96 7.32 7.82 8.12 8.51 8.75 9.10 BookValuepesh 10.50
63.74 65.75 67.47 72.20 106.80 111.82 113.97 113.19 123.45 127.18 128.97 132.33 133.40 135.37 136.49 137.97 138.90 139.90 Commo¡'-Shs Outg C 14i90
12.0 15.6 17.8 22.5 21.2 18.2 23.6 23.8 24.5 25.1 31.8 34.7 32.0 24.9 23.1 21.1 a.,... Æ"Æ AvgAnn1PIERao 21.0
.80 .96 1.03 1.7 1.21 1.8 1.21 1.29 1.40 1.33 1.69 1.87 1.70 1.50 1.54 1.36 v"..u.. Relatlve P/E Ratio 1.41
6.2% 4.9% 3.9% 2.9% 3.0% 3.3% 2.5% 2.5% 2.5% 2.3% 1.8% 1.8% 2.1% 2.8% 3.1% 3.1% ..n, lvs AvgAnn'IDI..dYield 2.5%
CAPITAL STRUCTURE as 0112/1/10 307.3 322.0 367.2 442.0 498.8 53.5 602.5 627.0 670.5 726.1 ns 825 Reotooes ($mil) 975Tot Debt $1560.4 mill. Due In 5 Yrs $316 mil. 58.5 62.7 67.3 80.0 91.2 92.0 95.0 97.9 104.4 124.0 130 145 Net prom l$mUIl 190
~CTD:i~~:;15:~r;e~i1¡.5x;L~:~'::::~~~e~~~e: 39.3% 38.5% 39.3% 39.4% 38.% 39.6% 38.9% 39.7% 392:: 3~:~ ~'50%% 4~~%% ~UDmeC~axto':Pr 411..0%5%4.5x) (57% of Cap'l) -. .. .. .. .' .. .. .. ~ ~52.2% 54.2% 51.4% 50.0% 52.0% 51.6% 55.4% 54.1% 55.6% 56.6% 56.0% 56.0% lo-Term DeblRato 54.0%
Pension Assets-12/0$159.2 mil. 47.7% 45.8% 48.6% 50.0% 48.0% 48.4% 44.6% 45.9 44.4% 43.4% 44.0% 440% ComoEoultRallo 46.0%Obllg. $234.9 mil. 99.4 1076.2 1355.7 1497.3 169.4 190.4 2191.4 2306.6 2495.5 2706.2 2790 28BO Tota Catal ($mll) 3210
136.1 1490.8 1824.3 206.8 228.0 250.0 279.8 2997.4 3227.3 3469.3 36 3815 Ne PtlSìin 43
7.8% 7.6% 6.4% 8.7% 6.9% 6.4% 5.9% 5.7% 5.6% 5.9% 6.0% 6.5% Retrn OI ToI cap'1 7.5%
12.3% 12.% 10.2% 10.7% 11.2% 10.0% 9.7% 9.3% 9.4% 10.6% 11.0''' 11.5% RernonShr'Equity 13.0%
12.4% 12.% 10.2% 10.7% 11.2% 10.0% 9.7% 9.3% 9.4% 10.6% 11.0% 11.5% RetrnonComEouiÍ 13.0%
5.1% 5.2% 4.2% 4.6% 4.9% 3.7% 3.2% 2.8% 2.7% 3.7% 3.5% 4.0% RetanetoCoEq 5.5%59% 59% 59 57% 59 63% 67% 70% 72% 65% 67 64 All DI"ds to Net Prol 59%
BUSINES: Aqua America, Inc. is th hok:ing company for water others. Water supply revenues '10: residential, 59.4%; commerci~
and wasewter utilities that serve approximately three mìllon resi. 14.5%; industia & other, 26.0%. Ofcers and directors own 2.0%
dents in Pennsyvania, Ohio, North Carolina, Ilinois, Texa, New of the common stock (4111 Proxy). Chairman & Chief Executve Of.
Jersey i Florida, Indiana, and fie other sttes. Divsted three of fir: Nicholas Deenedic. Incorporated: Pennsylvania. Address:
four non-ter businesses in '91; telemarketing group in '93; and 762 West Lacaster Avenue, Bryn Mawr, Pennsylnia 19010. Tel-
others. Acquired AquaSource, 7/03; Consumers Water, 4/9; an ephone: 610-525-1400. Internet ww.aquaamerica.com.
Aqua America is slated to improve Shale. As the drling requires signficant
ANNUAL RATES Past Past Esfd'08'10 steadily in 2011. Earnigs growt is like- water use, we expect drilg-related water
ofch.ng (prsh) 10 Yrs SYrs. to 'W16 ly to be driven by purchases, as well as fu- consumption to increase in the future,Revenues B.O% 7.5% 6.5% ture favorable rate rulings. adding to the revenue stream. Furter-''Cash Flow" B.5% 8.0% B.O% Acquisitions remain the backbone of more as the Marcellus Shale is set to pro-
E~~~e !:g~ ~:: 1~:~ ~~e~~i;isi~Oi~~o~ ci~~~: :~~~ ~~yi~.l~~~:e =~:~:e~ri:~~h:~~
Ca~ QUARTELY REVENUES ($ mill.) Full via purchases this year. Though no con- to increase over the next few year.endar Mar.31 Jun.3 SeD.30 Oeo.31 Year crete detai are known at ths tie, we do Long-term prospects look bright for
200 139.3 151.0 17.1 159.6 627.0 anticipate seeing a string of tranactons, Aqua America. It looks ever likely tht20 154.5 157.3 180.8 157.9 670.5 simiar to the previous year. the company will benefit both from
2010 160.5 178. 207.8 179.3 726. Rate rulngs should provide an addi- acquisition-driven growt and organc2011 180 185 215 195 ns tiona! boost to the bottom line. The growth. Finally, Aqua America's diver-2012 195 200 230 200 825 company has implemented a rate recovery sifcation into other sectors continues. It is
Cal- EARNINGS PER SHARE A Full program, with most of its rate cases likely looking at thee to four more solar opera-
endar Mar.31 Jun.30 Sep.3 Oeo.31 Year to receive favorable ruings. It already has tions th year, and is quite likely to ramp
208 .11 .17 .26 .19 .73 several major caes on the horizn, though up production from 2012 onward, as these
209 .14 .19 .25 .20 .77 there have not been any mings. States project ar turng out to be quite profita-
2010 .16 .22 .32 .20 .90 that the company plan to fie in include ble in the near and long term. The compa-2011 .16 .22 .34 .23 .95 Pennylvana, New Jersey, Ohio, Illnois, ny is alo cuttg down on costs. which
2012 .18 .24 .36 .27 1.05 and Texas. In the best-case scenaro, the should aid in boostig the bottom line over
ca~ QUARTERLY DlViOENDS PAlO e. Full incrase in revenues should boost the bot-the next few year.
endar Mar.31 Jun.3 SeD.30 Ot0.1 Year tom lines from 2012 onwad. Income investors should find ths is-
~: .m .m .m '1~; ~ ~~~~ o~.=:~li~~~ ~~vi:::~ ~~~d ~~ ~tr,:i~~e~ ~~;t; c:~~~:;:.
209 :135 :135 :135 :145 .55 pany ha alady implemented a new pro- Furtermore. the company has a hitory of200 .145 .145 .145 .155 .59 gram of "water stations" to fill the trcks steady dividend increases.
2011 .155 that servce the drilers in Marællus Sahana Zutshi April 22, 2011
(A) Dilutd egs. Excl. nonree. gains (losses): I i".Qs rert due mid-May. riC) In millions, adjusted lor stock split. Company's Financial Strengt B+'99. (11 t); '00. 2t; '01, 2t; '02. 5t; '03, 4t. (6) Dividends historiclly paid in earty Marc. St's Prce Stability 100Excl gain from disc. operations: '96, 2t. Eam~ June, Sept. & Dec. . Div'd. reinvestent plan Pnee Gro Persistence 70ings may not add due to rounding. Next earn- available (5% discount). Earnings Predictilit 100c 2011, value Une PUbl~ LLC.AI ~ts rese. Factal materl is ob I'om sou befieveto be rele and is prov wiut want of any ki _::~8~~~~~.O~ :~SI:l~~~R~~:=~12N:~Ei:lNirT=r;=:;~:~~~;==~seOr~= I . ,'. : II: .1 I.
,,"h
'.
Pfd Stock None
Common Stock 137,968,188 shares
as 012/11/1
MARKET CAP: $3.0 billon (Mid Cap)
CURRENT POSITION 20 20
ca.f~et 14.9 21.9Receibles 84.5 78.7Inventor (AvgCst) 9.8 9.5Otr 11.B 11.5Curren Asets 121.0 12
Acs Payeble 50.0 57.9Debl Due 87.9 87.0Other 55.3. 56.1Current Liab. 19 2õFIX Chg. Cov. 329% 34%
12/31/10
5.9
85.99.244.4
145.4
45.328.5149.9
223.729
Case No. UWI-W-11-02
Exhibit No_ 1
Schedule 6
Page 4 of 10
ARTESIAN RES. CORP, NOQ-ARA I~ECEN 2~A21= 19~1:=,!;~1~,:'~PRICE
15.38 19.83 20.04
.11.00 13.08 15.18 17.20 17.90 18.26 13.00 12.81 16.43 17.88 Low
PERFORMANCE 3 Average LEGENDS
- 12 Mos Mav Avg , I'. .18
Technica 3 Average . . . . Rei Price Strength II'
Above 3.for-2 spüt 7/03 13
SAElY 2 3.fO(-2 split 7/06 .....Me_Shadearinesrecess .. ...........
B
BETA .60 (1.00:: Market).........5.0 ....4
Financia Strengh B.3
Pric. Stbilit 100 1
Price Groh Persstence 45 I i-l==/25earnings Pr.dlclbilüy 90 VOL(Ious.)
e VAW LINE PUBLISHIG LLC 200 20 20 20 200 2007 200 2009 2010 2011/2012
SAS PER SH 5.97 6.20 6.67 7.52 7.77 7.20 7.59 8.11 8.48
"CASH FLOW" PER SH 1.27 1.28 1.42 1.56 1.75 1.57 1.65 1.84 1.92
EANINGS PER SH .76 .64 .72 .84 .97 .90 .86 .97 1.00 1.07".11.5 c
DN'DS DECL'D PER SH .52 1.06 1.11 1.16 .61 .66 .71 .72 .75
CAP'L SPENDING PER SH 3.18 4.20 4.82 3.35 5.08 3.66 6.09 2.32 2.57
BOOK VALUE PER SH 8.84 9.01 9.26 9.60 10.15 11.66 11.86 12.15 12.44
COMMON SHS OUTT'G MILL 5.79 5.85 5.93 6.02 6.09 7.30 7.40 7.51 7.65
AVG ANN'L PIE RATIO 17.3 24.7 25.4 23.5 20.3 21.5 20.1 16.4 18.2 18.1/16.9
RELATIVE PIE RATIO .94 1.41 1.34 1.24 1.0 1.14 1.21 1.09 1.17
AVG ANN'L DIV'D YIELD 3.9%6.7%6.1%5.9%3.1%3.4%4.1%4.5%4.1%
SALES ($MILL)34.6 36.3 39.6 45.3 47.3 52.5 56.2 60.9 64.9 Bold figures
OPERATING MARGIN 99.6%---100.0%45.6%45.6%45.1%46.9%46.5%are consensus
DEPRECIATION ($MIL)3.2 3.6 4.0 4.4 4.6 5.2 5.8 6.6 7.0 earnings
NET PROFIT ($MIL 4.2 3.9 4.4 5.0 6.1 6.3 6.4 7.3 7.6 estimates
INCOME TAX RATE 40.4%37.9%39.6%39.9%39.0%39.8%40.8%40.1%40.0%ønd, using the
NET PROFIT MARGIN 12.0%10.8%11.%11.%12.8%11.9%11.4%11.9%11.7%recent pris,
WORKING CAP'L ($MILL)2.4 dl0.5 d8.7 d1.8 d8.8 2.5 d20.9 d23.3 d27.9 PIE ratios.
LONG- TERM DEBT ($Mlu.64.0 80.6 82.4 92.4 92.1 91.8 107.6 106.0 105.1
SHR. EOUITY 1$MILU 51.3 52.7 54.9 57.8 61.8 85.1 87.8 91.2 95.1
RETURN ON TOTAL CAP'L 5.6%4.5%5.1%5.3%5.8%5.3%4.7%5.2%5.6%
RETURN ON SHR. EOUITY 8.1%7.4%8.0%8.7%9.8%7.4%7.3%8.0%8.0%
RETAINED TO COM EO 2.8%1.4%2.1%2.7%3.8%2.1%1.4%2.1%2.0%
ALL DIV'OS TO NET PROF 65%81%74%69 61%71%81%74%75%
ANa. of analysts changing earn. est in last 9 days: 0 up, 0 do, coensu 5-yeareaming gr 3.6% per year. seased upo 3 8Jslys' esmates. Caased upon 3 anlysts' estmates.
ANNUAL RATES ASSET ($mill.)200 200 12/1NOof change (per share)5Yrs.1 Yr.Cah Asset 2.9 .5 .2Sales3,5%4.5%Receivbles 7.8 9.0 5.1 BUSINESS:Artesian Resources Corporation. through its"Cash Flow"5.0%4.0%Inventory 1.1.2 1.2 subsidiaries, provides water, wastewater and other servcesEamings5.0%3.0%Oter -!~~Dividends .8.0%4.5%Current Assets 13.5 13.2 14.0 on lbe Delmara Peninsula. The company distrbutes and
Book Value 5,5%2.5%sells water, including water for public and private fire
Fiscl OUARTERLY SALS ($mill.)Full Prop.rt, Plan'protection, to residential, commercial, industral, municipal
Year 10 20 30 40 Year & Equip, at cos 38.5 40.0 414.8 and utility cutomers lbroughout the states of Delaware,
Accm Depreciation 58.8 64.9 69.2 Marland and Pennsylvania. It also provides wastewater12/1/0 12.3 13.9 15.7 14,3 56.2 Net Proper 327.7 338.1 34.4
12/1/09 13.9 15.16.1 15.5 60.9 Oter ~~~services to cutomers in Delaware and has entered into
12/1/10 15.0 16.0 18.0 15.9 64.9 Tolal Ass...348.7 358.9 371.5 purchase agreements to provide wastewater services in the
12/1/11 State of Maryland. In addition. Aresian provides contract
Fiscl EARNINGS PER SHARE Full UABIUTIES ($mlll.)water and wastewater operations, water and sewer ServiceAcci Payable 4.6 3.7 3.4Year10203040YearDeblDua22.8 27.7 30,6 Line Protection Plans, wastewater management services,
12/1/07 .18 .19 .37 .14 .9 Ot.r -.21 -l and design, constrction and engineering services. Aresian
12/1/08 .13 .21 .35 .17 .86 Current Uab 34.36.5 41.9 Resources is lbe parent holding company of Artesian Water
12/1/09 .22 .27 .28 .20 .97 Company, Inc., Artesian Water Pennsylvania, Inc~ Artesian
12/1/10 .22 .24 .38 .16 1.00 Water Maryland, Inc., Artesian Wastewater Managemeni.
12/1/11 .21 .25 .37 LONG- TERM DEBT AND EOUIT Inc., Artesian Wastewater Maryland. Inc. and tbree other
Cal-QUARTERLY DIVIDENDS PAID Full as 0' 12/31/1 entities. Has 238 employees. Cbairman, C.EO. & President:
endar 10 20 30 40 Year Totl Debt $135.7 mil.Due In 5 Yrs. $35.3 mil.Dian C. Taylor. Address: 664 Churchmans Rd., Newark. DE
2008 .172 .178 .178 .178 .71 LT D.bI$105,1 mill.19702.TeL.:[phone].Internet:
2009 .178 .178 .178 .187 .72 Including Cap. Leses None http://www.artesianwater.com.w.T.(52% of Cap'l)2010 .187 .188 .188 .189 .75 Le.... Uncpltiz.d Annual ranlals $.1 mil.
2011 .197 April 22, 20 II
INSTITUTIONAL DECISIONS
Pension Liabilty $.5 miL. in ~ 0 va. $.7 mil. in '0
TOTAL SHAREHOLDER RETURN
20'10 30'10 40'10 Pfd Stck None PI Div'd Paid Noe Divdends plus appriation as of 31112011
10 Buy 26 17 23 Comon S1ck 7,64,435 shra,3 Mos. 6 Mos.1 Yr.3Yrs.SYrs.10 Sell 15 20 21 (48% of Cap'l)HId's(OOO)2151 2148 2190 3.86%4.22%14.86%19.74%6.44%
To subscribe call 1-800.833.0046. C2011 Vahle line PtbHshlng LLC. All ri reer Faeal mateal Is obtined frm sos berieed to be rebl an IS prvied wlt wamlis of any kind.
THE PUBUSHER IS NOT RESPOSIBlt FOR ANY ERRORS OR OMISSIONS HEREIN. This pulicati is strtly for stler's ow, noo-cmeia innal use. No panof it may be repodutè reol stored or Irans in any prte elic or ot fom, or used io geneatng or maetng any pr or elonic pub. se or prll
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 6
Page 5 of 10
CALIFORNIA WATER NYSE-ewr
I RECEN 36 39d PIE 18 8 (Trailng 20.1)' RELATIVE 112 DlD
i PRICE ., I RATIO . Medan: 2tO PIE RATIO. YLO
TIELIESS
SAFff
TECHNICAL
4 loY4n1
3low7a1RJ7
3 lowlln2nO
r¿~: ~U ~:~ I ~~:~
LEGENDS- ~:~D~:sl ~~e
..., Rela~iiStrgt2-fOf-'S~t 1198O~~v..BETA .10 (1.00'" Martel
2014-16 PROJECTÀ~~~ Totl
Prce Gain ReturnHig 55 (~~O%l 14%LOw 40 l10%~ 6%
Insider DecisionsMJJASON
to Buy a 0 0 1 0 0 0Options 0000201to Sell 1 0 0 0 0 0 1
Institutional Decisions
200 30D10 4Q201D Percntto Buy 43 53 62 sharesto sea 72 53 48 traded
Hld'sOD 8640 9706 10125
1995 1996 1997 1998 199
13.17 14.48 15.48 14.76 15.96
2.07 2.50 2.92 2.60 2.75
1.17 1.51 1.83 1.45 lß3
1.02 1.04 1.06 1.07 1.09
2.17 2.83 2.61 2.74 3.44
11.72 12.22 13.00 13.38 13.3
12.54 12.62 12.62 12.62 12.94
13.7 11.9 12.6 17.8 17.8
.92 .75 .73 .93 1.01
6.4% 5.8% 4.6% 4.2% 4.0%
CAPITAL STRUCTURE as of 12/1/1
Tolal Debt $505.3 mill. Due in 5 Yrs $4.9 miiL
LT Debt $479.2 mil. LT Interest $27.9 milL.
o J
o 0o 0o 0
.. ."........
200
16.16
2.52
1.31
1.0
2.45
12.90
15.15
19.6
1.27
4.3%
(l T interest earned: 3.4x; total into cOV.: 3.2x)
Pension Asets-12/10 $139.0 mill.
Oblig. $26.9 mil.
Pfd Stock None
Common stock 20,833,303 shs.as of 2/11
31.423.7 37.926.'48.333.5
38.3
34.6
39.7
33.845.832.8 45.434.2 46.627.742.'31.2
3.40/-=
Targel Price Range
2014 2015 2016
128
96
eo
64
4840
32
24
. II 11,1" II.
,1111,1111111,'"
16
12..H.............
......-'-. ...
206 2 2010
17.18 17.44 16.20 17.76 19.80 21.64 22.10
2.83 3.03 2.71 3.12 3.72 3.87 3.86
1.46 1.47 1.34 1.50 1.90 1.95 1.81
1.3 1.4 1.15 1.6 1.7 1.8 1.9
3.73 4.01 4.28 3.68 4.82 5.33 5.95
15.66 15.79 18.15 18.50 19.44 20.26 20.91
18.37 18.39 20.66 20.67 20.72 2O.IT 20.83
20.1 24.9 29.2 26.1 19.8 19.7 20.3
1.06 1.33 1.58 1.39 1.9 1.31 1.30
3.9%3.1%2.9%3.0%3.1%3.1%3.2%
315.6 320.7 334.7 367.1 410.3 449.4 46.4
26.0 27.2 25.6 31.2 39.8 40.6 37.7
39.6%42.4%37.4%39.9%37.7%40.3%39.5%
3.2%3.3%10.6%8.3%8.6%7.6%4.2%
48.6%48.3%43.5%42.9%41.6%47.1%52.4%
50.6%51.%55.9%56.6%58.4%52.9%47.6%
565.9 568.1 670.1 874.9 69.4 79.9 914.7
800.3 862.7 941.5 1010.2 1112.4 1198.1 1294.3
6.1%6.3%5.2%5.9%7.1%6.5%5.5%
8.9%9.3%6.8%8.1%9.9%9.6%8.6%
9.0%9.3%6.8%8.1%9.9%9.6%8.6%
2.1%2.1%1.0%1.8%3.3%3.8%3.0%
77%78%86%77%61%60 66
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 6
Page 6 of 10
CONN. WATER SERVICES NOQ-e I
RECEN ~;oll= 22!!~ ,!!11~~:.7%:PPRICE
31.09 30.41 29.7620.35 24.00 23.83 21.91 20.29 22.40 19.26 17.31 20.00 2327 Low
PERFORMANCE 3 A_go LEGENDS I 45
Technical 3 Average :- ~:I ~~eM;~~~h I 30
Ab..ShIl infeni '"., ,"I,.
SAFETY 2 Average ,22.5'."...
BETA .80 (i .00 = Market)13'..'.''.9...........
Financial Strength B+....6'................
Price Stbilty 95 "4..
Price Growh Persistence 325I
If .55Eamings Prediabilit 80 VOLII(Iou.)
e VALUE LINE PUBUSIUG LLC 2002 2003 2004 200 200 2007 200 200 2010 2011/2012
SALES PER SH 5.77 5.91 6.04 5.81 5.68 7.05 7.24 6.93 7.65
"CASH FLOW" PER SH 1.78 1.89 1.91 1.62 1.52 1.90 1.95 1.93 2.04
EANINGS PER SH 1.12 1.15 1.6 .88 .81 1.05 1.11 1.19 1.3 1.20A.B/1.24c
DIV'DS DECL'D PER SH .81 .83 .84 .85 .66 .87 .88 .90 .92
CAP'L SPENDING PER SH 1.98 1.49 1.58 1.96 1.96 2.24 2.44 3.28 3.06
BOOK VALUE PER SH 10.06 10.46 10.94 11.52 11.60 11.95 12.23 12.67 13.05
COMMON SHS OUTST'G MILL)7.94 7.97 8.04 8.17 8.27 8.38 8.46 8.57 8.68
AVG ANN'L PIE RATIO 24.3 23.5 22.9 28.6 29.0 23.0 22.2 18.4 20.7 20.810.2
RELATIVE PiE RATIO 1.33 1.34 1.21 1.51 1.57 1.22 1.34 1.22 1.33
AVG ANN'L DIV'D YIELD 3.0%3.0%3.1%3.4%3.6%3.6%3.6%4.1%3.9%
SAS ($MILL)45.8 47.1 48.5 47.5 46.9 59.0 61.3 59.4 66.4 Bold figures
OPERATING MARGIN 57.7%52.1%51.0%48.3%43.7%40.8%49.0%35.8%40.7%are consensus
DEPRECIATION ($MILL)5.4 5.9 6.0 6.1 5.9 7.2 7.1 6.4 7.9 earnings
NET PROFIT ($MILU 8.8 9.2 9.4 7.2 6.7 8.8 9.4 10.2 9.8 estimates
INCOME TAX RATE 33.8%17.9%22.9%--23.5%32.4%27.2%19.5%35.2%and, using the
NET PROFIT MAGIN 19.2%19.5%19.4%15.1%14.3%14.9%15.4%17.2%14.8%recent prices,
WORKING CAP'L ($MILL)d5.1 d3.9 d.7 13.0 1.2 8.1 d3.3 d13.1 d14.7 PÆratios.
LONG- TERM DEBT ($MILL 64.8 64.8 66.4 77.4 77.3 92.3 92.2 112.0 111.7
SHR. EQUITY ($MILL)80.7 84.2 88.7 94.9 96.7 100.9 104.2 109.3 114.0
RETURN ON TOTAL CAP'L 7.4%7.5%7.0%5.0%4.9%5.5%5.9%5.5%5.4%
RETURN ON SHR. EQUIT 10.9%10.9%10.6%7.5%6.9%8.7%9.0%9.3%8.6%
RETAINED TO COM EQ 3.1%3.2%3.1%.3%NMF 1.6%1.9%2.3%1.6%
ALL DIV'OS TO NET PROF 72%71%71%95%105%82%79%76%81%
ANo. of analysts changing earn. est. in last 9 days: 0 up, 0 down conssu 5-ye earnngs gr 4.0% per yer. BBased upon 3 analys' estates. cBase upo 3 analyss' esmales.
ANNUAL RATES ASET ($ilL)200 200 12/1110
of change (per shre)5Yrs.1 Yr.Ca Assel .7 5.4 1.0Sales4.0%10.5%Rece 12.0 6.5 10.1 BUSINESS:Connecticut Water Service, Inc. pnmanIy"Cash Flow"2.0%5.5%Invenlor (Avg co 1.1.1 1.7 operates as a water utility provider. The company operatesEarnings1.5%.5.0%Oter ~-2 ~Divdends 1.5%2.0%Current Assets 15.8 20.0 20.4 through three segments: Water Activities, Real Estale Trans-
Book Value 3.0%3.0%actions, and Services and Rentals. The Water Activities
Fiscal aUARTERLY SALES ($mll.)Full Propert, Plant segment supplies public dnnking water to its customers. Its
Year 1Q 2Q 3Q 4Q Year & Equip, at cost 416.1 44.2 471.6 Real Estate Transactions segment involves in the sale of itsAcm Deprecin 115.6 123.0 127.4 limited excess real estate holdings. The Services and Rent-12/1/0 13.6 16.0 17.0 14.7 61.3 Net Propert 30.3 325.2 34.2
12/1/09 13.4 15.2 16.6 14.2 59.4 Oter 54.3 ..~als segment provides contracted services to water and
12/1/10 13.8 15.9 21.0 15.7 66.4 Total Asets 372.4 415.3.425.2 wastewater utilities and other clients, as well as leases
12/1/11 certain propertes to third pares. This segment's services
Fiscal EARNINGS PER SHARE Full LIABLITES ($mll.)include contract operations of water and wastewater facili-Acct Payble 5.7 6.5 6.6Year1Q2Q3Q4QYearDebt Due 12.1 25.0 26.3 ties; Linebacker, its service line protection plan for public
12/110 ,16 .22 .46 .19 1.05 Oter ..---.dnnking water customers; and provision of bulk delivenes
12/1/08 .20 .35 .34 .22 1.1 Current Usb 19.1 33.1 35.1 of emergency drinking water to businesses and residences
12/1/0 .13 .27 .67 .12 1.9 via tanker truck. As of December 31. 2010, Connecticut
12/31li .12 .27 .54 .20 1.3 Water Service provided water to approximaiely 90,000
12/1/11 .16 .31 .55 LONG- TERM DEBT AND EQUIT customers in 55 towns throughout Connecticut. Has 225
Ca~QUARTERLY OIVIDENDS PAID Full as of 12/1110 employees. Chairman, C.E.O. & President: Eric W. Thorn-
endar 1Q 2Q 3Q 4Q Year Total Debt $138.0 mil.Due in 5 Yrs. $26.3 mil.burg. Inc.: CT. Address: 93 Wesl Main Street, Clinton, CT
2008 .218 218 .222 .22 .88 LT Debt $11.7 mil.06413.Tel.[phone].InternetIncluding Cap. Lease None2009.222 ,222 228 .226 .90 (49% of Cap'l)http://www.ctwater.com.w.r.
2010 .228 .226 .233 .23 .92 Leases, Uncaltalized Annual rentals $.3 milL.
2011 .233 April 22, 20 II
INSTIUTIONAL DECISIONS Pension Liabilit $16.7 mil. in '10 vs. $14.9 miD. in '09
TOTAL SHAREHOLDER RETURN
2Q'10 3Q'10 40'10 P1d Stck $.8 mil.P1d Dlv'd Paid Nil DNidends plus appreciation as of 31112011
to Buy 30 21 27 Commo S1D 8,676,849 shares 3 Mos.6 Mos.1 Yr.3Yrs.5 Yrs.to Sell 23 21 19 (51% of Cap'l)HId's(OOO)2790 2747 2764 -4.61%12.06%17.78%25.16%21.46%
To sub5cribe call 1.800.833-046.Cl2011 Value line Publishing LLC. All ris resered Facual malenal IS obtined frm SOlKS beieve to be reiabl and IS prvid wit wamlis of any ki.
THE PUBUSHER iS NOT RESPONSIBl~ FOR ANY ERRORS OR OMISIONS HEREIN. Thi pUlicti is str for subscber's Ow non-commeia, innal use. No partof it may berepriied,res st or tranmiU in an prte. eloiorolherlo,or us rogeing orinTtetng anypr or ek! publ ic,seorprll
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 6
Page 7 of 10
MIDDLESEX WATER NDQ-MSEX I~ECNT 2~; 141= 18.2¡r ,!;21~,.~.0%~PRICE
20.04 21.23 21.81
13.73 15.77 16.65 17.07 16.50 16.93 12.05 11.64 14.74 17.35 Low
PERFORMANCE 3 Average LEGENDS ,,"'LL 1"- 12 Mos Mov Avg 16
Technical 3 Average . . . . Rei Price Strength3-for-2 split 1/02 13
SAFET 2 Abve 4.for-3 split 11103Averagestarinie 8BETA .75 (1.00 :; Market)."'.'0'5
4
Financial Streth B++..''0 3..............
Pnc Stbility 95 2
Price Groh Persistence 30 Iff 1100Earnings Predictbilit 90 VOL
(thus.)
e VALUE LINE PUBLlSIHG LLC 2002 2003 2004 2005 200 2007 200 2009 2010 2011/2012
S~LES PER SH 5.98 6.12 6.25 6.44 6.16 6.50 6.79 6.75 6.60
"CASH FlOW" PER SH 1.20 1.5 1.28 1.33 1.33 1.49 1.53 1.40 1.55
EARNINGS PER SH .73 .61 .73 .71 .82 .87 .89 .72 .96 .95 A,B/.99 c
DIV'OS DEClD PER SH .63 .65 .66 .67 .68 .69 .70 .71 .72
CAP'L SPENDING PER SH 1.59 1.87 2.54 2.18 2.31 1.66 2.12 1.49 1.90
BOOK VALUE PER SH 7.39 7.60 8.02 8.26 9.52 10.05 10.03 10.33 11.13
COMMON SHS OUTSlG (MILL 10.36 10.48 11.36 11.58 13.17 13.25 13.40 13.52 15.57
AVG ANN'L PIE RATIO 23.5 30.0 26.4 27.4 22.7 21.6 19.8 21.0 17.8 19.1118.3
RELTIV PIE RATIO 1.28 1.1 1.39 1.45 1.23 1.15 1.19 1.40 1.14
AVG ANN'L DIV'D YIELD 3.7%3.5%3.4%3.5%3.7%3.7%4.0%4.7%4.2%
SAS ($MILL)61.9 64.1 71.0 74.6 81.86.1 91.0 91.2 102.7 Bold figures
OPERATING MARGIN 47.1%44.0%44.4%44.4%47.4%47.0%46.9%42.6%46.7%are consensus
DEPRECIATION ($MILL)5.0 5.6 6.4 7.2 7.8 8.2 8.5 9.2 10.0 earnings
NET PROFIT ($MILU 7.8 6.6 8.4 8.5 10.0 11.8 12.2 10.0 14.3 estimates
INCOME TAX RATE 33.3%32.8%31.1%27.6%33.4%32.6%33.2%34.1%32.1%and, using the
NET PROFIT MAGIN 12.5%10.3%11.9%11.4%12.4%13.8%13.4%10.9%13.9%rent pries,
WORKING CAP'L ($MILL)d9.3 d13.3 dl1.8 d4.5 2.8 d9.6 d40.9 d38.6 d17.9 PIE ratios.
LONG-TERM DEBT ($MILL)87.5 97.4 115.3 128.2 130.7 131.6 118.2 124.9 133.8
SHR. EQUITY ($MILl 80.6 83.7 99.2 103.6 133.3 137.1 141.2 143.0 176.6
RETURN ON TOTAL CAP'L 6.0%5.0%5.1%5.0%5.1%5.6%5.8%5.0%5.7%
RETURN ON SHR. EQUITY 9.6%7.9%8.5%8.2%7.5%8.6%8.6%7.0%8.1%
RETAINED TO COM EQ 1.3%NMF .9%.6%1.3%1.8%2.0%.1%2.1%
ALL DIV'DS TO NET PROF 87%106%90%94%84%79%78%98%75%
ANa. of analysts changing earn. est. in last 9 days: 0 up, 0 do, cosus 5-year earnings gro 3.0% per ye BBased up 2 an8Jysts' estimates. CBase upon 2 anaysIs' estmates.
ANNUAL RATES ASET ($mlll.) 200 200 12/1nG_of change (pe shere) 5 Yrs. 1 Yr. Cash Assel 3.3 4.3 2.5Sales 1.5% .2.0% Receivables 14.3 10.6 16.7 BUSINESS:Middlesex Water Company engages in the"Cash Flow"3.5%10.0%Inventory (Avg cost)1.5 1.6 2.2 ownership and operation of regnlated water utilty systemsEarnings4.5%33.5%OISl 1.5 5.5 1.4Dividends1.5%1.5%Currnt Assets 20.6 22.0 22.8 in New Jersey and Delaware, and a regulated wastewater
Book Value 5.5%8.0%utility in NJ. The company offers contract operations
Fiscl QUARTERLY SALES ($mll.)Full Properl, Plant services and a serviæ line maintenanæ program through its
Year 1Q 2Q 3Q 4Q Year & Equip, at cost 436.8 453.6 49.6 nonregulated subsidiary, Utility Service Afliates, Inc. itsAccm Depreciation 70.5 n.i 84.7 water utility system treats, stores, and distributes water for12/1/0 20.8 23.0 25.7 21.5 91.0 Net Properl 36.3 376.5 405.9
12/31/0 20.6 23.1 25.5 22.0 91.2 OIer -&59.6 ~residential, commercial. industrial, and fire prevention pur-
12/1/10 21.6 26.5 29.6 25.0 102.7 Tolal Asets 440.0 458.1 489.2 poses. It als provides water treatment and pumping ser-
12/1/11 vire to the Township of Eat Bruswick, as well as water
Fiscal EARNlNGS PER SHARE Full LIBlUTIES ($mlll.)and wastewater serviæs to residents in Southampton Town-Acets Payble 5.7 4.3 6.4Year1Q2Q3Q4QYearDebt Due 43.9 46.6 21.4 ship.Middlesex Water's Delawar subsidiares provide
12/1/07 .13 .24 .31 .19 .87 OIer ..~~water services to retail customers in New Castle, Kent, and
12/1/0 .15 .26 .35 .13 .89 Currnt Lib 61.5 60.7 40.7 Sussex counties. In February, Middlesex Water announced
12/1/0 .10 .21 .29 .12 .72 the retirement of J. Richard Tompkins, who wil not seek
12/1/10 .11 .31 .37 .17 .96 re-election when his term expires in May 2011. Has 285
12/1/11 .11 .29 .34 LONG- TERM DEBT AND EQUIT employees.Chairman:Dennis W. Doll. Address:1500as 0112/1/10Ca~QUARERLY DIVIDENDS PAID Full Ronson Rd, P.O. BOX 1500, Iselin, NJ 08830. TeL.: 732-
endar 1Q 2Q 3Q 4Q Year Tolal Debt $155.3 mil.Due In 5 Yrs. $40.1 mil.634-1500. Internet: http://W.middlesexwater.com.
2008 .175 .175 .175 .178 .70 LT Debt $133.8 mil.
2009 .178 .178 .178 .18 .71 Including Cap. Lea None w.T.(43% of Cap'l)2010 .18 .18 .18 .183 .72 leases, Uncapitaliz Annual rentals None
2011 .183 April 22, 20 I1
INSTITTIONAL DECISIONS Pension Liabilit $28.6 miL. in '10 "" $2.7 mill. in '09
TOTAL SHAREHOLDER RETURN
2Q'10 SC'10 4Q'10 Pl Slck $3.4 mill.Pfd Div'd Paid $.2 miL.Divdends plus appation as of 3/1/2011
to Buy 40 30 39 (1% of Ga'i) 3 Mos.6 Mos. 1 Yr.3Yrs.5Yrs.to Sell 21 24 21 Comm Sto 15,56,00 sharesHId's(OOO)5706 5930 6031 /56 ofCaDT 0.10%10.18%11.08%13.92%16.41%
To subscribe call 1.800.833.0046.
02011 value Une Pub6shing LLC. All riht res FaclUal matel IS obtained frm soius believed to be reria and IS prvied wit war of an kind.
THE PUBUSHER 1$ NOT RESPOSIBLE FOR ANV ERRORS OR OMISSIONS HEREIN. Thi pubicti is stry for subsa's own. nor,ommeiaL interna us. No paofil may be repruced re. st orJr in any pr, elenl orot fo, or usfogealin ormaetng any prnt or eletr publti. se or prii
Case No. UWI-W-11-Q2
Exhibit NO.1
Schedule 6
Page 8 of 10
SJW CORP. NYSE.SJW ¡rECEN 22 65ll/E NMF eraU~g:27.0)RELTIE NMF DIV 3.0%-=PRICE . RATI Meia. 22.0 P/ERATID Yt
TIMELINESS 4 New4f21 High:20.3 17.8 15.1 15.0 19.6 27.8 45.3 43.0 35.1 30.4 28.2 26.8 Target Price RangeLow:15.8 11.6 12.7 12.6 14.6 16.1 21.2 27.7 20.0 18.2 21.6 22.3 2014 2015 2016SAFET3 New4/211 LEGENDS .
TECHNICAL 3 New4J1
-=OMd=ii eo
BETA .90 (1.00 " Mark).......'iSlgt 60~:'~illere 50
2014-16 ~HOJECTiON.S 40Ann'l Totl .11 'iiihi 30PriceGaintl Return ----r:40
l+75% 17%
25
25 .10% 6%.r".11 " '.20I'IInsider Decisions "15MJJASON° J 1'1 "'01.".',i'''.
10 Buy 1000000 1 0 10
Opllons0000000 , 0 .'. ."-,,~. -7.510 Sell 0000000 , 0 .~.......................,,'.'.~.% TOT. RETURN 3/11Institutional Decisions .......Tl VLARITH"-"30"""''Percent 21 '.SlOCK ",DE
to Buy 3'26 3.shares ,.iyr.....23.4
::~~~32 28 26 traded 7 'yr.-12.1 49.0
8930 89 8840 . yr. -2.7 45.9
199 1996 1997 1998 1999 200 200 200 200 205 2006 2007 2008 2009 2010 2011 2012 "YAlUE LINE PUB. LLC14-16
4.99 5.39 5.79 5.58 6.40 6.74 7.45 7.97 8.20 9.14 9.86 10.35 11.25 12.12 11.68 11.62 11.20 11.35 Revenues per sh 12.00
.98 1.43 1.27 1.26 1.43 1.23 1.49 1.55 1.75 1.89 2.21 2.38 2.30 2.44 2.21 2.37 2.46 2.40 "Ca Flow per sl 2.60
.59 .96 .80 .76 .87 .58 .71 .78 .91 .87 1.2 1.9 1.04 1.08 .81 .84 .90 1.00 Eamings per sl A 1.36
.35 .37 .38 .39 .40 .41 .43 .46 .49 .51 .53 .57 .61 .65 .66 .68 .69 .74 Div'd Deld per sh ...82
.96 1.06 1.27 1.81 1.77 1.69 2.63 2.06 3.41 2.31 2.83 3.87 8.62 3.79 3.17 5.65 5.15 5.00 cap'1 Spending per sl 4.80
5.58 6.31 7.02 7.5 7.88 7.90 8.17 8.40 9.11 10.11 10.72 12.48 12.90 13.99 13.66 13.75 14.90 15.70 Bok Yalue per sh 17.00
19.50 19.02 19.02 19.01 18.27 18.27 18.27 18.27 18.27 18.27 18.27 18.28 18.36 18.18 18.50 18.55 20.50 22.00 i;mm Shs Outg C 25.00
9.9 6.8 11.2 13.1 15.5 33.1 18.5 17.3 15.4 19.8 19.7 23.5 33.4 26.2 28.7 29.5 Bod".....Avg Ann'l P/~ Rao 25.0
.66 .43 .65 .68 .88 2.15 .95 .94 .88 1.04 1.05 1.27 1.77 1.58 1.91 1.89 ValuilLin Relave P/ERao 1.65
6.0%5.7%4.3%3.9%3.0%2.1%3.0%3.4%3.5%3.0%2.4%2.0%1.7%2.3%2.8%2.8%"u....Avg Ann'l Div'd VId 2.5%
CAPITAL STRUCTURE as 0112/1/10 138.1 145.7 149.7 168.9 180.1 189.2 206.6 220.3 216.1 215.6 230 250 Revenues ($mill)300
Total Debt $300.8 mm. Due In 5 Yrs $12.4 mm.14.0 14.2 16.7 16.0 20.7 22.2 19.3 20.2 15.2 15.6 18.0 22.0 Net Profi ($.uii 32.0LT Debt $295.7 mm.LT Inlerest $15.9 miH.34.5%40.4%36.2%42.1%41.8%40.8%39.4%39.5%40.4%39.7%40.0%46.0%Incme Tax Ra 39.0%(LT interest earned: 2.7x: totl interest 4.4%4.2%1.6%2.1%1.6%2.1%2.7%2.3%2.0%3.6%5.0%5.0%AFUDC % to Net Pro 5.0%coverage: 2.6x)(54% of Cap'l)42.4%41.7%45.6%43.7%42.8%41.8%47.7%46.0%49.4%53.7%51.0%50.0%Long-Ter De Raio 47.0%
Leases, Uncapltllzed: Annual rentals $4.2 mil.57.6%58.3'54.4%56.3'57.4%58.2%52.3%54.0%50.6%46.3%49.0%50.0%Commn Equit Rato 53.0%
259.4 263.5 30.0 328.3 341.2 391.8 453.2 470.9 499.6 55.7 625 700 Tot Copilal ($mllij 900Pension Assets-12/0 $10.8 mill.367.8 390,428.5 456.8 48.8 541.645.5 684.2 718.5 785.5 85 93 NelPlanl ($il)1175Ob1i9. $58.8 milL.6.7%6.9%6.9%6.5%7.8%7.0%5.7%5.8%4.4%4.2%4.5%4.5%Rem on Tot cao'l 6.0%Ptd Stock None.9.4%9.3%10.0%8.7%10.6%9.7%8.2%8.0%6.0%6.1%6.0%6.5%Retm on Shr. equity 7.5%
Common Stock 18,Sn,012 shs.9.4%9.3%10.0%8.7%10.6%9.7%8.2%8.0%6.0%6.1%6.0%6.5%Retum on Com Eluiiv 7.5%
as 012/8/11 4.1%3.8%4.7%3.6%5.6%5.2%3.5%3.3%1.2%1.2%1.5%2.0%Retned to Com Eq 2.5%MARKET CAP: $425 millon (Small cap)56%59%53 58%47%48 57%59%80 81%74%74%All Div'ds to Net Pro 6720 20 12/1/10 BUINES: SJW Coron engge in the productn, pur- Austn, Tex. The company offers nonregulaed water-related
3.4 1.4 1.7 chse. st0f, purin, dis, and retl sal of war. It. sece, including waer system operations, cash remitnces, and
28.6 26.6 36.3 pres water SeM to approxmaly 22,00 conecns that mantnance contct seJVce. SJW also owns and operates com.
32.0 -- -- serv a polati of approxiatly one million peopl in the San mercil real estae investents. Ha 375 employees. Chairman:
1~:~ ~:g ~:~ Jose ar and 8,700 conens tha serve approximately 36,000 Charles J. Toeniskoetler. inc.: CA Address: 110 W. Taylr Stree,18.4 18.5 18.6 resKnt in a servic area in the region between San Antonio and san Jose, CA 95110, TeL.: [phone]. Int:ww.sjwater.com.~ "3 -- We welcome newcomer SJW Corp to We are a little wary of the company's29% 352% 400% The l4ue Line Investment Survy in near-term prospects. Operating costs
Past Past Estd '08'10 thi issue. Although it dabbles in com- are likely to remain on the rise, given the10g~g~ 5il~ loigG ~~~al aiJo~~,%~s:~ ~~m~anJ~t~i: ~l:;' ~~aln :~~smt~l Ù~~:~ i~:e~ tillte~~~~
2.0% -1.5% 9.0% engaging in the production, purchase, SJW, like many of its bedfellows, is not ex-
~:g~ ~.~~ ~.~~ storage, purfication, distribution, and sale actly flush with cash and will probably
. ." . of water. It offers nonregulated services have to tum to outside financing to mae
Ca~ QUARTERLY REVENUES ($mRl.) Full via agreements with muTucipalities and the improvements. The costs assocatedendar Mar.31 Jun. 30 Sao. 30 Dec. 31 Year other utiities, but the bulk of its business with additional debt or share offerings,
200 41.3 60.0 69.5 49.5 220. is regulated. Operations are centered however, will be diutive, likely keeping2009 40.0 58.2 69.3 48.6 216.1 around San Jose, Calorna, where it pro- growth under wraps going forwar. Note.2010 40.4 54.1 70.3 50.8 215. vides more than 225,000 connections that however, tht growt may look decent
2011 43.0 58.0 75.0 54.0 230 serve population of roughly one milion against depressed 2010 comparisons.
2012 47.0 63.0 81.0 59.0 250 people. Services are not exclusive to the We advise investors to take a pass on
Cal- EANINGS PER SHAE A Full Golden State, however, with anther 8,700 th issue. SJW is raed 4 (Below Aver-endar Mar.31 Jun. 30 Sep.30 Dec. 31 Yea connections servg 36.000 residents in age) for Timelies and lacks 3- to 5-year
208 .15 .34 .44 .15 1.08 the state of Texas. apprecition potential, as well. Meanwhie,209 .01 .23 .43 .14 .81 The company's inaugual appeaance the balance sheet is highly leveraged, add-2010 .05 .24 .44 .11 .84 is forgettable. It posted eargs of $0.11 ing some skepticism about the
2011 .05 .25 .47 .13 .90 in the four quarer of 2010 (Marh- sustanability of the stock's only saving2012 .07 .28 .50 .15 1.00 period results ar due out next week), a grace at this time, its dividend. Although
Cal. QUARTERLY DIVIDENDS PAID" Full few pennes below the prior year's tay, the steady stream of Income is not likely to
endar Mar.31 Jun.3 Seo.30 Dec.31 Year afer strppIng out gains we deem as non- dry up completely, the financial con-
207 .15 .15 .15 .15 .60 recurrg in nature. Sales inched up mod- straits alluded to above could prompt the20B .16 .16 .16 .16 .64 estly in the quarer, but the costs of doing company to use the funds to make capita20 .165 .165 .165 .165 .66 business in tls capital-Intensive industr improvements intead.
~~:~ .~~. .17 .17 .17 .66 contiued to take a toll. Andre J. Costan April 22, 2011
(A) Onutd earings. Excludes nonrecurring; i_add due to rounding. : I (C) In millions. Compay's Financia Stren B+~,s~;~i :g;" W~;'~b~~~:; '~~x~'e~~i:' f~~;i~b~~t~~I\~~ii.':Wr"~~~~~: =~=~::~~nce ~g
report due April 28th. Quartrly e9s. m8Y not vetment plan available. Earnings Predictbilit 85c 2011. Value lie Pub6stin llC.AI riht reserved. Facal matal is otiaine l'om soes beiev to be relibl and is prided wiut warrntie of any kid. _.
THE PUBU5HER IS NOT RESPONSIBLE FOR ANY ERRS OR OMISSIONS HEREIN. Th publictio is stricly for subsc's own, non-ammrcia ineil use. No pa . . . .. i I I. I l i lof ~ ma be repoduc reld stored IX irnsed in an pr, ele or ot form, or us for geerat or marketng any pr or eleic publti. ser or pr
CURRENT POSITION
($MlLlCa Asts01
Current Assets
Ac Payable
Debt DueOther
Currnt Lib.
Fix. Ch~. Cov.
ANNUAL RATES
of chng (pe sh)Revenue"Cash Flo"
~iv~~s
800kValue
Case No. UWI-W-11-02
Exhibit No, 1
Schedule 6
Page 9 of 10
PERFORMANCE 4 :.":..
Technical 4 :ei:;'
SAETY 2 Z'V::ge
BETA .70 (1.00 :: Market)
13.45 13.498.20 9.33
LEGENDS
- 12 Mos Mov Avg. . . . Rei Prie Strength2-for-1 split 5/23-for-2 split 9/0Shareinra
I
RECENT 16 521IRAUNG 23 3
I
RElTIVE 1 271~D 3 2~~
14.0:R1CE 17.8: P:O~TI '18.5~RAiiO 16.~0 YLD17.95. 018.00 17.60 High11.00 11.67 15.33 15.45 6.23 9.74 12.83 15.81 Low
YORK WATER CO NDQ-YORW
,,,I','..p-- ~íli I. ...18
13Ii"
.''"0 .0
....... .
.'.
Financial strength Btt
Price Stabilty 90
e VALUE LINE PUBLISHIG LLC 2002 200 2007 2008
I 60ll VOL~lhUS.1
2010 2011/2012
Price Groh Persistence 60
Earnings Predlctbilily 100
200 20 200 2009
REVUES PER SH 2.05 2.17 2.18 2.58 2.56 2.79 2.89 2.95 3.07"CASH FLOW" PER SH .57 .65 .65 .79 .77 .86 .88 .95 1.07EARNINGS PER SH .40 .47 .49 .56 .58 .57 .57 .64 .71DIV'D DECL'D PER SH .35 .37 .39 .42 .45 .48 .49 ,51 .52
CAP'L SPENDING PER SH .66 1.07 2.50 1.69 1.85 1.69 2.17 1.18 .83BOOKVALUEPERSH 3.90 4.06 4.65 4.85 5.84 5.97 6.14 6.92 7.19
COMMON SHS OUTST'G ¡MILL) 9.55 9.63 10.33 10.40 11.20 11.27 1 I .37 12.56 12.69AVG ANN'L PIE RATIO 26.9 24.5 25.7 26.3 31.2 30.3 24,6 21.9 20.7
RELATIVE PIE RATIO 1.47 1.40 1.36 1.39 1.68 1.61 1.48 1.46 1.33AVG ANN'L DIV'D YIELD 3.3% 3.2% 3.1 % 2.9% 2.5% 2.8% 3.5% 3.6% 3.5%REVNUES ($MILL) 19.6 20.9 22.5 26.8 28.7 31.4 32.8 37.0 39.0NET PROFIÙ$MIù. 3.8 4.4 4.8 5.8 6.1 6.4 6.4 7.5 8.9
INCOME TAX RATE 34.9% 34.8% 36.7% 36.7% 34.4% 36.5% 36.1% 37.9% 38.5%AFUDC%TONETPROFIT 3.7% -- - - 7.2% 3.8% 10.1% - 1.2%
LONG-TERM DEBT RATIO 46.7% 43.4% 42.5% 44.1% 48.3% 46.5% 54.5% 45.7% 48.3%
COMMON EQUIT RAno 53.3% 56.6% 57.5% 55.9% 51.7% 53.5% 45.5% 54.3% 51.7%
TOTAL CAPITAL ($MILL) 69.9 69.0 83.6 90.3 126.5 125.7 153.4 160.1 176.4
NET PLANT ($MILLl 106.7 116.5 140.0 155.3 174.4 191.6 211.4 222.0 228.4RETURN ON TOTAL CAP'L 7.4% 8.5% 7.6% 8.4% 6.2% 6.7% 5.7% 6.2% 6.5%
RETURN ON SHR. EQUIT 10.2% 11.4% 10.0% 11.6% 9.3% 9.5% 9.2% 8.6% 9.8%
RETURN ON COM EQUIT 10.2% 11.4% 10.0% 11.6% 9.3% 9.5% 9.2% 8.6% 9.8%RETAINEDTOCOMEQ 1.3% 2.6% 2.1% 3.0% 2.2% 1.7% 1.4% 1.9% 2.7%ALL DIV'DS TO NET PROF 88., 77% 79% 74% 77% 82% 85% 78% 72%
ANa. of analyst changig earn. est in last 9 days: 0 up, 0 down, consensus 5-yesr earnings grwt 6.0% per yer. BBased up 4 anals' esttes. Cease upon 4 analyss' 9stimales.
.77A.BI.80C
21.510.7
Bold fiures
aTe consensus
eanings
estimates
and, using the
recent prices,
PIE ratlos.
ANNUAL RATES ASSET ($mill.)200 200 12/Mof chge (per share)5 Vrs.lVr.Cash Assets .0 .0 1.3Revenues5.0%4.0%Receivles 5.9 5.4 6.3"Cash Flow"7.0%12.0%Inventory (Avg cost).7 .7 .6
Earnings 5.0%11.0%Oter -2 -l --Dividends 5.0%2,0%Current Assets 7.3 7.1 8.8Book Value 8.5%4.0%
Ascl QUARTERLV SALES ($il.)Full Propert, Plant
Year lQ 2Q 3Q 4Q Year & Equip, at cot 246.260.4 270.8
Accum Depreciaion 34.6 38.4 42.4
12/1/08 7.5 7.8 8.6 8.9 32.8 Net Propert 211.4 222.0 228.
12/1/09 8.8 9.2 9.8 9.2 37.0 Oter .1 ..--
12/1/10 9,0 9.7 10.5 9.8 39.0 Tota Assets 240.4 248.8 259.9
12/1ni
Asl EARNINGS PER SHARE Full UABIUTIES ($mil.)
Acct Payable 1.6 1.4 1.2YearlQ2Q3Q4QYearDebt Due 9.1 9.3 .0
12/1/07 .12 .15 .15 ,15 .57 Oter -1 ~-.
12/1/08 .11 .13 ,15 .18 .57 Current Uab 14.2 14.6 5.3
12/1/0 .13 .17 ,18 .16 .64
12/1/10 .15 .18 .21 .17 .71
12/1/11 .17 .20 .22 LONG- TERM DEB AND EQUITY
ca~QUARTERLV DIVIDENDS PAID Full as 01 12/1/10
endar lQ 2Q 3Q 4Q Vear Total Debt $85.2 min,Due in 5 Yrs. $12.2 mill.
2008 .121 .121 .121 .121 .48 LT Deb $85.1 mil.
200 .126 .126 .126 .126 .50 lncuding Cap. Lees None
(48% of Cap'l)2010 .128 .128 .128 .128 .51 Leases, Uncapitlized Annual rental None
2011 .131 .13
INSTITUTIONAL DECISIONS Pension Libilit $9.8 mil. in '10 YS. $8.8 milL. in '09 _
20'10 30'10 4Q'10 Pld Stock Non Pf Dlv'd Paid Noe
to Bu 29 21 25 Co,,on St 12,692,00 shes10 Sell 19 18 16 (52 of cat)HId's(OOO)2811 3078 3107
BUSINESS: The York Water Company engages in the
impounding, purification, and distrbution of water in York
County and Adams County, Pennsylvania. The company
supplies water for residential, commercial, industrial, and
other customers. It has two reservoirs, Lake Wiliams,
which is 700 feet long and 58 feet high, and creates a
reservoir covering approximately 165 acres containing
about 870 millon gallons of water; and Lake Redman,
which is 1,000 feet long and 52 feet high and creates a
reservoir covering approximately 290 acres containing
about 1.3 bilion gallons of water. In addition, it possesses a
15-mile pipeline from the Susquehanna River to Lake
Redman that provides access to an additional supply of
water. As of December 31, 2010. York Water served
approximately 182,000 residential, commercial. industral,
and other customers in 39 municipalities in York County
and seven municipalities in Adams County. Has 111 em-
ployees, C.E.O. & President: Jeffey R. Hines. Inc.: PA.
Address: 130 East Market Street, York, PA 17401. TeL.:
[phone]. Internet: http://ww.yorkwater.com.
w.T.
April 22, 2011
TOTAL SHAREHOLDER RETURN
Divdends pfus appreafjon as of 31112011
3 Mos.6 Mos.1 Vr.
30.69%
3Yrs.S Vrs.
16.25%1.47%10.26%28.75%
C2011 Value Une Publishig LlC. AN right reed. Facl malena! is obned l'm SOlKS belie to be rebl and IS prvied witho warntis of any ki.
THE PUBUSHER iS NOT RESPONSIBLE FOR ANY ERRORS OR OMISSIONS HEREIN. Ths publicti is slly lor subsa's own, nOl-cinial, inl use No paofilma be reoduced res, stored or trnsm in any pr,elenic Olothe fo,or us for gene ormaanyprntorelicpubseorpr To subSCribe call 1-800.833.0046.
Case No. UWI-W-11-02
Exhibit No.1
Schedule 6
Page 10 of 10
United Water Idaho. Inc.
Current Institutional Holdings and Individual Holdings
the Proxy Group of Nine Water Companies
l
July 06, 2011
Percentage of
Institutional
Holdings
Proxy Group of Nine Water
Companies
American States Water Co.
American Water Works Co., Inc.
Aqua America, Inc.
Artesian Resources Corp.
California Water Service Group
Connecticut Water Service, Inc.
Middlesex Water Company
SJW Corporation
York Water Company
61.86 %
84.08
41.26
34.01
52.31
32.20
39.65
46.54
24.25
Average 46.24 %
Notes:
(1) (1 - column 1).
Source of Information:pro.edgar-online.com, July 6, 2011
g
July 06, 2011
Percentage of
Individual
Holdings (1)
38.14 %
15.92
58.74
65.99
47.69
67.80
60.35
53.46
75.75
53.76 %
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 7
Page 1 of 1
United Water Idaho. Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
Using an Adjusted Total Market Approach
Proxy Group of
Nine WaterLine No. Companies
1.Prospective Yield on Aaa Rated
Corporate Bonds (1)5.35 %
2.Adjustment to Reflect Yield Spread
Between Aaa Rated Corporate
Bonds and A Rated Public
Utilty Bonds 0.34 (2)
3.Adjusted Prospective Yield on A Rated
Public Utility Bonds 5.69 %
4.Adjustment to Reflect Bond
Rating Difference of Proxy Group 0.14 (3)
5.Adjusted Prospective Bond Yield 5.83
6.Equity Risk Premium (4)4.50
7.Risk Premium Derived Common
Equity Cost Rate 10.33 %
Notes: (1) Derived in Note (4) on page 6 of this Schedule.
(2) The average yield spread of A rated public utility bonds over Aaa
rated corporate bonds of 0.34% from page 4 of this Schedule.
(3) Adjustment to reflect the A3 Moody'S bond rating of the proxy
group of nine water companies as shown on page 2 of this
Schedule. The 14 basis point adjustment is derived by taking 1/3
of the spread between Baa2 and A2 Public Utilty Bonds (1/3 *
0.42% = 0.14%).
(4) From page 5 of this Schedule.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 8
Page 1 of8
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United Water Idaho, Inc.
Numerical Assignment for
Moody's and Standard & Poor's Bond Ratings
and Standard & Poor's Business and Financial Risk Profiles
Moody's Numerical Standard & Poor's
Bond Rating Bond Weighting Bond Rating
Aaa AA
Aa1 2 AA+
Aa2 3 AA
Aa3 4 AA-
A1 5 A+
A2 6 A
A3 7 A-
Baa1 8 BBB+
Baa2 9 BBB
Baa3 10 BBB-
Ba1 11 BB+
Ba2 12 BB
Ba3 13 BB-
Standard & Poots
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Financial
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Numerical
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Excellent
Strong
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Fair
Weak
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1
2
3
4
5
6
Minimal
Modest
Intermediate
Significant
Aggressive
Highly Leveraged
1
2
3
4
5
6
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 8
Page 3 of8
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United Water Idaho. Inc.
Judgment of Equity Risk Premium for
the Proxy Group of Nine Water Companies
Notes: (1) From page 6 of this Schedule.
(2) From page 8 of this Schedule.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 8
Page 5 of8
United Water Idaho. Inc.
Derivation of Equity Risk Premium Based on the Total Market Approach
Using the Beta for
the Proxy Group of Nine Water Companies
Une No.
Proxy Group of
Nine Water
Companies
1.Arithmetic mean total return rate on
the Standard & Poor's 500 Composite
Index - 1926-2010 (1)11.90 %
2.Arithmetic mean yield on
Aa and Aa Corporate Bonds
1926-2010 (2)(6.10)
3.Historical Equity Risk Premium 5.80 %
4.Forecasted 3-5 year Total Annual
Market Return (3)13.4 %
5.Prospective Yield an Aaa Rated
Corporate Bonds (4)(5.35)
6.Forecasted Equit Risk Premium 8.09 %
7.Conclusion of Equity Risk Premium (5)6.95 %
8.Adjusted Value Une Beta (6)0.70
9.Beta Adjusted Equity Risk Premium 4.87 %
Notes: (1) Stocks, Bonds, Bills, and Inflation - Market Results for 1926-2010 Yearbook
Valuation Edition, Morningstr, Inc., 2011 Chicago, IL.
(2) From Moody's Industrial Manual and Mergent Bond Record Monthly Update.
(3) From page 3 of Schedule 10.
(4) Average forecast based upon six quarterly estimates of Aaa rated corporate bonds
per the consensus of nearly 50 economists reported in Blue Chip Financial
Forecasts dated July 1, 2011 (see page 7 of this Schedule). The estimates are
detailed below.
Third Quarter 2011 5.00 %
Fourth Quarter 2011 5.10
First Quarter 2012 5.30
Second Quarter 2012 5.40
Third Quarter 2012 5.60
Fourth Quarter 2012 5.70
Average 5.35 %
(5) The average of the historical equity risk premium of 5.80% from Une NO.3 and
the forecasted equity risk premium of 8.09% from Line NO.6 ((5.80% + 8.09%) I
2=6.95%.
(6) Median beta from page 1 of Schedule 10.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 8
Page 6 of 8
12 . BLUE CHIP FINANCIAL FORECASTS. JULY 1,2011 I
Consensus Forecasts Of u.s. Interest Rates And Key Assumptions!
------------------------------------- Histoiy -----------------------------------------
-------Average For Week Ending------ ----Average For Month---- Latest Q*
June 24 June 17 June 10 June 3 May Apr. Mar. 2Q 2011
0.09 0.09 0.10 0.10 0.09 0.10 0.14 0.11
3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25
0.25 0.25 0.25 0.25 0.26 0.28 0.31 0.28
0.14 0.12 0.10 0.12 0.11 0.14 0.17 0.14
0.03 0.05 0.05 0.05 0.04 0.06 0.10 0.060.10 0.11 0.10 0.11 0.09 0.12 0.16 0.1 1
0.17 0.18 0.18 0.18 0.19 0.25 0.26 0.22
0.39 0.40 0.41 0.44 0.56 0.73 0.70 0.62
1.5 1.8 1.58 1.63 1.84 2.17 2.11 1.96
2.97 2.99 3.00 3.01 3.17 3.46 3.41 3.294.1 9 4.21 4.22 4.21 4.29 4.50 4.51 4.40
4.96 4.98 4.97 4.95 4.96 5.16 5.13 5.06
5.73 5.73 5.73 5.70 5.78 6.02 6.03 5.91
4.46 4.49 4.49 4.51 4.59 4.99 4.92 4.77
4.50 4.50 4.49 4.55 4.64 4.84 4.84 4.73
--------------------------------------- History ------------------------------------------3Q 4Q 1Q 2Q 3Q 4Q lQ 2Q*
Key Assumptions 2009 2009 2010 2010 2010 2011 2011 2011
Major Curency Index 76.4 72.8 74.8 77.6 75.9 73.0 71.9 69.7Real GDP 1.6 5.0 3.7 1. 2.6 3.1 1.9 2.2
GDP Price Index 0.7 -0.2 1.0 1.9 2.1 0.4 2.0 2.3
Consumer Price Index 3.7 2.7 1. -0.5 1.4 2.6 5.2 4.2
Forecasts for interest rates and the Federal Reserve's Major Currency Index represent averages for the quarter. Foreasts for Real GOP, GOP Price Index and Consumer Price
Index are seasonally-adjusted annual rates of change (saar). Individual panel members' foreca~ts are on pages 4 through 9. Historical data for interest rates except UBOR is from
Federal Resere Release (FRSR) H.15. LIBOR quotes available from The Wall Street Joumal. Interest rate definitions are the same as those in FRSR H.15. Treaswy yields are
reported on a constant maturity basis. Historical data for the Fed's Major Currency Index is from FRSR H.I 0 and G.5. Historical data for Real GOP and G'OP Chained Price Index
are from the Bureau of Economic Analysis (BEA). Consumer Price Index (CPI) history is from the Department of Labor's Bureau of Labor Statistics (BLS). ). 'Interest rate data
for 2Q 2011 hosed on historical data through the week ended June 24. "Data for 2Q 20ll Major Currency Index alsols hosed on data through week ended June 24. Figures
for 2Q 201 I Real GDP, GDP Chained Price Index and Consumer Price Index are consensus forecasts hased all a special question asked of the panelists this month (see page
14).
-Year Ago-X-Weekended 06/24/11
--Consensus 4Q 2012
--Consensus 3Q 2011
Interest Rates
Federal Funds Rate
Prime Rate
LIB OR, 3-mo.
Commercial Paper, I-mo.
Treasur bil, 3-mo.
Treasury bil, 6-mo.
Treasury bill, 1 yr.
Treasury note, 2 yr.
Treasur note, 5 yr.
Treasury note, 10 yr.
Treasury note, 30 yr.
Corporate Aaa bond
Corporate Baa bond
State & Local bonds
Home mortgage rate
j
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
3mo
U.S. Treasury Yield Curve
Week ended May 20, 2011 and Year Ago vs.
20 2011 and 30 2012 Consensus Forecasts
6mo 10y
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
30yr
U.S. 3-Mo. T-Bils & 10-Yr. T-Note Yield
(Quarterly Average) History Forecast 6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1yr 2yr 5yr
Maturities
Corporate Bond Spreads
As of week ended May 20, 2011
6.00
5.50
5.00
4.50
4.00
3.50
~ 3.00
æ. 2.502.00
1.50
1.00
0.50
0.00
10 10 10 10 10 10 10 10 10 10 10 10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
I3-Month T-Bil Yield
U.S. Treasury Yield Curve
As of week ended May 20, 2011
700 700 400 400
650 650 350 350600600
550 550 300 300
500 500 250 250
450 450 200 200
~
400 400 r!
350 350 ;r 150 150
..300 300 j 10-Year T-Bond
Æ 100 minus 3-Month T-Bil 100250250
200 200 50 (Constant Maturity Yields)50
150 150 0 0
100 100 -50 -505050
0 0 -100 -100
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 8
Page 7 of8
Line No.
1.
2.
3.
Notes: (1)
United Water Idaho. Inc.
Derivation of Mean Equit Risk Premium Based on a Study
Using Holding Period Returns of Public Utilities
Over A Rated
Moody's Public Utility
Bonds - AUS
Consultants Study (1)
Arithmetic Mean Holding Period Returns on
the Standard & Poor's Utility Index 1926-
2010 (2):10.69 %
Arithmetic Mean Yield on Moody's A Rated
Public Utility Yields 1926-2010 (6.57)
Equity Risk Premium 4.12 %
(2)
sap Public Utility Index and Moody's Public Utility Bond Average Annual Yields
1928-2010, (AUS Consultants - Utility Services, 2011).
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.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule a
Page a ofa
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Exhibit NO.1
Schedule 9
Page 1 of 3
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Case No. UWI-W-11-02
Exhibit NO.1
Schedule 9
Page 2 of3
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Case No. UWI-W-11-02
Exhibit No. 1
Schedule 9
Page 3 of3
,. AL__
United Water Idaho. Inc.
Indicated Common Equity Cost Rate Through Use
of the Traditional Capital Asset Pricing Model (CAPM) and Empirical Capital Asset Pricing Model (ECAPM)
l g ~1.§§
Indicated
Value Une Traditional ECAPM Common
Adjusted Market Risk Risk-Free CAPM Cost Cost Rate Equity Cost
Proxy Group of Nine Water Companies Beta Premium (1)Rate (2)Rate (3)(4)Rate (5)
American States Water Co.0.75 7.71 %4.73 %10.51 %10.99 %
American Water Works Co., Inc.0.65 7.71 4.73 9.74 10.42
Aqua America, Inc.0.65 7.71 4.73 9.74 10.42
Artesian Resources Corp.0.60 7.71 4.73 9.36 10.13
California Water Service Group 0.70 7.71 4.73 10.13 10.71
Connecticut Water Service, Inc.0.80 7.71 4.73 10.90 11.28
Middlesex Water Company 0.75 7.71 4.73 10.51 10.99
SJW Corporation 0.90 7.71 4.73 11.67 11.86
York Water Company 0.70 7.71 4.73 10.13 10.71
Average 10.30 %10.83 %10.57 %
Median 10.13 %10.71 %10.42 %
See page 2 for notes.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 10
Page 1 of2
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 Nine AUS Utility Reports Water Companies
Adjusted to Reflect a Forecasted Risk-Free Rate and Market Return
Notes:
(1) For reasons explained in Ms. Ahern's accmpanying direct testimony, from the thirteen weeks ending July 8,2011, Value Line Summary & Index, a forecasted 3-5 year total annual market return of 13.44% can be derived by
averaging the thirteen weeks ended July 8,2011 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-§ year average total market appreciation of 55% produces a four-year average annual return of
11.51% ((1.55' 5) -1). When the average annual forecasted dividend yield of 1.93% is added, a total average
market return of 13.44% (1.93% + 11.51 %) is derived.
The thirteen week forecasted total market return of 13.44% minus the forecasted risk-free rate of 4.73%
(developed in Note 2) is 8.71 % (13.44% - 4.73%). The Morningstar, Inc. (Ibbotson Associates) calculated market
premium of6.70% for the period 1926-2010 results from a total market return of 11.90% less the average income
return on long-term U.S. Government Securities of 5.20% (11.90% - 5.20% = 6.70%). This is then averaged with
the 8.71% Value Line market premium resulting in a 7.71% market premium. The 7.71% market premium is then
multiplied by the beta in column 1 of page 1 of this Schedule.
(2) The average forecast based upon six quarterly estimates of 3D-year Treasury Note yields per the consensus ofnearly 50 economists reported in the Blue ChiD Financial Forecasts dated July 1, 2011 (see page 7 of Schedule
8). The estimates are detailed below:
Third Quarter 2011
Fourth Quarter 2011
First Quarter 2012
Second Quarter 2012
Third Quarter 2012
Fourth Quarter 2012
3D-Year
Treasury Note Yield
4.30
4.50
4.60
4.80
5.00
5.20
Average 473%
(3) The traditional Capital Asset Pricing Model (CAPM) is applied using the following formula:
Rs = RF + ß (RM - RF)
Where Rs = Return rate of common stock
RF = Risk Free Rate
ß = Value Line Adjusted Beta
RM = Return on the market as a whole
(4) The empirical CAPM is applied using the following formula:
Rs = RF + .25 (RM - RF ) + .75 ß (RM - RF )
Where Rs = Return rate of common stock
RF = Risk-Free Rate
ß = Value Line Adjusted Beta
RM = Return on the market as a whole
Source of Information: Value Line Summary & Index
Blue Chip Financial Forecasts, July 1, 2011
Value Line Investment Suryey, April 22, 2011
Standar~Editio~ and Small and Mid-Cap Edition
Ibbotson SBBI 2011 Valuation Yearbook - Market Results for
Stocks, Bonds, Bils, and Inflation -1926 - 2010, Morningstar, Inc., 2011 Chicago, IL
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 10
Page 2 of2
United Water Idaho, Inc.
Summary of Cost of Equity Models Applied to the
Proxy Group of Non-Utility Companies
Comparable in Total Risk to the
Proxy Group of Nine Water Companies
Proxy Group of
Thirt-Nine Non-
Principal Methods Utilty Companies
Projected Return on BookCommon Equity (1) 15.50 %
Average of Market-BasedModels (2) 11 .39 %
Average 13.45 %
Notes:
(1) From Schedule 12.
(2) Average of the results of the DCF (12.05%),
RPM (11.38%), and CAPM / ECAPM
(10.75%) analyses as shown on pages 1,2,
and 5 of Schedule 13 respectively.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 11
Page 1 of4
United Water Idaho. Inc.
Basis of Selection of Comparable Risk
Domestic Non-Price Regulated Companies
Residual
Value Line Standard Error
Proxy Group of Nine Water Adjusted Unadjusted of the
Companies Beta Beta Regression
American States Water Co.0.75 0.57 3.6376
American Water Works Co., Inc.0.65 0.43 3.5017
Aqua America, Inc.0.65 0.41 2.7699
Artesian Resources Corp.0.60 0.34 2.4340
California Water Service Group 0.70 0.49 3.4453
Connecticut Water Service, Inc.0.80 0.64 2.8611
Middlesex Water Company 0.75 0.56 2.6991
SJW Corporation 0.90 0.82 4.3423
York Water Company 0.70 0.48 3.2807
Average 0.72 0.53 3.2191
Beta Range (+/- 2 std. Devs. of Beta)0.40 0.66
2 std. Devs. of Beta 0.13
Residual Std. Err. Range (+/- 2 std.
Devs. of the Residual Std. Err.)2.9363 3.5019
Std. dey. of the Res. Std. Err.0.1414
2 std. devs. of the Res. Std. Err.0.2828
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 11
Page 2 of4
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 11
Page 3 of4
United Water Idaho, Inc.
Basis of Selection of Groups of Domestic, Non-Price Regulated Companies
Comparable in Total Risk to the Proxy Group of Nine Water Companies
(1) The proxy group of thirt-nine non-utility companies was selected based upon the proxy
group of nine water companies unadjusted beta range of 0.40 - 0.66 and standard error of
the regression range of 2.9363 - 3.5019. These ranges are based upon plus or minus two
standard deviations of the unadjusted beta and standard error of the regression as detailed
in Ms. Ahern's direct testimony. Plus or minus two standard deviations captures 95.50% of
the distribution of unadjusted betas and standard errors of the regression.
(2) The standard deviation of group of nine water companies' standard error of the regression is
0.1414. The standard deviation of the standard error of the regression is calculated as
follows:
Standard Deviation of the Std. Err. of the Regr. = Standard Error of the RegressionJ2
where: N = number of observations. Since Value Line betas are derived from
weekly price change observations over a period of five years, N = 259
Thus,0.1414 =3.2191 =
.J518
3.2191
22.7596
Source of Information: Value Line, Inc., June 15, 2011
Value Line Investment Survey (Standard Edition)
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 11
Page 4 of4
Unjted Water Idaho Inc
Comparable Earnings Analysis
for the Proxy Group of Non-Utility Companies Comparable to the
Proy Group of Nine Water Coroanies(1)
Rate of Return on Book
Common Equity, Net Worth, or
Partner's Capita
5-Year Projected (2)
Residual
Standard
VL Error Standard
Proxy Group of Thirt-Nine Adjusted Unadjusted olthe Deviation of 5 Year Student's T
Non-Utility Companies Beta Beta Regression Beta Projecton Statistic
Gallagher (Arthur J.)0.70 0.54 3.0362 0.0629 13.00 %(0.5)
AutoZone Inc.0.70 0.51 3.3427 0.0693 NMF (1.3)
Baxer Inti Inc.0.65 0.45 2.9474 0.0611 27.50 0.5
Bristol-Myers Squibb 0.75 0.57 3.0546 0.0633 20.00 0.0
Brown & Brown 0.70 0.48 3.0383 0.0630 12.00 (0.5)
Capitol Fed. Finl 0.65 0.44 3.2917 0.0682 3.50 (1.)
CenturyLink Inc.0.75 0.55 2.9789 0.0617 9.00 (0.7)
Quest Diagnostics 0.70 0.49 2.9409 0.0609 15.00 (0.3)
Edwards Lifescience 0.65 0.41 3.1041 0.0643 18.50 (0.1)
Forest Labs.0.80 0.64 3.3015 0.0684 13.50 (0.4)
Gilead Sciences 0.65 0.46 3.5013 0.0726 36.50 1.1
Gao-Probe 0.80 0.66 3.4121 0.0707 13.50 (0.4)
Hasbro, Inc.0.75 0.60 3.4389 0.0713 28.00 0.5
Hudson City Bancorp 0.80 0.66 3.2150 0.0666 10.00 (0.7)
Hospira Inc.0.70 0.52 3.4108 0.0707 24.50 0.3
IAC/lnterActiveCorp 0.70 0.49 3.2562 0.0754 4.50 (1.0)
Investors Bancorp 0.75 0.55 3.3951 0.0704 9.50 (0.7)
J&J Snack Foods 0.70 0.48 3.4541 0.0716 13.00 (0.5)
Lancaster Colony 0.75 0.57 3.3757 0.0700 17.50 (0.2)
McKesson Corp.0.75 0.58 3.3192 0.0688 14.50 (0.4)
Marsh & McLennan 0.75 0.59 2.9986 0.0621 15.00 (0.3)
MAXIMUS Inc.0.80 0.63 3.485 0.0723 35.00 1.0
Owens & Minor 0.65 0.46 3.3308 0.0690 16.00 (0.3)
Rollns,lnc.0.80 0.66 3.0435 0.0631 32.00 0.8
Sherwin.Willams 0.70 0.49 3.0351 0.0629 24.50 0.3
Smucker (J.M.)0.70 0.49 3.0242 0.0627 11.50 (0.6)
Sara Lee Corp.0.80 0.65 3.2561 0.0675 94.00 (3)4.9
Silgan Holdings 0.75 0.62 3.1746 0.0658 17.00 (0.2)
Suburban Propane 0.75 0.59 2.9382 0.0609 25.00 0.3
Stericycle Inc.0.70 0.48 3.1808 0.0659 15.50 (0.3)
Safeway Inc.0.70 0.48 3.1874 0.0661 17.00 (0.2)
Strker Corp.0.80 0.66 3.1280 0.0648 19.50 (0.0)
T JX Companies 0.80 0.65 3.0165 0.0625 44.00 1.6
Walgreen Co.0.75 0.61 3.2419 0.0672 20.50 0.0
WD-40 Co.0.75 0.56 3.4782 0.0721 15.50 (0.3)
Weis Markets 0.65 0.45 2.9598 0.0613 9.00 (0.7)
Watson Pharmac.0.75 0.57 3.0355 0.0629 13.50 (0.4)
Berkley (W.R.)0.70 0.50 3.0005 0.0622 13.50 (0.4)
West Pharmac. Svcs.0.80 0.62 3.4659 0.0718 14.50 (0.4)
Average 0.73 0.55 3.1999 0.0665
Average for the Proxy
Group of Nine Water
Companies 0.72 0.53 3.2191 (1)0.0674
Median (4)15.50%
Conservative Median (5)15.50%
Notes:
(1) See Page 4 of Schedule 11.
(2) From Value Line Investent Survey, various issues for the years 2013-2015/2014-2016.
(3) The students T statistic associated wih these returns exceds 1.96 at the 95% level of con1dence. Therefore,
they have been excluded, as outliers, to arrive at proper projected returns as fully expained in Ms. Ahern's
testimony.
(4) Median five year projected rate of return on book comon equity, shareholders' equity, net wort, or parters'
capital including returns identified as outliers as outlined in note (3) above.
(5) Median five year projected rate of return on book common equit, shareholders' equity, net wort, or paers'capital excluding returns identified as outiiers as outlined in note (3) above.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 12
Page 1 of 1
United Wate Idaho Inc.
DCF Results for the Proxy Group of Non-Utilit Companies Comparable in Total Risk to
the Proxy Group of Nine Water Companies
Average
Value Una Reuters Mean Zsck's Five Yahoo!Projeced
Projeced Consensus Year Roance Rve Year Indicate
Proxy Group of Thirt-Average Rve Year Projected Rve Projeced Projected Five Growth Adjusted Common
Nine Non-Utility Dividend Growt in Year Growt Growt Rate Year Growt in Rate in Dividend Equity Cost
Companies Yield EPS Rate in EPS in EPS EPS EPS Yield Rate
Gallagher (ArUur J.4.57 %8.50 %9.00 %9.80 %9.00 %9.08 %4.77 %13.85 %
AutoZone Inc.14.50 15.00 13.50 14.67 14.42 N/A
Baxer Inll Inc.2.13 9.50 9.00 9.70 9.87 9.52 2.24 11.76
Bristol-Myers Squibb 4.67 7.50 1.90 0.70 (1.19)3.37 4.75 8.12
Brown & Brown 1.25 7.00 11.00 13.30 11.60 10.73 1.32 12.05
Capitol Fed. Finl 2.60 12.00 N/A N/A N/A 12.00 2.75 14.75
Centuryink, Inc.7.10 (1.00)2.80 (0.30)5.65 4.23 7.25 11.48
Quest Diagnoscs 0.69 9.00 11.00 11.70 11.21 10.73 0.73 11.46
Edwards Liesciences 15.00 27.00 33.90 26.31 25.55 N/A
Forest Lab.NMF 3.40 (2.40)(1.51)3.40 N/A
Gilead Sciences 10.00 15.00 14.60 15.53 13.78 N/A
Gen-Prob 11.00 12.00 13.60 12.48 12.27 N/A
Hasbro, Inc.2.64 10.00 13.00 N/A 13.55 12.18 2.80 14.98
Hudson Cit Bancorp 3.58 3.50 4.50 4.50 5.00 4.38 3.66 8.04
Hospira Inc.11.50 11.00 12.20 10.78 11.37 N/A
IAC/lnterActiveCorp 22.50 35.00 25.00 25.00 26.88 N/A
Investors Bancorp In NMF 15.00 15.00 15.00 15.00 N/A
J&J Snack Foods 0.96 10.50 N/A N/A N/A 10.50 1.01 11.51
Lancaer Colony 2.18 9.00 N/A N/A 10.00 9.50 2.28 11.78
McKesson Corp.0.86 9.50 11.00 11.30 13.70 11.38 0.91 12.29
Marsh & McLennan 2.79 28.50 8.50 10.70 8.54 14.06 2.99 17.05
MAXIMUS Inc.0.38 18.00 10.00 N/A 10.00 12.67 0.41 13.08
Owens & Minor 2.37 11.00 10.00 11.50 10.07 10.64 2.49 13.13
Rollins, Inc.1.41 14.50 N/A N/A 10.00 12.25 1.49 13.74
Sherwin-Willams 1.74 11.00 11.00 10.40 11.70 11.03 1.83 12.86
Smucker (J.M.)2.31 10.50 6.90 8.00 7.08 8.12 2.41 10.53
Sara Lee Corp.2.42 6.00 8.70 6.00 9.48 7.55 2.51 10.06
Silgan Holdings 1.02 11.50 8.00 5.00 8.06 8.14 1.06 9.20
Suburban Propane 6.41 1.00 4.00 3.00 4.00 3.00 6.51 9.51
Stericycle Inc.14.50 17.00 16.50 16.00 16.00 N/A
Safeway Inc.2.02 6.50 10.00 10.70 10.43 9.41 2.11 11.52
Strer Cop.1.20 13.00 11.00 11.20 10.89 11.52 1.27 12.79
T JX Companies 1.46 13.50 13.00 14.60 13.35 13.61 1.56 15.17
Walgreen Co.1.62 12.00 13.00 13.40 14.17 13.14 1.73 14.87
WD-4 Co.2.66 9.00 12.00 12.00 12.00 11.25 2.80 14.05
Weis Markets 2.90 6.50 N/A N/A N/A 6.50 2.99 9.49
Watson Pharmac.11.50 11.00 12.80 12.53 11.96 N/A
Berkley (W.R)0.87 11.50 11.00 11.30 9.67 10.87 0.92 11.9
Wes Pharmac. Svcs.1.51 8.50 20.00 N/A 15.00 14.50 1.62 16.12
Average 12.31 %
Median 12.05 %
NA= Not Available
NMF= Not Meaningfl Rgure
(1) Ms. Ahern's applicaon of the DCF model to the domestic, non-prce regluated comparable risk companies is identical to the applicaon olthe DCF to her proxy
group of water companies. She uses the 60 day aveage price and the spot indicated dividend as of 40730 for her dividend yield and then adjusts that yield for
1/2 the average projected growt rate in EPS, which is calculated by averaging the 5 year projecd growt in EPS provided by Value Une, ww.reuters.com.
ww.zacks.com, and ww.yahoo.com (excluding any negtive grow rates) and then adding that growt rate to the adjusted dividend yield.
Source of Information:Value Line Investment Survey:
ww.reuters.comDownloadedon07/06/2011
wwzacks.com Downloaded on 07/06/211
ww.yahoo.com Downloaded on 07/08/2011
Case No. UWI-W-11-02
Exhibit No.1
Schedule 13
Page 1 of5
P. Ahern
Line No.
1.
2.
3.
United Water Idaho. Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
Using an Adjusted Total Market Approach
Prospective Yield on Baa Rated
Corporate Bonds (1)
Equity Risk Premium (2)
Risk Premium Derived Common
Equity Cost Rate
Proxy Group of
Thirty-Nine Non-
Utilty Companies
6.17 %
5.21
11.38 %
Notes: (1) Average forecast based upon six quarterly estimates of Baa rated
corporate bonds per the consensus of nearly 50 economists
reported in Blue Chip Financial Forecasts dated July 1, 2011 (see
page 7 of Schedule 8). The estimates are detailed below.
Third Quarter 2011 5.80 %
Fourth Quarter 2011 5.90
First Quarter 2012 6.10
Second Quarter 2012 6.20
Third Quarter 2012 6.40
Fourth Quarter 2012 6.60
Average 6.17 %
(2)From page 4 of this Schedule.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 13
Page 2 of 5
P. Ahern
United Water Idaho. Inc.
Comparison of Bond Ratings for the
Proxy Group of Non-Utilty Companies Comparable in Total Risk to the
Proxy Group of Nine Water Companies
Line No.
United Water Idaho. Inc.
Derivation of Equity Risk Premium Based on the Total Market Approach
Using the Beta for
the Proxy Group of Non-Utilty Companies
Comparable in Total Risk to the
Proxy Group of Nine Water Companies
Proxy Group of
Thirt-Nine Non-
Utility Companies
1.Arithmetic mean total return rate on
the Standard & Poor's 500 Composite
Index - 1926-2010 (1)11.90 %
2.Arithmetic mean yield on
Aaa and Aa Corporate Bonds
1926-2010 (2)(6.10)
3.Historical Equity Risk Premium 5.80 %
4.Forecasted 3-5 year Total Annual
Market Return (3)13.44 %
5.Prospective Yield an Aaa Rated
Corporate Bonds (4)(5.35)
6.Forecasted Equity Risk Premium 8.09 %
7.Conclusion of Equity Risk Premium (5)6.95 %
8.Adjusted Value Line Beta (6)0.75
9.Beta Adjusted Equity Risk Premium 5.21 %
Notes: (1) Ibbotson Associates 2011 Valuation Yearbook - Market Results for 1926-2010,
Morningstar, Inc., 2011 Chicago, IL.
(2) From Moody'S Industrial Manual and Mergent Bond Record Monthly Update.
(3) From page 2 of Schedule 10.
(4) Average forecast based upon six quarterly estimates of Aaa rated corporate bonds
per the consensus of nearly 50 economists reported in Blue Chip Financial Forecasts
dated July 1, 2011 (see page 7 of Schedule 8). The estimates are detailed below.
Third Quarter 2011 5.00 %
Fourth Quarter 2011 5.10
First Quarter 2012 5.30
Second Quarter 2012 5.40
Third Quarter 2012 5.60
Fourth Quarter 2012 5.70
Average 5.35 %
(5) The average of the historical equity risk premium of 5.80% from Line NO.3 and the
forecasted equity risk premium of 8.09% from Line NO.6 ((5.80% + 8.09%) /2=
6.95%.
(6) Median beta from page 5 of this Schedule.
Case No. UWI-W-11-02
Exhibit NO.1
Schedule 13
Page 4 of5
P. Ahern
United Water Idaho Inc.
Traditional CAPM and ECAPM Results for the Proxy Group of Non-Utility Companies Comparable in Total Risk to the
Proxy Group of Nine Water Companies
Value Line Traditional Indicated
Proxy Group of Thirt-Nine Adjusted Market Risk Risk-Free CAPM Cost ECAPM Cost Common Equity
Non-Utilty Companies Beta Premium (1)Rate (2)Rate (3)Rate (4)Cost Rate (5)
Gallagher (Arhur J.)0.70 7.71 4.73 10.13 10.71
AutoZone Inc.0.70 7.71 4.73 10.13 10.71
Baxer Inti Inc. 0.65 7.71 4.73 9.74 10.42
Bristol-Myers Squibb 0.75 7.71 4.73 10.51 10.99
Brown & Brown 0.70 7.71 4.73 10.13 10.71
Capitol Fed. Finl 0.65 7.71 4.73 9.74 10.42
CenturyLink Inc.0.75 7.71 4.73 10.51 10.99
Quest Diagnostics 0.70 7.71 4.73 10.13 10.71
Edwards Ufesciences 0.65 7.71 4.73 9.74 10.42
Forest Labs.0.80 7.71 4.73 10.90 11.28
Gilead Sciences 0.65 7.71 4.73 9.74 10.42
Gen-Probe 0.80 7.71 4.73 10.90 11.28
Hasbro, Inc.0.75 7.71 4.73 10.51 10.99
Hudson City Bancorp 0.80 7.71 4.73 10.90 11.28
Hospira Inc.0.70 7.71 4.73 10.13 10.71
IAC/lnterActiveCorp 0.70 7.71 4.73 10.13 10.71
Investors Bancorp 0.75 7.71 4.73 10.51 10.99
J&J Snack Foods 0.70 7.71 4.73 10.13 10.71
Lancaster Colony 0.75 7.71 4.73 10.51 10.99
McKesson Corp.0.75 7.71 4.73 10.51 10.99
Marsh & McLennan 0.75 7.71 4.73 10.51 10.99
MAXIMUS Inc.0.80 7.71 4.73 10.90 11.28
Owens & Minor 0.65 7.71 4.73 9.74 10.42
Rollns, Inc.0.80 7.71 4.73 10.90 11.28
Sherwn-Williams 0.70 7.71 4.73 10.13 10.71
Smucker (J.M.)0.70 7.71 4.73 10.13 10.71
Sara Lee Corp.0.80 7.71 4.73 10.90 11.28
Silgan Holdings 0.75 7.71 4.73 10.51 10.99
Suburban Propane 0.75 7.71 4.73 10.51 10.99
Stericycle Inc.0.70 7.71 4.73 10.13 10.71
Safeway Inc.0.70 7.71 4.73 10.13 10.71
Stryer Corp.0.80 7.71 4.73 10.90 11.28
T JX Companies 0.80 7.71 4.73 10.90 11.28
Walgreen Co.0.75 7.71 4.73 10.51 10.99
WD-40Co.0.75 7.71 4.73 10.51 10.99
Weis Markets 0.65 7.71 4.73 9.74 10.42
Watson Pharmac.0.75 7.71 4.73 10.51 10.99
Berkley (W.R.)0.70 7.71 4.73 10.13 10.71
West Pharmac. Svcs.0.80 7.71 4.73 10.90 11.28
Average 10.36 %10.88 %10.62 %
Median 10.51 %10.99 %10.75 %
Notes:
(1) From Schedule 10, page 2, note 1.
(2) From Schedule 10, page 2, note 2.
(3) Derived from the model shown on Schedule 10, page 2, note 3.
(4) Derived from the model shown on Schedule 10, page 2, note 4.
(5) Average of CAPM and ECAPM cost rates.
Case No. UWI-W-11-02
Exhibit No. 1
Schedule 13
Page 5 of5
P. Ahern
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