20150521Ahern Direct.pdf

ORIGINAL
Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
P.O. Box 2564-83701
Boise, lD 83702
Tel: [phone]
Fax [phone]
ioe@mcdevitt-m i I ler. com
Attorneys for the Applicant
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-I5-01
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
DIRECT TESTIMONY OF PAULINE M. AHERN, CRRA
TABLE OF CONTENTS
Paqe
No.
lntroduction .............. .......,1
Purpose ...........2
Summary .........3
General Comments on Capital Market Conditions ...........5
General Principles .........11
Business Risk........ ........12
Financial Risk........ ........23
Proxy Group...... .............24
Common Equity Cost Rate Models..... ...........26
Discounted Cash Flow Model ('DCF') ...........26
The Risk Premium Model ("RPM') .................29
The CapitalAsset Pricing Model ('CAPM"). ...................40
Common Equity Cost Rates for the Proxy Group of Domestic, Non-Price Regulated
Companies Based Upon the DCF, RPM and CAPM .....44
Conclusion of Common Equity Cost Rate ......48
Business Risk Adjustment .............49
Appendix A - Professional Qualifications of Pauline M. Ahern, CRRA
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lntroduction
O. PLEASE STATE YOUR NAME, OCCUPATION AND BUSINESS ADDRESS.
A. My name is Pauline M. Ahern. I am a Partner with Sussex Economic Advisors,
LLC. My business address is 161 Worcester Road, Suite 503, Framingham, MA
01701 . My mailing address is 3000 Atrium W"y, Suite 241, Mount Laurel, NJ
08054.
PLEASE SUMMARIZE YOUR PROFESSIONAL EXPERIENCE AND
EDUCATIONAL BACKG ROUND.
I have offered expert testimony on behalf of investor-owned utilities before
twenty-nine state regulatory commissions in the United States as well as one
provincial regulatory commission in Canada on rate of return issues, including
but not limited to common equity cost rate, fair rate of return, capital structure
issues, relative investment risk and credit quality issues. I am a graduate of
Clark University, Worcester, MA, where I received a Bachelor of Arts degree with
honors in Economics. I have also received a Master of Business Administration
with high honors and a concentration in finance from Rutgers University.
On behalf of the American Gas Association ('A.G.A.'), ! calculate the
A.G.A. Gas lndex, which serves as the benchmark against which the
performance of the American Gas lndex Fund ('AGIF") is measured monthly.
The A.G.A. Gas lndex and AGIF are a market capitalization weighted index and
mutual fund, respectively, comprised of the common stocks of the publicly traded
corporate members of the A.G.A.
I am a member of the Society of Utility and Regulatory Financial Analysts
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("SURFA") 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
Secretary/Treasurer from 2004 - 2006. ln 1992, I was awarded the professional
designation "Certified Rate of Return Analyst" ("CRR,q'; by SURFA, which is
based upon education, experience and the successfu! completion of a
com prehensive written exam ination.
I am also an associate member of the National Association of Water
Companies, serving on its Finance/Accountingfl-axation and Rates and
Regulation Committees; a member of the Advisory Counci! of the Financial
Research lnstitute - University of Missouri - Robert J. Trulaske, Sr. College of
Business; a member of the American Finance and Financia! Management
Associations; a member of Edison Electric lnstitute's Cost of Capital Working
Group; and, a member of A.G.A.'s State Affairs Committee.
Purpose
O. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY?
A. The purpose of my direct testimony is to provide testimony on behalf of United
Water ldaho lnc. ("UW|D" or "the Company") relative to the appropriate overall
rate of return, including capital structure ratios, long-term debt cost rate and the
investor-required common equity cost rate which UWID should be afforded the
opportunity to earn on its sewer jurisdictional rate base.
O. HAVE YOU PREPARED AN EXHIBIT WHICH SUPPORTS YOUR
RECOMMENDED COMMON EQUITY COST RATE?
A. Yes. They have been marked for identification as Exhibit No. 1 consisting of
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Schedules (PMA-1 ) through (PMA-1 0).
WHAT IS YOUR RECOMMENDED OVERALL RATE OF RETURN?
I recommend that the ldaho Public Utilities commission ("the lPUc" or "the
Commission") authorize the Company the opportunity to earn an overall rate of
return of 8.45o/" based upon the consolidated capital structure of United
Waterworks, lnc. ("UWW" or "the Parent") at December 31, 2014, which
consisted of 44.70o/o long-term debt and 55.30% common equity, at a long-term
debt cost rate of 6.03% and my recommended common equity cost rate of
1O.4O%. A common equity cost rate of 1040% results in an overall rate of return
of 8.45% when applied to the common equity ratio of 55.30% as will be
discussed below and as derived on page 1 of Schedule (PMA-1) and
summarized in Table 1 below:
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Tvpe of Capital
Long-Term Debt
Common Equity
Total
Table 1
Ratios Cost Rate
44.70/o 6.03%
55.30 10.40
100.00%
Weiohted Cost Rate
2.70o/o
5.75
8.45"/"
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Summarv
O. PLEASE SUMMARIZE YOUR RECOMMENDED COMMON EQUITY COST
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RATE.
My recommended common equity cost rate of 10.40o/o is summarized on page 2
of Schedule (PMA-I). Because UWID's common stock is not publiclytraded, a
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market-based common equity cost rate cannot be directly observed for the
Company. Consequently, I have assessed the market-based common equity
cost rates of companies of relatively similar, but not necessarily identical risk,
i.e., a proxy group, for insight into a recommended common equity cost rate
applicable to UWID. Using companies of relatively similar risk as proxies is
consistent with the principle of fair rate of return established in the Hopel and
Btuefietdz cases, adding reliability to the informed expert judgment necessary to
arrive at a recommended common equity cost rate. However, no proxy group
can be selected to be identical in risk to UWID. Therefore, the proxy group's
results must be adjusted, if necessary, to reflect the unique relative investment
(financial and lor business) risk of the Company.
My recommendation results from the application of market-based cost of
common equity models, the Discounted Cash Flow ("DCF") approach, the Risk
Premium Model ("RPM") and the Capital Asset Pricing Model ('CAPM'), to the
market data of the proxy group of eight water companies whose selection will be
discussed below. ln addition, I also applied the DCF, RPM and CAPM to the
market data of domestic, non-price regulated companies comparable in total risk
to the eight water companies.
The results derived from each are as follows:
Federal Power Commission v. Hope NaturalGas Co.,320 U.S. 591 (1944).
Bluefield Water Works lmprovement Co. v. Public Seru. Comm'n,262 U.S. 679 (1922).
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1 Table 2
23 ProxY GrouP4 of Eight
5 Water
6 ComPanies
78 Discounted Cash Flow Model 8.54o/"9 Risk Premium Model 10.7210 Capital Asset Pricing Model 9.35
1L72 Cost of Equity Models APPlied toL3 Comparable Risk, Non-PriceL4 Regulated ComPanies 10.43/"15 lndicated Common EquitY16 Cost Rate 9.83/"
1718 Business Risk Adjustment 0.55%
t920 lndicated Common Equity Cost Rate 10.38%
21,22 Recommended Common Equity Cost Rate 1949%
23 After reviewing the cost rates based upon these models, I conclude that a
24 common equity cost rate of 9.83% is indicated before any adjustment for UWID's
25 greater business risk relative to the pro)ry group of eight water companies as I
26 discuss in more detail below. Thus, the indicated common equity cost rate
27 based upon the eight water companies needs to be adjusted upward by 0.55%
28 to reflect UWID's greater business risk. After adjustment, the common equity
29 cost rate is 10.38%, which when rounded lo 10.40%, is my recommended
30 common equity cost rate, which in my opinion is reasonable, if not conservative.
31 General Comments on Capital Market Conditions
32 O. PLEASE DESCRIBE CURRENT CAPITAL MARKET CONDITIONS.
33 A. The U.S. economy is slowly recovering from the Great Recession of 2008 -
34 2009, with the Federal Reserve Bank's ("Fed") Federal Open Market
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Committee's ("FOMC") having tapered off its quantitative easings while
maintaining the Federal Funds ("Fed Funds") and discount rate at record lows
until certain economic thresholds are met and maintained for an undefined
period. As a result, the stock market has recovered remarkably with the Dow up
more than 175o/o, from the lows of early March 2009, notwithstanding the recent
volatility in the Dow.
ln its May 15, 2015 Selection & Opinion Value Line lnvestment Suruey
("Value Line") notes the following regarding the U,S. economy as it moves into
mid-20154:
1) Second quarter 2015: Picture is mixed.
Jobless claims are low enough to sustain healthy job growth;
Car sales are up;
Non-manufacturing is accelerating; BUT,
Manufacturing are barely advancing;
Consumer confidence is up and down; and
Exports are being held back by a strong U.S. dollar.
2) Progress to be measured and uneven throughout rest of quarter and year.
a. Softer landing in 1't quarter suggests Gross Domestic Product
('GDP') growth will struggle to reach 3o/o in the 2nd quarter; and
b. GDP growth should average 2.5o/o - g.O% in 2nd half of 2015.
3) Overall a decent quarter, in spite of the challenges.
Purchase of mortgage backed securities.
Value Line lnvestment Suruey, Selection & Opinion, May 15, 2015, 4221.
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Globally, the long economic upturn here in the U.S. will gradually spread
globally.
"All of this has led to a volatile trading pattern on Wall Street."
Conclusion:
a. Stock market is not undervalued;
b. lnterest rates near historic lows;
c. Fed in no hurry to raise interest rates; hence,
d. "Equities remain an attractive option."
Remember, however, that volatility is a measure of risk, and volatile trading
patterns on Wall Street indicate a risky stock market and higher common equity
costs, notwithstanding the currently, historically low interest rate environment.
The cost of capital, including the cost of common equity, is expectational in
nature. So, expected interest rates are relevant to rate of return analyses, the
current historical low interest rates are not. As noted by Value Line below,
interest rates are expected to rise. lt is a matter of when, not if. On February 20,
2015, Value Line published its Quarterly Forecast for the U.S. Economy in its
Selection & Opinion. Value Line projects interest rates to rise significantly by
2019. Specifically, the yield on the 3-month Treasury Bills is expected to rise
from a recent (May 6, 2015) O.O1%5 to 3.5% in 20196; the yield on long-term U.S.
Treasury securities from a recent (May 6, 2015) 2.99/o lo 4.5o/o in 2019; and, the
prime rate from a recent (May 6, 201 5) 3.25o/o to 5.5% in 2019.
ln fact, the yield on 30-year U.S. Treasury securities has already risen 64
Value Line, May 15, 2015, 4229.
Value Line lnvestment Suruey, Selection & Opinion, February 20,2015,4367.
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basis points (0.64"/") during the last three months, from 2.35o/o7 on February 4,
2015 to the 2.99/" noted above. Likewise, as shown on Schedule (PMA-6),
page 4, the average yield on Moody's A-rated public utility bonds has risen 16
basis points (0.16%) from 3.58% in January 2015 lo 3.74% in March 2015, rising
another 17 basis points (0.17%) to 3.91o/oB on April 30,2015 for a total of 33
basis points (0.33%). As noted below, the Fed considers recent levels of interest
rates as below the longer-term "normal."
Clearly, the capital markets are reflecting both the recent historically low
interest rate environment engineered by the Fed plus an expectation of rising
interest rates. The Fed's engineering of interest rates impacts the measurement
of the cost of capital, specifically the investor required return on common equity.
HOW DOES THE FED'S ENGINEERING OF INTEREST RATES AFFECT THE
TRADITIONAL COST OF COMMON EQUITY MODELS?
The traditional cost of common equity models, e.9., the DCF, RPM, and CAPM
models do not accurately or reliably capture the investors' required return under
current economic and capital market conditions, where interest rates are
artificially and historically low, being maintained there by Fed policy as stated
above. That such low interest rates are below the long-run "rlorm" is
corroborated by the FOMC's own statements in the press release it issued
following its latest meeting on Apri! 28 - 29,2015e where the FOMC stated that
"The Committee anticipates that it will be appropriate to raise the target range for
the federal funds rate when it has seen further improvement in the labor market
Value Line February 20,2015 4367.
Bloomberg Professional Services
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and is reasonably confident that inflation will move back to its 2 percent objective
over the medium term". and "economic conditions may, for some time,
warrant keeping the target federal funds rate below levels the Committee views
as normal in the longer run." Clearly, the FOMC anticipates that it will raise the
target range for the federalfunds rates. Again, it is a matter of when, not if.
That the Fed will raise interest rates sooner rather than later is
corroborated by the Vice Chair of the Federal Reserve, Stanley Fischer who
stated in an interview with CNBC on April 16, 201510:
We expect that the markets look ahead somewhat, so I think - |
hope - that they are taking into account that the Fed, at some point,
is likely to raise the interest rate, [markets] can't depend on the
current situation continuing forever - or even probably - beyond the
end of this year.
These artificially low interest rates have lead some analysts to the faulty
conclusion that current capital costs are low and will continue to be so. These
analysts are mistaken. Their conclusion only holds true under the hypothesis of
Perfectly Competitive Capital Markets ('PCCM') and the classical valuation
framework which underpins the traditional cost of common equity models.
PCCM are capital markets where no single trader, known as a "market-mover",
has the power to change the prices of goods or services, including bond and
common stock securities. ln other words, under the PCCM hypothesis, no single
trader has a significant impact on market prices, Classic valuation theory means
that investors trade securities rationally with prices reflecting their perceptions of
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Board of Governors of the Federal Reserve System, Press Release, April 29,2015.
"Fed's Fischer: Economy in A1 was'poor,' but rebound coming,"
www. cnbc. com/id/1 0258905 1
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value. However, in my opinion, although the Fed has always had the ability to set
the Fed Funds and discount rates, it has recently and is currently maintaining low
rates to encourage continued economic and capital market recovery. Thus, the
Fed is acting as that market-mover, which has a significant impact on the market
prices of both bonds and stocks. The presence of a market-mover like the Fed
in the current capital markets invalidates the PCCM, which is the foundation of
the traditional cost of common equity models. This is corroborated by Michael K.
Farr of CNBC who statedll:
It seems like an eternity since the markets have behaved
'normally.' For at least the past 6 - 7 years, there has been a
wholly different driver of supply and demand in the stock market.
Market peaks and valleys have been clearly and unambiguously
correlated to the various pronouncements of monetary support by
the Federal Reserve. The financial market distortions created bv
the Fed will have a lastinq impact on the economy for years to
.@C." (emphasis added)
ln addition, relative to an April 15, 2015 interview with CNBC's "Squawk
Box", former U.S. Treasury Secretary Hank Paulson, CNBC notedl2:
Former Treasury Secretary Hank Paulson said Wednesday that
stocks and other assets need to start to trade again on "real
economic." Arguing the Federal Reserve should hike interest rates
sooner rather than later.
***
He acknowledged the "disortational [sic] effects" of the Fed's easy
money policies, which have benefited investors by pumping up
assets, while hurting savers and Americans on fixed incomes.
ln such a capital market, it is more important than ever to use projected
data, including interest rates, growth rates, equity risk premiums, as well as
Michael K. Farr, President, Farr, Miller & Washington, LLC, "Goldilocks lives! Time for Fed to
stand down", www.cnbc.com/id/'l01888234 August 5, 2015.
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multiple cost of common equity models which will enhance the exercise of the
inforrned expert judgment required of a rate of return analyst. lt is also important
that, due to the low interest rate environment, coupled with the Fed acting as a
.market-mover, the traditional cost of common equity models, DCF, RPM and
CAPM, have a tendency, in my opinion, to understate the investor required cost
of common equity. Consesequently, the results of these cost of common equity
models, including those presented in this analysis, are particularly reasonable
and conservative estimates of the investor required rate of return on common
equity. ln my opinion, the results of traditional cost of common equity modelsl3
should be viewed with even greater scrutiny under current economic and capital
market conditions.
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12 General Principles
L3 O. WHAT GENERAL PRINGIPLES HAVE YOU CONSIDERED IN ARRIVING AT
L4 YOUR RECOMMENDED COMMON EQUITY COST RATE OF 1O.4OO/O?
A. ln unregulated industries, the competition of the marketplace is the principal
determinant of the price of products or services. For regulated public utilities,
regulation must act as a substitute for marketplace competition. Assuring that
the utility can fulfill its obligations to the public while providing safe and reliable
service at all times requires a level of earnings sufficient to maintain the integrity
of presently invested capital as well as permitting the attraction of needed new
capital at a reasonable cost in competition with other firms of comparable risk.
This is consistent with the fair rate of return standards established by the
"l worry about Fed-induced asset bubbles: Paulson," www.cnbc.com/id/102588168.
Discounted Cash Flow, Risk Premium and CapitalAsset Pricing Models.
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1 U.S. Supreme Court in the Hope and Bluefield cases. Consequently,
marketplace data must be relied upon in assessing a common equity cost rate
appropriate for ratemaking purposes. Therefore, my recommended common
equity cost rate is based upon marketplace data for a proxy group of utilities as
similar in risk as possible to UWID, based upon selection criteria that will be
discussed subsequently. The use of the market data for a proxy group adds
reliability to the informed expert judgment used in arriving at a recommended
common equity cost rate. Also, the use of multiple common equity cost rate
, models adds reliability when arriving at a recommended common equity cost
rate.
11 Business Risk
12 O. PLEASE DEFINE BUSINESS RISK AND EXPLAIN WHY IT IS IMPORTANT TO
13 THE DETERMINATION OF A FAIR RATE OF RETURN.
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A. 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 principle of risk and return. Business risk is the
riskiness of a company's common stock without the use of debt and/or preferred
capital. Examples of the qeneral business risks faced by all utilities, i.e., electric,
natural gas distribution and water utilities, include, but are not limited to, the
quality of management, the regulatory environment, customer mix and
concentration of customers, seruice territory economic growth, capital intensity
and size, all of which have a direct bearing on earnings. An individual utility may
face different levels of one or more particular risks.
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WHAT BUSINESS RISKS DOES THE WATER UTILITY INDUSTRY IN
GENERAL FACE TODAY?
Water is essential to life and unlike electricity or natural gas, water is the only
utility product which is intended for customers to ingest. Consequently, water
quality is of paramount importance to the health and well-being of customers and
is therefore subject to additional and increasingly strict health and safety
regulations. Beyond health and safety concerns, water utility customers also
have significant aesthetic concerns regarding the water delivered to them and
regulators pay close attention to these concerns because of the strong feelings
they arouse in consumers. Also, unlike many electric and natural gas utilities,
water utilities serve a production function in addition to the delivery functions
served by electric and gas utilities.
Water utilities obtain supply from wells, aquifers, surface water reservoirs
or streams and rivers. Throughout the years, well supplies and aquifers have
been environmentally threatened, with historically minor purification treatment
giving way to major well rehabilitation, extensive treatment or replacement.
Simultaneously, safe drinking water quality standards have tightened
considerably, requiring multiple treatments prior to water delivery. Supply
availability is also limited by drought, water source overuse, runoff, threatened
species and habitat protection, and other operational, political and environmental
factors. ln addition, the United States Environmental Protection Agency ("EPA"),
as well as individual state and local environmental agencies, are continually
monitoring potential contaminants in the water supply and promulgating or
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expanding regulations when necessary. lncreasingly stringent environmental
standards necessitate additional capital investment in the distribution and
treatment of water, exacerbating the pressure on water utilities' free cash flows
through increased capital expenditures for infrastructure, repair and replacement.
ln the course of procuring water supplies and treating water so that it complies
with Safe Drinking Water Act ("SDWA") standards, water utilities have an ever-
increasing responsibility to be stewards of the environment from which supplies
are drawn, in order to preserve and protect essential natural resources of the
United States.
Water utilities are typically vertically engaged in the entire process of
acquisition, supply, production, treatment and distribution of water. ln contrast,
electric and natural gas companies, where transmission and distribution is
generally separate from generation, do not produce the electricity or natural gas
which they transmit and distribute. Hence, water utilities require significant
capital investment not only in distribution and transmission systems but also in
sources of supply (wells), production (treatment facilities), and storage.
Significant capital investment is necessary both to serve additional customers
and to replace aging systems, creating a major risk facing the water utility
industry.
Value Line lnvestment Suruey ("Value Line")1a observes the following
about the water utility industry:
The industry continues to face the same problems that have
existed for years. Chronic under-investment in the infrastructure of
14 Value Line lnvestment Survey, January 16, 2015 p 1779.
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water utilities in the past has resulted in most domestic investor
owned and municipal systems being antiquated and in great need
of repair.
To bring these water systems up to par, companies are increasing
their capital budgets. Since these expenditures can't be financed
entirely with internal funds, the difference must be made up by
issuing new debt and equity.
****
No stock in the industry is ranked to outperform the market in the
year ahead. Moreover, the recent strength in the price of most of
these stocks has significantly reduced their long-term appeal.
****
Almost no utilities generate a sufficient amount of funds internally
to cover the rising capital budgets. Therefore, there should be a fair
amount of new debt and equity issued in the years ahead. Since no
regulated utility currently has subpar finances, as of now, we don't
foresee a major deterioration in the group's balance sheet.
However, most will likely be in worse shape by the end of the
decade.***
Most state commissions realize that huge sums are required to
mostly replace aging pipelines networks. Therefore, they have
been relatively reasonable when it comes to allowing the
companies to increase their customers [sic] bills to recoup their
investment.
***
lnvestors should understand that a harsh regulatory environment is
one of the major risks that any kind of utility faces.
As we mentioned earlier, these stocks have been on a remarkable
run the past few months. The sharp increases in the price of the
equities has removed much of the previous appeal that this group
offered. lndeed, almost every water stock seems to be fully valued
for both the long and short term.
ln addition, because the water utility industry is more capital-intensive than
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the electric, combination electric and gas or natural gas utilities, the investment
required to produce a dollar of revenue is greater. For example, as shown on
page 1 of Schedule (PMA-Z), it took $3.95 of net utility plant on average to
produce $1.00 in operating revenues in 2014 for the water utility industry as a
whole. For UWID specifically, it took a much greater $S.Se of net utility plant to
produce $1.00 in operating revenues in 2014. ln contrast, for the electric,
combination electric and gas and natural gas utility industries, on average it took
only $2.65, $2.18 and $1.69, respectively, to produce $1.00 in operating
revenues in 2014. As financing needs have increased and will continue to
increase, the competition for capital from traditional sources has increased and
will also continue to increase, making the need to maintain financial integrity and
the ability to attract needed new capital increasingly important.
WHY IS THERE AN INCREASED NEED FOR FINANCING?
There are a number of challenges facing the water utility industry. The National
Association of Regulatory Commissioners ("NARUC") has highlighted the
challenges facing the water utility industry stemming from its capital intensity.
NARUC's Board of Directors adopted the following resolution in July 2013.15
WHEREAS, There is both a constitutional basis and judicial
precedent allowing investor owned public water and wastewater
utilities the opportunity to earn a rate of return that is reasonably
sufficient to assure confidence in the financial soundness of the
utility and its ability to provide quality service; and
WHEREAS, Through the Reso/ution Supporting Consideration of
Regulatory Policies Deemed as 'Besf Practices" (2005), the
National Association of Regulatory Utility Commissioners
"Resolution Supporting Consideration of Regulatory Policies Deemed as'Best Practices"'
Sponsored Oy ine Committee on Water. nO6pteO tiy tne NARUC Board of Directors, July 2013.
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(NARUC) has previously recognized the role of innovative
regulatory policies and mechanisms in the ability for public water
and wastewater utilities to address significant infrastructure
investment challenges facing water and wastewater system
operators; and
***
WHEREAS, Recent analysis shows that as compared to other
regulated utility sectors, significant and widespread discrepancies
continue to be obserued between commission authorized returns
on equity and observed actual returns on equity among regulated
water and wastewater utilities; and
WHEREAS, The extent of such discrepancies suggests the
existence of challenges unique to the regulation of water and
wastewater utilities; and
***
WHEREAS, Deficient returns present a clear challenge to the
ability of the water and wastewater industry to attract the capital
necessary to address future infrastructure investment
requirements necessary to provide safe and reliable seruice, which
coufd exceed one trillion dollars over a 2}-year period; and
WHEREAS, The NARUC Committee on Water recognizes the
critical role of the implementation and the effective use of sound
regulatory practice [sic] and the innovative regulatory policies
identified in the Resolution Supporting Consideration of Regulatory
Policies Deemed as 'Besf Practices'\ and
***
RESOLVED, That the Board of Directors of the National
Association of Regulatory Utility Commissioners, convened at its
2013 Summer Meeting in Denver, Colorado, identifies the
implementation and effective use of sound regulatory practice [sic]
and the innovative regulatory policies identified in the Resolution
Supporting Consideration of Regulatory Policies Deemed as ?esf
Practices" (2005) as a critical component of a water and/or
wastewater utility's reasonable ability to earn its authorized return;
and be it further
RESOLVED, That NARUC recommends that economic regulators
carefully consider and implement appropriate ratemaking
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measures as needed so that water and wastewater utilities have a
reasonable opportunity to earn their authorized returns within their
jurisdictions...
UWID itself is facing significant capital expenditures as it projects net
capital expenditures of $100M for 2016 - 2021, representing an increase of
more than 39% over 2014 net plant of $259M.
PLEASE CONTINUE YOUR DISCUSSION OF BUSINESS RISKS.
Coupled with its capital-intensive nature, the water utility industry also
experiences lower relative depreciation rates as well. Given that depreciation is
one of the principal sources of internal cash flows for all utilities, lower
depreciation rates mean that water utility depreciation as a source of internally-
generated cash is far less than for electric, combination electric and gas or
natural gas. Water utility assets have longer lives and, hence, longer capital
recovery periods. As such, water utilities face greater risk due to inflation which
results in a higher replacement cost per dollar of net plant than for other types of
utilities. As shown on page 2 of Schedule (PMA-2), water utilities experienced
an average depreciation rate of 3.0% tor 2014, with UWID experiencing a similar
rate of 2.9/". ln contrast, in 2014, the electric, combination electric and gas and
natural gas utilities experienced average depreciation rates of 3.3%, 3.4o/o alnd
3.7y", respectively. Low depreciation rates signify that the pressure on cash
flows remains significantly greater for water utilities than for other types of
utilities.
Not only is the water utility industry historically capital intensive, it is
expected to incur significant capital expenditure needs over the next 20 years.
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ln 2011, the EPA stated the following:16
The survey estimated a total national infrastructure need of $384.2
billion for the 20-year period from January 2011 through December
2030.
The large magnitude of the national need reflects the challenges
confronting water systems as they deal with an infrastructure
network that has aged considerably since these systems were
constructed, in many cases, 50 to 100 years ago.
***
With $247.5 billion 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
infrastructure. The other categories, in descending order of need
are: treatment, storage, source and a miscellaneous category of
needs called "other".
FROM WHERE WILL THE NECESSARY CAPITAL TO FUND THIS LEVEL OF
INFRASTRUCTURE REPLACEMENT BE RAISED?
The question of the source of this necessary capital highlights the importance of
capital attraction. Water utility capital expenditures as large as those projected
by the EPA will require significant financing. The three sources typically used for
financing are debt, equity (common and preferred) and cash flow. All three are
intricately linked to the opportunity to earn a sufficient rate of return as well as
the ability to achieve that return. Consistent with Hope and Bluefield, the return
must be sufficient enough to maintain credit quality as well as enable the
"Fact Sheet: "EPA's 2011 Drinking Water lnfrastructure Needs Survey and Assessment," United
States Environmental Protection Agency, Office of Water, April 2013.
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attraction of necessary new capital, be it debt or equity capital. lf unable to raise
debt or equity capital, the utility must turn to either retained earnings or free cash
flow [operating cash flow (funds from operations) minus capital expenditures],
both of which are directly linked to earning a sufficient rate of return. The level of
free cash flows represents the financial flexibility of a company or a company's
ability to meet the needs of its debt and equity holders. If either retained
earnings or free cash flows are inadequate, it will be nearly impossible for the
utitity to attract the necessary new capital, on reasonable terms, to invest in
needed new infrastructure. lt is thus clear that an insufficient rate of return can
be financially devastating for utilities and for their customers.
ln view of the foregoing, the water utility industry's high degree of capital
intensity and low depreciation rates, coupled with the need for substantial
infrastructure capital spending, makes the need to maintain financial integrity
and the ability to attract needed new capital increasingly important in order for
water utilities to be able to successfully meet the challenges they face.
DOES UWID FACE ADDITIONAL EXTRAORDINARY BUSINESS RISK?
Yes. UWID faces three specific unique risk factors. The first is due to the
uncertainty surrounding its future supply portfolio due to water rights issues. The
second is due to the substantial variations in weather conditions in ldaho. The
third is due to UWID's smaller size relative to the companies in the proxy group.
PLEASE DISCUSS THE UNCERTAINTY SURROUNDING UWID'S SUPPLY
PORTFOLIO.
UWID's supply portfolio consists of both surface water and ground water rights
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which are difficult and increasingly expensive to acquire or modify. UWID
continually struggles to protect these rights at all times. New risks arise
continually. Currently, the Company informs me, that UWID faces risk due to the
issue of refill. ln addition water rights are annually at risk from weather
fluctuations. lf precipitation is not sufficient during the winter, UWID may not
receive its full allocation on the water rights it owns. Then, UWID would need to
go to the State Water Bank, i.e., the spot market, to purchase enough water to
meet its needs for that year, unexpectedly increasing operating expense.
PLEASE DISCUSS THE WEATHER CONDITIONS FACED BY UWID.
UWID's service territory experiences an arid desert climate which has a
significant effect upon UWID's revenues. The majority of its annual revenues
are realized during the summer months due to customer dependence upon
UWID for summer irrigation supply. Average monthly production in the summer
months climbs to four times that of the winter months. ln addition, because
UWID's service territory receives only approximately 11 - 12 inches of annual
precipitation, UWID's annual revenues are particularly sensitive to unusually cool
or wet weather in the summer. As new customers draw less water, conservation
efforts become increasingly successful and high flow fixtures in older homes are
replaced with low flow fixtures. Even without summer weather fluctuations,
average winter consumption is down when compared with history and UWID
expects that it will continue to decline. Nevertheless, UWID must continue to
manage its water rights and build new rate base to meet its increasing number of
customers and anticipated summer loads, furthering pressuring revenues and
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cash flows.
DOES A COMPANY'S SIZE HAVE A BEARING ON BUSINESS RISK?
Yes. Lack of sufficient company size is a significant element of business risk for
which investors expect to be compensated through higher returns on their
investment. Smaller companies are simply less able to cope with significant
events that affect sales, revenues and earnings. For example, smaller
companies face more risk exposure to business cycles and economic conditions,
both nationally and locally. Additionally, the loss of revenues from a few larger
customers would have a greater effect on a small company than on a much
bigger company with a larger, more diverse, customer base.
Further evidence of the risk effects of size includes the fact that investors
demand higher returns to compensate for the lack of marketability and liquidity of
the securities of smaller firms. Moreover, it is a basic financial principle that it is
the use of funds invested and not the source of those funds that gives rise to the
risk of any investment.lT Consistent with the financial principle of risk and return
discussed above, such increased risk due to small size must be taken into
account in the allowed rate of return on common equity.
PLEASE DISCUSS HOW UWID'S SIZE INCREASES ITS BUSINESS RISK
RELATIVE TO THE PROXY GROUP.
UWID is smaller than the average company in the proxy group of eight water
companies based upon estimated market capitalization, providing water and
wastewater service to approximately 88,000 customers in and around Boise,
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including Ada and Canyon counties. I will discuss this in greater detail below.
For now, as shown on Schedule (PMA-10), page 1, UWID's estimated market
capitalization of $201.415 million is lower than the average market capitalization
of.the pro)ry water group, $2.349 billion at March 27,2015. Consequently, UWID
has greater relative business risk because, all else being equal, size has a
bearing on risk.
Since investors demand an increased return in compensation for assuming
greater risk, UWID's greater relative business risk must be reflected in the cost of
common equity derived from the market data of the less business risky proxy
TO THE DETERMINATION OF A FAIR RATE OF RETURN.
A. Financial risk is the additional risk created by the introduction of senior capital,
i.e., 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.
O. CAN THE COMBINED BUSINESS RISKS, I.E., INVESTMENT RISK OF AN
ENTERPRISE, BE PROXIED BY BOND AND CREDIT RATINGS?
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11 Financial Risk
12 O. PLEASE DEFINE FINANCIAL RISK AND EXPLAIN WHY IT IS IMPORTANT
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Com pany, 1 996) 204-205, 229.
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Yes, similar bond/issuer credit (bondicredit) ratings reflect and are representative
of similar combined business and financial risks, i.e., total risk faced by bond
investors. Although specific business or financial risks may differ between
companies, the sarRe bond/credit rating indicates that the combined risks are
similar, albeit not necessarily equal, as the purpose of the bond/credit rating
process is to assess credit quality or credit risk and not common equity risk.
Risk distinctions within Standard & Poor's ('S&P") bond/issuer rating categories
are recognized 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 41, A2 and A3. As shown on Schedule (PMA-6), page 4,
the average S&P long-term issuer rating of the eight water companies is A and
the average Moody's long-term issuer rating is A2lA3.
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15 O. PLEASE EXPLAIN HOW YOU CHOSE THE PROXY GROUP OF EIGHT
L6 WATER COMPANIES.
t7 A. I chose the proxy group by selecting those companies which meet the following
criteria: 1) they are included in lhe Value Line's standard edition (January 16,
2015;2) they have 70"/" or greater of 2014 total operating income derived from
and 7O%o or greater of 2014 total assets devoted to regulated water operations;
3) at the time of the preparation of this testimony, they had not publicly
announced that they were involved in any major merger or acquisition activity,
i.e., one publicly-traded utility merging with or acquiring another; 4) they have not
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cut or omitted their common dividends during the five years ending 2014 or
through the time of the preparation of this testimony; 5) they have a Value Line
adjusted beta; and 6) they have Value Line, Reuters, Zacks or Yahoo! Finance,
.consensus five-year earnings per share ('EPS') groMh.rate projections. The
following eight companies met these criteria: American States Water Co.,
American Water Works Co., lnc., Aqua America, lnc., California Water Service
Corp., Connecticut Water Service, lnc,, Middlesex Water Co., SJW Corp, and
York Water Co.
HAVE YOU REVIEWED FINANCIAL DATA FOR THE PROXY GROUP?
Yes. Page 1 of Schedule (PMA-3) contains comparative capitalization and
financial statistics for the eight proxy group water companies for the years 2010-
2014.
As shown on page 1, during the five-year period ending 2014, the
historically achieved average earnings rate on book common equity for the group
averaged 10.03%. The average common equity ratio based upon permanent
capital (excluding short-term debt) was 51 .24o/o, and the average dividend payout
ratio was 60.38%.
Total debt outstanding as a percent of EBITDA for the years 2O1O-2O14
ranged between 3.65 and 4.55 times, averaging 4.01 times, while funds from
operations relative to total debt range between 17.6O/o and 25.83%, averaging
21.31o/o.
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Common Equitv Cost Rate Models
O. ARE THE COST OF COMMON EQUIW MODELS YOU USE MARKET.BASED
3 MODELS?
A; Yes. lt is important to use market-based models because the cost of common
equity is a function of investors' perception of risk, which is embodied in the
market prices they pay. 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/issuer ratings and expected bond yields used in
the application of the RPM reflect the market's assessment of bond/credit risk.
Also, market prices are used in the development of the returns and equity risk
premiums used in the Predictive Risk Premium Model ("PRPM"). ln addition, the
use of betas to determine the equity risk premium also reflects the market's
assessment of market/systematic risk as betas are derived from regression
analyses of market prices. The CAPM is market-based for many of the same
reasons that the RPM is market-based i.e., the use of expected bond (U.S.
Treasury bond) yields and betas.
Discounted Cash Flow Model ("DCF")
O. WHAT IS THE THEORETICAL BASIS OF THE DCF MODEL?
A. The theoretical basis of 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 capital, 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
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form of dividends plus appreciation in market price (the expected groMh rate).
Mathematically, the dividend yield on market price plus a growth 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 groMh DCF model because, in my experience,
it is the most widely utilized version of the DCF in public utility rate regulation. ln
my opinion, it is widely utilized because utilities are generally in the mature stage
of their lifecycles and not transitioning from one growth stage to another.
PLEASE DESCRIBE THE DIVIDEND YIELD YOU USED IN YOUR
APPLICATION OF THE DCF MODEL.
The unadjusted dividend yields are based upon a recent (March 27, 2015)
indicated dividend divided by the average of closing market prices for the 60
days ending March 27,2015 as shown in Column [1] on page 1 of Schedule
(PMA-4).
PLEASE EXPLAIN THE ADJUSTED DIVIDEND YIELD SHOWN ON PAGE 1
oF SCHEDULE (PMA-4), COLUMN [7J.
Because dividends are paid periodically (quarterly), as opposed to continuously
(daily), 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 full growth rate, or D1, in calculating the
dividend yield component of the model. However, since the various companies
in the proxy group increase their quarterly dividend at various times during the
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year, a reasonable assumption is to reflect one-half the annual dividend growth
rate in the dividend yield component, or D172. This is a conservative approach,
which does not overstate the dividend yield that should be representative of the
next twelve-month period. Therefore, the actual average dividend yields in
Column [1] on page 1 of Schedule (PMA-4) 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 THAT YOU USE IN YOUR APPLICATION OF THE DCF MODEL.
Schedule (PMA-S) shows that on average approximately 43o/o of the common
shares of the eight water companies are held by individuals as opposed to
institutional investors. lndividual investors, who tend to have more limited
resources than institutional investors, are likely to place great significance on the
opinions expressed by financial information services, such as Value Line,
Reuters, Zacks and Yahoo! Finance, which are easily accessible and/or available
on the lnternet and through public libraries. lndividual, as well as institutional,
investors recognize that security analysts have significant insight into the
dynamics of the industries and individual companies they analyze, as well as an
entity's historical and future abilities to effectively manage the effects of changing
laws and regulations and ever changing economic and market conditions.
Security analysts' earnings expectations have a significant, but not sole,
influence on market prices and are therefore reasonable indicators of investor
expectations." As noted by Morinle:
Roger A. Morin, New Reoulatory Finance (Public Utility Reports, lnc., 2006) 2gB-309.
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Because of the dominance of institutional investors and their
influence on individual investors, analysts' forecasts of long-run
grov,rth rates provide a sound basis for estimating required returns.
Financial analysts exert a strong influence on the expectations of
many investors who do not possess the resources to make their
own forecasts, that is, they are a cause of g.
Thus, the use of earnings growth rates in a DCF analysis provides a better
matching between investors' market price appreciation expectations and the
groMh rate component of the DCF than other proxies for growth, e.9., historical
EPS or dividend per share ("DPS') groMh rates.
PLEASE SUMMARIZE YOUR DCF MODEL RESULTS.
As shown on page 1 of Schedule (PMA-4), the average result of the single-stage
DCF model is 8.72/", while the median result is 8.36%. I have averaged these
two results in arriving at a conclusion of a DCF-indicated common equity cost
rate of 8.54"/" for the proxy group. By doing so, I have not only considered the
DCF results for each company, but have not given undue weight to outliers on
either the high or the low side.
The Risk Premium Model ("RPM")
O. PLEASE DESCRIBE THE THEORETICAL BASIS OF THE RPM.
A. The RPM is based upon the basic financial principle of risk and return, namely,
that investors require greater returns for bearing greater risk. The RPM
recognizes that common equity capital has greater investment risk than debt
capital, as common equity shareholders are last in tine in any claim on an entity's
assets and earnings, with debt holders being first in line. Therefore, investors
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require higher returns from investment in common stocks than from investment
in bonds to compensate them for bearing the additional risk.
While the investor required common equity return cannot be directly
determined or observed, it is possible to directly observe bond returns and
yields. According 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. ln summary, according 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 a
corporation's assets and earnings.
PLEASE EXPLAIN HOW YOU DERIVED YOUR INDICATED COST OF
COMMON EQUITY BASED UPON THE RPM.
I relied upon the results of the application of two risk premium methods. The first
method is the Predictive Risk Premium Model (PRPM), while the second method
is a risk premium model using an adjusted total market approach.
PLEASE EXPLAIN THE PRPM.
The PRPM, published in the Journat of Regutatory Economics URE)20 and
The Electricitv Journal (TEJ).21 was developed from the work of Robert F. Engle
who shared the Nobel Prize in Economics in 2003 "for methods of analyzing
"A New Approach for Estimating the Equity Risk Premium for Public Utilities', Pauline M. Ahern,
Frank J. Hanley and Richard A. Michelfelder, Ph.D. The Journal of Reoulatorv Economics
(December 201 1 ), 40:261 -278.
"Comparative Evaluation of the Predictive Risk Premium ModelrM, the Discounted Cash Flow
Model and the CapitalAsset Pricing Model", Pauline M. Ahern, Richard A. Michelfelder, Ph.D.,
Rutgers University, Dylan W. D'Ascendis, and Frank J. Hanley, The ElectriciV Journal (May,
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economic time series with time-varying volatility ("ARCH")'22 with "ARCH"
standing for autoregressive conditional heteroskedasticity. ln other words, the
volatility of stock returns and equity risk premiums changes over time and is
related from one period to the next. Engle discovered that the volatility in market
prices, returns, and equity risk premiums also clusters over time, making them
highly predictable and available to predict future levels of risk and risk premiums.
ln other words, the predicted equity risk premium is generated by the prediction
of volatility (risk). The PRPM estimates the risk / return relationship directly by
analyzing the actual results of investor behavior rather than using subjective
judgment as to the inputs required for the application of other cost of common
equity models. Thus, the PRPM is not based upon an estimate of investor
behavior, but rather upon the evaluation of the actual results of that behavior,
i.e., the variance of historical equity risk premiums.
The inputs to the model are the historical returns on the common shares
of each utility in the proxy group minus the historical monthly yield on longterm
U.S. Treasury securities through March 2015. Using a generalized form of
ARCH, known as GARCH, each water utility's projected equity risk premium was
determined using Eviewso statistical software. The forecasted 3O-year U.S.
Treasury Bond (Note) yield of 3.68% is based upon the consensus forecast for
the six quarters ending with the third quarter 2016, derived from the April 1 , 2015
Blue Chip Financial Forecasts (Blue Chip.l, was averaged with the long-range
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forecasts for 2016-2020 and 2021-2025 from the December 1, 2014 Blue Chip
(shown on pages 9 and 10 of Schedule (PMA- 6) as discussed below. The risk-
free rate of 3.68% was then added to each company's PRPM-derived equity risk
premium to arrive at a PRPM-derived cost of common equity as shown on page
2 of Schedule (PMA-6) which presents the average and median results for each
proxy company. As shown on page 2, lhe average PRPM indicated common
equity cost rate is 12.08%, while the median is 11.30o/o for the eight water
companies. Consistent with my use of the average of the average and median
DCF results, I rely upon the average of the average and median PRPM results of
1 1 .69% (1 1 .69% = (12.08o/o + 1 1 .30%) 12) as my conclusion of PRPM cost rate.
PLEASE EXPLAIN THE ADJUSTED TOTAL MARKET APPROACH RPM.
The adjusted total market approach RPM adds a prospective public utility bond
yield to an equity risk premium which is derived from a beta-adjusted total market
equity risk premium and an equity risk premium based upon the S&P Utilities
lndex.
PLEASE EXPLAIN THE BASIS OF THE ADJUSTED PROSPECTIVE BOND
YIELD OF 4.87O/O APPLICABLE TO THE EIGHT WATER COMPANIES SHOWN
oN PAGE 3 OF SCHEDULE (PMA-6).
The first step in the adjusted total market approach RPM analysis is to determine
the expected bond yield. Because both ratemaking and the cost of capital,
including common equity cost rate, are prospective in nature, a prospective yield
on long-term debt similarly rated to the proxy group is essential. Hence, I rely on
a consensus forecast of about 50 economists of the expected yield on Aaa rated
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corporate bonds for the six calendar quarters ending with the third calendar
quarter of 2016 as derived from the April 1, 2015 Blue Chip averaged with the
long-range forecasts tor 2016-2020 and 2021-2025 from the December 1, 2014
'Blue Ohip (shown on pages 9 and 10 of Schedule (PMA-6)). As shown on Line
No. 1 of page 3, the average expected yield on Moody's Aaa rated corporate
bonds is 4.74%. An adjustment of 0.10% is necessary to adjust that average
Aaa corporate bond yield to be equivalent to a Moody's A rated public utility
bond, as shown on Line No. 2 and explained in Note 2 resulting in an expected
bond yield applicable to a Moody's A rated public utility bond of 4.84o/o as shown
on Line No.3.
Since the eight water companies' average Moody's issuer rating is A2lA3,
an adjustment of 0.13% is necessary to make the prospective bond yield
applicable to the proxy group's average A2lA3 longterm issuer rating, as
detailed in Note 3 on page 3 of Schedule (PMA-6). Therefore, the adjusted
prospective bond yield is 4.97o/o for the eight water companies as shown on Line
No. 5.
PLEASE EXPLAIN THE METHOD OF ESTIMATING THE EQUITY RISK
PREMIUM IN THE ADJUSTED TOTAL MARKET APPROACH.
I evaluated the results of market equity risk premium studies based upon
lbbotson Associates' data and Value Line's forecasted total annual market return
in excess of the prospective yield on Moody's Aaa corporate bonds, as well as
two different studies of the equity risk premium for public utilities with Moody's A
rated bonds as detailed on pages 8 and 11 of Schedule (PMA-6). As shown on
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Line No. 3, page 7 of Schedule (PMA-6), the average equity risk premium is
4.78o/o applicable to the eight water companies. This estimate is the result of an
average of a beta-derived equity risk premium as well as the average public
utility equity risk premium relative to bonds rated A by Moody's based upon
holding period returns.
PLEASE EXPLAIN THE BASIS OF THE BETA.DERIVED EQUIW RISK
PREMIUM.
The basis of the beta-derived equity risk premium applicable to the proxy group
is shown on page 8 of Schedule (PMA-6). The beta-determined equity risk
premium is relevant because betas are derived from the market prices of
common stocks over a recent five-year period. Beta is a measure of relative risk
to the market as a whole and a logical means by which to allocate an
entity's/proxy group's share of the total market's equity risk premium relative to
corporate bond yields.
The total market equity risk premium utilized is 6.26%, based upon an
average of the long-term arithmetic mean historical market equity risk premium;
a predicted market equity risk premium based upon the PRPM; a forecasted
market equity risk premium based upon Value Line's projected market
appreciation and dividend yield; and, a forecasted market equity risk based upon
the S&P 500's projected market appreciation and dividend yield as detailed
below and in Notes 1 through 4 on page 7 of Schedule (PMA-6)).
HOW DID YOU DERIVE THE LONG,TERM HISTORICAL MARKET EQUIry
RISK PREMIUM?
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To derive the historical (expectational) market equity risk premium, I used the
most recent Morningstar data on holding period returns for the large company
common stocks from the Stocks. Bonds. Bil! and lnflation lbbotson@ SBBI@ 2015
Market Report ("SBBI - 2015 Market Report"\23 and the average historical yield
on Moody's Aaa and Aa rated corporate bonds for the period 1926-2014.
Moreover, the use of holding period returns over a very long period of time is
useful because it is consistent with the long-term investment horizon presumed
by the DCF model.
Consequently, as explained in Note 1 on page 8 of Schedule (PMA-6), the
long-term arithmetic mean monthly total return rate on large company common
stocks of 12.07"/" and the long-term arithmetic mean monthly yield on Moody's
Aaa and Aa rated corporate bonds of 6.18% were used. As shown on Line No.
1, the resultant long-term historical equity risk premium on the market as a whole
is 5.89%.
I used arithmetic mean monthly total return rates for the large company
stocks and yields (income returns) for Moody's AaalAa corporate bonds,
because they are appropriate for cost of capital purposes as noted in the
lbbotson@ SBBI@ 2015 Classic Yearbook - Market Results for Stocks. Bonds. Bill
. Arithmetic mean return rates and
yields are appropriate because ex-post (historical) total returns and equity risk
premiums differ in size and direction over time, providing insight into the variance
and standard deviation of returns. Because the arithmetic mean captures the
Stocks. Bonds. Bills and lnflation lbbotson@ SBBI@ 2015 Market Report, Morningstar, lnc., 2015.
lbbotson@ SBBI@ 2015 Glassic Yearbook - Market Results for Stocks. Bonds. Bills and lnflation
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prospect for variance in returns and equity risk premiums, it provides the
valuable insight needed by investors in estimating future risk when making a
current investment. Absent such valuable insight into the potential variance of
returns, investors cannot meaningfully evaluate prospective risk. .lf investors
alternatively relied upon the geometric mean of ex-post equity risk premiums,
they would have no insight into the potential variance of future returns because
the geometric mean relates the change over many periods of time to a constant
rate of change, thereby obviating the period-to-period fluctuations, or variance,
critical to risk analysis.
Only the arithmetic mean takes into account all of the returns / premiums,
hence, providing meaningful insight into the variance and standard deviation of
those returns / premiums.
PLEASE EXPLAIN THE DERIVATION OF PRPM MARKET EQUITY RISK
PREMIUM.
The inputs to the model are the historical monthly returns on large company
common stocks from the SBBI - 2015 Market Report minus the monthly yields on
Aaa and Aa corporate bonds during the period from January 1926 through
February 2015 (the latest available at the time of the preparation of this
testimony), consistent with the rationale for using of the long-term historical
arithmetic market equity risk premium discussed above. Using the previously
discussed generalized form of ARCH, known as GARCH, the market's projected
equity risk premium was determined using Eviews@ statistical software. The
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resulting predicted market equity risk premium based upon the PRPM of 6.37o/o.
PLEASE EXPLAIN THE DERIVATION OF A MARKET EQUITY RISK
PREMIUM BASED UPON VALUE LINE'S 3-5 YEAR ESTIMATED MEDIAN
TOTAL ANNUAL MARKET RETURN MINUS THE PROSPECTIVE YIELD ON
AAA RATED CORPORATE BONDS IN YOUR DEVELOPMENT OF A MARKET
EQUITY RISK PREMIUM FOR YOUR RPM ANALYSIS.
Because both ratemaking and the cost of capital, including the cost rate of
common equity, are prospective, a prospective market equity risk premium is
essential. The derivation of lhe Value Line based forecasted or prospective
market equity risk premium of 4.67% can be found in Note 3 on page 8 of
Schedule (PMA-6). Consistent with the development of the dividend yield
component of my DCF analysis, it is derived from an average of the most recent
thirteen weeks ending March 27, 2015 3-5 year estimated median market price
appreciation potential by Value Line plus an average of the median estimated
dividend yield for the common stocks of the approximately 1,700 firms covered in
Value Line's Standard Edition as explained in detail in Note 1 on page 2 of
Schedule (PMA-7).
The average median expected price appreciation is 33olo, which translates
to a 7.39% annual appreciation and, when added to the average (similarly
calculated) median dividend yield of 2.02o/o equates to a forecasted annual total
return rate on the market as a whole of 9.41%. The forecasted total market
equity risk premium of 4.670/o, shown on Line No. 3, page 8 of Schedule (PMA-
6), is derived by deducting the 4.74o/o prospective yield on Moody's Aaa rated
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corporate bonds discussed previously from the Value Line-derived projected
market (eturn of 9.41V" (4.67"/o = 9.41o/o - 4.74o/o).
PLEASE EXPLAIN THE DERIVATION OF THE MARKET EQUITY RISK
PREMIUM BASED UPON THE S&P 5OO.
Using data from Bloomberg Professional Service, an expected total return for the
S&P 500 can be derived by adding the expected dividend yield for the S&P 500
to long-term growth in earnings per share as a proxy for capital appreciation.
The expected total return for the S&P 500 is 12.860/o. Subtracting the
prospective yield on Moody's Aaa rated corporate bonds of 4.74o/o results in a
8.12o/o projected market equity risk premium.
ln arriving at my conclusion of market equity risk premium of 6.260/o on
Line No. 4 on page 8, I averaged the historical market equity risk premium of
5.89o/oi the PRPM based market equity risk premium of 6.370/o; the Value Line-
based forecasted market equity risk premium of 4.67o/oi and, the S&P 500
projected market equity risk premium of 8.12% shown on Line Nos. 1 through 4.
(6.26/" = ((5.89% + 6.37"/" + 4.670/o + 8.12/") I 4).
WHAT IS YOUR CONCLUSION OF A BETA.DERIVED EQUITY RISK
PREMIUM FOR USE IN YOUR RPM ANALYSIS?
As shown on page 1 of Schedule (PMA-7), the most current average and median
Value Line betas for the eight water companies average 0.76. Applying a beta of
0.76 to the market equity risk premium of 6.260/", on Line No. 4 of page 8 of
Schedule (PMA-6), results in a beta adjusted equity risk premium of 4.76a/o tor
the eight water companies.
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38
o.HOW DID YOU DERIVE THE 4.80% EQUITY RISK PREMIUM BASED UPON
THE S&P UTILITY INDEX AND MOODY'S A RATED PUBLIC UTILITY
BONDS?
First, I derived the long-term monthly arithmetic mean equity risk premium
between the S&P Utility lndex total returns of 10.69% and monthly A rated public
utility bond yields of 6.48/" from 1 928-2014 to arrive at an equity risk premium of
4.21o/o as shown on Line No. 3 on page 11 of Schedule (PMA-6). I then
performed the PRPM using historical monthly equity risk premiums from January
1928 through March 2015 to arrive atthe PRPM derived equity risk premium of
4.48% for the S&P Utility lndex shown on Line No. 4, on page 11. Finally, I
derived the projected total return on the S&P Utilities lndex using data from
Bloomberg Professional Service of 10.55%, identically to the projected total
return on the S&P 500 discussed above, and subtracting the prospective
Moody's A rated public utility bond yield of 4.84% from Line No. 3 on page 3 of
Schedule (PMA-6). The resulting equity risk premium is 5.71%
I rely upon the average of the historical (4.210/"); the PRPM (4.48o/o) and
S&P Utilities lndex (5.71V") derived equity risk premiums, which is 4.80%.
(4.8O/" = ((4.21o/o + 4.48o/o + 5.7 1Y") I 3).
WHAT IS YOUR CONCLUSION OF AN EOUIry RISK PREMIUM FOR USE IN
YOUR ADJUSTED TOTAL MARKET APPROACH RPM ANALYSIS?
The equity risk premium applicable to the proxy group of eight water companies
is the average of the beta-derived premium, 4.76o/", and that based upon the
holding period returns of public utilities with Moody's A rated bonds, 4.80%, as
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summarized on Line No. 3 on Schedule (PMA-6), page 7, i.e., (4.78Vo = (4.76%
+ a.8O"/.) l2).
WHAT IS THE INDICATED RPM COMMON EQUITY COST RATE BASED
UPON THE ADJUSTED.TOTAL MARKET APPROACH?4
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A. lt is 9.75% for the eight water companies as shown on Line No. 7 on Schedule
(PMA-6) page 3.
O. WHAT ARE THE RESULTS OF YOUR APPLICATION OF THE PRPM AND
THE ADJUSTED TOTAL MARKET APPROACH RPM?
A. As shown on page 1 of Schedule (PMA-6), the indicated RPM-derived common
equity cost rate is 10.72/o, derived by averaging the PRPM results with those
based upon the adjusted total market approach. (10.72o/o = ((11 .69/" + 9.75o/o) I
2).
The Capital Asset Pricinq Model ("GAPM")
O. PLEASE EXPLAIN THE THEORETICAL BASIS OF THE CAPM.
A. CAPM theory defines risk as the covariability of a security's returns with the
market's returns as measured by beta (B). A beta less than 1.0 indicates lower
variability while a beta greater than 1.0 indicates greater variability than the
market.
The CAPM assumes that all other risk, i.e., all non-market or unsystematic
risk, can be eliminated through diversification. The risk that cannot be eliminated
through diversification is called market or systematic risk. ln addition, the CAPM
presumes that investors require compensation only for these systematic risks
that are the result of macroeconomic and other events that affect the returns on
40
L all assets. The model is applied by adding a risk-free rate of return to a market
2 risk premium, which is adjusted proportionately to reflect the systematic risk of
3 the individual security relative to the total market as measured by beta. The
4 traditional CAPM.model is expressed as:
5 Rs = ft+B(Rr-R)
67 Where: R. = Return rate on the common stock
89 Rr = Risk-free rate of return
1011 R, = Return rate on the market as a whole
L2L3 B = Adjusted beta (volatility of the security14 relative to the market as a whole)
15L6 Numerous tests of the CAPM have measured the extent to which security
17 returns and betas are related as predicted by the CAPM confirming its validity.
18 The empirical CAPM ('ECAPM") reflects the reality that while the results of these
19 tests support the notion that beta is related to security returns, the empirical
20 Security Market Line ("SML") described by the CAPM formula is not as steeply
2l sloped as the predicted SML.25
22 ln view of theory and practical research, I have applied both the traditional
23 CAPM and the ECAPM to the companies in the proxy group and averaged the
24 results.
25 O. PLEASE DESCRIBE YOUR SELECTION OF THE BETA COEFFICIENT FOR
26 YOUR CAPM ANALYSIS?
27 A. I relied upon an average of the adjusted betas published by the Value Line and
28 provided by Bloomberg Professional Service.
25 Morin 175.
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PLEASE DESCRIBE YOUR SELECTION OF A RISK-FREE RATE OF RETURN
FOR YOUR CAPM ANALYSIS.
As shown in column [3] on page 1 of Schedule (PMA-7), the risk-free rate
adopted for both applications of the CAPM is 3.68%. The risk-free rate for my
CAPM analysis is based upon the average of the consensus forecast of the third
calendar quarter of 2016 from the April 1, 2015 Btue Chip averaged with the
long-range forecasts for 2016-2020 and 2021-2025 from the December 1, 2014
Blue Chip, as shown in Note 2, page 2 of Schedule (PMA-7).
WHY IS THE 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 utilities measured by the
yields on A rated public utility bonds, the long-term investment horizon inherent
in utilities' common stocks, the long-term investment horizon presumed in the
standard DCF model employed in regulatory ratemaking, and the longterm life
of the jurisdictional rate base to which the allowed fair rate of return (i.e., cost of
capital) will be applied. ln contrast, short-term U.S. Treasury yields are more
volatile and largely a function of Federal Reserve monetary policy.
PLEASE EXPLAIN THE ESTIMATION OF THE EXPECTED EQUITY RISK
PREMIUM FOR THE MARKET.
The basis of the market equity risk premium is explained in detail in Note 1 on
page 2 of Schedule (PMA-7). lt is derived from Value Line's 3-5 year median
total market price appreciation projections averaged over the most recent
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thirteen weeks ending March 27, 2015; the arithmetic mean monthly equity risk
premiums of large company common stocks relative to long-term U.S. Treasury
bond income yields from SBEI - 2015 Market Report from 1926-2014; the PRPM
" predicted market equity r,isk premium using monthly equity risk premiums for
large company common stocks relative to long-term U.S. Treasury securities
from January 1926 through February 2015 (the latest available at the time of the
preparation of this testimony); and, the projected total return on the S&P 500
less the projected risk free rate as detailed below and in Note 1 on of Schedule
(PMA-7).
the Value Line-derived forecasted total market equity risk premium is
derived by deducting the 3.68% risk-free rate discussed above from the Value
Line projected total annual market return of 9.417o, also discussed above,
resulting in a forecasted total market equity risk premium of 5.80o/o.
The long-term income return on U.S. Government Securities of 5.23o/o
was deducted from the SBBI - 2015 Market Report monthly historical total
market return of 12.07o/" resulting in an historical market equity risk premium of
6.84o/o.
The PRPM market equity risk premium is 7.19%, derived using the PRPM,
discussed above, relative to the yields on long-term U.S. Treasury securities
from January 1926 through February 2015 (the latest available at the time of the
preparation of this testimony).
The S&P 500 projected market equity risk premium of 9.18/o is derived by
subtracting the 3.68% projected risk-free rate, discussed above, from the
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projected total return of 12.86/o, also discussed above.
These four market equity risk premiums result in an average total market
equity risk premium of 7.23/o. (7.23Yo = ((5.73!o + 6.84"/o + 7.19o/o + 9.18/") I a)
"WHAT ARE TFIE RESULTS OF YOUR APPLICATION OF THE TRADITIONAL
AND EMPIRICAL CAPM TO THE PROXY GROUP?
As shown on Schedule (PMA-7), page 1, the average traditional CAPM cost rate
is 9.10% while the average ECAPM result is 9.55%, averaging 9.33% for the
eight water companies. The median tradition CAPM cost rate is 9.14% while the
median ECAPM cost rate is 9.58%, averaging 9.36/". Consistent with my
reliance upon the average of the average and median results of the DCF
discussed above, I rely upon the average of the average and median results of
the traditional CAPM and ECAPM for the proxy group, 9.33% and 9.36%,
respectively, or 9.35Vo as shown on column [6] on page 1 of Schedule (PMA-7).
(e.35% = ((e.33% +9.36%) l2)
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Common Equitv Cost Rates for the Proxv Group of Domestic. Non-Price
Reoulated Companies Based Upon the DCF. RPM and CAPM
O. PLEASE DESCRIBE THE BASIS OF APPLYING COST OF COMMON EQUITY
MODELS TO COMPARABLE RISK, NON.PRICE REGULATED COMPANIES.
A. Applying cost of common equity models to non-price regulated companies,
comparable in total risk, is derived from the "conesponding isk" standard of the
landmark cases of the U.S. Supreme Court, i.e., Hope and Bluefield, previously
discussed. Therefore, it is consistent with the Hooe doctrine that the return to
the equity investor should be commensurate with returns on investments in other
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firms having corresponding risks based upon the fundamental economic concept
of opportunity cost which maintains that the true cost of an investment is equalto
the cost of the best available alternative use of the funds to be invested. The
opportunity cost principle is also consistent with one of the fundamental
principles upon which regulation rests: that regulation 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 opportunity cost of common equity
based upon a group of non-price regulated companies comparable in total risk to
the eight water companies is to choose an appropriate broad-based proxy group
of non-price regulated firms comparable in total risk to the proxy group of eight
water companies which excludes utilities to avoid circularity.
The selection criteria for the non-price regulated firms of comparable risk
are based upon statistics derived from the market prices paid by investors. Value
Line belas were used as a measure of systematic risk. The standard error of the
regression was used as a measure of each firm's unsystematic or specific risk
with the standard error of the regression reflecting the efient to which events
specific to a company's operations affect its stock price. ln essence, companies
which have similar betas and standard errors of the regression, have similar total
investment risk. Using a Value Line proprietary database dated April 2015, the
application of these criteria based upon the eight water companies results in a
pro)ry group of non-price regulated firms comparable in total risk to the average
water company in the proxy group of eight water companies as explained on
page 1 of Schedule (PMA-8). Page 3 provides the identities of the companies in
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the proxy group of non-price regulated companies.
DID YOU CALCULATE COMMON EQUIW COST RATES USING THE DCF,
RPM AND CAPM FOR THE PROXY GROUP OF DOMESTIC, NON-PRICE
,REGULATED COMPANIES THAT ARE COMPARABLE IN TOTAL RISK. TO
THE UTILITY PROXY GROUP?
Yes. Because the DCF, RPM and CAPM have been applied in an identical
manner as described above relative to the market data of the eight water
companies, I will not repeat the details of the rationale and application of each
model shown on page 1 of Schedule (PMA-9). An exception is that, in the
application of the RPM, I did not use public utility-specific equity risk premiums
nor apply the PRPM to the individual companies.
Page 2 of Schedule (PMA-9) contains the derivation of the DCF cost rates.
As shown, the average of the average and median DCF cost rates for the proxy
group of eighteen non-price regulated companies comparable in total risk to the
eight water companies, is 1 1.85"/".
Pages 3 through 5 of Schedule (PMA-9) contain information relating to the
1O.29o/o RPM cost rate for the proxy group of eighteen non-price regulated
companies summarized on page 3. As shown on Line No. 1 of page 3, the
consensus prospective yield on Moody's Baa rated corporate bonds of 5.58% is
based upon the forecasted yields for the six quarters ending with the third quarter
of 2016 averaged with the long-range forecasted yields tor 2016-2020 and 2021-
2025 from the April 1 , 2015 and December 1 , 2014 Blue Chip, respectively. Since
the eighteen non-price regulated companies comparable in total risk to the eight
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water companies have an average Moody's long-term issuer rating of Baal as
shown on page 4 of Schedule (PMA-9), a downward adjustmenl of 0.24o/o is
necessary to make the prospective bond yield applicable to the Baal corporate
bond yield. Thus, the expected specific bond yield is 5.34"/" for the eighteen non-
price regulated companies as shown on Line No. 1 on page 3 of Schedule (PMA-
9). When the beta-adjusted risk premium of 4.95% relative to the pro)ry group of
non-price regulated companies, as derived on page 5, is added to the prospective
Baa rated corporate bond yields of 5.34%, the indicated RPM cost rate is 10.29%.
Page 6 of Schedule (PMA-9) contains the details of the application of the
traditional CAPM and ECAPM to the pro)ry group of eighteen non-price regulated
companies comparable in total risk to the eight water companies. As shown, the
average and median traditional CAPM and ECAPM results are 9.56% and 9.52%",
for the eighteen non-price regulated companies which, when averaged, result in
an indicated CAPM cost rate of 9.54"/".
WHAT IS YOUR CONCLUSION OF THE COST RATE OF COMMON EQUITY
BASED UPON THE PROXY GROUP OF NON-PRICE REGULATED
COMPANIES COMPARABLE !N TOTAL RISK TO THE EIGHT WATER
COMPANIES?
As shown on page 1 of Schedule (PMA-9), the results of the DCF, RPM and
CAPM applied to the non-price regulated group comparable in total risk to the
eight water companies are 1 1.85o/o, 10.29o/o and 9.54"/", respectively. Based
upon these results, I will rely upon the 10.43o/o average of the average DCF,
RPM and CAPM results of 10.56% and median results of 10.29o/o forthe pro)ry
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group of non-price regulated companies as summarized on page 1 of Schedule
(PMA-9) (10.43% = (10.56% + 10.29/") I 2),
Conclusion of Common Equitv Cost Rate
O.. WHAT IS YOUR RECOMMENDED COMMON EQUITY COST RATE?
A, lt is 1O.40V" based upon the indicated common equity cost rate resulting from
the application of multiple cost of common equity models to the eight water
companies adjusted for UWID's business risks.
As discussed above, I employ multiple cost of common equity models as
primary tools in arriving at my recommended common equity cost rate because:
1) no single model is so inherently precise that it can be relied upon solely to the
exclusion of other theoretically sound models; 2) all of the models are market-
based; 3) the use of multiple models adds reliability to the estimation of the
common equity cost rate; and 4) the prudence of using multiple cost of common
equity models is supported in both the financial literature and regulatory
precedent. Therefore, no single model should be relied upon exclusively to
estimate the investor required rate of return on common equity.
The results of the cost of common equity models applied to the eight
water companies are shown on page 2 of Schedule (PMA-1), and summarized
below:
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1 Table 3
z Proxy Group3 of Eight4 Water5 ComPanies
6.7 Discounted Cash Flow Model 8.54%8 Risk Premium Model 10.729 Capital Asset Pricing Model 9.35
1011 Cost of Equity Models APPlied toL2 Comparable Risk, Non-Price13 Regulated Companies 10.43%
1415 lndicated Common Equity16 Cost Rate 9.830/"
L718 Business Risk Adjustment 0.55%
t920 lndicated Common Equity Cost Rate 1O.38o/o
2t22 Recommended Common Equity Cost Rate 19AM
23 Business Risk Adiustment
24 O. IS THERE A WAY TO OUANTIFY A BUSINESS RISK ADJUSTMENT DUE TO
25 UWID'S SMALL SIZE RELATIVE TO THE PROXY GROUP?
26 A. Yes. As discussed above, increased risk due to small size must be taken into
27 account in the cost of common equity consistent with the financial principle of
28 risk and return. Since the Company is smaller in size relative to the proxy group,
29 measured by the estimated market capitalization of common equity for UWID,
30 whose common stock is not traded, it has greater business risk than the average
31 company in the proxy group.
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United Water ldaho lnc.
Proxy Group of Eight
Water Companies
Table 4
Market
Capitalization(1)
($ Millions)
$201.415
$2,349.349
Times
Greater than
the Company
11.7x
(1) From page 1 of Schedule (PMA-10).
As derived on page 2 of Schedule (PMA-10), UWID's estimated market
capitalization based upon the proxy group's March 27,2015 market-to-book ratio
was $201 .415 million. ln contrast, the market capitalization of the average water
company was $2.349 billion on March 27,2015, or 11.7 times the size of UWID's
market capitalization.
Therefore, it is necessary to upwardly adjust the indicated common equity
cost rate of 9.83% based upon the eight water companies to reflect UWID's
greater risk due to its smaller relative size. The determination is based upon the
size premiums for decile portfolios of New York Stock Exchange (NYSE),
American Stock Exchange (AMEX) and NASDAQ listed companies for the 1926-
2014 period and related data from Duff & Phelps 2015 Valuation Handbook
Guide to Cost of Capital - Market Results throuoh 2014 (D&P - 2015). The size
premium for the 6th decile (1.74yo) in which the eight water companies fall has
been compared with the size premium for the 1Oth decile (5.78%) in which the
estimated market capitalization of UWID falls. As shown on page 1, the size
premium spread between the 10th and 6th deciles is 4.04o/o. lnview of the
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2L o.
22 A.
foregoing, I am recommending a business risk adjustment to reflect UWID's
greater relative business risk due to UWID's smaller size relative to the proxy
group of 0.55%. ln my opinion, a business risk adjustment of 0.55% is both
reasonable and conservative, given UWID's increased business risk relative to
that of the proxy group due to UWID's based upon the risk issues surrounding
UWID's water rights, the arid desert environment of its service territory and the
large expected capital expenditures projected by UWID.
Adding a business risk adjustment of 0.55o/o lo the 9.83% indicated
common equity cost rate based upon the eight water companies, before
adjustment, results in a business risk-adjusted common equity cost rate of
10.38%26 which when rounded lo 10.4Oo/o is my recommended common equity
cost rate.
ln my opinion, a common equity cost rate of 10.40 which results in an
overall rate of return of 8.450/" is both reasonable and conservative.
A common equity cost rate of 10.400/" is consistent with the Hope and
Bluefield standards of a fair and reasonable return which ensures the integrity of
presently invested capital and enables the attraction of needed new capital on
reasonable terms. lt also ensures the continued reliability and quality of service
to the benefit of ratepayers. Thus, it balances the interests of both ratepayers
and the Company.
DOES THAT CONCLUDE YOUR DIRECT TESTIMONY?
Yes.
t3
1,4
15
L6
L7
18
19
10.38%=9.83%+0.55%.
51
APPENDIX A
PROFESSIONAL QUALI FICATIONS
OF
PAULINE M. AHERN, CRRA
PARTNER
SUSSEX ECONOMIC ADVISORS, LLC
PROFESSIONAL QUALI FICATIONS
OF
PAULINE M. AHERN, CRRA
PARTNER
SUSSEX ECONOMIC ADVISORS, LLC
PROFESSIONAL EXPERI ENCE
2015-Present
ln 2015, I joined Sussex Economic Advisors, LLC as a partner. I am responsible
for providing testimony as an expert witness on subjects of fair rate of return, cost of
capital and related issues before public utility regulatory commissions. I also provide
assistance and support to clients throughout the entire ratemaking litigation process.
I continue to be responsible for maintaining and calculating the performance of
the AGA lndex, a market capitalization weighted index of the common stocks of the
approximately 70 corporate members of the AGA, which serves as the benchmark for
the AGA Gas Utility lndex Fund.
As a Partner, I am also involved in strategic planning for Sussex Economic
Advisors, LLC.
1994-2015
ln 2014, I became a Managing Principal of AUS Consultants responsible for
continuing to manage the consulting practice, in addition to providing testimony as an
expert witness as described below. I am also a Vice President of AUS lnc.
ln 1996, I became a Principal of AUS Consultants, continuing to offer testimony
as an expert witness on the subjects of fair rate of return, cost of capital and related
issues before state public utility commissions. I provide assistance and support to
clients throughout the entire ratemaking litigation process. ln addition, I supervise the
financial analyst and administrative staff in the preparation of fair rate of return and cost
of capital exhibits which are filed along with expert testimony before various state and
federal public utility regulatory bodies. The team also assists in the preparation of
interrogatory responses, as well as rebuttal exhibits.
As the Publisher of AUS Utility Reports (formerly C. A. Turner Utility Reports), I
am responsible for the production, publishing, and distribution of the reports. AUS
Utility Reports provides financial data and related ratios for about B0 public utilities, i.e.,
electric, combination gas and electric, natural gas distribution, natural gas transmission,
telephone, and water utilities, on a monthly, quarterly and annual basis. Among the
subscribers of AUS Utility Reports are utilities, many state regulatory commissions,
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.
I am also responsible for maintaining and calculating the performance of the
AGA lndex, a market capitalization weighted index of the common stocks of the
approximately 70 corporate members of the AGA, which serves as the benchmark for
the AGA Gas Utility lndex Fund.
As an Assistant Vice President from 1994 - 1996, I prepared fair rate of return
and cost of capital exhibits which were filed along with expert testimony before various
state and federal public utility regulatory bodies. These supporting exhibits include the
determination 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 limited 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 utility. I also assisted in the preparation of responses to any interrogatories
received regarding such testimonies filed on behalf of client utilities. Following the filing
of fair rate of return testimonies, I assisted in the evaluation of opposition testimony in
order to prepare interrogatory questions, areas of cross-examination, and rebuttal
testimony. I also evaluated and assisted in the preparation of briefs and exceptions
following the hearing process. I also submitted testimony before state public utility
commissions regarding appropriate capital structure ratios and fixed capital cost rates.
1 990-1 994
As a Senior Financial Analyst, I supervised two analysts and assisted in the
preparation of fair rate of return and cost of capital exhibits which are filed along with
expert testimony before various state and federal public utility regulatory bodies. The
team also assisted in the preparation of interrogatory responses.
I evaluated the final orders and decisions of various commissions to determine
whether further actions were warranted and to gain insight which assisted in the
preparation of future rate of return studies.
I assisted in the preparation of an article authored by Frank J. Hanley and A.
Gerald Harris entitled "Does Diversification lncrease the Cost of Equity Capital?"
published in the July 15, 1991 issue of Public Utilities Fortnightly.
ln 1992, I was awarded the professional designation "Certified Rate of Return
Analyst" (CRRA) by the National Society of Rate of Return Analysts (now the Society of
Utility and Regulatory Financial Analysts (SURFA)). This designation is based upon
education, experience and the successful completion of a comprehensive examination.
As Administrator of Financial Analysis for AUS Utility Reports, which then
reported financial data for over 20A utility companies with approximately 1,000
subscribers, I oversaw the preparation of this monthly publication, as well as the
accompanying annual publication, Financial Statistics - Public Utilities.
1988-1 990
As a Financial Analyst, I assisted in the preparation of fair rate of return studies
including capital structure determination, development of senior capital cost rates, as
well as the determination of an appropriate rate of return 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. Turner Utilitv Reports - Financial Statistics -Public Utilities.
1 973-1 975
As a Research Assistant in the Research Department of the Regional Economics
Division of the Federal Reserve Bank 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 articles for the New England
Economic Review. Also, I was Assistant Editor of New England Business lndicators.
1972
As a Research Assistant in the Office of the Assistant Secretary for lnternational
Affairs, U.S. Treasury Department, 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 testimony before the following commissions:
Alpena Power Company
Apple Canyon Utility Company
Maine
Maryland
Michigan
Missouri
Nevada
New Hampshire
New Jersey
New York
North Carolina
Ohio
Pennsylvania
Rhode lsland
South Carolina
Virginia
Washington
Applied Wastewater Management,
Aqua lllinois, lnc.
Alaska
Arkansas
Arizona
British Columbia
California
Connecticut
Delaware
Florida
Hawaii
ldaho
lllinois
lndiana
lowa
Kentucky
Louisiana
I have sponsored testimony on fair rate of return and related issues for:
lnc.
Aqua New Jersey, lnc.
Aqua North Carolina, lnc.
Aquarion Water Company
Aquarion Water Co. of New Hampshire,
lnc.
Arizona Water Company
Artesian Water Company
The Atlantic City Sewerage Company
Audubon Water Company
Bermuda Water Company
Carolina Pines Utilities, lnc.
Carolina Water Service, lnc. of NC
Carolina Water Service, lnc. of SC
Chaparral City Water Company
The Columbia Water Company
The Connecticut Water Company
Consumers lllinois Water Company
Consumers Maine Water Company
Consumers New Jersey Water
Company
Corix Utilities
City of DuBois, Pennsylvania
Elizabethtown Water Company
Emporium Water Company
EPCOR Water Arizona, lnc.
Fairbanks Natural Gas LLC
Greenridge Utilities, lnc.
The Borough of Hanover, PA
GTE Hawaiian Telephone lnc.
lllinois American Water Company
lndiana American Water Company
lowa American Water Company
Jersey Central Power & Light Co.
Lake Wildwood Utilities Corp.
Land'Or Utility Company
Long lsland American Water Company
Long Neck Water Company
Louisiana Water Service, lnc.
Maine Water Company
Massanutten Public Service Company
Middlesex Water Company
Missouri Gas Energy
Missouri-American Water Company
Mt. Holly Water Company
Nero Utility Services, lnc.
New Jersey Utilities Association
Aqua Ohio, lnc.
Aqua Virginia, lnc.
The Newtown Artesian Water Company
NRG Energy Center Harrisburg LLC
NRG Energy Center Pittsburgh LLC
Ohio-American Water Company
Penn Estates Utilities
Pinelands Waste Water Company
Pinelands Water Company
Pioneer Water LLC
Pittsburgh Thermal
San GabrielValley Water Company
San Jose Water Company
Southland Utilities, lnc.
Spring Creek Utilities, lnc.
Sussex Shores Water Company
Tega Cay Water Services, lnc.
Thames Water Americas
Tidewater Utilities, lnc.
Total Environmental Services, lnc. -
Treasure Lake Water & Sewer
Divisions
Transylvania Utilities, lnc.
Trigen - Philadelphia Energy
Corporation
Twin Lakes Utilities, lnc.
United Utility Companies
United Water Arkansas, lnc.
United Water Arlington Hills Sewerage,
lnc.
United Water Connecticut, lnc.
United Water Delaware, lnc.
United Water Great Gorge lnc./United
Water
Vernon Transmission, lnc.
United Water ldaho, lnc.
United Water lndiana, lnc.
United Water New Jersey, lnc.
United Water New Rochelle, lnc.
United Water New York, lnc.
United Water Owego/Nichols, lnc.
United Water Pennsylvania, lnc.
United Water Rhode lsland, lnc.
United Water South County, lnc.
United Water Toms River, lnc.
United Water Vernon Sewage lnc.
I have sponsored testimony on generic/uniform methodologies for determining
the return on common equity for:
United Water Virginia, lnc.
United Water West Lafayette, lnc.
United Water West Milford, lnc.
United Water Westchester, lnc.
Utilities, lnc.
Utilities lnc. of Central Nevada
Utilities, lnc. of Florida
Utilities, lnc. of Louisiana
Utilities, lnc. of Nevada
Aquarion Water Company
The Connecticut Water ComPany
Corix Multi-Utility Seruices, lnc.
Alpena Power Company
Arkansas-Western Gas Company
Associated Natural Gas Company
Algonquin Gas Transmission Company
Anadarko Petroleum Corporation
Arizona Water Company
Arkansas-Louisiana Gas Company
Arkansas Western Gas Company
Artesian Water Company
Associated Natural Gas Company
Atlantic City Electric Company
Bridgeport-Hyd rau lic Company
Cambridge Electric Light Company
Utilities, lnc. of Pennsylvania
Utilities, lnc. - Westgate
Utilities Services of South Carolina
Utility Center, lnc.
Valley Energy, lnc.
Water Services Corp. of Kentucky
Wellsboro Electric Company
Western Utilities, lnc.
United Water Connecticut, lnc.
Utilities, lnc.
PG Energy lnc.
United Water Delaware, lnc.
Washington Natural Gas Company
Carolina Power & Light Company
Citizens Gas and Coke Utility
City of Vernon, CA
Columbia Gas/Gulf Transmission Cos.
Commonwealth Electric Company
Commonwealth Telephone Company
Conestoga Telephone & Telegraph Co.
Connecticut Natural Gas Corporation
Consolidated Gas Transmission
Company
I have sponsored testimony on the rate of return and capital structure effects of
merger and acquisition issues for:
Californ ia-American Water Company
Company
New Jersey-American Water
I have sponsored testimony on capital structure and senior capital cost rates for
the following clients:
I have sponsored testimony on Distribution System lmprovement Charges
(DSrC):
Arizona Water Company
! have assisted in the preparation of rate of return studies on behalf of the
following clients:
Consumers Power Company
CWS Systems, lnc.
Delmarva Power & Light Company
East Honolulu Community Services, lnc.
Equitable Gas Company
Equitrans, lnc.
Fairbanks Natural Gas, LLC
Florida Power & Light Company
Gary Hobart Water Company
Gasco, lnc.
Great Lakes Gas Transmission L.P.
GTE Arkansas, lnc.
GTE California, lnc.
GTE Florida, lnc.
GTE Hawaiian Telephone
GTE North, lnc.
GTE Northwest, lnc.
GTE Southwest, lnc.
Hawaiian Electric Company
Hawaiian Electric Light Company
IES Utilities lnc.
lllinois Power Company
lnterstate Power Company
lnterstate Power & Light Co.
lowa Electric Light and Power Company
lowa Southern Utilities Company
Kentucky-West Virginia Gas Company
Lockhart Power Company
Middlesex Water Company
Milwaukee Metropolitan Sewer District
Mountaineer Gas Company
National Fuel Gas Distribution Corp.
National Fuel Gas Supply Corp.
Newco Waste Systems of NJ, lnc.
New Jersey Natural Gas Company
New Jersey-American Water Company
New York-American Water Company
North Carolina Natural Gas Corp.
Northumbrian Water Company
Ohio-American Water Company
Oklahoma Natural Gas Company
Orange and Rockland Utilities
Paiute Pipeline Company
PECO Energy Company
Penn Estates Utilities, lnc.
Penn-York Energy Corporation
Pennsylvania-American Water Co.
PG Energy lnc.
Philadelph ia Electric Company
Providence Gas Company
South Carolina Pipeline Company United Water Virginia, lnc.
Southwest Gas Corporation United Water West Lafayette, lnc.
Stamford Water Company Utilities, lnc. of Pennsylvania
Tesoro Alaska Petroleum Company Utilities, lnc. - Westgate
Tesoro Refining & Marketing Co. Vista-United Telecommunications Corp.
United Telephone of New Jersey Washington Gas Light Company
United Utility Companies Washington Natural Gas Company
United Water Arkansas, lnc. Washington Water Power Corporation
United Water Delaware, lnc. Waste Management of New Jersey -
United Water ldaho, lnc. Transfer Station A
United Water lndiana, lnc. Wellsboro Electric Company
United Water New Jersey, lnc. Western Reserve Telephone Company
United Water New York, lnc. Western Utilities, lnc.
United Water Pennsylvania, lnc. Wisconsin Power and Light Company
EDUCATION:
1973 - Clark University - B.A. - Honors in Economics (Concentration: Econometrics
and
RegionaUl nternational Economics)
1991 - Rutgers University - M.B.A. - High Honors (Concentration: Corporate Finance)
PROFESS I ONAL AFFI LIATIONS:
Advisory Council - Financial Research lnstitute - University of Missouri- Robert J.
Trulaske, Sr. School of Business
Edison Electric lnstitute - Cost of Capital Working Group
National Association of Water Companies - Member of the
Finance/Accounting/Taxation and Rates and
Regulation Committees
Society of Utility and Regulatory Financial Analysts
Member, Board of Directors - 2010-2014
President - 2006-2008 and 2008-2010
Secretary/Treasurer - 2004-2006
American Finance Association
Financial Management Association
SPEAKING ENGAGEMENTS:
"Leadership in the Financial Services Sector", Guest Professor - Cost of Capital,
Business Leader Development Program, Rutgers University School of Business,
February 20,2015, Camden, NJ.
"ROE: Trends & Analysis", American Gas Association, AGA Mini-Forum for the
Financial Analysts Community & Finance Committee Meeting, September 1 1 , 2014, The
Princeton Club, New York, NY.
Guest Professor, "Measuring Risk", Asset Supervision and Administration Commission
of the State Council of the Peoples' Republic of China, Rutgers School of Business, July
21,2014, New Brunswick, NJ.
Instructor, "Cost of Capital 101', EPCOR Water America, lnc., Regulatory Management
Team, June 9,2014, Phoenix, AZ.
Moderator: Society of Utility FinancialAnalysts: 46th Financial Forum - "The Rating
Agencies' Perspectives: Regulatory Mechanisms and the Regulatory Compact", April
22-25, 2O1 4, lndianapolis, lN.
"The Return on Equity Debate: lts lmpact on Budgeting and lnvestment and Wall
Street's View of Risk", National Association of Water Companies - 2014 lndiana
Chapter Water Summit, March 13, 2014, lndianapolis, lN.
"Regulatory Training in Financing, Planning, Strategies and Accounting lssues for
Publicly- and Privately-Owned Water and Wastewater Utilities", New Mexico State
University Center for Public Utilities, October 13-18, 2013, lnstructor (Cost of Capital).
"Regulated Utilities - Access to Capital", (panelist) - lnnovation: Changing the Future of
Energy, 2013 Deloitte Energy Conference, Deloitte Center for Energy Solutions, May 22,
2O13, Washington, DC.
"Comparative Evaluation of the Predictive Risk Premium Model, the Discounted Cash
Flow Model and the Capital Asset Pricing Model for Estimating the Cost of Common
Equity", (co-presenter with Richard A. Michelfelder, .Ph.D., Rutgers University) -
Advanced Workshop in Regulation and Competition, 32no Annual Eastern Conference of
the Center for Research in Regulated lndustries (CRRI), May 17,2013, Rutgers
University, Shawnee on the Delaware, PA.
"Decoupling: lmpact on the Risk and Cost of Common Equity of Pu.blic Utility Stocks",
before the Society of Utility and Regulatory Financial Analysts: 45tn Financial Forum,
April 1 7-18, 201 3, lndianapolis, lN.
"lssues Surrounding the Determination of the Allowed Rate of Return", before the Staff
Subcommittee on Electricity of the National Association of Regulatory Utility
Commissioners, Winter 2013 Committee Meetings, February 3,2013, Washington, DC.
"Leadership in the Financial Services Sector", Guest Professor - Cost of Capital,
Business Leader Development Program, Rutgers University School of Business,
February 1,2013, Camden, NJ.
"Analyst Training in the Power and Gas Sectors", SNL Center for Financial Education,
Downtown Conference Center at Pace University, New York City, December 12,2012,
lnstructor (Financial Statement Analysis).
"Regulatory Training in Financing Planning, Strategies and Accounting lssues for
Publicly and Privately Owned Water and Wastewater Utilities", New Mexico State
University Center for Public Utilities, October 14-19, 2Ol2,lnstructor (Cost of Financial
Capital).
"Application of a New Risk Premium Model for Estimating the Cost of Common Equity",
Co-Presenter with Dylan W. D'Ascendis, CRRA, AUS Consultants, Edison Electric
lnstitute Cost of Capital Working Group, October 3, 2012, Webinar.
"Application of a New Risk Premium Model for Estimating the Cost of Common Equity",
Co-Presenter with Dylan W. D'Ascendis, CRRA, AUS Consultants, Staff Subcommittee
on Accounting and Finance of the National Association of Regulatory Commissioners,
September 10,2012, St. Paul, MN.
"Analyst Training in the Power and Gas Sectors", SNL Center for Financial Education,
Downtown Conference Center at Pace University, New York City, August 7, 2012,
lnstructor (Financial Statement Analysis).
"Advanced Regulatory Training in Financing Planning, Strategies and Accounting lssues
for Publicly and Privately Owned Water and Wastewater Utilities", New Mexico State
University Center for Public Utilities, May 1 3-17, 2012, lnstructor (Cost of Financial
Capital).
"A New Approach for Estimating the Equity Risk Premium Applied to Public Utilities",
before the Finance and Regulatory Committees of the National Association of Water
Companies, March 29, 2012, Telephonic Conference.
"A New Approach for Estimating the Equity Risk Premium Applied to Public Utilities",
(co-presenter with Frank J. Hanley, Principal and Director, AUS Consultants) before the
Water Committee of the National Association of Regulatory Utility Commissioners'
Winter Committee Meetings, February 7,2012, Washington, DC.
"A New Approach for Estimating the Equity Risk Premium Applied to Public Utilities",
(co-presenter with Richard A. Michelfelder, Ph.D., Rutgers University and Frank J.
Hanley, Principal and Director, AUS Consultants) before the Wall Street Utility Group,
December 19, 2011, New York City, NY.
"Advanced Cost and Finance lssues for Water", (co-presenter with Gary D. Shambaugh,
Principal & Director, AUS Consultants), 2011 Advanced Regulatory Studies Program -
Ratemaking, Accounting and Economics, September 29, 2011, Kellogg Center at
Michigan State University - lnstitute for Public Utilities, East Lansing, Ml.
"Public Utility Betas and the Cost of Capital", (co-presenter with Richard A. Michelfelder,
Ph.D., Rutgers University) - Advanced Workshop in Regulation and Competition, 30'n
Annual Eastern Conference of the Center for Research in Regulated lndustries (CRRI),
May 20, 2011, Rutgers University, Skytop, PA.
Moderator: Society of Utility and Regulatory Financial Analysts: 43'd Financiat Forum -"lmpact of Cost Recovery Mechanisms on the Perception of Public Utility Risk", April 14-
15, 2011, Washington, DC.
"A New Approach for Estimating the Equity Risk Premium for Public Utilities", (co-
presenter with Richard A. Michelfelder, Ph.D., Rutgers University) - Hot Topic Hotline
Webinar, December 3,2010, Financial Research lnstitute of the University of Missouri.
"A New Approach for Estimating the Equity Risk Premium for Public Utilities", (co-
presenter with Richard A. Michelfelder, Ph.D., Rutgers University) before the lndiana
Utility Regulatory Commission Cost of CapitalTask Force, September 28,2010,
lndianapolis, lN
Tomorrow's Cost of Capital: Cost of Capital lssues 2010, Deloitte Center for Energy
Solutions, 2010 Deloitte Energy Conference, "Changing the Great Game: Climate,
Customers and Capital", June 7-8, 2010, Washington, DC.
"A New Approach for Estimating the Equity Risk Premium for Public Utilities", (co-
presenter with Richard A. Michelfelder, Ph.D.,. Rutgers University) - Advanced
Workshop in Regulation and Competition, 29'n Annual Eastern Conference of the Center
for Research in Regulated lndustries (CRRI), May 20, 2010, Rutgers University, Skytop,
PA
Moderator: Society of Utility and Regulatory Financial Analysts: 42nd Financial Forum -
"The Changing Economic and Capital Market Environment and the Utility lndustry", April
29-30, 2010, Washington, DC
"A New Modelfor Estimating the Equity Risk Premium for Public Utilities" (co-presenter
with Richard A. Michelfelder, Ph.D., Rutgers University) - Spring 2010 Meeting of the
Staff Subcommittee on Accounting and Finance of the National Association of
Regulatory Utility Commissioners, March 17,2010, Charleston, SC
"New Approach to Estimating the Cost of Common Equity Capital for Public Utilities"
(co-presenter with Richard A. Michelfelder, Ph.D., Rutgers University) - Advanced
Workshop in Regulation and Competition, 28'n Annual Eastern Conference of the Center
for Research in Regulated lndustries (CRRI), May 1 4,2009, Rutgers University, Skytop,
PA
Moderator: Society of Utility and Regulatory Financial Analysts: 41't Financial Forum -"Estimating the
Cost of Capital in Today's Economic and Capital Market Environment", April 16-17,
2009, Washington, DC
"Water Utility Financing: Where Does All That Cash Come From?", AWWA Pre-
Conference Workshop: Water Utility Ratemaking, March 25,2008, Atlantic City, NJ
PUBLICATIONS:
Contributor: The Lawyer's Guide to the Cost of Capital: Understanding Risk and Return
for Valuinq Businesses and Other lnvestments, Shannon Pratt and Roger Grabowski,
American Bar Association, 2014.
"Comparative Evaluation of the Predictive Risk Premium ModelrM, the Discounted Cash
Flow Model and the Capital Asset Pricing Model", co-authored with Richard A.
Michelfelder, Ph.D., Rutgers University, Dylan W. D'Ascendis, and Frank J. Hanley, The
Electricity Journal, May, 2013.
"A New Approach for Estimating the Equity Risk Premium for Public Utilities", co-
authored with Frank J. Hanley and Richard A. Michelfelder, Ph.D., Rutgers University,
The Journal of Regulatory Economics (December 2011),40:261-278.
"Comparable Earnings: New Life for OId Precept" co-authored with Frank J. Hanley,
Financial Quarterlv Review, (American Gas Association), Summer 1994.
Dean J. Miller
McDEVITT & MILLER LLP
420 West Bannock Street
P.O. Box 2564-83701
Boise, lD 83702
Tel: [phone]OO
Fax: [phone]
[e-mail]
Attorneys for the Applicant
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-I5-01
BEFOHE THE IDAHO PUBLIC UT!LITIES COMMISSION
EXHIBIT NO. 1
TO ACCOMPANY THE
DIRECT TESTIMONY OF PAULINE M. AHERN, CRRA
United Water ldaho lnc.
Table of Contents
to Exhibit No. 1
of Pauline M. Ahern. CRRA
Summary of Cost of Capitaland Fair Rate of Return
Capital lntensity and Depreciation Rates for United Water ldaho
lnc. and the Proxy Group of Nine Water Companies
Financial Profile of the Proxy Group of Nine Water Companies
lndicated Common Equity Cost Rate Using the Discounted
Cash Flow Model
Current Institutional Holdings
lndicated Common Equity Cost Rate Using the Risk Premium Model
lndicated Common Equity Cost Rate Using the CapitalAsset
Pricing Model
Basis of selection for the Non-Price Begulate Companies
Comparable in Total Risk to the Proxy Group of Eight
Water Companies
Cost of Cornmon Equity Models Applied to the
Comparable Risk Non-Price Regulated Companies
Estimated Market Capitalization for the United Water ldaho
lnc. and the Proxy Group of Nine Water Companies
Schedule
(PMA-1)
(PMA-2)
(PMA-3)
(PMA-4)
(PMA-s)
(PM4-6)
(PMA-7)
(PMA-8)
(PMA-e)
(PMA-10)
United Water Idaho Inc.
Summary of Cost of Capital and Fair Rate of Return
Based upon the Actual Capital Structure of United Waterworks. Inc. at December 31. 2014
Type Of Capital
Long-Term Debt
Common Equity
Total
Weighted Cost
Rate
Notes:
(1) Company provided.
(2J From pageZ of this Schedule.
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-1)
Page 1 of2
Ratios [1)Cost Rate
44.70o/o
55,30%
6.03o/o
L0.40o/o
2.700/o
5.75o/o
t1)
(z)
100.000/o 8.45o/o
United Water Idaho Inc.
Brief Summary of Common Equity Cost Rate
Line No.Principal Methods
1.Discounted Cash Flow Model IDCF) [1)
Risk Premium Model (RPM) [2)
Capital Asset Pricing Model ICAPM) [3)
Market Models Applied to Comparable Risk Non-Price
Regulated Companies [4)
Indicated Common Equity Cost Rate before Adjustment
for Business Risks
Size Adjustment [5)
Indicated Common Equity Cost Rate
Recommended Common Equity Cost Rate
2.
3.
4.
5.
6.
7.
8.
Proxy Group of Eight
Water Companies
8.54 o/o
10.72
9.35
L0.43
9.83 o/o
0.55
10.38 o/o
10.40 o/o
Notes: t1) From Schedule (PMA-4).
(2) From page 1of Schedule (PMA-5).
t3) From page 1of Schedule [PMA-7).
(4) From page 1of Schedule [PMA-9).(5) Business risk adjustment to reflect United Water Idaho Inc.'s greater business risk due
to its small size relative to the proxy group as detailed in Ms. Ahern's accompanying
direct testimony.
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-1)
Page 2 ol 2
United Water ldaho Inc.
2014 Capital lntensity of United Water Idaho Inc. and
AUS Utility Reports Utilitv Companies IndustryAverages
Average
Net Plant
Total
0perating
Revenue
$ 45.74
$ 611.15
$ 6,422.08
$ 7,385.21$ 2,277.59
Capital
Intensity
Capital Intensity
United Water ldaho Inc.
United Water ldaho Inc.
Water IndustryAverage
Electric Industry Average
Combination Elec. & Gas IndustryAverage
Gas Distribution Average
$ 2s5.33
$ 2,4L1.70
$ 17,004.84
$ 16,109.32$ 3,842.72
($ milll ($ mill) ($) v. Other Industries
$
$
$
$
$
I times )
14t.27q6
270.57Vo
255.960/0
330.18%
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-2)
Page 1 of2
s.58
3.95
2.65
2.78
7.69
Notes:
Capital Intensity is equal to Net Plant divided by Total Operating Revenue.
Source oflnformation:
EDGAR Online's l-Metrix Daabase
Company Annual Forms 10-K
AUS Utility Reports - April 2015
Published By AUS Consultants
Unied Water ldaho IncAnnual Report to the ldaho Public Utilities Commission for the year ended December 31, 2014.
$5.58
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Water lndustry Electric lndustry Combination E&G LDC lndustry Avg.Avg. Avg. Avg.
2014 Depreciation Rate ofUnited Water ldaho [nc. and
AUS Utility Reports Utility Companies IndustryAverages
United Water ldaho Inc.
Water lndustry Average
Electric Industry Average
Combination Elec. & Gas lndustry Average
LDC Gas Distribution Industry Average
Depreciation
Depletion
& Amoru Expense
($ mill)
Average Toal
Gross Plant
Less CWIP
($ milt)
I 2e4.39
| 2,739,56$ 22,063.7L
$ 22,24t.95
S 4,979.82
Depreciation
Rate
(%)
Depreciation Rate
United Water ldaho Inc,
v. other Industries-ry-96.670h
87.880/0
8S.Z90h
7A38Vo
$
$
$
$
$
8.53
80.97
727.38
756.74
742.93
2,9%
3.0%
3,30
3.40/o
3,70h
2014 Effective Depreciation Rate
4.O/"
3.5"/"
3.0%
2.5"/"
2.O/"
1.5/"
1.0o/"
O.5"/"
o.o%
UWID Water lndustry Avg, Electric lndustry Avg. Combination E&G LDC lndustry Avg.
Avg.
Notes:
Effective Depreciadon Rate is equal to Depreciation, Depletion and Amortizadon Expense divided by
average beginning and ending year's Gross Plant minus Construction Work in Progress'
Source oflnformation:
EDCAR Online's I-Metrix Database
Company Annual Forms 10-K
AUS Utility Report - April 2015
Published by AUS Consulants
Unied Water Idaho lnc,Annual Report to the Idaho Public Udlides Commission for the year ended December 31, 2014.
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-2)
Page 2 ol 2
Proxv Group of Eight Water Companies
CAPITALIZATION AND FINANCIAL STATISTICS (1)
2010 - 2014. Inclusive
2074 zo13
CAPITALIZATION STATISTICS
AMOUNT OF CAPITAL EMPLOYED
TOTAL PERMANENT CAPITAL
SHORT.TERM DEBT
TOTALCAPITAL EMPLOYED
INDICATED AVERAGE CAPITAL COST RATES (21
TOTAL DEBT
PREFERRED STOCK
CAPITAL STRUCTURE RATIOS
BASED ON TOTAL PERMANENT CAPITAL:
LONC.TERM DEBT
PREFERRED STOCK
COMMON EQUITY
TOTAL
BASED ON TOTAL CAPITAL:
TOTAL DEBT, INCLUDING SHORT.TERM
PREFERRED STOCK
COMMON EQUITY
TOTAL
FINANCIAL STATISTICS
EARNINGS / PRICE RATIO
MARKET / AVEMGE BOOK RATIO
DIVIDEND YIELD
DIVIDEND PAYOUT RATIO
RATE OF RE-IURN ON AVEMGE BOOK COMMON EQUITY
ToTAL pEBT / EBtTpA (3)
FUNDS FROM OPEMTIONS / TOTAL DEBT (4)
s2,756.407
s72.459
u,2,r,9,9s9
5.09 0/o
5.30 0
45.77 0/o
0.13
54.76
.ULq.0g 0/6
47.00 o/o
0.13
s2.47
19!49 %
$2,0s8.747
s95.589
s2.154.335
S.Lg o/o
5.51 0A
46.24 o/o
0.16
53.60
.19!,!q %
47.77 0/o
0.15
52.08
19q.pq %
$1,998.358
$60.594
$2-058152
5.36 o/o
5.53 o/o
49.32 %
0.18
50.50
Lo!,.Qq %
50.87 0/o
0.77
44.96
10q.0q 0/6
2072
(MILLIONS OF DOLLARS)
2077
s1,926.369
$89.698
s2.O16.067
5.32 o/o
5.53 %
50.91 0
0.27
48.88
ru4q %
52.68 0/6
0.19
47.13
lqgq.q 0/6
2070
$1,901.851
s56.420
sl€glzr
5.54 o/o
5.54 0A
5 YEAR
AVERAGE
50.73 o/o 4A.58 oA
0.22 0.18
49.05 5L.24
.1Q0.qq % 49.8q 0/6
SZ.8Z oA 50.23 o/o
0.20 0.77
46.98 49.60
&.Q.gq % 19!..99 %
5.44 0h
2L2.84
2.81
52.49
4,84 0h
206.33
3.07
58.37
5.47 o/o
787.65
3.60
60.4S
!0.72 o/o
3.83 X
20.95 o/o
50.87 0/o
s.t9 0
78L.94
3.97
64.89
9.30 o/o
4.30 X
79,26 0h
52.68 0A
5.78 o/o S.Z2 o
181.79 L94.1L
4.22 3.53
65.69 60.38
9.29 o/o 7O,03 o/o11.38 % 10.08 0/6
3.74 X 3.65 X
25.83 o/o 22.91 o/o
47.00 Vo 47.77 Vo
4.55 X
L7.50 o/o
4.01 X
21..31 o/o
5?,.82 0/6 50.23 o/o
Notes:
(1) Allcapitalizationandfinancialstatisticsforthegrouparethearitimeticaverageoftleachievedresults
for each individual company in the group, and are based upon financial statements as originally reported
in each year.
(2) Computed by relating actual total debt interest or preferred stock dividends booked to average of
beginning and ending total debt or preferred stock reported to be outstanding.
(3J Total debt relative to EBITDA (Earnings before Interest, Income Taxes, Depreciation and Amortization),
(4) Funds from operations (sum of net income, depreciadon, amortiation, net defered income tax and
investment tax credits, less total AFUDC) plus interest charges as a percentage oftotal debL
Source of Information: Company Annual Forms 10-K
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA-3)
Page 1 of2
ZIA}Zll:LllclllElv!
SJEAB
2910 avEEAeE
Ahlrlcan SEbs
w'tsr Co.
Pr.f.red StEk 0.00 0.00 0.00 0.00 0.00 0.00
ComDonEquity 60.85 59.70 5751 5{5,t 55,70 57.56
ToEtcapihl 100.00 9( 100.00 x 100.00 96 100.00 96 100.00 % 100.00 %
Amarlcan WaEr
Works C4. lnc
t.ng-TcmDebt 52.70 % 52.12 54.30 % 55.72 % 56,73 51,37 oA
Prcfrr.d Stock 0.15 O.77 0,27 0,27 029 022
Common Equity 17,75 17,4L 15.49 1+,01 12,94 45.41
Tobt capiEt 100.00 % 100.00 % 100.00 % 100.00 % 100,00 % 100.00 %
Aoua Ahcrlca- Inc.
Long.T.m Dcbt 19,15 50,32 % 53.41 % 54.11 % 57.05 % 52.87
Pr.f.r.d Sbck 0.00 0.01 0.01 0,O2 0.02 0.01
Common Equity 50.55 {9.67 46.58 4537 42,93 17.L2
Callfohla WaEr
Sarvlc. Gmub
LoqrT.mD.bt ,00.46 % 12.03 % 50.39 % 52.04 % 52,51 Vo 17,49
Profcmd Soc* 0.00 0.00 0.00 0.00 0.00 0.00
Common Eqlity 59.51 57,97 19.61 47,96 47,19 52.5L
ToElcapiEt 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100,00 96
Conn2cddt WaEr
SsEdr! lDe
Long-TrmD.bt 45.91 96 47.34 49,03 % 53.05 % 49,32 ,18.93 %
Prcfcrr.d sbck 0.20 0.20 0,27 0,30 0.34 0,25
c.ftmon Equlg 53.90 S2.,t6 50.76 ,{6.65 50,34 50,82
ToEl CapiEI 100.01 i6 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
ul4Cl$rg!trr
f4EE![v
LonfT.m Dcbt 4L51 41.36 96 43.53 % 13,L2 13,91 % 12,69 %
Pr.f.red SEk 0.71 0Ag L02 1.06 L.0? 0.95
Comnon Equfly 57.75 5?,76 55.,+5 5532 55.02 56,36
ToEt c.piht 100.00 % 100.00 % 100.00 % 100.00 % 100,00 % 100.00 %
flllIlsrDgrrleD-
long-T.mD.bt 51.66 96 5L09 % 55.39 016 56.63 % 53.79 % 53.71 %
PEf.red Sbck 0,00 0.00 0.00 0.00 0.00 0.00
CommonEquity ,18.3{ ,t8.91 11.61 13,3? 1627 4629Tobtcrpiht 100.00 % 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
York W.Er
S4E!!!r
Lory-T.m Dlbr +1.87 45.07 % 45.98 % 17.76 % 4.28 16.26 %
Prcf!red Sbck 0,00 0,00 0.00 0,00 0.00 0.00
Comnon Eqrlty 55,19 5,(,93 51.02 52.a4 5L72 53.74ToElcaptbl 100.00 % 100.00 96 100.00 96 100.00 % 100,00 96 100.00 %
ProB Grcu. of
IEhtlAlrtE&I[!!!&!
[ont.Tcm D.bt
Prcf.red Sd<
Comon Equlty
ToEl C.plEl
15.71 1621 % 19.32 % 50.91 96 50.73 % {€.58 %0.13 0.16 0.18 021 022 0.18
54.L6 53.60 50.50 48A8 49.05 57.21
:oo-.66'x--i5d.66'x-1o-d6d'x-roo-o-6's6--i6ffi x--loffi x
Sour of lnfoImdon
An u.l Foms 1GX
Exhibit No. 1
Case No. UWFl5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-3)
Page2 of2
UDi$dlAle.Eddabolnr
Indlated Common Equlty Cost Rat€ Uslngt le Dlscounted Cash Flow Model for
18l17lt4It3I12)tU tsl
Yahool
Flnance
Prcrect€d
Five Year
Growth ln
EPS
I6I
Avemge
Prcrectsd
Flve Year
Growtl in
EPs [3)
3.88 0/6
7.69
5.70
5.63
5.50
3.85
10.50
5.95
Value Line
ProiectedAvemge Five Vear
Dlvidend Grcwth in
Yield (1) EPs (2)
Zacl{s Five
Reutrrs Mean Year
Consensus Proiected
Pror€cted Five Year Growth Rate
Growtl Rate ln EPS in EPSProxy Croup of Elght Water Companies
American Stat€s Water Co.
American Water Works Co.,Inc.
Aqua Amerlca, lnc,
Califomia Water Seroice Group
Connectiot Water Seruice, lnc.
Middlesex Water Company
SrW CorporaUon
York Water Company
Source oflnformation:
lndlet!dAdrusted CommotrDlvidend EquityCost
Yield [4) Rate (5)
Z.l2 Vo
2.28
2.13
2.65
2.78
3.42
2.30
2.48
6.50 o/o
7.50
8.50
7.50
7.00
5.00
7.00
7,00
3.00 %
7.83
4.50
5.00
5.00
NA
NA
NA
3.00 %
7.60
5.30
5.00
5.00
NA
NA
NA
3.00 %
7.83
4.50
5.00
5.00
2.70
14.00
4.90
2.16 %
2.37
2.50
2.72
2.86
3.49
2.+2
2.55
6.04 o/o
10.06
8.20
8.35
8.36
7.31
72,92
8.50
NotEs:
Avemge 8,72 %
Medlan 436 %
AvemgeofMeanandMedlan 8.54 %
NA= NotAvallable
NMF = Not Meaninttul Flgure
(1) lndtateddividendat03/31l20lSdlvldedbytheavemgecloslngprlceofthelast60Eadtngdaysendlng03/31/2015fo
each company.
(2) From pages 2 ttrrough 10 ofthls Schedule.
(3) Average of columns 2 through 5 excluding negative growth mtes.
(4) Thls reflecs a growtl mtr component equal to one-half the concluslon of trowti Ete (from column 6) x column 1 to
reflect the periodlc payment of dlvldends (Gordon Model) as opposed to the condnuous payment Thus, for Amerlcan
States Water Co., 2,L2o/o x (7+(1 12 x 3,88%) ) = 2,15o5,
(5) Column 5 + column 7.
Value Llne lnvestsnent Suruey
M,reuteE.com Downloaded on 03/31/2015
M.acks.com Domloaded on 03/3112015
M.yahoo.com Downloaded on 03/31/2015
Exhibit No. 1
Case No. UW-l5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA4)
Page 1 of9
Alt/l ER, STATES \1|IATER NysE.rwn llffi,T' 36,97 l'dl,, 23.4 fi:Iiltrlii)
lELATlvE .. an
lE RAIO I .IU w 2,40/o
TItuEUilESS 3 L*r.OSnO'il
sAtETY 2 nri*arnonz
TECHN|CAL 3 nrioonartt
BETA .70 (1.00=Martet)
High:14.5 13.4 17.3
12.2
21.9
15.'l
23.'l
16,8
21.0
13.5
19.4
14.9
19.8
15.6
18.2'15.3 24.'l'17.0 33.1
24.0
38.7
27.O Target Price
2017
12018
Range
t':'LEGEI
-l
tDs
15 r.0ivid6ds p:h
.... Retarire Pfte Suendh3jtr'2 elit 6O2
2-td-1 sbfi 9n3
oDtims: Yes\hffi eni irldidtes t*Bsinzulr-rY rnvJEvIvNo
Ann'l TohlPrie cain RcturnHhh 50 l+35%l lOY"tdfu 3s ' t-sa"\ 2./"
.t ,,_.t
rllr.tr tl t::lnatd6r ueqStons
FHAMJJASOtoBut 000o00000orti@ 010o00000tosdl 020010010
i
Percant 24,shars 16'tradod 8 -
r :.r#i 513.
*TOI
I yr.
3 yr.
5 yr.
REIURil 12/11rc [lm'iTH tml34.7 6.9t35.1 73.7t46.4 107,3
nslluuonat uecl$ons
102011 20201a 302firtoBuy 79 96 8ltosd 72 6a 86
1 999 2000 2001 2003 4 2005 2006 2o()7 2004 2009 2010 2011 2012 2r)13 2fJ14 201 5 @ VALI,E LII{E PUB. I,I(I 7-19
5.51
1.02
.54
.42
6.45
1.13
.60
6.08
1.10
.64
6.53
1.m
.67
.43
5.89
1.27
.o/
.44
6.99
r.01
.39
.44
6.81
1. t1
.53
.44
7.03
1.32
.66
.45
7.88
1.45
.67
,46
8.75
1.65
,81
.48
9.21
1.69
.78
.50
9.74
1.70
.81
.51
10.71
2.11
1.11
.52
11.12
2.13
1.12
.55
12.12
2.48
1.41
.64
12.19
2.65
1,61
.76
1250
2.55
1.5t)
.83
,3.35
2.75
1.60
,90
levenEg pe, sh
'Cash Flow' por sh
hrningsprsh a
)iy'dDecl'dpersh er
15.05
3.35
2.00
1.15
t,co
5.74
2.15
5.91
.51
6.37
I Llu
6,61
t.fl
7.02 6.98
t.6 2.5t
7.86
z.1z
8.32
r.vl
8.77
45
8.97
Z.ZJ
9.70
z.w
t0.13
z,1z
I 0.84
2..I7
1 1.80
1 t5z
12.72
LU'
13"15 13.05
L4U ;ap'l spending persh
hok Valu€ p€r sh
LlV
15.N
]16.6t t6.bt 'JU.24 3U.2{iJU.Jb 30.42 3:t.50 1,3.60 lJ4. tu 34.46 lr4.b1)3/.06 3t.2t5 3t.lt)3U.53 38.12 3t.tN 31.50 ,;ommon shs outsl Jl.w
.81
5.096
tt.c I t.t
.97
4.N
t.03
ID.Y
4.N
lD.,
.86
3.9i6 3.6*
to.J
1.00
J I.Y
1.82
3.5%
4.t
t.n
3.6%
.9
1.17
2
3.1%
1.50
zt.t
2.5%
1.27
z1.u
2.5%
1.36
u.b
2.%
,l.41
z1.z
2.W
1.00
3.0%
5.7
.97
3.X
5.4
_s1
3.1%
tq.J
2.r*
1.2
.97
I
2.6%
1.09
11,u AVg Ann't HE Katro
Relative P/E Bath
lvq Ann'l Div'd Yeld
4.U
2.7%
1.30
CAPITAL STRUCTURE as ol 9f30n4
Total ocbt $317.1 mill. DUG in 5 Yrs $7.6 mill.
LT Dcbt $310.8 mill. LT lntcrcst $22.0 mill.
(LT interest etrned: 5.7 x: total interest
coverage: 5.4 x) (38% of Cap'l)
L.ss6s, Un@pit lized: Annual rentals $2.2 mill.
Prnslon Asssb-12/13 $127.5 mill.
Oblis. $152.7 mill,
Pld Stock None.
Common Stock 38,400,038 shs.
as ot 10/31/14
MARKET CAP: $'1.4 billion (ilid Cse)
2n.0
16.5
n6.2
n.5
268.6
n.1
30t.4
280
318.7
ni8
361.0
?95
398.9
41.4
419.3
42.0
466.9
54.1
472.1
62.7
175
56.0
500
57.0
Rewnues ($nil0
Net Profit f3mil0
565
f50
37.4%47.W 40.5%lrx 42.ffi
eqq
37.8%
AW
38.996AN 43.%{ru 41.7%
,M
39.9i6
,\q
36.3%(q 3&fn
5%
39.Vt
2.004
ncome Tax Bate
IFIJDC % io llel Proft
3E.tn
2.00/.
47.7%
f,, lq
il.4%
4S.6*
cu.b)6
51.4%
4b.sib
53.1%
qb.:fh
53.896
/tJ.tlr
54.t%'yl.J)6
55.7%51.5*
qz,zh
57.8*
39.8%
60.n6
40.w.
60.trt
41.070
59.M
-ong- lelm ueor Hauo
lommon Eouitv Ralio
.LITb
58.ff/,
4W.4
664.2
dJZ.I
713.2
551.6
750.6
5fi9.4
776.4
5ns
825.3
665.0
866.4
61t.4
855.0 896.5
1149.181.0
917.8
UIU.4
981.5
ng
1000 1U0
otu roH Capibl($mill)
[et Plant {Smiln
9W
1160
5.2%
6.6%
AA(
5.4%
8.5%
e (q(
6.0%
8.r%
8.1%
6.7%
9.3%
q qq4
6.4%
8.6*
R Aq1
5.9%
8.2%
A
'OL
7.6%
11.tr6it nqt
7.1%
103%
rn lql
8.3%
11.9%
1 1.S96
8.9%
12,7%tr Tol^
9.0%
11.5%lt R|t
8.5%
1z.et
1) not
letum on Total Cap'l
leturn on Shr. Equity
I.ft ffi m a^m En 'ito
8.5%
125%,, 1p/,,
r.uh
84%
zdh
67%
2.t%
67%
3.S
58%
3.1%
8r%
J.tft
61%
J.UA
4t%
J.J}
49%
0.01
45%
D.6A
47%
7.ah
5v/,
7,U7c
1tr/,
letained to coor Eq
Ul Div'ds to ilet Prof
4,47.
58r/,CURRENT POS|T|ON 2012 2013 9F0n4
0mLL)Cash Assets 23.5 38.2 57.9orhsr 160.5 153.4 128.7currentAssets 184.6 -191-6 -is6.6
Accis Pavable 40.6 49.8 49.7
Debt Duri 3.3 6.3 6,3Other 49.8 44.8 64.6
currsnl Liab. --E57 -lb6:5 120-:6-
Fix. chq. cov. 48A% 531% 533%
BUSINESS: Ameri€n States Water Co. opqates as a holding
mmpmy. Ttrough its principal sub€idiary, Goldon State Water
Compmy, it suppliB mter lo mqe $an 250,000 customers in 75
mmmunilies in l0 counties. Sflice treas include he greter
metropolitan tr* of Los Angel€s and Ormge Countigs. The mm-
pany also provides electric utility $ryic6 to marly 23,250 custom-
ere in h€ city of Big Bea Lako and in aras of San Bemrdino
County. Sold Chapsral City Water of Arizom (d11). Has 728 em-
ployees. Otfi€rs & directors own 2.9% ol @mmm stock (4/12
Prory). Chairnan: Uoyd Boss. President & CEO: Rob8rl J.
Sprowls. lnc: CA. Addr 630 East Foothill BouleErd, San Dims,
CA 91773. Tol: 9@-394-3600. lnternet: m.aswaler.com.
Shares ofArnerican States Water havesurged since our October report. The
price of the stock has increased 2l%o, well
above the 4o/o gain posted by the market
averages. The entire water sector has donewell, but American States' performance
has been esoeciallv strons. This is unusual
return on equlty. States regulate the up-per limit as to what utilities are allowed to
earn on the common equity dedicated tothe water business. (Please note the cal-
culations on our page can vary significant-ly from how regulators arrive at theirnumbers.) Hence. we estimate that Amer-
AIINUAL RATES Past
ofch.ng. (por shl 10 Yrs.Revenues 5.5%
"Cash Flow" 7.5o/oEarninos s.0%Divide;ds 4.o%
Book Value 5.5o/"
Pasi Esl'd ''llrl3
5 Y6. to'171196.5% 4.0%8.5% 5.s"4't3.0% 6.5%6.5% 10.Wo6.5% 4.5%
Crl-
andar
OUARTERLY RE\/ENUES ($ miII.)
ilar.3I Jun.30 SeD,30 Dec.31
FullY.ar
because water utilities ale generally con-
sidered to be low-Beta, defensive equities.
One possibility for American States'stock
movement could be that investors are will-ing to pay a large premium for higher-
yielding stocks with good dividend growth
prospects. Another is that the company
repurchased more of its own shares on the
open market (at a very high price).The attractiveness of the stock hasbeen greatly reduced. Despite American
States being one of the best run water util-ities in the country, with very favorablelong-term dividend growth prospects, our
concern is with the valuation of the equity.
True. these shares are ranked to perform
ican States'share net declined 6Yo in 2074,
to $1.50, because 2013's results were aided
by a one-time recovery of certain expenses.In 2015, we expect earnings per share to
recover and rise 6%, to $1.60.Nonregulated operations could wellbe a swing factor in the company's
earnings. American States provides water
services to nine domestic militarli bases.Profits from this segment can be uneven,but they carry higher margins than theregulated water business. We estimatethat this endeavor accounts for almost
ZOVo of the utility's total ea-rnings. With an
estimated 50 to 70 bases expected to pri-
vatize their water oDerations in the next
2011
2012
2013
2014
,nt q
94.3 1m.8
107.6 1 14.3
110.6 12f..7
101.9 115.6110 125
19_9 95.3
33.5 111.5
30.9 109.938.3 119.2115 120
4t9.:
466.1
472.
175
500
C!l-EARI{II{GS PER SHARE A
Uar.31 Jun. $ Sep. O 0ec.31
FullYarr
201 1
2012
2013
2014
2015
.19 .34 .42 .17.27 .40 .49 .%.35 .43 .53 .30.28 .39 .54 .29.30 .15 _55 .i0
1.12
1.41
'1.61
1.50
1.60
Cal-
cnder
OUARTEBLY DlVlDEt{DS PAID Br
llrrll .hhm q.nm nc.11 Full
2011
2012
2013
2014
2015
.13 .14 .14 .14.14 .14 .1775 .1775.1775 .1775 .m25 .m25.m25 .2025 .213 .213
.55
.64
.76
.83
in line with the market in the year ahead.
However, total return potential through
2017-2019 is now below average.Meanwhile, the company's earnings
may be restrained by its current hlgh
few years, the company may pick up an-other 15 to 20. This would make our long-term earnings estimates somewhat conser-
vative.
James A. Flood January 16, 2015
(A) Primary €rnings. Excludes mnrffming I add dw to rounding.
gainv(losses): 'M,7i: '05, 13(; '06, 3t: '08, l(B) DMdsnds historically paid in eally March,
(1ar); '10, (23t) ''ll, 10r. Nexl eamings report I June, SsPlember, and Deember. . Div'd rein-
due mid February. Quartedy etrnings may not I vestrnonl plm available.
for Comprnfs Fin.ncial Strongth
Siock's Prico Stability
PricG Growth PrBist8ncc
Errnino3 Prrdictrbilitv
A
85
65
85
I2015 \ralue Lire Putfishirc LLC. All fuHs resred. Fatual mtsial is ohahed ftom sMces bdieved to be reliable and is prcvided widod mmnties d ary kind.
rHE PUB|-TSHER tS NOT RESPONS|ELEIOR ANY ERRoRS OR OMlsslotis HEREIN. ftis Fnfication i5 gliliy fq ebsibe/s om, mcmqdal, htsml u*. flo pan
,itmybergodued,rmld,$deddranilltedharyEiiled,d6lmkqdhslomr6edlorqeEdimdmdl(diuEnyD.iileddde(trqicDubftalim,sicecpdrudpub&alim,
{o Panpoducr
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA4)
Page 2 of 9
rcflodued,h any Fiiled,geEa[i.B d mdl(dir! any Fiiled
w 2,40/oAIIll ER ICAN \IVATER NYSE.AWK
Target Price
2017 t2O18
128
96
80
64
40
40
32
?4
16
12
SATETY 3 k*rnsros
TECHNICAL 3 n ir.orBns
BETA .70 (1.m=Markel)
LEGENDS
-
0.85 r Divilsds D sh
divided bY ldsed RaE.... ReldiE ftte sks{thOnrim(: YB
lnrider Dcci3ionsFITAUJJASOtg8!y 010000000o?llqE 010030O40Olosdl 090300600 % TOT. REIUR'{ 12/14TES IAflrI{.'STOCX UD€I1yi 29.4 6.9
3 yL 81.2 73.7
5 yr. 176.3 107.3
102014 2020il 30a1alo8uy 22O 208 206fos.ll 177 194 189
CAPITAL STRUCTURE as ol 980/14
Totrl Dlbt $5910.2 mil. Due in 5 Yrs $1034.0 mil.
LT Dcbt $5540.6 mil. LT lntcrcst $278.0 mil.
(Total inleresl coverage:3.0x) (53% ofCap'l)
Lra$s, Unepilalizcd: Annual rentals $15.9 mill.
Prnsion Asscts 1213 $1383.6 mill
oblig. $1494.1 mill.
Pld Stock $16.0 mill. Pfd Div'd $.7 mill
Common Stock 179,309,045 shs.
a8 o, 10/30/2014
iIABKET CAP: $9.5 billion {Lrrsc Cap)
w45.7
s18.0
NMF
8750.2
9991.8
3.7%
9561.3
11059
4.4%
CURRENTPOS|T|ON 2012 2013 9/50n4($tlLL)
Cash Assets 24.4 27.0 74.1Olher 475.0 523.3 682.9currsntAssets -507 -sos- 757I
Accts PavablB 279.6 264.1 260.7
Debr Dud 38s.9 644.5 369.6Other 329.3 326.9 428.6
Current Liab. -9943- i2355- 1o-5s-9-
Fix. cha. cov. 297% 307% 305%
BUSINESS: AmtriBn Water Wo*s Cmptry, lnc. is ths hrgest
investor{wned v€tsr and wastewaler utility in the U.S., prwijing
services lo over 14 million people in over 40 stat€s and Canada.
(Rsgulated prsne in 16 ststs.) Nmreguhted busimss assisb
municipalitiE ard militay bases wih he maint8me and upkep
as woll. Regulaled operations mads up 89% of 2013 revenues,
New Jersey is its largest m*et amuntirE ftr 24.6% ot rovenues.
Has mughly 6,600 employees. Depmistion rate, 3.1% in '13.
BlackRmk, lnc., owns 10.5% of shar€s outstianding. Officers &
direcloF om 2.9%. 13111 ftory). Pr€s. & CEO; Susn Story.
Chaiman; Getrge Macksnzie. Addr.: 1025 Laurel Oak Road, Voor
hes, NJ 08043. Tsl.: 856-34&8200. lnlsrnet www.mwal€r.com.
American Water Works probably just
wrapped up a successful 2014. Man-
agement estimates that full-year earnings
per share will come in at $2.30-$2.35. Fol-
lowing last year's slight dip in the bottomline, this represents a nice recovery, espe-cially considering that the utility lost
$0.05 a share due to wet weather, and
took a $0.04-a-share hit as a result of a
chemical spill in West Virginia.
The year ahead should be even better.Share earnings Erre expected to reach
$2.60, a strong l3oZ increase over lastyear. A decent portion of the higher re-
turns will be a result of American Water's
continuing drive to improve its operating
margins through cost cutting and cost sav-
ings from acquisitions. Indeed, the compa-ny's expense margin has declined from
4lYo in 2013 to an estimated 38% lastyear. Moreover, we are expecting a l.5o/o
improvement in this ratio in both 2015
and 2016, which should lower the rate to
35% by 2017.Acqulsitions will remain an lrnportantpart of American Water's long-termplan. The water utility industry in the
U.S. consists mostly of small municipally-
run systems. As vast sums of money arerequired to finance the modernization ofan aging water infrastructure, more
cash-strapped local authorities are willingto sell their systems to bigger well-capitallzed utilities. And, while most pur-
chases aren't that large, consummating
about 30 mergers a year, adds up in the
long term.Strares of American Water Works have
been perforrning well. Since our Octo-
ber report, the price of the water utility'sstock has risen over l0oZ, compared to an
increase of about 4% for the broader mar-ket. Making this showing even more im-
pressive is that water utilities are usuallyconsidered defensive plays. Overall, the
stock price soared 3l% in 2O14, or about
twice that of the market average.
We think that these shares may take abreather. Despite our favorable outlookfor the company, the Timeliness rank ofthe stock has been lowered one notch to a
3 (Average). Moreover, the positive outlook
appears to be fully priced into the equityas its prospects through 2017-2019 arenow subpar.
James A. Flood January 16, 2015
ANNUAL MTES Past Past E3l'd '1lrl3
ofchangE (pcr !h) 10 Yr3. 5 Yrs. to'17i19Revenues -- 3.0% 4.5%"Cash Flow" 32.5% 3.5%Earninos 7.5%oivide;ds 8.0%
Book Value - - -.5A 5.5%
596.7 668.8 760.9518.5 745.6 &11.8636.1 724.3 82s.2 71
681.9 759.2 846.2 712.f05 810 890 t95
ilar.31 Jun.30 Seo.30 Dec.31
.28 .66 .87 .30.32 .57 .84 .33.38 .61 .87 .11.15 .70 1.00 .15
.n .4 .23 .23.23 .4 .25 .50-- .28 .28 .28.28 .31 .31 .31
(A) Dilutsd arnings. Excludes nmrecudng I Feb. OGnedy emings mey ml sm due to
losses: '08, $4.62; '09, $2.63; '11, $0.07. Dis- | rounding. (B) oiviiends Paid in March, June,
continued operalions:'06, (4C):'11,3r;'12,lSept€mber, and Dec8mber. t Div. reinv€st-(10r):'14, 3r. Next eamings reporl due early I msnt aEihble. Two payments made in 4th
qBrtar of 20
tangiblss. ln 2013: $1.21 billion,
(E) Pm foma numbers for'06 &'
o 20'15 tlalue LiE Prtashim l-tc. All dohs r6eoed. Fatul naBial is oblaiEd flom ffies befiwed lo be rc{able 8rd is mired rilhou mtrddes d w lind.
THE PUSUSHER tS t{OT RESPONSTBIEtOR ANY ERRORS 0R $flSSIONS HEREltl. Ihis publi@rion is $rirly
'q
$b$rlbe/s oin, m-cmmial hmt us. (0 pdr
otlmyberryod{€4regld,ssedqUansminedhanyFirfed,eledMtdothsrdm,dusedldgma[ngqmdetr{aoypdnteddtud*pub{calio,wiEqFdrucl.
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA4)
Page 3 of 9
AQUA AII|E llCA *tst.*u !Ei,'l' 2O.gS l'#r, 21.3 fi:lililifif)BE{Iffi 1.18 ffi 2,60/0
nMEUNESS 3 r*nosnltrr
SAFETY 2 nri*ommz
TECHNICAL 3 n irarzzsnr
BETA .?0 (1.00=Ma*et)
Higi:13.4 14.8113 2
14
23.4
16.1
21.3
'15.1
17.6
9.8 7
2
18.4
13.2
19.0
15.4
21.5't6.8 28.1
20.6
24.2
22.4 Target Price
2017
|
2018LEGENDS
-
1.60 r oividdvild bY lr re i'l!i 5-f(
sJd.t $h 12[3t.rd-3 sbh 12/05
s-fd-4 sblir 9/13
40
ZUI /.I9 PI{UJEU I IUN5
Ann'l TotelPrkr Gain RlbhHirh /t0 l+soY"l 11Y.L& 30 l+ tS%l 7%,,11 I'
lnsidcr DccisionsFIIAMJJASOtoBuy 0000000000plh6 320210100tosdl 1 4 1 3 1 1 2 1 2iNtituE;miE;;Eloreroatl ?020t1 3020raloBuy 130 127 139losdl 145 133 126Hlddoml 82758 8t$)9 aosrr
i.E#.itffij
':'d
X TOI
1 yr.
3 yr.
5 yr.
RETURT{ 12l1{fls [ffi.'iffi tE16.1 5.963.5 73.7
I 18.5 107.3
I
Percenl 15.shar6 10 -traded 5 :
1998 2000 2001 2f)02 2003 20o4 2005 2006 2007 2008 2009 2010 2011 2Q12 2013 2014 2015 9VALUE LII{E PUE. LLt 7-19
t.67
.49
.32
.n
r.93
.58
1t
.22
1.97
.61
.37
.23
2.16
.69
.41
.24
2.4
.76
.43
.26
2.N
.77
.46
,28
2.78
.87
.51
,a
3.08
.97
.57
,32
323
1.01
.56
.35
3.61
l.t0
11
.JO
3.71
1.14
.58
.41
3.93
1.n
.62
.44
4.21
1.42
.72
.47
4.10
'1.45
.83
.50
4.32
1.51
.87
.54
4.32
1.82
't.16
to
1.50
1.90
LN
.63
1.75
2.05
1.30
.69
Revenues pr sh
"Cash Flom" per sh
Earnings pr sh a
Div'dlhcl'dpersh B'
t65
2.9t)
1.55
.90
2.5t
.oc
2.74
,UJ
3.08
.ol
3.32
.YO
3.49
LU6
4.21
't.z:!
4.71
.41
5.04
t,b4
5.57
t.4il
5.85
t.au
6.26
t.bb
6.50
l.u9
6.8'l
I,gI,J
7.21
t.w
7.90
t.tJ
8.63
751.
8.e5
,.v5
9.05
uapl spenorng per sn
Book Value pet sh 11.00
,.9'
90.25 I 33.50 I 39.78 142.4 t 141.49 154.3r t58.9/l6t.2l 165.41 't6tr./5 l6[,21 r /u.6 1 1t2.41)I /3.6t)I 75.43 llls3 1t6.5t)115.W common shs o0tsl 110.w
zt.c
1.17
2.9%
<t,a
't.21
3.0%
to.z
3.3%
Lt8
2.5%
1.21
zJ.o
2.5%
l.E
6.O
1,40
2.5%
25.1
1.33
z,Jh
31.6
1.69
1.8%
Jq,t
1.87
1.8%
3Z.t)
1,70
2:%
zq.y
1.50
2.8%
n.
'1.54
3.1%
21.1
1.34
3.1%
zl.i,
1.34
2.ffi
zl.9
1.39
2.8%
:z1.2
1.19
2.4%
20.8
1.08
2.5%
AVg Ann t P,E l(,0o
Felstive P/E Ralio
Ava Ann'l Div'd Yield
at,7
1.35
2.6%
CAPITAL STRUCTURE as or 9/30/14
Tolal Dcbl $1653.6 mill. DUG in 5 YB $324.6 mill,
442.0
80.0
496.8
91.2
533.5
92.0
602.5
95.0
Q7.0
97.9
670.5
104.4
724.1
124.0
712.0
144.8
757.8
153.1
768.6
205.0
7W
215
835
2fr
Revenues ($nill)
l{et P'ofit 6miln
960
265
(total interest coverage: 3.9x) (49/o of Cap'l)
Pcnsion Asscts-l2/13 $232.4 mill.
oblig. $281.2 mil.
Pld Stock None
Common Stock 176,633,848 shares
.8 ol 10n4l14
UARKET CAP: S4.7 billion (Mid Cap)
39.4%38.4%39.6i%38.9%39.7%39.4%39.%32.9%39.0*
2.%
10.096
't.1%
15.r/,
2.0%
28.M,
2.e/.
ncomo Td Rata
\FUDC % to Nel ftofit
28.M
2.0%
50.0%
50.0%
tz.ut
48.0%
5t.bi6
48.4%
cJ.4rb
44.6%
bc.t )5
45.996
b5.brh
44I%
56.6%
43.4%
52.7%
173%
52.7%
4734
48.996
(l tq
51.0%
t9.00/.
51.e/o
l9.oa
.ong.Term Debt Ballo
hmmon Eoullv Ealio
SZrn
t8.0./.
t cvr.J
2069.8
I 6!'0.4mp I 904.4
2506.0
2t91.4
2792.8
it06.6
m7.4
zcu).5
3n7.3
zlw.z
3469.3 3612_9
zb4b.6 NN.7
3S62
JWJ.b
4't67.3 13tu
J'M)tJtalm rolar LllPmr (Imilu
{et Plent atmilt}
3950
5N0
6.7%
10.7%
10.7%
6.9%
11,*
fi.n"
6.4%
10.0%
r0.0%
5.996
9,7%
9.7%
5.7%
93%
9.3%
5.6%
9.4%
9.4%
5.9%
10.6%
10.6%
6.9%
I 1.6%
1't.6%
6.bx
1 1.096
11.0%
8.0%
't3.4%
13.4%
6,5V.
13.5%
t7 40t
9.0%
11.5%
11 \ol
tetum on Total capl
letwn on Shr. Equity
l.fien ^n affi Fd'itu
d,th
11.0%
1t nol
oUBRENT POSIT|ON 2012 2013 9rJ0n4($n[.r)
Cash Assets 5.5 5.1 4.8Fleceivables 92.9 95.4 105.7
lnvenlorv (Avocsl) 1 1.8 11.4 12.6Other " - 150.7 59.8 84.4
Current Assets 260-9 -711.7 -ffi6
Accts Pavable 55.5 65.8 48.9Debt Duti 125.4 123.0 93.6olher 93.3 7A1 92.9
curont Liab. -frm -7fids- 87
Fix. Cho. Cov. 4't3% 388% 389%
4.6*
57%
4.9%
56%
3.7%
63%
3.2%
67%
2.8i6
7W
2.7%
7m
3.7%
65%
4.5-96
60%
4.3%
61%
ti./%
5096
6.5%
5?/,
1.0%
53%
rmHrowmEq
tll Div'& to ilot Prof
o.uh
5E/,
BUSINESS: AqG America, lnc. is he holding compay tor water
ard wastewater utilities lhat srve approximatsly three million resi-
dents in Ponnsylvaniq Ohio, North Caroline, lllinois, Texas, New
Jersey, Florida, lndiaa, and five oth€r shtes. Acquir6d
Aquasour6, 7/03i Con$mers Wat8r, 4/99; and ohers. Water sup-
ply revenues '13: residential, 60.3%; commercial, 15.8p/6; indusldal
& oths, 23.9%. OrfieF and diroctore om .8% of th€ common
st@ki Vangurad Group, 6.6%; Shte Slreet Capital Corp., 6.3%;
Blackrock, lnc, 6.1% (4114 Prory). Chdrmn & Chiet Executivo 0f-f6r: Niciolas DeBensdictis. lncorporated: Pennsylvanh. Addres:
762 West Lan€ster Avsnue, Bryn Maw, Pennsylvanh 19010. Tel-
ephono: 6'1G52$,l400. lntem6l: ffi.aquameriB@m.
Aqua America should record solidearnings in 2015. The company probably
posted decent results in 2Ol4 as we think
earnings per share rose 3.4%o, to $1.20.This figure is much better than lt appears,
as 2013 was an outstanding year and com-
parisons with it are very difficult. Fueledby an expanding rate base (on which theutility earns a return), we expect share net
riod, the utilitys annual payout will likelybe hiked 9% annually, a level well abovethat of its peers.Nonregulated operations will proba-bly be affected by declining oil prices.Exploring for oil and gas domestically re-quires large quantities of water, which areusually shipped to the drilling site by
trucks. This is an expensive and cumber-
ANNUAL RATES Past Pasi Est'd'11113
olchange(pssh) 10Yrs 6Yr, b'1f19Revenues 6.5% 4.O% 5.0%
"Cash Flow" 8.0% 8.0% 10.5%Eaminos 8.5% 1 1.0% 8.5%Divide;ds 1.5% 7 .o% 9.0%Bookvalus 8.0% 6.0% 5.5%
Cal-
!nd8r
OUARTERLY REVENUES (T miIIJ
ilar.3l Jun.30 SeD.g, Dec.3'l
Full
Ycar
2011
2012
2013
2014
2015
la.6 178.3 197.3 172.7164.0 191.7 214.6 187.5
180,0 195.7 2U.3 188.6182.7 195.3 210.5 201.5,95 210 220 210
112.0
757,8
768.6
790
E35
this year.Acquisltions will continue to remain akey part of Aqua's strate&y. The U.S.water market consists of over 50,000
cedure by extending water pipellnes right
to the rigs. Energy producers are willing topay high fees for such a service. However,
y_llf, 9il prices having declined by about
C.l-
!ndat
EARI{IIGS PER SHAREAllar.3l Jun.30 SeD.o Dec.31
Full
Ya!r
InurllclPauy-r urr ursu-rcls, Ilany or wnlcnare financially strapped and don't have therequired funds to upgrade their anti-quated water infrastructure. Some arewilling to sell themselves to a well-
capitalized utility. Since there are many
redundancies in the business, Aqua is ableto integrate purchases and improve proflt-
ability by reducing costs. An estimated 20
acquisitions were made last year, and wethink that will represent the low end of
Aqua's long-term merger activity.Dividend growth prospects are excel-lent. Over the next three- to five-year pe-
JUTo Srnce lasf, summer, enefgy exProrafioncould fall substantially if crude prices do
not recover.Income-oriented lnvestors will findmuch to like about these shares. True,
the stock's yield is lower than the industry
average. However, buyers tlzpically have tosacrifice more current income to obtain awater utility with such robust dividendgrowth prospects. Indeed, the equity's cap-Ital appreciation and total return potentialthrough 2017-2019 are much higher than
others in the group.
James A. Flood January 16, 2015
zul
2012
201 3
2014
ml5
.18 .22 .24 .19.ls .24 .29 .19.26 .30 .36 .24.24 .31 .38 .27.27 .32 .10 .31
.UJ
.87
1.16
1.20
1.30
c€t-
rndar
OUARTERLY DMIDEi{DS PA|O s r
llrr31 .lh10 Qon'lo I'lan1l
Full
Ycar
2011
2012
201 3
m14
2015
.124 j24
.132 132.14 .14.152 .152
124 .132132 .14152 .152165 .165
.50
.54
.58
.63
(A) Dilut8d egs. Excl. nonrec. gains (losses): | €arnings reporl du€ mid February. | (C) ln millions, adiustsd lor stock spliE.'99,(9f);'00,2(,:'01,2A:'02,10i'03,31;'12, l(B)DividendshisloricallypaidinearlyMarch, I18r. Excl. gain frcm disc. operations: '12,7(, I Jtne, SepL & Dec. r Div'd. reinvestrnenl plan I'13,9r. May not sum due to rounding. Next I available (5% discount). Ic 2015 l/rblE Lire Pubtshino LLC. All doHs rNryed. Fatul mlsial is obtained rrcm suces bdi4ed to be refiable and is mired titEd mmdies ot aff lhd.
THE PUBLISHER lS l{OT RESPONS|ELEFOR At{Y ERRORS OR OMISSIOT{S HEREIN. Ttis Frbricarion is eridry
'd
rlbsrbe/s oim, mmmffiiat, hrsBtus. (o pafl
ol il my be reflodEed, resld, nded q ranililted h ily pdded, dedmic q othc tm, q sed lq gwalinq ff mdiding arry pdiled q d6loic Drrbtcalim, sie or goir6
Company's Financirl Strenlth
Stock's Price Stability
Pricr Growth PersistGnc.
Earnlngs Prcdicbbilily
100
60
95
F,btcalim,
ilo pan
godud
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-4)
Page 4 of I
ily Iri.'dy rd rbsrbe/s m,
g ff mdidnE any pdiled tr
0ALIF0RNIA \II/ATER NysE.cIl|T lB[iFl' 24,09 l'#,, 20.1 (x:llH;ffi)IEIATIVE { {{,ERAno l. I I i$' 2.9%
TIMEUNESS 3 naiseostzoril
sAtETY 3 L*r.Oinltor
TECHN|CAL 2 ni*orn6,u
BErA .70 (1.m.Maile0
High:r5.7i1a 19.0 21.1
15.6
22.9
16.4
22.7
17.1
23.3't3.8 24.1
16.7
19.8
16.9
19.4
16.7
19.3
16.8
23.4
18.4
26.4
20.3 Target Price
2017
12018
Range
t2019
LEGENOS
-
1.33 r Divid(
dvidcd bY li.... RelaliE Pric2-fq.l sph 6/'11Odim: YE
lged Rate, Suengrh
Br#sin
Ann'l Toiafticc Grin RctlnHhh 35 l+4sY"l 11o/"kiil 25 '(+5%l 1%
lo Buy0BioIb S.ll
' uqqgtona
FI'AMJJASO000000000010000100o00100000
I
% TOI
1 yr.
3 yr.
5 vr.
RETURN 12/14HS [m.';TH MEX9,7 6.948.1 73.757.0 107.3
L;
t
I
Percent 18shars 12raded 6
'al"*ti
.llnsfltuuonal DSctSlonst0ar4 20a1a 302011to8r,, 64 57 53los.ll 58 56 53Rtrdmf ,€Ao 269rA taq49
1998 1999 2000 200'l 20tJ2 201 2.l04 2f)lJ5 2006 2008 200 2010 201 I 2(J12 2013 2r)14 2(J15 gVALUE LII{E PUB. LL(7-19
7.38
1.30
.It
.54
7.98
1.37
.77
.54
8.08
1.26
.66
.55
8.13
1.10
.47
.56
8.67
1.32
.bJ
,56
8.18
1.%
.61
.56
8.59
1,42
.73
.57
8.72
1.52
.74
11
8.10
1.36
.6t
.58
8.88
1.56
7l
.58
9.90
1.86
.95
.59
t0.82
1.93
.98
.59
I.05
1.93
.91
.60
t2.00
2.07
.86
.62
13.34
2.32
r.02
.63
12.n
2.21
1.02
.64
12.fi
L10
1.10
.65
13.25
2.60
1.25
.67
levenues pcr sh
'Cash Flow" persh
hrnings per sh A
)iv'd Oecl'd per sh Br
,6.60
3.00
1.50
.95
6.6!
.371
6.71
I.72
6.45
t.:f,r
6,48
z.w Z.Jl
6.56
z,15
7.4
l.or
7.83 7.90 9.07
t.ff
9.25 9.72 't0.13
z.oo
10.45 10.76 11.41 12.54
z.#t.tu
13.U)13.55
Lnu npl Dpenorng psrsn
iook Velu H sh c
J.tu
16.N
25.24 2b.El 30.29 30.3t,lr0.ll6 :TJ.U6 36.73 36.78 41.31 41 3l 41.45 41 fl 41.67 41.E2 4l.s 41.14 1E"N 16,N ;ommon shs outsl xt.w
7.81
.93
4%
1.8I
101
4.0%
'ty.b
1.27
4.3%
27
1.39
4.4%
.1
,.08
4.5%
lv.6
1.26
4.4
u,t a.l
i.06
3.9%
1.33
3.1%
u.z
't.58
2.%
26.1
1.39
3.ffi
r9.6
1.19
3.1%
't.3 1
3.r%
1.29
3.296
zt.J
't.34
3.4%
I /.9
1.14
3.5%
zu.i
1.13
3.1%
tt.J
2,M
1.11
lvg Annl r,E xatro
lelalive P/E Ralio
lvo Ann'l Div'd Yield
lu.u
1.25
3.2%
CAPITAL STRUCTURE as ol 980/'t4
Tohl Dcbt $491.1 mill. Duc in 5 Yrs $89,3 mill ,AN
3n.7
27.2
334.7
25.6
367.1
31.2
410.3
39.8
449.4
40.6
460.4
37.7
50t.8
36.1
560.0
42.6
584.1
47.3
6fi
525.
635
60.0
levcnues (gnill) E
{et Profil6mill}
830
75.0
(LT interest earned: 3.4x; total int. cov.: 3.2x)
(4@/o ofCaP'l)
PBnsion Ass6ts-12/13 $266.2 mill.
Oblig' $383.2 mill.
Pfd Stock None
Common Stock 47,8O3,849 shs.
as ol 1OnBl14
MARKET CAP: $12 billion (Mid cap)
39.6%
3.2%
42.4%
J.J}
37.404
10.6%
39.9%
83%
37.7%
8.6ft
40.3%
7.8%
39.5%
4.2%
40.5%
7.6%
37.5%
8.0%
30.3%
4.3%
27.5%
2.0%
It.0%
1.5%
ncome Tax Rate
IFUDC % to Nel Profit
37.0%
5.0%
48.M
E0 f,pt
48.3%
51 t*43.5%
Itu
42.%
56.696
41.6%(t t{47.1%
E'ry
52.4%
47.M
51.7%&e{47.W
ECX
41.6%
trtq
10.s%
59.*l
10.5%
59.5c1
-ong-Tem lhbt Ratio
:ommon Eouft, Ralio
10.5%
59.5%
565.9
8{n 3
568.1
882.7
670.1
s41.5
674.9
1010.2
6!'0.4
1fi2.4
/:/1.9
'l.l98.'l
914.7ta4t wt.5
1381.t
y(.8.2
1457.'|
1024.9
't5t5.8
'tuN
1fl5
TUtt
1630
rolal uaprB (lm[r,
Net Plant &nil[1820
ttu
b.lh
8.996
00%
b.\rb
9.3%o2{
5.:&
63%Ag
c,fi
8.r%
8.1%
t.t;
9.996ou
D,5h
9.6%
OR
c,ai
8.6'96
naq
D.Ch
8.0%EM
o.J1
9.096
OM
o.ffi
7.996
7 Ca6
o.0h
8.5%
I 1.1
t.v7.
9.0%
o til
leturn on Total Cap'l
letun on Shr. Equityl.t'rn d am Enitu
7.0%
9.5%
o q.t
77%
2.th
78%
2.
85{A
r.urb .u,b
6't%
ir.6h
60q6
J.dh
6M
J.U'5
71%
zlh
62*
J.CA
5606
J.S)b
1vt
J.ah 4,37.
51%
rerarlEo ro uom Eq
lll Dlv'ds to l{et Prof
J,Clc
63%CURRENT PoSIT|ON 2012 2013 9/30/14($illLL.)
Cash Assets 38.8 27.5 29.5Other 1 07.8 112.0 147.8
current Assets t 46,6- t 395- T773-
Accts Pavable 46.8 55.1 71.9
Debt Dud 136.3 54.7 68.3orher 59.7 56.8 75.2
curent Liab. -2123 -1E63 -21s-3
Fix. cho. cov. 296% 301% 299%
breakdovi,n, '13: residenlial, 70%; business, 19%; public authodtles,
5%; industrial, 5olo; other 1%. '13 repoded depreciation rate: 3.8%.
Has 1,131 employes. Presidenl Chairman, md Chief Executive
Off@r: Peter C. Nel$n. lnc.: Delawe. Addr*s: 1720 Nor$ Firsi
Sbst, San Jo*, Calrdnia 95112-4598. Telephom: 408-367-
8200. lnternet w.cahflatergroup.@m.
BUSINESS: Califomia Watar Seruic8 Group providos rogulatod and
nmregulatod water s6Mca to roughly 471,900 customers in 83
communities in Califomh, Washington, New Mexi@, and Hawaii.
Main sNice arem: San Frilci$o Bay ares" Sacrmento Valley,
Salins Valley, San JGquin Valley & pans of LG Angsls. Ac-
quired Bio Grande Corpi W€sl Hawaii Utilitis (9/08). Hsvenue
Prevlouslv granted rate relief should resoectivelv. This rate was sisnificantlv
ANNUAL MTES P.st Past Est'd'1'l jl3
olchange (pssh) 10Yr3. 5YE. b'l7i19Bevenues 4.ol% 7.O% 5.M
"Cash Flow" 6.070 6.5% 5.5%Earnings 5.5% 4.0"h 7.5%Dividends 1 .O% 1.5% 7.0%Bookvalus 5.5% 4.5% 5.5%
help propel Californla Water ServlceGroup's earnlngs for the next fewyears. Utilities in the state are only aI-
lowed to file a petition seeking highertariffs every three years. Hence, the rela-tively favorable decision allowed by Cali-
fornia regulators last summer will have apositive effect on the company's bottomline through 2O17. ln addition, a mqjorpotential regulatory risk has been
removed for the next several years.We are ralsing our bottom-line es-tlmates for the company, yet again.Third-quarter earnings came in higher
than we expected, even thoush the recent
below the average of the typical water util-
ity. In the coming year, we are conserya-
tively estimating that there will be a $0.03(4.6"/o) increase, Furthermore, annualhikes through 2017-2015 could be in the
7o/o tange.California Water is not beingmeaningfully lmpacted by the area'ssevere drought. State regulators have
implemented rules so that water utilities
won't be penalized for a decline in waterconsumption due to conservation
measures. Also, future demand should be
met with water from the company's own
wells alonq with a dependable secondarv
Cal-
endar
OUIRTERLY REI/Ei{UES (l mill.}ellar3l Jun.30 Seo.$ Dec.31
FullYrar
2011
m12
2013
2014
20.l5
98.1 131.4 169.3 103.0
116.8 143.6 178.1 121.5
111.4 154.6 184.4 133.7
110.5 158,4 191.2 139.9125 160 200 150
501.8
s60.0
584.1
60061(
Csl-
cndar
EARilIt{GS PER SHAREA
M8r.3l Jun.30 Seo.30 Dec.3l
Full
2011
2012
2013
2014,0tq
.03 .8 .50 .04.03 .31 .56 .12.01 .28 .61 .12d.11 .36 .70 .15.03 .32 .75 .15
.86
1,02
r.02
1.10
1.25
rate hike was only in effect for part of thequarter. Expectations for the year-ending
period are favorable, too. All told, share
net should probably reach $1.10, a 7.4Yoin.rFesc over 2Ol3's rrninsnirinq showino
source that sells its bulk water. Moreover,
any change in the price of water will just
be passed along directly to consumers.
These shares do not have much to of-fer- Desnite a strons halance sheet and
Cal-
cndal
OUARTERLY DMDET{DS PAID s.
Urrll -h'nm eans rlarll Full
Ya!r In 2015, with the rates iir effEct for tfieentire year, a 13.6% hlke in earnings per
share, to $1.25, is possible.
Dlvldend growth should accelerate aswell. Over the past five- and ten-year pe-
riods, Californla Water's annual dividend
payout averaged a meager 1.0%o, and, 1.5%,
solid dividend growth prospects, the recent
strong price showing by the equity of Cali-
fornia Water has greatly reduced its near-term attraction. Moreover, total returnpotential through 2017-2019 is below aver-
age for a stock followed by Value Line.
James A. Flood January 16,2015
ffil
2012
2013
2014
201 5
154 .154 .154 .154
1575 .t575 .1575 .157516 .16 .16 ,16
1625 .1625 .'1625 .1625
62
,63
,64
.55
aAl Bsic EPS. Excl. nonrecurino @in 0o$): INov. r oivd reinvesiment plan available.
Oti, (lr); 'Ot, zr: '02.4i: '11, afli,l'ext iam I (c) lncl. intangible assets. h '13: $18.2 mill..
ings report due mid-February. P) Dividerds | $0.38/sh.
h6tori(hly paii in late Feb.,'Lliy, Aug., and | (D) ln milftons, adjusled tol sPlits.
non-Ieg. rev.uomPany 3 Hnanctat ursngrn
Sto6k's Prlcc St bllIry
Pric. Grow$ PGFistrnce
E.rninEs Prcdiciability
u++
95
40
90
2015 lrbbe tire PuHishiro LLC, Alt dttns Eiled. Frctal mtdhl E otiained frm sMces bdreved lo be reliable ard is gwired widDd wranliE d arry thd.
tE PUBUSHER tS NoI RESpOitStBLEtoR ANY ERRoRS 0R OtullsstoNs HERElil. Ihis Fblidi,n is nrilty lq $bsibe/s om, Mercial, htsmtu*. fto pad
itmybeqrcduced.mld,srqeddtresdttedh&yFired,eledrmicdothstum,qu$dlqgwalingqMletingaoypdrl€dq€ledrdicFblElir,stedprodd
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA-4)
Page 5 of I
C0NNECTICUT \II/ATER *ro"*'RECEI{T
PRICE 35.1 I l'd[,' 1 8,4 fillilfl 33)
REIATM { ^NP/E RAn0 I .UZ ?H 3,0%
nMEUilESS 3 Lo*e,eOrmt/',H
SAFETY 3 r*uanr
TECHNTCAI 2 n i*arnars
BETA .65 l'1.00=Marlct)
Higt:30.4 29.4,AA 28.2
21.9I 27.7
20.3
25.6
22.4
29.0
19.3
26.4'17.3 27.9
20.o
29.1 32.4
26.2
36.4
27.4
37.5
31.0 Target Price2017
I
2018
Range
12019LEGENDS
-
1.30 r Divi,dividd br lr.... RelaiivePri(
ds plh
Srs$
ZUI '-II THU.JEU I IUNI
Ann'l TotaPric! Gain RctumHioh 50 l+4octt"l 12%kto 3s (Nlrl 3%
_, t.---t
lnstder uaclstonaFIAilJJASObBuy 0000000000db0 000000000los.ll 000oo0000
1t
:i=.-.
.i:i:z
L,.
L
F
I
Percent 12,shar6s 8 'rad€d 4'
I
%TOI
i yr.
3yL
5 yr.
REruR'{ 12/14Tf,S ftAilm'iT@x txEx5.3 6.947.0 73.773.5 107.3
rnstrruuonat usctSton3
t0mt4 2q201{ 3o2m{toBuy 44 40 50los.ll 27 32 34ll4d00l a24 ao4 42*
1998 1999 2d 2001 02 2003 2oo4 to 2011 2(J12 2013 2014 201 5 gVALUE LIIiE PU8. LL(7.19
5.58
1.59
1.02to
5.87
1.65
1.03
.79
5.70
1.73
1.09
.79
5.93
1.78
't.13
.80
5.77
1.78
1.12
.81
5.91
1.89
1.15
.83
6.04
1.91
r.16
.84
5.8'l
1.62
.88
.85
5.68
1.52
.81
.86
7.05
1.90
1.05
.87
7.24
1.95
1.11
.88
6.93
1.93
1.19
.90
7.65
2.04
1.13
,92
7.93
2.11
1.13
.94
9.4i
2.il
1.53
.96
8.29
2.63
1.66
.98
8.95
2.90
1.90
't.01
9.25
3.10
2.N
1.05
levenues pel sh
'Cash Flow" persh
:arnir€s per 6h A
)it'd Decl'd persh B'
12"50
3.10
2-15
1.20
8.52
1.12
8.61
L90
8.92
t.ub
9.25
,98
1 0.06 10.46
49 t.$
1 0.94
l.Yo
11.52
t.w
1 1.60
ztq
11.9s 12.23
J,ao
12.67
J.W
t3.05
t.ot
13.50
t.tJ
20.95
J,Vt
17.n
a.7v
18.85
a.o,
19.80
;ap'l spending persh
lookvalueDersh D
t,w
21.65
6.80 7.26 l-a 7.65 1.94 u.t4 u.l /6.21 U.3U u.4ti u.5/u.6u 6. iro U.E5 l t.u4 11.15 11.J5 ;0mm0n sht 0utst lz.ql
.81
I C.a
4.9%
ta.z
4.*1.04
4.0%
t6,t
t.18
3.3%
t.10
4t.c
1.33
3.0%
6.5
1.34
3.096 3.t%
1.21
'2..v
3.496
zu,o
1.52
J.OA
t.57
4,V
3.696
1.4
tt,u
3.6%
1.34
4,t
4.1%
123
lu.c 'il.t
3.9%
1.32
zJ.t)
3.6%
1.41
4t9.
1.n
3.X
16.4
1.03
3.X 3.0*
'u.t
.92
AVg Ann r rrE xauo
Relative P/E Ratio
lvo Ann'l Div'd Yield
tv.u
1.25
2.8%
CAPITAL STRUCTURE !s ol 9/30/14
Tot8l D.bt $175.6 mill. Duc in 5 Yrs $18.6 mill.
48.5q4 47.5 46.9
67
59.0et 61.3o,59.4
in t 66.4
c8
69.4
00
83.8
13.6
91.5
18.3
1U)
21.0
105
22.5
Revenues ($mill)
Net Profit (tmill}
15fr
26.0
Ootal intergst @verag€: 4.4x)
(45% of CaP'l)
Lla$s, Unepibliz.d: Annual rentals $.1 mill.
Pension Assets $56.8 mill.
0blig. $e.2 mill.
Pld Stock $0.8 mill. Pfd Divd NMF
Common Slock '11,'112,589 shs.
a8 ot 10/31/14
MARKET CAP: $4m million (Small C!e)
u..%-zJ.5h 32.4%-.%27
't.7*
rY.b%-35.296 41.3%
t.7*
SLIJt 28.0%
,M
19.t4
.5R
N.511
2.O/.
ncome Tax R8te
IFUDC gto ih Proft
30.5Y.
2_04
lZ.th
56.7%
s,s
54.6"i
44.4%
55.1%
47.8%
51.8%
46.9%
52.7%
au.ob
49. t%
4V.th
50.2%46.5%
c{r.eb 4V.ub
50.8%
4b.vf,
52.996
tl'.7h
51.504
al,w.
53.0%
.ong- tem ueol Halo
)ommon Eouilv Balio
lE.W,
52.0%
155.1
24$,1
7.096
112.3
247.7
5.095
174.1
268.1
4.996
193.2
n4.3
5.5%
196.5
302.3
5.!l%
221.3
325.2
5.5%
4C.O
344.2
5.4%
254.2
362.4
4.9%
30r.6
447.9
1.8%
3/3.6
471.9
5.9*6.M
385
5N 530
425
6.0%
rffir HpEr (untru
I'l€t Phnl ($mil[
Relum on Tolrl CaD'l
u
580
t \./,,
't0.61
,r0 69(
7.5%
76q
6.9967ru 8.7%
97q
9.0%ol{9.3%
q4%
8.6%8rt 8.3%
8,3%
7.3%
7.3%
92%
9.&
10.0%
10.0%
10.W.
10.0%
letrn 0n shr. Equtty
letun on Com Eouitv
IU,W.
10.ut
3.1%
71%
.Jh
95%
NMF
t05%
'|.6%w 1 .9%
79%764
2.Jh .5%
81%
1.4%
83%
2.8%
62*
3.8%
5996
1.5%
5?t
5.0%
5?/,
tetaircd to Com Eq
lll Div'ds to lht Prof
s.5%
$etCUERENTPOS|TION 2012 2013 9F0n4
6m[L)Cash Assts 13.2 18,4 1.6
Accounts Receivabla 1 1.5 12.3 13.0Other 11.7 16.2 24.7
CurreniAssets - 36,4 - 46.9 --EE3
Accts Pavable 10.0 10.8 9.0
Debt Duri 3.0 4.1 2.2Othsr 2.9 7.8 9.9
curont Liab. --iii --ni --fr1
Fix. Cho. Cov. 4oa% 375% 375%
BUSINESS: Comocticut Water Ssruie, lnc. is a nmoperating
holding company, whose income is derivod from earnings ol ib
wholly-owned subddiary companies (regulated wator utilili€s). lts
largsst subsidiary, Connecticut Watsr, a@unted fd about 85% of
the holding ompanys net income in 2012, and provides ffiter
$ryices to 4m,000 psple in 55 towns $rot ghout Connscticul ad
Maim. Acquhsd Th6 [rains Water Co., 1/12; Biddetord and Saco
Walet, 12112. lnc.: CT. H6 about 260 smployes. Cheir-
mary'Presidsnt/CEo: Eric W. Thomburg. Orfi€rs and diroctors own
2.4% of th€ common stmk; EackRock, lnc. 7.3%; The Vanguerd
Group, 3.8% (4/14 prory). Address: 93 W6t Main Street Clinton,
CT 06413. Tslephono: (860) 6698636. lntsrnet: www.ctwater.com.
Connecticut Water Service probablyc-:-L^i &,1 ,nt i TL--L-tal spendlng. Entering 2014's fourth
ANNUAL M1ES P.st PASI fuT'd'IIJI3
of chlnee (prsh) l0 YB. 5 YB. b'l?rigRevenu€s 4.M 5.0% 6.5%
"Cash Flow'' 3.0% 6.5% 5.5%Earninos 2.5% 8.0% 7.0%Divid6;ds 1.5% 2.0% 4.0%BookValue 6.0% 8.0% 3.5%
to a deal reached in 2013 with Connecticut
regulators, the utility agreed to lower cus-tomers' bills and delay seeking higher
rates in return for being allowed to hold onto an IRS tax refund. In addition, Con-
ital ratio stood ai """"t'il;h;;i;5%;-ternally generated funds will probably notbe sufficient to cover the capital budget
over the next three- to five-year period. Is-
suance of new debt will be required and
Cal
cndat
OUARTERLY REVENUES (T miII.}
ilar.3l Jun.30 Seo.30 Dec.31
FUII
Ycar merging the two utilities that it operatesin Maine. All told, we think that sha-re net
probably rose a robust 14%, to $1.90.Bottom-llne gains should moderatethis year. A recent petition for higher
rates in Maine and the ongoing tax bene-fits should enable share earnings to rise
$0.10, or SYo, in 2O75. If not for the diffi-
may decline somewhat, but it still shouldremain in relatively good shape.Two future projects will increase thecompany's revenues. Pipelines are being
extended to include the town of Mansfield
and the main campus of the University ofConnecticut in Storrs to expand Con-necticut Water's service area.
zu] r
2012
2013
2014
2015
16.0 17.4 20.6 15.4'l8.5 21.3 24.5 19.519.7 n6 27.6 21.620.3 27.3 N.4 23.02L0 28.0 32.0 23.0
69.,
83.
91.
100
105
Cal-
cndar
EARIIIiIGS PER SHARE A
Mar.31 Jun.30 Sep.30 Dec.3'l
Full
Y?ar
2011
2012
2013
2014
2015
.26 .37 .39 .11.n .47 .67 ,17.24 .39 .86 .17.27 .57 .76 .20.35 .60 .80 .25
1.13
1.53
1.66
1.90
2.00
ber would be more impressive.Capital expenditures are expected torise a sizable 2O% ln 2O15. Like most
water utilities, Connecticut Water is in the
process of upgrading an antiquated infra-
structure. We estimate that about $46 mil-
appeal. Like the rest of the sector, thestock of Connecticut Water has out-performed the market by a wide margin
since our October report. Hence, the equityis now less attractive on a relative basis.The Timelessness rank has also beenCal-
cndar
0UARTERLY DIVIOEi{DS PAID s.
U.rt{ l,^s CAnm n.^21 Full
Yrar
2011
2012
201 3
2014,nl E
.233 .233 .A8 .n8.zts8 .239 .2425 .2425
.2425 .2425 .2475 .2475
.2475 .2475 .2575 .%75
.94r
.90
.98
1.01
The company has announced plans to in-
crease this total to $55 million this year.Connecticut Water's finances shouldbe able to handle ttre additlonal capi-
prospects to 2017-2079 are now well belowaverage compared to other stocks in the
Value Line universe.
James A. Flood January 16, 2015
(A) Dilulod samings. Nexl snings repod duo lJune, SsPlsmber, and De@mber. t DiVd reir lliory$2.87 a shile.
eady February. Qurtorly eamings do not add I veslment Pla avaihble. Iin '12 due to rcunding. I (C) ln millions, adiusted tor split. I(B) DMdends historically paid in mid-March, l(D) lncludes intangibles. ln "13: $31.7 mil- |
u9mpeny s rrnanctat ltnngln
Stock's Prico Stlbility
Pricc Growh Pcrsistcncc
Earninm Prodictabilitv
6+
90
50
85
o 2015 lhlue l-ine Publishim ttc. All dohts resNed. Fadual malqial i5 otMined from sources beleved to be reliable and h D@ftred wittDd wsranties of aN kind.
THE PUBLTSHER tS NOT RESPONS|BLEIOR AtiY ERRORS OR OMISSIOI{S HEREIi{.Iis publicatim is griLu fo subsibe/s oia ffimffikl, hrsnatus. (o pan
dlmyberegodEilmld.nmdqran$lledhmlFirre4eledotddhsbm,qusedlqgffilingqMtdingilypirnedqelEtuicrubftabtsierfdtno
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA4)
Page 6 of 9
ltllIDDLESEX IfllATER NDo.ilsil lfrf'T' 22.07 l'#,0 1 9,5 fi$fll il:l)BEflIHI 1.08 DIT/OY[)3.5%
TIMELnESS 3 trrer.omtnr
sAtETY 2 nnfi:ant
TECHNICAL 3 t*rt ogno,u
BETA .70 (1.00=Mafie0
High:21.2
15.A
21.8 23.5
17.1
20.5
16.5
20.2
16.9
19.8
12.0
'17.9
1'1.6
19.3
14.7
19.4
16.5
19.6'17.5 22.5'18.6 23.7
19.1 Target Pric€2017
12018LEGENDS
-
'1.20 x oMdl
divided bY knire{ tiite
3{d'2 $lit 1/024{q.3 sblir t1/03Oolirrc: Nolhtu ,re, dbd* ffisinzutr-tt rhudEr,iluNJ
Ann'l TotaPrice Gain nctumH'Eh 30 (+35%l 11/.Ldw 20 'r-10%l 20a
to 8uI0ib6
lo S.ll
' ueq9tonsFTIAMJJASO0002000100000000000001ooo10 *..:j
% TOT.
lyL
3yL5yr
RfruRil 1214m [tm.'iTc( tM14.2 6.938.4 73.?58.9 107.3
I
Percent 12.shar6 8 -tradod 4 '
lnsuu[onal uect$on3loata 202014 gDo,aloBuy 37 41 32tosCl 34 34 40
t99E 1 999 200(,2001 20,02 2003 2rlrl4 2of)7 2011 2f)12 201 3 2f)14 201 5 @,LILtt /-1 I
4.39
1.02
.71
.58
(t(
l.t9
.r0
.60
(10
m
.51
.61
5.87
1.18
.66
.62
5.S
1.20
.73
.63
6.12
1.15
.61
.65
6.25
1.8n
.66
6.44
1.33
.71
.67
6.t6
133
.82
.68
6.50
't.49
.87
,w
6.79
1.53
.89
.70
6.75
1.40
.72
.7'.|
6.60
1.55
.96
.72
6.50
1.46
.84
.73
6.98
1.56
.90
.74
7.19
1.72
1.m
.75
7.30
1.80
1.10
8.U)
1.9)
1.15
.77
Reveilas per sh
'Cash Flo#' por sh
Earnin$ por sh a
0iv'd Decl'd Dersh B'
10.N
2.15
1.25
.83
z.oE
6.80 6.95
z.dJ
6.98
.32 .251
7.11
L5V
7.39
t.6I
7.60
.,7
8.02 8.26 9.52 10.05 10.03
t.+v
10.33
t.vu
11.13
l.w
11.27
t.Jo
I 1.48
Llo
11.82
1.JV
1215
a,w
1L30
Grpl Sp€nding Persh
BookValueD€rsh D
t,uu
13.25
9.U2 t0.00 r0.t I 10.'tl I U.36 IU.4U l.irb 1.58 13.17 t3.25 13.40 r3.52 15.5/I b./u I 5.62 15.*i r0.7t 1lt--t}uommon sns unst 7l.w
lt.z
.79
5.4%
7.61
1.00
4.4%
'4.t
1.87
4.%
24.6
1.26
3.46
ft.a
128
3,r*
1.71
il.u
3.5%
&.{
3.4%
1.39
3.5%
1.46
3.7%
1.n
at,0
't.15
3.7%
tY.o
t.19
4.096
z t,v
t.40
4.7%
i r.o
1.13
4.X
tt.t
1.36
4.0i
d,6
1.32
4.0%
IY.'
1.11
3.1%
I'U
.99
3.5r[
AVg Annl rrB MUo
Belative P/E Ratio
Avq Ann'l Div'd Yield
tl.u
1.30
3.3%
CAPITAL STRUCTURE ss ol 9,80/14
Totrl Debt $165.3 mill. Duc in 5 Yrs $56.4 mill.
71.0nt 74.5
A5
81.1
10.0
86.'l
I 1.8
91.0
12.2
91.2
tn n
102.7
t, e
102.1
ia,I 10.4
lat
114.8
iAA
118
,74
125trt Revenues omill)
tlet Profit 6m[n
154
24n
(LT interest eaned: 6.0x)
(40/o ofCap'l)
P.nsion Asset8-12/13 $116.4 mill.
Oblig. $56.0 mill.
Ptd Stock $2.4 mill. Pfd Div'd: $.1 mill.
Common Stock 16,1 1 1,268 shs.
.s ol 10/31/14
MARKET CAP: $350 million (Small Cap)
Jt.rt zl.bh 33.4%32.6%s.rt 34.1%_t%32.
6.896
nz.t'b ,rJ.lrb
3.4%
ir4.lh
1.9%
g.Jh
1-5%
Ja.W.
1.5%
rEome lu ltSrc
IFUDC % to Nct Profit
u.fa
2.0%
53.8%
42.5%
55.3%
41.3%
49.5%
475%
49.096
49.606
45.6%
51.8%
46.6%
52.1%
43.1%
55.8%
42.3%
56.616
4t.5%
57I%
40.4%
58.7%
40,u/t
59.f/.
lZf/o
57.V/
,n9- lem r[ Hflo
hmmon Eouitv Ralio
1J.17.
56.rt
214.5
262.9
5.'l%
?31.7
288.0
5.0%
zb4.u
317,1
5.t%
ZbU.U
333.9
5 894
N9.4
366.3
5.8%
267.9
376.5
5.0%
310.5
4()5.9
5.7%
312.5
422.2
5%
316.5
435,2
5.4%
321.4
446.5
5.9%
330
160
6.0%
350
170
6.0%
robl Capital ($mill)
{et Plrnt 0mll0
letum on Total CaD'l
1N
500
t 4rl,
8.5%q0c 8.%qg 7.5%7W 8.6%lu 8.6%eq 7.0%7ru 8.1969ry 75%
t.5%
7.8%
7i%
8.7%
8.7%
9.0%
9.0%
9.5%
9.5%
letrn olr She Eryity
letun on Com Eodtv
9.5%
9.5%
,9b
s0%
.b-b
94%84%
.3%8%
7
z,w
78%
Ih
s8%75%
z,\h t.ffi
87%
1.4%
83%
2.4%
73%
tara
6901 676t
3.tt/o tetairEd to Com Eq
\ll Div'ds to Net Prol
3.Ut
66%CURRENT POSIT|ON 2012 2013 9/30/14
($lllLL.)
Cash Assets 3.0 4.8 5.1Other 21.6 21.0 23.7
current Assets 24.6 -,5Z 2&8
Accts Pavable 3.8 6.3 7.2
Debt Duri I 1.1 33.8 36.1Other 4l .1 12.6 13.4
Current Liab. -i6.o- -TZ:7 --E67
Fix. Chq. Cov. 554% 697% 695%
BUSINESS: Middlesex Watsr Company engages in the ownership
and operation of rsgulated water utility systms in N€w Jersey, Del-
awae, and Pennsylvilia. lt also operates mler and wstervaler
systems under contBa on behalf ol municipal ard pdEto clients in
NJ ard DE. lts Mudl6ex Systsm prwid€s mter swicss to 60,000
retafl customers, primrily in Middlesex Counly, Nil Jsrssy. ln
2013, the Middlesex System accounted ,or 60% ol operaling rsvs-
n$s. At 12131/13, lir6 company had 279 smployses. lncorpoated:
NJ. Prsiiionl CEO, and Chairman: Dennis W. Doll. Offiere &
directors om 3.3% of the mmmm stock; BlackRek, 7-4%;
VilgBrd 3.3%. (4/14 prory). Add.: 1500 Bonson Rcd, l*lin, NJ
08830. Tel.: [phone]. lnternet m.midd€$xwater.com.
Middlesex Water Company has an in-credibly consistent dlvidend policy. Inlate October, the company raised its divi-
dend by one-quarter of $0.01. For the full
year, the increase works out to one cent.This marks the 12th straight year inwhich the utility has raised the annualpayout by $0.01.Conslstency ls not alwavs a sood
ed, this was a good showing, consideringthat the company lost its largest client (aHess refinery) and the borough ofSayreville less than rwo years ago. In
2015, the increase in proflts will probablybe less impressive, as we estimate only
calls for a 4o/o-1Yo advance in share net to
$ 1.15.
The balance sheet may be small but it
ANNUAL RATES Prst Pasl Esl'd '11113
otch.n!6 (per sh) 10 Yrs. 5 YB. to l7rl9Revenues 1.5% 1.0% 6.5%"Cash FloW' 3.0% 1.5% 5.5%Earninos 3.5% 1.5% 5.O%oivide;ds 1.5% 1.5% 2.o%Book ValuB 4s% 3.0% 2.5%
Cal.
cndar
oUARTERLY REVET{UES ($ mill,)lrar.3l Jun.30 Sep. $ Dec.3'
Full
Yrar
20tl
m12
2013
m14
mt5
24.0 26.1 28.7 n323.5 27.4 32.4 27 .127.0 29.1 31.3 27.427.1 n.2 32.7 29.029.0 31.0 31.0 31.0
102.r
110.,
114.t
118
125
characteristic for a company. -The
latest dividend hike represents a paltry
1.3% yearly hike, compared to the industryaverage of over 60/o. Indeed, this
represented the lowest rate of growth ofany regulated water utility in the indus-try. What's more, we don't anticlpate any
change in Middlesex's one-cent-a-year phi-
losophy until 2016 or 2O17.Near-term earnings prospects are notbad for a water utllity. Even though weare not looking for a great comparlson inthe fourth quarter, better-than-expectedresults in the Seotember neriod were nroh-
is relatively solld. With net plant just alittle north of $450 million and total capi-tal of only about $330 million, Middlesexhas better than average financial metrics
compared to the rest of the industry.More attractlve candidates can befound for ttrose investors lnslsting onbelng involved in the water utility in-dustry. If a water utility stock must be
selected, we think that most currentvaluations in the group are too high. More-over, Middlesex would not be our recom-
mendation. Typically, utilities with subparrilvidend srowfh nrosnecl's mlrst .om-
Csl-
rndrr
EARNINGS PEB SHARE A
Mar.31 Jun.30 Seo.30 Dec,31
Full
Yc!r
2011
2012
ml3
2014
2015
.11 .23 .32 .12.11 .23 .38 .17.m .28 .36 .19.20 .29 .42 .19.21 .31 .43 .20
.84
.90
1.03
1,10
1,15
&t-
cndal
OIJARTERLY DlVlDEl{DS PAID Br
Urr2l Lr^2n Ca.ln n.^21 Full
YaEl
mll
m12
201 3
201 4
2015
.183 .183 .183 .185.185 .185 .185 .1875.1875 .1875 .1875 .19.19 .19 .19 .1925
.tJ
.74
,75
.76
ably enough to enable the company to earn
$1.10 a share, a solid 7% increase over
2013. Modest rate increases in both New
Jersey and Delaware were most likely be-hind most of the gains. All things conslder-
pensate buyers by having a much higheryield. Middlesex's yield does not appear tobe high enough to make up for its poor div-
idend growth prospects.
James A. Flood January 16, 2015
(A} Diluted earnings. [,lay nol sum due to | [,lay, Aug., and Nov€mber.r Diyd
rounding. Nexl earnings report due mij- | phn available.Fabruary. J (C) ln millions, adjusted for splits.(B) oMdends historically paid in mid-Feb., I
Comp.ny's Fin.ncirl Stnngth
Stock's Pric. Stability
Pricc Grow$ Persist.ncc
E.rnlno3 Predictability
B++
95
40
80
o 2015 l,/blE tiE Publishim LLC, All dohls rwryed. FaclEl mBid h obbined from sMes befiwed to be rdiable and is qoided widql watrailiE ot aN kind.
THE PUBUSHER rS r{OT RESPONS|BLEtOR ANY ERRORS OR oMISSIONS HEREIN. ftis publcaion is suic{y
'q
ilb$fters oi!, mcmqciat, intmt u*. (o par
nl il mv b ,pdtr.ld re$H <od d rardd h ril iliid eledmnic tr olhs lm- tr used lff 0ffielino or Mdind ,ny iliild ar ffid nntr.rrh sd! r m;l'Hpublelim,Io part
Fodud
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA4)
Page 7 of 9
my be rcFoduced,Bny p*red,gwating or Mteling any Finled
SJW CORP NYSE.SJW ffii,'l* 32,02 l'#r,
,|
1,6 fi:Xilfl lli)[.flffi 0.64 ?b' 2.5%
TIMEUIIIESS 4 rmredl2/r9111
sAtETY 3 H*mar
TECHNTCAL 2 n inornns
SEIA .85 {1.O=Mafta)
High:15.0 19.6 27.
16.
45.3
21.2
43.027.7 35.'t20.0
l;ti:ti,i
30.4
18.2
25.221.6 26.820.9 26.922.6 30.124.5 33.7
25.5 Target Price
2017
lI2018
LEGENDS
-
1.50 r Divid(
divided bY li.... RelativePric
3-td.1 elit 3O{
2-td-1 sbh 306Ooris: No
ds psh
) Slrength
tbs B6sin.UI '.IY TNVJEU IIUtrD
Ann'l TotaPricc Gain RchnnHioh 45 l+4O7"1 11%I ^; 2n ' ,-a{l 1o/-20
' uect9longFI'IATIJJASO000110r10000000000o00000010
to 8uloplint
b sdt
10
Lr.s
tPscentshar€sraded
15-
10 -5-
$'; L..Y)si
%TOI
lyL
3yL
5 yr.
REIURN 12,14fls nffi.'ilocr tEr0.8 6.947.8 73.764.0 107.3
lnstltu$onel uGct9lona
r0201a Nl2ola o?0r1bBuy 92 45 3atosdl 39 40 45
1998 't999 2000 2001 2002 20,04 2006 2o,f)7 2008 2009 2010 2011 2fJ12 2013 2(J14 201 5 qVALUE LINE PUE. LL(7-19
5.58
1.26
.76
.39
6.40
1.43
.87
.40
6.74
1.8
.58
.41
1.45
1.49
.77
.43
7.97
'1.55
.78
.46
8.20
L/C
.91
.49
9.14
1,89
.87
.51
9.86
2.21
1.12
,53
10.35
2.38
1.19
.57
11.25
2.30
1.04
.61
12.12
2.44
1.08
.65
11.68
2.21
.81
.68
11.62
2.38
34
.68
12.85
2.fi
1.11
.6S
t4.01
2.97
1.18
.71
r3.73
2.90
1.12
,t85
1.10
2.60
.75
t1.75
3.35
1.15
.79
levenu€s per sh
'Cash Flo#' per sh
:arnin$ per sh A
)iv'dlhcl'dpersh st
17.15
3.85
1.70
1.00
1.81
7.53 7.88
E9
7.90
2.il,
8.'t7
z.@
8.40
J.{r
9.1'l
2.J\
10.1 I
.83
10.72
2 J,U I
12.48
b,bz
12.90
J,/U
13.99
J.l /
tJ bb
i.bi
13.75
J,/5
A.n
b,b/
14.71
q.b6
15.n
1.0u
17.55
t.ta
18.55
ap r rPenorng Per sn
look Value o€r sh
J.UU
20.t0
l9.ul 16.21 18.2t 1ts.2t 14.2t 'l6.zl 18.2t 18.21 18.28 lB.ltti IU.IU rE.50 ru.5o r E.5g lu.ii/L4J.1 I 20.x,21.w ;ommon shs ousl 23,N
13.
_68
3.9%
rt.c
.88
3.0%
I33.
2.15
2.1%
lu,c
.95
3.e6
17.3
34
3,4%
.88
tc.q
3.5%
tv.o
1.04
3.096
19./
1.05
2A%
zt.5
1.27
2.W
JJ.4
1.7%
:zb.z
1.58
2.3%
'4.1
1.91
2.8%
29.
1.85
2.ffi
z1.z
1.33
2.9%
'a).4
t.30
3.P6
:z4.;t
1.36
2.7%
7U,t
.57
2,64
rvg Ann t HE Kauo
lelative P/E Ralio
\v[ Ann'l Dit'd Yield
lLu
t.l0
2.7%
CAPITAL STRUCTURE as ot 980/14
Total Debt $393.3 mill. DUG in 5 Yrs $21.2 mill.
166.9
tA n
1&,1
n.7
18S.2
n.2
206.6
19.3
m.3
n.2
2t6,1
15.2
215.6
15.8
239.0
20.9
261.5
u.3
276.9
23.5
325
52'0
310
30.0
lcvenues (Snilf
'LJ Prnfil llfriln
395
39.0Ll uebt $364.5 mril. LT Intersst $',lE.l mill.
(Total interest coverage: 2.9x) (5ry0 of Cap'l)
Leascs, Uncapitaliz.d: Annual rentals $5.5 mill.
Pension Assrts $91.4 mill.
oblig. $128.7 mill.
Pfd Stock None.
Common Stock 20,238,134 shs.
as ol 10124114
MARKET CAP: 0550 million (Small Cap)
42.1%
2.1%
41.616
1.6%
40.8%
2,1%
39.496
2.7%
39,5%
2.3%
40.4%
2i%
38.8%4't.t%41.1%
2,0%
38.7%30.0%
1.0%
38.0%
1.0%
ncomc Ta Rate
\FUDC % to Net Profrl
38.5%
2 001
43.7%
56.3%
42.trA
57.4%
{1.8%
58 2t
47.7%(r lq 46.0%UM 49.4%
MM
53.7%
,a 1{56.6%
tQ iq
55.096d(ru 51.1%&H 5Zt/c
ln frt SZrt
t7 1.1
.oru,Tem DebtRatio
)mon Eouitv Ratio
53.ft
a6.9.
328.3
4563
6.5%
341.2
484.8
7.ffi
J91.U
541.7
7.W
qu2
8r5.5
5.7%
70.94
684.2
5.tr4
{w.b
718.5
4.4%
b)u./
785.5
4.3%
urr.c
15f,.2
4.9*
bIU.Z
831.6
5.0%
b3b.z
898.i
5.0%
t5,)
965
8.5%
01,
1010
5.0%
rolsr uaPllar 0mlu
[et Phnt ($mill)
leturn on Totel Cap'l
'tutt
1n0
5_5.4
8./%
8.7%
't0.6-95
t0 69(
9.7%
97%
8,296Ary 8.0%e&6.0%Aru 6.2%Ary 7.9%
7W
8.1%
q 1{73%
73%
1L5%
4t \01
8.e/c
8.M
{t[rn (M snr, Equ[y
2.irn n am Ed'itu
E.0%
8.0.1
3.6%
58%
5.6%
47%48%
5.Zh J.ih
57%
J.JA
59%
.zh
8ffi
.zh
8096
3,l%
61%
J,J,6
5996
z,6h
6m
1U,1h
29%
J.th
51%
rcllrmo ro ffi Eq
Ul Oiv'ds io t{et Prof
J,ah
59%CURHENTPOS|T|ON 2012 2013 9F0n4
0MrLL)Cash Assets 2.5 2.3 5.6Other 40.4 37.4 64.9currentAssets 4zg 3gj --765
Accts Pavable 8.5 12.6 12.3
Debr Dud 20j 23.0 8.8Other '19.9 23.6 30.7
current Liab. -?5.i --507 --Els-
Fix. Cho. Cov. 317% 26a% 270%
BUSINESS: SJW Corporation engags in the produclion, pur-
chas, storage, purifiation, distribution, ard retail sle of water. lt-
prwidm mter seruice to approximatsly 228,000 @nnections that
sewe a population of +proximtsly ore million psple in ths San
Jos ara and 1 1,000 @mections that s€rye approximtely 36,000
residenB in a seNie ar@ in th€ region betwen Sil Antonio and
A6tin, Tere. The mmpany offors noflregulated wal6r-r6hted
sMcs, including wats system oporations, 6h remittances, and
mainlenance contract seryic€s. SJW d$ oms and operates com-
msrcial rel state investments. H6 about 379 employs€s. Chrm.:
Chades J. Toeniskelts. lnc.: CA. Addrs: 110 W. Taylor Street,Sil Jo$, CA 95110. Tel.: [phone]. lnt www.qwaEr.com.
SJWs impressive 2O14 performance modernize waste facilities, the company
was the result of a one-time event. In will need to spend close to $1 billion an-
the third quarter, the utility's share net nually over the next several years.
spiked to $1.88, versus the $0.44 recorded The large proJected capital outlaysin the similar 2013 period. Behind this will only have a minor impact on the
whopping increase was SJWs recognition company's balance sheet. SJW will
of $58.2 million in revenues due the com- have to issue new debt because internallypany for expenses incurred in previous generated funds will not cover the entire
years. The delay in recovering the reve- long-term capital budget. The common
nues was the reason for the previous four equity-to-total capital ratio will most likely
quarters having negative year-over-year decline from the current 487o level to
cbmparisons. We are not backing out the about 46.5% by later in the decade. Thisprofits as a nonrecurring item because should leave the utility with marginallythey were earned by the utility's main below-average finances.
buslness during the course of normal oper- Shares of SJW do not have good near-
ations. It's iust that thev were recosnized term DrosDects. Our Droprietary system
Past Est'd'll113
5 Yrs. to'17rtg4.O% 4.0%4.00k 5.M.5"A 7.0%3.5% 6.0%2.5% 5.5%
AI{NUAL RATES Past
ofchango (psr sh) 10 Yrs.Revenues 5.5%
"Cash Flow'' 6.0%Earnings 3.5%Dividends 4 5g
Book Valu6 5.5%
Cal-
cndar
OUIRIERLY REVENUES ($ miIIJ
irat3l Jun.30 Seo.gl Dec.31
Full
Yaal
201 I
2012
201 3
2014
2015
43.7 59.0 73.9 62.451.1 55.6 82.4 62.450.1 74.2 85.2 67.454.6 70.4 125.4 71.660.0 t5.0 95.0 80.0
w.l
261.1
276.1
325
310
Cal-
andar
EARNINGS PER SHARE A
[rar.31 Jun.30 Seo.30 Dec.31
Full
Ylsr
2011
2012
20t3
2014
20.l5
.03 .29 .44 .35.06 .28 .53 .31.07 .37 .44 .24.04 .34 1.88 .u.10 .13 .55 .35
1.1 1
1.18
1.12
2.60
1.15
all at the same time. Investors shoultl note
that SJWs P/E and relative P/E ratio will
be out of kilter for the next three months.
Earnings in 2015 wlll not be as poor asthey will probably appear. Excluding
the large one-time item taken by SJW lastvear. we estimate that the utilitv could
has dropped the ranking of SJW one notchto 4 (Below Average) for year-ahead rela-
tive performance.Long-term prospects are not en-
couraging either. The l8% rise in the
price of the equity since our October reporthas reduced much of S-JW's aooeal. WithCal-
rndar
OUARIEFLY DMDEI{DS PAID B.
U.,21 hr.t^ e^^ti n..!l Full
Ycar
201 I
2012
2013
2014
201 5
173 .173 .173 .173
1775 .1775 .1775 .17751825 .t82s .182s .1825
1875 .187s .187s .1875
.69
.t I1a
.75
'have shown close to a double-digit i?rcrease
in earnings per share.
SJW ts in the midst of overhauling itsoutdated infrastructure. To remove andinstall new pipes, as well as repair and
the stock already trading in our 2017-2019
projected Target Price Range, both totalreturn and capital appreciation potential
are not impresslve.
James A. Flood January 16, 2015
(A) Dilutsd earnings. Excludes nmrecuring
losses : '03, $1.97; '04, $3.78: '05, $1.09: '06,
$16.36; '08, $1.22i'10, 46r. Next eamings
report due miC Fobruary. Ourterlv eqs. may
not add due lo rounding. I (C) ln millions, adiust€d for stoc* splits.
(B) oivijends hblodca,ly pard in €dy March, IJuns, Seplemb€r, ard December. r Div'd rein- |vgstrnenl plm aEilable. I
Comprny's Fimncial Strsngth
Stock's Prico Shbllity
Pric! Growth Porsistcnce
Ecrnlno: Prodict bility
B+
80
30
80
c 2015 \,/atue LiE Puuishim LLC. All rklts @rued. Fadul mt6id is obtained lrem urc6 be{eved to be refable and is Fwiled rihod wamilks d a[y thd.
THE pUBLtSHER tS t{OT RESPONSTBLE}OR Afiy ERRORS 0R OMtSStOt{S HEREIN. T}is plbhalhn is Erlr,y fq subsbe/s M, mm€rcial hrmal use. No pan
olil mv be Mrodked reeE nord tr ransikd h anv ilided. dedoic ffdls fm ( rd lq oencatino s mdtelim an iliiled q detfq* ilbt@lir,9ice q qldlclpubt@lim,ptldtd.
Exhibit No. 1
Case No. UWl-l5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA4)
Page 8 of 9
it my rEprodrced, .erld, siored q tannikd any Fr{ed,gencaling q hdeting any Fhted
YoRK III|ATER NDo.YoRW lBEf,'l' 22.35 #,0 24,3fillilflll:8)E[.fllH[ 1,34 2,7010DMO
YLD
T|MEL|i{ESS 3 n ir.orzrgnl
sAtETY 2 rcw?/19/13
TECHNICAL 3 l*r*rononl
BErA .65 (1.00=Mafteo
Hig.h:'13.5 't4.0
110
'17.9'fi.7 21.O
15.3
'18,5
15.5
16.5
6.2
18.0 18.0
12.A
'18.1
15.8
't8.5
16.8
22.O
17.6
24.3
18.8 Target Price
2017
12018LEGEItos
;rJffiriihfidR;ie,... ReladwPrir$mnh2-fd.l sDlil 5/02
3-fd-2 sirir 9,06ootiffi: No\habd aru irdi"dq res
40
ZUI /.IY P}IUJEU I IUNS
kicsHioh 30Lofr 20
Ann'l TotalGain Returnl+35v"1 10%'l-ro%l 1y"
rai
ilm
!lttt 1r.g I I l'
FMAMJJASOtoBuy O14104214oBift 000000000bscl 000010000
l-.l$l-;l"t,-L;
LL
t-
'l
Percent 12'shares 8 'rad€d 4 -
% TOI
1 'tt3 yr.
5 yr.
REruRil 12/14HS [lm'iTffi lm14.0 6.942.3 73.784.6 107.3
lnsulutlonal ueqstonat020( 2(I201t !Qrl4toBuy 30 29 30
to sdl 21 2a 30
2.05
.59
.43
.34
2.05
.40
2.11
.65
.47
.JI
2.18
.65
.49
.39
2.8
.79
.56
.42
2.fi
.n
.58
.45
2.t9
.86
.57
.48
239
.88
.49
2.95
.95
.64
.51
3.07
1.07
.71
.52
3.18
1.09
.71
.53
3.21
1.12
.72
.M
3.27
1.r9
.75
.55
3.60
1.35
.85
.57
3.85
1.15
.95
.60
lcvenues pcr sh
'Cash Flofl" persh
iarnings pr sh A
)iv'dDecl'dDersh B
,f.65
1.70
1.10
.15
,,c
3.79 3.90
.66 l.u/
4.06
z.N
4.65
t9
4.85
t.oc
5.84
t.oY
5.97
t,l t
6.14
t,io
6.92
,N
7.19 7.45
.w .ro
7.98
.vJ
8.20
.J'
8.00
,aP I lPErulng Pe.
3ook Value oer sh 8.90
9.46 9.55 9.E,lu.i,l IU.iru I1.z{.,tt.zt I ',t.J /t2.56 tz.E 1:z.t9 12.C2 't z.cu 1LW 1ZU)iommon sns uurst 11.U)
4.4%
L.0
.91 1.47
3.3%
to.t zq.t
1.40
3.?*
'a.l
1.36
3.r%
L'b.J
1.40
2.%
nt,z
t.68
2.5%
fl.J
l.6l
2.8%
zq,o
3.5%
1.48
3.61
1.46
tt,5
3.5%
1.32
4,t
3.1%
t.50
tJ.v z1,q
3.1%
1.55
ZO.J
2.8%
1.48
aa,t
2.8%
1.26
AYg Ann I rrE MUO
R€htive PiE Ralio
lvq Ann'l Dit'd Yield 3.0%
tLo
1.10
CAPITAL STBUCTUBE !s ot 9/30/14
Total Drbt $84.9 mill. Due in 5 Yrs $19.5 mill
22.5
4.8
26.8
5.8
n.7
6.1
31.4
A'
32.8
64
37.07t 39.0
Rq
40.6
9.1
41.4 42.4
o7
16.0
1,1 0
18.0
120
Revenues ($nill)
Net Profit 6mill)
55.0
13.0
(Tolal interest coverage: 4.0x)
(45% of CaP'l)
P.nsion Asseb I 2/1 3 $27.1 mill.
Oblig' $32 1 mill
Pld Stock None
Common Stock 12,809,217 shs.
as o, 11/4/14
MARKET CAP:9275 million (Small Cap)
36,7%36.7%34.4%
7.4
36.5%
lAq
36.1%
tn iq 37.9%38.5%
12%
35.3%
11%
37.6%
1.1%
37,616
Aq
37.5%
I aot
3E.0%
1.5%
ncome Ta( Hate
IFIIDC % to iht Profit
Jt,t%lnu
12.5%
57.596
44.1%
55.S
{u.Jt
51.7%
cb.lb
53.5%
04.5t
45.5%
4b.r)6
54.3%
4U.Jb
51.7%
41.1%
52.9%
4b.trb
54.0%
l%45.
54.9%
L.Uh
55"tt
46.r4
51.Ut
-ongte]m ueor Ham
:ommon Eouitv Batio
50.0Y0
50.u/,
UJ.b
140.0
7.5i6
90.3
155.3
A'C
'126.5
174.4
6.2%
1X.7
19r.6
6.7%
153.4
211.4
5.1%
160.1
w..0
6.*
176.4
m.4
6.5%
r60.2
43.0
6.4%
I 84.8
2403
6.4%
188.4
244.2
6.5*
190
250
7.trt
,05
255
ena
ToblCapibl (SnilD
ilct Plant (tnill)
Relun on Total Cao'l
270
210
7.5.4
I U.tr6
10.06
I l.bb
I t.6rD6
9.3%
9.3%
9.5%
9.5%
f:4
92*
E.6A
8.6%
9.16
9.8ft
v.D1
9.5%
9.3%
9.3%
v.J1
9.3%
10.5%
10.5%
lLUh
12.r1
let nonshr.Equrly
lelun on C,om Eqiitv
1 LJh
12"f/,
2.1%
7W
3.0%
74%
2.%
77%
1,7%
82%
1.4%
85%
1.996
78%
2.7%
7%
25%
73%
2.4%
74!I
2.4%
74%
35%
67%
1.5%
6et
leErnec to (nm tq
Ul Div'ds to Net Prof
1.0%
68%CURRENT POS|T|ON 2012 2013 980/14
($MILL)
Cash Assets 4.o 7.6 3.2Accounts Receivable 6.4 3.8 4.2Other 1.2 3.8 4.3
current Assets fi-6- --m -ii.7
Accts Pavable 1.1 1.8 2.7
Debt Duri .1 - -Other 4.3 6.0 8.9
current Liab. -- 55 -"3 --i16
Fix. Cho. Cov. 414% 417% 417%
BUSINESS: The York Water Company is the oldst investoFown€d
rogulated water utility in the United States. lt has operated contin-
uously since 1816. As of December 31, 2013, the mmpany's aver-
age daily availability ws 35.0 million gallons ild its seM@ teri-
tory had an eslimled populalion of 190,000. Has mre than 63,000
customsts. Residenlial customars accounted for 63% ol 2013 .eve
nues; commercial ad industrial (29%); other (8%). lt also provides
sewer billing servicos. lncorporated: PA. York tEd 105 full-time em-
ploy8es at 12131/13. PrBidenVCEO: Jetfiey H. Hinm. O-
ficerddirectors own 1.1% of tho @mmon st@k (3/14 prory). Ad-drs: 130 East iihket Stst Yort, PennsylEnh 17401. Tele-
phone: f/17) 84t3601. lntsrnet www.yqkwats.com.
ln late November, The York WaterCompany raised its dividend by 4.5%.
This increase is much higher than the sub-par (for a water utility) 2.57o annualgrowth rate that t}Ie company averaged
over the past five years. We believe this isthe start of a trend in which York will
probably be able to raise the yearly payout
between 5%o and 6% for the next five years.The company has solid short-termearning prospects. For. the last 10
months of 2O74, Pennsylvania regulatorsallowed York to raise customers' monthly
bills. This probably enabled the companyto earn $0.85 a share in 2074, a l3%o ln-
crease over 2013. In 2015, due to a com-bination of the higher tariffs being in ef-
fect for all 12 months, along with a slower
increase in expenses thanks to some costcutting, we look for a l2o/o increase in
share earnings, to $0.95.
will not be overwhelming.Finances should remain solid. Cash on
hand and internally generated funds were
probably sufficient to meet 2014's planned
expenditures. Over the next three- to five-
year period, however, York will most likely
have to access the debt markets to fullyfund the capital budget. Currently, the
company is well capitalized, as its common
equity-to-total capital ratio is a healthy55%. So, while the company's financial
condition may slip a few notches, we think
the balance sheet will remain healthy.
As has been the case with most waterutilities, York shares have been per-formlng extremely well. In December
alone, the va-lue of the equity rose ZOYo.
This strong showing has reduced the divi-
dend yield to only 2.7Yo, or only 60 basispoints higher than the median of all
dividend-paying companies in the Value
ANNUAL RATES Past Past Est'd'11-'13
odchanF{porsh} 10Y6. 5YIs. to'17119Revenues 4.5% 3.0% 6.5%"Cash Flow" 6.590 6.5% 7.eAEarnings 5.5% 5.0% 7.0"4Dividends 4.5% 2.5"/" 5.5%
Book Value 7.0% 5.0% 2.5%
CaF
cndar
oUARTERLY REVENUES (l mill.)
llar.31 Jun. 30 Seo.g) Dec. 31
Full
Ye!l
2011
2012
2013
2014
20.l5
10.5
1 1.0
10.9
12.1
12.5
10.0
'10.4
10.7
11.5
12.5
9.6 10.59.6 10.4'10.1 10.710.6 11.811.0 12.0
40.(
41.,
42./
16.1l8.t
Cal-
cndal
EARNINGS PER SHAREA
Mar.31 Jun.30 Seo.30 Dec.3'
Full
Yrar
zutI
2012
201 3
2014
20'ts
.17 .19 .19 ,16.t5 .17 .n .18.17 .18 .19 .21.16 .22 .23 .21.20 .2s .25 .75
.71
.727\
.85
.95
Cal-
cndar
OUARTERLY DMDEiIDS PAID B
Mar.3l Jun.30 Sep.30 Dec.31
Full
Yaar Most U.S. water utilities have aging infra-to pay a substantial premium for just alirfl- *^-^ ^rr-r^nr in^^'.- T- -ilili^- +L-
2011
2012
2013
2014
201s
131 .131 .13't .131134 .134 .134 .134138 .138 .138 .1381431 .1431 ,1431 .1431
1405
.52
.53
(7
estimate that York spent about $12 mil-lion for this purpose last year and will
come close to this figure again in 2015. So,
while the outlays will be meaningful, they
recent price run-up in the stock has left itwith meager potential returns through
2017-2019.
James A. Flood January 16, 2015
(c) ln tor splits.(A) Diluted eamings. Nexl esnings reporl du6
mid FebrBry.
(B) Divilends historielly paid in midJanuary,
Aplil, Julv, and October.
uomPenys Hntnctat JIBtrgrn
Siock's Price Strbility
Pricr Growtr Pcreislencc
Earnino. Prcdictabilitv
b+
90
55
100
o 2015 Value LiE Pubtishim LLC. All ,htxs resed. Facual mtsial is obtained tom sMes beliwed lo be reaable and b godded tithod warandes d ary khd.
THE PUBUSI|ER tS NOT RESPONS|BLEIOR At{Y ERRORS OR OMISSIONS HERtlN. T}is publkatm is sridly fd $bsdibe/s oin, m-cmmmial. intsnal E. flo pan
olitmv beretudEed. rcsold {d orril$iled h anv diiled. dElmic ddhs fm, d used Itr@calim qmrteliro anyqiiled trdedrqic Nbkdhn. siceffqoddpubkdkn,{o panprodrd
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA4)
Page 9 of 9
my be .egldEed, rcsold, lqed ot any pne4
s Dgrw4 lo B rgaDE am 6
katm is $ic{Y fd $bsdibe/s oigacaling q nirfeinq any Fiiled
American States Water Co.
American Water Works Co.,lnc.
Aqua America, Inc.
California Water Service Group
Connecticut Water Service, Inc.
Middlesex Water Company
SJW Corporation
YorkWater Company
Notes:
(1) (1 - column L).
Proxy Group of Eight Water
Companies
United Water Idaho Inc.
Current Institutional Holdings and Individual Holdings
the Proxy Group of Eight Water Companies
t1l
March 31,20Ls
Percentage of
Institutional
Holdings
68.60
87.92
52.04
75.59
4L.44
41.85
59.78
32.04
121
March 37,201,5
Percentage of
Individual
Holdings [1)
o/o 3'1,.40 o/o
12.08
47.96
24.41.
58.56
58.15
40.22
67.96
42.59 o/o
Exhibit No. I
Case No. UWI-15-01
Pauline M. Ahem, Sussex Ecoiromic Advisors
Schedule (PMA-5)
Average 57.41 o/o
Source of Information:Bloomberg Professional, March 3L, 2015
United Water Idaho Inc.
Summary of Risk Premium Models for the
ProxvGrouB of Eieht Water Comnanies
Predictive Risk
Premium Model'"
[PRPM-) (1)
Risk Premium Using
an Adjusted Total
Market Approach (2)
Proxy Group of
Eight Water
Companies
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page 1 of11
71,69 0/o
9.75 o/o
Average L0.72 a/o
Notes:
(1) From pageZ of this Schedule.
[2J From page 3 of this Schedule.
Proxy Grouo of Eight Water Comnanies
Indicated ROE
Derived bv the Predictive Risk Premium Model (1J
171t5ltsIt4lt3Itztl1l
Proxlr Group of Eight Water
Comnanies
American States Wat€r Co.
American Water Works Co., Inc.
Aqua America, Inc.
California Water Service Group
Connecticut Water Service, Inc
Middlesex Water Company
SfW Corporation
York Water Company
Notes:
(1)
LTAverage Spot Average
Predicted Predicted Predicted
Variance Variance Variance
Predicted
GARCH RiskPremium Risk-Free IndicatedCoefficient (2) Rate (3) ROE [4)
0.39o/o 0.44oh
NM NM
0.470/6 0.32o/D
0.32o/o 0.35%
0.280h 0.250/6
0.270/6 0.340h
0.42o/o 0.42o/o
0.450/0 0.37o/o
0.42o/o 1.678607
NM NM
0.39o/o 2.228726
0.330/6 7.8607750.270 7.789657
0.300/6 1.99L82
0.4296 1.367863
0.470h 2.778092
3.680h t2.480h
3.680/0 NM
3.680h L4.620h
3.680/0 L1.300/o
3.680/6 9.640/o
3.680/0 7L,09oh
3.680A 10.80%
3.680/0 L4.61oh
8.8006
NM
10.940h
7.620h
5.960h
7.4toh
7.720h
L0.930h
(2)
(3)
(4)
Average t2.08%
Median ;
AverageofMeanandMedian 11.69%
The Predictive Risk Premium Model uses historical data to generate a predict€d variance and a GARCH
coefficienl The historical data used are the equity risk premiums for t}te first available trading month
as reported by CRSP @ Datao 2012 through March 2015. Center for Research in Security Prices, The
University of Chicago Boot} School of Business and Bloomberg Professional Service.
(1+(Column [1] * Column tzl) ^'1 - L
From note 2 on page 2 ofschedule (PMA-7).
Column [3] + Column [4].
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page2of11
United Water Idaho Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
Usins an Adiusted Total Market Anoroach
Line No.
L.
2.
Prospective Yield on Aaa Rated
Corporate Bonds (1)
Adjustment to Reflect Yield Spread
Between Aaa Rated Corporate
Bonds and A Rated Public
Utility Bonds
Adjusted Prospective Yield on A Rated
Public Utility Bonds
Adjustment to Reflect Bond
Rating Difference of Proxy Group
Adjusted Prospective Bond Yield
Equity Risk Premium [5)
Risk Premium Derived Common
Equity Cost Rate
Proxy Group of
Eight Water
Companies
4.74 o/o
0.10 (2)
4.84 o/o
0.13 t3)
4.97 o/o
4.78
9.75 o/o
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page3of11
3.
4.
5.
6.
7.
Notes: t1)Consensus forecast of Moody's Aaa Rated Corporate bonds from Blue
Chip Financial Forecasts [see pages 9-10 ofthis Schedule).
The average yield spread of A rated public utility bonds over Aaa
rated corporate bonds of0.10% from page 6 ofthis Schedule.
Adjustment to reflect the A2 / A3 Moody's LT issuer rating of the
proxy group of eight water companies as shown on page 6 of this
Schedule. The 13 basis point upward adjustment is derived by
taking l/6 of the spread between A2 and A3 Public Utility Bonds
(l/6* 0.78o/o = 0.13%) as derived from page 4 of this Schedule.
(2)
(3)
t4) From page 7 ofthis Schedule.
United Water Idaho Inc.
Interest Rates and Bond Spreads for
Moody's Corporate and Public Utility Bonds
Selected Bond Yields
Aaa Rated A Rated Public Baa Rated Public
Corporate Bond Utility Bond Utility Bond
fan-15 3.46 o/o 3.58 o/o 4.39 o/o
Feb-15 3.67 3.67 4.44
Mar-15 3.64 3.74 4.57
Average 3.57 Vo 3.67 Vo 4.45 o/o
Selected Bond Spreads
A Rated Public Utility Bonds Over Aaa Rated Corporate Bonds:
-q4-
o/o (7)
Baa Rated Public Utility Bonds Over A Rated Public Utility Bonds:
0.78 o/o (2)
Notes:
(1) Column [2] - Column [1].
(2) Column [3] - Column [2].
Source of Information:
Bloomberg Professional Service
t1l 12)t3l
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA€)
Page4of11
United Water Idaho Inc.
Comparison ofLong-Term Issuer Ratingsfor the
Proxy Group of Eight Water Companies
Moody's Standard & Poor's
Long-Term Issuer Rating Long-Term Issuer Rating
March 2015 March 2015
Proxy Group of Eight Water
Companies
American States Water Co. (2)
American Water Works Co., Inc. [3)
Aqua America, Inc. (4)
California Water Service Group [5J
Connecticut Water Service, Inc. (5)
Middlesex Water Company
SfW Corporation (7)
York Water Company
Average
Long-Term
Issuer
Rating
A2
A3
NR
NR
NR
NR
NR
NR
Long-Term
Numerical Issuer
Weighting(l) Rating
Numerical
Weighting[1)
6.0
,:
A+
A-
A+
A+
A
A.
A
A-
5.0
7.0
5.0
5.0
6.0
7.0
6.0
7.0
_42/A3
Notes:
(1) From page 6 ofthis Schedule.
(2) Ratings are those of Golden State Water
[3) Ratings are those of Pennsylvania American Water and New ]ersey American
Water.
[4) Ratings are those of Aqua Pennsylvania, Inc.
(5J Ratings are those of California Water
(6) Ratings are those of Connecticut Water
(7) Ratings are those of San fose Water Co.
Source Information:Moody's Investors Service
Standard & Poor's Global Utilities Rating Service
Exhibit No. 'l
Case No. UWI-I5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA€)
Page 5 of11
6.06.5
Numerical Assignment for
Moody's and Standard & Poor's Bond Ratings
Numerical
Bond Weightino
Moody's
Bond Ratino
Baal
Baa2
Baa3
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB.
B+
B
B-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Aaa
Aa1
Aa2
Aa3
A1M
A3
Ba1
Baz
Ba3
B
82
B3
Standard & Poor's
Bond Ratino
AAA
Exhibit No. 1
Case No. UWLI5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page6of11
United Water Idaho Inc.
fudgment of Equity Risk Premium for
the Proxy Group of Eight Water Companies
1.
2.
3.
Line
No.
Calculated equity risk
premium based on the
total market using
the beta approach (1)
Mean equity risk premium
based on a study
using the holding period
returns of public utilities
with A rated bonds [2)
Average equity risk premium
Notes: [1) From page B of this Schedule.
(2) From page 11 of this Schedule.
Proxy Group ofEight
Water Companies
4.76 o/o
4.80
4.78 o/o
Exhibit No. 'l
Case No. UWl-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA{)
PageT of11
United Water ldaho Inc.
Derivation of Equity Risk Premium Based on the Total Market Approach
Using the Beta for
tJre Proxv Group of Eight Water Companies
Line No.EouiW Risk Premium Measure
Ibbotson Equity Risk Premium (1)
Ibbotson Equity Risk Premium based on PRPMTM (21
Equity Risk Premium Based on Value Line
Summary and Index (3)
Equity Risk Premium Based on S&P 500
Companies(4)
Conclusion of Equity Risk Premium (5)
Adjusted Beta (5)
Forecasted Equity Risk Premium
Proxy Group of
Eight Water
Companies
5.89 o/o
6.37
4.67
8.72
6.26
0.76
4.76 o/D
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA6)
Page8of11
L.
o/o5.
(1)Notes:
t2)
Based on the arithmetic mean historical monthly returns on large company common
stocks from lbbotson@ SBBI@ 2015 Market Report minus the arithmetic mean monthly
yield of Moody's Aaa and Aa corporate bonds from 7926 - 20L4. {72.07o/o - 6.780/o =
5.89o/o).
The Predictive Risk Premium Model (PRPM) is discussed in Ms, Ahern's accompanying
direct testimony. The lbbotson equity risk premium based on the PRPM is derived by
applying the PRPM to the monthly risk premiums between Ibbotson large company
common stock monthly returns minus the average Aaa and Aa corporate monthly bond
yields, from fanuary 1928 through February 2015.
The equity risk premium based on the Value Line Summary and Index is derived from
taking the projected 3-5 year total annual market return of 9.410lo (described fully in
note 1 of Schedule [PMA-7)) and subtracting t]e average consensus forecast ofAaa
corporate bonds of 4.7 4o/o (Shown on page 3 of this Schedule). (9.4L0/o - 4.74o/o =
4.67o/o).
(4) Using data from tlre Bloomberg Professional Service for the S&P 500, an expected total
return of 12.860/o was derived based upon expected dividend yields and long-term
growth estimates as a proxy for capital appreciation. Subtracting the average consensus
forecast ofAaa corporate bonds of 4.74o/o results in a expected equity risk premium of
8.!2o/o. (12,860/o - 4.74o/o = 8.L2o/o).
(5) Average oflines 1 through4.
(6) Average of mean and median beta hom Schedule (PMA-7).
Sources of Information:
Stocks. Bonds. Bills. and Inflation - Ibbotson@ SBBI@ 2015 Market ReporL Morningstar
Inc., 2015 Chicago, IL.
Industrial Manual and Mergent Bond Record Monthly Update.
Value Line Summary and Index
Blue Chip Financial Forecasts, April 1, 2015 and December 1,2014
Bloomberg Professional Services
(3)
2 I BLUE CHIP FINANCIAL FORECASTS T ATRIL L,2OT5
Consensus Forecasts Of U.S. Interest Rates And Key Assumptionsl
Interest Rates
Federal Funds Rate
Prime Rate
LIBOR,3-mo.
Commercial Paper, 1-mo
Treasury bill, 3-mo.
Treasury bill, 6-mo.
Treasury bill, 1 yr.
Treasury note, 2 yr.
Treasury note,5 yr.
Treasury note, 10 yr.
Treasury note, 30 yr.
Corporate Aaa bond
Corporate Baa bond
State & Local bonds
Home mortgage rate
Kev Assumptions
Major Currency Index
Real GDP
GDP Price Index
Consumer Price Index
4.50
4.OO
3.50
3.@
E 2.s
g 2.oo&1.50
1.@
o.50
. . ;;;;;;;.;;;;;;#:::: " ;;; ;;; ;;;, ;...1
- i., "1, o.
Mar.27 Mar,20 Mar. 13 Mar.6 Feb. Jan. Dec. 1020150.L2 0.11 0.12 0.09 0.11 0.11 0.1,2 0.113.2s 3.25 3.25 3.25 3.25 3.25 3.25 3.250.27 0.27 0.27 0.21 0.26 0.26 0.23 0.260.08 0.09 0.08 0.07 0.08 0.09 0.11 0.080.03 0.03 0.03 0.02 0.02 0.03 0.03 0.030.11 0.13 0.10 0.08 0.07 0.08 0.11 0.09o.2s 0.25 0.25 0.25 0.22 0.20 0.21 0.22
0.60 0.63 0.69 0.68 0.62 0.55 0.64 0.611,.42 1,.49 1.61 1.61 1.57 1.37 1.64 1.491.93 2.00 2.14 2.13 1.98 1.88 2.21 1.972.50 2.57 2.72 2.73 2.57 2.46 2.83 2.553.54 3.62 3.70 3.14 3.61 3.46 3.'19 3.s74.45 4.57 4.59 4.60 4.51 4.45 4.74 4.50
3.52 3.52 3.62 3.68 3.58 3.40 3.70 3.s23.69 3.78 3.86 3.75 3.71 3.71, 3.86 3.7i
History------2Q 3Q 4Q 1Q 2Q 3Q 4Q 18*
2013 2013 2013 201,4 2014 2014 2014 201576.4 76.7 76.0 77.1 76.6 77.8 82.6 89.51.8 4.5 3.5 -2.r 4.6 5.0 2.2 1.71.2 1.7 1.5 1.3 2.1 1..4 0.1 0.2-0.1 2.3 1.4 2.1 2.4 '.1.2 -0.9 -2.3
Consensus Forecasts-Quarterly Avg.2Q 3Q 4Q lQ 2Q 3Q
2015 2015 2015 2016 2016 20160.2 0.4 0.7 1,0 1.3 1.63.3 3.4 3.7 4.0 4.3 4.60.3 0.5 0,9 1.2 1.5 l;90.2 0.3 0.7 r..0 1.4 1,70.1 0.3 0.6 0.9 1.3 t.60.2 0.4 0.7 1.1 1.4 1.70.4 0.6 0.9 1.3 1.6 1.90.E 1.0 1.3 1.6 1.9 2.21.6 1.8 2.t 2.3 2.5 2.82.2 2.4 2.6 2.8 3.0 3.22.7 2.9 3.1 3.4 3.6 3.73.7 4.0 4.2 4.5 4.7 4.94,6 4.8 5.1 5.3 5.5 5,73,7 3.9 4.1 4.3 4.s 4.63.9 4.t 4.4 4.6 4.8 s.0
Consensus Forecasts-Quarterly2Q 3Q 4Q rQ 2Q 3Q
2015 2015 2015 2016 2016 2016
91.s 92.1 92.6 92.2 91.6 9r.23.2 3.0 3.0 2.E 2.8 2.81.6 1.8 1.9 1.9 2.0 2.1
1.9
Forecasts for interest rates and the Federal Reserye's Major Currency Index represent averages for the quarter. Forecasts for Real GDP, GDP Price Index and Consumer Price
Index re seasonally-adjusted annual rates ofchmge (saa). Individual panel members'forecasts are on pages 4 through 9. Historical data for interest rates excepl LIBOR is from
Federal Reserue Release (FRSR) H.15. LIBOR quotes available fromThe Wall Street Journal. Interest rate definitions are same as those in FRSR H.15. Treasury yields are
reported on a constant maturity basis. Historical data for Fed's Major Cunency Index is from FRSR H.l0 md G.5. Historical data for Real GDP and GDP Chained Price Index
are fiom the Bureau ofEconomic Analysis (BEA). Consumer Price Index (CPI) history is from the Department ofLabor's Bureau ofl:bor Statistics (BlS).'lnterest rate dqta
for lQ 2015 based on historical data irough the week ended March 2/'. 'Data for lQ 2015 Major Currency Index is based on dara through week ended March 2dt'. Figures
for lQ 201 5 Real GDP, GDP Choined Price lndex and Consumer Price Index are consensusforecasts based on a special question asked ofthe panelists'this nonth
U.S. Treasury Yield Curve
Week ended Nlarch 27, 2O1 5 and Year Ago w
2Q 20 1 5 and 30 20 1 6 Consensus Forecasts
1yr zyr
lvbturities
5yl 'lOyr SOyr
U.S.3-Mo. T-Bills & 10-Yr. T-Note Yield
(Quarterly Awrage)Fo16cast
too9 lQlo 1Q11 tQ12 1Q13 1014 1(}15 1016
U.S. Treasury Yaeld Curve
As of week ended itbrch 27, 2o1 5
2009 20'to 201'l 2013 2014 2015
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page9of11
4.*
4.@
3.50
3.@
2.fi
2.OO
1-50
.t.oo
o.50
o.oo
Coe
L
6.OO
5.50
5.@
4.@
4.OO
3.50
3.OO
2.fi
z@
1.50
1.m
o.50
o.@o.@ a-
3mo
'6
6
700
650
600
550
500
450
400
350
300
o
200
150.too
50
o
Corporate Bond SPreads
As of week end ed Nb,rch 27. 2o1 5
Aaa CorpoEte Baa coDoctg Bd)dBondYield yietdmirusto-yegminuslO-Year T_Bondt,i6ldT-Bond Yield
,,,\..-'/'*
700
650
600
550
500
4-50
400
350
300
250
200
'150
100
50
o
efrop rso
'H 1oo6
50
150
100
50
o
-50
-100
-.*
ya. AF
..._x...'_ w.* -d.dgnDO15
+ CoE6Bus3o206
+ CoE6.u3 20 2ol5
1O-Yr T-Note Yield. Conenss
'i 3-Monihi T-Bill Yield consnss
l , !l)r i I .1L
:,, .i' i "' i,' '' ",.. .'""' : ! '"j,ir . i iil-ii.-;, I '1- ')_ '_ .:!, i
':.,lt,J "
!,j:i'li i
!'i-r,r ! ii
!
J
tljii
.i'Ir
I\I'
1 o-Year T-Bond
m inus 3-Month T-Bill(Cons tart Matu rity Yie lds )
no7 n@ 2009 2010 2o1-l m12 2013 2014 2015
14I BLUE CHIP FINANCIALFORECASTS I DECEMBER L,2OI4
Long-Ranqe Estimates:
The table below contains results of our semi-annual long-range CONSENSUS survey. There are also Top L0 and bottom 10 averages for each varia-
ble. Shown are esrimates for the years 2016 through 2020 and averages for the five-year periods 2016-2020 afi2020-2025. Apply these projections
cautiously. Few economic, demographic and political forces can be evaluated accurately over such long time spans.
Interest Rates
1. Federal Funds Rate
2- Prime Rate
3. LIBOR,3-Mo.
4. Commercial Paper, 1-Mo.
5. Tieasury Bill Yield, 3-Mo,
6. Tieasury Bill Yield, 6-Mo.
7. Treasury Bill Yield, 1-Yr.
8. Treasury Note Yield, 2-Yr.
10. Tleasury Note Yield,5-Yr.
11. Treasuy Note Yield, lO-Yr.
12. Treasury Bond Yield,3O-Yr.
13. Corporate Aaa Bond Yield
13. C.orporate Baa Bond Yield
14. State & I-ocal Bonds Yield
15. Home Mortgage Rate
A- FRB - Major Currency Index
B. Real GDP
C. GDP Chained Price Index
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Arzerage
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average.
CONSENSUS
Top 1O Average
4.7 s.8 6s 6.6 6.65.4 6.6 7.t 7.2 7.24.2 5.2 5.8 5.9 5.8
-----------Average For The Year------------ Five-Year Averages
20 6 2017 2018 2019 2020 2016-2020 2021-2025
1.8 2.9 3.6 3.7 3.7 3.1 3.6
2.4 3.7 4.2 4.2 4.2 3.7 4.7
1.2 2_a 2.9 3,O 3-O 2.5 2.9
6.O
6.7
5.4
6.5
7.L
5.6
2.t 32 3.7 3.9 3.9
2.7 3.9 4.3 4.4 4.41.5 2.5 3.1 3.2 3.3
33
3.9
2.7
3.8
4.3
3.3
1.9 3.O 3.5 3.7 3.7
4.O 4.2 4.23.0 3.1
2.4 3.51.5 2.5 3.2
3.1
3.6
2.7
3.7
4.2
3.21.8 2.9 3.4 3.6 3.6
2.4 3.6 4.O 4.2 4.t
1.3 2.2 2.9 2.9 2.9
3.0
3.7
2.4
3.5
4.1
2.O 3.O 3.6 3.7 3.72.5 3.8 4.2 4.4 4.31.5 2.4 3.0 3.L 3.1Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 1O Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 10 Average
Bottom 10 Average.
CONSENSUS
Top 10 Average
Bottom 10 Average
3.2
3.8
2.6
3.6
4.2
2.82.L 32 3.7 3.8 3.82.8 3.9 4.4 4.5 4.41.6 2-5 3.1 3-1 3.2
33
4.O
2.7
3.7
4.3
2.9
2.5 3.4 3.9 4.O 4.O
3.3 4.I 4.5 4.7 4.6
'I _9 2.A 33 1_1 3.3
3.6
4.2
29
4.O
4.5
1.2
3.1 3-8 4.2 43 43
3.8 4.5 4.9 5.1 5.1
4.O
4.7
J,J
4.3
4.9
3.62.6 3.2 3.6 3.5 3.63.7 43 4.6 4.7 4.7
4.4 5.O 5.4 5.6 5.6
3.2 3.5 3.8 3.8 3.9
4.4
5.2
4.6
5.4
3.7 3.94.3 4.E 5.0 s.l 5.25.O s.6 s.9 6.2 6.23.7 4.O 4.2 4.2 4.3
4.9
5.8
4.L
5.1
6.O
4.3s.l 5.6 6.0 6.1 6.L5.8 6.4 6.8 7.O 7.O
5.8
6.6
5.0
6.1
6.8
5.44.5 4.8 5.1 5.1 5.26.0 63 6.8 6.9 7.O
6.7 7.3 7.7 7.9 7.9
5.4 5.6 s.9 5.9 6.0
6.6
7.5
5.8
7.O
7.7
6.2
4.9 52 5.4 5.4 5.45.5 5.7 6.0 6.1 6.7
4.3 4.6 4.7 4.7 4.7
5.2
5.9
4.6
53
6.0
4.7s.2 s.8 6.2 6.3 635.9 6.5 7.1 7.2 7.2
6.0
6.8
5)_
6.2
7.O
5346 51 55 5s 5583.6 E33 A2.7 E2.4 Ez.L86.7 46.7 86.6 865 86.680.3 79.8 78.5 77 .9 77 .3
E2A
86.6
78.7
E2.O
86.3
77.4
CONSENSUS
Tbp 1O Average
Bottom 10 Arrerage
CONSENSUS
Top 1O Average
Bottom 10 Average
CONSENSUS
Top 10 Arzerage
Bottom 10 Average
2.O 2.2 2.2 2-1 2.12.3 2.7 2.6 25 2.4
----------Year-Over-Year, Vo &ange--- ------.2016 20a7 20IE 2019 20202.4 2.8 2.6 2.4 2.43.2 3.1 2.9 2.8 2.72.6 2-4 2.3 1_8 2.O
Five-Year Averages
20 6-2020 2021-202s
2.6
2.9
2.2
2.3
2.6
2.O
L.7 1.8 1.8 1.8 r.8
2.1
25
1.8
2.L
2.5
1.82.3 25 2.4 23 232.7 3-1 3.0 2-a 2.7
2.O 2.O 2.O L.9 L.9
2.4
2.4
1.9
23
2.7
7.9
Exhibit No. 1
Case No. UWI-'|5-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page10of11
D. Consumer Price Index
Line No.
Notes: (1)
t.
United Water Idaho Inc.
Derivation of Mean Equity Risk Premium Based on a Study
Using Holding Period Returns of Public Utilities
Arithmetic Mean Holding Period Returns on
the Standard & Poor's Utility Index 1928-
2014 (2):
Arithmetic Mean Yield on Moody's A Rated
Public Utility Yields 1928-2014
Historical Equity Risk Premium
Forecasted Equity Risk Premium Based on
PRPMTM (3)
Forecased Equity Risk Premium based on
Projected Total Return on the S&P Utilities
Index (4)
Average of Historical and PRPMTM Equity
Risk Premium
OverA Rated Moody's
Public Utility Bonds
10.69 0/o
[6.48)
4.2't 0/o
4.48
5.71
4.80 o/o
2.
3.
4.
5.
6.
(2)
i3)
(4)
Based on S&P Public Utility Index monthly total returns and Moody's Public Utility
Bond average monthlyyields from 1928-2014.
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.
The Predictive Risk Premium Model (PRPM) is applied to the risk premium of the
monthly total returns of the S&P Utility Index and the monthly yields on Moody's
A rated public utility bonds from January 7928 - March 2015.
Using data from Bloomberg Professional Service for the S&P Utilities Inde& an
expected return of 10.55olo was derived based on expected dividend yields and
long-term growth estimates as a proxy for market appreciation. Subtracting the
expected A rated public utility bond yield of 4.84%, calculated on line 3 of page 3
of this Schedule results in an equity riskpremium of 5.710/0. [10.55% - 4.84o/o =
5.7Ll/o)
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-6)
Page 11 of11
t nlEdWaEr ld.ho lE
lndic.Ed Comoo Equlty Co* Ratc Through Ue
of th. Tndldoh.l Capibl Ast Prtdn, Mod.l rCAPMI md Emolrlal CapiEl Asct PriclntModcl IECAPMJ
t8lvlt31t2lt1lt41
Mrrk.tRl6k
Premlom (1)
tsl
Rlsk-Pr.r
RaE (21
16l
Thdldon.l
C PMCo6t
RrEProry Group of Elght WaEr Comp.ni6
Valur Llnc Bloobb€rg
AdrusBd Adlused Aven8.B.E B.E Bcta
lndiat d
Common
ECAPM Co* Equity CostR.E Retr (3)
Am.ri6n SE@sWaEr Co.
Am.riBn WaEr Works Co. Inc
Aqua Amcriq Inc
Califomia wabr s.ilic. G.oup
Connedi@t W.Er Scwie, Inc
Middlesrx Watsr Codpany
SIW Corporadon
YorkWeErCohp.ny
0.78 0.?10.60 0.650.n 0.710.78 0.770.71 0.680.78 0.770.87 0.84
0.92 0.81
3.58 % 9.03 %3.64 838
3.68 9.033.68 9.253.68 8.603,68 925
3.68 9.75
3.58 9.S4
9.50 %
9,01
9,50
9,66
9.77
9.56
10.04
9.88
9.55 % g.XX %
0.70
o.70
0.70
0.7s
0.65
0.75
0.80
0.70
7.23
7.23
?.23
7,23
7.23
7.23
7.23
?.23
0.75
0,76
0.76
9.10 %
9.74 % 9.58 %9.36Mrdl.n
Averege of M..n and Mrdlan 9.35 %
NoEsl
(11 Thcharkrtriskprcmium(MRP)isrnrvcngcoffourdifr.r.ntmcdrTh.fiffimla6urcofti.MRPd.rlvcsth.bhlr.Emondre
merkrt by edding th. thi&.n-w4} av.rat forced 3-5 ycar 6pibl apprcdation to thc thlrucD-wek .v.n8. .xp.&d dividetrd
yi.ld from Valu. ljD. Suhmary ed Ind.L Th. p6l.ed risl-fr.. nE [d.v.lop.d ir NoE 2) lE th.n ilbhctld froh dE bbl rcbm b
mivc.t t t. pmic&d MRP.'I'ltc s.@nd h.*ur. of MRP t6 b*.d on thc eitih.tk n6 of hi.brl6l montlly ruom d.E of largc
company sml6 lc$ thr l@mr icrm on lon8 Em Sovcmh.ht bondi ftom 19262014 a publi.h.d by Momtngfir, Inc Th. tilrd
m.a$E applrls the PRPM b dle lbbotron hierlcd daE b deriv. a proieed MRP. Th. fourti Dlsur u$r d.E from Bl@mb..g
Prof..slond SNi@s b derive a btsl prcr.&d Erm on tlE S&P 500 by using.xpeod divldcnd ylcld! rnd long-Em Ercwth.rdmB s a prory for ceplEl appr.cl.don. Th. proje&d rirk-frc€ EE ts thn subm@d trom dr. pmr!&d bbl reum b ilriv. at
thr prcJ.ed MRP. The four measur.s of MRP.r. lllustraEd b.low:
Meaure 1: Velue Line Projeed MRP ghlrE.n w..ks endlnr3l27ll5l
Toblprcie&d rcomon th. mark t3 -5 yr6 hcnc!:
Prc,.ed RlBk-Frc. Rats (derlbcd in NoE 2);
MRP b6cdonValue Linc Slrlmary &lnd.x:
Mc.surc 2: IbbobnAiithm.ticM.e MRP (1926 -2014)
Arithm.tic Mar Montht R.Eru for Lrg. Sbctt L926 - Z0L1l
Arithmadc Matr IDom. Rcrm on Lang-Tam Govamhant Bonds:
MRP bs.d or lbboBor Hlturiel DaE:
M.er.3:Appliation of dE PRPM b lbboBon tll6brl@l D.ts:
(r.nuary1926 - F.bnary 2015)
M.sur. 4i Eloohb.rgPrcic&d MRP
ToEl fturn on tbe Mark tbascd on th! s&P 500:
Prc,eed Ri6k-Frce Rat (dqcribed ln Nob 2)r
MRP bsed oo Bl@mb€r8 d.E
9.47 0h
3.68
-
12.07
523
-ffix
7.19 %
L2.46 %
3.68
9.18 %
AvcEglMRP: 3%
(2) Forr.ensGxphinldinth.dlr.ctE6timny,th..ppropri.bdsk-fr..Ebfor@stofapit lpurprabth.ecnS.for.dof3oy.ar
Trc8ry Bonds pcr tic coEnflr of E.rly 50.cononrls r.porud inBbchlEEb!trgblElr!@li (Scc pegs 9 and l0 ofSchcdulc
(PMA6) Th. prcFdion of thr rlsk-frlr EE 16 illumEd bllowr
s€@trd Qumr2015
Th,rd Quatur2015
Fourt r Quarur2015
Flcrquaer 2016
Sccond Qumr2016
Th,rd QwEr2016
20L62020
2021-2025
(3) Av.r.8. ofcolrhn 6 and Column 7.
sour@sof lnfomadon:
v.lu. lln. Stlffiry and lnd.x
8lu! Orlp Fln.rci..l Foffi Aprll 1,2015 .nd Dc@hbcr 1, 201,f
SEkE, Bonds, Bills, sd lnfl.don - lbboMh'SBBI'2015 Malcr n!po& trfomlrgor, lnc, 2015 Chl6go, lL
Bl@mbrrg Pmf.slonal S!ryic.s
2:r0 0i
2.90
3.10
3.40
3.60
3,70
4.90
5.10:re-'x
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-7)
United Water Idaho Inc.
Basis of Selection of the Group of Non-Price Regulated Companies
ComLarable in Total Risk to the Proxy Group of Eight Water Companies
The criteria for selection of the proxy group of eighteen non-price regulated companies
was that the non-price regulated companies be domestic and reported in Value Line
Investment Survey (Standard Edition).
The proxy group of eighteen non-price regulated companies were then selected based
upon the unadjusted beta range of 0.4L - 0.67 and residual standard error of the regression
range of 2.1,073 - 2.5733 of the water proxy group.
These ranges are based upon plus or minus two standard deviations of the unadjusted
beta and standard error of the regression. PIus or minus two standard deviations captures
95.50% ofthe distribution ofunadjusted betas and residual standard errors ofthe regression.
The standard deviation of the water industry's residual standard error of the regression is
0.1015. The standard deviation of the standard error of the regression is calculated as follows:
Standard Deviation ofthe Std. Err. ofthe Regr. = Standard Error ofthe Regression
J2N
where: N =number of observations. Since Value Line betas are derived from weekly price
change observations over a period offive years, N = 259
Thus,0.L0L5 =2.31,03 =
.,m
2.3103
22.7596
Source of Information: Value Line, Inc., April 2015
Value Line Investment Survey (Standard Edition)
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-8)
Page 1 of3
United Water Idaho Inc.
Basis of Selection of Comparable Risk
Domestic Non-Price Regulated Companies
t1l 12)
Proxy Group of Eight Water
Companies
Value Line
Adjusted
Beta
Unadjusted
Beta
t3l
Residual
Standard
Error ofthe
Regression
2.6459
7.8756
7.97L7
2.022L
2.5962
2.2258
2.6762
2.4686
t4l
Standard
Deviation
of Beta
American States Water Co.
American Water Works Co., Inc.
Aqua America, Inc.
California Water Service Group
Connecticut Water Service, Inc.
Middlesex Water Company
SJW Corporation
York Water Company
Average
0.70
0.70
0.70
0.75
0.65
0.75
0.80
0.70
0.53
0.50
0.54
0.56
0.46
0.55
0.66
0.51
0.0766
0.0543
0.0571
0.0585
0.0752
0.0644
0.0775
0.0715
0.72 0.54 23t03 0.0569
Beta Range (*/- 2 std. Devs. of Beta)
2 std. Devs. of Beta
Residual Std. Err. Range (+/-2std.
Devs. of the Residual Std. Err.)
Std. dev. ofthe Res. Std. Err.
2 std. devs. ofthe Res. Std. Err.
0.4L
0.13
2.L073
0.1015
0.2030
0.67
2.5L33
Source of Information:Valueline Proprietary Database April 2015
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-8)
Page 2 of 3
United Water Idaho Inc.
Pro:iy Group of Non-Price Regulated Companies
Comparable in Total Risk to the
Pro4r Group of Eight Water Companies
14)I3ll2lt1l
Residual
Standard Standard
Error of the Deviation ofProxy Group of Eighteen Non-Price-
Regulated Companies
VL Adjusted
Beta
Unadjusted
Beta Regression
2.1555
2.L297
2.4884
2.2076
2.4L99
2.39L7
2.3710
2.L797
2.2L52
2.3959
2.1934
2.L463
2.3786
2.4523
2.2498
2.2009
2.L661
2.2784
Beta
AmerisourceBergen
Bard [C.R.)
Bristol-Myers Squibb
ConAgra Foods
Dr Pepper Snapple
Kroger Co.
Lancaster Colony
Laboratory Corp.
McKesson Corp.
Mercury General
Merck & Co.
Reynolds American
Sherwin-Williams
Silgan Holdings
Target Corp.
TfX Companies
Verisk Analytics
Weis Markets
Average
Proxy Group of Eight Water
Companies
0.75
0.80
0.7s
0.65
0.65
0.75
0.80
0.80
0.75
0.70
0.75
0.65
0.80
0.80
0.70
0.75
0.65
0.70
0.58
0.64
0.58
0.46
0.45
0.57
0.64
0.64
0.56
0.48
0.55
0.45
0.66
0.64
0.50
0.60
0.47
0.52
0.0624
0.06L7
0.0720
0.0539
0.0701
0.0692
0.0586
0.0631
0.0541
0.0694
0.0635
0.0627
0.0689
0.0710
0.0551
0.0637
0.0627
0.0660
0.73
0.72
0.56 2.2789 0.0660
0.54 2.3L03 0.0669
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-8)
Page 3 of 3
United Water Idaho Inc.
Summary of Cost of Equity Models Applied to the
Proxy Group of Non-Price-Regulated Companies
Comparable in Total Risk to the
Proxy Group of Eight Water Companies
Principal Methods
Discounted Cash Flow Model [DCF)
(1)
Risk Premium Model [RPM) [2)
Capital Asset Pricing Model ICAPM)
(3)
Proxy Group of
Eighteen Non-
Price-Regulated
Companies
11.85 o/o
t0.29
9.54
Notes:
(1) From pageZ of this Schedule.
[2) From page 3 ofthis Schedule.
(3) From page 6 of this Schedule.
Mean
Median
Average of Mean and Median
10.56 o/o
L0.29 o/o
70.43 o/o
Exhibit No. 1
Case No. UW-15-01
,Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-9)
Page 1 of6
lrnlEd Watsr ldaho Inc
DCF Rsults for the Prory Croup of Non-Prie-R.gul.Ed Compeler Comparrble in ToEl Risk tc
Valrc Lln. R.uEr Mcen ZeclCs Fiv. Yelool Flnilc. Av.E8!
Prcry croup of Elghtlcn Prcrdd Fivc Co@Nus Prc,&d Yd Prc,ctud Prc,.ed Ftv. Prcr.ed Fivc Ad,usd IndleEd
NoFPricR.gul.Ed Averag. Ylu GDw6 in Fiv. Y8 G.owth Grcwth RaE in Y.d Growth itr Yca Grouth Dlvldcnd Comotr Equlty
Compani6 DMdepd Yl.ld EPS kE in EPS EPS EPS RaE h EPs Yicld Co*R.E
t8lnt6llslt{t3It2II11
AmcriEouiccB!rgen
Bard (Cl")
Brisl-MycE Squibb
Con^t'e F@ds
Dr Plpp.rSnappl.
Krcger Co.
LenosEr Colohy
LaboEbry Corp,
MGXND Corp.
Merfrry Gcnchl
M.rck & Co.
RlyBolds Amarlcan
ShrMin-Wlllsm6
SilSan Holdlngs 1.08T.rgetcorp. 2.69
TrX Compenl.s 1.03
Vcrisk Amljfrics
W.iE MarkrB
L,22 % 73.40 %0.54 17.76
2.51 18.022.93 10.85-NA1.08 1a602.08 8.83-NA
0.17 L7.91-NA1.0,+ 8.38.N
NA1,13 9,622,80 10.801.09 77.97-NA.NA
1.15 %
0.s1
2.36
232
1.03
2.01
0.,{3
i.n"
1,t.00 %
10.00
14.50
7.00
8.50
10.50
5.50
750
15.00
850
4.00
9.50
13.00
9,00
8.00
11.00
12.00
1.00
10.90 %
11.,15
16.15
8.70
7.46
10.68
NA
10'85
27.50
8.20
5.12
9.35
18.30
7,Lr
L2.43
9.98
11.33
NA
72.90
12.70
15.10
7.50
7.30
to-20
NA
10.30
15,10
820
7.10
9.30
L4,20
9.30
tL.20
11.90
12.80
NA
10.90 .i6
t7.32
16,15
4,17
7.e6
10,68
8.00
9.90
17,t7
8.20
5.L2
9.35
15.S3
LS6
12.08
10.65
LZ.2S
NA
L2,74
7t.22
15.,t8
7,92
7AA
10.52
6,75
9.61
77.11
aza
534
9.3S
75,26
8.49
8.00
10.88
72.70
L00
Mcan g%
Mcdian 4%
AvemgcofMcanandMedian 11.85 %
NA= NotAvailable
l,lMP= Not Me.ninttul Fl8lrc
(11 M*Ahcm'eappliedonofth.DCFmod.lbth.domrsic,non-prlc.GgluaEdsmparableriskcomp.nldlrldcntiElbtheappllcrdonoft}cDCFbherprcrygoupofw.Er
@mpani4 sh! us tlr. 50 day rvc.sg. pric€ ed th. spot indicabd dlvidehd as of Mech 31, 2015 for hcr dlvidcnd yicld ud tt.n.drus ti.t ytcld for 1/2 th. avrEtc
proied growtfi EE in EP$ which i. elalaEd by av.Bging $! 5 ycrr proi.&d growth in EPS prcvldcd by yalu. Lin., txw,..ucEom, M.ackaom, and
w.yahoo.@h (.rcludi4.ny n.Ftiv. growti r.tss) etd thch .dding dr.t trcwth Et! b $c.diu5Ed dMdcnd yi.ld.
Sourc! of lnformadonr Valua LiDe lnvMrrtSunayrM.r.uEEcom DoMlo.d.d on 03/31/2015
wra.ks@b Domlo.d.d oD 03/31/2015
M,yahoo.con DoMlo.drd on 03/3 1/2015
Exhibit No. 1
Case No. UW-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-9)
Page 2 of 6
United Water ldaho Inc.
Indicated Common Equity Cost Rate
Through Use of a Risk Premium Model
Using an Adjusted Total MarketApproach
Line No.
5.
Notes: t1)
Prospective Yield on Baa Rated
Corporate Bonds [1J
Adiustment to Reflect Bond rating
Difference of Non-Price Regulated
Companies (2)
Adjusted Prospective Bond Yield
Equity Risk Premium (3)
Risk Premium Derived Common
Equity Cost Rate
Proxy Group of
Eighteen Non-Price-
Regulated
Companies
5.58 %
(0.24)
5.34
4.95
L0.29 0/o
4.60 o/o
4.80
5.10
5.30
5.50
5.70
6.60
7.00
0.77 o/o
--------TTo/o
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-9)
Page 3 of6
Average forecast of Baa corporate bonds based upon the consensus of
nearly 50 economists reported in Blue Chip Financial Forecasts dated
April 1, 2015 and December 1,2074 fsee pages 9-10 of [Schedule PMA-
6)). The estimates are deailed below.
(2)
Second Quarter 2015
Third Quarter 2015
Fourth Quarter 2015
First Quarter 2016
Second Quarter 2016
Third Quarter 2016
2076-2020
202L-2025
Mar-15 'n3rrt*r.r.,orrll1
1/3 ofspread
[3) From page 5 ofthis Schedule.
Average 5.58 o/o
The average yield spread ofBaa rated corporate bonds over A corporate
bonds for the three months ending March 20\4. To reflect the A3 average
rating ofthe non-utility proxy group, the prosepctive yield on A corporate
bonds must be adjusted by 1/3 ofthe spread between A and Baa
corporate bond yields as shown below:
A Corp.Baa Corp.
BondYield BondYield SPread
1an-t5 o/o
Feb-15 3.81 4.51 0.70
0.69
United Water Idaho Inc.
Comparison ofLong-Term Issuer Ratings for the
Proxy Group of Non-Price-Regulated Companies Comparable in Total Risk to the
Pro:ry Group of Eight Water Companies
Moody's
Long-Term Issuer Rating
March 2015
Standard & Poor's
Long-Term Issuer Rating
March 2015
Pro:<y Group of Eighteen Non-
Price-Reeulated Companies
AmerisourceBergen
Bard (C.R.)
Bristol-Myers Squibb
ConAgra Foods
Dr Pepper Snapple
Kroger Co.
Lancaster Colony
Laboratory Corp.
McKesson Corp.
Mercury General
Merck & Co.
Reynolds American
Sherwin-Williams
Silgan Holdings
Target Corp.
TJX Companies
Verisk Analytics
Weis Markets
Average
Bond
Rating
Baa2
Baal
A2
BaaZ
Baal
Baa2
NR
Baa?
Baa2
WR
AZ
Baa?
A3
Ba2
A2
A3
Baa3
NR
Numerical
Weighting
r1l
9.0
8.0
6.0
9.0
8.0
9.0
9.0
9.0
6.0
9.0
7.0
72.0
6.0
7.0
10.0
Bond
Rating
A-
A
A+
BBB-
BBB+
BBB
NR
BBB
BBB+
NR
AA
BBB.
A
BB+
A
A+
BBB-
NR
Numerical
Weighting
(1.l
7.0
6.0
5.0
10.0
8.0
9.0
9.0
8.0
3.0
10.0
6.0
11.0
6.0
5.0
10.0
(1) From page 6 of Schedule (PMA-6).
Source of Information:
Bloomberg Professional Services
43lBBB+
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-9)
Page 4 of 6
Baal 7.58.3
United Water Idaho Inc.
Derivation of Equity Risk Premium Based on the Total MarketApproach
Using the Beta for
the Proxy Group of Non-Price-Regulated Companies
Proxy Group of EightWater Companies
Line No.Equity Risk Premium Measure
Ibbotson Equity Risk Premium (1)
Ibbotson Equity Risk Premium based on PRPM (1)
Equiry Risk Premium Based on Value Line
Summary and Index (1)
Equity Risk Premium Based on S&P 500
Companies(1)
Conclusion of Equity Risk Premium [2)
Adjusted Beta [3)
Forecasted Equity Risk Premium
1.
2.
3.
Proxy Group of
Eighteen Non-Price-
Regulated
Companies
5.89 o/o
6.37
4.67
8.12
6.26
0.79
4.95 o/o
4.
5.
6.
7.
Notes:
o/o
[1J From page 8 of Schedule (PMA-6J.
[2J Average oflines 1 through 4.
[3) Average of mean and median beta from page 5 of this Schedule.
Sources of Information:
Ibbotson@ SBBI(0 2014 Classic Yearbook - Market Results for Stocks. Bonds. Bills. and
Inflation. Morningstar, lnc., 201,4 Chicago, IL.
Value Line Summaryand Index
Blue Chip Financial Forecasts, April1,2015 and December 7,2074
Bloomberg Professional Services
Exhibit No. 1
Case No. UWI-15-0'l
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-g)
Page 5 of6
th[rd.]thfed&Io.Ie
TBdldon.l CAPM .nd ECAPM R.illE for $c Prory Grcup ofNoFPrleRr8ul.bd Compml6 CohpaEble in ToEl Rlsk to tI.
tll
v.lu. lln.
Ad,u6trd
B.E Bloomb.rgBea
BI
Avararr
B.E
16Itslt1Ipl m
ECAPM Cost
RaE
tsl
lndtaEd
Comhon Equlty
Cost R.E (3)
Prc).y GrouF ofElghticn Non-Prie-
RegulaEd Compani!s
AmcrisouacaBergen
Br.d (CR.)
Britul-My.s Squlbb
ConAtE F@dr
Dr Plppcr Sn.ppl.
lGogcr Co,
Lenca6tar Colony
L.borabry Corp.
McKrsoa Cory,
M.rcury Gcner.l
Mrrck & Co.
Rcynolds Ancrlaan
Shrruln-Wlli.ms
Silg$ Eoldlngs
T.rg.t corp.
TIX Comp.nics
V.rlsk Analyri6
W.l6 Markctr
Mcdian
AvrEgr ofM.d and Mcdi.n
TndidoMl
Mark t ttlsk Risk-FE. RlE CAPM Cofi
PEmlum(l) (21 R.b
0.7s
0.80
0.75
0.65
0.65
0,75
0.80
0.80
0.75
0.70
0.7s
0.55
0.80
0,80
0.70
0.75
0.65
0.70
NoEa:
(1) FEm Sch.dul. [Pi{A-?), noe 1.
(z) Frcm sdr.dulc (PMA- 7), mts 2'
(3) AvGrrSc of CAPM ard ECAPM cd EEa
030
0.91
048
0,67
0a7
0.79
0.92
0.80
0.89
0.69
0.?a
0.83
0.96
0.83
0.84
0.89
0.9L
0.84
0.78
0.85
0.81
0.66
0,76
0.7?
0€6
0a0
0.82
0.70
0,?6
0,71
0.88
0.82
0.77
0s2
0.78
o.?7
7.23 %
7.23
723
723
7.23
723
7.23
7.23
7.23
7.23
?.23
723
7.23
7.23
723
723
7.23
7.23
3.68 %
3.68
3.68
3.68
3.6S
3.68
3.58
3.58
3.68
3.68
3.68
3.68
3.68
3.69
3.68
3.68
3.68
3.64
9.32 0h
9.90
9.51
8.,r5
9.17
925
9.90
9.46
9.67
4.74
9.17
9.03
10.0,1
9.61
925
9.6L
932
925
9,72
10.15
938
9.07
9.61
9.66
10.15
9,83
9.93
9.24
9,6L
9.50
10.26
9.93
9.66
9.93
9.72
9.66
9,75 %9.37 %
9.12 %
0.79
0.78
0.79
9.72 %
Exhibit No. 1
Case No. UWI-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-9)
Page 6 of 6
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Exhibit No. 1
Case No. UW-W-15-01
Pauline M. Ahem, Sussex Economic Advisors
Schedule (PMA-10)
Page 1 of2
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Exhibit No. 1
Case No. UW-W-15-01
Pauline M. Ahern, Sussex Economic Advisors
Schedule (PMA-10)
Page 2 oI 2