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CASE NO. PAC-E-10-07
Direct Testimony and Exhibits of
Michael P. Gorman
On behalf of
Monsanto Company
Project 9210
October 14,2010
J?'S'U;t:".~.~:f:R &':'A~~~'')~':lATt:-:. lr-(.~.
CHESTEIEW, MO 63017
PACIFICORP dba ROCKY MOUNTAIN POWER
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. PAC-E-10-07
Table of Contents to the
Direct Testimony of Michael P. Gorman
Page
Summary..............................................................................~...............................................2
Rate of Return...................................................................................................................... 3
Electric Utilty Industry Market Outlook.......... ............ .... ............ ..... ............... .... ...... ...... 4
RMP Investment Risk.. .... .... .... .... ............ ............. ................... ..... ............ .... ... ......... ..... 9
RMP's Proposed Capital Structure...... ..... ... ............ .... .... ................ ................. ........ ... .12
Return on Common Equit ...........................................................................................16
Discounted Cash Flow Model.............. ............ ................. ........ ....... .... ............. .... ..18
Sustainable Growth DCF ...................................................................................... .23
Multi-Stage Growth DCF Model.......................... .................... ................ ...............25
Risk Premium Model.. ......... ... ............ .... .... ........ ........................ ............ .... ........... .28
Capital Asset Pricing Model ("CAPM") .................................................................. .32
Return on Equity Summary ...... ........................ ........ ............. ............... ................ ..37
Financial Integrity .. .... ............ .... ................ ............ ........ .... ..... .... .... ........... ..... ........... ...38
Response to RMP Witness Dr. Samuel Hadaway.............................................................42
Qualifications of Michael P. Gorman.................................................................Appendix A
Exhibits:
Exhibit No. 202 (MPG-1):
Exhibit No. 203 (MPG-2):
Exhibit No. 204 (MPG-3):
Exhibit No. 205 (MPG-4):
Exhibit No. 206 (MPG-5):
Exhibit No. 207 (MPG-6):
Exhibit No. 208 (MPG-7):
Exhibit No. 209 (MPG-8):
Exhibit No. 210 (MPG-9):
Exhibit No. 211 (MPG-1 0):
Exhibit No. 212 (MPG-11):
Exhibit No. 213 (MPG-12):
Exhibit No. 214 (MPG-13):
Exhibit No. 215 (MPG-14):
Exhibit No. 216 (MPG-15):
Exhibit No. 217 (MPG-16):
Exhibit No. 218 (MPG-17):
Exhibit No. 219 (MPG-18):
Exhibit No. 220 (MPG-19):
Rate of Return
Proxy Group
Growth Rates
Constant Growth DCF Model
Electricity Sales Are Linked to U.S. Economic Growth
Proxy Group Payout Ratios
Sustainable Growth Rates
Sustainable Constant Growth DCF Model
Multi-Stage Growth DCF Model
Electric Utilty Market/Book Ratio
Electric Equity Risk Premium - Treasury Bond
Electric Equity Risk Premium - Utilty Bond
Utility Bond Yield Spreads
Utilty and Treasury Bond Yields
Value Line Beta
CAPM Return
Standard & Poor's Credit Metrics
Adjusted Hadaway DCF
Accuracy of Interest Rate Forecasts
1 Q
2 A
PACIFICORP dba ROCKY MOUNTAIN POWER
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. PAC-E-10-07
Direct Testimony of Michael P. Gorman
PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
3 Chesterfeld, MO 63017.
Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140,
4 Q
5 A
WHAT IS YOUR OCCUPATION?
6 Brubaker & Associates, Inc., energy, economic and regulatory consultants.
I am a consultant in the field of public utilty regulation and a managing principal of
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8 A
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10 A
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND EXPERIENCE.
This information is included in Appendix A to my testimony.
ON WHOSE BEHALF ARE YOU APPEARING IN THIS PROCEEDING?
11 RMP.
I am appearing on behalf of Monsanto Company, a special contract customer of
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13 A
WHAT IS THE SUBJECT OF YOUR TESTIMONY?
14 Mountain Power ("RMP" or "Company").
i wil recommend a fair return on common equity and overall rate of return for Rocky
Gorman, Oi - 1
Monsanto Company
1 Q ARE YOU SPONSORING ANY EXHIBITS IN CONNECTION WITH YOUR
2 TESTIMONY?
3 A Yes. I am sponsoring Exhibit No. 202 (MPG-1) through Exhibit No. 220 (MPG-19).
4 These exhibits were prepared either by me or under my supervision and direction.
5 Summary
6 Q PLEASE SUMMARIZE YOUR RETURN ON EQUITY RECOMMENDATIONS.
7 A I recommend the Idaho Public Utilties Commission ("Commission") award RMP a
8 return on common equity of 9.5%, which is the midpoint of my estimated range of
9 9.1 % to 9.9%. I propose adjustments to the Company's proposed capital structure to
10 exclude common equit supporting assets not devoted to utilty operations. Based on
11 my recommended return on equity and capital structure, i recommend an overall rate
12 of return of 7.70% for RMP, as shown on Exhibit No. 202 (MPG-1), page 1 of 2. As
13 set forth in this testimony, my recommended return on equity and capital structure wil
14 support RMP's financial integrity, and provide fair compensation for the risk of utilty
15 operations.
16 i wil also respond to RMP witness Dr. Samuel Hadaway's proposed return on
17 equity of 10.6%. For the reasons discussed below, Dr. Hadaway's recommended
18 return on equity for RMP is excessive and should be rejected.
19 Q HOW DID YOU ESTIMATE RMP'S CURRENT MARKET COST OF EQUITY?
20 A i did this by development of a comparable proxy investment group of publicly traded
21 utiity companies that have investment risk similar to RMP. i then performed three
22 versions of the Discounted Cash Flow ("DCF") model, Risk Premium ("RP") study,
23 and Capital Asset Pricing Model ("CAPM") analysis. Based on these assessments,
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Monsanto Company
1 and as discussed in more detail below, I estimate RMP's current market cost of equity
2 to be 9.5%.
3 Q HOW DID YOU ADJUST RMP'S PROPOSED CAPITAL STRUCTURE?
4 A RMP's balance sheet includes short-term assets which are not included in utility plant
5 in-service or utilty rate base. These short-term cash assets are primarily attributable
6 to PacifiCorp's decision to retain all earnings in the utilty and build up its common
7 equity balance. I recommend that the common equity supporting these short-term
8 assets be excluded from the capital structure used to estimate the rate of return on
9 RMP's utilty rate base. As such, I adjusted RMP's capital structure to remove
10 common equity not supporting utility rate base investments, and thereby estimating
11 the capital structure relative weights that are currently supporting utility rate base.
12 Q WHAT IS THE REVENUE REQUIREMENT IMPACT OF YOUR RETURN ON
13 EQUITY AND CAPITAL STRUCTURE ADJUSTMENTS?
14 A The revenue impact from reducing RMP's return on equity from 10.6% down to 9.5%
15 and reducing the common equity ratio of the forecasted test year capital structure
16 from 52.1 % to 49.7% lowers its claimed Idaho jurisdictional revenue deficiency by
17 $7.7 millon.
18 Rate of Return
19 Q
20 A
PLEASE SUMMARIZE THIS SECTION OF YOUR TESTIMONY.
In this section of my testimony:
21 1. I wil review the current electric utility industry market outlook.
22 2. i wil review the investment risk of RMP.
Gorman, Oi - 3
Monsanto Company
1 3. I wil propose a capital structure that wil maintain RMP's financial integrity.
2 4. i wil estimate a fair return on equity for RMP.
3 5. i wil show that my recommended rate of return wil support RMP's financial
4 integrity and investment grade bond rating.
5 6. Finally, i wil respond to RMP witness Dr. Hadaway's recommended return on
6 equity of 10.6% and explain why it is excessive and unreasonable.
7 Electric Utilty Industry Market Outlook
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9 A
PLEASE DESCRIBE THIS SECTION OF YOUR TESTIMONY.
10 industry. Based on the assessments below, I find the credit rating outlook of the
i review the credit rating and investment return performance of the electric utilty
11 industry to be strong and supportive of the industry's financial integrity. Further,
12 electric utilties' stocks have exhibited strong return performance and are again
13 characterized as a safe investment.
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PLEASE DESCRIBE THE ELECTRIC UTILITIES' CREDIT RATING OUTLOOK.
Electric utilties' credit rating outlook is improving over the recent past. Standard &
Poor's ("S&P") recently provided an assessment of the credit rating of U.S. electric
utilities for the second quarter of 201 O. S&P's commentary included the following:
The past three months witnessed several outlook changes, most of
which were positive or revisions to stable from negative. The principal
drivers for the positive outlooks were constructive rate decisions,
overall improving business risk profiles, and stronger measures of
bondholder protection.
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The universe of U.S. electric utilities is relatively highly rated, certainly
compared with the average 'B' category for U.S. industrial companies.
This is due to the large percentage of firms carrying 'excellent' (84%)
and 'strong' (13%) business risk profiles. ...What typically distinguishes
one utilty's business profile score from another is the quality of the
regulatory climate and management's commitment to credit quality and
financial policies. We consider the financial risk profile for most electric
companies to be 'aggressive' ...
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Monsanto Company
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The ratings distribution for electric utilities in the U.S. remains solidly
entrenched in investment grade. Approximately 67% of the industry
carries a 'BBB' category corporate credit rating ('BBB+', 'BBB', and
'BBB-'), nearly 29% 'A.'and above, and about 4% below investment
grade ('BB+' and below). Some 86% of all domestic electric utilty
companies carry a stable outlook, so the number of rating changes is
expected to remain moderate in the near to intermediate term. Ratings
stability for the electric sector continues to be based in large part on
the following expectations:
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. Generally responsive rate orders, including mechanisms or
automatic provisions that allow that for the timeiY recovery of
commodity prices, environmental compliance costs, and other
expenses;
· Receptive capital markets, access to liquidity, and manageable
debt maturity schedules;
· Moderation in growth and expansion capital expenditures; and
. Credit-supportive actions by utility management.1
18 From an economic standpoint, S&P stated the following:
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Effects On Ratings
Regulated electric utilities have been, and are expected to continue,
weathering the diffcult economy with litle lasting effect on the
collective financial risk profile of the industry, and we assess ratings
and outlooks based on our stable view of industry and company-
specific factors. Outlooks and ratings should remain predominantly
unchanged, even if industry conditions worsen in the near term, as
described in our pessimistic scenario (see table 1). However, if lack of
economic growth persists for an extended period, regulatory risk could
rise if concerns about the plight of ratepayers leads to resistance to
rate increases.
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Solid Industry Fundamentals Support Stable Outlook
Throughout 2009, U.S. electric utilties performed well with continued
favorable access to capital compared to most corporate issuers.
Despite diffcult market conditions last year, external financing activity
for the U.S. regulated electric utilty industry was about $49.8 bilion,
roughly matching 2008 activity. Many companies have proactively pre-
financed issuance well in advance of their debt maturities, taking
advantage of investor appetite and favorable spreads. Investor
appetite for first-mortgage bonds remained healthy, and deals
remained oversubscribed. Credit fundamentals indicate that most, if
not all, electric utilties should continue to have ample access to capital
markets and credit. Banking syndicates are also expressing
1Standard & Poor's RatingsDirect on the Global Credit Portal: "Ratings Roundup: Strongly
Positive Rating Changes In U.S. Electric Utility Sector In Second-Quarter 2010; No Downgrades,"
July 15, 2010, emphasis added.
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willngness to renegotiate credit facilities, although at more demanding
terms than in the previous years.2
3 Moody's also acknowledges the following for the electric utilty industry in its report:
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Overview
The fundamental credit outlook for the U.S. investor-owned electric
utilty sector remains stable, thanks to a supportive regulatory
framework that provides good transparency into operating cost and
capital investment recovery; adequate liquidity profiles; relatively
unfettered access to the capital markets; and reasonably stable
financial credit metrics. The investor-owned utilty business model
remains well positioned within its investment-grade rating category for
2010 and at least the first half of 2011. 3
13 Similarly, Fitch states:
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Overview
The U.S. Utilties, Power, and Gas (UPG) sector 2010 outlook is
framed in the context of Fitch Ratings' outlook for a slow U.S.
economic recovery in 2010, with stable outlooks for most of the
business segments within the UPG universe except for negative 2010
credit outlook for competitive generators and retail propane
distributors.
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Resilent Performance in 2009
Companies in the UPG sector weathered the recession and financial
crisis of 2008-2009 with considerably less pain than sectors such as
financial institutions, cyclical industrials, and retailers. The absence of
significant defaults in the sector is in stark contrast to the upswing in
defaults and bankruptcy filngs across the rest of the U.S. economy,
consistent with the defensive reputation of the sector. '
In general, companies in the UPG sector entered 2009 in reasonably
sound financial condition; some drew down their bank credit facilties
during the banking crisis in late 2008 and repaid the loans as the bank
and financial markets stabilzed during 2009.4
33 As noted by S&P, Moody's and Fitch above, the regulated electric utilty
34 industry is maintaining strong investment grade credit and is well positioned to
2Standard & Poots RatingsDirect on the Global Credit Portal: "Industry Economic And
Ratings Outlook: Slightly Positive Outlook For U.S. Regulated Electric Utilities Supports Rating
Stability," February 2,2010, emphasis added.3Moody's Investors Service Industry Outlook: "U.S. Electric Utilities Face Challenges Beyond
Near-Term," January 2010, emphasis added.4Fitch Ratings: "U.S. Utilities, Power and Gas 2010 Outlook," December 4,2009.
Gorman, OJ - 6
Monsanto Company
1 weather the recent economic downturn. Therefore, reasonable and rational
2 adjustments to RMP's rates would be appropriate to provide fair compensation, but
3 not excessive compensation, in an effort to improve RMP's competitive position and
4 support its credit quality.
5 Q PLEASE DESCRIBE ELECTRIC UTILITY STOCK PRICE PERFORMANCE OVER
6 THE LAST FIVE YEARS.
7 A As shown in Figure 1 below, the Edison Electric Institute ("EEl") has recorded electric
8 utilty stock price performance compared to the market. The EEl data shows that its
9 Electric Utility Index has outperformed the market over the last five years
10 (2004-2008). Again, this strong stock performance indicates commission-authorized
11 returns on equity over the last several years have been positively received by the
12 market.
FIGURE 1
Index Comparison
30.00
20.00
10.00c..::..GIII (10.00)..c
l!(20.00)..
GIci
(30.00)
(40.00)
(50.00)
""EEllndex
_S&P500
2004 2005 2006 2007 2008 2009 Q22010
Source: EEl Q2 2010 Stock Performance Finanåal Update, at Page 1.
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Monsanto Company
1 During 2009 and the first half of 2010, the EEl Index underperformed the market,
2 which is not unusual for stocks that are considered "safe havens" during periods of
3 market turbulence. The EEl states the following:
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Given the explosive market rally that began in March, the EEl Index's
underperformance of the major averages is not surprising. Defensive
stocks typically lag early in market rebounds coming out of recessions,
and the EEl Index surpassed broad market returns in each year from
2004 through 2008. Five years is a long stretch of outperformance for
any industry but especially so for the traditionally staid and
conservative utilties, who spent much of the middle years of the past
decade rebuilding balance sheets and refocusing business strategies
on basic regulated distribution and generation after the turbulence and
missteps into non-core businesses that followed deregulation in the
late 1990s.
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Utilties a Winner for the Decade
Indeed. the industry's return to its roots in the traditional power
business proved a winning strategy for long-term growth of
shareholder value during the decade that just ended. From January 1,
2000 through December 31, 2009, the EEl Index returned 134%,
substantially outperforming the Dow Jones Industrials 14% return, the
S&P 500's -9% return, and the Nasdaq's 44% decHne. The
tech-heavy Nasdaq never fully retraced the ground lost after the tech
bubble collapsed in 2001, and the S&P 500 was also heavily weighted
with technology at the decade's start, which accounts in part for its
negative showing. The financial crisis and "Great Recession" (the
popular label for our current economic malaise) capped the ten-year
stretch. producing severe losses in financial stocks and a new round of
weakness for the Nasdaq. All in all, conservative, plodding utilities
were the tortoise that outran the hare, demonstrating that sound
regulation, financial stabilty, operational and service excellence and
good investment returns can all coexist, and in fact be mutually
reinforcing.
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Fundamentals Remain Solid
While the changed economic landscape since mid-2008 has
diminished the industry's near-term earnings prospects, industry
analysts continue to believe that many companies offer potential for a
return to reasonably strong earnings growth - supported by rate base
growth and rate relief from cases decided in recent months - as the
economy recovers from recession and enters a new expansion phase.
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In fact. the industry's generally strong balance sheets and credit
ratings. and its strategic focus on predictable regulatory treatment
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Monsanto Company
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(such as pre-approval of major projects and construction work-in-
progress rate treatment in several states) were key factors that enable
companies to access capital throughout the credit crisis of late
2008/early 2009. The industry's positive long-term fundamental outlook
and attractive dividend yields wil likely continue to appeal to investors
looking for stable investments in today's difficult economic
environment. As the year came to an end, a number of analysts
remarked on the relative undervaluation of regulated utilty stocks
relative to the broad market, and sug~ested that the underperformance
in 2009 was unlikely to be sustained.
11 RMP Investment Risk
12 Q PLEASE PROVIDE A BRIEF OVERVIEW OF RMP AND ITS INVESTMENT
13 CHARACTERISTICS.
14 A RMP is a subsidiary of PacifiCorp, which is owned by MidAmerican Energy Holdings
15 Company ("MEHC"). PacifiCorp issues debt and equity on behalf of RMP.
16 PacifiCorp's current senior secured bond ratings from S&P and Moody's are "A" and
"A2," respectively.6 PacifiCorp's corporate credit ratings from S&P and Moody's are
"A-" and "Baa1," respectively.?
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19 Specifically, S&P states the following:
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Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflects its
"excellent" business risk profile, evidenced by a diverse and growing
service territory, and "aggressive" financial risk profile that reflects a
large capital program and the need to shore up its cash flow metrics.
While the ring-fenced utilty's credit metrics are more consistent on a
stand-alone basis with a 'BBB' category rating, Standard & Poor's
Ratings Services expects that management wil achieve cash flow
metrics more consistent with an 'A' category rating over the next
several years. PacifiCorp is owned by MidAmerican Energy Holdings
Co. (MEHC; BBB+/Stable/--).
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Outlook
The stable outlook on the PacifiCorp ratings incorporates our
expectation that MEHC wil continue to support the utilty by
5EEi Q4 2009 Financial Update, emphasis added.
SWilliams Direct at 6.
?PacifiCorp, FERC Form 3-Q as of June 30,2010 at 109.10.
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Monsanto Company
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contributing equity suffcient to ensure that our fully adjusted debt to
total capitalization is managed over the next few years to an adjusted
level of closer to 50% and that FFO to total debt and FFO interest
coverage wil be 20% or better and in the range of 4.0x-4.5x,
respectiveiY. Given that PacifiCorp's financial risk profile is weak for
the current ratings, we do not expect near-term upward ratings
momentum for the utilty. PacifiCorp's regulatory and structural
insulation shields the utilty from some MEHC credit deterioration, to an
extent. Specifically, our criteria provide that the PacifiCorp CCR can
be no more than three notches above the MEHC consolidated credit
rating. The company is comfortably within this range, so we do not
see significant prospects for the utilty rating to fall as a result of
adverse rating changes on MEHC, which also enjoys a stable outlook. 8
14 Similarly, Moody's confirms PacifiCorp's supportive regulatory treatment:
15 Rating Rationale
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PacifiCorp's Baa1 rating for its senior unsecured obligations is driven
by the stability of its regulated cash flows, the geographically diverse
and relatively constructive regulatory environments in which it
operates, the diversification of its generation portfolio, financial credit
metrics that are within the ranges demonstrated by U.S. integrated
electric utilties rated Baa, and its position as the largest subsidiary of
MEHC. The rating also considers PacifiCorp's plans for significant
capital investment in generation and transmission and for
environmental compliance. The stable outlook incorporates Moody's
expectation that PacifiCorp wil continue to receive generally
supportive regulatory treatment to recover its increased costs and that
capital expenditures wil be financed in a manner that is consistent with
its current credit profile.
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Reasonably Supportive Regulatory Environment
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PacifiCoæ's rating recognizes that the regulated nature of its
businesses and acknowledges the relative stability and predictabilty of
cash flows associated with these operations. The rating also
considers PacifiCorp's specific regulatory relationships. In 2007,
approximately 72% of PacifiCorp's retail revenues were subject to
regulatory oversight in Utah and Oregon which Moody's generally
ranks as average among U.S. regulatory jurisdictions in terms of
framework development, consistency and predictabilit of decisions,
and expectation of timely recovery of costs and investments. In
Oregon, California and Wyoming (44% of 2007 revenues) regulators
have authorized adjustment mechanisms to recover changes in the
costs of fuel and purchased power. Such provisions add adjustment
8Standard & Poor's RatingsDirect Summary: "PacifiCorp,. October 30, 2009 (emphasis
added).
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Monsanto Company
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mechanisms to recover changes in the costs of fuel and purchased
power. Such provisions add predictabilty to utility returns and reduce
implementation lag. In an attempt to minimize regulatory lag and earn
its allowed ROEs, PacifiCorp is filing more frequent rate cases in all its
jurisdictions.
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Existence of Ring-Fencing Provisions
PacifiCorp is ring-fenced via a special purpose entity structure, which
preserves its credit profile as an independent operating company,
separate from its ultimate parent company. The structure includes
typical ring-fencing provisions such as an independent director,
separate books and records, restrictions on affilate transactions (arm's
length), prohibitions on collateralizing or guaranteeing affliate debt,
and restrictions on dividend distributions. PacifiCorp's dividend
distributions are subject to compliance with certain financial tests,
including a minimum interest coverage ratio of 2.5 times and minimum
equity ratio in the range of 44-48.25%.
Financial Metrics
PacifiCorp's cash flow metrics are expected to remain fairly stable over
the near-to-medium term as the company continues with its significant
capital expenditure program. Moody's anticipates the company wil
proactively seek additional rate recovery for increased costs and
investments, and that dividend policy wil continue to be established in
a manner that is supportive of the company's current credit profile.
Over the next few years, Moody's anticipates PacifiCorp's ratio of CFO
pre-W/C to Debt wil remain in the range of 17-19% and that its interest
coverage ratio wil be in a range of 4.0-5.0 times.9
WHAT DO YOU RECOMMEND THE COMMISSION TAKE FROM THIS CREDIT
REPORT REVIEW OF THE REGULATORY TREATMENT RMP IS RECEIVING?
Credit analysts consider the regulatory treatment for RMP to be constructive and
supportive of RMP's excellent business risk profile and stable investment grade credit
standing.
9Moody's Investors Service Credit Opinion: "PacifiCorp," October 17, 2008 (emphasis added).
Gorman, OJ - 11
Monsanto Company
1 RMP's Proposed Capital Structure
2 Q WHAT CAPITAL STRUCTURE IS THE COMPANY REQUESTING TO USE TO
3 DEVELOP ITS OVERALL RATE OF RETURN FOR ELECTRIC OPERATIONS IN
4 THIS PROCEEDING?
5 A RMP's 2010 forecasted capital structure, as supported by RMP witness Mr. Bruce N.
6 Wiliams, is shown below in Table 1.
TABLE 1
RMP's Proposed Capital Structure
(December 31,2010)
Description
Percent of
Total Capital
Long-Term Debt
Preferred Stock
Common Equity
Total Capital Structure
47.6%
0.3%
52.1%
100.0%
Source: Wiliams Direct at 2.
7 Q DO YOU HAVE ANY ISSUES WITH RMP'S PROPOSED CAPITAL STRUCTURE?
8 A Yes. RMP's proposed capital structure reflects a substantial increase in its common
9 equity ratio over the last several years. Indeed, based on its Federal Energy
10 Regulatory Commission financial statements, RM~ has not paid dividends to its
11 parent company over at least the last three years and has received $990 millon of
12 equity infusions since its acquisition by MEHC.10 As a result, RMP's common equity
13 ratio has increased from approximately 49.4% in 2007, up to 52.2% by June 30,
14 2010.
15 The concern i have with RMP's capital structure, is that while it has retained
16 all earnings in the Company, those earnings have not been completely invested in
1CWilliams Direct at 6.
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Monsanto Company
1 utility plant and equipment in the test year, or through 2010. Indeed, the Company's
2 books and records show that the Company has a substantial investment in special
3 deposits, temporary cash investments, and notes receivable from affilate companies
4 (together short-term asset investments). The five quarter average of the short-term
5 asset investment totals over $200 million. RMP is using its retained earnings in part
6 to invest in these short-term assets.
7 i recommend the common equity supporting these short-term assets
8 investments not be included in the capital structure used to recover RMP's cost of
9 capital for utilty operations. RMP's common equity that is not used to support
10 investments in utility plant should not be included in its utility cost of capital. As a
11 result, RMP's ratemaking capital structure should be adjusted to remove the common
12 equity supporting short-term cash investments and, thus, excluded from the
13 development of an overall rate of return applied to RMP's utility plant investment.
14 Q PLEASE DESCRIBE YOUR PROPOSED ADJUSTMENT TO RMP'S CAPITAL
15 STRUCTURE.
16 A RMP is proposing a 2009 test year, with known and measurable adjustments through
17 year-end 2010. However, actual data is only available for the post-test year through
18 June 30, 2010. Therefore, i relied on RMP's most recent five quarters of data ending
19 June 30, 2010 to develop an average capital structure ending June 30, 2010.11
20 RMP's capital structure at June 30, 2010 is 52.2%, and is very close to that projected
21 by RMP for year-end 2010 of 52.1%.
22 i propose to remove the common equit capital supporting the following
23 non-utilty assets: (1) special deposits, (2) short-term investments, and (3) the
24 difference between notes receivable from affliate companies and notes payable to
11Data for the last two quarters of 2010 were not available.
Gorman, OJ -13
Monsanto Company
1 affliate companies. This wil reduce the five quarter average common equity amount
2 by approximately $200 millon, and lower the common equity ratio from 52.1% down
3 to 49.7%.
4 I believe this capital structure is more reasonable for setting rates because it
5 reflects the actual common equity capital RMP relied on to invest in utility plant. The
6 primary difference between my capital structure and that proposed by RMP, is that
7 the Company is proposing to reflect the cost of common equity capital that has not
8 been used to support investments in utility plant. In contrast, my capital structure
9 reflects the actual capital structure mix supporting its investment in utility plant.
10 Therefore, I believe my capital structure produces a more reasonable estimate of
11 RMP's actual cost of capital supporting its utilty plant investment.
12 Q DOES RMP HAVE AN ACQUISITION ADJUSTMENT RECORDED ON ITS
13 BALANCE SHEET THAT IS SUPPORTED BY COMMON EQUITY CAPITAL?
14 A Yes. However, RMP's schedules in this case indicate that a portion of this acquisition
15 adjustment is included in its Idaho rate base. Therefore, I did not remove the
16 common equity supporting this acquisition asset from the capital structure supporting
17 rate base. However, if this acquisition adjustment is removed from the Idaho rate
18 base, then the common equity supporting the acquisition adjustment should also be
19 removed from utilty capital structure.
20 Q IS IT POSSIBLE THAT RMP'S DEBT CAPITAL COULD HAVE BEEN USED TO
21 FUND INVESTMENTS IN THESE SHORT-TERM CASH ASSETS?
22 A No. RMP's long-term embedded debt cost is 5.92%, and is more expensive than the
23 short-term interest earnings it produces on these short-term cash investments.
24 Therefore, it is reasonable to believe that these short-term cash investments simply
Gorman, OJ -14
Monsanto Company
1 represent a placeholder for all the earnings RMP is retaining in its Company until
2 needed to fund utilty plant investment.
3 Q WHAT IS YOUR PROPOSED CAPITAL STRUCTURE IN THIS PROCEEDING?
4 A My proposed capital structure is shown below in Table 2.
TABLE 2
Adjusted Capital Structure
(ActuaI5-Quarter average, ending June 2010)
Description
Percent of
Total Capital
Long- Term Debt
Preferred Stock
Common Equity
Total Capital Structure
50.0%
0.3%
49.7%
100.0%
Source: Exhibit No. 202 (MPG-1) at 1.
5 Q IS YOUR PROPOSED CAPITAL STRUCTURE GENERALLY CONSISTENT WITH
6 RMP'S TARGET CAPITAL STRUCTURE FOR UTILITY OPERATIONS?
7 A Yes. In previous proceedings, Mr. Wiliams has stated a capital structure target for
8 utilty operations of 50%/50% debt/equit. The capital structure outlined in Table 2
9 approximates this targeted utilty capitalization mix.
10 Q WILL YOUR PROPOSED CAPITAL STRUCTURE SUPPORT RMP'S FINANCIAL
11 INTEGRITY AND CREDIT RATING?
12 A Yes. As i wil discuss later in my testimony, my proposed capital structure is
13 consistent with RMP's current credit rating and wil support RMP's financial integrity.
Gorman, OJ -15
Monsanto Company
1 Return on Common Equity
2 Q PLEASE DESCRIBE WHAT IS MEANT BY A "UTILITY'S COST OF COMMON
3 EQUITY."
4 A A utilty's cost of common equity is the return investors expect, or require, in order to
5 make an investment. Investors expect to achieve their return requirement from
6 receiving dividends and stock price appreciation.
7 Q PLEASE DESCRIBE THE FRAMEWORK FOR DETERMINING A REGULATED
8 UTILITY'S COST OF COMMON EQUITY.
9 A In general, determining a fair cost of common equity for a regulated utilty has been
10 framed by two decisions of the U.S. Supreme Court: Bluefield Water Works &
11 Improvement Co. v. Public Servo Commission of West Virginia, 262 U.S. 679 (1923)
12 and Federal Power Commission V. Hope Natural Gas Co., 320 U.S. 591 (1944).
13 These decisions identify the general standards to be considered in
14 establishing the cost of common equity for a public utilty. Those general standards
15 provide that the authorized return should: (1) be sufficient to maintain financial
16 integrity; (2) attract capital under reasonable terms; and (3) be commensurate with
17 returns investors could earn by investing in other enterprises of comparable risk.
18 Q PLEASE DESCRIBE THE METHODS YOU HAVE USED TO ESTIMATE THE COST
19 OF COMMON EQUITY FOR RMP.
20 A i have used several models based on financial theory to estimate RMP's cost of
21 common equity. These models are: (1) a constant growth Discounted Cash Flow
22 ("DCF") model; (2) a sustainable growth DCF model; (3) a multi-stage growth DCF
23 model; (4) a Risk Premium model; and (5) a Capital Asset Pricing Model ("CAPM"). i
Gorman, OJ -16
Monsanto Company
1 have applied these models to a group of publicly traded utiities that I have
2 determined reflect investment risk similar to RMP.
3 Q HOW DID YOU SELECT A PROXY GROUP OF UTILITIES SIMILAR IN
4 INVESTMENT RISK TO RMP TO ESTIMATE ITS CURRENT MARKET COST OF
5 EQUITY?
6 A I relied on the same proxy group used by RMP witness Dr. Hadaway to estimate
7 RMP's return on equity.
8 Q HOW DOES THIS PROXY GROUP'S INVESTMENT RISK COMPARE TO THE
9 INVESTMENT RISK OF RMP?
10 A The proxy group is shown on Exhibit No. 203 (MPG-2). This proxy group has an
11 average senior secured credit rating from S&P of "A-," which is comparable to RMP's
12 senior secured credit rating from S&P of "A." The proxy group's senior secured credit
13 rating from Moody's is "A2," which is identical to RMP's senior secured credit rating
14 from Moody's. Therefore, my proxy group has comparable total investment risk to
15 RMP.
16 The proxy group has an average common equity ratio of 46.9% (including
17 short-term debt) from AUS and 48.1 % (excluding short-term debt) from Value Une in
18 2009. This proxy group's common equit ratio is lower than my proposed common
19 equity ratio for RMP of 49.7%. A comparable common equity ratio demonstrates that
20 RMP's financial risks are comparable to or lower than my proxy group.
21 I also compared RMP's business risk to the business risk of my proxy group
22 based on S&P's ranking methodology. RMP has a business risk profile of "Excellent,"
23 which is identical to the risk profile of my proxy group. S&P's profile score
24 methodology is discussed later in my testimony.
Gorman, OJ -17
Monsanto Company
1 Discounted Cash Flow Model
2 Q
3 A
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20 Q
21 A
PLEASE DESCRIBE THE DCF MODEL.
The DCF model posits that a stock price is valued by summing the present value of
expected future cash flows discounted at the investor's required rate of return or cost
of capital. This model is expressed mathematically as follows:
Po = D1 + D2--D~_ where (Equation 1)
(1+K)1 (1+K)2 (1+Kf
Po = Current stock price
D = Dividends in periods 1 - 00
K = Investor's required return
This model can be rearranged in order to estimate the discount rate or investor
required return, "K." If it is reasonable to assume that earnings and dividends wil
grow at a constant rate, then Equation 1 can be rearranged as follows:
K = D1/Po + G (Equation 2)
K = Investor's required return
D1 = Dividend in first year
Po = Current stock price
G = Expected constant dividend growth rate
Equation 2 is referred to as the annual "constant growth" DCF modeL.
PLEASE DESCRIBE THE INPUTS TO YOUR CONSTANT GROWTH DCF MODEL.
22 expected dividend, and expected growth rate in dividends.
As shown under Equation 2 above, the DCF model requires a current stock price,
Gorman, OJ -18
Monsanto Company
1 Q WHAT STOCK PRICE AND DIVIDEND HAVE YOU RELIED ON IN YOUR
2 CONSTANT GROWTH DCF MODEL?
3 A I relied on the average of the weekly high and low stock prices over a 13-week period
4 ended September 10, 2010. An average stock price is less susceptible to market
5 price variations than a spot price. Therefore, an average stock price is less
6 susceptible to aberrant market price movements, which may not be reflective of the
7 stock's long-term value.
8 A 13-week average stock price is stil short enough to contain data that
9 reasonably reflect current market expectations, but is not so short a period as to be
10 susceptible to market price variations that may not be reflective of the security's
11 long-term value. In my judgment, a 13-week average stock price is a reasonable
12 balance between the need to reflect current market expectations and the need to
13 capture sufficient data to smooth out aberrant market movements.
14 I used the most recently paid quarterly dividend, as reported in The Value Line
15 Investment SUNey. This dividend was annualized (multiplied by 4) and adjusted for
16 next year's growth to produce the D1 factor for use in Equation 2 above.
17 Q WHAT DIVIDEND GROWTH RATES HAVE YOU USED IN YOUR CONSTANT
18 GROWTH DCF MODEL?
19 A There are several methods one can use in order to estimate the expected growth in
20 dividends. However, for purposes of determining the market required return on
21 common equity, one must attempt to estimate investors' consensus about what the
22 dividend or earnings growth rate wil be, and not what an individual investor or analyst
23 may use to form individual investment decisions.
24 Security analysts' growth estimates have been shown to be more accurate
25 predictors of future returns than growth rates derived from historical data because
Gorman, OJ -19
Monsanto Company
1 they are more reliable estimates. 12 Assuming the market generally makes rational
2 investment decisions, analysts' growth projections are more likely the growth
3 estimates considered by the market that influence observable stock prices than are
4 growth rates derived from only historical data.
5 For my constant growth DCF analysis, i have relied on a consensus, or mean,
6 of professional security analysts' earnings growth estimates as a proxy for the
7 investor consensus dividend growth rate expectations. I used the average of three
8 sources of analysts' growth rate estimates: Zacks, SNL Financial and Reuters. All
9 consensus analysts' projections used were available on September 15, 2010, as
10 reported online.
11 Each consensus growth rate projection is based on a survey of securit
12 analysts. The consensus estimate is a simple arithmetic average, or mean, of
13 surveyed analysts' earnings growth forecasts. A simple average of the growth
14 forecasts gives equal weight to all surveyed analysts' projections. It is problematic as
15 to whether any particular analyst's forecast is more representative of general market
16 expectations. Therefore, a simple average, or arithmetic mean, of analyst forecasts is
17 a good proxy for market consensus expectations.
18 Q WHAT IS THE GROWTH RATE YOU USED IN YOUR CONSTANT GROWTH DCF
19 MODEL?
20 A The growth rates I used in my DCF analysis are shown in Exhibit No. 204 (MPG-3).
21 The average and median growth rateS for my proxy group are 5.67% and 5.45%,
22 respectively.
12See, ~, David Gordon, Myron Gordon, and Lawrence Gould, "Choice Among Methods of
Estimating Share Yield," The Journal of Portolio Management, Spring 1989.
Gorman, OJ - 20
Monsanto Company
1 Q WHAT ARE THE RESULTS OF YOUR CONSTANT GROWTH DCF MODEL?
2 A As shown in Exhibit No. 205 (MPG-4), the average and median constant growth DCF
3 returns for the proxy group are 10.45% and 10.50%, respectively.
4 Q DO YOU HAVE ANY COMMENTS CONCERNING THE RESULTS OF YOUR
5 CONSTANT GROWTH DCF ANALYSIS?
6 A Yes. The three- to five-year growth rate exceeds a long-term sustainable growth rate
7 as required by the constant growth DCF model.
8 Q WHY DO YOU BELIEVE THE PROXY GROUP'S THREE- TO FIVE-YEAR
9 GROWTH RATE IS IN EXCESS OF A LONG-TERM SUSTAINABLE GROWTH?
10 A The three- to five-year growth rate of the proxy group exceeds the growth rate of the
11 overall U.S. economy. As developed below, the consensus of published economists'
12 projects is that the U.S. Gross Domestic Product ("GDP") wil grow at a rate of no
13 more than 5.1% and 4.9% over the next 5 and 10 years, respectively. A company
14 cannot grow, indefinitely, at a faster rate than the market in which it sells its products.
15 The U.S. economy, or GDP, growth projection represents a ceilng, or high-end,
16 sustainable growth rate for a utility over an indefinite period oftime.
17 Q WHY IS THE GOP GROWTH PROJECTION CONSIDERED A CEILING GROWTH
18 RATE FOR A UTILITY?
19 A Utilties cannot indefinitely sustain a growth rate that exceeds the growth rate of the
20 overall economy. Utilties' earnings/dividend growth is created by increased utilty
21 investment or rate base. Utility plant investment, in turn, is driven by service area
22 economic growth and demand for utilty service. In other words, utilities invest in
23 plant to meet sales demand growth, and sales growth in turn is tied to economic
Gorman, OJ - 21
Monsanto Company
1 growth in their service areas. The Energy Information Administration ("EIA") has
2 observed that utilty sales growth is less than U.S. GDP growth, as shown in Exhibit
3 No. 206 (MPG-5). Utilty sales growth has lagged behind GDP growth. Hence,
4 nominal GDP growth is a very conservative, albeit overstated, proxy for electric utilty
5 sales growth, rate base growth, and earnings growth. Therefore, GDP growth is a
6 reasonable proxy for the highest sustainable long-term growth rate of a utilty.
7 Q IS THERE RESEARCH THAT SUPPORTS YOUR POSITION THAT, OVER THE
8 LONG TERM, A COMPANY'S EARNINGS AND DIVIDENDS CANNOT GROW AT
9 A RATE GREATER THAN THE GROWTH OF THE U.S. GOP?
10 A Yes. This concept is supported in both published analyst literature and academic
11 work. Specifically, in a textbook entitled "Fundamentals of Financial Management,"
12 published by Eugene Brigham and Joel F. Houston, the authors state as follows:
13 The constant growth model is most appropriate for mature companies14 with a stable history of growth and stable future expectations.
15 Expected growth rates vary somewhat among companies, but
16 dividends for mature firms are often expected to grow in the future at17 about the same rate as nominal gross domestic product (real GDP18 plus inflation).13
19 Also, Morningstar's Stocks, Bonds, Bils and Inflation 2009 Yearbook
20 Valuation Edition tracked dividends of the stock market in comparison to GDP growth
21 over the period 1926 through the end of 2008.14 Based on that study, the authors
22 found that earnings and dividends for the market have historically grown in tandem
23 with the overall economy. It is important to note that the growth of companies
24 included in the overall market wil normally be higher than that of utilty companies.
25 These non-utilty companies achieve a higher level of growth because they retain a
13"Fundamentals of Financial Management," Eugene F. Brigham and Joel F. Houston,
Eleventh Edition 2007, Thomson South-Western, a Division of Thomson Corporation at 298.14Stocks, Bonds, Bils and Inffation 2009 Yearbook Valuation Edition (Morningstar, Inc.) at 67.
Gorman, OJ - 22
Monsanto Company
1 larger percentage of their earnings and payout a much smaller percentage of their
2 earnings as dividends. Retaining higher percentages of total earnings fuels stronger
3 growth for these non-utility companies. Since the market in general grows at the
4 overall GDP growth rate, it is very conservative to assume that utility companies could
5 achieve this same level of sustained growth without a material reduction in their
6 dividend payout ratios. As such, using the GDP as a maximum sustainable growth
7 rate is a very conservative and high-end estimate for utilty companies.
8 Q
9
10 A
11
12
13
14
15
16
17
18
19
20
21
22
HAVE ANALYSTS RECOGNIZED THAT SHORT-TERM GROWTH OUTLOOKS
WILL SLOW OVER TIME?
Yes. Value Line recognized that dividend growth wil likely slow from short-term
growth patterns. Value Line stated as follows:
Dividends have been increasing at a rapid pace since 2002, reflecting
relatively healthy balance sheets throughout the industry. In fact, last
year 61 % of electric utilties raised their dividend, 33% reported no
change, 2% reinstated theirs, 2% lowered them, and only 2% are not
paying them at all. In any industry these statistics would be viewed as
quite favorable. But. 2008 actually marked the slowing of a trend for
the electric utilty industry, in which the percentage of dividend
increases declined. The reversal is attributable to deteriorating
economic conditions, elevated capital spending, and higher debt-to-
capitalization ratios. Despite this, many utilties are stil sporting
attractive yields. 15
23 Sustainable Growth DCF
24 Q
25 GROWTH RATE FOR YOUR SUSTAINABLE GROWTH DCF MODEL.
PLEASE DESCRIBE HOW YOU ESTIMATE A SUSTAINABLE LONG-TERM
26 A A sustainable growth rate is based on the percentage of the utilty's earnings that are
27 retained and reinvested in utilty plant and equipment. These reinvested earnings
15Value Line Investment Survey, May 29, 2009, emphasis added.
Gorman, OJ - 23
Monsanto Company
1 increase the earnings base (rate base) and wil grow earnings when the reinvested
2 earnings investment is put into service, and the Company is allowed to earn its
3 authorized return on the additional rate base investment.
4 The internal growth methodology is tied to the percentage of earnings retained
5 in the company and not paid out as dividends. The earnings retention ratio is 1 minus
6 the dividend payout ratio. As the payout ratio declines, the earnings retention ratio
7 increases. An increased earnings retention ratio will fuel stronger growth because
8 the business funds more investments with retained earnings. As shown in Exhibit No.
9 207 (MPG-6), Value Line projects the proxy group to have a declining dividend
10 payout ratio over the next three to five years. These dividend payout ratios and
11 earnings retention ratios can then be used to develop a sustainable long-term
12 earnings retention growth rate to help gauge whether analysts' current three- to five-
13 year growth rate projections can be sustained over an indefinite period of time.
14 The data used to estimate the long-term sustainable growth rate is based on
15 the Company's current market to book ratio, and Value Line's three- to-five year
16 projections per earnings, dividends, earned return on book equity, and projected
17 stock issuances.
18 As shown in Exhibit No. 208 (MPG-7), page 1 of 2, the average and median
19 sustainable growth rates for the proxy group using this internal growth rate model are
20 5.16% and 5.03%, respectively.
21 Q WHAT IS THE CONSTANT GROWTH DCF ESTIMATE USING THIS
22 SUSTAINABLE LONG-TERM GROWTH RATE?
23 A A DCF estimate based on this sustainable growth rate is developed in Exhibit No. 209
24 (MPG-8). As shown there, a sustainable growth DCF analysis produces a group
25 average and median DCF result of 9.92% and 9.14%, respectively.
Gorman, OJ - 24
Monsanto Company
1 The average result is skewed due to a significant outlier - DPL Inc., which
2 produces a return on equity of 19.14%. Excluding DPL Inc., the proxy group's
3 average DCF would be 9.48%. Therefore, I conclude that the median result of 9.14%
4 better represents the central tendency of my proxy group. Hence, I wil rely on the
5 median DCF result.
6 The sustainable growth DCF result is based on the dividend and price data
7 used in my constant growth DCF study (using analyst growth rates) and the
8 sustainable growth rate discussed above and developed in Exhibit No. 208 (MPG-7).
9 Multi-Stage Growth DCF Model
10 Q HAVE YOU CONDUCTED ANY OTHER DCF STUDIES?
11 A Yes. My first constant growth DCF is based on consensus analysts' growth rate
12 projections, so it is a reasonable reflection of rational investment expectations over
13 the next three to five years. The limitation on the constant growth DCF model is that
14 it cannot reflect a rational expectation that a period of high/low short-term growth can
15 be followed by a change in growth to a rate that is more reflective of long-term
16 sustainable growth. Hence, i performed a multi-stage growth DCF analysis to reflect
17 this outlook of changing growth expectations.
18 Q PLEASE DESCRIBE YOUR MULTI-STAGE GROWTH DCF MODEL.
19 A The multi-stage growth DCF model reflects the possibilty of non-constant growth for
20 a company over time. The multi-stage growth DCF model reflects three growth
21 periods: (1) a short-term growth period, which consists of the first five years; (2) a
22 transition period, which consists of the next five years (6 through 10); and (3) a
23 long-term growth period, starting in year 11 through perpetuity.
Gorman, OJ - 25
Monsanto Company
1 For the short-term growth period, I relied on the consensus analysts' growth
2 projections described above in relationship to my constant growth DCF model. For
3 the transition period, the growth rates were reduced or increased by an equal factor,
4 which reflects the difference between the analysts' growth rates and the GDP growth
5 rate. For the long-term growth period, i assumed each company's growth would
6 converge to the maximum sustainable growth rate for a utilty company as proxied by
7 the consensus analysts' projected growth for the U.S. GDP of 4.9%.
8 Q WHAT DO YOU BELIEVE IS A REASONABLE SUSTAINABLE LONG-TERM
9 GROWTH RATE?
10 A A reasonable growth rate that can be sustained in the long run should be based on
11 consensus analysts' projections. Blue Chip Financial Forecasts publishes consensus
12 GDP growth projections twice a year. Based on its latest issue, the consensus
13 economists' published 5- to 10-year GDP growth rate outlook is 5.1 % to 4.9%,
14 respectively. 16
15 Therefore, i propose to use the consensus economists' projected 10-year
16 GDP consensus growth rate of 4.9%, as published by Blue Chip Financial Forecasts,
17 as an estimate of sustainable long-term growth. This consensus GDP growth
18 forecast represents the most likely views of market participants because it is based
19 on published economist projections.
20 Q WHAT STOCK PRICE, DIVIDEND AND GROWTH RATES DID YOU USE IN YOUR
21 MUL TI-STAGE GROWTH DCF ANALYSIS?
22 A i relied on the same 13-week stock price and the most recent quarterly dividend
23 payment discussed above. For stage one growth, i used the consensus analysts'
16Blue Chip Financial Forecasts, June 1, 2010 at 14.
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Monsanto Company
1 growth rate projections discussed above in my constant growth DCF modeL. The
2 transition period begins in year 6 and ends in year 10. For the long-term sustainable
3 growth rate starting in year 11, I used 4.9%, the consensus economists' 10-year
4 projected nominal GDP growth rate.
5 Q WHAT ARE THE RESULTS OF YOUR MULTI-STAGE GROWTH DCF MODEL?
6 A As shown in Exhibit No. 210 (MPG-9), the average and median multi-stage growth
7 DCF return on equity for the proxy group are 9.87% and 9.90%, respectively.
8 Q PLEASE SUMMARIZE THE RESULTS FROM YOUR DCF ANALYSES.
9 A The results from my DCF analyses are summarized in Table 3:
TABLE 3
Summary of DCF Results
Description Proxy Group
Constant Growth DCF Model (Analysts' Growth)
Constant Growth DCF Model (Sustainable Growth)
Multi-Stage Growth DCF Model
Average DCF Return
10.50%
9.14%
9.90%
9.85%
10 For reasons set forth above, i believe my constant growth DCF model based
11 on analysts' growth is inflated because short-term analyst growth rate projections are
12 not reasonable estimates of long-term sustainable growth. Therefore, the DCF model
13 based on analysts' growth rate estimates should not be used on a stand-alone basis.
14 i recommend it be averaged with my other DCF estimates to produce a reasonable
15 DCF point estimate that can be used to derive RMP's return on equity. The constant
16 growth DCF model based on the sustainable growth approach is based on a growth
17 rate that is sustainable in the long term in comparison to GDP growth, but may not
Gorman, Oi - 27
Monsanto Company
1 reflect analysts' short-term growth outlooks. The multi-stage growth DCF model
2 return reflects the expectation of changing growth rates over time. Even though I
3 have strong concerns about the accuracy of the constant growth DCF at this time, I
4 included all estimates in my DCF return of approximately 9.85%.
5 Risk Premium Model
6 Q
7 A
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
PLEASE DESCRIBE YOUR BOND YIELD PLUS RISK PREMIUM MODEL.
This model is based on the principle that investors require a higher return to assume
greater risk. Common equity investments have greater risk than bonds because
bonds have more security of payment in bankruptcy proceedings than common equity
and the coupon payments on bonds represent contractual obligations. In contrast,
companies are not required to pay dividends on common equity, or to guarantee
returns on common equity investments. Therefore, common equit securities are
considered to be more risky than bond securities.
This risk premium model is based on two estimates of an equity risk premium.
First, I estimated the difference between the required return on utilty common equity
investments and Treasury bonds. The difference between the required return on
common equity and the bond yield is the risk premium. i estimated the risk premium
on an annual basis for each year over the period 1986 through June 2010. The
common equity required returns were based on regulatory commission-authorized
returns for electric utilty companies. Authorized returns are typically based on expert
witnesses' estimates of the contemporary investor required return.
The second equity risk premium method is based on the difference between
regulatory commission-authorized returns on common equity and contemporary
"A" rated utilty bond yields. This time period was selected because over the period
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1 1986 through June 2010, public utility stocks have consistently traded at a premium
2 to book value. This is ilustrated in Exhibit No. 211 (MPG-10), where the market to
3 book ratio since 1986 for the electric utilty industry was consistently above 1.0. Over
4 this time period, regulatory authorized returns were suffcient to support market prices
5 that at least exceeded book value. This is an indication that regulatory authorized
6 returns on common equity supported a utility's abilit to issue additional common
7 stock, without diluting existing shares. It further demonstrates that utilities were able
8 to access equity markets without a detrimental impact on current shareholders.
9 Based on this analysis, as shown in Exhibit No. 212 (MPG-11), the average
10 indicated equity risk premium over U.S. Treasury bond yields has been 5.19%. Of
11 the 25 observations, 19 indicated risk premiums fall in the range of 4.40% to 6.08%.
12 Since the risk premium can vary depending upon market conditions and changing
13 investor risk perceptions, i believe using an estimated range of risk premiums
14 provides the best method to measure the current return on common equity using this
15 methodology.
16 As shown in Exhibit No. 213 (MPG-12), the average indicated equity risk
17 premium over contemporary Moody's utility bond yields was 3.75% over the period
18 1986 through June 2010. The indicated equit risk premium estimates based on this
19 analysis primarily fall in the range of 3.03% to 4.59% over this time period.
20 Q DO YOU BELIEVE THAT THIS RISK PREMIUM IS BASED ON A TIME PERIOD
21 THAT IS TOO LONG OR TOO SHORT TO DRAW ACCURATE RESULTS
22 CONCERNING CONTEMPORARY MARKET CONDITIONS?
23 A No. Contemporary market conditions can change dramatically during the period that
24 rates determined in this proceeding wil be in effect. Therefore, relying on a relatively
25 long period of time where stock valuations reflect premiums to book value is an
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Monsanto Company
1 indication that the authorized returns on equity and the corresponding equit risk
2 premiums were supportive of investors' return expectations and provided utilties
3 access to the equity markets under reasonable terms and conditions. Further, this
4 time period is long enough to smooth abnormal market movement that might distort
5 equity risk premiums. While market conditions and risk premiums do vary over time,
6 this historical time period is a reasonable period to estimate contemporary risk
7 premiums.
8 The time period I use in this risk premium is a generally accepted period to
9 develop a risk premium study using "expectational" data. Conversely, studies have
1 0 recommended that use of "actual achieved return data" should be based on very long
11 historical time periods. The studies find that achieved returns over short time periods
12 may not reflect investors' expected returns due to unexpected and abnormal stock
13 price performance. However, these short-term abnormal actual returns would be
14 smoothed over time and the achieved actual returns over long time periods would
15 approximate investors' expected returns. Therefore, it is reasonable to assume that
16 averages of annual achieved returns over long time periods wil generally converge
17 on the investors' expected returns.
18 My risk premium study is based on expectational data, not actual returns, and,
19 thus, need not encompass very long time periods.
20 Q
21
BASED ON HISTORICAL DATA, WHAT RISK PREMIUM HAVE YOU USED TO
ESTIMATE RMP'S COST OF EQUITY IN THIS PROCEEDING?
22 A The equity risk premium should reflect the relative market perception of risk in the
23 utilty industry today. i have gauged investor perceptions in utilty risk today in Exhibit
24 No. 214 (MPG-13). On that exhibit, i show the yield spread between utility bonds and
25 Treasury bonds over the last 30 years. As shown in this exhibit, the 2008 utilty bond
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Monsanto Company
1 yield spreads over Treasury bonds for . A" rated and "Baa" rated utility bonds are
2 2.25% and 2.97%, respectively. The utilty bond spreads over Treasury bonds for "A"
3 and "Baa" rated utilty bonds for 2009 are 1.96% and 2.98%, respectively. These
4 utility bond yield spreads over Treasury bond yields are much higher than the 30-year
5 average spreads of 1.60% and 2.00%, respectively.
6 While the yield spreads for 2008 and 2009 reflect unusually large spreads, the
7 market has started to improve and these spreads have started to decline. For
8 example, the 13-week average "A" rated utilty bond yield has subsided relative to the
9 end of 2008 and 2009, down to around 5.17%. This utility bond yield when compared
10 to the current Treasury bond yield of 3.92% as shown on Exhibit No. 215 (MPG-14),
11 page 1 of 3, implies a yield spread of around 1.25%, which is lower than the 3D-year
12 average spread for "A" utilty bonds of 1.60%. The same is true for the "Baa" utilit
13 yields and spreads.
14 Q HOW DID YOU ESTIMATE RMP'S COST OF COMMON EQUITY WITH THIS RISK
15 PREMIUM MODEL?
16 A i added a projected long-term Treasury bond yield to my estimated equity risk
17 premium over Treasury yields. The 13-week average 30-year Treasury bond yield,
18 ending September 10, 2010 was 3.92%, as shown on Exhibit No. 215 (MPG-14).
19 Blue Chip Financial Forecasts projects the 30-year Treasury bond yield to be 4.7%,
20 and a 10-year Treasury bond yield to be 3.8%.17 Using the projected 30-year bond
21 yield of 4.70%, and a Treasury bond risk premium of 4.40% to 6.08%, as developed
22 above, produces an estimated common equity return in the range of 9.10% (4.70% +
23 4.40%) to 10.78% (4.70% + 6.08%), with a midpoint of 9.94%.
17 Blue Chip Financial Forecasts, September 1, 2010 at 2.
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1 I next added my equity risk premium over utilty bond yields to a current
2 13-week average yield on "A" rated utilit bonds for the period ending September 10,
3 2010 of 5.17%. Exhibit No. 215 (MPG-14), page 1 of 3. Adding the utility equity risk
4 premium of 3.03% to 4.59%, as developed above, to an "A" rated bond yield of
5 5.40%, produces a cost of equity in the range of 8.20% to 9.76%, with a midpoint of
6 8.98%.
7 My risk premium analyses produce a return estimate in the range of 8.98% to
8 9.94%, with a midpoint estimate of 9.46%.
9 Capital Asset Pricing Model ("CAPM"l
10 Q PLEASE DESCRIBE THE CAPM.
11 A The CAPM method of analysis is based upon the theory that the market required rate
12 of return for a security is equal to the risk-free rate, plus a risk premium associated
13 with the specific security. This relationship between risk and return can be expressed
14 mathematically as follows:
15 R¡ = Rf + B¡ x (Rm - Rf) where:
16
17
18
19
R¡=
Rf=
Rm =
B¡=
Required return for stock i
Risk-free rate
Expected return for the market portfolio
Beta - Measure of the risk for stock
20 The stock-specific risk term in the above equation is beta. Beta represents
21 the investment risk that cannot be diversified away when the security is held in a
22 diversified portfolio. When stocks are held in a diversified portolio, firm-specific risks
23 can be eliminated by balancing the portfolio with securities that react in the opposite
24 direction to firm-specific risk factors (e.g., business cycle, competition, product mix,
25 and production limitations).
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1 The risks that cannot be eliminated when held in a diversified portfolio are
2 nondiversifiable risks. Nondiversifiable risks are related to the market in general and
3 are referred to as systematic risks. Risks that can be eliminated by diversification are
4 regarded as non-systematic risks. In a broad sense, systematic risks are market
5 risks, and non-systematic risks are business risks. The CAPM theory suggests that
6 the market wil not compensate investors for assuming risks that can be diversified
7 away. Therefore, the only risk that investors wil be compensated for are systematic
8 or non-diversifiable risks. The beta is a measure of the systematic or
9 non-diversifiable risks.
10 Q PLEASE DESCRIBE THE INPUTS TO YOUR CAPM.
11 A The CAPM requires an estimate of the market risk-free rate, the company's beta, and
12 the market risk premium.
13 Q WHAT DID YOU USE AS AN ESTIMATE OF THE MARKET RISK-FREE RATE?
14 A As previously noted, Blue Chip Financial Forecasts' projected 30-year Treasury bond
15 yield is 4.7%.18 The current 30-year bond yield is 4.4%. I used Blue Chip Financial
16 Forecasts' projected 30-year Treasury bond yield of 4.7% for my CAPM analysis.
17 Q WHY DID YOU USE LONG-TERM TREASURY BOND YIELDS AS AN ESTIMATE
18 OF THE RISK-FREE RATE?
19 A Treasury securities are backed by the full faith and credit of the United States
20 government. Therefore, long-term Treasury bonds are considered to have negligible
21 credit risk. Also, long-term Treasury bonds have an investment horizon similar to that
22 of common stock. As a result, investor-anticipated long-run inflation expectations are
18Blue Chip Financial Forecasts, September 1, 2010 at 2.
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1 reflected in both common stock required returns and long-term bond yields.
2 Therefore, the nominal risk-free rate (or expected inflation rate and real risk-free rate)
3 included in a long-term bond yield is a reasonable estimate of the nominal risk-free
4 rate included in common stock returns.
5 Treasury bond yields, however, do include risk premiums related to
6 unanticipated future inflation and interest rates. A Treasury bond yield is not a
7 risk-free rate. Risk premiums related to unanticipated inflation and interest rates are
8 systematic or market risks. Consequently, for companies with betas less than 1.0,
9 using the Treasury bond yield as a proxy for the risk-free rate in the CAPM analysis
10 can produce an overstated estimate of the CAPM return.
11 Q WHAT BETA DID YOU USE IN YOUR ANALYSIS?
12 A As shown in Exhibit No. 216 (MPG-15), the proxy group average Value Line beta
13 estimate is 0.69.
14 Q HOW DID YOU DERIVE YOUR MARKET RISK PREMIUM ESTIMATE?
15 A i derived two market risk premium estimates, a forward-looking estimate and one
16 based on a long-term historical average.
17 The forward-looking estimate was derived by estimating the expected return
18 on the market (as represented by the S&P 500) and subtracting the risk-free rate from
19 this estimate. i estimated the expected return on the S&P 500 by adding an expected
20 inflation rate to the long-term historical arithmetic average real return on the market.
21 The real return on the market represents the aChieved return above the rate of
22 inflation.
23 Morningstar's Stocks, Bonds, Bils and Inflation 2010 Yearbook publication
24 estimates the historical arithmetic average real market return over the period 1926 to
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1 2009 as 8.6%.19 A current consensus analysts' inflation projection, as measured by
2 the Consumer Price Index, is 1.9%.20 Using these estimates, the expected market
3 return is 10.66%.21 The market premium then is the difference between the 10.66%
4 expected market return, and my 4.7% risk-free rate estimate, or 5.96%.
5 The historical estimate of the market risk premium was also estimated by
6 Morningstar in Stocks, Bonds, Bils and Inflation 2010 Yearbook. Over the period
7 1926 through 2009, Morningstar's study estimated that the arithmetic average of the
8 achieved total return on the S&P 500 was 11.80%,22 and the total return on long-term
9 Treasury bonds was 5.8%.23 The indicated equity risk premium is 6.0% (11.80% -
10 5.8% = 6.00%).
11 Q HOW DOES YOUR ESTIMATED MARKET RISK PREMIUM RANGE COMPARE TO
12 THAT ESTIMATED BY MORNINGSTAR?
13 A Morningstar estimates a forward-looking market risk premium based on actual
14 achieved data from the historical period of 1926 through year-end 2009. Using this
15 data, Morningstar estimates a market risk premium derived from the total return on
16 large company stocks (S&P 500), less the income return on Treasury bonds. The
17 total return includes capital appreciation, dividend or coupon reinvestment returns,
18 and annual yields received from coupons and/or dividend payments. The income
19 return, in contrast, only reflects the income return received from dividend payments or
20 coupon yields. Morningstar argues that the income return is the only true risk-free
21 rate associated with the Treasury bond and is the best approximation of a truly
22 risk-free rate. i disagree with this assessment from Morningstar, because it does not
19Morningstar, Inc. Ibbotson SBBI 2010 Classic Yearbook at 82.
2°Blue Chip Financial Forecasts, July 1, 2010 at 2.
21t ((1 + 0.086) * (1 + 0.019) i -1 )) * 100.
22Morningstar, Inc. Ibbotson SBBI2010 Classic Yearbook at 82.
23,d.
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1 reflect a true investment option available to the marketplace and therefore does not
2 produce a legitimate estimate of the expected premium of investing in the stock
3 market versus that of Treasury bonds. Nevertheless, I wil use Morningstar's
4 conclusion to show the reasonableness of my market risk premium estimates.
5 Morningstar's analysis indicates that a market risk premium falls somewhere
6 in the range of 5.2% to 6.7%. This range is based on several methodologies. First,
7 Morningstar estimates a market risk premium of 6.7% based on the difference
8 between the total market return on common stocks (S&P 500) less the income return
9 on Treasury bond investments. Second, Morningstar found that if the New York
10 Stock Exchange (the "NYSE") was used as the market index rather than the
11 S&P 500, that the market risk premium would be 6.4% and not 6.7%. Third, if only
12 the two deciles of the largest companies included in the NYSE were considered, the
13 market risk premium would be 5.9%.24
14 Finally, Morningstar found that the 6.7% market risk premium based on the
15 S&P 500 was impacted by an abnormal expansion of price-to-earnings ("PIE") ratios
16 relative to earnings and dividend growth during the period 1980 through 2001.
17 Morningstar believes this abnormal PIE expansion is not sustainable. Therefore,
18 Morningstar adjusted this market risk premium estimate to normalize the growth in the
19 PIE ratio to be more in line with the growth in dividends and earnings. Based on this
20 alternative methodology, Morningstar published a long-horizon supply-side market
21 risk premium of 5.2%.25
22 Thus, based on all of Morningstar's estimates, the market risk premium falls
23 somewhere in the range of 5.2% to 6.7%.
24Morningstar observes that the S&P 500 and the NYSE Decile 1-2 are both large
capitalization benchmarks. Morningstar, Inc. Ibbotson SBBI 2009 Valuation Yearbook at 54.
251d. at 66.
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1 Q WHAT ARE THE RESULTS OF YOUR CAPM ANALYSIS?
2 A As shown in Exhibit No. 217 (MPG-16), based on my low-end market risk premium of
3 5.2%, high-end market risk premium of 6.7%, a risk-free rate of 4.7%, and a beta of
4 0.69, my CAPM analysis produces a return in the range of 8.28% to 9.31%, with a
5 midpoint of 8.80%.
6 Return on Equity Summary
7 Q BASED ON THE RESULTS OF YOUR RATE OF RETURN ON COMMON EQUITY
8 ANALYSES DESCRIBED ABOVE, WHAT RETURN ON COMMON EQUITY DO
9 YOU RECOMMEND FOR RMP?
10 A Based on my analyses, I estimate RMP's current market cost of equity to be 9.5%.
TABLE 4
Return on Common Equity Summary
Description Results
DCF
Risk Premium
CAPM
9.85%
9.46%
8.80%
11 My recommended return on equity range is 9.10% to 9.90%. My low end is
12 based on the average of my CAPM and risk premium return estimates and my high
13 end is based on my DCF analysis.
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1 Financiallntegrity
2 Q WILL YOUR RECOMMENDED OVERALL RATE OF RETURN SUPPORT AN
3 INVESTMENT GRADE BOND RATING FOR RMP?
4 A Yes. I have reached this conclusion by comparing the key credit rating financial
5 ratios for RMP at my proposed capital structure, and my return on equity to S&P's
6 benchmark financial ratios using S&P's new credit metric ranges.
7 Q PLEASE DESCRIBE THE MOST RECENT S&P FINANCIAL RATIO CREDIT
8 METRIC METHODOLOGY.
9 A S&P publishes a matrix of financial ratios that correspond to its assessment of the
10 business risk of the utilty company and related bond rating. S&P updated its credit
11 metric guidelines on November 30, 2007, and incorporated utilty metric benchmarks
12 with the general corporate rating metrics. However, the effect of integrating the utility
13 metrics with that of general corporate bonds, resulted in a reduction to the
14 transparency in S&P's credit metric guideline for utilties. Most recently, on May 27,
15 2009 S&P expanded its matrix criteria and included an additional business and
16 financial risk category. Based on S&P's most recent credit matrix, the business risk
17 profile categories are "Excellent," "Strong," "Satisfactory," "Fair," "Weak," and
18 "Vulnerable." Most electric utilties have a business risk profile of "Excellent" or
19 "Strong." The financial risk profile categories are "Minimal," "Modest," "Intermediate,"
20 "Significant," "Aggressive," and "Highly Leveraged." Most of the electric utilties have
21 a financial risk profile of "Aggressive." RMP has an "Excellent" business risk profile
22 and a "Significant" financial risk profile.
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1 Q PLEASE DESCRIBE S&P'S USE OF THE FINANCIAL BENCHMARK RATIOS IN
2 ITS CREDIT RATING REVIEW.
3 A S&P evaluates a utility's credit rating based on an assessment of its financial and
4 business risks. A combination of financial and business risks equates to the overall
5 assessment of RMP's total credit risk exposure. S&P publishes a matrix of financial
6 ratios that defines the level of financial risk as a function of the level of business risk.
7 S&P publishes ranges for three primary financial ratios that it uses as
8 guidance in its credit review for utilty companies. The three primary financial ratio
9 benchmarks it relies on in its credit rating process include: (1) debt to EBITDA,
10 (2) funds from operations ("FFO") to total debt, and (3) total debt to total capital.
11 Q HOW DID YOU APPLY S&P'S FINANCIAL RATIOS TO TEST THE
12 REASONABLENESS OF YOUR RATE OF RETURN RECOMMENDATIONS?
13 A I calculated each of S&P's financial ratios based on RMP's cost of service for retail
14 operations. While S&P would normally look at total consolidated financial ratios in its
15 credit review process, my investigation in this proceeding is to judge the
16 reasonableness of my proposed cost of capital for rate-setting in RMP's Idaho utility
17 operations. Hence, i am attempting to determine whether the rate of return and cash
18 flow generation opportunity reflected in my proposed utilit rates for RMP in Idaho wil
19 support its investment grade bond ratings and financial integrity.
20 Q DID YOU INCLUDE ANY OFF-BALANCE SHEET DEBT?
21 A Yes. As shown in Exhibit No. 218 (MPG-17), page 4 of 4, i estimated an Idaho
22 allocation of PacifiCorp total off-balance sheet debt, imputed interest and amortized
23 expenses for operating leases and purchased power agreements ("PPAs"). These
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1 off-balance sheet obligations were used to estimate RMP credit metrics at my
2 proposed rate of return.
3 Q HOW DID YOU ESTIMATE RMP'S OFF-BALANCE SHEET DEBT?
4 A The off-balance sheet debt is shown on Exhibit No. 218 (MPG-17), page 4 of 4. First,
5 I developed an Idaho allocator, which is the ratio of RMP's Idaho rate base as of
6 December 2009 divided by total Company rate base at the same time.
7 Second, I obtained RMP's total Company lease and purchased power
8 off-balance sheet debt and associated imputed interest and amortization expenses
9 from the S&P report (Williams Exhibit No. 60, page 6 of 10). These factors were used
10 to estimate the Idaho allocated portion of the total Company off-balance sheet lease
11 and purchased power imputed debt, interest and amortization expense. The
12 off-balance sheet impact on RMP's total capital structure weights was used to
13 develop the RMP debt ratio for Idaho operations including total Company off-balance
14 sheet PPA and operating lease debt equivalents.
15 Q PLEASE DESCRIBE THE RESULTS OF THIS CREDIT METRIC ANALYSIS FOR
16 RMP.
17 A The S&P financial metric calculations for RMP are developed on Exhibit No. 218
18 (MPG-17), page 1 of 4.
19 As shown on Exhibit No. 218 (MPG-17), page 1 of 4, column 1, based on an
20 equity return of 9.50%, RMP wil be provided an opportunity to produce a debt to
21 EBITDA ratio of 3.3x. This is within the S&P's "Significant" financial risk guideline
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1 range of3.0x to 4.0x and above (stronger) than the "Aggressive" risk profile.26 This
2 ratio supports an investment grade credit rating.
3 RMP's retail operations FFO to total debt coverage at a 9.50% equity return
4 would be 26%, which is within the "Significant" metric guideline range of 20% to 30%
5 and above the "Aggressive" profile range. The FFO/total debt ratio wil support an
6 investment grade bond rating.
7 Finally, RMP's total debt ratio to total capital is 52%. This is within the
8 "Aggressive" profile guidance range of 50% to 60%. This total debt ratio wil support
9 PacifiCorp's investment grade bond rating.
10 At my recommended return on equity and my proposed capital structure, the
11 Company's financial credit metrics are supportive of its current "A" utilty bond rating.
12 Q DO YOU BELIEVE THIS CREDIT METRIC EVALUATION OF RMP AT YOUR
13 PROPOSED RETURN ON EQUITY PROVIDES MEANINGFUL INFORMATION TO
14 HELP THE COMMISSION DETERMINE THE APPROPRIATENESS OF YOUR
15 RECOMMENDATION?
16 A Yes. While S&P calculates these credit metrics based on total Company operations,
17 and not the retail operations of RMP as I have performed in this study, it stil provides
18 meaningful information on the proposed rate of return for RMP in this case and how it
19 wil contribute and help support consolidated operations credit standing. Further,
20 while credit rating agencies also consider other financial metrics and qualitative
21 considerations, these metrics are largely driven by the cost of service items of
22 depreciation expense and return on equity. Hence, to the extent these important
23 aspects of cost of service impact RMP's internal cash flows, the relative impact on
26Standard & Poor's RatingsDirect: "Criteria Methodology: Business Risk/Financial Risk
Matrix Expanded," May 27, 2009.
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Monsanto Company
1 RMP wil be measured by these credit metrics. As ilustrated above, an authorized
2 return on equity of 9.50% wil support internal cash flows that wil be adequate to
3 maintain RMP's current investment grade bond rating.
4 Response to RMP Witness Dr. Samuel Hadaway
5 Q WHAT RETURN ON COMMON EQUITY IS RMP PROPOSING FOR THIS
6 PROCEEDING?
7 A RMP is proposing to set rates based on a return on equity of 10.6%. RMP's return on
8 equity proposal is based on the analysis and judgment of Dr. Samuel Hadaway.
9 Dr. Hadaway'S results are summarized at page 40 of his direct testimony.
10 Q DO DR. HADAWAY'S METHODOLOGIES SUPPORT HIS 10.6% RETURN ON
11 EQUITY FOR HIS PROXY GROUP?
12 A No. As discussed in detail below, reflecting current market data and properly
13 applying his models, Dr. Hadaway'S own analyses would support a return on equity in
14 the range of 9.1% to 9.9%.
15 Q PLEASE DESCRIBE THE METHODOLOGY SUPPORTING DR. HADAWAY'S
16 RETURN ON COMMON EQUITY RECOMMENDATION.
17 A Dr. Hadaway develops his return on common equity recommendation using three
18 versions of the DCF model, and two utilty risk premium analyses. I have summarized
19 Dr. Hadaway'S results below in Table 5 under column 1. Under column 2, I show the
20 results of Dr. Hadaway'S analyses adjusted for updated data and more reasonable
21 application of the models.
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1 As shown below in Table 5, using consensus economists' projection of GDP
2 growth rather than Dr. Hadaway's inflated GDP growth estimates, his own DCF
3 analyses would support a return on equity for RMP in the range of 9.1% to 9.9%.
TABLES
Summary of Dr. Hadaway's ROE Estimate
Description
Hadaway
Results
(1)
DCF Analysis
Constant Growth (Analysts' Growth)
Constant Growth (GDP Growth)
Multi-Stage Growth Model
Reasonable DCF Range
10.3% - 10.5%
10.7% - 10.8%
10.6%
10.3% - 10.8%
Risk Premium AnaiYsis
Forecasted Utilty Debt + Equity Risk Premium
Current Utilty Debt + Equity Risk Premium
Risk Premium Estimate
10.59%
10.39%
10.84%
Recommended ROE
Adjusted ROE
10.6%
Sources:
1 Hadaway Direct at 40.
2Exhibit No. 219 (MPG-18).
Adjusted
Hadawar
Results
(2)
10.3% - 10.5%
9.6% - 9.7%
9.6% - 9.7%
9.8% -10.0%
Reject
8.1% - 9.75%
9.56%
9.1% - 9.9%
4 Q
5 A
PLEASE DESCRIBE DR. HADAWAY'S CONSTANT GROWTH DCF ANALYSIS. .
Dr. Hadaway's adjusted constant growth DCF analysis is shown in Exhibit No. 219
6 (MPG-18). As shown on that exhibit, Dr. Hadaway's constant growth DCF analysis is
7 based on a recent stock price, an annualized dividend and an average of three
8 growth rates: (1) Value Une; (2) Zacks; and (3) Thomson.
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Monsanto Company
1 Q ARE DR. HADAWAY'S DCF ESTIMATES RELIABLE?
2 A No, for at least two reasons. First, Dr. Hadaway's constant growth DCF based on
3 analyst growth rates produces excessive return estimates for the same reasons
4 discussed above concerning my DCF studies. That is, Dr. Hadaway's analyst growth
5 DCF study is based on an abnormally high dividend yield in the range of 4.78% to
6 4.86% and growth rate of 5.50%. The growth rate used in this DCF study is too high
7 to be a reasonable estimate of a sustainable long-run growth rate.
8 Second, his DCF studies that use a GDP growth rate are overstated, because
9 his GDP growth rate used in his constant growth and multi-stage growth models is
10 based on an inflated GDP growth rate of 6.0%. This GDP growth is excessive and
11 not reflective of current market expectations.
12 Q HOW DID DR. HADAWAY DEVELOP HIS GOP GROWTH RATE?
13 A He states that the GDP growth rate is based on the achieved GDP growth over the
14 last 10, 20, 30,40, 50, and 6o-year periods. Dr. Hadaway's projected GDP growth
15 rate is unreasonable. Historical GDP growth over the last 20 and 40-year periods
16 was strongly influenced by the actual inflation rate experienced over that time period.
17 Q WHY IS DR. HADAWAY'S DCF ESTIMATE EXCESSIVE IN COMPARISON TO
18 THAT OF PUBLISHED MARKET ANALYSTS?
19 A The consensus economists' projected GDP growth rate is much lower than the GDP
20 growth rate used by Dr. Hadaway in his DCF analysis. A comparison of
21 Dr. Hadaway's GDP growth rate and consensus economists' projected GDP growth
22 over the next five and ten years is shown below in Table 6. As shown in this table,
23 Dr. Hadaway'S GDP rate of 6.0% reflects real GDP of 3.1% and an inflation adjusted
24 GDP of 2.9%. However, consensus economists' projections of nominal GDP include
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Monsanto Company
GDP inflation projections over the next five and ten years of 2.1%, and 2.2%,
2 respectively. 27
3 As is clearly evident in the table below, Dr. Hadaway'S historical GDP growth
4 reflects historical inflation, which is much higher than, and not representative of,
5 consensus market expected forward-looking inflation.
TABLE 6
GOP Projections
Description
GOP
Inflation
Dr. Hadaway
Consensus 5- Year Projection
Consensus 10- Year Projection
3.1%
2.1%
2.2%
Real Nominal§I GOP
2.9%6.0%
2.9%5.1%
2.6%4.9%
Source: Blue Chip Financial Forecasts, June 1, 2010, at 14.
6 As such, Dr. Hadaway's 6.0% nominal GDP growth rate is not reflective of consensus
7 market expectations and should be rejected.
8 Q HOW WOULD DR. HADAWAY'S DCF ANALYSES CHANGE IF CURRENT
9 MARKET-BASED GOP GROWTH RATE PROJECTIONS ARE INCLUDED IN HIS
10 ANALYSIS RATHER THAN HIS EXCESSIVE GOP GROWTH RATE?
11 A As shown in Exhibit No. 219 (MPG-18), I updated Dr. Hadaway'S DCF analyses using
12 more recent market data and a GDP growth rate of 4.9%. This GDP growth rate is
13 the consensus economists' 10-year projected growth rate of the GDP as published in
14 the Blue Chip Financial Forecasts on June 1, 2010. As shown in Exhibit No. 219
27 Blue Chip Financial Forecasts, June 1,2010, at 14.
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1 (MPG-18), using this consensus economists' projected GDP growth rate, reduces
2 Dr. Hadaway's DCF results from 10.6% to 9.9%.
3 Q PLEASE SUMMARIZE YOUR UPDATE AND ADJUSTMENTS TO
4 DR. HADAWAY'S DCF STUDIES.
5 A Updating the price and dividend yield information and growth rates in Dr. Hadaway's
6 study, and modifying them for a more reasonable GDP growth rate, reduces the
7 average DCF result produced by Dr. Hadaway's studies from 10.6% down to 9.9%.
8 Dr. Hadaway's original estimates, and these updated and adjusted results are shown
9 below in Table 7.
TABLE 7
Adjusted Hadaway DCF
Range Average
Description HadawayDCF Adjusted DCF
Constant Growth (Analysts' Growth)
Constant Growth (GDP Growth)
Multi-Stage Growth Model
Average
10.4%
10.8%
10.6%
10.6%
10.4%
9.7%
9.7%
9.9%
10 As shown above in Table 7, using a consensus economists' GDP forecast, rather
11 than the GDP forecast derived by Dr. Hadaway, would support a return on equity for
12 RMPof9.9%.
13 Q PLEASE DESCRIBE DR. HADAWAY'S UTILITY RISK PREMIUM ANALYSIS.
14 A Dr. Hadaway's utility bond yield versus authorized return on common equity risk
15 premium is shown in his Exhibit No. 14. As shown in this exhibit, Dr. Hadaway
16 estimated an annual equity risk premium by subtracting Moody's average bond yield
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1 from the electric utilty regulatory commission authorized return on common equity
2 over the period 1980 through 2009. Based on this analysis, Dr. Hadaway estimates
3 an average indicated equity risk premium over current utilty bond yields of 3.23%.
4 Dr. Hadaway then adjusts this average equity risk premium using a regression
5 analysis based on an expectation that there is an ongoing inverse relationship
6 between interest rates and equity risk premiums. Based on this regression analysis,
7 Dr. Hadaway increases his equity risk premium from 3.23%, up to 4.40% and 4.55%
8 relative to projected and current "A" bond yield of 6.19% and 5.84%, respectively. He
9 then adds these inflated equity risk premiums to a projected and the current "A" rated
10 utility bond yield of 6.19% and 5.84% to produce a return on equity of 10.59% and
11 10.39%, respectively.
12 Q ARE DR. HADAWAY'S UTILITY RISK PREMIUM ANALYSES REASONABLE?
13 A No. Dr. Hadaway develops a forward-looking risk premium model, relying on
14 forecasted interest rates and volatile utiity spreads, which are highly uncertain and
15 produce inaccurate results. Further, Dr. Hadaway adjusts his equity risk premium of
16 3.23% to reflect the inverse relationship between interest rates and utility risk
17 premiums. This adjustment is inappropriate and not consistent with academic
18 literature that finds that this relationship should change with risk changes and not
19 simply changes to nominal interest rates.
20 Q DOES DR. HADAWAY'S RISK PREMIUM ANALYSIS SUPPORT A RETURN ON
21 EQUITY IN THE RANGE OF 10.59% TO 10.39%?
22 A No. His equity risk premium estimates of 4.40% and 4.55% are overstated. The
23 common equity risk premium over the period 1986 to 2010 is approximately 3.75% as
24 shown in Exhibit No. 213 (MPG-12).
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1 Q DO YOU HAVE ANY COMMENTS CONCERNING DR. HADAWAY'S
2 FORECASTED UTILITY YIELD OF 6.19%?
3 A Yes. Dr. Hadaway develops his forecasted utility yield based on the 3-month
4 historical spread of "A" rated utilty bond yields and 30-year Treasury yields of 1.19%
5 added to his projected long-term Treasury yield of 5.0%. This approach is
6 unreasonable because Dr. Hadaway relies on projected interest rates. The accuracy
7 of his projections are highly problematic. Indeed, while interest rates have been
8 projected to increase over the last several years, those increased interest rate
9 projections have turned out to be wrong.
10 Q WHY DO YOU BELIEVE THAT THE ACCURACY OF FORECASTED INTEREST
11 RATES IS HIGHLY PROBLEMATIC?
12 A This is clearly evident by a review of projected changes to interest rates made over
13 the last several years, in comparison to how accurate these projections turned out to
14 be. This analysis clearly ilustrates that observable interest rates today are as
15 accurate as are economists' consensus projections of future interest rates.
16 An analysis supporting this conclusion is ilustrated in Exhibit No. 220
17 (MPG-19). On this exhibit, under Columns 1 and 2, i show the actual market yield at
18 the time a projection is made for Treasury bond yields two years in the future. In
19 Column 1, I show the actual Treasury yield and, in Column 2, i show the projected
20 yield two years out.
21 As shown in Columns 1 and 2, over the last several years, Treasury yields
22 were projected to increase relative to the actual Treasury yields at the time of the
23 projection. In Column 4, i show what the Treasury yield actually turned out to be two
24 years after the forecast. Under Column 5, I show the actual yield change at the time
25 of the projections relative to the projected yield change.
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1 As shown in this exhibit, over the last several years, economists have been
2 consistently projecting increases to interest rates. However, as demonstrated under
3 Column 5, those yield projections have turned out to be overstated in virtually every
4 case. Indeed, actual Treasury yields have decreased or remained flat over the last
5 five years, rather than increase as the economists' projections indicated.
6 This review of the experience with projected interest rates clearly illustrates
7 that interest rate projection accuracy is highly problematic. Indeed, current
8 observable interest rates are just as likely a reasonable projection of future interest
9 rates as are economists' projections.
10 Q WHY IS DR. HADAWAY'S USE OF A SIMPLE INVERSE RELATIONSHIP
11 BETWEEN INTEREST RATES AND EQUITY RISK PREMIUMS NOT
12 REASONABLE?
13 A Dr. Hadaway'S belief that there is a simplistic inverse relationship between equity risk
14 premiums and interest rates is not supported by academic research. While academic
15 studies have shown that, in the past, there has been an inverse relationship with
16 these variables, researchers have found that the relationship changes over time and
17 is influenced by changes in perception of the risk of bond investments relative to
18 equity investments, and not simply changes to interest rates. 28
19 In the 1980s, equity risk premiums were inversely related to interest rates, but
20 that was likely attributable to the interest rate volatility that existed at that time.
21 Interest rate volatility currently is much lower than it was irr the 1980s.29 As such,
22 when interest rates were more volatile, the relative perception of bond investment risk
2B.'The Market Risk Premium: Expectational Estimates Using Analysts' Forecasts," Robert S.
Harris and Felicia C. Marston, Journal of Applied Finance, Volume 11, NO.1, 2001 and "The Risk
Premium Approach to Measuring a Utility's Cost of Equity," Eugene F. Brigham, Dilip K. Shome, and
Steve R. Vinson, Financial Management, Spring 1985.29Morningstar SBBI, 2009 Yearbook at 95-96.
Gorman, OJ - 49
Monsanto Company
1 increased relative to the investment risk of equities. This changing investment risk
2 perception caused changes in equity risk premiums.
3 In today's marketplace, interest rate variabilty is not as extreme as it was
4 during the 1980s. Nevertheless, changes in the perceived risk of bond investments
5 relative to equity investments stil drive changes in equity premiums. However, a
6 relative investment risk differential cannot be measured simply by observing nominal
7 interest rates. Changes in nominal interest rates are highly influenced by changes to
8 inflation outlooks, which also change equity return expectations. As such, the
9 relevant factor needed to explain changes in equity risk premiums is the relative
10 changes to the risk of equity versus debt securities investments, not simply changes
11 to interest rates.
12 Importantly, Dr. Hadaway's analysis simply ignores investment risk
13 differentials. He bases his adjustment to the equity risk premium exclusively on
14 changes in nominal interest rates. This is a flawed methodology and does not
15 produce accurate or reliable risk premium estimates. His results should be rejected
16 by the Commission.
17 Q CAN DR. HADAWAY'S RISK PREMIUM ANALYSES BASED ON CURRENT AND
18 PROJECTED YIELDS BE MODIFIED TO PRODUCE MORE REASONABLE
19 RESULTS?
20 A Yes. Eliminating the inverse relationship adjustment to the equity risk premium of
21 3.23% and relying on Dr. Hadaway's current "A" rated utilty yield of 5.84% wil result
22 in a return on equity risk premium of 9.07%. Using Dr. Hadaway'S 2009 equity risk
23 premium of 4.20% as shown in his Exhibit No. 14 and his current "A" rated utilit yield
24 of 5.84% will result in a return of 10.04%. Therefore, Dr. Hadaway'S risk premium wil
25 be in the range of 9.07% to 10.04%, with a midpoint of 9.56%.
Gorman, OJ - 50
Monsanto Company
1 Q DOES THE "A" RATED BOND YIELD USED BY DR. HADAWAY REFLECT
2 CURRENT "A" RATED UTILITY BOND YIELDS?
3 A No. The "A" rated utilty bond yield of 5.84% used by Dr. Hadaway represents a
4 three-month average time period ending April 10, 2010 (Direct at 21). As shown on
5 my Exhibit No. 215 (MPG-14), the current "A" rated utilty bond yield is approximately
6 5.17%, rounded to 5.2%. Using the current "A" rated utility bond yield, and a risk
7 premium in the range of 3.2% to 4.55%, would suggest a return on equity in the range
8 of 8.4% to 9.75%, with a midpoint of 9.1%. Again, more current interest rates clearl
9 show a very significant decline in capital market costs relative to RMP's last rate case
10 and even the time Dr. Hadaway performed his return on equity study.
11 Q DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
12 A Yes, it does.
Gorman, OJ - 51
Monsanto Company
Qualifications of Michael P. Gorman
1 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
2 A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140,
3 Chesterfield, MO 63017.
4 Q PLEASE STATE YOUR OCCUPATION.
5 A I am a consultant in the field of public utility regulation and a Managing Principal with
6 Brubaker & Associates, Inc., energy, economic and regulatory consultants.
7 Q PLEASE SUMMARIZE YOUR EDUCATIONAL BACKGROUND AND WORK
8 EXPERIENCE.
9 A In 1983 I received a Bachelors of Science Degree in Electrical Engineering from
10 Southern Illnois University, and in 1986, i received a Masters Degree in Business
11 Administration with a concentration in Finance from the University of Illnois at
12 Springfield. I have also completed several graduate level economics courses.
13 In August of 1983, I accepted an analyst position with the Illnois Commerce
14 Commission ("ICC"). In this position, I performed a variety of analyses for both formal
15 and informal investigations before the ICC, including: marginal cost of energy, central
16 dispatch, avoided cost of energy, annual system production costs, and working
17 capital. In October of 1986, I was promoted to the position of Senior Analyst. In this
18 position, I assumed the additional responsibilties of technical leader on projects, and
19 my areas of responsibilty were expanded to include utilty financial modeling and
20 financial analyses.
21 In 1987, I was promoted to Director of the Financial Analysis Department. In
22 this position, I was responsible for all financial analyses conducted by the staff.
Appendix A
Gorman, Oi - 1
Monsanto Company
1 Among other things, I conducted analyses and sponsored testimony before the iCC
2 on rate of return, financial integrity, financial modeling and related issues. I also
3 supervised the development of all Staff analyses and testimony on these same
4 issues. In addition, I supervised the Staffs review and recommendations to the
5 Commission concerning utilty plans to issue debt and equity securities.
6 In August of 1989, I accepted a position with Merrill-Lynch as a financial
7 consultant. After receiving all required securities licenses, I worked with individual
8 investors and small businesses in evaluating and selecting investments suitable to
9 their requirements.
10 In September of 1990, I accepted a position with Drazen-Brubaker &
11 Associates, Inc. In April 1995, the firm of Brubaker & Associates, Inc. ("BAI") was
12 formed. It includes most of the former DBA principals and Staff. Since 1990, I have
13 performed various analyses and sponsored testimony on cost of capital, cost/benefits
14 of utilty mergers and acquisitions, utilty reorganizations, level of operating expenses
15 and rate base, cost of service studies, and analyses relating industrial jobs and
16 economic development. i also participated in a study used to revise the financial
17 policy for the municipal utilty in Kansas Cit, Kansas.
18 At BAI, I also have extensive experience working with large energy users to
19 distribute and critically evaluate responses to requests for proposals ("RFPs") for
20 electric, steam, and gas energy supply from competitive energy suppliers. These
21 analyses include the evaluation of gas supply and delivery charges, cogeneration
22 and/or combined cycle unit feasibility studies, and the evaluation of third-party
23 asset/supply management agreements. i have also analyzed commodity pricing
24 indices and forward pricing methods for third part supply agreements, and have also
25 conducted regional electric market price forecasts.
Appendix A
Gorman, OJ - 2
Monsanto Company
1 In addition to our main office in st. Louis, the firm also has branch offces in
2 Phoenix, Arizona and Corpus Christi, Texas.
3 Q HAVE YOU EVER TESTIFIED BEFORE A REGULATORY BODY?
4 A Yes. I have sponsored testimony on cost of capital, revenue requirements, cost of
5 service and other issues before the Federal Energy Regulatory Commission and
6 numerous state regulatory commissions including: Arkansas, Arizona, California,
7 Colorado, Delaware, Florida, Georgia, Idaho, Illnois, Indiana, Iowa, Kansas,
8 Louisiana, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, North
9 Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Vermont,
10 Virginia, Washington, West Virginia, Wisconsin, Wyoming, and before the provincial
11 regulatory boards in Alberta and Nova Scotia, Canada. I have also sponsored
12 testimony before the Board of Public Utilties in Kansas City, Kansas; presented rate
13 setting position reports to the regulatory board of the municipal utility in Austin, Texas,
14 and Salt River Project, Arzona, on behalf of industrial customers; and negotiated rate
15 disputes for industrial customers of the Municipal Electric Authority of Georgia in the
16 LaGrange, Georgia district.
17 Q PLEASE DESCRIBE ANY PROFESSIONAL REGISTRATIONS OR
18 ORGANIZATIONS TO WHICH YOU BELONG.
19 A I earned the designation of Chartered Financial Analyst ("CFA") from the CFA
20 Institute. The CFA charter was awarded after successfully completing three
21 examinations which covered the subject areas of financial accounting, economics,
22 fixed income and equit valuation and professional and ethical conduct. I am a
23 member of the CFA Institute's Financial Analyst Society.
IIHueylSharesILDocslSlJ21 OIT estmony - BAli 184614.OOc
AppendjxA
Gorman, OJ - 3
Monsanto Company
Monsanto Company
Exhibit No. 202 (MPG-1)
Page 1 of2
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Rate of Return
Weighted
Line Description Amount1 Weight Cosf Cost
(1)(2)(3)(4)
1 Long-Term Debt $6,402,725 50.0%5.92%2.96%
2 Preferred Stock 41,317 0.3%5.41%0.02%
3 Common Equity 6,372,409 49.7%9.50%4.72%
4 Total $12,816,450 100.0%7.70%
Sources:
1 Exhibit No. 202 (MPG-1), Page 2 of 2.
2 Willams Direct at 2.
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Monsanto Company
Exhibit No. 203 (MPG-2)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Proxy Group
Credit Ratings 1 Common Equity Ratios S&P Business
Line Company S&P Moody's AUS1 Value Line 2 RiskScore3
(1)(2)(3)(4)(5)
1 ALLElE A-A2 57.0%57.2%Strong
2 Allant Energy Co.A-A2 51.0%51.2%Excellent
3 Black Hils Corp BBB A3 52.0%51.6%Strong
4 Con. Edison A-A3 49.0%51.0%Excellent
5 DPL Inc.A Aa3 46.0%46.9%Excellent
6 DlE Energy Co.A-A2 46.0%46.0%Strong
7 Duke Energy A-A2 57.0%57.4%Excellent
8 Edison Intemat.NIR A1 46.0%46.5%Strong
9 Entergy Corp.A-Baa1 42.0%43.1%Strong
10 NextEra Energy A Aa3 39.0%44.3%Strong
11 IDACORP A-A2 50.0%49.8%Excellent
12 Northeast Utilties BBB+A3 43.0%41.5%Excellent
13 NSlAR AA-A1 39.0%48.2%Excellent
14 PG&ECorp.BBB+A3 49.0%47.4%Excellent
15 Portland General A-A3 46.0%49.7%Strong
16 Progress Energy A-A1 43.0%43.3%Excellent
17 SCANACorp.A-A3 42.0%43.2%Excellent
18 Sempra Energy A+Aa3 54.0%54.1%Excellent
19 Southern Co.A A2 45.0%43.6%Excellent
20 Vectren Corp.A A2 44.0%47.5%Excellent
21 Wisconsin Energy A-A1 45.0%47.7%Excellent
22 Xcel Energy Inc.A-A2 46.0%47.7%Excellent
23 Average A.A2 46.9%48.1%Excellent
24 Rocky Mountain Power A4 A24 49.7%5 Excellent
Sources:
1 AUS Utility Reports, August 2010.
2 The Value Line Investment Survey, June 25, August 6 and August 27,2010.
3 S&P RatingsDirect: "U.S. Regulated Electric Utilities, Strongest to Weakest," August 4,2010.
4 Willams Direct at 6.
5 Exhibit No. 202 (MPG-1), Page 1 of 2.
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Exhibit No. 205 (MPG-4)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Constant Growth DCF Model
13-WeekAVG Analysts'Annualized Adjusted Constant
Line Company Stock Price 1 Growth2 Djvidend3 Yield Growth DCF
(1)(2)(3)(4)(5)
1 ALLETE $35.60 5.28%$1.76 5.21%10.58%
2 Allant Energy Co.$34.26 6.31%$1.58 4.90%11.30%
3 Black Hills Corp $30.44 6.00%$1.44 5.01%11.10%
4 Con. Edison $46.03 4.45%$2.38 5.40%9.95%
5 DPL Inc.$25.26 8.85%$1.21 5.22%14.17%
6 DTE Energy Co.$46.88 4.87%$2.12 4.74%9.69%
7 Duke Energy $16.94 3.63%$0.98 6.00%9.76%
8 Edison Internat.$33.38 4.66%$1.26 3.95%8.67%
9 Entergy Corp.$77.17 3.29%$3.32 4.44%7.81%
10 NextEra Energy $52.27 6.44%$2.00 4.07%10.57%
11 IDACORP $35.04 4.00%$1.20 3.56%7.61%
12 Norteast Utilities $27.80 7.66%$1.03 3.97%11.68%
13 NSTAR $37.06 5.62%$1.60 4.56%10.25%
14 PG&E Corp.$44.25 6.84%$1.82 4.39%11.31%
15 Portland General $19.33 7.00%$1.04 5.76%12.87%
16 Progress Energy $41.56 3.94%$2.48 6.20%10.29%
17 SCANACorp.$38.28 4.83%$1.90 5.20%10.13%
18 Sempra Energy $50.24 5.67%$1.56 3.28%8.99%
19 Southern Co.$35.27 5.18%$1.82 5.43%10.71%
20 Vecten Corp.$24.45 4.92%$1.36 5.84%10.88%
21 Wisconsin Energy $54.00 9.00%$1.60 3.23%12.26%
22 Xcel Energy Inc.$21.84 6.28%$1.01 4.92%11.28%
23 Average $37.61 5.67%$1.66 4.79%10.54%
24 Medjan 5.45%10.57%
Sources:1 http://moneycentral.msn.com, downloaded on September 14,2010.
2 Exhibit No. 203 (MPG-2), Column 7.
3 The Value Line Investment Survey, June 25, August 6, and August 27,2010.
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Exhibit No. 207 (MPG-6)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Proxy Group Payout Ratios
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Line Company 2009 Projected 2009 Projected 2009 Projected
(1)(2)(3)(4)(5)(6)
1 ALLETE $1.76 $1.80 $1.89 $2.50 93.12%72.00%
2 Allant Energy Co.$1.50 $1.92 $1.89 $3.60 79.37%53.33%
3 Black Hils Corp $1.42 $1.60 $2.32 $2.50 61.21%64.00%
4 Con. Edison $2.36 $2.46 $3.16 $3.85 74.68%63.90%
5 DPL Inc.$1.14 $1.50 $2.01 $2.90 56.72%51.72%
6 DTE Energy Co.$2.12 $2.60 $3.24 $4.25 65.43%61.18%
7 Duke Energy $0.94 $1.05 $1.13 $1.50 83.19%70.00%
8 Edison InternaL.$1.25 $1.50 $3.24 $3.50 38.58%42.86%
9 Entergy Corp.$3.00 $4.15 $6.30 $7.75 47.62%53.55%
10 NextEra Energy $1.89 $2.40 $3.97 $5.00 47.61%48.00%
11 IDACORP $1.20 $1.40 $2.64 $3.10 45.45%45.16%
12 Northeast Utilities $0.95 $1.30 $1.91 $2.50 49.74%52.00%
13 NSTAR $1.53 $2.05 $2.28 $3.25 67.11%63.08%
14 PG&E Corp.$1.68 $2.40 $3.03 $4.50 55.45%53.33%
15 Portland General $1.01 $1.20 $1.31 $2.00 7710%60.00%
16 Progress Energy $2.48 $2.58 $2.99 $3.55 82.94%72.68%
17 SCANACorp.$1.88 $2.00 $2.85 $3.50 65.96%57.14%
18 Sempra Energy $1.56 $2.05 $4.78 $5.00 32.64%41.00%
19 Southern Co.$1.73 $2.10 $2.32 $3.00 74.57%70.00%
20 Vedren Corp.$1.35 $1.50 $1.79 $2.25 75.2%66.67%
21 Wisconsin Energy $1.35 $2.40 $3.20 $5.00 42.19%48.00%
22 Xcel Energy Inc.$0.97 $1.15 $1.49 $2.00 65.10%57.50%
23 Average $1.59 $1.96 $2.72 $3.50 62.78%57.60%
Source:
The Value Line Investment SUNey, June 25, August 6, and August 27, 2010.
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Monsanto Company
Exhibit No. 209 (MPG-8)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Sustainable Constant Growth DCF Model
13-WeekAVG Sustainable Annualized Adjusted Constant
Une Company Stock Price 1 Growth2 Dividend3 yjeld Growth OCF
(1 )(2)(3)(4)(5)
1 ALLETE $35.60 3.05%$1.76 5.10%8.14%
2 Allant Energy Co.$34.26 5.87%$1.58 4.88%10.76%
3 Black Hils Corp $30.44 2.95%$1.44 4.87%7.82%
4 Con. Edison $46.03 3.53%$2.38 5.35%8.88%
5 DPL Inc.$25.26 13.69%$1.21 5.45%19.14%
6 DTE Energy Co.$46.88 3.97%$2.12 4.70%8.67%
7 Duke Energy $16.94 2.53%$0.98 5.93%8.46%
8 Edison InternaL.$33.38 5.20%$1.26 3.97%9.17%
9 Entergy Corp.$77.17 4.75%$3.32 4.51%9.25%
10 NextEra Energy $52.27 6.79%$2.00 4.09%10.87%
11 IDACORP $35.04 5.10%$1.20 3.60%8.69%
12 Northeast Utilities $27.80 5.23%$1.03 3.88%9.11%
13 NSTAR $37.06 4.15%$1.60 4.50%8.64%
14 PG&E Corp.$44.25 8.26%$1.82 4.45%12.72%
15 Portland General $19.33 3.28%$1.04 5.56%8.83%
16 Progress Energy $41.56 2.91%$2.48 6.14%9.05%
17 SCANACorp.$38.28 5.74%$1.90 5.25%10.99%
18 Sempra Energy $50.24 5.72%$1.56 3.28%9.01%
19 Southern Co.$35.27 5.53%$1.82 5.45%10.98%
20 Vectren Corp.$24.45 3.79%$1.36 5.77%9.56%
21 Wisconsin Energy $54.00 6.56%$1.60 3.16%9.72%
22 Xcel Energy Inc.$21.84 4.96%$1.01 4.85%9.81%
23 Average $37.61 5.16%$1.66 4.76%9.92%
24 Median 9.14%
Sources:
1 http://moneycentral.msn.com, downloaded on September 15, 2010.
2 Exhibit No. 208 (MPG-7), Page 1 of2, Column 10.
3 The Value Line Investment Survey, June 25, August 6, and August 27,2010.
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Monsanto Company
Exhibit No. 212 (MPG-11)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Electric Equity Risk Premium - Treasury Bond
Authorized Indicated
Electric Treasury Risk
Line Year Returns1 BondYield2 Premium
(1)(2)(3)
1 1986 13.93%7.78%6.15%
2 1987 12.99%8.59%4.40%
3 1988 12.79%8.96%3.83%
4 1989 12.97%8.45%4.52%
5 1990 12.70%8.61%4.09%
6 1991 12.55%8.14%4.41%
7 1992 12.09%7.67%4.42%
8 1993 11.41%6.59%4.82%
9 1994 11.34%7.37%3.97%
10 1995 11.55%6.88%4.67%
11 1996 11.39%6.71%4.68%
12 1997 11.40%6.61%4.79%
13 1998 11.66%5.58%6.08%
14 1999 10.77%5.87%4.90%
15 2000 11.43%5.94%5.49%
16 2001 11.09%5.49%5.60%
17 2002 11.16%5.43%5.73%
18 2003 10.97%4.96%6.01%
19 2004 10.75%5.05%5.70%
20 2005 10.54%4.65%5.89%
21 2006 10.36%4.91%5.45%
22 2007 10.36%4.84%5.52%
23 2008 10.46%4.28%6.18%
24 2009 10.48%4.08%6.40%
25 Jun 20103 10.41%4.50%5.92%
26 Average 11.50%6.32%5.19%
Sources:1 Regulatory Research Associates, Inc., Regulatory Focus. Jan. 85 - Dec. 06,
and July 7,2010.
2 Economic Report of the President 2010: Table 73. The yields from 2002 to 2005
represent the 20-Year Treasury yields obtained from the Federal Reserve Bank.3 St. Louis Federal Reserve: Economic Research, http://research.stlouisfed.org/,
January to June 2010.
Monsanto Company
Exhibit No. 213 (MPG-12)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Electric Equity Risk Premium - Utilty Bond
Authorized Average Indicated
Electric "A" Rated Utilty Risk
Line Year Returns1 BondYield2 Premium
(1)(2)(3)
1 1986 13.93%9.58%4.35%
2 1987 12.99%10.10%2.89%
3 1988 12.79%10.49%2.30%
4 1989 12.97%9.77%3.20%
5 1990 12.70%9.86%2.84%
6 1991 12.55%9.36%3.19%
7 1992 12.09%8.69%3.40%
8 1993 11.41%7.59%3.82%
9 1994 11.34%8.31%3.03%
10 1995 11.55%7.89%3.66%
11 1996 11.39%7.75%3.64%
12 1997 11.40%7.60%3.80%
13 1998 11.66%7.04%4.62%
14 1999 10.77%7.62%3.15%
15 2000 11.43%8.24%3.19%
16 2001 11.09%7.76%3.33%
17 2002 11.16%7.37%3.79%
18 2003 10.97%6.58%4.39%
19 2004 10.75%6.16%4.59%
20 2005 10.54%5.65%4.89%
21 2006 10.36%6.07%4.29%
22 2007 10.36%6.07%4.29%
23 2008 10.46%6.53%3.93%
24 2009 10.48%6.04%4.44%
25 Jun 20103 10.41%5.71%4.70%
26 Average 11.50%7.75%3.75%
Sources:1 Regulatory Research Associates, Inc., Regulatory Focus, Jan. 85 - Dec. 06,
and July 7,2010.2 Mergent Public Utilty Manual, Mergent Weekly News Reports, 2003. The utilty yields
for the period 2001-2009 were obtained from the Mergent Bond Record. The utilty
yields were obtained from http://credittrends.moodys.com/.3 ww.moodys.com. Bond Yields and Key Indicators.
Monsanto Company
Exhibit No. 214 (MPG-13)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Utilty Bond Yield Spreads
Public Utilit Bond Yields Corprate Bond Yields
T-Bond A-T-Bond Baa-T-Bond Aaa-T-Bond Baa-T-Bond Baa Utilty-
Line Year Yieldl ~Baa2 Spread Spread Aaal Baal Spread Spread Corporate
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)
1 1980 11.27%13.34%13.95%2.07%2.68%11.94%13.67%0.67%2.40%0.28%
2 1981 13.45%15.95%16.60%2.50%3.15%14.17%16.04%0.72%2.59%0.56%
3 1982 12.76%15.86%16.45%3.10%3.69%13.79%16.11%1.03%3.35%0.34%
4 1983 11.18%13.66%14.20%2.48%3.02%12.04%13.55%0.86%2.37%0.65%
5 1984 12.41%14.03%14.53%1.62%2.12%12.71%14.19%0.30%1.78%0.34%
6 1985 10.79%12.47%12.96%1.68%2.17%11.37%12.72%0.58%1.93%0.24%
7 1986 7.78%9.58%10.00%1.80%2.22%9.02%10.39%1.24%2.61%-0.39%
8 1987 8.59%10.10%10.53%1.51%1.94%9.38%10.58%0.79%1.99%-0.05%
9 1988 8.96%10.49%11.00%1.53%2.04%9.71%10.83%0.75%1.87%0.17%
10 1989 8.45%9.77%9.97%1.32%1.52%9.26%10.18%0.81%1.73%-0.21%
11 1990 8.61%9.86%10.06%1.25%1.45%9.32%10.36%0.71%1.75%-0.30%
12 1991 8.14%9.36%9.55%1.22%1.41%8.77%9.80%0.63%1.66%-0.25%
13 1992 7.67%8.69%8.86%1.02%1.19%8.14%8.98%0.47%1.31%-0.12%
14 1993 6.59%7.59%7.91%1.00%1.32%7.22%7.93%0.63%1.34%-0.02%
15 1994 7.37%8.31%8.63%0.94%1.26%7.96%8.62%0.59%1.25%0.01%
16 1995 6.88%7.89%8.29%1.01%1.41%7.59%8.20%0.71%1.32%0.09%
17 1996 6.71%'7.75%8.17%1.04%1.46%7.37%8.05%0.66%1.34%0.12%
18 1997 6.61%7.60%7.95%0.99%1.34%7.26%7.86%0.65%1.25%0.09%
19 1998 5.58%7.04%7.26%1.46%1.68%6.53%7.22%0.95%1.64%0.04%
20 1999 5.87%7.62%7.88%1.75%2.01%7.04%7.87%1.17%2.00%0.01%
21 2000 5.94%8.24%8.36%2.30%2.42%7.62%8.36%1.68%2.42%0.00%
22 2001 5.49%7.76%8.03%2.27%2.54%7.08%7.95%1.59%2.46%0.08%
23 2002 5.43%7.37%8.02%1.94%2.59%6.49%7.80%1.06%2.37%0.22%
24 2003 4.96%6.58%6.84%1.62%1.89%5.67%6.77%0.71%1.81%0.07%
25 2004 5.05%6.16%6.40%1.11%1.35%5.63%6.39%0.58%1.34%0.00%
26 2005 4.65%5.65%5.93%1.00%1.28%5.24%6.06%0.59%1.41%-0.14%
27 2006 4.91%6.07%6.32%1.16%1.41%5.59%6.48%0.68%1.57%-0.16%
28 2007 4.84%6.07%6.33%1.23%1.49%5.56%6.48%0.72%1.64%-0.15%
29 2008 4.28%6.53%7.25%2.25%2.97%5.63%7.45%1.35%3.17%-0.20%
30 2009 4.08%6.04%7.06%1.96%2.98%5.31%7.30%1.23%3.22%-0.24%
31 Average 7.61%9.11%9.51%1.60%2.00%8.35%9.47%0.84%1.96%0.04%
Yield Spreads
Treasury Vs. Corporate &Treasury Vs. Utilty
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-i Utility A - T-Bond Spread -i Utilty Baa - T -Bond Spred
.. Corporate Aaa - T -Bond Spread -+Corporate Baa - T-Bond Spread
Sources:
1 Economic Report of the President 2008: Table 73 at 316. The yields from 2002 to 2005
represent the 20- Year Treasury yields obtained from the Federal Reserve Bank.2 Mergent Public Utility Manual 2003. Moody'S Daily News Report.
Monsanto Company
Exhibit No. 215 (MPG-14)
Page 1 of 3
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Utilty and Treasury Bond Yields
Treasury "A" Rated Utilty "Baa" Rated Utilty
Line Date BondYield1 BondYield2 BondYield2
(1)(2)(3)
1 09/10/10 3.78%5.10%5.64%
2 09/03/10 3.66%5.02%5.57%
3 08/27/10 3.61%4.94%5.50%
4 08/20110 3.71%4.85%5.40%
5 08/13/10 3.95%5.06%5.60%
6 08/06/10 4.04%5.18%5.70%
7 07/30/10 4.05%5.17%5.80%
8 07/23/10 3.97%5.28%5.92%
9 07/16/10 4.02%5.24%6.00%
10 07/09/10 3.97%5.33%6.13%
11 07/02/10 3.94%5.24%6.02%
12 06/25/10 4.10%5.38%6.15%
13 06/18/10 4.18%5.47%6.23%
14 13-Wk Average 3.92%5.17%5.82%
Sources:
1 St. Louis Federal Reserve: Economic Research, http://research.stlouisfed.org.
2 ww.moodys.com. Bond Yields and Key Indicators.
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Rocky Mountain Power
Value Line Beta
Line Company Beta
(1)
1 ALLETE 0.70
2 Allant Energy Co.0.70
3 Black Hils Corp 0.80
4 Con. Edison 0.65
5 DPL Inc.0.60
6 DTE Energy Co.0.75
7 Duke Energy 0.65
8 Edison Internat.0.80
9 Entergy Corp.0.70
10 NextEra Energy 0.75
11 IDACORP 0.70
12 Northeast Utilties 0.70
13 NSTAR 0.65
14 PG&E Corp.0.55
15 Portland General 0.75
16 Progress Energy 0.60
17 SCANACorp.0.70
18 Sempra Energy 0.85
19 Southern Co.0.55
20 Vectren Corp.0.70
21 Wisconsin Energy 0.65
22 Xcel Energy Inc.0.65
23 Average 0.69
Source:
The Value Line Investment Survey,
June 25, August 6, and August 27,2010.
Monsanto Company
Exhibit No. 216 (MPG-15)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Monsanto Company
Exhibit No. 217 (MPG-16)
Page 1 of 1
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
CAPM Return
CAPMRange
Line Description Low High
1 Risk-Free Rate 1 4.70%4.70%
2 Risk Premium2 5.20%6.70%
3 Beta3 0.69 0.69
4 CAPM 8.28%9.31%
5 CAPM Average 8.80%
Sources:
1 Blue Chip Financial Forecasts; September 1, 2010, at 2.
2 Morningstar, Inc. Ibbotson SBBI 2010 Valuation Yearbook,
at 54 and 66.
3 The Value Line Investment Survey, June 25, August 6, and August 27,2010.
Monsanto Company
Exhibit No. 218 (MPG-17)
Page 1 of4
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Standard & Poor's Credit Metrics
S&P Benchmark 112
Line DescriPton Amount Significant Aggressive Reference
(1)(2)(3)(4)
Rate Base $667,459,415 McDougal Direc, Exhibit No.1, page 1 of 3.
2 Weighted Common Return 4.72%Exhibit No. 202 (MPG-1), Page 1 of 2, Line 3, Col. 4.
3 Pre-Tax Rate of Return 10.61%Page 2, Line 4, Col. 5.
4 Income to Common $31,527,122 Line 1 x Line 2.
5 EBIT $70,787,658 Line 1 x Line 3.
6 Depreciation & Amortzation $29,577,958 McDougal Direct, Exhibit NO.1, page 1 of 3.
7 Imputed Amortization $2,076,427 Page 3, Line 15, Col. 1.
8 Deferred Income Taxes & ITC $25,306,719 McDougal Direct, Exhibit No.1, page 1 of 3.
9 Funds from Operations (FFO)$88,488,227 Sum of Line 4 and Lines 6 through 8.
10 Imputed Interest Expense $1,451,433 Page 3, Line 14, Col. 1.
11 EBITDA $103,893,477 Sum of Lines 5 through 7 and Line 10.
12 Total Debt Ratio 52%45%-50%50% -60%Page 2, Line 3.
13 Debt to EBITDA 3.3x 3.0x-4.0x 2.0x- 3.0x (Line 1 x Line 12)/ Line 11.
14 FFO to Total Debt 26%20% -30%12%-20%Line 9/ (Line 1 x Line 12).
Sourcs:
1 Standard & Poor's: "U.S. Utilities Ratings Analysis Now Portyed in The S&P Corporate Ratings Matrix," May 27,2009.
2 S&P RatingsDirect: "U.S. Regulated Electic Utilities, Strongest to weakest," August 4,2010.
Notes:
Based on the new S&P metrics, PacifCorp has an "Excellent' business prole and a "Signifcant" financial profile.
Monsanto Company
Exhibit No. 218 (MPG-17)
Page 2 of4
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Standard & Poor's Credit Metrics
(Pre-Tax Rate of Return)
Pre-Tax
Wejghted Weighted
Line Oescription Amount1 Wejght Cose Cost Cost
(1)(2)(3)(4)(5)
1 Long-Term Oebt $6,402,725 50.0%5.92%2.96%2.96%
2 Preferred Stock 41,317 0.3%5.41%0.02%0.03%
3 Common Equity 6,372,409 49.7%9.50%4.72%7.62%
4 Total $12,816,450 100.0%7.70%10.61%
5 Tax Conversion Factor3 1.613215
Sources:
1 Exhibit No. 202 (MPG-1), Page 2 of 2.
2 Williams Direct at 2.
3 McDougal Direct, Exhibit No. 1.1.
Monsanto Company
Exhibit No. 218 (MPG-17)
Page 3 of4
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Standard & Poor's Credit Metrics
lFinancial Capital Structure),
Line Description Amount1 Weight
(1)(2)
1 Long-Term Debt $6,402,725 48.33%
2 Off-Balance Sheet Debe 432,200 3.26%
3 Total Long-Term Debt $6,834,925 51.59%
4 Preferred Stock $41,317 0.31%
5 Common Equity 6,372,409 48.10%
6 Total $13,248,650 100.00%
Sources:
1 Exhibit No. 202 (MPG-1), Page 1 of 2.
2 Exhibit No. 218 (MPG-17), Page 4 of 4, Line 6, Col. 1.
Monsanto Company
Exhibit No. 218 (MPG-17)
Page 4 of4
Case No. PAC-E-10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Standard & Poor's Credit Metrics
(Off-Balance Sheet Debt Equivalents)
Line Oescrjption Amount Reference
(1)(2)
RMP Idaho Allocator1
1 Idaho December 2009 Rate Base $557,117,960
2 Total Company December 2009 Rate Base $10,785,901,285
3 RMP Idaho Allocator I 5.17%I
Total Compani
Of-Balance Sheet Oebt
4 Operating Leases $36,500,000
5 Purchased Power Agreements 395,700,000
6 Total Of-Balance Sheet Debt $432,200,000
Imputed Interest Expense
7 Operating Leases $2,300,000
8 Purchased Power Agreements 25,800,000
9 Total Imputed Interest Expense $28,100,000
Imputed Amortjzatjon Expense
10 Operating Leases $2,700,000
11 Purchased Power Agreements 37,500,000
12 Total Imputed Amortizatjon Expense $40,200,000
Idaho Allocation
13 Off-Balance Sheet Debt $22,324,178 Line 3 * Line 6
14 Imputed Interest Expense $1,451,433 Line 3 * Line 9
15 Imputed Amortization $2,076,427 Line 3 * Line 12
Sources:1 McDougal Direct, Exhibit NO.1, page 2 of 3.
2 Bruce Williams Exhibit NO.6, page 6 of 10, Standard & Poor's
Global Credit Portal, RatingsDirect: "PacifiCorp," April 30, 2010.
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1
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1
4
.
Monsanto Company
Exhibit No. 220 (MPG-19)
Page 1 of 1
Case No. PAC-E"10-07
Witness: Michael P. Gorman
Rocky Mountain Power
Accuracy of Interest Rate Forecasts
(Long-Term Treasury Bond Yjelds - Projected Vs. Actual)
Publication Data Actual Yield Projected Yield
Prior Quarter Projected Projected in Projectd Higher (Lower)
Line Date Actual Yield Yield Quarter Quarter Than Actual Yield
(1)(2)(3)(4)(5)
1 Dec-OO 5.8%5.8%1Q,02 5.6%0.2%
2 Mar-01 5.7%5.6%2Q,02 5.8%-0.2%
3 Jun-01 5.4%5.8%3Q,02 5.2%0.6%
4 Sep-01 5.7%5.9%4Q,02 5.1%0.8%
5 Dec-01 5.5%5.7%1Q,03 5.0%0.7%
6 Mar-02 5.3%5.9%2Q,03 4.7%1.2%
7 Jun-02 5.6%6.2%3Q,03 5.2%1.0%
8 Sep-02 5.8%5.9%4Q,03 5.2%0.7%
9 Dec-02 5.2%5.7%1Q,04 4.9%0.8%
10 Mar-03 5.1%5.7%2Q,04 5.4%0.3%
11 Jun-03 5.0%5.4%3Q,04 5.1%0.3%
12 Sep-3 4.7%5.8%4Q,04 4.9%0.9%
13 Dec-03 5.2%5.9%1Q,05 4.8%1.1%
14 Mar-04 5.2%5.9%2Q,05 4.6%1.4%
15 Jun-04 4.9%6.2%3Q,05 4.5%1.7%
16 Sep-04 5.4%6.0%4Q,05 4.8%1.2%
17 Dec-Q4 5.1%5.8%1Q,06 4.6%1.2%
18 Mar-Q5 4.9%5.6%2Q,06 5.1%0.5%
19 Jun-05 4.8%5.5%3Q,06 5.0%0.5%
20 Sep-05 4.6%5.2%4Q,06 4.7%0.5%
21 Dec-05 4.5%5.3%1Q,07 4.8%0.5%
22 Mar-06 4.8%5.1%2Q,07 5.0%0.1%
23 Jun-06 4.6%5.3%3Q,07 4.9%0.4%
24 Sep-06 5.1%5.2%4Q,07 4.6%0.6%
25 Dec-06 5.0%5.0%1Q,08 4.4%0.6%
26 Mar-07 4.7%5.1%2Q,08 4.6%0.5%
27 Jun-07 4.8%5.1%3Q,08 4.5%0.7%
28 Sep-07 5.0%5.2%4Q,08 3.7%1.5%
29 Dec-07 4.9%4.8%1Q,09 3.5%1.4%
30 Mar-08 4.6%4.8%2Q,09 4.0%0.8%
31 Jun-08 4.4%4.9%3Q,09 4.3%0.6%
32 Sep-8 4.6%5.1%4Q,09 4.3%0.8%
33 Dec-08 4.5%4.6%1Q,10 4.6%0.0%
34 Jan-09 3.8%4.0%2Q,10
35 Feb-09 3.7%3.9%2Q,10
36 Mar-09 3.7%4.1%2Q,10
37 Apr-09 3.5%4.3%3Q,10
38 May-09 3.5%4.3%3Q,10
39 Jun-09 3.5%4.6%3Q,10
40 Jul-09 4.0%5.0%4Q,10
41 Aug-09 4.0%5.0%4Q,10
42 Sep-09 4.0%5.0%4Q,10
43 Oct-09 4.3%5.1%1Q,11
44 Nov-09 4.3%5.0%1Q,11
45 Dec-09 4.3%5.0%1Q,11
46 Jan-10 4.3%5.2%2Q,11
47 Feb-10 4.3%5.2%2Q,11
48 Mar-10 4.3%5.2%2Q,11
49 Apr-10 4.6%5.3%3Q,11
50 May-10 4.6%5.3%3Q,11
51 Jun-10 4.6%5.2%3Q,11
52 Jul-10 4.4%5.1%4Q,11
53 Aug-10 4.4%4.9%4Q,11
Sourc:
Blue Chip Financial Forecasts, Various Dates.
. Col. 2 - Col. 4.