20040621Thornton Exhibits.pdf

Conley E. Ward (ISB No. 1683)
GIVENS PURSLEY LLP
601 W. Bannock Street
O. Box 2720
Boise, ill 83701-2720
Telephone No. [phone]
Fax No. [phone]
cew~gi venspursley. com
Attorneys for Potlatch Corporation.
S:\CLIENTS\54\Thornton Direct Testimony. DOC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN
THE STATE OF IDAHO.
Case Nos. A \rV-O4-
A VU -04-
EVIDENCE SUPPORTING THE
DIRECT TESTIMONY OF JOHN S. THORNTON
ON BEHALF OF POTLATCH CORPORATION
June 21, 2004
Table of Contents
Exhibit JST-
Description Page No.
Rate of Return Calculations
Select Pages from Stocks For The Long Run by Jeremy Siegel
Electric Utility Sample Dividend Yield and M/B Information
Multi-Stage DCF Calculations
S. Treasury Rates From The Wall Street Journal
Money Rates From The Wall Street Journal
Sample Companies' Common Equity Capitalizations and Betas
Fitch Synopsis of Fitch 2004 Outlook
Dr. Avera s Sample Dividend Growth 1994-2003
Dr. Avera s Sample Dividend Growth 2004 to 2007-2009
NRRI Journal of Applied Regulation Article by Stephen Kim
Witness Qualifications Statement
14-
20-
24-
48-
Avista Corporation
Overall Rate of Return Recommendation
and Range Estimates
Avista Corporation s ROR at Recommended Return on Equity
Applicant's Proposed Capital Structure and Costs of Debt and Preferred Stock
(A)
Capital
(B)(C)
Capital
(D)(E)
Weighted
Source Structure Cost CostDebt832735,414 48.190/0 700/0 19010Trust Preferred Securities 100 000 000 79%01010 0.41 %Preferred stock 750 000 72%340/0 13010Common equity 765 520,415 44.30010 500/0 770/0
Totals:$ 1 728 005 829 00.00010 490/0
Interest coverage ratio:
=(E7 +(E8+E9+E 1 0*65)/E7
Avista Corporation s ROR at High Cost of Equity Estimate
Applicant's Proposed Capital Structure and Costs of Debt and Preferred Stock
(A)
Capital
Source
(B)(C)
Capital
Structure
(D)(E)
Weighted
CostCost
Debt 832 735,414 48.190/0 70%19010Trust Preferred Securities 100 000 000 79010 010/0 0.41 %
Preferred stock 750 000 1 .720/0 34010 13%
Common equity 765 520,415 44.30010 90%39010Totals:$ 1 728 005 829 100.000/0 110/0
Interest coverage ratio:
=(E24+(E25+E26+E27)*65)/E24
Avista Corporation s ROR at Low Cost of Equity Estimate
Applicant's Proposed Capital Structure and Costs of Debt and Preferred Stock
(A)
Capital
Source
(B)(C)
Capital
Structure
(D)(E)
Weighted
CostCost
Debt 832 735,414 48. 19%70010 19%Trust Preferred Securities 100 000 000 790/0 01%0.41 %
Preferred stock 750 000 72%340/0 130/0Common equity 765 520,415 44.30010 50%32%Totals:I $ 1 728 005 829 1 00.000/0 050
Interest coverage ratio:
=(E42+(E42+E43+E44)*65)/E42
Exhibit JST-
Page 1
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EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-O4-
J. Thornton, Potlatch
June 21, 2004 Page 2 of 50
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ONE OF THE BEST INVESTMENT BOOKS OF ALL
TIME... THIS IS THE BUY-AND-HOLD BIBLE.
James K. Glassman, The Washington Post on 2nd edition of Stocks for the Long Run
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Discounted Cash Flow Analysis
Forward Dividend Yield and M/B Ratios
Electric Utility Industry
Comp Div(j)Yld M/B
01%
82%
09%
32010
67%
800/0
06%
5. 150/0
920/0
080/0
980/0
230/0
640/0
500/0
970/0
950/0
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350/0
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810/0
51%
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71010
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250/0
320/0
91%
780/0
Alliant Energy
2 Ameren Corp.
Avista Corp.
Black Hills Corp.
Central Vermont Public Service
6 CH Energy Group
Cinergy Corp.
Cleco Corp.
Consolidated Edison
10 Dominion Resources
11 DPL, Inc.
12 DTE Energy Company
13 Energy East Corp.
14 Entergy Corporation
15 FPL Group, Inc.
16 FirstEnergy Corporation
17 Great Plains Energy, Inc.
18 Hawaiian Electric Industries, Inc.
19 IDACORP, Inc.20 MGE Energy, Inc.21 NiSource~lnc.
22 NSTAR
23 OGE Energy Corp.
24 Otter Tail Corporation
25 Pinnacle West Capital Corp.
26 PNM Resources
27 Public Service Enterprise Group, Inc28 Puget Energy, Inc.
29 SCANA Corp.
30 The Empire District Electric Co.
31 The Southern Company
32 Wisconsin Energy
Mean
Median
Std. Deviation
Maximum value
Minimum value
1 st Quartile
3rd Quartile
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EXDlbIt J~T-
Page 13
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Exhibit JST -
Page 14
Multi-Stage DCF Cost of Equity Analysis
Electric Utility Industry
Long-
Term IRRStockFirstGrowthCost ofPriceStaqeNear-Term StaQe Rate uit
Alliant Energy (24.95) $29%2 Ameren Corp.(43.67) $37%Avista Corp.(16.84) $55%Black Hills Corp.(29.20) $32%Central Vermont Public Service (19.90) $81%6 CH Energy Group (44.99) $7.43 %Cinergy Corp.(37.36) $93%8 Cleco Corp.(17.47) $75%Consolidated Edison (38.37) $59%10 Dominion Resources (63.30) $07%DPL, Inc.(19.48) $85%12 DTE Energy Company (39.38) $89%13 Energy East Corp.(22.64) $1.05 72%14 Entergy Corporation (53.09) $61%15 FPL Group, Inc.(62.90) $98%16 FirstEnergy Corporation (38.00) $1.50 97%17 Great Plains Energy, Inc.(30.13) $37%18 Hawaiian Electric Industries, Inc.(48.17) $5.44%19 IDACORP, Inc.(27.58) $01%20 MGE Energy, Inc.(30.60) $15%NiSource, Inc.(20.24) $64%NST AR (46.60) $2.43 78%23 aGE Energy Corp.(24.14) $26%24 Otter Tail Corporation (25.76) $17%Pinnacle West Capital Corp.(39.31)85%PNM Resources (29.96) $29%27 Public Service Enterprise Group, Inc (41.67) $13%Puget Energy, Inc.(21.14) $83%29 SCANA Corp.(34.80) $1.48 7.49%30 The Empire District Electric Co.(20.24) $84%The Southern Company (28.90) $1.42 1.47 00%32 Wisconsin Energy (30.60) $91%
Mean (rounded to three decimal places)
Median
Std. Deviation
Maximum value
Minimum value
1 st Quartile
3rd Quartile
50%
68%
75%
84%
5.44%
06%
90%
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, PotlatchJune 21, 2004 Page 14 of 50
Exhibit JST-
Page 15Multi-Stage DCF Cost of Equity Analysis
Electric Utility Industry
Long-
Term IRRStockFirstGrowthCost ofStaQeNear-Term StaQe B!!!
Alliant Energy (24.95)
17%2 Ameren Corp.(43.67)
23%Avista Corp.(16.84)
7.45%Black Hills Corp.(29.20)
21%Central Vermont Public Service (19.90)68%6 CH Energy Group (44.99) $
31%Cinergy Corp.(37.36) $
81%Cleco Corp.(17.47)
63%Consolidated Edison (38.37)9.45%Dominion Resources (63.30) $
96%DPL, Inc.(19.48)
72%12 DTE Energy Company (39.38)
76%Energy East Corp.(22.64)59%Entergy Corporation (53.09)51%FPL Group, Inc.(62.90)
88%FirstEnergy Corporation (38.00) $
86%17 Great Plains Energy, Inc.(30.13) $
23%
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37%19 IDACORP, Inc.(27.58)90%20 MGE Energy, Inc.(30.60)04%NiSource, Inc.(20.24)52%NST AR (46.60)2.43 65%23 aGE Energy Corp.(24.14) $13%24 Otter Tail Corporation (25.76) $06%Pinnacle West Capital Corp.(39.31) $72%PNM Resources (29.96)20%27 Public Service Enterprise Group, Inc (41.67) $
00%Puget Energy, Inc.(21.14)70%29 SCANA Corp.(34.80) $1.48 38%30 The Empire District Electric Co.(20.24) $69%The Southern Company (28.90) $1.42 1.47 87%32 Wisconsin Energy (30.60)83%
Mean (rounded to three decimal places)
Median
Std. Deviation
Maximum value
Minimum value
1 st Quartile
3rd Quartile
40%
56%
73%
69%
37%
95%
77%
EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-G-O4-
J. Thornton, Potlatch
June 21 , 2004 Page 15 of 50
Exhibit JST-
Page 16
Multi-Stage DCF Cost of Equity Analysis
Electric Utility Industry
Long-
Term IRRStockFirstGrowthCost ofPriceStaaeNear-Term Staae Rate uit
Alliant Energy (24.95)06%2 Ameren Corp.(43.67) $10.09%Avista Corp.(16.84) $36%Black Hills Corp.(29.20) $10%Central Vermont Public Service (19.90)56%6 CH Energy Group (44.99) $20%Cinergy Corp.(37.36) $68%Cleco Corp.(17.47)51%Consolidated Edison (38.37) $10.31%Dominion Resources (63.30) $86%DPL, Inc.(19.48) $60%DTE Energy Company (39.38) $64%Energy East Corp.(22.64) $9.47%14 Entergy Corporation (53.09) $8.42%15 FPL Group, Inc.(62.90) $77%16 FirstEnergy Corporation (38.00) $76%17 Great Plains Energy, Inc.(30.13) $1.66 10.10%18 Hawaiian Electric Industries, Inc.(48.17) $30%19 IDACORP, Inc.(27.58)80%20 MGE Energy, Inc.(30.60)93%NiSource, Inc.(20.24)9.40%22 NST AR (46.60) $2.43 53%23 aGE Energy Corp.(24.14) $10.00%24 Otter Tail Corporation (25.76) $95%Pinnacle West Capital Corp.(39.31)60%PNM Resources (29.96)11%27 Public Service Enterprise Group, Inc (41.67)87%Puget Energy, Inc.(21.14) $58%29 SCANA Corp.(34.80)1.48 26%30 The Empire District Electric Co.(20.24) $10.55%The Southern Company (28.90) $1.42 1.47 74%32 Wisconsin Energy (30.60) $76%
Mean (rounded to three decimal places)
Median
Std. Deviation
Maximum value
Minimum value
1 st Quartile
3rd Quartile
20%
44%
71%
10.55%
30%
84%
65%
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 2004 Page 16 of 50
THE WALL STREET JOURNAL.
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Treasury Bonds, Notes and Bills
Explanatory Notes
Representative Over.the.Counter quotaUDn based on. transactions of $1 million Dr more. TreasUlY bond.note and bill quotes are as of mld.afternoon. Colons in bld.and-asked quotes represent 32nds: 101:01means 101 1/32. Net changes In 32nds. n.Treasury note. i.lnOation-lndexed Issue. TreasUlY bill quotes inhundredths. quoted on leons of a rate Df dlscDunl Days to maturity calculated from senlement data. Allyields are to maturity and based on the. asked quote. latest 13.week and 26.week bills ale boldfaced. Forbonds callable prior tD maturity, yields are computed to the eariiest call date for Issues quoted above parand to the maturity date fDr issues below par. 'When Issued.Source: eSpeed/Cantor Rtzgerald
S. Tmasury strips as Df 3 p.m. Eastern Ume. also based on transactions of $1 million or more. Colonsin bid and asked quotes represent 32nds; 99:01 means 99 1/32. Net changes in 32nds. Yields calculated'on the asked quotaUon. ci.strlpped coupon interest. bp.Treasury bond, stripped principal. np.Treasury note.stripped principal. For bonds callable prior ID maturity. yields are compured to the earilest call dale for Issuesquoted above par and 10 the marurity date for issues below pal.Source: Bear. Steams & Co. via Street Software Technology Inc.MATURITY ASK MATURITYRATE MOIVR BID ASKED CHG YLD RATE MOIVR BID ASKED
Government Bonds & Notes 3.875 Feb Un 94:21 94:22
3.625 May Un 92:25 92:263150 May 04n 100:00 100:01 -1 018 1875 Jul13i 99:09 99:102.875 Jun 04n 100:05 100:06 -1 0.75 4.250 AU9 Un 96:19 96:202150 Jul 04n 100:06 100:07 -1 0.95 12000 AU9 13 132:16 132:172.125 AU9 04n 100:08 100:09 -1 0.99 4150 Noy Un 96:11 96:12000 AU9 04n 101:03 101:04 ... 0.92 2.000 Jan 141 100:00 100:007.250 AU9 04n 101:12 101:13 - O. 4000 Feb 14n .94:16 94'13.750 AU9 04 102:25 102:26 -1 0.98 4:750 May 140 100:04 1875 Sap 04n 100:07 100:08 -1 UO 13.250 May 14 142:05 142:06125 Od 04n 100:10 100:11 ... 12.500 AU9 14 140:03 140:04875 Noy 04n 102:02 102:03 -136 11750 Noy 14 137:21 137:22875 Nov 04n 103:00 103:01 -135 11250 Feb 15 153:08 153:0911625 Noy 04 104:25 104:26 ... 132 10.625 AU9 15 149:02 149:032.000 Noy 04n 100:09 100:10 ... 136 9.875 Noy 15 142:25 142:261750 Dee 04n 100:04 100:05 -1 146 9.250 Feb 16 137:18 137:191625 Jan 05n 100:01 100:02 .151 7.250 May 16 ll9:22 U9:23500 Feb OS;) 104:06 104:07 -. 158 7.500 Nov 16 122:01 122:021500 Feb 05n 99:29 99:30 ... 158 8.750 May 17 134:07 134:081625 Mar 05n 99:29 99:30 -1 1.68 8.875 AU9 17 135:20 135:211625 Apr 05n 99:27 99:28 ... 176 9.125 May 18 138:28 138:29500 May 05n 104:15 104:16 ... 178 9.000 Noy 18 138:03 138:04750 May 05n 104:22 104:23 -1 1.80 8.875 Feb 19 136:25 136:2612000 May 05 109:26 109:27 '.' 1.72 8.125 AU9 19 129:14 129:151250 May 05n 99;14 99:15 - 178 8.500 Feb 20 133:24 133:25Ll25 Jun 05n 99:05 99:06 -1 1.86 8.750 May 20 136;25 136:261500 Jul 05n 99:14 99:15 ... 1.96 8.750 AU9 20 137:00 137:016.500 AU9 05n 105:12 105:13 -1 199 7.875 Feb 21 127:18 127:1910.750 AU9 05 110:16 110:17 -1 197 8.125 May 21 130:19 130:202.000 AU9 05n 99:30 99:31 .. 2.02 8.125 AU9 21 130:24 130:251625 Sap 05n 99:11 99:12 -1 2.09 8.000 Nov 21 129:16 129:171625 Od 05n 99:07 99:08 ... U6 250 AU9 22 120:30 120:31750 Noy 05n 105:02 105:03 -1 211 . 7.625 NDY 22 125:17 125:18875 Noy 05n 105:08 105:09 ... 2.20 7.125 Feb 23 119:20 119:211.875 Noy 05n 99:13 99:14 .. 214 6150 Aug 23 109:05 109:061875 Dee 05n 99:08 99:09 ... 2.33 7.500 Noy 24 124:30 124:311875 Jan 06n 99:05 99:06 -. 237 7.625 Feb 25 126:18 126:19625 Feb 06n 105:15 105:16 .n 235 6.875 AU9 25 117:07 117:089375 Feb 06 ill:23 1ll:24 .. 236 6.000 Feb 26 106:07 106:081625 Feb 06n 98:19 98:20 ... 2.43 6.750 AU9 26 115:30 115:311500 Mar 06n 98:07 98:08 .n 2.47 6.500 Noy 26 112:23 112:242.250 Apr 06n 99:14 99:15 ... 253 6.625 Feb 27 114:13 .114:142.000 May 06n 98:29 98:30 no 2.56 6.375 AU9 1J m08 m09625 May 06n 103:29 103:30 no 2.56 6.125 Noy 27 108:01 108:02875 May 06n 108:07 108:08 2.55 3.625 Apr 28i 122:01 122:02000 Jul 06n 108:28 108:29 .n 2.68 5.500 AU9 28 99:26 99:272.375 AU9 06n 99:07 99:08 1 2.72 5.250 NDY 28 96:17 96:186.500 Od 06n 108:12 108:13 ... 2.83 5.250 Feb 29 96:19. 96:20625 Noy 06n 99:11 99:12 ... 2.89 3.875 Apr 291 127:17 127:183.500 Noy 06~ 101:13. 101:14 ... 2.89 6.125 AU9 29 108:12 108:133375 Jan 071 107:26 107:27 -3 038 6250 May 3D 110:11 110'2.250 Feb 07n 98:00 98:01 n. 3.00 5375 Feb 31 99;U 99~4250 Feb 07n 108:12 108:13 ... 3.00 3.375 Apr 321 121:27 121:28625 May 07n 109;25 109:26 .n 3.4.375 May 07n 103:14 103:15 .n 3.14 U.S. Treasury Strips3.125 May 07n 99:29 99:30 3.143.250 AU9 07n 100:01 100:02 ... 313 MATURITY TYPE BID. ASKED CHG125 AU9 07n 108:23 108:24 ... 314000 Noy 07n 98:29 98:30 .. 333 Jul 04 cI 99:27 99:273.625 Jan 08i 110:01 110:02 -4 0.81 Au9 04 cI 99:25 99:25000 Feb 08n 98:13 98:14 1 3.45 AU9 04 np 99:25 99:25500 Feb 08n 107:03 107:04 ... 3.44 Nov 04 ci 99:12 99:122.625 May 08n 96:16 96:17 1 3.57 Nov 04 bp 99:12 99:12
625 May 08n 107;18 107:19 1 3.56 Noy 04 np 99:12 99:123150 AU9 08n 98:14 98:15 1 3.64 Jan 05 ci 99:09 99:093.125 Sap OBn 97:24 97:25 1 3.69 Feb 05 cI 98:28 98:28125 Od 08n 97:18 97:19 1 3.72 Feb 05 np 98:28 98:283375 Noy 08n 98:15 98:16 2 3.74 May 05 cI 98:10 98:10750 Noy 08n 104:04 104:05 1 3.73 May 05 bp 98:09 98:093375 Dee 08n 98:08 ' 98:09 1 3.79 May 05 np 98:09 98:093.250 Jan 09n 97:18 97:19 1 3.82 May. 05 np 98:09 98:093.875 Jan 091 112:02 112:03 -118 Jul 05 ci 98:09 98:093.000 Feb 09n 96:12 96:13 no 3.83 AU9 05 ci 97:21 97:212.625 Mar 09n 94:21 94:22 1 3.85 AU9 05 bp 97:18 97:183.125 Apr 09n 96:24 96:25 1 3.85 AU9 05 np 97:19 97:19875 May 09n 99:30 99:31 1 3.88 Noy 05 ci 96:27 96;275.500 May 09n 107:13 107:14 2 3.84 Noy 05 np. 96:26 96:26000 AU9 09n 109:18 109:19 1 3.95 Noy 05 np 96:26 96:2610375 Noy 09 104:06 104:07 ... 134 Jan 06 ci 96:23 96:23. 4.250 Jan 10i 115:01 115:02 -6 145 Feb 06 d 95:28 95:286.500 Feb IOn 112:07 112:08 4.07 Feb 06 bp 96:00 96:0011750 Feb 10 107:07 107:08 no li1 Feb 06 rip 96:00 96:0010.000 May 10 107:25 107:26 ... .1.84 May 06 cI 95:02 95:02750 AU9 IOn 108:14 108:15 1 4.19 May 06 np 95:01 95:0112.750 Nov 10 115:02 115:03 2 215 May 06 np 95:03 95:033.500 Jan Ui lll:l5 111:16 -1.66 Jul 06 ci 95:07 95:07000 Feb 11n 104:01 104:02 2 4.29 Jul 06 np 94:14 94:1413.875 May 11 121:19 121:20. -1 255 AU9 06 ci 94:06 94:06000 AU9 lln 103:21 103:22 2 4.40 AU9 06 np 94:04 94:0414.000 Noy 11 126:13 126:14 1 2.84 Oct 06 np 93:14 93:143375 Jan 12i ill:08 111:09 -4 179 Noy 06 ci 93:08 93:08875 Feb 12n 102:15 102:16 3 4.49 Noy 06 np 93:03 93:033.000 Jul12! 108;18 108:19 -4 186 Noy 06 np 93:04 93:044375 AU9 12n 98:22 98:23 3 4.56 Feb 07 ci 91:31 91:31000 Noy 1211 95:28 95:29 2 459 Feb 07 np 92:02 92:0210375 Noy 12~ 122:23 122:24 3.37 May 07 ci 91:00 91:00
ASK
CHG VLD
3 4.
3 4.
-4 196
2 410
3 3.
4 4.
-6 2.
3 4.
413
5 3.
5 3.
5 4.
4 4.
4.89
5 4.
5 4.
5 5.
5 5.
5.11
5 513
5.18
511
6 5.
6 5.
530
5.30
531
5.35
5357 5.36
7 537
7 5.42
8 5.
6 5.
5.47
7 5.
8 5.
7 5.
8 5.50
9 5.
8 5.50
8 5.50
9 5.
9 5.
-10 2.41
8 5.
9 5.
8 5.50
-11 2.40
7 5.
10 5.
10 5.
-11 231
May 25, 2004
ASKCHG YLD
310
3.161 3.
3.31
3.27
339
3371 3.
3.51
3.491 3.1 3.
1 3.
3.70
3.60
3.852 3.
3.81
2 3.
3.89
2 4.
3.932 3.2 4.2 4.2 4.2 4.
4154 4.
4303 4.
4.30
432
3 4.
4 4.
4.533 4.
4523 4.3 4.3 4.
4.773 4.4 4.3 4.
4.704 .
4 4.
4 4.1 4.4 4.
4.824 5.
4 4.4 5.4 4.
5.11
4 4.
5.144 5.
MATURITY TYPE BID
May 07 np 91:00May 07 np 91'03AU9 07 ci 89:29Aug 07 np 89:31
AU9 07 np . 90:03.Noy 07 cI 89:00
Nov 07 np 89:02Feb 08 ci 87:25Feb 08 np 87:28
Feb 08 np 87:30May 08 ci 86:19May 08 np 86:23AU9 08 ci 85:19AU9 08 np 85:21
May 08 np 86:26Nov 08 ci 84:11Nov 08 np 84:16Noy 08 np 84:16Feb 09 ci 83:05
Feb 09 np 83:12May 09 d 82:01
May 09 np 82:13May 09 np 82:11AU9 09 ci 80:31
AU9 09 np 81:03
Noy 09 .ci 80:06Noy 09 bp 79:16Feb 10 cI 78:20Feb 10 np 78:29
May 10 cI 77:19AU9 10 ci 76:18
AU9 10 np 76;24Noy 10 cI 75:27Feb 11 ci 74:08
Feb 11 np 74:19May 11 ci 73:06AU9 11 ci 72:00-AU9 11 np 72:13Noy 11 ci 71:03
Feb 12 ci 69:26Feb 12 np 70:10May 12 cl 68:22
AU9 12 ci 67:18AU9 12 np 68:11Noy 12 ci 66:17
Nov 12 np 67:16Feb 13 ci 65:18
Feb 13 np 66:18May 13 cI 64:15May 13 np 65:28AU9 13 d 63:15AU9 13 np 64:14Nov 13 d 62:15Nov 13 np 63:15Feb 14 ci 61:16
Feb 14 np 63:00May 14 ci 60:15May 14 np 61:31
AU9 14 ci .59:16Noy 14 ci 58:18
Treasury Bills
DAYS TO ASKMATURITY MAT BID ASKED CHG YLD
May 27 04 1 0.89 0.88 0.02 0.Jun 03 04 8 0.85 0,84 -0.01 0.Jon 10 04 15 0.89 0.88 0.01 0.89Jon 17 04 22 0.92 0.91 0.03 0.Jon 24 04 29 0.92 0.91 0.03 0.Jul 01 04 36' 0.88 0.87 0.02 0.ASK Jul 08 04 43 0.89 0.88 0.02 0.Jul 15 04 50 0.90 0.89 0.01 0.
107 Jul 22 04 57 0.90 0.89 .. 0.
98 Jul 29 04 64 0.92 0.91 0.01 0.
98 Aug 05 04 71. 0.96 0.95 0.01 0.
133 Aug 12 04 78 0.95 0.94 0.01 0.
136 AU9 19 04 85 103 102 0.01 104
136 AU9 2604 92 106 LOS 0.D2 107
Ll4 Sap 02 04 99 108 L07 0.03 109
156 -Sep 0904 106 1.08 107 0.02 109158 Sap 16 04 ill 110 109 0.01 111178 Sap 23 04 120 111 110 ... ill179 Sep 30 04 . 127 114 113 0.01 11580 Oct 0704 134 117 116 0.01 1181.80 Od14 04 141 112 L2l 0.03 123154 Od 21 04 148 124 123 0.01 125196 Od 28 04 155 126 U5 0.01 L272.02 Noy 04 04 162 129 U8 0.01 1312.01 Noy 12 04 170 133 132 0.01 1352.19 Nov 18 04 176 137 L36 0.02 1392.22 Noy 26 04 184 1.38 131 1402.232.05 Inflation-Indexed Treasury2.46 Securities2.40 AC(R
~~
RATE MAT BID/ASKED CHG "VLD PRiN
2.60 3375 01107 107-26/V -3 0386 1l8l
57 3.625 01/08 110-01102 -4 0.814 1158
231 3.875 01/09 112-02/03 -6 1188 1141
70 4150 01/10 115-01/02 -6 1458 11l2
71 3.5D0 01/11 ill-15/16 -1663 1075
75 3375 01112 ill-08/09 -4 1788' 1054
86 3.000 07/12 108-18/19 -4 1857 1041
86 1875 07/13 99-09/10 -4 1957 1019
2.92 2.000 01114 100-00/00 -6 2.000 10112.91 3.625 04/28 122-01/02 10 2.405 11573.10 3.875 04/29 . 127-17/18 -11 2.398 1138
06 3375 04/32 121~7128 -11 2307 1054310 .Yield to maturity on accrued principal.
ASKED
91:00
91:0389:29
89:31
90:03
89:00
89:02
87:25
87:28
87:30
86:19
86:23
85:19
85:21
86:26
84:11
84:16
84:16
83:05
83:12
82:01
82:13
82:11
80:31
81:03
80:06
79:16
78:20
78:29
77:19
76:18
76:24
75:27
74:08
74:19
73:06
72.110
72:13
71;03
69;26
70:10
68:2267:18
68:11
66:17
67:16
65:18
66:18
64:15
65:28
63:15
64:14
62:15
63:15
61:16
63:00
60:15
61:31
59:16
58:18
EXHIBIT NO. 201
Case Nos. A VU-04-1 and A VU-04-J. Thornton, Potlatch
June 21 , 2004 Page 17 of 50
THE WALL STREET JOURNAL.
Money Rates
The key U. S. and foreign annual interest rates
below are a guide to general levels but don t al-
ways represent actual transactions.
Commercial Paper
Yields paid by corporations for short-term
financing, typically for daily operation
. .. .
2003
Source: Federal Reserve
Prime Rate: 4.00% (effective 06/27/03). The base rate on
corporate loans posted by at least 75% of the nation s 30
largest banks.
Discount Rate (Primary): 2.00% (effective 06/25/03).
Federal Funds: 1.031% high, 0.969% low, 0.969% near clos-
ing bid, 1.000% offered. Effective rate: 1.00%. Source: Pre-
bon Yamane (USA) Inc. Federal-funds target rate: 1.000%
(effective 06/25/03).
Call Money: 2.75% (effective 06/30/03),
Commercial Paper: Placed directly by General Electric Capi-
tal Corp.: 0.80% 30 to 51 days; 1.12% 52 to 83 days;
1.22% 84 to 105 days; 1.31% 106 to 120 days; 0.80% ill
to 132 days; 1.41% 133 to 175 days; 1.50% 176 to 197
days; 1.60% 198 to 231 days; 1.69% 232 to 270 days.
Euro Commercial Paper: Placed directly by General Electric
Exhibit JST-
Page 18
WEDNESDAY, MAY 26, 2004 C13..
Tuesday, May 25, 2004
Capital Corp.: 2.01% 30 days; 2.04% two months; 2.05%
three months; 2.07~~ four months; 2.09% five months;
11% six months.
Dealer Commercial Paper: High-grade unsecured notes sold
through dealers by major corporations: 1.02% 30 days;
1.10% 60 days; 1.20% 90 days.
Certificates of Deposit: 1.05% one month; 1.23% three
months; 1.54% six months.
Bankers Acceptances: 1.04% 30 days; 1.13% 60 days; 1.231,;
90 days; 1.33% 120 days; 1.43% 150 days; 1.51% 180 days.
Source: Prebon Yamane (USA) Inc.
Eurodollars: 1.04% - 1.03% one month; 1.14% - 1.12% two
months; l.25~o - 1.23% three months; 1.37% - 1.34% four
months; 1.47% - 1.43% five months; 1.56% - 1.52% six
months. Source: Prebon Yamane (USA) Inc.
london Interbank Offered Rates (libor): 11000% one
..
month; 1.2900% three months; 1.5825% six months;
1 %: 2.1000% one year. Effective rate for contracts entered
. ...
into two days from date appearing at top of this columl'..
Euro libor. 2.06225% one month; 2.09150% three months;
2.14588% six months; 2.32038% one year. Effective rate
for contracts entered into two days from date appearing
at top of this column.
Euro Interbank Offered Rates (Euribor): 2.063% one
month; 2.092% three months; 2.147% six months; 2.323%
one year. Source: Reuters.
Foreign Prime Rates: Canada 3.75%; European Central0:, Bank 2.00%; Japan 1375%; Switzerland 2.14%; Britain
25%.
Treasury Bills: Results of the Monday, May 24, 2004, auc-
tion of short-term U.S. government bills, sold at a dis-
count from face value in units of $1,000 to $1 million:
050~; 13 weeks; 1.375% 26 weeks. Tuesday, May 25,
2004 auction: 0.910% 4 weeks.
OvemightRepurchase Rate: 0.96%. Source: Garban Inter-
capital.
Freddie Mac: Posted yields on 3D-year mortgage commit-
ments. Delivery within 30 days 6.05%, 60 days 6.12%,
standard conventional fixed-rate mortgages: 2.875%, 2%
rate capped one-year adjustable rate mortgages.
Fannie Mae: Posted yields on 30 year mortgage commit-
ments (priced at par) for delivery within 30 days 6.08%,
60 days 6.16%, standard conventional fixed-rate mort-
gages; 3.35%, 6/2 rate capped one-year adjustable rate
mortgages. Constant Maturity Debt Index: 1.202% three
months; 1.525% six months; 2.030% one year.
Merrill lynch Ready Assets Trust: 0.51%.
Consumer Price Index: April, 188.0, up 2.3% from a year
ago. Bureau of labor Statistics.
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-O4-
J. Thornton, Potlatch
June 21 , 2004 Page 18 of 50
Exhibit JST-
Capital Structures and Betas Page 19
Sample Electric Utility Companies
10010 TO 1.Unlevered
Raw Adjusted Raw
2003 Equity AssetCom.5.gu i Beta Beta Beta Beta
Alliant Energy 490/0
2 Ameren Corp.500/0
Avista Corp.41%
Black Hills Corp.450/0 0.42Central Vermont Public Service 600/0
6 CH Energy Group 62010 0.43
Cinergy Corp.47%
Cleco Corp.34 %0.43
Consolidated Edison 490/0 0.4310 Dominion Resources 40010
DPL, Inc.26010
12 DTE Energy Company 410/0 0.4513 Energy East Corp.390/0
14 I::ntergy Corporation 530/0
15 FPL Group, Inc.450/0 0.4516 FirstEnergy Corporation 44%17 Great Plains Energy, Inc.44 %18 Hawaiian Electric Industries, Inc.50%0.43IDACORP, Inc.460/0
20 MGE Energy, Inc.570/0
NiSource , Inc.420/0
22 NST 400/0
23 OGE Energy Corp.460/0 0.4524 Otter Tail Corporation 54 %25 Pinnacle West Capital Corp.490/0 0.4126 PNM Resources 520/027 Public Service Enterprise Group, I 270/028 Puget Energy, Inc.420/0
29 SCANA Corp.410/0 0.45
30 The Empire District Electric Co.490/0 0.45The Southern Company 43010 0.4332 Wisconsin Energy 400/0 0.45
Mean 450/0
Median 450/0
Std. Deviation 80/0
Maximum value 620/0 0.43Minimum value 260/0 0.45
Assumed marginal tax rate:36.50/0
EXHIBIT NO. 201
Case Nos. A VU-E-O4-1 and A VU-04-J. Thornton, Potlatch
June 21 , 2004 Page 19 of 50
Exhibit JST-
Page 20
. 1 C",
. .
'it'lllgrS cP FitchRes(;~arch
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-c::-c:: back to Global Power
=== Fitch 2004 Outlook: U.S. Utilities & Merchant EnergyCompanies Both Stabilize
15 Dec 2003 1:26 PM (EST)
Fitch Ratings-New York-December is, 2003: The Rating Outlook for U.S. investor-owned electric utilities and for
the competitive energy sector, including generators, diversified energy merchants and energy traders , is Stable
according to an outlook and review of the U.S. utility industry published today by Fitch Ratings.
Behind a definite and sustained stabilization of credit profiles during 2003 , however, Fitch hasidentified volatile natural gas prices, widely varying credit quality within corporate families, event riskfrom acquisitions and the medium-term refinancing burden of the diversified energy sector as crucialdrivers within its overall outlook for the industry over the next five years. Fitch has published several2004 outlooks concerning the credit outlooks of various industries as well as other fixed-income
sectors.
Although the Outlook for the regulated and unregulated sectors is stable in both cases, this masks thedivergent paths both segments have taken. While the investor-owned utilities (IOUs) either
maintained creditworthiness or are well on their way to recovery, the merchant or competitive energy
sector will need much more time (and consistent favorable developments) to recover. In particular
Fitchls outlook report focuses on the $43 billion of speculative-grade debt for refinancing between now
and the end of 2009.
Thus, while the diversified energy segment carries mostly Stable Outlooks, the median rating hasfallen to the 'category during 2003, implying a one-in-three likelihood of default over five years.
The report published today carries a detailed quarterly refinancing schedule for the speculative gradeissuers rated by Fitch in the U.S. power & gas sector, sorted by year and by rating category.
The improvement in Outlooks for the regulated sector, 820/0 of which now carry a Stable RatingOutlook, has reflected decreasing credit contagion from unregulated businesses, stemming in largepart from significantly more conservative business strategies, and the resumption of capital marketaccess. There is evidence, however, that event risk for the sector may be rising, as merger &acquisition activity begins to pick up after the very low levels of 2003 , led by both traditional utilityoperators and leveraged acquisition funds.
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-J. Thornton, Potlatch
June 21 2004 Page 20 of 50
http://www.fitchratings.comicorporate/events/press releases - detail.cfm?pr - id=l 02718&sector- f... 12/16/2003
~A.llIUll d':'.l-.l
Page 21
Rating linkage between parents and affiliates will remain one of the single largest determinants in
rating actions, with obvious implications for acquisition structures which increase leverage within the
corporate group owning a utility. The report contains an analysis of the root cause behind aggregateFitch rating actions in each of the past three years, and also highlights a list identifying 29 issuers
whose ratings are currently constrained by the credit ratings of their parent company.
The final issue addressed within the outlook report is the exposure or many segments within the U.
power & gas industry to volatility in natural gas pricing. The report contains a look at Fitch's forwardrange of gas prices and a discussion of the impact of gas pricing on different power & gas sub-sectorscovered by Fitch. The report also contains Outlook Profiles for 21 major power & gas companiesincluding American Electric Power, The AES Corp., Aquila, Inc., Calpine Corp., Duke Energy Corp.,Dynegy Inc., FirstEnergy Corp., Reliant Resources Inc, Williams and Xcel EnergYI Inc.
The report 'Outlook 2004: U.S. Power & Gas: Utilities recover; Merchants pause for breath' can befound on Fitch's web site at 'www.fitchratings.com' by linking to the 'Corporate Finance' sectorclicking on 'Global Power' and then 'Special Reports . Fitch will be maintaining a web page with a fulllist of 2004 outlook pieces that will be readily available on 'www.fitchratings.com
Contact: Richard Hunter [phone], New York.
Media Relations: James Jackie [phone] New York.
Home I Contact I Terms of Use I Privacy Policy Copyright (92003 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries.
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-O4-J. Thornton, Potlatch
June 21 , 2004 Page 21 of 50
http://www.fitchratings.com!corporate/events/press releases _detail. cfm ?pr - id= 102718 &sector _f... 12/16/2003
Exhibit JST-
Page 22
Dr. Avera s Electric Utility Sample
Historical Dividend Growth
1994-2003
1 Black Hills Corporation
2 Hawai'ian Electric
3 MDU Resources Group
PNM Resources
5 Pinnacle West Capital
6 Puget Energy, Inc.
7 Sempra Energy
8 Xcel Energy
(1 )
(2)
Average:
Notes:
(1) First full year of dividend data: 1997
(2) First full year of comparable data: 1998
Source: Value Line
10-Yr.
2003 1994 Growth
Dividends Dividends Rate
200 880 510/0
240 170 650/0
660 470 840/0
910 630 320/0
730 830 500/0
000 840 550/0
000 560 51 %
750 310 01 %
219%
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 2004 Page 22 of 50
Exhibit JST-
Page 23
Dr. Avera s Electric Utility Sample
Value LIne Projected Dividend Growth
2004-2007/2009
and 2005-2007/2009
2004 to 2005 to
2007 -2009 2007 -2009
Value Line Value Line Value Line Implied Implied
2004 2005 2007-2009 Growth Growth
Dividends Dividends Dividends Rate Rate
1 Black Hills Corporation 1.40 08%03%
2 Hawai'ian Electric 19%59%
3 MDU Resources Group 28%14%4 PNM Resources 97%89%
5 Pinnacle West Capital 11%02%
6 Puget Energy, Inc.78%71%
7 Sempra Energy 00%00%8 Xcel Energy 39%5.46%
Average:350%354%
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 , 2004 Page 23 of 50
EXhIbit JST-
Page 24
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Improper Risk Assessment
HOW IMPROPER RISK ASSESSMENT LEADS,
OVERSTATED REQUIRED, RETURNS FOR UTILITY STOCKS
Steven G.' Kjhm . CFA
' ,
Overview
In discussing investors' required
returns on utiHty stocks , some rate-of-
, return witnesses fqcus their testil1)ony
, on th~ numerous specific risks affecting
the utilitY under review, Those
witnesses~often adjust initial estimates
, ,
of the investor9' required return upward
to reflect those particular risk factors.
Such testimony assumes that all
risks that a company faces affect its
investors
' '
required return. ' That is not
the case. It is true that 'all risks affect
,the utility s stock price, but only a limited
n~mber of them affect the required
, '
return, ~he required return on any
company s stock, utilities included is a
, "
function only of its sensitivity to risk
factors tha~ affect all stocks (systematic
risks); it is. oat a fuqcti.0n, of the plethora
\ "
of ri$?fadng:.thewcompany in quest~on
(firm-specific risksi:~ Frrrn-specific risk
factors affect the other variable that
, determines stock pri~es-expectatiQns
. ~he au~hor is ~ senio~ financial analy~t with the
WISCOnSin Public Service Commi~sion.
about a company s future cash flows.
This is summarized in the following
; table.
Firm-specific risk impacts are
generally uncorrelated across firms in
the econo~y. Some firm-specific
events ne~atively affect some
companies while ,at the same time other
firm-specifi~ events positively affect
other companies. The cumulative
impact of all the firm-specific risks 'can
~herefore be minimized by following the
cardinal, rule of investing-diversify. In a
well-diversified portfolio the countless
firm-specific risks affecting individual
businesses tend to cancel out
, Therefore, the investor who holds a
diversified portfolio sees little impact
his wealth from firm-specific risks, and in
turr1 does not consider those risks when
determining the required return on any
stock,
Why is it so critical to approach
required return estimation from the
perspective of a diversified investor?
Becaus~ diversified investors do minate'
~I Journal of Applied Regulation Volume June 2003
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Page 25
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Improper Risk Assessment
.Exhibit JST-I
Page 26
;i;~P
, -::~,~"'\'
~:itJ;
, .'-::;'-- --' - ,",-- -
TABLE
THE IMPACT OF SYSTEMATIC RISKS AND
FIRM-SPECIFIC RISKS ON stOCK PRICE DETERMINANTS
- -,'. - '- "
/~~IJ~t~~~~~i1 economic recessfon
i~iJ~!R~~t~~ Increased competition
Source: Author's construct
the trading in financial markets, they
therefore determine -the market'
required return on a stock., Institutional
investors are almost universally well-
diversified, as are most individual
investors , especially when one
considers their indirect equity hal'dings
in retirement plans. The smaller group
of nan-diversified investors is essentially
rry~rginalized by the market. They can
participate in the market if they wish, but
they -have to play by the diversifi~d
investors' rules.
While diversification is ,highly
effective at reducing risk, it cannot
e!iminate all risk. Unlike highly _localized
firm-specific risk impacts, systematic
macroeconomic-type risk impacts tend
to ripple through the entire stock market.
Fot the investor, there is nowhere to
hide from these types of risk factors.
.since investors cannot insulate
themselves to any great extent from
=Q-
requiredreturl!
expect~d cash:flbWS
- ~,' -,,- - -- '- - ." '- ~-' -- ,-, -, , ' ,:..;;- ,:. -- ~-'
:\3(
macroeconomic risk factors, their
required returns are affected
significantly by those risks. The more
sensitive a company is to macro-
economic risks factors , the higher t
- required return on the company s stock.
When the inappropriate firm--
specific risk factor adjustments are
stripped away from the required return
determination~ we find that investors
today demand less than a -0% return
. on most utility equities. This is
- "
supported not only by academic
research, but also by research at
investment banking and brokerage
firms. For example , in August 2002 the
investment firm A. G. Edwards estimated
that the required return on Consolidated
Edison s stock was 8.4%.1 This level of
, -, ,- -- ;:-:
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- - ,; -. -- ':'" ," '-' .',' (!- -:, --::-., ,- ..- :-
investor required return is consistent
. with the- well -estab/.ished 'concept that
1 AG.
Edwards, Consolidated Edison Equity
Research Report Aug. 5, 2002.
tyRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G,:,04-
J. Thornton, Potlatch
June 21 , 2004 Page 26 of 50
, .;:!'- ,- '
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only economy-wide risk factors drive
investors' required returns.
. ,
Risk and Required Return
The finance literature makes it
clear that the risk factors that matter in
. determining the req~ired return on any
stock are restricted to those risk factors
that affect.ill! stocks. That implies that
there are but a few risk factors that are
fmportant in this regard. That inference
is correct.
Prospective portfolio managers learn
in their basic training that the required
return for any stock is a function not of
the specific risks facing the firm but
rather of thefirm s sensitivity to chafJges
in macroeconomic factors. Those tyPE?s
of risk factors include the:
general inflation rate
national level of industrial
production
spread between yields a n low-
and. high-gr;~9~, qonds
, .
t~. -term structure of interest rate
, "';. ,... ,.... '
2 Charles.A. D'Ambrosio
, "
Portfolio Management
Basics,
n Managing Investment Portfolios: A
Dynamic Process, in John L. Maginn and
Charles L. Tuttie, eds., (Warren , Gorham &
Lamont, 1990), 2-35.
Exhibit JST-
Page 27
Improper Risk Assessment
While these few factors affect the
required return on all stocks
, '
each factor
does not necessarily have the same
impact on every company. A~ a result
the required retun~ ~an vary from stock
to stock even though the risk factors are
the same for all companies:
One does not have to develop
exotic financial equations such as
arbitrage pric~ng theory (APT) models to
determine the degree to which each
macroeconomic factor affects. an
individual stock.3 The market has
already factored this information into
, stock prices. A properly applied
discounted cash flow (DCF) model for a
portfolio of utility stocks will incorpQrate
this risk assessment automatically. The
fact that a utility might have substantially
more firm-specific risk than other
companies in the portfolio has no
bearing on whether the required return
estimate from the portfolio is appropriate
for the utility in question. The particular
" UTIlity likely has very similar exposure to
the key macroeconomic risk factors, and
that is what matters. Therefore, the
, 3 For a discussion of the application of arbitrage
pricing models as th"ey apply to utilities~ see
Dorothy A. Bower, Richard S. Bower and Dennis
E. Logue, ,Arbitrage Pricing' and Utility Stock
Returns,Journal of Finance, 39(4) (September
1984): 1041-54.
NRRI Journal of Applied Regulation Volume 1, June 2003
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Improper Risk Assessment
DCF result for a. portfoli'o of utility stocks
IS likely to' represent a reasonable
estimate ,of the investors~ required return
for all the' utilities in the portfolio. That
includes a uti lity that ~aces very high
firm-specific risks as well as a utmty
facing no firm-specific risks.
This conciusiO'n has interesting
impli.cations. The utility investors
required return is essentially unaffected
by changes in firm~spedffc risks, such
as those brought about by the
introduction of competition in the utility'
. service 'territory. On,the other hand, the
required return is heavily infllienced by
macroe6onomic cht~mges, such as thase
that might flaw from revisiO'ns to' Federal,
Reserve Board interest rate policy.
Finance witnesses who feel a need to'
augm.ent their DCF results 'with
additional analysis should. therefore
focus their testimO'ny on th~ utility'
sensitivity to' what is happening in
Washington, D.C. rather than what is
happening in the utility's service
territary.
This is in contrast to' the role of
utility managers who are responsible for
maximizing the firm s cash flow.
Because those risks can threaten the
utility s ,cash flows, those indivi'duals
Exhibit JST-
Page 28
, ..- ", ,. .
need to be, aware of the specific risks
facing the utility. Rate-af-return
witnesses can, however, ignore firm-
, specific risks precisely because they
affect the utility s cash flQw rather than
Jhe investors' r~ql.1ired: tatum.
.' .. ---. -- .. .
~nvestor Response's to Firm-Specific
and Systematic Risks
" ,
The reason that firm-specific risks
do not 'affect investors' required returns
, ,
can be explained intuitively, a~ wen as
theoretically. Whether we realize it or
not, most of-us act in ,the way that
diversified investors should act. This
can be demonst~ated with a hypothetical
example.
, Assume that yO'u have invested'
a stock index mutual fund that mimics
, ..
the price changes of the S&P 500 stock
index. If you read a story in The Wall
Street Journal that the Florida
Legislature is considering deregulating
its utilities, would you increase your
required return on yO'ur mutual fund
investment? Mast likely you woul~ nO't.
Why? Yau view ,stocks in a portfoliO'
context, as is proper.
The wealth imp,act of
... ~
deregulation on aflY Florida utility stocks
that might be in the mutual fund portfolio
NRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 , 2004 Page 28 of 50
n ,
.'.'"
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would be miniscule at best. More
importantly, the impact would most likely
be offset by unrelated events that-
positively affect othe; compa~ies in the
portfolio. For example, on the day the
story on the Florida Legislature
appeared, there might be a story
indicating that Boeing was likely to be
. awarded a contract to provide jet
airplanes to China. The Florida utility'
, stock price goes down based on its firm-
specific news. Boeing s stock price
goes up based on its firm-specific news.
The net effect on the mutual fund
portfolio value is negligible.' This sort of .
canceling of randomly occurring firm-
specific risk impacts ~a~ IittlE? bearing on
your required return on any stock in a
, well-diversified portfolio.
On the other hand , what if. you
read that the Federal Reserve Board
was considering adopting an aggressive
interest rate policy to control inflation?
That type of risk factor is much more
threatenin~ to you~ '1"ltD. Sharply
.. .
, risiri~'inter~s~ rates. tend to t~ke their toll
, ''"
on ait stocks. The'~value of the mutual
fund discussed above could decline
noticeably under these conditions. The
decline would be attributed to a market-
Exhibit JST-
Page 29
'Improper Risk Assessment
wide increase in the required return by
investors such ,as yourself.
If interest rates rise, as is being
contemplated )6 this example, the
returns on investments that compete
with stocks will have increased. . If your
required return on stocks was 90/0 when
. Treasury bonds yielded 4%, you would
likely increase the required return onI ,
~cks to a le~el higher ~han9% when
Treasury bond yields increas~d
noticeably. Shifts in fundamental
macroeconomic conditions such as
interest rates can , and do, have
significant impacts on investors
required returns on all financial
instruments, stocks included. ,
Financial Analysis in Theory and in
Practice
The important distinction between
diversifiable firm-specific risks and .nQn-
diversifiable systematic risks and the
manner in which those rfsks affect stock
, prices have formed the foundation of
, investment theory for the past 50 years.
Academic finance professionals
consulting in practice have recognized
that, unfortunate!y, this foundation
4 Mark Rubenstein
, "
Markowitz's Portfolio
Selection: A Fifty Year Retrospective,Journal of
Finance, 57(3) (June 2002): 1041-45.
NRRJ Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-CHJ4-
J. Thornton, Potlatch
June 21 , 2004 Page 29 of 50
Improper Risk Assessment
seems to have been left in the
classroom by some finance majors.
Instead of distinguishing ,between risks
that are "relevant to the required .return
and those that are relevant to the
development of expected cash flows,"
many practitioners lump all risks
together and adjust only the required
return when any risk factor changes. "
. The entire framework of finance is Jost
" when this occurs, and poor financial
decisions result.
Many finance professionals make
, ,
the common mistake of equating
potential bad outcomes with risks that
affect the investors' req uired return.
Those are two very different concepts.
The wide~y read Principles ot Corporate
FInance written by Richard Brealey and
Stewart Myers notes:
In everyday usage risk simply.
equals 'bad outcome.' People
think of the risks of a project as a
list of things that can go wrong.
For example, (1) a geologist
looking for oil worries about the
risk of a dry hole; (2) a
pharmaceutic~manufacturer
worries about the risk that a new
drug which cures bal~ness may
not be approved by the Food and
Drug' Administration; (3) the
owner of a hotel in a politically
unstable part of the world worries
about the political risk of
expropriation. Managers often
Exhibit JST-
Page 30
~: . ",-:;~
i:'l.::
, ,,'.'". ::::
, add fu~ge factors to discount
rates (the i~vestors required
. '
r~~urn~ to offset worries such asthese.
Sinc~ the impacts of the firm-
specific risks discussed. in the preceding
, ..: '" '
. quote can be diversified away ,by -th~ ~
" ..
Investor, adjusting the ivequired Feturri
via such a fudge, factor is "not
appropriate. Brealey and Myers
continue:
" .
This sort of adjustment makes us
nervous. First, the bad outcomes
we cited appear to reflect ,unique
(Le.; diversifiable) risks that
would not affect the expected
rate of return by investors
" "" .-';:
None of the risk factors
discussed above is linked to
macroeconomic activity. Thus , the
impact of all of them on the investor can
be minimized via portfolio diversification.
It is important to be clear that
Brealey and Myers are not saying that
firms should ignore'the types offirm-
specific risk factors discussed above
only that th~y do not affect the investors
required return. The risk of the oil
company drilling a dry hole will affect the
ability of the comp~ny:to ,generate future
" ,
5 Richard A. Brealey and Stewart C. Myers,
Principles af Corporate Finance, (McGraw-Hili,
2003), 235.
NRRI Journal of Applied Regulation Volume 1 J June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-04-
J. Thornton, Potlatch
June 21 , 2004 Page 30 of 50
i-:,
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earnings and dividends. Brealey and
Myers continue their discussion along.
these lines:
. ~
Second, the need for a discount
rate (require~ return1 adjustment
usually arises because managers
fail to give bad outcomes due
weight in cash-flow forecasts. 7
A manager who has been
informed that there is an increased risk
that his company will drill a dry hole
should re~ise downward the expected
cash flows from the project., ,He sh~uld
then discount those estimated cash
flows at the same required return that
was used before the threat was
recognized. This will provide the
manager with a reasonable' estimate of
the value of the project.
A corporate manager who adjusts
the investors' required return to reflect
all the risks .his company faces will' te nd
to overstate that return . Michael Porter
of. Harvard University has found that
such i~proper fin8;ncial analysis causes
'" . ;'~ .. .' ,
Jila~y. companies' to. overstate their
';t..
:. -.
inv.e.~tors ' required returns by at least a
' .
I:.
fact~r' ~f two.s Thi~ makes capital
appear to be much more costly than it
, ', '" .
6 Ibid.
. 7 Ibid. a Michael porter, "America s Investment
Famine,The Economist (Jun. 27, 1992), 89.
, ,...... .', '"Exhibit JST-
Page 31
IPnproper Risk Assessment
actually fs and, in turn, leads to less
investment than would be optimal for the
firm. This not only reduces the potential
, market value of the firm, but it places
the firm at a competitive disadvantage
relative to c.ompanies that :apply the
proper techniques.
Risk and Stock Prices
, By now, it should be dear to the
reader that there is more to stock price
determination than the required return.
Stock prices are expressed in, dollars.
The required return is a percentage
figure. Something else must enter the
st,?~k price equation along with the
required return. The other variable is
the firm s expected future cash flows.
We can use a simple conceptual stock.
val'uation model to demonstrate this
poi nt.
Conc8Qtual Stock Price Model
price
::=
annual c8sh flow
required rettirn
(1)
"This is the model for pricing or
v?luing a stream of annual cash flows
that \s unchanged from year to year (a
perpetuity). Ot~er stock price valuation
models are more comptex variants of
this simple modeL
NRRI Journal of Applied Regulation -Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04~1 and AVII_l'-.,Q4
J. Thornton, PotlatchJune 21, 2004 Page 31 of 50
Improper Risk Assessment
Divers'ifiable firm-specific risks
affect the cash flows of the firm 'which
form the numerator of the valuation
equation. Non-diversifiable systematic
, risks affect the required return! which is
the denominator of the equation., If we
substitute the' risk factors for the
financial variables in the conceptual
stock price model we obtain the
, following:
Conceptuaf Stock Price Model
price
(firm specific risks)
2, (systematic risks)
(2)
Interestingly; when viewed
througH this lens , firm-specific risks
appear to be quite threatening to the
i~vestor. The equation above reveals
that they are , in fact, key determinants
, of a company s stock price.
Financial research has found that
individual stock prices are actually more
sensitive to firm-specific, castrflow
related risks than they are to the
systematic risks that affect the required
return. A recent article in the Journal of
Finance concluded that firm-specific risk
factors produce stock price changes that
have twice the variance of the stock
price changes caused by the systematic
EXhibit JST-
Page 32
risk facto~s., At first blush , therefore, it
wquld appear that t~e firm~speciftc risks
are more important, not less important
to ~he investor t~an are the systematic
risks.
In reaching th~t.,(;onclusio~: /
. ,, ,
. however, one wou!d Joo ki~g, thr Jgh
. ,
microscope whe~ bl~oculars ~h6uld
be used. The entire conclusion of the
Journal of Finance article must be read
to draw the proper'inference,. ' The
reader foliowing the logic of this paper
should see where we are headed. We
need to think about these issues in the
s~me ~anner'that a portfolio manager
does. His focus is on the value of the
portfolio, not the, prices of individual
securities. Not surprisingly, the !oumal
of Finance article is yet ~~other
confi'rmation offmance theory. The
author reports that for large cbmpanies
such as those of investor-owned public
utilities, the highly volatile, but randomly
occurring individual stock price changes
caused by firm-specific risk, factors tend
ii to neutralize each other in the market.
On net, there is no significant effect on
the value of diversified portfolios. Thus
since the firm-specJficJisks do not affect
Tuomo Vuolteenaho
, "
What Drives Firm-Leve!
Stock Returns?" Journal of Finance 57(1)
, (February 2002): 233-64.
NRRI Journal of Applied Regulation Volume June 2003
;;f,t';:'.
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EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-04-
J. Thornton, PotlatchJune 21, 2004 Page 32 of 50
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the portfolio value : they do not affect the
portfolio managers required returns.
Firm-Specific Risks and the DCFModel
We. can expand the analysi$ to
consider how firm-specific risks .affect
particular components of the constant-
growth DCF model, which is one of the
principal models used to estimate the.
. investors' required return. That model is
expressed as:
Constant-Growth Discounted
Cash Flow Model
(:;~:d
)J :;:~::tr e;~~~%:1 (3)
y;eld J l growth
What happens when firm-specific
risks increase? There are three
possible changes. First , the stock price
would likely decline because investors
would expect that cash flow production
will decline. If all. el~e were held
constant- t~e price
:~q_
~clin~ would lead to
' '
a hiStJeF, (jiyjdend yield and, therefo~e, a
'" .
higher. required reti:Jf1!. But that
conclusion would be premature.
Exhibit JST-
Page 33
~proper Risk Assessment
An else will not be held constant if
the firrn-specific risk is real. There will
be offsetting impacts on the other
variables. One of two things must occur
when a company s cash flow projection~
decline: either the dividend wiiI be cut or
the ability of the company to produce
long -term dividend growth will be
reduced. A reduction in either of the
variables reduces the required return.
We can limit our attention to the
two most likely impacts of a firm-specific
risk change and ignore the less likely
dividend-cut scenario. The dividend
yield increase and th~ expected growth
rate decline will have countervailing
impacts on ,the required return .lAS a
result, the required return could
mathematically either increase or
decrease when firm-specific risks
Increase. This is summarized in Table
, 2.
This is where financial analysis
can. prqvide critical insight.' Both
..
erppirical studies and theoretical models
suggest that the higher dividend yield
will be offset almosten~irely by lower
EXHIBIT NO. 201
ase Nos. AVU-~ and AVIJ-r...o4
J. Thornton, Potlatch
June 21 , 2004 Page 33 of
NRRI Journal of Applied Regulation
.:....
Volume 1, JUne 2003
Improper Risk Assessment
Exhibit JST-
Page 34
:.
;i.~'3;
, .$~:~~~:::
TABLE 2
IMPACT OF INCREASED FIRM-SPECIFIC RISKS
ON INVESTORS' REQUIRED RETURN
, ,
Dividend yield
Dividend growth
,"'
~.;.;"":'~"'1;;-=~T':~.
'"
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i'~;;;:;:';;:'i";-#'i.i::"""'';'~;;f~.-.,ti"-"'t.1"~"i#"
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q'~,
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Source: Author s. construct
growth expectations, leaving the required
return essentially unaffected.
.Lm.Pact of Firm-Specific Risk Increase
hiGher lower no chanGe
diVidend expected in required (4)yield dividend return
If we view only the stock price
decline associated with increased firm-
, specific risk, as some analysts do , then
we will draw the incorrect conclusion that
the required return is increased-as
manifested by a higher dividend yield.
Careful analysis shows this conclusion to
be in error.. The stock pric~, declines in
response to the increa~ed risk because
the firm s ability to generat~ cash flow is
hampered. But this necessarily means
that the firm s ability to produce long -term
dividend gro\0h is also compromised.
The two impacts tend to offset each
other, leaving the required return
, ,.
Increase
, "
Decrease
, .. ". ~ - :. .: ;!, ,
essentially unchanged relative to what it
was before the increase in .the firm-
specific risk.
:",,-
Investor Diversification in Practice
It may be helpful to apply the
concepts discussed so far to actual stock
market data to demonstrate that
. combining a utility stock with other stocks
, in a portfolio substantially reduces the
risk. of investing in the utility without
reducing the investorsJ return,:
Wisconsin Energy Corp serves as
the utility example. As of October 2002
10 Finance experts make adistinction between
investor diversification at!9 CQrporate '
diversification. Inve~fur diversification is highly
effective at reducing risk. The fact that it is so
effective, however, suggests that corporate
diversification is redundant and provides little
benefit to a firm s already diversified investors.
NRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO., 201
Case Nos. AVU-E-O4-1 and AVU-O4-
J. Thornton, Potlatch
June 21 , 2004 Page 34 of 50
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""':'; :.
It'
:'~:~;;j)~\"
i:"
(~:" ,: ..
:0\:
, '
I~~~:,
Wisconsin Energy had a dividend yield of
4% and a stock price beta of 0.
There were many other ~tocks with
characteristics sirriila; to those '~hibited
, I
by Wisconsin Energy at that time. The
following portfolio (s ee Table 3)of low-
risk stocks,-which includes Wisconsin
Energy, had an average dividend yield
and beta factor equal to those of
Wisc~nsin Energy by itself. This portfolio
contains 20 $tocks from 11 industries. All
the stocks pay dividends and have beta-
factors that are below one. Noticeably
missing from the list are stocks of high-
tech firms , such as Microsoft! which tenet
not to pay dividends and which tend to
have beta factors in excess of-one. An
investor who is ?ttracted to utility stocks
, is more likely to be interested in the types
of stocks shown in the portfolio t~an they
would be in high-flying stocks such as
Microsoft.
The question being addressed
how an inve~tor s risk exposure changes
when .he invests i
q ~~,
e P?rtfolio instead of
, ,~' .:, =-. - -" ". .
11 Beta.is a measure" bf the clegree to which a
price or return on an individual stock is sensitive
to changes in the general stock market prices ,
returns.. A beta below 1".0 indicates that the stock'
is less sensitive than the typical stock to market
changes: Conversely, a beta in excess of
. indicates that the stack ~s more sensitive than the
typical stack to market changes
Exhibit JST-
Page 35
~,
Improper Risk Assessment
inv~sting solely in Wiscon~in Energy. '
The answer is that adopting the portfolio
approach substantially reduces the
investors return volatility, which means
that risk is substantially reduced. The
annual standard deviation ,of the value of
the portfolio is about 35% less than the
standard deviation Wisconsin Energy
stock price considered by itself over ~he
same 'period (see Table 4). The portfolio
value is therefore much more stable from
day-to-day'or year-to-year than is
Wisconsin Energy s stock price.
The results presented here are
specific to this small portfolio ~ Even more
impressive results have been obtained
when diversification has been examined
in a more comprehensive fashion. .For
, ex~mple , i-es~afch as far back as 30
years ago revealed that diversification
eliminates about 500/0 of the risk of
holding a typical u.s. stoCk.12 If one
combines international stocks , in the
PQrtfolio, almost 70% of the risk of
12 G.A. Whitmore, "Diversification and the
Reduction in Dispersion: A Nqte,Joumal of
Fina'ncia/ and Quantitative Analysis, 5(2) (June
1970): 263-64. Whitmore expresses the
reduction in risk in terms of variance reduction.
To be consistent with my earlier analysis, 1
converted the figures to standard deyiations. The
reductions in risk are even more impressive when
viewed in variance terms-75% for U.S. stocks
and 89% for an international stock portfolio.
NRRJ Journal of Applied Regulation Volume June 2003 EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-04-
J. Thornton , Potlat
June 21 , 2004 Page 35 of 50
Improper Risk Assessment
TABLE 3
PORTF OLIO OF LOW-RISK STOCKS
OCTOBER 200.2
Abbott Labs
AGL Resources
American Water Works'
Anheuser Busch
Coca Cafa
Consolidated Edison-
DTE Corp
Equitable "Resources
Exxon-Mobil
FPL Group
Johnson & Johnson
Lac/ede G'
'Merck
New Yark Times
Northwest Natural Gas
PepsiCo
Public Storage
Washington Mutual
Washington Real Estate
Pharmaceutical
Natural gas utility
Water' utility .
Beverages
Beverages
, ~Iectric utility.
Elect~ic utility
Natural gas diversified
Oil and gas integrated'
Electric utility
Medical products
Natural gas utility
.Pharmaceutical
Newspaper
Natural gas utility
Beverages
Real estate investment
Savings bank
Real estate investment
3%
9% '
, , ,. - -
10
1.4%50/0 0.
, 5.2% 0.9% 0.
0010 7% 0.4% 0.
4%'
2010
1 % 2% ,
.4.2% 4% 0~64
1010
, 3.4%
8% . 0.
Source: Author s construct
:~~~~
~~~!~!f!!'lJfl~i~~~
!~j!~~!~~
~fr~f~%~~J~~~!~t~~~
Exhibit JST-
Page 36
, c"
;'~~
"'-'..G
;"', ,- ~, ,, ,, ,, ~'. ,
NRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton , Potlatch
June 21 , 2004 Page 36 of 50
, ,::' ',: "-, ..:;;:; "
~il;..
:~,:;~', ,~\)."
T:~( ,
::..
f:;
.;:\, , ':~~ ,::,:" ,
, t\;i
~~\:
:;~i "
~:~F :
:)~':;:~/:: ';,:,:+'" .., ,'" ',- ', :~;~:~ ;'
,"J:::
~; ,
1f~,
':~'.": .
holding an individual stock can be
eliminated via diversification. These
figures are staggenng~ When viewed in
isolation, stocks appear to be much
more risky than they actually are
because at least half- of the risk
associated with holding the stock can be
eliminated via diversification.
Returning to our 20-stock
portfolio, note that the investor would
not have tp 'accept a lower return to
obtain the lower risk provided by the'
portfolio. In this example the annual
total return on the portfolio is identical to
the annual ret~rn on Wi~consin Energy's
stock. These results are also shown in
Table 4.
This is why financial experts ~re
so unequivocal about recommending
that inve~tors diversify. The lower risk
that results from diversification does not
come at the expense of the investor's-
return.
, Note also that the reduction in
,. , ;'~ .' "
risk~gpined by in\j~'stjng in the portfolio
;. -~
was .achi~ved bY.'90l11btning, Wisconsin
. -,
Energy stock with stocks that were
Exhibit JST-
Page 37
lfnproper Risk Assessment
generally more volatile , not less volatileJ
than Wisconsin Energy. Seventeen of
the ,1 9 other stocks added to create the
. portfolio have stock price standard
deviations that are equal to or greater
than Wisconsin Energis stock price
standard deviation. Nevertheless
because firm-specific impacts on stock
prices are not correlated across the
companies in the portfo lio, price
increases for some stocks ai6 offset by
simulta neQus price decreases for other
stocks. As' a result of these offsetting
impacts, the standard deviation of the
portfolio value is substantially below the
standard deviation of stock price~ for
any of-the individual companies in the
portfolio.
"'lith respect to risk, when an
, investor diversifies the total is less than
the sum of the, parts~ This is a welcome,
, outcome for the investor. The key point
here is that diversiflcation makes stocks
much less risky for the investor than
they would appear to be when viewed in
isolation. Market-determined required
returns reflect that fact.
EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-G-O4-
J. Thornton. Potlatch
June 21 , 2004 Page 37 of 50
NRRJ Journal of Applied Regulation Volume 1, June 2003
Exhibit JST-
Page 38
Improper Risk Assessment
,;:,
t;;t
\~:
~;)i
! .
TABLE 4
, RISK AND RETURN
PORTFOLIO OF 'LOW-RI~K STOC
1997-2002
bbott Labs'31%/0'
~ -.... .- ,- ;
GL Resources 21%60/0
. merican Water W'orks 260/0 18%
nheuser Busch 26%23?/O
Coca Cola 33%
Consolidated Edison 25%
OTE Corp 240/0 110/0
Equitable Resources 28%200
Exxon~Mobil 26~!o
FPL Group 24%
ohnson. & Johnson ,29%15%
aclede Gas 22%
Merck 32%1%'
New York Times,310/0 10%
Northwest Natural Gas 250/0
PepsiCo 300
Public Storage 23%
ashington Mutual 41%
ashington Real Estate 20%
Source: Authors construct
NRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 , 2004 Page 38 of 50
, ": "::,(:';.', ,~:' "::;::' ,, ,,.,...:" ', ," ,.. ". ,, ,, "
:.-c'
~(~L
,:~. ,
The Cost. of Diversification
Diversification today can be
achieved at v.ert low cost. Mutual funds
are excellent- diversification vehicles for'
small investors. For example the
management-fee fqra typical S&P 500
index fund is less than one-half of 1010.
Paying one-half of 1 % to obtain the
diversification benefits associ~ted with
500 stocks is a very efficient way to
invest. Most indiviqual investors' w9uld
have a difficult time finding a better deal
than an index fund" which not only tends
to exhibit 10 w volatility put produces
returns thafare higher than those of
most qctively managed portfolios.
Investors who choose to manage
their own investments may incur
somewhat higher transaction costs than
those associated 'witD an index fund.
But those investors, do so of their own
volition since more cost-effective
diversification op~~~ns are available.
. '
Di'ver5ific~~ori is'inexpensive for
ins tuti~n ' i ~~~rs , as well.
,. ", .
Inv t~ent firms ~ompete aggressively
to provide brokerage services for
institutional clients. The highly
, competitive environment in which
Exhibit JST-
Page 39
1mproper Risk Assessment
institutional brokers operate is
, manifested by the very low fees
institutions pay when they trade stocks.
, Diversified and Non-DiversifiedI~e~o~
When faced with the
overwhelming evidence that dive rsifiable
firm-specific risks do not affect the
quired r~turns ' ot'di~ersified investors,
some finance witnesses attempt to show'
that some investors who hold the stock
of the particular utility under review ar
not well-diversified. -For example, some
witnesses present results of surveys
that show that many investors own three
or fewer individual stocks. They then
argue that the required return o~ the
utility stock must reflect both firm-
specific and systematic risks. There are
three significant errors of logic in this
argument: (1) knowing who holds the
sto.ck tf3lls us little about who is trading
the stock in the market and: therefore,
little about the market's requireq return,
on the stock; (2) knowing the humber of
individual stocks that an investor owns
provides little information about
diversification of the inves~ors complete
financial. portfolio; (3) knowing that an
NRRI Journal of Applied Regulation Volume June 2003.
EXHIBIT NO. 201
Case Nos. A VU-1 and A VU-
J. Thorn atc
June 21 , 2004 Page 39 of 50
Improper Risk Assessment
investor holds a non-diyersified portfolio
does not mean that the investor' could
not diversify if he or she chos~ to do so.
If we think this through for
, j
moment we can see that even if many
non-diversified investors hold a
particular utilitis s~ock, the market's
required return will be set by the
diversified inve$tors. There is only ene
market-determined required return
embedded' in the s!ock price for a given
company.: Put another way, the market
. does not develop one required return for
diversified investors and a different
: '
required return for non-diversified
investors. The single required return on
: '
a given stock is set by buyers ,and
sellers in the financial markets.
Who are the buyers and seifers?
Examining who hol~s a stock (individual
investors typically hold a little 'more than
half of most utility's securities) will not
tell you who is trading the stock.
Individual investors tend to be, more of
the buy-and-hold variety. Institutions
dominate the trading in stocks.
Moreover, almo~t all institutional
investors are required by law or charter
Exhibit JST -
Page 40
to be welf-diversifIed.13 It is these well-
diversified institutional investors who set
the'price for the stock; therefor~, it is the
well-diversified investors who determine
. , ',..
the market's required r~turn on the
- .
stock.
-: ., "'... , ~.. ,
In highly competitive flnani'~1. . t
, ,' .
.. r ' markets , any i"nstitutionaJ investors who.
try to demand a return that
cgmpensates them for firm-specific risks
will fi~d no stocks to buy. ~iversified
, ., "
investors do not demand compensation'
for finn-specific risks; therefore, the
market-determined required return will '
not reflect those risks. This means that
diversrlled investors will pay more 'for a
given stock than will the investor
- demandi,ng the higher return. Any
investor, either diversified or not, who
wants'to participate in the market will
have to accept stock prices set by
diversified investors. This applies to
individuals as 'well as institutio ns.
Does this mean that individual
, ,, ,
investors are not being compensated for
... :"
13 Jerome 8. Cohen, Edward D. Zinbarg, and
Arthur Zeikel Investment Analysis and Portfolio
Management (Irvvin , 1 Q87), 175.
NRRI 'Journal of Applied Regulation Volume 1 J June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-04-
J. Thornton, Potlatch
June 21 , 2004 Page 40 of 50
, -, ,, " ', " " .., ' '
the risks they take when they hold
' ,
individual stocks? No. Diversified
investors determine the market'
-; ....
required return on individual stocks
based only on the sensitivity of each
stock to systematic risk factors, because
those are the only risks t~at have a
noticeable effect on the value of their
portfolios. Moreover, most individual
investors, even t~ose who own only one
, or two individual stocks, are actually
well-diversified. Survey results that
report only the number of individual'
sto~ks the typical inves~or holds but that
, do not also' reveal the value of those
- investments relative to the typical total
, financial portfolio (incl u~ing indir?ct
equity holdings) tell us little about
whether the investor is well-diversified.
Many individuals who own a few stocks
also hold well-diversified mutual 'funds in
their portfolios. More importantly,
however, most individuals have
relatively'large amounts of money in
indirect eguity inv
~~.
lJ1E?nts. For
" ,
ex~ple, r:nq,st individual investors are
cov~red by well"GJiyer-sitied retirement
plans.
Even ,if investors are not
diversified, it is likely that they could be.
There are very few, if any, investors who
Exhibit JST-
Page 41
1mprop~r Risk Assessment
could not diversify if they w~nted to do
as is explained in,the modern
corporate finance texts:
For investin'g amounts smaller
than $25 000 and when wanting
the responsibility of managing'
their own portfolio , investors can
invest in mutual funds to
approximate the ,market portfolio.
, Currently, there, are index funds
such as those based on the
Standard & Poors 500 Index.
fact, an important reason ,for the
existence of mutual funds is to
rovide the 0 ortuni to all
investors to diversify
lruillJensivelv 14
If the few remaining non~
diversified investors find the market-
determined requir~d returns to be too
low, they can diversify to reduce their
e~p~sure to the utility's firm-specific
risks or they can sell the stock. The
degree of diversification is a cDoice
made by the investor, not a condition
imposed from the outside. The
reg,ulator clearly has no: obligation
cqmpensate a non-diversified investor
for risks that could be easily avoided.
EI.
14 Donald R. Emery and John .0. Finnerty,
Principles of Finance With Corporate
Applications (West Publishing Company, 1991),
176. (Emphasis ~dded.
NRRI Journal of Applied Regulation -Volume June 2003"
EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-
J. Thornton , Potlatch
June 21 2004 Page 41 of 50
::-
i .
j, .
Improper Risk Assessment,
Required Return Estimation in
Regula-tory Proceedings
Rather than the approach
suggested by finance principles being
used , in regulatory proceedings we
often see incorrect ad hoc; approaches
to. required rettJrn estimatian. A finance
witnesses' disc?unted cash flaw (OqF)
. analysis might suggest that the" required
retu~n on the typical utili~ stock today is
10%. Then the witness might suggest
th~t investars require a higher return on
the utility in question because it faces
, higher-than-average competition risk, its
exposu~e to risks related to its nuclear
plants tis relatively high, 'its fuel mix is
not as diversified as that of other
lfti!ities, its largest customer is
threatening to relecate to. another state
. and its regulatary c!im~te is not highly
regarded by the. investment cammunity.
As was discussed above these
items represent firm-specific ~isks. They
affect the cash flovy forecasts far the
utility-not investars' required return.
The required return on the utility steck in
this example is 10%, just as the DCF
model suggests. Table 5 presents the
requited return determination from the
iQ.
Exhibit JST-
Page 42 '
:'~"-':
perspectiye of the finance witness who.
treats all risks' as th.ough they affect the
required return (the ad hoc approach),
and from the perspective of the witness
who applies financial prinCiples. Ad hoc
required return adJust'mentE; of the
magnitude shown appye a~e '~omhi~n in
. .. ,
'I
regulateI)' hearings. This IS bafflhlg in
that such adjustments have no financial
basis.' The vyitness who emp loys them
is Iit~rally .making things U'p.as he goes
along rather than applying. w.ell-
established financial concepts.
In this example , utility investors
~re fully compensated for the risks they
take if the 1 00/0 return is authorized by
the regulator. Authorizing returns
excess ~jf that 1evel to. account for firm-
specific risks serves on Iy to
~stiiutionalize bad financialpractrce.
The utility consumer .bears the brunt ofthat mistake.
Proper Estimation of Inv~5tors
Required Returns
Since firm-specific risks are nat
relevant to the required return
. regulato~s can ignare' any adjustment
suggested for tho~e i!~fT1s' when. setting
a utility's authorized return. In mast
NRRI Journal of Applied Regulation - Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-04-
J. Thornton, PotlatchJune 21, 2004 Page 42 of 50
, ": '- -- '; ', ,-;- '= " '' ' .-, ," ,, -
I~
Exhibit JST-
Page 43
1inproper Risk Assessment,
TABLE 5
HYPOTHETICAL REQUIRED RETURN ESTIMATES
TWO APPROACHES
10.000/6
500/0
250/0
500/0
500/0
0250/0
Source: Authors construct
cases a properly derived DCF-based
required return estimate for a portfolio of
. '
utility companies wiJI provide
reasonable estimate of the investors
, required return on the utility's stock.
Since only systematic risks are
considered when diversified investors
year. The constant-growth DCF model.
would suggest in that case that th~
required return on a utility stock today, is
about 8 to 10.
Some rate-at-return experts
would likely suggest that the growth rate
used in the preceding analysis is too
low. They might argue th.at stocks
analysts' forecasts of earnings growth,
for the next three to five years, which
are sometimes usad as,a proxy for long-
term dividend growth , are much higher.
than 2 to 30/0. There are several
, !
set stock prices, DCF-based required
return estimates will not include the
impacts of firm-specific risk factors.
Neither should the r~gulator.
, DCF-baseq required return
" = ":'
estfro-ates ,fo~ utility. stocks today typically'
lie b~I.ow'1 00/0. ,p.0J e-xample, in October
2002 the divide nd yield on the' Dow
Jones Utility Index was 60/0. Over the
past 50' years or so utility dividends.per
share have grown' at about 2 to 30/0 per
problems with this argument.
No one, including the stock
analysts, is suggesting that a utiiity can
necessarily sustain indefinitely growth'
rates trat the analysts project to occur
NRRJ Journal of Applied Regulation Volume June 2003'EXHIBIT NO. 201
Case Nos. AVU-1 and AVU-04-
J. Thornton, Potlatch
June 21 , 2004 Page 43 of 50
i I~;
:i!
11;j:i
' ,
I:"
II:
;ijII!
Iii
Ii!ill
I ,
Improper Risk Assessment
only over the next three to five years.
Whi,le dividend growth rates of varying
degrees could occur in the near term
there is no reason to believe 'that the
long-ferm sustainabfe growth rate will,
vary s~bstantially from the historic, rate
of 2 to 30/0.
Financial research has made it
cle~r that no companYJ especially a
utility, can sustain a growth rate over the
long run that exceeds th~ growth rate of,
the economy.' ?ince 1959 , the iong-
term sustainable real rate of growth in
, the economy has been about 50/0.16
the long-term inflation rate is expected
to be about 2.5O/0! the maximum long-
term sustainable nominal growth rate for
any company today is about 10.
Since utilities are among the slowest
growing firms in the economy, a utility
today would be expected to have a long-
ter~ nominal sustainable ~rowth rate
that is significantly 19wer than 60/0.
Assumed long-term growth rates'for
utilities today that are noticeably in
excess of 3% should raise questions of
15 Robert D. Arnott and ,Peter L. Bernstein,
What Risk Premium is Normal?" Financial
Analysts Journal, 58 (2) (March/April 2002): 64-85. 16 Source: Council of Economic Advisors
Economic Report of the President 2002.
Exhibit JST-
Page 44
reasonableness in the mind of wel'l-
trained rate-of-retu~n experts.
If the growth prospects for a
company truly are relatively high in the
near term ! .the analyst should use a
multi-stage DCF model to estimate the,
" '"" '
required return. Th~~'igher groWtlfrate.
-... "
, can be used for the i6itial period (e.
five years)! but the long-term growth
rate must be a sustainable one.
;,~,.'". ,, '~:~, :::.., -, ':.:;., , ,, ;,
, "I
, '
,'..;i
. ':':, .
The other problem 'with ,using
anaiyst forecasts as the long-term
growth rate in a DCF model is that such
forecasts are biased to the upside. The'
evidence on this issue is
overwhelming.17 The foreca~t bias
persists year after year rn large part due
to in~entive structures in place at many
Wall Street firms that tend to reward
mare optimistic projections and to
disc6u~age the incorporation of
potentic~.lly negative views in anaiysts
fo recasts .
, ''"'",;
To put an 8 to goio,required return
, on a utility stock in perspective ! we can
17 See for example, Vijay Kumar Chopra, 'Why
So Much Error in Analysts' Earnings Forecasts?"
Fjnancial Analysts Journal 54(6) (November/
December 1998): 35-42.18 Se~ Masakao N. DarrOugh and Thomas
Russell
, "
A Positive Model of Earnings
Forecasts: Top Down Versus Bottom Up,
Journal of Business 75(1) (January 2002): 127-
52.
NRRI Journal of Applied Regulation Volume June 2003
EXHIBIT NO. 201
Case Nos. AVU-E-O4-1 and AVU-G-O4-
J. Thornton, Potlatch
June 21 , 2004 Page 44 of 50
, '' '. .. ...:,/"
,: c.
' :., "~::., .. .. '
~i~;
i\r~~
look to the research of Wall Street
investment advisors. Institut"ional
investment advisors today sugg€st that
. ~
the required return on equity today for a
. I
typical stock is at most 500 basis points
above the long-term Treasury bond
yield, and possibly much lower :19 The
C"urrent 1 q-year Treasury bond yield of
40/0 suggests that the required return on
a typica.stock today is therefore no
more than go/a. The required return on a
utility stock would be somewhat lower.
These lower equity risk premiums
. are in contrast to historic returns on
stocks that were about 700 basis points
over the T -bond yield for much of th~
20th century. The fact that the historic
risk pr€mium estimates lead to
. substantial1y overstated required r~turn
. ~stimates is now widely held 'within both
. '
the academic and institutional
investment communities.2O Roger
Ibbotson, the founder of Ibbotsqn
Associates, a firm that pubHshes historic
risk premiums fig~r $, s!-)ggests that
- ,- .. .. ,.. .. .
thq~~ hi.s~or~c returns produce required
...
retwrl1s estimatesjhat are too hig~ given
19 Amott and Bernstein, "What Risk Premium' is
NormalT 20 See Eugene F. Fama and Kenneth R. French
The Equity Premium Journal of Finance 57(2)
. (April 2002): 637-59, and Deutsche Asset
Exhibit JST-
Page 45
1/mproper Risk Assessment
today's equity risk premiums.21' In
addition, investment research by
. Prof~ssor Jeremy Siegel has shown that.
over the very long run (200 years
instead of the typically used 75 years)
. .
the stable and more statistically reliable
long-term historic risk premium is much
, less than that observed in more recent
decades.22
The required returns on common
stocks suggested by the mainstream
finance community today appear low
only if one expects to receive
compensation for the firm-specific risks
that affect individual stock prices. 8~t
what if we ignore the firm-specific risks?
. If the .Treasury' b~nd yield were./o, it
would be difficult to argue 'convincingly
that a g% return' is unreasonable if the
. only risks that truly threaten investor
returns are macroeconQmi~ factors such
as potential changes in interest rates.
When viewed 'in isolation, stQcks
appear to be at least twice as risky as
they actually are to the diversified
. .
Management What Can We Expect for Asset
Returns in the Long Term? 2001
21 See Proceedings: AlMA's Equity Risk
Premium Forum Nov. 8, 2001 103. The
proceedings are available on-line at the
Association far Investment Management and
Research's publications website
~www.aimrpubs_ora)
Jeremy J. Siege!Stocks for the Long Run;
(McGraw-Hili , 2092).
NRR/ Journal of Applied Regulation
-,-
Volume June 2003.'EXHIBIT NO. 201
Case 'Nos. AVU-O4-1 and AVU-G-O4-
J. Thornton, Potlatch -June 21, 2004 Page 45 of 50
i..
lmproper Risk Assessment,
i '
investors who dominate markets and
ignore firm-specific risks when
determining required returns. Financial
academics know that So do Wall Street
, investment advisors. When vikwed from
the proper risk p~rspective , the
conclusions of financial academics and
Wall Streetinvestment advisors that
required returns on stocks today are
below 1 00/0 appear to be quite
reasonable.
An Investment Advisor Analyzes a
Uti lily Stock
The 8 to 90/0 required return level
suggested by the DCF model discussed
above is also consistent with utility
, required return estimates found' in
specific stock analyst research reports.
For example , in an August 2002
research release A.G. Edwards
suggested that the required return on
Consolidated Edison s stock,was
/0.23 A.G. Edwards reported that this
estimate was derived from a risk
premiuf!1 model (its required return
model for utilities adds' 300 basis
points-o( 3%-to the 3D-year T-bond
yield),
23 A.G. Edwards Consolidated Edison Equity,
Research Report Aug. 5, 2002, 6.
100
Exhibit JST-
Page 46
e risk-premium-based required
return estimate and forecasted cash
flows were then entered into a OCF
stock price model t.o estimate the
intrinsic vatue of ConsoHdated Edison
stock. The analyst-fOund that!
:. ,. . ,
Consolidated EdisO8
~ ~
dk ~,as vJdrth
.,;
: ' $42 per share at the ~me. The
"'
analyst
concluded that Consolidated Edison
stock was fairly valued because it traded
at almost exactly the same price 'as his
valuation mode~ suggested it should
($41.40 per share).
The same A.G. Edwards
research report also discussed
numerous firm-specific risk factors
affecting Consol'idated Edison. Those
risks include the potential for:
lower earnings in the ,near term
adverse regulatory decisions
non-recovery of higher-than-
expected purchase power costs
unsuccessful acquisitions
below average customer growth
poor local economic conditions
related to the September
attacks
increased competition in the
service territorY
NRRI Journal of Applied Regulation Volume June 2003
. '. ''..
(!) 0II)
::) ""'"
;::.. 0c:c
ca
~ .c
Co) no
W;::
' 0NSno
oct cg. 0 Nen .....
2 ~0'"cu.c::J: en t- ca .WO~~
...'., ":.. ", ", ., ,:' ,, ":: '" ', "
Yi:,
, '.',"., ,
i~~;;
deterioration in the quality of
earnings r~lated to pension costs
adverse decisions in pending
. '.. ....
lawsuits
Nonetheless, A.G. Edwards did
not adjust the 8.4% required return
estimate to reflect these risk factors.
. '
Instead , it discussed the firm-specific
risk fac~ors in the context of their
potential impact on Consolidated
Edison s ~bility to generate future cash
flows. This is proper risk-return
analysis.
If the risks do not affect the
required return, why does A. G.
Edwards spend so much time analyzing
those firm-specific risks? We have to
remember that even though firm-specific
risks do not affect the required return
they are still, quite important to investors.
If the investor understands all the risks
Consolidated Edison faces, he can get a
better handle on its ability to generate
cash flowin the fu!Ure~ Combining the
outlook ~ri cash f(bws with the 8.40/0
:'-~~ .
requ'fr.~d retu rn aWo~s the- investor to
.. . .
develop his own estim ~te '
Consolidated Edison s intrinsic value. '
that value appears to be higher than the
Exhibit JST-
Page 47
1mproper Risk Assessment
current stock price, the investo.rmay
decide to add this stock to his portfolio.
Conclusion
Risk and return are important
issues in regulatory proceedings.
, Understanding how risks affect stock
prices 'leads to better: estimates af the
market's required return on utility stocks.
Risks that are specific to the 'utility affect
, expectations about future utility bash
flows, but they have little beadng on the
investors' required return. Regulators
should therefore ignore t~stimany
suggesting that firm-specific risks
influence the required return. Once the
inappropriate' firm-specific risk
adjustments are eliminated, regulators
will likely find that the required returns
on most utilities stocks today are below
1 00/0.
':'~ "
NRRI Journal of Applied Regulation Volume J June 2003 1111
,..., ,
EXHIBIT NO. 201
se Nos. AVU-04-1 and AVU-G-O4
orn
June 21 , 2004 Page 47 of 50
N AN1E :
ADDRESS:
EDUCATION:
EXPERIENCE:
Exhibit JST -
Page 48
Witness Qualifications Statement
JOHN S. THORNTON, JR.
7929 E Joshua Tree Lane, Scottsdale AZ 85250
Master of Science Degree from the University of London, having completedthe graduate program in economics at The London School of Economics and
Political Science (1986)
Graduate Diploma in Economics from The London School of Economics
(1985).
Bachelor of Arts degree, major in economics, from Willamette University
(1984).
Certified Rate of Return Analyst, member of the Society of Utility and
Regulatory Financial Analysts.
1998 passed level I of the CFA
1995 Paine Webber Seminar on Corporate Finance for the Utility Industry.
1990 WT /Harvard Public Disputes Resolution Program seminar.
1990 National Association of Regulatory Utility Commissioners (NARUC)
Advanced Regulatory Studies Program.
1988 NARUC Annual Regulatory Studies Program.
Chief, Financial & Regulatory Analysis Section, Utilities Division,
Arizona Corporation Commission, 2001 to January 2004
.Testified in the following dockets:
.W-01656A-98-0577 & WS-02334A-98-0577-Sun City Water Co. and Sun
City West Utilities Co.s request for approval of the Central Arizona Project
water utilization plan.
.E-01345A-02-0707-Arizona Public Service Co.s application for authority to
incur $500 000 000 of debt and to acquire a fmancial interest in an affiliate.
.E-01345A-02-0840-Arizona Public Service Co.s application for authority to
loan $125 000 000 of debt to an affiliate.
.E-O1345A-02-0403-Arizona Public Service Co.s application for approval of
adjustment mechanisms.
.E-OI032-00-0751 , G-OI032A-02-0598, E-01933A-O2-0914 , E-1032C-O2-091401032A-02-0914-Consolidated dockets ofUniSource, Citizens
Cormnunications Arizona Gas Division (AGD), & Citizens Communications
Arizona Electric Division (AED); general rate case for the AGD, PPF ACadjustment for AED, and sale of AGD and AED to UniSource.
.W-01445A-O2-0619-Arizona Water Company s application for rates and
charges for eight systems. Testimony on implementing lifeline rates and
marginal cost pricing into rate design, resulting in inverted block rates.
EXHIBIT NO. 201
Case Nos. A VU-04-1 and A VU-04-
J. Thornton, Potlatch
June 21 2004 Page 48 of 50
Exhibit JST -
Page 49
Witness Qualifications Statement (continued)
-W-O3512A-O3-0279-Pine Water Company s general rate case. Testified on
financing request to convert inter-company note payable to debt and equity and
rate of return.
Senior Analyst with the Public Utility Commission of Oregon, 1988-2001-Testified or provided rate of return analyses in the following dockets:
-00 102-PGE disaggregation! general rate case (chief rate of return witness).
-00 94-PacifiCorp general rate case (chief rate ofretum witness).
-VE 93 (UM 592, UM 694)-Portland General Electric Co. excess power
cost/Coyote/BP A filing.
-VE 92-Idaho Power general rate case.
-VE 88-Portland General Electric Co. general rate case (chief rate of return
witness ).
-VE 851UM 529-Portland General Electric Co. Earnings test for Trojan
Shutdown Cost Adjustment Account.
-00 84-Idaho Power Co. deferred account earnings benchmark.
-VE 821UM 445- Trojan Outage Cost Adjustment Account earnings test
benchmark.
-UE79-Portland General Electric Co. general rate case (chief rate of return
witness ).
-UG 104/UG 105/UG 106-LDC deferred account earnings test benchmarks.
-UG88-Cascade Natural Gas Co. general rate case (chief rate of return witness).
-UG81-Northwest Natural Gas Co. general rate case (chiefrate of return
witness ).
-UT 125-US WEST Communications, Inc general rate case (chief rate of return
witness ).
-UT 113-GTE Northwest general rate case (chief rate of return witness).
-UTI0I-United Telephone Co. of the Northwest general rate case (chief rate ofreturn witness).
- UT85-US WEST general rate case (capital structure and debt cost witness).
-RP95-409-Northwest Pipeline general rate case (FERC).
-RP93-Northwest Pipeline general rate case (FERC).
Responsibilities also included the following:
Analyses and recommendations in over fIfty financing dockets.
-UM 903- Northwest Natural, cost of capital analysis for purchased gas
adjustment mechanism.
UM 21-Cost of capital analysis for avoided cost calculations.
-UM 351-Cost of capital analysis for long-run incremental-cost studies.
UM 573-Analysis of purchased power on the utility's cost of capital.
-UM 773-Cost of capital analysis for long-run incremental-cost studies.
-U1vI 814-Enron s application to acquire Portland General Electric Co.
-UM 918-Scottish Power pIc s application to acquire PacifiCorp.
-UM 967-Sierra Pacific Resource s application to acquire Portland General
Electric Co.
EXHIBIT NO. 201
Case Nos. A VU-04-1 and A VU-04-J. Thornton, Potlatch
June 21 , 2004 Page 49 of 50
Exhibit JST -
Page 50
Witness Qualifications Statement (continued)
Speaker-US Agency for International Development's Conference on PrivateSector Participation in the Colombian Power Sector.
Presented beta adjustment and distribution risk discount testimony on behalf of
the Division of Ratepayer Advocates of the California Public Utility
Commission, Application Nos. 98-05-019, 021 , & 024.
Sierra Pacific Power Co. compliance filing docket no. 99-4001 and NevadaPower Co. compliance filing no. 99-4005: rate of return witness for intervenors
Mirage Resorts, Inc., Park Place Entertainment Corp., and the Mandalay Group.
Corporate finance witness for the Industrial Customers of Northwest Utilities
Docket No. DE 010395, Avista Utilities.
Docket Nos. 01-10001 and 01-10002 re: application of Nevada Power Co. for
authority to increase its annual revenue requ ement for general rates charged to
all classes of electric customers and for relief properly related thereto: Rate ofreturn witness for intervenor MGM-Mirage.
Docket Nos. 03-10001 and 03-10002 re: application of Nevada Power Co. for
authority to increase its annual revenue requirement for general rates charged to
all classes of electric customers and for relief properly related thereto: Rate ofreturn witness for intervenor MGM-Mirage.
Docket No. UM 1121 re: application of Oregon Electric Utility Company to
acquire Portland General Electric Co. from Enron. Merger & acquisitionanalysis on behalf of the Industrial Customers of Northwest Utilities.
EXHIBIT NO. 201
Case Nos. AVU-04-1 and AVU-G-O4-
J. Thornton, Potlatch
June 21 , 2004 Page 50 of 50
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 2151 day of June 2004, I caused to be served a
true and correct copy of the foregoing document by the method indicated below, and
addressed to the following:
Jean Jewell
Idaho Public Utilities Commission
472 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
J U.S. Mail
( .JJ Hand Delivered
J Overnight Mail
J Facsimile
Scott Woodbury
John Hammond
Idaho Public Utilities Commission
472 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
swoodbu~puc.state.id. us
jhammon~puc.state.id. us
J U.S. Mail
( Jj Hand Delivered
J Overnight Mail
J Facsimile
J E-Mail
David J. Meyer
Senior Vice President and General Counsel
A vista Corporation
O. Box 3727
1411 E. Mission Ave., MSC-
Spokane, WA 99220-3727
david.meyer~avistacorp. com
J U.S. Mail
J Hand Delivered
Overnight Mail
J Facsimile
J E-Mail
Kelly Norwood
Vice President, State and Federal Regulation
A vista Utilities
O. Box 3727
1411 E. Mission Ave., MSC-
Spokane, WA 99220-3727
kelly .norwood~avistacorp .com
J U.S. Mail
J Hand Delivered
( ./J Overnight Mail
J Facsimile
J E-Mail
Dennis E. Peseau, Ph.
Utility Resources, Inc.
1500 Liberty Street SE, Ste. 250
Salem, OR 97302
dpeseau~exci te. com
(JJ U.S. Mail
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J Overnight Mail
J Facsimile
J E-Mail
Charles L.A. Cox
EVANS, KEANE
111 Main Street
O. Box 659
Kellogg, ID 83837
ccox~usamedia. tv
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J Hand Delivered
( /J Overnight Mail
J Facsimile
J E-Mail
Brad M. Purdy
Attorney at Law
2019 N. 17th Street
Boise, ID 83702
bmpurdy~hotmail.com
Michael Karp
147 Appaloosa Lane
Bellingham, W A 98229
michael~awish.net
J U.S. Mail
(JJ Hand Delivered
J Overnight Mail
J Facsimile
J E-Mail
J U.S. Mail
J Hand Delivered
( JJ Overnight Mail
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J E-Mail
Anthony J. Yanke
29814 Lake Road
Bay Village, OH 44140
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( .J) Overnight Mail
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J E-Mail
d1- J. flAW; foV