20230512Walker Direct_Exhibits.PDF

Preston N. Carter (ISB No. 8462)
Morgan D. Goodin (ISB No. 11184)
Givens Pursley LLP
601 W. Bannock St.
Boise, ID 83702
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]

Attorneys for Falls Water Co., Inc.

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF
FALLS WATER CO., INC. FOR AUTHORITY
TO INCREASE ITS RATES AND CHARGES
FOR WATER SERVICE IN THE STATE OF
IDAHO

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Case No. FLS-W-23-01

DIRECT TESTIMONY OF HAROLD WALKER, III
FOR FALLS WATER CO., INC.

RECEIVED
2023 May 12, 2:02PM
IDAHO PUBLIC
UTILITIES COMMISSION

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TABLE OF CONTENTS

INTRODUCTION 1
SUMMARY OF RECOMMENDATION 1
PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN 3
INVESTMENT RISK 5
DESCRIPTION OF FALLS WATER 6
THE INDUSTRY 7
COMPARABLE GROUP 10
CAPITAL STRUCTURE 13
EMBEDDED COST RATE 18
FINANCIAL ANALYSIS 19
RISK ANALYSIS 22
CAPITAL COST RATES 31
DISCOUNTED CASH FLOW 37
CAPITAL ASSET PRICING MODEL 51
RISK PREMIUM 54
SUMMARY OF COMMON EQUITY COST RATE 60
OVERALL RATE OF RETURN RECOMMENDATION 62
APPENDIX A A-1

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OVERALL RATE OF RETURN TERMS, ABBREVIATIONS AND ACRONYMS

Defined
CAPM Capital Asset Pricing Model
Commission Idaho Public Utilities Commission
Company Falls Water Company, Inc.
Comparable Companies Water Group Followed by Analysts
Comparable Group Water Group Followed by Analysts
Cost of Capital Investor-required cost rate
DCF Discounted Cash Flow
DPS Dividend per share
EPA U.S. Environmental Protection Agency's
EPS Earnings per share
Falls Water Falls Water Company, Inc.
Financial Risk Leverage
GICS Global Industry Classification System
GO General Obligation Bonds
IOU Investor Owned Utilities
Leverage Fixed cost capital
Long-term U.S. Treasury Securities Base Risk-Free Rate
M/B Market-to-Book Ratios
Moody’s Moody's Investors Service
NARUC National Association of Regulatory Utility
Commissioners
Non-Systematic Risk Company-Specific Risk
PUC Idaho Public Utilities Commission
ROE Return on Equity
RP Risk Premium
S&P Standard & Poor's
SIC Standard Industrial Classification
Systematic Risk Non-Diversifiable Risk
Value Line Value Line Investment Survey
Water Group Water Group Followed by Analysts
Terms, Abbreviations and Acronyms

WALKER, Di 1
Falls Water Co., Inc.

INTRODUCTION 1
Q. Please state your name and business address. 2
A. My name is Harold Walker, III. My business address is 1010 Adams Avenue, 3
Audubon, Pennsylvania 19403. 4
Q. By whom are you employed and in what capacity? 5
A. I am employed by Gannett Fleming Valuation and Rate Consultants, LLC as 6
Manager, Financial Studies. 7
Q. What is your educational background and employment experience? 8
A. My educational background, business experience and qualifications are provided 9
in Appendix A. 10
SCOPE OF TESTIMONY 11
Q. What is the purpose of your testimony? 12
A. The purpose of my testimony is to recommend an appropriate overall rate of return 13
that Falls Water Co., Inc. (“Falls Water” or the “Company”) should be afforded an 14
opportunity to earn on its water service rate base. My testimony is supported by 15
Exhibit No. 6, which is composed of 19 Schedules. 16
SUMMARY OF RECOMMENDATION 17
Q. What is your recommended cost of equity? 18
A. My recommendation is that Falls Water be permitted an overall rate of return of 19
8.12%, including an 11.00% cost of common equity, based upon the Company’s 20
hypothetical capital structure at December 31, 2022. My recommended cost of 21
common equity reflects Falls Water’s unique risk characteristics. 22

WALKER, Di 2
Falls Water Co., Inc.

Q. How did you determine your recommended common equity cost rate? 1
A. I used several models to help me in formulating my recommended common equity 2
cost rate including Discounted Cash Flow (“DCF”), Capital Asset Pricing Model 3
(“CAPM”) and Risk Premium (“RP”). 4
Q. Is it important to use more than one market model? 5
A. Yes. It is necessary to estimate common equity cost rates using a number of 6
different models. At any given time, a particular model may understate or overstate 7
the cost of equity. While any single investor may rely solely upon one model, 8
different investors rely on different models and many investors use multiple 9
models. Therefore, because the price of common stock reflects a number of 10
valuation models, it is appropriate to estimate the market-required common equity 11
cost rate by applying a broad range of analytical models. 12
Q. Please summarize your common equity cost rate recommendation. 13
A. There is no market data concerning Falls Water’s shares of common stock because 14
Falls Water shares of common stock are not publicly traded. Accordingly, due to 15
the lack of market data concerning Falls Water’s equity, I used a comparable group 16
of publicly traded companies to estimate the common equity cost rate. Based upon 17
the results of my entire analysis, I conclude Falls Water’s current common equity 18
cost rate is at least 11.00%. The current range of common equity cost for Falls 19
Water is 9.70% (DCF), 12.30% (CAPM), and 11.20% (RP). Value Line Investment 20
Survey (“Value Line”) is relied upon by many investors and is the only investment 21
advisory service of which I am aware that projects earned return on equity. As a 22
check on the reasonableness of my common equity cost rate recommendation, I 23

WALKER, Di 3
Falls Water Co., Inc.

reviewed Value Line’s projected returns on common equity for comparable 1
utilities. Value Line’s projected earned returns on common equity for my 2
comparable utilities average 10.7% for the period 2025-2027. For 2021, the 3
comparable utilities earned a return on common equity of 11.3% and earned a return 4
on common equity of 10.5% in 2020. The range of the projected returns and actual 5
returns suggests that my recommendation that Falls Water be permitted an 6
opportunity to earn 11.00% is reasonable, if not conservative. 7
Q. What ROE is the Company requesting? 8
A. As stated in the testimony of Adam Rue, the Company is requesting no change to 9
their currently authorized ROE of 10.2%. 10
PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN 11
Q. What are the principles guiding fair rates of return in the context of rate 12
regulation? 13
A. In a capitalistic or free market system, competition determines the price for all 14
goods and services. Utilities are permitted to operate as monopolies or near 15
monopolies as a tradeoff for a ceiling on the price of service because: (1) the 16
services provided by utilities are considered necessities by society; and (2) capital-17
intensive and long-lived facilities are necessary to provide utility service. 18
Generally, utilities are required to serve all customers in their service territory at 19
reasonable rates determined by regulators. As a result, regulators act as a substitute 20
for a competitive-free market system when they authorize prices for utility service. 21
Although utilities operate in varying degrees as regulated monopolies, they 22
must compete with governmental bodies, non-regulated industries, and other 23

WALKER, Di 4
Falls Water Co., Inc.

utilities for labor, materials, and capital. Capital is provided by investors who seek 1
the highest return commensurate with the perceived level of risk; the greater the 2
perceived risk, the higher the required return rate. In order for utilities to attract the 3
capital required to provide service, a fair rate of return should equal an investor-4
required, market-determined rate of return. 5
Q. What constitutes a fair rate of return? 6
A. Two noted Supreme Court cases define the benchmarks of a fair rate of return. In 7
Bluefield1, a fair rate of return is defined as: (1) equal to the return on investments 8
in other business undertakings with the same level of risks (the comparable earnings 9
standard); (2) sufficient to assure confidence in the financial soundness of a utility 10
(the financial integrity standard); (3) adequate to permit a public utility to maintain 11
and support its credit, enabling the utility to raise or attract additional capital 12
necessary to provide reliable service (the capital attraction standard). The second 13
case, Hope2, determined a fair rate of return to be based upon guidelines found in 14
Bluefield as well as stating that: (1) allowed revenues must cover capital costs 15
including service on debt and dividends on stock; and (2) the Commission was not 16
bound to use any single formula or combination of formulae in determining rates. 17
Utilities are not entitled to a guaranteed return. However, the regulatory-18
determined price for service must allow the utility a fair opportunity to recover all 19
costs associated with providing the service, including a fair rate of return. 20

1Bluefield Water Works & Improvement Company v. P.S.C. of West Virginia, 262 U.S. 679 (1923).
2Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944).

WALKER, Di 5
Falls Water Co., Inc.

INVESTMENT RISK 1
Q. Previously, you referred to risk. Please define the term risk. 2
A. Risk is the uncertainty associated with a particular action; the greater the 3
uncertainty of a particular outcome, the greater the risk. Investors who invest in 4
risky assets expose themselves to investment risk particular to that investment. 5
Investment risk is the sum of business risk and financial risk. Business risk is the 6
risk inherent in the operations of a business. Assuming that a Company is financed 7
with 100% common equity, business risk includes all operating factors that affect 8
the probability of receiving expected future income such as: sales volatility, 9
management actions, availability of product substitutes, technological 10
obsolescence, regulation, raw materials, labor, size and growth of the market 11
served, diversity of the customer base, economic activity of the area served, and 12
other similar factors. 13
Q. What is financial risk? 14
A. Financial risk reflects the manner in which an enterprise is financed. Financial risk 15
arises from the use of fixed cost capital (leverage) such as debt and/or preferred 16
stock, because of the contractual obligations associated with the use of such capital. 17
Because the fixed contractual obligations must be serviced before earnings are 18
available for common stockholders, the introduction of leverage increases the 19
potential volatility of the earnings available for common shareholders and therefore 20
increases common shareholder risks. 21
Although financial risk and business risk are separate and distinct, they are 22
interrelated. In order for a company to maintain a given level of investment risk, 23

WALKER, Di 6
Falls Water Co., Inc.

business risk and financial risk should complement one another to the extent 1
possible. For example, two firms may have similar investment risks while having 2
different levels of business risk, if the business risk differences are compensated 3
for by using more or less leverage (financial risk) thereby resulting in similar 4
investment risk. 5
DESCRIPTION OF FALLS WATER 6
Q. Please give a brief description of the Company. 7
A. Falls Water is a private or investor-owned company. Falls Water is a regulated 8
public utility that provides water service to about 7,000 (as of December 31, 2022) 9
customers located in its franchise territories in Bonneville County and Jefferson 10
County, Idaho. The price and conditions of service of Falls Water is regulated by 11
the Idaho Public Utilities Commission (“Commission” or “PUC”). 12
Falls Water is a wholly-owned subsidiary of NW Natural Water of Idaho, 13
LLC. NW Natural Water of Idaho, LLC is the sole direct source of Falls Water’s 14
external equity capital. In addition to Falls Water, NW Natural Water of Idaho, 15
LLC also owns Gem State Water Company, LLC (regulated utility) and Gem State 16
Infrastructure, LLC (unregulated). NW Natural Water of Idaho, LLC is a wholly-17
owned subsidiary of NW Natural Water, LLC. NW Natural Water, LLC owns 18
water and wastewater utility companies which are located in five states throughout 19
the United States (e.g., Falls Water). NW Natural Water, LLC is a subsidiary of 20
Northwest Natural Holding Company. 21
Northwest Natural Holding Company, through its subsidiaries, provides 22
regulated natural gas distribution and gas transportation services in two states, gas 23

WALKER, Di 7
Falls Water Co., Inc.

storage facilities, natural gas asset management services, operates an appliance 1
retail center, water and wastewater utility services in five states, non-regulated 2
renewable natural gas, and other investment businesses. 3
THE INDUSTRY 4
Q. Please give a brief overview of the industry in which the Company operates. 5
A. Falls Water operates in the water supply industry. The water supply industry has a 6
Standard Industrial Classification (“SIC”) code of 4941, has water utilities, and 7
includes establishments primarily engaged in distributing water for sale for 8
residential, commercial, and industrial uses. Government controlled 9
establishments such as municipalities, public service districts and other local 10
governmental entities dominate the industry. Private companies or investor owned 11
utilities (“IOU”) are active in the construction and improvement of water supply 12
facilities and infrastructure. There are currently about 11,000 U.S. Businesses with 13
a SIC code of 4941. 14
A comparative industry to the water supply industry is the wastewater 15
supply industry. The wastewater utility industry has a Standard Industrial 16
Classification (“SIC”) code of 4952 (Sewerage Systems), has sewer utilities, and 17
includes establishments primarily engaged in the collection and disposal of wastes 18
conducted through a sewer system, including such treatment processes as may be 19
provided. There are currently about 2,200 U.S. Businesses with a SIC code of 4952. 20
The water supply industry is the most fragmented of the major utility 21
industries with more than 53,000 community water systems in the U.S. (83% of 22
which serve less than 3,300 customers). The nation’s water systems range in size 23

WALKER, Di 8
Falls Water Co., Inc.

from large municipally owned systems, such as the New York City water system 1
that serves approximately 9 million people, to small systems, where a few 2
customers share a common well. 3
According to the U.S. Environmental Protection Agency’s (“EPA”) most 4
recent survey of publicly-owned wastewater treatment facilities in 2008, there are 5
approximately 15,000 such facilities in the nation, serving approximately 74% of 6
the U.S. population. Ninety eight percent of domestic wastewater systems are 7
government owned rather than IOUs. Currently, there are no wastewater utility 8
companies that have actively traded stock.3 9
An estimated 16% of all water supplies are managed or owned by IOUs. 10
IOUs consist of companies with common stock that is either actively traded or 11
inactively traded, as well as companies that are closely held, or not publicly traded. 12
Currently, there are only about nine investor owned water utility companies with 13
publicly traded stock in the U.S. 14
The water utility industry’s and wastewater utility industry’s increased 15
compliance with state and federal water purity levels and large infrastructure 16
replacements are driving consolidation of the wastewater utility and water utility 17
industries. Because many wastewater utility and water utility operations do not 18
have the means to finance the significant capital expenditures needed to comply 19
with these requirements, many have been selling their operations to larger, 20
financially stronger utilities. 21

3Many of the publicly traded water utility stocks also own some wastewater utilities but there are no
publicly traded utility stocks which are comprised solely of wastewater utilities.

WALKER, Di 9
Falls Water Co., Inc.

The larger IOUs have been following an aggressive acquisition program to 1
expand their operations by acquiring smaller wastewater and water systems. 2
Generally, they enter a new market by acquiring one or several wastewater or water 3
utilities. After their initial entry into a new market, the larger investor-owned water 4
utility companies continually seek to expand their market share and services 5
through the acquisition of wastewater and water utility businesses and operations 6
that can be integrated with their existing operations. Such acquisitions may allow 7
a company to expand market share and increase asset utilization by eliminating 8
duplicate management, administrative, and operational functions. Acquisitions of 9
small, independent utilities can often add earning assets without necessarily 10
incurring the costs associated with the SDWA if such acquisitions are contiguous 11
to the potential purchaser. 12
In summary, the result of increased capital spending, to meet the SDWA 13
and CWA requirements4 and replace the aging infrastructure of many systems, has 14
moved the wastewater and water industries toward consolidation. Moreover, 15
Federal and State regulations and controls concerning water quality are still in the 16
process of being developed and it is not possible to predict the scope or the 17
enforceability of regulations or standards which may be established in the future, 18
or the cost and effect of existing and potential regulations and legislation upon Falls 19

4The SDWA, or Safe Drinking Water Act, is the principal federal law in the United States intended to
ensure safe drinking water for the public. Pursuant to the act, the EPA is required to set standards for
drinking water quality and oversee all states, localities, and water suppliers who implement these standards.
The CWA, or Clean Water Act, is the primary federal law in the United States governing water pollution.
The CWA’s objective is to restore and maintain the chemical, physical, and biological integrity of the
nation’s waters by preventing point and nonpoint pollution sources, providing assistance to publicly owned
treatment works for the improvement of wastewater treatment, and maintaining the integrity of wetlands.

WALKER, Di 10
Falls Water Co., Inc.

Water. However, as a smaller water system, Falls Water faces the cost of 1
compliance with less financial resources when compared to larger IOU water 2
utilities. 3
COMPARABLE GROUP 4
Q. How do you estimate the cost of common equity for Falls Water? 5
A. Falls Water’s common stock is not publicly traded. Accordingly, I employed a 6
comparable group of utility companies with actively traded stock, to determine a 7
market-required cost rate of common equity capital for Falls Water. Since no 8
companies are perfectly identical to Falls Water, it is reasonable to determine the 9
market-required cost rate for a comparable group of utility companies and adjust, 10
to the extent necessary, for investment risk differences between Falls Water and the 11
comparable group. 12
Q. How did you select the comparable group used to determine the cost of 13
common equity for Falls Water? 14
A. I selected a comparable group of water utilities to determine the cost of common 15
equity for Falls Water considering security analysts’ coverage. Unlike the other 16
utility industries, only a portion of the IOU water companies with publicly traded 17
stock in the U.S. are followed by security analysts. Coverage by security analysts 18
is important when determining a market required cost of common equity. 19
Accordingly, security analysts’ coverage was considered when selecting my 20
comparable group. I selected my water utility comparable group, Water Group 21
Followed by Analysts (“Water Group”), based upon a general criteria that includes: 22
(1) all U.S. water utilities that are covered by security analysts as measured by the 23

WALKER, Di 11
Falls Water Co., Inc.

existence of sources of published projected five-year growth rates in earnings per 1
share (“EPS”); (2) with a Standard Industrial Classification (SIC) of 4941 (i.e., 2
Water Supply Facilities and Infrastructure); (3) with a North American Industry 3
Classification System (NAICS) of 221310 (i.e., Water Supply and Irrigation 4
Systems); (4) are not the announced subject of an acquisition; (5) currently pay a 5
common dividend and have not reduced their common dividend within the past four 6
years; (6) have market value of common stock, the product of multiplying the 7
closing stock price by the number of common shares outstanding, greater than 8
$500.0 million; and (7) have a total enterprise, the sum of market value, preferred 9
stock and total debt, greater than $700.0 million. 10
It should be noted that the Water Group is also referred to as the Comparable 11
Group and/or the Comparable Companies.5 The names of the utilities that comprise 12
the Comparable Group and their bond or credit ratings are listed in Table 1. 13

5All of the Comparable Companies also provide some wastewater service.

WALKER, Di 12
Falls Water Co., Inc.

Bond and Credit Ratings for
The Water Group Followed by Analysts

S&P Credit Rating

Water Group Followed by Analysts
American States Water Co A+
American Water Works Co Inc A
California Water Service Gp * A+
Essential Utilities, Inc. A
Middlesex Water Co A
SJW Corp A-
York Water Co A-

Average A

* - The A+ bond rating is that for California Water Service, Inc.

Table 1 1
Q. Why did you include not being the subject of an acquisition as a criteria for 2
the Water Group? 3
A. To begin with, there are only about nine investor owned water utility companies 4
with publicly traded stock in the U.S., and some of these companies are very small. 5
As stated previously, the IOU water industry receives only limited exposure on 6
Wall Street. 7
Additionally, merger activity in the water industry can result in abnormal or 8
“tainted” stock prices in terms of a DCF analysis because premiums are typically 9
paid in corporate acquisitions. That is, when a tender offer is made for the purchase 10
of all the outstanding stock of a company, the amount of that offer usually exceeds 11
the price at which the stock was previously traded in the market. These large 12

WALKER, Di 13
Falls Water Co., Inc.

premiums are often reflected in the prices of other water utilities that are not 1
currently the announced subject of an acquisition.6 2
CAPITAL STRUCTURE 3
Q. What is required to develop an overall rate of return? 4
A. The first step in developing an overall rate of return is the selection of capital 5
structure ratios to be employed. Next, the cost rate for each capital component is 6
determined. The overall rate of return is the product of weighting each capital 7
component by its respective capital cost rate. This procedure results in Falls 8
Water’s overall rate of return being weighted proportionately to the amount of 9
capital and cost of capital of each type of capital. 10
Q. Is there a set of regulatory and financial principles used in deciding the 11
appropriate capital structure to use for cost of capital purposes? 12
A. Yes. There is a general set of regulatory and financial principles used in deciding 13
the capital structure issue for cost of capital purposes that are consistent with both 14
regulatory and financial theories: 15
1) It is generally preferable to use a utility’s actual capital structure in 16
developing its rate of return. However, in deciding whether a departure 17
from this general preference is warranted in a particular case, it is 18
appropriate to first look to the issue of whether the utility is a financially 19
independent entity. In determining whether a utility is a financially 20

6 Multiple publications mention these impacts including Research Magazine – April 2010, Barron’s – March
2001, Utility Business – June 2002, and Value Line Investment Survey – April 2013.

WALKER, Di 14
Falls Water Co., Inc.

independent entity or self-financing, it is important to look to whether the 1
utility: 2
● has its own bond rating; 3
● provides its own debt financing; and 4
● debt financing is not guaranteed by a parent company. 5
2) When a utility issues its own debt that is not guaranteed by the public or 6
private parent and has its own bond rating, regulatory and financial 7
principles indicate to use a utility’s own capital structure, unless the utility’s 8
capital structure is not representative of the utility’s risk profile or where 9
use of the actual capital structure would create atypical results. Regulatory 10
and financial principles involve determining whether the actual capital 11
structure is atypical when compared with the capital structures approved by 12
the Commission for other utilities that operate in the same industry (i.e., 13
water utility, gas distribution utility, etc.), as well as those of the proxy 14
utility companies that operate in the same industry. 15
3) For utility subsidiaries without publicly traded stock, the manner in which 16
the utility obtains its debt financing determines whether it does its own 17
financing. Public Utility Commissions generally determine if a subsidiary 18
has financial, operational, and managerial relationships with its parent 19
entity. However, having such ties typically has not led to use of a parent’s 20
capital structure for regulatory purposes, unless the subsidiary utility issues 21
no long-term debt, issues long-term debt only to its parent, or issues long-22
term debt to outside investors only with the guarantee of its parent. 23

WALKER, Di 15
Falls Water Co., Inc.

4) If a utility does not provide its own financing, Public Utility Commissions 1
often look to another entity. Generally, Public Utility Commissions use the 2
actual capital structure of the entity that does the financing for the regulated 3
utility as long as it results in just and reasonable rates. This generally means 4
using a parent company. 5
5) If the parent’s capital structure is used, because it finances the operation of 6
the utility, regulatory and financial principles require adjustments in the 7
utility’s allowed rate of return on equity to adjust for risk differences, if any, 8
between the parent and the regulated subsidiary. If, however, the financing 9
entity’s capital structure is inconsistent relative to the capital structures of 10
the publicly-traded proxy companies used in the cost of equity analysis and 11
capital structures approved for other utilities that operate in the same 12
industry (i.e., water utility, gas distribution utility, etc.), Public Utility 13
Commissions employ a hypothetical capital structure. 14
Once the cost of equity for the proxy companies is determined, thereby 15
establishing a range of reasonable returns, Public Utility Commissions should 16
determine where to set the utility’s return in that range based upon how the utility’s 17
risk compares with that of other utilities that operate in the same industry (i.e., water 18
utility, gas distribution utility, etc.). The risk analysis begins with the assumption 19
that the utility generally falls within a broad range of average risk, absent highly 20
unusual circumstances that indicate an inconsistently high or low risk as compared 21
to other utilities that operate in the same industry (i.e., water utility, gas distribution 22
utility, etc.). Generally, financial risk is a function of the amount of debt in an 23

WALKER, Di 16
Falls Water Co., Inc.

entity’s capital structure used for cost of capital purposes. When there is more debt, 1
there is more risk. 2
Q. Does Falls Water directly raise or issue its own debt capital? 3
A. Yes, currently Falls Water has issued its own debt capital. However, prospectively, 4
Falls Water debt capital will be issued by NW Natural Water, LLC. 5
Q. What capital structure ratios are appropriate to be used to develop Falls 6
Water’s overall rate of return? 7
A. Consistent with settled rate setting principles, I believe it is necessary to evaluate 8
Falls Water’s current cost of capital based on a hypothetical capital structure at 9
December 31, 2022. Falls Water’s actual capital structure at December 31, 2022 is 10
14% debt and 86% common equity, which is not consistent with the range of capital 11
ratios used by the Comparison Group water companies. 12
Specifically, Falls Water actual 86% common equity ratio is not similar to 13
the Comparison Group’s current (September 30, 2022) common equity ratio, which 14
ranged from 40.7% to 62.1% and averaged 50.1% (see page 3 of Schedule 2). The 15
Comparison Group’s common equity ratio is relative to companies with an A credit 16
profile based on their bond ratings and have about 555-times more investor 17
provided capital (average $5.4 billion) than Falls Water ($9.8 million). The 18
significance that size plays in the market’s dictation of acceptable common equity 19
ratios can be seen by examining the size and the common equity ratios of the 20
companies which comprise the Comparison Group. 21
The amount of investor provided capital of the companies which comprise 22
Comparison Group ranges from $329.5 million to $19,047.0 million (see page 3 of 23

WALKER, Di 17
Falls Water Co., Inc.

Schedule 2). The two largest companies in the Comparison Group, or those 1
companies with more than $10,000 million of investor provided capital have 2
common equity ratios which range from 40.7% to 45.6%, while the two smallest 3
companies in the Comparison Group had common equity ratios ranging from 4
55.8% to 62.1%. The two smallest companies in the Comparison Group have 5
$329.5 million to $713.5 million of investor provided capital. Therefore, even the 6
two smallest companies in the Comparison Group are much larger than Falls Water, 7
since they have about 53-times more investor provided capital (average $521.5 8
million) than Falls Water’s $9.8 million investor provided capital. 9
Based on the aforesaid, I believe it is appropriate to evaluate Falls Water’s 10
current cost of capital based upon a targeted ratemaking capital structure which 11
contains no less than 55% common equity. A targeted ratemaking capital structure 12
of 45% debt and 55% common equity is similar to the smallest companies in the 13
Comparison Group. Further, the recommended ratios are in line with S&P’s 14
implied ratios, based upon published financial benchmarks for water utilities, and 15
accounts for some of the risk differences between Falls Water and the Comparison 16
Group. 17
Q. How does your recommended capital structure compare with ratios employed 18
by other investor-owned companies? 19
A. The capital structure I recommend for Falls Water reflects a common equity ratio 20
of 55% which is similar to the range of the ratios employed by other investor-owned 21
water companies as shown on pages 1 and 2 of Schedule 2. A comparison of my 22

WALKER, Di 18
Falls Water Co., Inc.

recommendation for Falls Water’s capital structure ratios to those recently 1
employed by the Comparison Group is shown in Table 2. 2
3
Table 2 4
Falls Water’s rate making capital structure ratios are reasonable based upon 5
the above information. 6
EMBEDDED COST RATE 7
Q. What embedded cost rates do you recommend be used to calculate Falls 8
Water’s overall rate of return? 9
A. Consistent with my recommended capital structure ratios I recommend using an 10
embedded debt cost rate of 4.61% for Falls Water as reflected in Schedule 1. The 11
4.61% embedded debt cost rate is a weighted cost rate comprised of Falls Water’s 12
actual embedded debt cost rate, 2.80%, and a 5.40%7 cost rate for the additional 13

7 Based upon the settled yields implied in the Treasury Bond future contracts and the long-term and recent
trends in spreads between long-term government bonds and A-rated public utility bonds available to me at
the time Schedule 11 was prepared, I conclude that the market believes that if the Comparable Companies
issued new long-term bonds near term it would be priced to yield about 5.4% based upon their credit profile
of A.
Comparison of Capital Structure Ratios
Water Group
At At Projected
12/31/2022 9/30/2022 2026
Debt 45.0 49.8 48.3
Preferred Stock 0.0 0.1 0.0
Common Equity 55.0 50.1 51.7
100.0 100.0 100.0
Falls Water

WALKER, Di 19
Falls Water Co., Inc.

hypothetical debt assumed for Falls Water’s hypothetical capital structure, as 1
shown on Schedule 1. 2
FINANCIAL ANALYSIS 3
Q. Have you reviewed historical financial information of Falls Water as part of 4
your analysis? 5
A. Yes. On page 1 of Schedule 3, I developed a five-year analysis, ending in 2021, 6
detailing various financial ratios for Falls Water. On Schedule 4, I performed a 7
similar five-year analysis for the Water Group. Schedule 5 reveals the results of 8
operations for a large broad-based group of utilities known as the Standard & Poor’s 9
(“S&P”) Utilities for the five years ending 2021. This information is useful in 10
determining relative risk differences between different types of utilities. 11
Comparing Falls Water, the Comparable Group and the S&P Utilities’ 12
coverage of fixed charges and the various cash flow coverage proves that the 13
Comparable Group has experienced a higher level of coverage than the S&P 14
Utilities. Reviewing Falls Water’s various cash flow coverages shows Falls Water 15
has had higher levels of coverage than the Comparable Group.8 16
Q. What do you conclude from the comparison of all the information shown on 17
Schedules 3 through 5? 18
A. Taken together, these comparisons show that Falls Water is exposed to risk that is 19
similar in nature but greater in degree compared with the Comparable Groups. This 20
is evident in particular when one considers the size and diversification of Falls 21

8 Falls Water’s various cash flow coverages reflect their actual common equity ratio that ranged from
74.1% to 89.7% during the years analyzed.

WALKER, Di 20
Falls Water Co., Inc.

Water, or lack thereof, as compared to the Comparable Companies. Moreover, the 1
evidence from the various financial ratios shows Falls Water’s risks as being similar 2
to the Comparable Companies’ but less than the larger S&P Utilities. 3
Q. What information is shown on Schedule 6? 4
A. Schedule 6 lists the names, issuer credit ratings, common stock rankings, betas and 5
market values of the companies contained in the Comparable Group and the S&P 6
Utilities. As is evident from the information shown on Table 3, the Comparable 7
Group and the S&P Utilities are similar to each other in risk. 8

S&P S&P Value Recent Market
Issuer Credit Quality Line Market Quartile
Rating Ranking Beta Value Name
(Mill $)

Water Group A High (A) 0.79 3,138.126 Mid-Cap

S&P Utilities BBB+ Average (B+) 0.88 25,329.726 Large-Cap

Table 3 9
The Water Group’s average issuer credit ratings and common stock 10
rankings are higher than the S&P Utilities. The average beta of the Comparable 11
Group, 0.79, is less than the average beta of the S&P Utilities, 0.88. Beta is a 12
measure of volatility or market risk; the higher the beta, the higher the market risk. 13
The market values provide an indication of the relative size of each group. As a 14
generalization, the smaller the average sizes of a group, the greater the risk. 15
Page 2 of Schedule 6 shows that Falls Water has generally experienced the 16
lowest return on equity (“ROE”) when compared to the Comparable Companies. 17

WALKER, Di 21
Falls Water Co., Inc.

Further, Falls Water’s dividend payout ratio is lower than the Comparable 1
Companies’ dividend payout ratio. 2
S&P, the predominant bond rating agency, considers profit to be a 3
fundamental determinant of credit protection. S&P states that a firm’s profit level: 4
Whether generated by the regulated or deregulated side of the 5
business, profitability is critical for utilities because of the need to 6
fund investment-generating capacity, maintain access to external 7
debt and equity capital, and make acquisitions. Profit potential and 8
stability is a critical determinant of credit protection. A company 9
that generates higher operating margins and returns on capital also 10
has a greater ability to fund growth internally, attract capital 11
externally, and withstand business adversity. Earnings power 12
ultimately attests to the value of the company’s assets, as well. In 13
fact, a company’s profit performance offers a litmus test of its 14
fundamental health and competitive position. 15
16
Accordingly, the conclusions about profitability should confirm the 17
assessment of business risk, including the degree of advantage 18
provided by the regulatory environment.9 19
Q. What information is shown on Schedule 7? 20
A. Schedule 7 reveals the capital intensity and capital recovery for Falls Water, the 21
Comparable Companies and the S&P Utilities. Based upon the 2021 capital 22
intensity ratio of plant to revenues, Falls Water ($3.91) is less capital intensive as 23
compared to the Water Group ($6.60) and more than the S&P Utilities ($4.78). 24
From a purely financial point of view, based on current accounting practices, the 25
rate of capital recovery or depreciation rate is an indication of risk because it 26

9Standard & Poor’s Ratings Services, Criteria, Utilities: Key Credit Factors: Business And Financial Risks In The
Investor-Owned Utilities Industry, Nov. 26, 2008, pgs. 8-9.

WALKER, Di 22
Falls Water Co., Inc.

represents cash flow and the return of an investment. Falls Water’s average rate of 1
capital recovery is higher than the Comparable Group’s, suggesting less risk. 2
The return on equity and depreciation expense provides the margin for 3
coverage of construction expenditures. For a utility company, depreciation expense 4
is the single largest generator of cash flow. From a financial analyst’s point of 5
view, cash flow is the life blood of a utility company. Without it, a utility cannot 6
access capital markets, it cannot construct plant, and therefore, it cannot provide 7
service to its customers. 8
RISK ANALYSIS 9
Q. Please explain the information shown on Schedule 8. 10
A. Schedule 8 details the size difference between Falls Water and the Comparable 11
Group. Company size is an indicator of business risk and is summarized in Table 12
4. 13

Number of Times Larger Than Falls
Water

Water Group

Capitalization 689.3x
Revenues 440.4x
Number of Customers 139.5x

Table 4 14
As shown in Table 4, Falls Water is much smaller than the Water Group. The size 15
of a company affects risk. A smaller company requires the employment of 16
proportionately less financial leverage (i.e., debt and preferred capital) than a 17

WALKER, Di 23
Falls Water Co., Inc.

larger company to balance out investment risk. If investment risk is not balanced 1
out, then a higher cost of capital is required. 2
Q. Why is size significant to your analysis? 3
A. The size of a company can be likened to ships on the ocean, since a large ship has 4
a much better chance of weathering a storm than a small ship. The loss of a large 5
customer will impact a small company much more than a large company because a 6
large customer of a small company usually accounts for a larger percentage of the 7
small company’s sales. 8
Moreover, a larger company is likely to have a more diverse geographic 9
operation than a smaller company, which enables it to sustain earnings fluctuations 10
caused by abnormal weather in one portion of its service territory. A larger 11
company operating in more than one regulatory jurisdiction enjoys “regulatory 12
diversification” which makes it less susceptible to adverse regulatory developments 13
or eminent domain claims in any single jurisdiction. Further, a larger company 14
with a more diverse customer base is less susceptible to downturns associated with 15
regional economic conditions than a small company. For example, on average, the 16
average company in the Water Group provides water/sewer service in multiple 17
states for about 968,000 customers. The average population of the communities 18
served by the average company in the Water Group is about 3.5 million people. 19
These wide-ranging operations provide the Water Group substantial geographic, 20
economic, regulatory, weather and customer diversification. Falls Water provides 21
regulated water service to about 6,940 customers (2021). The concentration of 22
Falls Water’s business in eastern Idaho makes it very susceptible to any adverse 23

WALKER, Di 24
Falls Water Co., Inc.

development in local regulatory, economic, demographic, competitive and weather 1
conditions. 2
Further, S&P, a major credit rating agency, recognizes the importance that 3
diversification and size play in credit ratings. S&P believes some of the critical 4
factors include: regional and cross-border market diversification (mitigates 5
economic, demographic, and political risk concentration); customer diversification; 6
and regulatory regime diversification.10 7
The size of a company can be a barrier to fluid access to capital markets 8
(i.e., liquidity risk). Investors require compensation for the lack of marketability 9
and liquidity of their investments. If no compensation is provided, then investors, 10
or at least sophisticated investors, shy away. 11
Q. Is the risk related to the Company’s small size mitigated by who owns the 12
Company’s stock? 13
A. No, investment risk does not change due to ownership. Investment risk is unique 14
to an enterprise, not who owns that enterprise. For example, the market yield 15
provided by a bond does not change based on the geographic distribution of its 16
investors, the wealth of its investors, or the nationality of its investors and the same 17
to true for common stock. That is, common stocks do not provide different amounts 18
of dividends depending on who owns the stock. Similarly, a fair rate of return for 19
a business enterprise should not change based on the composition of its investors 20
either. 21

10Standard & Poor’s, Corporate Ratings Criteria, Utilities: Key Credit Factors: Business and Financial Risks
in The Investor-Owned Utilities Industry, Nov. 26, 2008.

WALKER, Di 25
Falls Water Co., Inc.

Q. Is the impact of size commonly recognized? 1
A. Yes, the National Association of Regulatory Utility Commissioners (“NARUC”), 2
and the majority of acclaimed financial texts, recognize that size affects relative 3
business risk. Liquidity risk and the existence of the small firm effect relating to 4
business risk of small firms are well-documented in financial literature.11 Investors’ 5
expectations reflect the highly-publicized existence of the small firm effect. For 6
example, many mutual funds classify their investment strategy as small 7
capitalization in an attempt to profit from the existence of the small firm effect. 8
As previously discussed, S&P recognizes that size plays a role in credit 9
ratings. 10
Standard & Poor’s has no minimum size criterion for any 11
given rating level. However, size turns out to be 12
significantly correlated to ratings. The reason: size often 13
provides a measure of diversification, and/or affects 14
competitive position. . . . Small companies are, almost by 15
definition, more concentrated in terms of product, number of 16
customers, or geography. In effect, they lack some elements 17
of diversification that can benefit larger companies. To the 18
extent that markets and regional economies change, a 19
broader scope of business affords protection. This 20
consideration is balanced against the performance and 21
prospects of a given business. . . . In addition, lack of 22
financial flexibility is usually an important negative factor in 23
the case of very small companies. Adverse developments 24
that would simply be a setback for companies with greater 25
resources could spell the end for companies with limited 26
access to funds.12 27
28

11Banz, Rolf, W. "The Relationship Between Return and Market Value of Common Stocks," Journal of
Financial Economics, 9:3-18 1981. For subsequent studies see Fama and French, etc.
12Standard & Poor’s, Corporate Ratings Criteria 2006; pg. 22.

WALKER, Di 26
Falls Water Co., Inc.

As shown on Schedule 9, size plays a role in the composition of investors, and 1
hence liquidity. In 2021, about 112% of the Water Group’s shares traded while the 2
larger companies comprising the S&P Utilities had a much higher trading volume 3
of 149%. Insiders13 hold more than eight times more, as a percent to total, of the 4
Water Group’s shares than the S&P Utilities. Currently, only about 71% of the 5
Water Group shares are held by institutions14 while the larger companies 6
comprising the S&P Utilities had much higher institutional holdings of 80%. Due 7
to small size and less interest by financial institutions, fewer security analysts 8
follow the Comparable Group and none follow Falls Water. 9
The lack of trading activity may affect the cost of equity estimates for small 10
entities such as Falls Water and the Water Group. When stock prices do not change 11
because of inactive trading activity, estimates of dividend yield for use in a dividend 12
cash flow model and beta estimates for use in the capital asset pricing model are 13
affected. In a stock market that is generally up, the beta estimates for the 14
Comparable Companies may be understated due to thin trading. 15
Q. Do Falls Water and the Comparable Companies have similar operating risks? 16
A. Yes. From an operations standpoint, Falls Water and the Comparable Companies 17
have similar risks and are indistinguishable. Both are required to meet Clean Water 18
Act and Safe Drinking Water Act requirements and are also required to provide 19

13An insider is a director or an officer who has a policy-making role or a person who is directly or indirectly
the beneficial owner of more than 10% of a certain company’s stock.
14Institutional holders are those investment managers having a fair market value of equity assets under
management of $100 million or more. Certain banks, insurance companies, investment advisers, investment
companies, foundations and pension funds are included in this category.

WALKER, Di 27
Falls Water Co., Inc.

safe and reliable services to their customers and comply with Commission 1
regulations. 2
Q. Is there any single measure that best shows investment risk from a common 3
stockholder’s perspective? 4
A. No. However, from a creditor’s viewpoint, the best measure of investment risk is 5
debt rating. The debt rating process generally provides a good measure of 6
investment risk for common stockholders because the factors considered in the debt 7
rating process are usually relevant factors that a common stock investor would 8
consider in assessing the risk of an investment. Credit rating agencies, such as 9
S&P, assess the risk of an investment into two categories based on: fundamental 10
business analysis; and financial analysis.15 The business risk analysis includes 11
assessing: Country risk; industry risk; competitive position; and profitability/peer 12
group comparisons. The financial risk analysis includes assessing: accounting; 13
financial governance and policies/risk tolerance; cash flow adequacy; capital 14
structure/asset protection; and liquidity/short-term factors. 15
Q. What is the bond rating of Falls Water and the Comparable Group? 16
A. Page 1 of Schedule 10 shows the average bond/credit rating Comparable Group. 17
The Comparable Group has an A credit profile and Falls Water does not have bonds 18
rated. The major bond rating/credit rating agencies append modifiers, such as +, - 19
for S&P and 1, 2, and 3 for Moody’s Investors Service (“Moody’s”) to each generic 20
rating classification. For example, an “A” credit profile is comprised of three 21

15Standard & Poor’s, Corporate Ratings Criteria, General: Criteria Methodology: Business Risk/Financial
Risk Matrix Expanded, May 27, 2009 and Standard & Poor’s, Criteria Corporates General: Corporate
Methodology, November 19, 2013.

WALKER, Di 28
Falls Water Co., Inc.

subsets such as A+, A, A- for S&P or A1, A2 or A3 for Moody’s. The modifier of 1
either “+” or “1” indicates that the obligation ranks in the higher end of its generic 2
rating category; the modifier “2” indicates a mid-range ranking; and the modifier 3
of “-“ or “3” indicates a ranking in the lower end of that generic rating category. 4
S&P and Moody’s publish financial benchmark criteria necessary to obtain 5
a bond rating for different types of utilities. As a generalization, the higher the 6
perceived business risk, the more stringent the financial criteria so the sum of the 7
two, business risk and financial criteria, remains the same. 8
Q. What are some financial benchmarks applied by credit rating agencies for 9
rating public utility debt? 10
A. S&P describes their range of financial benchmarks as 11
Risk-adjusted ratio guidelines depict the role that financial ratios 12
play in Standard & Poor’s rating process, since financial ratios are 13
viewed in the context of a firm’s business risk. A company with a 14
stronger competitive position, more favorable business prospects, 15
and more predictable cash flows can afford to undertake added 16
financial risk while maintaining the same credit rating. The 17
guidelines displayed in the matrices make explicit the linkage 18
between financial ratios and levels of business risk.16 19
Q. What other information is shown on Schedule 10? 20
A. Page 2 of Schedule 10 summarizes the application of S&P’s and Moody’s measures 21
of financial risk for Falls Water and the Comparable Group. S&P’s and Moody’s 22
measures of financial risk are broader than the traditional measure of financial risk 23
(i.e., leverage). Besides reviewing amounts of leverage employed, S&P and 24
Moody’s also focus on earnings protection and cash flow adequacy. 25

16Standard & Poor’s Corporate Rating Criteria, 2000.

WALKER, Di 29
Falls Water Co., Inc.

As is evident from the information shown on page 2 of Schedule 10, for the 1
five years ending in 2021 and for the year 2021, Falls Water’s cash flow adequacy 2
ratios were generally higher than the Comparable Companies in most instances.17 3
Comparing the Falls Water and the Water Group’s measures of cash flow adequacy 4
shows that the Falls Water has experienced a higher level of cash flow adequacy 5
than Water Group, indicating that Falls Water is a lower investment risk than the 6
Water Group. Based solely upon Falls Water’s historical ratios, it is my opinion 7
that Falls Water’s credit profile is similar but higher to the Comparable Companies. 8
However, based solely upon Falls Water’s size, it is my opinion that Falls 9
Water’s credit profile is lower than the Comparable Groups’. Based on Falls 10
Water’s smaller size, it is highly likely that Falls Water’s credit profile is below 11
BBB (i.e., BB), based solely upon size. An analysis of corporate credit ratings, 12
shown on page 4 of Schedule 10, indicates that there is an 90% (100%-0%-1%-6%-13
3%=90%) chance that Falls Water’s credit profile falls below BBB based on their 14
small size alone.18 As S&P has stated, size is significantly correlated to credit 15
ratings. 16
An analysis of corporate credit ratings, summarized on page 4 of Schedule 17
10, found The Berkshire Gas Company (“Berkshire”) to be the smallest utility with 18
a credit rating. Berkshire’s credit rating is only A- despite having a capitalization 19

17 Falls Water’s various cash flow coverages reflect their actual common equity ratio that ranged from
74.1% to 89.7% during the years analyzed.
18 Additionally, I found no companies with bonds rated higher than BB that had less than $198 million of
capitalization. Of these companies with less than $198 million of capitalization, only 17% had bonds rated
BB and 83% had bonds rated BB.

WALKER, Di 30
Falls Water Co., Inc.

comprised of about $198 million and a common equity ratio of 70%. According to 1
this analysis of corporate credit ratings, the smallest rated water utility is The York 2
Water Company (“York”). York’s credit rating is only A- notwithstanding having 3
a capitalization of about $301 million and a common equity ratio of 51%. 4
In order to compete with the Comparable Group for capital, in the future, it 5
will be necessary for Falls Water to achieve higher returns on equity, and increased 6
cash flow just to maintain a similar credit quality. 7
S&P has stated: 8
... low authorized returns may affect the industry’s ability to attract 9
necessary capital to develop new water supplies and upgrade the 10
quality of existing supplies . . . Traditional ratemaking policy has not 11
provided sufficient credit support during the construction cycle of the 12
electric industry over the past 15 years. To avoid a repeat in the water 13
industry, regulators must be aware of the increased challenges the 14
industry faces.19 15
Investors will not provide the equity capital necessary for increasing the amount of 16
common equity in a capital structure unless the regulatory authority allows an 17
adequate rate of return on the equity.20 18
Q. What do you conclude from the various measures of investment risk 19
information you have testified to? 20
A. A summary of my conclusions regarding the risk analyses discussed previously is 21
shown in Table 5. Overall, the information summarized in Table 5 indicates that 22
Falls Water has similar investment risk as the Water Group. 23

19Standard & Poor’s CreditWeek, May 25, 1992 (emphasis added).
20National Association of Regulatory Utility Commissioners, loc. cit.

WALKER, Di 31
Falls Water Co., Inc.

Table 5 1
CAPITAL COST RATES 2
Q. What information is shown on Schedule 11? 3
A. Schedule 11 reviews long-term and short-term interest rate trends. Long-term and 4
short-term interest rate trends are reviewed to ascertain the “sub-flooring” or 5
“basement” upon which the Comparable Companies’ common equity market 6
capitalization rate is built. Based upon the settled yields implied in the Treasury 7
Bond future contracts and the long-term and recent trends in spreads between long-8
Summary of Risk Analyses
Falls Water Water Group Followed
by Analysts
1.Business Risk:
2.Country Risk Similar Risk Level
3.Industry Risk Similar Risk Level
4.Competitive Position Similar Risk Level
5.Profitability/Peer Group Comparisons Higher Risk Level
6.Capitalization Ratios & Financial Risk (Leverage)*Similar Risk Level
7.Debt Cost Rate*Similar Risk Level
8.Relative Size:
9.Regulatory Diversification Higher Risk Level
10.Economic Diversification Higher Risk Level
11.Demographic Diversification Higher Risk Level
12.Diversification of Weather Conditions Higher Risk Level
13.Customer Concentration of Revenues Higher Risk Level
14.Capital Intensity Higher Risk Level
15.Capital Recovery Higher Risk Level
16.Lower Liquidity:
17.Institutional Holdings Higher Risk Level
18.Insider Holdings Higher Risk Level
19.Percentage of Shares Traded Higher Risk Level
20.Required To Meet Clean Water Acts and Safe Drinking Water Act Similar Risk Level
21.Credit Market Financial Risk Metrics Higher Risk Level
22.Cash Flow Adequacy Higher Risk Level
23.Credit Rating / Credit Profile Similar Risk Level
* - Based on recommended capital structure for rate making purposes.
Comment: The terms "Similar Level " indicates same amount of risk and the terms "Higher Level " indicates greater risk.

WALKER, Di 32
Falls Water Co., Inc.

term government bonds and A-rated public utility bonds available to me at the time 1
Schedule 11 was prepared, I conclude that the market believes that if the 2
Comparable Companies issued new long-term bonds near term, they would be 3
priced to yield about 5.4% based upon a credit profile of “A.” Further, it is 4
reasonable to conclude the market anticipates that long-term government bonds will 5
be priced to yield about 3.8%, near term. 6
Since October 2008, the Federal Reserve has been monetizing US Treasury 7
debt to artificially suppress interest rates through expansionary money policies (i.e., 8
quantitative easing). The Federal Reserve, with effectively unlimited money at its 9
disposal, intervenes at any time it wishes, in whatever volume it wishes, to make 10
sure that Treasury bond and bill prices and yields are exactly what the Federal 11
Reserve wants them to be. The US Treasury bond market, and mortgage market, 12
has become an artificial market with no connection to objective risk and interest 13
rates. 14
In August 2011, the Federal Reserve began “Operation Twist.” Under 15
“Operation Twist,” the Federal Reserve began buying $400 billion of long-dated or 16
long-term US Treasury debt, financed by selling short-term US Treasury debt with 17
three years to go or less. The goal of “Operation Twist” was to try to drive long-18
term rates lower, which the Federal Reserve thought would help the mortgage 19
market. This process has created an artificial demand for the US Treasury debt 20
themselves, and easily drives interest rates artificially lower and deceives investors 21
into believing US Treasury debt is safe with wide demand. This has resulted in the 22

WALKER, Di 33
Falls Water Co., Inc.

entire capital system being impacted by the Federal Reserve’s distortion of the price 1
of risk. 2
In the real world of economics, the borrower pays an interest rate to 3
a lender, who makes money (interest) by taking on the risk of 4
lending and deferring gratification. The lender is willing to not 5
spend his money now. In a free market economy, interest rates are 6
essentially a price put on money, and they reflect the time preference 7
of people. Higher interest rates reflect a high demand for borrowing 8
and lower savings. But the higher rates automatically correct this 9
situation by encouraging savings and discouraging borrowing. 10
Lower interest rates will work the opposite way. When the 11
government/central bank tampers with interest rates, savings and 12
lending are distorted, and resources are misallocated. This is evident 13
in looking back on the housing bubble. The artificially low interest 14
rates signaled that there was a high amount of savings. But it was a 15
false signal. There was also a signal for people to borrow more. 16
Again, it was a false signal. As these false signals were revealed, 17
the housing boom turned into a bust.21 18
More recently, in response to COVID-19, the Federal Reserve provided 19
monetary and fiscal stimulus to increase liquidity in the form of new fiscal stimulus 20
programs and rate cuts. “For context, new fiscal stimulus and total fiscal deficits in 21
the US are roughly double the levels seen in 2008-2009, and the US fiscal deficit 22
we project for 2020 of 15%-18% is only matched by deficits seen at the height of 23
WWII in 1942-1943.”22 The combined result of these actions by the Federal 24
Reserve and investors’ flight to quality resulted in artificial and historically low 25
risk-free rates as measured by the 30-year treasury bond yield. 26

21Pike, Geoffrey "The Threat of Negative Interest Rates," Wealth Daily, May 30, 2014,
http://www.wealthdaily.com/articles/the-threat-of-negative-interest-rates/5185, (6/03/2014)
22 https://www.jpmorgan.com/jpmpdf/1320748588999.pdf, (5/29/20).

WALKER, Di 34
Falls Water Co., Inc.

Q. What are some of the results from the FED’s monetary and fiscal stimulus? 1
A. The FED’s quantitative easing of expanding its own balance sheet, by buying 2
bonds, and therefore injecting money into the economy, floods the economy with 3
additional cash, keeping interest rates low and impacts equity markets. 4
Additionally, the FED’s uninterrupted and aggressive monetary expansion policy 5
necessarily puts pressure on inflation. The FED’s monetary and fiscal stimulus, 6
which included artificial and historically low interest rates, have produced some of 7
the highest inflation rates in the last 40 years according to CNBC. 8
Inflation rose 9.1% in June, even more than expected, as consumer 9
pressures intensify. 10
11
Shoppers paid sharply higher prices for a variety of goods in June as 12
inflation kept its hold on a slowing U.S. economy, the Bureau of 13
Labor Statistics reported Wednesday. 14
15
The consumer price index, a broad measure of everyday goods and 16
services related to the cost of living, soared 9.1% from a year ago, 17
above the 8.8% Dow Jones estimate. That marked the fastest pace 18
for inflation going back to November 1981.23 19
In response to the recent level of inflation rates, the Federal Reserve 20
announced its goal of increasing interest rates as high as needed to get inflation 21
back to 2%. 22
Americans are headed for a painful period of slow economic growth 23
and possibly rising joblessness as the Federal Reserve raises interest 24
rates to fight high inflation, U.S. central bank chief Jerome Powell 25
warned on Friday in his bluntest language yet about what is in store 26
for the world's biggest economy. 27
28
In a speech kicking off the Jackson Hole central banking conference 29
in Wyoming, Powell said the Fed will raise rates as high as needed 30

23 Cox, J. (2022, July 13). Inflation rose 9.1% in June, even more than expected, as consumer pressures
intensify. CNBC. Retrieved from https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-
even-more-than-expected-as-price-pressures-intensify.html, (7/13/22).

WALKER, Di 35
Falls Water Co., Inc.

to restrict growth, and would keep them there "for some time" to 1
bring down inflation that is running at more than three times the 2
Fed's 2% goal. 3
4
"Reducing inflation is likely to require a sustained period of below-5
trend growth," Powell said. "While higher interest rates, slower 6
growth, and softer labor market conditions will bring down 7
inflation, they will also bring some pain to households and 8
businesses. These are the unfortunate costs of reducing inflation. 9
But a failure to restore price stability would mean far greater pain." 10
11
As that pain increases, Powell said, people should not expect the Fed 12
to dial back its monetary policy quickly until the inflation problem 13
is fixed.24 14
Prospectively the capital markets will be affected by the upcoming 15
unprecedented large Treasury financings coupled with increased interest rates. 16
Investors provide capital based upon risk and return opportunities and investors will 17
not provide common equity capital when higher risk-adjusted returns are available. 18
COMMON EQUITY COST RATE ESTIMATE 19
Q. What is the best method of estimating common equity cost rates? 20
A. There is no single method (model) suitable for estimating the cost rate for common 21
equity. While a single investor may rely solely upon one model in evaluating 22
investment opportunities, other investors rely on different models. Most 23
sophisticated investors who use an equity valuation model rely on many models in 24
evaluating their common equity investment alternatives. Therefore, the average 25
price of an equity security reflects the results of the application of many equity 26
models used by investors in determining their investment decisions. 27

24 Schneider, H and Saphir, A (2022, August 26). Powell sees pain ahead as Fed sticks to the fast lane to
beat inflation. REUTERS. Retrieved from https://www.reuters.com/markets/us/feds-powell-pain-tight-
policy-slow-growth-needed-for-some-time-beat-inflation-2022-08-26/, (8/27/22).

WALKER, Di 36
Falls Water Co., Inc.

The application of any single model to estimate common equity cost rates 1
is not appropriate because the security price for which the equity cost rate is being 2
estimated reflects the application of many models used in the valuation of the 3
investment. That is, the price of any security reflects the collective application of 4
many models. Accordingly, if only one model is used to estimate common equity 5
cost rates, that cost rate will most likely be different from the collective market’s 6
cost rates because the collective valuation in the market reflects more than one 7
method. 8
Noted financial texts, investor organizations and professional societies all 9
endorse the use of more than one valuation method. “We endorse the dividend 10
discount model, particularly when used for establishing companies with consistent 11
earnings power and when used along with other valuation models. It is our view 12
that, in any case, an investor should employ more than one model.”25 13
The American Association of Individual Investors state, “No one area of 14
investment is suitable for all investors and no single method of evaluating 15
investment opportunities has been proven successful all of the time.”26 16
In their study guide, the National Society of Rate of Return Analysts state, 17
“No cost of equity model or other concept is recommended or emphasized, nor is 18
any procedure for employing any model recommended . . . it remains important to 19

25Sidney Cottle, Roger F. Murray and Frank E. Block, Graham and Dodd’s Securities Analysis 5th Edition,
McGraw-Hill, Inc., 1988, p. 568 (emphasis added).
26Editorial Policy, AAII Journal, American Association of Individual Investors, Volume 18, No. 1, January
1996, p. 1.

WALKER, Di 37
Falls Water Co., Inc.

recognize that alternative methods exist and have merit in cost of capital estimation. 1
To this end, analysts should be knowledgeable of a broad spectrum of cost of capital 2
techniques and issues.”27 3
Several different models should be employed to measure accurately the 4
market-required cost of equity reflected in the price of stock. Therefore, I used 5
three recognized methods: the DCF shown on Schedule 12, the CAPM shown on 6
Schedule 17, and the RP shown on Schedule 18. 7
DISCOUNTED CASH FLOW 8
Q. Please explain the discounted cash flow model. 9
A. The DCF is based upon the assumption that the price of a share of stock is equal to 10
a future stream of cash flows to which the holder is entitled. The stream of cash 11
flows is discounted at the investor-required cost rate (cost of capital). 12
Although the traditional DCF assumes a stream of cash flow into perpetuity, 13
a termination, or sale price can be calculated at any point in time. Therefore, the 14
return rate to the stockholder consists of cash flow (earnings or dividends) received 15
and the change in the price of a share of stock. The cost of equity is defined as: 16
...the minimum rate of return that must be earned on equity 17
finance and investments to keep the value of existing 18
common equity unchanged. This return rate is the rate of 19
return that investors expect to receive on the Company’s 20
common stock . . . the dividend yield plus the capital gains 21
yield . . . 28 22

27David C. Parcell, The Cost of Capital - A Practitioners Guide, National Society of Rate of Return Analysts,
1995 Edition.
28J. Fred Weston and Eugene F. Brigham, Essentials of Managerial Finance, 3rd ed. (The Dryden Press),
1974, p. 504 (emphasis added).

WALKER, Di 38
Falls Water Co., Inc.

Q. Please explain how you calculated your dividend yield in the DCF shown on 1
Schedule 12. 2
A. As shown on page 1 of Schedule 12, I used the average dividend yield of 1.8% for 3
the Water Group. The individual dividend yields are shown on page 2 of Schedule 4
12 and are based upon the most recent months’ yield, February 2023, and the 5
twelve-month average yield, ending February 2023. The second input to a market 6
DCF calculation is the determination of an appropriate share price growth rate. 7
Q. What sources of growth rates did you review? 8
A. I reviewed both historical and projected growth rates. Schedule 13 shows the array 9
of projected growth rates for the Comparable Companies that are published. 10
Specific historical growth rates are shown for informational purposes because I 11
believe the meaningful historical growth rates are already considered when analysts 12
arrive at their projected growth rates. Nonetheless, some investors may still rely on 13
historical growth rates. 14
Q. Please explain the sources of the projected growth rates shown on Schedule 13. 15
A. I relied upon four sources for projected growth rates, First Call, S&P, Zacks 16
Investment Research and Value Line.29 17
Q. Did you review any other growth rates besides those shown on Schedule 13? 18
A. Yes. I reviewed EPS growth rates reflecting changes in return rates on book 19
common equity (ROE) over time. I summarized recent ROEs on page 1 of 20

29With the exception of Value Line, the earnings growth rate projections are consensus estimates five-year
EPS estimates. These consensus estimates are compiled from more than 1,700 financial analysts and
brokerage firms nationwide. It should be noted that none of the consensus forecasts provides projected DPS
estimates. Value Line publishes projected Cash flow, EPS and DPS five-year growth projections as well.

WALKER, Di 39
Falls Water Co., Inc.

Schedule 14 and compared those to the Water Group’s higher levels projected to 1
be achieved by Value Line, as shown on page 2 of Schedule 14. ROEs increase 2
when EPS grows at much higher/faster rates than book value. 3
I also reviewed industry specific average projected growth rates that are 4
published by Zacks for the industries in which the Comparable Companies operate. 5
According to Zacks, the Water Group’s industry is projected to have EPS growth 6
rates that average 9.8% over the next five years. 7
Q. What do you conclude from the growth rates you have reviewed? 8
A. Table 6 summarizes some of the various growth rates reviewed. 9

Summary of Growth Rates
Water
Group
Projected 5 Year Growth in EPS 7.0
Actual 5 Year Growth in EPS 5.4
Projected 5 Year Growth in DPS 7.3
Projected 5 Year Growth in EPS for the industry 9.8

Table 6 10
Academic studies suggest that growth rate conclusions should be tested for 11
reasonableness against long-term interest rate levels. Further, the minimum growth 12
rate must at least exceed expected inflation levels. Otherwise, investors would 13
experience decreases in the purchasing power of their investment. Finally, the 14
combined result of adding the growth rate to the market value dividend yield must 15
provide a sufficient margin over yields of public utility debt. 16

WALKER, Di 40
Falls Water Co., Inc.

Q. What method did you use to arrive at your growth rate conclusion? 1
A. No single method is necessarily the correct method of estimating share value 2
growth. It is reasonable to assume that investors anticipate that the Water Group’s 3
current ROE will expand to higher levels. The published historical earnings growth 4
rates for the Water Group averages 5.4%. Because there is not necessarily any 5
single means of estimating share value growth, I considered all of this information 6
in determining a growth rate conclusion for the Comparable Companies. 7
Moreover, while some rate of return practitioners would advocate that 8
mathematical precision should be followed when selecting a growth rate, the fact 9
is that investors do not behave in the same manner when establishing the market 10
price for a stock. Rather, investors consider both company-specific variables and 11
overall market sentiment such as inflation rates, interest rates and economic 12
conditions when formulating their capital gains expectations. This is especially 13
true when one considers the relatively meaningless negative growth rates. That is, 14
use of a negative growth rate in a DCF implies that investors invest with the 15
expectation of losing money. 16
The range of growth rates previously summarized supports the 17
reasonableness of an expected 7.0% growth rate for the Water Group based 18
primarily on the projected five-year growth rates and considering the Water 19
Group’s industry projected EPS growth rates of 9.8%. Like the projected growth 20
rates, this investor-expected growth rate of 7.0% is based on a survey of projected 21
and historical growth rates published by established entities, including First Call, 22
S&P, Zacks Investment Research and Value Line. Use of information from these 23

WALKER, Di 41
Falls Water Co., Inc.

unbiased professional organizations provides an objective estimation of investor’s 1
expectations of growth. Based on the aforesaid, all growth rates for the Comparison 2
Companies have been considered and have been given weight in determining a 3
7.0% growth rate for the Water Group. 4
Q. What is your market value DCF estimate for the Comparable Companies? 5
A. The market value DCF cost rate estimate for the Water Group is 8.9%, as detailed 6
on page 1 of Schedule 12. 7
Q. Are there other considerations that should be taken into account in reviewing 8
a market value capitalization DCF cost rate estimate? 9
A. Yes. It should be noted that although I recommend specific dividend yields for the 10
Comparable Group, I recommend that less weight be given to the resultant market 11
value DCF cost rate due to the market’s current market capitalization ratios and the 12
impact that the market-to-book ratio has on the DCF results. The Comparable 13
Companies’ current market-to-book ratios of 302% and low dividend yields are 14
being affected by the aforementioned policy of the Federal Reserve that has resulted 15
in the mispricing of capital due to artificial interest rates, not DCF fundamentals. 16
Although the DCF cost for common equity appears to be based upon 17
mathematical precision, the derived result does not reflect the reality of the 18
marketplace since the model proceeds from unconnected assumptions. The 19
traditional DCF derived cost rate for common equity will continuously understate 20
or overstate investors’ return requirements as long as stock prices continually sell 21
above or below book value. A traditional DCF model implicitly assumes that stock 22
price will be driven to book value over time. However, such a proposition is not 23

WALKER, Di 42
Falls Water Co., Inc.

rational when viewed in the context of an investor purchasing stock above book 1
value. It is not rational to assume that an investor would expect share price to 2
decrease 67% (100%÷302%=33%-100%=67%) in value to equal book value. 3
Utility stocks do not trade in a vacuum. Utility stock prices, whether they 4
are above or below book value, reflect worldwide market sentiment and are not 5
reflective of only one element. 6
Q. What do you mean by your statement that utility stocks are not traded in a 7
vacuum? 8
A. Utility stocks cannot be viewed solely by themselves. They must be viewed in 9
the context of the market environment. Table 7 summarizes recent market-to-10
book ratios (“M/B”) for well-known measures of market value reported in the 11
March 13, 2023 issue of Barron’s and the Water Group’s average M/B as shown 12
on page 1 of Schedule 14. 13

M/B Ratios(%)

Dow Jones Industrials 429
Dow Jones Transportation 442
Dow Jones Utilities 204
S&P 500 383
S&P Industrials 519
Vs.
Water Group 302

WALKER, Di 43
Falls Water Co., Inc.

Table 7 1
Utility stock investors view their investment decisions compared with other 2
investment alternatives, including those of the various market measures shown in 3
Table 7. 4
Q. How does a traditional DCF implicitly assume that market price will equal 5
book value? 6
A. Under traditional DCF theory, price will equal book value (M/B=1.00) only when 7
a company is earning its cost of capital. Traditional DCF theory maintains that a 8
company is under-earning its cost of capital when the market price is below book 9
value (M/B<1.00), while a company over-earning its cost of capital will have a 10
market price above its book value (M/B>1.00). If this were true, it would imply 11
that the capitalistic free-market is not efficient because the overwhelming majority 12
of stocks would currently be earning more than their cost of capital. Table 7 shows 13
that most stocks sell at an M/B that is greater than 1.0. 14
Q. Please explain why such a phenomenon would show that the capitalistic free-15
market is not efficient. 16
A. Historically, the S&P 500, which represented the largest 500 companies listed on 17
exchanges in the United States, have not sold at an M/B of 1.0 during the last 24-18
years, 1999-2022. Based upon the traditional DCF assumption, which suggests that 19
companies with M/Bs greater than 1.0 earn more than their cost of capital, this data 20
would suggest that the S&P 500 companies have earned more than their cost of 21
capital while competing in a competitive environment over the 24-year period. In 22

WALKER, Di 44
Falls Water Co., Inc.

a competitive market, new companies would continually enter the market up to the 1
point that the earnings rate was at least equal to their cost of capital. 2
During this period the S&P 500 sold at an average M/B of 306% while 3
experiencing a ROE of 18.0% over a period in which interest rates averaged 3.9%. 4
It is important to note that during this period the S&P 500 M/B ranged from 192% 5
to 490%, all while competing in competitive markets. 6
Q. What is the significance of S&P 500 m/b and the cost of capital for a water 7
utility? 8
A. As stated previously, utility stocks do not trade in a vacuum. They must compete 9
for capital with other firms including the S&P 500 stocks. Over time, there has 10
been a relationship between M/Bs of S&P 500 stocks and utility stocks. Although 11
S&P 500 stocks have generally sold at a higher multiple of book value than utility 12
stocks, both have tracked in similar directions. Because utility and S&P 500 stock 13
prices relative to book values move in similar directions, it is irrational to conclude 14
that stock prices that are different from book value, either higher or lower, suggests 15
that a firm is over-or under-earning its cost of capital when competitive, free-16
markets exist. 17
Q. Does the market value DCF provide a reasonable estimate of the Water 18
Group’s common equity cost rate? 19
A. No, the DCF only provides a reasonable estimate of the Comparable Group’s 20
common equity cost rate when their market price and book value are similar 21

WALKER, Di 45
Falls Water Co., Inc.

(M/B=100%).30 A DCF will overstate a common equity cost rate when M/Bs are 1
below 100% and understate when they are above 100%. Since the Comparable 2
Group’s current M/Bs average 302%, the DCF understates their common equity 3
cost rate. Schedule 15 provides a numerical illustration of the impact of M/Bs on 4
investors’ market returns and DCF returns. The reason that DCF understates or 5
overstates investors’ return requirements depending upon M/B levels is because a 6
DCF-derived equity cost rate is applied to a book value rate base while investors’ 7
returns are measured relative to stock price levels. Based upon this, I recommend 8
that less weight be given to the market value DCF cost rate unless the increased 9
financial risk, resulting from applying a market value cost rate to a book value, is 10
accounted for. 11
Q. How do you resolve the financial risk difference between market value cost 12
rates and book value cost rates? 13
A. The basic proposition of financial theory regarding the economic value of a 14
company is based on market value. That is, a company's value is based on its 15
market value weighted average cost of capital.31 The American Society of 16
Appraisers, ASA Business Valuation Standards, 2009, and the National 17
Association of Certified Valuation Analysts, Professional Standards, 2007, use the 18
same definition: 19

30Roger A Morin, Regulatory Finance - Utilities’ Cost of Capital, Public Utility Reports, Inc., 1994, pp.
236-237.
31For other examples, see http://www.investinganswers.com/financial-dictionary/financial-statement-
analysis/weighted-average-cost-capital-wacc-2905. Also see http://www.wallstreetmojo.com/weighted-
average-cost-capital-wacc/ , or http://accountingexplained.com/misc/corporate-finance/wacc .

WALKER, Di 46
Falls Water Co., Inc.

Weighted Average Cost of Capital (WACC). The cost of capital 1
(discount rate) determined by the weighted average, at market 2
values, of the cost of all financing sources in the business 3
enterprise's capital structure. (Emphasis added) 4
Accordingly, the market value derived cost rate reflects the financial risk or 5
leverage associated with capitalization ratios based on market value, not book 6
value. 7
As shown on page 1 of Schedule 16, for the Water Group there is a large 8
difference in leverage as a result of the average $4.400 billion difference in market 9
value common equity and book value common equity. This difference in market 10
values and book values results in debt/equity ratios based on market value of 11
26.2%/73.8% (debt/equity) verses 49.8%/50.2% (debt/equity) based on book value 12
as shown on page 1 of Schedule 16. The larger the difference between market 13
values and book values the less reliable the models’ results are because the models 14
provide an estimate of the cost of capital of market value, not book value. 15
Financial theory concludes that capital structure and firm value are related. 16
Since capital structure and firm value are related, an adjustment is required when a 17
cost of common equity model is based on market value and if its results are then 18
applied to book value. As explained previously, the market value derived cost rate 19
reflects the financial risk or leverage associated with capitalization ratios based 20
on market value, not book value. The authors Brealey, Myers and Allen provide 21
a similar definition of the cost of capital being based on market capitalization, not 22
book value, 23
The values of debt and equity add up to overall firm value (D + E = 24
V) and firm value V equals asset value. These figures are all 25

WALKER, Di 47
Falls Water Co., Inc.

market values, not book (accounting) values. The market value of 1
equity is often much larger than the book value, so the market debt 2
ratio D/V is often much lower than a debt ratio computed from the 3
book balance sheet.32 4
The work of Modigliani and Miller concludes that the market value of any 5
firm is independent of its capital structure and this is precisely the reason why an 6
adjustment is appropriate. The only way for the market value of a firm to remain 7
independent of its capital structure is if the capital cost rates change to offset 8
changes in the capital structure. If the capital cost rates do not change to offset 9
changes in the capital structure, then the value of the firm will change. Clearly an 10
adjustment is required when a cost of common equity model is based on market 11
value and if its results are then applied to book value because the capital structure 12
is changed from market value capitalization ratios to book value capitalization 13
ratios. 14
Differences in the amount of leverage employed can be quantified based 15
upon the Comparable Group’s leveraged beta being “unleveraged” through the 16
application of the a “Hamada Model.” 17
The Hamada equation is a fundamental analysis method of 18
analyzing a firm's cost of capital as it uses additional financial 19
leverage, and how that relates to the overall riskiness of the firm. 20
The measure is used to summarize the effects this type of leverage 21
has on a firm's cost of capital—over and above the cost of capital as 22
if the firm had no debt.33 23

32Brealey, Myers and Allen, Principles of Corporate Finance, 10th edition, page 216 (emphasis added).
33 Hargrave, Marshall. “Hamada Equation Definition, Formula, Example,” Investopedia. Accessed
3/14/23. https://www.investopedia.com/terms/h/hamadaequation.asp.

WALKER, Di 48
Falls Water Co., Inc.

The Hamada Model combines two financial theorems: the Modigliani-Miller 1
Theorem and the CAPM.34 On page 2 of Schedule 16 I used two Hamada Models 2
including the original Hamada formula and the Harris-Pringle formula to account 3
for the 23.7 percentage point change in common equity ratio that results from 4
changing from market value capitalization to book value capitalization. The results 5
of the application of the original Hamada formula and the Harris-Pringle formula 6
determine a range of adjustment of 0.75% to 1.20%, and average 0.98%. The 7
details of the application of the two Hamada models are shown on page 2 of 8
Schedule 16. 9
For example, the inputs to the original Hamada formula for the Water Group 10
market value capitalization consist of their raw leveraged beta of 0.66, debt ratio of 11
26.2%, preferred stock ratio of 0.0%, common equity ratio of 73.8% and combined 12
tax rate of 27.87%. The group's unleveraged beta is determined to be 0.53 through 13
the use of the following original Hamada formula: 14
Bl = Bu (1 + (1 - t) D/E + P/E) 15
where: 16
Bl = observed, leveraged beta 17
Bu = calculated, unleveraged beta 18
t = income tax rate 19
D = debt ratio 20
P = preferred stock ratio 21
E = common equity ratio 22
Applying the unleveraged beta of 0.53 along with the Water Group’s book value 23
capitalization ratios of 49.8% long-term debt, 0.1% preferred stock and 50.1% 24

34 “Hamada’s Equation,” Corporate Finance Institute. Accessed 3/14/23.
https://corporatefinanceinstitute.com/resources/valuation/hamadas-equation/.

WALKER, Di 49
Falls Water Co., Inc.

common equity and combined tax rate of 27.87% results in a leveraged beta of 0.90 1
applicable to the group’s book value capitalization. Based upon the Water Group’s 2
risk premium of 5.0% and the difference between Water Group's market value 3
leveraged beta, their book value leveraged beta of 0.24 (0.90 - 0.66) indicates that 4
the Water Group’s common equity cost rate must be increased by 1.20 (0.24 x 5.0 5
= 1.20) in recognition of their book value’s exposure to more financial risk. 6
The inputs to the Harris-Pringle formula for the Water Group market value 7
capitalization consist of their raw leveraged beta of 0.66, debt ratio of 26.2%, 8
preferred stock ratio of 0.0%, common equity ratio of 73.8% and debt beta of 0.34. 9
The group's unleveraged beta is determined to be 0.58 through the use of the 10
following Harris-Pringle formula: 11
Bl = Bu + (Bu - Bd)(D/E) 12
where: 13
Bl = observed, leveraged beta 14
Bu = calculated, unleveraged beta 15
Bd = debt beta 16
D = debt ratio 17
P = preferred stock ratio 18
E = common equity ratio 19
Applying the unleveraged beta of 0.58 along with the Water Group’s book value 20
capitalization ratios of 49.8% long-term debt, 0.1% preferred stock and 50.1% 21
common equity and debt beta of 0.34 results in a leveraged beta of 0.81 applicable 22
to the group’s book value capitalization. Based upon the Water Group’s risk 23
premium of 5.0% and the difference between Water Group's market value 24
leveraged beta, their book value leveraged beta of 0.15 (0.81 - 0.66) indicates that 25

WALKER, Di 50
Falls Water Co., Inc.

the Water Group’s common equity cost rate must be increased by 0.75 (0.15 x 5.0 1
= 0.75) in recognition of their book value’s exposure to more financial risk. 2
Q. Is there another way to reflect the financial risk difference that exists as a 3
result of market capitalization ratios being significantly different from book 4
value capitalization ratios? 5
A. Yes, generally speaking. Although it is possible to know the direction of a financial 6
risk adjustment on common equity cost rate, a specific quantification of financial 7
risk differences is very difficult. Although the end result of a financial risk 8
adjustment is very subjective and specific quantification very difficult, the direction 9
of the adjustment is clearly known. However, hypothetically if the Comparable 10
Group’s debt were rated based on market value debt ratios they would command 11
an Aaa rating. The Comparison Group currently has bonds rated A based upon 12
their book value debt ratios. The yield spread on a bond rated Aaa versus A rated 13
bonds averages about 65 basis points or 0.65% as shown on page 3 of Schedule 16. 14
The result of the original Hamada formula indicates an adjustment of 15
1.20%, the Harris-Pringle formula indicates an adjustment of 0.75%, and the bond 16
yield spread approach indicates an adjustment of 0.65%. Based on the results of 17
these three approaches, I believe the Water Group’s market value common equity 18
cost rate should be adjusted upward by at least 0.80% (0.98% hamada est. + 0.65% 19
yield spread = 1.63% ÷ 2 = 0.8%) since it is going to be applied to a book value 20
equity ratio that is 23.7 percentage points less than the market value equity ratio. 21

WALKER, Di 51
Falls Water Co., Inc.

Accounting for the increased amount of leverage between market value 1
derived DCF cost rates and book value cost rates indicates a book value DCF cost 2
rate of 9.70% for the Water Group (8.9% + 0.8% = 9.70%). 3
CAPITAL ASSET PRICING MODEL 4
Q. Please briefly describe the theory of the capital asset pricing model. 5
A. The CAPM is based upon the assumption that investors hold diversified portfolios 6
and that the market only recognizes or rewards non-diversifiable (or systematic) 7
risk when determining the price of a security because company-specific risk (or 8
non-systematic) is removed through diversification. Further, investors are assumed 9
to require additional or higher returns for assuming additional or higher risk. This 10
assumption is captured by using a beta that provides an incremental cost of 11
additional risk above the base risk-free rate available to investors. The beta of a 12
security reflects the market risk or systematic risk of the security relative to the 13
market. The beta for the market is always equal to 1.00; therefore, a company 14
whose stock has a beta greater than 1.00 is considered riskier than the market, and 15
a company with a beta less than 1.00 is considered less risky than the market. The 16
base risk-free rate is assumed to be a U.S. Government treasury security because 17
they are assumed to be free of default risk. 18
Q. What risk-free rate and beta have you used in your CAPM calculation? 19
A. The risk-free rate used in CAPM should have approximately the same maturity as 20
the life of the asset for which the cost rate is being determined. Because utility 21
assets are long-lived, a long-term Treasury Bond yield serves as an appropriate 22
proxy. Previously, I estimated an appropriate risk-free rate of 3.8% based upon the 23

WALKER, Di 52
Falls Water Co., Inc.

recent and forward long-term Treasury yields. I used the average beta of 0.79 for 1
the Water Group as shown on page 1 of Schedule 17. However, as stated 2
previously, the Comparable Group’s betas are understated due to their small size 3
which affects their stock price changes. 4
Q. After developing an appropriate beta and risk-free rate, what else is necessary 5
to calculate a CAPM derived cost rate? 6
A. A market premium is necessary to determine a traditional CAPM derived cost rate. 7
The market return rate is the return expected for the entire market. The market 8
premium is then multiplied by the company specific beta to capture the incremental 9
cost of additional risk (market premium) above the base risk-free rate (long-term 10
treasury securities) to develop a risk adjusted market premium. For example, if you 11
conclude that the expected return on the market as a whole is 15% and further 12
assume that the risk-free rate is 8%, then the market premium is shown to be 7% 13
(15% - 8% = 7%). 14
Further, assume there are two companies, one of which is considered less 15
risky than the market, and therefore has a beta of less than 1.00 or 0.80. The second 16
company has a beta that is greater than 1.00 or 1.20, and is therefore considered 17
riskier than the market. By multiplying the hypothetical 7.0% market premium by 18
the respective betas of 0.80 and 1.20, risk adjusted market premiums of 5.6% (7.0% 19
x 0.80) and 8.4% (7.0% x 1.20) are shown for the company considered less risky 20
than the market and for the company considered riskier than the market, 21
respectively. 22

WALKER, Di 53
Falls Water Co., Inc.

Adding the assumed risk-free rate of 8% to the risk adjusted market 1
premiums results in the CAPM derived cost rates of 13.6% (5.6% + 8.0%) for the 2
less risky company and 16.4% (8.4% + 8.0%) for the company considered of 3
greater risk than the market. In fact, the result of this hypothetical CAPM 4
calculation shows that: (1) the least risky company, with the beta of 0.80, has a cost 5
rate of 13.6%; (2) the market, with the beta of 1.00, has a cost rate of 15.0%; and 6
(3) that the higher risk company, with a beta of 1.20, has a cost rate of 16.4%. 7
Q. How did you develop a market premium for your CAPM? 8
A. The average projected market premium of 11.1% is developed on page 2 of 9
Schedule 17. It is based upon Value Line’s average projected total market return 10
for the next three to five years of 14.9% less the risk free rate of 3.8%. I also 11
reviewed market premiums derived from Ibbotson Associates’ most recent 12
publication concerning asset returns that show a market premium of 7.5%. The 13
Ibbotson Associates’ market premium may be on the low side reflective of the 14
higher interest rate environment found during their study (i.e., 5.0%). The Value 15
Line market premium reflects the Federal Reserve’s current artificial interest rate 16
levels while the Ibbotson Associates’ market premiums reflect a higher interest rate 17
environment. 18
Q. How did you adjust for the impact that size has on the Comparable Group’s 19
beta? 20
A. The adjustment is reflected in the CAPM size premium. The CAPM size premium 21
is developed on page 4 of Schedule 17. The size premium reflects the risks 22
associated with the Comparable Group’s small size and its impact on the 23

WALKER, Di 54
Falls Water Co., Inc.

determination of their beta. This adjustment is necessary because beta (systematic 1
risk) does not capture or reflect the Comparable Group’s small size. I reduced the 2
size premium by the ratio of the Comparison Group’s beta to their respective market 3
quartile’s beta. 4
Q. What is the comparison group’s market cost of equity based upon your CAPM 5
calculation? 6
A. The CAPM based on Ibbotson Associates’ historical market returns shows a market 7
cost rate of 11.5% for the Water Group. The CAPM based on Value Line’s 8
projected market returns shows a 14.4% for the Water Group, as shown on page 1 9
of Schedule 17. The Comparable Group’s market value CAPM of 11.5% is based 10
100% on the results of the historical market returns and 0% on the projected market 11
returns. Adjusting the market value CAPM based upon the end result of the 12
application of the Hamada Model and the bond yield spread to account for the 13
difference in leverage between market value capitalization ratios and book value 14
ratios discussed previously indicates a cost rate of 12.3% for the Water Group 15
applicable to book value (11.5% + 0.8% = 12.3%). 16
RISK PREMIUM 17
Q. What is a risk premium? 18
A. A risk premium is the common equity investors’ required premium over the long-19
term debt cost rate for the same company, in recognition of the added risk to which 20
the common stockholder is exposed versus long-term debtholders. Long-term 21
debtholders have a stated contract concerning the receipt of dividend and principal 22
repayment whereas common stock investors do not. Further, long-term debtholders 23

WALKER, Di 55
Falls Water Co., Inc.

have the first claim on assets in case of bankruptcy. A risk premium recognizes the 1
higher risk to which a common stock investor is exposed. The risk premium-2
derived cost rate for common equity is the simplest form of deriving the cost rate 3
for common equity because it is nothing more than a premium above the 4
prospective level of long-term corporate debt. 5
Q. What is the appropriate estimated future long-term borrowing rate for the 6
Comparable Companies? 7
A. The estimated near term long-term borrowing rate for the Comparable Companies 8
is 5.4% based upon their credit profile that supports an A bond rating. 9
Q. What is the appropriate risk premium to be added to the future long-term 10
borrowing rate? 11
A. To determine a common equity cost rate, it is necessary to estimate a risk premium 12
to be added to the Comparable Group’s prospective long-term debt rate. Investors 13
may rely upon published projected premiums; they also rely upon their experiences 14
of investing in ultimately determining a probabilistic forecasted risk premium. 15
Projections of total market returns are shown on page 9 of Schedule 18. A 16
projected risk premium for the market can be derived by subtracting the debt cost 17
rate from the projected market return as shown on page 9 of Schedule 18. However, 18
the derived risk premium for the market is not directly applicable to the Comparable 19
Companies because they are less risky than the market. The use of 90% of the 20
market’s risk is a conservative estimation of their level of risk as compared to the 21
market. 22

WALKER, Di 56
Falls Water Co., Inc.

The midpoint of the risk premium range is 9.1% and the average for the 1
most recent quarter is 8.7% as shown on page 9 of Schedule 18. Based on this, a 2
reasonable estimate of a longer term projected risk premium is 8.7%. 3
Q. How do investors’ experiences affect their determination of a risk premium? 4
A. Returns on various assets are studied to determine a probabilistic risk premium. 5
The most noted asset return studies and resultant risk premium studies are those 6
performed by Ibbotson Associates. However, Ibbotson Associates has not 7
performed asset return studies concerning public utility common stocks. Based 8
upon Ibbotson Associates’ methodology of computing asset returns, I calculated 9
annual returns for the S&P utilities and bonds for the period 1928-2021. The 10
resultant annual returns were then compared to determine a recent risk premium 11
from a recent 20-year period, 2002-2021 and subsequent periods that were each 12
increased by ten years until the entire study period was reviewed (pages 2 and 3 of 13
Schedule 18). 14
A long-term analysis of rates of return is necessary because it assumes that 15
investors’ expectations are, on average, equal to realized long-run rates of return 16
and resultant risk premium. Observing a single year’s risk premium, either high or 17
low, may not be consistent with investors’ requirements. Further, studies show a 18
mean reversion in risk premiums. In other words, over time, risk premiums revert 19
to a longer-term average premium. Moreover, since the expected rate of return is 20
defined as “the rate of return expected to be realized from an investment; the mean 21

WALKER, Di 57
Falls Water Co., Inc.

value of the probability distribution of possible results,”35 a long-term analysis of 1
annual returns is appropriate. 2
Q. What do you conclude from the information shown on pages 2 and 3 of 3
Schedule 18? 4
A. The average of the absolute range of the S&P Utilities’ appropriate average risk 5
premium (i.e., bonds rated AAA to A) was 3.8% during the seven periods studied, 6
as calculated from page 2 of Schedule 18. The credit adjusted longer term risk 7
premiums (i.e., bonds rated A), 1928-2021, averages 4.3%. The appropriate 8
average (i.e., bonds rated AAA to A) longer term risk premiums, 1928-2021, have 9
an absolute range of 4.3% to 5.2%, and averages 4.6%. 10
The aforementioned premiums are based on total returns for bonds; and 11
reflect their price risk. A bond’s price risk is not related to its credit quality and is 12
eliminated when a bond is held to maturity from time of purchase. Using the 13
income returns, page 4 of Schedule 18, for bonds eliminates price risk and better 14
measures an investor’s required return based on credit quality. The appropriate 15
average risk premium (i.e., bonds rated AAA to A) based on income returns was 16
5.5% during the seven periods studied. The credit adjusted longer term risk 17
premiums (i.e., bonds rated A), 1928-2021, averages 4.9%. The appropriate 18
average (i.e., bonds rated AAA to A) longer term risk premiums, 1928-2021, have 19
an absolute range of 4.9% to 5.3%, and averages 5.1%. 20

35Eugene F. Brigham, Fundamentals of Financial Management, Fifth Edition, The Dryden Press, 1989, p.
106.

WALKER, Di 58
Falls Water Co., Inc.

Q. What information is shown on page 4 of Schedule 18? 1
A. Page 4 of Schedule 18 proves and measures the negative relationship between 2
interest rate levels and the resulting risk premium. That is, risk premiums are 3
generally higher when interest rates are low and risk premiums are generally lower 4
when interest rates are high. This was proven by sorting the 94-year period, 1928 5
to 2021, annual returns based on interest rate level from lowest interest rate to 6
highest interest rate and distributing the results into two equal groups, a 47-year 7
low interest rate environment group and a 47-year high interest rate environment 8
group. 9
During the period 1928-2021, the 47 years with the lowest interest rates had 10
an average interest rate of 2.9% and reflected a range of interest rates from 1.4% to 11
4.1%. This period resembles the current interest rate environment of 3.8% 12
discussed previously regarding the CAPM's risk free rate. The risk premium based 13
on total returns during this low interest rate environment produced the appropriate 14
average (i.e., bonds rated AAA to A) longer term risk premium of 6.4% and a credit 15
adjusted longer term risk premium (i.e., bonds rated A) of 5.6%. The annual 16
income return based risk premium during this low interest rate environment 17
produced the appropriate average (i.e., bonds rated AAA to A) longer term risk 18
premium of 7.5% and a credit adjusted longer term risk premium (i.e., bonds rated 19
A) of 7.2%. 20
However, during the period 1928-2021, the 47 years with the highest 21
interest rates had an average interest rate of 7.2% and reflected a range of interest 22
rates from 4.1% to 13.5%. This period is far different from the current interest rate 23

WALKER, Di 59
Falls Water Co., Inc.

environment of 3.8%. The risk premium based on total returns during the highest 1
interest rate environment produced an average longer term risk premium of 3.0% 2
over bonds rated AAA to A and a credit adjusted longer term risk premium (i.e., 3
bonds rated A) of only 2.9%. The annual income return based risk premium during 4
the highest interest rate environment produced an average longer term risk premium 5
of 2.8% over bonds rated AAA to A and a credit adjusted longer term risk premium 6
(i.e., bonds rated A) of only 2.7%. 7
Over time, risk premiums are mean reverting. They constantly move toward 8
a long-term average reflecting a long-term level of interest rates. That is, an above-9
average risk premium will decrease toward a long-term average while a below-10
average risk premium will increase toward a long-term average. In any single year, 11
of course, investor-required rates of return may not be realized and in certain 12
instances, a single year’s risk premiums may be negative. Negative risk premiums 13
are not indicative of investors’ expectations and violate the basic premise of finance 14
concerning risk and return. Negative risk premiums usually occur only in the stock 15
market’s down years (i.e., the years in which the stock markets’ return was 16
negative). 17
When interest rate levels are not considered the credit adjusted longer term 18
risk premium (i.e., bonds rated A), 1928-2021, averages 4.6%, discussed previously 19
regarding pages 2 and 3 of Schedule 18. However, the annual income return based 20
risk premium during the low interest rate environment produced a credit adjusted 21
longer term risk premium (i.e., bonds rated A) of 7.2%. Since this period’s interest 22
rate environment resembles the current interest rate environment of 3.8%, a 23

WALKER, Di 60
Falls Water Co., Inc.

reasonable estimate of investors risk premium based on historical returns is based 1
on a 50% weighting on the results of the entire 1928-2021 historical market returns 2
and a 50% weighting on the results of the low interest rate environment to produce 3
a 5.5% historical risk premium. However, I recognize that the current interest rate 4
environment of 3.8% is close to the upper end of the low interest rate environment, 5
which ranged from 1.4% to 4.1%, and have lowered my estimate of the risk 6
premium to 5.0%. 7
Adding the risk premium of 5.0% for the Comparable Group to the 8
prospective cost of newly-issued long-term debt of 5.4% results in a market value 9
risk premium derived cost rate for common equity of 10.4% as reflected on page 1 10
of Schedule 18. Adjusting the market value risk premium based upon the end result 11
of the application of the Hamada Model and the bond yield spread to account for 12
the difference in leverage between market value capitalization and book value ratios 13
discussed previously indicates a cost rate of 11.2% applicable to book value (10.4% 14
+ 0.8% = 11.2%). 15
SUMMARY OF COMMON EQUITY COST RATE 16
Q. What is your Comparable Group’s common equity cost rate? 17
A. Based upon the results of the models employed, the Water Group’s common equity 18
cost rate is in the range of 9.7% to 12.3% as reflected on Schedule 19. Based upon 19
this data, the common equity cost rate for the Water Group is at least 11.00%. My 20
recommendation is based upon the Water Group’s 11.00% common equity cost 21
rate. 22

WALKER, Di 61
Falls Water Co., Inc.

Q. Do you recommend a cost of common equity of 11.00% for Falls Water? 1
A. Yes. Based upon the financial analysis and risk analysis, I conclude that Falls 2
Water is exposed to overall similar investment risk as the Comparable Group. This 3
is evidenced by the factors summarized in Table 5 discussed previously. 4
The results of the three models employed for the Water Group show a 5
current range of common equity cost applicable to book value of Falls Water of 6
9.70% (DCF), 12.30% (CAPM), and 11.20% (RP) as shown in Table 8. 7
Summary of the Falls
Water’s Equity Cost Rates

DCF 9.70
CAPM 12.30
RP 11.20

Table 8 8
Q. What is your common equity cost rate recommendation for Falls Water? 9
A. As discussed above and as shown in Schedule 19, I recommend a 11.00% common 10
equity cost rate for Falls Water. 11
Q. Have you checked the reasonableness of your recommended common equity 12
rate for Falls Water? 13
A. Yes. Page 2 of Schedule 14 reflects the average projected earned return on average 14
book common equity for the companies in the Comparable Group for the period 15
2025-2027, which is shown to average 10.7%. For 2021, the Comparable Group 16
earned a return on common equity of 11.3% and earned a return on common equity 17
of 10.5% in 2020, as shown on page 3 of Schedule 6. Given the large degree to 18
which regulatory lag and attrition impacts water utilities earning, the range of the 19

WALKER, Di 62
Falls Water Co., Inc.

comparable utilities’ projected and actual earned returns suggests that my 1
recommendation that Falls Water be permitted an opportunity to earn 11.00% is 2
reasonable, if not conservative. 3
OVERALL RATE OF RETURN RECOMMENDATION 4
Q. What is your overall fair rate of return recommendation for the Falls Water? 5
A. Based upon the recommended capital structure and my estimate of the Falls Water’s 6
common equity cost rate, I recommend an overall fair rate of return of 8.12%. The 7
details of my recommendation are shown on Schedule 1. 8
Q. Have you tested the reasonableness of your overall fair rate of return 9
recommendation? 10
A. Yes. If my recommended overall rate of return is actually earned, it will give Falls 11
Water ratios that will allow Falls Water to present a financial profile that will enable 12
it to attract capital necessary to provide safe and reliable water service, at 13
reasonable terms. 14
Q. Does that conclude your direct testimony? 15
A. Yes, it does.16
A-1

APPENDIX A
Professional Qualifications
of
Harold Walker, III
Manager, Financial Studies
Gannett Fleming Valuation and Rate Consultants, LLC.

EDUCATION

Mr. Walker graduated from Pennsylvania State University in 1984 with a Bachelor of Science
Degree in Finance. His studies concentrated on securities analysis and portfolio management with
an emphasis on economics and quantitative business analysis. He has also completed the
regulation and the rate-making process courses presented by the College of Business
Administration and Economics Center for Public Utilities at New Mexico State University.
Additionally, he has attended programs presented by The Institute of Chartered Financial Analysts
(CFA).

Mr. Walker was awarded the professional designation “Certified Rate of Return Analyst” (CRRA)
by the Society of Utility and Regulatory Financial Analysts. This designation is based upon
education, experience and the successful completion of a comprehensive examination. He is also
a member of the Society of Utility and Regulatory Financial Analysts (SURFA) and has attended
numerous financial forums sponsored by the Society. The SURFA forums are recognized by the
Association for Investment Management and Research (AIMR) and the National Association of
State Boards of Accountancy for continuing education credits.

Mr. Walker is also a licensed Municipal Advisor Representative (Series 50) by Municipal
Securities Rulemaking Board (MSRB) and Financial Industry Regulatory Authority (FINRA).

BUSINESS EXPERIENCE

Prior to joining Gannett Fleming Valuation and Rate Consultants, LLC., Mr. Walker was
employed by AUS Consultants - Utility Services. He held various positions during his eleven
years with AUS, concluding his employment there as a Vice President. His duties included
providing and supervising financial and economic studies on behalf of investor owned and
municipally owned water, wastewater, electric, natural gas distribution and transmission, oil
pipeline and telephone utilities as well as resource recovery companies.

A-2

In 1996, Mr. Walker joined Gannett Fleming Valuation and Rate Consultants, LLC. In his capacity
as Manager, Financial Studies and for the past twenty years, he has continuously studied rates of
return requirements for regulated firms. In this regard, he supervised the preparation of rate of
return studies in connection with his testimony and in the past, for other individuals. He also
assisted and/or developed dividend policy studies, nuclear prudence studies, calculated fixed
charge rates for avoided costs involving cogeneration projects, financial decision studies for capital
budgeting purposes and developed financial models for determining future capital requirements
and the effect of those requirements on investors and ratepayers, valued utility property and
common stock for acquisition and divestiture, and assisted in the private placement of fixed capital
securities for public utilities.

Head, Gannett Fleming GASB 34 Task Force responsible for developing Governmental
Accounting Standards Board (GASB) 34 services, and educating Gannett Fleming personnel and
Gannett Fleming clients on GASB 34 and how it may affect them. The GASB 34 related services
include inventory of assets, valuation of assets, salvage estimation, annual depreciation rate
determination, estimation of depreciation reserve, asset service life determination, asset condition
assessment, condition assessment documentation, maintenance estimate for asset preservation,
establishment of condition level index, geographic information system (GIS) and data
management services, management discussion and analysis (MD&A) reporting, required
supplemental information (RSI) reporting, auditor interface, and GASB 34 compliance review.

Mr. Walker was also the Publisher of C.A. Turner Utility Reports from 1988 to 1996. C.A. Turner
Utility Reports is a financial publication which provides financial data and related ratios and
forecasts covering the utility industry. From 1993 to 1994, he became a contributing author for
the Fortnightly, a utility trade journal. His column was the Financial News column and focused
mainly on the natural gas industry.

In 2004, Mr. Walker was elected to serve on the Board of Directors of SURFA. Previously, he
served as an ex-officio directors as an advisor to SURFA’s existing President. In 2000, Mr. Walker
was elected President of SURFA for the 2001-2002 term. Prior to that, he was elected to serve on
the Board of Directors of SURFA during the period 1997-1998 and 1999-2000. Currently, he also
serves on the Pennsylvania Municipal Authorities Association, Electric Deregulation Committee.

EXPERT TESTIMONY

Mr. Walker has submitted testimony or been deposed on various topics before regulatory
commissions and courts in 26 states including: Arizona, California, Colorado, Connecticut,
Delaware, Hawaii, Idaho, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan,
Missouri, New Hampshire, Nevada, New Jersey, New York, North Carolina, Oklahoma,
Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and West Virginia. His
testimonies covered various subjects including: fair rate of return, fair market value, the taking of
natural resources, benchmarking, appropriate capital structure and fixed capital cost rates,
depreciation, purchased water adjustments, synchronization of interest charges for income tax
purposes, valuation, cash working capital, lead-lag studies, financial analyses of investment
alternatives, and fair value. The following tabulation provides a listing of the electric power,

A-3

natural gas distribution, telephone, wastewater, and water service utility cases in which he has been
involved as a witness.
Client Docket No.

Alpena Power Company U-10020
Armstrong Telephone Company -
Northern Division 92-0884-T-42T
Armstrong Telephone Company -
Northern Division 95-0571-T-42T
Artesian Water Company, Inc. 90 10
Artesian Water Company, Inc. 06 158
Aqua Illinois Consolidated Water Divisions
and Consolidated Sewer Divisions 11-0436
Aqua Illinois Hawthorn Woods
Wastewater Division 07 0620/07 0621/08 0067
Aqua Illinois Hawthorn Woods Water Division 07 0620/07 0621/08 0067
Aqua Illinois Kankakee Water Division 10-0194
Aqua Illinois Kankakee Water Division 14-0419
Aqua Illinois Vermilion Division 07 0620/07 0621/08 0067
Aqua Illinois Willowbrook Wastewater Division 07 0620/07 0621/08 0067
Aqua Illinois Willowbrook
Water Division 07 0620/07 0621/08 0067
Aqua Pennsylvania, Inc A-2022-3034143
Aqua Pennsylvania Wastewater Inc A-2016-2580061
Aqua Pennsylvania Wastewater Inc A-2017-2605434
Aqua Pennsylvania Wastewater Inc A-2018-3001582
Aqua Pennsylvania Wastewater Inc A-2019-3008491
Aqua Pennsylvania Wastewater Inc A-2019-3009052
Aqua Pennsylvania Wastewater Inc A-2019-3015173
Aqua Pennsylvania Wastewater Inc A-2021-3024267
Aqua Pennsylvania Wastewater Inc A-2021-3026132
Aqua Pennsylvania Wastewater Inc A-2021-3027268
Aqua Virginia - Alpha Water Corporation Pue-2009-00059
Aqua Virginia - Blue Ridge Utility Company, Inc. Pue-2009-00059
Aqua Virginia - Caroline Utilities, Inc. (Wastewater) Pue-2009-00059
Aqua Virginia - Caroline Utilities, Inc. (Water) Pue-2009-00059
Aqua Virginia - Earlysville Forest Water Company Pue-2009-00059

A-4

Aqua Virginia - Heritage Homes of Virginia Pue-2009-00059
Aqua Virginia - Indian River Water Company Pue-2009-00059
Aqua Virginia - James River Service Corp. Pue-2009-00059
Aqua Virginia - Lake Holiday Utilities, Inc.
(Wastewater) Pue-2009-00059
Aqua Virginia - Lake Holiday Utilities, Inc. (Water) Pue-2009-00059
Aqua Virginia - Lake Monticello Services Co.
(Wastewater) Pue-2009-00059
Aqua Virginia - Lake Monticello Services Co.
(Water) Pue-2009-00059
Aqua Virginia - Lake Shawnee Pue-2009-00059
Aqua Virginia - Land'or Utility Company
(Wastewater) Pue-2009-00059
Aqua Virginia - Land'or Utility Company (Water) Pue-2009-00059
Aqua Virginia - Mountainview Water Company, Inc. Pue-2009-00059
Aqua Virginia - Powhatan Water Works, Inc. Pue-2009-00059
Aqua Virginia - Rainbow Forest Water Corporation Pue-2009-00059
Aqua Virginia - Shawnee Land Pue-2009-00059
Aqua Virginia - Sydnor Water Corporation Pue-2009-00059
Aqua Virginia - Water Distributors, Inc. Pue-2009-00059
Atlantic City Sewerage Company WR21071006
Berkshire Gas Company 18-40
Berkshire Gas Company 22-20
Borough of Brentwood A-2021-3024058
Borough of Hanover R-2009-2106908
Borough of Hanover R-2012-2311725
Borough of Hanover R-2014-242830
Borough of Hanover R-2021-3026116
Borough of Hanover P-2021-3026854
Borough of Royersford A-2020-3019634
Butler Area Sewer Authority A-2020-3019634
Chaparral City Water Company W 02113a 04 0616
California-American Water Company CIVCV156413
Connecticut-American Water Company 99-08-32
Connecticut Water Company 06 07 08
Citizens Utilities Company
Colorado Gas Division -
Citizens Utilities Company

A-5

Vermont Electric Division 5426
Citizens Utilities Home Water Company R 901664
Citizens Utilities Water Company
of Pennsylvania R 901663
City of Beaver Falls A-2022-3033138
City of Bethlehem - Bureau of Water R-00984375
City of Bethlehem - Bureau of Water R 00072492
City of Bethlehem - Bureau of Water R-2013-2390244
City of Bethlehem - Bureau of Water R-2020-3020256
City of Dubois – Bureau of Water R-2013-2350509
City of Dubois – Bureau of Water R-2016-2554150
City of Lancaster Sewer Fund R-00005109
City of Lancaster Sewer Fund R-00049862
City of Lancaster Sewer Fund R-2012-2310366
City of Lancaster Sewer Fund R-2019-3010955
City of Lancaster Sewer Fund R-2019-3010955
City of Lancaster Water Fund R-00984567
City of Lancaster Water Fund R-00016114
City of Lancaster Water Fund R 00051167
City of Lancaster Water Fund R-2010-2179103
City of Lancaster Water Fund R-2014-2418872
City of Lancaster Water Fund R-2021-3026682
City of Lancaster Water Fund P-2022-3035591
Coastland Corporation 15-cvs-216
Consumers Pennsylvania Water Company
Roaring Creek Division R-00973869
Consumers Pennsylvania Water Company
Shenango Valley Division R-00973972
Country Knolls Water Works, Inc. 90 W 0458
East Resources, Inc. - West Virginia Utility 06 0445 G 42T
Elizabethtown Water Company WR06030257
Forest Park, Inc. 19-W-0168 & 19-W-0269
Hampton Water Works Company DW 99-057
Hidden Valley Utility Services, LP R-2018-3001306
Hidden Valley Utility Services, LP R-2018-3001307
Illinois American Water Company 16-0093
Illinois American Water Company 22-0210

A-6

Indian Rock Water Company R-911971
Indiana Natural Gas Corporation 38891
Jamaica Water Supply Company -
Kane Borough Authority A-2019-3014248
Kentucky American Water Company, Inc. 2007 00134
Middlesex Water Company WR 89030266J
Millcreek Township Water Authority 55 198 Y 00021 11
Missouri-American Water Company WR 2000-281
Missouri-American Water Company SR 2000-282
Missouri-American Water Company WR-2022-0303
Mount Holly Water Company WR06030257
Nevada Power Company d/b/a NV Energy 20-06003
New Jersey American Water Company WR 89080702J
New Jersey American Water Company WR 90090950J
New Jersey American Water Company WR 03070511
New Jersey American Water Company WR-06030257
New Jersey American Water Company WR08010020
New Jersey American Water Company WR10040260
New Jersey American Water Company WR11070460
New Jersey American Water Company WR15010035
New Jersey American Water Company WR17090985
New Jersey American Water Company WR19121516
New Jersey American Water Company WR22010019
New Jersey Natural Gas Company GR19030420
New Jersey Natural Gas Company GR21030679
Newtown Artesian Water Company R-911977
Newtown Artesian Water Company R-00943157
Newtown Artesian Water Company R-2009-2117550
Newtown Artesian Water Company R-2011-2230259
Newtown Artesian Water Company R-2017-2624240
Newtown Artesian Water Company R-2019-3006904
North Maine Utilities 14-0396
Northern Indiana Fuel & Light Company 38770
Oklahoma Natural Gas Company PUD-940000477
Palmetto Utilities, Inc. 2020-281-S
Palmetto Wastewater Reclamation, LLC 2018-82-S
Pennichuck Water Works, Inc. DW 04 048

A-7

Pennichuck Water Works, Inc. DW 06 073
Pennichuck Water Works, Inc. DW 08 073
Pennsylvania Gas & Water Company (Gas) R-891261
Pennsylvania Gas & Water Co. (Water) R 901726
Pennsylvania Gas & Water Co. (Water) R-911966
Pennsylvania Gas & Water Co. (Water) R-22404
Pennsylvania Gas & Water Co. (Water) R-00922482
Pennsylvania Gas & Water Co. (Water) R-00932667
Philadelphia Gas Works R-2020-3017206
Public Service Company of North Carolina, Inc. G-5, Sub 565
Public Service Electric and Gas Company ER181010029
Public Service Electric and Gas Company GR18010030
Presque Isle Harbor Water Company U-9702
Sierra Pacific Power Company d/b/a NV Energy 19-06002
Sierra Pacific Power Company d/b/a NV Energy 22-06014
St. Louis County Water Company WR-2000-844
Suez Water Delaware, Inc. 19-0615
Suez Water Idaho, Inc. SUZ-W-20-02
Suez Water New Jersey, Inc. WR18050593
Suez Water New Jersey, Inc. WR20110729
Suez Water Owego-Nichols, Inc. 17-W-0528
Suez Water Pennsylvania, Inc. R-2018-3000834
Suez Water Pennsylvania, Inc. A-2018-3003519
Suez Water Pennsylvania, Inc. A-2018-3003517
Suez Water Rhode Island, Inc. Docket No. 4800
Suez Water Owego-Nichols, Inc. 19-W-0168 & 19-W-0269
Suez Water New York, Inc. 19-W-0168 & 19-W-0269
Suez Westchester, Inc. 19-W-0168 & 19-W-0269
Town of North East Water Fund 9190
Township of Exeter A-2018-3004933
United Water New Rochelle W-95-W-1168
United Water Toms River WR-95050219
Upper Pottsgrove Township A-2020-3021460
Valley Township (water) A-2020-3019859
Valley Township (wastewater) A-2020-3020178
Valley Water Systems, Inc. 06 10 07
Virginia American Water Company PUR-2018-00175

A-8

Virginia American Water Company PUR-2021-00255
West Virginia-American Water Company 15-0676-W-42T
West Virginia-American Water Company 15-0675-S-42T
Wilmington Suburban Water Corporation 94-149
York Water Company R-901813
York Water Company R-922168
York Water Company R-943053
York Water Company R-963619
York Water Company R-994605
York Water Company R-00016236
Young Brothers, LLC 2019-0117

Preston N. Carter, ISB No. 8462
Morgan D. Goodin, ISB No. 11184
GIVENS PURSLEY LLP
601 West Bannock Street
P.O. Box 2720
Boise, Idaho 83701-2720
Office: [phone]
Fax: [phone]
[e-mail]
[e-mail]

Attorneys for Falls Water Co., Inc.

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF FALLS WATER CO., INC. FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE
IN THE STATE OF IDAHO

Case No. FLS-W-23-01

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
EXHIBIT 6 TO ACCOMPANY THE
DIRECT TESTIMONY OF HAROLD WALKER
Falls Water, Inc.
Cost of Capital and Fair Rate of Return
At December 31, 2022
Cost Weighted
Type of Capital Ratios*Rate*Cost Rate
(%) (%)
Debt 45.00% 4.61 2.07%
Common Equity 55.00 11.00 6.05
Overall Cost of Capital 100.00%8.12%
Before Income Tax Interest Coverage (x) 4.9x
(Based on effective income tax rate of 25.58%.)
*
Case No. FLS-W-23-01
Exhibit No.
Schedule 1
H. Walker
Page 1 of 1
Captial Ratio
Actual Capitalization
Debt $1,338,264 14%
Common Equity 8,458,450 86%
Total $9,796,714 100%
Captial Ratio
Hypothetical Capitalization
Debt 4,408,521 45%
Common Equity 5,388,193 55%
Total $9,796,714 100%
Captial Cost Rate Interest
Debt Cost Rate
Debt - Actual $1,338,264 2.80% $37,458
Debt - Hypothetical 3,070,257 5.40% 165,794
Total Debt $4,408,521 4.61% $203,252
6
Capital Structure Ratios for
The Water Group Followed by Analysts
At 9/30/2022 and Estimated for 2026
Est.(1)
9/30/2022 2026
Water Group Followed by Analysts
Long-term Debt 49.8 % 48.3 %
Preferred Stock 0.1 0.0
Common Equity 50.1 51.7
Total 100.0 % 100.0 %
Notes: (1) Project by Value Line for the period 2025 to 2027.
Source of Information: Value Line Investment Survey, 1/06/23, and S&P Capital IQ
Case No. FLS-W-23-01
Exhibit No.
Schedule 2
H. Walker
Page 1 of 3
6
Capital Structure Ratios for
The Water Group Followed by Analysts
At 9/30/2022 and Estimated for 2026
Actual at 9/30/22
Long-term
Debt
Preferred
Stock
Common
Equity
Water Group Followed by Analysts
American States Water Co 49.7 0.0 50.3
American Water Works Co Inc 59.3 0.0 40.7
California Water Service Gp 45.3 0.0 54.7
Essential Utilities, Inc. 54.4 0.0 45.6
Middlesex Water Co 43.9 0.3 55.8
SJW Corp 58.2 0.0 41.8
York Water Co 37.9 0.0 62.1
Average 49.8 0.1 50.1
Estimated at 2026
Long-term
Debt
Preferred
Stock
Common
Equity
Water Group Followed by Analysts
American States Water Co 52.0 0.0 48.0
American Water Works Co Inc 60.0 0.0 40.0
California Water Service Gp 37.5 0.0 62.5
Essential Utilities, Inc. 53.0 0.0 47.0
Middlesex Water Co 42.0 0.5 57.5
SJW Corp 45.0 0.0 55.0
York Water Co NA NA NA
Average 48.3 0.0 51.7
Source of Information: Value Line Investment Survey, 1/06/23, and S&P Capital IQ
Case No. FLS-W-23-01
Exhibit No.
Schedule 2
H. Walker
Page 2 of 3
6
Investor Provided Capital and Capital Structure Ratios for
The Water Group Followed by Analysts
At 9/30/2022
Actual at 9/30/22
Invested Capital -
Permanent Qtly
Long-term
Debt
Preferred
Stock
Common
Equity
(000s of $)
Water Group Followed by Analysts
American States Water Co 1,403.833 49.7 0.0 50.3
American Water Works Co Inc 19,047.000 59.3 0.0 40.7
California Water Service Gp 2,338.066 45.3 0.0 54.7
Essential Utilities, Inc. 11,706.313 54.4 0.0 45.6
Middlesex Water Co 713.535 43.9 0.3 55.8
SJW Corp 2,507.435 58.2 0.0 41.8
York Water Co 329.581 37.9 0.0 62.1
Range
Low 329.581 37.9 0.0 40.7
High 19,047.000 59.3 0.3 62.1
Average 5,435.109 49.8 0.0 50.1
Median 2,338.066 49.7 0.0 50.3
Largest Two Companies in the Water Group (Capital > $10 Billion)
American Water Works Co Inc 19,047.000 59.3 0.0 40.7
Essential Utilities, Inc. 11,706.313 54.4 0.0 45.6
Range
Low 11,706.313 54.4 0.0 40.7
High 19,047.000 59.3 0.0 45.6
Average 15,376.657 56.9 0.0 43.2
Median 15,376.657 56.9 0.0 43.2
Samllest Two Companies in the Water Group (Capital <$1 Billion)
Middlesex Water Co 713.535 43.9 0.3 55.8
York Water Co 329.581 37.9 0.0 62.1
Range
Low 329.581 37.9 0.0 55.8
High 713.535 43.9 0.3 62.1
Average 521.558 40.9 0.2 59.0
Median 521.558 40.9 0.2 59.0
Source of Information: S&P Capital IQ
Case No. FLS-W-23-01
Exhibit No.
Schedule 2
H. Walker
Page 3 of 3
6
Falls Water Company, Inc.
Five Year Analysis
2017 - 2021 (1)
Ln #2021 2020 2019 2018 2017
Average
(Millions of $) Ann. Chg(%)
Investor Provided Capital($)
1 Permanent Capital 7.476 5.855 4.317 3.477 3.226 23.8
2 Short-Term Debt 0.019 0.015 0.037 0.037 0.020
3 Total Capital 7.495 5.870 4.354 3.514 3.246 23.7
4 Total Revenue($) 2.552 2.005 1.900 1.769 1.651 11.8
5 Construction($) 1.325 0.446 1.140 0.517 0.419 70.0
Average
Five Year Central
Average Values(9)
6 Effective Income Tax Rate(%) 31.4 17.2 (2.8) 0.0 0.0 9.2 5.7
Capitalization Ratios(%)
7 Long-Term Debt 12.2 10.3 15.8 21.9 25.9 17.2 16.6
8 Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0
9 Common Equity 87.8 89.7 84.2 78.1 74.1 82.8 83.4
Total 100.0 100.0 100.0 100.0 100.0
10 Total Debt 12.4 10.5 16.5 22.7 26.3 17.7 17.2
11 Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0
12 Common Equity 87.6 89.5 83.5 77.3 73.7 82.3 82.8
Total 100.0 100.0 100.0 100.0 100.0
Rates on Average Capital(2)(%)
13 Total Debt 3.4 3.7 3.5 3.6 6.5 4.1 3.6
14 Long-Term Debt 3.4 3.9 3.7 3.7 6.7 4.3 3.8
15 Preferred Stock NA NA NA NA NA NA NA
Coverage - Including AFC(3)(x)
16 PreTax Interest 17.0 11.6 14.1 11.9 10.0 12.9 12.5
17 PreTax Interest + Pref. Div 17.0 11.6 14.1 11.9 10.0 12.9 12.5
18 PostTax Interest + Pref. Div 12.0 9.8 14.5 11.9 10.0 11.6 11.3
Coverage - Excluding AFC(3)(x)
19 PreTax Interest 17.0 11.6 14.1 11.9 10.0 12.9 12.5
20 PreTax Interest + Pref. Div 17.0 11.6 14.1 11.9 10.0 12.9 12.5
21 PostTax Interest + Pref. Div 12.0 9.8 14.5 11.9 10.0 11.6 11.3
22 GCF / Interest Coverage(4)(x) 25.7 16.5 15.7 16.1 14.1 17.6 16.1
23 Coverage of Common Dividends(5)(x)0.0 0.0 0.0 0.0 0.0 0.0 0.0
24 Construction / Avg. Tot. Capital(%) 19.8 8.7 29.0 15.3 15.3 17.6 16.8
25 NCF / Construction(6)(%) 48.5 86.6 34.3 87.2 97.3 70.8 74.1
26 AFC / Income for Common Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0
27 GCF / Avg. Tot. Debt(7)(%) 83.0 57.7 51.6 54.6 84.4 66.3 65.1
28 GCF / Permanent Capital(8)(%) 8.6 6.6 9.1 13.0 12.6 10.0 10.1
See page 3 of this Schedule for notes.Case No. FLS-W-23-01
Exhibit No.
Schedule 3
H. Walker
Page 1 of 2
6

Falls Water Company, Inc.
Five Year Analysis
2017-2021

Notes:

(1) Based upon the achieved results for each individual company based upon the
financials as originally reported.

(2) Computed by relating total debt interest, long-term debt interest and preferred
dividend expense to average of beginning and ending balance of the
respective capital outstanding.

(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.

(4) GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.

(5) GCF (see note 4) less all preferred dividends which cover common
dividends.

(6) The percent of GCF (see note 4) less all cash dividends which cover gross
construction expenditures.

(7) GCF (see note 4) as a percentage of Permanent Capital (long-term debt,
current maturities and preferred, preference and common equity).

(8) GCF (see note 4) as a percentage of average total debt.

(9) Average of the second, third and fourth quintile values.

Source of Information: Annual Reports filed with the ID PUC

Case No. FLS-W-23-01
Exhibit No.
Schedule 3
H. Walker
Page 2 of 2
6
Water Group Followed by Analysts
Five Year Analysis
2017 - 2021 (1)
Ln #2021 2020 2019 2018 2017
Average
(Millions of $) Ann. Chg(%)
Investor Provided Capital($)
1 Permanent Capital 5,153.338 4,667.439 3,933.051 3,230.128 2,836.135 16.2
2 Short-Term Debt 120.245 278.756 162.140 171.857 188.340
3 Total Capital 5,273.584 4,946.196 4,095.190 3,401.985 3,024.475 15.1
4 Total Revenue($) 1,124.265 1,040.317 899.254 856.759 835.976 7.8
5 Construction($) 511.706 488.708 414.853 386.422 357.285 9.5
Average
Five Year Central
Average Values(9)
6 Effective Income Tax Rate(%) 7.1 8.9 13.4 14.4 32.2 15.2 13.4
Book Capitalization Ratios(%)
7 Long-Term Debt 51.9 51.5 49.3 46.2 45.6 48.9 49.3
8 Preferred Stock 0.0 0.0 0.1 0.1 0.1 0.1 0.1
9 Common Equity 48.1 48.4 50.6 53.7 54.3 51.0 50.6
Total 100.0 100.0 100.0 100.0 100.0
10 Total Debt 52.6 53.8 50.9 48.5 49.0 51.0 50.9
11 Preferred Stock 0.0 0.0 0.1 0.1 0.1 0.1 0.1
12 Common Equity 47.4 46.1 49.0 51.4 50.9 49.0 49.0
Total 100.0 100.0 100.0 100.0 100.0
Rates on Average Capital(2)(%)
13 Total Debt 3.5 3.8 4.4 5.1 4.9 4.4 4.4
14 Long-Term Debt 3.5 3.6 4.2 5.1 5.1 4.3 4.2
15 Preferred Stock 5.8 5.8 5.8 5.9 5.9 5.8 5.8
Coverage - Including AFC(3)(x)
16 PreTax Interest 4.2 4.0 3.6 3.7 4.8 4.1 4.0
17 PreTax Interest + Pref. Div 4.2 4.0 3.6 3.7 4.8 4.1 4.0
18 PostTax Interest + Pref. Div 3.9 3.7 3.3 3.3 3.6 3.6 3.6
Coverage - Excluding AFC(3)(x)
19 PreTax Interest 4.1 3.9 3.5 3.6 4.7 4.0 3.9
20 PreTax Interest + Pref. Div 4.1 3.9 3.5 3.6 4.7 4.0 3.9
21 PostTax Interest + Pref. Div 3.8 3.6 3.2 3.2 3.5 3.5 3.5
22 GCF / Interest Coverage(4)(x) 6.0 5.5 5.1 5.0 6.1 5.5 5.5
23 Coverage of Common Dividends(5)(x) 3.5 3.3 3.0 3.2 4.0 3.4 3.3
24 Construction / Avg. Tot. Capital(%) 12.0 12.9 12.8 13.6 14.4 13.1 12.9
25 NCF / Construction(6)(%) 55.5 48.9 46.7 49.2 62.0 52.5 49.2
26 AFC / Income for Common Stock 3.7 4.3 6.5 3.6 3.7 4.4 3.7
27 GCF / Avg. Tot. Debt(7)(%) 17.2 16.9 17.7 19.3 23.9 19.0 17.7
28 GCF / Permanent Capital(8)(%) 8.8 8.6 8.3 9.1 11.9 9.3 8.8
See page 2 of this Schedule for notes.
Case No. FLS-W-23-01
Exhibit No.
Schedule 4
H. Walker
Page 1 of 2
6

Water Group Followed by Analysts
Five Year Analysis
2017-2021

Notes:

(1) Average of the achieved results for each individual company based upon the
financials as originally reported.

(2) Computed by relating total debt interest, long-term debt interest and preferred
dividend expense to average of beginning and ending balance of the
respective capital outstanding.

(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.

(4) GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.

(5) GCF (see note 4) less all preferred dividends which cover common
dividends.

(6) The percent of GCF (see note 4) less all cash dividends which cover gross
construction expenditures.

(7) GCF (see note 4) as a percentage of Permanent Capital (long-term debt,
current maturities and preferred, preference and common equity).

(8) GCF (see note 4) as a percentage of average total debt.

(9) Average of the second, third and fourth quintile values.

Source of Information: Standard & Poor's and Annual Reports

Case No. FLS-W-23-01
Exhibit No.
Schedule 4
H. Walker
Page 2 of 2
6
S&P Utilities
Five Year Analysis
2017 - 2021 (1)
Ln #2021 2020 2019 2018 2017
Average
(Millions of $) Ann. Chg(%)
Investor Provided Capital($)
1 Permanent Capital 59,039.068 54,280.519 50,697.412 45,050.361 42,898.567 8.4
2 Short-Term Debt 1,815.962 1,408.252 1,621.474 2,223.236 1,461.341
3 Total Capital 60,855.030 55,688.772 52,318.886 47,273.597 44,359.908 8.3
4 Total Revenue($) 15,294.383 13,917.132 14,471.068 14,271.745 14,075.305 2.2
5 Construction($) 6,793.353 6,330.592 6,233.700 5,465.972 5,017.795 8.0
Average
Five Year Central
Average Values(9)
6 Effective Income Tax Rate(%) 8.6 2.9 8.8 29.7 20.0 14.0 8.8
Book Capitalization Ratios(%)
7 Long-Term Debt 57.4 56.9 55.7 55.8 57.2 56.6 56.9
8 Preferred Stock 0.7 0.9 0.9 0.5 0.0 0.6 0.3
9 Common Equity 41.8 42.2 43.4 43.6 42.8 42.8 42.8
Total 100.0 100.0 100.0 100.0 100.0
10 Total Debt 58.8 58.1 57.2 58.0 58.8 58.2 58.1
11 Preferred Stock 0.7 0.9 0.8 0.5 0.0 0.6 0.7
12 Common Equity 40.4 41.0 42.0 41.5 41.2 41.2 41.2
Total 100.0 100.0 100.0 100.0 100.0
Rates on Average Capital(2)(%)
13 Total Debt 3.5 3.9 4.3 4.2 4.1 4.0 4.1
14 Long-Term Debt NA NA NA NA NA NA 0.0
15 Preferred Stock 1.7 1.9 3.7 5.3 NA 3.1 1.9
Coverage - Including AFC(3)(x)
16 PreTax Interest 3.1 2.7 3.1 3.3 3.3 3.1 3.1
17 PreTax Interest + Pref. Div 3.1 2.7 3.1 3.2 3.3 3.1 3.1
18 PostTax Interest + Pref. Div 2.9 2.5 2.9 2.9 2.8 2.8 2.9
Coverage - Excluding AFC(3)(x)
19 PreTax Interest 3.0 2.7 3.1 3.2 3.2 3.0 3.1
20 PreTax Interest + Pref. Div 3.0 2.7 3.0 3.2 3.2 3.0 3.0
21 PostTax Interest + Pref. Div 2.8 2.5 2.8 2.9 2.7 2.7 2.8
22 GCF / Interest Coverage(4)(x) 5.4 4.8 5.1 5.3 5.2 5.2 5.2
23 Coverage of Common Dividends(5)(x) 3.1 3.1 4.1 3.9 3.2 3.5 3.2
24 Construction / Avg. Tot. Capital(%) 11.4 11.9 12.5 12.6 12.4 12.2 12.4
25 NCF / Construction(6)(%) 63.5 52.8 67.6 60.2 53.3 59.5 60.2
26 AFC / Income for Common Stock 2.4 13.7 5.4 3.5 4.5 5.9 4.5
27 GCF / Avg. Tot. Debt(7)(%) 14.1 14.4 16.9 17.4 17.3 16.0 16.9
28 GCF / Permanent Capital(8)(%) 8.2 8.1 9.4 10.0 9.8 9.1 9.4
See page 2 of this Schedule for notes.
Case No. FLS-W-23-01
Exhibit No.
Schedule 5
H. Walker
Page 1 of 2
6

S&P Public Utilities
Five Year Analysis
2017-2021

Notes:

(1) Market value weighted achieved results for each individual company based
upon the financials as originally reported.

(2) Computed by relating total debt interest, long-term debt interest and preferred
dividend expense to average of beginning and ending balance of the
respective capital outstanding.

(3) The coverage calculations, both including and excluding AFC, represent the
number of times available earnings cover the various fixed charges.

(4) GCF or gross cash flow (sum of net income, depreciation, amortization, net
deferred income taxes and investment tax credits, less AFC), plus interest
charges, divided by interest charges.

(5) GCF (see note 4) less all preferred dividends which cover common
dividends.

(6) The percent of GCF (see note 4) less all cash dividends which cover gross
construction expenditures.

(7) GCF (see note 4) as a percentage of Permanent Capital (long-term debt,
current maturities and preferred, preference and common equity).

(8) GCF (see note 4) as a percentage of average total debt.

(9) Average of the second, third and fourth quintile values.

Source of Information: Standard & Poor's, Moody’s and Annual Reports

Case No. FLS-W-23-01
Exhibit No.
Schedule 5
H. Walker
Page 2 of 2
6
Risk Measures for the Common Stock of
The Water Group Followed by Analysts and the S&P Utilities
Recent Recent Recent
S&P S&P Value Market Market
Issuer Credit Stock Quality Line Value Market Quartile
Rating Exchange Ranking Beta 2/28/23 Quartile Name
(Mill $)
Water Group Followed by Analysts
American States Water Co A+ NYSE High (A) 0.65 3,300.608 2 Mid-Cap
American Water Works Co Inc A NYSE High (A) 0.90 25,544.461 1 Large-Cap
California Water Service Gp A+ NYSE Above Average (A-) 0.70 3,138.126 2 Mid-Cap
Essential Utilities, Inc. A NYSE High (A) 0.95 11,220.803 2 Mid-Cap
Middlesex Water Co A NasdaqGS High (A) 0.70 1,349.353 3 Low-Cap
SJW Corp A- NYSE Average (B+) 0.80 2,357.912 3 Low-Cap
York Water Co A-NasdaqGS High (A)0.80 620.734 3 Low-Cap
Average A High (A)0.79 3,138.126 2 Mid-Cap
S&P Public Utilities
AES Corporation (The) BBB- NYSE Lower (B-) 1.05 16,504.589 1 Large-Cap
Alliant Energy Corporation A- NasdaqGS High (A) 0.80 12,875.821 2 Mid-Cap
Ameren Corporation BBB+ NYSE Above Average (A-) 0.80 21,672.399 1 Large-Cap
American Electric Power Company, Inc.A- NasdaqGS Above Average (A-) 0.75 45,204.799 1 Large-Cap
American Water Works Company, Inc. A NYSE High (A) 0.85 25,544.461 1 Large-Cap
Atmos Energy Corporation A- NYSE High (A) 0.80 16,150.164 1 Large-Cap
CenterPoint Energy, Inc. BBB+ NYSE Average (B+) 1.15 17,520.722 1 Large-Cap
CMS Energy Corporation BBB+ NYSE High (A) 0.75 17,195.671 1 Large-Cap
Consolidated Edison, Inc. A- NYSE Average (B+) 0.75 31,723.273 1 Large-Cap
Consolidated Edison, Inc. A- NYSE NA 0.75 31,723.273 1 Large-Cap
Dominion Energy, Inc. BBB+ NYSE Below Average (B) 0.80 46,453.469 1 Large-Cap
DTE Energy Company BBB+ NYSE Above Average (A-) 0.95 22,566.093 1 Large-Cap
Duke Energy Corporation BBB+ NYSE Average (B+) 0.85 72,587.768 1 Large-Cap
Edison International BBB NYSE Below Average (B) 0.95 25,329.726 1 Large-Cap
Entergy Corporation BBB+ NYSE Below Average (B) 0.90 21,746.336 1 Large-Cap
Evergy, Inc. A- NasdaqGS Above Average (A-) 0.90 13,500.898 1 Large-Cap
Eversource Energy A- NYSE High (A) 0.90 26,261.711 1 Large-Cap
Exelon Corporation BBB+ NasdaqGS Below Average (B) NMF 40,152.787 1 Large-Cap
FirstEnergy Corp. BBB- NYSE Below Average (B) 0.80 22,626.575 1 Large-Cap
NextEra Energy, Inc. A- NYSE Above Average (A-) 0.90 141,171.792 1 Large-Cap
NiSource Inc. BBB+ NYSE Below Average (B) 0.85 11,315.093 2 Mid-Cap
NRG Energy, Inc. BB NYSE Below Average (B) 1.10 7,534.297 2 Mid-Cap
Pinnacle West Capital Corporation BBB+ NYSE High (A) 0.90 8,336.170 2 Mid-Cap
PPL Corporation A- NYSE Below Average (B) 1.10 19,941.870 1 Large-Cap
Public Service Enterprise Group IncorporatedBBB+ NYSE Average (B+) 0.90 30,140.666 1 Large-Cap
Sempra Energy BBB+ NYSE Average (B+) 0.95 47,172.845 1 Large-Cap
Southern Co (The) BBB+ NYSE Average (B+) 0.90 68,666.533 1 Large-Cap
WEC Energy Group, Inc. A- NYSE High (A) 0.80 27,966.426 1 Large-Cap
Xcel Energy Inc. A-NasdaqGS High (A)0.80 35,503.694 1 Large-Cap
Average BBB+Average (B+)0.88 25,329.726 1 Large-Cap
Case No. FLS-W-23-01
Exhibit No.
Schedule 6
H. Walker
Page 1 of 3
6
Comparative Ratios
For Falls Water Company, Inc.,
For the Water Group Followed by Analysts,
S&P Utilities, and S&P 500
For the Years 2017-2021(1)
Five
Year
2021 2020 2019 2018 2017 Average
Return on Common Equity(2)
Falls Water Company, Inc.4.8 4.9 11.3 12.7 12.5 9.2
Water Group Followed by Analysts 11.3 10.5 9.5 10.1 11.4 10.6
S&P Utilities 8.7 8.1 30.0 11.5 9.9 13.6
S&P 500 20.5 10.3 15.8 15.9 14.0 15.3
Market/Book Multiple(3)
Water Group Followed by Analysts 3.6 3.3 3.4 3.1 3.1 3.3
S&P Utilities 2.6 2.3 2.6 1.8 2.2 2.3
S&P 500 4.4 3.3 3.2 3.2 3.1 3.2
Earnings/Price Ratio(4)
Water Group Followed by Analysts 3.1 3.2 2.7 3.3 3.7 3.2
S&P Utilities 3.9 3.9 5.0 5.2 4.8 4.6
S&P 500 4.7 3.2 4.9 5.1 4.5 4.5
Dividend Payout Ratio(5)
Falls Water Company, Inc.0.0 0.0 0.0 0.0 0.0 0.0
Water Group Followed by Analysts 53.7 57.4 73.2 60.5 54.7 59.9
S&P Utilities 225.8 104.9 101.3 59.9 84.1 115.2
S&P 500 30.2 60.4 42.0 40.4 43.8 43.4
Dividend Yield(6)
Water Group Followed by Analysts 1.7 1.8 1.8 2.0 1.9 1.8
S&P Utilities 3.2 3.5 3.4 3.7 3.5 3.5
S&P 500 1.4 1.9 2.1 2.0 2.0 1.9
See next page for Notes.
Case No. FLS-W-23-01
Exhibit No.
Schedule 6
H. Walker
Page 2 of 3
6

Comparative Ratios For
Falls Water Company, Inc.,
The Water Group Followed by Analysts,
The S&P Utilities, and the S&P 500
For the Years 2017-2021 (1)

Notes:

(1) The average of the achieved results for the companies in each group. The
information for the S&P Public Utilities is market weighted. The information
for the S&P 500 is based upon per share information adjusted to price index
level.

(2) Rate of Return on Average Book Common Equity - income available for
common equity divided by average beginning and ending year's balance of
book common equity.

(3) Market/Book Ratio - average of yearly high-low market price divided by the
average of beginning and ending year's book value per share.

(4) Earnings/Price Ratio - reported earnings per share yearly divided by the
average of yearly high-low market price.

(5) Dividend Payout Ratio is computed by dividing the yearly reported dividends
paid by the yearly income available for common equity.

(6) Dividend Yield - yearly dividend per share divided by the average yearly
high-low market price.

Source of Information: Standard & Poor's and Annual Reports

Case No. FLS-W-23-01
Exhibit No.
Schedule 6
H. Walker
Page 3 of 3
6
Capital Intensity and Capital Recovery
Falls Water Company, Inc.
The Water Group Followed by Analysts, and S&P Utilities
For the Year 2021
Rate of Capital
Capital Capital Recovery
Intensity Recovery Years
Falls Water Company, Inc. $3.91 2.80% 35.7
Water Group Followed by Analysts $6.60 2.19% 46.6
S&P Utilities $4.78 3.79% 32.1
Case No. FLS-W-23-01
Exhibit No.
Schedule 7
H. Walker
Page 1 of 1
6
Relative Size of
Falls Water Company, Inc.
Versus the Water Group Followed by Analysts
For the Year 2021
Water Group
Followed by
Analysts
Water Group Vs.
Falls Water Followed by Falls Water
Company, Inc.Analysts Company, Inc.
Total Capitalization (000's) $7,476 $5,153,000 689.3 x
Total Operating Revenues (000's) $2,552 $1,124,000 440.4 x
Number of Customers 6,940 968,228 139.5 x
Case No. FLS-W-23-01
Exhibit No.
Schedule 8
H. Walker
Page 1 of 1
6
Institutional Holdings, Insider Holdings and Percentage of Shares Traded Annually for
The Water Group Followed by Analysts, and the S&P Utilities
Water Group
Followed by S&P
Analysts Public Utilities
Percentage of common shares held by insiders (1) 2.5% 0.3%
Percentage of common shares held by institutions (2) 71% 80%
Percentage of Common Shares Traded in 2020 121% 179%
Percentage of Common Shares Traded in 2021 112% 149%
Average Number of Months For All Common Shares to Turnover (3) 11.4 7.7
Notes: (1) An insider is a director or an officer who has a policy-making role or a person who is directly or indirectly the
beneficial owner of more than 10% of a certain company’s stock. An insider may be either an individual or a
corporation. Insiders are required to disclose their purchase/sale transactions to the SEC in which a change in
beneficial ownership has occurred. The filings must be submitted before the end of the second business day
following the day on which the transaction had been executed.
(2) Institutional holders are those investment managers having a fair market value of equity assets under
management of $100 million or more. Certain banks, insurance companies, investment advisers, investment
companies, foundations and pension funds are included in this category.
(3) Based on average turnover (shares traded) over the past five years.
Case No. FLS-W-23-01
Exhibit No.
Schedule 9
H. Walker
Page 1 of 1
6
Bond and Credit Ratings for
Falls Water Company, Inc., NW Natural Water Company, LLC and
The Water Group Followed by Analysts
S&P
Credit
Rating
Falls Water Company, Inc. NA
NW Natural Water Company, LLC NA
Water Group Followed by Analysts
American States Water Co A+
American Water Works Co Inc A
California Water Service Gp * A+
Essential Utilities, Inc. A
Middlesex Water Co A
SJW Corp A-
York Water Co A-
Average A
* - The A+ bond rating is that for California Water Service, Inc.
Case No. FLS-W-23-01
Exhibit No.
Schedule 10
H. Walker
Page 1 of 4
6
Comparison of Credit Measures of Financial Risk
Falls Water Company, Inc. and
For the Water Group Followed by Analysts(1)
Spot in Credit Measures of Trend in Credit Measures of
Financial Risk (For the Year 2021) Financial Risk (Five-Year Average 2017-21)
Water Group Water Group
Credit Subject Followed by Credit Subject Followed by
Implication Company Analysts Implication Company Analysts
1. Base Credit Metrics
2. PreTax Interest Coverage(2)(x) Higher 17.0x 4.1x Higher 12.9x 4.0x
3. Total Debt/Total Capital(%) Higher 12.4% 52.6% Higher 17.7% 51.0%
4. GCF / Interest Coverage(3)(x) Higher 25.7x 6.0x Higher 17.6x 5.5x
5. GCF / Average Total Debt(4)(%) Higher 83.0% 17.2% Higher 66.3% 19.0%
6. NCF / Construction(5)(%) Lower 48.5% 55.5% Higher 70.8% 52.5%
7. Construction / Average Total Capital(6)(%) Lower 19.8% 11.6% Lower 17.6% 12.5%
8. Standard & Poor's Credit Metrics
9. Funds from Operation / Average Total Debt(7)(%) Higher 83.0% 15.6% Higher 66.3% 18.5%
10. Average Total Debt / EBITDA(8)(x) Higher 1.1x 5.4x Higher 1.3x 4.5x
11. FFO / Interest Coverage(9)(x) Higher 25.7x 5.5x Higher 17.6x 5.4x
12. EBITDA / Interest(10)(x) Higher 27.7x 5.7x Higher 19.5x 5.6x
13. CFO / Average Total Debt(11)(%) Higher 93.2% 17.2% Higher 77.2% 19.0%
14. FOCF / Average Total Debt(12)(%) Lower -77.8% -5.3% Lower -30.3% -6.2%
15. DCF / Average Total Debt(13)(%) Lower -77.8% -10.5% Lower -30.3% -12.3%
16. Moody's Credit Metrics
17. Cash Flow Interest Coverage(3) (x) Higher 25.7x 6.0x Higher 17.6x 5.5x
18. Cash Flow / Average Total Debt(4)(%) Higher 83.0% 17.2% Higher 66.3% 19.0%
19. Retained Cash Flow / Average Total Debt(14)(%) Higher 83.0% 11.9% Higher 66.4% 13.0%
20. Average Total Debt / Average Adjusted Total Capital(15)(%) Higher 11.6% 47.6% Higher 17.2% 44.7%
21. Capital Credit Metrics
22. Standard & Poor's Credit Metrics - Adjusted to Total Capital
23. Funds from Operation / Average Total Capital(16)(%) Higher 9.6% 8.1% Higher 11.1% 9.1%
24. Average Total Capital / EBITDA(17)(x) Higher 9.3x 10.1x Higher 8.1x 8.8x
25. CFO / Average Total Capital(18)(%) Higher 10.8% 9.0% Higher 12.8% 9.4%
26. FOCF / Average Total Capital(19)(%) Lower -9.0% -2.6% Lower -4.8% -3.1%
27. DCF / Average Total Capital(20)(%) Lower -9.0% -5.3% Higher -4.8% -6.0%
28. Moody's Credit Metrics - Adjusted to Total Capital
29. Cash Flow / Average Total Capital(21)(%) Higher 9.6% 9.0% Higher 11.1% 9.4%
30. Retained Cash Flow / Average Total Capital(22)(%) Higher 9.6% 6.3% Higher 11.1% 6.5%
See the next page for notes.
Case No. FLS-W-23-01
Exhibit No.
Schedule 10
H. Walker
Page 2 of 4
6

Comparison of Credit Market Financial Risk Metrics
For Falls Water Company, Inc. and
The Water Group Followed by Analysts
2017 - 2021
Notes:
(1) Average of the achieved results for each individual company based upon the
financials as originally reported.
(2) Represents the number of times available pretax earnings (“EBIT”), excluding AFC,
cover all interest charges.
(3) GCF or gross cash flow (sum of net income, depreciation, amortization, net deferred
income taxes and investment tax credits, less AFC), plus interest charges, divided by
interest charges.
(4) GCF (see note 3) as a percentage of average total debt.
(5) The percent of GCF (see note 3) less all cash dividends which cover gross
construction expenditures.
(6) Construction expenditures as a percentage of average total capital.
(7) Funds from operations (“FFO”), revenue minus operating expenses, plus
depreciation and amortization expenses (“EBITDA”) less net interest expense less
current tax expense, as a percentage of average total debt.
(8) Average total debt divided by EBITDA (see note 7).
(9) FFO (see note 7) plus interest charges, divided by interest charges.
(10) EBITDA (see note 7) divided by interest charges.
(11) Cash flow from operations (“CFO”), GCF (see note 3) plus changes in operating
assets and liabilities (working capital), as a percentage of average total debt.
(12) Free operating cash flow (“FOCF”), CFO (see note 11) minus capital expenditures,
as a percentage of average total debt.
(13) Discretionary cash flow (“DCF”), FOCF (see note 12) minus cash dividends as a
percentage of average total debt.
(14) The percent of GCF (see note 3) less all cash dividends as a percentage of average
total debt.
(15) Average total debt divided by average of total capital plus deferred taxes (balance
sheet).
(16) Funds from operations (“FFO”), revenue minus operating expenses, plus
depreciation and amortization expenses (“EBITDA”) less net interest expense less
current tax expense, as a percentage of average total capital.
(17) Average total capital divided by EBITDA (see note 7).
(18) Cash flow from operations (“CFO”), GCF (see note 3) plus changes in operating
assets and liabilities (working capital), as a percentage of average total capital.
(19) Free operating cash flow (“FOCF”), CFO (see note 11) minus capital expenditures,
as a percentage of average total capital.
(20) Discretionary cash flow (“DCF”), FOCF (see note 12) minus cash dividends as a
percentage of average total capital.
(21) GCF (see note 3) as a percentage of average total capital.
(22) The percent of GCF (see note 3) less all cash dividends as a percentage of average
total capital.

Source of Information: Standard & Poor's, Moody’s and Annual Reports
Case No. FLS-W-23-01
Exhibit No.
Schedule 10
H. Walker
Page 3 of 4

6
Distribution of Bond and Credit Ratings for
All Companies Contained in S&P's Capital IQ Database (1)
Number of
Companies Range of Reported Permanent
In Each S&P Bond and Credit Ratings Capital By Groupings (Million $)
Grouping Average Median Maximum Minimum Smallest Average Largest
100 B+ B AA- CCC- 78.800 544.473 825.300
100 B+ B+ AA- CCC+ 828.900 1,083.605 1,372.900
100 BB BB- AA- CCC+ 1,373.800 1,626.344 1,863.900
100 BB BB- A+ CCC+ 1,874.200 2,209.218 2,529.800
100 BB+ BB AA+ CCC+ 2,530.100 2,924.806 3,367.400
100 BB+ BB+ AA- CC 3,371.400 3,793.940 4,230.600
100 BB+ BB+ AA CCC+ 4,232.100 4,783.777 5,428.900
100 BBB- BBB- A+ B- 5,434.200 6,113.916 6,972.000
100 BBB- BBB- AA+ CCC+ 6,982.400 7,883.185 8,827.900
100 BBB BBB AA- CCC+ 8,827.900 10,215.632 11,612.000
100 BBB BBB AA- B- 11,643.000 13,737.919 16,636.600
100 BBB BBB+ AA- CCC- 16,681.000 19,887.954 24,031.000
100 BBB+ BBB+ AA+ B 24,061.000 30,156.292 38,223.000
100 BBB+ A- AA+ B- 38,230.000 59,444.273 95,309.000
40 A A- AAA BB- 98,614.000 170,069.678 375,831.000
Total 1,440
Number of
Companies Range of Reported Permanent
In Each Capital By Groupings (Million $) Distribution of S&P Bond and Credit Ratings By Size Grouping
Grouping Smallest Average Largest AAA AA A BBB BB B CCC CC
100 78.800 544.473 825.300 0% 1% 6% 3% 8% 74% 8% 0%
100 828.900 1,083.605 1,372.900 0% 1% 4% 3% 28% 60% 4% 0%
100 1,373.800 1,626.344 1,863.900 0% 2% 7% 17% 34% 36% 4% 0%
100 1,874.200 2,209.218 2,529.800 0% 0% 5% 22% 44% 28% 1% 0%
100 2,530.100 2,924.806 3,367.400 0% 4% 7% 26% 36% 25% 2% 0%
100 3,371.400 3,793.940 4,230.600 0% 1% 13% 30% 39% 13% 3% 1%
100 4,232.100 4,783.777 5,428.900 0% 1% 12% 35% 30% 21% 1% 0%
100 5,434.200 6,113.916 6,972.000 0% 0% 17% 42% 32% 9% 0% 0%
100 6,982.400 7,883.185 8,827.900 0% 2% 11% 47% 29% 10% 1% 0%
100 8,827.900 10,215.632 11,612.000 0% 3% 24% 46% 19% 7% 1% 0%
100 11,643.000 13,737.919 16,636.600 0% 3% 21% 53% 18% 5% 0% 0%
100 16,681.000 19,887.954 24,031.000 0% 2% 32% 47% 12% 4% 3% 0%
100 24,061.000 30,156.292 38,223.000 0% 3% 37% 49% 7% 4% 0% 0%
100 38,230.000 59,444.273 95,309.000 0% 14% 37% 37% 7% 5% 0% 0%
40 98,614.000 170,069.678 375,831.000 5% 20% 38% 28% 10% 0% 0% 0%
1,440
Note: (1) Includes all non-financial public and private companies located in the US that are contained in S&P's Capital IQ Database that have a S&P bond or credit ratings of CC or higher
and reported permanent capital for the year 2021 (as of 8/12/22). Companies were sorted based on amount of reported permanent capital and then separated into groups of 100
companies from smallest to largest.
Case No. FLS-W-23-01
Exhibit No.
Schedule 10
H. Walker
Page 4 of 4
6
Interest Rate Trends for
Investor-Owned Public Utility Bonds
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
Years Aaa Rated Aa Rated A Rated Baa Rated
2017 NA 3.82 4.00 4.38
2018 NA 4.09 4.25 4.67
2019 NA 3.61 3.77 4.19
2020 NA 2.79 3.02 3.39
2021 NA 2.97 3.11 3.36
Average NA 3.46 3.63 4.00
Jan 2022 NA 3.19 3.33 3.57
Feb 2022 NA 3.56 3.68 3.95
Mar 2022 NA 3.81 3.98 4.28
Apr 2022 NA 4.10 4.32 4.61
May 2022 NA 4.55 4.75 5.07
Jun 2022 NA 4.65 4.86 5.22
Jul 2022 NA 4.57 4.78 5.15
Aug 2022 NA 4.54 4.76 5.09
Sep 2022 NA 5.08 5.28 5.61
Oct 2022 NA 5.68 5.88 6.18
Nov 2022 NA 5.54 5.75 6.05
Dec 2022 NA 5.06 5.28 5.57
Avg 2022 NA 4.53 4.72 5.03
Jan 2023 NA 4.98 5.20 5.49
Feb 2023 NA 5.12 5.29 5.54
Source of Information: MERGENT BOND RECORD
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 1 of 7
6
Credit Risk Spreads of
Investor-Owned Public Utility Bonds
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
Aa A Baa Baa
Over Over Over Over
Years Aaa Aa A Aaa
2017 NA 0.18 0.38 NA
2018 NA 0.16 0.42 NA
2019 NA 0.16 0.42 NA
2020 NA 0.23 0.37 NA
2021 NA 0.14 0.25 NA
Average NA 0.17 0.37 NA
Jan 2022 NA 0.14 0.24 NA
Feb 2022 NA 0.12 0.27 NA
Mar 2022 NA 0.17 0.30 NA
Apr 2022 NA 0.22 0.29 NA
May 2022 NA 0.20 0.32 NA
Jun 2022 NA 0.21 0.36 NA
Jul 2022 NA 0.21 0.37 NA
Aug 2022 NA 0.22 0.33 NA
Sep 2022 NA 0.20 0.33 NA
Oct 2022 NA 0.20 0.30 NA
Nov 2022 NA 0.21 0.30 NA
Dec 2022 NA 0.22 0.29 NA
Avg 2022 NA 0.19 0.31 NA
Jan 2023 NA 0.22 0.29 NA
Feb 2023 NA 0.17 0.25 NA
Source of Information: MERGENT BOND RECORD
Case No. FLS-W-23-01 Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 2 of 7
6
Interest Rate Trends
Of Long-Term Treasury Constant
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
10-Year 20-Year 30-Year Long-term
Years T-Bond T-Bond T-Bond T-Bond Yield
2017 2.33 2.65 2.90 2.63
2018 2.91 3.02 3.11 3.01
2019 2.14 2.40 2.58 2.37
2020 0.89 1.35 1.56 1.27
2021 1.44 1.98 2.05 1.98
Average 1.94 2.28 2.44 2.25
Jan 2022 1.76 2.15 2.10 2.13
Feb 2022 1.93 2.31 2.25 2.28
Mar 2022 2.13 2.51 2.41 2.46
Apr 2022 2.75 2.99 2.81 2.90
May 2022 2.90 3.26 3.07 3.17
Jun 2022 3.14 3.48 3.25 3.37
Jul 2022 2.90 3.35 3.10 3.23
Aug 2022 2.90 3.35 3.13 3.24
Sep 2022 3.52 3.82 3.56 3.69
Oct 2022 3.98 4.28 4.04 4.16
Nov 2022 3.89 4.22 4.00 4.11
Dec 2022 3.62 3.87 3.66 3.77
Avg 2022 2.95 3.30 3.12 3.21
Jan 2023 3.53 3.81 3.66 3.74
Feb 2023 3.75 3.95 3.80 3.88
Source of Information: Federal Reserve Bulletin
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 3 of 7
6
Spread in Average Long-Term Bond Yields
Versus Public Utility Bond Yields
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
Spread in Average Long-Term T-Bond Yields Versus Public Utility Bonds:
Years Aaa Rated Aa Rated A Rated Baa Rated
2017 NA 1.19 1.37 1.75
2018 NA 1.08 1.24 1.66
2019 NA 1.24 1.40 1.82
2020 NA 1.52 1.75 2.12
2021 NA 0.99 1.13 1.38
Average NA 1.20 1.38 1.75
Jan 2022 NA 1.07 1.21 1.45
Feb 2022 NA 1.28 1.40 1.67
Mar 2022 NA 1.35 1.52 1.82
Apr 2022 NA 1.20 1.42 1.71
May 2022 NA 1.39 1.59 1.91
Jun 2022 NA 1.29 1.50 1.86
Jul 2022 NA 1.35 1.56 1.93
Aug 2022 NA 1.30 1.52 1.85
Sep 2022 NA 1.39 1.59 1.92
Oct 2022 NA 1.52 1.72 2.02
Nov 2022 NA 1.43 1.64 1.94
Dec 2022 NA 1.30 1.52 1.81
Avg 2022 NA 1.32 1.52 1.82
Jan 2023 NA 1.25 1.47 1.76
Feb 2023 NA 1.25 1.42 1.67
Comment: Derived from the information on pages 1 and 3 of this Schedule.
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 4 of 7
6
Interest Rate Trends for
Federal Funds Rate and Prime Rate
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
Fed
Funds Prime
Years Rate Rate
2017 1.00 4.10
2018 1.83 4.90
2019 2.16 5.28
2020 0.38 3.54
2021 0.08 3.25
Average 1.09 4.21
Jan 2022 0.08 3.25
Feb 2022 0.08 3.25
Mar 2022 0.20 3.37
Apr 2022 0.33 3.50
May 2022 0.77 3.94
Jun 2022 1.21 4.38
Jul 2022 1.68 4.85
Aug 2022 2.33 5.50
Sep 2022 2.56 5.73
Oct 2022 3.08 6.25
Nov 2022 3.78 6.95
Dec 2022 4.10 7.27
Avg 2022 1.68 4.85
Jan 2023 4.33 7.50
Feb 2023 4.57 7.74
Source of Information: Federal Reserve Bulletin
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 5 of 7
6
Blue Chip Financial Forecasts - March 1, 2023
First Second Third Fourth First Five
Quarter Quarter Quarter Quarter Quarter Quarter
2023 2023 2023 2023 2024 Average
Prime Rate
Top Ten Average 7.9 % 8.3 % 8.5 % 8.4 % 8.3 % 8.3 %
Group Average 7.8 8.2 8.2 8.1 7.8 8.0
Bottom Ten Average 7.7 8.0 7.9 7.5 6.9 7.6
Three-Month Treasury Bills
Top Ten Average 5.0 5.3 5.4 5.3 5.2 5.2
Group Average 4.8 5.1 5.1 4.9 4.6 4.9
Bottom Ten Average 4.7 4.9 4.7 4.3 3.8 4.5
Ten Year Treasury Notes
Top Ten Average 3.9 4.2 4.4 4.4 4.3 4.2
Group Average 3.8 3.8 3.8 3.7 3.6 3.7
Bottom Ten Average 3.6 3.5 3.2 2.9 2.9 3.2
Thirty Year Treasury Bonds
Top Ten Average 4.1 4.3 4.5 4.5 4.5 4.4
Group Average 3.9 4.0 3.9 3.9 3.8 3.9
Bottom Ten Average 3.7 3.7 3.4 3.3 3.2 3.5
Aaa-Rated Corporate Bonds
Top Ten Average 5.2 5.5 5.5 5.5 5.6 5.4
Group Average 4.8 5.1 5.1 5.0 4.9 5.0
Bottom Ten Average 4.5 4.7 4.6 4.4 4.2 4.5
Baa-Rated Corporate Bonds
Top Ten Average 5.1 5.1 5.1 5.1 5.1 5.1
Group Average 5.8 6.0 6.1 6.0 5.8 5.9
Bottom Ten Average 4.6 4.6 4.6 4.6 4.6 4.6
Derived Public Utility Bond Yield Forecasts Based on Aaa and Baa Corporate Yields
Aa-Rated Public Utility Bonds
Top Ten Average 5.1 5.2 5.3 5.3 5.3 5.2
Group Average 5.3 5.5 5.6 5.5 5.3 5.4
Bottom Ten Average 4.5 4.6 4.6 4.5 4.4 4.5
A-Rated Public Utility Bonds
Top Ten Average 5.3 5.4 5.5 5.5 5.5 5.4
Group Average 5.5 5.7 5.7 5.7 5.5 5.6
Bottom Ten Average 4.7 4.8 4.8 4.7 4.6 4.7
Baa-Rated Public Utility Bonds
Top Ten Average 5.6 5.7 5.8 5.8 5.8 5.7
Group Average 5.8 6.0 6.0 6.0 5.8 5.9
Bottom Ten Average 5.0 5.1 5.1 5.0 4.9 5.0
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 6 of 7
6
Settled Yields on Treasury Bond
Future Contracts
Traded on the Chicago Board of Trade
at the Close of January 00, 1900
Treasury
Bonds
Delivery Date (CBOT)
Mar-23 3.739 %
Jun-23 3.731
Sep-23 3.731
Average 3.734 %
Source of Information: Chicago Board of Trade
Case No. FLS-W-23-01
Exhibit No.
Schedule 11
H. Walker
Page 7 of 7
6
Market Value Discounted Cash Flow for
The Water Group Followed by Analysts
Water Group
Followed by
Analysts
Dividend Yield(1) 1.8 %
Growth in Dividends(2) 0.1
Adjusted Dividend Yield 1.9
Stock Appreciation(3) 7.0
Market Value DCF Cost Rate 8.9 %
Notes: (1) Developed on page 2 of this Schedule.
(2) Equal to one-half the assumed growth in value.
(3) As explained in the direct testimony, the growth in value
is supported by the information shown on Schedules 13 and 14.
Case No. FLS-W-23-01
Exhibit No.
Schedule 12
H. Walker
Page 1 of 2
6
Market Value Dividend Yield for
the Water Group Followed by Analysts
For the Twelve Months Ended February 2023
Recent Longer Term
Dividend Dividend Average
Yields(1)Yields(2)Yields
Water Group Followed by Analysts
American States Water Co 1.7 % 1.8 %
American Water Works Co Inc 1.8 1.7
California Water Service Gp 1.7 1.7
Essential Utilities, Inc.2.5 2.4
Middlesex Water Co 1.5 1.4
SJW Corp 1.9 2.1
York Water Co 1.8 1.8
Average 1.8 %1.8 %1.8 %
Notes: (1) Average of the high and the low dividend yield for the month of
February 2023.
(2) Average of the high and the low dividend yield for each of the
twelve months ended February 2023.
Source of Information: S&P Capital IQ
Case No. FLS-W-23-01
Exhibit No.
Schedule 12
H. Walker
Page 2 of 2
6
Development of Long Term Projected Growth in Value
Based Upon Growth Over The Next Five Years
For the Water Group Followed by Analysts
A B C D E F G H
Analysts' Projected Growth in EPS Other Projected Growth
First Value Value Value
Call S&P ZACK's Line Line Line Average Average
EPS EPS EPS EPS DPS Cash Flow EPS All
Growth Growth Growth Growth Growth Growth Growth Growth
Water Group Followed by Analysts
American States Water Co 4.4 % NA % NA % 5.5 % 9.0 % 5.5 % 5.0 % 6.1 %
American Water Works Co Inc 8.3 7.7 8.1 3.0 8.5 3.5 6.8 6.5
California Water Service Gp 11.7 NA NA 6.5 6.5 2.0 9.1 6.7
Essential Utilities, Inc. 6.6 6.1 6.0 10.0 8.0 10.0 7.2 7.8
Middlesex Water Co 2.7 NA NA 6.0 6.0 4.5 4.4 4.8
SJW Corp 9.8 14.0 NA 12.0 5.5 1.5 11.9 8.6
York Water Co 4.9 NA NA NA NA NA 4.9 4.9
Average 6.9 % 9.3 % 7.1 % 7.2 % 7.3 % 4.5 % 7.0 % 6.5 %
Historical 5-Year Growth in EPS
First Value
Call ZACK's Line Average
EPS EPS EPS EPS
Growth Growth Growth Growth
Water Group Followed by Analysts
American States Water Co 8.5 % 6.2 % 8.5 % 7.7 %
American Water Works Co Inc 5.6 8.0 13.5 9.0
California Water Service Gp -9.5 7.1 11.0 2.9
Essential Utilities, Inc. 1.6 5.3 1.0 2.6
Middlesex Water Co 6.6 8.7 11.0 8.8
SJW Corp 6.7 0.2 -6.5 0.1
York Water Co 6.7 7.1 6.0 6.6
Average 3.7 % 6.1 % 6.4 % 5.4 %
Source of Information: Value Line Investment Survey, 1/6/23; S&P Capital IQ 3/11/23;
FirstCall 3/11/23; and
Zacks Investment Research 3/11/23
Case No. FLS-W-23-01
Exhibit No.
Schedule 13
H. Walker
Page 1 of 1
6
Recent Payout Ratios,
ROEs, P-E Multiples, Market/Book Multiples, and Market Value
For the Water Group Followed by Analysts
Current
Current Return Market to Current
Dividend on PE Book Market
Payout Equity Mult Mult Value
(Mill $)
Water Group Followed by Analysts
American States Water Co 69 11.5 41.3 4.68 3,300.608
American Water Works Co Inc 35 18.0 19.4 3.29 25,544.461
California Water Service Gp 66 6.7 38.5 2.46 3,138.126
Essential Utilities, Inc. 61 8.8 24.0 2.10 11,220.803
Middlesex Water Co 48 11.1 31.7 3.39 1,349.353
SJW Corp 73 5.7 39.5 2.21 2,357.912
York Water Co 57 10.5 32.0 3.03 620.734
Average 59 10.3 32.4 3.02 6,790.285
Source of Information: S&P Capital IQ, spot date of 2/28/2023
Case No. FLS-W-23-01
Exhibit No.
Schedule 14
H. Walker
Page 1 of 2
6
Value Line Projected ROE Based on Year-End and Average,
Dividend Payout Ratio, and Common Equity Ratio for
The Water Group Followed by Analysts for 2025 - 2027
Value Line
Projected Value Line Projected
Value Line Average Projected Common
Projected ROE Dividend Equity
ROE (1) Payout Ratio
Water Group Followed by Analysts
American States Water Co 13.5 % 13.8 % 66.2 % 48.0 %
American Water Works Co Inc 10.5 10.7 61.7 40.0
California Water Service Gp 9.5 9.6 49.0 62.5
Essential Utilities, Inc.8.5 8.8 68.9 47.0
Middlesex Water Co 13.0 13.1 50.0 57.5
SJW Corp 8.0 8.1 54.2 55.0
York Water Co NA NA NA NA
Average 10.5 % 10.7 % 58.3 % 51.7 %
Notes: (1) Value Line ROE, which is a year-end ROE, is converted to average ROE by the factor
derived from the following formula: 2((1+g)/(2+g)), where "g" is the rate of growth in
common equity.
Source of Information: Value Line Investment Survey, 1/6/23
Case No. FLS-W-23-01
Exhibit No.
Schedule 14
H. Walker
Page 2 of 2
6
Illustration of the
Effect of Market-To-Book Ratio on Market Return
Ln #Situation 1 Situation 2 Situation 3
1 M/B Ratio 50% 100% 200%
2 Market Purchase Price $25.00 $50.00 $100.00
3 Book Value $50.00 $50.00 $50.00
4 DCF Return 10.0% 10.0% 10.0%
5 DCF Dollar Return $5.00 $5.00 $5.00
6 Dividend Yield 5.0% 5.0% 5.0%
7 DPS $1.25 $2.50 $5.00
8 Dollar Growth in Value $3.75 $2.50 $0.00
9 Market Sale Price $28.75 $52.50 $100.00
10 Total Market Return 20.0% 10.0% 5.0%
"The simple numerical illustration....demonstrates the impact of market-to-book
ratios on the DCF market return....The DCF cost rate of 10%, made up of a 5%
dividend yield and a 5% growth rate, is applied to the book value rate base of $50
to produce $5.00 of earnings. Of the $5.00 of earnings, the full $5.00 are required
for dividends to produce a dividend yield of 5.0% on a stock price of $100.00, and
no dollars are available for growth. The investor's return is therefore only 5%
versus his required return of 10%. A DCF cost rate of 10%, which implies $10.00
of earnings, translates to only $5.00 of earnings on book value, or a 5%
return.....Therefore, the DCF cost rate understates the investor's required return
when stock prices are well above book, as is the case presently."
The above illustration is taken from Roger A Morin, Regulatory Finance -
Utilities' Cost of Capital, Public Utility Reports, Inc., 1994, pp. 236-237.
Case No. FLS-W-23-01
Exhibit No.
Schedule 15
H. Walker
Page 1 of 1
6
Differences in Book Value and Market Values for the
Water Group Followed by Analysts
Recent Recent Difference in
Book Value Market Value Average Average Market Value
Capitalization Capitalization Book Value Market Value and
Ratios Ratios of Common of Common Book Value
(9/30/22) (2/28/23) Equity Equity Common Equity
(Millions) (Millions)
Water Group Followed by Analysts:
Long Term Debt 49.8 % 26.2 %
Preferred Stock 0.1 0.0
Common Equity 50.1 73.8 $2,390.295 $6,790.285 $4,399.991
Total 100.0 % 100.0 %
Differnce in Common Equity Ratio 23.7%
Case No. FLS-W-23-01
Exhibit No.
Schedule 16
H. Walker
Page 1 of 3
6
Water Group Followed by Analysts
Financial Risk Adjustment Using the "Hamada Models"
Original Hamada Formulas Harris-Pringle Formulas
Market Value @ (2/28/23)Market Value @ (2/28/23)
Line Line
No.DEBT PREF CE TAX BETA No.DEBT PREF CE TAX BETA DEBT BETA
1. (D) (P) (E) (t) (Bl) 1. (D) (P) (E) (t) (Bl) (Bd)
2. 26.2% 0.0% 73.8% 27.87% 0.66 2. 26.2% 0.0% 73.8% 27.87% 0.66 0.34
3. Bl = Bu (1+(1-t)D/E+P/E) 3. Bl = Bu + (Bu - Bd)(D/E)
4. 1-t = 0.7213 4. Bl = 0.66
5. D/E = 0.3550 5. Bd = 0.34
6. P/E = 0.0000 6. D/E = 0.3550
7. Bl = Bu * 1.2561 7. Bl + Bd(D/E) = 0.7807
8. Bu = 0.53 8. 1 + D/E = 1.3550
9. 9. Bu = 0.58
Book Value @ (9/30/22)Book Value @ (9/30/22)
BETA BETA
10. DEBT PREF CE TAX UNLEVERED 10. DEBT PREF CE UNLEVERED
11. (D) (P) (E) (t) (Bu) 11. (D) (P) (E) (Bu)
12. 49.80% 0.10% 50.10% 27.870% 0.53 12. 49.80% 0.10% 50.10% 0.58
13. Bl = Bu (1+(1-t)D/E+P/E) 13. Bl = Bu + (Bu - Bd)(D/E)
14. 1-t = 0.7213 14. Bu = 0.58
15. D/E = 0.9940 15. Bd = 0.34
16. P/E = 0.0020 16. Bu - Bd = 0.2362
17. Bl = Bu * 1.7190 17. D/E = 0.9940
18. Bl = 0.90 18. Bl = 0.81
Cost Adjustment Based on Original Hamada Cost Adjustment Based on Harris-Pringle
19. Book Beta (Raw) = 0.90 19. Book Beta (Raw) = 0.81
20. Market Beta (Raw) = 0.66 20. Market Beta (Raw) = 0.66
21. Beta difference = 0.24 21. Beta difference = 0.15
22. Risk premium = 5.0 22. Risk premium = 5.0
23. Risk adjustment = 1.20 23. Risk adjustment = 0.75
Case No. FLS-W-23-01
Exhibit No.
Schedule 16
H. Walker
Page 2 of 3
6
Default Spread for
Aaa Rated Corporate Bonds and A Rated Investor-Owned Public Utility Bonds
Yearly for 2017-2021, Monthly for the Years 2022 and 2023
A
Corporate Public Utility Over
Years Aaa Rated A Rated Aaa
2017 3.74 4.00 0.25
2018 3.93 4.25 0.32
2019 3.39 3.77 0.38
2020 2.50 3.02 0.52
2021 2.71 3.11 0.40
Average 3.25 3.63 0.37
Jan 2022 3.07 3.33 0.26
Feb 2022 3.25 3.68 0.43
Mar 2022 3.43 3.98 0.55
Apr 2022 3.76 4.32 0.56
May 2022 4.13 4.75 0.62
Jun 2022 4.24 4.86 0.62
Jul 2022 4.06 4.78 0.72
Aug 2022 4.07 4.76 0.69
Sep 2022 4.59 5.28 0.69
Oct 2022 5.10 5.88 0.78
Nov 2022 4.90 5.75 0.85
Dec 2022 4.43 5.28 0.85
Avg 2022 4.09 4.72 0.63
Jan 2023 4.40 5.20 0.80
Feb 2023 4.56 5.29 0.73
Source of Information: MERGENT BOND RECORD
Case No. FLS-W-23-01
Exhibit No.
Schedule 16
H. Walker
Page 3 of 3
6
Market Value CAPM for
The Water Group Followed by Analysts
Water Group
Followed by
Analysts
Estimation Based Upon Historical Information
Market Premium(1) 7.5 %
x Beta(2) 0.79
Risk Adjusted Market Premium 5.9
Size Adjustment Premium(2) 1.8
Plus Risk Free Rate(1) 3.8
Market Value CAPM Cost Rate 11.5 %
Estimation Based Upon Projected Information
Market Premium(1) 11.1 %
x Beta(2) 0.79
Risk Adjusted Market Premium 8.8
Size Adjustment Premium(2) 1.8
Plus Risk Free Rate(1) 3.8
Market Value CAPM Cost Rate 14.4 %
Market Value CAPM is: 11.5%
Notes: (1) Developed on page 2 of this Schedule.
(2) Developed on page 4 of this Schedule.
Case No. FLS-W-23-01
Exhibit No.
Schedule 17
H. Walker
Page 1 of 4
6
Development of Market Premiums for Use in a CAPM Model
A B C D E F G H
Value Line Forecasted CAPM
Summary & Index Market Stock Price Annual Annual Midpoint Average Projected
Month End Dividend Appreciation Price Total Market Market Market
Edition Yield Next 3-5 Years Appreciation(1)Return(1)Return(2)Return(3)Return
December-22 2.3 % 70 % 14.2 % 16.5 %
January-23 2.1 55 11.6 13.7
February-23 2.1 55 11.6 13.7
15.1 % 14.6 % 14.9 %
Less Risk Free Rate(4) 3.8
Estimated Market Premium Based Upon Projected Information (1) 11.1 %
Estimated Market Premium Based Upon Historical Information (5) 7.5 %
See next page of this Schedule for Notes.
Case No. FLS-W-23-01
Exhibit No.
Schedule 17
H. Walker
Page 2 of 4
6
CAPM
The Water Group Followed by Analysts
Notes: (1) A projected market premium is based upon the projected market return rate derived from the
Value Line Summary and Index for the various dates shown. For example, Value Line
projects (Feb-23) that the market will appreciate in price 55% over the next three to five years. Using
a four-year midpoint estimate, Value Line's appreciation potential equates to 11.6%
annually ([1.55]^.25). Additionally, Value Line estimates the market will have a dividend yield of 2.1%.
Combining the market dividend yield of 2.1% with the market appreciation results in
a projected market return rate of 13.7% (11.6% + 2.1%).
(2)Mid point of the month-end total market returns in Column E.
(3)Average total market return in Column E.
(4)As discussed in the direct testimony, the risk-free rate is 3.8%.
(5) The historical market premium is based upon studies conducted by Ibbotson Associates concerning
asset returns. Ibbotson Associates' asset return studies are the most noted asset return rate
studies available today. The results are widely disseminated throughout the investment
public. Ibbotson Associates' long-term common stock total market return is 12.33% which, when
reduced by the long-term historic risk-free rate of 4.87% results in a market premium of
7.5% (12.33% - 4.87%).
Case No. FLS-W-23-01
Exhibit No.
Schedule 17
H. Walker
Page 3 of 4
6
Recent Market Values and
Beta Adjusted Ibbotson Associates Size Premiums For
The Water Group Followed by Analysts
1 2 3 4 5 6 7 8
Beta Adjusted
Recent Market Quartile Value Quartile
Market Quartile Market Size Quartile Line Beta Size
Value Name Quartile Premium Beta Beta Ratio Premium
(Mill $)
Water Group Followed by Analysts
American States Water Co $3,300.608 Mid-Cap 2 2.48 1.13 0.65 58% 1.4
American Water Works Co Inc 25,544.461 Large-Cap 1 0.00 1.00 0.90 90% 0.0
California Water Service Gp 3,138.126 Mid-Cap 2 2.48 1.13 0.70 62% 1.5
Essential Utilities, Inc. 11,220.803 Mid-Cap 2 2.48 1.13 0.95 84% 2.1
Middlesex Water Co 1,349.353 Low-Cap 3 3.95 1.23 0.70 57% 2.3
SJW Corp 2,357.912 Low-Cap 3 3.95 1.23 0.80 65% 2.6
York Water Co 620.734 Low-Cap 3 3.95 1.23 0.80 65%2.6
Average Mid-Cap 2 2.48 1.13 0.79 69%1.8
Source of Information: 2022 SBBI Yearbook, Stocks, Bonds, Bills, and Inflation, and Value Line
Case No. FLS-W-23-01
Exhibit No.
Schedule 17
H. Walker
Page 4 of 4
6
Market Value Risk Premium
For the Water Group Followed by Analysts
Water Group
Followed by
Analysts
Prospective Public Utility Bond Yields(1)5.4 %
Estimated Risk Premium(2)5.0
Market Value Risk Premium Indicated Cost Rate 10.4 %
Notes: (1) Based upon the current and prospective long-term debt cost rates, it is
reasonable to expect that if the comparable group (i.e., Water Group)
issued new long-term bonds, it would both be priced to yield about
5.4% based upon credit profiles of A for the Water Group.
(2) A 5% risk premium is concluded for the Group after reviewing the
tabulation of risk spreads shown on pages 2, 3, 4 and 5 of this Schedule.
Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 1 of 9
6
Annual Total Returns and Risk Premiums of
S&P Public Utility Stocks and Bonds
for the Years 2002-2021, 1992-2021, 1982-2021, 1972-2021,1962-2021, 1952-2021 and 1928-2021
Annual Total Returns
Public Utility Bonds
Public Utility L-Term AAA
Periods Stock T-Bonds AAA & AA AA A BBB
Average Annual Rates of Return
2002 to 2021 0.1185 0.0725 0.0000 0.0865 0.0865 0.0886 0.0957
1992 to 2021 0.1183 0.0822 0.0916 0.0885 0.0890 0.0876 0.0935
1982 to 2021 0.1396 0.1038 0.1329 0.1096 0.1106 0.1113 0.1178
1972 to 2021 0.1311 0.0861 0.1000 0.0947 0.0956 0.0963 0.1030
1962 to 2021 0.1149 0.0759 0.0799 0.0822 0.0830 0.0838 0.0895
1952 to 2021 0.1236 0.0666 0.0668 0.0726 0.0733 0.0744 0.0799
1928 to 2021 0.1116 0.0577 0.0594 0.0658 0.0668 0.0690 0.0759
Average Risk Premiums
2002 to 2021 0.0460 0.1185 0.0320 0.0320 0.0299 0.0229
1992 to 2021 0.0361 0.0268 0.0298 0.0293 0.0307 0.0248
1982 to 2021 0.0358 0.0067 0.0300 0.0291 0.0283 0.0218
1972 to 2021 0.0390 0.0349 0.0327 0.0319 0.0311 0.0254
1962 to 2021 0.0390 0.0349 0.0327 0.0319 0.0311 0.0254
1952 to 2021 0.0570 0.0567 0.0510 0.0503 0.0491 0.0437
1928 to 2021 0.0539 0.0522 0.0458 0.0448 0.0426 0.0357
Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 2 of 9
6
Annual Total Returns, Annual Income Returns and Risk Premiums of
S&P Public Utility Stocks and Bonds
for the Years 2002-2021, 1992-2021, 1982-2021, 1972-2021,1962-2021, 1952-2021 and 1928-2021
Annual Income Returns
Annual
Total Returns Public Utility Bonds
Public Utility L-Term AAA
Periods Stock T-Bonds AAA & AA AA A BBB
Average Rates of Return
2002 to 2021 0.1185 0.0357 0.0000 0.0482 0.0482 0.0501 0.0551
1992 to 2021 0.1183 0.0456 0.0755 0.0578 0.0580 0.0597 0.0639
1982 to 2021 0.1396 0.0588 0.0918 0.0706 0.0709 0.0731 0.0773
1972 to 2021 0.1311 0.0645 0.0924 0.0756 0.0761 0.0784 0.0828
1962 to 2021 0.1149 0.0622 0.0836 0.0726 0.0732 0.0753 0.0795
1952 to 2021 0.1236 0.0581 0.0743 0.0675 0.0681 0.0702 0.0740
1928 to 2021 0.1116 0.0500 0.0609 0.0590 0.0597 0.0623 0.0670
Average Risk Premiums
2002 to 2021 0.0828 0.1185 0.0703 0.0703 0.0684 0.0634
1992 to 2021 0.0727 0.0428 0.0605 0.0603 0.0587 0.0544
1982 to 2021 0.0808 0.0479 0.0690 0.0687 0.0665 0.0623
1972 to 2021 0.0527 0.0312 0.0423 0.0417 0.0396 0.0354
1962 to 2021 0.0527 0.0312 0.0423 0.0417 0.0396 0.0354
1952 to 2021 0.0655 0.0493 0.0560 0.0555 0.0534 0.0495
1928 to 2021 0.0615 0.0507 0.0526 0.0519 0.0493 0.0446
Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 3 of 9
6
Annual Total Returns, Annual Income Returns and Risk Premiums of
S&P Public Utility Stocks and Bonds
For the 47 Years of the Lowest Interest Rate Environment and the 47 Years of the Highest Interest Rate Environment
For The Years 1928-2021
Current Interest Rate Environment: 3.8%
Public Utility Bonds
Public Utility L-Term AAA
Periods Stock T-Bonds AAA & AA AA A BBB
Annual Total Returns
Low Interest Rate Environment:
47 Years of the Lowest Interest Rates, Ranging from 1.4% to 4.1% with an Average Rate of 2.9%
Average Rates of Return
0.1121 0.0332 0.0366 0.0500 0.0512 0.0562 0.0679
Average Risk Premiums
0.0788 0.0754 0.0621 0.0609 0.0559 0.0442
High Interest Rate Environment:
47 Years of the Highest Interest Rates, Ranging from 4.1% to 13.5% with an Average Rate of 7.2%
Average Risk Premiums
0.1111 0.0822 0.0788 0.0815 0.0823 0.0818 0.0839
Average Risk Premiums
0.0289 0.0323 0.0296 0.0287 0.0293 0.0271
Annual Income Returns
Low Interest Rate Environment:
47 Years of the Lowest Interest Rates, Ranging from 1.4% to 4.1% with an Average Rate of 2.9%
Average Rates of Return
0.1121 0.0285 0.0340 0.0366 0.0372 0.0401 0.0459
Average Risk Premiums
0.0835 0.0780 0.0755 0.0748 0.0719 0.0661
High Interest Rate Environment:
47 Years of the Highest Interest Rates, Ranging from 4.1% to 13.5% with an Average Rate of 7.2%
Average Risk Premiums
0.1111 0.0716 0.0837 0.0814 0.0822 0.0844 0.0881
Average Risk Premiums
0.0395 0.0274 0.0296 0.0289 0.0267 0.0230
Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 4 of 9
6
Annual Total Returns of
S&P Public Utility Stocks and Bonds
for the Years 1928-2021
Annual Total Returns
Public Utility Bonds
Public Utility L-Term AAA
Years Stocks T-Bonds AAA & AA AA A BBB
1928 0.5431 -0.0030 0.0370 0.0388 0.0406 0.0372 0.0392
1929 0.1376 0.0410 0.0209 0.0193 0.0178 0.0163 -0.0076
1930 -0.2149 0.0509 0.0917 0.0892 0.0869 0.0820 0.0378
1931 -0.3193 -0.0782 0.0058 -0.0059 -0.0171 -0.0608 -0.1089
1932 -0.0724 0.1736 0.1073 0.1037 0.1003 0.0685 0.0570
1933 -0.2170 0.0090 0.0142 -0.0145 -0.0401 -0.0686 -0.0601
1934 -0.1743 0.0962 0.1712 0.2000 0.2272 0.3264 0.4593
1935 0.6914 0.0610 0.1053 0.1243 0.1427 0.1760 0.2885
1936 0.2357 0.0691 0.0783 0.0916 0.1046 0.1079 0.1078
1937 -0.3337 -0.0091 0.0290 0.0323 0.0357 0.0272 -0.0626
1938 0.1020 0.0662 0.0720 0.0773 0.0825 0.0884 0.1505
1939 0.1538 0.0692 0.0435 0.0473 0.0510 0.0851 0.0923
1940 -0.1643 0.0910 0.0480 0.0506 0.0532 0.0949 0.1359
1941 -0.3050 0.0234 0.0255 0.0291 0.0327 0.0428 0.0681
1942 0.1079 -0.0735 0.0261 0.0287 0.0313 0.0314 0.0590
1943 0.4750 0.0228 0.0312 0.0346 0.0380 0.0405 0.0564
1944 0.1879 0.0268 0.0343 0.0353 0.0362 0.0303 0.0459
1945 0.5665 0.1075 0.0298 0.0349 0.0383 0.0683 0.0805
1946 -0.0130 -0.0006 0.0233 0.0238 0.0242 0.0267 0.0377
1947 -0.1236 -0.0165 -0.0139 -0.0187 -0.0234 -0.0213 -0.0105
1948 0.0451 0.0202 0.0287 0.0317 0.0347 0.0225 0.0073
1949 0.3074 0.0760 0.0718 0.0746 0.0773 0.0892 0.0757
1950 0.0152 -0.0034 0.0126 0.0131 0.0135 0.0107 0.0233
1951 0.2075 -0.0541 -0.0393 -0.0393 -0.0393 -0.0468 -0.0268
1952 0.1947 0.0101 0.0373 0.0390 0.0407 0.0442 0.0399
1953 0.0918 0.0062 0.0078 0.0063 0.0048 0.0107 0.0037
1954 0.2269 0.0676 0.0668 0.0701 0.0733 0.0745 0.0909
1955 0.1357 -0.0264 -0.0107 -0.0127 -0.0147 -0.0100 0.0146
1956 0.0416 -0.0484 -0.0703 -0.0703 -0.0703 -0.0714 -0.0816
1957 0.0541 0.0472 0.0246 0.0229 0.0213 0.0054 -0.0131
1958 0.3827 -0.0439 -0.0081 -0.0032 0.0017 0.0123 0.0339
1959 0.0958 -0.0320 -0.0231 -0.0234 -0.0237 -0.0120 -0.0102
1960 0.1680 0.1106 0.0764 0.0735 0.0705 0.0791 0.0994
1961 0.3646 0.0135 0.0432 0.0448 0.0464 0.0502 0.0442
1962 -0.0519 0.0650 0.0831 0.0829 0.0828 0.0852 0.0891
1963 0.1261 -0.0022 0.0171 0.0202 0.0232 0.0294 0.0329
1964 0.1685 0.0439 0.0394 0.0391 0.0387 0.0409 0.0396
1965 0.0489 -0.0064 -0.0010 -0.0014 -0.0018 -0.0044 0.0050
1966 -0.0504 0.0085 -0.0501 -0.0509 -0.0518 -0.0602 -0.0990
1967 -0.0216 -0.0650 -0.0525 -0.0539 -0.0553 -0.0592 -0.0271
1968 0.1419 0.0149 0.0268 0.0224 0.0181 0.0286 0.0243
1969 -0.1769 -0.0640 -0.0792 -0.0839 -0.0885 -0.0960 -0.0892
1970 0.1494 0.1537 0.0970 0.0978 0.0987 0.0952 0.0761
1971 0.0050 0.0999 0.1168 0.1241 0.1313 0.1510 0.1681
1972 0.1464 0.0661 0.0912 0.0980 0.1047 0.1103 0.1387
1973 -0.2106 -0.0893 0.0158 0.0138 0.0118 0.0156 0.0150
1974 -0.2135 0.0092 -0.0315 -0.0360 -0.0405 -0.0683 -0.1033Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 5 of 9
6
Annual Total Returns of
S&P Public Utility Stocks and Bonds
for the Years 1928-2021
Annual Total Returns
Public Utility Bonds
Public Utility L-Term AAA
Years Stocks T-Bonds AAA & AA AA A BBB
1975 0.4364 0.0465 0.0915 0.0863 0.0813 0.0872 0.0940
1976 0.3245 0.1955 0.1976 0.2017 0.2058 0.2475 0.2806
1977 0.1076 0.0074 0.0459 0.0545 0.0629 0.0683 0.0903
1978 -0.0174 -0.0189 -0.0083 -0.0055 -0.0027 -0.0026 0.0000
1979 0.1221 -0.0289 -0.0424 -0.0509 -0.0590 -0.0655 -0.0823
1980 0.1275 -0.0804 -0.0782 -0.0778 -0.0773 -0.0702 -0.0649
1981 0.1464 0.0472 0.0616 0.0674 0.0730 0.0416 0.0674
1982 0.2292 0.4323 0.3294 0.3750 0.3942 0.3708 0.3808
1983 0.2372 -0.0049 0.0721 0.0691 0.0763 0.1406 0.1347
1984 0.2219 0.1611 0.1770 0.1796 0.1768 0.1783 0.2075
1985 0.3232 0.3143 0.3473 0.3276 0.3259 0.3143 0.3098
1986 0.3575 0.3692 0.2994 0.2720 0.2698 0.2835 0.2933
1987 -0.0544 -0.1013 -0.1132 -0.0637 -0.0566 -0.0435 -0.0505
1988 0.1849 0.1026 0.2027 0.1615 0.1594 0.1643 0.1919
1989 0.4351 0.2176 0.1770 0.1743 0.1715 0.1692 0.1781
1990 0.0069 0.0482 0.0685 0.0689 0.0722 0.0738 0.0728
1991 0.0931 0.1472 0.1813 0.1647 0.1624 0.1715 0.1878
1992 0.1183 0.1093 0.1264 0.1312 0.1324 0.1355 0.1315
1993 0.1661 0.2162 0.1926 0.2126 0.2190 0.1429 0.1590
1994 -0.0825 -0.1075 -0.0802 -0.0656 -0.0657 0.0065 -0.0351
1995 0.3772 0.3268 0.2860 0.3074 0.3089 0.2164 0.2442
1996 0.0550 0.0020 0.0279 0.0211 0.0214 0.0279 0.0415
1997 0.1959 0.1454 0.1181 0.1157 0.1169 0.1238 0.1496
1998 0.1896 0.1786 0.1431 0.0365 0.0289 0.1074 0.0981
1999 -0.0998 -0.1062 -0.0792 -0.0275 -0.0237 -0.0921 -0.0684
2000 0.5475 0.1922 0.1076 0.1150 0.1146 0.1101 0.1196
2001 -0.2877 0.0596 0.0734 0.0788 0.0873 0.0780 0.0534
2002 -0.2934 0.1362 0.1851 0.1851 0.2461 0.1746
2003 0.2509 0.0488 0.1678 0.1678 0.1529 0.2329
2004 0.2763 0.0861 0.1162 0.1162 0.0782 0.0919
2005 0.2151 0.0520 0.0869 0.0869 0.0732 0.0541
2006 0.2323 0.0421 0.0486 0.0486 0.0596 0.0759
2007 0.1434 0.0814 0.0043 0.0043 0.0143 0.0042
2008 -0.3160 0.2953 0.0733 0.0733 0.0132 -0.1109
2009 0.1801 -0.1460 0.1159 0.1159 0.1662 0.3279
2010 0.0795 0.0755 0.0809 0.0809 0.0871 0.0893
2011 0.2051 0.3271 0.2701 0.2701 0.2505 0.2019
2012 0.1272 0.0622 0.0801 0.0801 0.0955 0.1287
2013 0.1363 -0.1592 -0.0850 -0.0850 -0.0758 -0.0494
2014 0.3017 0.2419 0.1577 0.1577 0.1872 0.1333
2015 -0.0629 0.0115 -0.0031 -0.0031 -0.0227 -0.0682
2016 0.1834 -0.0224 0.0443 0.0443 0.0512 0.1625
2017 0.1966 0.0714 0.1224 0.1224 0.1211 0.1505
2018 0.0644 -0.0579 -0.0566 -0.0566 -0.0477 -0.0680
2019 0.2690 0.2127 0.2209 0.2209 0.2098 0.2471
2020 0.0301 0.1584 0.1505 0.1505 0.1465 0.1557
2021 0.1510 -0.0679 -0.0499 -0.0499 -0.0335 -0.0210Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 6 of 9
6
Annual Total Returns of S&P Public Utility Stocks
And Annual Income Returns of Bonds
for the Years 1928-2021
Annual Total Income Returns
Returns Public Utility Bonds
Public Utility L-Term AAA
Years Stocks T-Bonds AAA & AA AA A BBB
1928 0.5431 0.0329 0.0451 0.0460 0.0470 0.0499 0.0541
1929 0.1376 0.0361 0.0468 0.0479 0.0490 0.0522 0.0578
1930 -0.2149 0.0332 0.0458 0.0470 0.0482 0.0514 0.0591
1931 -0.3193 0.0338 0.0434 0.0449 0.0463 0.0511 0.0635
1932 -0.0724 0.0350 0.0474 0.0504 0.0535 0.0640 0.0815
1933 -0.2170 0.0315 0.0436 0.0468 0.0499 0.0604 0.0833
1934 -0.1743 0.0306 0.0402 0.0436 0.0471 0.0559 0.0713
1935 0.6914 0.0278 0.0351 0.0376 0.0402 0.0466 0.0544
1936 0.2357 0.0273 0.0324 0.0343 0.0362 0.0415 0.0465
1937 -0.3337 0.0275 0.0320 0.0334 0.0347 0.0395 0.0486
1938 0.1020 0.0263 0.0303 0.0316 0.0329 0.0392 0.0510
1939 0.1538 0.0239 0.0286 0.0296 0.0305 0.0360 0.0448
1940 -0.1643 0.0224 0.0277 0.0285 0.0293 0.0331 0.0410
1941 -0.3050 0.0197 0.0269 0.0276 0.0283 0.0304 0.0366
1942 0.1079 0.0239 0.0272 0.0279 0.0287 0.0305 0.0358
1943 0.4750 0.0246 0.0264 0.0269 0.0273 0.0296 0.0338
1944 0.1879 0.0248 0.0265 0.0268 0.0272 0.0294 0.0333
1945 0.5665 0.0229 0.0256 0.0261 0.0266 0.0285 0.0318
1946 -0.0130 0.0208 0.0250 0.0254 0.0257 0.0268 0.0293
1947 -0.1236 0.0215 0.0257 0.0261 0.0264 0.0273 0.0297
1948 0.0451 0.0240 0.0282 0.0287 0.0292 0.0301 0.0327
1949 0.3074 0.0223 0.0270 0.0274 0.0277 0.0291 0.0324
1950 0.0152 0.0216 0.0262 0.0264 0.0267 0.0276 0.0312
1951 0.2075 0.0244 0.0285 0.0288 0.0291 0.0307 0.0334
1952 0.1947 0.0265 0.0300 0.0303 0.0305 0.0324 0.0351
1953 0.0918 0.0300 0.0325 0.0328 0.0331 0.0347 0.0371
1954 0.2269 0.0266 0.0296 0.0298 0.0301 0.0317 0.0348
1955 0.1357 0.0287 0.0307 0.0309 0.0311 0.0324 0.0341
1956 0.0416 0.0310 0.0335 0.0337 0.0340 0.0357 0.0374
1957 0.0541 0.0355 0.0397 0.0400 0.0403 0.0428 0.0452
1958 0.3827 0.0344 0.0384 0.0386 0.0389 0.0414 0.0447
1959 0.0958 0.0409 0.0445 0.0448 0.0451 0.0470 0.0494
1960 0.1680 0.0409 0.0450 0.0453 0.0455 0.0473 0.0489
1961 0.3646 0.0391 0.0442 0.0445 0.0449 0.0462 0.0476
1962 -0.0519 0.0401 0.0434 0.0437 0.0439 0.0450 0.0466
1963 0.1261 0.0403 0.0427 0.0429 0.0431 0.0437 0.0456
1964 0.1685 0.0419 0.0441 0.0442 0.0443 0.0450 0.0466
1965 0.0489 0.0424 0.0448 0.0450 0.0451 0.0458 0.0475
1966 -0.0504 0.0475 0.0513 0.0515 0.0518 0.0531 0.0552
1967 -0.0216 0.0494 0.0553 0.0556 0.0559 0.0576 0.0605
1968 0.1419 0.0543 0.0621 0.0627 0.0633 0.0651 0.0684
1969 -0.1769 0.0624 0.0706 0.0716 0.0725 0.0743 0.0778
1970 0.1494 0.0692 0.0822 0.0833 0.0844 0.0870 0.0913
1971 0.0050 0.0614 0.0766 0.0777 0.0789 0.0825 0.0868
1972 0.1464 0.0601 0.0744 0.0751 0.0758 0.0778 0.0815
1973 -0.2106 0.0701 0.0762 0.0767 0.0773 0.0789 0.0812
1974 -0.2135 0.0800 0.0849 0.0861 0.0873 0.0899 0.0929Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 7 of 9
6
Annual Total Returns of S&P Public Utility Stocks
And Annual Income Returns of Bonds
for the Years 1928-2021
Annual Total Income Returns
Returns Public Utility Bonds
Public Utility L-Term AAA
Years Stocks T-Bonds AAA & AA AA A BBB
1975 0.4364 0.0817 0.0894 0.0912 0.0929 0.0978 0.1057
1976 0.3245 0.0794 0.0864 0.0880 0.0895 0.0928 0.0987
1977 0.1076 0.0765 0.0814 0.0829 0.0845 0.0859 0.0896
1978 -0.0174 0.0840 0.0877 0.0888 0.0900 0.0917 0.0947
1979 0.1221 0.0921 0.0962 0.0978 0.0995 0.1017 0.1064
1980 0.1275 0.1115 0.1182 0.1211 0.1241 0.1271 0.1352
1981 0.1464 0.1349 0.1427 0.1458 0.1489 0.1529 0.1616
1982 0.2292 0.1309 0.1439 0.1448 0.1464 0.1532 0.1610
1983 0.2372 0.1115 0.1247 0.1229 0.1237 0.1298 0.1350
1984 0.2219 0.1247 0.1297 0.1339 0.1341 0.1374 0.1434
1985 0.3232 0.1104 0.1187 0.1179 0.1189 0.1228 0.1270
1986 0.3575 0.0802 0.0908 0.0930 0.0940 0.0973 0.1015
1987 -0.0544 0.0843 0.0934 0.0946 0.0953 0.0985 0.1027
1988 0.1849 0.0897 0.1013 0.1009 0.1014 0.1040 0.1083
1989 0.4351 0.0854 0.0938 0.0949 0.0955 0.0980 0.1001
1990 0.0069 0.0858 0.0943 0.0959 0.0964 0.0985 0.1009
1991 0.0931 0.0818 0.0891 0.0915 0.0921 0.0943 0.0961
1992 0.1183 0.0769 0.0822 0.0860 0.0869 0.0887 0.0897
1993 0.1661 0.0671 0.0737 0.0776 0.0780 0.0805 0.0816
1994 -0.0825 0.0730 0.0794 0.0799 0.0802 0.0826 0.0868
1995 0.3772 0.0708 0.0781 0.0774 0.0776 0.0813 0.0857
1996 0.0550 0.0672 0.0745 0.0742 0.0745 0.0762 0.0805
1997 0.1959 0.0670 0.0746 0.0743 0.0746 0.0747 0.0782
1998 0.1896 0.0572 0.0682 0.0674 0.0677 0.0687 0.0710
1999 -0.0998 0.0592 0.0710 0.0740 0.0748 0.0743 0.0766
2000 0.5475 0.0607 0.0790 0.0817 0.0821 0.0830 0.0839
2001 -0.2877 0.0557 0.0747 0.0777 0.0780 0.0787 0.0810
2002 -0.2934 0.0542 0.0730 0.0730 0.0754 0.0818
2003 0.2509 0.0496 0.0646 0.0646 0.0623 0.0673
2004 0.2763 0.0505 0.0608 0.0608 0.0617 0.0641
2005 0.2151 0.0465 0.0546 0.0546 0.0566 0.0592
2006 0.2323 0.0499 0.0583 0.0583 0.0607 0.0632
2007 0.1434 0.0493 0.0591 0.0591 0.0605 0.0629
2008 -0.3160 0.0448 0.0619 0.0619 0.0650 0.0711
2009 0.1801 0.0401 0.0579 0.0579 0.0610 0.0721
2010 0.0795 0.0405 0.0525 0.0525 0.0548 0.0598
2011 0.2051 0.0375 0.0489 0.0489 0.0514 0.0565
2012 0.1272 0.0256 0.0385 0.0385 0.0416 0.0490
2013 0.1363 0.0302 0.0417 0.0417 0.0441 0.0492
2014 0.3017 0.0316 0.0424 0.0424 0.0435 0.0485
2015 -0.0629 0.0254 0.0397 0.0397 0.0408 0.0496
2016 0.1834 0.0221 0.0373 0.0373 0.0394 0.0474
2017 0.1966 0.0267 0.0386 0.0386 0.0404 0.0443
2018 0.0644 0.0307 0.0404 0.0404 0.0420 0.0460
2019 0.2690 0.0248 0.0369 0.0369 0.0385 0.0429
2020 0.0301 0.0141 0.0285 0.0285 0.0307 0.0345
2021 0.1510 0.0194 0.0293 0.0293 0.0308 0.0334Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 8 of 9
6
Development of the Projected Risk Premium
A B C D E F G H I
Less:
Value Line Forecasted Forecasted Yield of
Summary & Index Market Stock Price Annual Annual Moody's Forecasted Estimated Forecasted
Month End Dividend Appreciation Price Total A Rated Equity Risk Risk
Edition Yield Next 3-5 Years Appreciation Return Industrial Bonds Premium Adjustment Premium
December-22 2.3 % 70 % 14.2 % 16.5 % 4.94 % 11.6 % 90 % 10.4 %
January-23 2.1 55 11.6 13.7 4.88 8.8 90 7.9
February-23 2.1 55 11.6 13.7 5.03 8.7 90 7.8
Midpoint of data 15.1 10.1 9.1 %
Quarter's Average 14.6 9.7 8.7 %
Case No. FLS-W-23-01
Exhibit No.
Schedule 18
H. Walker
Page 9 of 9
6
Falls Water, Inc.
Common Equity Cost Rate Summary
Water Group Followed by Analysts
DCF(1)CAPM(2)RP(3)
Common Equity Cost Rate Range 9.70 % 12.30 % 11.20 %
Investment Risk
Adjustments (4) 0.00 0.00 0.00
Falls Water, Inc.
Adjusted Common Equity Cost
Rate Range: 9.70 12.30 11.20
Falls Water, Inc.
Recommended Common Equity Cost Rate (5) 11.00 %
Check of Reasonableness of
Common Equity Cost Rate (6) 10.5 % to 10.7 %
Notes: (1) From Schedule 12 and explained in the Direct Testimony.
(2) From Schedule 17 and explained in the Direct Testimony.
(3) From Schedule 18 and explained in the Direct Testimony.
(4) As explained in the Direct Testimony.
(5) As explained in the Direct Testimony, the recommendation is only applicable to a
rate making common equity ratio of 55%. (~55.00%)
(6) See page 2 of Schedule 14.
Case No. FLS-W-23-01
Exhibit No.
Schedule 19
H. Walker
Page 1 of 1
6