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____________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________________________________________________________________________________
2018 Capitalization Rate Study
State-Assessed Properties Division Richard Reisinger, Chief
Lien Date 2018
BOARD MEMBERS SEN. GEORGE RUNNER (Ret.) First District
FIONA MA, CPA Second District
JEROME E. HORTON Third District
DIANE L. HARKEY Fourth District
BETTY T. YEE State Controller
DEAN R. KINNEE Executive Director
Lancaster San Francisco Los Angeles County Orange County
CALIFORNIA STATE BOARD OF EQUALIZATION
10AM 12PM 2PM 4PM
14.80
14.60
14.40
14.20
14.00
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Executive Summary
The income approach to value includes any method of converting
an income stream into a present value estimate (i.e., an indicator
of current fair market value). The income approach is also called
the capitalization approach because capitalization is the process
of converting an expected income into an indicator of value.
The methods or techniques used in the income approach may be
relatively simple (e.g., income or rent multipliers and direct
capitalization), or more complex (e.g., various yield
capitalization techniques). All of these methods are referred to as
capitalization techniques because they convert an expected future
income stream into a present value estimate.
The income approach requires careful application because small
variations in its key variables (capitalization rate, duration of
income stream, estimated income and expenses, etc.) will be
mathematically leveraged into a wide range of estimated value. This
is particularly true for the capitalization rate variable. The
reliability of the income approach is no greater than the validity
of the assumptions used to estimate the key variables. The
mathematical techniques used in the approach, while sometimes
complicated, are merely tools for converting these assumptions into
an estimate of current market value.1
I. Authority for Capitalization Rate Study
Property Tax Rule 8 (g) (2) provides the authority for the
method in which the capitalization rates were developed in this
study. The rule states the capitalization rate may be developed
By deriving a weighted average of the capitalization rates for
debt and for equity capital appropriate to the California money
markets (the band-of-investment method) and adding increments for
expenses that are excluded from outgo because they are based on the
value that is being sought or the income that is being capitalized.
The appraiser shall weight the rates for debt and equity capital by
the respective amounts of such capital he deems most likely to be
employed by prospective purchasers.
II. Band of Investment Approach
In its simplest form, the band of investment method assumes that
a purchaser would pay cash (or equity) for a portion of the
property and would borrow the balance of the purchase price. For
example:
Debt 30% x Cost of Debt 7% = 2.1% Equity 70% x Cost of Equity
12% = 8.4% Weighted Average Cost of Capital 10.5%
1 Assessors Handbook 501, Basic Appraisal, Revised January
2002
i
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Executive Summary
This booklet contains a study for each of the major state
assessee industry groups2 in California. Industry data was compiled
by groups with similar Value Line financial ratings. Local
exchange, wireless and interexchange industries have been combined
into one telecommunications study.
Generally accepted procedures were used to estimate the cost of
capital for debt and equity. The long term debt cost is the cost
for a particular risk class of debt on the lien date. The equity
rate reflects the rate of return or compensation that will satisfy
the risk that a prospective purchaser would anticipate if a
property purchase decision was made. The rates chosen are the
result of analysis of economic conditions and financial data listed
in the supporting schedules and are the product of the staffs
informed judgment.
The rates derived in this study are basic capitalization (or
discount) rates that represent the after-tax return on investment
only. Any increments required to be added by Property Tax Rule
8(g)(2), such as income or ad valorem tax components, are in
addition to the rates listed.
A. Capital Structure - Prospective Purchaser vs. Company
Specific
State assessees often ask why the Board does not use the current
capital structure of individual companies in the band-of-investment
method. As explained in Rule 8 (g)(2), the appraiser shall weight
the rates of debt and equity capital by the respective amounts of
such capital deemed most likely to be employed by a prospective
purchaser.
Therefore, the capital structure contemplated is a
representative or typical structure of an industry group of
companies with a similar bond rating, not that of the present
owner. The objective of doing so is to strike an optimum capital
structure from the perspective of a potential investor.
B. Company Specific Debt Rates
In many cases the debt component of the capital structure for a
prospective purchaser and the individual company being assessed may
be similar. In cases where, in the judgement of staff, the debt
ratings of the individual companies being assessed and the debt
ratings of prospective purchasers are similar, the company-specific
bond rating has been used to develop the appropriate debt component
of the recommended capitalization rate. In cases where rate-base
regulated companies have embedded debt with rates higher than the
market rates at the lien date, a revenue adjustment may be
indicated in order to match the revenue expected by a prospective
purchaser if the purhasers revenue would be determined by those
market rates.
2 Gas, Electric & Water; Natural Gas Transmission; Electric
Generation; Telecommunications (Local Exchange, Interexchange,
Wireless); Pipeline; Railroad
ii
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Executive Summary
C. Impact of Holding Companies on Determination of Capital
Structure
Many of the larger state assessees are subsidiaries of their
holding company. Stock purchases related to a subsidiary must be
made through the parent holding company. Since there is no direct
market data for state assessees that are subsidiaries of a holding
company, staff must rely, in great part, upon market data related
to the holding company.
III. Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is a widely accepted
theory used to estimate the cost of equity capital. In the
application of CAPM, the most sensitive component affecting the
outcome is the estimate of the beta3 coefficient. The choice of
different time frames and frequencies of measurement in the
calculation of the beta can produce significantly different
results. Another factor in the use of beta is the choice of whether
to use an unadjusted beta or a beta adjusted to reflect the fact
that betas tend to revert to the mean over time. In this study,
three betas were obtained from separate sources: one adjusted
(Value Line) and two unadjusted. Generally the betas from the three
sources are averaged to establish the beta used to estimate the
cost of equity capital for a specific industry. However, the
average beta for highly regulated industries, such as gas or
electric transmission and distribution, tend to understate the risk
inherent in those securities. Accordingly, for companies in highly
regulated environments, the Value Line adjusted beta was chosen as
a better estimate of the relative risk in the calculation of the
required equity return.
IV. Flotation Costs
When new issues of both debt and equity capital are sold to
investors, the issuing company incurs transaction costs such as
underwriting fees, legal expenses, and prospectus preparation
costs. These costs of issuing securities are known as flotation
costs. Much like loan fees or points on a mortgage, flotation costs
effectively reduce the net proceeds that a firm will receive from
issuing securities. The cost of capital is adjusted upward to
reflect the expected flotation costs incurred to issue securities.
Since the flotation costs are reflected in the weighted average
cost of capital, the flotation costs should not be allowed as
expenses in projecting cash flows to be capitalized. Each basic
capitalization rate in this study has been adjusted to reflect
flotation costs.
V. Utilization of Other Studies and Data
Staff appraisers reviewed data and capitalization rate studies
submitted by assessees and interested parties in addition to a
review of recent regulatory rate case filings and decisions, and
where appropriate, used this information in the development of the
staff derived rates.
The capitalization rates published in this study are intended to
be applied to the unitary operations of the companies subject to
assessment by the California State Board of Equalization.
3 The covariance of the returns of a security regressed against
the returns of the overall market - a measurement of relative
volatility
iii
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California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Gas, Electric and Water Companies
SBE No. Company Name
Ratings Capital Structure Rates of Return Basic Cap Rate
Financial
Preferred Stock Bond
Common Equity
Preferred Stock Debt
Common Equity
Preferred Stock Debt
Gas and Electric Companies 141 San Diego Gas & Electric
Company148 Southern California Edison Company135 Pacific Gas and
Electric Company106 PacifiCorp 125 Terra-Gen Dixie Valley, LLC 146
Sierra Pacific Power Company
119 Trans Bay Cable LLC 156 DATC Path 15, LLC 163 Liberty
Utilities (Calpeco Electric), LLC 191 Arizona Public Service
Company
Electric Cooperatives
Natural Gas Companies 149 Southern California Gas Company152
Southwest Gas Corporation192 Alpine Natural Gas Operating Company
No. One LLC 194 West Coast Gas Company, Inc.
104 Central Valley Gas Storage LLC 121 Gill Ranch Storage, LLC
195 Wild Goose Storage, LLC 198 Lodi Gas Storage, LLC
Water Company 101 Golden State Water Company
A A B
Not Rated Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
Not Rated
A B++ Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
A
A3 Baa1 Baa1 Baa2
Not Rated
A3
A1 A2 A2 A3
Not Rated Baa1
Not Rated A3
Not Rated A2
Not Rated
A1 A3
Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
A2
52% 48% 52% 52% 55% 52%
55% 55% 55% 55%
55%
52% 55% 55% 55%
60% 60% 60% 60%
55%
3% 9% 1% 1%
1%
2%
45% 43% 47% 47% 45% 47%
45% 45% 45% 45%
45%
46% 45% 45% 45%
40% 40% 40% 40%
45%
10.63% 10.73% 10.68% 11.46% 11.46% 11.46%
14.06% 14.06% 11.46% 11.46%
11.46%
10.47% 10.52% 12.76% 12.76%
15.10% 15.10% 15.10% 15.10%
9.82%
6.31% 6.31% 6.31% 6.31%
7.03%
6.09%
3.96% 4.02% 4.14% 4.14% 4.14% 4.25%
4.14% 4.14% 4.14% 4.14%
4.14%
3.96% 4.14% 4.51% 4.51%
5.50% 5.50% 5.50% 5.50%
3.87%
7.49% 7.45% 7.56% 7.97% 8.16% 8.03%
9.60% 9.60% 8.16% 8.16%
8.16%
7.39% 7.65% 9.05% 9.05%
11.26% 11.26% 11.26% 11.26%
7.14%
Page 1
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Ratings Capital Structure Rates of Return Basic Cap Common
Common
SBE No. Company Name Financial Bond Equity Debt Equity Debt
Rate
153 Transwestern Pipeline Company Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
180 North Baja Pipeline, LLC Not Rated Not Rated 70% 30% 13.54%
4.16% 10.73%
187 Mojave Pipeline Company, LLC Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
188 Kern River Gas Transmission Company Not Rated Not Rated 70%
30% 13.54% 4.16% 10.73%
189 Standard Pacific Gas Line, Incorporated Not Rated Not Rated
70% 30% 13.54% 4.16% 10.73%
190 Tuscarora Gas Transmission Company Not Rated Not Rated 70%
30% 13.54% 4.16% 10.73%
196 Questar Southern Trails Pipeline Company Not Rated Not Rated
70% 30% 13.54% 4.16% 10.73%
197 El Paso Natural Gas Company, LLC Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Natural Gas Transmission Companies
Page 2
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Facility Type
Ratings Capital Structure Rates of Return Basic Cap
3RateFinancial Bond Common Equity Debt
Common Equity Debt
Modern Electric Generation Technology
2 Older Electric Generation Technology
1 B
B
B2
B2
65%
65%
35%
35%
14.84%
16.93%
6.35%
7.36%
11.87%
13.58%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study Electric Generation
Facilities
1 Modern Electric Generation Technology - Generally high
efficiency combined-cycle or simple cycle gas turbine electric
generation facilities incorporating contemporary generation
technologies. 2 Older Electric Generation Technology - Generally
older steam turbine electric generation facilities that were sold
off by vertically integrated electric utilities and for which no
replacements, other than for routine maintenance, have been
made.
3 Staff may adjust the rates stated above if the specific
situation of a facility warrants an adjustment to its basic
capitalization rate.
Page 3
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SBE No. Company Name
Ratings Capital Structure Rates of Return Basic Cap Rate
Financial Bond
Common Equity Debt
Common Equity Debt
Local Exchange Companies 279 Pacific Bell Telephone Company294
Consolidated Communications of California Company284 Citizens
Telecommunications Company of California, Inc.201 Frontier
California, Inc.
Other Local Exchange Companies
Wireless Companies 2532 Los Angeles SMSA Ltd., Partnership 2552
Fresno MSA Limited Partnership 2559 Cellco Partnership 2606
AT&T Mobility LLC 2669 California RSA #4 Partnership 2748
T-Mobile West, LLC 2720 Sprint Telephony PCS, L.P.
1 Other Wireless Companies
Wireless Reseller Companies
Interexchange Companies 2274 MCI Communications Services, Inc.
2310 AT&T Communications 2372 MCI Metro Access Transmission
Services, LLC 2463 CenturyLink Communications, LLC 2014 Sprint
Communications Company, L.P.
Other Interexchange Carriers
Other Interexchange Resellers
1 Includes Radio Telephone and Paging Companies
A++ C++ C C
Not Rated
A++ A++ A++ A++ A++ B+ C++
Not Rated
Not Rated
A++ A++ A++ B C++
Not Rated
Not Rated
Baa1 B1 B3 B3
Not Rated
Baa1 Baa1 Baa1 Baa1 Baa1 Ba2 B1
Not Rated
Not Rated
Baa1 Baa1 Baa1 Ba3 B1
Not Rated
Not Rated
70% 65% 65% 65%
65%
70% 70% 70% 70% 70% 65% 65%
55%
55%
70% 70% 70% 65% 60%
55%
55%
30% 35% 35% 35%
35%
30% 30% 30% 30% 30% 35% 35%
45%
45%
30% 30% 30% 35% 40%
45%
45%
11.15% 15.36% 15.36% 15.36%
15.73%
10.57% 10.57% 10.57% 10.57% 10.57% 12.76% 14.58%
16.67%
18.75%
11.93% 11.93% 11.93% 14.58% 16.67%
21.35%
24.48%
4.05% 6.01% 6.01% 6.01%
6.26%
4.05% 4.05% 4.05% 4.05% 4.05% 5.22% 5.48%
7.53%
8.04%
4.05% 4.05% 4.05% 4.95% 5.48%
7.53%
8.04%
9.02% 12.09% 12.09% 12.09% 12.42%
8.62% 8.62% 8.62% 8.62% 8.62% 10.12% 11.40%
12.56%
13.93%
9.56% 9.56% 9.56% 11.21% 12.19%
15.13%
17.08%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Telecommunications Companies
Page 4
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Ratings Capital Structure Rates of Return Basic Cap Common
SBE No. Company Name Financial Bond Equity Debt Equity Debt
Rate
402 Calnev Pipe Line LLC NR-1 NR-b 65% 35% 13.80% 4.23% 10.45%
461 SFPP, L.P. NR-1 NR-b 65% 35% 13.80% 4.23% 10.45%
480 Phillips 66 Pipeline LLC NR-2 NR-b 65% 35% 14.32% 4.23%
10.79% 486 Pacific Pipeline System, LLC NR-2 NR-b 65% 35% 14.32%
4.23% 10.79% 492 San Pablo Bay Pipeline Company LLC NR-2 NR-b 65%
35% 14.32% 4.23% 10.79%
Other Pipeline Companies NR-3 NR-c 65% 35% 15.36% 5.25%
11.82%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study Pipeline Companies
Page 5
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SBE No.
Company Name
Ratings Capital Structure Rates of Return Basic Cap Rate
Financial Bond
Common Equity Debt
Common Equity Debt
804 843
802 810 813 822 826 850 865 878 882 897 899
BNSF Railway CompanyUnion Pacific Railroad Company
Central Oregon & Pacific Railroad California Northern
Railroad Pacific Harbor Lines Pacific Sun Railroad, LLC Sacramento
Valley Railroad, LLC Modesto & Empire Traction Company San
Diego & Imperial Valley Railroad Co. Inc. Stockton Terminal and
Eastern Railway Trona Railway Company, LLC San Joaquin Valley
Railroad Company Arizona & California Railroad Company
Other Railroad Companies
A++ A++
NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1
NR-2
Baa2 Baa2
NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1
NR-2
85% 85%
65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%
65%
15% 15%
35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%
35%
13.02% 13.02%
15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10%
15.10% 15.10%
15.36%
4.23% 4.23%
5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76%
5.76%
6.77%
11.70% 11.70%
11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83%
11.83% 11.83%
12.36%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study Railroad Companies
Page 6
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California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Gas, Electric and Water Companies
SBE No. Company Name
Ratings Capital Structure Rates of Return Basic Cap Rate
Financial
Preferred Stock Bond
Common Equity
Preferred Stock Debt
Common Equity
Preferred Stock Debt
Gas and Electric Companies 141 San Diego Gas & Electric
Company148 Southern California Edison Company135 Pacific Gas and
Electric Company106 PacifiCorp 125 Terra-Gen Dixie Valley, LLC 146
Sierra Pacific Power Company
119 Trans Bay Cable LLC 156 DATC Path 15, LLC 163 Liberty
Utilities (Calpeco Electric), LLC 191 Arizona Public Service
Company
Electric Cooperatives
Natural Gas Companies 149 Southern California Gas Company152
Southwest Gas Corporation192 Alpine Natural Gas Operating Company
No. One LLC 194 West Coast Gas Company, Inc.
104 Central Valley Gas Storage LLC 121 Gill Ranch Storage, LLC
195 Wild Goose Storage, LLC 198 Lodi Gas Storage, LLC
Water Company 101 Golden State Water Company
A A B
Not Rated Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
Not Rated
A B++ Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
A
A3 Baa1 Baa1 Baa2
Not Rated
A3
A1 A2 A2 A3
Not Rated Baa1
Not Rated A3
Not Rated A2
Not Rated
A1 A3
Not Rated Not Rated
Not Rated Not Rated Not Rated Not Rated
A2
52% 48% 52% 52% 55% 52%
55% 55% 55% 55%
55%
52% 55% 55% 55%
60% 60% 60% 60%
55%
3% 9% 1% 1%
1%
2%
45% 43% 47% 47% 45% 47%
45% 45% 45% 45%
45%
46% 45% 45% 45%
40% 40% 40% 40%
45%
10.63% 10.73% 10.68% 11.46% 11.46% 11.46%
14.06% 14.06% 11.46% 11.46%
11.46%
10.47% 10.52% 12.76% 12.76%
15.10% 15.10% 15.10% 15.10%
9.82%
6.31% 6.31% 6.31% 6.31%
7.03%
6.09%
3.96% 4.02% 4.14% 4.14% 4.14% 4.25%
4.14% 4.14% 4.14% 4.14%
4.14%
3.96% 4.14% 4.51% 4.51%
5.50% 5.50% 5.50% 5.50%
3.87%
7.49% 7.45% 7.56% 7.97% 8.16% 8.03%
9.60% 9.60% 8.16% 8.16%
8.16%
7.39% 7.65% 9.05% 9.05%
11.26% 11.26% 11.26% 11.26%
7.14%
Page 7
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2018 Capitalization Rate Study Gas, Electric and Water
Companies
Industry Notes
In establishing the capital structures for the rate-regulated
utilities, staff considered the decisions of the California Public
Utilities Commission (CPUC). For the non-rate-regulated utilities,
the capital structures were developed based on the financial data
collected and the relative risks of the utilities sampled in the
Capitalization Rate Study.
Staff considered the following in the development of equity
rates: 1. CPUC-authorized rates of return 2. Discounted Cash Flow
Model 3. Capital Asset Pricing Model Ex Post and Ex Ante risk
premiums
Staff considered the following in the development of debt rates:
1. Moodys Utility Bond Yield Spreads 2. The debt rates that a
prospective purchaser would expect at lien date
Empire District Electric Company was removed from the 2018
Capitalization Rate Study sample due to lack of financial data.
Due to a tax rate change in accordance with the Tax Cuts and Job
Act of 2017, the prospective purchasers tax rate used to relever
betas has changed from 40% to 28%.
Page 8
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2018 Capitalization Rate Study Gas and Electric Companies
Flotation Cost Adjustment
Equity Preferred Stock Debt Value Line Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
Moody's Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
Moody's Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
A 10.20% 4.00% 10.63% A3 6.22% 1.50% 6.31% A1 3.90% 1.50%
3.96%
A 10.30% 4.00% 10.73% Baa1 6.22% 1.50% 6.31% A2 3.96% 1.50%
4.02%
B 10.25% 4.00% 10.68% Baa1 6.22% 1.50% 6.31% A3 4.07% 1.50%
4.14%
Not Rated 11.00% 4.00% 11.46% Not Rated 6.92% 1.50% 7.03% Baa1
4.19% 1.50% 4.25%
Not Rated 13.50% 4.00% 14.06% Not Rated 4.44% 1.50% 4.51%
Cost of Capital Adjusted for Flotation Costs = ku 1 - f
Where: ku = The cost of capital unadjusted for flotation
costs
f = Flotation cost as a percentage of the value of securities
issued
Page 9
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Common Equity Preferred Stock Bonds Value Line Rating
Rate of 1 Return
Moody's Bond Rating
Rate of 2 Return
Moody's Bond Yields
Moody's Rating
Rate of 3 Return
A
A
B
Not Rated
Not Rated
10.20%
10.30%
10.25%
11.00%
13.50%
A3
Baa1
Baa1
Not Rated
6.22%
6.22%
6.22%
6.92%
Aa
A
Baa
Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Not
Rated
3.57% 3.63% 3.70% 3.76% 3.87% 3.99% 4.10% 4.24% 4.38% 4.52%
4.66% 4.80% 4.94% 5.08% 5.22%
2018 Capitalization Rate Study Gas and Electric Companies
Summary of Rates of Return
1 The Rate of Return on Common Equity was developed by staff
based on the relative risks of the utilities in conjunction with
the results of various financial models and pertinent information
from different sources. Consideration was also given to the latest
decision of the California Public Utilities Commission
(D.17-07-005). For 2018, the return on equity (ROE) and return on
rate base (ROR) for Pacific Gas and Electric Company are 10.25% and
7.69%, respectively; for Southern California Edison Company, the
ROE and ROR are 10.30% and 7.61%, respectively; for San Diego Gas
& Electric Company, the ROE and ROR are 10.20% and 7.55%,
respectively.
2 The Rate of Return on Preferred Stocks was developed by staff
based on the relative risks of the utilities. Consideration was
given to the latest decisions of the California Public Utilities
Commission.
3 The Rates of Return on Bonds were based on the 2017 Moody's
"Utility Bond Yields" reports. Because Moody's assigns yields only
to groups Aaa, Aa, A and Baa, staff interpolated the difference
between these groups to further refine the ratings.
Page 10
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2018 Capitalization Rate Study Gas and Electric Companies
Capital Asset Pricing Model - Ex Ante
Component Value Line Ratings
A+, A B++, B+, B
Expected Future Return, S&P 500 Less: Risk Free Return -
Long-Term Treasury Rates 1
11.29% 2.65%
11.29% 2.65%
Risk Premium Beta 2
8.64% 0.78
8.64% 0.80
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 1
6.71% 2.65%
6.91% 2.65%
Projected Return on Equity 9.36% 9.56%
1 US Department of the Treasury - Composite Long-Term Rates >
10 yrs, December 29, 2017 2 The betas are based on staff's
judgement in conjunction with the results from the beta analysis of
the study sample.
Page 11
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2018 Capitalization Rate Study Gas and Electric Companies
Capital Asset Pricing Model - Ex Post
Component Value Line Ratings
A+, A B++, B+, B
Common Stock Return, S&P 500 (1928 - 2017) 1
Less: Return on 10 Year Treasury Bonds (1928 - 2017) 1 11.53%
5.15%
11.53% 5.15%
Risk Premium Beta 2
6.38% 0.78
6.38% 0.80
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 3
4.95% 2.65%
5.10% 2.65%
Projected Return on Equity 7.60% 7.75%
1 Damodaran Online, January 5, 2018 2 The betas are based on
staff's judgement in conjunction with the results from the beta
analysis of the study sample. 3 US Department of the Treasury -
Composite Long-Term Rates > 10 yrs, December 29, 2017
Page 12
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2018 Capitalization Rate Study Gas and Electric Companies
Equity Rates
a b c d e f g h i j k l m Stock Est. Est. Dividend Est. Est. E/P
DvYld+ DvYld+
Value Line Company Price 2018 2017 2017 2018 Yield Dividend
Earnings Ratio DvGrth ErngsGr Rating Name 12/29/17 Earnings
Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i)
(h+j)
A+ American Electric Power Co., Inc. 73.57 3.85 3.60 2.39 2.51
3.41% 5.00% 3.87% 5.23% 8.41% 7.28% A+ Consolidated Edison, Inc.
84.95 4.20 4.05 2.76 2.84 3.34% 3.00% 2.57% 4.94% 6.34% 5.91% A+
Pinnacle West Capital Corporation 84.43 4.40 4.30 2.70 2.86 3.39%
5.50% 4.70% 5.21% 8.89% 8.09% A+ WEC Energy Group, Inc. 66.43 3.30
3.12 2.08 2.21 3.33% 6.50% 5.57% 4.97% 9.83% 8.89% A+ Xcel Energy
Inc. 48.11 2.40 2.15 1.44 1.52 3.16% 6.00% 5.33% 4.99% 9.16% 8.49%
A ALLETE, Inc. 74.36 3.55 3.35 2.14 2.22 2.99% 4.50% 6.10% 4.77%
7.49% 9.09% A Alliant Energy Corporation 42.25 2.10 1.90 1.26 1.34
3.17% 4.50% 6.17% 4.97% 7.67% 9.34% A Ameren Corporation 58.99 3.05
2.75 1.78 1.85 3.14% 4.50% 6.70% 5.17% 7.64% 9.84% A Avista
Corporation 51.49 1.95 1.80 1.43 1.49 2.89% 4.00% 4.00% 3.79% 6.89%
6.89% A Black Hills Corporation 60.11 3.50 3.30 1.81 1.90 3.16%
6.00% 5.43% 5.82% 9.16% 8.59% A Duke Energy Corporation 84.11 4.80
4.30 3.49 3.64 4.33% 4.50% 3.90% 5.71% 8.83% 8.23% A Edison
International 63.24 4.40 4.35 2.23 2.45 3.87% 9.00% 4.73% 6.96%
12.87% 8.61% A Eversource Energy 63.18 3.30 3.10 1.90 2.02 3.20%
6.00% 6.13% 5.22% 9.20% 9.33% A Hawaiian Electric Industries, Inc.
36.15 1.80 1.50 1.24 1.24 3.43% 2.00% 4.27% 4.98% 5.43% 7.70% A MGE
Energy, Inc. 63.10 2.40 2.22 1.26 1.32 2.09% 4.50% 6.50% 3.80%
6.59% 8.59% A NextEra Energy, Inc. 156.19 7.05 6.70 3.93 4.44 2.84%
9.50% 7.47% 4.51% 12.34% 10.31% A OGE Energy Corp. 32.58 2.05 1.90
1.27 1.40 4.30% 9.00% 5.10% 6.29% 13.30% 9.40% A Otter Tail
Corporation 44.45 1.90 1.80 1.28 1.30 2.92% 2.00% 7.00% 4.27% 4.92%
9.92% A Sempra Energy 106.92 5.30 3.60 3.29 3.56 3.33% 8.50% 8.77%
4.96% 11.83% 12.10% A The Southern Company 48.09 3.05 3.00 2.30
2.38 4.95% 3.50% 3.43% 6.34% 8.45% 8.38% A Vectren Corporation
65.02 2.80 2.65 1.71 1.83 2.81% 5.50% 6.25% 4.31% 8.31% 9.06% A
Westar Energy, Inc. 52.80 2.60 2.45 1.60 1.68 3.18% 5.00% 4.07%
4.92% 8.18% 7.25%
Mean 3.33% 5.39% 5.37% 5.10% 8.72% 8.69% Median 3.19% 5.00%
5.38% 4.97% 8.43% 8.60% Weighted Average 9.51% 8.78%
Sources: Columns a, d, e, f, g, and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j represents the
average estimated earnings growth extracted from Value Line,
Zacks.com, and ThomsonReuters.com.
Page 13
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2018 Capitalization Rate Study Gas and Electric Companies
Equity Rates
a b c d e f g h i j k l m Stock Est. Est. Dividend Est. Est. E/P
DvYld+ DvYld+
Value Line Company Price 2018 2017 2017 2018 Yield Dividend
Earnings Ratio DvGrth ErngsGr Rating Name 12/29/17 Earnings
Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i)
(h+j)
B++ CMS Energy Corporation 47.30 2.30 2.15 1.33 1.42 3.00% 6.50%
6.77% 4.86% 9.50% 9.77% B++ DTE Energy Company 109.46 5.75 6.00
3.36 3.59 3.28% 7.00% 5.63% 5.25% 10.28% 8.91% B++ El Paso Electric
Company 55.35 2.65 2.40 1.32 1.42 2.57% 7.00% 5.17% 4.79% 9.57%
7.73% B++ Entergy Corporation 81.39 4.85 6.70 3.50 3.58 4.40% 2.00%
-0.30% 5.96% 6.40% 4.10% B++ Exelon Corporation 39.41 2.75 2.65
1.31 1.34 3.40% 5.50% 4.37% 6.98% 8.90% 7.77% B++ Portland General
Electric Company 45.58 2.40 2.30 1.34 1.42 3.12% 6.00% 4.53% 5.27%
9.12% 7.65% B+ CenterPoint Energy, Inc. 28.36 1.40 1.40 1.07 1.11
3.91% 3.50% 6.57% 4.94% 7.41% 10.48% B+ FirstEnergy Corp. 30.27
2.80 2.60 1.44 1.44 4.76% 2.00% 2.35% 9.25% 6.76% 7.11% B+ Great
Plains Energy Incorporated 32.24 1.25 -0.10 1.10 1.18 3.66% 5.00%
5.17% 3.88% 8.66% 8.83% B+ PNM Resources, Inc. 40.15 1.70 1.90 0.99
1.09 2.71% 9.00% 6.47% 4.23% 11.71% 9.18% B+ SCANA Corporation
39.78 4.15 4.05 2.45 2.45 6.16% 3.00% 3.50% 10.43% 9.16% 9.66% B
PG&E Corporation 44.83 3.75 3.70 2.08 0.00 0.00% 3.00% 4.93%
8.36% 3.00% 4.93%
Mean 3.41% 4.96% 4.60% 6.18% 8.37% 8.01% Median 3.34% 5.25%
5.05% 5.26% 9.01% 8.30% Weighted Average 7.72% 7.53%
Sources: Columns a, d, e, f, g, and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j represents the
average estimated earnings growth extracted from Value Line,
Zacks.com, and ThomsonReuters.com.
Page 14
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2018 Capitalization Rate Study Gas and Electric Companies
Long Term Earnings Growth
a b c d e f Value Line Rating Company Name Value Line Zacks
Thomson Average
A+ American Electric Power Co., Inc. 4.00% 4.80% 2.80% 3.87% A+
Consolidated Edison, Inc. 2.50% 2.00% 3.20% 2.57% A+ Pinnacle West
Capital Corporation 5.50% 3.20% 5.40% 4.70% A+ WEC Energy Group,
Inc. 6.00% 5.40% 5.30% 5.57% A+ Xcel Energy Inc. 4.50% 5.50% 6.00%
5.33% A ALLETE, Inc. 5.00% 7.20% N/A 6.10% A Alliant Energy
Corporation 6.00% 5.40% 7.10% 6.17% A Ameren Corporation 6.00%
7.10% 7.00% 6.70% A Avista Corporation 4.00% N/A N/A 4.00% A Black
Hills Corporation 7.50% 4.70% 4.10% 5.43% A Duke Energy Corporation
4.50% 4.00% 3.20% 3.90% A Edison International 4.00% 6.40% 3.80%
4.73% A Eversource Energy 6.50% 6.00% 5.90% 6.13% A Hawaiian
Electric Industries, Inc. 1.50% 5.10% 6.20% 4.27% A MGE Energy,
Inc. 6.50% N/A N/A 6.50% A NextEra Energy, Inc. 7.00% 7.40% 8.00%
7.47% A OGE Energy Corp. 6.00% 5.40% 3.90% 5.10% A Otter Tail
Corporation 7.00% N/A N/A 7.00% A Sempra Energy 7.50% 8.90% 9.90%
8.77% A The Southern Company 3.50% 4.50% 2.30% 3.43% A Vectren
Corporation 6.50% 6.00% N/A 6.25% A Westar Energy, Inc. 6.00% 3.40%
2.80% 4.07%
Sources: Columns a and c were extracted from Value Line. Column
d was extracted from Zacks.com. Column e was extracted from
ThomsonReuters.com.
Page 15
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2018 Capitalization Rate Study Gas and Electric Companies
Long Term Earnings Growth
a b c d e f
Value Line Rating Company Name Value Line Zacks Thomson
Average
B++ B++ B++ B++ B++ B++ B+ B+ B+ B+ B+ B
CMS Energy Corporation DTE Energy Company El Paso Electric
Company Entergy Corporation Exelon Corporation Portland General
Electric Company CenterPoint Energy, Inc. FirstEnergy Corp. Great
Plains Energy Incorporated PNM Resources, Inc. SCANA Corporation
PG&E Corporation
6.50% 6.00% 5.00% -2.50% 8.50% 6.00% 6.00% 12.00% 4.50% 7.50%
3.50% 8.50%
6.40% 6.00% 5.20% 7.00% 4.30% 3.60% 6.00% N/A
5.00% 5.80% 3.50% 4.20%
7.40% 4.90% 5.30% -5.40% 0.30% 4.00% 7.70% -7.30% 6.00% 6.10%
N/A
2.10%
6.77% 5.63% 5.17% -0.30% 4.37% 4.53% 6.57% 2.35% 5.17% 6.47%
3.50% 4.93%
Mean 5.56% 5.31% 4.21% 5.09% Median 6.00% 5.40% 5.10% 5.17%
Weighted Average 4.88%
Sources: Columns a and c were extracted from Value Line. Column
d was extracted from Zacks.com. Column e was extracted from
ThomsonReuters.com.
Page 16
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2018 Capitalization Rate Study Gas and Electric Companies
Capital Structure
a b c Common
d Common
e Mkt Value
f L.T.
g Pfd
h Common
i Total
j L.T.
k Pfd
lCommon
Value Line Rating
CompanyName
Stock Outstanding
Stock Price 12/29/17
Equity ($million)
Debt Stock Equity ($million) ($million) ($million)
Capital ($million)
Debt %
Stock %
Equity %
A+ A+ A+ A+ A+ A A A A A A A A A A A A A A A A A
American Electric Power Co., Inc. Consolidated Edison, Inc.
Pinnacle West Capital Corporation WEC Energy Group, Inc. Xcel
Energy Inc. ALLETE, Inc. Alliant Energy Corporation Ameren
Corporation Avista Corporation Black Hills Corporation Duke Energy
Corporation Edison International Eversource Energy Hawaiian
Electric Industries, Inc. MGE Energy, Inc. NextEra Energy, Inc. OGE
Energy Corp. Otter Tail Corporation Sempra Energy The Southern
Company Vectren Corporation Westar Energy, Inc.
491,883,887 310,068,797 111,729,775 315,575,562 507,762,881
51,039,658 231,204,360 242,634,798 64,415,157 53,484,560
699,975,614 325,811,206 316,885,808 108,785,978 34,668,370
470,397,581 199,705,254 39,557,491 251,277,393 1,003,627,691
83,002,391 142,094,176
73.57 84.95 84.43 66.43 48.11 74.36 42.25 58.99 51.49 60.11
84.11 63.24 63.18 36.15 63.10 156.19 32.58 44.45
106.92 48.09 65.02 52.80
36,187.90 26,340.34 9,433.34 20,963.68 24,428.47 3,795.31
9,768.38 14,313.03 3,316.74 3,214.96 58,874.95 20,604.30 20,020.85
3,932.61 2,187.57 73,471.40 6,506.40 1,758.33 26,866.58 48,264.46
5,396.82 7,502.57
18,362.00 0.00 14,651.00 0.00 4,491.00 0.00 8,785.80 30.40
14,573.00 0.00 1,444.60 0.00 4,255.10 400.00 6,922.00 142.00
1,543.30 0.00 3,109.90 0.00 48,929.00 0.00 11,638.00 2,654.00
10,468.00 155.60 1,493.50 34.30 389.40 0.00
30,345.00 0.00 2,749.50 0.00 490.40 0.00
14,803.00 20.00 44,042.00 2,218.00 1,639.10 0.00 3,686.90
0.00
36,187.90 54,549.90 26,340.34 40,991.34 9,433.34 13,924.34
20,963.68 29,779.88 24,428.47 39,001.47 3,795.31 5,239.91 9,768.38
14,423.48 14,313.03 21,377.03 3,316.74 4,860.04 3,214.96 6,324.86
58,874.95 107,803.95 20,604.30 34,896.30 20,020.85 30,644.45
3,932.61 5,460.41 2,187.57 2,576.97 73,471.40 103,816.40 6,506.40
9,255.90 1,758.33 2,248.73 26,866.58 41,689.58 48,264.46 94,524.46
5,396.82 7,035.92 7,502.57 11,189.47
33.66% 35.74% 32.25% 29.50% 37.37% 27.57% 29.50% 32.38% 31.75%
49.17% 45.39% 33.35% 34.16% 27.35% 15.11% 29.23% 29.71% 21.81%
35.51% 46.59% 23.30% 32.95%
0.00% 0.00% 0.00% 0.10% 0.00% 0.00% 2.77% 0.66% 0.00% 0.00%
0.00% 7.61% 0.51% 0.63% 0.00% 0.00% 0.00% 0.00% 0.05% 2.35% 0.00%
0.00%
66.34% 64.26% 67.75% 70.40% 62.63% 72.43% 67.73% 66.96% 68.25%
50.83% 54.61% 59.04% 65.33% 72.02% 84.89% 70.77% 70.29% 78.19%
64.44% 51.06% 76.70% 67.05%
Mean 32.42% 0.67% 66.91% Median 32.32% 0.00% 67.39% Weighted
Average 36.50% 0.83% 62.67%
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
Page 17
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2018 Capitalization Rate Study Gas and Electric Companies
Capital Structure
a b c d e f g h i j k l Common Common Mkt Value L.T. Pfd Common
Total L.T. Pfd Common
Value Line Stock Stock Price Equity Debt Stock Equity Capital
Debt Stock Equity Rating Company Name Outstanding 12/29/17
($million) ($million) ($million) ($million) ($million) % % %
B++ CMS Energy Corporation 282,083,585 47.30 13,342.55 9,121.00
37.00 13,342.55 22,500.55 40.54% 0.16% 59.30% B++ DTE Energy
Company 179,390,286 109.46 19,636.06 11,795.00 0.00 19,636.06
31,431.06 37.53% 0.00% 62.47% B++ El Paso Electric Company
40,591,794 55.35 2,246.76 1,195.90 0.00 2,246.76 3,442.66 34.74%
0.00% 65.26% B++ Entergy Corporation 180,251,407 81.39 14,670.66
14,000.00 203.20 14,670.66 28,873.86 48.49% 0.70% 50.81% B++ Exelon
Corporation 960,852,473 39.41 37,867.20 32,090.00 0.00 37,867.20
69,957.20 45.87% 0.00% 54.13% B++ Portland General Electric Company
89,092,325 45.58 4,060.83 2,277.00 0.00 4,060.83 6,337.83 35.93%
0.00% 64.07% B+ CenterPoint Energy, Inc. 431,033,509 28.36
12,224.11 7,531.00 0.00 12,224.11 19,755.11 38.12% 0.00% 61.88% B+
FirstEnergy Corp. 444,858,003 30.27 13,465.85 21,089.00 0.00
13,465.85 34,554.85 61.03% 0.00% 38.97% B+ Great Plains Energy
Incorporated 215,661,646 32.24 6,952.93 3,312.00 0.00 6,952.93
10,264.93 32.27% 0.00% 67.73% B+ PNM Resources, Inc. 79,653,624
40.15 3,198.09 2,282.40 11.50 3,198.09 5,491.99 41.56% 0.21% 58.23%
B+ SCANA Corporation 142,616,254 39.78 5,673.27 6,455.00 0.00
5,673.27 12,128.27 53.22% 0.00% 46.78% B PG&E Corporation
514,422,806 44.83 23,061.57 16,619.00 252.00 23,061.57 39,932.57
41.62% 0.63% 57.75%
Mean 42.58% 0.14% 57.28% Median 41.05% 0.00% 58.77% Weighted
Average 44.88% 0.18% 54.94%
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
Page 18
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2018 Capitalization Rate Study Gas and Electric Companies
Beta Analysis a b c d e f g h i
Value Standard Company's Debt Value Line Line Zacks & Poor's
Average Tax Equity Unlevered Rating Company Name Beta Beta Beta
Beta Rate Ratio1 Beta2
A+ American Electric Power Co., Inc. 0.65 0.30 0.21 0.39 0.36
0.59 0.47 A+ Consolidated Edison, Inc. 0.50 0.10 0.00 0.20 0.36
0.60 0.36 A+ Pinnacle West Capital Corporation 0.70 0.38 0.27 0.45
0.33 0.47 0.53 A+ WEC Energy Group, Inc. 0.60 0.15 0.05 0.27 0.38
0.46 0.47 A+ Xcel Energy Inc. 0.60 0.21 0.07 0.29 0.36 0.67 0.42 A
ALLETE, Inc. 0.80 0.47 0.49 0.59 0.20 0.50 0.57 A Alliant Energy
Corporation 0.70 0.46 0.37 0.51 0.15 0.48 0.50 A Ameren Corporation
0.70 0.37 0.33 0.47 0.40 0.55 0.53 A Avista Corporation 0.75 0.42
0.36 0.51 0.37 0.63 0.54 A Black Hills Corporation 0.90 0.73 0.70
0.78 0.30 0.72 0.60 A Duke Energy Corporation 0.60 0.26 0.13 0.33
0.32 0.75 0.40 A Edison International 0.65 0.24 0.14 0.34 0.10 0.64
0.41 A Eversource Energy 0.65 0.31 0.30 0.42 0.37 0.54 0.49 A
Hawaiian Electric Industries, Inc. 0.70 0.50 0.30 0.50 0.36 0.46
0.54 A MGE Energy, Inc. 0.75 0.33 0.30 0.46 0.35 0.23 0.65 A
NextEra Energy, Inc. 0.65 0.31 0.21 0.39 0.29 0.53 0.47 A OGE
Energy Corp. 0.95 0.90 0.65 0.83 0.32 0.40 0.75 A Otter Tail
Corporation 0.90 0.82 0.76 0.83 0.25 0.38 0.70 A Sempra Energy 0.80
0.62 0.48 0.63 0.38 0.51 0.61 A The Southern Company 0.55 0.14 0.07
0.25 0.33 0.69 0.38 A Vectren Corporation 0.75 0.83 0.65 0.74 0.35
0.44 0.58 A Westar Energy, Inc. 0.70 0.42 0.37 0.50 0.34 0.56
0.51
Mean 0.71 0.42 0.33 0.49 0.54 0.52 Median 0.70 0.38 0.30 0.46
0.54 0.52 Weighted Average 0.38 0.60 0.46
Relevered Beta based on 45% Debt Capital Structure and Mean
Unlevered Beta 3 0.83 Relevered Beta based on 45% Debt Capital
Structure and Weighted Average Unlevered Beta 3 0.72
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to
equity ratio, tc is the company's most recent tax rate. 3 Relevered
Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to
equity ratio, tp is a prospective purchaser's tax rate (assumed to
be 28%).
Page 19
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2018 Capitalization Rate Study Gas and Electric Companies
Beta Analysis
a b c d e f g h i Value Standard Company's Debt
Value Line Line Zacks & Poor's Average Tax Equity Unlevered
Rating Company Name Beta Beta Beta Beta Rate Ratio1 Beta2
B++ CMS Energy Corporation 0.65 0.19 0.07 0.30 0.33 0.83 0.42
B++ DTE Energy Company 0.65 0.23 0.19 0.36 0.25 0.73 0.42 B++ El
Paso Electric Company 0.80 0.48 0.43 0.57 0.36 0.58 0.58 B++
Entergy Corporation 0.65 0.55 0.40 0.53 0.06 1.00 0.34 B++ Exelon
Corporation 0.70 0.30 0.22 0.41 0.33 0.87 0.44 B++ Portland General
Electric Company 0.70 0.30 0.30 0.43 0.21 0.65 0.46 B+ CenterPoint
Energy, Inc. 0.90 0.62 0.49 0.67 0.36 0.77 0.60 B+ FirstEnergy
Corp. 0.70 0.25 0.14 0.36 0.38 1.40 0.37 B+ Great Plains Energy
Incorporated 0.75 0.47 0.37 0.53 NMF 0.74 NMF B+ PNM Resources,
Inc. 0.75 0.36 0.28 0.46 0.34 0.78 0.50 B+ SCANA Corporation 0.65
0.20 0.22 0.36 0.31 0.79 0.42 B PG&E Corporation 0.65 0.14 0.21
0.33 0.21 0.63 0.43
Mean 0.71 0.34 0.28 0.44 0.81 0.45 Median 0.70 0.30 0.25 0.42
0.78 0.43 Weighted Average 0.41 0.87 0.41
Relevered Beta based on 47% Debt Capital Structure and Mean
Unlevered Beta 3 0.74 Relevered Beta based on 47% Debt Capital
Structure and Weighted Average Unlevered Beta 3 0.68
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to
equity ratio, tc is the company's most recent tax rate. 3 Relevered
Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to
equity ratio, tp is the prospective purchaser's tax rate (assumed
to be 28%).
Page 20
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2018 Capitalization Rate Study Natural Gas Companies
Flotation Cost Adjustment
Equity Preferred Stock Debt Value Line Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
Moody's Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
Moody's Rating
Recommended Rate
Flotation Cost in %
Adjusted Rate
A 10.05% 4.00% 10.47% A3 6.00% 1.50% 6.09% A1 3.90% 1.50%
3.96%
B++ 10.10% 4.00% 10.52% A2 3.96% 1.50% 4.02%
Not Rated 12.25% 4.00% 12.76% A3 4.07% 1.50% 4.14%
Not Rated 14.50% 4.00% 15.10% Baa1 4.19% 1.50% 4.25%
Baa2 4.30% 1.50% 4.37%
Baa3 4.44% 1.50% 4.51%
Ba1 4.58% 1.50% 4.65%
Ba2 4.72% 1.50% 4.79%
Ba3 4.86% 1.50% 4.93%
Not Rated 5.42% 1.50% 5.50%
Cost of Capital Adjusted for Flotation Costs = ku 1 - f
Where: ku = The cost of capital unadjusted for flotation
costs
f = Flotation cost as a percentage of the value of securities
issued
Page 21
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2018 Capitalization Rate Study Natural Gas Companies
Summary of Rates of Return
Common Equity Preferred Stock Bonds Value Line Rating
Rate of 1 Return
Moody's Bond Rating
Rate of 2 Return
Moody's Bond Yields
Moody's Rating
Rate of 3 Return
A
B++
Not Rated
Not Rated
10.05%
10.10%
12.25%
14.50%
A3 6.00% Aa
A
Baa
Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Not
Rated
3.57% 3.63% 3.70% 3.76% 3.87% 3.99% 4.10% 4.24% 4.38% 4.52%
4.66% 4.80% 4.94% 5.08% 5.22%
1 The Rate of Return on Common Equity was developed by staff
based on the relative risks of the utilities in conjunction with
the results of various financial models and pertinent information
from different sources. Consideration was also given to the latest
decisions of the California Public Utilities Commission. For 2018,
the return on equity (ROE) and return on rate base (ROR) for
Southern California Gas Company are 10.05% and 7.34%, respectively
(D.17-07-005); for Southwest Gas Corporation, the ROE and ROR are
10.10% and 8.18% , respectively.
2 The Rate of Return on Preferred Stocks was developed by staff
based on the relative risks of the utilities. Consideration was
given to the latest decisions of the California Public Utilities
Commission.
3 The Rates of Return on Bonds were based on the 2017 Moody's
"Utility Bond Yields" reports. Because Moody's assigns yields only
to groups Aaa, Aa, A and Baa, staff interpolated the difference
between these groups to further refine the ratings.
Page 22
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2018 Capitalization Rate Study Natural Gas Companies
Capital Asset Pricing Model - Ex Ante
Component Value Line Ratings
A+, A, B++, B+ Not Rated
Expected Future Return, S&P 500 Less: Risk Free Return -
Long-Term Treasury Rates 1
11.29% 2.65%
11.29% 2.65%
Risk Premium Beta 2
8.64% 0.92
8.64% 1.25
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 1
7.94% 2.65%
10.80% 2.65%
Projected Return on Equity 10.59% 13.45%
1 US Department of the Treasury - Composite Long-Term Rates >
10 yrs, December 29, 2017 2 The betas are based on staff's
judgement in conjunction with the results from the beta analysis of
the study sample and Damodaran Online.
Page 23
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2018 Capitalization Rate Study Natural Gas Companies
Capital Asset Pricing Model - Ex Post
Component Value Line Ratings
A+, A, B++, B+ Not Rated
Common Stock Return, S&P 500 (1928 - 2017) 1
Less: Return on 10 Year Treasury Bonds (1928 - 2017) 1 11.53%
5.15%
11.53% 5.15%
Risk Premium Beta 2
6.38% 0.92
6.38% 1.25
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 3
5.86% 2.65%
7.98% 2.65%
Projected Return on Equity 8.51% 10.63%
1 Damodaran Online, January 5, 2018 2 The betas are based on
staff's judgement in conjunction with the results from the beta
analysis of the study sample and Damodaran Online. 3 US Department
of the Treasury - Composite Long-Term Rates > 10 yrs, December
29, 2017
Page 24
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2018 Capitalization Rate Study Natural Gas Companies Equity
Rates
a b c d e f g h i j k l m Stock Est. Est. Dividend Est. Est. E/P
DvYld+ DvYld+
Value Line Company Price 2018 2017 2017 2018 Yield Dividend
Earnings Ratio DvGrth ErngsGr Rating Name 12/29/17 Earnings
Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i)
(h+j)
A+ Atmos Energy Corporation 85.89 3.80 3.60 1.80 1.94 2.26%
6.50% 6.50% 4.42% 8.76% 8.76% A+ New Jersey Resources Corp. 40.20
1.90 1.73 1.04 1.09 2.71% 3.50% 4.00% 4.73% 6.21% 6.71% A Northwest
Natural Gas Company 59.16 2.45 2.25 1.88 1.89 3.19% 1.00% 5.75%
4.14% 4.19% 8.94% A South Jersey Industries, Inc. 31.23 1.45 1.15
1.10 1.15 3.68% 4.00% 7.75% 4.64% 7.68% 11.43% A WGL Holdings Inc.
85.33 3.50 3.11 2.02 2.08 2.44% 3.00% 4.00% 4.10% 5.44% 6.44% B++
Southwest Gas Holdings, Inc. 80.48 3.70 3.55 1.98 2.08 2.58% 7.50%
6.95% 4.60% 10.08% 9.53% B++ Spire Inc. 75.15 3.80 3.43 2.10 2.25
2.99% 5.00% 5.83% 5.06% 7.99% 8.83% B++ UGI Corporation 46.95 2.50
2.29 0.96 1.02 2.17% 4.00% 6.35% 5.32% 6.17% 8.52% B+ NiSource Inc.
25.67 1.25 0.85 0.70 0.74 2.88% 6.50% 6.37% 4.87% 9.38% 9.25%
Mean 2.77% 4.56% 5.94% 4.65% 7.32% 8.71% Median 2.71% 4.00%
6.35% 4.64% 7.68% 8.83% Weighted Average 7.83% 8.73%
Sources: Columns a, d, e, f, g, and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j represents the
average estimated earnings growth extracted from Value Line,
Zacks.com, and ThomsonReuters.com.
Page 25
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2018 Capitalization Rate Study Natural Gas Companies
Long Term Earnings Growth
a b c d e f Value Line Rating Company Name Value Line Zacks
Thomson Average
A+ Atmos Energy Corporation 6.00% 7.00% 6.50% 6.50% A+ New
Jersey Resources Corp. 2.00% 6.00% N/A 4.00% A Northwest Natural
Gas Company 7.00% 4.50% N/A 5.75% A South Jersey Industries, Inc.
5.50% 10.00% N/A 7.75% A WGL Holdings Inc. 2.00% 6.00% N/A 4.00%
B++ Southwest Gas Holdings, Inc. 8.00% 5.90% N/A 6.95% B++ Spire
Inc. 8.00% 5.00% 4.50% 5.83% B++ UGI Corporation 6.50% N/A 6.20%
6.35% B+ NiSource Inc. 5.50% 5.90% 7.70% 6.37%
Mean 5.61% 6.29% 6.23% 5.94% Median 6.00% 5.95% 6.35% 6.35%
Weighted Average 6.09%
Sources: Columns a and c were extracted from Value Line. Column
d was extracted from Zacks.com. Column e was extracted from
ThomsonReuters.com.
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2018 Capitalization Rate Study Natural Gas Companies Capital
Structure
a b c d e f g h i j k l Common Common Mkt Value L.T. Pfd Common
Total L.T. Pfd Common
Value Line Stock Stock Price Equity Debt Stock Equity Capital
Debt Stock Equity Rating Company Name Outstanding 12/29/17
($million) ($million) ($million) ($million) ($million) % % %
A+ Atmos Energy Corporation 106,065,596 85.89 9,109.97 3,066.70
0.00 9,109.97 12,176.67 25.19% 0.00% 74.81% A+ New Jersey Resources
Corp. 86,538,661 40.20 3,478.85 897.70 0.00 3,478.85 4,376.55
20.51% 0.00% 79.49% A Northwest Natural Gas Company 28,713,052
59.16 1,698.66 757.40 0.00 1,698.66 2,456.06 30.84% 0.00% 69.16% A
South Jersey Industries, Inc. 79,549,080 31.23 2,484.32 1,180.30
0.00 2,484.32 3,664.62 32.21% 0.00% 67.79% A WGL Holdings Inc.
51,219,000 85.33 4,370.52 1,235.60 28.20 4,370.52 5,634.32 21.93%
0.50% 77.57% B++ Southwest Gas Holdings, Inc. 47,731,840 80.48
3,841.46 1,732.00 0.00 3,841.46 5,573.46 31.08% 0.00% 68.92% B++
Spire Inc. 48,266,858 75.15 3,627.25 1,995.00 0.00 3,627.25
5,622.25 35.48% 0.00% 64.52% B++ UGI Corporation 173,373,824 46.95
8,139.90 4,014.60 0.00 8,139.90 12,154.50 33.03% 0.00% 66.97% B+
NiSource Inc. 336,793,693 25.67 8,645.49 7,518.60 0.00 8,645.49
16,164.09 46.51% 0.00% 53.49%
Mean 30.75% 0.06% 69.19% Median 31.08% 0.00% 68.92% Weighted
Average 33.02% 0.04% 66.93%
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
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2018 Capitalization Rate Study Natural Gas Companies Beta
Analysis
a b c d e f g h i Value Standard Company's Debt
Value Line Line Zacks & Poor's Average Tax Equity Unlevered
Rating Company Name Beta Beta Beta Beta Rate Ratio1 Beta2
A+ Atmos Energy Corporation 0.70 0.40 0.39 0.50 0.37 0.28 0.60
A+ New Jersey Resources Corp. 0.80 0.43 0.49 0.57 0.32 0.39 0.63 A
Northwest Natural Gas Company 0.70 0.40 0.31 0.47 0.35 0.45 0.54 A
South Jersey Industries, Inc. 0.85 0.71 0.64 0.73 0.25 0.43 0.64 A
WGL Holdings Inc. 0.80 0.66 0.69 0.72 0.39 0.29 0.68 B++ Southwest
Gas Holdings, Inc. 0.80 0.61 0.48 0.63 0.35 0.49 0.61 B++ Spire
Inc. 0.70 0.30 0.34 0.45 0.32 0.66 0.48 B++ UGI Corporation 0.90
0.68 0.69 0.76 0.30 0.56 0.65 B+ NiSource Inc. 0.60 0.37 0.11 0.36
0.36 0.81 0.39
Mean 0.76 0.51 0.46 0.58 0.48 0.58 Median 0.80 0.43 0.48 0.57
0.45 0.61 Weighted Average 0.55 0.53 0.56
Relevered Beta based on 46% Debt Capital Structure and Mean
Unlevered Beta 3 0.94 Relevered Beta based on 46% Debt Capital
Structure and Weighted Average Unlevered Beta 3 0.90
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to
equity ratio, tc is the company's most recent tax rate. 3 Relevered
Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to
equity ratio, tp is a prospective purchaser's tax rate (assumed to
be 28%).
Page 28
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2018 Capitalization Rate Study Water Utility Companies
Flotation Cost Adjustment
Value Line Rating
Equity Recommended
Rate Flotation Cost in %
Adjusted Rate
Moody's Rating
Debt Recommended
Rate Flotation Cost in %
Adjusted Rate
A 9.43% 4.00% 9.82% Not Rated 3.81% 1.50% 3.87%
Cost of Capital Adjusted for Flotation Costs = ku 1 - f
Where: ku = The cost of capital unadjusted for flotation
costs
f = Flotation cost as a percentage of the value of securities
issued
Page 29
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2018 Capitalization Rate Study Water Utility Companies
Summary of Rates of Return
Value LineRating
Common Equity Rate of
Return1 Moody'sRating
Bonds Rate of
Return
A 9.43% Not Rated 3.81%
1 In developing the Rate of Return on Common Equity, staff
considered the latest decision of the California Public Utilities
Commission and other pertinent information. For 2018, the return on
equity and return on rate base for Golden State Water Company are
9.43% and 8.34%, respectively (D.12-07-009).
Page 30
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Component Value Line Ratings
A, B++, B+
Expected Future Return, S&P 500 11.29% Less: Risk Free
Return - Long-Term Treasury Rates
Risk Premium 2 Beta
Adjusted Risk Premium
1 2.65%
8.64% 0.76
6.54% 1 Risk Free Return - Long-Term Treasury Rates
Projected Return on Equity
2.65%
9.19%
2018 Capitalization Rate Study Water Utility Companies
Capital Asset Pricing Model - Ex Ante
1 US Department of the Treasury - Composite Long-Term Rates >
10 yrs, December 29, 2017 2 The betas are based on staff's
judgement in conjunction with the results from the beta analysis of
the study sample.
Page 31
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Component Value Line Ratings
A, B++, B+
Common Stock Return, S&P 500 (1928 - 2017) 1 11.53% Less:
Return on 10 Year Treasury Bonds (1928 - 2017) 1 5.15%
Risk Premium 2 Beta
6.38% 0.76
Adjusted Risk Premium 4.83% 3 Risk Free Return - Long-Term
Treasury Rates
Projected Return on Equity
2.65%
7.48%
2018 Capitalization Rate Study Water Utility Companies
Capital Asset Pricing Model - Ex Post
1 Damodaran Online, January 5, 2018 2 The betas are based on
staff's judgement in conjunction with the results from the beta
analysis of the study sample. 3 US Department of the Treasury -
Composite Long-Term Rates > 10 yrs, December 29, 2017
Page 32
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2018 Capitalization Rate Study Water Utility Companies
Equity Rates
a b c d e f g h i j k l m Stock Est. Est. Dividend Est. Est. E/P
DvYld+ DvYld+
Value Line Company Price 2018 2017 2017 2018 Yield Dividend
Earnings Ratio DvGrth ErngsGr Rating Name 12/29/17 Earnings
Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i)
(h+j)
A American States Water Company 57.91 1.85 1.85 0.99 1.06 1.83%
7.50% 4.83% 3.19% 9.33% 6.66% A Aqua America, Inc. 39.23 1.45 1.36
0.79 0.85 2.17% 9.00% 5.83% 3.70% 11.17% 8.00% B++ California Water
Service Group 45.35 1.55 1.40 0.72 0.75 1.65% 7.50% 8.00% 3.42%
9.15% 9.65% B++ Middlesex Water Company 39.91 1.65 1.40 0.86 0.91
2.28% 5.00% 9.00% 4.13% 7.28% 11.28% B+ American Water Works Co.,
Inc. 91.01 3.30 3.00 1.62 1.78 1.96% 10.00% 7.83% 3.63% 11.96%
9.79% B+ The York Water Co. 33.90 1.15 1.05 0.65 0.70 2.06% 8.00%
9.50% 3.39% 10.06% 11.56%
Mean 1.99% 7.83% 7.50% 3.58% 9.83% 9.49% Median 2.01% 7.75%
7.92% 3.52% 9.70% 9.72% Weighted Average 11.28% 9.22%
Sources: Columns a, d, e, f, g, and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j represents the
average estimated earnings growth extracted from Value Line,
Zacks.com, and ThomsonReuters.com.
Page 33
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2018 Capitalization Rate Study Water Utility Companies
Long Term Earnings Growth
a b c d e f Value Line Rating Company Name Value Line Zacks
Thomson Average
A American States Water Company 6.50% 4.00% 4.00% 4.83% A Aqua
America, Inc. 7.00% 5.50% 5.00% 5.83% B++ California Water Service
Group 10.00% 6.00% N/A 8.00% B++ Middlesex Water Company 9.00% N/A
N/A 9.00% B+ American Water Works Co., Inc. 8.50% 7.50% 7.50% 7.83%
B+ The York Water Co. 9.50% N/A N/A 9.50%
Mean 8.42% 5.75% 5.50% 7.50% Median 8.75% 5.75% 5.00% 7.92%
Weighted Average 7.23%
Sources: Columns a and c were extracted from Value Line. Column
d was extracted from Zacks.com. Column e was extracted from
ThomsonReuters.com.
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2018 Capitalization Rate Study Water Utility Companies Capital
Structure
a b c d e f g h i j k l Common Common Mkt Value L.T. Pfd Common
Total L.T. Pfd Common
Value Line Stock Stock Price Equity Debt Stock Equity Capital
Debt Stock Equity Rating Company Name Outstanding 12/29/17
($million) ($million) ($million) ($million) ($million) % % %
A American States Water Company 36,679,175 57.91 2,124.09 321.00
0.00 2,124.09 2,445.09 13.13% 0.00% 86.87% A Aqua America, Inc.
177,690,598 39.23 6,970.80 1,952.50 0.00 6,970.80 8,923.30 21.88%
0.00% 78.12% B++ California Water Service Group 48,015,000 45.35
2,177.48 519.70 0.00 2,177.48 2,697.18 19.27% 0.00% 80.73% B++
Middlesex Water Company 16,346,036 39.91 652.37 135.80 2.40 652.37
790.57 17.18% 0.30% 82.52% B+ American Water Works Co., Inc.
178,375,400 91.01 16,233.95 6,672.00 9.00 16,233.95 22,914.95
29.12% 0.04% 70.84% B+ The York Water Co. 12,859,432 33.90 435.93
88.90 0.00 435.93 524.83 16.94% 0.00% 83.06%
Mean 19.59% 0.06% 80.36% Median 18.22% 0.00% 81.63% Weighted
Average 25.30% 0.03% 74.67%
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
Page 35
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-
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to
equity ratio, tc is the company's most recent tax rate. 3 Relevered
Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to
equity ratio, tp is a prospective purchaser's tax rate (assumed to
be 28%).
2018 Capitalization Rate Study Water Utility Companies Beta
Analysis
a b c d e f g h i
Value Line Rating Company Name
Value Line Beta
Zacks Beta
Standard & Poor's Beta
Average Beta
Company's Tax Rate
Debt Equity Ratio1
Unlevered Beta2
A A B++ B++ B+ B+
American States Water Company 0.80 0.49 0.43 0.57 Aqua America,
Inc. 0.75 0.59 0.45 0.60 California Water Service Group 0.80 0.74
0.64 0.73 Middlesex Water Company 0.80 0.45 0.42 0.56 American
Water Works Co., Inc. 0.65 0.27 0.23 0.38 The York Water Co. 0.80
0.57 0.56 0.64
Mean 0.77 0.52 0.46 0.58 Median 0.80 0.53 0.44 0.59 Weighted
Average 0.48
3 Relevered Beta based on 45% Debt Capital Structure and Mean
Unlevered Beta Relevered Beta based on 45% Debt Capital Structure
and Weighted Average Unlevered Beta 3
0.37 0.09 0.35 0.32 0.40 0.24
0.21 0.32 0.34 0.30 0.52 0.25
0.32 0.31 0.43
0.51 0.46 0.60 0.46 0.29 0.54
0.48 0.48 0.37
0.76 0.59
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
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Ratings Capital Structure Rates of Return Basic Cap Common
Common
SBE No. Company Name Financial Bond Equity Debt Equity Debt Rate
153 Transwestern Pipeline Company Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
180 North Baja Pipeline, LLC Not Rated Not Rated 70% 30% 13.54%
4.16% 10.73%
187 Mojave Pipeline Company, LLC Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
188 Kern River Gas Transmission Company Not Rated Not Rated 70%
30% 13.54% 4.16% 10.73%
189 Standard Pacific Gas Line, Incorporated Not Rated Not Rated
70% 30% 13.54% 4.16% 10.73%
190 Tuscarora Gas Transmission Company Not Rated Not Rated 70%
30% 13.54% 4.16% 10.73%
196 Questar Southern Trails Pipeline Company Not Rated Not Rated
70% 30% 13.54% 4.16% 10.73%
197 El Paso Natural Gas Company, LLC Not Rated Not Rated 70% 30%
13.54% 4.16% 10.73%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Natural Gas Transmission Companies
Page 37
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2018 Capitalization Rate Study Natural Gas Transmission
Companies
Industry Notes
Interstate gas transmission companies are regulated by the
Federal Energy Regulatory Commission (FERC).
National Fuel Gas Company was removed from the 2018
Capitalization Study sample.
The following utilities were added to the 2018 Capitalization
Rate Study sample:
1. EQT Corporation. 2. Boardwalk Pipeline Partners, LP. 3. EQT
Midstream Partners, LP.
Due to a tax rate change in accordance with the Tax Cuts and Job
Act of 2017, the prospective purchasers tax rate used to relever
betas has changed from 40% to 28%.
Staff relied upon the results of the following models in the
development of equity rates:
1. Discounted Cash Flow 2. Capital Asset Pricing Model (Ex Post
and Ex Ante)
Page 38
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2018 Capitalization Rate Study Natural Gas Transmission
Companies Flotation Cost Adjustment
Value Line Rating
Equity Recommended
Rate Flotation Cost in %
Adjusted Rate
Moody's Rating
Debt Recommended
Rate Flotation Cost in %
Adjusted Rate
Not Rated 13.00% 4.00% 13.54% Not Rated 4.10% 1.50% 4.16%
Cost of Capital Adjusted for Flotation Costs = ku 1 - f
Where: ku = The cost of capital unadjusted for flotation
costs
f = Flotation cost as a percentage of the value of securities
issued
Staff applied a bond rating of Baa for the Natural Gas
Transmission Companies, which represents the estimated cost of debt
for the companies in the study.
Page 39
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2018 Capitalization Rate Study Natural Gas Transmission
Companies
Comparison of Return on Common Equity
Description 2018 2017 Change
E/P Ratio - Mean 6.01% 4.55% 1.46% E/P Ratio - Median 5.26%
4.86% 0.40%
Dividends Yield + Dividends Growth - Mean 15.26% 11.66% 3.60%
Dividends Yield + Dividends Growth - Median 15.68% 12.27% 3.41%
Dividends Yield + Earnings Growth - Mean 16.56% 14.32% 2.24%
Dividends Yield + Earnings Growth - Median 17.04% 12.65% 4.39%
Capital Asset Pricing Model (CAPM) - Ex Ante 12.24% 10.49% 1.75%
Capital Asset Pricing Model (CAPM) - Ex Post 9.73% 8.56% 1.17%
State-Assessed Properties Division Recommendation: 13.00% 11.75%
1.25%
The Discounted Cash Flow (DCF) model is computed using data from
a sample of gas transmission companies with similar risk and
operations.
The information considered by staff includes the results of DCF
analysis (Dividends Yield + Dividends Growth and Dividends Yield +
Earnings Growth) and the results of the Capital Asset Pricing Model
(CAPM) analysis.
Page 40
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2018 Capitalization Rate Study Natural Gas Transmission
Companies
Equity Rates
a b c d e f g h i j k l m Stock 2018 2018 Dividend Est. Est. E/P
Div Yld+ Div Yld+
Value Line Price Est. 2017 2017 Est. Yield Dividend Earnings
Ratio Div Grwh Engs Grwh Rating Company Name 12/29/17 Earnings
Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i)
(h+j)
B++ EQT Corporation 56.92 1.55 0.95 0.12 0.16 0.28% 5.00% 16.83%
2.72% 5.28% 17.11% B++ EQT Midstream Partners, LP 73.10 5.75 5.40
3.66 4.38 5.99% 15.50% 10.97% 7.87% 21.49% 16.96% B+ Enterprise
Products Partners, LP 26.51 1.55 1.30 1.67 1.73 6.53% 10.00% 8.03%
5.85% 16.53% 14.56% B+ ONEOK, Inc. 53.45 2.40 1.75 2.72 3.10 5.80%
8.00% 13.33% 4.49% 13.80% 19.13% B+ Western Gas Partners, LP 48.09
2.25 1.80 3.53 3.77 7.84% 7.00% 10.70% 4.68% 14.84% 18.54% C++
Boardwalk Pipeline Partners, LP 12.91 1.35 1.20 0.40 0.40 3.10%
16.50% 9.95% 10.46% 19.60% 13.05%
Mean 4.92% 10.33% 11.64% 6.01% 15.26% 16.56% Median 5.90% 9.00%
10.83% 5.26% 15.68% 17.04% Weighted Average 15.27% 16.02%
Sources: Columns a, d, e, f, g, and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j is an average of
Value Line, Zacks.com and ThomsonReuters.com.
Page 41
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2018 Capitalization Rate Study Natural Gas Transmission
Companies Long Term Earnings Growth
a b c d e f Value Line Rating Company Name Value Line Zacks
Thomson Average
B++ EQT Corporation 20.50% 15.00% 15.00% 16.83% B++ EQT
Midstream Partners, LP 11.00% 12.00% 9.90% 10.97% B+ Enterprise
Products Partners, LP 12.50% 5.10% 6.50% 8.03% B+ ONEOK, Inc.
18.50% 11.80% 9.70% 13.33% B+ Western Gas Partners, LP 13.50% 6.00%
12.60% 10.70% C++ Boardwalk Pipeline Partners, LP 12.50% NMF 7.40%
9.95%
Mean 14.75% 9.98% 10.18% 11.64% Median 13.00% 11.80% 9.80%
10.83% Weighted Average 10.27%
Sources: Columns a, b, and c were extracted from the Value Line
Investment Survey Reports. Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 42
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Component Industry Computation
Expected Future Return, S&P 500 11.29% Less: Risk Free
Return - Long-Term Treasury Rates
Risk Premium
1 2.65% 8.64%
Relevered Beta Adjusted Risk Premium
1.11 9.59%
1 Risk Free Return - Long-Term Treasury Rates 2.65%
Projected Return on Equity 12.24%
2018 Capitalization Rate Study Natural Gas Transmission
Companies
Capital Asset Pricing Model - Ex Ante
1 US Department of the Treasury - Composite Long-Term Rates >
10 yrs, December 29, 2017
Page 43
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Component Industry Computation
Common Stock Return, S&P 500 (1928-2017) 1 11.53% Less:
Return on 10 Year Treasury Bonds (1928-2017) 1 5.15%
Risk Premium 6.38% Relevered Beta 1.11 Adjusted Risk Premium
7.08%
2 Risk Free Return - Long-Term Treasury Rates
Projected Return on Equity
2.65%
9.73%
2018 Capitalization Rate Study Natural Gas Transmission
Companies
Capital Asset Pricing Model - Ex Post
1 Damodaran Online, January 5, 2018 2 US Department of the
Treasury - Composite Long-Term Rates > 10 yrs, December 29,
2017
Page 44
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a b c d e f g h i
Value Line Rating Company Name
Value Lines Beta
Zacks Beta
Standard & Poor's Beta
Average Beta
Company's Tax Rate
Debt Equity
Ratio 1 Unlevered
2 Beta B++ B++ B+ B+ B+ C++
EQT Corporation 1.00 0.76 0.79 EQT Midstream Partners, LP 1.25
0.89 0.94 Enterprise Products Partners, LP 1.30 0.88 0.92 ONEOK,
Inc. 1.55 1.25 1.07 Western Gas Partners, LP 1.40 1.14 1.13
Boardwalk Pipeline Partners, LP 1.00 0.72 0.76
Mean 1.25 0.94 0.94 Median 1.28 0.89 0.93 Weighted
Relevered Beta based on 30% Debt Capital Structure Relevered
Beta based on 30% Debt Capital Structure and a weighted average
Beta
0.85 1.03 1.03 1.29 1.22 0.83
1.04 1.03 1.07
0.35 0.40 0.40 0.25 0.40 0.40
1.08 3
1.11 3
0.26 0.17 0.38 0.54 0.40 0.86
0.44 0.39 0.41
0.73 0.93 0.84 0.92 0.99 0.54
0.83 0.88 0.85
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Average Beta/[1+(1-tc)(D/E)]; where D/E is the
debt to equity ratio, tc is the company's most recent tax rate. 3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the
debt to equity ratio, tp is a prospective purchaser's tax rate
(assumed to be 28%).
2018 Capitalization Rate Study Natural Gas Transmission
Companies
Beta Analysis
Sources: Columns a, b, and c were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
Page 45
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2018 Capitalization Rate Study Natural Gas Transmission
Companies
Capital Structure
a b c d e f g h i j k l Moody's Common Common Market Value L.T.
Common Total L.T. Common
Value Line Bond P/S Stock Stock Price Equity Debt Equity Capital
Debt Equity Rating Rating Rating Company Name Outstanding 12/29/17
($million) ($million) ($million) ($million) % %
B++ NR NR EQT Corporation 173,343,000 56.92 9,866.68 2,586.00
9,866.68 12,452.68 20.80% 79.20% B++ NR NR EQT Midstream Partners,
LP 80,581,758 73.10 5,890.53 986.90 5,890.53 6,877.43 14.30% 85.70%
B+ NR NR Enterprise Products Partners, LP 2,152,702,622 26.51
57,068.15 21,709.90 57,068.15 78,778.05 27.60% 72.40% B+ NR NR
ONEOK, Inc. 383,436,687 53.45 20,494.69 8,092.00 20,494.69
28,586.69 28.30% 71.70% B+ NR NR Western Gas Partners, LP
152,602,105 48.09 7,338.64 3,343.90 7,338.64 10,682.54 31.30%
68.70% C++ NR NR Boardwalk Pipeline Partners, LP 250,296,782 12.91
3,231.33 3,585.70 3,231.33 6,817.03 52.60% 47.40%
Mean 29.15% 70.85% Median 27.95% 72.05% Weighted Average 27.97%
72.03%
Recommended Capital Structure for Natural Gas Transmission
Companies for lien date January 1, 2018: Debt - 30% Equity -
70%
Sources: Columns a, e and h were extracted from Value Line.
Column f was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
NR - Not Rated
Page 46
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2018 Capitalization Rate Study Natural Gas Transmission
Companies
Bonds - Rate of Return
Bond Rating Utility Bond Yield Aaa Aa A Baa Avg Utility
As of December 29, 2017 N/A 3.57% 3.76% 4.10% 3.81%
Source: Moody's Daily Long-Term Corporate Bond Yield Averages as
of December 29, 2017.
Page 47
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Facility Type
Ratings Capital Structure Rates of Return Basic Cap
3RateFinancial Bond Common Equity Debt
Common Equity Debt
Modern Electric Generation Technology 1 B B2 65% 35% 14.84%
6.35% 11.87%
2 Older Electric Generation Technology B B2 65% 35% 16.93% 7.36%
13.58%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study Electric Generation
Facilities
1 Modern Electric Generation Technology - Generally high
efficiency combined-cycle or simple cycle gas turbine electric
generation facilities incorporating contemporary generation
technologies. 2 Older Electric Generation Technology - Generally
older steam turbine electric generation facilities that were sold
off by vertically integrated electric utilities and for which no
replacements, other than for routine maintenance, have been
made.
3 Staff may adjust the rates stated above if the specific
situation of a facility warrants an adjustment to its basic
capitalization rate.
Page 48
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2018 Capitalization Rate Study Electric Generation
Facilities
Industry Notes
Staff relied primarily on the Capital Asset Pricing Model (CAPM)
and Risk Premium Analysis in the development of equity rates.
Consideration was given to both the Ex Post and Ex Ante adjusted
risk premiums.
Dynegy, Inc. was removed from the 2018 Capitalization Rate Study
sample due to lack of data.
The Discounted Cash Flow Model was not relied upon because not
all of the merchant generators in the sample are currently paying
dividends.
Staff's recommended capital structure of 65% equity and 35% debt
provides sufficient coverage of interest and principal payments on
debt.
Staff added a risk premium of 100 basis points to the debt rate
for older technology to recognize the markets perception of
additional risk present in operating these types of facilities.
Staff considers the risk associated with older facilities to be
greater than that of newer facilities, and has adjusted the beta
used in the CAPM calculation upward to reflect this additional
risk.
Due to a tax rate change in accordance with the Tax Cuts and Job
Act of 2017, the prospective purchasers tax rate used to relever
betas has changed from 40% to 28%.
Page 49
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Facility Equity Debt
Recommended Flotation Adjusted Recommended Flotation Adjusted
Type Rate Cost in % Rate Rate Cost in % Rate
Modern Electric Generation Technology 1 14.25% 4.00% 14.84%
6.25% 1.50% 6.35%
2 Older Electric Generation Technology 16.25% 4.00% 16.93% 7.25%
1.50% 7.36%
2018 Capitalization Rate Study Electric Generation Facilities
Flotation Cost Adjustment
Cost of Capital Adjusted for Flotation Costs = ku 1 - f
Where: ku = The cost of capital unadjusted for flotation
costs
f = Flotation cost as a percentage of the value of securities
issued
1 The Modern Electric Generation Technology Recommended Debt
Rate was developed by staff based on the relative rates of the
utilities and other pertinent information from various sources. 2
The Older Electric Generation Technology Recommended Debt Rate is
equal to the Modern Electric Generation Technology Recommended Debt
Rate with an additional risk premium of 100 basis points.
Page 50
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2018 Capitalization Rate Study Electric Generation
Facilities
Summary of Rates of Return
Common Equity Bonds Facility Rate of Moody's Bond Moody's Rate
of Type Return 1 Yields Rating Return 2
Modern Electric Generation Technology 14.25% Aa Aa2 3.57% Aa3
3.63% A1 3.70%
A A2 3.76% Older Electric Generation Technology 16.25% A3
3.87%
Baa1 3.99% Baa Baa2 4.10%
Baa3 4.24% Ba1 4.38% Ba2 4.52% Ba3 4.66% B1 4.80% B2 4.94% B3
5.08% Caa1 5.22%
1 The Rate of Return on Common Equity was developed by staff
based on the relative risk of the utilities in conjunction with the
results of the various financial models and pertinent information
from various sources. 2 Rates of Return on Bonds are based on
Moody's "Utility Bond Yields" as of December 29, 2017. However,
because Moody's assigns a yield to the groups Aa, A and Baa for
bonds, the staff interpolates the difference between these groups
in order to achieve a further refinement of the ratings.
Page 51
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2018 Capitalization Rate Study Electric Generation
Facilities
Comparison of Rates of Return on Common Equity
All Facilities in Study
E/P Ratio-Mean E/P Ratio-Median
Div Yld + Div Growth-Mean Div Yld + Div Growth-Median
Div Yld + Div Growth-Weighted Avg.
Div Yld + Earn.Growth-Mean Div Yld + Earn.Growth-Median
Div Yld + Earn.Growth-Weighted Avg.
2018 2017 Change 6.17% 5.35%
8.81% 8.99% 10.70%
8.88% 8.49% 9.26%
4.32% 5.65%
4.06% 7.98% 10.78%
7.07% 8.54% 8.70%
1.85% -0.30%
4.75% 1.01% -0.08%
1.81% -0.05% 0.56%
Merrill Lynch Industry Factor - Required Return IPPs 12.50%
11.80% 0.70%
Damodoran Online - Return on Equity by Sector (Power) 15.55%
4.37% 11.18%
Damodoran Online - Return on Equity by Sector (Utility General)
9.95% 9.57% 0.38%
Modern Older Technology Technology
2017 Recommended Rate 13.50% 15.50%
CAPM - Ex Ante 13.28% 15.44% CAPM - Ex Post 10.50% 12.09% Risk
Premium Analysis 1 14.19% 16.80%
2018 Recommended Rate 14.25% 16.25%
1 Risk Premium Analysis estimates the market indicated cost of
equity by adding the appropriate "adjusted risk premium" to the
corresponding cost of debt.
Page 52
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2018 Capitalization Rate Study Electric Generation
Facilities
Capital Asset Pricing Model - Ex Ante
Component Modern Technology Types of Facilities
Older Technology
Expected Future Return, S&P 500 Less: Risk Free Return -
Long-Term Treasury Rates 1
11.29% 2.65%
11.29% 2.65%
Risk Premium Beta 2
8.64% 1.23
8.64% 1.48
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 1
10.63% 2.65%
12.79% 2.65%
Projected Return on Equity 13.28% 15.44%
1 US Department of the Treasury - Composite Long-Term Rates
>10 yrs, December 29, 2017 2 The betas are based on staff's
judgment in conjunction with the results of the Beta Analysis. See
explanation contained in the Industry Notes.
Page 53
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2018 Capitalization Rate Study Electric Generation
Facilities
Capital Asset Pricing Model - Ex Post
Component Modern Technology Types of Facilities
Older Technology
Common Stock Return, S&P 500 (1928 - 2017) 1
Less: Return on 10 Year Treasury Bonds (1928 - 2017) 1 11.53%
5.15%
11.53% 5.15%
Risk Premium Beta 2
6.38% 1.23
6.38% 1.48
Adjusted Risk Premium Risk Free Return - Long-Term Treasury
Rates 3
7.85% 2.65%
9.44% 2.65%
Projected Return on Equity 10.50% 12.09%
1 Damodaran Online, January 5, 2018 2 The betas are based on
staff's judgment in conjunction with the results of the Beta
Analysis. See explanation contained in the Industry Notes. 3 US
Department of the Treasury - Composite Long-Term Rates >10 yrs,
December 29, 2017
Page 54
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2018 Capitalization Rate Study Electric Generation
Facilities
Equity Rates
a
Value Line Rating
b
Company Name
c Stock Price 12/29/17
d Est. 2018 Earnings
e
2017 Earnings
f
2017 Dividends
g Est. 2018
Dividends
h Dividend Yield (g/c)
i Est.
Dividend Growth
j Est.
Earnings Growth
k E/P Ratio (d/c)
l Div Yld+ Div Grth (h+i)
m Div Yld+ ErngsGrth (h+j)
B+ B+ B
Merchant Generators Calpine Corp. NRG Energy, Inc. AES Corp.
15.13 28.48 10.83
0.85 1.45 1.20
-0.05 -1.50 0.65
0.00 0.12 0.61
0.00 0.12 0.66
0.00% 0.42% 6.09%
0.00% -0.50% 16.50%
3.00% NMF 8.30%
5.62% 5.09% 11.08%
0.00% -0.08% 22.59%
3.00% NMF
14.39%
A+ A A
Diversified Electric Utilities Xcel Energy Inc. Duke Energy
Corp. NextEra Energy, Inc.
48.11 84.11 156.19
2.40 4.80 7.05
2.30 4.30 6.70
1.44 3.49 3.93
1.52 3.64 4.44
3.16% 4.33% 2.84%
6.00% 4.50% 9.50%
5.33% 3.90% 7.47%
4.99% 5.71% 4.51%
9.16% 8.83% 12.34%
8.49% 8.23% 10.31%
Mean Median Weighted Average
2.81% 3.00%
6.00% 5.25%
5.60% 5.33%
6.17% 5.35%
8.81% 8.99% 10.70%
8.88% 8.49% 9.26%
Merrill Lynch Required Return - Independent Power Producers
& Energy Traders 12.50%
Sources: Columns a, d, e, f, g and i were extracted from Value
Line. Column c was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices. Column j represents the
average estimated earnings growth extracted from Value Line,
Zacks.com and ThomsonReuters.com.
Page 55
http:ThomsonReuters.comhttp:Zacks.comhttp:Finance.Yahoo.com
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2018 Capitalization Rate Study Electric Generation
Facilities
Long Term Earnings Growth
a b c d e f Value Line Rating Company Name Value Line Zacks
Thomson Average
Merchant Generators B+ Calpine Corp. -1.00% 7.00% NMF 3.00% B+
NRG Energy, Inc. NMF NMF NMF NMF B AES Corp. NMF 8.20% 8.40%
8.30%
Diversified Electric Utilities A+ Xcel Energy Inc. 4.50% 5.50%
6.00% 5.33% A Duke Energy Corp. 4.50% 4.00% 3.20% 3.90% A NextEra
Energy, Inc. 7.00% 7.40% 8.00% 7.47%
Mean Median Weighted Average
3.75% 4.50%
6.42% 7.00%
6.40% 7.00%
5.60% 5.33% 5.70%
Merrill Lynch 5 Year Growth Estimate - Independent Power
Producers & Energy Traders 22.10%
Sources: Columns a and c were extracted from Value Line. Column
d was extracted from Zacks.com. Column e was extracted from
ThomsonReuters.com.
Page 56
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2018 Capitalization Rate Study Electric Generation Facilities
Capital Structure
a ValueLineRating
b
Company Name
c Common Stock
Outstanding
d Common Stock Price 12/29/2017
e Mkt Value Equity ($million)
f L.T.Debt
($million)
g Pfd Stock
($million)
h Common Equity ($million)
i TotalCapital ($million)
j L.T.Debt %
k Pfd Stock %
l Common Equity %
m Debt Equity Ratio
B+ B+ B
Merchant Generators Calpine Corp. NRG Energy, Inc. AES Corp.
360,589,324 315,867,904 660,386,913
15.13 28.48 10.83
5,455.72 8,995.92 7,151.99
11,281.00 15,658.00 19,776.00
0.00 298.00 0.00
5,455.72 8,995.92 7,151.99
16,736.72 24,951.92 26,927.99
67.40% 62.75% 73.44%
0.00% 1.19% 0.00%
32.60% 36.05% 26.56%
2.07 1.68 2.77
Mean Median Weighted Average
67.87% 67.40% 68.08%
0.40% 0.00% 0.43%
31.74% 32.60% 31.48%
2.17 2.07 2.20
A+ A A
Diversified Electric Utilities Xcel Energy Inc. Duke Energy
Corp. NextEra Energy, Inc.
507,762,881 699,975,614 470,397,581
48.11 84.11 156.19
24,428.47 58,874.95 73,471.40
14,092.00 48,929.00 30,345.00
0.00 0.00 0.00
24,428.47 58,874.95 73,471.40
38,520.47 107,803.95 103,816.40
36.58% 45.39% 29.23%
0.00% 0.00% 0.00%
63.42% 54.61% 70.77%
0.58 0.83 0.41
Mean Median Weighted Average
37.07% 36.58% 37.33%
0.00% 0.00% 0.00%
62.93% 63.42% 62.67%
0.61 0.58 0.62
Damodaran Online - Power Industry Damodaran Online - Utility
(General) Industry
43.30% 40.21%
0.00% 0.00%
56.70% 59.79%
0.76 0.67
Fidelity.com Research Independent Power Producers & Energy
Traders Fidelity.com Research Electric Utilities
4.59 1.44
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents
December 29, 2017 closing stock prices.
Page 57
http:Finance.Yahoo.com
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2018 Capitalization Rate Study Electric Generation
Facilities
Beta Analysis
a Value Line Rating
b
Company Name
c Value Line Beta
d
Zacks Beta
e Standard & Poor's Beta
f
Average Beta
g Company's Tax Rate
h Debt Equity Ratio 1
i
Unlevered Beta 2
Merchant Generators
B+ B+ B
Calpine Corp. NRG Energy, Inc. AES Corp.
1.10 1.30 1.20
1.05 1.28 1.21
0.97 1.09 1.18
1.04 1.22 1.20
0.00 0.00 0.32
1.93 2.92 2.36
0.36 0.34 0.50
Mean 1.15 0.11 2.40 0.40 Median 1.20 0.00 0.36 Weighted 1.17
0.13 0.41
A+ A A
Diversified Electric Utility Xcel Energy Inc. Duke Energy Corp.
NextEra Energy, Inc.
0.60 0.60 0.65
0.21 0.26 0.31
0.07 0.13 0.21
0.29 0.33 0.39
0.33 0.32 0.29
0.66 0.75 0.53
0.20 0.22 0.28
Mean 0.62 0.26 0.14 0.34 0.31 0.65 0.23 Median 0.60 0.26 0.13
0.33 0.32 0.22 Weighted 0.35 0.31 0.24
Merchant Generators Relevered Beta based on 35% Debt Capital
Structure Diversified Electric Utilities Relevered Beta based on
35% Debt Capital Structure Merrill Lynch Adjusted Beta Independent
Power Producers & Energy Traders Damodaran Online - Cost of
Capital by Sector - Power Industry Beta
0.57 0.34 1.23 0.50
3
3
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com. Column e was extracted from
Standard and Poor's Stock Reports.
1 Average debt to equity ratio over the last five years. 2
Unlevered Beta = Corrected Beta/[1+(1-tc)(D/E)]; where D/E is the
debt to equity ratio, tc is the company's most recent tax rate. 3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the
debt to equity ratio, tp is a prospective purchaser's tax rate
(assumed to be 28%).
Page 58
http:Zacks.com
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SBE No. Company Name
Ratings Capital Structure Rates of Return Basic Cap Rate
Financial Bond
Common Equity Debt
Common Equity Debt
Local Exchange Companies 279 Pacific Bell Telephone Company294
Consolidated Communications of California Company284 Citizens
Telecommunications Company of California, Inc.201 Frontier
California, Inc.
Other Local Exchange Companies
Wireless Companies 2532 Los Angeles SMSA Ltd., Partnership 2552
Fresno MSA Limited Partnership 2559 Cellco Partnership 2606
AT&T Mobility LLC 2669 California RSA #4 Partnership 2748
T-Mobile West, LLC 2720 Sprint Telephony PCS, L.P.
1 Other Wireless Companies
Wireless Reseller Companies
Interexchange Companies 2274 MCI Communications Services, Inc.
2310 AT&T Communications 2372 MCI Metro Access Transmission
Services, LLC 2463 CenturyLink Communications, LLC 2014 Sprint
Communications Company, L.P.
Other Interexchange Carriers
Other Interexchange Resellers
1 Includes Radio Telephone and Paging Companies
A++ C++ C C
Not Rated
A++ A++ A++ A++ A++ B+ C++
Not Rated
Not Rated
A++ A++ A++ B ++C++
Not Rated
Not Rated
Baa1 B1 B3 B3
Not Rated
Baa1 Baa1 Baa1 Baa1 Baa1 Ba2 B1
Not Rated
Not Rated
Baa1 Baa1 Baa1 Ba3 B1
Not Rated
Not Rated
70% 65% 65% 65%
65%
70% 70% 70% 70% 70% 65% 65%
55%
55%
70% 70% 70% 65% 60%
55%
55%
30% 35% 35% 35%
35%
30% 30% 30% 30% 30% 35% 35%
45%
45%
30% 30% 30% 35% 40%
45%
45%
11.15% 15.36% 15.36% 15.36%
15.73%
10.57% 10.57% 10.57% 10.57% 10.57% 12.76% 14.58%
16.67%
18.75%
11.93% 11.93% 11.93% 14.58% 16.67%
21.35%
24.48%
4.05% 6.01% 6.01% 6.01%
6.26%
4.05% 4.05% 4.05% 4.05% 4.05% 5.22% 5.48%
7.53%
8.04%
4.05% 4.05% 4.05% 4.95% 5.48%
7.53%
8.04%
9.02% 12.09% 12.09% 12.09% 12.42%
8.62% 8.62% 8.62% 8.62% 8.62% 10.12% 11.40%
12.56%
13.93%
9.56% 9.56% 9.56% 11.21% 12.19%
15.13%
17.08%
California State Board of Equalization State-Assessed Properties
Division 2018 Capitalization Rate Study
Telecommunications Companies
Page 59
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2018 Capitalization Rate Study Telecommunications Companies
Industry Notes
Staff conducted a consolidated capitalization rate study for the
local exchange, wireless, and interexchange industries due to the
increasing convergence of these three industries. Separate
capitalization rates were estimated for the companies in each of
the three industries based on the relative risk experienced by each
group of companies within their respe