2018 capitalization rate study tax rule 8 (g) (2) provides the authority for the method in which the...
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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
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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
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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
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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%
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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
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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
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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%.
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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.
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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.
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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.
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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.
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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.
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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.
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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%).
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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%).
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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
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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.
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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.
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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
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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.
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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%).
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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
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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).
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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.
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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
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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.
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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.
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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
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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)
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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.
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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.
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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%.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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%).
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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
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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
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