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BUSINESS VALUATION PREPARED FOR: City of Murfreesboro Electric Department Fair Value of a 100%

May 14, 2019 Mr. Craig D. Tindall, City Manager City of Murfreesboro 111 West Vine Street Murfreesboro, Tennessee 37130 Dear Mr. Tindall: Pursuant to your request and in accordance with our engagement arrangements, we have performed a valuation engagement, as that term is defined in the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants. This valuation engagement was conducted in accordance with the SSVS. The estimate of value that results from a valuation engagement is expressed as a conclusion of value. We have prepared a detailed report of the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department on a controlling, marketable basis as of December 31, 2018 based on the cash flows of the operations. This detailed report is intended to be used in connection with the potential sale of the operations of the City of Murfreesboro’s Electric Department. This report should not be distributed or circulated, quoted from, or cited in any manner that is not consistent with this purpose. Based on our analysis, as described in this valuation report, the estimate of the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department based on the cash flows of the operations is

$267,018,000

This conclusion is subject to the Statement of Assumptions and Limiting Conditions found in Appendix A of this report. We have no obligation to update this report or our conclusion of value for information that comes to our attention after the date of this report. Sincerely, JACKSON THORNTON & CO., P.C. Jason B. Wells, CPA/ABV/CFF, CVA/MAFF Derek S. DuBose, Jr., CPA/ABV, CVA, Contributor

I. Introduction 1Statement of Scope and Limitations 1Standard of Value 1Premise of Value 2Levels of Value 2

II. Description of Company 3III. Industry Information 6IV. National Economic Information 13V. Financial Analysis of Company 40

Statements of Revenues, Expenses, and Changes in Net Position 40Statements of Net Position 42Ratio Analysis 42

VI. Summary of Strengths and Weaknesses 44VII. Business Valuation Methodology 45

Income Approach 45VIII. Valuation Summary 49

IX. Value Conclusion 49Appendix A - Statement of Assumptions and Limiting Conditions 50Appendix B - Valuator's Certification 52Appendix C - Qualifications 53

Schedule 1 - Statements of Net PositionSchedule 2 - Statements of Revenues, Expenses, and Changes in Net PositionSchedule 3 - Statements of Cash FlowSchedule 4 - Adjusted Benefit StreamSchedule 5 - Equity Discount RateSchedule 6 - Weighted Average Cost of CapitalSchedule 7 - Valuation Summary

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City of Murfreesboro Electric Department Jackson Thornton & Co., P.C.

DETAILED REPORT I. INTRODUCTION We have completed a valuation engagement estimating the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department (“Murfreesboro ED”) on a controlling, marketable basis as of December 31, 2018 based on the cash flows of the operations. We have been asked to determine our conclusion of value based on the cash flows of the operations and as such, we have limited the scope of the valuation to only consider the income approach in determining the conclusion of value. We have not considered nor made a determination of value utilizing either the asset or market approaches. This detailed valuation report is intended to be used in connection with the potential sale of Murfreesboro ED. This report should not be distributed or circulated, quoted from, or cited in any manner that is not consistent with this purpose. This detailed report describes the information considered, the process of analysis followed, and our conclusion of value. The report also sets forth all of the special considerations, assumptions, and limiting conditions pertinent to the valuation. Based upon the data, information, and analysis presented in this detailed report, it is our opinion that the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department based on the cash flows of the operations is

$267,018,000.

Statement of Scope and Limitations This valuation engagement and detailed report were conducted in accordance with the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants (AICPA) and the National Association of Certified Valuators and Analysts (NACVA) minimum guidelines in accordance with their standards for conducting and reporting on business valuations. As discussed previously, we have limited the scope of the valuation to only consider the income approach in our conclusion of value. Due to the scope limitation, we have not considered nor made a determination of value utilizing the asset or market approaches. In accordance with these guidelines, a Statement of Assumptions and Limiting Conditions (Appendix A), a Valuator’s Certification (Appendix B), and a summary of Qualifications (Appendix C) are included at the end of this detailed report and are an integral part of this valuation. We have relied on certain financial information, including the audited financial statements as of June 30, 2014 through June 30, 2018, as well as unaudited statements as of December 31, 2018. We have assumed financial information, extracted from these sources and from other information provided by management, to be accurate and a fair representation of the financial status of the Company. A material change in critical information, relied upon in this report, would require reassessment to determine the effect, if any, on our calculated values. We do not, however, take any responsibility for the effects on this detailed report of using information that constitutes the work products of others. Standard of Value For the purposes of this valuation engagement, we are determining the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department based on the cash flows of operations

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resulting in a conclusion of value as outlined above and in our engagement letter. The term fair value is defined as: The fair value of an asset (or liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. 1 Premise of Value For the purposes of this valuation engagement the appropriate premise of value to use in valuing a 100% interest in Murfreesboro ED is the going concern value. The term going concern value is defined as: The value of a business enterprise that is expected to continue to operate into the future2. Levels of Value This report determines the value of a 100% interest on a controlling basis (Financial Control Value) as discussed in the following: Strategic Control Value (may also be referred to as Synergistic Value or Investment Value) - the value attributable to the strategic features and financial synergies that may motivate a particular buyer to pay a premium over the Financial Control Value. Financial Control Value - the value attributable to an interest that has the power to direct the management and policies of a business enterprise3 excluding any synergies that may accrue to a strategic buyer. Marketable Minority Value - the value attributable to an ownership interest less than 50% of the voting interest in a business enterprise, but having the benefit of marketability, or the ability to quickly convert property to cash at minimal cost4. Non-Marketable Minority Value - the value attributable to an ownership interest less than 50% of the voting interest in a business enterprise that is lacking the benefit of marketability, or the ability to quickly convert property to cash at minimal cost5. A minority interest is defined as an ownership interest less than 50% of the voting interest in a business enterprise6. However, minority does not necessarily determine control, or the lack thereof. Some blocks of control shares may lack absolute control while some minority shares may enjoy some elements of control7.

1 Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 141 (June 2001) 2 SSVS 1, Appendix B, International Glossary of Business Valuation Terms, 45. 3 Id. at 42. 4 Id. at 47. 5 Ibid. 6 Ibid. 7 Pratt, Shannon P., Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 384.

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II. DESCRIPTION OF COMPANY Business Description and History Murfreesboro ED is a department within the City of Murfreesboro, Tennessee. Murfreesboro ED is a public electric utility and has been serving the City of Murfreesboro for over 77 years. The purpose and objective of Murfreesboro ED is to provide reliable and affordable energy to the citizens and businesses of the City of Murfreesboro while also building on the history of strong customer service and support. Murfreesboro ED earned the Reliable Power Provider designation from the American Public Power Association for providing reliable and safe electric service. Earning this designation places Murfreesboro ED among the top 240 public power providers across the nation. Operations Murfreesboro ED is made up of its own finance, customer service, operations, engineering, marketing, human resources, information technology and safety divisions. There are no commingling of funds between the Murfreesboro ED and any other department within the City of Murfreesboro. The only employees that Murfreesboro ED shares with any other department are members of the City of Murfreesboro’s legal team. The finance division is responsible for the all the accounting and financial matters for the department. This includes preparation of financial statements and all reporting to agencies such as the Tennessee Valley Authority (“TVA”) and the Internal Revenue Service. Murfreesboro ED strives to maintain a high level of customer service. The utility maintains a customer service division dedicated to assisting customers with tasks such as assisting customers with their accounts, creating service orders, and help with billing. Murfreesboro ED began offering the online and mobile app “SmartHub” in 2014 which gave Murfreesboro ED customers access to their electric accounts where they can pay bills, manage account information, and check their usage from their phone or computer. The operations division is tasked with the responsibility of keeping the electric system running by maintaining the more than 721 miles of distribution and transmission lines, 14 distribution substations, 54 miles of fiber optic cable, and over 16,000 street lights. The operations division is made up of line and service crews, metering specialists, vegetation management, and dispatchers. In 2018, in addition to the maintenance of the physical assets of the utility, the operations division worked and closed 1,719 work orders and 1,113 service orders (services to new construction).

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Murfreesboro ED contains its own in-house engineering division. The engineering division’s purpose is to provide technical expertise to electric projects, including design, coordination, and installation of capital projects. The electric division is also responsible for testing and inspecting electric equipment. The responsibilities of the marketing division within Murfreesboro ED include advertising, public relations, managing key accounts, communication during emergency situations, and promoting energy-efficiency programs. The department creates advertising and promotional campaigns to highlight the utility’s products and services. The advertising and promotional campaigns are done through avenues such as promotional materials, social media, press releases, and increasing the utility’s involvement in community events. The human resources division is one of the newest to be added to Murfreesboro ED. The need to have a specific division for human resources arose out of the need to recruit and retain highly skilled employees. The responsibilities of the division include recruitment, training and development, succession planning, employee relations, and maintaining updated policies and procedures. Murfreesboro ED has its own information technology (“IT”) division dedicated to keeping the utility’s technology operating efficiently. The IT division also maintains the secure operation of the critical IT infrastructure. A big part of the division’s responsibilities include keeping the utility’s information safe in the event of a disaster. The IT division hosts critical virtual servers on several VMware host servers at the utility’s office and multiple substations. The division also uses a Barracuda Backup device to prevent any interruption in utility business. The safety division instills safety awareness to Murfreesboro ED employees. Utility employees are trained for multiple types of jobs and the safety division is tasked with ensuring that utility is compliant with all safety standards. The division routinely inspects safety procedures. Regulation The utility is heavily regulated by the TVA. Murfreesboro ED is subject to multiple TVA regulations including customer service practices and policies, rate structure, attachments to poles, use of funds, NERC compliance, CIP compliance, and proper operations of the electric system. Murfreesboro ED also must remain compliant with the City’s TVA power contract, which states that TVA is the utility’s sole provider of power and wholesale rates will be the same for municipal and cooperative distributors. Customers Murfreesboro ED provides service to customers in Murfreesboro, Tennessee. Total customers increased at a compound annual rate of 2.8% from approximately 54,000 at June 30, 2014 to approximately 63,000 at June 30, 2018. Management anticipates the total customers to increase between 3-4% in 2019. According to management, the increase in customers is mainly attributable to the continued population growth within the City of Murfreesboro. The U.S. Census Bureau released population estimates in 2017 that listed Murfreesboro among the 15 fastest growing cities in the United States. The chart below dictates the projected population through 2040 for Rutherford County, Murfreesboro’s Urban Growth Boundary, and the City of Murfreesboro. This information was provided by Kendig Keast Collaborative as a part of the City of Murfreesboro’s 2035 comprehensive plan.

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Place Name 2000 2010 2015 2020 2025 2030 2035 2040 Rutherford County 182,023 262,604 309,088 357,615 407,591 458,229 509,910 562,568 UGB 112,343 176,665 202,140 233,164 268,917 315,277 362,388 404,772 City of Murfreesboro 68,816 108,755 124,745 145,259 168,403 194,208 228,090 259,292

As of June 30, 2018, residential customers made up approximately 88% of the total customers while commercial customers accounted for the remaining 12%. According to management, there is no perceived customer concentration risk as no single customer represents a significant percentage of revenue. Murfreesboro ED’s top two customers, General Mills and Middle Tennessee State University, each make up approximately 3% of operating revenue. Facilities and Equipment Murfreesboro ED’s main office is located on land owned by the City at 205 North Walnut Street, Murfreesboro, Tennessee 37130. According to management, the utility has outgrown this facility. No room is available at the current location to construct additional building or storage space. With the completion of the Gateway substation in 2018, the utility now also has 14 distribution substations. Management indicates that the substations have either been recently built or are in excellent physical condition. Other capital assets include vehicles, poles, 721 miles of distribution and transmission line, 54 miles of fiber optic cable, 16,000 street lights, meters, and servers. According to management, the utility’s capital assets are in good condition and able to meet the current and foreseeable needs of the utility. The need for future capital improvement projects and additional capital assets will increase as the city’s population continues to grow and Murfreesboro ED’s service area expands. Competition Murfreesboro ED does not face competition as no other energy provider is permitted to service the City of Murfreesboro other than Murfreesboro ED. Management and Employees Murfreesboro ED currently has 112 full and part-time employees. Management indicated that the local labor pool is sufficient to meet the current and foreseeable needs of the utility. According to management, skilled lineman can be difficult to find but the utility mitigates this risk by hiring apprentices and training these employees to become lineman. Murfreesboro ED also relies on contract labor when necessary for certain projects. Management is currently in the process of developing a succession plan for key individuals in management. According to management, the utility could attract individuals to replace key individuals in management if someone were to leave. Other Management is unaware of any environmental violations or threatened or pending litigation.

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III. INDUSTRY INFORMATION The purpose of industry research is to understand the competitive structure of the industry, the prospects for growth, and how various factors affecting the industry may impact the future operations of the subject company. According to the North American Industry Classification System (NAICS), Murfreesboro Electric Department would most closely be identified by NAICS Code 221122 (Electric Power Distribution). This U.S. industry comprises electric power establishments primarily engaged in either (1) operating electric power distribution systems (i.e., consisting of lines, poles, meters, and wiring) or (2) operating as electric power brokers or agents that arrange the sale of electricity via power distribution systems operated by others8.

Within our research, the most comparable industry report available relates to NAICS Code 2211 (Electric Utilities). Industry information contained herein is obtained from First Research, as of October 29, 20189.

Industry Overview

Companies in this industry generate, transmit, and distribute electric power. Major companies include Duke Energy, Exelon, and Southern Company (all based in the US), as well as EON (Germany), EDF (France), Enel (Italy), and Tokyo Electric Power (Japan).

The global electricity industry generates about 24 trillion kilowatt hours (KWh) of electricity. Leading countries in electricity generation include China, the US, India, Russia, and Japan. Unmet demand in parts of India and Africa is helping to fuel industry growth.

The US electric utilities industry includes about 10,800 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $470 billion. Major segments of the electric utilities industry, including electric power generation and electric power transmission, are covered in separate profiles.

Competitive Landscape

Although deregulation has altered power markets in many nations, electric utilities often continue to operate as unofficial monopolies in a given service territory. A growing number of countries have deregulated or are moving to deregulate their energy markets, including Australia, Canada, France, Germany, Japan, India, Italy, Portugal, Russia, Spain, the UK, and the US. The intended purpose of moving toward a less-regulated electricity market is to decrease the cost of electricity by fostering competition among producers. One practical effect is the divestment of generation facilities by many investor-owned and government-owned utilities.

Profitability in the electric utility industry is determined by government regulations and fuel costs. Large companies have an advantage in negotiating fuel contracts. Small companies can compete effectively by exploiting market niches, such as offering green power in regulated markets.

In the US, the electricity industry for many years consisted of investor-owned utilities, municipal utilities, cooperatives, and government entities that owned the generation, transmission, and retail distribution facilities within a limited area and served all customers within that area as tightly regulated "natural monopolies." Though "natural monopolies" still exist, the electric energy industry in the US underwent a

8 United States Census Bureau, North American Industry Classification System, http://www.census.gov/eos/www/naics. 9First Research® Industry Profile: Electric Utilities, http://www.firstresearch.com.

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restructuring driven by changes in federal and state laws in the 1990s. In restructured (or deregulated) markets, generation, transmission, and distribution operations are carried out by separate companies, and the owners of local distribution lines make their lines available to competitors.

Despite the popularity of restructuring activities initially, only about 15 US states have deregulated their electricity industries. Several other states, including California, launched restructuring initiatives before suspending them, in part because of concerns that restructuring caused electricity rates to rise. Many local electricity distributors are still owned by utility holding companies that also own power generation facilities, wholesale transmission lines, and wholesale power trading companies. The US electric utility industry is concentrated: the 50 largest companies generate about 75% of industry revenue.

Products, Operations & Technology

Major services include electric power transmission, control, and distribution (about 70% of US industry revenue); and electric power generation (30%). The electric power generation segment can be further broken down by power source. Most commercial power comes from turbine engines powered by steam produced by burning fossil fuels, mainly coal and natural gas. Other power sources include steam from nuclear reactors; conventional hydroelectric conversion; and renewable sources such as solar, wind, and geothermal. Natural gas was the top fuel source for US power producers in 2017, representing 32% of the fuel mix compared to 30% for coal. Other sources and shares for 2017 included nuclear, 20%; hydroelectric, 7%; wind, 6%; biomass, 2%; and solar, about 1%.

The output of the generation plant is stepped up to a high voltage at the transmission substation for connection to the wholesale power transmission lines (the transmission grid), and then lowered at smaller power substations or transformers to feed local power distribution systems for delivery to homes and businesses. Transmission lines are generally of a higher voltage than distribution lines, and often follow major highways. Distribution lines run above or below city streets and to individual consumers. Long-term storage of electricity is not feasible, creating the need for real-time balance between power generation and consumption.

The primary operations of retail electricity distributors include acquiring wholesale power (often under long-term supply contracts), maintaining and extending a line network, and billing and collections. Distributors may purchase from affiliates or buy power in the wholesale market. If local utilities can't meet demand through their own generation facilities, extra electricity may be bought from another utility with spare capacity. Utilities may also purchase from independent power producers. Power marketing companies are intermediaries in the wholesale market, buying power from generators and selling to distributors through short- or long-term contracts.

Fuel costs are a significant portion of annual operating expenses for power generation companies, and associated environmental pollution controls are also a major consideration in selecting a power source. Petroleum and natural gas emissions can be controlled at reasonable costs, but prices for these fuels are often volatile. Coal prices are the most stable of potential fuels, but emission controls can be expensive. Design challenges, extensive environmental regulation, and waste storage challenges make the costs of nuclear power plants higher than that of conventional plants. Hydroelectric plants are the most thermally efficient and least polluting generation method, but the number of suitable locations for dams is limited and long-term downstream effects are a growing concern. A number of state initiatives, particularly in the western US, are aimed at increasing the proportion of commercial electric power generated from renewable sources to between 10% and 30%.

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Technology

Utilities continue to invest in smart grid technology, which is expected to enhance the capabilities of transmission and distribution networks, potentially boosting margins long-term. Smart grids gather information about power production and consumption to improve reliability and efficiency. Smart meters monitor in-home demand and feed information back to the electricity grid. Other technologies allow transmission infrastructure to adjust to local power demands in real-time.

Power plants are highly automated with monitoring equipment sensing and measuring all operations, from burning fuel to controlling plant output voltage, frequency, and amperage. Monitoring equipment senses load changes in milliseconds and adjusts output accordingly. In nuclear power plants, monitoring is highly sophisticated and includes reactor performance and radiation monitoring. The control systems at nuclear power plants can sense dangerous conditions and automatically shut down the reactor.

Renewable portfolio standards are compelling energy providers to replace fossil fuel-powered plants with facilities that use alternative technologies. Tax credits, efficiency enhancements, and falling equipment prices have made solar and wind increasingly popular. Increasing solar capacity via utility-scale projects and panel leasing programs could help utilities meet the competitive challenge posed by distributed solar power generation, such as on-site rooftop systems that operate off the grid.

Sales & Marketing

The three major types of distribution utility customers are residential, commercial, and industrial; each accounts for about a third of US electricity demand. Because of economies of scale in delivering power, industrial customers pay the lowest prices while residential customers pay the highest.

Typical customers of electrical power plants are wholesale and retail power distributors and brokers. In deregulated states, power generators may market directly to end consumers and bill for usage through the local electric power distributor.

Traditionally, pricing has been based on capital and operations and maintenance costs. Prices are generally proposed by the company and set by a state regulatory commission. Regulatory commissions have generally not allowed investment in new power plants to be factored into rate bases until the facilities were in service, which discourages investment in new nuclear power plants due to their long approval cycles.

During transition to competitive markets, utility commissions retain regulatory approval of the prices charged (base rate) by the dominant supplier and establish that rate as the "rate to beat." This allows consumers to compare competitive rates and determine potential savings. Electricity rates vary greatly throughout the US, depending on the availability of natural resources and the stringency of environmental controls.

Finance & Regulation

Required investments in grid infrastructure, plants, and equipment are major budget items, and utilities may incur significant long-term debt to finance capital improvements. Maintaining positive perceptions by capital markets is paramount for electric utilities. Companies often enter long-term contracts for wholesale power and plant fuel purchases to avoid price volatility. The US electric utility industry is capital-intensive: average annual revenue per employee is about $1.2 million.

Electricity distributors usually have uneven cash flow during the year because of greater power demand in the summer in many regions. In other areas, demand peaks in winter; mild weather can diminish returns. Accounts receivable average about 50 days' sales.

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Regulation

Electric utilities are overseen by national, regional, and state regulatory authorities. In the US, state public utility commissions (PUCs) oversee the industry structure, regulation, and deregulation within their state boundaries. PUCs regulate retail electricity rates. Rates are set with the goal of providing the distributor a return on equity that is sufficient to ensure adequate investment in the distribution system. Distributors are frequently involved in rate hearings. Generation companies must gain approval and licensure from state PUCs to construct and operate new power plants.

The Federal Energy Regulatory Commission (FERC) is primarily responsible for overseeing and regulating the interstate transmission and wholesale sales of power. The FERC issued its open access rule in 1996 to restructure the electric industry, requiring transmission system owners to offer comparable services to other providers. In 1999 the FERC issued an order for the voluntary formation of regional transmission organizations (RTOs) and independent system operators (ISOs) to increase efficiency in wholesale markets.

Environmental regulations have become increasingly stringent. The EPA and its state equivalents oversee the control of emissions produced by power plants.

Regional Highlights

In the US, demand for electricity varies from region to region according to economic activity and population growth. States that gained the most people between 2016 and 2017 include Texas, Florida, California, Washington, and North Carolina.

Weather conditions in different regions can also affect demand for electricity and the type of power plants used to generate electricity. In areas of extreme heat, electricity demand for cooling is typically higher.

Coal and natural gas power plants are located throughout the US. About half of hydroelectric power generators are located in California, Oregon and Washington, because the West has most of the largest dams. Nuclear power plants are found in about 30 states across the US; the states with the highest nuclear generation capacity are Illinois, Pennsylvania, South Carolina, and New York.

In the US, interconnections among electric utilities form a national power grid organized into three major networks: Eastern, Western, and Texas. The Eastern grid is further subdivided into six regional entities; all eight grids are overseen by the North American Electric Reliability Corporation (NERC). These networks move electricity from one part of the country to another, creating the basis for the wholesale electricity market.

Many utilities have combined their regional transmission assets under the control of independent system operators (ISOs) or regional transmission organizations (RTOs), whose mission is to provide fair access to all power generators in their region at a standard price and to balance the load in the transmission network to provide the most efficient power delivery. Some ISOs and RTOs also operate power exchanges, where electricity is bought and sold wholesale within their region.

Human Resources

Average hourly wages for the industry in the US are significantly higher than the national average. Electric utilities employ large numbers of degreed engineers -- electrical, civil, mechanical, and nuclear -- many of whom receive special certification training from the National Electricity Reliability Council as qualified systems operators. US workers often are members of unions and generally receive a high level of benefits.

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Injury and illness rates for US electric utilities are significantly lower than the national average for all industries.

Quarterly Industry Update

Trend: Utilities Improve Energy Efficiency - Electric utilities are successfully reducing energy consumption by increasing spending on energy efficiency programs. Across the US, states spent nearly $7.9 billion on efficiency programs in 2017, up from $7.6 in 2016, according to the newly released 2018 State Energy Efficiency Scorecard from the American Council for an Energy-Efficient Economy. The increase in spending resulted in a 7.3% increase in electricity savings, or nearly 27.3 million megawatt hours, led by Massachusetts, California, Rhode Island, Vermont, and Connecticut. Utility programs are the largest contributor to power savings. A majority of US states have legislation requiring utilities to spend a set amount on energy efficiency efforts, which can include grid modernization, smart meters, renewable energy generation, rebate or loan programs, and consumer education programs. States may also enact appliance standards, zero-energy construction codes, or zero-emission vehicle policies. States showing the most improvement in 2017 included New Jersey, New York, and Virginia due to new clean energy legislation; other states such as Iowa and Connecticut showed declining spending due to changes in existing legislation.

Industry Impact - Utilities must follow state laws requiring energy efficiency improvements that help to lower consumer electric bills and help meet clean energy standards. To offset reduced growth in demand, utilities must control operating expenses and explore new service offerings

Industry Indicators

The value of US nonresidential construction spending, a demand indicator for electric utilities, rose 5.2% year-to-date in October 2018 compared to the same period in 2017.

US personal income, which drives consumer demand for electric utilities, rose 4.3% in October 2018 compared to the same month in 2017.

The value of US residential construction spending, an indicator of demand for electric utilities, rose 4.9% year-to-date in October 2018 compared to the same period in 2017.

Total US revenue for electric power generation, transmission and distribution rose 2.8% in the third quarter of 2018 compared to the previous year.

Industry Forecast

Revenue (in current dollars) for US electric utilities is forecast to grow at an annual compounded rate of 4% between 2018 and 2022. Data Published: September 2018

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First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links

between industries and the aggregate economy.

Critical Issues

Slow Growth in Electricity Demand - Electric energy distributors in developed markets face slower growth in electricity usage in coming years. Electricity production in industrialized (OECD) countries grew by less than half a percent between 2006 and 2015, according to the International Energy Agency. Through 2050 (from 2016), usage growth in the US is expected to average 0.5% annually, compared to 9.8% per year in the 1950s, according to the Energy Information Administration. Contributing factors include slowing population growth, market saturation, efficiency improvements, economic conditions, and shifts to less energy-intensive industries.

Fuel Price Volatility - One of the most common power sources used by utilities, natural gas is subject to significant price swings. To minimize the volatility of natural gas prices, utilities try to negotiate long-term contracts. Coal prices are relatively stable, but changing environmental regulations can require expensive plant retrofits. Most companies strive to have a diverse mix of plants using different fuels to minimize the effect of fluctuating fuel prices.

Business Challenges

Regulatory Uncertainty - Power utilities are subject to regulation by multiple federal and state agencies, which can greatly influence operating environments and ability to recover costs from utility customers. In most markets, the retail rates that electricity distributors can charge are regulated by state public utility commissions (PUCs). Rates are usually set to enable the distributor to earn an appropriate return on investment, but winning rate increases to reflect higher costs can be arduous. New power plant approval processes can also be complex. Utilities that operate in several states face the added complexity of dealing with multiple PUCs and environmental control agencies that rarely coordinate their regulatory activities.

Capital Improvement Costs - Power transmission and other facilities are often financed with long-term debt. Aging and inefficient infrastructures may be unable to achieve financial returns adequate to service and retire this debt. Regulatory initiatives, such as the push for alternative energy and new reliability standards for transmission networks, may make operations and upgrades more expensive. Restricted access to capital markets can impact a utility's finances. Debt service payments for extensive infrastructure upgrades can become unaffordable during periods of recession.

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Climate Change Legislation - Possible climate change legislation has become a deciding factor in the type of fuel that new power plants will use. Coal and natural gas will continue to be the fuels of choice in the short term, but other fuels are gaining popularity. Renewable sources, such as wind, solar, biomass, hydro, and geothermal, could account for nearly 60% of new generating capacity through 2040, according to the International Energy Agency. New environmental legislation may lead to costly plant updates, new plants for alternative fuels, and plant closures.

Cybersecurity Risks - Utilities have faced government scrutiny related to the vulnerability of the power grid. After a North Carolina resident in 2014 tapped into computer networks used by power companies and exposed how easily the transmission system could be penetrated, the Department of Homeland Security began urging utilities to upgrade security. Government agencies have since been working with the industry to establish new cybersecurity guidelines. Reports of Russian hacking into hundreds of utility data systems in 2016 and 2017 led to renewed calls for enhanced security.

Business Trends

Use of Renewable Sources - Issues concerning safety (nuclear); long-term cost (natural gas); and greenhouse gases (coal) are complicating and making more expensive the approval process for new power plants. Federal and state legislatures are actively encouraging development of electric power from wind, solar, geothermal, and hydro sources. A number of states have set capacity targets for the amount of power produced using renewable sources.

Coal Use Declining - A combination of increasingly stringent emissions regulations and falling natural gas prices has resulted in far fewer coal-powered power plants in the US. Coal accounted for 30% of US electricity generation in 2017, down from 50% in 2007. Natural gas surpassed coal as the top fuel source in 2016, representing 34% of the fuel mix in 2016 and 32% in 2017.

On-site Power Generation - More commercial and industrial customers are choosing to generate their own power, reducing their reliance on utilities. The shift has been driven, in part, by concern over weather-related outages, which has prompted some companies to seek more reliable sources of power. Environmental initiatives and tax breaks are also encouraging the implementation of power systems fueled by renewable resources. Photovoltaic solar systems are among the fastest growing options for on-site commercial installations, a trend that has been aided by falling panel prices and a growing number of finance options. Offering panel leasing or grid integration programs could help utilities meet the competitive challenge posed by distributed solar power generation.

Industry Opportunities

Smart Grid Support - New energy policies are guiding the development of smart grid technology in the US and other high-income countries, including standardization procedures. Smart grid technology could benefit electric energy distributors in the long run through cost-saving efficiencies, enhanced reliability, and a better supply-demand balance, but it will require substantial up-front costs for development. Global governments are supporting smart grid initiatives, and major utilities are adopting smart grid systems.

Utility-Scale Solar - While much of the growth in solar power in the US has been from distributed generation (most commonly on-site rooftop systems), utility companies are increasingly investing in large-scale solar plants. Renewable portfolio standards are driving some of the developments, but tax credits and falling photovoltaic panel prices have also improved the economics for utilities.

Promoting Rechargeable Electric Vehicles - The federal government is encouraging development of electric vehicles through tax credits and grants. These vehicles are charged using household power and

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increase demand for electric utilities. The power utilities suggest that vehicles could be charged in off-peak hours, effectively storing the energy for peak period usage.

Emerging Markets - Developing (non-OECD) countries, especially those where many people have little to no access to electricity, are the primary force behind rising global energy demand. Global electricity generation and transmission will increase about 45% through 2040, according to the Energy Information Administration's International Energy Outlook 2017. Generation is expected to grow 1.9% per year between 2015 and 2040 in non-OECD countries, led by China and India, compared to a 1% annual increase in OECD nations.

Smart Energy Storage - Utilities in several US states are partnering with device manufacturers on residential smart energy storage pilot programs to reduce emissions and cut generation costs during peak times. The devices capture power from the grid during periods of low demand and release power during high-cost peak demand periods, reducing the need to supply power from traditional generation plants. When software is used to remotely manage the residential units as if they were a single power source, the model is called a virtual power plant. Utilities are also experimenting with integrating larger scale solar-plus-storage facilities.

IV. NATIONAL ECONOMIC INFORMATION The purpose of economic research is to understand the effects of macroeconomic conditions on the subject company. The following discussion of the economy was extracted from the Economic Outlook Update™ December 201810.

ECONOMIC UPDATE AT A GLANCE

The Leading Economic Index increased 0.2% in November, coming in at 111.8 points. The November report included a 0.3% downward revision to the October score, instead of the rise of 0.1% as originally reported. With the pace of growth over the past two months slowing down, the November report indicated that the rapid pace for economic growth seen throughout much of 2018 may have peaked, and the economy is likely to moderate further in the second half of 2019. In the six-month period ending November 2018, the LEI increased 2.2% (about a 4.4% annual rate), slower than the growth of 2.9% (about a 5.9% annual rate) during the previous six months.

The Consumer Confidence Index declined 2.2 points in November, to 135.7, which ends the streak of consecutive monthly gains at four. At 135.7, the index came in lower than forecasts by economists for a reading of 135.9, as concerns that global economic growth could slow down further suppressed the monthly score. Consumer’s assessment of current conditions improved slightly, up 0.8 points in November, to 172.7, as consumers remain quite positive, primarily due to strong employment growth. The Consumer Sentiment Index decreased 1.1 points in November, to 97.5 points, which marked the second consecutive month of declines. At 97.5 points, the index score remains strong, as the average in 2018 for the Consumer Sentiment Index, at 98.4 points, has been higher than in any prior year since 2000, which was the last year of thelongest expansion since the mid-1800s. At its peak, consumer sentiment levels averaged 105.3 from 1997 to 2000.

10 All of the contents of the economic outlook section of this valuation report are quoted from the Economic Outlook Update™ December 2018 published by Business Valuation Resources, LLC, © 2018, reprinted with permission. The editors and Business Valuation Resources, LLC, while considering the contents to be accurate as of the date of publication of the Update, take no responsibility for the information contained therein. Relation of this information to this valuation engagement is the sole responsibility of the author of this valuation report.

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The Small Business Optimism index had its 25th month of positive readings, although, in November, the index fell 2.6 points, to 104.8. Despite the decline, the survey noted the index continued on its longest streak of small-business optimism in history, and small-business owners remain enthusiastic about the economy and have demonstrated their optimism by raising wages, creating new jobs, and investing in their businesses throughout 2018. The Wells Fargo/Gallup Small Business Report stated small-business owners indicated positive business financials drove the index to record highs. In the fourth-quarter small-business survey for 2018, the overall index score surged 11.0 points, to 129.0 points, rising to a new all-time high. The key drivers for this quarter’s index include:

Confidence in the economy: Eighty percent of business owners said their financial situation today was very or somewhat good, and 84% said they expect their financial situation will be very or somewhat good a year from now.

Ease in obtaining credit: Forty-seven percent of business owners said it will be very or somewhat easy to obtain credit over the next 12 months. Half of business owners surveyed said they expect credit will be easy to obtain over the next year.

Current and future cash flow: Seventy-four percent of small-business owners classified their cash flow over the past 12 months as somewhat or very good. Over the next year, 78% expect their cash flow to be very or somewhat good.

Congressional actions most important to their business: Seventy-four percent said actions relating to tax codes and regulations were most important to their business, while 61% said overall small business regulation were and 60% said actions related to healthcare were most important.

The latest survey findings suggest that small-business owners continue to feel confident about the economy and the future of their businesses. Fifty-five percent of the survey respondents noted that their revenues increased over the past 12 months, and 62% said they expect it to increase over the next 12 months. For the third consecutive quarter, the survey reported that the challenges in hiring and retaining staff remained the top problem for small businesses, followed by attracting new business and taxes. The Present Situation score of the report increased 7.0 points for the quarter, to 59.0 points, and the Future Expectations score climbed 4.0 points from last quarter, to 70.0 points.

Middle-market business sentiment moved down 2.4 points in the fourth quarter, as the RSM U.S. Middle Market Business Index came in at 132.0 points. Despite the decline, the figure remains at a robust level, but forward-looking pressures such as inflationary concerns and a tight labor market added additional uncertainty heading into 2019. The survey noted that nearly 48% of respondents indicated the economy had improved somewhat or substantially over the past quarter, which is down from 56% in the third quarter. Executives also noted that policymakers at the Federal Reserve should proceed cautiously on interest rate hikes during the next 12 to 18 months, with gradual 25-basis-point rate hikes in March 2019 and June 2019, then a pause to gauge how tightening financial policies and inflation are affecting the overall economy.

Total retail sales rose 0.2% in November, marking the second consecutive month of gains. Revisions to October data showed a rise of 1.1% compared to 0.6%, as originally reported. On a year-over-year basis, retail sales are up 4.2%. Sales in November received a boost from sales of electronic goods and home furnishing products. Retail sales in November matched economists’ expectations for the month, according

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to a survey from the Commerce Department. Core retail sales improved 0.5% in November and were up by 4.6% over the past 12 months.

Employment in November increased by 155,000 jobs, well below forecasts for 198,000 job gains in a survey by the Wall Street Journal. The November jobs report did, however, issue revisions to the prior two months of jobs data, which decreased overall numbers by 12,000 jobs, as figures in October were revised downward from 250,000 jobs to 237,000 jobs while September’s figures were revised to show 119,000 jobs gained versus 118,000 jobs.

In a separate report, the Labor Department said initial claims for state unemployment benefits remained near record lows, at 234,000 claims for the week ending November 24. In addition, the streak of 193 consecutive weeks below the 300,000 threshold, a figure that is associated with a strong labor market, is the longest such stretch since 1970, when the labor market was smaller.

Wages grew six cents in November, increasing to $27.35. Real average hourly earnings, seasonally adjusted from November 2017 to November 2018, remained at 3.1%, which is the largest annual growth in 10 years.

The manufacturing sector increased 1.6 percentage points in November, to 59.3%, as measured by the Institute for Supply Management’s manufacturing index. The rise in November ended two consecutive months of declines for the index. The report shows the economic activity in the manufacturing sector expanded in November for the 27th consecutive month and the overall economy grew for the 115th consecutive month. A reading above 50% indicates that the manufacturing economy is generally expanding, while a reading below 50% indicates that it is generally contracting.

As measured by the Institute for Supply Management’s services index (NMI), the services sector increased 0.4 percentage point in November, to 60.7%. The November figure represents continued growth in the nonmanufacturing sector for the 106th consecutive month and the overall economy for the 111th consecutive month. An NMI reading above 50% indicates the nonmanufacturing-sector economy is generally expanding, while a reading below 50% indicates the nonmanufacturing sector is generally contracting.

All five of the major U.S. stock market indices rebounded in November, after the drastic declines pushed the indices into correction territory in October. The gains in November only came after a rally at the end of the month helped boost the indexes into positive territory. The Dow Jones Industrial Average rose 2.1%, while the S&P 500 Index rose 2.0%. The Nasdaq Composite inched up 0.3%, the S&P MidCap 400 improved 3.1%, and the Russell 2000 advanced 1.6% in November. Volatility remained in November after resurfacing in October. The Chicago Board Options Exchange Volatility Index ranged between 16.1 and 23.8 and recorded an average 19.4 for the month.

Consumer prices, as measured by the Consumer Price Index, were unchanged November. The index reading marked the lowest reading for the index in eight months. Over the last 12 months, the index is up 2.2%. Chained CPI fell 0.3% in November but is up 2.0% over the past 12 months. Core CPI, which excludes energy and food prices, increased 0.2% in November. Core CPI is up 2.2% over the past 12 months.

Producer prices increased in November, rising 0.1% on the month, after reporting a rise of 0.6% in October. The 12-month figure, at 2.5%, suggests that inflation pressures are mostly in check. The year-over-year price increase is lower than it was in the summer, when it topped 3%. Core PPI, which excludes highly volatile food and energy prices, advanced 0.3% in November and is up 2.8% over the past 12 months.

Housing starts increased in November, rising 3.2% when compared to last month, but are 3.6% below the figures from one year ago. Following the rise in November, the adjusted annual rate was 1.256 million

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units. Gains were seen across two of the four regions, with a sizable gain of 37.8% in the Northeast. Building permits authorized, which can be seen as a sign of how much construction is in the pipeline, rose by 5.0% in November and is 0.4% above the level of a year ago. Building permits for single-family homes rose 0.1%, while those for multifamily homes increased by 15.4%. Existing-home sales increased 1.9% in November and posted a seasonally adjusted annual rate of 5.32 million. The rise in November marked the second consecutive month of increases after declines in the prior six months. Distressed home sales fell 1.0 percentage point to 2.0% of sales in November, which is the lowest level since October 2008 and down from 4% from one year ago. In November, the NAHB/Wells Fargo Housing Marking Index declined 8.0 points, to 60.0. All three HMI components decreased in November, as the component for current sales conditions fell 7.0 points, to 67.0; the component charting sales expectations in the next six months fell 10.0 points, to 65.0; and the component measuring buyer traffic fell 8.0 points, to 45.0.

The National Association of Realtors’ most recent Commercial Real Estate Outlook, analyzing the third quarter of 2018, found that sales volume rose 1.6% on a year-over-year basis and prices increased 1.4% over the same period. Leasing activity picked up, as vacancies experienced upward pressures, while low inventory remained the principal concern among realtors, as the wide pricing gap between buyers and sellers affected over 20% of respondents.

INDEX OF LEADING INDICATORS

The Conference Board’s Leading Economic Index (LEI) increased 0.2% in November, to 111.8 points. The November report included a revision to the October score, which was revised to show a decline of 0.3% versus a rise of 0.1%, as originally reported. Following the revision, the report noted that the pace of the index has slowed in the last two months, suggesting that growth in 2019 is likely to be tempered. The strengths among the leading indicators remain widespread, as seven of the 10 components of the LEI showed expansion in November, with positive contributions from the yield spread and consumer expectations for business conditions more than offsetting the three negative contributions coming from average weekly initial jobless claims, stock prices, and average weekly manufacturing hours. The November report suggests that GDP growth at about 2.8% should continue in early 2019 but is likely to moderate further in the second half of 2019.

The board’s coincident index, designed to reflect current economic conditions, rose 0.2% in November, to 104.9, and the lagging index increased by 0.4%, to 106.0.

The LEI is a leading American economic indicator intended to forecast future activity. The Conference Board, a nongovernmental organization, calculates the index from the values of 10 key variables. The 10 components of the LEI include:

Average weekly hours, manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders, consumer goods and materials; Institute for Supply Management’s Index of New Orders; Manufacturers’ new orders, nondefense capital goods excluding aircraft orders; Building permits, new private housing units; Stock prices, 500 common stocks; Leading Credit Index; Interest rate spread, 10-year Treasury bonds less federal funds; and Average consumer expectations for business conditions.

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CONSUMER CONFIDENCE

The Consumer Confidence Index declined 2.2 points in November, to 135.7 points. Despite the decline in November, the index remains at historically strong levels. The report noted the decline was due to a less optimistic view of future business conditions and personal income prospects. Overall, consumers are still quite confident that economic growth will continue at a solid pace into early 2019. November’s survey fell short of expectations from analysts for a drop in the index to 135.9 points, according to a survey from Reuters. At current levels, the November index score suggests confidence will carry into the early part of 2019. However, if expectations soften further in the coming months, the pace of growth is likely to begin moderating.

Consumers’ impressions of current economic conditions improved further in November, as the Conference Board’s Present Situation Index increased 0.8 percentage point, from 171.9 to 172.7 points. The index measures consumers’ confidence in the present and near-term future economy. The percentage saying business conditions are “good” increased from 41.0% to 41.2%, but those saying business conditions are “bad” increased from 9.4% to 10.9%. Overall, consumers’ assessment of the labor market was also more favorable, as the percentage of consumers stating jobs are “plentiful” increased from 45.4% to 46.6%, and those claiming jobs are “hard to get” decreased from 13.4% to 12.2%.

Consumers’ outlook in the short term was somewhat mixed in November, as the Expectations Index decreased 4.1 points, from 115.1 to 111.0. The survey results showed the percentage of consumers expecting business conditions to improve over the next six months decreasing 3.8 percentage points, to 22.5%, but those expecting business conditions to worsen increasing by 1.6 percentage points, to 8.8%. Consumers’ outlook for the labor market was mixed, as the proportion of those expecting more jobs in the months ahead increased 0.5 percentage point, to 22.8%, but those anticipating fewer jobs increased 0.5 percentage point, to 11.1%. The percentage of consumers expecting an improvement in their incomes declined 3.2 percentage points, to 21.5%, and the percentage expecting a decrease fell 0.4 percentage point, to 7.8%.

The Consumer Confidence Index is an indicator designed to measure the degree of optimism about the state of the economy that consumers express through their savings and spending. A decreasing month-over-month trend in the Consumer Confidence Index suggests that consumers have a negative outlook about their ability to secure and retain good jobs, whereas a rising trend in consumer confidence indicates improvements in consumer buying patterns. Opinions on current conditions make up 40% of the index (the Present Situation Index), while expectations of future conditions comprise the remaining 60% (the Expectations Index).

CONSUMER SENTIMENT

The Thomson Reuters/University of Michigan’s Consumer Sentiment Index fell 1.1 percentage points in November, to 97.5 points. The index has slumped since March, when it recorded its highest level since 2004, 101.4 points. More recently, since the midterm elections, the index also has fallen 2.8 points, but, among those surveyed, the decline is more likely due to income concerns, rather than political affiliations. The November reading came in lower than forecasts by economists for a reading of 98.3 points, according to a poll by CNBC.

The Index of Consumer Expectations remained unchanged in November, at 88.1. The Index of Consumer Expectations focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term.

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The Current Economic Conditions component declined 0.8 point in November, to 112.3, and is now down 1.2 percentage points from one year ago.

The Thomson Reuters/University of Michigan’s Survey of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the contiguous U.S. an equal probability of being selected. Interviews are conducted by telephone throughout the month. The Index of Consumer Sentiment is composed of the Expectations Index and the Current Conditions Index and is intended to gauge how consumers feel the economic environment will change. The survey’s Index of Consumer Expectations is an official component of the U.S. Leading Economic Index.

SMALL BUSINESS OPTIMISM

The National Federation of Independent Business’s (NFIB) Small Business Optimism Index declined 2.6 points in November, to 104.8 points. Despite the decline, the November reading marked the 25th consecutive month of reporting at a positive level, the longest streak for the index. Slightly more than half of the decline in the November index was attributable to expected business conditions and expected real sales. Still, small-business owners are enthusiastic about the economy and have demonstrated their optimism by raising wages, creating new jobs, and investing in their businesses throughout 2018. As a result, the index scores showed increases in compensation tied a near 30-year high as owners seek to attract more qualified candidates and an increasing percentage of owners reported capital outlays and higher sales.

As a result of the decline in November, eight of the 10 components that make up the Small Business Optimism Index posted declines, and two were unchanged. The November index indicated that consensus among forecasters is that the fourth quarter will be solid but slower than previous quarters, as growth appears to have peaked early this year and will slow as we move into 2019.

The component that measures small-business owners’ expectations of earnings fell 1.0 percentage point in November, to a net -4.0% reporting quarter-on-quarter profit improvements. Despite the decline, the score remains near historically high levels and continues the streak of historically very favorable profit reports. Reports of higher worker compensation remained unchanged, at a net 34%, a very strong reading. Plans to raise compensation rose 2.0 percentage points, to a net 25%, the highest score since 1989.

Twenty-five percent of small-business owners reported that finding qualified labor was their top business problem, which is up 2.0 percentage points from last month and a record high for the index. Notably, the remaining problems for small-business owners include taxes, weak sales, and the cost of regulation. Sixty percent of owners reported hiring or trying to hire, which is unchanged from last month, but 53% (87% of those hiring or trying to hire) reported few or no qualified applicants are available. Twenty-two percent of small-business owners plan to create new jobs, which is unchanged from October. Sixteen percent reported increasing employment an average of 2.9 workers per firm, and 11.0% reported reducing employment an average of 1.9 workers per firm. Thirty-four percent of owners reported job openings they could not fill in the current period, which is down 4.0 percentage points from last month’s record high. Fourteen percent of small-business owners reported using temporary workers, which is unchanged from last month. Thirty percent of all owners reported openings for skilled workers, which is down 8.0 percentage points from last month, and 12.0% have openings for unskilled labor, which is down 4.0 percentage points from last month.

The component that measures owners’ expectations to see higher real sales fell 4.0 percentage points, to a net 24% in November, a solid reading, but a significant decline as well. Six percent of all owners reported higher nominal sales in the past three months compared to the prior three months, which is down 2.0 percentage points from October. Inventory investment has made a significant contribution to GDP growth in recent quarters, but customers continue to deplete stocks with strong spending. The sales and inventories

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component that measures the net percentage of owners reporting inventory rose 2.0 percentage points, to a net 6.0%, the strongest reading since 2004. The net percentage of owners planning to add to inventory rose remained at 2.0%.The net percentage of owners viewing current inventory stocks as too low fell 3.0 percentage points, to a net -5.0%, suggesting that the stock of inventories is beginning to look a bit excessive given the expected decline in real sales noted above.

Sixty-one percent of small-business owners reported making capital outlays, which is up 2.0 percentage points from October. Of those making expenditures, 45% reported spending on new equipment, 22% acquired vehicles, and 18% improved or expanded facilities. Plans to invest were most frequent in wholesale trade, at 38%, followed by manufacturing, at 34%, and transportation, at 32%, respectively.

The percentage of small-business owners who reported that they raised their average selling prices remained unchanged, at a net 16.0%. As a comparison, the net percentage of firms raising prices was negative in each of the first three quarters of 2016 and averaged -2.0%. In the fourth quarter of 2016, it was 2.0%, but it has marched steadily upward ever since. Seasonally adjusted, a net 29% plan price hikes, which is 1.0 percentage point higher than last month, and the highest reading since August 2008. The component that measures small-business owners’ plans to raise compensation rose 2.0 percentage points, to a net 25%, the highest reading since 1989.

The component measuring the credit markets reported a net 3.0% of owners indicated not all their borrowing needs were satisfied, which is unchanged from last month and 1.0 percentage point above its record low. Thirty-two percent reported all credit needs met, which is up 2.0 percentage points, and 47% explicitly said they were not interested in a loan, which was down 5.0 percentage points from last month. Two percent reported that financing was their top business problem, which is unchanged from last month. Five percent of owners reported that loans were harder to get. This is up 1.0 percentage point from last month but remains near historic lows. Thirty-two percent of all owners reported borrowing regularly, which is unchanged from last month. The average rate paid on short maturity loans fell 30 points from last month, to 6.1%. Overall, credit markets have been supportive of growth and will not likely become an impediment for the next few quarters.

The Small Business Optimism Index is compiled from a survey of the NFIB’s 350,000 members that is conducted each month. NFIB, founded in 1943, began conducting its survey quarterly in 1974, transitioning to a monthly survey in 1986. The index is a composite of 10 seasonally adjusted components based on questions about the following: plans to increase employment, plans to make capital outlays, plans to increase inventories, whether members expect the economy to improve, whether they expect real sales will be higher, current inventory, current job openings, expected credit conditions, whether now is a good time to expand, and earnings trends. Analysts watch the index because small businesses are responsible for the majority of new job creation and the NFIB focuses on this sector of the economy.

The 4Q 2018 Wells Fargo/Gallup Small Business Index surged 11.0 points, to a record 129.0 points in its December report. The fourth-quarter survey surpassed the previous record-high of 118.0 points reported in the third quarter of 2018. The survey was conducted between November 8 and November 14, which immediately followed the midterm elections, but, instead, survey respondents focused on positive business financials as the driver for moving the index to a new record high.

The fourth-quarter survey asked small-business owners what priorities they see as paramount for the incoming U.S. Congress and included several questions asked in the fourth quarter of 2016 following the last national election. Respondents were asked to forecast their operating environment in the coming year, with 35% saying it will be better, which is down 10% from 2016. Fifty-five percent forecasted no change, when in 2016 43% predicted they would be no change, and 10% said it would get worse, compared to 11%

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in 2016. In addition, about half of respondents said the actions Congress will take next year will have no impact on their businesses, compared to about one quarter of respondents in 2016 who were asked a similar question regarding the new president and Congress.

In April 2018, the Small Business Index survey included a question about owners’ views of the recent tax reform, and 39% said they didn’t know how the tax bill would affect their businesses; 27% did not expect it to benefit them. Seven months later, taxes continue to be a key issue among small-business owners. When asked to list the most important issue they would like to see the new Congress address, 29% highlighted taxes as the top issue, with 12% listing healthcare and 11% saying government regulation. When asked what congressional actions will be most important for their businesses, 74% said actions relating to tax codes and regulations, 61% said overall small-business regulation, and 60% said actions related to healthcare.

When asked about the top challenges facing small-business owners, 18% of those surveyed said hiring and retaining employees remained the top challenge they face for the third consecutive quarter. Thirty-five percent of those surveyed said they plan to hire new employees in the next 12 months. Other top challenges business owners cited included attracting new business, at 10%, and taxes, at 9%.

Small-business owners expressed their confidence in the economy through their attitudes about their current and future financial situation. Eighty percent of small-business owners reported their financial situation today is very or somewhat good, and 84% of small-business owners said they expect their financial situation will be very or somewhat good a year from now.

In addition, both current and projected future cash flow were key drivers of small-business optimism, with 74% classifying their cash flow over the past 12 months as very or somewhat good, which is up 5.0 percentage points from the previous quarter and the highest reading in the history of the survey. Over the next year, 78% expect their cash flow to be very or somewhat good.

Small-business owners also reported on their ability to obtain credit when they need it. The percentage of small-business owners who said obtaining credit was somewhat or very easy in the past 12 months rose to 47%, compared to 40% last quarter. Half of business owners surveyed said they expect credit will be easy to obtain over the next year. Further underlining owner optimism around the ability to access credit, only 1% of respondents said access to credit was the most important challenge they face.

With the index showing soaring optimism, a record-high 55% of small-business owners reported an increase in revenue, and 62% said they expect company revenues will increase over the next 12 months.

The Present Situation Index (how business owners gauge their perception of the past 12 months) increased 7.0 points, to a reading of 59.0, and the future expectations index (how business owners expect their businesses to perform over the next 12 months) increased 4.0 points, to 70.0. During the fourth quarter of 2017, the Present Situation Index reported at 43.0 and the future expectations index was at 60.0.

Since August 2003, the Wells Fargo/Gallup Small Business Index has surveyed small-business owners on current and future perceptions of their business’s financial situation. The Small Business Index is published once a quarter. This index consists of owners’ ratings of their business’s current situation and their expectations for the next 12 months, measured in terms of their overall financial situation, revenue, cash flow, capital spending, number of jobs, and ease of obtaining credit. Before the recession and financial crisis of 2008-2009, Small Business Index scores were generally in triple digits. The Small Business Index reached its peak of 114.0 in December 2006 and hit a low of -28.0 in July 2010.

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MetLife and the U.S. Chamber of Commerce published their Q4 Small Business Index, which declined 0.6 point in the fourth quarter, ending the streak of gains at six consecutive quarters. The fourth-quarter decline brought the index to a reading of 69.3%, which remains at strong levels but reflects a pause in the upward trend over the past year. The survey noted that small-business owners continue to be increasingly positive about the health of the national and local economy. In line with their growing economic optimism, more than a quarter of businesses say they plan to invest more in their companies and increase their staff in the coming year. However, among those currently searching for new staff, two in three say that it is hard to find candidates in their geographic area with the skills and experience they require.

The fourth-quarter survey asked small-business owners about their recruiting strategies heading into 2019. In 2018, 84% of small businesses needing to hire new staff say they looked to professional contacts and current employees to refer qualified candidates. Fifty-nine percent said they used social networks, and 57% indicated they recruited candidates partially by promoting or highlighting the benefits they offer. Thirty-one percent said they used a recruiter, 30% used professional networking events, and 28% said they used college career fairs.

Regardless of whether they searched for candidates, or how successful their search, three out of four small-business owners say they do not plan to do anything differently to find qualified candidates in 2019.

Fewer than 10% of respondents endorsed adopting new recruitment strategies next year, with 6% open to finding new ways to advertise, 4% would increase, 3% would adjust the job description, 3% would offer internships, 2% would connect with colleges, 2% would work with headhunters, and 1% would offer more benefits. Among those who searched for candidates in 2018, two in three say they will use the exact same strategy to search in 2019.

It is clear that companies need to find innovative and different ways to attract and connect with talented candidates. Within manufacturing, for example, a Deloitte study recently suggested that possible reasons for the talent gap include retiring baby boomers, negative attitudes toward manufacturing jobs, and lack of apprenticeship opportunities. The businesses that find or create new avenues of recruitment in this industry, connect with young people at earlier stages through colleges or trade schools, or appeal to new hires through creative advertising, internships, or apprenticeships will be the manufacturers that attract a new generation of makers to their organizations.

While unemployment has declined, there remains a lack of skilled and experienced candidates in applicant pools. More than 40% of small-business owners say they have been actively searching for new hires in 2018 but are having difficulty finding quality candidates. Among businesses looking for talent, 20% rate potential recruits as poor quality (compared with 25% in Q2 2017) and 35% rate the quality of candidates as fair. Thirty-four percent of small businesses rate candidates as good (compared to 28% in Q2 of 2017) and just 9% say they are very good. Since the inception of the SBI in Q2 2017, there does seem to be some improvement in quality of recruits.

Small businesses are feeling the strain of not having the staff they need. Eighty-one percent say they have to work longer hours or take on more roles to compensate for their inability to find qualified candidates. This is especially noticeable among businesses run by women, at 86%; minorities, at 89%; and millennials, at 95%. Among this group, 61% said they had to push their staff to work longer hours and over half say they are investing time and money into training their current employees as a way to compensate for not finding new recruits. Over a third say they relied on help from family and friends to make up for staffing needs. This proportion spikes to over half within the service industry, businesses staffed by fewer than five employees, and those millennials own.

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As reported in Q2 2018, small-business owners work nearly double the hours of the average American worker, at 14 hours versus 7.8 hours daily, likely exacerbating their struggle to strike a healthy work-life balance.

Manufacturing businesses seem to be having a particularly difficult time finding qualified candidates compared to other industries. Seventy-eight percent report it was hard or very hard to find candidates with the right skills (compared to 67% across all sectors).

On experience, 81% of manufacturers looking for new employees say it was hard or very hard to find candidates with the right experience (compared to 69% across all sectors). These Small Business Index findings are consistent with a recent study the Manufacturing Group and Deloitte conducted, which found that manufacturers report a sizable gap between the talent they need and the talent they can find.

The data show that businesses in the manufacturing sector report that the quality of candidates is improving, however. Thirty-eight percent of small-business owners in manufacturing rate candidates as good or very good in Q4 (compared to 27% in Q2 2017) and 22% rate candidates as poor (compared to 31% in Q2 2017)

The percentage of small-business owners whose perception of the national economy was good improved 3.0 percentage points, to a record level, 58%.

Perception of the national economy helped fuel optimism in the local economy, as 56% of small-business owners rated the local economy as good or somewhat good. The South continues to see dramatic gains, where 64% of small-business owners rate the local economy positively, up a remarkable 15 points since last quarter. Small-business owners in the Northeast are the least positive about their local economy, but their perceptions ticked up three points this quarter, to 49% rating it positively, after a slight dip last quarter. In the Midwest, perceptions of the local economy improved four points, to 53%.

Perspectives on local competition remain unchanged since last quarter, with 18% of small businesses reporting an increase in competition and 74% saying competition has stayed the same, compared to six months ago. This figure varies by employee size and number of years in business, however, with larger small businesses, those with 100 employees or more, reporting the highest level of new competition compared to smaller companies, at 29%. A quarter of businesses younger than 10 years old report an increase in competition. In contrast, just 16% of more established businesses say they are seeing more competition cropping up in their local markets.

The Small Business Index paints an optimistic picture regarding small-business owners’ expectations for the next year. Revenue expectations have increased four points this quarter, with 60% of small businesses anticipating a rise in their revenue over the next year, and more businesses anticipate hiring new staff this quarter compared to last (30%, compared to 25% in Q3).

Expectations regarding future revenue are somewhat uneven across regions, company characteristics, and demographic differences. In the South, 68% of businesses expect to increase revenue, the highest of all regions. On the other side of the spectrum, just over half of small-business owners in the Northeast expect increased revenue in 2019. Businesses anticipating an increase in revenue in the coming year are more likely to be in the professional services sector and to employ over 100 people. This quarter, 62% of male-owned businesses expect a bump in revenue compared to 53% of businesses run by women. This represents a reversal in revenue expectations by gender from last quarter.

Tracking with regional differences in economic optimism and revenue projections, 40% of Southern businesses expect to hire more staff in the upcoming year, nearly double the percentage of Northeast businesses that say they expect to hire. After a pullback on reported hiring in the third quarter, businesses

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employing more than 100 people are again bullish, with 59% saying they anticipate hiring new staff. While only 38% of such companies reported anticipating hiring new talent in the third quarter, this quarter, 59% say they anticipated hiring.

Twenty-nine percent of businesses also plan to increase their investment, a figure that is up seven percentage points from the third quarter. As a result, 12% of companies expect to reduce investment this coming year as compared to the 10% from last quarter. Mirroring trends in future revenue and hiring, the South leads the country in the proportion of businesses expecting to increase their investment in 2019, at 38%. In all other regions, about a quarter of businesses anticipate increased investment.

Small-business owners’ perceptions about the overall health of their businesses remain steady from last quarter, with 64% feeling either somewhat good or very good. Those reporting that they believe their businesses to be in very good health ticked up one percentage point from the third quarter.

Eighty-six percent of larger small businesses, those with more than 100 employees, report that their businesses are in good health. Retail trails all sectors in the proportion of owners reporting good overall health, moving down five percentage points, to 52% from the third quarter. Similarly, the percentage of businesses in the professional services sector reporting good health has dropped 10 points from last quarter, to 66%.

The percentage of businesses that report hiring new staff in the past year remains constant between this quarter and last, at 19%, with the Northeast reporting the lowest percentage, at 15%. Fifty-five percent of larger small businesses say they hired new staff last year, compared with about a quarter of businesses with fewer than 100 employees. Significantly more minority-owned businesses report hiring new talent this past year compared with white-owned businesses, at 27% compared to 18%. Compared to last quarter, slightly more small businesses report having to reduce staff.

Eight in 10 small-business owners report feeling comfortable with their cash flow, which is in line with third-quarter results. This proportion does not vary significantly across industry or region. Male-owned businesses report a slight dip from 83% to 80% from the third quarter, and more female-owned businesses report feeling comfortable with cash flow compared to last quarter, at 81% versus 75%.

Small-business owners say they spent slightly more time dealing with licensing, compliance, and other government requirements this quarter compared to last; however, the percentage of businesses reporting an increase in time spent handling these issues was up 3.0 percentage points from the third quarter, at 23%.

The RSM U.S. Middle Market Business Index (MMBI) declined 2.4 points in the fourth quarter, to 132.0. Survey respondents expressed a more modest view of the overall economy and a declining confidence in the economy over the next six months. Specifically, business executives noted that the imposed tariffs are negatively impacting their bottom lines and are threatening millions of jobs as a result. Additionally, business owners are facing inflationary pressures and a tight labor market, which, as a result, have lowered their optimism heading into 2019. Still, the reading remains at strong levels that indicate middle-market economic conditions remain robust.

The survey noted that 55% of middle-market executives indicated that revenues increased in the fourth quarter, down from 62% in the prior quarter. Over the next six months, 64% expect revenues to improve further. Fifty-eight percent of middle-market executives noted that net earnings increased in the fourth quarter, while 61% anticipate further growth in the next 180 days.

Survey questions regarding hiring and compensation also reflect positively on current economic conditions, as 59% of middle-market executives indicated they expected to increase the pace of hiring over the next six

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months, while 48% said they did so in the current quarter. Additionally, 52% said they increased compensation, while 57% announced they planned to do so through the first quarter of 2019. The survey did note, however, that, despite the willingness to offer higher wages, the main challenge for middle-market executives is the lack of qualified labor.

The survey asked middle-market executives about their capital expenditure spending, with only 37% of respondents noting that they had increased their capital expenditures. The percentage of middle-market executives who noted plans to boost capital expenditures over the next six months declined from 51% to 49%. Middle-market executives noted a possible cause was the increased cost in raw materials, as 68% reported paying higher prices. Seventy-one percent expect price hikes over the next six months, and 60% reported passing these prices onto customers. Inventory levels remain carefully managed, as some 28% of businesses indicated they increased their inventory levels, while 35% indicated their inventory levels were unchanged over the quarter.

The RSM U.S. Middle Market Business Index is based on quarterly survey data collected by RSM U.S. LLP and Nielsen N.V. and is developed in partnership with Moody’s Analytics. The MMBI survey and data began in the first quarter of 2015, and the survey panel consists of 700 middle-market executives. An MMBI reading above 100 generally indicates that the middle market is expanding, and a reading below 100 generally indicates that the middle market is contracting.

RETAIL SALES

U.S. retail and food services sales advanced 0.2% in November, a figure that helps diminish fears of an economic slowdown. The November report had revisions to the October data, which now show a 1.1% increase versus an increase of 0.6% as originally reported. Sales in November were driven by increased spending at retail items such as furniture and electronics, among other household goods. Economists view retail sales as a key economic indicator since consumer spending accounts for nearly two-thirds of the U.S. economy.

The “Advance Monthly Retail Trade Report” highlighted the strength in sales across most retail categories in November, with nine of the 13 major categories seeing higher sales. Sales at nonstore retailers increased 2.3% from October, while electronics and appliance stores increase 1.4% and furniture and home furnishing stores saw an increase of 1.2%.

Four of the 13 major categories saw declines in November, led by gasoline stations, at 2.3%, followed by food services and drinking places, at 0.5%.

The retail sales figures over the past 12 months increased 4.2% from last year. Sales at nonstore retailers climbed 10.8% over the past 12 months, while gasoline stations saw a spike in sales, at 8.2%, over the past 12 months, and food services and drinking places increased 5.6%. Sales figures in 12 of the 13 major categories saw gains over the past year, which reflects that consumers remain confident in the overall economy.

Core retail sales increased 0.5% in November. The core retail sales figure excludes sales of automobiles, gasoline, building materials, and food services and corresponds most closely with the consumer-spending component of gross domestic product. Over the past 12 months, core retail sales have grown 4.6%.

UNEMPLOYMENT

Total nonfarm payroll employment increased by 155,000 in November, a figure that came in below forecasts by analysts for an increase of 195,000, according to CNBC. Still, the monthly average in 2018 at

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206,180 is well ahead of the pace of 178,750 in 2017. The November job figure extended the streak of monthly gains to 98, which ranks as the longest period of job growth on record.

The November report also showed revisions to the job figures for the prior two months, which showed employment figures over this period resulting in 12,000 jobs less than what was previously reported. September’s figures were revised up from 118,000 jobs to 119,000 jobs, but October’s figures fell from 250,000 jobs to 237,000 jobs.

Employment gains continued to trend upwards in several industries, including healthcare, manufacturing, and transportation and warehousing. The number of jobs in healthcare increased 32,000 in November and 328,000 over the past 12 months. The number of manufacturing jobs increased 27,000 in November and 288,000 over the past year. Employment in the professional and business service sector continued to trend upwards, adding 32,000 jobs in November and 561,000 over the year. The transportation and warehousing sector has seen gains of 25,000 in November and is up 192,000 over the past 12 months.

Employment in other major industries, including mining, construction, wholesale trade, information, financial activities, and leisure and hospitality, changed little over the month.

According to ADP, midsized businesses outpaced their peers in job creation, adding 119,000 jobs in November, compared with 46,000 jobs for small businesses and 13,000 jobs for large businesses. The report showed service-sector jobs outpaced goods-producing jobs, 163,000 to 16,000. Small-sized businesses saw gains of 5,000 in goods-producing jobs and 41,000 in service-sector jobs.

The unemployment rate (also known as the U3 unemployment rate) remained unchanged in November, at 3.7%, the lowest rate since December 1969. At 3.7%, the unemployment rate remains below the longer-term level the Federal Reserve targets. The U3 unemployment rate is the official rate per the International Labour Organization definition and occurs when people who have actively looked for work within the past four weeks are still without jobs.

The report found that the labor-force participation rate remained unchanged in November, at 62.9%, and still has shown no clear trend over the past 12 months. The employment-population ratio, which is the share of the working-age population with a job, remained unchanged in November, at 60.6%. The number of long-term unemployed (those jobless for 27 weeks or more) declined by 120,000 and reported at 1.3 million in November, which accounted for 20.8% of the unemployed.

The broadest measure of labor underutilization, the U6 unemployment rate, increased 0.2 percentage point in November, to a seasonally adjusted 7.6%. U6 unemployment is broader than U3 and includes “marginally attached workers” and people who are looking for and want full-time work but have settled for part-time employment. Marginally attached workers are people who are not actively looking for work but who have indicated they want a job and have looked for work (without success) sometime in the past 12 months. This class also includes “discouraged workers,” those who have completely given up on finding a job because they feel they would be unable to do so.

HOURLY EARNINGS AND WORKWEEK

Wages rose six cents in November, to $27.35, which continues the accelerated pace reported last month. Average hourly earnings for all private-sector employees were up 81 cents, or 3.1%, over the past 12 months, but monthly wages, which increased 0.2%, fell short of expectations from analysts for a rise of 0.3%. Average hourly earnings for private-sector production and nonsupervisory employees rose by seven

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cents in November, to $22.95. Over the last 12 months, average hourly earnings for private-sector production and nonsupervisory employees have increased 72 cents, or nearly 3.2%.

Compensation costs for civilian workers for the three-month period ending September 2018, as measured by the Employment Cost Index, increased 0.8% as wages and salaries (which comprise 70% of compensation costs) increased 0.9% and benefit costs (which make up the remaining 30%) increased 0.4%. Over the past 12 months, compensation costs for civilian workers increased 2.8%, which matched last quarter’s results as the largest annual increase in nearly 10 years, when it increased 2.9% in the third quarter of 2008.

Compensation for private-industry workers increased 2.9% over the past year, matching the gains from last quarter. Wages and salaries increased 3.1% for the 12-month period ending June 2018, while the costs of benefits increased 2.5% over the same period. Employer costs for healthcare benefits increased 1.9% for the 12-month period ending June 2018.

The Employment Cost Index is published quarterly by the Bureau of Labor Statistics and draws from a sample of 27,000 observations from 6,600 private businesses as well as 8,000 observations from 1,400 government offices.

The average workweek for all private workers decreased 0.1 hour in November, to 34.4 hours, and is down 0.1 hour from one year ago. The manufacturing workweek remained unchanged in November, at 40.8 hours, but manufacturing overtime remained unchanged, at 3.5 hours. The average workweek for production and nonsupervisory employees remained unchanged in November, at 33.7 hours.

MANUFACTURING

The manufacturing sector increased 1.6 percentage points in November, as reported by the Institute for Supply Management (ISM). The manufacturing index (PMI) reading in November was 59.3%, rebounding from the decline in October that produced the lowest index score since April 2018. The report noted that continued supply chain delivery difficulties are leading to an increased consumption of inventory and import expansion was stable. Lead-time extensions continue, while steel and aluminum prices are stabilizing. Supplier labor issues and transportation difficulties continue to disrupt production but at more manageable levels. PMI is an indicator of the economic health of the manufacturing sector and is based on data compiled from purchasing and supply executives nationwide.

A reading above 50.0% indicates that the manufacturing economy is generally expanding; a reading below 50.0% indicates that it is generally contracting. A PMI in excess of 43.3%, over a period, generally indicates an expansion of the overall economy. Therefore, the PMI reading indicates that November was the 27th consecutive month of growth in the manufacturing sector and the 115th straight month of growth in the overall economy.

Thirteen of the 18 manufacturing sectors surveyed in November reported growth. The report stated that, based on the past relationship between PMI and the overall economy, if PMI for November were annualized (59.3%), it would correspond to a 4.9% increase in GDP annually. Over the past 12 months, the average PMI score is 59.2%.

The 13 manufacturing industries that reported growth in November were: computer and electronic products; apparel, leather and allied products; textile mills; paper products; miscellaneous manufacturing; electrical equipment, appliances and components; furniture and related products; machinery; transportation equipment; food, beverage and tobacco products; petroleum- and coal-related products; plastics and rubber products; and chemical products. Three industries reported contraction in November.

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The component for new orders increased 4.7 percentage points in November, to 62.1%. The reading brought the index score above the 60.0% mark, after falling below it for the first time since April 2017 in the October reading. This marked the 35th consecutive month of growth in new orders. A New Orders Index above 52.4%, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders. Eleven of 18 industries reported growth in new orders in November, and four industries reported a decrease in growth in new orders.

The component for production increased 0.7 percentage point in November, to 60.6%. This reading indicates growth in new orders for the 27th consecutive month. The survey noted that transportation variables, labor constraints, and tariffs appear to be less impactful in November, but lead-time expansions continued to persist. An index above 51.5%, over time, is generally consistent with an increase in the Federal Reserve Board’s industrial production figures. Eleven of the 18 industries reported growth in production during the month of November, while three industries reported a decrease in production.

The manufacturing employment component increased 1.6 percentage points in November, to 58.4%. The reading indicates growth in manufacturing employment in November for the 26th consecutive month. Employment levels have been expanding since October 2016, but many respondents cited labor-market issues as a constraint to their production and their suppliers’ production capability. An Employment Index above 50.8%, over time, is generally consistent with an increase in the Bureau of Labor Statistics’ data on manufacturing employment. Ten of the 18 industries reported employment growth in November, while two industries reported a decrease in employment.

The index that tracks inventory increased 2.2 percentage points in November, to 52.9%. The reading indicated raw materials inventories grew in November for the 11th consecutive month. The report noted that supplier deliveries improved at a marginal level, barely keeping up with production and reflecting continued difficulties with supplier deliveries. An Inventories Index greater than 43.0%, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ figures on overall manufacturing inventories. Nine of the 18 industries reported higher inventories in November.

The component that measures prices decreased 10.9 percentage points in November, to 60.7%. Despite the decline, the reading indicates an increase in raw materials prices for the 33rd consecutive month but at a sharply lower pace than in previous months. The final score in November marked the lowest reading since June 2017, when it reported at 53.0%. Survey members noted price increases across all industry sectors continue and at higher levels than the previous month. The Business Survey Committee noted that price increases are continuing to soften and/or decline in metals (all steels, copper and aluminum). Increases continue for methanol, freight, labor, electrical and electronic components, printed circuit board assemblies, and products manufactured primarily from steel. Shortages continue in electrical and most electronic components and fabricated and machined components. Freight, aluminum, steel, and caustic soda prices are down. A Prices Index above 52.4%, over time, is generally consistent with an increase in the Bureau of Labor Statistics’ Index of Manufacturers Prices. Thirteen of the 18 industries reported paying higher prices for raw materials in November.

The index that tracks new export orders remained unchanged in November, at 52.2%. This reading indicates growth in new order exports for the 33rd consecutive month, as four of the “Big Six” industry sectors continued to expand their activity during the period. Eight of the 18 industries reported growth in new order exports in November.

The index that tracks imports decreased 0.7 percentage point in November, to 53.6%. Despite the decline, this reading indicates imports are growing in November for the 22nd consecutive month. Eleven of the 18 industries reported the same or better import levels in November.

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The index that tracks the average commitment lead time for capital expenditures decreased by two days in November, to 150 days. The average lead time for maintenance, repair, and operating supplies decreased by two days, to 33 days, and the average lead time for production materials increased by one day, to 68 days.

The Institute for Supply Management published its most recent “Semiannual Economic Forecast” in December, and the report highlighted that expectations for economic growth will continue into 2019. Specifically, executives in the manufacturing sector are optimistic that revenues are expected to increase in 17 manufacturing industries. Capital expenditures, a major driver in the U.S. economy, are expected to increase by 6%, and the employment base will grow by 2.4%.

The survey results showed that 64% of respondents from the panel of manufacturing supply management executives predict their revenues, on average, will be greater in 2019 than in 2018. The panel of purchasing and supply executives expects a 5.7% net increase in overall revenues for 2019, compared to a 5.1% increase predicted for 2018 over 2017 revenues. Seventeen of the 18 industries reported expecting revenue growth for 2019.

Purchasing managers reported that their companies are currently operating, on average, at 85.2% of normal capacity. This figure is down 0.6 percentage point from the May 2018 rate. Eleven of the 18 industries reported being at the average capacity of 85.8% or above.

Production capacity in manufacturing increased 4.0% in 2018, as 44% of purchasing and supply executives reported an average capacity increase of 9.9%, while 5% reported an average decrease of 7.2%, and 51% reported no change. This compares to a predicted increase in production capacity of 4.9% for 2018 made in May 2018. Expectations for 2019 are for an increase of 4.7%. Sixteen of the 18 industries reported an increase in production capacity for 2018.

Survey respondents reported a 13.4% increase in capital expenditures in 2018. The results were higher than the forecast for a 10.1% increase in capital expenditures reported in the May 2018 survey. The 46% of purchasers who reported increased capital expenditures in 2018 indicated an average increase of 34.8%, while the 6% who said their capital spending was reduced reported an average decrease of 42%. Forty-eight percent of respondents said they spent the same in 2018 as in 2017. Sixteen of the 18 industries are expecting increases in capital expenditures in 2018 when compared to 2017.

Purchasing and supply executives expect capital expenditures to increase 6% in 2019. The 41% of respondents who predict increased capital expenditures in 2019 indicate an average increase of 32.5%, while the 19% who said their capital spending would be reduced predict an average decrease of 38.2%. Forty percent said they expect to spend the same in 2019 as in 2018.

After an earlier forecast in May 2018 for a 5% increase in prices paid for raw materials in 2018, survey respondents now report realized price increases averaging 5.1% for the year 2018. The 72% who say their prices are higher now than at the end of 2017 report an average increase of 7.8%, while the 10% who report lower prices averaged a 4.4% decrease. The remaining 18% indicated no change between the end of 2018 and the end of 2017. Ten of the 18 manufacturing industries reported an increase in prices paid for the first part of 2018.

When asked to predict future price changes, 71% of purchasing and supply managers expect the prices they pay to increase in early 2019 by an average of 5.9%. At the same time, 12% anticipate decreases averaging 5.2%. Including the 17% who expect no change in prices in the first four months of 2019, purchasers expect a net average overall price increase of 3.5%. Ten of the 18 manufacturing industries reported a price

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increase in 2018. Respondents predict a net average increase in prices paid of 3.3% between December 2018 and December 2019, indicating they expect a slight decrease in prices during the period of May 2019 through December 2019. Sixty-seven percent of respondents expect an average price increase of 6% for the full year of 2019, while 11% expect an average reduction of 6.1%. The remaining 22% expect no change in their average prices paid for the year 2019.

Purchasing and supply executives expect higher overall labor and benefit costs for 2019. Sixty-four percent of respondents expect increased labor and benefit costs and expect them to grow by an average of 4% for all of 2019, while the 3% forecasting lower costs see them decreasing by an average of 5.8%. Including the 33% of respondents who believe costs will remain the same, the overall net rate of increase is expected to be 2.5% between the end of 2018 and the end of 2019. Twelve of the 18 industries reported expectations for employment growth in 2018.

Manufacturing employment increased 2.9% in 2018 relative to 2017 and forecast that employment will increase by 2.4%, on average, for the full year of 2019 relative to 2018. Forty-four percent of respondents expect employment to be 6.6% higher in 2019, while 8% predict employment to be lower by 6.1%. The remaining 48% of respondents expect their employment levels to be unchanged in 2019.

Summarizing revenues for 2018, 65% of respondents say revenue was better than it was in 2017 and that revenues increased an average of 10.2% over 2017. Nine percent say their revenues decreased in 2018 by an average of 8.6%, and the remaining 26% indicate no change. Overall, purchasing and supply executives indicate a net increase of 5.8% in business revenues for 2018 over 2017. This is less than the 6.6% increase that was forecast in May 2018 for all of 2018 but more than the 5.1% increase predicted in December 2017 for all of 2018. Seventeen of the 18 industries reported growth in revenue in 2018.

Manufacturing survey respondents forecast that business revenues for 2019 will be stronger than in 2018. The 64% of respondents forecasting better business revenues in 2019 than in 2018 estimate an average increase of 10.2% in their organizations’ revenues. This is in contrast to an average decrease of 7.6% forecast by the 11% who predict lower business revenues in 2019. Including the 25% who see no change in 2019, the forecast for overall net increase in business revenues for 2019 over 2018 is 5.7%. Seventeen manufacturing industries expect revenue improvement in 2019 over 2018.

Survey respondents are optimistic about the next six months as reflected in a diffusion index of 66.6%. Comparing their outlook for the first half of 2019 to the last half of 2018, 46% predict it will be better, 13% predict it will be worse, and 41% expect no change. Purchasing and supply executives are less optimistic about the second half of 2019 compared to the first half of 2019. The percentage of survey respondents who forecast the second half of 2019 to be better than the first half is 44%, while 16% expect it to be worse and 40% expect no change. The diffusion index for the second half of 2019 is 64%, compared to 66.6% for the first half of 2019. Thirteen industries expect improvement in the first half of 2019.

SERVICES

The services sector grew for the 106th consecutive month, as the nonmanufacturing index (NMI) rose 0.4 percentage point in November, to 60.7%. Respondents noted continued concerns about capacity, logistics, and tariffs but remain positive about business conditions heading into 2019. The respondents are positive about current business conditions and the economy. NMI measures the strength of the services sector and is based on data compiled from purchasing and supply executives nationwide.

An NMI reading above 50.0% indicates that the services sector of the economy is generally expanding, whereas a reading below 50.0% indicates that the services sector is generally contracting. An NMI in excess

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of 49.0%, over time, generally indicates an expansion in the overall economy. Therefore, the November NMI indicates an expansion in the services sector for the 106th consecutive month and growth in the overall economy for the 111th consecutive month.

Seventeen of the 18 nonmanufacturing sectors surveyed in November reported growth during the month. The majority of the respondents’ comments continue to indicate optimism about business conditions and the overall economy. The report noted that, based on the past relationship between the NMI and the overall economy, if NMI for November were annualized (60.7%), it would correspond to a 4.3% increase in GDP.

The component that measures business activity increased 2.7 percentage points in November, to 65.2%. The reading indicates that business activity grew for the 112th consecutive month, with respondents noting that their capital improvement projects are getting funded. Sixteen of the industries in the index reported growth in business activity for the month.

The new orders component of the index increased 1.0 percentage point, to 62.5%. The November report represents growth at a faster rate in new orders for the 94th consecutive month. Survey respondents noted that existing customers are providing greater business each month as the economy continues to improve. Fifteen of the industries in this index reported an increase in new orders for the month.

The employment component decreased 1.3 percentage points, to 58.4%, in November, which, despite the decline, marked employment growth in the services sector for the 57th consecutive month. Fourteen of the industries reported increased employment.

The supplier deliveries component decreased 1.0 percentage point in November, to 56.5%, which indicates deliveries were slower in November for the 35th consecutive month. A reading above 50% indicates slower deliveries, while a reading below 50% indicates faster deliveries. Twelve industries reported slower deliveries on the month.

The component that measures the Inventories Index increased 1.5 percentage points in November, to 57.5%. Of the total respondents, 34% indicated they do not have inventories or do not measure them. Eleven industries reported an increase in inventories in November.

The component that measures prices nonmanufacturing organizations paid for purchased materials and services increased 2.6 percentage points, to 64.3%, in November. For the month, 28% of respondents reported higher prices, 67% indicated no change in prices paid, and 5% of respondents reported lower prices. All 18 industries reported an increase in prices paid in the month of November.

The component that measures inventory sentiment decreased 2.0 percentage points in November, to 60.0%. This reading indicates that respondents believe their inventories are still too high at this time. Twenty-four percent of respondents said their inventories were too high, 4% of the respondents said their inventories were too low, and 72% said their inventories were about right.

The Institute for Supply Management published its most recent “Semiannual Economic Forecast” in December, with the report noting that economic growth is expected to continue into 2019. Fifty-seven percent of nonmanufacturing supply management executives expect their 2019 revenues to be greater than in 2018. They currently expect a 3.7% net increase in overall revenues for 2019 compared to a 4.5% increase reported for 2018 over 2017 revenues. Executives in the nonmanufacturing sector also indicate that 17 of their industries will see higher revenues. Capital expenditures, a major driver in the U.S. economy, are expected to increase by 3.4% in the nonmanufacturing sector, and employment growth is expected at 2.0%.

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Nonmanufacturing supply managers report operating at 88.4% of their normal capacity, higher than the 85.5% reported in May 2018. This is 2.9% higher than what was reported in May 2018 but less than the 91.9% reported in December 2017. Ten out of the 18 industries operated at capacity levels above the average rate of 88.4% of normal capacity. They are optimistic about continued growth in the first half of 2019 compared to the second half of 2018, with a projected increase in growth rate for capital reinvestment.

Respondents in nonmanufacturing industries expect the prices they pay for materials and services will increase by 3.6% during 2019. They also forecast that their overall labor and benefit costs will increase 3.2% in 2019. Profit margins are reported to have increased in the second and third quarters of 2018, and respondents expect them to increase between now and May 2019.

The survey results showed that business revenues for 2018 have increased compared to 2017 by 4.5%. This is more than the 3.2% increase predicted in May 2018 for all of 2018. The 58% of respondents reporting better business in 2018 than in 2017 estimate an average revenue increase of 8.8%. This is in contrast to an average decrease of 6.3% reported by the 10% of respondents who indicate worse business in 2018. The remaining 32% have experienced no change in 2018 from 2017. Seventeen out of 18 industries reported increased revenues in 2018.

Nonmanufacturing survey respondents forecast that business revenues for 2019 will be improved over 2018 by an average of 3.7%. This is less than the 4.5% increase reported for 2018 and less than the 6% increase predicted one year ago for 2018 revenues over 2017 revenues. The 57% of respondents forecasting better business in 2019 than in 2018 estimate an average revenue increase of 7.4%. This is in contrast to an average decrease of 5.7% forecast by the 8% who predict worse business in 2019. The remaining 35% see no change in 2019.

The capacity to produce products or provide services in the nonmanufacturing industries increased 2.4% during 2018. This compares to the 2.9% increase reported in December 2017 for the year 2017 and is less than the May 2018 prediction of a 3.8% increase for 2018. For 2019, an increase of 2.9% is predicted. For 2018, 31% of nonmanufacturing supply managers indicate increases averaging 9.1%, and 4% of respondents indicate decreases averaging 12.1%. Sixty-five percent saw no change in their capacity. Fifteen of the 18 industries increased their production capacity in 2018.

Nonmanufacturing purchasing and supply executives increased capital expenditures 2.8% compared to 2017. This is less than the 7% increase reported for 2017 one year ago, and less than the 6.8% increase predicted by respondents in May 2018. Forty-three percent report increases averaging 13.2%. An additional 11% report decreases averaging 24.7%. Forty-six percent indicate they spent the same on capital expenditures in 2018 as in 2017. Eleven of the 18 industries increased their capital expenditures in 2018.

Nonmanufacturing purchasing and supply executives are expecting an increase of 3.4% in capital expenditures in 2019, more than the increase of 2.8% they are reporting for 2018. The 43% of respondents expecting to spend more on capital expenditures predict an average increase of 13.8%. An additional 15% anticipate a decrease averaging 16.7%. Forty-two percent expect to spend the same on capital expenditures in 2019 as in 2018. Fifteen industries expect increases in capital expenditures in 2019.

Nonmanufacturing respondents report prices they pay have increased by 2% this year. This is slightly less than the 2.1% increase they predicted in May 2018, and more than the 2.2% increase for 2018 predicted one year ago. Sixty-one percent of purchasers report price increases averaging 5.3%. Ten percent of purchasers indicate decreased prices, with an average reduction of 12.9%, and 29% of respondents have not experienced overall price changes this year. Nine of the 18 industries reported an increase in paid prices in 2018.

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Nonmanufacturing survey respondents predict their purchases in the first five months of 2019 will cost an average of 3.2% more than at the end of 2018. This is more than the 2% increase reported in the preceding section for all of 2018. Sixty-six percent of nonmanufacturing respondents predict the prices they pay will increase an average of 5.2% in the first part of 2019. Five percent of respondents expect price decreases averaging 5.1%. The remaining 29% predict no change in prices in the first four months of 2019.

For all of 2019, nonmanufacturing supply management executives expect their prices to increase an average of 3.6%. Sixty-nine percent of respondents expect increases averaging 5.7%, 7% anticipate prices to drop an average of 4.2%, and 24% foresee no change in prices during the next year.

The survey noted that respondents expect prices to increase, on average, 2.1% when compared to the prices at the end of 2017. Given that respondents have reported that prices have increased 1.3% through May 2018, prices are projected to increase 0.8 percentage point over the remainder of the year. Fifty-three percent of respondents anticipate price increases averaging 4.8%. Nine percent of respondents expect price decreases of 6%, while 38% do not expect prices to change. Sixteen of the 18 industries are expecting price increases in 2018.

In 2018, respondents forecast that employment will see a 3.2% increase in labor and benefit costs for nonmanufacturing industries in 2019. Seventy-one percent of respondents expect such costs to increase by an average of 4.8%. Another 2% of respondents expect labor and benefit costs to shrink by an average of 7.5%, and 27% believe costs will remain stable during 2019. Eleven of the 18 industries are expecting employment to increase in 2018.

The November survey reported that nonmanufacturing employment has increased 1.7% since May 2018. Respondents forecast that employment will increase 2% by the end of 2019. In the coming year, 49% of respondents expect higher levels of employment, 11% anticipate lower levels, and 40% expect their employment levels to be unchanged. Sixteen industries anticipate increases in their employment in 2019.

Nonmanufacturing supply management executives report that business revenues for 2018 have increased compared to 2017 by 4.5%. This is more than the 3.2% increase predicted in May 2018 for all of 2018. The 58% of respondents reporting better business in 2018 than in 2017 estimate an average revenue increase of 8.8%. This is in contrast to an average decrease of 6.3% reported by the 10% of respondents who indicate worse business in 2018. The remaining 32% have experienced no change in 2018 from 2017. Seventeen of the 18 industries are expecting revenues to increase in 2018.

INDUSTRIAL PRODUCTION

The Federal Reserve reported that total industrial production increased 0.6% in November, after revisions to the October report showed a loss of 0.2%. The rise in November stemmed from the surging output at mines and utilities, although manufacturing production was flat. At 109.4% of its 2012 average, total industrial production in November was 3.9% above its level from one year ago. Capacity utilization for the industrial sector increased 0.4% in November, at 78.5%, a rate that is 1.3 percentage points below its long-run (1972 to 2017) average.

The output of consumer goods rose 0.1% in November, as a loss of 0.5% for nonenergy nondurables mostly offset a nearly 2.0% increase in consumer energy products. The index for business equipment moved down about 0.25%, and the index for defense and space equipment was unchanged.

The output of mining advanced 1.7% in November, with gains seen in oil and gas extraction, coal mining, and support activities for mining. The mining index has advanced more than 13.2% over the past 12 months. The index for utilities advanced 3.3% in November, with increases for both electric and natural gas utilities.

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Capacity utilization for manufacturing moved down to 75.7% in November, a rate that is 2.5 percentage points below its long-run average. Utilization for mining increased to 94.1% but remained above its long-run average of 87.0%. The capacity utilization rate for utilities advanced to 79.4%, nearly 6.0 percentage points below its long-run average.

STOCK MARKET AND VOLATILITY

All major stock market indexes posted gains in November, after a late-month rally reversed the downward skid started in October, when all major indices endured their worst monthly decline in seven years. The Dow Jones Industrial Average climbed 2.1%, while the S&P 500 Index posted gains of 2.0%. The Nasdaq Composite moved up 0.3% on the month, the S&P MidCap advanced 3.1%, and the small-cap-focused Russell 2000 gained 1.6% in November.

Volatility remained elevated in November, after spiking in October. In November, the VIX ranged from 16.1 to 23.8 and reported a monthly average of 19.4.

The VIX represents the implied volatility of 30-day options on the Standard & Poor’s 500 stocks and has been termed by analysts and investors as the “fear gauge.” Accordingly, the VIX represents the expected volatility of the market, as represented by the Standard & Poor’s 500 index. Stock market professionals use the VIX to gauge investor sentiment. Values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

CONSUMER PRICES

Consumer prices were flat in November, after rising 0.3% in October. With no reported change in November, the streak of seven consecutive month of gains ended. A sharp decline in the price of gasoline held back prices in November, but underlying inflation pressures remained firm amid rising rents and healthcare costs. Economists had predicted no change to occur in November, according to a poll by Reuters. Over the past 12 months, the Consumer Price Index is up 2.2%, slower than the figure reported last month, 2.5%. CPI is a measure of a basket of products and services—including housing, electricity, food, and transportation—and is used as a measure of inflation. CPI is comprised of three main indexes: the food index, the energy index, and the all items less food and energy index (also known as “Core CPI”). Core CPI is a measure of inflation that excludes volatile food and energy costs.

The energy index declined 2.2% in November, after rising 2.4% in October. Over the past year, the energy index has risen 3.1%. The gasoline index declined 4.2% in November but has risen 5.0% over the past year. The index for electricity advanced 0.3% in November and is up 0.6% over the past 12 months.

The Chained Consumer Price Index for all urban consumers fell 0.3% in November. The decline in the index was the first decline since December 2017. Over the past 12 months, the index has risen 2.0%, down from 2.3% last year. The Chained Consumer Price Index was designed to be a closer approximation of a cost-of-living index in that it, in its final form, accounts for any substitution that consumers make across item categories in response to changes in relative prices.

Core CPI rose 0.2% in November and matches the gain from the month prior. Core CPI has risen 2.2% over the past 12 months, up from 2.1% reported in October.

PRODUCER PRICES

The Producer Price Index (PPI) increased 0.1% in November, after rising 0.6% in October, a rate that marked the largest increase in wholesale prices in nearly six years. The modest increase stems from a rise

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in the costs for services, which offset a sharp decline for energy products. Indications are that the overall momentum in wholesale inflation appears to be slowing. Economists had forecasted for no change to the index, according to a poll by Reuters. PPI has grown at an annual rate of 2.5%, slowing from the rate of 2.9% reported in October. PPI is a gauge of inflation in the manufacturing process that can be a precursor to inflation in consumer prices. PPI for final demand is comprised of two main indexes: final demand services and final demand goods.

The index for final demand less foods, energy, and trade services rose 0.3% in November. Over the past 12 months, prices for final demand less foods, energy, and trade services increased 2.8%.

In November, prices for final demand services advanced 0.3%, for its third consecutive month of gains. Prices for final demand goods declined 0.4% in November, after a modest rise in October. Prices for final demand goods less foods and energy increased 0.3%.

Core PPI advanced 0.3% in November and is up 2.8% over the past 12 months. The increase in the annual Core PPI figure showed modest inflationary pressures in November.

PERSONAL CONSUMPTION EXPENDITURE

The Federal Reserve often emphasizes the price inflation measure for personal consumption expenditures (PCE), which the Department of Commerce produces, largely because the PCE index covers a wide range of household spending and is less volatile than some other measures. Prices continued to rise as highlighted by the October report, as personal consumption expenditures, measured in current dollars, rose 0.6 percentage point.

The PCE price index rose 0.2 percentage point in October. Core PCE, which excludes the volatile food and energy components, advanced 0.1 percentage point. Over the past 12 months, the PCE index is up 2.0%, while core PCE has risen 1.8%. Core PCE, which is the Federal Reserve’s preferred inflation measure, remained below the Federal Reserve’s long-term rate, 1.99%, and below the U.S. central bank’s 2.0% inflation target.

HOUSING STARTS AND BUILDING PERMITS

Housing starts advanced in November, rising 3.2% and marking two consecutive months of gains. Housing starts reported at a seasonally adjusted rate of 1,256,000, up from the revised figure of 1,217,000 in October. The November report highlighted the strength in the multifamily construction sector, which advanced 24.9%, while single-family homes fell to a 1 ½ year low following a decline of 4.6%. The multifamily-home sector, which consists of buildings with five units or more, tends to be more volatile than the single-family-home sector. Despite the rise in November, housing starts are down 3.6% over the past 12 months, with the root of the decline being the rise in borrowing costs and land and labor shortages, leading to tight inventories and homes that are more expensive.

Building permit authorizations for privately owned housing units, considered a leading indicator of demand for new homes, climbed to a seasonally adjusted rate of 1,328,000 in November. This is 5.0% above the revised October rate of 1,265,000. Building permits saw gains in two of the four regions, with the South region improving by 10.5%. Building permits are up 0.4% from the levels from one year ago. Building permits for single-family housing units increased 0.1% in November but are down 1.9% from one year ago. Building permits for multifamily housing units improved 15.4% in November and are up 5.5% from one year ago.

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Housing completions were at a seasonally adjusted rate of 1,099,000 in November. This is 0.4% above the revised rate in October but is 3.9% below the rate from one year ago. Single-family housing completions in November were at a rate of 772,000, which is 5.4% below the revised October rate of 816,000.

Builder confidence decreased 8.0 points, as the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reported a reading of 60.0 in November. An HMI reading above 50.0 indicates that more builders view sales conditions as good, rather than poor. HMI has now been above the 50.0 benchmark for 53 consecutive months. Homebuilders noted the sizable decrease in the November reading and have noted continued signs of consumer demand for new homes, but customers are taking a pause due to concerns over rising interest rates and home prices. With the prospects of future interest rate hikes, homebuilders are taking a cautious approach to market conditions.

All three HMI components posted declines in November. The component measuring current sales conditions fell seven points, to 67.0, and the component gauging sales conditions over the next six months fell 10 points, to 65.0. The component that measures buyer traffic declined eight points, to 45.0.

Looking at the three-month moving averages for the regional HMI indexes, the Northeast rose two points, to 58.0, and the South moved down two points, to 68.0. The West fell three points, to 71.0, and the Midwest fell one point, to 57.0.

HOME SALES, PRICES, AND INVENTORY

Existing-home sales improved 1.9% in November and recorded its second consecutive monthly gain after six consecutive months of declines. Despite the monthly rise, sales are 7.0% below the figure from one year ago.

Existing-home sales in November reported at an annual pace of 5.32 million, which is up from 5.22 million in October. Sales reported at 5.72 million one year ago. Existing-home sales are completed transactions that include single-family houses, townhomes, condominiums, and co-ops.

The report stated that market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.

All-cash sales were 21% of transactions in November, which is down 2.0 percentage points from October and 1.0 percentage point from one year ago. Individual investors, who account for many cash sales, purchased 13% of homes in November, which is down 2.0 percentage points from October and 1.0 percentage point from one year ago. First-time buyers accounted for 33% of sales in November, which is up from 31% last month and 29% from one year ago.

Shares of distressed home sales were at 2.0%, which remains their lowest rate since October 2008. This is down 1.0 percentage point from last month and down from 4% one year ago. Two percent of sales were foreclosures, and 2.0% were short sales.

The report showed that three of the four major regions saw sales increase in November. Home sales in the Northeast increased 7.2% in November but are down 2.6% from a year ago. Sales in the Midwest rose 5.5% from October but are down 4.3% from one year ago. Sales in the South increased 2.3% but are down 5.6% from one year ago. Sales in the West declined 6.3% and are down 15.4% from one year ago.

The national median existing-home price for all housing types was $257,700 in November and is up 4.2% from a year ago. November’s price increase marked the 81st consecutive month of year-over-year price gains. In November, home prices in the Northeast moved up 6.5% from one year ago, while prices in the

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Midwest climbed 2.6%. Home prices in the South rose 3.2%, while prices in the West increased 1.8% over the last 12 months. The median time on the market for all homes sold in November was 42 days, which was up six days from October and up from 40 days from one year ago. Forty-three percent of homes sold in October were on the market for less than a month.

Total housing inventory decreased from 1.85 million to 1.74 million existing homes available for sale but is up from 1.67 million homes one year ago. Unsold inventory was at a 3.9-month supply at the current sales pace in November, which is down from 4.3 months in October but up from 3.5 months from one year ago. Six months of inventory is considered a balanced market that equally benefits buyers and sellers.

NAR reports that, according to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage increased, to 4.87%, in November, rising from the 4.83% rate in the prior month. The average 30-year rate for 2017 was 3.99%.

NAR’s Realtors Confidence Index (RCI) for single-family houses reported a reading of 49.0 and is down 1.0 point from last month (strong = 100; moderate = 50; weak = 0). The RCI is a key indicator of housing market strength based on a monthly survey of over 50,000 real estate practitioners.

According to a report by Trulia, the share of U.S. homes listed for sale with at least one price cut is at its highest level since 2014, more evidence of a market that may finally be tilting in the homebuyers’ favor. For much of the first half of 2018, the share of listings on Trulia with a price reduction was largely unchanged from 2017. However, that figure rose to 17.2% in August, the highest national rate since August 2014. The report compares data from August 2017 with August 2018, noting the share of listings with a price cut rose in 63 of the 100 largest metros. Furthermore, when looking at 12 months of data, in 79 of the 100 largest metros, there is a strong correlation between how expensive a neighborhood is and the proportion of listings with at least one price cut over the past year. Homes in pricier neighborhoods have listing prices slashed more often than those listed in neighborhoods where homes are less expensive. Budget-conscious buyers in more-affordable neighborhoods may have a harder time finding a bargain. The typical price reduction has gotten smaller since the early years of the recovery. Across the 12 months ending August 2018, the median reduction nationwide knocked 2.6% off the listing price. During the same period in 2011-2012, the median reduction was 4%.

COMMERCIAL REAL ESTATE

NAR’s most recent “Commercial Real Estate Market Survey,” analyzing the third quarter of 2018, noted prices for commercial properties increased 1.4% year over year in the third quarter of 2018. Capitalization rates moved sideways in the third quarter, with cap rates reporting at 6.8% during the quarter. Capitalization rates ranged from 5.9% for Apartment Class A properties to 7.7% for Retail Class BC properties.

A shortage of inventory remained the principal concern among investors, as a wide gap between buyers and sellers affected over 20% of respondents. Prices advanced 1.4% year over year. Leasing activity picked up, as vacancies experienced upward pressures.

The third quarter of 2018 witnessed a modest increase in investment sales, as sales volume rose by 1.6%. The bifurcation continues along transaction volumes as well, with deals at the higher end, $2.5 million and above, comprising a large share of investment sales, while transactions at the lower end make up a smaller fraction. Sixty percent of realtors closed a leasing transaction in the third quarter.

Leasing volume improved 2.0% during the quarter, as tenants shifted their focus to smaller-space properties, with larger spaces being more readily available. Office space leasing experienced a slowdown in the third quarter, while industrial properties remained the same. In the third quarter, the under-2,500-square-feet

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segment accounted for the largest share of activity. The 2,500-square-feet-to-5,000-square-feet segment was next in leasing demand. Inventory shortage was the No. 1 problem among the leasing sector.

Vacancy rates remained low in the third quarter of 2018 across most property types. Lease terms remained steady, with 36-month and 60-month leases capturing 65.0% of the market. Vacancy rates ranged from 6.2% for multifamily properties to 14.7% for hotel properties.

FORECAST

Consensus Economics Inc., publisher of Consensus Forecasts—USA, reports that the consensus of U.S. forecasters believe that real GDP will increase at a seasonally adjusted annual rate of 2.6% in the fourth quarter of 2018 and 2.5% in the first quarter of 2019. Every month, Consensus Economics surveys a panel of 30 prominent U.S. economic and financial forecasters for their predictions on a range of variables, including future growth, inflation, current account and budget balances, and interest rates. The forecasters expect GDP to be 2.9% in 2018 and 2.7% in 2019.

They forecast that consumer spending will increase at a rate of 2.8% in the fourth quarter of 2018 and 2.4% in the first quarter of 2019. They expect consumer spending to increase 2.7% in 2018 and 2.7% in 2019.

The forecasters believe unemployment will average 3.7% in the fourth quarter of 2018 and 3.6% in the first quarter of 2019. They predict that unemployment will average 3.9% in 2018 and 3.5% in 2019.

The forecasters believe that the three-month Treasury bill rate will be 2.4% at the end of the fourth quarter of 2018 and 2.6% at the end of the first quarter of 2019. They predict the 10-year Treasury bond yield will be 3.2% at the end of the fourth quarter of 2018 and 3.3% at the end of the first quarter of 2019.

They also believe consumer prices will rise at a rate of 2.5% in the fourth quarter of 2018 and 2.4% in the first quarter of 2019. They expect consumer prices to increase 2.5% in 2018 and 2.3% in 2019. They expect producer prices to increase at a rate of 2.2% in the fourth quarter of 2018 and 2.4% in the first quarter of 2019. The forecasters anticipate producer prices will rise 3.1% in 2018 and 2.3% in 2019.

The forecasters believe real disposable personal income will rise at a rate of 1.9% in the fourth quarter of 2018 and 2.6% in the first quarter of 2019. They believe real disposable personal income will increase 2.8% in 2018 and 2.3% in 2019.

The forecasters expect industrial production to increase at a rate of 3.0% in the fourth quarter of 2018 and 2.5% in the first quarter of 2019. They forecast that industrial production will increase 3.7% in 2018 and 2.8% in 2019.

Nominal pretax corporate profits are expected to rise 7.1% in 2018 and 4.8% in 2019. The forecasters also project housing starts will be 1,270,000 in 2018 and 1,310,000 in 2019.

The most recent release of The Livingston Survey (the Survey) predicts lower growth for second half of 2018 and first half of 2019 than had been predicted in its prior survey. The Survey, conducted by the Federal Reserve Bank of Philadelphia, is the oldest continuous survey of economists’ expectations. It summarizes the forecasts of economists from industry, government, banking, and academia. The participants project real GDP to grow at an annual rate of 3.0% in the second half of 2018, 2.4% in the first half of 2019, and 2.3% in the second half of 2019. They believe that GDP will grow 2.07% annually over the next 10 years.

The Survey forecasted the unemployment rate to be 3.7% in December 2018, fall to 3.5% by June 2019, and remain at 3.5% by December 2019. The unemployment rate is expected to average 3.9% in 2018.

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The forecasters in the Survey expected consumer price inflation (CPI) to be 2.0% in December 2018, 2.4% in June 2019, and 2.3% by December 2019. The Survey expects CPI to average 2.23% over the next 10 years. The Survey also expects producer price inflation (PPI) to be 1.5% in December 2018, 2.7% in June 2019, and 2.8% in December 2019.

The Survey predicted the interest rate on three-month Treasury bills will be 2.45% at the end of December 2018. From there, the forecasters expect that the rate will increase to 2.80% in June 2019 and to 3.01% in December 2019. They predicted the interest rate on 10-year Treasury bonds to reach 3.20% at the end of December 2018. According to the Survey, the rate will then rise to 3.42% in June 2019 and to 3.51% in December 2019. The forecasters have revised their previous projections for future S&P 500 index values. They expect the S&P 500 index to be at 2,754.0 by the end of December 2018, 2,829.9 at the end of June 2019, and 2,900.0 at the end of December 2019.

The Energy Information Administration (EIA) predicts that the West Texas Intermediate crude oil spot price will average approximately $65.18 per barrel in 2018 and $54.19 per barrel in 2019, compared with $50.79 per barrel in 2017. The EIA expects retail prices for regular-grade gas to average $2.73 per gallon in 2018 and $2.50 per gallon in 2019, compared with $2.42 per gallon in 2017.

The Energy Information Administration believes the Henry Hub natural gas spot price will average $3.17 per million Btu (MMBtu) in 2018 and $3.11 per MMBtu in 2019, compared with $2.99 per MMBtu in 2017. The cost of coal delivered to electricity-generating plants, which averaged $2.06 per MMBtu in 2017, is expected to average $2.07 per MMBtu in 2018 and $2.08 per MMBtu in 2019. Residential electricity prices, which averaged 12.89 cents per kilowatt-hour (kWh) in 2017, are expected to average 12.90 cents per kWh in 2018 then rise to 13.31 cents per kWh in 2019. The airline ticket price index, which averaged 275.78 in 2017, is expected to be 271.82 in 2018 before rising to 323.00 in 2019.

The National Association of Realtors’ Realtors Confidence Index for the outlook of single-family homes decreased 1.0 point, to 49.0 points, in November (strong = 100; moderate = 50; weak = 0). The RCI for the outlook for townhomes decreased four points, to 41.0, while the outlook for condos declined 5.0 points in November, to 38.0. The RCI is a key indicator of housing market strength based on a monthly survey of over 50,000 real estate practitioners. Practitioners are asked about their expectations for home sales, prices, and market conditions.

NAR projects existing-home sales in 2018 to be 5.345 million (-3.0%) before increasing to 5.400 million (+1.0%) in 2019. It believes that new single-family home sales will be 623,000 (+1.6%) in 2018, before increasing to 690,000 (+10.8%) in 2019. NAR believes the median existing-home price will be $258,900 (+4.7%) in 2018, before increasing to $266,800 (+3.1%) in 2019. NAR believes the median new-home price will decrease to $322,600 (-0.2%) in 2018, before rising to $332,700 (+3.1%) in 2019. It expects housing starts to increase to 1,260,000 (+4.7%) in 2018, then to 1,320,000 (+4.8%) in 2019. NAR believes the 30-year fixed mortgage rate will average 4.6% in 2018, before rising to 5.3% in 2019, and the 5-1 hybrid adjustable rate mortgage will average 3.9% in 2018 and 4.7% in 2019.

The most recent three-year outlook from the Urban Land Institute (ULI) and Ernst & Young (EY) found that real estate economists and analysts believe the economy will continue to expand over the next three years, though they expect employment growth to slow and the unemployment rate to plateau as the economy reaches full employment. The ULI/EY Real Estate Consensus Forecast, a semiannual publication, is based on a survey of 45 of the industry’s top economists and analysts representing 33 of the country’s leading real estate investment, advisory, and research firms and organizations. The forecast for each indicator is the median forecast from the 45 survey respondents. The key findings from the Real Estate Consensus Forecast include:

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Annual commercial property transaction volume is expected to decline to $475 billion in 2018 and $415 billion by 2020. Still, these are among the highest annual volumes and remain well above the long-term average.

The issuance of commercial mortgage-backed securities (CMBS), a key source of financing for commercial real estate, rebounded in 2017, to $88 billion. Issuance is expected to remain essentially level in 2018 and 2019, at $90 billion and $88 billion, before decreasing slightly in 2020, to $80 billion.

Commercial real estate prices are projected to grow at subdued and relatively slowing rates relative to recent years, at 6.0% in 2018, 5.0% in 2019, and 4.0% in 2020. These are all below the long-term average growth rate of 4.4%.

Institutional real estate assets are forecasted to provide total returns of 6.5% in 2018 and 5.0% in 2020. By property type, 2018 returns are expected to range from 11.4% for industrial to 4.5% for retail. Total returns in 2020 are expected to range from 7.2% for industrial to 3.9% for retail.

Both apartment and office vacancy rates are expected to plateau in 2018 from their 2017 rates, before edging up in both 2019 and 2020. Both industrial and retail availability rates are expected to see slight declines in 2018 before seeing an increase in 2020 above their 2017 levels. The hotel occupancy rate is forecast to increase slightly in 2018, plateau in 2019, and then decline slightly in 2020.

Commercial property rent is expected to continue to increase in the next three years across all sectors, although at more subdued rates than in recent years. In 2018, rent increases will range from 3.9% for industrial to 1.8% for retail. Rental rate growth rates in all four sectors are expected to decelerate in both 2019 and 2020. Rent increases in 2020 will range from 2.4% for industrial to 0.6% for retail. Hotel RevPAR is expected to increase by 3.0% in 2018 and 1.5% in 2020.

Single-family housing starts are projected to increase from 848,900 units in 2017 to 900,000 units in 2018 and 930,000 in 2019. This brings annual starts just below their long-term average and completes eight straight years of growth. Housing starts are expected to moderate back to 900,000 in 2020.

In 2018, 17 real estate indicators are projected to be better than their 20-year averages, while six are expected to be worse. Also, inflation is expected to be above its long-term average, while the 10-year Treasury rate and the NCREIF capitalization rate are projected to be lower than their long-term averages.

In 2020, eight indicators are expected to be better than their 20-year average and 15 are expected to be worse. Similar to the 2018 projections, inflation in 2020 is expected to be above its long-term average, while the 10-year Treasury rate and the cap rate are projected to be lower than their 20-year averages.

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V. FINANCIAL ANALYSIS Statements of Revenues, Expenses, and Changes in Net Position Summaries of historical statements for the fiscal years ending June 30, 2014 through June 30, 2018 are presented in Schedule 2. Total operating revenue increased by a compound annual rate of 1.5% from $164,065,088 in 2014 to $174,059,044 in 2018. According to management, the decrease in operating revenues in 2016 was mainly due to Murfreesboro ED not passing along a wholesale rate increase to customers and decreased power usage from milder weather. The overall increase in operating revenue from 2014 to 2018 was largely from the growth in population of the City of Murfreesboro.

Total operating expenses increased at a compound annual rate of 2.3% from $147,739,988 in 2014 to $161,664,361 in 2018. Within operating expenses, power purchased made up approximately 86.9% of the total in 2018.

2014 2015 2016 2017 2018

$164,065,088 $165,924,035 $161,953,457 $169,127,855 $174,059,044

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

$200,000,000

Murfreesboro Electric DepartmentOperating Revenue

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The total net earnings from operations decreased at a compound annual rate of -6.6% from $16,325,100 in 2014 to $12,394,683 in 2018. The decrease over the five year period can be attributed in part to the growth in large non-cash factors such as depreciation as well as Murfreesboro ED not passing along wholesale rate increases to customers.

2014 2015 2016 2017 2018

$147,739,988 $149,926,034 $148,135,488 $157,481,493 $161,664,361

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

Murfreesboro Electric DepartmentOperating Expenses

2014 2015 2016 2017 2018

$16,325,100 $15,998,001 $13,817,969 $11,646,362 $12,394,683

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

$18,000,000

Murfreesboro Electric DepartmentNet Earnings from Operations

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Changes in net position decreased at a compound annual rate of -8.2% from $13,031,542 in 2014 to $9,241,286 in 2018. Included within non-operating expenses are tax equivalent payments made from Murfreesboro ED to the City of Murfreesboro. The tax equivalent payments represent the utility’s fair share cost of the local government.

Statement of Net Position Summaries of historical statements for the years 2014 through 2018 are presented in Schedule 1. Current assets made up approximately 34.4% of total assets in 2018. Within current assets, cash and cash equivalents comprised 74.7 % of the total and accounts receivable accounted for 22.2%. Utility plant made up 63% of total assets and other assets accounted for the remaining 2.6% of total assets. In 2018 total current liabilities made up approximately 64% of total liabilities. Within current liabilities, trade accounts payable comprised 70.3% of the total and customer deposits accounted for 25.4%. Total long-term liabilities accounted for the remaining 36% of liabilities. Post-retirement benefit obligation made up approximately 61.1% of the total long-term liabilities. Murfreesboro ED’s net position as of June 30, 2018 was $183,033,785. Ratio Analysis The industry used in the following ratio analysis is Utilities (NAICS Code 22)11. Cash Flow-Solvency Current Ratio - The current ratio (current assets ÷ current liabilities) measures current assets available to cover current liabilities, indicating the extent to which cash on hand and disposable assets can pay off near term liabilities. Higher is better unless it constrains necessary investment.

11 Bizminer, Industry Financial Report, All US, Sales Class: $100m - $249.99m, December 2018.

2014 2015 2016 2017 2018

$13,031,542 $12,773,546 $10,475,083 $8,836,187 $9,241,286

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

Murfreesboro Electric DepartmentChanges in Net Position

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Quick Ratio - The quick ratio ((cash + accounts receivables) ÷ current liabilities) is a more stringent version of the current ratio, indicating liquid assets available to cover current debt. Higher is better unless it constrains necessary investment.

Profitability Return on Assets – A key indicator of profitability, return on assets (net income before tax ÷ total assets), indicates how efficiently assets are used to generate profit. In small businesses, this ratio may be affected by owner compensation draws and other discretionary expenditures. Return on Business Revenue – This ratio (net income before tax ÷ revenue) indicates the level of profit generated by each dollar of revenue. This ratio can be used as a predictor of a company’s ability to withstand changes in prices or market conditions. However, in small business, this ratio may be affected by owner compensation draws and other discretionary expenditures.

Turnover Current Asset Turnover – This ratio (revenue ÷ current assets) is an indicator of the efficiency of short-term asset use. In general, higher is better.

-

0.50

1.00

1.50

2.00

2.50

MED NAICS 22

Cash Flow-Solvency Ratios

Current Ratio Quick Ratio

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

MED NAICS 22

Profitability Ratios

Return on Assets Return on Business Revenue

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Fixed Asset Turnover – This ratio (revenue ÷ fixed assets) is an indicator of the efficiency of investment in fixed assets such as plant and equipment.

VI. SUMMARY OF STRENGTHS AND WEAKNESSES Strengths According to management, the City of Murfreesboro is one of the fastest growing cities in the United

States. The U.S. Census Bureau released population estimates in 2017 that listed Murfreesboro among the 15 fastest growing cities in the United States. Murfreesboro ED has experienced an increase in customers at a compound annual rate of 2.8% from 2014 to 2018, and management anticipates growth in customers of between 3-4% in 2019.

Murfreesboro ED does not face competition as no other electric provider can service the City of Murfreesboro.

Murfreesboro ED has an experienced management team which is supported by 112 full and part-time employees including an in-house engineering division that provides technical expertise to electric projects.

Weaknesses The industry is heavily regulated by the TVA. Murfreesboro ED is subject to multiple TVA regulations

including customer service practices and policies, rate structure, attachments to poles, use of funds, NERC compliance, CIP compliance, and proper operations of the electric system.

Management indicated Murfreesboro ED has outgrown its current facility. No room is available at the

current location to construct additional buildings or storage space.

Murfreesboro ED’s operations and financial results are affected by changes in the weather. Power usage is typically decreased during periods of milder weather.

-

1.00

2.00

3.00

4.00

MED NAICS 22

Efficiency Ratios

Current Asset Turnover Fixed Asset Turnover

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VII. BUSINESS VALUATION METHODOLOGY There are three approaches that must be considered in performing a business valuation - the asset approach, the market approach, and the income approach. There are numerous methods within each of the approaches that a valuation analyst may consider in performing a valuation, given the facts and circumstances of the particular valuation assignment. As discussed previously herein, we have been asked to determine the fair value of a 100% interest in the operations of Murfreesboro ED based on the cash flows of the operations. As such, we have limited the scope of the valuation and have only considered the income approach in determining our conclusion of value. The basic concept of the income approach is to project the future economic income associated with an investment and to discount this projected economic income stream to a present value at a discount rate appropriate for the expected risk of the prospective income stream12. We have not considered nor made a determination of value utilizing the asset or market approach. Under the asset approach, all of the assets and liabilities of the subject company are restated from historical cost basis to the appropriate standard of value13, and under the market approach, the value of a business can be determined by reference to reasonably comparable guideline companies for which transaction values are known. Due to the scope limitations of the asset and market approaches in this engagement, we have not considered or utilized either approach in our determination of value. Income Approach The income approach is a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount14. The three primary methods under the income approach are: the discounted cash flow (DCF) method, the capitalized cash flow (CCF) method, and the excess cash flow method. We have utilized the capitalized cash flow method, as described in further detail below. Capitalized Cash Flow Method The capitalized cash flow method converts the anticipated economic benefits of a single period into value through the application of a capitalization rate. Adjusted Benefit Stream The first step in the capitalized cash flow method is to determine the expected future earnings (often referred to as net cash flows or benefit stream). This benefit stream represents the cash available to be paid out to stakeholders without jeopardizing ongoing operations. To arrive at the adjusted benefit stream (Schedule 4) we begin with net earnings and then make adjustments in order to estimate the cash needed to sustain and grow revenue into the future. We added back depreciation which is a non-cash item. Interest expense, adjusted for tax based off an estimated corporate tax rate of 21%, was added back to arrive at a benefit stream free of the effect of debt instruments. We also removed the effects of any gain or loss on the sale of assets.

12 Pratt, Shannon P., Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 175. 13 Pratt, Shannon P., Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 350. 14 SSVS 1, Appendix B, International Glossary of Business Valuation Terms, 45.

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We took an average of the benefit streams for the years 2014 through 2018. Based upon our discussions with management and review of historical performance, the average is the most likely indication of the utility’s financial performance into the foreseeable future. From the average we subtracted the expected annual working capital requirements and the expected annual capital expenditures for property, plant, and equipment to arrive at an adjusted benefit stream. The adjustments for working capital requirements and expected annual capital expenditures are based upon historical financial performance and discussions with management. We have subtracted $100,000 as the expected annual working capital requirement and $8,000,000 as the expected annual capital expenditures for property, plant, and equipment to arrive at an adjusted benefit stream of $12,917,378 (Schedule 4). An expected long-term growth rate of 3.5% is applied to the adjusted benefit stream to arrive at an adjusted benefit stream to capitalize of $13,369,486. The December 2018 Business Valuation Update15 indicates that long-term inflation is expected to be 2.28% and gross domestic product is expected to grow at 2.20%. We believe that, based on discussions with management and analysis of historical financial statements and industry projections, it is reasonable to assume that Murfreesboro ED could have growth of 3.5% into the future. Cost of Capital The cost of capital (commonly called the discount rate) is the expected rate of return that market participants require in order to attract funds to a particular investment16. Businesses typically raise capital by issuing equity and/or debt. The capital structure can include a combination of these components, each of which has its own cost of capital. Because we are valuing the overall business for the purpose of this valuation, we must blend the cost of capital for both equity and debt to determine the weighted average cost of capital (WACC). The WACC represents the weighted cost of capital for both equity holders and debt holders. Equity Cost of Capital In order to calculate the cost of capital, we have used the build-up method. The build-up method is a step-by-step process that starts with the risk-free rate and builds on additional risk inherent to investing in alternative assets. The risk-free rate is the return available on a security that the market generally regards as free of the risk of default17. For the purpose of this valuation, we have used the 20-year constant maturity U.S. government bond as a proxy for the risk free rate. As of December 31, 2018, the risk-free rate was 2.87%18. The equity risk premium (may be referred to as the market risk premium) is the extra return that investors demand to compensate them for investing in a diversified portfolio of large common stocks rather than investing in risk-free securities19 For the purpose of this valuation, we have used the historical long-term equity risk premium of 7.07%20.

15 Business Valuation Resources, Business Valuation Update, December 2018, Vol. 24 No. 12. 16 Duff & Phelps, 2015 Valuation Handbook Guide to Cost of Capital, 1-19. 17 Id. at 2-1. 18 Business Valuation Resources, BVR Risk-Free Rate Lookup™ 19 Duff & Phelps, 2015 Valuation Handbook Guide to Cost of Capital, 2-9. 20 Duff & Phelps, Cost of Capital Navigator.

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The size premium is based on the empirical observation that companies of smaller size are associated with greater risk and, therefore, have greater costs of capital21. For the purpose of this valuation, we have used the size premium for CRSP portfolio 10 of 5.37%22. Companies within CRSP portfolio 10 have a market capitalization below $299.29 million. The final step in the build-up method is to account for the company-specific risks faced by the subject company. This includes risks associated with the particular industry in which the subject company operates in relation to the economy as a whole as well as the risks associated with the internal workings of the subject company. The following paragraphs discuss these company-specific risks as they relate to Murfreesboro ED. History and Nature Murfreesboro ED provides energy to the City of Murfreesboro. The utility operates in an industry that is heavily regulated. Murfreesboro ED’s operations and financial results are affected by changes in the weather. Assigned Risk: 0.50% Financial Condition Murfreesboro ED has experienced an increase in operating revenue over the past five years, and the utility carries a low level interest bearing debt. Assigned Risk: 0.00% Facilities and Equipment Murfreesboro ED operates from a building located in Murfreesboro. According to management, the utility has outgrown this facility, and no room is available at the current location to construct additional building or storage space. Other capital assets include vehicles, poles, 721 miles of distribution and transmission line, 54 miles of fiber optic cable, 16,000 street lights, meters, and servers. According to management, the utility’s capital assets are in good condition and able to meet the current and foreseeable needs of the utility. The need for future capital improvement projects and additional capital assets will increase as the city’s population continues to grow and Murfreesboro ED’s service area expands. Assigned Risk: 0.50% Competition Murfreesboro ED does not face competition as no other energy provider is permitted to service the City of Murfreesboro other than Murfreesboro ED. Assigned Risk: -1.00% Management and Employees Murfreesboro ED currently has 112 full and part-time employees. Management indicated that the local labor pool is sufficient to meet the current and foreseeable needs of the utility. According to management, skilled lineman can be difficult to find but the utility mitigates this risk by hiring apprentices and training these employees to become lineman. Murfreesboro ED also relies on contract labor when necessary for certain projects. Assigned Risk: 0.00% General Economy Murfreesboro ED is minimally affected by changes in the general economy. Assigned Risk: 0.00%

21 Duff & Phelps, Cost of Capital Navigator. 22 2017 Center for Research in Security Prices (CRSP®)

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Key Person Risk Management is currently in the process of developing a succession plan for key individuals in management. According to management, the utility could attract individuals to replace key individuals in management if someone were to leave. Assigned Risk: 0.00% Reliance on Major Customers Murfreesboro ED provides service to customers in Murfreesboro, Tennessee. According to management, there is no perceived customer concentration risk as no single customer represents a significant portion of revenue. Assigned Risk: 0.00% As of the writing of this report, the total of company-specific risks applied to Murfreesboro ED is 0.00% (Schedule 5). This results in an equity discount rate of 15.31%. Debt Cost of Capital The cost of debt capital is the expected return to debt investors. Based on the details of Schedule 6, the future borrowing rate of the Company is computed to be 1.45%. Lending institutions often require the personal guarantee of the shareholder(s). It is generally accepted in valuation practice that the effective rate of borrowing for these closely held companies should be adjusted for this risk to the shareholder guaranteeing the debt23. Murfreesboro ED’s debt is related to municipal bonds and general obligation refunding bonds where a personal guarantee is not required. Therefore, we have made no adjustment to the debt cost of capital. Weighted Average Cost of Capital To determine the weighted average cost of capital (WACC), we must weigh the interest-bearing debt and equity components of capital. There is debate among valuators as to whether to use the actual capital structure of the Company or to use a hypothetical capital structure. We have used the average capital structure for the industry, 43.7% debt and 56.3% equity for 201824. We have weighted the equity cost of capital (Schedule 5) and the debt cost of capital (Schedule 6) so that the weighted average cost of capital discount rate was determined to be 9.26% (Schedule 6). We have reduced the weighted average cost of capital discount rate by a long-term expected growth rate of 3.5% to arrive at a weighted average cost of capital capitalization rate of 5.76% (Schedule 6). The adjusted benefit stream to capitalize of $13,369,486 (Schedule 4) is capitalized by dividing by the weighted average cost of capital capitalization rate of 5.76% (Schedule 6) to yield an indicated fair value of invested capital of $232,299,991 (Schedule 7). Interest-bearing debt is subtracted and the non-operating asset cash is added to arrive at an indicated fair value of equity on a controlling, marketable basis of $267,017,991 (Schedule 7).

23 Pratt, Shannon P., Cost of Capital, 2nd Edition, 41. 24 Duff & Phelps, 2018 Valuation Handbook Industry Cost of Capital, SIC 491.

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VIII. VALUATION SUMMARY The purpose of this valuation is to determine the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department based on the cash flows of the operations. Below is a summary of the calculation (Schedule 7). Benefit stream to capitalize (Schedule 4) $ 13,369,486

Divided by: Weighted Average Cost of Capital (Schedule 6) 5.76%

Fair value of invested capital $ 232,299,991

Less: Interest-bearing debt (Schedule 6) (5,282,000)

Add: Non-operating cash 40,000,000

Fair value of a 100% interest on a controlling, marketable basis $ 267,017,991

Fair value of a 100% interest on a controlling, marketable basis, rounded $ 267,018,000

IX. VALUE CONCLUSION It is our opinion that the fair value of a 100% interest in the operations of the City of Murfreesboro’s Electric Department as of December 31, 2018 based on the cash flows of the operations is

$267,018,000.

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APPENDIX A Statement of Assumptions and Limiting Conditions

This valuation report has been made with the following general assumptions and limiting conditions:

The conclusion of value arrived at herein is valid only for the stated purpose as of the date of the valuation.

Financial statements and other related information provided by the City of Murfreesboro or its representatives, in the course of this engagement, have been accepted without any verification as full and correctly reflecting the enterprise’s business conditions and operating results for the respective periods, except as specifically noted herein. Jackson Thornton & Co., P.C. has not audited, reviewed, or compiled the financial information provided to us and, accordingly, we express no audit opinion or any other form of assurance on this information.

Public information and industry and statistical information have been obtained from sources we believe to be reliable. However, we make no representation as to the accuracy or completeness of such information and have performed no procedures to corroborate the information.

We do not provide assurance on the achievability of the results forecasted by the City of Murfreesboro because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.

The conclusion of value arrived at herein is based on the assumption that the current level of management expertise and effectiveness would continue to be maintained, and that the character and integrity of the enterprise through any sale, reorganization, exchange, or diminution of the owners’ participation would not be materially or significantly changed.

This report and conclusion of value arrived at herein are for the exclusive use of the City of Murfreesboro for the sole and specific purposes as noted herein. They may not be used for any other purpose by the City of Murfreesboro or by any other party for any purpose. Furthermore the report and conclusion of value are not intended by the author and should not be construed by the reader to be investment advice in any manner whatsoever. The conclusion of value represents the considered opinion of Jackson Thornton & Co., P.C., based on information furnished to us by the City of Murfreesboro and other sources.

Neither all nor any part of the contents of this report (especially the conclusion of value, the identity of any valuation specialist(s), the firm with which such valuation specialists are connected, or any reference to any of their professional designations) should be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other means of communication without the prior written consent and approval of Jackson Thornton & Co., P.C.

Future services regarding the subject matter of this report, including, but not limited to testimony or attendance in court, shall not be required of Jackson Thornton & Co., P.C. unless previous arrangements have been made in writing.

Jackson Thornton & Co., P.C. is not an environmental consultant or auditor, and it takes no responsibility for any actual or potential environmental liabilities. Any person entitled to rely on this report, wishing to know whether such liabilities exist, or the scope and their effect on the value of the property, is encouraged to obtain a professional environmental assessment. Jackson Thornton & Co., P.C. does not conduct or provide environmental assessments and has not performed one for the subject property.

Full compliance with all applicable federal, state and local zoning, use, environmental and similar laws and regulations is assumed. It is assumed that all required licenses, certificates of occupancy, consents or other legislative or administrative authority from any local, state, or

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national government or private entity or organization have been or can be obtained or renewed for any use on which the conclusion of value contained in this report is based.

Jackson Thornton & Co., P.C. has not determined independently whether the City of Murfreesboro is subject to any present or future liability relating to environmental matters (including, but not limited to, CERCLA/Superfund liability), nor the scope of any such liabilities. Jackson Thornton & Co., P.C.’s valuation takes no such liabilities into account, except as they have been reported to Jackson Thornton & Co., P.C. by The City of Murfreesboro or by an environmental consultant working for the City of Murfreesboro, and then only to the extent that the liability was reported to us in an actual or estimated dollar amount. Such matters, if any, are noted in the report. To the extent such information has been reported to us. Jackson Thornton & Co., P.C. has relied on it without verification and offers no warranty or representation as to its accuracy or completeness.

Jackson Thornton & Co., P.C. has not made a specific compliance survey or analysis of the subject property to determine whether it is subject to, or in compliance with, the American Disabilities Act of 1990, and this valuation does not consider the effect, if any, of noncompliance.

No change of any item is this appraisal report shall be made by anyone other than Jackson Thornton & Co., P.C., and we shall have no responsibility for any such unauthorized change.

Unless otherwise stated, no effort has been made to determine the possible effect, if any, on the subject business due to future Federal, state, or local legislation, including any environmental or ecological matters or interpretations thereof.

If prospective financial information approved by management has been used in our work, we have not examined or compiled the prospective financial information and therefore, do not express an audit opinion or any other form of assurance on the prospective financial information or the related assumptions. Events and circumstances frequently do not occur as expected and there will usually be differences between prospective financial information and actual results, and those differences may be material.

We have conducted interviews with the current management of the City of Murfreesboro concerning the past, present, and prospective operating results of the company.

Except as noted, we have relied on the representations of the owners, management, and other third parties concerning the value and useful condition of all equipment, real estate, investments used in the business, and any other assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances or that the entity has good title to all assets.

No responsibility is taken for changes in market conditions and no obligation is assumed to revise this report to reflect events or conditions that occur subsequent to the date hereof.

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APPENDIX B Valuator’s Certification

I certify that, to the best of my knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and

limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions. 3. I have no present or prospective interest in the entity that is the subject of this report, and I have no

personal interest or bias with respect to the parties involved. 4. My compensation is not contingent on an action or event resulting from the analyses, opinions, or

conclusions in, or the use of, this report. 5. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity

with the standards of the National Association of Certified Valuators and Analysts and the standards of the American Institute of Certified Public Accountants.

6. No one provided significant professional assistance to the persons signing this report.

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APPENDIX C Qualifications

Jason B. Wells, CPA/ABV/CFF, CVA/MAFF

Certified Public Accountant Accredited in Business Valuation Certified in Financial Forensics

Certified Valuation Analyst Master Analyst in Financial Forensics

Education: Bachelor of Science in Accounting Birmingham Southern College, 1998 Master in Professional Accounting The University of Texas, Austin, 2000 Work Experience: Arthur Andersen Audit, June 2000-November 2001

Jackson Thornton & Co., P.C., 2001 Principal, 2010-present

Jackson Thornton has its home office in Montgomery, Alabama with other Alabama offices in Dothan, Opelika, Prattville, and Wetumpka as well as an office in Nashville, Tennessee and Kansas City, Kansas.

Certifications: Certified Public Accountant Alabama State Board of Public Accountancy Certificate Number 9127

Certified Valuation Analyst (CVA) National Association of Certified Valuators and Analysts

January 2002

Accredited in Business Valuation (ABV) American Institute of Certified Public Accountants Certificate Number 2539 Master Analyst in Financial Forensics (MAFF)

(Formerly Certified Forensic Financial Analyst) National Association of Certified Valuators and Analysts Certified in Financial Forensics (CFF) American Institute of Certified Public Accountants

Licensed as Life and Health Producer by Alabama Department of Insurance

Presentations: Montgomery Estate Planning Council Top Ten Keys to Understanding a Business Valuation Montgomery, Alabama

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Alabama Chapter of Certified Valuation Analysts Succession Planning – The Role of a Valuation Analyst Montgomery, Alabama Texas Electric Co-Operatives Valuing an Electric Utility Austin, Texas Affiliations: Alabama Society of Certified Public Accountants

American Institute of Certified Public Accountants Montgomery Estate Planning Council National Association of Certified Valuators and Analysts

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Derek S. DuBose, Jr., CPA/ABV, CVA

Certified Public Accountant Accredited in Business Valuation

Certified Valuation Analyst Education: Bachelor of Science in Business Administration in Accounting Auburn University, December 2009 Work Experience: Jackson Thornton & Co., P.C.

Manager October 2010 – present Jackson Thornton has its home office in Montgomery, Alabama with other Alabama offices in Dothan, Opelika, Prattville, and Wetumpka as well as an office in Nashville, Tennessee and Kansas City, Kansas.

Certifications: Certified Public Accountant Alabama State Board of Public Accountancy October 2010 Certificate Number 11451 Certified Valuation Analyst National Association of Valuators and Analysts April 2014 Certificate Number 992659 Accredited in Business Valuation American Institute of Certified Public Accountants Certificate Number 4544 Affiliations: Alabama Society of Certified Public Accountants

American Institute of Certified Public Accountants National Association of Certified Valuation Analysts River Region United Way Loaned Executive, 2014 Campaign

2014 2015 2016 2017 2018

AssetsCurrent Assets

Cash and cash equivalents 43,020,989$ 52,336,981$ 58,248,427$ 64,577,205$ 62,668,457$ Accounts receivable 17,347,145 19,778,329 18,441,189 16,650,616 18,581,386 Material and supply inventories 2,405,853 2,098,204 2,007,496 2,107,025 2,380,935 Prepaid pension benefit 928,727 Other current assets 257,349 209,314 214,908 1,011,929 240,612

Total Current Assets 63,960,063 74,422,828 78,912,020 84,346,775 83,871,390

Utility PlantElectric plant in service

Distribution plant 161,159,919 169,451,066 176,001,030 188,605,133 203,983,367 General plant 9,107,163 9,468,345 9,664,711 9,153,433 9,806,637

170,267,082 178,919,411 185,665,741 197,758,566 213,790,004 Less: accumulated depreciation (50,992,539) (55,038,882) (60,134,609) (65,147,182) (67,014,490)

119,274,543 123,880,529 125,531,132 132,611,384 146,775,514 Construction work in progress 11,544,858 8,121,450 11,551,290 7,844,066 5,606,564 Unamortized plant acquistion adjustment 1,000,369 1,030,962 951,100 1,330,540 1,083,492

Total Utility Plant 131,819,770 133,032,941 138,033,522 141,785,990 153,465,570

Other AssetsReceivables from customers on TVA sponsored

conversion loans 1,626,942 1,612,389 1,695,056 2,057,853 1,925,151 Net pension asset - 3,492,551 2,501,705 4,092,330 4,436,753 Other non-current assets 172,811 48,581 46,369 53,133 47,577

Total Other Assets 1,799,753 5,153,521 4,243,130 6,203,316 6,409,481

Total Assets 197,579,586$ 212,609,290$ 221,188,672$ 232,336,081$ 243,746,441$

Mufreesboro Electric DepartmentStatement of Net Position

As of June 30,

Schedule 1

2014 2015 2016 2017 2018


As of June 30,

Deferred Outflow of ResourcesDeferred pension costs - 1,215,922 2,480,857 1,076,780 1,228,689 Deferred bond refunding 50,209 42,950 35,690 28,431 21,172

Total Deferred Outflow of Resources 50,209$ 1,258,872$ 2,516,547$ 1,105,211$ 1,249,861$

LiabilitiesCurrent Liabilities

Trade accounts payable and TVA power bill due 23,500,378 24,059,407 23,604,808 24,485,443 27,405,764 Current maturities of long-term debt 946,000 982,000 1,020,000 1,069,000 1,115,000 Customer deposits 7,163,325 7,869,443 8,717,801 9,473,812 9,893,770 Accrued salaries and wages 279,414 318,432 405,807 147,148 164,181 Sales tax payable 340,734 357,243 339,880 338,863 348,972 Accrued rents 33,282 33,252 36,684 32,797 34,373 Accrued interest 6,018 5,408 4,721 3,883 3,008

Total Current Liabilities 32,269,151 33,625,185 34,129,701 35,550,946 38,965,068

Long-term debtElectric system revenue bonds, less current maturities 8,353,000 7,371,000 6,351,000 5,282,000 4,167,000 Premium on long-term debt 83,000 71,000 59,000 47,000 35,000 Compensated absences 1,345,831 1,406,790 1,475,898 1,564,044 1,597,882 Post-retirement benefit obligation 3,542,666 4,189,864 4,905,416 12,496,060 13,363,707 Advances from TVA on conservation loans 1,665,437 1,666,370 1,742,758 2,108,870 1,997,026

Total long-term debt 14,989,934 14,705,024 14,534,072 21,497,974 21,160,615

Plant acquisitions payable 645,214 649,694 573,975 881,162 710,953 Total Long-term liabilities 15,635,148 15,354,718 15,108,047 22,379,136 21,871,568

Total Liabilities 47,904,299$ 48,979,903$ 49,237,748$ 57,930,082$ 60,836,636$

Schedule 1

2014 2015 2016 2017 2018


As of June 30,

Deferred Inflow of ResourcesNet deferred inflow related to pension - 3,813,488 2,917,617 1,718,711 1,125,881

Total Deferred Inflow of Resources -$ 3,813,488$ 2,917,617$ 1,718,711$ 1,125,881$

Net PositionNet investment in capital assets 121,842,765 124,002,197 130,065,237 134,535,259 147,458,789 Restricted for pensions - 3,492,551 2,501,705 4,092,330 4,436,753 Unrestricted 27,882,731 33,580,023 38,982,912 35,164,910 31,138,243

Total Net Position 149,725,496$ 161,074,771$ 171,549,854$ 173,792,499$ 183,033,785$

Schedule 1

2014 2015 2016 2017 2018

Operating Revenue 164,065,088$ 165,924,035$ 161,953,457$ 169,127,855$ 174,059,044$

Operating ExpensesPower purchased 129,996,650 132,323,421 129,160,359 137,848,002 140,599,719Operating expenses 2,075,018 2,180,156 2,435,539 2,382,042 2,635,555Maintenance expenses 2,178,399 2,244,797 2,001,655 2,302,866 2,386,559Customer account expenses 1,842,286 1,956,872 2,317,197 2,167,432 2,222,164Sales expense 176,357 168,430 222,331 249,042 268,630Administrative and general expenses 4,181,894 3,374,986 3,865,576 4,129,972 4,668,818Depreciation expense 5,876,455 6,251,936 6,623,060 6,918,245 7,306,481Amortization of plant acquisition adjustment 154,514 166,772 179,929 191,239 247,049Taxes and tax equivalent expense 1,258,415 1,258,664 1,329,842 1,292,653 1,329,386

Total Operating Expenses 147,739,988 149,926,034 148,135,488 157,481,493 161,664,361

Net earnings from operations 16,325,100 15,998,001 13,817,969 11,646,362 12,394,683

Other incomeInterest earned 868 85,729 106,128 117,679 124,658Gain on sale of property 324,069

868 85,729 106,128 441,748 124,658

Mufreesboro Electric DepartmentStatement of Revenues, Expenses and Change in Net Position

For the Years Ended June 30,

Schedule 2

2014 2015 2016 2017 2018

Mufreesboro Electric DepartmentStatement of Revenues, Expenses and Change in Net Position


Other expensesInterest expense on bonded indebtedness (179,563) (116,871) (108,217) (126,918) (130,395)Other interest expense (67,612) (73,213) (80,938) (458)

(247,175) (190,084) (189,155) (127,376) (130,395)

Net earnings before transfers to other funds 16,078,793 15,893,646 13,734,942 11,960,734 12,388,946

Transfers to other funds (city) (3,047,251) (3,120,100) (3,259,859) (3,124,547) (3,147,660)

Increase in net position 13,031,542 12,773,546 10,475,083 8,836,187 9,241,286

Net position, beginning 136,693,954 148,301,225 161,074,771 164,956,312 173,792,499

Net position, end 149,725,496$ 161,074,771$ 171,549,854$ 173,792,499$ 183,033,785$

Schedule 2

2014 2015 2016 2017 2018

Cash flows from operative activities:Net earnings from operations 16,325,100$ 15,998,001$ 13,817,969$ 11,646,362$ 12,394,683$ Adjustments to reconcile net earnings to net cash provided by operating activities

Depreciation 6,040,120 6,445,274 6,763,318 7,064,149 7,463,028Amortization of bond premium (12,000) (12,000) (12,000) (12,000) (12,000)Amortization of plant acquisition adjustment 154,514 166,772 179,929 191,239 247,048Pension benefit (1,390,531) (1,169,960) (1,385,454) (1,089,162)Changes in assets and liabilities

Decrease (increase) in accounts and other receivables (1,298,559) (2,431,184) 1,337,140 1,790,573 (1,930,770)Increase in material and supply inventories (238,654) 307,649 90,708 (99,529) (273,910)Increase in other current assets (156,091) 48,035 (5,594) (797,021) 771,317Decrease (increase) in receivables from TVA sponsored conservation loans 45,469 14,553 (82,667) (362,797) 132,702Increase in prepaid pension benefit (469,981)Decrease in other non-current assets 434,606 124,230 2,212 (6,764) 5,556Decrease in accrued compensated absences (63,412) 60,959 69,108 88,146 33,838Increase in post retirement benefit obligation 616,841 647,198 715,552 997,102 867,647Increase in trade accounts payable 191,691 559,029 (454,599) 880,635 1,688,756Increase in customer deposits 684,393 706,118 848,358 756,011 419,958(Decrease) increase in accrued salaries and wages 64,194 39,018 87,375 (258,659) 17,033Increase in sales tax payable 34,308 16,509 (17,363) (1,017) 10,109(Decrease) increase in accrued rents (207) (30) 3,432 (3,887) 1,577Decrease in deferred credits (19,428)

Net cash provided by operating activities 22,332,904 21,299,600 22,172,918 20,487,089 20,747,410

Cash flows from non-capital financing activities:(Repays) advances on TVA conservation loans (66,095) 933 76,388 366,112 (111,844)Transfers to other funds (3,047,251) (3,120,100) (3,259,859) (3,124,547) (3,147,660)

Net cash used by non-capital financing activities (3,113,346) (3,119,167) (3,183,471) (2,758,435) (3,259,504)

Mufreesboro Electric DepartmentStatements of Cash Flow


Schedule 3

2014 2015 2016 2017 2018

Mufreesboro Electric DepartmentStatements of Cash Flow


Cash flows from capital and related financing activities:Additions to plant (13,129,757) (6,980,649) (11,373,245) (10,828,156) (17,756,339)Retirements of plant, net (210,804) (640,642) (465,616) (319,536) (394,494)Utility acquisition purchases (38,601) (7,416) (3,690)Payments on utility acquisition debt (134,427) (184,769) (169,736)Proceeds from sale of assets 1,000,000Principal payment on bond indebtedness (3,006,000) (946,000) (982,000) (1,241,649) (1,239,209)Interest paid (252,206) (190,694) (189,842) (128,214) (131,270)

Net cash used by capital and related financing activities (16,771,795) (8,950,170) (13,184,129) (11,517,555) (19,521,312)

Cash flows from investing activities - Interest received 868 85,729 106,128 117,679 124,658

Net increase in cash and equivalents 2,448,631 9,315,992 5,911,446 6,328,778 (1,908,748)

Cash and equivalents, beginning of year 40,572,358 43,020,989 52,336,981 58,248,427 64,577,205

Cash and equivalents, end of year 43,020,989$ 52,336,981$ 58,248,427$ 64,577,205$ 62,668,457$

Schedule 3

2014 2015 2016 2017 2018

Net Earnings 16,078,793$ 15,893,646$ 13,734,942$ 11,960,734$ 12,388,946$

Add: Depreciation and Amortization 6,182,634 6,600,046 6,931,247 7,243,388 7,698,076

Add: Interest Expense (adj for tax) 195,268 150,166 149,432 100,627 103,012

Remove: Gain/Loss (324,069)

22,456,695 22,643,858 20,815,621 18,980,680 20,190,034

Average (2014-2018) 21,017,378$

Estimated Annual Working Capital Requirements (100,000)

Estimated Annual Capital Expenditures (8,000,000)

Adjusted Benefit Stream 12,917,378$

Adjusted Benefit Stream to Capitalize* 13,369,486$

Murfreesboro Electric DepartmentAdjusted Benefit Stream

Schedule 4

Risk-free rate* 2.87%Equity risk premium** 7.07%Size premium** 5.37%

15.31%Company-specific risks

History and nature 0.50%Financial condition 0.00%Facilities and equipment 0.50%Competition -1.00%Management and employees 0.00%General economy 0.00%Key person risk 0.00%Reliance on major customers 0.00%

Total company-specific risks 0.00%

Equity discount rate (after-tax basis) 15.31%

* BVR Risk-Free Rate Lookup™, as of December 31, 2018

** Duff & Phelps, LLC, Cost of Capital Navigator

Murfreesboro Electric DepartmentEquity Discount Rate

Schedule 5

Debt Amount Rate Rate* Weight Weighted RateTennessee Municipal Bond 4,172,000$ 1.50% 1.19% 78.99% 0.94%General Obligation Refunding Bonds 1,110,000 3.13% 2.47% 21.01% 0.52%

5,282,000$ 100.00% 1.45%

0.00%

1.45%

Adjusted for estimated tax rate of 21%

Capital Cost of Capital Weight Weighted Cost of CapitalDebt 1.45% 43.7% 0.64%Equity 15.31% 56.3% 8.62%

9.26%

3.50%

5.76%WACC Capitalization Rate

Murfreesboro Electric DepartmentWeighted Average Cost of Capital (WACC)

Personal Guarantee

WACC Discount Rate

Less: Long-term expected growth rate

Schedule 6

Benefit stream to capitalize (Schedule 4) 13,369,486$

Divided by: Weighted Average Cost of Capital (Schedule 6) 5.76%

Fair value of invested capital 232,299,991$

Less: Interest-bearing debt (Schedule 6) (5,282,000)

Add: Non-operating cash 40,000,000

Fair value of a 100% interest on a controlling, marketable basis 267,017,991$

Fair value of a 100% interest on a controlling, marketable basis, rounded 267,018,000$

Murfreesboro Electric DepartmentValuation Summary

Schedule 7

business valuation prepared for: city of ... - townnews

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